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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q 
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2017November 3, 2018
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.
(Exact name of Registrant as specified in its charter)
 
Delaware31-1469076
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
  
6301 Fitch Path, New Albany, Ohio43054
(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.    x  Yes    ¨  No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company¨
  Emerging growth company¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
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 November 30, 2017December 7, 2018
$.01 Par Value 68,101,77065,845,073 Shares


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ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS

  Page No.
   
Item 1. 
   
 
   
 
   
 
   
 
   
Item 2.
   
Item 3.
   
Item 4.
   
   
Item 1.
   
Item 1A.
   
Item 2.
   
Item 6.


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PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Thousands, except per share amounts)
(Unaudited)



 
Thirteen Weeks Ended Thirty-nine Weeks EndedThirteen Weeks Ended Thirty-nine Weeks Ended
October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
Net sales$859,112
 $821,734
 $2,299,532
 $2,290,377
$861,194
 $859,112
 $2,434,507
 $2,299,532
Cost of sales, exclusive of depreciation and amortization332,485
 310,995
 913,085
 876,810
333,375
 332,485
 957,448
 913,085
Gross profit526,627
 510,739
 1,386,447
 1,413,567
527,819
 526,627
 1,477,059
 1,386,447
Stores and distribution expense375,944
 386,609
 1,105,168
 1,138,644
371,859
 375,944
 1,107,566
 1,105,168
Marketing, general and administrative expense124,533
 105,307
 343,779
 331,473
117,181
 124,533
 365,961
 343,779
Asset impairment3,480
 
 10,345
 6,356
656
 3,480
 10,383
 10,345
Other operating income, net(70) (822) (4,555) (16,835)(1,557) (70) (4,551) (4,555)
Operating income (loss)22,740
 19,645
 (68,290) (46,071)39,680
 22,740
 (2,300) (68,290)
Interest expense, net4,571
 4,609
 12,780
 13,856
2,857
 4,571
 8,898
 12,780
Income (loss) before taxes18,169
 15,036
 (81,070) (59,927)
Income (loss) before income taxes36,823
 18,169
 (11,198) (81,070)
Income tax expense (benefit)7,553
 6,762
 (16,062) (17,540)12,047
 7,553
 8,358
 (16,062)
Net income (loss)10,616
 8,274
 (65,008) (42,387)24,776
 10,616
 (19,556) (65,008)
Less: Net income attributable to noncontrolling interests541
 393
 2,108
 2,448
857
 541
 2,839
 2,108
Net income (loss) attributable to A&F$10,075
 $7,881
 $(67,116) $(44,835)$23,919
 $10,075
 $(22,395) $(67,116)
              
Net income (loss) per share attributable to A&F              
Basic$0.15
 $0.12
 $(0.98) $(0.66)$0.36
 $0.15
 $(0.33) $(0.98)
Diluted$0.15
 $0.12
 $(0.98) $(0.66)$0.35
 $0.15
 $(0.33) $(0.98)
              
Weighted-average shares outstanding              
Basic68,512
 67,975
 68,347
 67,848
66,818
 68,512
 67,775
 68,347
Diluted69,425
 68,277
 68,347
 67,848
68,308
 69,425
 67,775
 68,347
              
Dividends declared per share$0.20
 $0.20
 $0.60
 $0.60
$0.20
 $0.20
 $0.60
 $0.60
              
Other comprehensive income (loss)       
Other comprehensive (loss) income       
Foreign currency translation, net of tax$(3,496) $(12,194) $21,183
 $870
$(3,095) $(3,496) $(22,640) $21,183
Derivative financial instruments, net of tax5,518
 3,937
 (9,230) 557
(681) 5,518
 19,026
 (9,230)
Other comprehensive income (loss)2,022
 (8,257) 11,953
 1,427
Other comprehensive (loss) income(3,776) 2,022
 (3,614) 11,953
Comprehensive income (loss)12,638
 17
 (53,055) (40,960)21,000
 12,638
 (23,170) (53,055)
Less: Comprehensive income attributable to noncontrolling interests541
 393
 2,108
 2,448
857
 541
 2,839
 2,108
Comprehensive income (loss) attributable to A&F$12,097
 $(376) $(55,163) $(43,408)$20,143
 $12,097
 $(26,009) $(55,163)


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)




October 28, 2017 January 28, 2017November 3, 2018 February 3, 2018
Assets      
Current assets:      
Cash and equivalents$459,293
 $547,189
$520,523
 $675,558
Receivables78,554
 93,384
87,714
 79,724
Inventories, net570,484
 399,795
Inventories572,173
 424,393
Other current assets68,903
 98,932
109,888
 84,863
Total current assets1,177,234
 1,139,300
1,290,298
 1,264,538
Property and equipment, net767,930
 824,738
684,527
 738,182
Other assets352,737
 331,719
308,244
 322,972
Total assets$2,297,901
 $2,295,757
$2,283,069
 $2,325,692
Liabilities and stockholders’ equity      
Current liabilities:      
Accounts payable$248,963
 $187,017
$266,933
 $168,868
Accrued expenses292,479
 273,044
293,410
 308,601
Short-term portion of deferred lease credits19,314
 20,076
19,465
 19,751
Income taxes payable6,189
 5,863
10,360
 10,326
Total current liabilities566,945
 486,000
590,168
 507,546
Long-term liabilities:      
Long-term portion of deferred lease credits74,782
 76,321
79,667
 75,648
Long-term portion of borrowings, net263,910
 262,992
250,142
 249,686
Leasehold financing obligations48,082
 46,397
46,081
 50,653
Other liabilities174,023
 172,008
182,721
 189,688
Total long-term liabilities560,797
 557,718
558,611
 565,675
Stockholders’ equity      
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of October 28, 2017 and January 28, 20171,033
 1,033
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at November 3, 2018 and February 3, 2018, respectively1,033
 1,033
Paid-in capital389,384
 396,590
406,169
 406,351
Retained earnings2,361,055
 2,474,703
2,345,710
 2,420,552
Accumulated other comprehensive loss, net of tax(109,349) (121,302)(98,668) (95,054)
Treasury stock, at average cost: 35,184 and 35,542 shares at October 28, 2017 and January 28, 2017, respectively(1,481,363) (1,507,589)
Treasury stock, at average cost: 37,457 and 35,105 shares at November 3, 2018 and February 3, 2018, respectively(1,529,774) (1,490,503)
Total Abercrombie & Fitch Co. stockholders’ equity1,160,760
 1,243,435
1,124,470
 1,242,379
Noncontrolling interests9,399
 8,604
9,820
 10,092
Total stockholders’ equity1,170,159
 1,252,039
1,134,290
 1,252,471
Total liabilities and stockholders’ equity$2,297,901
 $2,295,757
$2,283,069
 $2,325,692

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)



