lecture 5 retail investor specializing in anf aeos aro

Lecture #5: An Investor Specializing in the Retail Sector discusses ARO, AEOS, ANF

John Chew at [email protected] studying/teaching/practicing investing

Editor: Go to the Appendix on page 12 and study the 10-Ks of ANF, AEOS and ARO to determine whether these are good businesses

and what they are worth BEFORE reading this lecture. The lecture illustrates the power of a focused/specialized approach.

Class # 5

A Professional Investor specializing in retail store investments: ARO, AEOS, ANF

November 08, 2005

Hopefully you will read the Magic Formula book for next Class

Another Great Investor’s (“AGI”) Presentation on investing in retail stocks.

GI = the professor and great investor.

(―GI‖): Before she speaks, just to give you a context, she sticks to one area: consumer products

and retail. She has been in that area for 10 years and has averaged high 20s percent returns

staying in that little niche that she knows well. She finds enough opportunities in that one area.

Her returns have been no more volatile than other concentrated investors. She has phenomenal

returns focusing on what she knows. There is a great lesson for you. It doesn’t have to be retail

but an industry that you understand. She picked something she really enjoys--that is a very

important lesson.

A number of people have come up to me before class and said they will join a big firm and they

are afraid they will be pigeon-holed. That may be true, but you can really learn an area very well

and still be very profitable. As you invest over a long period of time you will come to know more

areas. Knowing one area well is tremendous. This investor shows how well you can do in a

focused investment area and with a well-honed circle of competence.

She will talk about areas she is working on…….

What is a girl from the suburbs doing in retail?

(―AGI‖): So what is a girl from Long Island doing in retail? Pick an area that you can know and

that you can understand well and that you enjoy. I like shopping. It is definitely an area I have to

come to know well. You start to see patterns. Over a ten-year period you learn how a particular

industry group trades that gives you a big advantage over people who are first looking at the stock

and coming in cold and not having the background.

I like retail because you are constantly getting information (the barrage of same store sales

reports causes more volatility). You get it on a monthly basis and sometimes on a weekly basis.

Retailers put out same store sales numbers-Comparable sales in stores for a year-over-year

period. Monthly basis but most industry groups you normally get quarterly numbers. The more

information you have, the more people try to trade on the information before, after and during.

You get a tremendous volatility in this sector. A lot of people don’t like volatility. As far as I am

concerned, I can live with volatility if there is a good opportunity over the long term. And if I am

taking a two years’ time horizon that is actually my greatest opportunity--are these monthly

numbers.

Inevitably these companies are going to miss because of their fault or no fault of their own due to

the macro environment. There will be a missed number and the market tends to have no mercy.

So the market kills these stocks. One day it is trading at 20 times and the next day it is trading 10



times (earnings) but nothing has fundamentally has changed. That fundamentally is your

opportunity. So you must live with a little bit the anxiety. Believe me when these stocks are

down 30% to 40% it is hard to pull the trigger, but that is usually the best time to buy. Volatility

is your friend.

I don’t know how to pick the next trend. I really don’t know fashion. I say this: nobody can

predict fashion. It is really is not about hitting the next trend on a continuous basis. Are these

companies running a good business over the long-term? Are they running a business that can

weather the ups and downs?

The best time to get in is when they (the retailer’s management) missed a season of merchandise

because if you look at the fundamentals of the company and it is well-run and the stock gets

crushed because they miss a season of merchandise, then it is an opportunity to own for the long

term. It is really irrelevant if they pick the hot trends or not.

It is very interesting because the Street misses the point on retail. Most analyst reports focus on

how this company will do in Oct? How will this company be affected by Katrina (hurricane that

destroyed New Orleans) or higher heating prices for Christmas? These are all relevant questions,

but not relevant if this is a good business. Fundamentally it will be around? If you buy it at the

right price it really doesn’t matter what is happening to the customer today because they will be

around and they will continue to buy.

A quote from Fortune last year from a Hedge Fund manager who often invests in retail, ―I have

my people visit stores to see how much the items are marked down or if there are long lines at the

register and I buy if this company will beat numbers and short it if it misses numbers. It is that

simple.

He really misses the point. It is not that simple. If I had to invest that way, I would lose sleep

over whether I could consistently do that. Maybe I would get it right only 50% of the time. I

would have a lot of anxiety in between. If you can take a longer time horizon for one to two

years, you will have an edge. You have to buy these things when people hate it because that,

obviously, is when your opportunities are available. So you have to be a contrarian.

Can you see my slide: This is a price chart of AEOS, American Outfitters.



Here is the two year price chart, it was up then down. So the first thing you notice there is a lot

of money to make in this stock. Two years ago it traded at $7.5. Here at $10, they had $3 to $4

dollars of cash on the balance sheet, you knew they were not going under. Strong balance sheets

are critical when investing in retail due to the cyclicality of their business. Yes, they missed

sales—is anybody familiar with this story?

Basically they were off-trend for a while. They were not sure how to position themselves in the

marketplace. They tried to compete against (Abercrombie, ANF but they didn’t have the cache.

Back in 2004 they were not addressing their customer—the fickle teenager. Back in 2003/2004

they were missing the boat with their customer; they were not meeting their needs.

Fast forward six months, they got their inventory under control and they turned their merchandise

around. Comparable store sales turned around, that was the key. Back in 2004 it wasn’t that their

earnings potential was any less than six months later, it was the fact that comps (comparable

same store sales) were negative. This company doesn’t deserve this multiple because they are

showing negative comps so it should trade at six times potential earnings net of cash. To me this

is a company that will be around. They have a healthy balance sheet. Yes, they have merchandise

misses; yes their same stores sales are down. But they are making changes to their management

team; they are on top of their inventories. They got hit on inventories in 2004. Certainly there is

potential there.

As soon as people as people saw comps stabilizing and they recognize that they could get back to

more normalized earnings and margins, the stock basically tripled. This is one example how you

can make money in retail if you get in at the right time.

Next Chart: ANF:

Does anyone know the story here? Basically the same thing happened. Comps were negative for

awhile; there were merchandise misses, they tweaked their management team. Back in their

2003/2004 area, despite the fact that they had a strong balance sheet and strong customer base,



the stock was depressed. ANF has a loyal following and they were not going away. If they could

just stabilize their margins. Again, they had the highest margins in the business; they had the best

ROC in the business—a solidly run business. The one caveat was that their comps were negative.

That is why people knocked the stock down to those levels. The stock was basically a triple from

December of 2003 to July of 2005—the stock went from $25 to $75.

GI: By the way, she was here in class last year touting these stocks at the lower prices.

Aeropostale

Anybody know a little bit about this company? Anyone been into an ARO store? Have you ever

not bought something on sale? If they mark something at $30 it immediately has 20% off. You

immediately feel like you are getting a bargain. That is certainly different from what ANF is

trying to do. Most retailers are only taking their mark downs when they have too. If you see

people not buying, I am not going to buy too.

We want our customers to feel like they are getting a bargain. Their price points are about 30%

lower than Eagle and Eagle is about 30% lower than ANR. It positions them very well in the

marketplace. There is certainly a place for them in the marketplace so they are not going head to

head with the other guys. This is a one year stock chart. The stock was as low at $18.5 last week

and as high as $35 a few months ago. Perhaps there is an opportunity here. Around $18 was

where we were buying it.

She mentions ANF to

Students



We are going to build out their store base and figure out what we think it is worth in a three-to-

five year period. We want to figure out a price target of our own.

Search Strategy

So obviously, what got me interested was the precipitous fall in the stock price. It certainly made

me take a second look. And I knew estimates had been in the two dollar earnings range with $3 in

cash so $15 and potential for $2 EPS gives you 7.5 xs. The stock seems pretty interesting; I want

to do more work.

What happened for the decline to have occurred: They missed their comp sales, their merchandise

was slightly off; inventories were up 33% per sq. foot while same store sales were down 2% so

they were over inventoried, it will probably take them a few months (not a one quarter problem)

to clear out the inventory. So they were having big sales to get rid of stale inventories to bring in

fresh inventories so margins get crushed in the interim fire sales. It is a very stable company.

They will get their merchandise back on track. They just needed time to weather the storm. A

company with heavy debt that misses several merchandising seasons could go bust. The wheels

are in motion, management issues--if there are any--are being addressed and inventory issues are

addressed. I would rather see you take a hit and get your inventory problems behind you rather

than stretch their problems out over a year.

They started to have these issues and everyone piles onto the band wagon (investors sell

immediately; all the analysts downgrade the stock). You can’t own it here because the problems

will carry over into the next quarter. The majority of analysts either have ―holds‖ on it or sales on

it. Nobody wants to get ahead of themselves. They see that this will be a problem for a quarter or

two so they don’t want to go out on a limb and predict a turnaround no matter how cheap the

company becomes. They can’t predict over the next few months, but as you know, it is irrelevant

what same store sales are going to be. Because what is relevant is if this company gets past

these issues, can the company be back to normalized margins and earnings and when they

do, what is this company worth?



GI: Stop! She is right here and look at that chart and say isn’t it great that the world works like

that. (Stock chart shows a collapse from $35 to $18). She has been making money all these years

and that is what the chart looks like every time.

AGI: You don’t want to listen to the sell-side analysts. Analyst: At $19 we are underweighting

ARO because they will continue to miss estimates (―sell‖ it at the lows or buy high and sell low)

because they have too much inventory (no kidding). Those trends will likely continue into spring

(Jan-Feb). Maybe so, but we are taking a one to two year time horizon. We don’t care what

happens into spring, we care about what happens when they get through these issues.

―We think it makes sense to underweight stocks with earnings momentum slowing.‖ I think that

is exactly the wrong way to think. Downside earnings miss. It is the wrong way to think about

things. The time to buy is when everybody knows they are missing comps, have investment

issues, etc. You know what, if she knows it, then everyone knows it. This is the time you have to

be looking at it and thinking like a contrarian. Learn what is discounted in the stock price. Have a

variant perception.

GI: She has always has done it that way, she is going to keep doing it that way.

AGI: Pulled off the Bloomberg. Earnings were supposed to be $1.65 range and the number for

next year was supposed to be in the $2 range. This is now: earnings came down to $1.36 for the

year and they took earning down to $1.70 for the following year. Why did they take the

following year’s earnings down? It makes no sense. They can’t keep their estimates for next

year the same if they lower this year’s earnings. They automatically bring next year’s estimate

down regardless of the business. Could the business do $2 next year? Of course, they could. I

think there is a really good chance to make $2. Per share once they get through their inventory

issues.

The fact that they numbers come down means that you shouldn’t be fooled that something has

fundamentally changed with the business that is causing numbers to come down for next year.

Student: What do you do to differentiate among management teams?

AGI: Management--I like to see someone who has been around for awhile. I like to see a proven

management team. As I do more research, I look at: Who is their customer base? Who are their

competitors? Is there a reason for their being? Is there a reason people shop at this store vs. their

competitors? Yes, because of price. ARO will win on price. There is a reason for their being.

They are competing with the discounters and there are not many other specialty store concepts in

the malls that are competing directly with them. This is the price point they are looking to.

Student: Why didn’t you look at American Eagle as an investment? They both are way off of

their highs, they both are well run and they have a reason for being.

AGI: It is interesting because those are exactly the two companies I was looking at to add to the

portfolio. I looked at Eagle and you are right on all counts but the one major difference was that

ARO is a six hundred store chain and they have more potential to grow to 1000 to 1200 store with

their concepts like Jimmy’s. The growth potential is tremendous. I look at that an American

Eagle that is fully saturated at 900 stores. Perhaps they can open another 100 stores. I believe

growth will be better with ARO. It will be a few years before Eagle has any growth potential.

AEOS can open a new concept but it will take a year for a test phase and a few more years to get

momentum. I like ARO primarily for that. ARO was a little bit less a fashion concept than a



fashion follower. I like that position a little better. ARO doesn’t have to be in the lead on fashions,

they can be a step behind.

Student: What about falling same store sales?

AGI: Same store sales falling and growth in stores? It really depends upon the issues. They didn’t

have much top line growth but margin growth, then that might be of interest. I don’t necessarily

have to see 15% to 20% top line growth depending upon the situation.

You want to understand why the SSS are declining. Ask how the company is addressing the

problem or if they are addressing it. If management is blaming it on the weather, oil prices etc. I

like companies that take the blame and take responsibility to fix the problem. You know what,

there are some macro issues but we have a plan to fix our issues.

Student: How do you know when a retail concept is reaching saturation?

AGI: It depends upon whom they are catering to: what malls are they in: ABC Malls. You could

see an AEOS in an A or B or C mall. A 1000 to 1200 is max saturation for a retailer to go into all

three mall types. An ANF will max out at 400 malls because they are only in A type malls. You

won’t see them in a C mall. That is why they launched the Hollister concept which was for lower

quality malls: B and C.

Student: Whom do you talk to when doing your research?

GI: I will talk to anyone who will talk to me. I will talk to store managers because they often

know a lot. I try to talk to senior managers. You will get different information from a senior

merchandising manager than a CFO.

We talk to people who come out of the store with or without bags. We speak to store employees.

It depends upon what we are trying to find out at the time. When looking into ARO we wanted to



see a loyal customer base. Are customers coming in and not buying? What do they think of the

merchandise? Are the customers still coming in despite the weak merchandise? One of the basic

things we try to understand is what is happening to their customer base during this period of time

when they have these merchandising missteps. You go in with a thesis on the stock. Why is the

stock cheap? You go in and try to delve further.

The nice thing about retailers is that you have more access to their customers. Again, the more

information the better. I go the malls, my partner and a person in her twenties who spends a lot of

time in the malls—we all go to the malls to check out stores.

I send my mother or anyone who I know is a potential customer to the store. Everybody has a

valid opinion when it comes to retail. We are based on the East Coast so certainly we have a very

warped perspective of the world. It is important to be careful not to extrapolate from the East

Coast to the whole country. If you are out doing that qualitative research you focus on the entire

area not just one area.

Student: What about macro issues that can hurt retailers?

AGI: When it is a cheap retailer like this, this is the customer who will be hit the hardest because

of the high oil prices, but on the other side, the customer who used to shop at Eagle will now shop

at ARO because they have less money. I do not spend too much time on spending trends.

I try to avoid the macro stuff. Do I think the news of the Macro economy is out there already in

the market. Do I think that every article I have read for the past four months is already in the

market? Yes.

I ask whether this is a cheap stock today and do I think over the next two years there will there be

a normal environment.

Student: Do you short stocks?

AGI: Sometimes I short. I prefer to short more of a basket than a particular stock. These stocks

can go to even more ridiculous valuations on the upside. I don’t have the two-year stomach to

wait for a stock to drop like I do for the long side.

If I do see a company posting double digit comps for several months in a row and it is trading at

50 times earnings, do I think it is sustainable? No. I don’t know when it is going to turn but I

know it is unsustainable. You know the day will come. Reversion-to-the-mean.

Student: How do you value growth?

AGI: Here is a quick look at the numbers to say this stock looks cheap, so perhaps we want to do

more work on it. If you notice it’s EV to EBIT is 8 times but this is year coming off of depressed

margins because they messed up on merchandise. So that 8.5 EV/EBIT is not that relevant. You

really want to look out a year. That EV to EBIT is not really that relevant either. People look

down at their numbers not because the business is changed but because they got hurt this year.

I like to put together my own numbers for next year. My own numbers show EV to EBIT of 6

times so it looks pretty cheap, so I want to do more work.



Slides:

This slide is on store potential: It looks pretty exciting for ARO. Just some Easy numbers to

calculate for why the stock looks pretty cheap to me. Those P/Es are not net of cash so net of cash

they are even cheaper so that is interesting. You asked about growth.

ARO with the potential for another 400 stores and the other, Jimmy concept could be 800 stores.

I was more conserve with 600 stores, but there is a lot of store potential there. Here is a situation

where people are looking at this year’s numbers and they are really focusing on that operating

margin number of 10.8%--under pressure. The analysts write that the margins are really under

pressure; we hesitate to recommend it until they get back to better margins (investing in the rear

view mirror). It wasn’t that long ago that the company did north of 14% in margins. It wasn’t

that long ago the company did north of 14%. I believe the company can do 13% while the street is

at 11.5%. Is it difficult for them to get back to 14% op margins considering nothing in their

business has changed in the way they run their business? This says to me, Wow, there is 400 basis

point of operating margin improvement in operating margin here.

They have big room for improvement 11.5% to 14%. You need to look at normalized margins

not depressed margins. If I look at norm in the 13% area because they did 14.5% last year. That

This leads me to a valuation of the stock. But the point being is that I see 10.7% operating margin

with potential to go to 14%, so there is upside here. I get excited. Most people say, ―the stock is at

10.7% margins, I am going to knock it down.‖

There is huge potential upside here from 10.5% margin to 14.5% margin.

AGI: You like to see that has experience opening a large number of stores in a year. Typically

you don’t want to see a company go from 100 to 500 stores in a year, the risk is high. You want

to be sure that they have a good model, they can format the store, they know what their customer

is looking for, and they are earning attractive ROICs. As they gain confidence then the store

opening can accelerate.

GI: A new store may not do as well as a more mature store. If the company has poor

merchandising then it doesn’t matter if they open many stores or not to help ROC. Ask if there

are too many stores opening (saturation) or something else is going on.

I always want to discount their expansion. What is a fair discount for growth? I try to be very

conservative on my terminal value.

Be aware that the quality of merchandising may affect same store sales more than the number of

stores opening or the company being close to a saturation point.

New Slide:

GI: This slide is a little confusing, but it helps you come up with a thesis as to when the stock is

cheap; where you want to buy. I try to take a look out over a five year period and place a terminal

valuation on the stock over that five year period

2.2 billion for Arrow with potential for 400 stores and another 1.4 billion Sq ft. Jimmy’s currently

only has 8 stores. Now, this is a situation where they are in a test mode and they will continue to

test for another 6 mos. When I make my assumptions, I want to be very conservative. So I

assume they test for another two years, then they slowly open 50 stores a year.



If you look at how Arrow opened their store base, once they has their concept down, they opened

100 stores a year. These are conservative estimates. My assumptions are not aggressive in terms

of how I do my valuation.

Over next five years they have 2.2 billion Sq. and 2 billion square foot potential. Arrow doing

$525 a square foot. That is the number I am using for the additional store openings. I am not

assuming big things for comps again.

Jimmy’s not as productive as Arrow. They are doing $400 per sq ft for their category which is

more in line with retailers that compete in their category. Jimmy’s is catering to 18 to 25 year old

customer. You can take a look at competitors to get the numbers.

What is the potent earnings power over that five year period? Normal margins—peak margins

were 14.6%. Mind you, that the company believes it has the pot to do north of that. I assume a

13% margin which I believe is a normalized margin, certainly in line with other retailers and well

below what the company thinks it can do.

They are earning $1.63 on 13% margin and $1.42 with additional margins. If the Arrow can do a

13% margins and Jimmy’s doing a higher margins- Earnings over that five years is $3.05 and

place a low 12 multiple (based on conservative assumptions). Jimmy has the potential to open

800 stores but they will only have 150 stores opened by the end of five years.

Then the buildup of cash over the five years. $110 then adds back depreciation and subtracts

maintenance capex and it gets you to $8 per share in cash and there is $3 in cash today for a total

of $11 per share in cash. I am assuming that management does not pay dividend or buy back

stock, they just sit on their cash. Here you have $37 plus $11 gets you to $45 stock price at the

end of a 5 year period. If you remember Arrow’s stock chart, basically you had a month and a

half to buy at $20 or under to buy this stock. If you had done these calculations, you have a return

of 19% over the next five years. That is one way to look at it.

GI: Right. The way we talk about is that when everyone figures out what Arrow will earn and it

could be a $48 stock, you could have the stock revalued faster and within two years you could

have a $48 stock. Other investors could discount that back at 10% since that is a normal return of

what you expect to get from a stock. The stock could be at $36 within two years which is an 80%

return. Though she presents the return as 19% annualized over five years, when most people start

to figure it out, you could get a big chunk of your upside in the next two or three years.

I just want to make another important point that she made—she built out her store base. In other

words, most people say, ―Well, they are growing their stores at X percent and it deserves that P/E

or that P/E—people just pick numbers out of the sky based on a growth rate that will be short-

term. Whatever the growth rate may be, people just pick—I don’t know what they do. But what

She does is just so logical. She builds out the whole concept; it makes sense. She used

conservative margins and store openings. She built up the new concept by only 20% of the

potential but she still comes up with huge numbers. So this exercise is figuring out what it is

worth and being super conservative. If there is a big gap between what it is worth and what you

are paying, then you have something that is pretty good.

AGI: Another way I look at it is that if the company can get to that $2 in earnings run rate over

the next couple of years, then other investors once they get off same store sales and onto earnings

and then they look at square footage growth and say, ―Oh, they are growing at 15% to 20% so

this company deserves a 15x to 20x multiple, so you have a $30 to $40 stock over the next two



years. The bottom line is that I am not including what I could have put in additional assumptions

which would imply a more aggressive upside for the new concept of Jimmy’s which includes a

more aggressive roll-out of the stores. They could have 500 stores at the end of the five years not

just 150 stores like I mentioned in my assumptions. I am assuming a flattish pick-up of same store

sales, but they could do better. They do a stock buyback and the margin performance is doing

better than that 13%. The company takes steps to improve the margins beyond 14%.

Student: What are the ROIC’s on the stores? What type of return do mall based stores typically

have?

GI: You probably should figure out what the inventory will be.

AGI: This has 20% after tax ROIC, so it is very good.

Student: How did you figure out $20 million per year for capex?

GI: They break out the capex for stores then I multiply by the new stores they open per year—that

is how I reach that number. In terms of MCX, it varies.

What are the assumptions or the things that could happen in a good way which I am not

including? I am very conservative.

Student: Mr. Market rewarding you faster, then so you sell?

AGI: I would exit if the price was revalued much faster than my five year estimates. I have yet to

sell a stock at its peak.

Next week you have your 2nd

project due. Assume we are in the 1st qtr of 1996 for Munsingwear

Case Study.

END



Appendix: ARO, AEOS, ANF 2006 Year End 10-Ks

Form 10-K

AEROPOSTALE INC - ARO

Filed: April 05, 2006 (period: January 28, 2006)

Annual report which provides a comprehensive overview of the company for the past year



10-K - FORM 10-K

PART II

PART I

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for the Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6. Selected Financial Data

Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

SIGNATURES

EX-10.10 (EX-10.10: MERCHANDISE SERVICING AGREEMENT)

EX-21 (EX-21: SUBSIDIARIES)

EX-23.1 (EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP)

EX-31.1 (EX-31.1: CERTIFICATION)




http://www.10kwizard.com/cgi/convert/rtf/ARO-20060405-10K-20060128.rtf?ipage=4082129&g=6528728864e6f6eac1a6a6&quest=1&rid=23&section=1&sequence=-1&rtf=1&cik=1168213&fndateext=1&dn=1#doc_1_1

http://www.10kwizard.com/cgi/convert/rtf/ARO-20060405-10K-20060128.rtf?ipage=4082129&g=6528728864e6f6eac1a6a6&quest=1&rid=23&section=1&sequence=-1&rtf=1&cik=1168213&fndateext=1&dn=1#part_1_2_1


http://www.10kwizard.com/cgi/convert/rtf/ARO-20060405-10K-20060128.rtf?ipage=4082129&g=6528728864e6f6eac1a6a6&quest=1&rid=23&section=1&sequence=-1&rtf=1&cik=1168213&fndateext=1&dn=1#item_1_3_1





















































UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 28, 2006

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31314

AÉROPOSTALE, INC.

(Exact name of registrant as specified in its charter)

Delaware No. 31-1443880

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

112 West 34th Street, 22nd floor

New York, NY

(Address of principal executive offices)

10120

(Zip Code)

Registrant’s telephone number, including area code:

(646) 485-5398

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

Common Stock, $0.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the

Act. Yes No

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, and (2) has been subject to the filing requirements for at least the past

90 days. Yes No



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in

Part III of this Form 10-K or any amendment to this Form 10-K.

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 Act).

Large accelerated filer Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes No

The aggregate market value of voting stock held by non-affiliates of the registrant as of July 30, 2005 was $1,654,423,952.

54,413,785 shares of Common Stock were outstanding at March 15, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days

after the end of the registrant’s fiscal year covered by this Annual Report on Form 10-K, with respect to the Annual Meeting of

Stockholders to be held on June 14, 2006, are incorporated by reference into Part III of this Annual Report on Form 10-K. This report consists of 49 sequentially numbered pages. The Exhibit Index is located at sequentially numbered page 46.

AÉROPOSTALE, INC.

TABLE OF CONTENTS

PART I

Item 1. Business 2

Item 1A. Risk Factors 8

Item 1B. Unresolved Staff Comments 12

Item 2. Properties 12

Item 3. Legal Proceedings 13

Item 4. Submission of Matters to a Vote of Security Holders 13

PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities 13

Item 6. Selected Financial Data 14

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 16

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23

Item 8. Financial Statements and Supplementary Data 24

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44

Item 9A. Controls and Procedures 44

Item 9B. Other Information 44

PART III

Item 10. Directors and Executive Officers of the Registrant 45

Item 11. Executive Compensation 45

Item 12. Security Ownership of Certain Beneficial Owners and Management 45

Item 13. Certain Relationships and Related Transactions 45

Item 14. Principal Accountant Fees and Services 45

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PART IV

Item 15. Exhibits and Financial Statement Schedule 45

Signatures 48

EX-10.10: MERCHANDISE SERVICING AGREEMENT

EX-21: SUBSIDIARIES

EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP

EX-31.1: CERTIFICATION




As used in this Annual Report on Form 10-K, unless the context otherwise requires, all references to ―we‖, ―us‖, ―our‖, ―Aéropostale‖ or the ―Company‖ refer to Aéropostale, Inc., and its subsidiaries. The term ―common stock‖ means our common

stock, $.01 par value. Our website is located at www.aeropostale.com (this and any other references in this Annual Report on

Form 10-K to Aéropostale.com is solely a reference to a uniform resource locator, or URL, and is an inactive textual reference only, not intended to incorporate the website into this Annual Report on Form 10-K). On our website, we make available, as soon as

reasonably practicable after electronic filing with the Securities and Exchange Commission, our annual reports on Form 10-K,

quarterly reports on Form 10-Q, annual Proxy filings and current reports on Form 8-K, and any amendments to those reports. All of these reports are provided to the public free of charge.

PART I

Item 1. Business

Overview

Aéropostale, Inc., a Delaware corporation, is a mall-based specialty retailer of casual apparel and accessories. We design, market

and sell our own brand of merchandise principally targeting 11 to 18 year-old young women and young men. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is a California lifestyle-oriented brand targeting trend-aware young women and men

aged 18-25. We opened our first 14 Jimmy’Z stores during 2005. In May 2005, we launched our Aéropostale e-commerce website,

www.aeropostale.com . As of January 28, 2006, we operated 671 stores, consisting of 657 Aéropostale stores in 47 states and 14 Jimmy’Z stores in 11 states.

Aéropostale provides the customer with a focused selection of high-quality, active-oriented, fashion and fashion basic merchandise at compelling values. Jimmy’Z provides the customer with a broad selection of California lifestyle-oriented merchandise,

targeting trend-aware young men and women. We maintain control over our proprietary brands by designing and sourcing all of our merchandise. Our products are sold only at our stores, online through our e-commerce website or at organized sales events at college

campuses. We strive to create a fun high energy shopping experience through the use of creative visual merchandising, colorful in-

store signage, popular music and an enthusiastic well-trained sales force. Our average Aéropostale store size of approximately 3,500 square feet is generally smaller than that of our mall-based competitors and we believe that this enables us to achieve higher

sales productivity and project a sense of greater action and excitement in the store.

The Aéropostale brand was established by R.H. Macy & Co., Inc., as a department store private label initiative, in the early

1980’s targeting men in their twenties. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the

next decade, Macy’s, and then Federated Department Stores, Inc., expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to our management team and Bear Stearns Merchant Banking. In May of 2002, Aéropostale

management took the company public through an initial public offering and listed its common stock on the New York Stock

Exchange. In July of 2003, the Company effectuated a secondary offering of its common stock. On April 26, 2004, we completed a three-for-two stock split on all shares of our common stock that was affected in the form of a stock dividend. All prior period share

and per share amounts presented in this report have been restated to give retroactive recognition to the common stock split.





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Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2005 was the 52-week period ended January 28, 2006, fiscal

2004 was the 52-week period ended January 29, 2005, and fiscal 2003 was the 52-week period ended January 31, 2004. Fiscal 2006 will be the 53-week period ending February 3, 2007.

Growth Strategy

Continue to open new Aéropostale stores. We consider our merchandise and our stores as having broad national appeal that

continues to provide substantial new store expansion opportunities. Over the last three fiscal years we opened, on average, 100 new Aéropostale stores per year. We plan to open approximately 70 to 75 new Aéropostale stores in fiscal 2006. We plan to open stores

both in markets where we currently operate stores, and in new markets (see the section ― Stores — Store design and environment ‖

below).

Enhance and expand our brand. We seek to capitalize on the success of our core Aéropostale brand, while continuing to

enhance our brand recognition through external as well as in-store marketing initiatives. We expect that as our brand continues to gain increased awareness and greater overall recognition, our stores will continue to be preferred shopping destinations.

Continue high levels of store productivity. We seek to produce comparable store sales growth and increased average sales per

square foot. We expect to continue employing our promotional pricing strategies in order to maintain high levels of customer traffic.

We will also continue testing our products with our core demographics, so that we can identify and capitalize upon developing trends

and continue to evolve with the changing tastes of our customers.

New Business Opportunities

Jimmy’Z. In June 2004, we acquired the rights to and existing registrations for the JIMMY’Z ® and Woody Car Design brand

and trademarks in the United States and Canada for clothing and related goods and services. In 2005, we opened our first 14 Jimmy’Z

stores. These stores average approximately 3,800 square feet. Jimmy’Z is positioned as a California lifestyle-oriented brand, targeting trend-aware young men and women aged 18-25. Merchandise sold at Jimmy’Z stores is at initial price points higher than merchandise

sold at our Aéropostale stores. We anticipate opening up to 5 additional Jimmy’Z stores in various geographic regions during fiscal 2006.

E-Commerce. We launched our Aéropostale e-commerce business in May 2005. The Aéropostale web store is accessible at our website, www.aeropostale.com . A third party provides fulfillment services for our e-commerce business including, warehousing our

inventory and fulfilling our customers’ sales orders. We purchase, manage and own the inventory sold through our website and we

recognize revenue from the sale of these products when the customer receives the merchandise.

Stores

Existing stores. As of January 28, 2006, we operated 671 stores in the following 47 states. We strive to locate our stores in

regional shopping malls located in geographic areas with high concentrations of our target customers:

Number of

Number

Total

Aéropostale

of Jimmy’Z

Number of

State Stores Stores Stores

Alabama 14 — 14

Arkansas 3 — 3

Arizona 11 — 11

California 38 1 39

Colorado 9 — 9

Connecticut 10 — 10

Delaware 4 — 4

Florida 32 1 33

Georgia 17 — 17



Idaho 1 — 1

Illinois 25 1 26

Indiana 20 — 20

Iowa 12 — 12

Kansas 6 — 6

Kentucky 9 — 9

Louisiana 11 — 11

Massachusetts 22 — 22

Maryland 16 — 16

Maine 3 — 3

Michigan 27 — 27

Minnesota 14 1 15

Mississippi 5 — 5

Missouri 15 1 16

Montana 1 — 1

North Carolina 21 1 22

North Dakota 4 — 4

Nebraska 4 — 4

New Hampshire 6 — 6

New Jersey 24 — 24

New Mexico 1 — 1

Nevada 2 — 2

New York 45 1 46

Number of

Number

Total

Aéropostale

of Jimmy’Z

Number of

State Stores Stores Stores

Ohio 33 — 33

Oklahoma 6 — 6

Oregon 4 — 4

Pennsylvania 45 3 48

Rhode Island 1 — 1

South Carolina 11 — 11

South Dakota 2 — 2

Tennessee 19 1 20

Texas 40 2 42

Utah 7 — 7

Virginia 23 — 23

Vermont 2 — 2

Washington 11 — 11

Wisconsin 15 1 16

West Virginia 6 — 6

Total 657 14 671

The following table highlights the number of stores opened and closed since the beginning of fiscal 2003:



Total

Aéropostale

Jimmy’Z

Total

Aéropostale

Number of

Stores

Stores

Stores

Stores

Stores at End

Opened Opened Opened Closed of Period

Fiscal 2003 95 — 95 3 459

Fiscal 2004 103 — 103 1 561

Fiscal 2005 105 14 119 9 671

Store design and environment. We design our stores in an effort to create an energetic shopping environment, featuring

powerful in-store promotional signage, creative visuals and popular music. The enthusiasm of our associates is integral to our store

environment. Our stores feature display windows that provide high visibility for mall traffic. The front of our stores generally feature the newest, and what we anticipate will be the most desirable of our merchandise offerings at that time, in an effort to draw shoppers

into the store. Our strategy is to create fresh and exciting merchandise assortments by updating our floor sets numerous times

throughout the year. Visual merchandising directives are initiated at the corporate level, seeking to maintain consistency throughout

all of our stores. We generally locate our stores in central mall locations near popular teen gathering spots, including food courts,

music stores and other teen-oriented retailers.

New Store design. We are in the process of redesigning our store model and anticipate launching a prototype store design during

fiscal 2006.

Our Aéropostale stores average approximately 3,500 square feet. We believe that by keeping our store size generally smaller

than that of many of our competitors, we are able to achieve a higher level of productivity and help reinforce the sense of activity and energy that we want our stores to project. In addition, we generally implement renovations at the time of renewal of that store’s lease.

Store management. Our stores are organized into two zones and within each zone by region and further into districts. Each of the zones is managed by a Zone Vice President and encompasses 3 to 4 regions. A regional manager manages each of our 7 regions

and each region encompasses approximately 8 to 10 districts. Each district is managed by a district manager and encompasses

approximately 7 to 10 individual stores. We typically staff each store with one store manager, two assistant managers and 10 to 15 part-time sales associates, the number of which generally increases during our peak selling seasons. Store managers are responsible

for the operations of the store including executing guidelines for merchandise presentation and maintenance, scheduling, hiring and

training of sales associates. Store managers also provide the leadership and direction of the selling effort. Our corporate headquarters directs the merchandise assortments, store layout, inventory management and in-store visuals for our stores.

Expansion opportunities and site selection. Over the past four years, we have focused on opening new stores in an effort to penetrate existing markets as well as enter new markets. We plan to continue to increase our store base during fiscal 2006 by opening

approximately 70 to 75 new Aéropostale stores and up to 5 new Jimmy’Z stores (see the section ―Growth Strategy‖ above).

In selecting a specific site, we generally target high traffic locations in malls with suitable demographics and favorable lease

economics. As a result, we tend to locate our stores in malls in which comparable teen-oriented retailers have performed well. A

primary site evaluation criterion includes average sales per square foot, co-tenancies, traffic patterns and occupancy costs.

We have implemented our store format across a wide variety of mall classifications and geographic locations. For new stores

opened in fiscal 2004 and fiscal 2003, our average net investment has been approximately $242,000 per store location, which includes capital expenditures adjusted for landlord contributions and initial inventory at cost net of payables. Those of our stores which were

opened in fiscal 2004 and fiscal 2003 achieved, during their first twelve months of operations, average net sales of approximately

$1.7 million and sales per square selling foot of $494. These amounts exclude certain outlet locations that are not considered profit centers and are utilized primarily to sell end of season merchandise.

Pricing

We believe that a key component of our success is our ability to understand what our customers want and what they can afford.

Our merchandise, which we believe is of comparable quality to that of our primary competitors, is generally priced lower than our competitor’s merchandise. We conduct promotions in our Aéropostale stores throughout the year. Each promotion typically lasts

approximately two to four weeks.

Design and Merchandising



Both our Aéropostale and Jimmy’Z design and merchandising teams focus on designing merchandise that meets the demands of their core customers’ lifestyles. We maintain separate, dedicated, design and merchandising groups for each of our brands and within

those brands, for each of the young women’s, young men’s and accessories product lines.

Design. We offer a focused collection of fashion basic apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans,

outerwear and accessories. Our ―design-driven, merchant-modified‖ philosophy, in which our designers’ visions are refined by our

merchants’ understanding of the current market for our products, helps to ensure that our merchandise styles reflect the latest trends while not becoming too fashion-forward for our customers’ tastes. Much of our merchandise features our brands’ logos. We believe

that both our Aéropostale and Jimmy’Z logo apparel appeals to our young customers and reinforces our brand image.

Merchandising. Our merchandise planning organization determines the quantities of units needed for each product category. By

monitoring sales of each style and color and employing our flexible sourcing capabilities, we are able to adjust our merchandise

assortments to capitalize upon emerging trends.

The following chart provides a historical breakdown of our percentages of sales by category:

Fiscal

2005 2004 2003

Young Women’s 61% 60% 60%

Young Men’s 25% 26% 27%

Accessories 14% 14% 13%

Sourcing

We seek to employ a sourcing strategy that expedites our speed to market and allows us to respond quickly to our customers’

preferences. We believe that we have developed strong relationships with our vendors, some of who rely upon us for a significant

portion of their overall business. The majority of our vendors can respond to orders quickly. We monitor the quality of our vendors’ products by inspecting pre-production samples, arranging for periodic site visits to vendors’ foreign production factories and by

selectively inspecting inbound product shipments at our distribution center.

During fiscal 2005, we sourced approximately 33% of our merchandise from our top three suppliers, and approximately 67%

from our top ten suppliers. In addition, one company acted as our agent in sourcing approximately 21% of our total merchandise.

Most of our vendors maintain sourcing offices in the United States, with the majority of their production factories located in Europe, Asia and Central America. In an effort to minimize currency risk, all payments to our vendors and sourcing agents are made in

U.S. dollars. We engage a third party independent contractor to visit the production facilities we receive our products from. This

independent contractor assesses the compliance of the facility with, among other things, local and United States labor laws and regulations as well as fair trade and business practices.

Marketing and Advertising

We utilize numerous initiatives aimed at maximizing the impact of our marketing and advertising programs. We believe that the

enthusiasm and commitment of our store-level employees is a key element in enhancing the integrity of our brand with our target customers. We also view the use of our logo on our merchandise as a means for expanding our brand awareness and visibility.

We are in the process of expanding our marketing initiatives through focus group testing, customer surveys, expanded print advertisements and other marketing initiatives. In addition, in May 2005 we launched our e-commerce website, which we view as

another marketing tool for the Company. The Aéropostale web store is accessible at our website, www.aeropostale.com (see the

section ―New Business Opportunities‖ above).

We have also developed a targeted marketing program that allows us to gain additional exposure for our brand on college

campuses. We believe that our target customers value and aspire to an active, collegiate lifestyle. Accordingly, we sponsor a number of major collegiate athletic conference tournaments, including the Big East Men’s Basketball Tournament, by acting as presenting

sponsor for the tournament, providing co-branded apparel and donating various collegiate scholarships, among other things. In addition, we have entered into agreements with numerous colleges and universities enabling us to sell and market our products on

campuses through organized periodic sales events.



Distribution

We lease a 315,000 square foot distribution facility in South River, New Jersey, to process merchandise and to warehouse

inventory needed to replenish our stores. The timely and efficient replenishment of our merchandise is key to our overall business strategy. We continue to invest in systems and automation to improve processing efficiencies, automate functions which were

previously performed manually and to support our store growth. Our distribution center uses automated sortation materials handling

equipment to receive, process and ship to our stores. Our distribution center services all of our Aéropostale and Jimmy’Z stores. This facility also serves our other warehousing needs, such as storage of new store merchandise, floor set merchandise and packaging

supplies. The distribution center is currently equipped to process merchandise for over 800 stores.

The staffing and management of the distribution facility is outsourced to a third party provider that operates the distribution

facility and processes our merchandise. This third party provider employs personnel represented by a labor union. There have been no

work stoppages or disruptions since the inception of our relationship with this third party provider in 1991, and we believe that the third party provider has a good relationship with its employees. In addition, we outsource the shipment of our merchandise through

another third party provider. This third party ships our merchandise from our distribution facility to our stores.

We are currently considering opening a second distribution center and warehouse facility on the west coast of the United States.

We believe that this will allow us to more effectively flow goods which enter the United States through various ports on either coast,

more quickly and efficiently to our stores.

Information Systems

Our management information systems provide a full range of retail, financial and merchandising applications. We utilize

industry specific software systems to provide various functions related to:

• point-of-sale;

• inventory management;

• supply chain;

• planning and replenishment; and

• financial reporting.

We continue to invest in technology to align our technology and systems with our business requirements and to support our

continuing growth. In the past year we focused on key aspects of critical infrastructure requirements, and we plan to continue this

focus in the future. We are also undertaking initiatives to upgrade our point-of-sale systems for our stores.

Trademarks

We have registered the AÉROPOSTALE® trademark and stylized design with the U.S. Patent and Trademark Office as a

trademark for clothing and for a variety of accessories, including sunglasses, belts, socks and hats, and as a service mark for retail

clothing stores. We have also registered the AÉRO TM stylized design mark with the U.S. Patent and Trademark Office as a trademark for clothing and a further filing for AÉRO HOUSE SM for online services is pending. Additionally, we have applied for or have

obtained a registration for the AÉROPOSTALE mark in over 26 foreign countries where we obtain supplies, manufacture goods or

have the potential of doing so in the future.

In June 2004, we acquired the rights to and existing registrations for the JIMMY’Z® and Woody Car Design brand and marks in

the United States and Canada for clothing and related goods and services. We have also made further filings for the JIMMY’Z and Woody Car Design marks which are pending.

Competition



The teen apparel market is highly competitive. We compete with a wide variety of retailers including other specialty stores,

department stores, mail order retailers and mass merchandisers. Specifically, we compete with other teen apparel retailers including, but not limited to, American Eagle Outfitters ® , Hollister ® , Hot Topic ® , Old Navy ® , Pacific Sunwear ® , and Too ® . Stores in our

sector compete primarily on the basis of design, price, quality, service and selection. We believe that our competitive advantage lies

with our differentiated brand and our unique combination of quality, comfort and value. Moreover, we believe that we target a younger, value-oriented customer, while many of our competitors cater to a customer who is either older or seeking cutting-edge

fashion.

Many of our competitors are considerably larger and have substantially greater financing, marketing, and other resources. We

cannot assure you that we will be able to compete successfully in the future, particularly in geographic locations that represent new

markets for us.

Employees

As of January 28, 2006, we employed 2,600 full-time and 7,021 part-time employees. We employed 296 of our employees at our

corporate offices, and 9,325 at our store locations. The number of part-time employees fluctuates depending on our seasonal needs.

None of our employees are represented by a labor union and we consider our relationship with our employees to be good.

Seasonality

Our business is highly seasonal, and historically we have realized a significant portion of our sales, net income and cash flows in

the second half of the year, attributable to the impact of the back-to-school selling season in the third quarter, and the holiday selling

season in the fourth quarter. Additionally, working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters.

Available Information

We maintain an internet website, www.aeropostale.com, through which access is available to our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments of these reports filed, or furnished pursuant to

Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after they are filed with or furnished to the Securities and Exchange

Commission.

Our Corporate Governance Guidelines and the charters for our Audit Committee, Corporate Governance and Nominating

Committee and Compensation Committee may also be found on our internet website at www.aeropostale.com . In addition, our website contains the Charter for our Lead Independent Director and Code of Business Conduct and Ethics, which is our code of ethics

and conduct for our directors, officers and employees. Any waivers to our Code of Business Conduct and Ethics will be promptly

disclosed on our website.

Item 1A. Risk Factors

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve certain risks and

uncertainties, including statements regarding the company’s strategic direction, prospects and future results. Certain factors, including

factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements. The following risk factors should be read in connection with evaluating the Company’s business and future prospects. All forward

looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation

to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors:

Fluctuations in Comparable Store Sales and Quarterly Results of Operations May Cause the Price of our Common Stock to

Decline Substantially.

Our comparable store sales and quarterly results of operations have fluctuated in the past and are likely to continue to fluctuate

in the future. In addition, there can be no assurance that we will be able to maintain our recent levels of comparable store sales as our



business continues to expand. Our comparable store sales and quarterly results of operations are affected by a variety of factors,

including:

• fashion trends;

• changes in our merchandise mix;

• the effectiveness of our inventory management;

• actions of competitors or mall anchor tenants;

• calendar shifts of holiday or seasonal periods;

• changes in general economic conditions and consumer spending patterns;

• the timing of promotional events; and

• weather conditions.

If our future comparable store sales fail to meet the expectations of investors, then the market price of our common stock could decline substantially. You should refer to the section entitled ―Management’s Discussion and Analysis of Financial Condition and

Results of Operations‖ for more information.

If We Are Unable to Identify and Respond to Consumers’ Fashion Preferences in a Timely Manner, our Profitability Would

Decline.

We may not be able to keep pace with the rapidly changing fashion trends and consumer tastes inherent in the apparel industry.

Accordingly, we produce casual, comfortable apparel, a majority of which displays either the ―Aéropostale‖ or ―Aéro‖ logo. There can

be no assurance that fashion trends will not move away from casual clothing or that we will not have to alter our design strategy to reflect a consumer change. Failing to anticipate, identify or react appropriately to changes in styles, trends, desired images or brand

preferences, could have a material adverse effect on the Company’s sales, financial condition and results of operations.

Our Business Could Suffer As a Result of a Manufacturer’s Inability to Produce Merchandise on Time and to Specifications.

We do not own or operate any manufacturing facilities and therefore we depend upon independent third parties to manufacture

all of our merchandise. We utilize both domestic and international manufacturers to produce our merchandise. The inability of a

manufacturer to ship orders in a timely manner or meet our quality standards could cause delivery date requirements to be missed, which could result in lost sales.

Our Business Could Suffer if a Manufacturer Fails to Use Acceptable Labor Practices.

Our sourcing agents and independent manufacturers are required to operate in compliance with all applicable foreign and

domestic laws and regulations. While our vendor operating guidelines promote ethical business practices for our vendors and suppliers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by an independent

manufacturer, or by one of the sourcing agents, or the divergence of an independent manufacturer’s or sourcing agent’s labor practices

from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products or

damage the Company’s reputation. Any of these, in turn, could have a material adverse effect on the Company’s financial condition

and results of operations. To help mitigate this risk, we engage a third party independent contractor to visit the production facilities we

receive our products from. This independent contractor assesses the compliance of the facility with, among other things, local and United States labor laws and regulations as well as foreign and domestic fair trade and business practices.

We Rely on a Small Number of Vendors to Supply a Significant Amount of our Merchandise.

In fiscal 2005, we sourced approximately 33% of our merchandise from our top three suppliers; one company supplied approximately 15% of our merchandise, and two others each supplied approximately 9% of our merchandise. In addition,

approximately 67% of our merchandise was directly sourced from our top ten suppliers, and one company acted as our agent with

respect to the sourcing of approximately 21% of our merchandise. Our relationships with our suppliers generally are not on a long-



term contractual basis and do not provide assurances on a long-term basis as to adequate supply, quality or acceptable pricing. Most of

our suppliers could discontinue selling to us at any time. If one or more of our significant suppliers were to sever their relationship with us, we could be unable to obtain replacement products in a timely manner, which could cause our sales to decrease.

Foreign Suppliers Manufacture Most of Our Merchandise and the Availability and Costs of These Products May Be Negatively

Affected by Risks Associated with International Trade.

Trade restrictions such as increased tariffs or quotas, or both, could affect the importation of apparel generally and increase the cost and reduce the supply of merchandise available to us. Much of our merchandise is sourced directly from foreign vendors in

Europe, Asia and Central America. In addition, many of our domestic vendors maintain production facilities overseas. Some of these

facilities are also located in regions that may be affected by political instability that could cause a disruption in trade. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local political issues could have a material adverse

effect on our results of operations.

Our Growth Strategy Relies on the Continued Addition of a Significant Number of New Stores Each Year, Which Could Strain

Our Resources and Cause the Performance of Our Existing Stores to Suffer.

Our growth will largely depend on our ability to open and operate new stores successfully. We opened 105 Aéropostale and 14

Jimmy’Z stores in fiscal 2005, 103 Aéropostale stores in fiscal 2004, and 95 Aéropostale stores in fiscal 2003. Additionally, we plan

to open approximately 70 to 75 Aéropostale and up to 5 new Jimmy’Z stores in fiscal 2006. We expect to continue to open a significant number of new stores in future years while also remodeling a portion of our existing store base. Our planned expansion will

place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to

operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores. In addition, to the extent that our new store openings are in existing markets, we may experience reduced net sales volumes in previously

existing stores in those same markets.

Our Continued Expansion Plan is Dependent on a Number of Factors Which, if Not Implemented, Could Delay or Prevent the

Successful Opening of New Stores and Penetration into New Markets.

Unless we continue to do the following, we may be unable to open new stores successfully and, if so, our continued growth

would be impaired:

• identify suitable markets and sites for new store locations;

• negotiate acceptable lease terms;

• hire, train and retain competent store personnel;

• foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume

of merchandise;

• manage inventory effectively to meet the needs of new and existing stores on a timely basis;

• expand our infrastructure to accommodate growth; and

• generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund our

expansion plans.

In addition, we will open new stores in markets in which we currently have few or no stores. Our experience in these markets is

limited and there can be no assurance that we will be able to develop our brand in these markets or adapt to competitive, merchandising and distribution challenges that may be different from those in our existing markets. Our inability to open new stores

successfully and/or penetrate new markets would have a material adverse effect on our revenue and earnings growth.

The Loss of the Services of Key Personnel Could Have a Material Adverse Effect on Our Business.



The Company’s key executive officers have substantial experience and expertise in the retail business and have made significant

contributions to the growth and success of the Company’s brands. The unexpected loss of the services of one or more of these individuals could adversely affect the Company. Specifically, if we were to lose the services of Julian R. Geiger, our Chairman and

Chief Executive Officer, and/or Christopher L. Finazzo, our Executive Vice President-Chief Merchandising Officer, our business

could be adversely affected. In addition, Mr. Geiger and Mr. Finazzo maintain many of our vendor relationships, and the loss of either of them could negatively impact present vendor relationships.

Failure of New Business Concepts Would Have an Effect on Our Results of Operations.

We expect that the introduction of new brand concepts and other business opportunities will play an important role in our overall

growth strategy. In particular, we have and will continue to open our Jimmy’Z brand stores. The operation of the Jimmy’Z store is subject to numerous risks, including unanticipated operating problems; lack of prior experience; lack of customer acceptance; new

vendor relationships; competition from existing and new retailers; and could be a diversion of management’s attention from the

Company’s core Aéropostale business. The Jimmy’Z concept involves, among other things, implementation of a retail apparel concept which is subject to many of the same risks as Aéropostale, as well as additional risks inherent with a more fashion driven concept,

including risks of difficulty in merchandising, uncertainty of customer acceptance, fluctuations in fashion trends and customer tastes,

as well as the attendant mark-down risks. Risks inherent in any new concept are particularly acute with respect to Jimmy’Z because this is the first significant new venture by us, and the nature of the Jimmy’Z business differs in certain respects from that of our core

Aéropostale business. There can be no assurance that the Jimmy’Z stores will achieve sales and profitability levels justifying our

investments in this business. If those sales levels are not achieved we may be forced to impair the carrying value of our investments, which impairment would have an impact on our results of operations.

Our Net Sales and Inventory Levels Fluctuate on a Seasonal Basis.

Our net sales and net income are disproportionately higher from August through January each year due to increased sales from

back-to-school and holiday shopping. Sales during this period cannot be used as an accurate indicator for our annual results. Our net sales and net income from February through July are typically lower due to, in part, the traditional retail slowdown immediately

following the winter holiday season. Any significant decrease in sales during the back-to-school and winter holiday seasons would have a material adverse effect on our financial condition and results of operations. In addition, in order to prepare for the back-to-

school and holiday shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during

other parts of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively impact our

profitability.

A Downturn in the United States Economy May Affect Consumer Spending Habits.

Consumer purchases of discretionary items and retail products, including the Company’s products, may decline during recessionary periods and also may decline at other times when disposable income is lower. A downturn in the economy may adversely

affect our sales.

Our Ability to Attract Customers to Our Stores Depends Heavily on the Success of the Shopping Malls in Which We are Located.

In order to generate customer traffic, we must locate our stores in prominent locations within successful shopping malls. We cannot control the development of new shopping malls, the availability or cost of appropriate locations within existing or new

shopping malls, or the success of individual shopping malls. A significant decrease in shopping mall traffic would have a material

adverse effect on our results of operations.

We Rely on a Single Distribution Center.

We maintain one distribution center to receive, store and distribute merchandise to all of our stores. Any significant interruption

in the operation of the distribution center due to natural disasters, accidents, system failures or other unforeseen causes could have a

material adverse effect on the Company’s financial condition and results.

We Rely on a Third Party to Manage Our Distribution Center.

The efficient operation of our stores is dependent on our ability to distribute, in a timely manner, merchandise to our store

locations throughout the United States. An independent third party operates our distribution and warehouse facility. We depend on this

third party to receive, sort, pack and distribute substantially all of our merchandise. This third party employs personnel represented by a labor union. Although there have been no work stoppages or disruptions since the inception of our relationship with this third party

provider beginning in 1991, there can be no assurance that work stoppages or disruptions will not occur in the future. We also use a



separate third party transportation company to deliver our merchandise from our warehouse to our stores. Any failure by either of

these third parties to respond adequately to our warehousing and distribution needs would disrupt our operations and negatively impact our profitability.

Failure to Protect Our Trademarks Adequately Could Negatively Impact Our Brand Image and Limit Our Ability to Penetrate

New Markets.

