UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended July 29, 2006

OR

o		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.

(Exact name of Registrant as specified in its charter)

Delaware		31-1469076
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6301 Fitch Path, New Albany, OH		43054
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code         614) 283-6500       

Not Applicable

(Former name, former address and former Fiscal year, if changed since last report.)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   þ      No   o

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A Common Stock		Outstanding at September 1, 2006
$.01 Par Value		88,077,466 Shares

 

 

ABERCROMBIE & FITCH CO.

TABLE OF CONTENTS

				Page No.
Part I. Financial Information
Item 1.		Financial Statements
		Condensed Consolidated Statements of Net Income and Comprehensive Income Thirteen and Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005			3
		Condensed Consolidated Balance Sheets July 29, 2006 and January 28, 2006			4
		Condensed Consolidated Statements of Cash Flows Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005			5
		Notes to Condensed Consolidated Financial Statements			6
		Report of Independent Registered Public Accounting Firm			18
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			39
Item 4.		Controls and Procedures			40
Part II. Other Information
Item 1.		Legal Proceedings			41
Item 1A.		Risk Factors			44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3.		Defaults Upon Senior Securities			46
Item 4.		Submission of Matters to a Vote of Security Holders			47
Item 5.		Other Information			48
Item 6.		Exhibits			49
EX-15.1
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ABERCROMBIE & FITCH

CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME

AND COMPREHENSIVE INCOME

(Thousands, except per share data)

(Unaudited)

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 29, 2006				July 30, 2005				July 29, 2006				July 30, 2005
NET SALES		$	658,696			$	571,591			$	1,315,967			$	1,118,401
Cost of Goods Sold			203,438				181,931				430,793				371,489
GROSS PROFIT			455,258				389,660				885,174				746,912
Stores and Distribution Expense			270,494				232,097				528,846				454,320
Marketing, General and Administrative Expense			85,340				67,884				175,039				135,030
Other Operating Income, Net			(3,005	)			(1,408	)			(5,126	)			(1,814	)
OPERATING INCOME			102,429				91,087				186,415				159,376
Interest Income, Net			(2,765	)			(1,560	)			(5,931	)			(2,780	)
INCOME BEFORE INCOME TAXES			105,194				92,647				192,346				162,156
Provision for Income Taxes			39,472				35,246				70,383				64,396
NET INCOME		$	65,722			$	57,401			$	121,963			$	97,760
NET INCOME PER SHARE:
BASIC		$	0.75			$	0.66			$	1.39			$	1.13
DILUTED		$	0.72			$	0.63			$	1.34			$	1.07
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC			87,981				86,951				87,920				86,577
DILUTED			91,178				91,501				91,274				90,946
DIVIDENDS DECLARED PER SHARE		$	0.18			$	—			$	0.35			$	0.25
OTHER COMPREHENSIVE LOSS
Cumulative Foreign Currency Translation Adjustments		$	(247	)		$	—			$	110			$	—
Unrealized Gain/(Loss) on Marketable Securities, Net of Taxes of $51 and ($219) for the thirteen and twenty-six week periods ended July 29, 2006, respectively			66				—				(317	)			—
Other Comprehensive Loss		$	(181	)		$	—			$	(207	)		$	—
COMPREHENSIVE INCOME		$	65,541			$	57,401			$	121,756			$	97,760

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

ABERCROMBIE & FITCH

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands, except per share amounts)

		(Unaudited)
		July 29, 2006				January 28, 2006
ASSETS
CURRENT ASSETS:
Cash and Equivalents		$	50,365			$	50,687
Marketable Securities			284,630				411,167
Receivables			65,887				41,855
Inventories			434,268				362,536
Deferred Income Taxes			29,023				29,654
Other Current Assets			53,478				51,185
TOTAL CURRENT ASSETS			917,651				947,084
PROPERTY AND EQUIPMENT, NET			970,586				813,603
OTHER ASSETS			28,359				29,031
TOTAL ASSETS		$	1,916,596			$	1,789,718
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts Payable and Outstanding Checks		$	194,047			$	145,313
Accrued Expenses			224,323				215,034
Deferred Lease Credits			34,399				31,727
Income Taxes Payable			30,821				99,480
TOTAL CURRENT LIABILITIES			483,590				491,554
LONG-TERM LIABILITIES:
Deferred Income Taxes			30,434				38,496
Deferred Lease Credits			206,921				191,225
Other Liabilities			84,927				73,326
TOTAL LONG-TERM LIABILITIES			322,282				303,047
SHAREHOLDERS’ EQUITY:
Class A Common Stock — $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of July 29, 2006 and January 28, 2006			1,033				1,033
Paid-In Capital			271,990				229,261
Retained Earnings			1,378,678				1,290,208
Accumulated Other Comprehensive Loss			(1,222	)			(796	)
Deferred Compensation			—				26,206
Treasury Stock, at Average Cost - 15,262 and 15,574 shares at July 29, 2006 and January 28, 2006, respectively			(539,755	)			(550,795	)
TOTAL SHAREHOLDERS’ EQUITY			1,110,724				995,117
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,916,596			$	1,789,718

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

ABERCROMBIE & FITCH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands)

(Unaudited)

		Twenty-Six Weeks Ended
		July 29, 2006				July 30, 2005
OPERATING ACTIVITIES:
Net Income		$	121,963			$	97,760
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization			66,823				60,528
Amortization of Deferred Lease Credits			(16,735	)			(15,655	)
Share-Based Compensation			20,599				9,793
Tax Benefit from Share-Based Compensation			3,054				48,531
Excess Tax Benefit from Share-Based Compensation			(2,398	)			—
Deferred Taxes			(7,431	)			(11,847	)
Loss on Disposal of Assets			3,809				2,058
Lessor Construction Allowances			20,936				15,845
Changes in Assets and Liabilities:
Inventories			(94,961	)			(146,680	)
Other Assets and Liabilities			(953	)			17,305
Accounts Payable and Accrued Expenses			35,738				11,027
Income Taxes			(68,659	)			(37,867	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			81,785				50,798
INVESTING ACTIVITIES:
Capital Expenditures			(184,047	)			(117,463	)
Marketable Securities Activity
Purchases			(749,786	)			(372,209	)
Proceeds from Sales			875,837				155,840
Net Marketable Securities Activity			126,051				(216,369	)
NET CASH USED FOR INVESTING ACTIVITIES			(57,996	)			(333,832	)
FINANCING ACTIVITIES:
Proceeds from Share-Based Compensation and Other			4,637				69,931
Excess Tax Benefit from Share-Based Compensation			2,398				—
Purchase of Treasury Stock			—				(26,904	)
Change in Outstanding Checks			(375	)			2,939
Dividends Paid			(30,771	)			(21,564	)
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES			(24,111	)			24,402
NET DECREASE IN CASH AND EQUIVALENTS:			(322	)			(258,632	)
Cash and Equivalents, Beginning of Year			50,687				350,368
CASH AND EQUIVALENTS, END OF PERIOD		$	50,365			$	91,736
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
Change in Accrual for Construction in Progress		$	42,205			$	16,630

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

ABERCROMBIE & FITCH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Abercrombie & Fitch Co. (“A&F”), through its wholly-owned subsidiaries (collectively, A&F and its wholly-owned subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer of high quality, casual apparel for men, women and kids with an active, youthful lifestyle. The business was established in 1892.

