$ANF Valuation Model

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PDF of Excel workbook created for fundamental analysis of Abercrombie & Fitch ($ANF). Completed fall 2006.

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$ANF Valuation Model

  1. 1. Page 1 of 18 Discounted Cash Flow Model 2006 Model Exhibit Index EXHIBIT TITLE 1 - Key Inputs 2 - Operating Leases 3 - Employee Options 4 - Weighted Average Cost of Capital (WACC) 5 - Free Cash Flow to the Firm (FCFF) 6 - Free Cash Flow to the Firm Valuation (FCFF Valuation) 7 - Historic Growth Matrix 8 - Fundamental Growth in Earnings Before Interest & Tax (EBIT) 9 - Fundamental Growth in Net Income ITEM A - Balance Sheet B - Income Statement B1 - Income Statement - TTM C - Statement of Cash Flows D - Financial Ratios APPENDIX I - Free Cash Flow to Equity (FCFE) II - Positive Contingency Valuation Scenario III - Negative Contingency Valuation Scenario Abercrombie & Fitch Co.
  2. 2. Page 2 of 18 Ex. 1 Key Inputs for Valuation: Valuation Date 12/4/2006 Stock Price 68.26$ Shares Outstanding (000) 91,045 MV of Equity (000) $6,214,730 MV of Debt (000) $0 Beta 1.2 regression beta Market Risk Premium 5.00% Risk-free Rate 4.61% 10 yr. t-bill Cost of Debt 5.35% Marginal Tax Rate 39.69% Valuation Price (FCFF) $66.87 Key Inputs for Valuation Model Abercrombie & Fitch Co.
  3. 3. Page 3 of 18 Ex. 2 Inputs: Cost of Debt 5.35% Round Annuity Length? (1=yes, 0=no) 0 Operating Lease Commitments (in thousands) PV of Commitments 2006 93,837$ * 91,423$ 2007 187,397$ 173,305$ 2008 178,595$ 156,777$ 2009 169,856$ 141,534$ 2010 155,670$ 123,126$ >2010 538,635$ 383,079$ 1,069,245$ Estimation: Avg from 2007-2010 172,880$ Annuity yrs 3.12 PV of Lease Pmts 1,069,245$ 140,400.64$ St.Line Depreciation over 7.62 (4.5 + 3.12) years * Commitments due for second half of 2006 (calculated by dividing full year 2006 payments by 2) Operating Lease Commitments Abercrombie & Fitch Co.
  4. 4. Page 4 of 18 Ex. 3 Black-Scholes Option Pricing Model Inputs: Inputs (with dilution effects): Stock Price (S) $68.26 Stock Price (S) $68.26 Strike Price (X) $37.18 Strike Price (X) $37.18 Volatility () 47.00 % Volatility () 47.00 % Risk-free Rate 4.58 % Risk-free Rate 4.58 % Time to expiration (T) 4.6 yrs Time to expiration (T) 4.6 yrs Dividend Yield 1.00 % Dividend Yield 1.00 % # of Options 9,060,831 # Shares Outstanding 88,080,000 # of Options 9,060,831 Output: D1 1.27009 Output: D2 0.26206 Adjusted S (dilution) $65.43 N(D1) 0.89797 D1 1.22814 N(D2) 0.60336 D2 0.22010 Call Price $40.36855 N(D1) 0.89030 Put Price $5.29443 N(D2) 0.58710 Value of Call Options $365,772,646 Call Price $37.95452 Put Price $5.58005 Value of Call Options $343,899,458 After-tax Value $207,397,343 Black-Scholes Option Pricing Model (with Employee Options at 12/04/2006 Abercrombie & Fitch Co.
  5. 5. Page 5 of 18 Ex. 4 Inputs: Beta 1.20 Risk-Free Rate 4.61% Market Risk Premium 5.00% Market Value of Debt 0 thousand PV of Leases $1,069,245 thousand Adjusted MV of Debt $1,069,245 thousand MV of Equity $6,214,730 thousand MV of Employee Options $343,899 thousand Adjusted MV of Equity $6,558,630 thousand Cost of Debt 5.35% Marginal Tax Rate 39.69% Estimates: Debt Weight 14.02% Equity Weight 85.98% Cost of Equity 10.61% WACC 9.58% Weighted Average Cost of Capital Abercrombie & Fitch Co.