We believe that our key trademarks AÉROPOSTALE® and, to a lesser extent, AERO® are integral to our logo-driven design strategy. We have obtained a federal registration of the AÉROPOSTALE ® trademark in the United States and have applied for or

obtained registrations in most foreign countries in which our vendors are located. We use the AERO mark in many constantly

changing designs and logos even though we have not applied to register every variation or combination thereof for adult clothing. We also believe that the newly obtained JIMMY’Z and Woody Car Design marks are an important part of our growth strategy and

expansion of our business. We have acquired federal registrations in the United States and in Canada and have expanded the scope of

our filings in the United States Patent and Trademark Office for a greater number of apparel and accessory categories. There can be no assurance that the registrations we own and have obtained will prevent the imitation of our products or infringement of our

intellectual property rights by others. If any third party imitates our products in a manner that projects lesser quality or carries a

negative connotation, our brand image could be materially adversely affected. Because we have not registered the AERO mark in all forms and categories and have not registered the ―AÉROPOSTALE‖, ―JIMMY’Z‖ and Woody Car Design marks in all categories or

in all foreign countries in which we now or may in the future source or offer our merchandise, international expansion and our

merchandising of non-apparel products using these marks could be limited.

In addition, there can be no assurance that others will not try to block the manufacture, export or sale of our products as violation

of their trademarks or other proprietary rights. Other entities may have rights to trademarks that contain the word ―AERO‖ or may have registered similar or competing marks for apparel and accessories in foreign countries in which our vendors are located. Our

applications for international registration of the AÉROPOSTALE ® mark have been rejected in several countries in which our

products are manufactured because third parties have already registered the mark for clothing in those countries. There may also be other prior registrations in other foreign countries of which we are not aware. In addition, we do not own the Jimmy’Z brand outside

of the United States and Canada. Accordingly, it may be possible, in those few foreign countries where we were not been able to register the AÉROPOSTALE ® mark, or in the countries where the Jimmy’Z brand is owned by a third party, for a third party owner

of the national trademark registration for ―AÉROPOSTALE‖, ―JIMMY’Z‖ or the Woody Car Design to enjoin the manufacture, sale

or exportation of Aéropostale or Jimmy’Z branded goods to the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our products in those countries. Our inability to register our trademarks or

purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from or

manufacture in less costly markets or penetrate new markets should our business plan change to include selling our merchandise in those jurisdictions outside the United States.

The Effects of War or Acts of Terrorism Could Have a Material Adverse Effect on Our Operating Results and Financial

Condition.

The continued threat of terrorism, heightened security measures and military action in response to an act of terrorism has disrupted commerce and has intensified the uncertainty of the U.S. economy. Any further acts of terrorism or a future war may disrupt

commerce and undermine consumer confidence, which could negatively impact our sales revenue by causing consumer spending

and/or mall traffic to decline. Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from foreign vendors. Inability to obtain merchandise from our foreign vendors or

substitute other vendors, at similar costs and in a timely manner, could adversely affect our operating results and financial condition.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

We lease all of our store locations in shopping malls throughout the U.S. Most of our store leases have an initial term of ten

years, and require us to pay additional rent based on specified percentages of sales, after we achieve specified annual sales thresholds. Generally, our store leases do not contain extension options. Our store leases typically include a pre-opening period of approximately

60 days that allows us to take possession of the property to construct the store. Typically rent payment commences when the stores

open. We recognize rent expense in our consolidated financial statements on a straight-line basis over the non-cancelable term of each



individual underlying lease, commencing when we take possession of the property. Generally, our leases allow for termination by us

after a certain period of time if sales at that site do not exceed specified levels.

We lease 59,121 square feet of office space at 112 West 34th Street in New York, New York. The facility is used as our

corporate headquarters and for our design, sourcing and production teams. These leases expire in November 2015 and November 2016.

We also lease 20,000 square feet of office space at 201 Willowbrook Boulevard in Wayne, New Jersey. This facility is used as administrative offices for finance, operations and information systems personnel. This lease expires in May 2009. We are currently

considering expanding our office space in Wayne, New Jersey in order to support our continued expansion.

In addition, we lease a 315,000 square foot distribution and warehouse facility in South River, New Jersey. This facility is used

to warehouse inventory needed to replenish and back-stock all of our stores, as well as to serve our general warehousing needs. This

lease expires in May 2016. We are currently considering opening a second distribution center and warehouse facility, intended to be located on the west coast of the United States. We believe that this will allow us to more effectively flow goods which enter the

United States through various ports on either coast, more quickly and efficiently to our stores.

Item 3. Legal Proceedings

We are party to various litigation matters and proceedings in the ordinary course of business. In the opinion of our management,

dispositions of these matters are not expected to have a material adverse affect on our financial position, results from operations or

cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of the fiscal year covered by this

report.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange under the symbol ―ARO‖. The following table sets forth the range of high and low sales prices of our common stock as reported on the New York Stock Exchange since February 1, 2004, as

adjusted for the three-for-two stock split on all shares of our common stock that was affected on April 26, 2004.

Market Price

High Low

Fiscal 2005

4th quarter $ 31.00 $ 18.85

3rd quarter 29.81 18.05

2nd quarter 35.46 25.31

1st quarter 35.10 26.75

Fiscal 2004

4th quarter $ 34.38 $ 25.65

3rd quarter 33.98 25.87

2nd quarter 30.94 21.99



1st quarter 25.20 19.86

As of March 15, 2006, there were 51 stockholders of record. However, when including others holding shares in broker accounts

under street name, we estimate the shareholder base at approximately 16,000.

We repurchase our common stock from time to time under a stock repurchase program that was initiated in 2003. In November

2005, our Board of Directors approved an additional $50.0 million repurchase availability, thereby increasing the total amount of repurchase availability under this program to $150.0 million. The repurchase program may be modified or terminated by the Board of

Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases will depend upon general

business and market conditions, stock prices, and liquidity and capital resource requirements going forward. Our purchases of treasury stock for the fourth quarter ended January 28, 2006 and remaining availability pursuant to our share repurchase program were the

following:

Total Number of

Approximate Dollar

Total Number

Shares Purchased

Value of Shares

of Shares

Average

as Part of Publicly

that may yet be

(or Units)

Price Paid

Announced Plans

Purchased Under the

Period Purchased per Share or Programs Plans or Programs

(In thousands) (In thousands) (In thousands)

November 2005 — $ — — $ 50,723

December 2005 265,700 $ 24.69 265,700 $ 44,163

January 2006 80,000 $ 28.85 80,000 $ 41,855

Total 345,700 $ 25.65 345,700

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with ―Management’s Discussion and Analysis of Financial

Condition and Results of Operations,‖ and with our consolidated financial statements and other financial information appearing

elsewhere in this document. In January 2002, we changed our fiscal year end from the Saturday closest to July 31st to the Saturday closest to January 31st of each year. The fifty-two week period ended February 2, 2002 and the six month period ended February 3,

2001 are unaudited and are presented for comparative purposes:

52 Week

Period

Fiscal

Year

Fiscal Year Ended

Ended

Six Month Period

Ended Ended

January 28

,

January 2

9,

January 3

1,

February

1,

February

2,

February

2,

February

3,

August 4,

2006 2005 2004 2003 2002 2002 2001 2001

(In thousands, except per share data)

Statement of

Income Data:

Net sales $

1,204,3

47 $

964,2

12 $

734,8

68 $

550,9

04 $

404,4

38 $

284,0

40 $

184,3

69 $

304,7

67

Gross profit, as 30.1 % 33.2 % 31.3 % 29.5 % 32.2 % 36.6 % 32.4 % 28.3 %



a percent of

sales

SG&A, as a

percent of

sales 18.9 % 19.1 % 19.3 % 20.1 % 21.4 % 19.4 % 18.7 % 21.6 %

Net income, as

a percent of

sales 7.0 % 8.7 % 7.4 % 5.7 % 6.6 % 10.7 % 8.2 % 3.7 %

Income from

continuing

operations 83,954

84,11

2

54,25

4

31,29

0

24,85

7

28,63

7

14,69

4

10,91

4

Net income 83,954

84,11

2

54,25

4

31,29

0

26,50

6

30,26

9

15,08

2

11,31

9

Preferred

dividends — — — 362 1,113 574 508 1,048

Net income

available to

common

stockholders $ 83,954 $

84,11

2 $

54,25

4 $

30,92

8 $

25,39

3 $

29,69

5 $

14,57

4 $

10,27

1

Diluted

earnings per

common

share:

From

continuing

operations $ 1.50 $ 1.47 $ 0.93 $ 0.54 $ 0.44 $ 0.52 $ 0.27 $ 0.19

From

discontinue

d

operations — — — — — — 0.01 —

From

cumulative

accounting

change — — — — 0.03 0.03 — —

Diluted

earnings

per

common

share $ 1.50 $ 1.47 $ 0.93 $ 0.54 $ 0.47 $ 0.55 $ 0.28 $ 0.19

Selected

Operating

Data:

Number of

stores open at

end of period 671 561 459 367 278 278 224 252

Comparable

store sales

increase 3.5 % 8.7 % 6.6 % 6.6 % 15.5 % 23.0 % 14.5 % 8.7 %

Average store

sales (in

thousands) $ 1,890 $ 1,849 $ 1,728 $ 1,651 $ 1,521 $ 1,028 $ 872 $ 1,360

Average square

footage per

store 3,537 3,512 3,511 3,541 3,463 3,463 3,460 3,437



Sales per square

foot $ 534 $ 526 $ 491 $ 471 $ 456 $ 297 $ 250 $ 392

As of

January 28,

January 29,

January 31,

February 1,

February 2,

2006 2005 2004 2003 2002

(In thousands)

Balance Sheet Data:

Working capital $ 212,986 $ 182,493 $ 140,879 $ 86,791 $ 38,181

Total assets 503,951 405,819 307,048 223,032 146,927

121/2% Series B

redeemable preferred

stock — — — — 9,617

Total debt — — — — —

Total stockholder’s equity 284,790 238,251 185,693 127,959 60,190

Cash dividends declared per

common share — — — — —

Per share amounts have been restated to reflect a three-for-two split of our common stock that was affected in April 2004.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Aéropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories in the United States. Our target customers are both young women and young men from age 11 to 18, and we provide our customers with a selection of high-quality, active-

oriented, fashion basic merchandise at compelling values in a high-energy store environment. We maintain control over our

proprietary brand by designing and sourcing all of our own merchandise. Our products can be purchased in our stores, which sell Aéropostale merchandise exclusively, on our e-commerce website, www.aeropostale.com , and at organized sales events at college

campuses. We opened our first 14 Jimmy’Z stores in 2005. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is

a California lifestyle-oriented brand targeting trend-aware young women and men aged 18 to 25. We also launched our Aéropostale e-commerce business in May 2005. As of January 28, 2006, we operated 671 stores, consisting of 657 Aéropostale stores in 47 states

and 14 Jimmy’Z stores in 11 states, in addition to www.aeropostale.com (see the section ―Growth Strategy‖ in Part I of this report for

a further discussion).

The discussion in the following section is on a consolidated basis, unless indicated otherwise.

Overview

We achieved net sales of $1,204.3 million in fiscal 2005, an increase of $240.1 million or 24.9% from fiscal 2004. This increase was attributable to total store square footage growth of 20.0%, coupled with a 3.5% comparable store sales increase. Gross profit, as a

percentage of net sales, decreased by 3.1 percentage points for fiscal 2005. The decline in gross profit, as a percentage of net sales,

was primarily due to decreased merchandise margins from significantly higher promotional activity, which was intended to stimulate demand for our merchandise offerings. Gross profit for fiscal 2004 was unfavorably impacted by a $4.7 million cumulative rent

charge related to the correction to our lease accounting policies that was recorded in the fourth quarter of fiscal 2004 (see note 1 to the

Notes to Consolidated Financial Statements for a further discussion). Selling, general and administrative expense, or SG&A, as a percentage of net sales, declined by 0.2 percentage points in fiscal 2005. These reductions were attributable to a decrease in incentive

compensation and a retirement plan charge recorded in 2004. Net income for fiscal 2005 was $84.0 million, or $1.50 per diluted share, compared with net income of $84.1 million, or $1.47 per diluted share, for fiscal 2004. Net income for fiscal 2005 included a net loss

of $4.7 million, or $0.08 loss per diluted share, from our Jimmy’Z subsidiary. The above mentioned cumulative rent charge

unfavorably impacted our net income for fiscal 2004 by $2.8 million, or by $0.05 per diluted share.

As of January 28, 2006, we had working capital of $213.0 million, cash and cash equivalents of $205.2 million, short-term

investments of $20.0 million, and no third party debt outstanding. Merchandise inventories increased by 13% as of January 28, 2006,



compared to last year, and decreased by 6% on a square foot basis. Cash flows from operating activities were $144.4 million for fiscal

2005. We operated 671 total stores as of January 28, 2006, an increase of 20% from the same period last year.

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our

business, including the following:

Fiscal Year Ended

January 28,

January 29,

January 31,

2006 2005 2004

Net sales (in millions) $ 1,204.3 $ 964.2 $ 734.9

Total store count at end of period 671 561 459

Comparable store count at end of period 550 448 359

Net sales growth 24.9 % 31.2 % 33.4 %

Comparable store sales growth 3.5 % 8.7 % 6.6 %

Net sales per average square foot $ 534 $ 526 $ 491

Gross profit (in millions) $ 362.5 $ 319.9 $ 229.7

Income from operations (in millions) $ 135.4 $ 135.9 $ 88.2

Diluted earnings per share $ 1.50 $ 1.47 $ 0.93

Square footage growth 20.0 % 23.0 % 24.0 %

Increase in total inventory at end of period 13 % 31 % 33 %

(Decrease) increase in inventory per square foot at end of period (6 )% 7 % 7 %

Percentages of net sales by category

Women’s 61 % 60 % 60 %

Men’s 25 % 26 % 27 %

Accessories 14 % 14 % 13 %

Results of Operations

The following table sets forth our results of operations expressed as a percentage of net sales. We also use this information to evaluate the performance of our business:

Fiscal Year Ended

January 28,

January 29,

January 31,

2006 2005 2004

Net sales 100.0 % 100.0 % 100.0 %

Gross profit 30.1 33.2 31.3

SG&A 18.9 19.1 19.3

Income from operations 11.2 14.1 12.0

Interest income, net 0.3 0.1 0.1

Income before income taxes 11.5 14.2 12.1

Income taxes 4.5 5.5 4.7

Net income 7.0 % 8.7 % 7.4 %

Sales



Net sales consist of sales from comparable stores and non-comparable stores, and from our e-commerce business. A store is included in comparable store sales after 14 months of operation. We consider a remodeled or relocated store with more than a 25%

change in square feet to be a new store. Prior period sales from stores that have closed are not included in comparable store sales, nor

are sales from our periodic arrangements with colleges and universities.

Net sales increased by $240.1 million, or by 24.9% in fiscal 2005. The net sales increase was attributable to both increased

comparable store sales and new store sales. Comparable store sales increased by $31.2 million, or by 3.5%, reflecting comparable store sales increases in all of our categories: young women’s, young men’s, and accessories. The comparable stores sales increase

reflected a 1.8% increase in units per transaction, a 10.4% increase in the number of sales transactions, and an 8.0% decrease in

average dollar per unit. Due to lower than expected sales performance during the third quarter of 2005, we increased our promotional activity throughout the balance of fiscal 2005 in an effort to stimulate customer demand for our merchandise offerings. Non-

comparable store sales increased by $208.9 million, or by 21.4%, primarily due to 110 more stores open at the end of fiscal 2005

versus fiscal 2004.

Net sales increased by $229.3 million, or by 31.2% in fiscal 2004. The net sales increase was attributable to both increased

comparable store sales and new store sales. Comparable store sales increased by $58.0 million, or by 8.7%, reflecting comparable store sales increases in all of our categories: young women’s, young men’s, and accessories. The comparable stores sales increase

reflected a 5.5% increase in units per transaction, a 5.4% increase in the number of sales transactions, and a 2.2% decrease in average

dollar per unit. Non-comparable store sales increased by $171.3 million, or by 22.5%, primarily due to 102 more stores open at the end of fiscal 2004 versus fiscal 2003.

Cost of Sales and Gross Profit

Cost of sales includes costs related to: merchandise sold, distribution and warehousing, freight from the distribution center and

warehouse to the stores, payroll for our design, buying and merchandising departments, and occupancy costs. Occupancy costs include: rent, contingent rents, common area maintenance, real estate taxes, utilities, repairs, maintenance and all depreciation.

Gross profit, as a percentage of net sales, decreased by 3.1 percentage points in fiscal 2005. Gross profit for fiscal 2004 was

unfavorably impacted by a one-time, non-cash pre-tax rent charge of $4.7 million, or 0.5 percentage points, related to a correction to

our lease accounting policies associated with the timing of rent expense (see note 1 to the Notes to Consolidated Financial Statements for a further discussion). The decrease in gross profit was attributable to a 3.0 percentage point decline in merchandise margin, and a

0.3 percentage point increase in occupancy costs and depreciation. The decline in merchandise margin was primarily attributable to

significantly higher promotional activity.

Gross profit, as a percentage of net sales, increased by 1.9 percentage points in fiscal 2004. The above mentioned cumulative

rent charge unfavorably impacted gross profit by 0.5 percentage points in fiscal 2004. Merchandise margins increased by 1.4 percentage points, reflecting increases in all our categories. The improvement in merchandise margins was primarily due to lower

promotional markdowns, as well as lower initial cost. The leveraging of rent and distribution costs against the increased net sales

contributed to 0.5 percentage points of the gross profit increase, as a percentage of sales.

SG&A

SG&A includes costs related to: selling expenses, store management and corporate expenses such as payroll and employee benefits, marketing expenses, employment taxes, information technology maintenance costs and expenses, insurance and legal

expenses, and store pre-opening and other corporate expenses. Store pre-opening expenses include store payroll, grand opening event

marketing, travel, supplies and other store pre-opening expenses.

SG&A increased by $43.1 million in fiscal 2005, due largely to a $29.6 million increase in payroll and benefits, consisting

primarily of store payroll, from new store growth. The remainder of the increase was predominantly due to increased store transaction costs of $8.6 million, resulting from both sales growth and new store growth, and a $3.0 million increase in marketing costs. SG&A,

as a percentage of net sales, decreased by 0.2 percentage points, primarily due to a 0.6 percentage point reduction in incentive

compensation and a 0.3 percentage point decrease in benefit costs. These savings were partially offset by a 0.3 percentage point increase in store transaction expenses and a 0.2 percentage point increase in store payroll.

SG&A increased by $42.5 million in fiscal 2004. This increase was due largely to a $32.2 million increase in payroll and benefits, consisting primarily of store payroll, as a result of new store growth. The remainder of the increase was predominantly due to

increased store transaction and operating costs, resulting from both sales growth and new store growth. SG&A, as a percentage of net

sales, decreased by 0.2 percentage points, and was primarily due to the leveraging of SG&A expenses against the increased net sales.

Interest Income



Interest income, net of interest expense, increased by $2.2 million in fiscal 2005 and by $0.7 million in fiscal 2004. Increases in interest rates during fiscal 2005, and increases in cash and cash equivalents, together with short-term investments, were the primary

drivers of the increase in net interest income. Cash and cash equivalents, together with short-term investments, increased by

$42.9 million at the end of fiscal 2005. Cash and cash equivalents, together with short-term investments, increased by $44.0 million at the end of fiscal 2004.

Income Taxes

Our effective income tax rate was 39.6% for fiscal 2005, compared to 38.8% for fiscal 2004, and 39.0% for fiscal 2003. The

increase in the effective income tax rate during fiscal 2005 was primarily due to an increase in the effective state income tax rate.

Net Income and Earnings Per Share

Net income was $84.0 million, or $1.50 per diluted share, for fiscal 2005, compared with net income of $84.1 million, or $1.47 per diluted share, for fiscal 2004. The above mentioned cumulative rent charge unfavorably impacted our net income for fiscal

2004 by $2.8 million, or by $0.05 per diluted share. Net income for fiscal 2005 included a net loss of $4.7 million, or $0.08 loss per

diluted share, from our investment in Jimmy’Z .

Net income increased by $29.9 million, or 55.0%, for fiscal 2004. Diluted earnings per share increased 58.1% to $1.47 per

diluted share for fiscal 2004 from $0.93 for fiscal 2003. The above mentioned cumulative rent charge unfavorably impacted our net income for fiscal 2004 by $2.8 million, or by $0.05 per diluted share.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, the construction of new stores, the remodeling of existing stores, and to

improve and enhance our information technology systems. Due to the seasonality of our business, we have historically realized a significant portion of our cash flows from operating activities during the second half of the fiscal year. Most recently, our cash

requirements have been met primarily through cash and cash equivalents on hand during the first half of the year, and through cash flows from operating activities during the second half of the year. We expect to continue to meet our cash requirements primarily

through cash flows from operating activities, existing cash and cash equivalents, and short-term investments. In addition, we have a

revolving credit facility (the ―credit facility‖) with Bank of America Retail Finance (formerly Fleet Retail Finance) that provides for a $50.0 million base borrowing availability, and can be increased to an aggregate of $75.0 million if we so request (see below for a

further description). We have not had outstanding borrowings under the credit facility since November 2002. As of January 28, 2006,

we had working capital of $213.0 million, cash and cash equivalents of $205.2 million, short-term investments of $20.0 million, and no third party debt outstanding.

The following table sets forth our cash flows for the period indicated (in thousands):

Fiscal Year Ended

January 28,

January 29,

January 31,

2006 2005 2004

Net cash from operating activities $ 144,384 $ 136,975 $ 103,500

Net cash from investing activities (2,102 ) (124,301 ) (35,926 )

Net cash from financing activities (43,175 ) (44,902 ) (16,693 )

Net increase (decrease) in cash and cash equivalents $ 99,107 $ (32,228 ) $ 50,881

Operating Activities

Cash flows from operating activities, our principal form of liquidity on a full-year basis, increased by $7.4 million in fiscal 2005

and increased by $33.5 million in fiscal 2004, as compared to the prior fiscal year. The primary components of cash flows from operations for fiscal 2005 were net income, as adjusted for non-cash items, of $111.8 million, tenant allowances received from

landlords of $21.1 million, and tax benefits from stock options exercised of $4.8 million. Cash used for merchandise inventories



decreased to $10.7 million in fiscal 2005 from $19.4 million in fiscal 2004 and $15.2 million in fiscal 2003. Total inventories

increased by 13% as of January 28, 2006 versus January 29, 2005, and decreased by 6% on a per square foot basis for the same periods. The primary components of cash flows from operations for fiscal 2004 were net income, as adjusted for non-cash items, of

$106.3 million, tenant allowances received from landlords of $16.7 million, and tax benefits from stock options exercised of

$12.9 million.

Investing Activities

We invested $58.3 million in capital expenditures in fiscal 2005, primarily for the construction of 105 new Aéropostale stores

and 14 new Jimmy’Z stores, to remodel 14 existing stores, and for investments in information technology and for our distribution

center. Our future capital requirements will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. We are planning to invest approximately $54.0 million in capital expenditures in fiscal

2006 to open approximately 70 to 75 new Aéropostale stores and up to 5 new Jimmy’Z stores, to remodel approximately 25 existing

stores, to update our existing point of sale systems, and for certain other information technology investments.

We had $20.0 million in short-term investments as of January 28, 2006, consisting of auction rate debt and preferred stock securities. Auction rate securities are term securities that earn income at a rate that is periodically reset, typically within 35 days, to

reflect current market conditions through an auction process. As of January 28, 2006, these securities had contractual maturities

ranging from 2022 through 2040. These securities are classified as ―available-for-sale‖ securities under the provisions of Statement of Financial Accounting Standards, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Auction rate

securities, which were previously recorded in cash and cash equivalents in our interim fiscal 2004 consolidated financial statements,

have been included in short-term investments in the accompanying consolidated financial statements.

Financing Activities

We repurchase our common stock from time to time under a stock repurchase program that was initiated in 2003. In November

2005, our Board of Directors approved an additional $50.0 million repurchase availability, thereby increasing the total amount of

repurchase availability under this program to $150.0 million. The repurchase program may be modified or terminated by the Board of

Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases will depend upon general business and market conditions, stock prices, and liquidity and capital resource requirements going forward. We repurchased

1.8 million shares of our common stock for $44.5 million during fiscal 2005, and we repurchased 1.8 million shares of our common

stock for $45.9 million during fiscal 2004. As of January 28, 2006, we had repurchased a total of 4.5 million shares for $108.1 million since the inception of the repurchase program and had $41.9 million of repurchase availability remaining under this $150.0 million

stock buy back program.

In April 2005, we amended our revolving credit facility to allow us to borrow or obtain letters of credit up to at least an

aggregate of $50.0 million (see note 7 to the Notes to Consolidated Financial Statements for a further discussion). The amount of available credit can be increased to an aggregate of $75.0 million if we so request. We had no amounts outstanding under the credit

facility at either January 28, 2006, or January 29, 2005, and no stand-by or commercial letters of credit issued under the credit facility.

As of January 28, 2006, we were in compliance with all covenants under the credit facility. In addition, we have not had outstanding borrowings under the credit facility since November 2002.

We have not issued any letters of credit for the purchase of merchandise inventory or any capital expenditures.

Inflation

We do not believe that our sales revenue or operating results have been materially impacted by inflation during the past three

fiscal years. There can be no assurance, however, that our sales revenue or operating results will not be impacted by inflation in the

future.

Contractual Obligations

The following table summarizes our contractual obligations as of January 28, 2006:



Payments Due by Period

Less Than

1-3

3-5

More than

Total 1 Year Years Years 5 Years

(In thousands)

Contractual Obligations:

Employment agreements $ 3,204 $ 2,277 $ 927 $ — $ —

Event sponsorship agreement 1,810 900 910 — —

Operating leases 506,631 65,759 132,468 123,193 185,211

Total contractual obligations $ 511,645 $ 68,936 $ 134,305 $ 123,193 $ 185,211

The operating leases included in the above table do not include contingent rent based upon sales volume, which represented

approximately 17% of minimum lease obligations in fiscal 2005, or variable costs such as maintenance, insurance and taxes, which

represented approximately 56% of minimum lease obligations in fiscal 2005.

Our open purchase orders are cancelable without penalty and are therefore not included in the above table. There were no

commercial commitments outstanding as of January 28, 2006, nor have we provided any financial guarantees as of that date.

Off-Balance Sheet Arrangements

Other than operating lease commitments set forth in the table above, we are not a party to any material off-balance sheet financing arrangements.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the

United States. The preparation of these financial statements requires us to make certain estimates and assumptions about future events that impact amounts reported in our consolidated financial statements and related notes. We base these estimates on historical

experience and on other factors that we believe to be reasonable under the circumstances. Since future events and their impact cannot

be determined with certainty, actual results could differ materially from those estimated and could have a material impact on our consolidated financial statements.

Our accounting policies are described in note 1 of the Notes to Consolidated Financial Statements. We believe that the following are our most critical accounting estimates that include significant judgments and estimates used in the preparation of our consolidated

financial statements. These accounting policies and estimates are constantly reevaluated, and adjustments would be made when facts

and circumstances require. Historically, we have found our application of accounting estimates to be appropriate, and actual results have not differed materially from those estimated.

Merchandise Inventory

Merchandise inventory consists of finished goods and is valued utilizing the cost method at lower of cost or market on a first-in, first-out basis. We use estimates during interim periods to record a provision for inventory shortage. We also make certain

assumptions regarding future demand and net realizable selling price in order to assess that our inventory is recorded properly at the

lower of cost or market. These assumptions are based on both historical experience and current information. We believe that the carrying value of merchandise inventory is appropriate as of January 28, 2006. However, actual results may differ materially from

those estimated and could have a material impact on our consolidated financial statements. A 10% difference in our estimate to value

inventory at lower of cost or market as of January 28, 2006 would have impacted net income by $0.5 million for the fiscal year ended January 28, 2006.

Defined Benefit Pension Plan

We maintain a Supplemental Executive Retirement Plan, or SERP, which is a non-qualified defined benefit plan for certain

officers. The plan is non-contributory, is not funded and provides benefits based on years of service and compensation during employment. Pension expense is determined using various actuarial cost methods to estimate the total benefits ultimately payable to



officers, and this cost is allocated to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually.

We believe that these assumptions have been appropriate and that, based on these assumptions, the SERP liability of $8.4 million is appropriately stated as of January 28, 2006. However, actual results may differ materially from those estimated and could have a

material impact on our consolidated financial statements.

Finite Lived Assets

We periodically evaluate the need to recognize impairment losses relating to long-lived assets. Long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. Factors we consider

important that could trigger an impairment review include the following:

• significant changes in the manner of our use of assets or the strategy for our overall business;

• significant negative industry or economic trends;

• store closings; or

• under-performing business trends.

In evaluating an asset for recoverability, we estimate the future cash flows expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, we would write the

asset down to fair value and we would record an impairment charge, accordingly. We recorded an asset impairment charge of

$0.4 million during fiscal 2005. We believe that the carrying values of finite-lived assets, and their useful lives, are appropriate as of January 28, 2006. However, actual results may differ materially from those estimated and could have a material impact on our

consolidated financial statements.

Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, income

taxes are recognized for the amount of taxes payable for the current year and deferred tax assets and liabilities for the future tax

consequence of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and

liabilities are established using statutory tax rates and are adjusted for tax rate changes. We consider accounting for income taxes critical to our operations because management is required to make significant subjective judgments in developing our provision for

income taxes, including the determination of deferred tax assets and liabilities, and any valuation allowances that may be required

against deferred tax assets.

We record liabilities for tax contingencies when it is probable that a liability to a taxing authority has been incurred and the

amount of the contingency can be reasonably estimated. Tax contingency liabilities are adjusted for changes in circumstances and additional uncertainties, such as significant amendments to existing tax law. Liabilities for tax contingencies were estimated at

$1.7 million as of January 28, 2006. However, actual results may differ materially from those estimated and could have a material

impact on our consolidated financial statements.

Recent Accounting Developments

See the section ―Recent Accounting Developments‖ included in note 1 in the Notes to Consolidated Financial Statements for a

discussion of recent accounting developments and their impact on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As of January 28, 2006, we had no borrowings outstanding under our credit facility and we have not had any borrowings

outstanding under our credit facility since November 2002. To the extent that we may borrow pursuant to our credit facility in the

future, we may be exposed to market risk related to interest rate fluctuations. Additionally, we have not entered into financial instruments for hedging purposes.



Item 8. Financial Statements and Supplementary Data

Page

Reports of Independent Registered Public Accounting Firm 25 and 26

Consolidated Balance Sheets 27

Consolidated Statements of Income and Comprehensive Income 28

Consolidated Statements of Stockholders’ Equity 29

Consolidated Statements of Cash Flows 30

Notes to Consolidated Financial Statements 31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Aéropostale, Inc.:

We have audited the accompanying consolidated balance sheets of Aéropostale, Inc. and subsidiaries (the ―Company‖) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of income and comprehensive income, stockholders’

equity, and cash flows for each of the three years in the period ended January 28, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of

the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement

schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,

as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2006 and January 29, 2005, and the results of its operations and its cash flows for each of the three years

in the period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006, based on the criteria established in

Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and

our report dated April 5, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over

financial reporting.

DELOITTE & TOUCHE LLP

New York, New York

April 5, 2006









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Aéropostale, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting , that Aéropostale and subsidiaries (the ―Company‖) maintained effective internal control over financial reporting

as of January 28, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of

Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our

responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal

control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control

over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over

financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a

reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s

principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the

preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s

internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with

authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely

detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper

management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.

Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies

or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of

January 28, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in

all material respects, effective internal control over financial reporting as of January 28, 2006, based on the criteria established in

Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 28, 2006, of the Company and

our report dated April 5, 2006, expressed an unqualified opinion on those financial statements and the financial statement schedule.

DELOITTE & TOUCHE LLP

New York, New York

April 5, 2006



AÉROPOSTALE, INC.

CONSOLIDATED BALANCE SHEETS

January 28,

January 29,

2006 2005

(In thousands)

ASSETS

Current assets:

Cash and cash equivalents $ 205,235 $ 106,128

Short-term investments 20,037 76,224

Merchandise inventory 91,908 81,238

Prepaid expenses 12,314 10,138

Other current assets 9,845 5,759

Total current assets 339,339 279,487

Fixtures, equipment and improvements — net 160,229 122,651

Intangible assets 2,455 2,529

Other assets 1,928 1,152

Total assets $ 503,951 $ 405,819

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable $ 57,165 $ 44,858

Deferred income taxes 5,195 893

Accrued expenses 63,993 51,243

Total current liabilities 126,353 96,994

Deferred rent and tenant allowances 81,499 63,065

Retirement benefit plan liabilities 8,654 6,158

Deferred income taxes 2,655 1,351

Commitments and contingent liabilities

Stockholders’ equity

Common stock — par value, $0.01 per share; 200,000 shares authorized, 58,598 and

58,115 shares issued 586 581

Preferred stock — par value, $0.01 per share; 5,000 shares authorized, no shares

issued or outstanding — —

Additional paid-in capital 88,213 79,069

Other comprehensive loss (1,557 ) (1,271 )

Deferred compensation (2,577 ) (817 )

Retained earnings 308,269 224,315

Treasury stock at cost (4,548 and 2,749 shares) (108,144 ) (63,626 )

Total stockholders’ equity 284,790 238,251

Total liabilities and stockholders’ equity $ 503,951 $ 405,819



AÉROPOSTALE, INC.

CONSOLIDATED STATEMENTS OF INCOME

Fiscal Year Ended

January 28,

January 29,

January 31,

2006 2005 2004


Net sales $ 1,204,347 $ 964,212 $ 734,868

Cost of sales (includes certain buying, occupancy and

warehousing expenses) 841,872 644,305 505,152

Gross profit 362,475 319,907 229,716

Selling, general and administrative expenses 227,044 183,977 141,520

Income from operations 135,431 135,930 88,196

Interest income, net of interest expense of $42, $125, and

$286 3,670 1,438 760

Income before income taxes 139,101 137,368 88,956

Income taxes 55,147 53,256 34,702

Net income $ 83,954 $ 84,112 $ 54,254

Basic earnings per common share $ 1.53 $ 1.51 $ 0.99

Diluted earnings per common share $ 1.50 $ 1.47 $ 0.93

Weighted average basic shares 54,994 55,735 54,758

Weighted average diluted shares 55,937 57,255 58,287

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Fiscal Year Ended

January 28,

January 29,

January 31,

2006 2005 2004

(In thousands)

Net income $ 83,954 $ 84,112 $ 54,254

Minimum pension liability adjustment, net of tax (740 ) (145 ) (672 )

Comprehensive income $ 83,214 $ 83,967 $ 53,582

See Notes to Consolidated Financial Statements.

28



AÉROPOSTALE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Additional

Treasury Stock,

Other

Common Stock

Paid-in

Deferred

at Cost

Comprehens

ive

Retained

Shares Amount Capital

Compensati

on Shares Amount Loss Earnings Total

BALANCE,

FEBRUARY

1, 2003 52,959 $ 530 $ 41,480 $ — — $ — $ — $ 85,949 $ 127,959

Net income — — — — — — — 54,254 54,254

Stock

options

exercised 3,836 38 1,027 — — — — — 1,065

Tax benefit

related to

exercise of

stock

options — — 20,782 — — — — — 20,782

Repurchase

of common

stock — — — — (945 ) (17,695 ) — — (17,695 )

Other

comprehen

sive loss — — — — — — (672 ) — (672 )

BALANCE,

JANUARY 3

1, 2004 56,795 568 63,289 — (945 ) (17,695 ) (672 ) 140,203 185,693

Net income — — — — — — — 84,112 84,112

Stock

options

exercised 1,320 13 1,016 — — — — — 1,029

Tax benefit

related to

exercise of

stock

options — — 12,893 — — — — — 12,893

Repurchase

of common

stock — — — — (1,804 ) (45,931 ) — — (45,931 )

Issuance of

restricted

stock — — 1,871 (1,871 ) — — — — —

Amortization

of

restricted

stock — — — 600 — — — — 600

Other

comprehen

sive loss — — — — — — (145 ) — (145 )



BALANCE,

JANUARY 2

9, 2005 58,115 581 79,069 (1,271 ) (2,749 ) (63,626 ) (817 ) 224,315 238,251

Net income — — — — — — — 83,954 83,954

Stock

options

exercised 477 5 1,338 — — — — — 1,343

Tax benefit

related to

exercise of

stock

options — — 4,759 — — — — — 4,759

Repurchase

of common

stock — — — — (1,799 ) (44,518 ) — — (44,518 )

Net issuance

of

restricted

stock — — 3,047 (3,047 ) — — — — —

Amortization

of

restricted

stock — — — 1,741 — — — — 1,741

Vesting of

restricted

stock 6 — — — — — — — —

Other

comprehen

sive loss — — — — — — (740 ) — (740 )

BALANCE,

JANUARY 2

8, 2006 58,598 $ 586 $ 88,213 $ (2,577 ) (4,548 ) $

(108,14

4 ) $ (1,557 ) $ 308,269 $ 284,790

AÉROPOSTALE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended

January 28,

January 29,

January 31,

2006 2005 2004

(In thousands)

Cash Flows From Operating Activities

Net income $ 83,954 $ 84,112 $ 54,254

Adjustments to reconcile net income to net cash from

operating activities:

Depreciation and amortization 22,347 16,635 12,518

Amortization of tenant allowances and above market

leases (7,756 ) (6,717 ) (4,624 )

Amortization of deferred rent expense 3,716 7,474 1,927

Pension expense 1,672 3,008 558

Deferred income tax expense 6,100 2,409 6,404

Other 1,741 (597 ) 400



Changes in operating assets and liabilities:

Merchandise inventory (10,670 ) (19,431 ) (15,162 )

Prepaid expenses and other assets (7,059 ) (3,741 ) (3,084 )

Accounts payable 12,307 14,381 12,523

Accrued expenses and other liabilities 38,032 39,442 37,786

Net cash from operating activities 144,384 136,975 103,500

Cash Flows From Investing Activities

Purchase of fixtures, equipment and improvements (58,289 ) (46,677 ) (35,926 )

Purchase of short-term investments (310,901 ) (441,386 ) (145,945 )

Sale of short-term investments 367,088 365,162 145,945

Purchase of intangible assets — (1,400 ) —

Net cash from investing activities (2,102 ) (124,301 ) (35,926 )

Cash Flows From Financing Activities

Purchase of treasury stock (44,518 ) (45,931 ) (17,695 )

Proceeds from stock options exercised 1,343 1,029 1,065

Payment of deferred finance costs — — (63 )

Net cash from financing activities (43,175 ) (44,902 ) (16,693 )

Net Increase (Decrease) In Cash And Cash Equivalents 99,107 (32,228 ) 50,881

Cash And Cash Equivalents, Beginning Of Year 106,128 138,356 87,475

Cash And Cash Equivalents, End Of Year $ 205,235 $ 106,128 $ 138,356

Supplemental Disclosures Of Cash Flow Information

Interest paid $ 21 $ 94 $ 234

Income taxes paid $ 37,274 $ 36,456 $ 13,839

Tax benefit related to exercise of stock options included in

change in accrued expenses and other liabilities $ 4,759 $ 12,893 $ 20,782

Non-cash operating and investing activities $ 1,541 $ — $ —

See Notes to Consolidated Financial Statements.



AÉROPOSTALE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization

References to the ―Company,‖ ―we,‖ ―us,‖ or ―our‖ means Aéropostale, Inc. and its subsidiaries, except as expressly indicated or

unless the context otherwise requires. We are a mall-based specialty retailer of casual apparel and accessories for young women and

men. As of January 28, 2006, we operated 671 stores, consisting of 657 Aéropostale stores in 47 states and 14 Jimmy’Z stores in 11 states.

Fiscal Year

Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2005 was the 52-week period ended January 28, 2006, fiscal

2004 was the 52-week period ended January 29, 2005, and fiscal 2003 was the 52-week period ended January 31, 2004.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the

United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements

and accompanying notes. Actual results could differ from those estimated.

The most significant estimates made by management include those made in the areas of inventory; income taxes; medical self-

insurance reserves; and sales returns and allowances. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made

prospectively based on such periodic evaluations.

Seasonality

Our business is highly seasonal, and historically we have realized a significant portion of our sales, net income, and cash flow in the second half of the fiscal year, attributable to the impact of the back-to-school selling season in the third quarter and the holiday

selling season in the fourth quarter. Additionally, working capital requirements fluctuate during the year, increasing in mid-summer in

anticipation of the third and fourth quarters.

Cash Equivalents

We consider credit card receivables and all short-term investments with an original maturity of three months or less to be cash

equivalents.


Merchandise inventory consists of finished goods and is valued utilizing the cost method at the lower of cost or market

determined on a first-in, first-out basis. Merchandise inventory includes warehousing, freight, merchandise and design costs as an

inventory product cost. We make certain assumptions regarding future demand and net realizable selling price in order to assess that

our inventory is recorded properly at the lower of cost or market. These assumptions are based on both historical experience and current information. We recorded an adjustment to inventory and cost of sales for lower of cost or market of $7.4 million as of

January 28, 2006 and $4.9 million as of January 29, 2005.



AÉROPOSTALE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fixtures, Equipment and Improvements

Fixtures, equipment and improvements are stated at cost. Depreciation and amortization are provided for by the straight-line method over the following estimated useful lives:

Fixtures and equipment 10 years

Leasehold improvements Lesser of life of the asset or lease term

Computer equipment and software 5 years

Evaluation for Long Lived Asset Impairment

We periodically evaluate the need to recognize impairment losses relating to long-lived assets in accordance with Statement of Financial Accounting Standards, or SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. Long-lived

assets are evaluated for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In

evaluating an asset for recoverability, we estimate the future cash flows expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, we would write the asset down

to fair value and we would record an impairment charge, accordingly. We recorded impairment charges of $0.4 million in fiscal 2005,

none in fiscal 2004, and $0.4 million in fiscal 2003.

Pre-Opening Expenses

New store pre-opening costs are expensed as they are incurred.

Leases

Rent expense under our operating leases typically provide for fixed non-contingent rent escalations. Rent payments under our

store leases typically commence when the store opens, and these leases include a pre-opening period that allows us to take possession of the property to construct the store. We recognize rent expense on a straight-line basis over the non-cancelable term of each

individual underlying lease, commencing when we take possession of the property (see below).

In addition, most of our store leases require us to pay additional rent based on specified percentages of sales, after we achieve

specified annual sales thresholds. We use store sales trends to estimate and record liabilities for these additional rent obligations

during interim periods. Most of our store leases entitle us to receive tenant allowances from our landlords. We record these tenant allowances as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each

underlying lease.

In the fourth quarter of fiscal 2004, we corrected an error and recorded a one-time, non-cash rent charge of $4.7 million

($2.8 million, after tax) related to the timing of rent expense for store leases during the pre-opening period. Previously, we had

followed a prevailing retail industry practice in which we began recording rent expense at the earlier of the time a store opened or

when rent payments commenced. The charge was cumulative, and $0.5 million after tax was related to fiscal 2004, and $2.3 million

after tax was related to prior periods. Our financial statements for prior periods were not restated due to the immateriality of this issue

to our results of operations, statements of financial position, and cash flows for the current year or any individual prior year. This correction did not impact cash flows or timing of payments under related leases and will not have a material impact on our net income.

Revenue Recognition

Sales revenue is recognized at the ―point of sale‖ in our stores, and at the time our e-commerce customers take possession of

merchandise. Sales revenue related to gift cards and the issuance of store credits are recognized when



AÉROPOSTALE, INC.


they are redeemed. Allowances for sales returns are recorded as a reduction of net sales in the periods in which the related sales are

recognized.

Cost of Sales

Cost of sales includes costs related to: merchandise sold, distribution and warehousing, freight from the distribution center and warehouse to the stores, payroll for our design, buying and merchandising departments, and occupancy costs. Occupancy costs

include: rent, contingent rents, common area maintenance, real estate taxes, utilities, repairs, maintenance and all depreciation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, include costs related to: selling expenses, store management and corporate expenses such as payroll and employee benefits, marketing expenses, employment taxes, information technology

maintenance costs and expenses, insurance and legal expenses, and store pre-opening and other corporate level expenses. Store pre-

opening expenses include store level payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.

Medical Self-Insurance

The company self-insures a portion of employee medical benefits. The recorded liabilities for self-insured risks are primarily

calculated using historical experience and current information. The liabilities include amounts for actual claims and claims incurred

but not yet reported.

Marketing Costs

Marketing costs, which includes internet, television, print, radio and other media advertising and collegiate athlete conference

sponsorships, are expensed as incurred and were $6.8 million in fiscal 2005, $5.3 million in fiscal 2004, and $4.1 million in fiscal 2003.

AÉROPOSTALE, INC.


Stock-Based Compensation

We periodically grant stock-based compensation to our employees, and we account for these stock options in accordance with

the provisions of SFAS No. 25, Accounting for Stock Issued to Employees , or ―APB No. 25.‖ We have also adopted the disclosure-

only provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition

and Disclosure , or ―SFAS No. 148.‖ In accordance with the provisions of SFAS No. 148 and APB No. 25, we have not recognized

compensation expense related to stock options since all stock options were issued at market value. If we would have elected to

recognize compensation expense based on the fair value of options at grant date, as prescribed by SFAS No. 148, our net income and income per share would have been reduced to the pro-forma amounts indicated in the following table:



Fiscal

2005 2004 2003


Net income:

As reported $ 83,954 $ 84,112 $ 54,254

Add: restricted stock amortization, net of taxes 1,050 366 —

Less: total stock-based compensation expense determined under fair value

method, net of taxes (2,756 ) (1,525 ) (375 )

Pro-forma $ 82,248 $ 82,953 $ 53,879

Basic earnings per common share:

As reported $ 1.53 $ 1.51 $ 0.99

Pro-forma $ 1.50 $ 1.49 $ 0.98

Diluted earnings per common share:

As reported $ 1.50 $ 1.47 $ 0.93

Pro-forma $ 1.47 $ 1.45 $ 0.92

In accordance with SFAS No. 148, the fair value of each option grant is estimated on the date of grant using the Black-Scholes

option-pricing model based on the following assumptions for grants in the respective periods:

Fiscal

2005 2004 2003

Expected volatility 40 % 69 % 70 %

Expected life 5 years 5 years 4.7 years

Risk-free interest rate 4.11 % 2.80 % 2.81 %

Expected dividend yield 0 % 0 % 0 %

The effects of applying SFAS No. 148 and the results obtained through the use of the Black-Scholes option-pricing model are

not necessarily indicative of future values.

Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about a company’s operating segments. It also establishes standards for related disclosures about products and services,

geographic areas and major customers. We operate in a single aggregated operating segment, which includes the operation of our

Aéropostale and Jimmy’Z specialty retail stores and our Aéropostale

AÉROPOSTALE, INC.


e-commerce site. Revenues from external customers are derived from merchandise sales and we do not rely on any major customers as a source of revenue. Our consolidated net sales mix by merchandise category was as follows:



Fiscal

Merchandise Categories 2005 2004 2003

Young Women’s 61 % 60 % 60 %

Young Men’s 25 26 27

Accessories 14 14 13

Total Merchandise Sales 100 % 100 % 100 %

Recent Accounting Developments

In May 2005, the Financial Accounting Standards Board, or ―FASB,‖ issued SFAS No. 154, Accounting Changes and Error

Corrections. This statement replaces APB No. 20 and SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes

in accounting principle. The statement defines retrospective application as the application of a different accounting principle to prior

accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This statement shall be effective for accounting changes and correction of errors made in years

beginning after December 15, 2005. Accordingly, we will adopt the provisions of SFAS No. 154 at the beginning of our 2006 fiscal

year.

In April 2005, the Securities and Exchange Commission delayed the date of compliance with SFAS No. 123(R), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation, for publicly held companies until the company’s

first fiscal year beginning on or after June 15, 2005. Accordingly, we will adopt the provisions of SFAS No. 123(R) at the beginning

of our 2006 fiscal year. SFAS No. 123(R) was issued in December 2004, and supersedes APB No. 25, and its related implementation guidance. Under SFAS No. 123(R), all forms of share-based payment to employees and directors, including stock options, must be

treated as compensation and recognized in the income statement. As discussed previously in note 1, we currently account for stock

options under APB No. 25 and, accordingly, do not recognize compensation expense in our consolidated financial statements. Also, as prescribed by SFAS No. 148, we have disclosed the pro-forma impact of expensing options previously in note 1. We estimate that the

adoption of SFAS No. 123(R) will decrease diluted earnings per share in fiscal 2006 by approximately $0.04 per diluted share. We

expect that the adoption of SFAS No. 123(R) will not have a material impact on our consolidated balance sheets or consolidated statement of cash flows.

In March 2005, the FASB issued Interpretation No. 47, ―Accounting for Conditional Asset Retirement Obligations‖ , or

―FIN 47,‖ which clarifies that the term ―conditional asset retirement obligation‖ as used in FASB statement No. 143, ―Accounting for

Asset Retirement Obligations‖ . Conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of

the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of

the liability can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The adoption of FIN 47 unfavorably impacted net earnings by $0.2 million for the year ended January 28, 2006. The adoption of FIN 47 did not have a

material impact on our consolidated balance sheet or consolidated statement of cash flows. We were uncertain of the timing of

payment for the asset retirement obligations, therefore a liability was not previously recognized in the consolidated financial statements.

2. Common Stock Split

In April 2004, we completed a three-for-two stock split on all shares of our common stock that was affected in the form of a stock dividend. All prior period share and per share amounts presented in this report have been restated to give retroactive recognition

to the common stock split.

3. Short-Term Investments

Short-term investments consist of auction rate debt and preferred stock securities. Auction rate securities are term securities

earning income at a rate that is periodically reset, typically within 35 days, to reflect current market conditions through an auction

process. These securities are classified as ―available-for-sale‖ securities under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, these short-term investments are recorded at fair-value, with any

related unrealized gains and losses included as a separate component of stockholders’ equity, net of tax. Realized gains and losses and

investment income are included in earnings. As of January 28, 2006, the auction rate debt securities had contractual ultimate maturities ranging from 2022 through 2040.



4. Supplier Risk Concentration

Three suppliers in the aggregate constituted approximately 33% of our purchases in fiscal 2005, and approximately 35% in both fiscal 2004 and fiscal 2003. In addition, in fiscal 2005, approximately 67% of our merchandise was directly sourced from our top

10 suppliers, and one agent sourced approximately 21% of our merchandise. The loss of any of these sources could adversely impact

our ability to operate our business.

5. Fixtures, Equipment and Improvements — Net

Fixtures, equipment and improvements — net, consist of the following (in thousands):

January 28, 2006 January 29, 2005

Leasehold improvements $ 135,619 $ 99,292

Store fixtures and equipment 68,073 50,003

Computer equipment and software 18,178 12,917

Construction in progress 1,687 2,739

223,557 164,951

Less accumulated depreciation and amortization 63,328 42,300

$ 160,229 $ 122,651

Depreciation and amortization expense was $22.3 million in fiscal 2005, $16.6 million in fiscal 2004, and $12.8 million in fiscal 2003.

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):


Accrued compensation $ 10,714 $ 14,580

Sales and use tax 2,868 2,284

Accrued rent 9,933 8,401

Accrued gift certificates and credits 16,327 12,294

Income tax payable 14,159 6,322

Sales return liability 654 525

Payroll tax liabilities 1,033 1,385

Other 8,305 5,452

$ 63,993 $ 51,243

7. Revolving Credit Facility

In April 2005, we amended our revolving credit facility (the ―credit facility‖) with Bank of America, N.A., formerly Fleet Retail Finance, Inc. As amended, the credit facility allows us to borrow or obtain letters of credit up to an aggregate of $50.0 million,

with letters of credit having a sub-limit of $15.0 million. The amount of available credit can be increased to an aggregate of

$75.0 million if we so request. The credit facility matures in April 2010, and our assets collateralize indebtedness under the credit



facility. Borrowings under the credit facility bear interest at our option, either at (a) the lender’s prime rate or (b) the Euro Dollar Rate

plus 0.75% to 1.25%, dependent upon our financial performance. There are no covenants in the credit facility requiring us to achieve certain earnings levels and there are no capital spending limitations. There are certain negative covenants under the credit facility,

including, but not limited to, limitations on our ability to incur other indebtedness, encumber our assets, or undergo a change of

control. Additionally, we are required to maintain a ratio of 2:1 for the value of our inventory to the amount of the loans under the credit facility. As of January 28, 2006, we were in compliance with all covenants under the credit facility. Events of default under the

credit facility include, subject to grace periods and notice provisions in certain circumstances, failure to pay principal amounts when

due, breaches of covenants, misrepresentation, default of leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, business failure or application for bankruptcy, indictment of or institution of any legal

process or proceeding under federal, state, municipal or civil statutes, legal challenges to loan documents, and a change in control. If

an event of default occurs, the lenders under the credit facility will be entitled to take various actions, including the acceleration of amounts due there under and requiring that all such amounts be immediately paid in full as well as possession and sale of all assets

that have been used as collateral. We had no amount outstanding under the credit facility at either January 28, 2006 or January 29,

2005, and no stand-by or commercial letters of credit issued under the credit facility. In addition, we have not had outstanding borrowings under the credit facility since November 2002.

fs8. Earnings Per Share

In accordance with SFAS No. 128, Earnings Per Share, basic earnings per share has been computed based upon the weighted

average of common shares, after deducting preferred dividend requirements. Diluted earnings per share gives effect to outstanding stock options.