The accompanying consolidated financial statements include the historical financial statements of, and transactions applicable to, A&F and its wholly-owned subsidiaries and reflect the assets, liabilities, results of operations and cash flows on a historical cost basis.

The Company’s Fiscal year ends on the Saturday closest to January 31^st. Fiscal years are designated in the financial statements and notes by the calendar year in which the Fiscal year commences. All references herein to “Fiscal 2006” represent the 53-week Fiscal year that will end on February 3, 2007, and “Fiscal 2005” represents the 52-week Fiscal year that ended January 28, 2006.

Certain amounts have been reclassified to conform with the current year presentation. The Company periodically reacquires stock under various Board of Directors authorized buy-back plans. The shares reacquired are held as treasury stock and are not retired. The Company utilizes the treasury stock when issuing shares for associate stock options and restricted stock unit vestings. In accordance with the Accounting Principles Board (“APB”) Opinion No. 6, “Status of Accounting Research Bulletins”, “gains” on sales of treasury stock not previously accounted for as constructively retired should be credited to paid-in capital; “losses” may be charged to paid-in capital to the extent of previous net “gains” from sales or retirements of the same class of stock, otherwise to retained earnings. On the Consolidated Balance Sheet for the year ended January 28, 2006, the Company reclassified cumulative treasury stock “losses” of $67.6 million that were previously netted against paid-in capital to retained earnings. Amounts reclassified did not have an effect on the Company’s results of operations, total shareholders’ equity or Consolidated Statements of Cash Flows.

In accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), the Company determined its operating segments on the same basis 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.

The condensed consolidated financial statements as of July 29, 2006 and for the thirteen and twenty-six week periods ended July 29, 2006 and July 30, 2005 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2005. The year-end condensed balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2006.

The condensed consolidated financial statements as of July 29, 2006 and for the thirteen and twenty-six week periods ended July 29, 2006 and July 30, 2005 included herein have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of such firm follows the notes to the condensed consolidated financial statements. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the unaudited financial information because their report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2. STOCK-BASED COMPENSATION

On January 29, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires share-based compensation to be measured based on estimated fair values at the date of grant using an option pricing model. Previously, the Company accounted for share-based compensation using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and provided the required pro forma disclosures in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended. Since the exercise price of options equaled the market price of the underlying common stock on the date of grant, the stock options had no intrinsic value and, therefore, no expense was recognized for stock options by the Company prior to the beginning of Fiscal 2006.

The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires share-based compensation to be recognized for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, prior period information presented in this Report on Form 10-Q has not been restated to reflect the fair value method of expensing stock options. Under the modified prospective method, compensation cost for all share-based awards granted prior to, but not yet vested as of, January 29, 2006 is based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and compensation cost for all share-based awards granted subsequent to January 29, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

The Company recognized expense of $9.7 million and $20.6 million related to share-based compensation for the thirteen week and twenty-six week periods ended July 29, 2006, respectively. For the twenty-six week period ended July 29, 2006, the Company received proceeds of $4.9 million in connection with stock option exercises. The Company also realized $0.6 million and $3.1 million in tax benefits related to tax deductions from option exercises and restricted stock unit (“RSU”) vestings for the thirteen and twenty-six week periods ended July 29, 2006, respectively. After the adoption of SFAS No. 123(R), the liability for the share-based compensation is presented in the condensed consolidated balance sheet as part of paid-in capital and the related tax benefit is presented in the condensed consolidated balance sheet as part of paid-in capital. The excess tax benefit is presented in the consolidated statement of cash flows as part of the financing activities. Prior to adoption of SFAS No. 123(R), the liability was presented in the consolidated balance sheet as deferred compensation and the related tax benefit was presented in the statement of cash flows in operating activities.

On July 29, 2006, the Company had two primary share-based compensation plans, the 2002 Stock Plan for Associates (the “2002 Plan”) and the 2005 Long Term Incentive Plan (the “2005 LTIP”), under which it grants stock options and restricted stock units to its associates and non-associate board members. The Company also has three other share-based compensation plans under which it granted stock options and restricted stock units to its associates and non-associate board members in prior years.

The 2005 LTIP, which is shareholder approved, permits the Company to grant up to 2.0 million shares of A&F’s Class A Common Stock to the majority of associates who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, and any non-associate directors of the Company. The 2002 Plan, which is not shareholder approved, permits the Company to grant up to 7.0 million shares of A&F’s Class A Common Stock to any associate. Under both plans, stock options and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP plan, stock options and restricted stock units vest over one year for non-associate directors. Stock options have a ten year contractual term and the plans provide for accelerated vesting if there is a change of control as defined in the plans. The Company issues shares for stock option exercises and restricted stock unit vestings from treasury stock. As of July 29, 2006, the Company had enough treasury stock available to cover stock options and restricted stock units outstanding without having to repurchase additional treasury stock.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will be outstanding based on historical experience. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s stock for the period equal to the expected term of the stock option. The Company calculates the historic volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for dividends and stock splits.

The weighted-average estimated fair values of associate stock options granted during the twenty-six weeks ended July 29, 2006 and the weighted-average estimated fair value of associate stock options granted during the twenty-six weeks ended July 30, 2005 as well as the weighted-average assumptions used in calculating such values, on the date of grant, were as follows:

		Twenty-Six Weeks Ended
		July 29, 2006								July 30, 2005
		Other				Executive
		Associates				Officers
Weighted-Average Exercise Price		$	58.22			$	58.22			$	56.84
Fair value		$	20.81			$	24.92			$	19.82
Assumptions:
Price volatility			42	%			47	%			46	%
Expected term (Years)			4				5				4
Risk-free interest rate			4.9	%			4.9	%			3.7	%
Dividend yield			1.2	%			1.2	%			1.2	%

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

The following table summarizes the effect of the adoption of SFAS No. 123(R) to stock options granted under the Company’s share-based compensation plans:

		Thirteen Weeks				Twenty-Six
(Thousands, except per share amounts)		Ended				Weeks Ended
		July 29, 2006				July 29, 2006
Stores and Distribution Expense		$	87			$	228
Marketing, General and Administrative Expense			5,016				11,061
Other Operating Income, Net			—				—
Share-based compensation effect in income before taxes			5,103				11,289
Provision for Income Taxes			(1,599	)			(3,859	)
Net share-based compensation effects in net income		$	3,504			$	7,430
Effect on net income per basic share		$	0.04			$	0.08
Effect on net income per diluted share		$	0.04			$	0.08
Effect on cash flow from operations		$	(410	)		$	(2,398	)
Effect on cash flow from financing activities		$	410			$	2,398

Share-based compensation is recognized, net of forfeitures, over the requisite service period on a straight line basis. The Company adjusts share-based compensation on a quarterly basis for actual forfeitures and on an annual basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after January 29, 2006 is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments during the thirteen weeks ended July 29, 2006 was immaterial.