Thirty-nine Weeks EndedThirty-nine Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
Operating activities      
Net loss$(65,008) $(42,387)$(19,556) $(65,008)
Adjustments to reconcile net loss to net cash provided by operating activities:      
Depreciation and amortization146,147
 146,666
136,263
 146,147
Asset impairment10,345
 6,356
10,383
 10,345
Loss on disposal5,624
 1,914
3,191
 5,624
Amortization of deferred lease credits(16,510) (18,601)(16,129) (16,510)
Benefit from deferred income taxes(15,597) (26,103)(1,509) (15,597)
Share-based compensation15,774
 16,691
16,907
 15,774
Changes in assets and liabilities      
Inventories, net(167,546) (91,375)
Inventories(159,421) (167,546)
Accounts payable and accrued expenses73,214
 9,533
105,452
 73,214
Lessor construction allowances12,954
 4,976
13,784
 12,954
Income taxes93
 (6,463)(3,171) 93
Long-term lease deposits(421) 23,653
1,213
 (421)
Other assets40,706
 (4,544)(8,734) 42,351
Other liabilities(10,036) 1,776
(1,428) (10,036)
Net cash provided by operating activities29,739
 22,092
77,245
 31,384
Investing activities      
Purchases of property and equipment(86,300) (96,814)(98,768) (86,300)
Proceeds from sale of property and equipment203
 4,098

 203
Net cash used for investing activities(86,097) (92,716)(98,768) (86,097)
Financing activities      
Purchase of treasury stock(68,670) 
Dividends paid(40,776) (40,526)(40,550) (40,776)
Other financing activities(2,423) (4,840)(8,761) (2,423)
Net cash used for financing activities(43,199) (45,366)(117,981) (43,199)
Effect of exchange rates on cash11,661
 (2,868)(16,068) 11,661
Net decrease in cash and equivalents(87,896) (118,858)
Cash and equivalents, beginning of period547,189
 588,578
Cash and equivalents, end of period$459,293
 $469,720
Net decrease in cash and equivalents, and restricted cash(155,572) (86,251)
Cash and equivalents, and restricted cash, beginning of period697,955
 567,632
Cash and equivalents, and restricted cash, end of period$542,383
 $481,381
Significant non-cash investing activities      
Change in accrual for construction in progress$(10,445) $(12,453)$8,045
 $(10,445)
Supplemental information      
Cash paid for interest$9,849
 $11,538
$10,428
 $9,849
Cash paid for income taxes, net of refunds$(14,921) $20,516
Cash paid for income taxes$17,712
 $12,322
Cash received from income tax refunds$7,477
 $27,243


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
INDEX FOR NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Page No.
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10.
Note 11.

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ABERCROMBIE & FITCH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Nature of Businessbusiness

Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, multi-brand, specialty retailer, of branded apparel and accessories. The Company operateswhich primarily sells its products through its wholly-owned store and direct-to-consumer operations,channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The Company has operations in North America, Europe, Asia and the Middle East.

Principles of Consolidationconsolidation

The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.

The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets liabilities, results of operations and cash flowsliabilities of these VIEs.VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI on the Condensed Consolidated Balance Sheets.

Fiscal Yearyear

The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal 2017”2018” and “Fiscal 2016”2017” represent the fifty-threefifty-two week fiscal year ending on February 3, 20182, 2019 and the fifty-twofifty-three week fiscal year ended on January 28, 2017,February 3, 2018, respectively.

Interim Financial Statementsfinancial statements

The Condensed Consolidated Financial Statements as of October 28, 2017,November 3, 2018, and for the thirteen and thirty-nine week periods ended November 3, 2018 and October 28, 2017, and October 29, 2016, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, thesethe 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 20162017 filed with the SEC on March 27, 2017.April 2, 2018. The January 28, 2017February 3, 2018 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, 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 2017.2018.

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Recent Accounting Pronouncementsaccounting pronouncements

The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s financial statements. The following table provides a brief description of recent accounting pronouncements that could affect the Company’s financial statements:Company has adopted or is currently evaluating.
Accounting Standards Update (ASU) Description 
Date of
Adoption
 Effect on the Financial Statements or Other Significant Matters
Standards adopted
ASU 2015-11, Simplifying the Measurement of Inventory
This update amends ASC 330, Inventory. The new guidance applies to inventory measured using first-in, first-out (FIFO) or average cost. Under this amendment, inventory is to be measured at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
January 29, 2017The adoption of this guidance did not have any impact on the Company’s consolidated financial statements.
ASU 2016-09, Compensation—Stock Compensation
This update amends ASC 718, Compensation. Under the new guidance, tax benefits and certain tax deficiencies arising from the vesting of share-based payments are to be recognized as income tax benefits or expenses in the statement of operations; whereas, under the previous guidance, such benefits and deficiencies were recorded in additional paid in-capital. The cash flow effects of the tax benefit are to be reported in cash flows from operating activities; whereas, they were previously reported in cash flows from financing activities. This guidance also allows for entities to make a policy election to estimate forfeitures or account for them when they occur.

January 29, 2017As required by the update, all excess tax benefits and tax deficiencies recognized on share-based compensation expense are reflected in the condensed consolidated statements of operations as a component of the provision for income taxes on a prospective basis. This update resulted in additional non-cash income tax expense of $0.2 million and $10.1 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. In addition, excess tax benefits and tax deficiencies recognized on share-based compensation expense are now classified as an operating activity on the condensed consolidated statements of cash flows. The Company has applied this provision on a retrospective basis. For the thirty-nine weeks ended October 29, 2016, net cash provided by operating activities increased by $0.7 million with a corresponding offset to net cash used for financing activities. The Company has elected to maintain its practice of estimating forfeitures when recognizing expense for share-based payment awards rather than accounting for forfeitures when they occur. Based on share-based compensation awards currently outstanding and the price of the Company's Common Stock as of October 28, 2017, the adoption of this guidance would result in non-cash income tax expense of approximately $11 million for Fiscal 2017, $19 million for Fiscal 2018 and $3 million for Fiscal 2019.
Standards not yet adopted
ASU 2014-09, Revenue from Contracts with Customers
 
This update supersedessuperseded the revenue recognition requirementsguidance in ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
 February 4, 2018 
The Company is currently evaluating the impact thatadopted this guidance will have on its consolidated financial statements. Based on its preliminary assessment,and all related amendments using the Companymodified retrospective method, and applied the standard to contracts that were not complete as of the adoption date. Comparative period information has determined thisnot been restated and continues to be reported under the accounting standards in effect for those periods. This guidance will impactprimarily impacts the classification and timing of the recognition of the Company’s gift card breakage.breakage and timing of direct-to-consumer revenue. Adoption of this guidance had an immaterial impact on net income (loss) attributable to A&F in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The cumulative effect of applying the new standard on the Condensed Consolidated Balance Sheets as of November 3, 2018 was recognized as an adjustment to the opening balance of retained earnings, increasing beginning retained earnings by $6.9 million, with corresponding reductions in accrued expenses, inventories, and other assets of $4.7 million, $6.4 million, and $2.2 million, respectively, and increases to receivables and other current assets of $6.4 million and $4.4 million, respectively.

In accordance with the new guidance, expected gift card breakage is now recognized in net sales as gift cards are redeemed. Previously, gift card breakage was recognized as other operating income when the Company determined that the likelihood of redemption was remote. Under the new guidance, direct-to-consumer revenue is recognized when control is passed to the customer, typically upon shipment or pick-up of goods. Previously, direct-to-consumer revenue was recognized upon customer acceptance, which typically occurred upon the customer’s possession of the merchandise. The Company does not expect this guidance to have a material impact on store, direct-to-consumer, wholesale, franchise or license revenues.revenues on an ongoing basis.