Earnings per common share has been computed as follows (in thousands, except per share data):

Fiscal

2005 2004 2003

Net income $ 83,954 $ 84,112 $ 54,254

Weighted average basic shares 54,994 55,735 54,758

Impact of dilutive securities 943 1,520 3,529

Weighted average diluted shares 55,937 57,255 58,287

Per common share:

Basic earnings per share $ 1.53 $ 1.51 $ 0.99

Diluted earnings per share $ 1.50 $ 1.47 $ 0.93

Options to purchase 387,000 shares in fiscal 2005, 74,000 shares in fiscal 2004, and none in fiscal 2003 were excluded from

the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of

the common shares.

9. Common Stock Offering

In July 2003, certain of our stockholders completed a secondary offering of 12,333,750 shares of common stock at a price to

the public of $16.67. We did not receive any proceeds from the sale of shares of the common stock sold by the selling stockholders

and we incurred $0.6 million in offering expenses related to the secondary offering.

10. Stock-Based Compensation

We have stock option plans under which we may grant qualified and non-qualified stock options to purchase shares of our

common stock to executives, consultants, directors, or other key employees. As of January 28, 2006, 1,058,817 shares were available for future grant under our plans. Qualified stock options may not be granted at less than the fair market value at the date of grant.



Stock options generally vest over four years on a pro rata basis. All outstanding stock options immediately vest upon change in

control.

The following table summarizes stock option transactions for common stock (shares in thousands):

Fiscal 2005 Fiscal 2004 Fiscal 2003

Weighted

Weighted

Weighted

Average

Average

Average

Exercise

Exercise

Exercise

Shares Price Shares Price Shares Price

Outstanding, beginning of period 2,258 $ 7.93 3,092 $ 2.23 6,234 $ 0.24

Granted 321 32.33 528 23.79 744 9.05

Exercised (477 ) 2.82 (1,320 ) 0.78 (3,836 ) 0.28

Forfeited (61 ) 18.81 (42 ) 12.88 (50 ) 5.38

Outstanding, end of period 2,041 $ 12.63 2,258 $ 7.93 3,092 $ 2.23

Options exercisable at end of period 1,106 $ 4.27 1,314 $ 1.36 2,454 $ 0.41

Weighted average fair value of options granted

during the year $ 13.34 $ 13.99 $ 5.28

The following table summarizes information regarding currently outstanding options as of January 28, 2006 (shares in

thousands):

Options Outstanding Options Exercisable

Number

Weighted-Average

Number

Outstanding

Remaining

Exercisable

at

Contractual

at

January 28,

Life

Weighted-Average

January 28,

Weighted-Average

Range of Exercise Prices 2006 (Years) Exercise Price 2006 Exercise Price

$0.02 321 0.5 $ 0.02 321 $ 0.02

0.26 to 0.57 473 2.7 $ 0.41 473 $ 0.41

7.63 to 11.80 447 5.2 $ 8.90 188 $ 8.86

18.57 to 23.32 461 6.2 $ 23.13 117 $ 22.70

23.91 to 33.65 339 7.1 $ 32.32 7 $ 31.15

2,041 1,106

Beginning in fiscal 2004, certain of our employees and all of our directors have been awarded restricted stock, pursuant to restricted stock agreements. There were 167,650 outstanding shares of restricted stock as of January 28, 2006. The restricted stock

awarded to employees vests at the end of three years of continuous service with us. Initial grants of restricted stock awarded to

directors vest, pro-rata, over a three-year period, based upon continuous service. Subsequent grants of restricted stock awarded to



directors vest in full one year after the grant date. Total compensation expense is being amortized over the vesting period.

Amortization expense was $1.7 million for fiscal 2005 and $0.6 million for fiscal 2004.

11. Retirement Benefit Plans

We maintain a qualified, defined contribution retirement plan with a 401(k) salary deferral feature that covers substantially all

of our employees who meet certain requirements. Under the terms of the plan, employees may contribute up to 14% of gross earnings

and we will provide a matching contribution of 50% of the first 5% of gross earnings contributed by the participants. We also have the option to make additional contributions. The terms of the plan provide for vesting in our matching contributions to the plan over a

five-year service period with 20% vesting after two years and 50% vesting after year three. Vesting increases thereafter at a rate of

25% per year so that participants will be fully vested after year five. Contribution expense was $0.5 million in both fiscal 2005 and fiscal 2004, and $0.4 million in fiscal 2003.

We maintain a Supplemental Executive Retirement Plan, or SERP, which is a non-qualified defined benefit plan for certain officers. The plan is non-contributory and not funded and provides benefits based on years of service and compensation during

employment. Participants are fully vested upon entrance in the plan. Pension expense is determined using various actuarial cost

methods to estimate the total benefits ultimately payable to officers and this cost is allocated to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually.

The following information about the SERP is provided below (in thousands):

January 28,

January 2

9,

2006 2005

CHANGE IN BENEFIT OBLIGATION:

Net benefit obligation at beginning of period $ 10,884 $ 5,753

Service cost 421 278

Interest cost 732 626

Plan amendments — 1,203

Actuarial loss 3,303 5,712

Settlements — (270 )

Gross benefits paid (336 ) (2,418 )

Net benefit obligation at end of period $ 15,004 $ 10,884

Accumulated benefit obligation $ 8,446 $ 5,845

CHANGE IN PLAN ASSETS:

Fair value of plan assets at beginning of period $ — $ —

Employer contributions 336 2,418

Gross benefits paid (336 ) (2,418 )

Actual return on plan assets — —

Fair value of plan assets at end of period $ — $ —

Funded status at end of period $ (15,004 ) $

(10,88

4 )

Unrecognized net actuarial gain 9,130 6,377

Prior service and cost 1,055 1,129

Unrecognized transition amount — —

Net amount recognized $ (4,819 ) $ (3,378 )

Intangible assets $ 1,055 $ 1,129



Accrued benefit cost (8,446 ) (5,845 )

Accumulated other comprehensive income 2,572 1,338

Net amount recognized $ (4,819 ) $ (3,378 )

Pension expense includes the following components (in thousands):

Fiscal

2005 2004 2003

COMPONENTS OF NET PERIODIC BENEFIT COST:

Service cost $ 421 $ 278 $ 184

Interest cost 732 626 315

Prior service cost 74 74 30

Amortization of prior experience loss 550 321 110

Loss recognized due to settlement — 1,396 —

Net periodic benefit cost $ 1,777 $ 2,695 $ 639

WEIGHTED-AVERAGE ASSUMPTIONS USED:

Discount rate to determine benefit obligations 5.50 % 5.25 % 6.00 %

Discount rate to determine net periodic pension cost 5.25 % 6.00 % 6.75 %

Rate of compensation increase 4.50 % 4.50 % 4.50 %

The discount rate was determined by matching published zero coupon yield, and associated durations, to expected plan benefit

payment streams to obtain an implicit internal rate of return. The loss recognized due to settlement in fiscal 2004 resulted from the early retirement of our former President and Chief Operating Officer. We made a contribution of $2.4 million in fiscal 2004 in

connection with this early retirement.

During fiscal 2004, we adopted a long-term incentive deferred compensation plan established for the purpose of providing

long-term incentive to a select group of management. The plan is a non-qualified, defined contribution plan and is not funded.

Participants in this plan include all employees designated by us as Vice President, or other higher-ranking positions that are not participants in the SERP. We will record annual monetary credits to each participant’s account based on compensation levels and

years as a participant in the plan. Annual interest credits will be applied to the balance of each participant’s account based upon

established benchmarks. Each annual credit is subject to a three-year cliff-vesting schedule, and participant’s accounts will be fully vested upon retirement after completing five years of service and attaining age 55.

In fiscal 2004, we adopted a postretirement benefit plan for certain officers, and we had recorded a liability of $78,000 as of January 28, 2006 and $22,000 at January 29, 2005 for this plan.

12. Stock Repurchase Program

We repurchase our common stock from time to time under a stock repurchase program that was initiated in 2003. In November 2005, our Board of Directors approved an additional $50.0 million repurchase availability, thereby increasing the total amount of

repurchase availability under this program to $150.0 million. The repurchase program may be modified or terminated by the Board of

Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases will depend upon general business and market conditions, stock prices, and liquidity and capital resource requirements going forward. We repurchased

1.8 million shares of our common stock for $44.5 million during fiscal 2005, and we repurchased 1.8 million shares of our common

stock for $45.9 million during fiscal 2004. As of January 28, 2006, we had repurchased a total of 4.5 million shares for $108.1 million since the inception of the repurchase program and had $41.9 million of repurchase availability remaining under this $150.0 million

stock buy back program.



13. Income Taxes

The provision for income taxes consists of the following (in thousands):

Fiscal

2005 2004 2003

Current:

Federal $ 39,360 $ 42,728 $ 23,966

State and local 9,687 8,119 4,332

49,047 50,847 28,298

Deferred:

Federal 5,026 2,035 5,178

State and local 1,074 374 1,226

6,100 2,409 6,404

$ 55,147 $ 53,256 $ 34,702

Reconciliation of the U.S. statutory tax rate with our effective tax rate is summarized as follows:

Fiscal

2005 2004 2003

Federal statutory rate 35.0 %

35.

0 % 35.0 %

Increase (decrease) in tax resulting from:

State income taxes, net of federal tax benefits 4.9 4.0 4.1

Other (0.3 ) (0.2 ) (0.1 )

Effective rate 39.6 %

38.

8 % 39.0 %

The components of the net deferred income tax liabilities are as follows (in thousands):

January 28,

January 29,

2006 2005

Current:

Inventory (5,417 ) (1,784 )

Other 222 891

Total current liabilities $ (5,195 ) $ (893 )



Non-current:

Furniture, equipment and improvements (13,886 ) (11,358 )

Deferred rent and tenant allowances 7,636 8,177

SERP 2,847 1,840

Other 1,174 (10 )

Valuation allowances (426 ) —

Total non-current liabilities (2,655 ) (1,351 )

Net deferred income tax liabilities $ (7,850 ) $ (2,244 )

We have recorded a valuation allowance against certain deferred tax assets as of January 28, 2006. Subsequent recognition of

these deferred tax assets would result in an income tax benefit in the year of such recognition. We record liabilities for tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be

reasonably estimated. Tax contingency liabilities are adjusted for changes in circumstances and additional uncertainties, such as

significant amendments to existing tax law. We had tax contingency liabilities of $1.7 million as of January 28, 2006 and $1.8 million as of January 29, 2005.

14. Commitments and Contingencies

We are committed under non-cancelable leases for our entire store and office space locations, which generally provide for

minimum rent plus additional increases in real estate taxes, certain operating expenses, etc. Certain leases also require contingent rent based on sales.

The aggregate minimum annual rent commitments as of January 28, 2006 are as follows (in thousands):

Due in Fiscal Year Total

2006 $ 65,759

2007 66,145

2008 66,323

2009 64,225

2010 58,968

Thereafter 185,211

Total $ 506,631

Rental expense consists of the following (in thousands):

Fiscal

2005 2004 2003

Minimum rentals $ 61,681 $ 49,481 $ 40,086

Contingent rentals 10,376 8,704 5,683

Office space rentals 1,207 1,159 1,068

Employment Agreements — As of January 28, 2006, we had outstanding employment agreements with certain members of our senior management totaling $3.2 million. These employment agreements expire at the end of fiscal 2006, except for the employment

agreement with our Chief Executive Officer, which expires at the end of fiscal 2007. We plan to negotiate new employment contracts

with certain members of our senior management during 2006.



Legal Proceedings — We are party to various litigation matters and proceedings in the ordinary course of business. In the opinion of our management, dispositions of these matters are not expected to have a material adverse effect on our financial position,

results from operations or cash flows.

Event Sponsorship Agreement — We are a party to an event sponsorship agreement with the Big East Men’s Basketball

Tournament, with remaining payment obligations of $0.9 million in both 2006 and 2007.

Guarantees — We had not provided any financial guarantees as of January 28, 2006.

15. Selected Quarterly Financial Data (Unaudited)

The following table sets forth certain unaudited quarterly financial information (in thousands):

Thirteen Weeks Ended

April 30,

July 30,

October 29,

January 28,

2005 2005 2005 2006

Fiscal 2005

Net sales $ 211,674 $ 232,770 $ 324,657 $ 435,246

Gross profit 59,771 62,027 94,719 145,958

Net income 8,614 7,449 26,085 41,806

Basic earnings per share 0.16 0.13 0.48 0.77

Diluted earnings per share 0.15 0.13 0.47 0.76


May 1,

July 31,

October 30,

January 29,

2004 2004 2004 2005

Fiscal 2004

Net sales $ 167,654 $ 194,852 $ 274,616 $ 327,090

Gross profit 49,107 59,486 98,201 113,113

Net income 6,261 10,897 31,686 35,268

Basic earnings per share 0.11 0.20 0.57 0.63

Diluted earnings per share 0.11 0.19 0.55 0.62

Gross profit for the fourth quarter of fiscal 2004 was unfavorably impacted by a one-time, non-cash pre-tax rent charge of $4.7 million related to a correction in our lease accounting policies associated with the timing of rent expense for our store leases (see

note 1 for a further discussion).

Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Management’s Report On Internal Control Over Financial Reporting

The management of Aéropostale is responsible for establishing and maintaining effective internal control over financial

reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Aéropostale’s internal

control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding reliability of financial reporting and the preparation and fair presentation of published financial statements in

accordance with generally accepted accounting principles.



All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its

inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any

evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies or procedures may deteriorate.

The management of Aéropostale assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of

the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on that assessment, management believes

that, as of January 28, 2006, the company’s internal control over financial reporting is effective based on those criteria.

Aéropostale’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on

management’s assessment of the Company’s internal control over financial reporting. This report appears on page 26 of this annual report on Form 10-K.

Evaluation of Disclosure Controls and Procedures

Pursuant to Exchange Act Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the ―Exchange Act‖), our

management carried out an evaluation, under the supervision and with the participation of our Chairman and Chief Executive Officer

along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls (as defined in Rule 13a-15(e) of the Exchange Act) and procedures. Based upon that evaluation, our Chief Executive Officer along with our Chief

Financial Officer concluded that as of the end of our fiscal year ended January 28, 2006, our disclosure controls and procedures (1) are

effective in timely alerting them to material information relating to our Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings and (2) are adequate to ensure that information required to be disclosed by us in the reports

filed or submitted by us under the Exchange Act is recorded, processed and summarized and reported within the time periods specified

in the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

There have been no significant changes in our internal controls or in other factors during the Company’s fourth fiscal quarter

that has materially affected, or is reasonably likely to materially affect the Company’s internal controls over financial reporting.

Item 9B. Other Information

None

PART III

Item 10. Directors and Executive Officers of the Registrant

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC

not later than 120 days after the end of our fiscal year.

Item 11. Executive Compensation

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC not later than 120 days after the end of our fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management





Item 13. Certain Relationships and Related Transactions



Item 14. Principal Accountant Fees and Services



PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1. The financial statements listed in the ―Index to Consolidated Financial Statements‖ at page 24 are filed as a part of this Annual Report on Form 10-K.

2. Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes

thereto.

3. Exhibits included or incorporated herein:

See Exhibit Index.

EXHIBIT INDEX

Exhibit

No. Description

3 .1 Form of Amended and Restated Certificate of Incorporation.†

3 .2 Form of Amended and Restated By-Laws.†

4 .1 Specimen Common Stock Certificate.†

4 .2

Stockholders’ Agreement, dated as of August 3, 1998, by and among MSS-Delaware, Inc., MSS Acquisition Corp. II,

Federated Specialty Stores, Inc., Julian R. Geiger, David R. Geltzer and John S. Mills.†

10 .1 Aéropostale, Inc. 1998 Stock Option Plan.†

10 .2 Aéropostale, Inc. 2002 Long-Term Incentive Plan.†

10 .3

Management Services Agreement, dated as of July 31, 1998, between MSS-Delaware, Inc. and MSS Acquisition Corp.

II.†



10 .4

Loan and Security Agreement, dated July 31, 1998 between Bank Boston Retail Finance Inc., as agent for the lenders

party thereto (the ―Lenders‖), the Lenders and MSS-Delaware, Inc.†

10 .5

First Amendment to Loan and Security Agreement, dated November 8, 1999, by and between Bank Boston Retail

Finance Inc., as agent for the Lenders, the Lenders and MSS-Delaware, Inc.†

10 .6

Second Amendment to Loan and Security Agreement, dated May 2, 2002, by and between Fleet Retail Finance Inc. (f/k/a

Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aéropostale, Inc. (f/k/a MSS-Delaware, Inc.).†

10 .7

Third Amendment to Loan and Security Agreement, dated June 13, 2001, by and between Fleet Retail Finance Inc. (f/k/a


10 .8

Fourth Amendment to Loan and Security Agreement, dated February 2, 2002, by and between Fleet Retail Finance Inc.

(f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aéropostale, Inc. (f/k/a MSS-Delaware,

Inc.).†

10 .9

Sublease Agreement, dated February 5, 2002, between the United States Postal Services and Aéropostale, Inc.†

10 .10

Merchandise Servicing Agreement, dated April 1, 2002, between American Distribution, Inc. and Aeropostale, Inc.*

10 .11

Interim Merchandise Servicing Agreement, dated as of February 11, 2002, by and between American Consolidation Inc.

and Aéropostale, Inc.†

10 .12

Sourcing Agreement, dated July 22, 2002, by and among Federated Department Stores, Inc., Specialty Acquisition

Corporation and Aéropostale, Inc.††

10 .13

Fifth Amendment to Loan and Security Agreement, dated April 15, 2002, by and between Fleet Retail Finance Inc. (f/k/a


10 .14

Amendment No. 1 to Stockholders’ Agreement, dated April 23, 2002, by and among Aéropostale, Inc., Bear Stearns MB

1998-1999 Pre-Fund, LLC and Julian R. Geiger.†

10 .15

Employment Agreement, dated as of February 1, 2002, between Aéropostale, Inc. and Julian R. Geiger.†

10 .16

Employment Agreement, dated February 1, 2002, between Aéropostale, Inc. and Christopher L. Finazzo.††

10 .17

Employment Agreement, dated February 1, 2002, between Aéropostale, Inc. and John S. Mills.††

10 .18

Fifth Amendment to Loan and Security Agreement, dated October 7, 2003, by and between Fleet Retail Finance Inc.

(f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aéropostale, Inc. (f/k/a MSS-Delaware,

Inc).†††

10 .19

Employment Agreement, dated as of February 1, 2004, between Aéropostale, Inc. and Julian R. Geiger.††††

10 .20

Employment Agreement, dated as of February 1, 2004, between Aéropostale, Inc. and Christopher L. Finazzo.††††

10 .21

Employment Agreement, dated as of February 1, 2004, between Aéropostale, Inc. and John S. Mills.††††

Exhibit

No. Description

10 .22

Employment Agreement, dated as of February 1, 2004, between Aéropostale, Inc. and Michael J. Cunningham.††††



10 .23

Employment Agreement, dated as of February 1, 2004, between Aéropostale, Inc. and Thomas P. Johnson.††††

10 .24

Employment Agreement, dated as of February 1, 2004, between Aéropostale, Inc. and Olivera Lazic-Zangas.††††

10 .25

Amendment No. 1, dated as of April 11, 2005, to Employment Agreement, dated as of February 1, 2004, between

Aéropostale, Inc. and Julian R. Geiger.

21 Subsidiaries of the Company.*

23 .1 Consent of Deloitte & Touche LLP.*

31 .1

Certification by Julian R. Geiger, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley

Act of 2002.*

31 .2

Certification by Michael J. Cunningham, Executive Vice President and Chief Financial Officer, pursuant to Section 302

of the Sarbanes-Oxley Act of 2002.*

32 .1

Certification by Julian R. Geiger pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-

Oxley Act of 2002.*

32 .2

Certification by Michael J. Cunningham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002.*

AÉROPOSTALE, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Balance Beginning

Amounts Charged

Write-offs Against

Balance End

Reserve for Returns: of Period to Net Income Reserve of Period

(In thousands)

Year Ended January 28, 2006 $ 525 $ 620 $ 491 $ 654

Year Ended January 29, 2005 672 233 380 525

Year Ended January 31, 2004 418 526 272 672

Exhibit 10.10

MERCHANDISE SERVICING AGREEMENT

THIS AGREEMENT is made and entered into as of the 1st day of April 2002, by and between American Consolidation, Inc

., 500 Washington Avenue, Carlstadt, New Jersey 07512 (―ACI‖) and Aeropostale, Inc ., 35 Continental Drive Wayne NJ 07470. (―Customer‖).

W I T N E S S E T H

WHEREAS, Customer is engaged in the retail business and the sale of merchandise customarily available therein; and

WHEREAS, ACI receives, processes, marks, picks, consolidates, packs, manifests and loads merchandise at its facility located

at 500 Washington Avenue, Carlstadt, New Jersey (the ―ACI Facility‖); and



WHEREAS, Customer desires to have ACI perform and ACI is willing to provide to Customer all receiving, processing,

marking, consolidating, picking, packing, manifesting, and loading services for Customer’s merchandise sent to ACI at Customer’s discretion (the ―Merchandise‖) subject to the terms and conditions specified herein;

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

1. Term

The term of this Agreement shall be for an initial term of five (5) years commencing as of April 1, 2002 and ending March 31, 2007. Customer shall have the option to extend this Agreement for an additional five (5) year period commencing as of April 1, 2007

and ending March 31, 2012 upon terms mutually agreed upon. Customer will notify ACI with its intent to exercise its option to renew

within 120 days of the expiration of the initial term.

2. Termination

In the event there is a breach of any term of this Agreement by ACI, including but not limited to ACI’s failure to provide the

Services, materials and equipment pursuant to the standards set forth herein, Customer shall notify ACI of such breach in writing and

ACI shall have thirty (30) days to cure such breach. In the event ACI has not cured the breach within such time, Customer shall have the right to terminate this Agreement upon three (3) days notice to ACI.

Customer shall have right to terminate this Agreement: (a) upon thirty (30) days notice to ACI, if a substantial change in ownership of ACI occurs, (b) immediately in the event ACI seeks bankruptcy protection or assigns a substantial portion of its assets

for the benefits of creditors, or (c) immediately after an Event of Force Majeure, as hereafter defined in Section 12, continues for

ninety (90) days.

In addition, in the event Customer terminates this Agreement during the initial term prior to March 31, 2007, the expiration date set forth in Section 1, other than due to ACI’s breach of its obligations under this Agreement, Customer agrees to reimburse ACI for

the unamortized value of the material and equipment upgrades, which material and equipment shall be amortized over a five (5) year

period, made to the ACI Facility at the request of Customer during the calendar year 2002.

3. Services, Materials and Equipment Provided By ACI

During the term of this Agreement, ACI shall provide the distribution services for Customer according to the performance

standards as set forth in Exhibit A (the ―Services‖), which Exhibit may be amended from time to time upon written agreement by both

parties hereto.

In addition ACI will provide, at its sole cost and expense, the ACI Facility, utilities, insurance, all merchandise handling

equipment including consolidation, manifesting and sortation systems, a Pro Handling rapidpack system and management and labor necessary for the efficient performance of its obligations herein. Notwithstanding Section 5(a) of this Agreement, the parties

understand that ACI is specifically providing new scanners, radio frequency or other, manifesting and sortation equipment, and

software which is part of ACI’s new material handling system, which is compatible with the Customer’s existing computer hardware and software

4. Representations and Warranties of ACI

ACI makes the following representations and warranties to Customer on a continuing basis:

(a) ACI is a corporation duly organized, validly existing, and in good standing under the laws of the State of New Jersey and

has the requisite power and authority and the legal right, without violating its certificate or articles of incorporation or bylaws or any

agreement with any third party or any applicable law, rule, regulation or governmental or judicial decree, to conduct its business as presently conducted and hereafter contemplated to be conducted and to execute, deliver and perform this Agreement.



(b) This Agreement has been duly executed and delivered by ACI and constitutes the legal, valid, and binding obligation of

ACI.

(c) ACI is Solvent.

(d) No contract, lease agreement, or other instrument to which ACI is a party or by which either ACI is bound, and no

provision of applicable law, materially and adversely affects or may so affect the financial condition, business, property or prospects

of ACI or ACI’s ability to perform this Agreement.

(e) ACI shall comply with all present and future laws, statutes, ordinances, rulings, regulations, orders and requirements of all

federal, state, municipal, county and other government agencies and authorities relating to the ACI Facility, and shall obtain and keep in full force and effect all necessary licenses, permits and similar authorizations from governmental authorities required to

perform its obligations hereunder.

5. Customer’s Responsibilities

(a) Customer will provide, at its sole cost, all the materials and equipment set forth in Exhibit B attached hereto and made a part

hereof (the ―Customer Equipment‖). In addition, Customer will be responsible for the cost of all inbound and outbound freight

associated with the processing of its Merchandise.

(b) Customer will provide the personnel to:

(i) Act as an information resource for ACI in the event ongoing operational issues arise.

(ii) Handle all systems (AS 400 & Island Pacific) problems.

(iii) Handle all communications with vendors regarding shipments which are received at the ACI Facility.

(iv) Handle all freight negotiations and payment of freight bills.

6. Fees and Payment Terms

(a) As ACI’s entire and full compensation for its provision of the Services, materials and equipment set forth in Section 3 hereof, and any necessary and related costs or expenses incurred by ACI in the course of providing the Services, materials and equipment,

Customer shall pay ACI the fees set forth in Exhibit C attached hereto and made a part hereof.

(b) Customer shall make payment to ACI of all correctly stated amounts within seven (7) days of Customer’s receipt of the

invoice.

7. Right to Audit

ACI agrees to allow Customer’s personnel to inspect and to perform an operation field audit of the Services and the ACI Facility and to inspect and audit ACI’s invoicing and records which relate to the Services performed on the

51



Merchandise as Customer deems necessary in its sole discretion at times during any business hours in which ACI operates and upon

reasonable notice to ACI.

8. Shortages and Damages to Merchandise

ACI shall be responsible and liable to Customer for the cost to Customer of lost, damaged or misplaced Merchandise. The cost

to Customer shall be the greater of (i) the book value of the Merchandise as determined by the invoice cost plus per unit processing cost or (ii) if ACI has been reimbursed by virtue of an insurance claim, the total amount of such reimbursement. Customer shall notify

ACI of any shortage or damage to the Merchandise within thirty (30) days of ACI’s receipt of the Merchandise.

9. Insurance

ACI shall, at all times during the term of this Agreement, and at its sole cost and expense, obtain and maintain the following insurance written by insurance companies reasonably acceptable to Customer having a minimum rating of A-X in the most recently

published A.M. Best’s Guide, and admitted and licensed to provide insurance in the states in which the Services will be performed:

(a) All-risk property insurance upon the Merchandise in ACI’s possession in an amount equal to the full replacement cost of

the Merchandise;

(b) Commercial general liability insurance (including contractual liability coverage specifically covering ACI’s obligations

hereunder) written on an occurrence basis in amounts of Five Million Dollars ($5,000,000.00) combined single limit per occurrence

with respect to bodily injury (including death), personal injury and property damage;

(c) Workers’ compensation insurance covering all of its employees to the full extent required of all states in which ACI performs services under this Agreement;

(d) Employers’ liability insurance with a limit of not less than One Million Dollars ($1,000,000.00) for each accident and One Million Dollars ($1,000,000.00) for disease.

(e) Business income interruption insurance in an amount not to exceed $500,000.00 per occurrence.

The insurance policies, other than the workers’ compensation insurance policy, shall name Customer as an additional insured.

Such insurance coverage shall commence as of the date of this Agreement and ACI promptly shall deliver to the Customer the policies of such insurance, or certificates thereof, and with respect to each renewal policy, at least thirty (30) days prior to the expiration of the

policy it renews. All insurance policies maintained by ACI shall provide that such policies name Customer as loss payee and shall not

be amended or canceled without at least thirty (30) days prior written notice to Customer. In the event ACI does not obtain the insurance required under this Agreement, ACI shall be in default of this Agreement and Customer, in addition to its remedies at law

and equity and as may be found elsewhere in this Agreement, may obtain such insurance on behalf of ACI. Customer shall have the

option of (i) offsetting the cost of such insurance against any amounts payable by Customer to ACI until fully reimbursed, or (ii) invoicing ACI for such insurance, in which event ACI shall pay such invoice within fifteen (15) days after the invoice date

together with any the maximum rate of interest that may be legally charged.

The required liability insurance may be carried under a ―blanket policy‖ covering other work of ACI, provided that if the blanket

policy contains an aggregate limit, the limit will apply on a per location basis.

Such policies shall provide for a waiver of any right of subrogation that the insurer may acquire against Customer.

It is the express intention of the parties to this Agreement that ACI shall cause such insurance coverages to be provided on a ―primary‖ basis, regardless of any other insurance Customer may elect to purchase and maintain. Accordingly, no liability coverage

required of ACI shall be subject to an ―excess‖ or ―pro-rata‖ type of other insurance clause, nor shall any such coverage be subject to

any clause which would be contrary to the aforesaid intent of the parties. Any coverage purchased by Customer will be excess for Customer only and not provide any coverage for ACI.



10. Indemnification

ACI shall indemnify, defend and hold harmless Customer, its affiliates and their respective directors, officers, employees and

agents from and against any and all damages, costs, losses, liability and expenses (including reasonable attorneys fees) in connection with any and all actions or threatened actions arising out of: (a) the use by ACI of any Customer Equipment, (b) the performance by

ACI of the Services, or (c) the breach of ACI of any term of this Agreement, provided that such indemnification obligation shall not

arise in circumstances where the claim in question arose solely from any grossly negligent, intentional, wrongful or unlawful act or omission of Customer.

11. Effect of Termination

Upon the termination of this Agreement, ACI shall fully perform all Services with respect to all Merchandise delivered to ACI prior to the effective date of such termination. Customer shall pay for all Services performed by ACI prior to the effective date of such

termination. Each party also agrees to perform all other obligations on its part which, by the terms of this Agreement, are required to

be performed upon termination thereof.

12. Force Majeure

Neither party to this Agreement shall be liable for any default hereunder due to act of God, riot, accident, strikes, labor disputes,

work stoppages, fires, floods, acts of a public enemy, acts of the United States Government, war or other unforeseeable cause beyond

its control and without its fault or negligence (an ―Event of Force Majeure‖). Each party hereto shall notify the other in writing of any such unforeseeable causes beyond its control which may have delayed or may delay the performance of its obligations pursuant to this

Agreement. When ACI has, for any reason, failed to perform the Services hereunder because of an Event of Force Majeure or given

notice hereunder that it will fail to make such delivery because of any Event of Force Majeure, Customer shall have the right, for a period of not less than thirty (30) days, to have the Services performed by sources other than ACI, provided that Customer’s

commitment to have such Services performed by sources other than ACI. Notwithstanding anything contained herein to the contrary,

in the event any Event of Force Majeure, ACI shall have a period of ten (10) days from the date of said occurrence to have the Services performed with respect to the Merchandise from another source. In the event ACI is unable to provide such alternate source

to have the Services performed within such 10-day period, Customer shall have the right to have the Services performed through an alternate source, and any difference in the cost of having the Services performed by an alternate source and the cost of Services

provided under this Agreement shall be immediately reimbursed by ACI to Customer. The failure of ACI to perform the Services due

to an Event of Force Majeure shall not be deemed to be a breach of any provision of this Agreement; provided that ACI commences performing Services with respect to the Merchandise within ninety (90) days after an Event of Force Majeure or after notice to

Customer of any Event of Force Majeure.

13. Alternate Dispute Resolution

If there is a controversy or dispute arising out of, related to or involving this Agreement that is not resolved by negotiation and

agreement of the parties within 30 calendar days of the controversy or dispute arising, such controversy or dispute shall be resolved exclusively through binding, conclusive and confidential alternate dispute resolution (―ADR‖) pursuant to the New Jersey Alternate

Procedure for Dispute Resolution Act (―NJADR Act‖), N.J.S.A . 2A:23A-1 et seq , by submission to an umpire mutually selected by

the parties. If the parties are unable to mutually agree upon an umpire, each party shall designate a former federal judge or New Jersey Supreme Court justice of Superior Court judge and the umpire shall be selected as between them by the flip of a coin. The ADR shall

be held in Wayne, New Jersey, and shall then proceed in accordance with the NJADR Act but shall be conducted confidentially. The

decision of the umpire shall be binding upon the parties hereto and the parties hereby waive and relinquish right of appeal afforded by the NJADR Act. The cost of the umpire shall be borne equally by the parties, unless the umpire decides based on equitable principles

to apportion such costs in a different manner.

14. Confidentiality

ACI shall, from time to time, gain access to certain proprietary business information (including, without limitation, information relating to Customer’s business activities, cost of doing business and the cost of supplies purchased hereunder) (―Proprietary

Information‖) of Customer which is confidential in nature. ACI agrees to hold all such Proprietary Information in trust and confidence

for the exclusive benefit of Customer. ACI shall not disclose or divulge, nor permit any disclosure of, any Proprietary Information to any entity not a party to this Agreement, nor shall ACI appropriate or use any Proprietary Information to benefit itself or any other

entity. ACI shall also inform any of its respective affiliates or subsidiaries and their respective directors, officers, employees and

agents thereof (―Agent‖) providing Services hereunder of the terms of this Section of this Agreement. ACI shall be responsible for its respective Agent’s failure to comply with the terms of this Section and any liability arising therefrom.



ACI and Customer agree that any disclosure or use of the Proprietary Information other than for the exclusive benefit of Customer will cause irreparable harm to Customer and that money damages alone would be an inadequate remedy for any disclosure

or unauthorized use of the Proprietary Information by ACI. Therefore, ACI and Customer agree that Customer shall be entitled to

obtain specific performance, injunctive relief or any other remedy available at law or in equity in the event of such disclosure or unauthorized use. This Section 14 shall survive the termination of this Agreement.

15. Relationship of the Parties

The relationship between Customer and ACI under this Agreement shall be solely that of vendor and vendee. It is expressly

understood and agreed by the parties hereto that nothing in this Agreement, its provisions, or the transactions and relationships contemplated hereby shall constitute either party as an agent, employee, partner, or legal representative of the other for any purpose

whatsoever, nor shall either party hold itself out as such. Neither party to this Agreement shall have the authority to bind or commit

the other party hereto in any manner or for any purpose whatsoever but rather each party shall, at all times, act and conduct itself in all respects and events as an independent contractor. In no event shall the employees or contractors of ACI or any other person

performing the Services hereunder be deemed to be the employees of Customer. This Agreement creates no relationships of joint

ventures, partners, associates, or principal or agents between the parties hereto. ACI agrees that neither it nor any of it officers or affiliates will at any time, either during or after the termination of this Agreement, directly or indirectly, in any manner use the name

of Customer or any trade, trademark, service mark, or logo of Customer without Customer’s prior written permission. In no event shall

the employees or contractors of ACI or any other person performing the Services hereunder be deemed to be the employees of Customer.

16. Assignment

This Agreement may not be assigned by either party hereto except with the prior written consent of the other party, which

consent will not unreasonably be withheld or delayed, and any attempted assignment in violation of this provision shall be void.

17. Administrative Expenses

Each party hereto shall pay all of its own administrative expenses (including, without limitation, the fees and expenses of their

agents, representatives, counsel and accountants, incident to the preparation of this Agreement).

18. Successors and Assigns

This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto.

19. Title to Merchandise and Customer Equipment

(a) Title to and ownership of the Merchandise shall, at all times, rest solely with the Customer. ACI shall not act in a manner which is inconsistent with Customer’s title thereto including, but not limited to, causing or allowing any lien or security interest for the

benefit of any ACI creditor to attach to the Merchandise. In the event that any such security interest or lien attaches to such

Merchandise, ACI agrees to pay the same and have it discharged of record, promptly, and to take such action as may be required to reasonably and legally object to such security interest or lien or to have such security interest or lien removed from such Merchandise,

including, without limitation, completing and signing any documents, acknowledgments or other documentation requested by

Customer.

ACI hereby waives any right to lien against any Merchandise which may be located in the ACI facility. Customer may make, in

its sole discretion, any and all UCC informational filings regarding its ownership interest in its equipment and the Merchandise. ACI

agrees to cooperate with Customer in making such filings and take all reasonable action to complete such filings as requested by

Customer.

(b) In the event ACI causes or allows any such security interest of lien to attach to Customer’s property rights in and to the

Merchandise, which security interest or lien is not removed within thirty (30) days, Customer shall have the right to terminate this

Agreement immediately after such thirty (30) day period cure period.

(c) The Customer Equipment shall at all times remain the sole and exclusive property of Customer and shall not be used for any purpose except as specifically directed by Customer. ACI shall not permit any security interest, lien or other encumbrance

(―Encumbrance‖) to attach to any Customer Equipment or Merchandise and in the event any such Encumbrance attaches to any

Customer Equipment or Merchandise, ACI will pay to have it discharged of record promptly, and to take such action as may be



required to reasonably and legally object to such security interest or lien or to have such security interest or lien removed from such

property. ACI hereby waives any right to lien against any property of Customer, including any Customer Equipment and Merchandise which may be located at the ACI Facility. Customer may make, in its sole discretion, any and all UCC informational filings regarding

its ownership interest in the Customer Equipment and the Merchandise. ACI agrees to cooperate with Customer in making such filings

and take all reasonable action to complete such filings as requested by Customer at Customer’s cost and expense. Customer shall be responsible for the cost of maintenance of the Customer Equipment located at the ACI Facility and ACI agrees to notify Customer of

the need for any non-routine maintenance on the equipment and Customer agrees to keep all of the Customer Equipment in a

condition which enables ACI to perform the Services for Customer herein. Upon termination of this Agreement, all such Customer Equipment shall be returned forthwith to Customer in the condition such Customer Equipment was delivered to ACI, reasonable wear

and tear excepted. ACI hereby agrees that it will assume all risk of loss on the Merchandise and Customer Equipment owned by

Customer from the time of its receipt of such Merchandise or Customer Equipment until such time as Customer subsequently receives such Merchandise or Customer Equipment. ACI shall replace or repair, at its sole cost and expense, any Customer Equipment which is

lost, stolen, damaged, destroyed or otherwise unavailable for use or return to Customer.

20. Waiver of Breach

The waiver by any party to this Agreement of any breach or violation of any provision of this Agreement by the other party

hereto shall not operate or be construed to be a waiver of any subsequent breach of violation thereof.

EXHIBIT C

Fees Payable to ACI

Rate Schedule

Cost per Unit

Service 2002* 2003 2004 2005 2006 2007

Processing Service

Regular $ 0.316 N/A

Pre-Pack $ 0.246 N/A

Pre-Ticketed $ 0.251 $ .145

Pre-Pack/Pre-Ticketed $ 0.216 $ .11

Cross Dock $ 0.050 $ .04

Backstock $ 0.120 $ .14

Special Projects $ 9.50/hr $ 10.50/hr

* Rates effective 4/1/2002 until 1/31/2003.

All other rates commence on 2/1 of the stated year and are effective until 1/31 of the following year. New rate structures will be

implemented each year based upon Aeropostale’s receipt projection.

Commission or its staff upon request. 67

_____________________________________

Created by Morningstar® Document Research℠

http://documentresearch.morningstar.com Source: AEROPOSTALE INC, 10-K, April 05, 2006

http://www.10kwizard.com/cgi/convert/rtf/ARO-20060405-10K-20060128.rtf?ipage=4082129&g=6528728864e6f6eac1a6a6&quest=1&rid=23&section=1&sequence=-1&rtf=1&cik=1168213&fndateext=1&dn=1#http___documentresearch_mornings



AEOS 10-K 2006

Form 10-K

AMERICAN EAGLE OUTFITTERS INC - AEO





Table of Contents



10-K - FORM 10-K

Part III

Item 1. 1

PART I

ITEM 1. BUSINESS.

ITEM 1A. RISK FACTORS.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

ITEM 2. PROPERTIES.

ITEM 3. LEGAL PROCEEDINGS.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

PART II

ITEM 5. MARKET FOR THE REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

ITEM 9A. CONTROLS AND PROCEDURES.

ITEM 9B. OTHER INFORMATION.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER

MATTERS.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

SIGNATURES

EX-21 (SUBSIDIARIES)

EX-23 (CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)

EX-24 (POWER OF ATTORNEY)

EX-31.1 (SECTION 302 CEO CERTIFICATION)

EX-31.2 (SECTION 302 CFO CERTIFICATION)

EX-32.1 (SECTION 906 CEO CERTIFICATION)

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EX-32.2 (SECTION 906 CFO CERTIFICATION)




UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 28, 2006

OR

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

Commission File Number: 0-23760

American Eagle Outfitters, Inc.


Delaware No. 13-2721761



(I.R.S. Employer

Identification No.)

150 Thorn Hill Drive, Warrendale, PA 15086-7528

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (724) 776-4857

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Shares, $0.01 par value

(Title of class)



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. YES NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Sections 15(d) of the Act. YES NO

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, and (2) has been subject to the filing requirements for at least the

past 90 days. YES NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ―accelerated filer and large accelerated filer‖ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO

The aggregate market value of voting stock held by non-affiliates of the registrant as of July 30, 2005 was $4,356,846,338.

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

148,753,711 Common Shares were outstanding at March 15, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Part III - Proxy Statement for 2006 Annual Meeting of Stockholders, in part, as indicated.

AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

Page

Numbe

r

PART I

Item 1. Business 1

Item 1A. Risk Factors 7

Item 1B. Unresolved Staff Comments 10

Item 2. Properties 10

Item 3. Legal Proceedings 11

Item 4. Submission of Matters to a Vote of Security Holders 11

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 11

Item 6. Selected Consolidated Financial Data 12

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24

http://www.10kwizard.com/cgi/convert/rtf/AEO-20060405-10K-20060128.rtf?ipage=4082113&g=6528728864e6f6eac1a6a6&quest=1&rid=23&section=1&sequence=-1&rtf=1&cik=919012&fndateext=1&dn=1#toc26361_1














Item 8. Financial Statements and Supplementary Data 25

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 57

Item 9A. Controls and Procedures 57

Item 9B. Other Information 59

PART III

Item 10. Directors and Executive Officers of the Registrant 59

Item 11. Executive Compensation 59

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 59

Item 13. Certain Relationships and Related Transactions 59

Item 14. Principal Accounting Fees and Services 59

PART IV

Item 15. Exhibits and Financial Statement Schedules 60















PART I

ITEM 1. BUSINESS.

General

American Eagle Outfitters, Inc., a Delaware corporation, is a leading retailer that designs, markets and sells its own brand of laidback, current clothing targeting 15 to 25 year-olds, providing high-quality merchandise at affordable prices. We opened our first American

Eagle Outfitters store in the United States in 1977 and expanded the brand into Canada in 2001. We also distribute merchandise via

our e-commerce operation, ae.com, which offers additional sizes, colors and styles of favorite AE merchandise and ships around the world. Our original collection includes standards like jeans and graphic Ts as well as essentials like accessories, outerwear, footwear,

basics and swimwear under our American Eagle Outfitters ® , American Eagle ® and AE ® brand names. The Company plans to open

MARTIN + OSA ™ , a new sportswear concept targeting 25 to 40 year-old women and men, in the fall of 2006. Additionally, the Company plans to launch aerie ™ by American Eagle, its new intimates sub-brand, in the fall of 2006.

As used in this report, all references to ―we,‖ ―our,‖ and ―the Company‖ refer to American Eagle Outfitters, Inc. and its wholly-owned subsidiaries. The term ―American Eagle‖ refers to our U.S. and Canadian American Eagle Outfitters stores and the Company’s e-

commerce operation. ―Bluenotes‖ refers to the Bluenotes/Thriftys specialty apparel chain which we operated in Canada prior to its

disposition during Fiscal 2004.

As of January 28, 2006, we operated 869 American Eagle Outfitters stores in the United States and Canada.

In November 2000, we acquired three businesses in Canada - the Bluenotes chain, an established Canadian brand; the Braemar chain, with real estate in prime mall locations, of which 46 were converted to American Eagle stores during Fiscal 2001; and National

Logistics Services (―NLS‖), a 400,000 square foot distribution center near Toronto, which handled all of the distribution needs for our

Canadian stores.

In December 2004, we completed the disposition of Bluenotes to 6295215 Canada Inc. (the ―Bluenotes Purchaser‖), a privately held Canadian company. As a result, the Company’s Consolidated Statements of Operations and Consolidated Statements of Cash Flows

reflect Bluenotes’ results of operations as discontinued operations for all periods presented (note that amounts in the Company’s

Consolidated Balance Sheets have not been reclassified to reflect Bluenotes as discontinued operations). See Note 9 of the Consolidated Financial Statements for additional information regarding this transaction.

In January 2006, we entered into an agreement to sell certain assets of NLS to 6510965 Canada Inc. (the ―NLS Purchaser‖), a privately held Canadian company. The sale of these assets was completed in February 2006, at which time the Company exited its

NLS operations. As a result, the Company’s Consolidated Balance Sheets reflect the assets subject to the agreement as held-for-sale for all periods presented. See Note 9 of the Consolidated Financial Statements for additional information regarding this transaction.

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, ―Fiscal 2005,‖ ―Fiscal 2004‖

and ―Fiscal 2003‖ refer to the fifty-two week periods ended January 28, 2006, January 29, 2005 and January 31, 2004, respectively.

―Fiscal 2006‖ refers to the fifty-three week period ending February 3, 2007.

Information concerning the Company’s business segments and certain geographic information is contained in Note 2 of the Consolidated Financial Statements included in this Form 10-K and is incorporated herein by reference.

Growth Strategy

As we enter Fiscal 2006, we have several well-defined strategies in place to grow our business and sustain our financial performance. Our primary growth strategies are focused on the following key areas of opportunity:

Real Estate

Store Growth

We are continuing the expansion of the AE brand throughout the United States and Canada. At the end of Fiscal 2005, we operated in

all 50 states, the District of Columbia and Puerto Rico. During Fiscal 2005, we opened 21 new U.S. stores, net of 13 closings, increasing our U.S. store base by approximately 3% to 798 stores. Additionally, our U.S. gross square footage increased by

approximately 5% during Fiscal 2005 due to the new store openings as well as incremental square footage from 41 U.S. store

remodels.

During Fiscal 2005, we continued to grow in the western U.S. with 47% of our store openings in that region. We added seven new stores in California, a market with strong demographics for our target customer. We expanded our operations into all 50 states this

year by opening two locations in Alaska. We also opened our latest ―flagship‖ stores in Seattle and Union Square in New York City.

Our flagship locations utilize a larger store format in which we offer our customers a broader merchandise selection.

In Fiscal 2006, we plan to open approximately 50 new stores and remodel approximately 50 existing stores. We believe that there are attractive retail locations where we can continue to open American Eagle stores in enclosed regional malls, urban areas and lifestyle

centers.



During Fiscal 2005, we opened two new stores in Canada, both of which were in the province of British Columbia, increasing our

total Canadian store base by approximately 3% to 71 stores. We remain pleased with the results of our American Eagle expansion into Canada and look to a long-term potential of approximately 80 to 90 stores across the country.

The table below shows certain information relating to our historical American Eagle store growth in the U.S. and Canada:

Fisca

l

2005

Fisca

l

2004

Fisca

l

2003

Fisca

l

2002

Fisca

l

2001

Stores at beginning of period 846 805 753 678 554

Stores opened during the period 36 50 59 79 127

Stores closed during the period * (13 ) (9 ) (7 ) (4 ) (3 )

Total stores at end of period ** 869 846 805 753 678

* Stores closed during Fiscal 2005 include one store closed due to Hurricane Katrina as well as one store closed due to a fire.

** Fiscal 2005 ending store count includes one store that was temporarily closed due to Hurricane Katrina, which reopened during February 2006.

Store Remodeling and Refurbishment Opportunities

We continue to remodel our older stores into our current store format. In order to maintain a balanced presentation and to

accommodate additional product categories, we selectively enlarge our stores during the remodeling process. We select stores for expansion based on market demographics and store volume forecasts. In Fiscal 2005, stores selected for expansion increased from an

average of 4,300 gross square feet to an average of 6,300 gross square feet. We believe the larger format can better accommodate our

new merchandise categories and support future growth. In certain cases, we also upgrade the store location within the mall. During Fiscal 2005, we remodeled 41 stores in the U.S. to the current store design, of which 19 stores were expanded, 15 stores were

relocated within the mall and seven stores were refurbished as further discussed below. As of January 28, 2006, approximately 78% of

all American Eagle stores in the U.S. are in our current store format.

During Fiscal 2004, the Company initiated a store refurbishment program targeted towards our lower volume stores, typically located

in smaller markets. Stores selected as part of this program maintain their current location and size but are updated to include certain aspects of our current store format, including paint and certain new fixtures. This program provides a cost effective update for our

lower volume stores.

AE Brand Market Share

We believe that we can leverage the success we have had in making American Eagle the denim destination brand and increase market share in other brand-defining key categories. In Fiscal 2006, we expect to build upon this success by focusing on knit tops, including

men’s and women’s polos and graphic Ts and women’s tank tops. Additionally, we believe that our new customer loyalty program, the AE All-Access Pass, which we launched during Fiscal 2005, will help us to continue making AE a destination for our customers.

This new program gives us a direct, one-on-one connection with our best customers and allows us to develop a relationship with these customers while rewarding brand loyalty.

Intimates Expansion

We currently offer an assortment of women’s underwear and dorm wear in all of our stores and on ae.com. In the fall of 2006, we plan to launch our new intimates sub-brand, aerie by American Eagle, which targets our core AE customers. This new sub-brand will allow

us to expand our assortments into a comprehensive line of bras, panties and dormwear and will drive store productivity by building

upon our experience and success in this area. Our real estate strategy in this area includes expanded intimates shops located in existing AE stores, new side-by-side locations and stand-alone stores.

E-commerce

American Eagle sells merchandise via its e-commerce site, ae.com, which is an extension of the lifestyle that we convey in our stores.

During Fiscal 2004, ae.com began shipping internationally to 24 countries, providing an opportunity to grow in regions where we do

not currently have store locations. We are continuing to focus on the growth of ae.com through various initiatives, including improved site efficiency and faster check-out, expansion of sizes and styles, targeted marketing strategies and the launch of aerie by American

Eagle, our new intimates sub-brand.

MARTIN + OSA

During Fiscal 2005, we introduced MARTIN + OSA as the name of our new casual sportswear retail concept. The merchandise assortment for MARTIN + OSA is planned to be an innovative blend of sport, classic and denim, targeting 25 to 40 year-old men and

women in a way that is unique to the market. We expect to open approximately four to six MARTIN + OSA stores in premier shopping centers throughout the United States during the fall of 2006.



Store Locations

Our stores average approximately 5,500 gross square feet and approximately 4,500 on a selling square foot basis. At January 28, 2006, we operated 869 stores in the United States and Canada as shown below:

United States, including the Commonwealth of Puerto Rico – 798 stores

Alabama 15 Illinois 26 Montana 2 Puerto Rico 2

Alaska 2 Indiana 18 Nebraska 6 Rhode Island 3

Arizona 12 Iowa 13 Nevada 4 South Carolina 12

Arkansas 4 Kansas 7 New Hampshire 5 South Dakota 2

California 69 Kentucky 11 New Jersey 21 Tennessee 20

Colorado 13 Louisiana 12 New Mexico 4 Texas 58

Connecticut 10 Maine 3 New York 38 Utah 10

Delaware 3 Maryland 18 North Carolina 24 Vermont 3

District of Columbia 1 Massachusetts 26 North Dakota 4 Virginia 26

Florida 44 Michigan 29 Ohio 36 Washington 18

Georgia 25 Minnesota 17 Oklahoma 12 West Virginia 7

Hawaii 4 Mississippi 7 Oregon 9 Wisconsin 13

Idaho 3 Missouri 17 Pennsylvania 48 Wyoming 2

Canada – 71 stores

Alberta 7 New Brunswick 3 Ontario 37

British Columbia 12 Newfoundland 2 Quebec 4

Manitoba 2 Nova Scotia 2 Saskatchewan 2

Purchasing

We purchase merchandise from suppliers who either manufacture their own merchandise or supply merchandise manufactured by others, or both. During Fiscal 2005, we purchased a majority of our merchandise from non-North American suppliers.

All of our merchandise suppliers receive a vendor compliance manual that describes our quality standards and shipping instructions. We maintain a quality control department at our distribution centers to inspect incoming merchandise shipments for uniformity of

sizes and colors, and for overall quality of manufacturing. Periodic quality inspections are also made by our employees and agents at

manufacturing facilities to identify quality problems prior to shipment of merchandise.

Global Labor Compliance

We are firmly committed to the goal of using only the most highly regarded and efficient suppliers throughout the world. We require our suppliers to provide a workplace environment that not only meets basic human rights standards, but also one that complies with all

local legal requirements and encourages opportunity for all, with dignity and respect.

For many years, we have had a policy for the inspection of factories throughout the world where goods are produced to our order. This inspection process is important for quality control purposes, as well as customs compliance and human rights standards. We have a

comprehensive vendor compliance program that was developed with the assistance of an internationally recognized consulting firm. This program contractually requires all suppliers to meet our global workplace standards, including human rights standards, as set

forth in our Code of Conduct. The Code of Conduct is required to be posted in all factories in the local language. The program utilizes

third party inspectors to audit compliance by vendor factories with our workplace standards and Code of Conduct.