Pro forma information required under SFAS No. 123 for the second quarter of Fiscal 2005, as if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s share-based compensation plans, was as follows:

		Thirteen Weeks				Twenty-Six
(Thousands except per share amounts)		Ended				Weeks Ended
		July 30, 2005				July 30, 2005
Net income:
As reported		$	57,401			$	97,760
Stock-based compensation expense included in reported net income, net of tax(1)			2,774				5,001
Stock-based compensation expense determined under fair value based method, net of tax			(8,247	)			(15,858	)
Pro forma		$	51,928			$	86,903
Net income per basic share:
As reported		$	0.66			$	1.13
Pro forma		$	0.60			$	1.00
Net income per diluted share:
As reported		$	0.63			$	1.07
Pro forma		$	0.56			$	0.95

Below is the summary of stock option activity for Fiscal 2006:

		Twenty-Six Weeks Ended July 29, 2006
														Weighted-Average
		Number of				Weighted-Average				Aggregate Intrinsic				Remaining
Stock Options		Shares				Exercise Price				Value				Contractual Life
Outstanding at January 29, 2006			9,060,831			$	37.18
Granted			390,400				58.22
Exercised			(179,785	)			28.31			$	2,320,655
Forfeited or Expired			(79,775	)			50.89
Outstanding at July 29, 2006			9,191,671			$	38.13			$	138,600,238				4.4
Options exercisable at July 29, 2006			8,278,019			$	36.46			$	134,410,791				3.9

As of July 29, 2006, there were $16.7 million of total unrecognized compensation costs related to stock options granted. The unrecognized stock option compensation cost is expected to be recognized over a weighted-average period of 1.6 years.

A summary of the status of the Company’s restricted stock units as of July 29, 2006 and changes during the twenty-six week period ended July 29, 2006 were as follows:

		Twenty-Six Weeks Ended July 29, 2006
						Weighted-Average
Restricted Stock Units		Number of Shares				Grant Date Fair Value
Non-vested at January 29, 2006			1,856,847			$	36.54
Granted			572,612			$	58.20
Vested			(185,132	)		$	39.56
Forfeited			(98,116	)		$	51.37
Non-vested at July 29, 2006			2,146,211			$	40.91

Restricted stock units with a fair value of $7.3 million completed vesting during the twenty-six weeks ended July 29, 2006. As of July 29, 2006, there were $60.0 million of total unrecognized compensation costs related to restricted stock units under the Company’s share-based compensation plans. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.5 years.

3. NET INCOME PER SHARE

Net income per share is computed in accordance with SFAS No. 128, “Earnings Per Share.” Net income per basic share is computed based on the weighted-average number of outstanding shares of common stock. Net income per diluted share includes the weighted-average effect of dilutive stock options and restricted stock units.

Weighted-Average Shares Outstanding (in thousands):

		Thirteen Weeks Ended
		July 29, 2006				July 30, 2005
Shares of Class A Common Stock issued			103,300				103,300
Treasury Shares outstanding			(15,319	)			(16,349	)
Basic Shares outstanding			87,981				86,951
Dilutive effect of stock options and restricted stock			3,197				4,550
Diluted shares outstanding			91,178				91,501

Weighted-Average Shares Outstanding (in thousands):

		Twenty-Six Weeks Ended
		July 29, 2006				July 30, 2005
Shares of Class A Common Stock issued			103,300				103,300
Treasury Shares outstanding			(15,380	)			(16,723	)
Basic Shares outstanding			87,920				86,577
Dilutive effect of stock options and restricted stock			3,354				4,369
Diluted shares outstanding			91,274				90,946

Options to purchase 642,300 and 188,500 shares of Class A Common Stock during the thirteen and twenty-six week periods ended July 29, 2006, respectively, and 17,000 shares of Class A Common Stock during each of the thirteen and twenty-six week periods ended July 30, 2005, 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.

4. 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 July 29, 2006, the Company’s investments in marketable securities consisted primarily of investment grade municipal notes and bonds and investment grade auction rate securities, all classified as available-for-sale and reported at fair value, with maturities of three months to 40 years.

The Company began investing in municipal notes and bonds during Fiscal 2005. These investments may have early redemption provisions at predetermined prices. For the thirteen and twenty-six week periods ended July 29, 2006, there were no realized gains or losses and, as of July 29, 2006, cumulative net unrealized holding losses were $1.2 million.

The interest rates of auction rate securities reset through an auction process at predetermined periods ranging from seven to 49 days. Due to the frequent nature of the reset feature, the investments’ market prices approximates their fair value; therefore, there are no realized or unrealized gains or losses associated with these marketable securities.

The Company held approximately $284.6 million and $411.2 million in marketable securities as of July 29, 2006 and January 28, 2006, respectively.

5. INVENTORIES

Inventories are principally valued at the lower of average cost or market utilizing the retail method. The Company determines market value as the anticipated future selling price of the merchandise less a normal margin. Therefore, an initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost components of inventory on hand so as to maintain the already established cost-to-retail relationship.

The Fiscal year is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). The Company classifies its inventory into three categories: spring fashion, fall fashion and basic. The Company reduces inventory at the end of the first and third quarters to reserve for projected inventory markdowns required to sell through the current season inventory prior to the beginning of the following season. Additionally, the Company reduces inventory at season end by recording a markdown reserve that represents the estimated future selling price decreases necessary to sell through the remaining carryover fashion inventory for the season just passed. Further, as part of inventory valuation, inventory shrinkage estimates, based on historical trends, are made that reduce the inventory value for lost or stolen items. The Company performs physical inventories throughout the year and adjusts the shrink reserve accordingly.

9. LONG-TERM DEBT

On December 15, 2004, the Company entered into an amended and restated $250 million syndicated unsecured credit agreement (the “Amended Credit Agreement”). The primary purposes of the Amended Credit Agreement are for trade and stand-by letters of credit and working capital. The Amended Credit Agreement has several borrowing options, including an option where interest rates are based on the agent bank’s “Alternate Base Rate,” and another using the 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) and transactions with affiliates. The Amended Credit Agreement will mature on December 15, 2009. Letters of credit totaling approximately $65.5 million and $44.7 million were outstanding under the Amended Credit Agreement at July 29, 2006 and July 30, 2005, respectively. No borrowings were outstanding under the Amended Credit Agreement at July 29, 2006 or at July 30, 2005.