The Company’s revenue recognition accounting policies are discussed further in this Note 1 under “Revenue Recognition.”
ASU 2016-18, Statement of Cash Flows
This update amends the guidance in ASC 230, Statement of Cash Flows. The new guidance requires an entity to show the changes in total cash, cash equivalents and restricted cash in the statement of cash flows. Consequently, an entity is no longer required to present transfers between cash and equivalents and restricted cash.
February 4, 2018The Company adopted this guidance under the retrospective method. For the thirty-nine weeks ended October 28, 2017, adoption of this guidance resulted in a $1.6 million increase in net cash provided by operating activities and increases of $20.4 million and $22.1 million to beginning and ending cash, cash equivalents and restricted cash, respectively. In addition, captions have been updated in the Condensed Consolidated Statements of Cash Flows to reflect the inclusion of restricted cash. Restricted cash is classified as other assets on the Condensed Consolidated Balance Sheets, as was the case at year-end.
Standards not yet adopted
ASU 2016-02, Leases
 
This update supersedes the leasing requirementsguidance in ASC 840, Leases. The new guidance requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.
 February 3, 2019*2019 The Company expects that this guidance will result in a material increase in the Company’s long-term assets and long-term liabilities on the Company's consolidated balance sheets,Company’s Condensed Consolidated Balance Sheets for right-of-use assets and lease liabilities as the majority of the Company’s retail locations are currently categorized as operating leases. The Company plans to use the optional transition method when adopting the new standard and will be electing the practical expedient package. In addition, the Company is currently evaluating any additional impacts that this guidance may have on its consolidated financial statements.statements, including the impairment of right-of-use assets. The Company expects this guidance will result in a material decrease in the Company’s opening retained earnings related to the pre-existing impairment of right-of-use assets. The Company did not beelect to early adoptingadopt this guidance.
ASU 2017-12, Derivatives and HedgingTargeted Improvements to Accounting for Hedging Activities
 
This update amends ASC 815, Derivatives and Hedging. The new guidance simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements. Under theThe new standard,guidance allows more hedging strategies willto be eligible for hedge accounting including hedgesand aligns the recognition and presentation of the benchmark rate componenteffects of hedging instruments and hedged items within the contractual coupon cash flows of fixed-rate assets or liabilities and partial-term hedges of fixed-rate assets or liabilities.financial statements. For cash flow and net investment hedges, the guidance requires a modified retrospective approach while the amended presentation and disclosure guidance requires a prospective approach.
 February 3, 2019*2019 The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements. The Company willdid not beelect to early adoptingadopt this guidance.

* Early
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The Company’s significant accounting policies as of November 3, 2018 have not changed materially from those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017, with the exception of those discussed below:

Revenue recognition

The Company recognizes revenue from product sales when control of the good is transferred to the customer, generally upon pick up at, or shipment from, a Company location.

The Company provides shipping and handling services to customers in certain direct-to-consumer transactions. Revenue associated with the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receipt of the merchandise. The related shipping and handling costs are classified in stores and distribution expense on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Revenue is recorded net of estimated returns, associate discounts, promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience among other factors. The sales return reserve is classified in accrued expenses on the Condensed Consolidated Balance Sheets.

The Company accounts for gift cards sold to customers by recognizing an unearned revenue liability at the time of sale, which remains until income from gift cards not expected to be redeemed, referred to as gift card breakage, is recognized as revenue proportionally with gift card redemptions. Gift cards sold to customers do not expire or lose value over periods of inactivity and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates.

The Company also maintains loyalty programs, which primarily provides customers with the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized at the earlier of redemption or expiration.

Unearned revenue liabilities are primarily recorded when prepayments for future merchandise are received through gift card purchases or when loyalty rewards are earned by a customer in a sales transaction, and are classified in accrued expenses on the Condensed Consolidated Balance Sheets and are typically recognized as revenue within a 12-month period. Unearned revenue liabilities as of November 3, 2018 and the date of adoption, February 4, 2018, were approximately $41.6 million and $38.7 million, respectively. On the date of adoption, February 4, 2018, an adjustment related to the adoption of new revenue recognition standards decreased the beginning of period balance by $6.2 million. For the thirteen and thirty-nine weeks ended November 3, 2018, the Company recognized revenue of approximately $19.9 million and $61.2 million, respectively, related to previous deferrals of revenue resulting from the Company’s gift card and loyalty programs.

The Company also recognizes revenue under wholesale arrangements, which is permitted.generally recognized upon shipment, when control passes to the wholesale partner. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers.

All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For a discussion of the disaggregation of revenue, refer to Note 10, “SEGMENT REPORTING.” The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales.


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2. NET INCOME (LOSS) PER SHARE

Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of common stock.Class A Common Stock (“Common Stock”).

The following table presents weighted-average shares outstanding and anti-dilutive shares:Additional information pertaining to net income (loss) per share attributable to A&F is as follows:
Thirteen Weeks Ended Thirty-nine Weeks EndedThirteen Weeks Ended Thirty-nine Weeks Ended
(in thousands)October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
Shares of common stock issued103,300
 103,300
 103,300
 103,300
Shares of Common Stock issued103,300
 103,300
 103,300
 103,300
Weighted-average treasury shares(34,788) (35,325) (34,953) (35,452)(36,482) (34,788) (35,525) (34,953)
Weighted-average — basic shares68,512
 67,975
 68,347
 67,848
66,818
 68,512
 67,775
 68,347
Dilutive effect of share-based compensation awards913
 302
 
 
1,490
 913
 
 
Weighted-average — diluted shares69,425
 68,277
 68,347
 67,848
68,308
 69,425
 67,775
 68,347
Anti-dilutive shares (1)
5,181
 6,126
 5,367
 6,209
1,925
 5,181
 3,827
 5,367

(1) 
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive.


3. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:

Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
Level 3—inputs to the valuation methodology are unobservable.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution within these levels of the Company’s assets and liabilities whichthat are measured at fair value on a recurring basis were as follows:
Assets and Liabilities at Fair Value as of October 28, 2017Assets and Liabilities at Fair Value as of November 3, 2018
(in thousands)Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
Assets:              
Trust-owned life insurance policies (at cash surrender value)$
 $101,962
 $
 $101,962
$
 $105,083
 $
 $105,083
Money market funds25,071
 
 
 25,071
55,329
 
 
 55,329
Derivative financial instruments
 1,256
 
 1,256

 11,056
 
 11,056
Total assets$25,071
 $103,218
 $
 $128,289
$55,329
 $116,139
 $
 $171,468
              
Liabilities:              
Derivative financial instruments$
 $3,553
 $
 $3,553
$
 $
 $
 $
Total liabilities$
 $3,553
 $
 $3,553
$
 $
 $
 $
Assets and Liabilities at Fair Value as of January 28, 2017Assets and Liabilities at Fair Value as of February 3, 2018
(in thousands)Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
Assets:              
Trust-owned life insurance policies (at cash surrender value)$
 $99,654
 $
 $99,654
$
 $102,784
 $
 $102,784
Money market funds94,026
 
 
 94,026
330,649
 
 
 330,649
Derivative financial instruments
 6,042
 
 6,042

 37
 
 37
Total assets$94,026
 $105,696
 $
 $199,722
$330,649
 $102,821
 $
 $433,470
              
Liabilities:              
Derivative financial instruments$
 $492
 $
 $492
$
 $9,147
 $
 $9,147
Total liabilities$
 $492
 $
 $492
$
 $9,147
 $
 $9,147

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The Level 2 assets and liabilities consist of trust-owned life insurance policies and derivative financial instruments, primarily foreign currency exchange forward contracts. The fair value of trust-owned life insurance policies is determined using the cash surrender value of the life insurance policies. The fair value of foreign currency exchange forward contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.