Security Compliance

During recent years, there has been an increasing focus within the international trade community on concerns related to global terrorist activity. The security issues posed by 9/11 and other terrorist threats have brought increased demands from the Bureau of Customs and

Border Protection (―CBP‖) and other agencies within the Department of Homeland Security that importers take responsible action to secure their supply chains. In response, we became a certified member of the Customs – Trade Partnership Against Terrorism program

(―C-TPAT‖) during 2004. C-TPAT is a voluntary program offered by CBP in which an importer agrees to work with CBP to strengthen overall supply chain security. Our internal security procedures were reviewed by CBP during February 2005 and a

validation of processes with respect to our external partners was completed in June 2005. We received a formal written validation of

our security procedures from CBP during the first quarter of Fiscal 2006 indicating the highest level of benefits afforded to C-TPAT members. Additionally, we took significant steps to expand the scope of our security procedures during 2004, including, but not

limited to, a significant increase in the number of factory audits performed; a revision of the factory audit format to include a review

of all critical security issues as defined by CBP; a review of security procedures of our other international trading partners, including forwarders, consolidators, shippers and brokers; and a requirement that all of our international trading partners be members of C-

TPAT.



Trade Compliance

During 2003, we were selected by CBP for a Focused Assessment Audit. The purpose of this audit was to review and evaluate our adherence to CBP’s rules and regulations regarding trade compliance issues such as merchandise classification, valuation and origin.

Our audit was completed during May 2004 and resulted in no unacceptable risks of non-compliance being found.

Merchandise Inventory, Replenishment and Distribution

Purchase orders are entered into the merchandise system at the time of order. Merchandise is normally shipped directly from vendors and routed to our two distribution centers, one in Warrendale, Pennsylvania and the other in Ottawa, Kansas. Historically, our stores in

Canada received merchandise from NLS. Beginning in Fiscal 2006, our stores in Canada will receive merchandise through logistics

services provided under a transitional services agreement with the NLS Purchaser. Upon receipt, merchandise is entered into the merchandise system, then processed and prepared for shipment to the stores or forwarded to a warehouse holding area to be used as

store replenishment goods. The allocation of merchandise among stores varies based upon a number of factors, including geographic

location, customer demographics and store size. Merchandise is shipped to our stores two to five times per week depending upon the season and store requirements. Ae.com, the Company’s e-commerce operation, uses a third-party vendor for its fulfillment services.

We have announced plans for the construction of a third distribution center, to be located adjacent to our existing distribution center in

Ottawa, Kansas. This new facility will be used to support MARTIN + OSA and our new intimates sub-brand, aerie by American Eagle, as well as future growth opportunities.

Customer Credit and Returns

We offer our U.S. customers an American Eagle private label credit card, issued by a third-party bank. We have no liability to the card issuer for bad debt expense, provided that purchases are made in accordance with the issuing bank’s procedures. We believe that

providing in-store credit through use of our proprietary credit card promotes incremental sales and encourages customer loyalty. Our

credit card holders receive special promotional offers and advance notice of all in-store sales events. American Eagle customers in the U.S. and Canada may also pay for their purchases with American Express ® , Discover ® , MasterCard ® , Visa ® , bank debit cards,

cash or check.

Gift cards can be purchased in our American Eagle stores in the U.S. and Canada, as well as through our e-commerce site, ae.com. When the recipient uses the gift card, the value of the purchase is electronically deducted from the card and any remaining value can be used for future purchases. If a gift card remains inactive for greater than twenty-four months, the Company assesses the recipient a

one dollar per month service fee, where allowed by law, which is automatically deducted from the remaining value of the card. This

service fee is recorded within selling, general and administrative expenses on the Company’s Consolidated Statements of Operations.

We offer our customers a hassle-free return policy. The Company believes that certain of its competitors offer similar credit card and

service policies.

Competition

The retail apparel industry, including retail stores and e-commerce, is highly competitive. We compete with various individual and chain specialty stores catering to a youthful customer as well as the casual apparel and footwear departments of department stores and

discount retailers, primarily on the basis of quality, fashion, service, selection and price.

Trademarks and Service Marks

We have registered American Eagle Outfitters® in the U.S. Patent and Trademark Office as a trademark for clothing and for a variety of non-clothing products, including jewelry, perfume, and personal care products, and as a service mark for retail clothing stores and

credit card services. We have also registered AE ® for clothing and footwear products and an application is pending to register AE ® for a variety of non-clothing items. Additionally, American Eagle ® is registered for a variety of clothing items.

We have registered American Eagle Outfitters® in the Canadian Trademark Office for a wide variety of clothing products, as well as for retail clothing store services. In addition, we are exclusively licensed in Canada to use AE ® and AEO ® in connection with the

sale of a wide range of clothing products.

We have pending applications for MARTIN + OSA™ in the U.S. Patent and Trademark Office and Canadian Trademark Office as a

trademark for clothing and for a variety of non-clothing products and as a service mark for retail clothing store services.

We have pending applications for aerie™ in the U.S. Patent and Trademark Office and Canadian Trademark Office as a trademark for clothing and for a variety of non-clothing products and as a service mark for retail clothing store services.

We have also registered a number of other marks used in our business.

Employees

As of January 28, 2006, we had approximately 23,000 employees in the United States and Canada, of whom approximately 18,000 were part-time and seasonal hourly employees. We consider our relationship with our employees to be satisfactory.



Seasonality

Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting

increased demand during the back-to-school selling season. During Fiscal 2005, the third and fourth fiscal quarters accounted for approximately 58% of our sales and approximately 61% of our income from continuing operations. As a result of this seasonality, any

factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable

economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and

timing of new store openings, the acceptability of seasonal merchandise offerings, the timing and level of markdowns, store closings

and remodels, competitive factors, weather and general economic conditions.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available, free of charge, under the ―About AE‖ section of our website at www.ae.com. These reports are available as soon as

reasonably practicable after such material is electronically filed with the Securities and Exchange Commission.

Our corporate governance materials, including our corporate governance guidelines; the charters of our audit, compensation, and nominating and corporate governance committees; and our code of ethics may also be found under the ―About AE‖ section of our

website at www.ae.com. Any amendments or waivers to our code of ethics will also be available on our website. A copy of the

corporate governance materials is also available upon written request.

Additionally, our investor presentations are available under the ―About AE‖ section of our website at www.ae.com. These

presentations are available as soon as reasonably practicable after they are presented at investor conferences.


This report contains various ―forward-looking statements‖ within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs

concerning future events, including the following:

• the planned opening of approximately 50 American Eagle stores in the United States and Canada during Fiscal 2006;

• the selection of approximately 50 American Eagle stores in the United States and Canada for remodeling during Fiscal 2006;

• the completion of improvements and expansion at our distribution centers;

• the possibility of growth through acquisitions and/or internally developing additional new brands;

• the expected payment of a dividend in future periods;

• the launch of our new brand concept, MARTIN + OSA, during Fiscal 2006, including the planned opening of approximately four to

six stores in the United States;

• the launch of our new intimates sub-brand, aerie by American Eagle, during Fiscal 2006; and

• the completion of the purchase and initiation of the construction of our new corporate headquarters and data center.

We caution that these statements are further qualified by factors that could cause our actual results to differ materially from those in

the forward-looking statements, including without limitation, the following:

Our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner

Our future success depends, in part, upon our ability to identify and respond to fashion trends in a timely manner. The specialty retail apparel business fluctuates according to changes in the economy and customer preferences, dictated by fashion and season. These

fluctuations especially affect the inventory owned by apparel retailers because merchandise typically must be ordered well in advance of the selling season. While we endeavor to test many merchandise items before ordering large quantities, we are still susceptible to

changing fashion trends and fluctuations in customer demands.

In addition, the cyclical nature of the retail business requires that we carry a significant amount of inventory, especially during our

peak selling seasons. We enter into agreements for the manufacture and purchase of our private label apparel well in advance of the applicable selling season. As a result, we are vulnerable to changes in consumer demand, pricing shifts, and the timing and selection

of merchandise purchases. The failure to enter into agreements for the manufacture and purchase of merchandise in a timely manner

could, among other things, lead to a shortage of inventory and lower sales. Changes in fashion trends, if unsuccessfully identified, forecasted or responded to by us, could, among other things, lead to lower sales, excess inventories and higher markdowns, which in

turn could have a material adverse effect on our results of operations and financial condition.

Our ability to continue our current level of sales and earnings growth



During the past year, we realized substantial growth in both sales and earnings. A number of factors have historically affected, and

will continue to affect, our rate of growth and performance. These factors include, among other things, customer trends and preferences, competition, economic conditions and new store openings. There can be no assurance that we will be able to continue the

rates of growth or performance that we have been recently experiencing. Additionally, any decline in our future growth or

performance could have a material adverse effect on the market price of our common stock.

The effect of competitive pressures from other retailers and other business factors

The specialty retail industry is highly competitive. We compete primarily on the basis of quality, fashion, service, selection and price. There can be no assurance that we will be able to successfully compete in the future.

The success of our operations also depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates

and consumer confidence. There can be no assurance that consumer spending will not be negatively affected by general or local

economic conditions, thereby adversely impacting our continued growth and results of operations.

Our ability to grow through new store openings and existing store remodels and expansions

Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2006, we plan to open approximately 50 new American Eagle stores in the U.S.

and Canada. Additionally, we plan to remodel or expand approximately 50 existing stores during Fiscal 2006. Accomplishing our new

and existing store expansion goals will depend upon a number of factors, including the ability to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the

integration of new stores into existing operations and the expansion of our buying and inventory capabilities. There can be no

assurance that we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new and remodeled stores profitably.

Our ability to grow through the internal development of new brands

We have announced plans to launch a new brand concept, MARTIN + OSA, and a new intimates sub-brand, aerie by American Eagle, during Fiscal 2006. Our ability to succeed in these new brands requires significant capital expenditures and management attention.

Additionally, any new brand is subject to certain risks including customer acceptance, competition, product differentiation, the ability

to attract and retain qualified personnel, including management and designers, and the ability to obtain suitable sites for new stores at acceptable costs. There can be no assurance that these new brands will grow or become profitable. If we are unable to succeed in

developing profitable new brands, this could adversely impact our continued growth and results of operations.

Our international merchandise sourcing strategy

Substantially all of our merchandise is purchased from foreign suppliers. Although we purchase a significant portion of our

merchandise from a single foreign vendor, we do not maintain any exclusive commitments to purchase from any vendor. Since we rely on a small number of foreign sources for a significant portion of our purchases, any event causing the disruption of imports,

including the insolvency of a significant supplier or a significant labor dispute, could have an adverse effect on our operations. Other

events which could also cause a disruption of imports include the imposition of additional trade law provisions or import restrictions, such as increased duties, tariffs, anti-dumping provisions, increased Custom’s enforcement actions, or political or economic

disruptions.

We have a Vendor Code of Conduct that provides guidelines for all of our vendors regarding working conditions, employment

practices and compliance with local laws. A copy of the Vendor Code of Conduct is posted on our website, ae.com. We have a factory

compliance program to audit for compliance with the Code of Conduct. However, there can be no assurance that our factory compliance program will be effective in discovering violations. Publicity regarding violation of our Vendor Code of Conduct or other

social responsibility standards by any of our vendor factories could adversely affect our sales and financial performance.

Since the time of the attack on the World Trade Centers in 2001, we believe that there has been an increased risk of terrorist activity on a global basis. Such activity might take the form of a physical act that impedes the flow of imported goods or the insertion of a harmful or injurious agent to an imported shipment. We have instituted policies and procedures designed to reduce the chance or

impact of such actions including, but not limited to, a significant increase in the number of factory audits performed; the revision of

our factory audit protocol to include all critical security issues; the review of security procedures of our other international trading

partners, including forwarders, consolidators, shippers and brokers; and the cancellation of agreements with entities who fail to meet

our security requirements. In addition, we have become a certified member of the Customs - Trade Partnership Against Terrorism

program, a voluntary program in which an importer agrees to work with Customs to strengthen overall supply chain security. There can be no assurance that terrorist activity can be prevented and we cannot predict the likelihood of any such activities or the extent of

their adverse impact on our operations.

Seasonality

Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal

quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 2005, the third and fourth fiscal quarters accounted for

approximately 58% of our sales and approximately 61% of our income from continuing operations. As a result of this seasonality, any

factors negatively affecting us during the third and fourth fiscal quarters of any year could have a material adverse effect on our



financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such

factors as the timing of certain holiday seasons, the number and timing of new store openings, the acceptability of seasonal merchandise offerings, the timing and level of markdowns, store closings and remodels, competitive factors, weather and general

economic conditions.

Our reliance on key personnel

Our success depends to a significant extent upon the continued services of our key personnel, including senior management, as well as

its ability to attract and retain qualified key personnel and skilled employees in the future. Our operations could be adversely affected if, for any reason, one or more key executive officers ceased to be active in our management.

Our ability to successfully upgrade and maintain our information systems

We rely upon our various information systems to manage our operations and regularly make investments to upgrade, enhance or replace these systems. Any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with our

current systems, or any other disruptions affecting our information systems, could have a material adverse impact on our business.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002

In order to meet the requirements of the Sarbanes-Oxley Act of 2002 in future periods, we must continuously document, test, monitor

and enhance our internal control over financial reporting. There can be no assurance that the periodic evaluation of our internal controls required by Section 404 of the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies

and/or material weaknesses or that our auditors will be able to attest to the effectiveness of our internal control over financial

reporting. Failure to maintain the effectiveness of our internal control over financial reporting or to comply with the requirements of this Act could have a material adverse effect on our reputation, financial condition and market price of our common stock.

Our reliance on third-party distribution services for our Canadian stores

Our stores in Canada receive merchandise through logistics services provided under a transitional services agreement with the NLS

Purchaser. Any significant interruption in the logistics services provided by the NLS Purchaser could have a material adverse effect on the operation of our stores in Canada and on our financial condition and results.

Other risk factors

Additionally, other factors could adversely affect our financial performance, including factors such as: our ability to successfully acquire and integrate other businesses; any interruption of our key business systems; any disaster or casualty resulting in the

interruption of service from our distribution centers or in a large number of our stores; any interruption of key services provided by third party vendors; any interruption of our business related to an outbreak of a pandemic disease, such as the Avian Flu, in a country

where we source or market our merchandise; changes in weather patterns; the effects of changes in current exchange rates and interest

rates; and international and domestic acts of terror.

The impact of any of the previously discussed factors, some of which are beyond our control, may cause our actual results to differ

materially from expected results in these statements and other forward-looking statements we may make from time-to-time.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

We own our corporate headquarters and distribution center located near Pittsburgh, Pennsylvania. These facilities occupy

approximately 490,000 square feet, 120,000 square feet of which is used for executive, administrative and buying offices. We lease three additional locations near our headquarters, which are used for office and storage space, totaling approximately 51,000 square

feet. These leases expire with various terms through 2011.

During Fiscal 2005, we entered into an agreement for the purchase of an 186,000 square foot building and adjacent land in an urban Pittsburgh, Pennsylvania location. This building and land will be used for the relocation and expansion of our corporate headquarters. We plan to close on the purchase during Fiscal 2006 and we expect to relocate our corporate headquarters to the new location in 2007.

We rent approximately 92,000 square feet of office space in New York, NY for our designers and sourcing and production teams as well as for the offices of MARTIN + OSA. The lease for this space expires in May 2016. During Fiscal 2005, we entered into a lease

for an additional 10,000 square feet of office space in New York, NY, which expires in February 2014.

We own a distribution facility in Ottawa, Kansas consisting of approximately 400,000 square feet. During Fiscal 2005, we purchased land in Ottawa, Kansas to be used for the construction of an additional distribution center. This new facility will be used to support new and existing growth initiatives, including MARTIN + OSA and our new intimates sub-brand, aerie by American Eagle.

All of our stores in the United States and Canada are leased. The store leases generally have initial terms of 10 years. Certain leases also include early termination options which can be exercised under specific conditions. Most of these leases provide for base rent and

require the payment of a percentage of sales as additional rent when sales reach specified levels. Under our store leases, we are



typically responsible for maintenance and common area charges, real estate taxes and certain other expenses. We have generally been

successful in negotiating renewals as leases near expiration.


We are a party to litigation incidental to our business. At this time, our Management does not expect the results of the litigation to be material to our financial position or results of operations.


Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES.

Our stock is traded on the Nasdaq National Market under the symbol ―AEOS.‖ The following table sets forth the range of high and

low sales prices of the common stock as reported on the Nasdaq National Market during the periods indicated. As of March 15, 2006, there were 740 stockholders of record. However, when including associates who own shares through the Company’s 401(k) retirement

plan and employee stock purchase plan, and others holding shares in broker accounts under street name, the Company estimates the

shareholder base at approximately 50,000. The following information reflects the March 2005 two-for-one stock split.

Market Price

Cash Dividends per

Common Share For the Quarters Ended High Low

January 28, 2006

$ 26.94 $ 19.45 $ 0.075

October 29, 2005 $ 33.60 $ 20.32 $ 0.075

July 30, 2005 $ 34.04 $ 25.56 $ 0.075

April 30, 2005 $ 30.45 $ 24.78 $ 0.050

January 29, 2005 $ 25.71 $ 19.67 $ 0.030

October 30, 2004 $ 20.80 $ 14.78 $ 0.030

July 31, 2004 $ 16.55 $ 12.66 $ 0.000

May 1, 2004 $ 14.49 $ 9.29 $ 0.000

During the third quarter of Fiscal 2004, our Board of Directors (the ―Board‖) authorized a quarterly cash dividend of three cents per share. Since that time, a quarterly dividend has been paid as shown in the table above. The payment of future dividends is at the

discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation

and other relevant factors. It is anticipated that any future dividends paid will be declared on a quarterly basis.

Issuer Purchases of Equity Securities

The following table provides information regarding our repurchases of our common stock during the three months ended January 28, 2006.

Period

Total

Number of

Shares Purchas

ed

Average

Price Paid

Per Share

(1)

Total Number of

Shares Purchased

as

Part of Publicly

Announced Progr

ams

(2)

Maximum Number

of

Shares that May

Yet Be Purchased

Under the

Program

(2)

Month #1 (October 30, 2005 through November 26, 2005) — $ — — 4,500,000

Month #2 (November 27, 2005 through December 31, 2005)

1,000,000 $ 22.30 1,000,000 3,500,000

Month #3 (January 1, 2006 through January 28, 2006) — $ — — 3,500,000

Total 1,000,000 $ 22.30 1,000,000 3,500,000

(1) Average price paid per share excludes any broker commissions paid.

(2) On November 15, 2005, our Board authorized the repurchase of 4,500,000 shares of our common stock.



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The following Selected Consolidated Financial Data should be read in conjunction with ―Management’s Discussion and Analysis of Financial Condition and Results of Operations,‖ included under Item 7 below and the Consolidated Financial Statements and notes

thereto, included in Item 8 below. Most of the selected data presented below is derived from the Company’s Consolidated Financial Statements, which are filed in response to Item 8 below. The selected consolidated income statement data for the years ended

February 1, 2003 and February 2, 2002 and the selected consolidated balance sheet data as of January 31, 2004, February 1, 2003 and

February 2, 2002 are derived from audited consolidated financial statements not included herein.

For the Years Ended (1)

(In thousands, except per share amounts, ratios and

other

financial information)

January 28,

2006

January 29,

2005

January 31,

2004

February 1,

2003

February 2,

2002

Summary of Operations (2)

Net sales

$ 2,309,371 $ 1,881,241 $ 1,435,436 $ 1,382,923 $ 1,271,248

Comparable store sales increase (decrease)

15.5 % 21.4 % (6.6 )% (4.3 )% 2.3 %

Gross profit

$ 1,073,751 $ 877,808 $ 549,497 $ 540,955 $ 520,470

Gross profit as a percentage of net sales

46.5 % 46.7 % 38.3 % 39.1 % 40.9 %

Operating income

$ 461,082 $ 362,706 $ 133,271 $ 158,861 $ 159,681

Operating income as a percentage of net sales

20.0 % 19.3 % 9.3 % 11.5 % 12.6 %

Income from continuing operations

$ 293,711 $ 224,232 $ 83,108 $ 99,644 $ 101,666

Income from continuing operations as a percentage of

net sales

12.7 % 11.9 % 5.8 % 7.2 % 8.0 %

Per Share Results (3)

Income from continuing operations per common share-

basic

$ 1.94 $ 1.55 $ 0.59 $ 0.69 $ 0.71

Income from continuing opers per common share-

diluted

$ 1.89 $ 1.49 $ 0.57 $ 0.68 $ 0.69

Weighted average common shares outstanding – basic

151,604 145,150 142,226 143,418 143,058

Weighted average common shares outstanding – diluted

155,354 150,244 144,414 145,566 147,594

Cash dividends per common share (4)

$ 0.28 $ 0.06 — — —

Balance Sheet Information

Total cash and short-term investments

$ 751,518 $ 589,607 $ 337,812 $ 241,573 $ 225,483

Total assets (5)

$ 1,605,649 $ 1,328,926 $ 946,229 $ 824,510 $ 723,480

Long-term investments

$ 145,774 $ 84,416 $ 24,357 — —

Long-term debt

— — $ 13,874 $ 16,356 $ 19,361

Stockholders’ equity

$ 1,155,552 $ 963,486 $ 637,377 $ 571,590 $ 496,792

Working capital (5)(6)

$ 719,049 $ 582,739 $ 321,721 $ 272,288 $ 218,963

Current ratio (5)(6) 2.99 3.06 2.44 2.51 2.34



Average return on stockholders’ equity

27.8 % 26.7 % 9.9 % 16.5 % 24.3 %

Other Financial Information (7)

Total stores at year-end

869 846 805 753 678

Capital expenditures (000’s)

$ 81,545 $ 97,288 $ 77,544 $ 78,787 $ 127,622

Net sales per average selling square foot (8)

$ 577 $ 504 $ 420 $ 460 $ 516

Total selling square feet at end of period

3,896,441 3,709,012 3,466,368 3,108,556 2,705,314

Net sales per average gross square foot (8)

$ 471 $ 412 $ 343 $ 374 $ 417

Total gross square feet at end of period

4,772,487 4,540,095 4,239,497 3,817,442 3,334,694

Number of employees at end of period

23,000 20,600 15,800 14,100 12,500

See footnotes on page 14.

(1) All fiscal years presented include 52 weeks.

(2) All amounts presented are from continuing operations and exclude Bluenotes’ results of operations for all periods. See Note 9 of the accompanying

Consolidated Financial Statements for additional information regarding discontinued operations and the disposition of Bluenotes.

(3) Per share results for all periods presented reflect the two-for-one stock split distributed on March 7, 2005. See Note 2 of the accompanying Consolidated

Financial Statements for additional information regarding the stock split.

(4) Amount for the year ended January 29, 2005 represents cash dividends paid for two quarters only. Note that the Company initiated dividend

payments during the third quarter of Fiscal 2004.

(5) Amounts for the years ended January 28, 2006, January 29, 2005, January 31, 2004 and February 1, 2003 have been adjusted to reflect a change in the

Company’s recognition of its in-transit merchandise inventory. See Note 2 of the accompanying Consolidated Financial Statements for additional

information.

(6) Calculations for the years ended January 28, 2006 and January 29, 2005 reflect certain assets of NLS as held-for-sale. See Note 9 of the accompanying

Consolidated Financial Statements for additional information regarding assets held-for-sale.

(7) All amounts reflect American Eagle operations only and exclude Bluenotes for all periods presented. See Note 9 of the accompanying Consolidated

Financial Statements for additional information regarding the disposition of Bluenotes.

(8) Net sales per average square foot is calculated using retail sales for the year divided by the straight average of the beginning and ending square

footage for the year.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS.

The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements and should be read in conjunction with those statements and notes thereto.

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that may affect the reported financial condition and results of operations should

actual results differ. We base our estimates and assumptions on the best available information and believe them to be reasonable for the circumstances. We believe that of our significant accounting policies, the following involve a higher degree of judgment and

complexity. See also Note 2 of the Consolidated Financial Statements.

Revenue Recognition. We record revenue for store sales upon the purchase of merchandise by customers. Our e-commerce operation records revenue at the time the goods are shipped. Revenue is not recorded on the purchase of gift cards. A current liability is recorded

upon purchase and revenue is recognized when the gift card is redeemed for merchandise. Revenue is recorded net of actual sales returns and deductions for coupon redemptions and other promotions.

Revenue is not recorded on the sell-off of end-of-season, overstock and irregular merchandise to off-price retailers. These sell-offs are typically sold below cost and the proceeds are reflected in cost of sales. See Note 3 of the Consolidated Financial Statements for

further discussion.



Merchandise Inventory. Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average

cost includes merchandise design and sourcing costs and related expenses.

We review our inventory levels in order to identify slow-moving merchandise and generally use markdowns to clear merchandise. If inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer

acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price,

additional markdowns may be necessary. These markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. We also estimate a shrinkage reserve for the period between the last physical count and the balance

sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage

trends.

Asset Impairment. We are required to test for asset impairment whenever events or changes in circumstances indicate that the carrying

value of an asset might not be recoverable. We apply SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , in order to determine whether or not an asset is impaired. Our Management evaluates the ongoing value of assets associated

with retail stores that have been open longer than one year. Assets are evaluated for impairment when undiscounted future cash flows

are projected to be less than the carrying value of those assets. When events such as these occur, the assets are adjusted to estimated fair value and an impairment loss is recorded in selling, general and administrative expenses. Should actual results or market

conditions differ from those anticipated, additional losses may be recorded.

Income Taxes. We calculate income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of

the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the

Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in

effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred

tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized.

Legal Proceedings and Claims. We are subject to certain legal proceedings and claims arising out of the conduct of our business. In accordance with SFAS No. 5, Accounting for Contingencies , our Management records a reserve for estimated losses when the loss is

probable and the amount can be reasonably estimated. If a range of possible loss exists, we record the accrual at the low end of the

range, in accordance with FIN 14, an interpretation of SFAS No. 5. As Management believes that we have provided adequate reserves, we anticipate that the ultimate outcome of any matter currently pending against us will not materially affect our financial position or

results of operations.

Self-Insurance Reserve. We are self-insured for certain losses related to employee medical benefits. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. We believe that we have adequately reserved for our self-insurance liability, which is capped through the use of stop loss contracts with insurance companies.

However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.

Key Performance Indicators

Our Management evaluates the following items, which are considered key performance indicators, in assessing our performance:

Comparable store sales. Comparable store sales provide a measure of sales growth for stores open at least one year. A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of

25% or greater due to a remodel are removed from the comparable store sales base, but are included in total sales. These stores are

returned to the comparable store sales base in the thirteenth month following the remodel.

Management considers comparable store sales to be a good indicator of our current performance. Comparable store sales results are important in achieving leveraging of our costs, including store payroll, store supplies, rent and other operating expenses. Positive

comparable store sales generally contribute to leveraging of costs while negative comparable store sales contribute to deleveraging of

costs. Comparable store sales also have a direct impact on our total net sales, cash and working capital.

Gross profit. Gross profit measures whether we are appropriately optimizing the price and inventory levels of our merchandise. Gross

profit is the difference between net sales and cost of sales. Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage, promotional costs and buying, occupancy and warehousing

costs. Buying, occupancy and warehousing costs consist of compensation and travel for our buyers; rent and utilities related to our

stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs. An inability to obtain

acceptable levels of initial markups or a significant increase in our use of markdowns could have an adverse effect on our gross profit

and results of operations.

Operating income. Management views operating income as a key indicator of our success. The primary drivers of operating income are comparable store sales, gross profit and our ability to control operating costs.

Store productivity. Store productivity, including sales per square foot, average unit retail price, conversion rate, the number of transactions per store, the number of units sold per store and the number of units per transaction, is evaluated by Management in

assessing our operational performance.



Inventory turnover. Management evaluates inventory turnover as a measure of how productively inventory is bought and sold.

Inventory turnover is important as it can signal slow moving inventory. This can be critical in determining the need to take markdowns on merchandise.

Cash flow and liquidity. Management evaluates cash flow from operations, investing and financing in determining the sufficiency of our cash position. Cash flow from operations has historically been sufficient to cover our uses of cash. Management believes that cash

flow from operations will be sufficient to fund anticipated capital expenditures and working capital requirements.

Results of Operations

Overview

We achieved strong financial performance in Fiscal 2005. Our merchandise assortments were consistently on-trend and well received by our customers. Increased in-store traffic and higher transaction counts throughout the year led to strong comparable stores sales

growth. As a result, our operating margin reached a new high for the second year in a row.

Net sales for Fiscal 2005 increased 22.8% to $2.309 billion from $1.881 billion for Fiscal 2004 and our consolidated comparable store sales increased 15.5% compared to the corresponding period last year. Our comparable store sales growth was driven by higher

transactions per store as well as a higher realized average unit retail price.

Operating income as a percent to net sales rose to a rate of 20.0% for Fiscal 2005 from 19.3% for the same period last year. The increase was driven by an improvement in selling, general and administrative expenses and depreciation and amortization expense as a

percent to net sales, partially offset by a reduction in gross margin as a percent to net sales. Our gross profit increased $195.9 million compared to the prior year, however our gross margin declined by 20 basis points to a rate of 46.5%. Strong comparable store sales

enabled us to leverage fixed expenses including: rent; selling, general and administrative expenses; and depreciation and amortization

expense.

Income from continuing operations for Fiscal 2005 increased 31.0% to a record $293.7 million, or $1.89 per diluted share, from $224.2 million, or $1.49 per diluted share last year. Income from continuing operations was 12.7% as a percent to net sales during

Fiscal 2005, which is our highest historical rate to net sales.

Income (loss) from discontinued operations for Fiscal 2005 improved to $0.4 million, or $0.00 per diluted share, from $(10.9) million, or $(0.07) per diluted share last year. The Fiscal 2005 income from discontinued operations represents the elimination of any remaining reserves related to the Bluenotes’ disposition. The Fiscal 2004 loss from discontinued operations represents the Bluenotes’

loss from operations of $6.1 million, as well as a $4.8 million loss recorded on the disposition.

We ended Fiscal 2005 with $897.3 million in cash and short and long-term investments, an increase of $223.3 million from last year.

During the year, we continued to make significant investments in our business, including $81.5 million in capital expenditures, which

related primarily to our new and remodeled stores in the U.S. and Canada, as well as $161.0 million for the repurchase of common

stock.

This table shows, for the periods indicated, the percentage relationship to net sales of the listed items included in the Company’s Consolidated Statements of Operations.

For the Fiscal Years Ended

January 2

8,

2006

January 2

9,

2005

January 3

1,

2004

Net sales 100.0 % 100.0 % 100.0 %

Cost of sales, including certain buying, occupancy and warehousing expenses 53.5 53.3 61.7

Gross profit 46.5 46.7 38.3

Selling, general and administrative expenses 23.3 23.8 24.8

Depreciation and amortization expense 3.2 3.6 4.2

Operating income 20.0 19.3 9.3

Other income, net 0.6 0.2 0.1

Income before income taxes 20.6 19.5 9.4

Provision for income taxes 7.9 7.6 3.6

Income from continuing operations 12.7 % 11.9 % 5.8 %



As a result of the Bluenotes’ disposition during Fiscal 2004, the Company’s operations are now conducted in one reportable segment.

Prior to the disposition, Bluenotes was presented as a separate reportable segment. The American Eagle segment includes the Company’s 869 U.S. and Canadian retail stores and the Company’s e-commerce operation, ae.com.

Comparison of Fiscal 2005 to Fiscal 2004

Net Sales

Net sales increased 22.8% to $2.309 billion from $1.881 billion. The sales increase was due to a 15.5% comparable store sales increase as well as a 5.1% increase in gross square feet, consisting primarily of the addition of 23 new stores, net of 13 closings. The

comparable store sales increase was driven by an increase in transactions per store as well as a higher realized average unit retail price.

Comparable store sales percentages increased in the high-teens in the men’s business over last year and the women’s comparable store sales percentage increased in the mid-teens.

A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to a remodel are removed from the comparable store sales base, but are included in total sales. These

stores are returned to the comparable store sales base in the thirteenth month following the remodel.

Gross Profit

Gross profit as a percent to net sales declined by 20 basis points to 46.5% from 46.7% last year. The percentage decrease was

attributed to a lower merchandise margin rate, partially offset by a reduction of buying, occupancy and warehousing costs as a percent to net sales. The merchandise margin rate was lower for the period due primarily to increased markdowns during the second half of

Fiscal 2005 compared to last year’s strong full priced business. The increase in markdowns was partially offset by an improved

markon, reflecting lower product costs. Buying, occupancy and warehousing expenses decreased as a percent to net sales due primarily to an improvement in rent expense as a percent to net sales, partially offset by an increase in expenses related to the loss

from operations and sale of NLS, our Canadian distribution operation.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network

as well as design costs in cost of sales. Other retailers may exclude a portion of these costs from cost of sales, including them in a line

item such as selling, general and administrative expenses. See Note 2 of the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.


Selling, general and administrative expenses as a percent to net sales decreased to 23.3% from 23.8% due to our strong comparable store sales growth. During the period, direct compensation, incentive compensation, services purchased/professional services and

leasing costs improved as a percent to net sales. These improvements were partially offset by development costs for MARTIN + OSA, our new brand concept.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales decreased to 3.2% from 3.6% as a result of the comparable store sales increase.

Other Income, Net

Other income, net increased to $15.9 million from $4.1 million due primarily to increased investment income resulting from higher cash and investment balances this year compared to last year, as well as improved investment returns. The improvement in investment

returns is partially attributable to an increase in long-term investments. Long-term investments increased as a result of a change in our investment policy.

Provision for Income Taxes

The effective tax rate decreased to approximately 38% from 39% last year, reflecting a significant increase in tax exempt interest income and state tax credits received during the current year. This activity was partially offset by the recognition of a tax liability

related to the planned repatriation of unremitted Canadian earnings prior to the tax year ending July 2006.

Income from Continuing Operations

Income from continuing operations increased 31.0% to a record $293.7 million, or 12.7% as a percent to net sales, from $224.2

million, or 11.9% as a percent to net sales last year. Income from continuing operations per diluted share increased to $1.89 from $1.49 last year. The increase in income from continuing operations was attributable to the factors noted above.

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations for Fiscal 2005 improved to $0.4 million, or $0.00 per diluted share, from $(10.9) million, or $(0.07) per diluted share last year. The Fiscal 2005 income from discontinued operations represents the elimination of any

remaining reserves related to the Bluenotes’ disposition. The Fiscal 2004 loss from discontinued operations represents the Bluenotes’ loss from operations of $6.1 million, as well as a $4.8 million loss recorded on the disposition.



Comparison of Fiscal 2004 to Fiscal 2003

Net Sales

Net sales increased 31.1% to $1.881 billion from $1.435 billion. The sales increase was due to a 21.4% comparable store sales increase as well as a 7.1% increase in gross square feet, consisting primarily of the addition of 41 new stores, net of nine closings. The

comparable store sales increase was driven by a higher average unit retail price, resulting primarily from fewer markdowns and an

increase in transactions per store. Additionally, both the number of units sold per average store and the number of units sold per transaction increased during the year. Comparable store sales percentages increased in the mid-twenties in the women’s business over

Fiscal 2003 and the men’s comparable store sales percentage increased in the high-teens.

Gross Profit

Gross profit as a percent to net sales increased to a record rate of 46.7% from 38.3% in Fiscal 2003. The percentage increase was

primarily attributed to an improvement in merchandise margins. Merchandise margins increased significantly for the period due primarily to lower markdowns as well as an improved markon, reflecting better sourcing and a continuation of our cost control

initiatives, including reduced freight costs and fewer sell-offs. Buying, occupancy and warehousing expenses declined as a percent to

net sales due primarily to an improvement in rent expense as a percent to net sales.


Selling, general and administrative expenses as a percent to net sales decreased to 23.8% from 24.8% due to our strong comparable

store sales results, as well as our cost control initiatives. During the period, direct salaries, advertising, leasing costs, asset write-offs related to store closings, communications, travel and services purchased improved as a percent to net sales. These improvements were

partially offset by an increase in incentive compensation, which was not incurred in Fiscal 2003, as well as an increase in holiday

packaging as a percent to net sales.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales decreased to 3.6% from 4.2% due primarily to the comparable store sales increase.

Other Income, Net

Other income, net increased to $4.1 million from $2.0 million due primarily to increased investment income resulting from higher cash and investment balances during Fiscal 2004 compared to Fiscal 2003, as well as improved investment rates.

Income from Continuing Operations

Income from continuing operations increased 170% to $224.2 million, or 11.9% as a percent to net sales, from $83.1 million, or 5.8%

as a percent to net sales in Fiscal 2003. Income from continuing operations per diluted share increased to $1.49 from $0.57 in Fiscal

2003. The increase in income from continuing operations was attributable to the factors noted above.

Loss from Discontinued Operations

Loss from discontinued operations for Fiscal 2004 decreased to $10.9 million, or $0.07 per diluted share, from $23.5 million, or $0.16 per diluted share in Fiscal 2003. The Fiscal 2004 loss from discontinued operations represents the Bluenotes loss from operations of

$6.1 million, as well as a $4.8 million loss recorded on the disposition. The Fiscal 2003 loss from discontinued operations represents

Bluenotes’ loss from operations for the period, including a goodwill impairment charge of $14.1 million.

Liquidity and Capital Resources

Our uses of cash are generally for working capital, the construction of new stores and remodeling of existing stores, information

technology upgrades, distribution center improvements and expansion, the purchase of both short and long-term investments, the repurchase of common stock and the payment of dividends. Historically, these uses of cash have been funded with cash flow from

operations. In the future, we expect that our uses of cash will also include the purchase and construction of our new corporate

headquarters; the construction of a new data center to support our information technology needs; development of MARTIN + OSA; development of aerie by American Eagle, our new intimates sub-brand; and new brand concept development.

The following sets forth certain measures of our liquidity:

January 28,

2006

January 29,

2005

Working capital (in 000’s) $ 719,049 $ 582,739

Current ratio 2.99 3.06



Net cash provided by operating activities from continuing operations totaled $480.4 million during Fiscal 2005. Our major source of

cash from operations was merchandise sales. Our primary outflows of cash for operations were for the purchase of inventory and operational costs.

Investing activities from continuing operations for Fiscal 2005 included $81.5 million for capital expenditures and $311.4 million for the net purchase of investments. Capital expenditures consisted primarily of $54.7 million related to investments in our stores,

including 36 new and 43 remodeled stores in the United States and Canada. The remaining capital expenditures related primarily to improvements to our corporate offices and distribution centers as well as information technology upgrades.

We purchased both short and long-term investments during Fiscal 2005. We invest primarily in tax-exempt municipal bonds, taxable agency bonds, corporate notes and auction rate securities with an original maturity up to five years and an expected rate of return of

approximately a 4.7% taxable equivalent yield. We place an emphasis on investing in tax-exempt and tax-advantaged asset classes and

all investments must have a highly liquid secondary market and a stated maturity not exceeding five years.

Cash used for financing activities from continuing operations resulted primarily from $171.5 million used for the repurchase of common stock and $42.1 million used for the payment of dividends, partially offset by $48.2 million in proceeds from stock option

exercises during the period.

We have a $90.0 million unsecured letter of credit facility for letters of credit and a $40.0 million unsecured demand line of credit which can be used for letters of credit and/or direct borrowing, totaling $130.0 million. The interest rate is at the lender’s prime

lending rate (7.25% at January 28, 2006) or at LIBOR plus a negotiated margin rate. No direct borrowings were required against the line for the current or prior periods. At January 28, 2006, letters of credit in the amount of $90.0 million were outstanding on this

facility, leaving a remaining available balance on the line of $40.0 million. We also have an uncommitted letter of credit facility for

$75.0 million with a separate financial institution. At January 28, 2006, letters of credit in the amount of $39.7 million were outstanding on this facility, leaving a remaining available balance on the line of $35.3 million.

During Fiscal 2004, we retired our $29.1 million non-revolving term facility (the ―term facility‖) that we had in connection with our Canadian acquisition. The term facility required annual payments of $4.8 million, with interest at the one-month Bankers’ Acceptance

Rate plus 140 basis points, and was originally scheduled to mature in December 2007. At redemption, the term facility had an outstanding balance, including foreign currency translation adjustments, of $16.2 million.

On November 30, 2000, we entered into an interest rate swap agreement totaling $29.2 million in connection with the term facility. The swap amount decreased on a monthly basis beginning January 1, 2001 until the early termination of the agreement during Fiscal

2004. During Fiscal 2004, the interest rate swap was terminated at its fair value, which represented a net loss of $0.7 million, in

conjunction with the payoff of the term facility. As a result, we reclassified approximately $0.4 million, net of tax, of unrealized net losses from other comprehensive income into earnings during Fiscal 2004.

On February 24, 2000, our Board authorized the repurchase of up to 7.5 million shares of our common stock. Prior to Fiscal 2003, we

purchased approximately 6.0 million shares of common stock under this authorization. During Fiscal 2003, we purchased 80,000

shares of common stock for approximately $0.6 million. We did not purchase any shares of common stock on the open market during Fiscal 2004. At the beginning of Fiscal 2005, approximately 1.4 million shares remained available for repurchase under this

authorization. Our Board authorized the repurchase of an additional 2.1 million shares of our common stock on September 2, 2005. As

part of these stock repurchase authorizations, we repurchased 3.5 million shares during the three months ended October 29, 2005 for approximately $81.1 million, at an average share price of $23.16.

On October 6, 2005, our Board authorized the repurchase of an additional 2.5 million shares of our common stock. The repurchase of these shares was completed during October 2005 for approximately $57.6 million, at an average share price of $23.00. Our Board

authorized the repurchase of an additional 4.5 million shares of our common stock on November 15, 2005. As of January 28, 2006, we

had repurchased 1.0 million shares under this authorization for approximately $22.3 million, at an average share price of $22.30. The remaining shares will be repurchased at our discretion.

Additionally, during Fiscal 2005 and Fiscal 2003, we purchased 361,000 and 16,000 shares, respectively, from certain employees at market prices totaling $10.5 million and $0.1 million, respectively, for the payment of taxes in connection with the vesting of

restricted stock as permitted under the 1999 Stock Incentive Plan. No shares were repurchased during Fiscal 2004. The aforementioned share repurchases have been recorded as treasury stock.

During the third quarter of Fiscal 2004, our Board of Directors authorized a quarterly cash dividend of three cents per share. Since that

time, we have continued to pay a quarterly cash dividend, with a $0.03 per share dividend paid in the fourth quarter of Fiscal 2004, a

$0.05 per share dividend paid during the first quarter of Fiscal 2005 and a $0.075 per share dividend paid during each of the second,

third and fourth quarters of Fiscal 2005. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that

any future dividends paid will be declared on a quarterly basis.

Cash flows of discontinued operations, including operating, investing and financing activities, are presented separately from cash

flows from continuing operations in the Consolidated Statements of Cash Flows. The absence of the cash flows from discontinued operations is not expected to materially affect our future liquidity or capital resources.

We expect capital expenditures for Fiscal 2006 to be approximately $175 million, which will relate primarily to approximately 50 new and 50 remodeled American Eagle stores in the United States and Canada, the construction of our new distribution center in Ottawa,



Kansas and the purchase and initiation of the construction of our new corporate headquarters and data center. We plan to fund these

capital expenditures through existing cash and cash generated from operations.

Our growth strategy includes internally developing new brands and the possibility of acquisitions. We periodically consider and evaluate these options to support future growth. In the event we do pursue such options, we could require additional equity or debt

financing. There can be no assurance that we would be successful in closing any potential transaction, or that any endeavor we

undertake would increase our profitability.

Obligations and Commitments

Disclosure about Contractual Obligations

The following table summarizes our significant contractual obligations as of January 28, 2006:

Payments Due by Period

(In thousands) Total

Less than

1 Year

1-3

Years

3-5

Years

More than

5 Years

Operating Leases $ 1,037,311 $ 149,645 $ 294,866 $ 262,095 $ 330,705

Purchase Obligations (1) 174,906 171,832 3,074 — —

Total Contractual Obligations $ 1,212,217 $ 321,477 $ 297,940 $ 262,095 $ 330,705

(1) Purchase obligations primarily include binding commitments to purchase merchandise inventory as well as other legally binding commitments

made in the normal course of business. Included in the above purchase obligations are inventory commitments guaranteed by outstanding

letters of credit, as shown in the table below.

Disclosure about Commercial Commitments

The following table summarizes our significant commercial commitments as of January 28, 2006:

(In thousands)

Total

Amount

Committed

Amount of Commitment Expiration Per Period

Less than

1 Year

1-3

Years

3-5

Years

More than

5 Years

Letters of Credit (1) $ 129,699 $ 129,699 — — —

Total Commercial Commitments $ 129,699 $ 129,699 — — —

(1) Letters of credit represent commitments, guaranteed by a bank, to pay vendors for merchandise upon presentation of documents demonstrating that the

merchandise has shipped.

Guarantees

In connection with the disposition of Bluenotes, we have provided guarantees related to two store leases that were assigned to 6295215 Canada Inc. (the ―Bluenotes Purchaser‖). These guarantees were provided to the applicable landlords and will remain in

effect until the leases expire in 2007 and 2015, respectively. The lease guarantees require us to make all required payments under the

lease agreements in the event of default by the Bluenotes Purchaser. The maximum potential amount of future payments (undiscounted) that we could be required to make under the guarantees is approximately $1.4 million as of January 28, 2006. In the

event that we would be required to make any such payments, we would pursue full reimbursement from YM, Inc., a related party of

the Bluenotes Purchaser, in accordance with the Bluenotes’ Asset Purchase Agreement.

In accordance with FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB

Interpretation No. 34 (―FIN 45‖), as we issued the guarantees at the time we became secondarily liable under a new lease, no amounts

have been accrued in our Consolidated Financial Statements related to these guarantees. Our Management believes that it is unlikely that we will be required to perform under the guarantees.



Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Recent Accounting Pronouncements

Recent accounting pronouncements are disclosed in Note 2 of the Consolidated Financial Statements.

Certain Relationships and Related Party Transactions

We have historically had various transactions with related parties. The nature of our relationship with the related parties and a

description of the respective transactions are stated below.

As of January 28, 2006, the Schottenstein-Deshe-Diamond families (the ―families‖) owned 15% of the outstanding shares of our

Common Stock. The families also own a private company, Schottenstein Stores Corporation (―SSC‖), which includes a publicly-traded subsidiary, Retail Ventures, Inc. (―RVI‖), formerly Value City Department Stores, Inc., and also owned 99% of Linmar Realty

Company II (―Linmar Realty‖) until June 4, 2004. During Fiscal 2004, we implemented a strategic plan to eliminate related party

transactions with the families. As a result, we did not have any material transactions remaining with the families subsequent to January 29, 2005. We believe that the terms of the prior transactions were as favorable as those that could have been obtained from

unrelated third parties. We had the following transactions with these related parties during Fiscal 2004 and Fiscal 2003.

• We acquired Linmar Realty Company II, a general partnership that owned our corporate headquarters and distribution center. Prior to the acquisition,

we had an operating lease with Linmar Realty for these properties.

• We sold portions of our end-of-season, overstock and irregular merchandise to RVI.

• SSC and its affiliates charged us for an allocated cost of various professional services provided to us, including certain legal, real estate, travel and

insurance services.

• We discontinued our cost sharing arrangement with SSC for the acquisition of an interest in several corporate aircraft. We incurred operating costs and

usage fees under this arrangement.

See Note 3 of the Consolidated Financial Statements and Part III, Item 13 of this Form 10-K for additional information regarding related party transactions.

Income Taxes

For the year ended January 28, 2006, we recorded a deferred tax asset of $1.1 million relating to certain state tax credits that can be used to offset state income tax. The credits will expire over a period from July 2011 to July 2014. No valuation allowance has been

provided against this deferred tax asset. Our Management believes that it is more likely than not that the benefit of this asset will be

realized prior to the expiration dates of the tax credits.

For the year ended January 28, 2006, $0.9 million of a $1.4 million valuation allowance that had been previously recorded against a capital loss deferred tax asset was released, as our Management expects that we will be able to generate sufficient capital gains. The

capital loss carryforward will expire in July 2006. The effective tax rate used for the provision of income tax approximated 38%.

Impact of Inflation/Deflation

We do not believe that inflation has had a significant effect on our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact

our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and profitability.


We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency

exchange rates over the next year.

Interest Rate Risk

We are exposed to the impact of interest rate changes on cash equivalents and investments. The impact on cash and investments held at the end of Fiscal 2005 from a hypothetical 10% decrease in interest rates would have been a decrease in net income of

approximately $2.7 million during Fiscal 2005.

Foreign Exchange Rate Risk

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian operations where the functional currency

is the Canadian dollar. The recent weakening of the U.S. dollar compared to the Canadian dollar has positively impacted our net sales and any operating income generated by our Canadian businesses. As of January 28, 2006, a 10% change in the Canadian foreign

exchange rate would have resulted in an increase or decrease in net income of approximately $2.5 million during Fiscal 2005.




Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm 26

Consolidated Balance Sheets 27

Consolidated Statements of Operations 28

Consolidated Statements of Comprehensive Income 29

Consolidated Statements of Stockholders’ Equity 30

Consolidated Statements of Cash Flows 31

Notes to Consolidated Financial Statements 32

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

American Eagle Outfitters, Inc.

We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and

cash flows for each of the three fiscal years in the period ended January 28, 2006. These financial statements are the responsibility of

the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of

material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Eagle Outfitters, Inc. at January 28, 2006 and January 29, 2005, and the consolidated results of their operations and their

cash flows for each of the three fiscal years in the period ended January 28, 2006, in conformity with U.S. generally accepted

accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006, based on criteria established in

Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our

report dated March 31, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

March 31, 2006

26

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Table of Contents



(In thousands)

January 28,

2006

January 29,

2005

Assets

Current assets:

Cash and cash equivalents $ 130,529 $ 219,372

Short-term investments 620,989 370,235

Merchandise inventory 210,739 170,576

Accounts and note receivable 29,146 26,432

Prepaid expenses and other 30,110 25,856

Deferred income taxes 46,976 39,313

Assets held-for-sale 12,183 13,581

Total current assets 1,080,672 865,365

Property and equipment, at cost, net of accumulated depreciation and amortization 345,518 339,833

Goodwill 9,950 9,950

Long-term investments 145,774 84,416

Other assets, net 23,735 29,362

Total assets $ 1,605,649 $ 1,328,926

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 139,197 $ 108,929

Accrued compensation and payroll taxes 58,186 36,008

Accrued rent 52,506 45,089

Accrued income and other taxes 43,273 33,926

Unredeemed stored value cards and gift certificates 43,045 32,724

Current portion of deferred lease credits 10,406 9,798

Other liabilities and accrued expenses 15,010 16,152

Total current liabilities 361,623 282,626

Non-current liabilities:

Deferred lease credits 60,087 57,758

Other non-current liabilities 28,387 25,056

Total non-current liabilities 88,474 82,814

Commitments and contingencies — —

Stockholders’ equity 1,155,552 963,486

Total liabilities and stockholders’ equity $ 1,605,649 $ 1,328,926

See Notes to Consolidated Financial Statements

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Table of Contents


CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended

(In thousands, except per share amounts)

January 28,

2006

January 29,

2005

January 31,

2004

Net sales $ 2,309,371 $ 1,881,241 $ 1,435,436

Cost of sales, including certain buying, occupancy and warehousing expenses (exclusive of

depreciation shown separately below) 1,235,620 1,003,433 885,939

Gross profit 1,073,751 877,808 549,497

Selling, general and administrative expenses 538,091 446,829 356,261

Depreciation and amortization expense 74,578 68,273 59,965

Operating income 461,082 362,706 133,271

Other income, net 15,885 4,129 2,016

Income before income taxes 476,967 366,835 135,287

Provision for income taxes 183,256 142,603 52,179

Income from continuing operations 293,711 224,232 83,108

Income (loss) from discontinued operations, net of tax 442 (10,889 ) (23,486 )

Net income $ 294,153 $ 213,343 $ 59,622

Basic income per common share:

Income from continuing operations $ 1.94 $ 1.55 $ 0.59

Loss from discontinued operations — (0.08 ) (0.17 )

Net income per basic share $ 1.94 $ 1.47 $ 0.42

Diluted income per common share:

Income from continuing operations $ 1.89 $ 1.49 $ 0.57

Loss from discontinued operations — (0.07 ) (0.16 )

Net income per diluted share $ 1.89 $ 1.42 $ 0.41

Weighted average common shares outstanding - basic 151,604 145,150 142,226

Weighted average common shares outstanding - diluted 155,354 150,244 144,414


28




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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Net income $ 294,153 $ 213,343 $ 59,622

Other comprehensive income:

Unrealized loss on investments, net of tax (543 ) (231 ) (84 )

Foreign currency translation adjustment 8,823 7,315 3,958

Reclassification adjustment for losses realized in net income related to the sale of

Bluenotes — 2,467 —

Unrealized derivative gains (losses) on cash flow hedge, net of tax — 71 (148 )

Reclassification adjustment for losses realized in net income related to termination of

the cash flow hedge, net of tax — 437 —

Other comprehensive income 8,280 10,059 3,726

Comprehensive income $ 302,433 $ 223,402 $ 63,348


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share a

mounts)

Shares (

1)

Common

Stock

Contributed

Capital

Retained

Earnings

Treasury

Stock (2)

Deferred

Compensation

Expense

Accumulated

Other

Comprehensive

(Loss)/Income

Stockholders’

Equity

Balance at February 1, 2003 71,047 $ 733 $ 154,840 $ 462,636 $ (44,329 ) $ (2,253 ) $ (37 ) $ 571,590

Stock awards 192 2 1,934 — — 1,192 — 3,128

Repurchase of common stock as

part of publicly announced

programs (40 ) — — — (550 ) — — (550 )

Repurchase of common stock

from employees (8 ) — — — (139 ) — — (139 )

Net income — — — 59,622 — — — 59,622

Other comprehensive income, net

of tax — — — — — — 3,726 3,726

Balance at January 31, 2004 71,191 735 156,774 522,258 (45,018 ) (1,061 ) 3,689 637,377

Stock awards 3,553 35 112,259 — — (746 ) — 111,548

Two-for-one stock split –

March 7, 2005 74,744 747 (747 ) — — — — —

Net income — — — 213,343 — — — 213,343


of tax — — — — — — 10,059 10,059

Cash dividends ($0.06 per share)

(3) — — — (8,841 ) — — — (8,841 )

Balance at January 29, 2005 149,488 1,517 268,286 726,760 (45,018 ) (1,807 ) 13,748 963,486




Stock awards 5,804 91 102,329 — — 766 — 103,186

Repurchase of common stock as

part of publicly announced

programs (7,000 ) — — — (161,008 ) — — (161,008 )

Repurchase of common stock

from employees (361 ) — — — (10,487 ) — — (10,487 )

Net income — — — 294,153 — — — 294,153


of tax — — — — — — 8,280 8,280

Cash dividends ($0.28 per share) — — — (42,058 ) — — — (42,058 )

Balance at January 28, 2006 147,931 $ 1,608 $ 370,615 $ 978,855 $ (216,513 ) $ (1,041 ) $ 22,028 $ 1,155,552

(

1

)

250,000 authorized, 162,381 issued and 147,931 outstanding (excluding 761 shares of non-vested restricted stock), $.01 par value common stock at January 28,

2006; 250,000 authorized, 156,769 issued and 149,488 outstanding (excluding 953 shares of non-vested restricted stock) at January 29, 2005; and 250,000

authorized, 148,711 issued and 142,382 outstanding (post-split) at January 31, 2004. The Company has 5,000 authorized, with none issued or outstanding, $.01

par value preferred stock at January 28, 2006, January 29, 2005 and January 31, 2004.