10. CONTINGENCIES

A&F is a defendant in lawsuits arising in the ordinary course of business.

The Company previously reported that it was aware of 20 actions that had been filed against it and certain of its current and former officers and directors on behalf of a purported class of shareholders who purchased A&F’s Class A common stock between October 8, 1999 and October 13, 1999. These actions originally were filed in the United States District Courts for the Southern District of New York and the Southern District of Ohio, Eastern Division, alleging violations of the federal securities laws and seeking unspecified damages, and were later transferred to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities Litigation. The parties have reached a settlement-in-principle of these matters. According to the terms of the settlement-in-principle, the Company’s insurance company, on behalf of the defendants, will cause to be paid $6.0 million into a settlement fund in full consideration for the settlement and release of all claims that were asserted or could have been asserted in the action by the plaintiffs and the other members of the settlement class. The settlement is not expected to have a material effect on the Company’s financial statements. The settlement will become final and binding only upon execution of a definitive settlement agreement and approval thereof by the judge who is presiding over the cases, after notice to the settlement class and a hearing to determine whether the proposed settlement is fair, reasonable and adequate.

There have been developments in three class actions filed against the Company involving overtime compensation which were previously reported. In addition, a fourth class action has been filed against the Company involving overtime compensation. In each overtime compensation action, the plaintiffs, on behalf of their respective purported class, seek injunctive relief and unspecified amounts of economic and liquidated damages.

In Melissa Mitchell, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., which was filed on June 13, 2003 in the United States District Court for the Southern District of Ohio, the plaintiffs allege that assistant managers and store managers were not paid overtime compensation in violation of the Fair Labor Standards Act 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. All three plaintiffs filed a Notice of Appeal to the Sixth Circuit Court of Appeals on April 28, 2006, and filed an appellate brief with the Sixth Circuit on August 7, 2006.

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. The defendant filed an answer on February 7, 2005. Because of its similarities to the Mitchell case, the defendant filed, on April 19, 2005, 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. The parties reached a settlement of Fuller’s individual claims, and Fuller voluntarily dismissed his individual claims with prejudice on July 10, 2006. The settlement will not have a material effect on the Company’s consolidated financial statements.

In Eltrich v. Abercrombie & Fitch Stores, Inc., which was filed on November 22, 2005 in the Washington Superior Court of King County, the plaintiff alleges that store managers, assistant managers and managers in training were misclassified as exempt from the overtime compensation requirements of the State of Washington, and improperly denied overtime compensation. The complaintant seeks relief on a class-wide basis for unpaid overtime compensation, liquidated damages, attorneys’ fees and costs and injunctive relief. The defendant filed an answer to the complaint on or about January 27, 2006. The defendant filed a motion for summary judgment as to all of Eltrich’s claims on July 5, 2006.

Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., was filed in the Superior Court of the State of California for the County of Los Angeles on June 23, 2006. Three plaintiffs allege, on behalf of a putative class of California store managers employed in Hollister and abercrombie stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaintant seeks injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The Company plans to vigorously defend the case, the outcome of which cannot be predicted by the Company.

On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company, et al., was filed against A&F and certain of its officers in the United States District Court for the Southern District of Ohio on behalf of a purported class of all persons who purchased or acquired shares of 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, and seek unspecified monetary damages, 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. A consolidated amended complaint was filed on August 14, 2006 and the responses of defendants are due on October 13, 2006.

On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries, et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&F’s present and former directors, alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. In the following three months (October, November and December of 2005), four similar derivative actions were filed (three in the United States District Court for the Southern District of Ohio and one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. A&F is also a nominal defendant in each of the four later derivative actions. On November 4, 2005, a motion to consolidate all of the federal court derivative actions with the purported securities law class actions described in the preceding paragraph was filed. On March 22, 2006, the motion to consolidate was granted, and the federal court derivative actions have been consolidated with the aforesaid purported securities law class actions for purposes of motion practice, discovery and pretrial proceedings.

A consolidated amended complaint was filed in the federal proceeding on July 10, 2006. A&F has filed a motion to stay the consolidated federal derivative case and the time for all other defendants to respond has been extended pending decision of A&F’s motion. The state court action has been stayed by order of court pending the report of a Special Litigation Committee of the Company’s Board of Directors.

In December 2005, the Company received a formal order of investigation from the SEC concerning trading in shares of A&F’s 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.

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.

11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On July 13, 2006, the Financial Accounting Standards Board issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”, an Interpretation of SFAS No. 109, “Accounting for Income Taxes". FIN No. 48 provides a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN No. 48 defines the threshold for recognizing tax return positions in the financial statements as “more likely than not” that the position is sustainable, based on its merits. FIN No. 48 also provides guidance on the measurement, classification and disclosure of tax return positions in the financial statements. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to the beginning balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting FIN No. 48 on its consolidated financial statements.

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheet of Abercrombie & Fitch Co. and its subsidiaries as of July 29, 2006, and the related condensed consolidated statements of net income and comprehensive income for each of the thirteen and twenty-six week periods ended July 29, 2006 and July 30, 2005 and the condensed consolidated statements of cash flows for the twenty-six week periods ended July 29, 2006 and July 30, 2005. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

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

/s/PricewaterhouseCoopers LLP
Columbus, Ohio
September 7, 2006

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company’s Fiscal year ends on the Saturday closest to January 31^st. Fiscal years are designated in the financial statements and notes by the calendar year in which the Fiscal year commences. All references herein to “Fiscal 2006” represent the 53-week Fiscal year that will end on February 3, 2007, and “Fiscal 2005” represents the 52-week Fiscal year that ended January 28, 2006.

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

RESULTS OF OPERATIONS

During the second quarter of Fiscal 2006, net sales increased 15% to $658.7 million from $571.6 million in the second quarter of Fiscal 2005. The Company recorded stock option expense of $5.1 million related to Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). Operating income increased to $102.4 million in the second quarter of Fiscal 2006 from $91.1 million in the second quarter of Fiscal 2005. Net income increased to $65.7 million in the second quarter of Fiscal 2006 compared to $57.4 million in the second quarter of Fiscal 2005. Net income per diluted weighted-average share was $0.72, including the $0.04 per diluted share effect of SFAS No. 123(R), in the second quarter of Fiscal 2006 compared to $0.63 in the second quarter of Fiscal 2005.