Fair value of borrowings:borrowings

The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. For disclosure purposes, the Company estimated the fair value of borrowings outstanding based on market rates for similar types of debt, which are considered to be Level 2 inputs.

The carrying amount and fair value of the Company’s gross borrowings under the term loan credit facility were as follows:
(in thousands)October 28, 2017 January 28, 2017November 3, 2018 February 3, 2018
Gross borrowings outstanding, carrying amount$268,250
 $268,250
$253,250
 $253,250
Gross borrowings outstanding, fair value$266,909
 $260,551
$253,883
 $253,250

No borrowings were outstanding under the Company’s senior secured revolving credit facility as of October 28, 2017November 3, 2018 or January 28, 2017.February 3, 2018.


4. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:
(in thousands)October 28, 2017 January 28, 2017
Property and equipment, at cost$2,810,471
 $2,772,139
Less: Accumulated depreciation and amortization(2,042,541) (1,947,401)
Property and equipment, net$767,930
 $824,738

Long-lived assets, primarily comprised of leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable.

Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumptions used in the Company’s undiscounted future cash flow models include sales, gross profit and, to a lesser extent, operating expenses.

An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. The key assumptions used in estimating the fair value of impaired assets may include projected cash flows and discount rate.
(in thousands)November 3, 2018 February 3, 2018
Property and equipment, at cost$2,814,442
 $2,821,709
Less: Accumulated depreciation and amortization(2,129,915) (2,083,527)
Property and equipment, net$684,527
 $738,182

The Company incurred store asset impairment charges of $3.5$0.7 million and $10.4 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and 3.5 million and $10.3 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, and $6.4 million forprimarily related to certain of the thirty-nine weeks ended October 29, 2016. There were no asset impairment charges for the thirteen weeks ended October 29, 2016.Company’s international Abercrombie & Fitch stores.

The Company had $36.6$34.7 million and $35.6$38.7 million of construction project assets in property and equipment, net at October 28, 2017November 3, 2018 and January 28, 2017,February 3, 2018, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.


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5. INCOME TAXES

The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in law, regulations, interpretations and administrative practices, relative changes of expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax income (loss).earnings.

InTax Cuts and Jobs Act of 2017

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act makes broad and significantly complex changes to the U.S. corporate income tax system by, among other things: reducing the U.S. federal corporate income tax rate from 35% to 21%; transitioning U.S. international taxation to a modified territorial tax system; and imposing a mandatory one-time deemed repatriation tax, payable over eight years, on accumulated undistributed foreign subsidiary earnings and profits as of December 31, 2017. The Company recognized provisional discrete net tax charges of $19.9 million related to the enactment of the Act in the fourth quarter of Fiscal 2017.

Primarily due to proposed regulatory guidance issued by the Internal Revenue Service, the Company recognized measurement period charges in an aggregate amount of $2.4 million during the thirty-nine weeks ended November 3, 2018, which consisted of:

$2.0 million of measurement period charges during the thirteen weeks ended August 4, 2018, adjusting the provisional tax amounts related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign earnings; and,
$0.4 million of measurement period net charges during the thirteen weeks ended November 3, 2018, adjusting the provisional tax amounts related to the remeasurement of the Company’s ending deferred tax assets and liabilities at February 3, 2018, as well as adjusting the Company’s deferred tax liability on unremitted foreign earnings.

As a result of the Company’s initial analysis of the impact of the Act and subsequent measurement period adjustments, the Company has incurred discrete net income tax charges in an aggregate amount of $22.4 million since the enactment of the Act, which consists of:

$23.7 million of provisional tax expense related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits of approximately $385.8 million;
$3.5 million of provisional tax expense related to the remeasurement of the Company’s ending deferred tax assets and liabilities at February 3, 2018, as a result of the U.S. federal corporate income tax rate reduction from 35% to 21%;
$0.8 million of provisional tax expense at the state level related to the Company’s decision to repatriate $250 million of the Company’s undistributed foreign earnings to the U.S. in the fourth quarter of Fiscal 2018; and,
$5.6 million of tax benefit for the decrease in the Company’s federal deferred tax liability on unremitted foreign earnings.

Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts related to the enactment of the Act are provisional and assessed as of November 3, 2018. The ultimate outcome may differ from these provisional amounts and could impact the provision for income taxes in Fiscal 2018, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Act. Provisional amounts are expected to be finalized after the Company’s Fiscal 2017 U.S. corporate income tax return is filed in the fourth quarter of Fiscal 2018, but no later than one year from the enactment of the Act.

Other

The Company adopted ASU 2016-09, “Compensation—Stock Compensation,” which resulted inincurred discrete non-cash income tax charges recognized in income tax expense (benefit) onof $1.8 million and $9.8 million for the Condensed Consolidated Statements of Operationsthirteen and Comprehensive Income (Loss)thirty-nine weeks ended November 3, 2018, respectively, and charges of $0.2 million and $10.1 million for the thirteen and thirty-nine week periodsweeks ended October 28, 2017, respectively. Referrespectively, related to Note 1, “BASIS OF PRESENTATION--Recent Accounting Pronouncements” for further discussion regarding the adoptionexpiration of this standard.certain share-based compensation awards, recognized in income tax expense (benefit) due to changes in share-based compensation accounting standards adopted by the Company in the first quarter of Fiscal 2017.

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6. BORROWINGS

Asset-Based Revolving Credit FacilityAsset-based revolving credit facility

On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.

As ofOn October 19, 2017, the Company, through A&F Management, entered into the Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement. As amended, the asset-based revolving credit agreement continues to provide for a senior secured revolving credit facility of up to $400 million (the “Amended ABL Facility”). The Amended ABL Facility is subject to a borrowing base, consisting primarily of U.S. inventory, with a letter of credit sub-limit of $50 million (reduced from $100 million by the ABL Second Amendment) and an accordion feature allowing A&F to increase the revolving commitment by up to $100 million subject to specified conditions. The Amended ABL Facility is available for working capital, capital expenditures and other general corporate purposes. The Amended ABL Facility will mature on October 19, 2022.

ObligationsThe provisions of the credit agreement for the Amended ABL Facility have not changed from those describe in Note 11, “BORROWINGS,” in the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017.

As of November 3, 2018, the Company had not drawn on the Amended ABL Facility, and had availability under the Amended ABL Facility are unconditionally guaranteed by A&F and certain of its subsidiaries. The Amended ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The Amended ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property.

At the Company’s option, borrowings under the Amended ABL Facility will bear interest at either (a) an adjusted LIBOR rate plus a margin of 1.25% to 1.50% per annum, or (b) an alternate base rate plus a margin of 0.25% to 0.50% per annum. The applicable margins with respect to LIBOR loans and base rate loans, including swing line loans, under the Amended ABL Facility are 1.25% and 0.25% per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical availability during the preceding quarter. The Company is also required to pay a fee of 0.25% per annum on undrawn commitments under the Amended ABL Facility. Customary agency fees and letter of credit fees are also payable in respect of the Amended ABL Facility.