(2) 13,689 shares at January 28, 2006 and 6,328 shares (post-split) at both January 29, 2005 and January 31, 2004.

(3) Amount represents cash dividends paid for two quarters only. Note that the Company initiated dividend payments during the third quarter of Fiscal 2004.



For the Years Ended

January 28,

2006

January 29,

2005

January 31,

2004

(In thousands) (Revised) (Revised)

Operating activities:

Net income $ 294,153 $ 213,343 $ 59,622

(Income) loss from discontinued operations (442 ) 10,889 23,486

Income from continuing operations 293,711 224,232 83,108

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

Depreciation and amortization 74,578 68,273 59,965

Stock compensation 19,620 25,166 1,192

Deferred income taxes 4,752 (17,087 ) 13,008

Tax benefit from exercise of stock options and restricted stock 35,371 28,800 674

Other adjustments 4,867 2,796 5,999

Changes in assets and liabilities:

Merchandise inventory (39,137 ) (44,540 ) 14,452

Accounts and note receivable, including related party 4,638 3,878 (9,344 )

Prepaid expenses and other (3,642 ) 1,918 3,342

Accounts payable 29,366 23,166 13,353

Unredeemed stored value cards and gift certificates 10,137 7,373 2,725

Deferred lease credits 2,784 3,359 5,290

Accrued liabilities 43,374 41,349 21,437

Total adjustments 186,708 144,451 132,093

Net cash provided by operating activities from continuing operations 480,419 368,683 215,201

Investing activities:

Capital expenditures (81,545 ) (97,288 ) (77,544 )

Purchase of investments (1,187,556 ) (508,768 ) (397,506 )

Sale of investments 876,111 330,390 245,640



Other investing activities (74 ) (14 ) (1,513 )

Net cash used for investing activities from continuing operations (393,064 ) (275,680 ) (230,923 )

Financing activities:

Payments on note payable and capital leases (745 ) (2,655 ) (5,434 )

Retirement of note payable and termination of swap agreement — (16,915 ) —

Repurchase of common stock as part of publicly announced programs (161,008 ) — (550 )

Repurchase of common stock from employees (10,487 ) — (139 )

Net proceeds from stock options exercised 48,198 57,533 1,139

Cash dividends paid (42,058 ) (8,841 ) —

Net cash (used for) provided by financing activities from continuing operations (166,100 ) 29,122 (4,984 )

Effect of exchange rates on cash 4,680 1,903 1,055

Cash flows of discontinued operations (Revised – See Note 2)

Net cash (used for) provided by operating activities (15,214 ) 3,315 (11,165 )

Net cash provided by (used for) investing activities — 5,371 (1,362 )

Net cash provided by (used for) financing activities — — —

Effect of exchange rates on cash 436 762 909

Net cash (used for) provided by discontinued operations (14,778 ) 9,448 (11,618 )

Net (decrease) increase in cash and cash equivalents (88,843 ) 133,476 (31,269 )

Cash and cash equivalents - beginning of period 219,372 85,896 117,165

Cash and cash equivalents - end of period $ 130,529 $ 219,372 $ 85,896




FOR THE YEAR ENDED JANUARY 28, 2006

1. Business Operations

The Company designs, markets and sells its own brand of laidback, current clothing targeting 15 to 25 year-olds in its United States

and Canadian retail stores. We also operate via our e-commerce operation, ae.com. The American Eagle brand provides high quality merchandise at affordable prices. American Eagle’s collection includes standards like jeans and graphic Ts as well as essentials like

accessories, outerwear, footwear, basics and swimwear. The Company operates retail stores located primarily in regional enclosed

shopping malls in the United States and Canada.

The following table sets forth the approximate consolidated percentage of net sales attributable to each merchandise group for each of the periods indicated:

For the Years Ended

January 2

8,

2006

January 2

9,

2005

January 3

1,

2004

Men’s apparel and accessories 35 % 34 % 35 %

Women’s apparel and accessories 60 % 61 % 60 %

Footwear – men’s and women’s 5 % 5 % 5 %

Total 100 % 100 % 100 %

2. Summary of Significant Accounting Policies

Principles of Consolidation



The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany

transactions and balances have been eliminated in consolidation. At January 28, 2006, the Company operated in one reportable segment, American Eagle.

In December 2004, the Company completed the disposition of Bluenotes, which refers to the Bluenotes/Thriftys specialty apparel chain that we operated in Canada. As a result, the Company’s Consolidated Statements of Operations and Consolidated Statements of

Cash Flows reflect Bluenotes’ results of operations as discontinued operations for all periods presented. Amounts in the Company’s Consolidated Balance Sheets have not been reclassified to reflect Bluenotes as discontinued operations. Prior to the disposition,

Bluenotes was presented as a separate reportable segment. Additional information regarding the disposition is contained in Note 9 of

the Consolidated Financial Statements.

Fiscal Year

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, ―Fiscal 2005,‖ ―Fiscal 2004‖

and ―Fiscal 2003‖ refer to the fifty-two week periods ended January 28, 2006, January 29, 2005 and January 31, 2004, respectively. ―Fiscal 2006‖ refers to the fifty-three week period ending February 3, 2007.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America

requires our Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our Management reviews its estimates based

on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

FSP No. FAS 123(R)-4, Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event

In February 2006, the FASB issued Staff Position No. FAS 123(R)-4, Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event (―FSP No. 123(R)-4‖). FSP No. 123(R)-4 requires companies to classify employee stock options and similar instruments with contingent cash settlement features

as equity awards under SFAS No. 123(R), provided that: (1) the contingent event that permits or requires cash settlement is not

considered probable of occurring; (2) the contingent event is not within the control of the employee; and (3) the award includes no other features that would require liability classification. The Company will implement the guidance in FSP No. 123(R)-4 in

connection with its adoption of SFAS No. 123(R) in the first quarter of 2006. The Company does not permit or require the cash

settlement of options upon any contingent events. Therefore, the Company does not believe that FSP No. 123(R)-4 will have an impact on its Consolidated Financial Statements.

FSP No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards

In November 2005, the FASB issued Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (―FSP No. 123(R)-3‖). FSP No. 123(R)-3 provides an alternative transition method for calculating

the tax effects of stock-based compensation pursuant to SFAS No. 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (the ―APIC pool‖) related to the tax effects of

employee stock-based compensation and to determine the subsequent impact on the APIC pool and the statement of cash flows of the

tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). The Company will implement the guidance in FSP No. 123(R)-3 in connection with its adoption of SFAS No. 123(R) in the first quarter of 2006. In

accordance with this guidance, the Company will follow the transition method for the APIC pool as provided in SFAS No. 123(R) and

will not apply the alternative transition methods provided by FSP No. 123(R)-3.

FSP No. FAS 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)

In October 2005, the FASB issued Staff Position No. FAS 123(R)-2, Practical Accommodation to the Application of Grant Date as

Defined in FASB Statement No. 123(R) (―FSP No. 123(R)-2‖). FSP No. 123(R)-2 provides guidance on determining the grant date for an award as defined in SFAS No. 123(R). Assuming all other criteria in the grant date definition are met, FSP No. 123(R)-2 permits

companies to measure compensation cost for awards subject to SFAS No. 123(R) on the Board of Directors approval date, provided

that the key terms and conditions of an award (a) cannot be negotiated by the recipient with the employer because the award is a unilateral grant and (b) are expected to be communicated to an individual recipient within a relatively short time period from the date

of approval. FSP No. 123(R)-2 is required to be applied upon initial adoption of SFAS No. 123(R). The Company does not believe

that the adoption of FSP No. 123(R)-2 will have a material impact on its Consolidated Financial Statements and will implement the guidance in connection with its adoption of SFAS No. 123(R) in the first quarter of 2006.

FSP No. FAS 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for

Employee Services under FASB Statement No. 123(R)

In September 2005, the FASB issued Staff Position No. FAS 123(R)-1, Classification and Measurement of Freestanding Financial

Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R) (―FSP No. 123(R)-1‖). FSP No. 123(R)-1 defers indefinitely the requirement of SFAS No. 123(R) that a share-based payment to an employee subject to



SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights

conveyed by the instrument to the holder are no longer dependent on the holder being an employee. FSP No. 123(R)-1 is required to be applied upon initial adoption of SFAS No. 123(R). The Company does not believe that the adoption of FSP No. 123(R)-1 will have

an impact on its Consolidated Financial Statements and will implement the guidance in connection with its adoption of SFAS

No. 123(R) in the first quarter of 2006.

FSP No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period

In October 2005, the FASB issued Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (―FSP No. 13-1‖) . FSP No. 13-1 indicates that there is no distinction between the right to use a leased asset during the construction

period and the right to use that asset after the construction period and requires that rental costs associated with ground or building

operating leases that are incurred during a construction period be recognized as rental expense. Adoption is required for the first reporting period beginning after December 15, 2005. The Company is in compliance with FSP No. 13-1, and therefore, the adoption

of FSP No. 13-1 will not have an impact on its Consolidated Financial Statements.

SFAS No. 154, Accounting Changes and Error Corrections

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3 (―SFAS No. 154‖). SFAS No. 154 requires retrospective application

to prior periods’ financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the

period-specific effects or the cumulative effect of the change. SFAS No. 154 also applies to changes required by an accounting

pronouncement in the unusual instance that the pronouncement does not include specific transition provisions and makes a distinction

between retrospective application of an accounting principle and the restatement of financial statements to reflect the correction of an error. Additionally, SFAS No. 154 requires that a change in depreciation, amortization or depletion method for long-lived,

nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is

effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS No. 154 will have an impact on its Consolidated Financial Statements.

FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs

Creation Act of 2004

In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings

Repatriation Provision within the American Jobs Creation Act of 2004 (―FSP No. 109-2‖). FSP No. 109-2 provides guidance to companies to determine how the American Jobs Creation Act of 2004 (the ―Act‖) affects a company’s accounting for the deferred tax

liabilities on un-remitted foreign earnings. The Act provides for a special one-time deduction of 85% of certain foreign earnings that

are repatriated and which meet certain requirements. Although the deduction is subject to a number of limitations and significant uncertainty remains as to how to interpret numerous provisions in the Act, the Company believes that it has the necessary information

to make an informed decision on the impact of the Act on its repatriation plans. Based on that decision, the Company plans to

repatriate certain earnings generated prior to the tax year ending July 29, 2006 as extraordinary dividends from its Canadian

subsidiaries, as defined in the Act. These earnings were previously considered permanently reinvested. As of January 28, 2006,

unremitted Canadian earnings subject to repatriation approximated $73 million. Accordingly, the Company has recorded a tax liability

of $3.8 million related to the planned repatriation of this amount. As additional Canadian earnings are generated before the end of the tax year ending July 29, 2006, additional tax liabilities will be recorded.

The decision to take advantage of the special one-time deduction under the Act is a discrete event and it has not changed the Company’s intention to indefinitely reinvest accumulated earnings from its Canadian Operations to the extent not repatriated under the

Act. Accordingly, no provision will be made for income taxes that would be payable upon the distributions of such earnings.

SFAS No. 123 (revised 2004), Share-Based Payment

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (―SFAS No. 123(R)‖), a revision of SFAS No. 123. SFAS No. 123(R) requires that companies recognize all share-based payments to

employees, including grants of employee stock options, in the financial statements. The recognized cost will be based on the fair value of the equity or liability instruments issued. Pro forma disclosure of this cost will no longer be an alternative under SFAS No. 123(R).

In April 2005, the SEC adopted a rule that amended the effective dates of SFAS No. 123(R). Under this guidance, SFAS No. 123(R) is effective for public companies at the beginning of the first fiscal year that begins after June 15, 2005. Transition methods available to

public companies include either the modified prospective or modified retrospective adoption. The modified prospective transition

method requires that compensation cost be recognized beginning on the effective date, or date of adoption if earlier, for all share-based payments granted after the date of adoption and for all unvested awards existing on the date of adoption. The modified retrospective

transition method, which includes the requirements of the modified prospective transition method, additionally requires the restatement of prior period financial information based on amounts previously recognized under SFAS No. 123 for purposes of pro

forma disclosures. The Company will adopt the new standard in the first quarter of Fiscal 2006 using the modified prospective

transition method.

The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25,

Accounting for Stock Issued to Employees , using the intrinsic value method. As a result of using this method, the Company generally recognizes no compensation cost for employee stock options. The adoption of SFAS No. 123(R) and the use of the fair value method

will have an impact on our results of operations. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized

compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards.



This requirement will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. We cannot

estimate what those amounts will be in the future because they are dependent on, among other things, when employees exercise stock options.

Historically, for pro forma reporting purposes the Company has followed the nominal vesting period approach for stock-based compensation awards with retirement eligibility provisions. Under this approach, the Company recognizes compensation expense over

the vesting period of the award. If an employee retires before the end of the vesting period, any remaining unrecognized compensation cost is recognized at the date of retirement. SFAS No. 123(R) requires recognition of compensation cost under a non-substantive

vesting period approach. This approach requires recognition of compensation expense over the period from the grant date to the date

retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant. Refer to the Stock

Option Plan disclosure on pages 40 and 41 of this Annual Report on Form 10-K for additional discussion of the non-substantive

vesting period approach.

Based on its current analysis and information, the Company has determined that the impact of adopting SFAS No. 123(R) will result

in a reduction of net income and expects diluted earnings per share to be reduced by approximately $0.04 to $0.05 on a full year basis for Fiscal 2006.

Staff Accounting Bulletin No. 107, Share-Based Payment

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (―SAB No. 107‖). SAB No. 107 provides guidance regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations, including guidance related to

valuation methods; the classification of compensation expense; non-GAAP financial measures; the accounting for income tax effects of share-based payment arrangements; disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS

No. 123(R); and modifications of options prior to the adoption of SFAS No. 123(R). The Company will implement the guidance in

SAB No. 107 in connection with its adoption of SFAS No. 123(R) in the first quarter of 2006.

Foreign Currency Translation

The Canadian dollar is the functional currency for the Canadian businesses. In accordance with SFAS No. 52, Foreign Currency Translation, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the

exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included

in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in

accordance with SFAS No. 130, Reporting Comprehensive Income (see Note 7 of the Consolidated Financial Statements).

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107 (―SFAS No. 107‖), Disclosures about Fair Value of Financial Instruments,

requires Management to disclose the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as financial

instruments. At January 28, 2006, Management believes that the carrying amounts of cash and cash equivalents, receivables and

payables approximate fair value because of the short maturity of these financial instruments. Short-term and long-term investments consist of available for sale securities and are recorded on the Consolidated Balance Sheets at fair value, which is estimated based on

quoted market prices for the same or similar investments. Any difference between the original cost and the fair value of these

investments is recorded in other comprehensive income.

Cash and Cash Equivalents and Short-term Investments

Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or

less to be cash equivalents.

As of January 28, 2006, short-term investments included investments with an original maturity of three to twelve months and averaging approximately seven months (excluding auction rate securities and variable rate demand notes of $276.3 million and $82.5

million, respectively, at January 28, 2006 and $161.3 million and $55.7 million, respectively, at January 29, 2005) and consisted

primarily of tax-exempt municipal bonds, taxable agency bonds, corporate notes, variable rate demand notes (―VRDNs‖) and auction rate securities classified as available for sale. The Company had previously included VRDNs as a component of cash and cash

equivalents on its Consolidated Balance Sheets, but has now determined that categorization as a component of short-term investments

is more appropriate. Accordingly, these VRDNs have been reclassified from cash and cash equivalents to short-term investments for

all periods presented. This reclassification also resulted in changes in the Company’s Consolidated Statements of Cash Flows. The

purchase and sale of VRDNs previously presented as cash and cash equivalents have been reclassified to investing activities for all

periods presented.

The following table summarizes the fair value of our cash and marketable securities, which are recorded as cash and cash equivalents on the Consolidated Balance Sheets, and our short-term investments:



(In thousands)

January 28,

2006

January 29,

2005

Cash and cash equivalents:

Cash and money market investments $ 69,641 $ 90,200

Tax exempt investments — 110,797

Taxable investments 60,888 18,375

Total cash and cash equivalents 130,529 219,372

Short-term investments:

Tax exempt investments 517,199 343,614

Taxable investments 103,790 26,621

Total short-term investments 620,989 370,235

Total $ 751,518 $ 589,607


Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise

design and sourcing costs and related expenses. The Company has historically recognized ownership of merchandise inventory for financial reporting purposes at the point when it arrived at one of the Company’s deconsolidation centers. As of January 28, 2006, the

Company records merchandise at the FOB port as a result of upgrades to its merchandise systems, which increased visibility earlier in

the supply chain process. The Company assumes risk of loss and title transfers at the FOB port. The merchandise inventory and accounts payable balances on the Company’s Consolidated Balance Sheet, as of January 29, 2005, have been adjusted by $32.6

million to reflect this change. Additionally, the Company has adjusted its Consolidated Statements of Cash Flows for the years ended

January 29, 2005 and January 31, 2004 to reflect this change. These adjustments did not result in a change in cash and cash equivalents for either period.

The Company reviews its inventory levels in order to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in

customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and

amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the

balance sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix and changes in actual

shrinkage trends.

Property and Equipment

Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the estimated useful lives as follows:

Buildings 25 to 40 years

Leasehold improvements 5 to 10 years

Fixtures and equipment 3 to 5 years

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, Management evaluates the ongoing value of the Company’s property and equipment, including but not limited to leasehold improvements and store fixtures

associated with retail stores which have been open longer than one year. Impairment losses are recorded on long-lived assets used in

operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When events such as these occur, the impaired assets are

adjusted to estimated fair value and an impairment loss is recorded in selling, general and administrative expenses. The Company

recognized $1.2 million in impairment losses during Fiscal 2005 and $1.4 million in impairment losses during both Fiscal 2004 and Fiscal 2003.

Goodwill

As of January 28, 2006, the Company had approximately $10.0 million of goodwill, which is primarily related to the acquisition of

our importing operations on January 31, 2000. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , Management evaluates goodwill for possible impairment on at least an annual basis.

Long-term Investments



As of January 28, 2006, long-term investments included investments with an original maturity of greater than twelve months, but not

exceeding five years (averaging approximately twenty months) and consisted primarily of agency bonds and debt securities issued by states and local municipalities classified as available-for-sale.

Other Assets

Other assets consist primarily of deferred taxes, lease buyout costs, trademark costs and acquisition costs. The lease buyout costs are amortized over the remaining life of the leases, generally for no greater than ten years. The trademark costs are amortized over five to

fifteen years. Acquisition costs are amortized over five years. These assets, net of amortization, are presented as other assets (long-term) on the Consolidated Balance Sheets.

Deferred Lease Credits

Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of

the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date

(date of initial possession of the store). The deferred lease credit is amortized as a reduction of rent expense over the term of the lease (including the pre-opening build-out period) and the receivable is reduced as amounts are received from the landlord.

Self-Insurance Reserve

The Company is self-insured for certain losses related to employee medical benefits. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately

reserved for its self-insurance liability, which is capped through the use of stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.

Customer Loyalty Program

During Fiscal 2005, the Company introduced the AE All-Access Pass (the ―Pass‖), a customer loyalty program. Using the Pass, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three month

earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month

from the mailing date and can be redeemed for a discount on a future purchase of merchandise. Rewards not redeemed during the one month redemption period are forfeited. A current liability is recorded for the estimated cost of anticipated redemptions and is adjusted

through cost of sales based on reward earning activity. Rewards are recorded as markdowns at the time of redemption.

Derivative Instruments and Hedging Activities

On November 30, 2000, the Company entered into an interest rate swap agreement totaling $29.2 million in connection with a $29.1

million non-revolving term loan facility (the ―term facility‖). The swap amount decreased on a monthly basis beginning January 1,

2001 until the early termination of the agreement during Fiscal 2004. The Company also retired its term facility for $16.2 million at

that time.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company recognized its

derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative, which was designated and met all the required criteria for a cash flow hedge, were recorded in accumulated other comprehensive income. An

unrealized net loss on derivative instruments of approximately $0.1 million, net of related tax effects, was recorded in other

comprehensive income (loss) during Fiscal 2003. During Fiscal 2004, the interest rate swap was terminated at its fair value, which represented a net loss of $0.7 million, in conjunction with the payoff of the term facility. As a result, the Company reclassified

approximately $0.4 million, net of tax, of unrealized net losses from other comprehensive income into earnings during Fiscal 2004. As

of January 29, 2005, the Company did not have any remaining derivative instruments.

Stock Split

On February 4, 2005, the Company’s Board of Directors approved a two-for-one stock split that was distributed on March 7, 2005, to stockholders of record on February 14, 2005. All share amounts and per share data reflect this stock split.

Stock Repurchases

On February 24, 2000, the Company’s Board of Directors (the ―Board‖) authorized the repurchase of up to 7.5 million shares of its common stock. Prior to Fiscal 2003, the Company purchased approximately 6.0 million shares of common stock under this

authorization. During Fiscal 2003, the Company purchased 80,000 shares for approximately $0.6 million. The Company did not

purchase any shares of common stock on the open market during Fiscal 2004. At the beginning of Fiscal 2005, approximately 1.4 million shares remained available for repurchase under this authorization. The Company’s Board authorized the repurchase of an

additional 2.1 million shares of the Company’s common stock on September 2, 2005. As part of these stock repurchase authorizations, the Company repurchased 3.5 million shares during the three months ended October 29, 2005 for approximately $81.1 million, at an

average share price of $23.16.

On October 6, 2005, the Company’s Board authorized the repurchase of an additional 2.5 million shares of the Company’s common stock. The repurchase of these shares was completed during October 2005 for approximately $57.6 million, at an average share price



of $23.00. On November 15, 2005, the Company’s Board authorized the repurchase of an additional 4.5 million shares of the

Company’s common stock. As of January 28, 2006, the Company had repurchased 1.0 million shares under this authorization for approximately $22.3 million, at an average share price of $22.30. The repurchase of the remaining shares will occur at the discretion

of the Company.

Additionally, during Fiscal 2005 and Fiscal 2003, the Company purchased 361,000 shares and 16,000 shares, respectively, from certain employees at market prices totaling $10.5 million and $0.1 million, respectively, for the payment of taxes in connection with the vesting of restricted stock as permitted under the 1999 Stock Incentive Plan. During Fiscal 2004, the Company did not repurchase

any shares of common stock from employees for the payment of taxes in connection with the vesting of restricted stock.

The aforementioned share repurchases have been recorded as treasury stock.

Income Taxes

The Company calculates income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the

consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in

effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred

tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized.

Stock Option Plan

The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (―APB No. 25‖). The pro forma information below is based on provisions of SFAS No. 123, Accounting

for Stock-Based Compensation , as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (―SFAS No. 148‖), issued in December 2002. SFAS No. 148 requires that the pro forma information regarding net income and

earnings per share be determined as if the Company had accounted for its employee stock options granted beginning in the fiscal year

subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

For the Years Ended

January 2

8,

2006

January 29,

2005

January 31,

2004

Risk-free interest rates 3.8% 2.9% 2.6%

Dividend yield 1.12% 0.48% None

Volatility factors of the expected market price of the Company’s common stock 38.0% 31.4%-48.6% 50.3%-64.5%

Weighted-average expected life 5 years 6 years 5 years

Expected forfeiture rate 13.9% 13.6% 11.5%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions

including the expected stock price volatility.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows:

For the Years Ended


January 28,

2006

January 29,

2005

January 31,

2004

Net income, as reported $ 294,153 $ 213,343 $ 59,622

Add: stock-based compensation expense included in reported net income, net of tax 304 1,301 767

Less: total stock-based compensation expense determined under fair value method, net of tax (9,283 ) (10,948 ) (14,463 )

Pro forma net income $ 285,174 $ 203,696 $ 45,926

Basic income per common share:

As reported $ 1.94 $ 1.47 $ 0.42

Pro forma $ 1.88 $ 1.40 $ 0.32

Diluted income per common share:

As reported $ 1.89 $ 1.42 $ 0.41



Pro forma $ 1.83 $ 1.36 $ 0.32

Historically, for pro forma reporting purposes the Company has followed the nominal vesting period approach for stock-based compensation awards with retirement eligibility provisions. Under this approach, the Company recognizes compensation expense over

the vesting period of the award. If an employee retires before the end of the vesting period, any remaining unrecognized compensation

cost is recognized at the date of retirement. SFAS No. 123(R) requires recognition of compensation cost under a non-substantive vesting period approach. This approach requires recognition of compensation expense over the period from the grant date to the date

retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to

retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant.

The SEC has clarified that companies following the nominal vesting period approach should continue to follow that approach until the

adoption of SFAS No. 123(R). Accordingly, the Company will continue to follow the nominal vesting period approach for any new stock based compensation awards containing retirement eligibility provisions granted prior to the adoption of SFAS No. 123(R) and

for the remaining portion of unvested outstanding awards containing retirement eligibility provisions after adopting SFAS No. 123(R).

Upon adoption of SFAS No. 123(R), the Company will apply the non-substantive vesting period approach to new stock award grants that have retirement eligibility provisions. Had the Company applied the non-substantive vesting period approach for retirement

eligible employees, there would not have been an impact to our reported pro forma income per common share for Fiscal 2005, Fiscal

2004 or Fiscal 2003.

Revenue Recognition

The Company records revenue for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue at the time the goods are shipped. Revenue is not recorded on the purchase of gift cards. A current liability is recorded

upon purchase and revenue is recognized when the gift card is redeemed for merchandise. Revenue is recorded net of actual sales

returns and deductions for coupon redemptions and other promotions.

Revenue is not recorded on the sell-off of end-of-season, overstock and irregular merchandise to off-price retailers. These sell-offs are

typically sold below cost and the proceeds are reflected in cost of sales. See Note 3 of the Consolidated Financial Statements for further discussion.

Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and promotional costs. Buying, occupancy and warehousing costs consist of compensation and travel for our buyers and

certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies for our distribution centers, including

purchasing, receiving and inspection costs.

The gross profit impact of our sales returns reserve, which is recorded in cost of sales and other liabilities and accrued expenses, is based on projected merchandise returns determined through the use of historical average return percentages. A summary of activity in the sales return reserve account follows:

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Beginning balance $ 3,369 $ 2,400 $ 4,043

Returns (67,668 ) (55,677 ) (49,598 )

Provisions 68,054 56,646 47,955

Ending balance $ 3,755 $ 3,369 $ 2,400


Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include

advertising costs, supplies for our stores and home office, freight related to inter-store transfers, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation and

employee benefit expenses for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.

Advertising Costs

Certain advertising costs, including direct mail, in-store photographs and other promotional costs are expensed when the marketing campaign commences. Costs associated with the production of television advertising are expensed over the life of the campaign. All

other advertising costs are expensed as incurred. The Company recognized $53.3 million, $41.4 million and $44.8 million in

advertising expense during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.



Design Costs

The Company has certain design costs, including compensation, rent, travel, supplies and samples, which are included in cost of sales as the respective inventory is sold.

Store Pre-Opening Costs

Store pre-opening costs consist primarily of rent, advertising, supplies and payroll expenses. These costs are expensed as incurred.

Gift Cards

The value of a gift card is recorded as a current liability upon purchase and revenue is recognized when the gift card is redeemed for merchandise. If a gift card remains inactive for greater than twenty-four months, the Company assesses the recipient a one dollar per

month service fee, where allowed by law, which is automatically deducted from the remaining value of the card. This service fee is recorded within selling, general and administrative expenses.

Legal Proceedings and Claims

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with SFAS No. 5, Accounting for Contingencies , Management records a reserve for estimated losses when the loss is probable and the amount

can be reasonably estimated. If a range of possible loss exists, the Company records the accrual at the low end of the range, in

accordance with FIN 14, an interpretation of SFAS No. 5. As the Company believes that it has provided adequate reserves, it

anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the financial

position or results of operations of the Company.

Supplemental Disclosures of Cash Flow Information

We have revised the Consolidated Statements of Cash Flows for the years ended January 29, 2005 and January 31, 2004 to separately

disclose the operating, investing and financing portions of the cash flows attributable to the Company’s discontinued operations. We had previously reported these amounts on a combined basis.

The table below shows supplemental cash flow information for cash amounts paid during the respective periods:

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Cash paid during the periods for:

Income taxes $ 133,461 $ 121,138 $ 25,496

Interest $ — $ 1,188 $ 1,510

Earnings Per Share

The following table shows the amounts used in computing earnings per share from continuing operations and the effect on income from continuing operations and the weighted average number of shares of potential dilutive common stock (stock options and

restricted stock).

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Income from continuing operations $ 293,711 $ 224,232 $ 83,108

Weighted average common shares outstanding:

Basic shares 151,604 145,150 142,226

Dilutive effect of stock options and non-vested restricted stock 3,750 5,094 2,188

Diluted shares 155,354 150,244 144,414

Options to purchase 115,000, 1,327,000 and 10,543,000 shares of common stock during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively, were outstanding, but were 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.

Segment Information

In accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related

Information (―SFAS No. 131‖), the Company has identified three operating segments (U.S. retail stores, Canadian retail stores and the



Company’s e-commerce operation, ae.com) that reflect the basis used internally to review performance and allocate resources. The

three operating segments have been aggregated and are presented as one reportable segment, as permitted by SFAS No. 131, based on their similar economic characteristics, products, production processes, target customers and distribution methods. Prior to its

disposition, Bluenotes was presented as a separate reportable segment. (See Note 9 of the Consolidated Financial Statements.)

The following tables present summarized geographical information:

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Net sales (1):

United States $ 2,132,497 $ 1,751,776 $ 1,339,636

Foreign (2) 176,874 129,465 95,800

Total net sales $ 2,309,371 $ 1,881,241 $ 1,435,436

(1) Net sales data represents American Eagle operations only. Bluenotes’ net sales amounts have been excluded from all periods as they are being presented in

discontinued operations. See Note 9 of the Consolidated Financial Statements for additional information regarding Bluenotes.

(2) Amounts represent sales from American Eagle’s Canadian retail stores, as well as AE Direct sales, which are billed to and/or shipped to foreign countries.

(In thousands)

January 28,

2006

January 29,

2005

Long-lived assets, net:

United States $ 329,050 $ 320,021

Foreign (1) 26,418 29,762

Total long-lived assets, net (1) $ 355,468 $ 349,783

(1) Long-lived assets as of January 28, 2006 and January 29, 2005 do not include the assets of National Logistics Services subject to the sales agreement

entered into during the fourth quarter of Fiscal 2005, as they have been classified as held-for-sale. See Note 9 of the Consolidated Financial Statements

for additional information regarding National Logistics Services.

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the Fiscal

2005 presentation.

3. Related Party Transactions

The Company and its wholly-owned subsidiaries historically had various transactions with related parties. The nature of the Company’s relationship with the related parties and a description of the respective transactions is stated below.

As of January 28, 2006, the Schottenstein-Deshe-Diamond families (the ―families‖) owned 15% of the outstanding shares of Common Stock of the Company. The families also own a private company, Schottenstein Stores Corporation (―SSC‖), which includes a

publicly-traded subsidiary, Retail Ventures, Inc. (―RVI‖), formerly Value City Department Stores, Inc., and also owned 99% of

Linmar Realty Company II (―Linmar Realty‖) until June 4, 2004. During Fiscal 2004, the Company implemented a strategic plan to

eliminate related party transactions with the families. As a result, we did not have any material transactions remaining with the

families subsequent to January 29, 2005. We believe that the terms of the prior transactions were as favorable to the Company as those that could have been obtained from unrelated third parties. The Company had the following transactions with these related parties

during Fiscal 2004 and Fiscal 2003.

During Fiscal 2004, the Company, through a subsidiary, Linmar Realty Company II LLC, acquired for $20.0 million Linmar Realty Company II, a general partnership that owned the Company’s corporate headquarters and distribution center. The acquisition price,

less a straight-line rent accrual adjustment of $2.0 million, was recorded as land and building on the consolidated balance sheet during the three months ended July 31, 2004 and is being depreciated over its anticipated useful life of twenty-five years. Prior to the

acquisition, the Company had an operating lease with Linmar Realty for these properties. Rent expense under the lease was $0.8

million and $2.4 million during Fiscal 2004 and Fiscal 2003, respectively.



The Company and its subsidiaries sell end-of-season, overstock and irregular merchandise to various parties, which have historically

included RVI. These sell-offs, which are without recourse, are typically sold below cost and the proceeds are reflected in cost of sales. During April 2004, the Company entered into an agreement with an independent third-party vendor for the sale of merchandise sell-

offs, thus reducing sell-offs to related parties. As a result, there have been no sell-offs of merchandise to related parties since the date

of the agreement. Below is a summary of merchandise sell-offs for Fiscal 2004 and Fiscal 2003:

(In thousands)

Related

Party

Non-Related

Party Total

Fiscal 2004

Marked-down cost of merchandise disposed of via sell-offs $ 147 $ 15,633 $ 15,780

Proceeds from sell-offs 148 15,273 15,421

Increase (decrease) to cost of sales $ (1 ) $ 360 $ 359

Fiscal 2003

Marked-down cost of merchandise disposed of via sell-offs $ 12,924 $ 23,538 $ 36,462

Proceeds from sell-offs 13,256 18,688 31,944

Increase (decrease) to cost of sales $ (332 ) $ 4,850 $ 4,518

At January 28, 2006 and January 29, 2005, the Company had no related party accounts receivable.

Prior to the implementation of the Company’s plan to eliminate related party transactions, SSC and its affiliates charged the Company for various professional services provided, including certain legal, real estate and insurance services. For Fiscal 2004 and Fiscal 2003,

the Company paid approximately $0.2 million and $0.9 million, respectively, for these services.

During Fiscal 2004, the Company discontinued its cost sharing arrangement with SSC for the acquisition of an interest in several corporate aircraft. The Company paid $0.1 million and $1.0 million during Fiscal 2004 and Fiscal 2003, respectively, to cover its

share of operating costs based on usage of the corporate aircraft under the cost sharing arrangement. No payments were made during

Fiscal 2005, as a result of the discontinuation of this arrangement.

See Part III, Item 13 of this Form 10-K for additional information regarding related party transactions.

4. Accounts and Note Receivable

Accounts and note receivable are comprised of the following:

(In thousands)

January 28,

2006

January 29,

2005

Fabric $ — $ 2,871

Construction allowances 8,212 6,801

Sell-offs to non-related parties 6,904 6,657

Taxes 1,860 2,584

Distribution services 1,618 2,015

Sale of Bluenotes — 2,707

Interest income 2,982 821

Property insurance claims 4,081 —

Other 3,489 1,976

Total $ 29,146 $ 26,432

5. Property and Equipment

Property and equipment consists of the following:

(In thousands)

January 28,

2006

January 29,

2005

Land $ 4,284 $ 3,250

Buildings 30,682 30,397



Leasehold improvements 391,820 358,161

Fixtures and equipment 239,139 209,352


667,023 603,478

Less: Accumulated depreciation and amortization (321,505 ) (263,645 )

Net property and equipment $ 345,518 $ 339,833

Amounts as of January 28, 2006 and January 29, 2005 reflect certain assets of NLS as held-for-sale. See Note 9 of the Consolidated Financial Statements for additional information regarding assets held-for-sale.

Depreciation expense is summarized as follows:

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Depreciation expense $ 74,056 $ 66,326 $ 59,083

6. Note Payable and Other Credit Arrangements

Unsecured Demand Lending Arrangement

The Company has a $90.0 million unsecured letter of credit facility for letters of credit and a $40.0 million unsecured demand line of

credit that can be used for letters of credit and/or direct borrowing, totaling $130.0 million. The interest rate is at the lender’s prime lending rate (7.25% at January 28, 2006) or at LIBOR plus a negotiated margin rate. Because there were no borrowings during any of

the past three years, there were no amounts paid for interest on this facility. At January 28, 2006, letters of credit in the amount of $90.0 million were outstanding on this facility, leaving a remaining available balance on the line of $40.0 million.

Uncommitted Letter of Credit Facility

The Company also has an uncommitted letter of credit facility for $75.0 million with a separate financial institution. At January 28, 2006, letters of credit in the amount of $39.7 million were outstanding on this facility, leaving a remaining available balance on the

line of $35.3 million.

Non-revolving Term Facility

During Fiscal 2004, the Company retired its $29.1 million non-revolving term facility (the ―term facility‖) for $16.2 million. The term

facility required annual payments of $4.8 million, with interest at the one-month Bankers’ Acceptance Rate plus 140 basis points, and was originally scheduled to mature in December 2007. Interest paid under the term facility was $1.2 million and $1.5 million for the

years ended January 29, 2005 and January 31, 2004, respectively.

7. Other Comprehensive Income (Loss)

The accumulated balances of other comprehensive income (loss) included as part of the Consolidated Statements of Stockholders’ Equity follow:

(In thousands)

Before

Tax

Amount

Tax

Benefit

(Expense)

Other

Comprehensi

ve

Income

(Loss)

Balance at February 1, 2003 $ (61 ) $ 24 $ (37 )

Unrealized (loss) on investments (135 ) 51 (84 )

Foreign currency translation adjustment 6,521 (2,563 ) 3,958

Unrealized derivative (loss) on cash flow hedge (247 ) 99 (148 )

Balance at January 31, 2004 6,078 (2,389 ) 3,689




Foreign currency translation adjustment (1) 4,581 2,734 7,315

Reclassification adjustment for losses realized in net income related to the disposition

of Bluenotes 2,467 — 2,467

Unrealized derivative gain on cash flow hedge 116 (45 ) 71

Reclassification adjustment for loss realized in net income related to termination of the

cash flow hedge 714 (277 ) 437

Balance at January 29, 2005 13,578 170 13,748


Foreign currency translation adjustment 8,823 — 8,823

Balance at January 28, 2006 $ 21,488 $ 540 $ 22,028

(1) During Fiscal 2004, the Company reclassified the income tax provision related to its foreign currency translation gains, as it is the Company’s intention to utilize

the earnings of its foreign subsidiaries in the foreign operations for an indefinite period of time. See Note 10 of the Consolidated Financial Statements for

additional information.

8. Leases

The Company leases all store premises, some of our office space and certain information technology and office equipment. The store leases generally have initial terms of ten years. Most of these store leases provide for base rentals and the payment of a percentage of

sales as additional rent when sales exceed specified levels. Additionally, most leases contain construction allowances and/or rent

holidays. In recognizing landlord incentives and minimum rent expense, the Company amortizes the charges on a straight line basis over the lease term (including the pre-opening build-out period). These leases are classified as operating leases.

A summary of fixed minimum and contingent rent expense for all operating leases follows:

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Store rent:

Fixed minimum $ 136,876 $ 124,507 $ 100,418

Contingent 13,248 6,788 4,758

Total store rent, excluding common area maintenance charges, real estate taxes and certain

other expenses 150,124 131,295 105,176

Offices, distribution facilities, equipment and other 10,752 11,265 16,943

Total rent expense $ 160,876 $ 142,560 $ 122,119

In addition, the Company is typically responsible under its store, office and distribution center leases for common area maintenance charges, real estate taxes and certain other expenses.

The table below summarizes future minimum lease obligations, consisting of fixed minimum rent, under operating leases in effect at

January 28, 2006:

Fiscal years:

(In thousands)

Future Minimum

Lease Obligations

2006 $ 149,645

2007 149,545

2008 145,321

2009 137,838

2010 124,257



Thereafter 330,705

Total $ 1,037,311

9. Assets Held-for-Sale and Discontinued Operations

On January 27, 2006, the Company entered into an asset purchase agreement (the ―Agreement‖) with 6510965 Canada Inc. (the ―NLS Purchaser‖), a privately held Canadian company, for the sale of certain assets of NLS. In accordance with Statement of Financial

Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (―SFAS No. 144‖), the accompanying Consolidated Balance Sheets reflect the assets subject to the Agreement as held-for-sale, for all periods presented. An

impairment loss of $0.6 million was recorded in selling, general and administrative expenses on the Company’s Consolidated

Statement of Operations for the year ended January 28, 2006 to record these assets at their fair value less costs to sell. The transaction was completed during February 2006. See Note 15 of the Consolidated Financial Statements for additional information related to this

subsequent event.

Additionally, as a result of entering into the Agreement, the Company recorded estimated severance costs of approximately $1.3 million in cost of sales, including certain buying, occupancy and warehousing expenses, on its Consolidated Statement of Operations

for the year ended January 28, 2006. These costs were recorded in accordance with Statement of Financial Accounting Standards No. 112, Employers’ Accounting for Postemployment Benefits.

During December 2004, the Company completed its disposition of Bluenotes to 6295215 Canada Inc. (the ―Bluenotes Purchaser‖). The transaction had an effective date of December 5, 2004. In accordance with SFAS No. 144, the accompanying Consolidated

Statements of Operations reflect Bluenotes’ results of operations as discontinued operations for all periods presented. Additionally, the accompanying Consolidated Statements of Cash Flows reflect Bluenotes’ results of operations as discontinued operations. Amounts in

the Company’s Consolidated Balance Sheets, including total assets of $18.2 million at January 29, 2005, have not been reclassified to

reflect Bluenotes as discontinued operations. As of January 28, 2006, there were no remaining assets related to Bluenotes recorded in the Company’s Consolidated Balance Sheet.

The Company received approximately $23 million as consideration for the sale of certain of its Bluenotes assets, including inventory and property and equipment. The transaction resulted in an after-tax loss of $4.8 million, or $0.03 per diluted share, during Fiscal 2004

and was partially offset by net income from the disposition of $0.4 million during Fiscal 2005. Additionally, during Fiscal 2005, the Company recorded a $6.0 million income tax benefit related to the completion of the Bluenotes’ disposition. At this time, the

realization of the aforementioned income tax benefit is uncertain. As a result, the Company has recorded a valuation reserve for the

full amount.

The operating results of Bluenotes, which are being presented as discontinued operations, were as follows:

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Net sales $ — $ 69,825 $ 84,532

Loss from operations, net of tax (1) $ — $ (6,070 ) $ (23,486 )

Income (loss) on disposition, net of tax 442 (4,819 ) —

Income (loss) from discontinued operations, net of tax (2) $ 442 $ (10,889 ) $ (23,486 )

(1) Fiscal 2003 includes a goodwill impairment charge of $14.1 million, for which no tax benefit was realized.

(2) Amounts are net of tax (expense) benefit of $(0.3) million, $3.9 million and $5.8 million, respectively.

10. Income Taxes

The components of income from continuing operations before taxes on income were:

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

U.S. $ 448,442 $ 339,328 $ 131,804

Foreign 28,525 27,507 3,483

Total $ 476,967 $ 366,835 $ 135,287



The significant components of the Company’s deferred tax assets and liabilities were as follows:

(In thousands)

January 28,

2006

January 29,

2005

Deferred tax assets:

Current:

Inventories $ 7,018 $ 4,192

Rent 16,393 14,732

Deferred compensation 16,206 17,562

Capital loss 1,173 1,426

Valuation allowance (477 ) (1,426 )

Other 6,663 2,827

Total current deferred tax assets 46,976 39,313

Long-term:

Purchase accounting basis differences 124 1,194

Deferred compensation 9,544 8,441

Property and equipment 2,194 2,682

Operating losses — 9,750

Other 1,659 1,987

Total long-term deferred tax assets 13,521 24,054

Total deferred tax assets $ 60,497 $ 63,367

Deferred tax liabilities:

Property and equipment $ 22,077 $ 20,829

Total deferred tax liabilities $ 22,077 $ 20,829

Significant components of the provision for income taxes are as follows:

For the Years Ended

(In thousands)

January 28,

2006

January 29,

2005

January 31,

2004

Current:

Federal $ 152,416 $ 130,988 $ 33,519

State 26,722 24,338 5,860

Total current 179,138 155,326 39,379

Deferred:

Federal (3,387 ) (18,860 ) 10,424

Foreign taxes 8,109 9,572 525

State (604 ) (3,435 ) 1,851

Total deferred 4,118 (12,723 ) 12,800

Provision for income taxes $ 183,256 $ 142,603 $ 52,179

As a result of additional tax deductions related to vested restricted stock grants and stock option exercises, tax benefits have been recognized as contributed capital for the years ended January 28, 2006, January 29, 2005 and January 31, 2004 in the amounts of

$35.3 million, $28.8 million and $0.7 million, respectively.



The Company has made a decision to take advantage of the special one-time deduction of 85% of certain foreign earnings that are

repatriated under the American Jobs Creation Act of 2004, prior to the tax year ending July 29, 2006.

As of January 28, 2006, unremitted Canadian earnings subject to repatriation approximated $73 million. Accordingly, the Company

has recorded a tax liability of $3.8 million related to the planned repatriation of this amount. This decision has not changed the Company’s intention to indefinitely reinvest accumulated earnings from its Canadian Operations to the extent not repatriated under the

Act. Accordingly, no provision will be made for income taxes that would be payable upon the distributions of such earnings.

Income tax accruals of $35.9 million and $25.4 million were recorded at January 28, 2006 and January 29, 2005, respectively. As of January 28, 2006, contingent tax reserves of approximately $16.0 million were recorded, of which $8.1 million related to potential state and local income tax liabilities.

For the year ended January 28, 2006, the Company released $0.9 million from the $1.4 million valuation allowance it had previously recorded against a capital loss deferred tax asset as it expects to be able to generate sufficient capital gains. The capital loss

carryforward will expire in July 2006.

A reconciliation between the statutory federal income tax rate and the effective tax rate from continuing operations follows:

For the Years Ended

January 2

8,

2006

January 2

9,

2005

January 3

1,

2004

Federal income tax rate 35 % 35 % 35 %

State income taxes, net of federal income tax effect 4 4 4

Change in valuation reserve for capital losses — — 1

Change in tax reserves — — (1 )

Accrued tax on unremitted Canadian earnings 1 — —

State tax credits, net of federal income tax effect (1 ) — —

Tax impact of tax exempt interest (1 ) — —

38 % 39 % 39 %

11. Retirement Plan and Employee Stock Purchase Plan

The Company maintains a profit sharing and 401(k) plan (the ―Retirement Plan‖). Under the provisions of the Retirement Plan, full-

time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained 21 years of age, have completed sixty days of service, and work at least twenty hours per week. Individuals can decline enrollment or can

contribute up to 30% of their salary to the 401(k) plan on a pretax basis, subject to IRS limitations. After one year of service, the

Company will match up to 4.5% of participants’ eligible compensation. Contributions to the profit sharing plan, as determined by the Board of Directors, are discretionary. The Company recognized $4.8 million in expense during both Fiscal 2005 and Fiscal 2004 and

$2.1 million in expense during Fiscal 2003 in connection with the Retirement Plan.

The Employee Stock Purchase Plan is a non-qualified plan that covers all full-time and part-time employees who are at least 18 years old, have completed sixty days of service, and work at least twenty hours a week. Contributions are determined by the employee, with

the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock in the open market.

12. Stock Incentive Plan, Stock Option Plan, and Restricted Stock Grants

All amounts below reflect the Company’s two-for-one stock split, unless otherwise indicated.

1994 Stock Option Plan

On February 10, 1994, the Company’s Board of Directors adopted the American Eagle Outfitters, Inc. 1994 Stock Option Plan (the

―1994 Plan‖). The 1994 Plan provided for the grant of 8,100,000 incentive or non-qualified options to purchase common stock. The

1994 Plan was subsequently amended to increase the shares available for grant to 16,200,000 shares. Additionally, the amendment provided that the maximum number of options that may be granted to any individual may not exceed 5,400,000 shares. The options

granted under the 1994 Plan are approved by the Compensation Committee of the Board of Directors, primarily vest over five years,

and expire ten years from the date of grant. The 1994 Plan terminated on January 2, 2004 with all rights of the optionees and all unexpired options continuing in force and operation after the termination.

1999 Stock Incentive Plan

The 1999 Stock Option Plan (the ―1999 Plan‖) was approved by the shareholders on June 8, 1999. The 1999 Plan authorized 12,000,000 shares for issuance in the form of stock options, stock appreciation rights, restricted stock awards, performance units, or

performance shares. The 1999 Plan was subsequently amended to increase the shares available for grant to 22,000,000. Additionally,



the 1999 Plan provided that the maximum number of shares awarded to any individual may not exceed 6,000,000 shares. The 1999

Plan allowed the Compensation Committee to determine which employees and consultants received awards and the terms and conditions of these awards. The 1999 Plan provided for a grant of 1,875 stock options quarterly (not to be adjusted for stock split) to

each director who is not an officer or employee of the Company starting in August 2003. The Company ceased making these quarterly

stock options grants in June 2005. At January 28, 2006, notwithstanding cancellations to date, 22,106,155 non-qualified stock options and 4,472,246 shares of restricted stock were granted under the 1999 Plan to employees and certain non-employees. Approximately

33% of the options granted vest eight years after the date of grant but can be accelerated to vest over three years if the Company meets

annual performance goals. Approximately 34% of the options granted under the 1999 Plan vest over three years, 23% vest over five years with the remaining grants vesting over one year. All options expire after ten years. Restricted stock is earned if the Company

meets established performance goals. The 1999 Plan terminated on June 15, 2005 with all rights of the awardees and all unexpired

awards continuing in force and operation after the termination.

2005 Stock Award and Incentive Plan

The 2005 Stock Award and Incentive Plan (the ―2005 Plan‖) was approved by the shareholders on June 15, 2005. The 2005 Plan authorized 12,250,000 shares for issuance, of which 4,250,000 shares are available for full value awards in the form of restricted stock

awards, restricted stock units or other full value stock awards and 8,000,000 shares are available for stock options, stock appreciation

rights, dividend equivalents, performance awards or other non-full value stock awards. The 2005 Plan provides that the maximum number of shares awarded to any individual may not exceed 4,000,000 shares per year plus the amount of the unused annual limit of

the previous year. The 2005 Plan allows the Compensation Committee to determine which employees receive awards and the terms

and conditions of these awards. The 2005 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed 20,000 shares per year. At January 28, 2006, notwithstanding cancellations to date, 102,000 non-qualified

stock options, 133,500 shares of restricted stock and 27,916 shares of common stock had been granted under the 2005 Plan to

employees and directors. Approximately 64% of the options granted under the 2005 Plan vest over three years and 36% vest over five years. Options were granted for ten and seven year terms. Restricted stock is earned if the Company meets established performance

goals.

A summary of the Company’s stock option activity under all plans follows:

For the Years Ended

January 28, 2006(1) January 29, 2005(1) January 31, 2004(1)

Options

Weighted-

Average

Exercise

Price Options

Weighted-

Average

Exercise

Price Options

Weighted-

Average

Exercise

Price

Outstanding - beginning of year 13,481,248 $ 10.53 20,050,190 $ 9.28 16,211,712 $ 9.92

Granted (Exercise price equal to fair value) 781,365 $ 26.57 1,581,250 $ 15.63 5,257,560 $ 7.18

Exercised (2) (4,883,113 ) $ 9.87 (7,105,752 ) $ 8.10 (397,656 ) $ 2.86

Cancelled (374,590 ) $ 12.08 (1,044,440 ) $ 10.74 (1,021,426 ) $ 11.05

Outstanding - end of year 9,004,910 $ 12.22 13,481,248 $ 10.53 20,050,190 $ 9.28

Exercisable - end of year 4,680,459 $ 10.90 4,699,874 $ 11.69 9,222,422 $ 8.73

Weighted-average fair value of options granted during

the year (Black-Scholes method) $ 10.52 $ 6.34 $ 3.74

(1) As of January 28, 2006, the Company had 8,094,203 shares available for stock option grants. As of January 29, 2005 and January 31, 2004, the Company had

1,396,482 shares and 2,939,962 shares available for the grant of stock options (as well as restricted stock and all other awards allowed under the 1999 Plan),

respectively.

(2) Options exercised during Fiscal 2005 ranged in price from $0.57 to $20.52 with an average of $9.87.