The following data represent the amounts shown in the Company’s condensed consolidated statements of income for the thirteen and twenty-six week periods ended July 29, 2006 and July 30, 2005, expressed as a percentage of net sales:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 29, 2006				July 30, 2005				July 29, 2006				July 30, 2005
NET SALES			100.0	%			100.0	%			100.0	%			100.0	%
Cost of Goods Sold			30.9	%			31.8	%			32.7	%			33.2	%
GROSS PROFIT			69.1	%			68.2	%			67.3	%			66.8	%
Stores and Distribution Expense			41.1	%			40.6	%			40.2	%			40.6	%
Marketing, General and Administrative Expense			13.0	%			11.9	%			13.3	%			12.1	%
Other Operating Income, Net			(0.5	)%			(0.2	)%			(0.4	)%			(0.2	)%
OPERATING INCOME			15.6	%			15.9	%			14.2	%			14.3	%
Interest Income, Net			(0.4	)%			(0.3	)%			(0.5	)%			(0.2	)%
INCOME BEFORE INCOME TAXES			16.0	%			16.2	%			14.6	%			14.5	%
Provision for Income Taxes			6.0	%			6.2	%			5.3	%			5.8	%
NET INCOME			10.0	%			10.0	%			9.3	%			8.7	%

Financial Summary

The following summarized financial and statistical data compare the thirteen and twenty-six week periods ended July 29, 2006 to the comparable periods ended July 30, 2005:

		Thirteen Weeks Ended												Twenty-Six Weeks Ended
		July 29, 2006				July 30, 2005				% Change				July 29, 2006				July 30, 2005				% Change
Net sales by brand (in thousands)		$	658,696			$	571,591				15	%		$	1,315,967			$	1,118,401				18	%
Abercrombie & Fitch		$	316,257			$	305,588				3	%		$	628,976			$	607,718				3	%
abercrombie		$	72,732			$	63,773				14	%		$	152,205			$	126,334				20	%
Hollister		$	262,855			$	199,360				32	%		$	522,362			$	379,055				38	%
RUEHL*		$	6,852			$	2,870				139	%		$	12,424			$	5,294				135	%
Net retail sales per average store (in thousands)		$	727			$	692				5	%		$	1,443			$	1,346				7	%
Abercrombie & Fitch		$	848			$	829				2	%		$	1,650			$	1,618				2	%
abercrombie		$	417			$	369				13	%		$	868			$	717				21	%
Hollister		$	753			$	713				6	%		$	1,505			$	1,384				9	%
RUEHL*		$	685			$	574				19	%		$	1,380			$	1,151				20	%
Increase/(decrease) in comparable store sales**			0	%			30	%							3	%			24	%
Abercrombie & Fitch			(4	)%			26	%							(4	)%			20	%
abercrombie			11	%			57	%							20	%			44	%
Hollister			3	%			29	%							8	%			25	%
RUEHL			24	%			n	/a							20	%			n	/a
Retail sales increase attributable to new and remodeled stores, catalogue and websites			15	%			12	%							15	%			14	%
Net retail sales per average gross square foot		$	103			$	98				5	%		$	204			$	190				7	%
Abercrombie & Fitch		$	97			$	95				2	%		$	188			$	184				2	%
abercrombie		$	95			$	84				13	%		$	198			$	163				21	%
Hollister		$	115			$	110				5	%		$	230			$	213				8	%
RUEHL*		$	77			$	61				26	%		$	157			$	122				29	%
Transactions per average retail store			12,651				12,201				4	%			24,179				22,734				6	%
Abercrombie & Fitch			12,497				12,413				1	%			23,329				23,195				1	%
abercrombie			7,307				6,641				10	%			14,425				12,258				18	%
Hollister			15,493				15,391				1	%			30,034				28,885				4	%
RUEHL*			8,716				6,475				35	%			16,610				11,919				39	%
Average retail transaction value		$	57.46			$	56.72				1	%		$	59.68			$	59.23				1	%
Abercrombie & Fitch		$	67.84			$	66.81				2	%		$	70.75			$	69.78				1	%
abercrombie		$	57.06			$	55.58				3	%		$	60.14			$	58.45				3	%
Hollister		$	48.60			$	46.32				5	%		$	50.12			$	47.92				5	%
RUEHL*		$	78.61			$	88.65				(11	)%		$	83.11			$	96.58				(14	)%
Average units per retail transaction			2.35				2.28				3	%			2.34				2.26				4	%
Abercrombie & Fitch			2.28				2.21				3	%			2.26				2.22				2	%
abercrombie			2.77				2.73				1	%			2.75				2.69				2	%
Hollister			2.32				2.22				5	%			2.30				2.18				6	%
RUEHL*			2.57				2.30				12	%			2.55				2.33				9	%
Average unit retail sold		$	24.45			$	24.88				(2	)%		$	25.50			$	26.21				(3	)%
Abercrombie & Fitch		$	29.75			$	30.23				(2	)%		$	31.31			$	31.43					nm
abercrombie		$	20.60			$	20.36				1	%		$	21.87			$	21.73				1	%
Hollister		$	20.95			$	20.86				n	m		$	21.79			$	21.98				(1	)%
RUEHL*		$	30.59			$	38.54				(21	)%		$	32.59			$	41.45				(21	)%

* Net Sales for RUEHL during the second quarter of Fiscal 2006 and Fiscal 2005, and the related statistics, reflect the activity of ten stores open in second quarter Fiscal 2006 and five stores open in second quarter Fiscal 2005. As a result, year-over-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

The Company is pleased with the sales and profit growth achieved in the second quarter of Fiscal 2006. Comparable store sales for the quarter were flat compared to last year versus a 30% increase for the second quarter of Fiscal 2005 compared to the second quarter of the Fiscal year ended January 29, 2005. While the Company believes it can achieve positive comparable store sales increases for the remainder of Fiscal 2006, it expects comparable store sales to be at a modest level.

Enhancing the quality of the Company’s brands continues to be a top priority. To continue the Company’s success and meet management’s objective of being recognized as the coolest brand for each of the targeted age groups, the Company has taken steps over the past two years to improve the store environment, its primary method of communicating with its customers. Over this time period, the Company has focused on maintaining appropriate inventory levels in its stores and newness in both store inventory and presentation and has increased store payroll hours to enhance environment, attitude and presentation. Currently, Abercrombie & Fitch stores are undergoing a store refresh program with the objective of replicating the environment of the Company’s Fifth Avenue Flagship store. The Company completed 13 refresh projects during the second quarter and expects to complete an additional 35 in the third quarter. The Company also improved 112 storefronts with the addition of louvers during the second quarter and expects to improve an additional 52 storefronts during the third quarter.