No borrowings were outstanding under the Amended ABL Facility as of October 28, 2017.$398.9 million.

Term Loan Facilityloan facility

A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan credit agreement on August 7, 2014, which, as amended, provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”).

TheOn June 22, 2018, the Company, through A&F Management, entered into the Term Loan Second Amendment, which served to reprice the Term Loan Facility. As permitted under the credit agreement applicable to the Term Loan Facility, has not changed materially from that disclosedamong other things, the Term Loan Second Amendment provided for the issuance by A&F Management of refinancing term loans in Note 11, “BORROWINGS,an aggregate principal amount of $253.3 million in exchange for the term loans then outstanding under the Term Loan Facility, which resulted in the reduction of the Notesapplicable margins for term loans by 0.25%. Under the Term Loan Second Amendment, at the Company's option, borrowings under the Term Loan Facility will now bear interest at either (a) an adjusted LIBO rate no lower than 1.00% plus a margin of 3.50% per annum, reduced from a margin of 3.75% per annum, or (b) an alternate base rate plus a margin of 2.50% per annum, reduced from a margin of 2.75% per annum. Deferred financing fees associated with the repricing transaction were not significant. All other material provisions under the credit agreement applicable to the Term Loan Facility have remained unchanged.

As of November 3, 2018, the interest rate on borrowings under the Term Loan Facility was 5.78%.

The Company’s Term Loan Facility debt is presented in the Condensed Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA”Balance Sheets, net of A&F’s Annual Report on Form 10-K for Fiscal 2016.the unamortized discount and fees. Net borrowings as of November 3, 2018 and February 3, 2018 were as follows:
(in thousands)November 3, 2018 February 3, 2018
Borrowings, gross at carrying amount$253,250
 $253,250
Unamortized discount(930) (1,184)
Unamortized fees(2,178) (2,380)
Borrowings, net250,142
 249,686
Less: short-term portion of borrowings, net
 
Long-term portion of borrowings, net$250,142
 249,686


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Representations, Warrantieswarranties and Covenantscovenants

The Credit Facilities contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of A&F and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to the greater of 10% of the loan cap or $30 million must be maintained under the Amended ABL Facility. The Credit Facilities do not otherwise contain financial maintenance covenants. Both Credit Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.

The Company was in compliance with the covenants under the Credit Facilities as of October 28, 2017.November 3, 2018.


7. SHARE-BASED COMPENSATION

Financial statement impact

The Company recognized share-based compensation expense of $6.0 million and $16.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and $5.4 million and $15.8 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, and $5.7 million and $16.7 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively. The Company recognized tax benefits associated with share-based compensation expense of $1.3 million and $3.4 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and $2.0 million and $6.0 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, and $2.2 million and $6.3 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively.

Stock Options

The following table summarizes stock option activity for the thirty-nine weeks ended October 28, 2017:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 28, 2017189,800
 $76.62
    
Granted
 
    
Exercised
 
    
Forfeited or expired(88,600) 74.74
    
Outstanding at October 28, 2017101,200
 $78.26
 $
 0.3
Stock options exercisable at October 28, 2017101,200
 $78.26
 $
 0.3

Stock Appreciation Rights

The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended October 28, 2017:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 28, 20174,079,050
 $47.49
    
Granted
 
    
Exercised
 
    
Forfeited or expired(982,928) 42.85
    
Outstanding at October 28, 20173,096,122
 $49.09
 $
 2.2
Stock appreciation rights exercisable at October 28, 20172,846,623
 $51.14
 $
 1.7
Stock appreciation rights expected to become exercisable in the future as of October 28, 2017225,010
 $25.87
 $
 7.2

As of October 28, 2017, there was $1.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 8 months.

The grant date fair value of stock appreciation rights that vested during the thirty-nine weeks ended October 28, 2017 and October 29, 2016 was $2.2 million and $4.1 million, respectively.

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Restricted Stock Unitsstock units

The following table summarizes activity for restricted stock units for the thirty-nine weeks ended October 28, 2017:November 3, 2018:
Service-based Restricted
Stock Units
 
Performance-based Restricted
Stock Units
 
Market-based Restricted
Stock Units
Service-based Restricted
Stock Units
 
Performance-based Restricted
Stock Units
 
Market-based Restricted
Stock Units
Number of 
Underlying
Shares(1)
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
Number of 
Underlying
Shares (1)
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
Unvested at January 28, 20171,915,461
 $25.47
 203,923
 $22.53
 184,892
 $26.89
Unvested at February 3, 20182,520,160
 $15.35
 690,174
 $11.82
 383,980
 $16.50
Granted1,673,528
 9.89
 524,030
 9.11
 236,872
 11.79
764,213
 21.79
 197,979
 21.77
 142,014
 33.69
Adjustments for performance achievement
 
 
 
 
 

 
 (43,999) 20.10
 (36,817) 19.04
Vested(676,345) 25.92
 
 
 
 
(923,378) 17.19
 
 
 (7,185) 19.04
Forfeited(293,668) 23.00
 (37,779) 21.75
 (37,784) 26.14
(154,812) 15.41
 (12,998) 12.17
 (12,999) 17.28
Unvested at October 28, 20172,618,976
 $15.61
 690,174
 $11.82
 383,980
 $16.50
Unvested at November 3, 20182,206,183
 $16.83
 831,156
 $13.74
 468,993
 $21.45

(1) 
Includes 730,736449,923 unvested restricted stock units as of October 28, 2017 which areNovember 3, 2018, subject to vesting requirements related to the vesting requirement that the Company must achieve at least $1.00achievement of GAAPcertain performance metrics, such as operating income and net income, attributable to A&F for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one or more installments of the award if the cumulative performance requirements are met in a subsequent year. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at 100% of their target vesting amount in the table above.

Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying common stockCommon Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For an awardawards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. Unvested shares related to restricted stock units with performance-based vesting conditions are reflected at 100% of their target vesting amount in the table above.

Service-based restricted stock units are expensed on a straight-line basis over the total award’s requisite service period, net of forfeitures.period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis, netbasis. Performance share award expense is primarily recognized in the performance period of forfeitures.the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period, netperiod. Compensation

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expense for stock options had been, and stock appreciation rights is, recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. Unrecognized compensation expense presented excludes the effect of potential forfeitures, and will be adjusted for actual forfeitures as they occur.

As of October 28, 2017,November 3, 2018, there was $30.1$27.6 million, $4.0$8.0 million and $3.7$5.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1516 months, 1512 months and 13 months for service-based, performance-based and market-based restricted stock units, respectively.

The actual tax benefit realized for tax deductions related to the issuance of shares associated with the vesting ofrestricted stock units vesting was $0.4 million and $5.3 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and $0.2 million and $2.7 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, and $0.2 million and $6.6 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively.