The following table summarizes information about stock options outstanding and exercisable at January 28, 2006:

Options Outstanding Options Exercisable

Range of Exercise Prices

Number

Outstanding at

January 28, 2006

Weighted-

Average

Remaining

Contractual

Life (in years)

Weighted-

Average

Exercise Price

Number

Exercisable at

January 28, 2006

Weighted-

Average

Exercise Price

$0.97 to $7.03 2,213,421 6.69 $6.49 718,853 $5.49



$7.17 to $10.83 2,594,122 4.49 $9.91 2,284,506 $10.16

$10.85 to $13.15 1,892,736 5.72 $12.42 1,087,220 $12.14

$13.20 to $32.81 2,304,631 7.13 $20.14 589,880 $18.08

$0.97 to $32.81 9,004,910 6.34 $12.22 4,680,459 $10.90

Restricted Stock Grants

The Company issued restricted stock awards under the above Plans to compensate certain employees. Through January 28, 2006, a total of 9,078,868 shares of restricted stock had been granted, of which 2,541,058 have been cancelled and 5,777,786 shares have

vested. Included in the aforementioned shares of restricted stock that have vested is one-third of a 90,000 share time-based restricted

stock award, which vested in May 2005. The remaining 60,000 shares of this time-based restricted stock award will vest over two years. The Fiscal 2005 performance-based restricted stock award of 700,024 shares vested on February 28, 2006.

For Fiscal 2005, Fiscal 2004 and Fiscal 2003, the Company recorded approximately $19.6 million, $25.2 million and $1.3 million, respectively, in compensation expense related to stock options, restricted stock and stock awards in connection with the above Plans.

The compensation expense related to stock options was recorded for non-employee grants in accordance with APB No. 25.

13. Contingencies

Guarantees

In connection with the disposition of Bluenotes, the Company has provided guarantees related to two store leases that were assigned to

the Bluenotes Purchaser. These guarantees were provided to the applicable landlords and will remain in effect until the leases expire in 2007 and 2015, respectively. The lease guarantees require the Company to make all required payments under the lease agreements in

the event of default by the Bluenotes Purchaser. The maximum potential amount of future payments (undiscounted) that the Company

could be required to make under the guarantees is approximately $1.4 million as of January 28, 2006. In the event that the Company would be required to make any such payments, it would pursue full reimbursement from YM, Inc., a related party of the Bluenotes

Purchaser, in accordance with the Bluenotes Asset Purchase Agreement.

In accordance with FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect

Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (―FIN 45‖), as the Company issued the guarantees at the time it became secondarily liable under a new lease, no

amounts have been accrued in the Company’s Consolidated Financial Statements related to these guarantees. Management believes

that it is unlikely that the Company will be required to perform under the guarantees.

14. Quarterly Financial Information - Unaudited

The sum of the quarterly EPS amounts may not equal the full year amount as the computations of the weighted average shares

outstanding for each quarter and the full year are calculated independently.

Quarters Ended


May 1,

2004

July 31,

2004

October 30,

2004

January 29,

2005

Net sales $ 332,230 $ 395,402 $ 479,585 $ 674,024

Gross profit 148,719 162,854 233,858 332,377

Income from continuing operations, net of tax 27,001 31,582 58,705 106,944

Loss from discontinued operations, net of tax (1,727 ) (2,328 ) (807 ) (6,027 )

Net income 25,274 29,254 57,898 100,917

Basic per common share amounts:

Income from continuing operations 0.19 0.22 0.40 0.73

Loss from discontinued operations (0.01 ) (0.02 ) — (0.04 )

Net income per basic share 0.18 0.20 0.40 0.69

Diluted per common share amounts:


Loss from discontinued operations (0.01 ) (0.02 ) (0.01 ) (0.04 )

Net income per diluted share 0.17 0.20 0.38 0.66



Quarters Ended


April 30,

2005

July 30,

2005

October 29,

2005

January 28,

2006

Net sales $ 454,019 $ 513,320 $ 577,665 $ 764,367

Gross profit 222,160 227,980 269,367 354,244

Income from continuing operations, net of tax 55,184 58,034 73,357 107,136

Income (loss) from discontinued operations, net of tax 89 (15 ) (37 ) 405

Net income 55,273 58,019 73,320 107,541

Basic per common share amounts:


Loss from discontinued operations — — — —

Net income per basic share 0.36 0.38 0.48 0.72

Diluted per common share amounts:


Loss from discontinued operations — — — —

Net income per diluted share 0.35 0.37 0.47 0.71

15. Subsequent Event

On January 27, 2006, the Company entered into an asset purchase agreement with 6510965 Canada Inc., for the sale of certain assets

of NLS. During February 2006, the Company completed the transaction, with an effective date of February 28, 2006.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE.

None.


Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports

under the Securities Exchange Act of 1934, as amended (the ―Exchange Act‖), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the

management of American Eagle Outfitters, Inc. (the ―Management‖), including the Company’s Chief Executive Officer (―CEO‖) and

Interim Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our Management recognized that any controls and procedures, no matter how well

designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In connection with the preparation of this Annual Report on Form 10-K as of January 28, 2006, an evaluation was performed under the supervision and with the participation of our Management, including the CEO and Interim Principal Financial Officer, of the

effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the CEO and the Interim Principal Financial Officer have concluded that the Company’s disclosure

controls and procedures were effective as of January 28, 2006.

Management’s Annual Report on Internal Control Over Financial Reporting

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule

13a-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide a reasonable assurance to our Management and our Board regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our Management assessed the effectiveness of our internal control over financial reporting as of January 28, 2006. In making this assessment, our Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission

(COSO) in Internal Control – Integrated Framework. Based on this assessment, our Management concluded that we maintained effective internal control over financial reporting as of January 28, 2006.



Our Management’s assessment of the effectiveness of internal control over financial reporting as of January 28, 2006, has been

audited by Ernst & Young LLP, the independent registered public accounting firm who also audited our Consolidated Financial Statements. Ernst & Young’s attestation report on Management’s assessment of our internal control over financial reporting is located

below.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended January 28, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


The Board of Directors and Stockholders of American Eagle Outfitters, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that American Eagle Outfitters, Inc. (the ―Company‖) maintained effective internal control over financial reporting as of

January 28, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). American Eagle Outfitters, Inc.’s management is responsible for

maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over

financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the

Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over

financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal

control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a

reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in

accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect

on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in

conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that American Eagle Outfitters, Inc. maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, American

Eagle Outfitters, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006,

based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the

consolidated balance sheets of American Eagle Outfitters, Inc. as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in

the period ended January 28, 2006 and our report dated March 31, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

March 31, 2006


Not applicable.

PART III


The information appearing under the captions ―Information Regarding Nominees For Class III Directors With Terms Expiring in 2007,‖ ―Information Regarding Class I Directors With Terms Expiring in 2008,‖ ―Information Regarding Class II Directors With



Terms Expiring in 2009,‖ ―Code of Ethics,‖ ―Executive Officers,‖ and ―Compliance with Section 16(a) of the Securities Exchange

Act of 1934‖ in our Proxy Statement relating to our 2006 Annual Meeting of Stockholders, is incorporated herein by reference.


The information appearing in our Proxy Statement relating to our 2006 Annual Meeting of Stockholders under the captions ―Executive Officer Compensation,‖ ―Option/SAR Grants in Last Fiscal Year,‖ ―Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-

End Option Values‖ and ―Long-Term Incentive Plans—Awards in the Last Fiscal Year‖ is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED

STOCKHOLDER MATTERS.

The information appearing under the captions ―Security Ownership of Principal Stockholders and Management‖ and ―Equity

Compensation Plan Table‖ in our Proxy Statement relating to our 2006 Annual Meeting of Stockholders, is incorporated herein by reference.


The information appearing under the caption ―Certain Relationships and Related Transactions‖ in the Company’s Proxy Statement relating to our 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information appearing under the caption ―Principal Accounting Fees and Services‖ in the Company’s Proxy Statement relating to our 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

PART IV


(a)(1) The following consolidated financial statements are included in Item 8:

Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005

Consolidated Statements of Operations for the fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004

Consolidated Statements of Comprehensive Income for the fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004

Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004

Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004

Notes to Consolidated Financial Statements

(a)(2)

Financial statement schedules have been omitted because either they are not required or are not applicable or because the information required to be set forth

therein is not material.

(a)(3) Exhibits

/s/ Dale E. Clifton

Dale E. Clifton

Senior Vice President and Chief Accounting Officer

(Interim Principal Financial Officer)

April 5, 2006

_____________________________________


http://documentresearch.morningstar.com

Source: AMERICAN EAGLE OUTFITTERS INC, 10-K, April 05, 2006 --

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ANF 2006 10-K

Form 10-K

ABERCROMBIE & FITCH CO /DE/ - ANF





Table of Contents



10-K - ABERCROMBIE & FITCH CO. 10-K/FYE 1-28-06

PART I

ITEM 1. BUSINESS.


ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 2. PROPERTIES.



PART II

ITEM 5. MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES

OF EQUITY SECURITIES.

ITEM 6. SELECTED FINANCIAL DATA.

ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



PART III



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER

MATTERS.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV


SIGNATURES

EXHIBIT INDEX

EX-10.33 (EX-10.33)

EX-10.34 (EX-10.34)

EX-10.35 (EX-10.35)

EX-10.36 (EX-10.36)

EX-21.1 (EX-21.1)

EX-23.1 (EX-23.1)

EX-24.1 (EX-24.1)

EX-31.1 (EX-31.1)

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EX-31.2 (EX-31.2)

EX-32.1 (EX-32.1)





Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended January 28, 2006

OR

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

For the transition period from to

Commission file number 1-12107

ABERCROMBIE & FITCH CO.


Delaware 31-1469076



(I.R.S. Employer Identification No.)

6301 Fitch Path, New Albany, Ohio 43054

(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Class A Common Stock, $.01 Par Value New York Stock Exchange, Inc.

Series A Participating Cumulative Preferred

Stock Purchase Rights

New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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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 No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not

be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition

of ―accelerated filer and large accelerated filer‖ in Rule 12b-2 of the Act. (Check one):

Large Accelerated Filer Accelerated Filer Non-Accelerated Filer

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Aggregate market value of the Registrant’s Class A Common Stock (the only outstanding common equity of the registrant) held by

non-affiliates of the Registrant as of July 30, 2005: $6,391,373,141.

Number of shares outstanding of the Registrant’s common stock as of April 1, 2006: 87,958,588 shares of Class A Common Stock.

DOCUMENT INCORPORATED BY REFERENCE:

Portions of the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on June 14, 2006 are

incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

ITEM 1A. RISK FACTORS


ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



PART III


ITEM 11. EXECUTIVE COMPENSATION


STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

SIGNATURES

EX-10.33

EX-10.34

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EX-10.35

EX-10.36

EX-21.1

EX-23.1

EX-24.1

EX-31.1

EX-31.2

EX-32.1

PART I

ITEM 1. BUSINESS.

GENERAL.

Abercrombie & Fitch Co., a Delaware corporation (―A&F‖), through its subsidiaries (collectively, A&F and its subsidiaries are

referred to as ―Abercrombie & Fitch‖ or the ―Company‖), is a specialty retailer that operates stores selling casual apparel; such as knit

shirts, graphic t-shirts, jeans, woven shirts, shorts; personal care and other accessories for men, women and kids under the Abercrombie & Fitch, Abercrombie, Hollister and RUEHL brands. As of January 28, 2006, the Company operated 851 stores in the

United States and Canada.

A&F makes available free of charge, on or through its web site, www.abercrombie.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or

15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after A&F electronically files such material with, or

furnishes it to, the Securities and Exchange Commission (―SEC‖).

A&F has included its web site addresses throughout this filing as textual references only. The information contained on these web

sites is not incorporated into this Form 10-K.

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 2005‖ represent the results of the 52-

week fiscal year ended January 28, 2006; to ―Fiscal 2004‖ represent the 52-week fiscal year ended January 29, 2005; and to ―Fiscal

2003‖ represent the 52-week fiscal year ended January 31, 2004. In addition, references herein to ―Fiscal 2006‖ represent the 53-week fiscal year that will end on February 3, 2007.

DESCRIPTION OF OPERATIONS.

Brands.

The Abercrombie & Fitch brand was established in 1892 and became well known as a supplier of rugged, high-quality outdoor gear.

Famous for outfitting the safaris of Teddy Roosevelt and Ernest Hemingway and the expeditions of Admiral Byrd to the North and

South Poles, Abercrombie & Fitch goods were renowned for their durability and dependability. Abercrombie & Fitch placed a premium on complete customer satisfaction with each item sold.

In 1992, a new management team began repositioning Abercrombie & Fitch as a more fashion-oriented casual apparel business directed at 18 to 22 year-old male and female college students with a product assortment reflecting a youthful lifestyle based upon an

East Coast heritage and Ivy League traditions. In reestablishing the Abercrombie & Fitch brand, the Company’s goal was to combine

its historical reputation for quality with a new emphasis on casual American style and youthfulness.

In 1998, the Company launched Abercrombie, a brand directed at seven to 14 year-old boys and girls based on the traditions of

Abercrombie & Fitch.

The Company launched its next brand, Hollister, in 2000. Hollister is a West Coast oriented lifestyle brand targeted at 14 to 18 year-old high school aged dudes and bettys that embodies the laid-back California surf lifestyle. Hollister offers casual apparel, personal

care and other accessories at a lower price point than the Abercrombie & Fitch brand.

The RUEHL brand, targeted at 22 to 35 year-olds, was launched in the Fall 2004. RUEHL’s product assortment is a mix of casual

sportswear and trendy fashion created to appeal to the modern-minded, post-college customer. The RUEHL concept is inspired by

New York City’s Greenwich Village. The store structure is based on a Greenwich Village townhouse and conveys an aura of sophistication through its creative use of interconnected rooms, fine furniture, lighting, vintage books, photography and cool music.

The Company’s brands, Abercrombie & Fitch, Abercrombie, Hollister and RUEHL, represent different American lifestyles and are

targeted to appeal to the same type of customer — the sophisticated, cool, attractive, fashion-conscious, influential trendsetter — through different stages of his or her life from elementary school through post-college. This is consistent with the Company’s belief

that ―trend transcends age.‖

In-store Experience and Store Operations.











The Company views the customer’s in-store experience as the primary vehicle for communicating the spirit of each brand. The

Company uses visual presentation of merchandise, in-store marketing, music, fragrances and the sales associates, or brand representatives, to reinforce the aspirational lifestyles represented by the brands.

The Company’s in-store marketing is designed to convey the principal elements and personality of each brand. The store design,

furniture, fixtures and music are all carefully planned and coordinated to create a shopping experience that is consistent with the Abercrombie & Fitch, Abercrombie, Hollister or RUEHL lifestyle.

The Company’s brand representatives and managers are a central element in creating the atmosphere of the stores. In addition to

providing a high level of customer service, brand representatives and managers reflect the casual, energetic and aspirational attitude of the brands.

The Company maintains a uniform appearance throughout the stores for each of its brands in terms of a particular brand’s

merchandise display and location on the selling floor. Store managers receive detailed store plans designating fixture and merchandise placement to ensure uniform execution of the Company-wide merchandising strategy at the store level. Standardization, by brand, of

store design and merchandise presentation also creates cost savings in store furnishings, maximizes usage and productivity of selling

space and enables the Company to open new stores efficiently.

At the end of Fiscal 2005, the Company operated 851 stores. The following table details the changes in the number of retail stores, by

brand, operated by the Company for the past two fiscal years:

Abercrombie &

Fitch Abercrombie Hollister RUEHL Total

Fiscal 2004

Beginning of Year 357 171 172 — 700

New 16 9 84 4 113

Closed (16 ) (9 ) — — (25 )

End of Year 357 171 256 4 788

Fiscal 2005

Beginning of Year 357 171 256 4 788

New 15 5 57 4 81

Remodels/Conversions (net activity) (1 ) (1 ) 6 — 4

Closed (10 )1 (11 ) (1 )1 — (22 )

End of Year 361 164 318 8 851

1 Includes one Abercrombie & Fitch and one Hollister store temporarily closed due to hurricane damage.

Direct-to-Consumer Business.

In 1997, the Company introduced the A&F Quarterly (a catalogue/magazine), which was a lifestyle magazine focused on the college experience, and subsequently added an additional catalogue-only format for the Abercrombie & Fitch brand. In December 2003, the

Company retired the A&F Quarterly , but continued distributing the Abercrombie & Fitch catalogue.

In 1998, the Company launched a web-based store for the Abercrombie & Fitch brand featuring lifestyle pieces, such as A&F Film , located at its web site, www.abercrombie.com. The Abercrombie lifestyle web-based store, www.abercrombiekids.com, was

introduced in 2000 and the Hollister lifestyle web-based store, www.hollisterco.com, was established in 2003. Products similar to

those offered at individual stores can be purchased through the web sites. Each of the three web sites reinforces the particular brand’s lifestyle and is designed to complement the in-store experience. Since the introduction of the web sites, aggregate merchandise net

sales through the direct-to-consumer business have grown consistently year-over-year to $122.5 million (4.4% of net sales) in Fiscal

2005. The Company believes that its web sites have allowed it to broaden its market and recognition of its brands worldwide. During Fiscal 2005, the sales penetration of the direct-to-consumer business decreased as a result of the implementation of brand protection

initiatives that reduce the amount of sale merchandise available on the web sites and limit the customer’s ability to purchase large quantities of the same item.

Merchandise Suppliers.

During Fiscal 2005, the Company purchased merchandise from approximately 246 factories and suppliers located throughout the world, primarily in Southeast Asia and Central and South America. In Fiscal 2005, the Company did not source more than 5% of its

apparel from any single factory or supplier. The Company pursues a global sourcing strategy that includes relationships with vendors

in 40 countries and the United States. Any event causing a sudden disruption, either political or financial, in these sourcing operations



could have a material adverse effect on the Company’s operations. Substantially all of the Company’s foreign purchases of

merchandise are negotiated and settled in U.S. dollars.

Distribution and Merchandise Inventory.

Substantially all of the Company’s merchandise and related materials are shipped to the Company’s distribution center in New

Albany, Ohio where the merchandise is received and inspected. Merchandise and related materials are then distributed to the Company’s stores using contract carriers.

The Company’s policy is to maintain sufficient quantities of inventory on hand in its retail stores and distribution center so that it can

offer customers a full selection of current merchandise. The Company attempts to balance in-stock levels and inventory turnover and takes markdowns when required to keep merchandise fresh and current with fashion trends.

Seasonal Business.

The retail apparel market has two principal selling seasons, Spring (first and second fiscal quarters) and Fall (third and fourth fiscal quarters). As is generally the case in the apparel industry, the Company experiences its greatest sales activity during the Fall season.

This seasonal sales pattern, in which approximately 40% of the Company’s sales are realized in the Spring season and 60% in the Fall,

results in increased inventory during the Back-to-School and Holiday selling periods. During Spring of Fiscal 2005, the highest inventory level of approximately $364.0 million at cost was reached at the end of July 2005 and the lowest inventory level of

approximately $211.2 million at cost was reached at the beginning of February 2005. During Fall of Fiscal 2005, the highest inventory

level of approximately $418.5 million at cost was reached at the end of November 2005 and the lowest inventory level of approximately $342.3 million at cost was reached at the end of December 2005.

Trademarks.

The Abercrombie & Fitch®, Abercrombie®, Hollister Co.® and Ruehl No. 925® trademarks have been registered with the United States Patent and Trademark Office and are either registered or have registrations pending with the registries of many of the foreign countries

in which its manufacturers are located. The Company has also registered or has applied to register certain other trademarks with these

registries. The Company believes that its products are identified by its trademarks and, thus, its trademarks are of significant value within the United States. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered and the

country in which it is registered, and is subject to an infinite number of renewals for a like period upon continued use and appropriate

application. The Company intends to continue the use of each of its trademarks and to renew each of its registered trademarks.

Financial Information about Segments.

In accordance with Statement of Financial Accounting Standards (―SFAS‖) No. 131, ―Disclosures about Segments of an Enterprise and Related Information,‖ the Company determined its operating segments on the same basis that 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.

Other Information.

Additional information about the Company’s business, including its revenues and profits for the last three fiscal years and gross square footage of stores, is set forth under ―Management’s Discussion and Analysis of Financial Condition and Results of Operations‖ in this

Annual Report on Form 10-K.

COMPETITION.

The sale of apparel and personal care products through retail stores and direct-to-consumer business — e-commerce and catalogue

sales — is a highly competitive business with numerous participants, including individual and chain fashion specialty stores and

department stores. Brand recognition, fashion, price, service, store location, selection and quality are the principal competitive factors in retail store and direct-to-consumer sales.

The competitive challenges facing the Company include anticipating and quickly responding to changing fashion trends and

maintaining the aspirational positioning of its brands so that it can maintain its premium pricing position.

ASSOCIATE RELATIONS.

As of April 1, 2006, the Company employed approximately 76,100 associates, none of whom were party to a collective bargaining

agreement. Approximately 69,200 of these associates were part-time employees. In addition, temporary associates are hired during peak periods, such as the Back-to-School and Holiday seasons.

On average, the Company employed approximately 19,000 full-time equivalents, approximately 13,000 of whom were part-time,

throughout Fiscal 2005. On average, during the non-peak periods the Company employed approximately 16,000 full-time equivalents, approximately 11,000 of whom were part-time, throughout Fiscal 2005.



The Company believes its relationship with associates is good. However, in the normal course of business, the Company is party to

lawsuits involving a small number of its former and current associates. (See ―Legal Proceedings.‖)


FORWARD-LOOKING STATEMENTS AND RISK FACTORS.

The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of

1995) contained in this Form 10-K or made by management involve risks and uncertainties and are subject to change based on various

important factors, many of which may be beyond its control. Words such as ―estimate,‖ ―project,‖ ―plan,‖ ―believe,‖ ―expect,‖ ―anticipate,‖ ―intend,‖ and similar expressions may identify forward-looking statements. The following factors in some cases have

affected and in the future could affect the Company’s financial performance and could cause actual results to differ materially from

those expressed or implied in any of the forward-looking statements included in this report or otherwise made by management:

• changes in consumer spending patterns and consumer preferences;

• the impact of competition and pricing;

• disruptive weather conditions;

• availability and market prices of key raw materials;

• currency and exchange risks and changes in existing or potential duties, tariffs or quotas;

• availability of suitable store locations on appropriate terms;

• ability to develop new merchandise;

• ability to hire, train and retain associates; and

• the effects of political and economic events and conditions domestically and in foreign jurisdictions in which the Company operates, including, but not

limited to, acts of terrorism or war.

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. Therefore, there

can be no assurance that the forward-looking statements included in this report will prove to be accurate and the inclusion of such

information should not be regarded as a representation by the Company, or any other person, that its objectives will be achieved. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking

statements.

Because forward-looking statements involve risks and uncertainties, the Company cautions that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. These

factors include the following:

The Loss of the Services of Skilled Senior Executive Officers Could Have a Material Adverse Effect on the Company’s Business.

The success of the Company’s business is dependent upon its senior executive officers closely supervising all aspects of its business,

in particular the designing of its merchandise and operation of its stores. The Company’s senior executive officers have substantial

experience and expertise in the retail business and have made significant contributions to the growth and success of its brands. If the Company were to lose the benefit of their involvement, in particular the services of any one or more of Michael S. Jeffries, Chairman

and Chief Executive Officer, Diane Chang, Executive Vice President – Sourcing, Leslee K. Herro, Executive Vice President –

Planning and Allocation, John W. Lough, Executive Vice President – Distribution Center Logistics and Michael W. Kramer, Senior Vice President and Chief Financial Officer, its business could be adversely affected. Competition for such senior executive officers is

intense and the Company cannot be sure that it will be able to attract and retain a sufficient number of qualified senior executive

officers in future periods.

Failure To Anticipate, Identify and Respond To Changing Consumer Preferences and Fashion Trends in a Timely Manner Could

Cause the Company’s Profitability To Decline.

The Company’s success is largely dependent on its ability to anticipate and gauge the fashion preferences of its customers, and provide merchandise that satisfies constantly shifting demands in a timely manner. The merchandise must appeal to each brand’s

corresponding target market of consumers whose preferences cannot be predicted with certainty and are subject to rapid change.

Because the Company enters into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, it is vulnerable to changes in consumer preference and demand, pricing shifts and the sub-optimal selection and timing

of merchandise purchases. There can be no assurance that the Company will be able to continue successfully to anticipate consumer

demands in the future. To the extent that the Company fails to anticipate, identify and respond effectively to changing consumer preferences and fashion trends, its sales will be adversely affected and inventory levels for certain merchandise styles no longer



considered to be ―on trend‖ may increase, leading to higher markdowns to reduce excess inventory or increases in inventory valuation

reserves, which could have a material adverse effect on its financial condition or results of operations.

Comparable Store Sales Will Fluctuate on a Regular Basis, Which in Turn May Cause Volatility in the Price of the Company’s

Common Stock.

The Company’s comparable store sales, defined as year-over-year sales for a store that has been open as the same brand at least one year and the square footage of which has not been expanded or reduced by more than 20%, have fluctuated significantly in the past on

an annual, quarterly and monthly basis and are expected to continue to fluctuate in the future. During the past three fiscal years, the

comparable sales results have fluctuated as follows: (a) from (9%) to 26% for the annual results; (b) from (11%) to 30% for the quarterly results; and (c) from (14%) to 38% for the monthly results. The Company believes that a variety of factors affect comparable

store sales results including, but not limited to, fashion trends, actions by competitors, economic conditions, weather conditions,

opening or closing of Company stores nearby, such as the opening of the New York City Flagship store, and calendar shifts of holiday periods. Comparable store sales fluctuations may have in the past been an important factor in the volatility of the price of the

Company’s common stock, and it is likely that future comparable store sales fluctuations could contribute to future stock volatility.

Although the Company considers comparable store sales an important metric when it analyzes its results, the Company primarily focuses on the long-term aspirational positioning and profit potential of each brand.

The Company’s Market Share May Be Adversely Impacted at any Time by a Significant Number of Competitors.

The specialty retail industry is highly competitive. The Company competes primarily on brand differentiation. It competes against a diverse group of retailers, including national and local specialty retail stores, traditional department stores and mail-order retailers. The

Company faces a variety of competitive challenges, including:

• anticipating and quickly responding to changing consumer demands and preferences;

• maintaining favorable brand recognition and effectively marketing its products to consumers in several diverse market segments;

• developing innovative, high-quality products in colors and styles that appeal to its target consumer; and

• sourcing merchandise efficiently.

There can be no assurance that the Company will be able to compete successfully in the future.

The Interruption of the Flow of Merchandise from Key International Manufacturers Could Disrupt the Company’s Supply Chain.

The Company purchases the majority of its merchandise from outside the United States through arrangements with approximately 240

foreign manufacturers located throughout the world, primarily in Southeast Asia and Central and South America. In addition, many of

its domestic manufacturers maintain production facilities overseas. Political, social or economic instability in Southeast Asia as well

as Central and South America, or in other regions in which the Company’s manufacturers are located, could cause disruptions in trade, including exports to the United States. Other events that could also cause disruptions to exports to the United States include:

• the imposition of additional trade law provisions or regulations;

• the imposition of additional duties, tariffs and other charges on imports and exports;

• quotas imposed by bilateral textile agreements;

• foreign currency fluctuations;

• restrictions on the transfer of funds; and

• significant labor disputes, such as dock strikes.

Historically, substantially all of the merchandise the Company imports has been subject to quotas that restrict the quantity of textile or apparel products that can be imported into the United States annually from a given country, and a significant majority of the

Company’s purchases of such products was from World Trade Organization (WTO) member countries. The United States has agreed,

as of January 1, 2005, to a phase out of import quotas for WTO member countries. As a result, the Company should be able to freely import textile and apparel products from WTO member countries in which its suppliers have their manufacturing facilities. However,

the United States and China have reached an agreement to place quantitative restrictions on a number of products, including many

textiles and apparel products. The outcome of this agreement could have a significant impact on worldwide sourcing patterns in Fiscal 2006 and going forward. The extent of this impact, if any, and the possible effect on the Company’s purchasing patterns and costs,

cannot be determined at this time.

In addition, the Company cannot predict whether any of the countries in which its merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States or other foreign governments,



including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes,

safeguards and customs restrictions against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to the Company and adversely affect its business, financial condition or

results of operations.

The Company does not maintain any long-term or exclusive commitments or arrangements to purchase from any single supplier.

A Decrease in Consumer Spending Could Adversely Impact the Company’s Business.

The success of the Company’s operations depends, to a significant extent, upon a number of factors that influence discretionary

consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates, and inflation and consumer confidence. In addition, the Company estimates that a material portion of its sales in urban

areas are to foreign tourists. As a result, fluctuations in foreign currency exchange rates and strengthening of the U.S. dollar with

respect to foreign currencies could result in decreased sales to these consumers. There can be no assurance that consumer spending will not be negatively affected by general or local economic conditions, thereby adversely impacting the Company’s business,

financial condition or results of operations.

The Company’s Reliance on a Single Distribution Center Makes It Susceptible to Disruptions at or Adverse Conditions Affecting Its Distribution Center.

The Company’s only distribution center for the receipt, storage, sorting, packing and distribution of merchandise to all of its stores and

direct consumers is located in New Albany, Ohio. As a result, the Company’s operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, natural disasters, and demographic and population changes, as

well as other unforeseen events and circumstances. If the Company’s distribution center operations were disrupted, its ability to

replace inventory in its stores could be interrupted and sales could be negatively impacted. In addition, the Company’s distribution center operations could reach capacity. Currently, a second distribution center is under construction at the Company’s New Albany

campus, which is expected to be fully functional in late Fiscal 2006. Any significant interruption in the operation of the Company’s

distribution center or delay in the construction of the second distribution center could have a material adverse effect on its financial condition or results of operations.

The Company’s Growth Strategy Relies on the Addition of New Stores and Remodeling of Stores Each Year, Which May Strain the

Company’s Resources and Adversely Impact the Current Store Base Performance.

Part of the Company’s growth strategy depends on opening new stores, remodeling existing stores in a timely manner and operating

them profitably. For Fiscal 2006, the Company expects to open approximately 100 to 110 new stores and remodel 10 to 20 stores. Successful implementation of the Company’s growth strategy depends on a number of factors including, but not limited to, obtaining

desirable prime store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise

and the hiring and training of store managers and brand associates. Additionally, the new stores may place increased demands on the Company’s operational, managerial and administrative resources, which could cause the Company to operate less effectively.

Furthermore, there is a possibility that new stores that are opened in existing markets may have an adverse effect on previously

existing stores in that market. Failure to properly implement the Company’s growth strategy could have a material adverse effect on its financial condition or results of operations.

The Company’s Net Sales and Inventory Levels Fluctuate on a Seasonal Basis, Leaving Its Results of Operations Particularly

Susceptible to Changes in Back-to-School and Holiday Shopping Patterns.

Historically, the Company’s operations have been seasonal, with a significant amount of net sales and net income occurring in the

fourth fiscal quarter, reflecting increased sales during the Holiday selling season and, to a lesser extent, the third fiscal quarter,

reflecting increased sales during the Back-to-School selling season. The Company’s net sales and net income during the first and second fiscal quarters typically are lower due, in part, to the traditional retail slowdown immediately following the Holiday season. As

a result of this seasonality, net sales and net income during any fiscal quarter cannot be used as an accurate indicator of the Company’s

annual results. In addition, any factors negatively affecting the Company during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on its financial condition or

results of operations for the entire year. Also, in order to prepare for the Back-to-School and Holiday selling seasons, the Company

must order and keep in stock significantly more merchandise than it would carry during other parts of the year. High inventory levels due to an unanticipated decreases in demand for the Company’s products during peak selling seasons, misidentification of fashion

trends or excess inventory purchases could require the Company to sell merchandise at a substantial markdown, which could reduce

its net sales and gross margins and negatively impact its profitability.

The Company Does Not Own or Operate any Manufacturing Facilities and Therefore Depends Upon Independent Third Parties for the

Manufacture of All Its Merchandise.

The Company does not own or operate any manufacturing facilities. As a result, the continued success of the Company’s operations is tied to its timely receipt of quality merchandise from third-party manufacturers. A manufacturer’s inability to ship orders in a timely

manner or meet the Company’s quality standards could cause delays in responding to consumer demands, negatively affect consumer

confidence in the quality and value of the Company’s brands and negatively impact the Company’s competitive position and could have a material adverse effect on the Company’s financial condition or results of operations.



The Company’s Ability To Attract Customers to Its Stores Depends Heavily on the Success of the Shopping Centers in Which They

Are Located.

In order to generate customer traffic, the Company locates many of its stores in prominent locations within successful shopping

centers. The Company cannot control the development of new shopping centers, the availability or cost of appropriate locations within

existing or new shopping centers, competition with other retailers for prominent locations or the success of individual shopping centers. In addition, factors beyond the Company’s control impact shopping center traffic, such as general economic conditions and

consumer spending levels. A slowdown in the U.S. economy could negatively affect consumer spending and reduce shopping center

traffic. A significant decrease in shopping center traffic could have a material adverse effect on the Company’s financial condition or results of operations. Furthermore, in pursuing its growth strategy, the Company will be competing with other retailers for prominent

locations within successful shopping centers. If the Company is unable to secure these locations or is unable to renew store leases on

acceptable terms – as they expire from time-to-time – it may not be able to continue to attract the number or quality of customers it normally has attracted or would need to attract to sustain its projected growth. All these factors may also impact the Company’s ability

to meet its growth targets and could have a material adverse effect on its financial condition or results of operations.

The Company’s Reliance on Third Parties To Deliver Merchandise from Its Distribution Center to Its Stores Could Result in Disruptions to Its Business.

The efficient operation of the Company’s stores depends on their timely receipt of merchandise from the Company’s distribution

center. An independent third party transportation company delivers the Company’s merchandise to its stores. This company employs

personnel represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees of this third party

could delay the timely receipt of merchandise. There can be no assurance that such stoppages or disruptions will not occur in the

future. Any failure by this third party to respond adequately to the Company’s distribution needs would disrupt its operations and could have a material adverse effect on its financial condition or results of operations.

The Company’s Internal Control Procedures May Not Prevent or Detect all Errors and all Fraud.

The Company has spent significant time and money designing, documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires management’s assessment of the

effectiveness of the Company’s internal controls over financial reporting as of the end of each fiscal year and a report by the

Company’s independent registered public accounting firm addressing management’s assessment and the effectiveness of the internal controls as of that date (See ―Item 9A. Controls and Procedures‖). The Company does not expect that its internal control over financial

reporting and, more broadly, its disclosure controls and procedures will prevent and/or detect all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the

control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute

assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, projections of any evaluation of effectiveness to future periods

have risks and breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the

individual acts of some persons, by collusion of two or more people, or by management’s override of any control. Because of its

inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect

misstatements. Further, these sorts of controls and procedures must reflect the fact that there are resource constraints, and the benefits

of controls must be considered relative to their costs.

A Manufacturer’s Failure To Comply with Applicable Laws, Regulations and Ethical Business Practices Could Adversely Impact the

Company’s Business.

The Company’s policy is to use only those sourcing agents and independent manufacturers who operate in compliance with applicable laws and regulations. The violation of laws, particularly labor laws, by an independent manufacturer, or by one of the sourcing agents,

or the divergence of an independent manufacturer’s or sourcing agent’s labor practices from those generally accepted as ethical in the

United States or in the country in which the manufacturing facility is located, and the public revelation of those illegal or unethical practices could cause significant damage to the Company’s reputation. Although the Company’s manufacturer operating guidelines

promote ethical business practices and Company representatives periodically visit and monitor the operations of the independent

manufacturers, the Company does not control these manufacturers and cannot guarantee their legal and regulatory compliance.

The Company’s Litigation Exposure Could Exceed Expectations, Having a Material Adverse Effect on Its Financial Condition or

Results of Operations.

The Company is involved, from time-to-time, in litigation incidental to its business, such as litigation regarding overtime compensation and other employment related matters. In addition, the Company currently is involved in several purported class action

lawsuits and several shareholder derivative actions, as well as a SEC investigation, all regarding trading in the Company’s Class A

Common Stock in the summer of Fiscal 2005 (collectively, the ―Securities Matters‖). (See ―Legal Proceedings.‖) Management believes that the outcome of the 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 damaging 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 and other employment related claims

and the Securities Matters, the Company’s exposure could greatly exceed expectations and have a material adverse effect upon the financial condition or results of operations.



The Company’s Failure To Adequately Protect Its Trademarks, Abercrombie & Fitch®, Abercrombie®, Hollister Co.® and Ruehl

No. 925® Could Have a Negative Impact on Its Brand Image and Limit Its Ability To Penetrate New Markets.

The Company believes that its trademarks Abercrombie & Fitch®, Abercrombie®, Hollister Co.® and Ruehl No. 925® are an

essential element of the Company’s strategy. The Company has obtained or applied for federal registration of these trademarks, has

pending trademark registration applications for other trademarks in the United States and has applied for or obtained registrations in many foreign countries in which its manufacturers are located. There can be no assurance that the Company will obtain such

registrations or that the registrations the Company obtains will prevent the imitation of its products or infringement of its intellectual

property rights by others. If any third party copies the Company’s products in a manner that projects lesser quality or carries a negative connotation, the Company’s brand image could be materially adversely affected.

Because the Company has not yet registered all of its trademarks in all categories or in all foreign countries in which it now or may in

the future source or offer its merchandise, its international expansion and its merchandising of products using these marks could be limited. For example, the Company cannot assure that others will not try to block the manufacture, export or sale of its products as

violate of their trademarks or other proprietary rights. The pending applications for international registration of various trademarks

could be challenged or rejected in those countries because third parties of which the Company is not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various

registration applications is pending or unclear, for a third party owner of the national trademark registration for a similar mark to

enjoin the manufacture, sale or exportation of branded goods in or from that country. If the Company is unable to reach a licensing arrangement with these parties, the Company’s manufacturers may be unable to manufacture its products, and the Company may be

unable to sell, in those countries. The Company’s inability to register its trademarks or purchase or license the right to use its

trademarks or logos in these jurisdictions could limit its ability to obtain supplies from or manufacture in less costly markets or penetrate new markets should the Company’s business plan include selling its merchandise in those non-U.S. jurisdictions.

The Company recently launched a new anti-counterfeiting program, under the auspices of the Abercrombie & Fitch Brand Protection

Team, whose goal will be to improve the current practices and strategies by focusing on eliminating the supply of illicit Abercrombie & Fitch Co. products.

The Brand Protection Team will interact with investigators, customs officials and law enforcement entities throughout the world to

combat the illegal use of the Company’s trademarks. Although brand security initiatives are being taken, the Company cannot guarantee that its efforts against the counterfeiting of its brands will be successful.

The Company’s Long-Term Growth Strategy Depends on the Development of New Brand Concepts.

Historically, the Company has grown by adding new brand concepts every several years and may continue to do so in the future. Each

new brand concept requires management’s focus and attention as well as significant capital investments. Furthermore, each new brand

concept is susceptible to risks such that include lack of customer acceptance, competition from existing or new retailers, product differentiation, production and distribution inefficiencies and unanticipated operating issues. Even though the Company’s past brand

concepts have been successful, there is no assurance that new brand concepts will achieve similar results. Any new brand concept

could have a material adverse effect on the Company’s financial condition or results of operations.

Modifications and/or Upgrades to Information Technology Systems May Disrupt Operations.

The Company regularly evaluates its information technology systems and requirements and is currently implementing modifications

and/or upgrades to its information technology systems supporting the business, including its purchasing and real estate systems. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems

with new functionality. The Company is aware of inherent risks associated with replacing and changing these systems, including

accurately capturing data and system disruptions and believes it is taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such

replacement technologies. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a

material adverse effect on its financial condition or results of operations. Additionally, there is no assurance that a successfully implemented system will deliver value to the Company.

The Company’s International Expansion Plan Is Dependent on a Number of Factors, Any of Which Could Delay or Prevent the

Successful Penetration into New Markets and Strain Its Resources.

As the Company expands internationally, it may incur significant costs related to starting up and maintaining foreign operations. Costs

may include, and are not limited to, obtaining prime locations for stores, setting up foreign offices and distribution centers and hiring

experienced management. The Company will be unable to open and operate new stores successfully and its growth will be limited unless it can:

• identify suitable markets and sites for store locations;

• negotiate acceptable lease terms;

• hire, train and retain competent store personnel;

• successfully gain acceptance from its foreign customers;



• foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise;

• manage inventory effectively to meet the needs of new and existing stores on a timely basis;

• expand its infrastructure to accommodate growth;

• generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund its expansion plan; and

• manage its foreign exchange risks effectively.

In addition, the Company’s proposed international expansion will place increased demands on its operational, managerial and

administrative resources. These increased demands may cause the Company to operate its business less effectively, which in turn

could cause deterioration in the performance of its stores. Furthermore, the Company’s ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks.

Direct-to-Consumer Sales Include Risks that Could Have a Material Adverse Effect on the Company’s Financial Condition or Results

from Operations.

The Company’s direct-to-consumer operations are subject to numerous risks that could have a material adverse effect on its

operational results. Risks include, but are not limited to, the following: (a) diversion of sales from the Company’s stores; (b) difficulty

in recreating the in-store experience on a web site; (c) the opportunity that domestic or international resellers will purchase merchandise and re-sell it overseas outside the Company’s control; and (d) risks related to the failure of the systems that operate the

web sites and their related support systems, including computer viruses, theft of customer information, telecommunication failures and

electronic break-ins and similar disruptions.

The Effects of War or Acts of Terrorism Could Have a Material Adverse Effect on the Company’s Financial Condition or Results of

Operations.

The continued threat of terrorism and related heightened security measures in the United States may disrupt commerce and the U.S. economy. Any further acts of terrorism or a war may disrupt commerce and undermine consumer confidence, which could negatively

impact sales revenue by causing consumer spending and/or shopping center traffic to decline. Furthermore, an act of terrorism or war,

or the threat thereof, could negatively impact the Company’s business by interfering with its ability to obtain merchandise from foreign manufacturers. The terrorist attacks of September 11, 2001 caused disruptions to the Company’s supply chain. Any future

inability to obtain merchandise from the Company’s foreign manufacturers or substitute other manufacturers, at similar costs and in a

timely manner, could have a material adverse effect on its financial condition or results of operations.


Not applicable.

ITEM 2. PROPERTIES.

The Company’s headquarters and support functions (consisting of home office and distribution and shipping facilities) are centralized

in a 358-acre campus-like setting in New Albany, Ohio that is owned by the Company. The Company leases small facilities to house its design support centers in the United Kingdom, Hong Kong, New York City and Santa Monica, California as well as offices in

Switzerland and Italy for its European operations.

All of the retail stores operated by the Company are located in leased facilities, primarily in shopping centers throughout the continental United States and Canada. The leases expire at various dates, principally between 2006 and 2021.

Typically, when the Company leases space for a retail store in a shopping center, the Company is responsible for all improvements,

including interior walls, floors, ceilings, fixtures and decorations. Certain landlords provide construction allowances to fund all or a

portion of the cost of improvements. The Company accounts for construction allowances as deferred lease credits and amortizes such

credits over the life of the applicable leases as a reduction in rent expense. The cost of improvements varies widely, depending on the

size and location of the store. Rental terms for new locations usually include a fixed minimum rent and may include a percentage of sales in excess of a specified amount. The Company also typically pays certain operating costs such as common area maintenance,

utilities, insurance and taxes.

As of April 1, 2006, the Company’s 850 stores were located in 49 states, the District of Columbia and Canada, as follows:

Alabama 15 Kentucky 14 North Dakota 1

Alaska 1 Louisiana 15 Ohio 40

Arizona 13 Maine 3 Oklahoma 10



Arkansas 6 Maryland 13 Oregon 9

California 97 Massachusetts 24 Pennsylvania 39

Colorado 10 Michigan 32 Rhode Island 4

Connecticut 16 Minnesota 16 South Carolina 11

Delaware 1 Mississippi 4 South Dakota 2

District of Columbia 1 Missouri 19 Tennessee 20

Florida 51 Montana 2 Texas 66

Georgia 27 Nebraska 5 Utah 5

Hawaii 4 Nevada 8 Vermont 1

Idaho 2 New Hampshire 5 Virginia 24

Illinois 43 New Jersey 25 Washington 20

Indiana 23 New Mexico 3 West Virginia 3

Iowa 5 New York 39 Wisconsin 12

Kansas 7 North Carolina 29 Canada 5


A&F is a defendant in lawsuits arising in the ordinary course of business.

A&F is aware of 20 actions that have been filed against A&F and certain of its current and former officers and directors on behalf of a

purported, but as yet uncertified, class of shareholders who purchased A&F’s Class A Common Stock between October 8, 1999 and October 13, 1999. These 20 actions have been 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. On

April 12, 2000, the Judicial Panel on Multidistrict Litigation issued a Transfer Order transferring the 20 pending actions to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities

Litigation. On November 16, 2000, the Court signed an Order appointing the Hicks Group, a group of seven unrelated investors in

A&F’s Common Stock, as lead plaintiff, and appointing lead counsel in the consolidated action. On December 14, 2000, plaintiffs filed a Consolidated Amended Class Action Complaint (the ―Amended Complaint‖) in which they did not name as defendants Lazard

Freres & Co. and Todd Slater, who had formerly been named as defendants in certain of the 20 complaints. On February 14, 2001,

A&F and the other defendants filed motions to dismiss the Amended Complaint. On November 14, 2003, the motions to dismiss the Amended Complaint were denied as to all defendants except Michelle Donnan-Martin. On December 2, 2003, A&F and the other

defendants moved for reconsideration or reargument of the November 14, 2003 order denying the motions to dismiss. On February 23,

2004, the motions for reconsideration or reargument were denied. On April 1, 2004, plaintiffs filed a motion for class certification. On April 8, 2005, A&F and the other defendants filed their opposition to plaintiffs’ motion for class certification. The Court has yet to

rule on the plaintiffs’ motion for class certification. The parties are currently conducting merits discovery.

Five class actions have been filed against the Company involving overtime compensation. In each 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 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 that

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 that 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. These cases have been consolidated with the Fuller case described in the following paragraph.

In Casey Fuller, Individually and on Behalf of All Others Similarly Situated v. Abercrombie & Fitch Stores, Inc., which was filed on

December 28, 2004 in the United States District Court for the Eastern District of Tennessee, the plaintiff alleges that he and other similarly situated assistant managers and managers in training were not paid properly calculated overtime during their employment

and seeks overtime pay under the Fair Labor Standards Act. Because of its similarities to the Mitchell case, on April 19, 2005, the

defendant filed a motion to stay the Fuller case pending the outcome of the Mitchell case or, in the alternative, transfer the Fuller case to the United States District Court for the Southern District of Ohio.

On May 31, 2005, the United States District Court for the Eastern District of Tennessee transferred the Fuller case to the United States

District Court for the Southern District of Ohio. On September 2, 2005, the Fuller case was consolidated with the Mitchell case for all purposes. Unlike the Mitchell case described above, defendants have not moved for summary judgment in the Fuller case and it

remains pending.



In Bryan T. Kimbell, Individually and on Behalf of All Others Similarly Situated and on Behalf of the Public v. Abercrombie & Fitch

Stores, Inc., which was filed on July 10, 2002 in the California Superior Court for Los Angeles County, the plaintiffs alleged that California general and store managers were entitled to receive overtime pay as ―non-exempt‖ employees under California wage and

hour laws. The parties have agreed to a settlement of this matter, which was finally approved by the California Superior Court for Los

Angeles County on January 12, 2006. The settlement did not have a material effect on the Company’s consolidated financial statements.

On October 25, 2005, a purported class action, styled Gibson v. Hollister Co., was filed in the Superior Court of Orange County,

California. The plaintiff alleges the following claims for herself and a purported class and subclasses of hourly employees employed by Hollister in the State of California: failure to provide and maintain uniforms; failure to pay regular and overtime wages; failure to

provide rest periods and meal periods or compensation in lieu thereof; failure to timely pay wages due at termination; failure to

itemize wage statements; conversion; and violation of unfair competition law. The Complaint cites various California statutes, orders and regulations. The Complaint seeks compensatory damages for alleged unpaid wages due to the plaintiff and the purported class,

penalties, injunctive relief, attorneys’ fees, interest and costs. The defendant filed an answer to the complaint on January 25, 2006.

In Eltrich v. Abercrombie & Fitch Stores, Inc., a purported class action 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. Plaintiff filed an Amended Complaint on November 30, 2005. The Amended Complaint seeks compensatory damages for alleged unpaid wages due to the plaintiff and the purported class, penalties, injunctive relief, attorneys’ fees, interest and costs. The

defendant filed an answer to the Amended Complaint on or about January 27, 2006.

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 Class A Common Stock of A&F between June 2, 2005 and August 16, 2005. In

September and October of 2005, five other purported class actions, and seek unspecified monetary damages, were subsequently filed against A&F and other defendants in the same Court. All six cases allege claims under the federal securities laws as a result of a

decline in the price of A&F’s Class A Common Stock in the summer of 2005. On November 1, 2005, a motion to consolidate all 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.

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. 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.

In December 2005, the SEC issued a formal order of investigation concerning trading in shares of A&F’s Class A 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.

On December 9, 2005, a purported class action, styled Rankin, et al. v. Abercrombie & Fitch Stores, Inc., was filed by plaintiff Will

Rankin in the Circuit Court of the State of Oregon for the County of Multnomah. By a First Amended Complaint dated January 9, 2006, two additional plaintiffs were named – Chris Masagatani and Kayti Kersten. The plaintiffs allege, on behalf of themselves and a

purported class of in-store managers and hourly employees, that they were required to purchase clothing and that the costs of

purchases reduced actual wages earned in violation of Oregon’s minimum wage laws. The First Amended Complaint seeks payment of alleged wages due to plaintiffs and the purported class, civil penalties under Oregon statutes, a permanent injunction, attorneys’ fees

and prejudgment interest. The defendant filed an answer to the First Amended Complaint on February 8, 2006.

Management intends to vigorously defend the aforesaid matters, as appropriate, and believes that 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 financial condition or results of operations of the Company. 20




Not applicable.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below is certain information regarding the executive officers of A&F as of April 1, 2006.

Michael S. Jeffries, 61, has been Chairman and Chief Executive Officer of A&F since May 1998. From February 1992 to May 1998,

Mr. Jeffries held the position of President and Chief Executive Officer of A&F. Mr. Jeffries has also been a director of A&F since

1996.

Leslee K. Herro, 45, has been Executive Vice President – Planning and Allocation of A&F since May 2004. Prior thereto, Ms. Herro

held the position of Senior Vice President – Planning and Allocation from February 2000 to May 2004 and the position of Vice

President-Planning & Allocation of A&F from February 1994 to February 2000.

Diane Chang, 50, has been Executive Vice President – Sourcing of A&F since May 2004. Prior thereto, Ms. Chang held the position

of Senior Vice President – Sourcing from February 2000 to May 2004 and the position of Vice President – Sourcing of A&F from

May 1998 to February 2000.

John W. Lough, 61, has been Executive Vice President –Distribution Center Logistics since July 2005. Prior thereto, Mr. Lough held

the position of Senior Vice President – Distribution Center Logistics from February 2003 to July 2005 and the position of Vice

President Distribution Center Logistics from June 1999 to February 2003.

Michael W. Kramer, 41, joined the Company in August 2005 as Senior Vice President and Chief Financial Officer. Prior to this he

served as the Chief Financial Officer, Apple Retail for Apple Computer, Inc. since April 2001. Prior thereto, he served as Vice

President, Assistant Corporate Controller of Gateway, Inc. from April 2000 to March 2001.

Thomas D. Mendenhall, 44, has been Senior Vice President & General Manager — Abercrombie & Fitch and Abercrombie since

November 2004. Prior thereto, Mr. Mendenhall held various positions at the Gucci Group N.V., including Worldwide Director of

Merchandising for the Gucci Division, since 1999.

James A. Yano, 54, joined the Company in August 2005 as Senior Vice President and General Counsel. Prior thereto, Mr. Yano was a

partner in the law firm of Vorys, Sater, Seymour and Pease LLP since 1984.

The executive officers serve at the pleasure of the Board of Directors of Abercrombie & Fitch and, in the case of Mr. Jeffries, pursuant to an employment agreement.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES.

A&F’s Class A Common Stock (the ―Common Stock‖) is traded on the New York Stock Exchange under the symbol ―ANF.‖ The table below sets forth the high and low sales prices of A&F’s Common Stock on the New York Stock Exchange for Fiscal 2005 and

Fiscal 2004:

Sales Price

High Low

Fiscal 2005

4th Quarter $ 68.25 $ 50.25

3rd Quarter $ 72.66 $ 44.17

2nd Quarter $ 74.10 $ 52.51

1st Quarter $ 59.98 $ 49.74

Fiscal 2004

4th Quarter $ 53.03 $ 38.51

3rd Quarter $ 39.94 $ 27.42

2nd Quarter $ 39.46 $ 30.93

1st Quarter $ 36.38 $ 25.53

Beginning in Fiscal 2004, the Board of Directors voted to initiate a cash dividend, at an annual rate of $0.50 per share. A quarterly dividend, of $0.125 per share, was paid in March, June, September and December 2004. A quarterly dividend, of $0.125 per share,

was paid in March and June 2005. In August 2005, the Board of Directors increased the quarterly dividend to $0.175 per share, which

was paid in September and December of Fiscal 2005. The Company expects to continue to pay a dividend, subject to Board of Directors review of the Company’s cash position and results of operations.



As of April 1, 2006, there were approximately 5,340 shareholders of record. However, when including investors holding shares in

broker accounts under street name, active associates who participate in A&F’s stock purchase plan and associates who own shares through A&F-sponsored retirement plans, A&F estimates that there are approximately 60,150 shareholders.