From a merchandising standpoint, during the second quarter, the Company changed the method of clearing through older items by eliminating the first of what used to be two seasonal sales events to ensure that full price merchandise will be available at its stores even during the transition from one season to the next. The Company cleared through the Spring season merchandise better than in Fiscal 2005, ending the quarter with lower Spring season carryover levels, at cost, and a lower markdown rate compared to Fiscal 2005. The Company intends to continue employing this strategy in the second half of the year, although the Company believes the impact on gross margin will be minimal.

The Company ended the second quarter of Fiscal 2006 with an inventory increase, at cost, of approximately 9% per gross square foot compared to the second quarter of Fiscal 2005. The Company expects to end the third quarter of Fiscal 2006 with a lower inventory increase year-over-year per gross square foot when compared to the increase during the second quarter of Fiscal 2006 and expects that inventory levels will continue to moderate for the remainder of the Fiscal year.

For Fiscal 2006, the Company plans to invest approximately $260 million in new store construction, remodels, conversions and improvements to existing stores. In the Abercrombie & Fitch brand alone, the Company is planning to invest at least $50 million over two years to refresh the brand’s store base and enhance the in-store experience for its customers. The Company is also investing in its home office, especially in its information technology infrastructure and distribution center, in order to better support the Company’s future growth. Construction of the new distribution center is ahead of schedule and is expected to be completed in November 2006.

Although the Company will continue to make strategic investments in its store and distribution operations, it seeks to reduce stores and distribution expense, as a percentage of net sales, with modest projected comparable store sales increases for the remainder of the Fiscal year. In the short term, the Company does not expect to leverage its marketing, general and administrative expense due to stock option expensing and continued investments in its home office infrastructure, especially in information technology.

The Company expects net income per share on a diluted basis for the second half of Fiscal 2006 to be in the range of $3.15 to $3.20, including stock option expense of approximately $0.02 attributable to SFAS No. 123(R). Included in the guidance is an estimated $0.08 of incremental fourth quarter net income per diluted share resulting from an extra selling week in the Fiscal 2006 calendar.

SECOND QUARTER RESULTS

Net Sales

Net sales for the second quarter of Fiscal 2006 were $658.7 million, an increase of 15% over net sales of $571.6 million during the second quarter of Fiscal 2005. The net sales increase was attributable to the net addition of 76 stores, which included the Fifth Avenue Flagship store and five stores in Canada.

By brand, comparable store sales for the second quarter of Fiscal 2006 versus the same quarter in Fiscal 2005 were as follows: Abercrombie & Fitch comparable store sales decreased 4% with women’s comparable store sales decreasing by a low single-digit and men’s comparable store sales decreasing by a high single-digit. In abercrombie, comparable store sales increased 11% with girls realizing a low double-digit increase and boys achieving a mid single-digit increase. In Hollister, comparable store sales increased by 3% with bettys realizing a mid single-digit comparable store sales increase and dudes posting a low single-digit decrease. RUEHL comparable store sales increased 24% with men’s comparable store sales increasing by the mid-thirties and women posting a high single-digit increase.

Regionally, comparable store sales were strongest in the North Atlantic and weakest in the South.

In Abercrombie & Fitch, when compared to the second quarter of Fiscal 2005, women’s comparable store sales decreased during the second quarter of Fiscal 2006 in jeans, skirts and sweaters, partially offset by increases in shorts and knits, while men’s comparable store sales decreased during the second quarter of Fiscal 2006 in knits, jeans and activewear, partially offset by increases in graphic tees and personal care.

In abercrombie, girls’ comparable store sales increased in knits and shorts partially offset by decreases in jeans and skirts, while boys achieved comparable store sales increases in knits and graphic tees, partially offset by decreases in activewear and jeans, when compared to the second quarter of Fiscal 2005.

In Hollister, when compared to the second quarter of Fiscal 2005, bettys had comparable store sales increases in knits, pants and shorts, and decreases in jeans, sweaters and skirts. Dudes had comparable store sales increases in graphic tees and shorts, and decreases in jeans and knits.

In RUEHL, men had comparable store sales increases across the majority of categories, especially in graphic tees and shorts when compared to the second quarter of Fiscal 2005. In women comparable store sales increases in pants, accessories and fleece were partially offset by decreases in sweaters.

Net direct-to-consumer merchandise sales through the Company’s websites and catalogue for the second quarter of Fiscal 2006 were $27.5 million, an increase of 33.5% over Fiscal 2005 second quarter net sales of $20.6 million. Shipping and handling revenue for the second quarter of Fiscal 2006 was $4.4 million compared to $3.2 million for the corresponding period in Fiscal 2005. The direct-to-consumer business accounted for 4.8% of net sales in the second quarter of Fiscal 2006 compared to 4.2% in the second quarter of Fiscal 2005.

Gross Profit

Gross profit for the second quarter of Fiscal 2006 was $455.3 million compared to $389.7 million for the comparable period in Fiscal 2005. The gross profit rate (gross profit divided by net sales) for the second quarter of Fiscal 2006 was 69.1%, up 90 basis points from the second quarter Fiscal 2005 rate of 68.2%. The increase in the gross profit rate primarily reflects a lower markdown rate combined with a slightly higher initial markup compared to the second quarter of Fiscal 2005, partially a result of eliminating the seasonal sales event.

Stores and Distribution Expense

Stores and distribution expense for the second quarter of Fiscal 2006 was $270.5 million compared to $232.1 million for the comparable period in Fiscal 2005. For the second quarter of Fiscal 2006, the stores and distribution expense rate (stores and distribution expenses divided by net sales) was 41.1% compared to 40.6% in the second quarter of Fiscal 2005. The increase in the rate resulted primarily from the expense related to improvements to existing Abercrombie & Fitch stores, including the refresh program, partially offset by leverage in store payroll expense.

The distribution center productivity, as measured in units processed per labor hour (“UPH”), decreased during the second quarter of Fiscal 2006 by 16% as compared to the second quarter of Fiscal 2005. The decrease resulted from increased capacity utilization at the distribution center and the Company’s focus on newness and maintenance of inventory levels at the stores during Fiscal 2006 . The Company expects the UPH level to continue to decrease until the second distribution center at the Company’s New Albany campus is fully operational.

Marketing, General and Administrative Expense

Marketing, general and administrative expense during the second quarter of Fiscal 2006 was $85.3 million compared to $67.9 million during the same period in Fiscal 2005. For the second quarter of Fiscal 2006, the marketing, general and administrative expense rate (marketing, general and administrative expenses divided by net sales) was 13.0% compared to 11.9% for the second quarter of Fiscal 2005. The increase in this rate was due to expense related to SFAS No. 123(R) and information technology related projects.

Other Operating Income, Net

Second quarter other operating income for Fiscal 2006 was $3.0 million compared to $1.4 million for the second quarter of Fiscal 2005. The increase was primarily related to an insurance reimbursement received during the second quarter of Fiscal 2006 for Hurricane Katrina damage.