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Additional information pertaining to restricted stock units for the thirty-nine weeks ended November 3, 2018 and October 28, 2017 and October 29, 2016 follows:
(in thousands)October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
Service-based restricted stock units:      
Total grant date fair value of awards granted$16,551
 $28,310
$16,652
 $16,551
Total grant date fair value of awards vested17,531
 18,337
15,873
 17,531
      
Performance-based restricted stock units:      
Total grant date fair value of awards granted$4,774
 $3,334
$4,310
 $4,774
Total grant date fair value of awards vested
 1,178

 
      
Market-based restricted stock units:      
Total grant date fair value of awards granted$2,793
 $4,023
$4,784
 $2,793
Total grant date fair value of awards vested
 
137
 

The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirty-nine weeks ended November 3, 2018 and October 28, 2017 and October 29, 2016 were as follows:
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
Grant date market price$11.43
 $28.06
$23.59
 $11.43
Fair value$11.79
 $31.01
$33.69
 $11.79
Assumptions:      
Price volatility47% 45%54% 47%
Expected term (years)2.9
 2.7
2.9
 2.9
Risk-free interest rate1.5% 1.0%2.4% 1.5%
Dividend yield7.0% 3.0%3.4% 7.0%
Average volatility of peer companies35.2% 34.5%37.4% 35.2%
Average correlation coefficient of peer companies0.2664
 0.3415
0.2709
 0.2664


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Stock appreciation rights

The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended November 3, 2018:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life (years)
Outstanding at February 3, 20183,010,720
 $49.35
    
Granted
 
    
Exercised(50,190) 22.21
    
Forfeited or expired(1,903,746) 56.65
    
Outstanding at November 3, 20181,056,784
 $37.68
 $15,525
 4.0
Stock appreciation rights exercisable at November 3, 2018965,488
 $39.09
 $11,644
 3.8
Stock appreciation rights expected to become exercisable in the future as of November 3, 201887,897
 $22.85
 $3,460
 6.4

As of November 3, 2018, there was $0.3 million of total unrecognized compensation cost related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3 months.

The grant date fair value of stock appreciation rights that were exercised during the thirty-nine weeks ended November 3, 2018 and October 28, 2017 was $1.3 million and $2.2 million, respectively.

Stock options

The following table summarizes stock option activity for the thirty-nine weeks ended November 3, 2018:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 Weighted-Average
Remaining
Contractual Life (years)
Outstanding at February 3, 201887,200
 $78.20
    
Granted
 
    
Exercised
 
    
Forfeited or expired(87,200) 78.20
    
Outstanding at November 3, 2018
 $
 $
 
Stock options exercisable at November 3, 2018
 $
 $
 

As of November 3, 2018, there was no unrecognized compensation cost related to stock options.


8. DERIVATIVE INSTRUMENTS

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominatedforeign currency denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominatedforeign currency denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”). Substantially into earnings. Under the current accounting guidance, substantially all of the unrealized gains or losses related to designated cash flow hedges as of October 28, 2017 willNovember 3, 2018 would be recognized in cost of sales, exclusive of depreciation and amortization, over the next twelve months. Refer to Note 1, “BASIS OF PRESENTATION,” for further discussion of recent accounting pronouncements related to derivative instruments that could affect the Company's financial statements.

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The Company presents its derivative assets and derivative liabilities at their gross fair values on the Condensed Consolidated Balance Sheets. However, the Company'sCompany’s derivative contracts allow net settlements under certain conditions.


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As of October 28, 2017,November 3, 2018, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominatedforeign currency denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominatedforeign currency denominated intercompany accounts receivable, or both:
(in thousands)
Notional Amount(1)
Notional Amount (1)
Euro$105,638
$105,013
British pound$45,689
$50,161
Canadian dollar$22,851
$19,494
Japanese yen$8,476
$9,928

(1) 
Amounts reported are the U.S. Dollar notional amounts outstanding as of October 28, 2017.November 3, 2018.

The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains/(losses)gains or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.

As of October 28, 2017,November 3, 2018, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets/liabilities:
(in thousands)
Notional Amount(1)
Notional Amount (1)
Euro$23,424
$3,427
British pound$1,313

(1) 
AmountsAmount reported areis the U.S. Dollar notional amountsamount outstanding as of October 28, 2017.November 3, 2018.

The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of October 28, 2017November 3, 2018 and January 28, 2017February 3, 2018 were as follows:
(in thousands)Location October 28,
2017
 January 28,
2017
 Location October 28,
2017
 January 28,
2017
Location November 3,
2018
 February 3,
2018
 Location November 3,
2018
 February 3,
2018
Derivatives designated as hedging instruments:Derivatives designated as hedging instruments:        Derivatives designated as hedging instruments:        
Foreign currency exchange forward contractsOther current assets $894
 $5,920
 Accrued expenses $3,553
 $486
 $11,050
 $37
 $
 $9,108
Derivatives not designated as hedging instruments:Derivatives not designated as hedging instruments:        Derivatives not designated as hedging instruments:        
Foreign currency exchange forward contractsOther current assets $362
 $122
 Accrued expenses $
 $6
 $6
 $
 $
 $39
TotalOther current assets $1,256
 $6,042
 Accrued expenses $3,553
 $492
Other current assets $11,056
 $37
 Accrued expenses $
 $9,147

Refer to Note 3, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative instruments.


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The location and amounts of derivative gains and losses for the thirteen and thirty-nine weeks ended November 3, 2018 and October 28, 2017 and October 29, 2016 on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows:
 Thirteen Weeks Ended Thirty-nine Weeks Ended
 October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016
(in thousands)Location Gain/(Loss) Gain/(Loss) Gain/(Loss) Gain/(Loss) Thirteen Weeks Ended Thirty-nine Weeks Ended
Derivatives not designated as hedging instruments:Derivatives not designated as hedging instruments:        Location November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
Foreign currency exchange forward contractsOther operating income, net $634
 $152
 $83
 $295
Foreign currency exchange forward contracts gain (loss)Other operating income, net $(1,912) $634
 $2,684
 $83
Effective Portion Ineffective Portion and Amount Excluded from Effectiveness TestingEffective Portion Ineffective Portion and Amount Excluded from Effectiveness Testing
Amount of Gain (Loss) Recognized in AOCL on Derivative Contracts (1)
 Location of Gain (Loss) Reclassified from AOCL into Earnings 
Amount of Gain (Loss) Reclassified from AOCL into Earnings (2)
 Location of Gain Recognized in Earnings on Derivative Contracts 
Amount of Gain  Recognized in Earnings on Derivative Contracts (3)
Amount of Gain (Loss) Recognized in AOCL on Derivative Contracts (1)
 Location of Gain (Loss) Reclassified from AOCL into Earnings 
Amount of Gain (Loss) Reclassified from AOCL into Earnings (2)
 Location of Gain Recognized in Earnings on Derivative Contracts 
Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (3)
Thirteen Weeks EndedThirteen Weeks Ended
(in thousands)October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
Derivatives in cash flow hedging relationships:Derivatives in cash flow hedging relationships:        Derivatives in cash flow hedging relationships:        
Foreign currency exchange forward contracts$1,775
 $4,986
 Cost of sales, exclusive of depreciation and amortization $(3,544) $450
 Other operating income, net $975
 $695
$2,051
 $1,775
 Cost of sales, exclusive of depreciation and amortization $2,814
 $(3,544) Other operating income, net $1,265
 $975
                      
Thirty-nine Weeks EndedThirty-nine Weeks Ended
(in thousands)October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
Derivatives in cash flow hedging relationships:Derivatives in cash flow hedging relationships:        Derivatives in cash flow hedging relationships:        
Foreign currency exchange forward contracts$(10,627) $3,026
 Cost of sales, exclusive of depreciation and amortization $536
 $2,551
 Other operating income, net $2,136
 $1,308
$18,716
 $(10,627) Cost of sales, exclusive of depreciation and amortization $(2,408) $536
 Other operating income, net $4,320
 $2,136

(1) 
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
(2) 
The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
(3) 
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.