During Fiscal 2005, Fiscal 2004 and Fiscal 2003, the Company repurchased shares of its outstanding Common Stock having a value of

approximately $103.3 million, $434.7 million and $115.7 million, respectively, pursuant to Board of Directors authorizations. The majority of the Fiscal 2005 repurchases were completed under previous Board of Directors authorizations. In August 2005, the Board

of Directors authorized the Company to purchase an additional 6.0 million shares. As of January 28, 2006, the remaining aggregate

number of shares of Common Stock authorized for repurchase was approximately 5.7 million shares.

The number and average price of shares purchased in each fiscal month of the fourth quarter of Fiscal 2005 are set forth in the table

below:

Total Number of

Shares Purchased as Maximum Number of

Total Number Average Part of Publicly Shares that May Yet be

of Shares Price Paid Announced Plans or Purchased under the

Period Purchased per Share Programs Plans or Programs (1)

October 30, 2005 - November 26, 2005 — — — 5,683,500

November 27, 2005 - December 31, 2005 — — — 5,683,500

January 1, 2006 - January 28, 2006 — — — 5,683,500

Totals — — — 5,683,500

(1) The number shown represents, as of the end of each period, the maximum number of shares of Common Stock that may yet be purchased

under A&F’s publicly announced stock purchase authorizations. The shares may be purchased from time-to-time, depending on market conditions.



ITEM 6. SELECTED FINANCIAL DATA.

ABERCROMBIE & FITCH

FINANCIAL SUMMARY

(Thousands except per share and per square foot amounts, ratios and store and associate data)

Fiscal Year 2005 2004 2003 2002 2001

Summary of Operations

Net Sales $ 2,784,711 $ 2,021,253 $ 1,707,810 $ 1,595,757 $ 1,364,853

Gross Profit $ 1,851,416 $ 1,341,224 $ 1,083,170 $ 980,555 $ 817,325

Operating Income $ 542,738 $ 347,635 $ 331,180 $ 312,315 $ 268,004

Operating Income as a Percentage of Net Sales 19.5 % 17.2 % 19.4 % 19.6 % 19.6 %

Net Income $ 333,986 $ 216,376 $ 204,830 $ 194,754 $ 166,600

Net Income as a Percentage of Net Sales 12.0 % 10.7 % 12.0 % 12.2 % 12.2 %

Dividends Declared Per Share $ 0.60 $ 0.50 — — —

Net Income Per Weighted-Average Share

Results

Basic $ 3.83 $ 2.33 $ 2.12 $ 1.98 $ 1.68

Fully-Diluted $ 3.66 $ 2.28 $ 2.06 $ 1.94 $ 1.62

Fully-Diluted Weighted-Average Shares

Outstanding 91,221 95,110 99,580 100,631 102,524

Other Financial Information

Total Assets $ 1,789,718 $ 1,386,791 $ 1,401,369 $ 1,190,615 $ 929,978

Return on Average Assets 21 % 16 % 16 % 18 % 20 %

Capital Expenditures $ 256,422 $ 185,065 $ 159,777 $ 145,662 $ 171,673

Long-Term Debt — — — — —

Shareholders’ Equity $ 995,117 $ 669,326 $ 857,765 $ 736,307 $ 582,395

Return on Average Shareholders’ Equity 40 % 28 % 26 % 30 % 34 %

Comparable Store Sales* 26 % 2 % (9 %) (5 %) (9 %)

Net Retail Sales Per Average Gross Square Foot $ 464 $ 360 $ 345 $ 379 $ 401



Stores at End of Year and Average Associates

Total Number of Stores Open 851 788 700 597 491

Gross Square Feet 6,025,000 5,590,000 5,016,000 4,358,000 3,673,000

Average Number of Associates 69,100 48,500 30,200 22,000 16,700

* A store is included in comparable store sales when it has been open as the same brand at least one year and its square footage has not been expanded or reduced

by more than 20% within the past year.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

Beginning with the first quarter of Fiscal 2005, the Company reclassified its condensed consolidated statements of net income and

comprehensive income. In prior periods, the Company included buying and occupancy costs as well as certain home office expenses

as part of the gross profit calculation. The Company believes that presenting gross profit as a function of sales reduced solely by cost of goods sold, as well as presenting stores and distribution expense and marketing, general and administrative expense as individual

expense categories, provides a clearer and more transparent representation of gross selling margin and operating expenses. Prior

period results have been reclassified accordingly.

The Company had net sales of $2.785 billion in Fiscal 2005, up 37.8% from $2.021 billion in Fiscal 2004. Operating income for Fiscal

2005 increased 56.1% to $542.7 million from $347.6 million for Fiscal 2004. Operating income results in Fiscal 2005 and Fiscal 2004

included the impact of non-recurring charges of $13.5 million related to a severance agreement of an executive officer and $40.9 million related to a legal settlement, respectively. Net income was $334.0 million in Fiscal 2005, up 54.3% from $216.4 million

in Fiscal 2004. Net income per fully-diluted weighted-average share was $3.66 for Fiscal 2005 compared to $2.28 in Fiscal 2004, an

increase of 60.5%. The non-recurring charges, net of the related tax effect, reduced reported net income per fully-diluted share by $0.09 and $0.27 in Fiscal 2005 and Fiscal 2004, respectively.

The Company generated cash from operations of $453.6 million in Fiscal 2005 versus $423.8 million in Fiscal 2004, resulting

primarily from strong sales and income. During Fiscal 2005, the Company used cash from operations to finance its growth strategy, opening 57 new Hollister stores, 15 new Abercrombie & Fitch stores, five new Abercrombie stores and four new RUEHL stores, as

well as remodeling 14 Abercrombie & Fitch stores.

Further, the Company used excess cash to repurchase 1.8 million shares of common stock for $103.3 million and pay dividends of $0.60 per share for a total of $52.2 million. The Company believes that share repurchases and dividends are an important way for the

Company to deliver shareholder value, but the Company’s first priority will be to invest in the business to support its domestic and

international growth plans. The Company continues to be committed to maintaining sufficient cash on the balance sheet to support the needs of the business and withstand unanticipated business volatility.

The following data represent the Company’s consolidated statements of net income for the last three fiscal years, expressed as a

percentage of net sales:

2005 2004 2003

NET SALES 100.0 % 100.0 % 100.0 %

Cost of Goods Sold 33.5 33.6 36.6

GROSS PROFIT 66.5 66.4 63.4

Stores and Distribution Expense 35.9 36.5 35.0

Marketing, General and Administrative Expense 11.3 (1) 12.9 (2) 9.1

Other Operating Income, Net (0.2 ) (0.2 ) (0.1 )

OPERATING INCOME 19.5 17.2 19.4

Interest Income, Net (0.2 ) (0.3 ) (0.2 )

INCOME BEFORE INCOME TAXES 19.7 17.5 19.6

Provision for Income Taxes 7.7 6.8 7.6



NET INCOME 12.0 % 10.7 % 12.0 %

(1) Includes 0.5% related to a severance agreement.

(2) Includes 2.0% related to a legal settlement.

FINANCIAL SUMMARY

The following summarized financial and operational data compares Fiscal 2005 to Fiscal 2004 and Fiscal 2004 to Fiscal 2003:

Change

2005 2004 2003 2004-2005 2003-2004

Net sales (thousands) $ 2,784,711 $ 2,021,253 $ 1,707,810 38 % 18 %

Net sales by brand (thousands)

Abercrombie & Fitch $ 1,424,013 $ 1,210,222 $ 1,180,646 18 % 3 %

Abercrombie $ 344,938 $ 227,204 $ 212,276 52 % 7 %

Hollister $ 999,212 $ 579,687 $ 314,888 72 % 84 %

RUEHL* $ 16,548 $ 4,140 n/a 300 % n/a

Net retail sales per average store (thousands)

Abercrombie & Fitch $ 3,784 $ 3,103 $ 3,184 22 % (3 )%

Abercrombie $ 1,957 $ 1,241 $ 1,194 58 % 4 %

Hollister $ 3,442 $ 2,740 $ 2,594 26 % 6 %

RUEHL* $ 2,903 $ 1,255 n/a 131 % n/a

Increase (decrease) in comparable store sales**

Abercrombie & Fitch 18 % (1 )% (11 )%

Abercrombie 54 % 1 % (6 )%

Hollister 29 % 13 % 7 %

Net retail sales increase attributable to new and

remodeled stores, catalogue and web sites 12 % 16 % 16 %

Net retail sales per average gross square foot

Abercrombie & Fitch $ 432 $ 352 $ 358 23 % (2 )%

Abercrombie $ 446 $ 282 $ 270 58 % 4 %

Hollister $ 528 $ 423 $ 404 25 % 5 %

RUEHL* $ 315 $ 136 n/a 132 % n/a

Transactions per average store

Abercrombie & Fitch 49,685 45,941 51,234 8 % (10 )%

Abercrombie 30,356 21,740 22,128 40 % (2 )%

Hollister 64,913 56,687 57,593 15 % (2 )%

RUEHL* 26,215 12,913 n/a 103 % n/a

Average transaction value



Abercrombie & Fitch $ 76.16 $ 67.54 $ 62.15 13 % 9 %

Abercrombie $ 64.47 $ 57.10 $ 53.98 13 % 6 %

Hollister $ 53.03 $ 48.33 $ 45.04 10 % 7 %

RUEHL* $ 110.74 $ 97.16 n/a 14 % n/a

Average units per transaction

Abercrombie & Fitch 2.18 2.22 2.24 (2 )% (1 )%

Abercrombie 2.66 2.68 2.68 (1 )% nm

Hollister 2.21 2.18 2.14 1 % 2 %

RUEHL* 2.28 2.17 n/a 5 % n/a

Average unit retail sold

Abercrombie & Fitch $ 34.94 $ 30.42 $ 27.75 15 % 10 %

Abercrombie $ 24.24 $ 21.31 $ 20.14 14 % 6 %

Hollister $ 24.00 $ 22.17 $ 21.05 8 % 5 %

RUEHL* $ 48.57 $ 44.77 n/a 8 % n/a

* Net Sales for RUEHL during Fiscal 2004 and Fiscal 2005, and the related statistics, reflect the activity of three stores opened in September 2004,

one store opened in December 2004, and four stores opened in 2005; as a result, year-to-year comparisions may not be meaningful.

** A store is included in comparable store sales when it has been open as the same brand at least one year and its square footage has not been

expanded or reduced by more than 20% within the past year.

CURRENT TRENDS AND OUTLOOK

During Fiscal 2005, the Company made important expenditures in order to continue to develop, enhance and protect the aspirational

position of its brands. Initially, the Company focused on its store base by completing the roll out across all brands of the store

investment program that started in late Fiscal 2004. The Company added more sales floor coverage by increasing the brand

representative hours at the stores, which the Company believes enhanced the customer’s in-store experience and helped lower

inventory shrink. Additionally, the Company implemented a new store merchandise filling system and organized the store stock rooms to improve merchandise replenishment efficiency. Finally, the Company invested in its home office organization by broadening the

merchandising and design groups, providing the Company with greater expertise at the product category level across all brands, while

creating leverage with its supplier base. Other home office investments included the creation and launch of the Abercrombie & Fitch Brand Protection Team, the Company’s new anti-counterfeiting program, the development of its international support group, as well

as investments in its design and technical design groups.

During the fourth quarter of Fiscal 2005, the Company opened the first Abercrombie & Fitch flagship store on 5th Avenue in New York City. The store performed well throughout the fourth quarter of Fiscal 2005, exceeding management’s initial sales productivity

expectations. During January 2006, the Company also opened its first Abercrombie & Fitch and Hollister stores in Canada. These

stores are off to a strong start with productivity above that of their respective average U.S. counterparts. The Company plans to open additional flagship locations in Los Angeles during Fiscal 2006 and London in early 2007.

The Company views the Hollister brand as a significant growth vehicle for the Company in the future, with the brand having reached

only half of its maximum store potential; Abercrombie & Fitch is a maturing brand with its opportunity for future growth and contribution depending on securing prime locations for its stores and expanding the brand and its presence outside of the United

States; Abercrombie is viewed as having growth opportunities within the United States; management continues to refine RUEHL’s

merchandise mix, marketing strategy and store presentation to position the brand for long term profitability.

For Fiscal 2006, the Company will be faced with the challenge of improving on Fiscal 2005’s successful business. The Company has

begun to annualize the strong comparable store sales growth, which started in January 2005. While the Company believes it can

sustain positive comparable store sales increases in Fiscal 2006, the increases are not expected to be at the level reported during Fiscal 2005. Management will operate the business as it always has – it will protect and enhance the brands and work to ensure their long-

term success.

While the Company has been able to improve its Initial Markup (―IMU‖) in the past, management does not anticipate any IMU improvements in its forecasts or projections. The Company ended the fourth quarter of Fiscal 2005 with inventories, at cost, up 59%

per gross square foot versus the fourth quarter of Fiscal 2004 as a result of the Company’s investment in the jeans business and other

basic categories. The Company will continue to invest in key inventory categories to drive business while actively managing its



markdown exposure. The Company believes it will end the first quarter of Fiscal 2006 with a slightly lower increase in inventory per

gross square foot, at cost, when compared to the fourth quarter of Fiscal 2005.

During Fiscal 2006, the Company will continue to focus on the customer’s in-store experience. The Company expects that the on-

going management of the store investment program initiatives will be evaluated primarily by store sales performance, with

consideration for customer service, shrink and other aspects of the customer’s in-store experience. Additionally, the Company plans to continue to make capital expenditures to invest strategically in the appearance of its stores, primarily in Abercrombie & Fitch and

Hollister stores. These investments will allow the Company to update some of its older stores without having to do full remodels.

The Company plans to make an investment during Fiscal 2006 in home office organizations and information technology infrastructure to enhance and increase efficiencies in its systems. The Company expects its payroll expense, excluding the impact of stock option

expensing, to increase at a lower rate during Fiscal 2006 than it did during Fiscal 2005. Additionally, the Company also expects

depreciation and amortization expense for the home office to increase during Fiscal 2006 as a result of the capital expenditures it incurred during Fiscal 2005, primarily the addition of a new office building.

Historically the Company has reported stock-based compensation through the disclosure-only requirements of SFAS No. 123,

―Accounting for Stock-Based Compensation,‖ as amended by SFAS No. 148, ―Accounting for Stock-Based Compensation–Transition and Disclosure–an Amendment of FASB Statement No. 123,‖ but elected to measure compensation expense using the

intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, ―Accounting for Stock Issued to Employees.‖

Accordingly, no compensation expense for options has been recognized as all options have been granted at fair market value at the grant date. In accordance with SFAS No. 123(Revised 2004) ―Share-Based Payment,‖ the Company will begin to recognize expense

for stock options granted to the Company’s associates and non-associate directors beginning with the first quarter of Fiscal 2006,

which will have an adverse impact on the Company’s reported net income. Based on stock options previously issued, but not fully vested, and an estimate of stock options to be granted during Fiscal 2006, the Company expects that the implementation of SFAS

No. 123(R) will result in a charge of approximately $0.10 per fully-diluted share for Fiscal 2006.

The following measurements are among the key business indicators that management reviews regularly to gauge the Company’s

results:

• Comparable store sales, defined as year-over-year sales for a store that has been open as the same brand at least one year and its square footage has not

been expanded or reduced by more than 20% within the past year, by brand, by product category and by store;

• IMU;

• Selling margin, defined as sales price less original cost, by brand and by product category;

• Store metrics such as sales per gross square foot, average unit retail, average transaction values, store contribution, defined as store sales less direct

costs of running the store, and average units per transaction;

• Markdown rates;

• Gross profit;

• Operating income;

• Net income; and

• Cash flow and liquidity determined by Company’s current ratio and cash provided by operations.

While not all of these metrics are disclosed publicly by the Company, due in some cases to their proprietary nature, the Company does publicly disclose and discuss several of these metrics as part of its financial summary and in several sections of this Management’s

Discussion and Analysis.

FISCAL 2005 COMPARED TO FISCAL 2004

FOURTH QUARTER RESULTS

Net Sales

Net sales for the fourth quarter of Fiscal 2005 were $961.4 million, up 39.9% versus last year’s fourth quarter net sales of

$687.3 million. The net sales increase was primarily attributable to a comparable store sales increase of 28% for the quarter and the

net addition of 63 stores during Fiscal 2005 and an increase in the direct-to-consumer business net sales (including shipping and handling revenue) of $8.1 million versus the comparable period in the fourth quarter of Fiscal 2004.

By merchandise brand, comparable store sales for the quarter were as follows: Abercrombie & Fitch increased 18% with women’s

comparable store sales increasing by a low-twenties percentage and men’s increasing by a mid-teen percentage. Abercrombie, the



kids’ business, achieved a 59% increase in comparable store sales with girls achieving a high-sixties increase and boys posting a high-

thirties increase. In Hollister, comparable store sales increased by 34% for the fourth quarter with bettys increasing comparable store sales by a mid-thirties percentage and dudes realizing an increase in the low-thirties.

On a regional basis, comparable store sales increases for the Company ranged from the mid-twenties to the low-thirties across the United States. Stores located in the North Atlantic and Southwest had the best comparable store sales performance on a consolidated

basis.

In Abercrombie & Fitch, the women’s comparable store sales increase for the quarter was driven by strong performances in polos, fleece, outerwear and sweaters. The men’s comparable store sales growth was driven by increases in polos, graphic tees, jeans and

personal care, offset by decreases in woven shirts and accessories.

In the kids’ business, the girls’ comparable store sales increased as a result of strong sales performances across the majority of the categories, led by polos, fleece, graphic tees and jeans. Boys’ comparable store sales increase was driven by the following categories:

polos, jeans, graphic tees and fleece, offset by slight decreases in the woven shirt and activewear categories.

In Hollister, bettys had strong comparable store sales increases in polos, fleece, sweaters and graphic tees. The increase in the dudes’ comparable store sales was the result of strong performance in polos, graphic tees, fleece and personal care categories for the quarter,

offset by decreases in woven shirts and sweaters.

Direct-to-consumer merchandise net sales, which are sold through the Company’s web sites and catalogue, in the fourth quarter of

Fiscal 2005 were $47.5 million, an increase of 18.5% versus last year’s fourth quarter net sales of $40.1 million. Shipping and

handling revenue for the corresponding periods was $6.2 million in Fiscal 2005 and $5.5 million in Fiscal 2004. The direct-to-

consumer business, including shipping and handling revenue, accounted for 5.6% of net sales in the fourth quarter of Fiscal 2005 compared to 6.6% in the fourth quarter of Fiscal 2004. The decrease in sales penetration was due to the implementation of brand

protection initiatives that reduced the amount of sale merchandise available on the web sites and limit the customer’s ability to

purchase large quantities of the same item.

Gross Profit

Gross profit during the fourth quarter of Fiscal 2005 was $639.4 million compared to $455.8 million in Fiscal 2004. The gross profit

rate (gross profit divided by net sales) for the fourth quarter of Fiscal 2005 was 66.5%, up 20 basis points from last year’s fourth quarter rate of 66.3%. The increase in gross profit rate resulted largely from a higher IMU during the fourth quarter of Fiscal 2005 and

a reduction in shrink versus the fourth quarter of Fiscal 2004, partially offset by a slightly higher markdown rate. The improvement in IMU during the fourth quarter was a result of higher average unit retail pricing across all brands. Abercrombie & Fitch, Abercrombie

and Hollister all operated at similar IMU margins.

Stores and Distribution Expense

Stores and distribution expense for the fourth quarter of Fiscal 2005 was $293.5 million compared to $223.8 million for the

comparable period in Fiscal 2004. The stores and distribution expense rate (stores and distribution expense divided by net sales) for

the fourth quarter of Fiscal 2005 was 30.5% compared to 32.6% in the fourth quarter of Fiscal 2004. Stores and distribution expense was as follows:



(in millions) % of net sales (in millions) % of net sales

Store Payroll Expense $ 101.5 10.6 % $ 74.6 10.9 %

Store Management Expense (1) 12.4 1.3 % 7.7 1.1 %

Rent, Utilities and Other Landlord Expense 75.0 7.8 % 57.5 8.4 %

Depreciation and Amortization 29.4 3.1 % 28.1 4.1 %

Repairs and Maintenance Expense 8.5 0.9 % 8.3 1.2 %

Other Store Expenses (2) 45.9 4.8 % 30.8 4.5 %

Total Stores Expense $ 272.7 28.4 % $ 207.0 30.1 %

Direct-to-Consumer Expense 13.1 1.4 % 10.6 1.5 %

Distribution Center Expense 7.7 0.8 % 6.2 0.9 %

Total Stores and Distribution Expense $ 293.5 30.5 % $ 223.8 32.6 %



(1) Previously reported within Store Payroll Expense.

(2) Includes packaging, supplies, credit card fees and other store support functions.

The Company’s total store expense, as a percent of net sales, during the fourth quarter of Fiscal 2005 decreased 170 basis points

versus the comparable period during Fiscal 2004 as a result of the Company’s ability to leverage fixed costs due to significant comparable store sales increases partially offset by increases in store management and loss prevention programs during Fiscal 2005.

The Company believes that the increases in store management and loss prevention programs were key in driving sales and reducing

shrink levels during the quarter, which had a favorable impact on the Company’s gross profit rate.

The distribution center productivity level, measured in units processed per labor hour (―UPH‖), was 20% lower in the fourth quarter of

Fiscal 2005 versus the fourth quarter of Fiscal 2004. The UPH rate decrease resulted from increases in inventory and from a change in

the way the Company flowed merchandise to its stores. Merchandise was routed to the stores in a more gradual process in order to avoid stockroom congestion at the stores. This resulted in the distribution center approaching capacity levels, which in turn resulted in

lower productivity rate due to the increased inventory handling. Although the Company expects the UPH level to continue to decrease

in the near term, it is building a second distribution center at the Company’s New Albany campus to address capacity issues and support future store growth. The second distribution center, which is currently under construction, is expected to be fully functional in

late Fiscal 2006.

Marketing, General and Administrative Expense

Marketing, general and administrative expense during the fourth quarter of Fiscal 2005 was $80.8 million compared to $66.1 million

during the same period in Fiscal 2004. For the fourth quarter of Fiscal 2005, the marketing, general and administrative expense rate

(marketing, general and administrative expense divided by net sales) was 8.4% compared to 9.6% in the fourth quarter of Fiscal 2004. The decrease in the marketing, general and administrative expense rate was due to the Company’s ability to leverage home office

payroll, a reduction in sample expenses and marketing expenses due to timing of photo shoots, offset by increases in outside services

mostly due to legal costs.

Other Operating Income, Net

Fourth quarter other operating income for Fiscal 2005 was $2.3 million compared to $4.3 million for the fourth quarter of Fiscal 2004.

The decrease was related to the amount of the gift card liability recognized as other income for gift cards for which the Company has determined the likelihood of redemption to be remote.

Operating Income

Operating income during the fourth quarter of Fiscal 2005 increased to $267.5 million from $170.2 million in Fiscal 2004, an increase

of 57.2%. The operating income rate (operating income divided by net sales) for the fourth quarter of Fiscal 2005 was 27.8%

compared to 24.8% for the fourth quarter of Fiscal 2004.

Interest Income and Income Taxes

Fourth quarter net interest income was $2.4 million in Fiscal 2005 compared to $1.3 million during the comparable period in Fiscal

2004. The increase in net interest income was due to higher rates on investments, partially offset by lower average investment balances during the fourth quarter of Fiscal 2005 when compared to the same period in Fiscal 2004. The Company continued to invest

in investment grade municipal notes and bonds and investment grade auction rate securities. The effective tax rate for the fourth

quarter of Fiscal 2005 was 39.0% compared to 39.2% for the Fiscal 2004 comparable period.

Net Income and Net Income per Share

Net income for the fourth quarter of Fiscal 2005 was $164.6 million versus $104.3 million for the fourth quarter of Fiscal 2004, an

increase of 57.8%. Net income per fully-diluted weighted-average share outstanding for the fourth quarter of Fiscal 2005 was $1.80 versus $1.15 for the same period last year, an increase of 56.5%.

FISCAL 2005 RESULTS

Net Sales

Net sales for Fiscal 2005 were $2.785 billion, an increase of 37.8% versus Fiscal 2004 net sales of $2.021 billion. The net sales

increase was attributable to an increase in comparable stores sales of 26% for the year, the net addition of 63 stores during Fiscal 2005

and a $13.9 million increase in net sales (including shipping and handling revenue) for the direct-to-consumer business.

For the fiscal year, comparable store sales by brand were as follows: Abercrombie & Fitch increased 18%; Abercrombie increased

54%; Hollister increased 29%. In addition, the women’s, girls’ and bettys’ businesses continued to be more significant than the men’s,

boys’ and dudes’. During Fiscal 2005, women, girls and bettys represented over 60% of the net sales for each of their corresponding brands. Abercrombie girls achieved a mid-sixties increase, Hollister bettys achieved a low-thirties increase and Abercrombie & Fitch

women had a high-teens increase.



Direct-to-consumer merchandise net sales in Fiscal 2005 were $122.5 million, an increase of 10.8% versus last year’s net sales of

$110.6 million for the comparable period. Shipping and handling revenue was $17.6 million in Fiscal 2005 and $15.7 million in Fiscal 2004. The direct-to-consumer business, including shipping and handling revenue, accounted for 5.0% of net sales in Fiscal 2005

compared to 6.2% of net sales in Fiscal 2004. The decrease in sales penetration during Fiscal 2005 was due to the implementation of

brand protection initiatives throughout the year that reduced the amount of sale merchandise available on the web sites and limited the customer’s ability to purchase large quantities of the same item.

Gross Profit

For Fiscal 2005, gross profit increased to $1.851 billion from $1.341 billion in Fiscal 2004. The gross profit rate for Fiscal 2005 was 66.5% versus 66.4% the previous year. The gross profit rate increase of 10 basis points reflects higher initial markup and a reduction

in shrink, partially offset by a slightly higher markdown rate than last year.


Stores and distribution expense for Fiscal 2005 was $1.001 billion compared to $738.2 million for Fiscal 2004. For Fiscal 2005, the

stores and distribution expense rate was 35.9% compared to 36.5% in the previous year. Stores and distribution expense was as

follows:

Fifty-Two Weeks Ended












Total Stores and Distribution Expense $ 1,000.8 35.9 % $ 738.2 36.5 %



The Company’s total store expense, as a percent of net sales, during Fiscal 2005 decreased 30 basis points versus Fiscal 2004 as a

result of the Company’s ability to leverage fixed costs, due to significant comparable store sales increases, partially offset by increased

store payroll and store management expense.

The distribution center’s UPH rate for the year was 7% lower in Fiscal 2005 versus Fiscal 2004. The UPH rate decrease resulted from

increases in inventory and from a change in the way the Company flowed merchandise to its stores. Merchandise was routed to the

stores in a more gradual process in order to avoid stockroom congestion at the stores. This resulted in the distribution center

approaching capacity levels, which in turn resulted in lower productivity rate due to the increased inventory handling. Although the

Company expects the UPH level to continue to decrease in the near term, it is building a second distribution center at the Company’s

New Albany campus to address capacity issues and support future store growth. The second distribution center, which is currently under construction, is expected to be fully functional in late Fiscal 2006.


Marketing, general and administrative expense during Fiscal 2005 was $313.5 million compared to $259.8 million in Fiscal 2004. For the current year, the marketing, general and administrative expense rate was 11.3% compared to 12.9% in Fiscal 2004. The decrease

in the marketing, general and administrative expense rate was due to a non-recurring charge of $40.9 million in Fiscal 2004 related to

a legal settlement and leverage in the home office payroll expense, offset by a non-recurring charge of $13.5 million in Fiscal 2005 related to a severance agreement of an executive officer and legal costs.




Other operating income for Fiscal 2005 was $5.5 million compared to $4.5 million for Fiscal 2004. The increase in other operating income was related to the favorable settlement of a class action lawsuit related to credit card fees in which the Company was a class

member and lease buyout payments from landlords, partially offset by a lower amount of gift card liability recognized as other income

for gift cards for which the Company has determined the likelihood of redemption to be remote.

Operating Income

Fiscal 2005 operating income was $542.7 million compared to $347.6 million for Fiscal 2004, an increase of 56.1%. The operating

income rate for Fiscal 2005 was 19.5% versus 17.2% in the previous year.


Net interest income for Fiscal 2005 was $6.7 million compared to $5.2 million for the previous year. The increase in net interest

income was due to the Company receiving higher rates on its investments, partially offset by lower average investment balances during Fiscal 2005 when compared to Fiscal 2004. The effective tax rate for Fiscal 2005 was 39.2% compared to 38.7% for Fiscal

2004. The increase in the annual effective tax rate was due to the Company’s change of estimates in the potential outcomes and

favorable settlements of certain state tax matters in Fiscal 2005.


Net income for Fiscal 2005 was $334.0 million versus $216.4 million in Fiscal 2004, an increase of 54.3%. Net income included after-

tax non-recurring charges of $8.2 million in Fiscal 2005 related to a severance agreement of an executive officer and $25.6 million in Fiscal 2004 related to a legal settlement. Net income per fully-diluted weighted-average share was $3.66 in Fiscal 2005 versus $2.28

in Fiscal 2004, an increase of 60.5%. The percentage increase in net income per fully-diluted shares outstanding was greater than the

percentage increase in net income due to the impact of the Company’s share repurchase program. In Fiscal 2005, the Company repurchased 1.8 million shares.

FISCAL 2004 COMPARED TO FISCAL 2003

FOURTH QUARTER 2004

Net Sales

Net sales for the fourth quarter of Fiscal 2004 were $687.3 million, a 22.6% increase versus Fiscal 2003 fourth quarter net sales of

$560.4 million. The net sales increase was attributable to the net addition of 88 stores during Fiscal 2004, a comparable store sales increase of 9% for the quarter and an increase of $11.1 million in net sales (including shipping and handling revenue) for the direct-to-

consumer business versus the comparable period in Fiscal 2003.

By merchandise brand, comparable store sales for the quarter were as follows: Abercrombie & Fitch increased 4% with men’s

comparable store sales increasing by a high-single digit percentage and women’s increasing by a low single-digit percentage.

Abercrombie, the kids’ business, achieved a 16% increase in comparable store sales with girls attaining a high-teen increase and boys increasing by a low double-digit percentage. In Hollister, comparable store sales increased by 19% for the fourth quarter with bettys

realizing an increase in the low-twenties and dudes posting a high-teens increase.

On a regional basis, comparable store sales results across all three brands were strongest in the Northeast and in the West and weakest in the Midwest. However, all regions reported positive comparable store sales for the quarter.

The Company committed to a strategy that included fewer promotions in early Fiscal 2004, and maintained this strategy throughout

the fiscal year. As such, the Company did not anniversary the direct mail promotions used during the fourth quarter of Fiscal 2003 to drive business between Thanksgiving and Christmas.

In Abercrombie & Fitch, the men’s comparable store sales increase for the quarter was driven by strong performances in graphic tees,

jeans, and woven shirts. Women’s comparable store sales growth was driven by an increase in polos, jeans and fleece, offset by a decrease in sweaters.

In the Abercrombie business, for the quarter, girls had comparable store sales increases across most of the categories, especially polos,

jeans and graphic tees. Boys’ comparable store sales increases were driven by graphic tees, jeans and fleece.

In Hollister, bettys achieved a slightly higher comparable store sales increase than dudes. In bettys, polos, jeans and fleece had strong

comparable store sales increases. The increase in the dudes’ comparable store sales was the result of a strong performance in graphic

tees, jeans and woven shirts categories for the quarter.

Direct-to-consumer merchandise net sales through the Company’s web sites and catalogue for the fourth quarter of Fiscal 2004 were

$40.1 million, an increase of 29.4% versus Fiscal 2003 fourth quarter net sales of $31.0 million. Shipping and handling revenue for the

corresponding periods was $5.5 million in Fiscal 2004 and $3.5 million in Fiscal 2003. The direct-to-consumer business, including shipping and handling revenue, accounted for 6.6% of net sales in the fourth quarter of Fiscal 2004 compared to 6.2% in the fourth

quarter of Fiscal 2003.

Gross Profit



Gross profit for the fourth quarter of Fiscal 2004 was $455.8 million compared to $355.4 million in the corresponding period in Fiscal

2003. The gross profit rate for the fourth quarter of Fiscal 2004 was 66.3%, up 290 basis points from the Fiscal 2003 rate of 63.4%. The increase in gross profit rate resulted largely from lower markdowns and an increase in IMU during the fourth quarter of Fiscal

2004 versus the fourth quarter of Fiscal 2003, partially offset by the lower margin of RUEHL. The improvement in IMU during the

fourth quarter was a result of higher average unit retail pricing in Abercrombie & Fitch, Abercrombie and Hollister. The three brands had IMU improvements compared to the fourth quarter of Fiscal 2003 and operated at similar margins.

The Company ended the fourth quarter of Fiscal 2004 with inventories, at cost, up 11% per gross square foot versus the fourth quarter

of Fiscal 2003. The inventory increase reflected a planned acceleration of Spring and jeans merchandise deliveries.


Stores and distribution expense for the fourth quarter of Fiscal 2004 was $223.8 million compared to $164.0 million for the

comparable period in Fiscal 2003. For the fourth quarter of Fiscal 2004, the stores and distribution expense rate was 32.6% compared to 29.3% in the fourth quarter of Fiscal 2003. Stores and distribution expense was as follows:
















The Company’s total store expense for the fourth quarter of Fiscal 2004, as a percent of net sales, increased versus the comparable

period during Fiscal 2003 as a result of the Company beginning to implement its store investment program during this period, offset by leverage of rent, utilities and other landlord expense as a result of the increase in comparable store sales. In the fourth quarter of

Fiscal 2004, the distribution center’s UPH increased 10% over Fiscal 2003 fourth quarter results.


Marketing, general and administrative expense during the fourth quarter of Fiscal 2004 was $66.1 million compared to $37.1 million

during the same period in Fiscal 2003. For the fourth quarter of Fiscal 2004, the marketing, general and administrative expense rate was 9.6% compared to 6.6% in the fourth quarter of Fiscal 2003. The increase in the marketing, general and administrative expense

rate was due to higher home office payroll expense as a result of additional headcount in the home office, incentive compensation and

legal expense.


Fourth quarter other operating income for Fiscal 2004 was $4.3 million compared to $459,000 for the fourth quarter of Fiscal 2003.

The increase was related to the amount of gift card liability recognized as other income for gift cards for which the Company has determined the likelihood of redemption to be remote.

Operating Income

Operating income for the fourth quarter of Fiscal 2004 increased to $170.2 million from $154.8 million in Fiscal 2003. The operating income rate was 24.8% for the fourth quarter of Fiscal 2004 compared to 27.6% for the fourth quarter of Fiscal 2003.




Fourth quarter net interest income for Fiscal 2004 was $1.3 million compared with net interest income of $1.1 million for the

comparable period in Fiscal 2003. The increase in net interest income was due to higher rates during the fourth quarter of Fiscal 2004 when compared to the same period in Fiscal 2003. The Company continued to invest in tax-free securities for the majority of the

quarter and then changed its investing strategy to taxable money market investments. The effective tax rate for the fourth quarter was

39.2% compared to 39.3% for the Fiscal 2003 comparable period.


Net income for the fourth quarter of Fiscal 2004 was $104.3 million versus $94.6 million for the same period in Fiscal 2003, an

increase of 10.3%. Net income per fully-diluted weighted-average share outstanding for the fourth quarter of Fiscal 2004 was $1.15 versus $0.97 for the fourth quarter of Fiscal 2003, an increase of 18.6%. The percentage increase in net income per fully-diluted shares

outstanding was greater than the percentage increase in net income due to the Company’s share repurchase program. In the fourth

quarter of Fiscal 2004 the Company had fully-diluted weighted-average shares outstanding of 90.8 million versus 97.8 million in the fourth quarter of Fiscal 2003.

FISCAL 2004

Net Sales

Net sales for Fiscal 2004 reached $2.021 billion, an increase of 18.3% versus Fiscal 2003 net sales of $1.708 billion. The net sales

increase was attributable to the net addition of 88 stores during Fiscal 2004, an increase in comparable store sales of 2% for the year

and an increase in the direct-to-consumer business net sales (including shipping and handling revenue) of $35.6 million versus Fiscal 2003.

For the fiscal year, comparable store sales by brand were as follows: Abercrombie & Fitch declined 1%; Abercrombie increased 1%;

Hollister increased 13%. The women’s, girls’ and bettys’ businesses in each brand continued to be more significant than the men’s, boys’ and dudes’. During Fiscal 2004, women, bettys and girls represented over 60% of the net sales for each of the brands. Hollister

bettys achieved a mid-teens increase and Abercrombie girls posted a mid-single digit increase in comparable store sales for Fiscal

2004, while Abercrombie & Fitch women had a low-single digit decrease.

Direct-to-consumer merchandise net sales through the Company’s web sites and catalogue for Fiscal 2004 were $110.6 million, an

increase of 37.6% versus net sales of $80.4 million in Fiscal 2003. The Company added a Hollister direct-to-consumer business during

the 2003 Back-to-School selling season. Shipping and handling revenue for the corresponding periods was $15.7 million in Fiscal 2004 and $10.2 million in Fiscal 2003. The direct-to-consumer business, including shipping and handling revenue, accounted for 6.2%

of net sales compared to 5.3% for Fiscal 2004 and Fiscal 2003, respectively.

Gross Profit

For Fiscal 2004, gross profit increased to $1.341 billion from $1.083 billion in Fiscal 2003. The gross profit rate in Fiscal 2004 was

66.4% versus 63.4% in Fiscal 2003. The increase was driven by improvements in IMU across Abercrombie & Fitch, Abercrombie and Hollister due to higher average unit retail pricing, especially in Abercrombie & Fitch.


Stores and distribution expense for Fiscal 2004 was $738.2 million compared to $597.4 million for Fiscal 2003. For Fiscal 2004, the stores and distribution expense rate was 36.5% compared to 35.0% in Fiscal 2003. Stores and distribution expense was as follows:

Fifty-Two Weeks Ended

















The Company’s total store expense for Fiscal 2004, as a percent of net sales, increased versus Fiscal 2003 as a result of the Company

beginning to implement its store investment program during the fourth quarter of Fiscal 2004, offset by leverage of rent, utilities and other landlord expense as a result of the increase in comparable store sales. In Fiscal 2004, the distribution center’s UPH increased

10% over the Fiscal 2003 results.


Marketing, general and administrative expense during Fiscal 2004 was $259.8 million compared to $155.6 million during Fiscal 2003.

For Fiscal 2004, the marketing, general and administrative expense rate was 12.9% compared to 9.1% in Fiscal 2003. The increase in

the marketing, general and administrative expense rate was due to a non-recurring charge of $40.9 million in Fiscal 2004, which represented 0.9% of net sales, related to a legal settlement and higher incentive compensation accruals resulting from the improved

financial performance during the fiscal year.


Other operating income for Fiscal 2004 was $4.5 million compared to $979,000 for Fiscal 2003. The increase was related to the

amount of the gift card liability recognized as other income for gift cards for which the Company has determined the likelihood of

redemption to be remote.

Operating Income

For Fiscal 2004, operating income was $347.6 million compared to $331.2 million for Fiscal 2003. The operating income rate for

Fiscal 2004 was 17.2% versus 19.4% in Fiscal 2003.


Net interest income for Fiscal 2004 was $5.2 million compared to $3.7 million in Fiscal 2003. The increase in net interest income was

due to an increase in interest rates and average cash balances for Fiscal 2004 when compared to Fiscal 2003. Beginning in January 2005, the Company began investing in taxable money market investments; prior thereto, the Company invested in tax-free

securities. The effective tax rate for Fiscal 2004 was 38.7% compared to 38.8% for Fiscal 2003.


Net income for Fiscal 2004 was $216.4 million versus $204.8 million for Fiscal 2003, an increase of 5.7%. Net income for Fiscal 2004

included the after-tax impact of the legal settlement of $25.6 million. Net income per fully-diluted weighted-average diluted share was $2.28 in Fiscal 2004 versus $2.06 in Fiscal 2003, an increase of 10.7%. The percentage increase in net income per fully-diluted share

was greater than the percentage increase in net income due to the Company’s repurchase program in Fiscal 2004. The Company

repurchased 11.2 million shares in Fiscal 2004.

FINANCIAL CONDITION

Continued growth in net income resulted in higher cash provided by operating activities. A more detailed discussion of liquidity,

capital resources and capital requirements follows.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes cash provided by operating activities and cash on hand will continue to provide adequate resources to support

operations, including projected growth, seasonal requirements and capital expenditures. Furthermore, the Company expects that cash from operating activities will fund dividends currently being paid at a rate of $0.175 per share per quarter. The Board of Directors will

review the Company’s cash position and results of operations and approve the appropriateness of future dividend amounts.

A summary of the Company’s working capital (current assets less current liabilities) position and capitalization for the last three fiscal years follows (thousands):

2005 2004 2003

Working capital $ 455,530 $ 241,572 $ 466,970

Capitalization:

Shareholders’ equity $ 995,117 $ 669,326 $ 857,765



The increase in working capital in Fiscal 2005 versus Fiscal 2004 was the result of higher cash and marketable securities resulting

primarily from the Company’s net sales increase and the increase in inventory, partially offset by an increase in income taxes payable. The decrease in working capital in Fiscal 2004 versus Fiscal 2003 was the result of lower cash and marketable securities resulting

primarily from the Company’s repurchase of 11.2 million shares of common stock at a cost of $434.7 million.

The Company considers the following to be measures of its liquidity and capital resources for the last three fiscal years:

2005 2004 2003

Current ratio

(current assets divided by current liabilities) 1.93 1.56 2.63

Net cash provided by operating activities (in thousand) $ 453,590 $ 423,784 $ 340,814

Operating Activities

Net cash provided by operating activities, the Company’s primary source of liquidity, increased to $453.6 million for Fiscal 2005 from

$423.8 million in Fiscal 2004 primarily due to increases in net income, income taxes payable and tax benefit of stock option exercises, partially offset by an increase in inventory and a decrease in accounts payable and accrued expenses. The increase in net income and

income taxes payable was a result of the net sales growth during Fiscal 2005. The increase in tax benefit of stock option exercises was the result of approximately 3.3 million stock options exercised during Fiscal 2005. The Company ended Fiscal 2005 with higher

inventory levels in key product categories to ensure size, color and style integrity. The decrease in accounts payable and accrued

expenses was due to payment of a legal settlement in Fiscal 2005 that was settled and accrued for in Fiscal 2004.

The increase in cash provided by operating activities in Fiscal 2004 compared to Fiscal 2003 was primarily driven by an increase in

accounts payable and accrued expenses. The increase in accrued expenses was primarily due to the accrual for the settlement of three

related class action employment discrimination lawsuits and the increase in accounts payable was due to the purchase of inventory. Inventories increased from the net addition of 103 stores representing an increase of 658,000 gross square feet in Fiscal 2003.

Inventories at fiscal year-end were 3% higher on a per gross square foot basis than at the end of the 2002 fiscal year.

The Company’s operations are seasonal in nature and typically peak during the Back-to-School and Holiday selling periods. Accordingly, cash requirements for inventory expenditures are highest in the second and third fiscal quarters as the Company builds

inventory in anticipation of these selling periods.

Investing Activities

Cash outflows for Fiscal 2005 and Fiscal 2003 were primarily for purchases of marketable securities and capital expenditures. Cash

inflows for Fiscal 2004 were primarily the result of proceeds from sales of marketable securities, offset by capital expenditures. See

―Capital Expenditures and Lessor Construction Allowances‖ for additional information. As of January 28, 2006, the Company held $411.2 million of marketable securities with original maturities of greater than 90 days; as of January 29, 2005, all investments had

original maturities of less than 90 days and accordingly were classified as cash equivalents. As of January 31, 2004, the Company held

$464.7 million of marketable securities with original maturities of greater than 90 days.

Financing Activities

Cash outflows related to financing activities consisted primarily of the repurchase of the Company’s Class A Common Stock in Fiscal

2005, Fiscal 2004 and Fiscal 2003 and the payment of dividends in Fiscal 2005 and Fiscal 2004. Cash inflows consisted of stock option exercises, restricted stock issuances and the change in overdrafts. The overdrafts are outstanding checks reclassified from cash

to accounts payable.

The Company repurchased 1,765,000 shares, 11,150,500 shares and 4,401,000 shares of its Class A Common Stock pursuant to previously authorized stock repurchase programs in Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. As of January 28, 2006,

the Company had 5,683,500 shares remaining available to repurchase under the 6,000,000 shares authorized by the Board of Directors

in August 2005.

Effective December 15, 2004, the Company entered into an amended and restated $250 million syndicated unsecured credit agreement

(the ―Amended Credit Agreement‖). The Amended Credit Agreement will expire on December 15, 2009. The primary purpose of the

Amended Credit Agreement is to support letters of credit (trade and standby) and finance 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 LIBO rate. The facility fees payable under the Amended Credit Agreement are based on the Company’s

leverage ratio of the sum of total debt plus 600% of forward minimum rent commitments to consolidated EBITDAR for the trailing four-fiscal-quarter period. The facility fees are projected to accrue between 0.15% and 0.175% on the committed amounts per annum.

Letters of credit totaling approximately $45.1 million and $49.6 million were outstanding under the Amended Credit Agreement at

January 28, 2006 and January 29, 2005, respectively. No borrowings were outstanding under the Amended Credit Agreement at January 28, 2006 or January 29, 2005.



The Company has standby letters of credit in the amount of $4.5 million that are set to expire during the fourth quarter of Fiscal 2006.

The beneficiary, a merchandise supplier, has the right to draw upon the standby letters of credit if the Company authorizes or files a voluntary petition in bankruptcy. To date, the beneficiary has not drawn upon the standby letters of credit.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements or debt obligations.

CONTRACTUAL OBLIGATIONS

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

Payments due by period (thousands)

Less than More than

Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years

Operating Leases Obligations $ 1,417,827 $ 187,674 $ 365,992 $ 325,526 $ 538,635

Purchase Obligations $ 303,683 303,683 — — —

Other Obligations $ 49,739 48,185 1,554 — —

Totals $ 1,771,249 $ 539,542 $ 367,546 $ 325,526 $ 538,635

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). 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 for Fiscal

2005 was $96.5 million. The purchase obligations category represents purchase orders for merchandise to be delivered during Spring 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 January 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.

STORES AND GROSS SQUARE FEET

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

respectively:

Store Activity Abercrombie & Fitch Abercrombie Hollister RUEHL Total

October 30, 2005 354 163 297 6 820

New 6 2 17 2 27

Remodels/Conversions (net activity) 1 — 4 — 5

Closed — (1 ) — — (1 )

January 28, 2006 361 164 318 8 851

Gross Square Feet (thousands)

October 30, 2005 3,077 713 1,941 58 5,789

New 76 8 112 11 207

Remodels/Conversions (net activity) 4 — 30 — 34

Closed — (5 ) — — (5 )

January 28, 2006 3,157 716 2,083 69 6,025

Average Store Size 8,745 4,366 6,550 8,625 7,080


October 31, 2004 363 174 224 3 764



New 5 4 32 1 42

Closed (11 ) (7 ) — — (18 )

January 29, 2005 357 171 256 4 788


October 31, 2004 3,191 767 1,452 28 5,438

New 31 16 211 9 267

Closed (84 ) (31 ) — — (115 )

January 29, 2005 3,138 752 1,663 37 5,590


Store count and gross square footage by brand were as follows for the fifty-two weeks ended January 28, 2006 and January 29, 2005,

respectively:


January 30, 2005 357 171 256 4 788

New 15 5 57 4 81

Remodels/Conversions (net activity) (1 ) (1 ) 6 — 4

Closed (10 )1 (11 ) (1 )1 — (22 )

January 28, 2006 361 164 318 8 851


January 30, 2005 3,138 752 1,663 37 5,590

New 146 20 389 32 587

Remodels/Conversions (net activity) (46 ) (4 ) 38 — (12 )

Closed (81 )1 (52 ) (7 )1 — (140 )

January 28, 2006 3,157 716 2,083 69 6,025


1 Includes one Abercrombie & Fitch and one Hollister store temporarily closed due to hurricane damage.


February 1, 2004 357 171 172 — 700

New 16 9 84 4 113

Closed (16 ) (9 ) — — (25 )

January 29, 2005 357 171 256 4 788


February 1, 2004 3,152 753 1,111 — 5,016

New 105 37 552 37 731

Closed (119 ) (38 ) — — (157 )



January 29, 2005 3,138 752 1,663 37 5,590


CAPITAL EXPENDITURES AND LESSOR CONSTRUCTION ALLOWANCES

Capital expenditures totaled $256.4 million, $185.1 million and $159.8 million for Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.

In Fiscal 2005, $204.7 million was used for store related projects, including new store construction, remodels, conversions and other

projects. The remaining $51.7 million was used for projects at the home office, including home office expansion, information technology investments, distribution center improvements and other projects.

In Fiscal 2004, $169.7 million was used for store related projects, including new store construction, remodels, conversions and other

projects. The remaining $15.4 million was used for projects at the home office, including home office improvements, information technology investments, distribution center improvements and other projects.

In Fiscal 2003, $124.8 million was used for store related projects, including new store construction, remodels and other projects. The

remaining $35.0 million was used for projects at the home office, including home office improvements, information technology investments, distribution center improvements and other projects.

Lessor construction allowances are an integral part of the decision making process for assessing the viability of new store leases. In

making the decision whether to invest in a store location, the Company calculates the estimated future return on its investment based on the cost of construction, less any construction allowances to be received from the landlord. The Company received $42.3 million,

$55.0 million and $60.6 million in construction allowances during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. For

accounting purposes, the Company treats construction allowances as a deferred lease credit which is amortized to reduce rent expense on a straight-line basis over the life of the leases in accordance with Statement of Financial Accounting Standards No.13,

―Accounting for Leases‖ and Financial Accounting Standards Board Technical Bulletin No. 88-1, ―Issues Relating to Accounting for

Leases.‖

The Company anticipates spending $400 million to $420 million in Fiscal 2006 for capital expenditures, including $205 million to

$210 million for the construction of approximately 100 to 110 new stores and the remodeling of 10 to 20 existing stores; $100 million

to $105 million to build a second distribution center and an additional building on the home office campus; $40 million to $45 million for upgrades to its information technology infrastructure and other home office and distribution center projects; and $55 million to

$60 million for various store projects that the Company believes are necessary to enhance the customer’s in-store experience, which is the centerpiece of the Company’s marketing strategy. The Company believes periodic investments in the in-store experience are

necessary to maintain the long-term positioning of the brands.

The Company intends to add approximately 700,000 to 750,000 gross square feet of stores during Fiscal 2006, which will represent an increase of approximately 10% to 12% over Fiscal 2005. Management anticipates the increase during Fiscal 2006 will be primarily

due to the addition of approximately 60 to 70 new Hollister stores, 15 to 20 Abercrombie stores, five to ten Abercrombie & Fitch

stores and five to eight RUEHL stores. Additionally, the Company plans to remodel five to 15 Abercrombie & Fitch stores, including the opening of the flagship store in the Grove at Farmer’s Market in Los Angeles in the summer of 2006 and to convert a total of four

Abercrombie & Fitch stores to Hollister stores.

In Fiscal 2006, the Company expects the average construction cost per square foot, net of construction allowances, for new Hollister stores to increase from last year’s actual of approximately $114 to approximately $130. The Company expects the average

construction cost per square foot, net of construction allowances, for new Abercrombie stores to increase from last year’s actual of

approximately $154 to approximately $169. The change from last year’s estimates for Hollister and Abercrombie were driven by a number of factors, including store location, construction material pricing, landlord allowance levels, and furniture and fixture

additions. In addition, varying allowance levels for the small number of Abercrombie stores added in Fiscal 2005 prevent a

meaningful comparison with Fiscal 2006 expected costs. Due to variances in landlord allowances and other characteristics unique to the three new Abercrombie & Fitch locations currently identified for Fiscal 2006, the construction costs, net of construction

allowances, of these stores are also higher than last year’s actual per store costs. The Company believes that the construction costs of

the three identified Abercrombie & Fitch stores are not representative of the costs the Company expects to incur for the remaining Abercrombie & Fitch stores planned in Fiscal 2006. The Company expects initial inventory purchases for the stores to average

approximately $371,000, $148,000 and $243,000 per store for Abercrombie & Fitch, Abercrombie and Hollister, respectively.

The Company expects that substantially all future capital expenditures will be funded with cash from operations. In addition, the Company has $250 million available (less outstanding letters of credit) under its Amended Credit Agreement to support operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States

(―GAAP‖). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the

reported amounts of assets, liabilities, revenues and expenses. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.



The Company’s significant accounting policies can be found in the Notes to Consolidated Financial Statements (see Note 2 of the

Notes to Consolidated Financial Statements). The Company believes that the following policies are most critical to the portrayal of the Company’s financial condition and results of operations.

Revenue Recognition — The Company recognizes retail sales at the time the customer takes possession of the merchandise and

purchases are paid for, primarily with either cash or credit card. Catalogue and e-commerce sales are recorded upon customer receipt of merchandise. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as revenue and the

related direct shipping costs are classified as stores and distribution expense. Employee discounts are classified as a reduction of

revenue. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable. The Company’s gift cards do not expire or lose value over periods of inactivity. The Company

accounts for gift cards by recognizing a liability at the time a gift card is sold. The liability remains on the Company’s books until the

earlier of redemption (recognized as revenue) or when the Company determines the likelihood of redemption is remote (recognized as other operating income). The Company considers the probability of the gift card being redeemed to be remote for 50% of the balance

of gift cards at 24 months after the date of issuance and remote for the remaining balance at 36 months after the date of issuance and at

that time recognizes the remaining balance as other operating income. At January 28, 2006 and January 29, 2005, the gift card liability on the Company’s Consolidated Balance Sheet was $53.2 million and $41.7 million, respectively.