Operating Income

Operating income for the second quarter of Fiscal 2006 increased to $102.4 million from $91.1 million in the second quarter of Fiscal 2005, an increase of 12.4%. The operating income rate (operating income divided by net sales) was 15.6% for the second quarter of Fiscal 2006 compared to 15.9% for the second quarter of Fiscal 2005.

Interest Income and Income Tax Expense

Second quarter net interest income was $2.8 million in Fiscal 2006 compared to $1.6 million in the second quarter of Fiscal 2005. The increase in net interest income was due to higher interest rates and a higher available investment balance during the second quarter of Fiscal 2006 when compared to the second quarter of Fiscal 2005.

The effective tax rate for the second quarter of Fiscal 2006 was 37.5% as compared to 38.0% for the Fiscal 2005 comparable period. The decrease in the effective tax rate relates primarily to an increase in tax-exempt income and a $0.6 million tax provision benefit related to the settlement of a tax audit.

The Company estimates that the annual effective tax rate for Fiscal 2006 will be 39%, exclusive of the impact of any items that are discrete to the interim periods. The Company estimates that the full year effective tax rate for Fiscal 2006 will be approximately 38.0%, including the benefit recognized as a discrete item in the first and second quarters, but excluding any future items that may be recognized discretely in the interim periods in which they occur.

Net Income and Net Income per Share

Net income for the second quarter of Fiscal 2006 was $65.7 million versus $57.4 million for the second quarter of Fiscal 2005, an increase of 14.5%. Net income per diluted weighted-average share outstanding for the second quarter of Fiscal 2006 was $0.72 versus $0.63 for the same period of Fiscal 2005, an increase of 14.3%. The after-tax effect of SFAS No.123(R) for the second quarter of Fiscal 2006 was $0.04 per share on a diluted basis.

YEAR-TO-DATE RESULTS

Net Sales

Year-to-date net sales in Fiscal 2006 were $1.316 billion, an increase of 18% over Fiscal 2005’s net sales of $1.118 billion for the same period. The net sales increase was attributable to the combination of a 3% comparable store sales increase and the net addition of 76 stores, which included the Fifth Avenue Flagship store and five stores in Canada.

Year-to-date comparable store sales by brand were as follows: Abercrombie & Fitch decreased 4%, abercrombie increased 20%, Hollister increased 8% and RUEHL posted a 20% increase. The women’s business in each concept continued to be more significant than the men’s. Year-to-date, womens and girls represented over 60% of net sales for each of the brands. abercrombie girls achieved a low-twenties comparable stores sales increase, Hollister girls and RUEHL womens had high single-digit comparable store sales increases and Abercrombie & Fitch womens posted a low single-digit decrease.

Net direct-to-consumer merchandise sales through the Company’s websites and catalogue for the year-to-date period for Fiscal 2006 were $57.9 million, an increase of 20.4% over Fiscal 2005’s comparable period net sales of $48.1 million. Shipping and handling revenue for the corresponding periods was $9.2 million in Fiscal 2006 and $7.5 million in Fiscal 2005. The direct-to-consumer business accounted for 5.1% of net sales for the Fiscal 2006 year-to-date period compared to 5.0% in the Fiscal 2005 year-to-date period.

Gross Profit

Year-to-date gross profit during Fiscal 2006 was $885.2 million compared to $746.9 million in the comparable period during Fiscal 2005. The gross profit rate for the year-to-date period of Fiscal 2005 was 67.3%, up 50 basis points from last fiscal year’s rate of 66.8%. The increase in the gross profit rate results primarily from a lower markdown rate combined with a slightly higher initial markup.

Stores and Distribution Expense

Stores and distribution expense for the Fiscal 2006 year-to-date period was $528.8 million compared to $454.3 million for the comparable period in Fiscal 2005 . The stores and distribution expense rate was 40.2% compared to 40.6% in the corresponding period of Fiscal 2005. The decrease in the rate resulted primarily from the Company’s ability to leverage store-related fixed costs, combined with a reduction in store repairs and maintenance expense, partially offset by improvements to existing Abercrombie & Fitch stores, including the refresh program.

The distribution center productivity, as measured in UPH, for the Fiscal 2006 year-to-date period decreased 16%. The decrease resulted from increased capacity utilization at the distribution center. The Company expects the UPH level to continue to decrease until the second distribution center at the Company’s New Albany campus is fully operational.

Marketing, General and Administrative Expense

Marketing, general and administrative expense for the Fiscal 2006 year-to-date period was $175.0 million compared to $135.0 million during the same period in the 2005 Fiscal year. The marketing, general and administrative expense rate was 13.3% compared to 12.1% for the year-to-date period of the 2005 Fiscal year. The increase is primarily attributable to SFAS 123(R) expense and information technology related expense.

Other Operating Income, Net

Year-to-date other operating income for Fiscal 2006 was $5.1 million compared to $1.8 million for the second quarter of Fiscal 2005. The increase was primarily related to insurance reimbursements.

Operating Income

For the Fiscal 2006 year-to-date period, operating income was $186.4 million compared to $159.4 million for the Fiscal 2005 comparable period, an increase of 16.9%. The operating income rate for the Fiscal 2006 year-to-date period was 14.2% versus 14.3% for the Fiscal 2005 year-to-date period. The operating income rate for the Fiscal 2006 year-to-date period remained relatively flat to the comparable period last Fiscal year as a result of a an increase in marketing, general and administrative expenses partially offset by a higher gross profit rate, a decrease in stores and distribution expense rate and a higher other operating income rate.

Interest Income and Income Tax Expense

Year-to-date net interest income for Fiscal 2006 was $5.9 million compared to $2.8 million for the Fiscal 2005 comparable period. The increase in net interest income was due to higher interest rates and a higher available investment balance during the second quarter of Fiscal 2006 when compared to the second quarter of Fiscal 2005.

The effective tax rate for the Fiscal 2006 year-to-date period was 36.6% compared to 39.7% for the Fiscal 2005 comparable period. The Fiscal 2006 tax rate includes a $2.6 million tax benefit related to the settlement of tax audits and the resulting change in reserve estimates. The decrease in the effective tax rate is also a result of an increase in tax exempt income during the Fiscal 2006 year-to-date period as compared to the Fiscal 2005 year-to-date period. The 2005 comparable period tax rate reflected a $2.3 million charge related to the Company’s change in estimate of the potential outcome of certain state tax matters.

The Company estimates that the annual effective tax rate for Fiscal 2006 will be 39.0%, exclusive of the impact of any items that are discrete to the interim periods. The Company estimates that the full year effective tax rate for Fiscal 2006 will be approximately 38.0%, including the benefit recognized as a discrete item in the first and second quarters, but excluding any future items that may be recognized discretely in the interim periods in which they occur.