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9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended October 28, 2017November 3, 2018 was as follows:
Thirteen Weeks Ended October 28, 2017Thirteen Weeks Ended November 3, 2018
(in thousands)Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments TotalForeign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total
Beginning balance at July 29, 2017$(101,448) $(9,923) $(111,371)
Beginning balance at August 4, 2018$(104,492) $9,600
 $(94,892)
Other comprehensive (loss) income before reclassifications(2,451) 1,775
 (676)(3,111) 2,051
 (1,060)
Reclassified from accumulated other comprehensive loss (1)

 3,544
 3,544

 (2,814) (2,814)
Tax effect(1,045) 199
 (846)16
 82
 98
Other comprehensive (loss) income(3,496) 5,518
 2,022
Ending balance at October 28, 2017$(104,944) $(4,405) $(109,349)
Other comprehensive loss(3,095) (681) (3,776)
Ending balance at November 3, 2018$(107,587) $8,919
 $(98,668)
 Thirty-nine Weeks Ended October 28, 2017
(in thousands)Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total
Beginning balance at January 28, 2017$(126,127) $4,825
 $(121,302)
Other comprehensive income (loss) before reclassifications22,228
 (10,627) 11,601
Reclassified from accumulated other comprehensive loss (1)

 (536) (536)
Tax effect(1,045) 1,933
 888
Other comprehensive income (loss)21,183
 (9,230) 11,953
Ending balance at October 28, 2017$(104,944) $(4,405) $(109,349)
 Thirty-nine Weeks Ended November 3, 2018
(in thousands)Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total
Beginning balance at February 3, 2018$(84,947) $(10,107) $(95,054)
Other comprehensive (loss) income before reclassifications(22,656) 18,716
 (3,940)
Reclassified from accumulated other comprehensive loss (1)

 2,408
 2,408
Tax effect16
 (2,098) (2,082)
Other comprehensive (loss) income(22,640) 19,026
 (3,614)
Ending balance at November 3, 2018$(107,587) $8,919
 $(98,668)

(1)  
Amount represents gains(gain) loss reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended October 29, 201628, 2017 was as follows:
Thirteen Weeks Ended October 29, 2016Thirteen Weeks Ended October 28, 2017
(in thousands)Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments TotalForeign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total
Beginning balance at July 30, 2016$(106,132) $1,197
 $(104,935)
Beginning balance at July 29, 2017$(101,448) $(9,923) $(111,371)
Other comprehensive (loss) income before reclassifications(12,194) 4,986
 (7,208)(2,451) 1,775
 (676)
Reclassified from accumulated other comprehensive loss (2)(1)

 (450) (450)
 3,544
 3,544
Tax effect
 (599) (599)(1,045) 199
 (846)
Other comprehensive (loss) income(12,194) 3,937
 (8,257)(3,496) 5,518
 2,022
Ending balance at October 29, 2016$(118,326) $5,134
 $(113,192)
Ending balance at October 28, 2017$(104,944) $(4,405) $(109,349)
Thirty-nine Weeks Ended October 29, 2016Thirty-nine Weeks Ended October 28, 2017
(in thousands)Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments TotalForeign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total
Beginning balance at January 30, 2016
$(119,196) $4,577
 $(114,619)
Beginning balance at January 28, 2017
$(126,127) $4,825
 $(121,302)
Other comprehensive income before reclassifications870
 3,026
 3,896
22,228
 (10,627) 11,601
Reclassified from accumulated other comprehensive loss (2)(1)

 (2,551) (2,551)
 (536) (536)
Tax effect
 82
 82
(1,045) 1,933
 888
Other comprehensive income870
 557
 1,427
Ending balance at October 29, 2016$(118,326) $5,134
 $(113,192)
Other comprehensive income (loss)21,183
 (9,230) 11,953
Ending balance at October 28, 2017$(104,944) $(4,405) $(109,349)

(2)(1) 
Amount represents gains(gain) loss reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

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10. SEGMENT REPORTING

The Company hasCompany’s two operating segments: (a)segments are brand-based: Hollister and (b) Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective areas.

The following table provides the Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended November 3, 2018 and October 28, 2017 and October 29, 2016.2017.
Thirteen Weeks Ended Thirty-nine Weeks EndedThirteen Weeks Ended Thirty-nine Weeks Ended
(in thousands)October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
Hollister$508,086
 $463,479
 $1,329,401
 $1,245,710
$515,125
 $508,086
 $1,439,589
 $1,329,401
Abercrombie351,026
 358,255
 970,131
 1,044,667
346,069
 351,026
 994,918
 970,131
Total$859,112
 $821,734
 $2,299,532
 $2,290,377
$861,194
 $859,112
 $2,434,507
 $2,299,532

The following table provides the Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended November 3, 2018 and October 28, 2017 and October 29, 2016.2017.
Thirteen Weeks Ended Thirty-nine Weeks EndedThirteen Weeks Ended Thirty-nine Weeks Ended
(in thousands)October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017 November 3, 2018 October 28, 2017
United States$554,673
 $531,449
 $1,434,019
 $1,435,633
$562,590
 $554,673
 $1,543,162
 $1,434,019
Europe192,698
 187,184
 543,578
 541,711
187,516
 192,698
 549,530
 543,578
Other111,741
 103,101
 321,935
 313,033
111,088
 111,741
 341,815
 321,935
Total$859,112
 $821,734
 $2,299,532
 $2,290,377
$861,194
 $859,112
 $2,434,507
 $2,299,532


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11. CONTINGENCIES

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. LegalThe Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss is reasonably estimable. The Company’s assessmentCompany also determines estimates of the current exposure could changereasonably possible losses or ranges of reasonably possible losses in the eventexcess of the discovery of additional facts. As of October 28, 2017,related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. Based on currently available information, the Company hadcannot estimate a range of reasonably possible losses in excess of these accrued charges of approximately $15.9 millionfor legal contingencies. In addition, the Company has not established accruals for certain claims and legal contingencies, which are classified within other current liabilities onproceedings pending against the accompanying Condensed Consolidated Balance Sheet. Company where it is not possible to reasonably estimate the outcome of or potential liability, and cannot estimate a range of reasonably possible losses for these legal matters.

Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of theselegal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There are certain claims andThe Company’s assessment of the current exposure could change in the event of the discovery of additional facts.