The Company is not required by law to escheat the value of unredeemed gift cards to the states in which it operates. During Fiscal

2005 and Fiscal 2004, the Company recognized other operating income for adjustments to the gift card liability of $2.4 million and $4.3 million, respectively. No income for adjustments to the gift card liability was recognized during Fiscal 2003.

Inventory Valuation — Inventories are principally valued at the lower of average cost or market utilizing the retail method. The retail

method of inventory valuation is an averaging technique applied to different categories of inventory. At the Company, the averaging is determined at the stock keeping unit (―SKU‖) level by averaging all costs for each SKU. 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 use of the retail method and the recording of markdowns effectively values inventory at the lower of cost or market. At the end of the first and third fiscal quarters, the Company

reduces inventory value by recording a markdown reserve that represents the estimated future anticipated selling price decreases

necessary to sell-through the current season inventory.

Additionally, as part of inventory valuation, an inventory shrinkage estimate is made each period that reduces the value of inventory

for lost or stolen items. The Company performs physical inventories throughout the year and adjusts the shrink reserve accordingly. Inherent in the retail method calculation are certain significant judgments and estimates including, among others, IMU, markdowns

and shrinkage, which could significantly impact the ending inventory valuation at cost as well as the resulting gross margins.

Management believes that this inventory valuation method is appropriate since it preserves the cost-to-retail relationship in ending inventory.

Property and Equipment — Depreciation and amortization of property and equipment are computed for financial reporting purposes

on a straight-line basis, using service lives ranging principally from 30 years for buildings, the lesser of 10 years or the life of the lease for leasehold improvements and 3 to 10 years for other property and equipment. The cost of assets sold or retired and the related

accumulated depreciation or amortizations are removed from the accounts with any resulting gain or loss included in net income.

Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend service lives of the assets are capitalized. Long-lived assets are reviewed at the store level at least annually for impairment or whenever events or changes in

circumstances indicate that full recoverability is questionable. Factors used in the evaluation include, but are not limited to,

management’s plans for future operations, recent results of operations and projected cash flows.

Income Taxes — Income taxes are calculated in accordance with SFAS No. 109, ―Accounting for Income Taxes,‖ which requires the

use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial

statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Inherent

in the measurement of deferred balances are certain judgments and interpretations of enacted tax law and published guidance with

respect to applicability to the Company’s operations. No valuation allowance has been provided for deferred tax assets because management believes the full amount of the net deferred tax assets will be realized in the future. The effective tax rate utilized by the

Company reflects management’s judgment of the expected tax liabilities within the various taxing jurisdictions.

Contingencies — In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities, which requires the use of management’s judgment on the outcome of various issues. Management may also use outside

legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than

management estimates, and adjustments may be required.

Equity Compensation Expense — The Company reports stock-based compensation through the disclosure-only requirements of SFAS

No. 123, ―Accounting for Stock-Based Compensation,‖ as amended by SFAS No. 148, ―Accounting for Stock-Based Compensation–

Transition and Disclosure–an Amendment of FASB Statement No. 123,‖ but elects to measure compensation expense using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, ―Accounting for Stock Issued to

Employees.‖

Accordingly, no compensation expense for options has been recognized because all options are granted at fair market value on the grant date. The Company recognizes compensation expense related to restricted stock unit awards to associates and non-associate

directors.

For the disclosure requirement of SFAS No. 123, the Company’s equity compensation expense related to stock options is estimated using the Black-Scholes option-pricing model to determine the fair value of the stock option grants, which requires the Company to

estimate the expected term of the stock option grants and expected future stock price volatility over the term. The Company uses the



vesting period of the stock option as a proxy for the term of the option. 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 dividends and stock splits.

The fair market value calculation under the Black-Scholes valuation model is particularly sensitive to changes in the term and volatility assumptions. Increases in term or volatility will result in a higher fair market valuation of stock option grants. Assuming all

other assumptions disclosed in Note 2 of the Notes to the Consolidated Financial Statements, ―Summary of Significant Accounting

Policies — Stock Based Compensation,‖ being equal, a 10% increase in term will yield a 4% increase in the Black-Scholes valuation, while a 10% increase in volatility will yield a 8% increase in the Black-Scholes valuation. The Company believes that changes in term

and volatility will not have a material effect on the Company’s results since the number of stock options granted during the period was

not material.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (―FASB‖) issued SFAS No. 123(R). This standard is a revision of

SFAS No. 123 and requires all share-based payments to employees, including grants of employee stock options and similar awards, to be recognized in the financial statements based on their fair values measured at the grant date.

In April 2005, the SEC delayed the effective date of SFAS No. 123(R) to annual periods beginning after June 15, 2005 for public

companies. Based on stock options previously issued, but not fully vested, and stock options to be granted during Fiscal 2006, the

Company expects that the implementation of SFAS No. 123(R) will result in a charge of approximately $0.10 per fully-diluted share

for Fiscal 2006.

Effective January 28, 2006, the Company adopted FASB Interpretation No. 47 (―FIN 47‖,) ―Conditional Asset Retirement Obligations,‖ which clarifies that the term ―conditional asset retirement obligation‖ as used in FASB Statement No. 143,

―Accounting for Asset Retirement Obligations ‖, refers to a legal obligation to perform an asset retirement activity in which the timing

and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The adoption of FIN 47 did not have any effect on the Company’s results of operations or its financial position.

IMPACT OF INFLATION

The Company’s results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes that the effects of

inflation, if any, on its results of operations and financial condition have been minor.


The Company maintains its cash equivalents in financial instruments with original maturities of 90 days or less. The Company also

holds investments in marketable securities, which consist primarily of investment grade municipal notes and bonds and investment grade auction rate securities, all classified as available-for-sale and could have maturities ranging from three months to forty years.

These securities are consistent with the investment objectives contained within the investment policy established by the Company’s

Board of Directors. The basic objectives of the investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing net after-tax yield.

Investments in municipal notes and bonds have early redemption provisions at predetermined prices. Taking these provisions into

account none of these investments extend beyond five years. The Company believes that a significant increase in interest rates could result in a material loss if the Company sells the investment prior to the early redemption provision. For Fiscal 2005, there were no

realized gains or losses, and as of January 28, 2006, net unrealized holding losses were $718,000.

Despite the underlying long-term maturity of auction rate securities, from the investor’s perspective, such securities are priced and subsequently traded as short-term investments because of the interest rate reset feature. Interest rates are reset through an auction

process at predetermined periods ranging from one to 49 days. Failed auctions rarely occur. As of January 28, 2006, the Company

held approximately $411.2 million in marketable securities.

The Company does not enter into financial instruments for trading purposes.

As of January 28, 2006, the Company had no long-term debt outstanding. Future borrowings would bear interest at negotiated rates

and would be subject to interest rate risk.

The Company’s market risk profile as of January 28, 2006 has not significantly changed since January 29, 2005.




ABERCROMBIE & FITCH

CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME

(Thousands except per share amounts)

2005 2004 2003

NET SALES $ 2,784,711 $ 2,021,253 $ 1,707,810

Cost of Goods Sold 933,295 680,029 624,640

GROSS PROFIT 1,851,416 1,341,224 1,083,170

Stores and Distribution Expense 1,000,755 738,244 597,416

Marketing, General & Administrative Expense 313,457 259,835 155,553

Other Operating Income, Net (5,534 ) (4,490 ) (979 )

OPERATING INCOME 542,738 347,635 331,180

Interest Income, Net (6,674 ) (5,218 ) (3,708 )

INCOME BEFORE INCOME TAXES 549,412 352,853 334,888

Provision for Income Taxes 215,426 136,477 130,058

NET INCOME $ 333,986 $ 216,376 $ 204,830

NET INCOME PER SHARE:

BASIC $ 3.83 $ 2.33 $ 2.12

FULLY DILUTED $ 3.66 $ 2.28 $ 2.06

WEIGHTED-AVERAGE SHARES OUTSTANDING:

BASIC 87,161 92,777 96,833

FULLY DILUTED 91,221 95,110 99,580

DIVIDENDS DECLARED PER SHARE $ 0.60 $ 0.50 $ —

OTHER COMPREHENSIVE INCOME



Cumulative Foreign Currency Translation Adjustments $ (78 ) — —

Unrealized Gains (Losses) on Marketable Securities (718 ) — —

Other Comprehensive Income (Loss) $ (796 ) — —

COMPREHENSIVE INCOME $ 333,190 $ 216,376 $ 204,830

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

ABERCROMBIE & FITCH


(Thousands)

January 28, January 29,

2006 2005

ASSETS

CURRENT ASSETS:

Cash and Equivalents $ 50,687 $ 338,735

Marketable Securities 411,167 —

Receivables 41,855 37,760

Inventories 362,536 211,198

Deferred Income Taxes 29,654 39,090

Other Current Assets 51,185 44,001

TOTAL CURRENT ASSETS 947,084 670,784

PROPERTY AND EQUIPMENT, NET 813,603 687,011

OTHER ASSETS 29,031 28,996

TOTAL ASSETS $ 1,789,718 $ 1,386,791

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts Payable $ 86,572 $ 83,760

Outstanding Checks 58,741 53,577

Accrued Expenses 215,034 205,153

Deferred Lease Credits 31,727 31,135

Income Taxes Payable 99,480 55,587

TOTAL CURRENT LIABILITIES 491,554 429,212

LONG TERM LIABILITIES:



Deferred Income Taxes 38,496 50,032

Deferred Lease Credits 191,225 177,923

Other Liabilities 73,326 60,298

TOTAL LONG TERM LIABILITIES 303,047 288,253

SHAREHOLDERS’ EQUITY:

Class A Common Stock — $.01 par value: 150,000,000 shares authorized and 103,300,000 shares issued at

January 28, 2006 and January 29, 2005, respectively 1,033 1,033

Paid-In Capital 161,678 140,251

Retained Earnings 1,357,791 1,076,023

Accumulated Other Comprehensive Income (796 ) —

Deferred Compensation 26,206 15,048

Treasury Stock, at Average Cost 15,573,789 and 17,262,943 shares at January 28, 2006 and January 29,

2005, respectively (550,795 ) (563,029 )

TOTAL SHAREHOLDERS’ EQUITY 995,117 669,326

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,789,718 $ 1,386,791


ABERCROMBIE & FITCH

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Thousands)

Common Stock Treasury Stock Total

Shares Paid-In Retained Deferred At Average Shareholders’

Outstanding Par Value Capital Earnings Compensation Shares Cost Equity

Balance,

February 1,

2003 97,269 $ 1,033 $ 142,577 $ 701,255 $ 6,184 6,030 $ (114,743 ) $ 736,307

Purchase of

Treasury

Stock (4,401 ) — — — — 4,401 (115,670 ) (115,670 )

Net Income — — — 204,830 — — — 204,830

Restricted Stock

Unit Issuance 149 — 83 — (5,230 ) (149 ) 2,862 (2,285 )

Restricted Stock

Unit Expense — — — 5,311 — — 5,311

Stock Option

Exercises 1,590 — (13,026 ) — — (1,590 ) 32,793 19,767

Tax Benefit from

Exercise of

Stock Options

and Issuance

of Restricted

Stock Units — — 9,505 — — — — 9,505



Balance,

January 31,

2004 94,607 $ 1,033 $ 139,139 $ 906,085 $ 6,265 8,692 $ (194,758 ) $ 857,765

Purchase of

Treasury

Stock (11,151 ) — — — — 11,151 (434,658 ) (434,658 )

Net Income — — — 216,376 — — — 216,376

Restricted Stock

Unit Issuance 24 — 108 — (1,578 ) (24 ) 542 (928 )

Restricted Stock

Unit Expense — — — — 10,361 — — 10,361

Stock Option

Exercises 2,556 (16,304 ) — — (2,556 ) 65,845 49,541

Dividends ($0.50

per share) — — — (46,438 ) — — — (46,438 )

Tax Benefit from

Exercise of

Stock Options

and Issuance

of Restricted

Stock Units — — 17,308 — — — — 17,308

Balance,

January 29,

2005 86,036 $ 1,033 $ 140,251 $ 1,076,023 $ 15,048 17,263 $ (563,029 ) $ 669,326

Purchase of

Treasury

Stock (1,765 ) — — — — 1,765 (103,296 ) (103,296 )

Net Income — — — 333,986 — — — 333,986

Restricted Stock

Unit Issuance 166 — (4,297 ) — (12,966 ) (166 ) 5,650 (11,613 )

Restricted Stock

Unit Expense — — — — 24,124 — — 24,124

Stock Option

Exercises 3,289 — (26,985 ) — — (3,289 ) 109,880 82,895

Dividends ($0.60

per share) — — — (52,218 ) — — — (52,218 )

Unrealized Gains

(Losses) on

Marketable

Securities — — — (718 ) — — — (718 )

Cumulative

Foreign

Currency

Translation

Adjustments — — — (78 ) — — — (78 )

Tax Benefit from

Exercise of

Stock Options

and Issuance

of Restricted

Stock Units — — 52,709 — — — — 52,709



Balance,

January 28,

2006 87,726 $ 1,033 $ 161,678 $ 1,356,995 $ 26,206 15,574 $ (550,795 ) $ 995,117


BERCROMBIE & FITCH


(Thousands) 2005 2004 2003

OPERATING ACTIVITIES:

Net Income $ 333,986 $ 216,376 $ 204,830

Impact of Other Operating Activities on Cash Flows:

Depreciation and Amortization 124,206 105,814 89,539

Amortization of Deferred Lease Credits (32,527 ) (32,794 ) (24,774 )

Non-cash Charge for Deferred Compensation 29,347 17,378 11,186

Deferred Taxes (2,099 ) 3,942 7,126

Non-Cash Charge for Asset Impairment 272 1,190 —

Loss on Disposal of Assets 7,386 4,664 —

Lessor Construction Allowances 42,336 55,009 60,649

Changes in Assets and Liabilities:

Inventories (146,314 ) (34,445 ) (27,397 )

Accounts Payable and Accrued Expenses (2,912 ) 99,388 15,551

Income Taxes 43,893 1,659 954

Tax Benefit of Stock Option Exercises 52,709 17,308 9,505

Other Assets and Liabilities 3,307 (31,705 ) (6,355 )

NET CASH PROVIDED BY OPERATING ACTIVITIES 453,590 423,784 340,814

INVESTING ACTIVITIES:

Capital Expenditures (256,422 ) (185,065 ) (159,777 )

Marketable Securities Activity:

Purchases (1,016,986 ) (4,314,070 ) (3,849,077 )

Proceeds from Sales 605,101 4,778,770 3,771,085

Net Marketable Securities Activity (411,885 ) 464,700 (77,992 )

NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (668,307 ) 279,635 (237,769 )

FINANCING ACTIVITIES:

Change in Outstanding Checks 5,164 20,404 4,145

Purchase of Treasury Stock (103,296 ) (434,658 ) (115,670 )

Stock Option Exercises and Other 77,019 48,927 19,767

Dividends Paid (52,218 ) (46,438 ) —

NET CASH USED FOR FINANCING ACTIVITIES (73,331 ) (411,765 ) (91,758 )



NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (288,048 ) 291,654 11,287

Cash and Equivalents, Beginning of Year 338,735 47,081 35,794

CASH AND EQUIVALENTS, END OF PERIOD $ 50,687 $ 338,735 $ 47,081

SIGNIFICANT NON-CASH INVESTING ACTIVITIES:

Change in Accrual for Construction in Progress $ 3,754 $ (15,513 ) $ 18,589


ABERCROMBIE & FITCH


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.

FISCAL YEAR

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 2005‖ represent the results for the 52-

week fiscal year ended January 28, 2006; to ―Fiscal 2004‖ represent the 52-week fiscal year ended January 29, 2005; and to ―Fiscal

2003‖ represent the 52-week fiscal year ended January 31, 2004. In addition, references herein to ―Fiscal 2006‖ represent the 53-week fiscal year that will end on February 3, 2007.

RECLASSIFICATIONS

Certain amounts have been reclassified to conform with the current year presentation. Amounts reclassified did not have an effect on the Company’s results of operations or total shareholders’ equity. On the Consolidated Balance Sheet for the year ended January 29,

2005, the Company reclassified (a) deferred income tax assets ($44.4 million) that were previously netted against income tax payable

to current assets; (b) the long-term portion of straight-line rent ($32.9 million) from an accrued expense to other long-term liabilities and the corresponding deferred income tax asset ($13.2 million) from current to long-term deferred income taxes; (c) the long-term

portion of executive severance ($6.6 million) from accrued expense to other long-term liabilities; (d) the portion of gift card liabilities ($10.4 million) that was previously classified in other long-term liabilities to accrued expense; (e) a portion of store supplies

($20.6 million) from current assets to other non-current assets and the corresponding deferred income tax liability ($7.8 million) from

current to long-term deferred income taxes; (f) deferred compensation ($15.0 million) to be shown as a separate component of shareholders’ equity; and (g) third party credit card receivables ($11.6 million) from cash equivalents to receivables. On the

Consolidated Statements of Cash Flows, the reclassification of third party credit card receivables during Fiscal 2004 and Fiscal 2003

decreased the ending cash balance and other assets and liabilities by $11.6 million and $9.3 million, respectively. All other reclassifications were within the operating activity section of the Consolidated Statements of Cash Flows.

Beginning with the first quarter of the fiscal year ending January 28, 2006, the Company reclassified the condensed consolidated statements of net income and comprehensive income. In prior periods, the Company included buying and occupancy costs as well as

certain home office expenses as part of the gross profit calculation. The Company believes that presenting gross profit as a function

of sales reduced solely by cost of goods sold, as well as presenting stores and distribution expense and marketing, general and administrative expense, as individual expense categories, provides a clearer and more transparent representation of gross selling

margin and operating expenses. Prior period results have been reclassified accordingly.

In accordance with Statement of Financial Accounting Standards (―SFAS‖) No. 131, ―Disclosures about Segments of an Enterprise and Related Information,‖ the Company determined its operating segments on the same basis that 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of A&F and its subsidiaries. All intercompany balances and transactions

have been eliminated in consolidation.

CASH AND EQUIVALENTS

Cash and equivalents include amounts on deposit with financial institutions and investments with original maturities of less than

90 days. Outstanding checks at year-end are reclassified in the balance sheet from cash to accounts payable to be reflected as

liabilities.

MARKETABLE SECURITIES

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. At

January 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 that

could range from three months to 40 years.

The Company began investing in municipal notes and bonds during the Fiscal 2005. These investments have early redemption

provisions at predetermined prices. For the fiscal year ended January 28, 2006, there were no realized gains or losses and as of

January 28, 2006, net unrealized holding losses were $718,000.

For the Company’s investments in auction rate securities, the interest rates reset through an auction process at predetermined periods

ranging from one to 49 days. Due to the frequent nature of the reset feature, the investment’s market price approximates its fair value;

therefore, there are no realized or unrealized gains or losses associated with these marketable securities.

At January 28, 2006, the Company held approximately $411.2 million in marketable securities and at January 29, 2005, the Company

had no investments in marketable securities.

CREDIT CARD RECEIVABLES

As part of the normal course of business, the Company has approximately two to three days of sales transactions outstanding with its

third-party credit card vendors at any point. The Company classifies these outstanding balances as receivables. At January 28, 2006 and January 29, 2005, credit card receivables were $17.3 million and $11.6 million, respectively.

INVENTORIES

Inventories are principally valued at the lower of average cost or market utilizing the retail method. 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 further reduces inventory at season end by recording a markdown reserve that represents the estimated

future anticipated selling price decreases necessary to sell through the inventory for the season just passed. Markdowns on this

carryover inventory represent estimated future anticipated selling price declines. Additionally, inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns for the total season. Further, as part of inventory valuation,

inventory shrinkage estimates are made, based on historical trends, 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 $10.0 million and $6.6 million at January 28, 2006 and January 29, 2005, respectively. The shrink

reserve was $3.8 million and $2.9 million at January 28, 2006 and January 29, 2005, respectively.

STORE SUPPLIES

The initial inventory of supplies for new stores including, but not limited to, security tags, hangers and miscellaneous supplies are

capitalized at the store opening date. In lieu of amortizing the initial balances over their estimates useful lives, the Company expenses

all subsequent replacements and adjusts the balance, as appropriate, for changes in quantities or cost. This policy approximates the expense that would have been recognized under generally accepted accounting principles (―GAAP‖). Store supply categories are

classified as current or non-current based on their estimated useful lives. Packaging is expensed as used. Current store supplies were

$16.1 million and $16.0 million at January 28, 2006 and January 29, 2005, respectively. Non-current store supplies were $20.6 million at both January 28, 2006 and January 29, 2005.

PROPERTY AND EQUIPMENT

Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from 30 years for buildings, the lesser of 10 years or the life of the lease for leasehold improvements

and three to 10 years for other property and equipment. The cost of assets sold or retired and the related accumulated depreciation or



amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are

charged to expense as incurred. Major renewals and betterments that extend service lives are capitalized.

Long-lived assets are reviewed at the store level at least annually for impairment or whenever events or changes in circumstances

indicate that full recoverability of net assets through future cash flows is in question. Factors used in the evaluation include, but are

not limited to, management’s plans for future operations, recent results of operations and projected cash flows. The Company incurred impairment charges of $272,000 and $1.2 million in Fiscal 2005 and Fiscal 2004, respectively.

INCOME TAXES

Income taxes are calculated in accordance with SFAS No. 109, ―Accounting for Income Taxes,‖ which requires the use of the asset

and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement

carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Inherent in the

measurement of deferred balances are certain judgments and interpretations of enacted tax law and published guidance with respect

to applicability to the Company’s operations. No valuation allowance has been provided for deferred tax assets because management believes the full amount of the net deferred tax assets will be realized in the future. The effective tax rate utilized by the Company

reflects management’s judgment of the expected tax liabilities within the various taxing jurisdictions.

CONTINGENCIES

In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities,

which requires the use of management’s judgment on the outcome of various issues. Management may also use outside legal advice

to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments may be required.

SHAREHOLDERS’ EQUITY

At January 28, 2006 and January 29, 2005, there were 150 million shares of $.01 par value Class A Common Stock authorized, of which 87.7 million and 86.0 million shares were outstanding at January 28, 2006 and January 29, 2005, respectively, and

106.4 million shares of $.01 par value Class B Common Stock authorized, none of which were outstanding at January 28, 2006 and

January 29, 2005, respectively. In addition, 15 million shares of $.01 par value Preferred Stock were authorized, none of which have been issued. See Note 14 for information about Preferred Stock Purchase Rights.

Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per

share on all matters submitted to a vote of shareholders.

REVENUE RECOGNITION

The Company recognizes retail sales at the time the customer takes possession of the merchandise and purchases are paid for,

primarily with either cash or credit card. Direct-to-consumer sales are recorded upon customer receipt of merchandise. Amounts

relating to shipping and handling billed to customers in a sale transaction are classified as revenue and the related direct shipping costs are classified as stores and distribution expense. Employee discounts are classified as a reduction of revenue. The Company

reserves for sales returns through estimates based on historical experience and various other assumptions that management believes

to be reasonable. The Company’s gift cards do not expire nor lose value over periods of inactivity.

The Company accounts for gift cards by recognizing a liability at the time a gift card is sold. The liability remains on the Company’s

books until the earlier of redemption (recognized as revenue) or when the Company determines the likelihood of redemption is remote (recognized as other operating income). The Company considers the probability of the gift card being redeemed to be remote

for 50% of the balance of gift cards at 24 months after the date of issuance and remote for the remaining balance at 36 months after

the date of issuance and at that time recognizes the remaining balance as other operating income. At January 28, 2006 and January 29, 2005, the gift card liability on the Company’s Consolidated Balance Sheet was $53.2 million and $41.7 million,

respectively.

The Company is not required by law to escheat the value of unredeemed gift cards to the states in which it operates. During Fiscal 2005 and Fiscal 2004, the Company recognized other operating income for adjustments to the gift card liability of $2.4 million and

$4.3 million, respectively. No income for adjustments to the gift card liability was recognized during Fiscal 2003.

The Company does not include tax amounts collected as part of the sales transaction in its net sales results.

COST OF GOODS SOLD

Cost of goods sold includes cost of merchandise, markdowns, inventory shrink and valuation reserves and outbound freight expenses.

STORES AND DISTRIBUTION EXPENSE

Stores and distribution expense includes store payroll, store management, rent, utilities and other landlord expenses, depreciation and

amortization, repairs and maintenance, other store support functions, direct-to-consumer and distribution center expenses.

MARKETING, GENERAL & ADMINISTRATIVE EXPENSE



Marketing, general and administrative expense includes photography and media ads, store marketing, home office payroll, except for

those departments included in stores and distribution expense, information technology, outside services such as legal and consulting, relocation and employment and travel expenses.

OTHER OPERATING INCOME, NET

Other operating income consists primarily of gift card balances whose likelihood of redemption the Company has determined to be remote and are therefore recognized as income.

CATALOGUE AND ADVERTISING COSTS

Catalogue costs, consist primarily of catalogue production and mailing costs and are expensed as incurred as a component of ―Stores and Distribution Expense.‖ Advertising costs consist of in-store photographs and advertising in selected national publications and

billboards and are expensed as part of ―Marketing, General and Administrative Expense‖ when the photographs or publications first

appear. Catalogue and advertising costs, which include photo shoot costs, amounted to $36.1 million in Fiscal 2005, $33.8 million in Fiscal 2004 and $33.6 million in Fiscal 2003.

OPERATING LEASES

The Company leases property for its stores under operating leases. Most lease agreements contain construction allowances, rent

escalation clauses and/or contingent rent provisions.

For construction allowances, the Company records a deferred lease credit on the consolidated balance sheet and amortizes the deferred lease credit as a reduction of rent expense on the consolidated statement of net income and comprehensive income over the

terms of the leases. For scheduled rent escalation clauses during the lease terms, the Company records minimum rental expenses on a

straight-line basis over the terms of the leases on the consolidated statement of net income and comprehensive income. The term of the lease over which the Company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on

the date of initial possession, which is generally when the Company enters the space and begins to make improvements in preparation

of intended use.

Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The

Company records a contingent rent liability in accrued expenses on the consolidated balance sheets and the corresponding rent

expense when management determines that achieving the specified levels during the fiscal year is probable.

STORE PRE-OPENING EXPENSES

Pre-opening expenses related to new store openings are charged to operations as incurred.

DESIGN AND DEVELOPMENT COSTS

Costs to design and develop the Company’s merchandise are expensed as incurred and are reflected as a component of ―Marketing,

General and Administrative Expense.‖

FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded values of current assets and current liabilities, including receivables, marketable securities and accounts payable,

approximate fair value due to the short maturity and because the average interest rate approximates current market origination rates.

STOCK-BASED COMPENSATION

The Company reports stock-based compensation through the disclosure-only requirements of SFAS No. 123 (―SFAS 123‖),

―Accounting for Stock-Based Compensation,‖ as amended by SFAS No. 148, ―Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB No. 123,‖ but elects to measure compensation expense using the intrinsic

value method in accordance with Accounting Principles Board Opinion No. 25, ― Accounting for Stock Issued to Employees. ‖

Accordingly, no compensation expense for options has been recognized because all options are granted at fair market value on the grant date. The Company recognizes compensation expense related to restricted share awards. If compensation expense related to

options had been determined based on the estimated fair value of options granted in Fiscal 2005, Fiscal 2004 and Fiscal 2003,

consistent with the methodology in SFAS 123, the pro forma effect on net income and net income per basic and fully-diluted share would have been as follows:

(Thousands except per share amounts)

2005 2004 2003

Net income:

As reported $ 333,986 $ 216,376 $ 204,830

Stock-based compensation expense included in reported net income, net of tax (1) 14,716 6,358 3,250

Stock-based compensation expense determined under fair value based method, net of

tax (36,689 ) (27,720 ) (27,274 )

Pro forma $ 312,013 $ 195,014 $ 180,806



Basic earnings per share:

As reported $ 3.83 $ 2.33 $ 2.12

Pro forma $ 3.58 $ 2.10 $ 1.87

Fully-diluted earnings per share:

As reported $ 3.66 $ 2.28 $ 2.06

Pro forma $ 3.38 $ 2.05 $ 1.83

(1) Includes stock-based compensation expense related to restricted share awards actually recognized in earnings in each period presented using the intrinsic value

method.

The average weighted-average fair value of options were $23.01, $15.05 and $14.18 for Fiscal 2005, Fiscal 2004 and Fiscal 2003,

respectively. The fair value of each option was estimated using the Black-Scholes option-pricing model, which is included in the pro

forma results above. For purposes of the valuation, the following weighted-average assumptions were used:

Fiscal 2005 Fiscal 2004 Fiscal 2003

Dividend yield 1.1 % 1.3 % —

Price volatility 47 % 56 % 63 %

Risk-free interest rate 4.0 % 3.2 % 3.0 %

Annual forfeiture rate 5.7 % 6.4 % 5.3 %

Expected life (years) 4 4 4

For options granted to non-associates directors during Fiscal 2005, the weighted-average fair value of the options was $8.42. The fair

value of each option was estimated using the Black-Scholes option-pricing model, which is included in the pro forma results above.

For purposes of the valuation, the following weighted-average assumptions were used: a 1.23% dividend yield; stock price volatility over the expected term of 37%; risk-free interest rate of 3.33%; annual forfeiture rate of 9%; and expected term of 1 year.

EARNINGS 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 fully-diluted share includes the

weighted-average effect of dilutive stock options and restricted shares.

Weighted-Average Shares Outstanding (in thousands):

2005 2004 2003

Shares of Class A Common Stock issued 103,300 103,300 103,300

Treasury shares outstanding (16,139 ) (10,523 ) (6,467 )

Basic shares outstanding 87,161 92,777 96,833

Dilutive effect of options and restricted shares 4,060 2,333 2,747

Fully-diluted shares outstanding 91,221 95,110 99,580

Options to purchase 150,500, 5,213,000 and 6,151,000 shares of Class A Common Stock were outstanding at fiscal year-end 2005, 2004 and 2003, respectively, but were 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.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that

affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues

and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.



3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (―FASB‖) issued SFAS No. 123 (Revised 2004), ―Share-Based Payment.‖ This standard is a revision of SFAS No. 123 and requires all share-based payments to employees, including grants of

employee stock options and similar awards, to be recognized in the financial statements based on their fair values measured at the

grant date.

In April 2005, the Securities and Exchange Commission delayed the effective date of SFAS No. 123(R) to annual periods beginning

after June 15, 2005 for public companies. The Company adopted FAS 123(R) at the beginning of the first quarter of Fiscal 2006

using the modified prospective application transition method. Based on stock options previously issued, but not fully vested, and stock options to be granted during Fiscal 2006, the Company expects that the implementation of SFAS No. 123(R) will result in a

charge of approximately $0.10 per fully-diluted share for Fiscal 2006.

Effective January 28, 2006, the Company adopted FASB Interpretation No. 47 (―FIN 47‖), ―Conditional Asset Retirement Obligations,‖ which clarifies that the term ―conditional asset retirement obligation‖ as used in FASB Statement No. 143,

―Accounting for Asset Retirement Obligations ‖, refers to a legal obligation to perform an asset retirement activity in which the

timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The adoption of FIN 47 did not have any effect on the Company’s results of operations or its financial position.

4. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consisted of (thousands):

2005 2004

Land $ 15,985 $ 15,985

Building 117,398 110,971

Furniture, fixtures and equipment 444,540 509,349

Leasehold improvements 625,732 402,535


Other 3,248 6,790

Total $ 1,286,383 $ 1,073,412

Less: Accumulated depreciation and amortization 472,780 386,401

Property and equipment, net $ 813,603 $ 687,011

5. DEFERRED LEASE CREDITS, NET

Deferred lease credits are derived from payments received from landlords to partially offset store construction costs and are

reclassified between current and long-term liabilities. The amounts, which are amortized over the life of the related leases, consisted of the following (thousands):

2005 2004

Deferred lease credits $ 376,460 $ 334,175

Amortized deferred lease credits (153,508 ) (125,117 )

Total deferred lease credits, net $ 222,952 $ 209,058

6. LEASED FACILITIES AND COMMITMENTS

Annual store rent is comprised of a fixed minimum amount, plus contingent rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally require additional payments covering taxes, common area costs and certain other

expenses.

A summary of rent expense follows (thousands):



2005 2004 2003

Store rent:

Fixed minimum $ 170,009 $ 141,450 $ 122,001

Contingent 16,178 6,932 5,194

Total store rent $ 186,187 $ 148,382 $ 127,195

Buildings, equipment and other 3,241 1,663 1,219

Total rent expense $ 189,428 $ 150,045 $ 128,414

At January 28, 2006, the Company was committed to non-cancelable leases with remaining terms of one to 15 years. A summary of

operating lease commitments under non-cancelable leases follows (thousands):

2006 $ 187,674

2007 $ 187,397

2008 $ 178,595

2009 $ 169,856

2010 $ 155,670

Thereafter $ 538,635

7. ACCRUED EXPENSES

Accrued expenses consisted of the following (thousands):

2005 2004

Rent and landlord charges $ 23,847 $ 13,843

Gift card liability 53,150 41,707

Employee salaries and bonus 30,250 21,985

Accrual for construction in progress 19,510 15,756

Property, franchise and other taxes 13,600 9,228

Other 74,677 102,634

Total $ 215,034 $ 205,153

Other accrued expenses in Fiscal 2004 included $49.1 million related to the settlement of three related class action employment discrimination lawsuits.

8. INCOME TAXES

The provision for income taxes consisted of (thousands):

2005 2004 2003

Currently Payable:

Federal $ 184,884 $ 112,537 $ 101,692

State 32,641 19,998 18,248

$ 217,525 $ 132,535 $ 119,940

Deferred:

Federal $ (5,980 ) $ 2,684 $ 8,601

State 3,881 1,258 1,517



$ (2,099 ) $ 3,942 $ 10,118

Total provision $ 215,426 $ 136,477 $ 130,058

A reconciliation between the statutory Federal income tax rate and the effective income tax rate follows:

2005 2004 2003

Federal income tax rate 35.0 % 35.0 % 35.0 %

State income tax, net of Federal income tax effect 4.3 3.9 3.8

Other items, net (0.1 ) (0.2 ) —

Total 39.2 % 38.7 % 38.8 %

Amounts paid directly to taxing authorities were $122.0 million, $114.0 million and $113.0 million in Fiscal 2005, Fiscal 2004, and Fiscal 2003, respectively.

The effect of temporary differences which give rise to deferred income tax assets (liabilities) was as follows (thousands):

2005 2004

Deferred tax assets:

Deferred compensation $ 24,046 $ 16,205

Rent 88,399 98,793

Accrued expenses 11,340 7,194

Inventory 3,982 3,268

Legal Expense 2,977 15,288

Total deferred tax assets $ 130,744 $ 140,748

Deferred tax liabilities:

Store supplies $ (10,851 ) $ (10,542 )

Property and equipment (128,735 ) (141,147 )

Total deferred tax liabilities $ (139,586 ) $ (151,689 )

Net deferred income tax liabilities $ (8,842 ) $ (10,941 )

No valuation allowance has been provided for deferred tax assets because management believes the full amount of the net deferred tax assets will be realized in the future.

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, stand-by letters of credit and

working capital. The 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 LIBO rate. The facility fees payable under the Amended Credit Agreement are based on the Company’s leverage ratio of the sum of total debt plus 600% of forward minimum rent commitments to consolidated

EBITDAR for the trailing four-fiscal-quarter period. The facility fees are projected to accrue between 0.15% and 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), hedging transactions and transactions with affiliates. The Amended Credit Agreement

will mature on December 15, 2009. Letters of credit totaling approximately $45.1 million and $49.6 million were outstanding under the Amended Credit Agreement at January 28, 2006 and January 29, 2005, respectively. No borrowings were outstanding under the

Amended Credit Agreement at January 28, 2006 and January 29, 2005.



10. RELATED PARTY TRANSACTIONS

Shahid & Company, Inc. has provided advertising and design services for the Company since 1995. Sam N. Shahid, Jr., who served on A&F’s Board of Directors until June 15, 2005, has been President and Creative Director of Shahid & Company, Inc. since 1993.

Fees paid to Shahid & Company, Inc. for services provided during his tenure as a Director in Fiscal 2005, Fiscal 2004 and Fiscal

2003 were approximately $863,000, $2.1 million and $2.0 million, respectively. These amounts do not include reimbursements to Shahid & Company, Inc. for expenses incurred while performing these services.

11. STOCK OPTIONS AND RESTRICTED STOCK UNITS

Under the Company’s stock plans, associates and non-associate directors may be granted up to a total of 25.9 million restricted shares and options to purchase A&F’s common stock at the market price on the date of grant. In Fiscal 2005, associates of the Company

were granted options covering approximately 479,900 shares, with a vesting period of four years. Options covering a total of 20,000

shares were granted to non-associate directors in Fiscal 2005. Options granted to the non-associate directors vest on the first anniversary of the grant date. All options have a maximum term of ten years.

Options Exercisable at

Options Outstanding at January 28, 2006 January 28, 2006

Weighted-Average

Range of Exercise Remaining Weighted-Average Weighted-Average

Prices Number Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price

$8-$23 320,143 3.0 $ 15.06 233,393 $ 17.29

$23-$38 3,627,288 5.6 $ 27.43 2,612,387 $ 27.52

$38-$53 4,651,400 3.7 $ 44.04 3,435,750 $ 43.96

$53-$71 383,000 7.8 $ 57.80 2,500 $ 59.98

$71 & over 79,000 9.5 $ 71.10 — $ —

$8-$71 9,060,831 4.6 $ 37.18 6,284,030 $ 36.14

A summary of option activity for Fiscal 2005, Fiscal 2004 and Fiscal 2003 follows:

2005

Weighted-Average

Shares Option Price

Outstanding at beginning of year 12,029,900 $ 32.44

Granted 499,900 59.67

Exercised (3,288,612 ) 23.16

Canceled (180,357 ) 32.63

Outstanding at end of year 9,060,831 $ 37.18

Options exercisable at year-end 6,284,030 $ 36.14

2004

Weighted-Average

Shares Option Price


Granted 484,000 36.48

Exercised (2,556,000 ) 19.49

Canceled (738,000 ) 31.67





2003

Weighted-Average

Shares Option Price


Granted 640,000 27.89

Exercised (1,586,600 ) 12.39

Canceled (272,500 ) 27.04



Approximately 627,100, 507,500 and 78,000 restricted shares were granted in Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively, with a total market value at grant date of $36.3 million, $16.0 million and $2.1 million, respectively. The restricted share grants

primarily vest on a graduated scale over four years for associates or over one year for non-associate directors. The market value of

restricted shares is amortized as compensation expense over the vesting period. Compensation expenses related to restricted share awards amounted to $24.1 million, $10.4 million and $5.3 million in Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.

12. RETIREMENT BENEFITS

The Company maintains a qualified defined contribution retirement plan and a nonqualified retirement plan. Participation in the qualified plan is available to all associates who have completed 1,000 or more hours of service with the Company during certain 12-

month periods and attained the age of 21. Participation in the nonqualified plan is subject to service and compensation requirements.

The Company’s contributions to these plans are based on a percentage of associates’ eligible annual compensation. The cost of these plans was $10.5 million in Fiscal 2005, $9.9 million in Fiscal 2004 and $7.0 million in Fiscal 2003.

Effective February 2, 2003, the Company established a Supplemental Executive Retirement Plan (the ―SERP‖) to provide additional

retirement income to its Chairman. Subject to service requirements, the Chairman will receive a monthly benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The SERP has been actuarially valued by an independent third party

and the expense associated with the SERP is being accrued over the stated term of the Amended and Restated Employment

Agreement, dated as of August 15, 2005, between the Company and its Chairman.

13. CONTINGENCIES

A&F is a defendant in lawsuits arising in the ordinary course of business.

A&F is aware of 20 actions that have been filed against A&F and certain of its current and former officers and directors on behalf of a purported, but as yet uncertified, class of shareholders who purchased A&F’s Class A Common Stock between October 8, 1999 and

October 13, 1999. These 20 actions have been 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. On April 12, 2000, the Judicial Panel on Multidistrict Litigation issued a Transfer Order transferring the 20 pending actions to the

Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities

Litigation. On November 16, 2000, the Court signed an Order appointing the Hicks Group, a group of seven unrelated investors in A&F’s Common Stock, as lead plaintiff, and appointing lead counsel in the consolidated action. On December 14, 2000, plaintiffs

filed a Consolidated Amended Class Action Complaint (the ―Amended Complaint‖) in which they did not name as defendants Lazard

Freres & Co. and Todd Slater, who had formerly been named as defendants in certain of the 20 complaints. On February 14, 2001, A&F and the other defendants filed motions to dismiss the Amended Complaint. On November 14, 2003, the motions to dismiss the

Amended Complaint were denied as to all defendants except Michelle Donnan-Martin. On December 2, 2003, A&F and the other

defendants moved for reconsideration or reargument of the November 14, 2003 order denying the motions to dismiss. On

February 23, 2004, the motions for reconsideration or reargument were denied. On April 1, 2004, plaintiffs filed a motion for class

certification. On April 8, 2005, A&F and the other defendants filed their opposition to plaintiffs’ motion for class certification. The

Court has yet to rule on the plaintiffs’ motion for class certification. The parties are currently conducting merits discovery.

Five class actions have been filed against the Company involving overtime compensation. In each 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 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 that it intended to rule on the defendants’ motions for summary judgment forthwith and, for purposes of docket

administration, denied the plantiffs motions to certify their class. The Court also indicated that 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. These cases have been

consolidated with the Fuller case described in the following paragraph.

In Casey Fuller, Individually and on Behalf of All Others Similarly Situated v. Abercrombie & Fitch Stores, Inc., which was filed on December 28, 2004 in the United States District Court for the Eastern District of Tennessee, the plaintiff alleges that he and other

similarly situated assistant managers and managers in training were not paid properly calculated overtime during their employment

and seeks overtime pay under the Fair Labor Standards Act. Because of its similarities to the Mitchell case, on April 19, 2005, the defendant filed a motion to stay the Fuller case pending the outcome of the Mitchell case or, in the alternative, transfer the Fuller case

to the United States District Court for the Southern District of Ohio. On May 31, 2005, the United States District Court for the

Eastern District of Tennessee transferred the Fuller case to the United States District Court for the Southern District of Ohio. On September 2, 2005, the Fuller case was consolidated with the Mitchell case for all purposes. Unlike the Mitchell case described

above, defendants have not moved for summary judgment in the Fuller case and it remains pending.

In Bryan T. Kimbell, Individually and on Behalf of All Others Similarly Situated and on Behalf of the Public v. Abercrombie & Fitch Stores, Inc., which was filed on July 10, 2002 in the California Superior Court for Los Angeles County, the plaintiffs alleged that

California general and store managers were entitled to receive overtime pay as ―non-exempt‖ employees under California wage and

hour laws. The parties have agreed to a settlement of this matter, which was finally approved by the California Superior Court for Los Angeles County on January 12, 2006. The settlement did not have a material effect on the Company’s consolidated financial

statements.

On October 25, 2005, a purported class action, styled Gibson v. Hollister Co., was filed in the Superior Court of Orange County, California. The plaintiff alleges the following claims for herself and a purported class and subclasses of hourly employees employed

by Hollister in the State of California: failure to provide and maintain uniforms; failure to pay regular and overtime wages; failure to

provide rest periods and meal periods or compensation in lieu thereof; failure to timely pay wages due at termination; failure to itemize wage statements; conversion; and violation of unfair competition law. The Complaint cites various California statutes, orders

and regulations. The Complaint seeks compensatory damages for alleged unpaid wages due to the plaintiff and the purported class, penalties, injunctive relief, attorneys’ fees, interest and costs. The defendant filed an answer to the complaint on January 25, 2006.

In Eltrich v. Abercrombie & Fitch Stores, Inc., a purported class action 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. Plaintiff filed an Amended Complaint on November 30, 2005. The Amended Complaint seeks compensatory damages

for alleged unpaid wages due to the plaintiff and the purported class, penalties, injunctive relief, attorneys' fees, interest and costs. The defendant filed an answer to the Amended Complaint on or about January 27, 2006.

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 Class A Common Stock of A&F 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 as a result of a decline in the price of A&F’s Class A Common Stock in the summer of 2005. On November 1, 2005, a motion to consolidate all 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.

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.

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, and seek unspecified monetary damages, 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.

In December 2005, the SEC issued a formal order of investigation concerning trading in shares of A&F’s Class A 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.

On December 9, 2005, a purported class action, styled Rankin, et al. v. Abercrombie & Fitch Stores, Inc., was filed by plaintiff Will

Rankin in the Circuit Court of the State of Oregon for the County of Multnomah. By a First Amended Complaint dated January 9,

2006, two additional plaintiffs were named — Chris Masagatani and Kayti Kersten. The plaintiffs allege, on behalf of themselves and a purported class of in-store managers and hourly employees, that they were required to purchase clothing and that the costs of

purchases reduced actual wages earned in violation of Oregon’s minimum wage laws. The First Amended Complaint seeks payment



of alleged wages due to plaintiffs and the purported class, civil penalties under Oregon statutes, a permanent injunction, attorneys’

fees and prejudgment interest. The defendant filed an answer to the First Amended Complaint on February 8, 2006.

Management intends to vigorously defend the aforesaid matters, as appropriate, and believes that 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 financial condition or results of operations of the Company.

14. PREFERRED STOCK PURCHASE RIGHTS

On July 16, 1998, A&F’s Board of Directors declared a dividend of one Series A Participating Cumulative Preferred Stock Purchase Right (the ―Rights‖) for each outstanding share of Class A Common Stock, par value $.01 per share (the ―Common Stock‖), of A&F.

The dividend was paid on July 28, 1998 to shareholders of record on that date. Shares of Common Stock issued after July 28, 1998

and prior to May 25, 1999 were issued with one Right attached. A&F’s Board of Directors declared a two-for-one stock split (the ―Stock Split‖) on A&F’s Common Stock, payable on June 15, 1999 to the holders of record at the close of business on May 25, 1999.

In connection with the Stock Split, the number of Rights associated with each share of Common Stock outstanding as of the close of

business on May 25, 1999, or issued or delivered after May 25, 1999 and prior to the ―Distribution Date‖ (as defined below), was

proportionately adjusted from one Right to 0.50 Right. Each share of Common Stock issued after May 25, 1999 and prior to the

Distribution Date has been and will be issued with 0.50 Right attached so that all shares of Common Stock outstanding prior to the

Distribution Date will have 0.50 Right attached.

The Rights initially will be attached to the shares of Common Stock. The Rights will separate from the Common Stock after a

Distribution Date occurs. The ―Distribution Date‖ generally means the earlier of (i) the close of business on the 10th day after the

date (the ―Share Acquisition Date‖) of the first public announcement that a person or group (other than A&F or any of A&F’s subsidiaries or any employee benefit plan of A&F or any of A&F’s subsidiaries) has acquired beneficial ownership of 20% or more

of A&F’s outstanding shares of Common Stock (an ―Acquiring Person‖) or (ii) the close of business on the 10th business day (or

such later date as A&F’s Board of Directors may designate before any person has become an Acquiring Person) after the date of the commencement of a tender or exchange offer by any person which would, if consummated, result in such person becoming an

Acquiring Person. The Rights are not exercisable until the Distribution Date. After the Distribution Date, each whole Right may be exercised to purchase, at an initial exercise price of $250, one one-thousandth of a share of Series A Participating Cumulative

Preferred Stock.

At any time after any person becomes an Acquiring Person (but before the occurrence of any of the events described in the immediately following paragraph), each holder of a Right (other than the Acquiring Person and certain affiliated persons) will be

entitled to purchase, upon exercise of the Right, shares of Common Stock having a market value of twice the exercise price of the

Right. At any time after any person becomes an Acquiring Person (but before any person becomes the beneficial owner of 50% or more of the outstanding shares of Common Stock or the occurrence of any of the events described in the immediately following

paragraph), A&F’s Board of Directors may exchange all or part of the Rights (other than Rights beneficially owned by an Acquiring

Person and certain affiliated persons) for shares of Common Stock at an exchange ratio of one share of Common Stock per 0.50 Right.

If, after any person has become an Acquiring Person, (i) A&F is involved in a merger or other business combination transaction in

which A&F is not the surviving corporation or A&F’s Common Stock is exchanged for other securities or assets or (ii) A&F and/or one or more of A&F’s subsidiaries sell or otherwise transfer 50% or more of the assets or earning power of A&F and its subsidiaries,

taken as a whole, each holder of a Right (other than the Acquiring Person and certain affiliated persons) will be entitled to buy, for

the exercise price of the Rights, the number of shares of common stock of the other party to the business combination or sale (or in certain circumstances, an affiliate) which at the time of such transaction will have a market value of twice the exercise price of the

Right.

The Rights will expire on July 16, 2008, unless earlier exchanged or redeemed. A&F may redeem all of the Rights at a price of $.01 per whole Right at any time before any person becomes an Acquiring Person.

Rights holders have no rights as a shareholder of A&F, including the right to vote and to receive dividends.

15. COMPREHENSIVE INCOME

Comprehensive income consists of cumulative foreign currency translation adjustments and unrealized gains and losses on

marketable securities.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial results for Fiscal 2005 and Fiscal 2004 follow (thousands except per share amounts):

Fiscal 2005 Quarter First Second Third Fourth

Net sales $ 546,810 $ 571,591 $ 704,918 $ 961,392

Gross profit $ 357,252 $ 389,660 $ 465,086 $ 639,418

Operating income $ 68,289 $ 91,087 $ 115,874 $ 267,488



Net income $ 40,359 $ 57,401 $ 71,600 $ 164,626

Net income per basic share $ 0.47 $ 0.66 $ 0.81 $ 1.88

Net income per fully-diluted share $ 0.45 $ 0.63 $ 0.79 $ 1.80

Fiscal 2004 Quarter First Second Third Fourth

Net sales $ 411,930 $ 401,346 $ 520,724 $ 687,254

Gross profit $ 267,924 $ 280,917 $ 336,617 $ 455,767

Operating income $ 46,722 $ 68,762 $ 61,978 $ 170,175

Net income $ 29,317 $ 42,888 $ 39,911 $ 104,260

Net income per basic share $ 0.31 $ 0.45 $ 0.43 $ 1.19

Net income per fully-diluted share $ 0.30 $ 0.44 $ 0.42 $ 1.15


To the Board of Directors and Shareholders

of Abercrombie & Fitch Co.:

We have completed integrated audits of Abercrombie & Fitch Co.’s fiscal 2005 and fiscal 2004 consolidated financial statements and

of its internal control over financial reporting as of January 28, 2006, and an audit of its fiscal 2003 consolidated financial statements

in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Abercrombie & Fitch Co. and its subsidiaries at January 28, 2006 and January 29, 2005, and the

results of their operations and their cash flows for each of the three years in the period ended January 28, 2006 in conformity with

accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted

our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts

and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,

and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting

appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of January 28, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the

Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the

Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for

maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over

financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in

accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we

plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal

control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of

internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in

accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect

on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in

conditions, or that the degree of compliance with the policies or procedures may deteriorate.



PricewaterhouseCoopers LLP

Columbus, Ohio April 3, 2006


Not applicable.


Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities

Exchange Act of 1934, as amended (the ―Exchange Act‖)) that are designed to provide reasonable assurance that information required

to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated

to the Company’s management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief

Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute,

assurance that the objectives of disclosure controls and procedures are met.

The Company’s management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s design and operation of its disclosure controls and procedures as of the end of

the fiscal year ended January 28, 2006. The Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial

Officer concluded that the material weakness discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005 had been remediated in the first fiscal quarter ended April 30, 2005 and the Company’s disclosure controls and

procedures were effective at a reasonable level of assurance as of January 28, 2006, the period covered by this Form 10-K.

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

The Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a

process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections

of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management evaluated the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006 using

criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment of the Company’s internal control over financial reporting, management has

concluded that, as of January 28, 2006, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006 as stated in their report, which is

included herein.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended January 28, 2006

that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.


Not applicable.

PART III


Information concerning directors, executive officers and persons nominated or chosen to become directors or executive officers is incorporated by reference from the text under the caption ―Election of Directors‖ in the Company’s Proxy Statement for the Annual

Meeting of Stockholders to be held on June 14, 2006 and from the text under the caption ―Supplemental Item — Executive Officers of

the Registrant‖ in Part I of this Annual Report on Form 10-K.



Compliance with Section 16(a) of the Exchange Act

Information concerning beneficial ownership reporting compliance under Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the text under the caption ―Security Ownership of Certain Beneficial Owners and

Management — Section 16(a) Beneficial Ownership Reporting Compliance‖ in the Company’s Proxy Statement for the Annual

Meeting of Stockholders to be held on June 14, 2006.

Code of Business Conduct

Information concerning the Company’s Code of Business Conduct is incorporated by reference from the text under the caption

―Election of Directors — Code of Business Conduct and Ethics‖ in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2006.


Information regarding executive compensation is set forth under the captions ―Executive Compensation‖ and ―Election of Directors — Compensation of Directors‖ in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2006

and is incorporated herein by reference. Such incorporation by reference shall not be deemed specifically to incorporate by reference

the information referred to in Item 402(a)(8) of SEC Regulation S-K.


STOCKHOLDER MATTERS.

Information concerning the security ownership of certain beneficial owners and management is incorporated by reference from the text under the caption ―Security Ownership of Certain Beneficial Owners and Management‖ in the Company’s Proxy Statement for

the Annual Meeting of Stockholders to be held on June 14, 2006.

Information concerning equity compensation plans is incorporated by reference from the text under the caption ―Equity Compensation Plans‖ in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2006.

_____________________________________


http://documentresearch.morningstar.com

Source: ABERCROMBIE & FITCH CO /DE/, 10-K, April 07, 2006

END

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