Net Income and Net Income per Share

For the Fiscal 2006 year-to-date period, net income was $122.0 million compared to $97.8 million for the 2005 Fiscal year comparable period, an increase of 24.7%. Fiscal 2006 year-to-date net income per diluted weighted-average share outstanding was $1.34 versus $1.07 for the same period last Fiscal year, an increase of 25.2%. The after-tax effect of SFAS No.123(R) was $0.08 per share on a diluted basis for the 2006 Fiscal year-to-date period.

Off-Balance Sheet Arrangements and Contractual Obligations

As of July 29, 2006, the Company did not have any off-balance sheet arrangements and the Company’s contractual obligations were as follows:

		Payments due by period (thousands)
						Less than 1												More than 5
Contractual Obligations		Total				year				1-3 years				3-5 years				years
Operating Leases Obligations		$	1,544,243			$	199,559			$	393,664			$	348,315			$	602,705
Purchase Obligations			219,339				219,339				—				—				—
Other Obligations			73,580				67,079				4,409				2,031				61
Totals		$	1,837,162			$	485,978			$	398,073			$	350,346			$	602,766

Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases (see Note 6 of the Notes to Consolidated Financial Statements contained in A&F’s Annual Report on Form 10-K for Fiscal 2005). Operating lease obligations do not include common area maintenance (“CAM”), insurance or tax payments for which the Company is also obligated. Total expense related to CAM, insurance and taxes was $52.6 million and $45.9 million for year-to-date Fiscal 2006 and year-to-date Fiscal 2005, respectively. The purchase obligations category represents purchase orders for merchandise to be delivered during Fall 2006 and commitments for fabric to be used during the next several seasons. Other obligations represent preventive maintenance contracts for Fiscal 2006 and letters of credit outstanding as of July 29, 2006 (see Note 9 of the Notes to Consolidated Financial Statements). The Company expects to fund all of these obligations with cash provided from operations.

FINANCIAL CONDITION

Liquidity and Capital Resources

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

		July 29, 2006				January 28, 2006
Working capital		$	434,061				$  455,530
Capitalization:
Shareholders’ equity		$	1,110,724				$  995,117

Operating Activities

Net cash provided by operating activities, the Company’s primary source of liquidity, totaled $81.8 million for the twenty-six weeks ended July 29, 2006 versus $50.8 million in the comparable period in Fiscal 2005. Cash was provided primarily by current year net income, adjusted for depreciation and amortization and share-based compensation charges; lessor construction allowances collected; and changes in accounts payable and accrued expenses. Uses of cash primarily consisted of increases in inventory and payments of income taxes.

Investing Activities

Cash outflows for investing activities were for purchases of marketable securities and capital expenditures (see the discussion in “Capital Expenditures and Lessor Construction Allowances”) related primarily to new store construction and other construction in progress. Cash inflows from investing activities were generated by sales of marketable securities. As of July 29, 2006, the Company held $284.6 million of marketable securities with original maturities of greater than 90 days.

Financing Activities

Financing activities for the twenty-six week period ended July 29, 2006 consisted of $30.8 million for the payment of $0.175 per share quarterly dividends on March 21, 2006 and June 20, 2006 and $4.9 million received in connection with stock option exercises.

During the second quarter of Fiscal 2006, the Company did not repurchase shares of A&F’s Class A Common Stock. As of July 29, 2006, 5.7 million shares were subject to repurchase as part of the August 2005 A&F Board of Directors’ authorization to repurchase six million shares of A&F’s Class A Common Stock.

The Company has $250 million available (less outstanding letters of credit) under its Amended Credit Agreement to support operations. Trade letters of credit totaling approximately $60.6 million and $40.2 million were outstanding on July 29, 2006 and July 30, 2005, respectively. No loans were outstanding on July 29, 2006 or July 30, 2005.

Standby letters of credit totaling approximately $4.9 million and $4.5 million were outstanding on July 29, 2006 and July 30, 2005. The standby letters of credit are set to expire primarily 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 declares bankruptcy. To date, the beneficiary has not drawn upon the standby letters of credit.

Store Count and Gross Square Feet

Store count and gross square footage by brand were as follows for the thirteen weeks ended July 29, 2006 and July 30, 2005, respectively:

Store Activity		Abercrombie & Fitch				abercrombie				Hollister				RUEHL				Total
April 29, 2006			348				161				327				10				846
New			—				4				23				—				27
Remodels/Conversions (net)			5				—				5				—				10
Closed			(2	)			(1	)			—				—				(3	)
July 29, 2006			351				164				355				10				880
Gross Square Feet (thousands)
April 29, 2006			3,039				704				2,143				89				5,975
New			—				19				151				—				170
Remodels/Conversions (net)			62				—				35				—				97
Closed			(16	)			(4	)			—				—				(20	)
July 29, 2006			3,085				719				2,329				89				6,222
Average Store Size			8,789				4,384				6,561				8,900				7,070

Store Activity		Abercrombie & Fitch				abercrombie				Hollister				RUEHL				Total
April 30, 2005			351				167				260				5				783
New			10				1				21				—				32
Closed			(6	)			(5	)			—				—				(11	)
July 30, 2005			355				163				281				5				804
Gross Square Feet (thousands)
April 30, 2005			3,096				740				1,689				47				5,572
New			62				4				138				—				204
Closed			(72	)			(30	)			—				—				(102	)
July 30, 2005			3,086				714				1,827				47				5,674
Average Store Size			8,693				4,379				6,502				9,488				7,057

Store count and gross square footage by brand were as follows for the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively:

Store Activity		Abercrombie & Fitch				abercrombie				Hollister				RUEHL				Total
January 29, 2006			361				164				318				8				851
New			1				4				32				2				39
Remodels/Conversions (net)			(6	)			—				5				—				(1	)
Closed			(5	)			(4	)			—				—				(9	)
July 29, 2006			351				164				355				10				880
Gross Square Feet (thousands)
January 29, 2006			3,157				716				2,083				69				6,025
New			8				19				211				20				258
Remodels/Conversions (net)			(40	)			—				35				—				(5	)
Closed			(40	)			(16	)			—				—				(56	)
July 29, 2006			3,085				719				2,329				89				6,222
Average Store Size			8,789				4,384				6,561				8,900				7,070

Store Activity		Abercrombie & Fitch				abercrombie				Hollister				RUEHL				Total
January 30, 2005			357				171				256				4				788
New			11				1				25				1				38
Closed			(13	)			(9	)			—				—				(22	)
July 30, 2005			355				163				281				5				804
Gross Square Feet (thousands)
January 30, 2005			3,138				752				1,663				37				5,590
New			70				4				164				10				248
Closed			(122	)			(42	)			—				—				(164	)
July 30, 2005			3,086				714				1,827				47				5,674
Average Store Size			8,693				4,379				6,502				9,488				7,057