  6. 6. Page 6 of 18 Ex. 5 (in thousands) 2000 2001 2002 2003 2004 2005 2006LTM (year 0) Reported Operating Income (EBIT) 253,652 271,458 312,617 331,634 347,635 542,738 569,776 Effective Tax Rate 39.52% 39.00% 38.39% 38.84% 38.68% 39.21% 38.2% Marginal Tax Rate 39.69% 39.69% 39.69% 39.69% 39.69% 39.69% 39.69% Reported After-tax Operating Income 153,415 165,583 192,613 202,834 213,176 329,929 352,116 Adjustments for Unusual Charges 0 0 0 0 0 0 0 Add R&D Expense 0 0 0 0 0 0 0 Subtract R&D Amort 0 0 0 0 0 0 0 Operating Lease Debt 1,200,288 1,225,145 1,230,683 1,220,107 1,186,887 1,111,103 1,069,245 Cost of Debt 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% Oper Lease Financing Expense 64,215 65,545 65,842 65,276 63,498 59,444 57,205 Add Oper Lease Fin Exp x (1-T) 38,839 39,981 40,567 39,924 38,938 36,136 35,352 Adjusted Pre-tax Operating Income 317,867 337,003 378,459 396,910 411,133 602,182 626,981 Adjusted After-tax Operating Income 192,254 205,564 233,180 242,758 252,115 366,065 387,468 Net Capex: Expenditures on PP&E 153,481 126,515 92,976 99,128 185,065 256,422 323,006 Subtract Depreciation 30,731 41,155 56,925 66,604 105,814 124,206 130,501 Expenditures on Acquisitions 0 0 0 0 0 0 0 Expenditures on R&D 0 0 0 0 0 0 0 Subtract Amortization of R&D 0 0 0 0 0 0 0 Total Net Capex 122,750 85,360 36,051 32,524 79,251 132,216 192,505 Change in non-cash Working Capital 42,577 -8,687 -14,081 -37,071 -32,401 106,224 0 Change in WC as 0% of change in Rev 0 0 0 0 0 0 0 Use WC as a % of change in Rev (1=yes) 1 FCFF: Adjusted After-tax Operating Income 192,254 205,564 233,180 242,758 252,115 366,065 387,468 - Net Capex -122,750 -85,360 -36,051 -32,524 -79,251 -132,216 -192,505 - Change in non-cash Working Capital 0 0 0 0 0 0 0 FCFF 69,504 120,204 197,129 210,234 172,864 233,849 194,963 Implied Reinvestment Rate 63.85% 41.52% 15.46% 13.40% 31.43% 36.12% 49.68% Book Debt 0 0 0 0 0 0 0 Adj Book Debt 1,200,288 1,225,145 1,230,683 1,220,107 1,186,887 1,111,103 1,069,245 Equity 422,700 595,434 749,527 871,257 669,326 995,117 1,110,724 Debt/Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Adj Debt/Equity 283.96% 205.76% 164.19% 140.04% 177.33% 111.66% 96.27% Debt/(Debt+Equity) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Adj Debt/(Debt+Equity) 73.96% 67.29% 62.15% 58.34% 63.94% 52.75% 49.05% Free Cash Flows Worksheet Abercrombie & Fitch Co.
  7. 7. Page 7 of 18 Ex. 6 Note: Three stage model with three years of high growth, followed by three years of intermediate growth, followed by stable growth in perpetuity Inputs (in thousands): Adjusted Operating Income (yr 0) 626,981 Tax Rate during High Growth 38.20% Tax Rate during Stable Growth 39.69% Growth Rate in High Growth 14.00% Reinvestment Rate in High Growth 49.68% Implied ROC 28.2% Growth Rate in Mid Growth 8.00% Reinvestment Rate in Mid Growth 49.68% Implied ROC 16.1% Growth Rate in Stable Growth 4.50% ROC in Stable Growth 14.32% industry average Req Reinvestment Rate in Stable Growth 31.42% Cost of Capital 9.58% MV of Debt 1,069,244.57 MV of Existing Options 343,899.46 Shares Outstanding 91,045 Cash Flow Forecasts: Year 0 1 2 3 4 5 6 7 EBIT 626,981 714,758 814,824 928,899 1,003,211 1,083,468 1,170,146 1,222,802 EBIT(1-T) 387,468 441,714 503,554 574,051 619,975 669,573 723,139 737,442 Reinvestment 192,505 219,456 250,179 285,205 308,021 332,663 359,276 231,738 FCFF 194,963 222,258 253,374 288,846 311,954 336,911 363,863 505,704 PV of FCFF - 202,836 211,028 219,550 216,394 213,283 210,218 Valuation Estimates: PV of High Growth FCFF 1,273,308 Terminal Value 9,964,602 PV of Terminal Value 5,756,930 Total Value of Operating Cash Flows 7,030,239 Add Cash and Marketable Securities 334,995 Add Nonconsolidated Holdings in Other Firms - Total Firm Value 7,365,234 Subtract Debt 1,069,245 Subtract Minority Interests - Subtract After-Tax Value of Existing Options 207,397 Equity Value 6,088,592 Equity Value Per Share 66.87$ 52-week Price Target 73.28$ Market Price as of 12/4/06 68.26$ FCFF Valuation as of 12/04/2006 Abercrombie & Fitch Co.
  8. 8. Page 8 of 18 Ex. 7 Year Revenues % Change EBIT % Change Net Income % Change Stores % Change EBITDA % Change Regression Models: 1995 235659 23798 14298 100 23798 23798.00 10.08 1 1996 335372 42.31% 45993 93.26% 24674 72.57% 127 27.00% 29,315 23.18% 45993.00 10.74 2 1997 521617 55.53% 84125 82.91% 48322 95.84% 156 22.83% 64,200 119.00% 84125.00 11.34 3 1998 815804 56.40% 166958 98.46% 102062 111.21% 196 25.64% 149,156 132.33% 166958.00 12.03 4 1999 1042056 27.73% 242064 44.98% 149604 46.58% 250 27.55% 221,613 48.58% 242064.00 12.40 5 2000 1237604 18.77% 253652 4.79% 158133 5.70% 354 41.60% 230,722 4.11% 253652.00 12.44 6 2001 1364853 10.28% 271458 7.02% 168672 6.66% 491 38.70% 235,367 2.01% 271458.00 12.51 7 2002 1595757 16.92% 312617 15.16% 194935 15.57% 597 21.59% 316,385 34.42% 312617.00 12.65 8 2003 1707810 7.02% 331634 6.08% 205102 5.22% 700 17.25% 335,342 5.99% 331634.00 12.71 9 2004 2021253 18.35% 347635 4.82% 216376 5.50% 788 12.57% 352,853 5.22% 347635.00 12.76 10 2005 2784711 37.77% 542738 56.12% 333986 54.35% 851 7.99% 549,412 55.71% 542738.00 13.20 11 Arithmetic Avg. 27.64% 41.36% 41.92% 24.27% 43.06% Avg. 2001-2005 18.07% 17.84% 17.46% 19.62% 20.67% Geometric Avg. 28.01% 36.71% 37.04% 23.88% 36.88% 44222.7909 26.55% Std. Deviation. 17.05% 37.01% 38.40% 9.94% 45.17% 0.18547905 Historic Growth Matrix Abercrombie & Fitch Co.
  9. 9. Page 9 of 18 Ex. 8 Abercrombie & Fitch Co. Return on Capital: 2000 2001 2002 2003 2004 2005 2006LTM Book Debt 0 0 0 0 0 0 0 Book Equity 422,700 595,434 749,527 871,257 669,326 995,117 1,110,724 Reported after-tax Operating Income 153,415 165,583 192,613 202,834 213,176 329,929 352,116 Stated ROC 39.17% 32.35% 27.06% 24.47% 49.29% 35.38% Debt Adjusted for Operating Leases 1,200,288 1,225,145 1,230,683 1,220,107 1,186,887 1,111,103 1,069,245 Equity Adjusted for R&D 422,700 595,434 749,527 871,257 669,326 995,117 1,110,724 Adjusted after-tax Operating Income 192,254 205,564 233,180 242,758 252,115 366,065 387,468 Adjusted ROC 11.94% 12.27% 11.92% 12.77% 18.48% 18.08% Industry ROC (Apparel Stores) 14.32% Reinvestment Rate: 2000 2001 2002 2003 2004 2005 2006LTM Net Capex 122,750 85,360 36,051 32,524 79,251 132,216 192,505 Change in non-cash Working Capital as % of Rev 0 0 0 0 0 0 0 Total Reinvestment 122,750 85,360 36,051 32,524 79,251 132,216 192,505 Reinvestment Rate 63.85% 41.52% 15.46% 13.40% 31.43% 36.12% 49.68% Industry Reinvestment Rate (Apparel Stores) 5.40% Expected Growth in EBIT: 2000 2001 2002 2003 2004 2005 2006LTM L-T Fundamental Growth Forecast 0.00% 4.96% 1.90% 1.60% 4.02% 6.67% 8.98% Total Fundamental Growth Forecast 4.67% -1.22% 11.13% 51.33% 6.83% Industry Fundamental Growth 0.00% Fundamental Growth in EBIT

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