Certain legal proceedings pending against the Company for which accruals have not been established.matters

The Company iswas a defendant in two separate class action lawsuits filed by former associates of the Company who are represented by the same counsel. The first lawsuit, filed on September 16,in 2013, allegesalleged failure to indemnify business expenses and a series of derivative claims for compelled patronization, inaccurate wage statements, waiting time penalties, minimum wage violations and unfair competition under California state law on behalf of all non-exempt hourly associates at Abercrombie & Fitch, Abercrombieabercrombie kids, Hollister and Gilly Hicks stores in California. Four subclasses of associates have since beenwere certified, and the matter is nowwas before the United States (“a U.S.”) District Court for the Central District of California. The second lawsuit, filed on December 15,in 2015, allegesalleged that associates were required to purchase uniforms without reimbursement in violation of federal law, and laws of the states of New York, Florida and Massachusetts, as well as derivative putative state law claims and seekssought to pursue such claims on a class and collective basis. This matter is now before theOn December 12, 2017, a U.S. District Court forof California granted the Southernparties’ stipulation to transfer and combine the first-filed lawsuit with the second-filed lawsuit then pending before a U.S. District Court of Ohio and is stayed pending mediation.Ohio. Both matters have beenwere mediated and the parties have reachedsigned a framework for settling both cases onsettlement with a class-wide basis through a proposedmaximum potential payment of $25.0 million claims-made settlement agreement. The parties continuesubject to negotiate the detailsa claim process. On February 16, 2018, a U.S. District Court of Ohio granted preliminary approval of the proposed settlement and ordered that notice of the proposed settlement be given to the absent members of the settlement class. On November 7, 2018, the U.S. District Court of Ohio granted final approval of the proposed settlement, which will result in a full and final settlement of all claims in both lawsuits on a class-wide basis for an ultimate settlement amount is dependent uponof approximately $10.1 million, to be paid by the Company in the fourth quarter of Fiscal 2018, based on the actual claims made by members of the classes and is also subjectclass. As of November 3, 2018, the Company had accrued charges for this payment obligation of $10.1 million, classified within accrued expenses on the accompanying Condensed Consolidated Balance Sheet.

In addition to the matters discussed above, the Company was a defendant in certain other class action lawsuits filed by former associates of the Company. These lawsuits, assigned to the same judge in a U.S. District Court of California, alleged non-exempt hourly associates of the Company were not properly compensated, in violation of federal and California law, for call-in practices requiring associates to engage in certain pre-shift activities in order to determine whether they should report to work and the Company’s alleged failure to pay reporting time pay and all wages earned at termination. In addition, these lawsuits included derivative claims alleging inaccurate wage statements and unfair competition under California state law on behalf of non-exempt hourly associates. One of these lawsuits was mediated and the parties involved have signed a $9.6 million settlement agreement, which was preliminary approved by a U.S. District Court of California. On November 20, 2018 the U.S. District Court of California granted final approval of a court of competent jurisdiction.

The Company incurred a pre-tax charge of $11.1 million within marketing, general and administrative expense on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the thirteen weeks ended October 28, 2017 and has a total estimated liability of $13.1 million as of October 28, 2017 related to the proposed settlement. The estimated liability represents whatsettlement, which will result in a full and final settlement of all claims made therein for an ultimate settlement amount of $9.6 million, to be paid by the Company believes to be a reasonable estimate of the loss exposure related to these matters and is included in the accrued charges disclosed above.fourth quarter of Fiscal 2018. The ultimate outcome of these matters may differ from the Company’s estimated loss exposure, due to uncertainties regarding final settlement agreement negotiations, actual claims rate experience, and court approvals. The
Company mayamount could be subject to an incremental lossappeal from class members. As of as much as $11.9November 3, 2018, the Company had accrued charges for this legal contingency of $9.6 million, and thereclassified within accrued expenses on the accompanying Condensed Consolidated Balance Sheet. There can be no absolute assurance that a settlement will be finalized and approved or of the ultimate outcome of thethis litigation.

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


OVERVIEW

BUSINESS SUMMARYBusiness summary

The Company is a global, multi-brand, specialty retailer, whowhich primarily sells its products through its wholly-owned store and direct-to-consumer operations,channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad arrayassortment of apparel, products, including knit tops, woven shirts, graphic t-shirts, fleece, sweaters, jeans, woven pants, shorts, outerwear, dresses, intimates and swimwear; and personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The Company has operations in North America, Europe, Asia and the Middle East.

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2018” represent the fifty-two-week fiscal year ending on February 2, 2019, and to “Fiscal 2017” represent the fifty-three week fiscal year that will end on February 3, 2018, and to “Fiscal 2016” represent the fifty-two weekfifty-three-week fiscal year that ended January 28, 2017.February 3, 2018.

Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.

SUMMARY RESULTS OF OPERATIONSSummary results of operations

The table below summarizes the Company'sCompany’s results of operations and reconciles GAAP financial measures determined in accordance with accounting principles generally accepted in the U.S. (“GAAP”) to non-GAAP financial measures for the thirteen and thirty-nine week periods ended November 3, 2018 and October 28, 2017 and October 29, 2016.2017. Additional discussion about why the Company believes that these non-GAAP financial measures are useful to investors is provided below under “NON-GAAP FINANCIAL MEASURES.”
 October 28, 2017 October 29, 2016 November 3, 2018 October 28, 2017
(in thousands, except change in comparable sales, gross profit rate and per share amounts) GAAP 
Excluded Items(1)
 Non-GAAP GAAP 
Excluded Items(1)
 Non-GAAP GAAP 
Excluded Items (1)
 Non-GAAP GAAP 
Excluded Items (1)
 Non-GAAP
Thirteen Weeks Ended                        
Net sales $859,112
 $
 $859,112
 $821,734
 $
 $821,734
 $861,194
 $
 $861,194
 $859,112
 $
 $859,112
Change in net sales 0%          
Change in comparable sales(2)
     4%     (6)%     3%     4%
Gross profit rate 61.3% % 61.3% 62.2% % 62.2 % 61.3% % 61.3% 61.3% % 61.3%
Operating income $22,740
 $(14,550) $37,290
 $19,645
 $6,000
 $13,645
 $39,680
 $3,005
 $36,675
 $22,740
 $(14,550) $37,290
Net income attributable to A&F $10,075
 $(10,433) $20,508
 $7,881
 $6,479
 $1,402
 $23,919
 $1,536
 $22,383
 $10,075
 $(10,433) $20,508
Net income per diluted share attributable to A&F $0.15
 $(0.15) $0.30
 $0.12
 $0.09
 $0.02
 $0.35
 $0.02
 $0.33
 $0.15
 $(0.15) $0.30
                        
Thirty-nine Weeks Ended                        
Net sales $2,299,532
 $
 $2,299,532
 $2,290,377
 $
 $2,290,377
 $2,434,507
 $
 $2,434,507
 $2,299,532
 $
 $2,299,532
Change in net sales 6%          
Change in comparable sales(2)
     0%     (5)%     3%     0%
Gross profit rate 60.3% % 60.3% 61.7% % 61.7 % 60.7% % 60.7% 60.3% % 60.3%
Operating loss $(68,290) $(20,685) $(47,605) $(46,071) $11,926
 $(57,997)
Operating (loss) income $(2,300) $(11,266) $8,966
 $(68,290) $(20,685) $(47,605)
Net loss attributable to A&F $(67,116) $(14,958) $(52,158) $(44,835) $10,158
 $(54,993) $(22,395) $(10,547) $(11,848) $(67,116) $(14,958) $(52,158)
Net loss per diluted share attributable to A&F $(0.98) $(0.22) $(0.76) $(0.66) $0.15
 $(0.81) $(0.33) $(0.16) $(0.17) $(0.98) $(0.22) $(0.76)

(1) 
Refer to RESULTS OF OPERATIONS for details on excluded items.
(2) 
Changes in comparable
Comparable sales are calculated on a constant currency basis by converting prior year store and onlinebasis. Due to the calendar shift resulting from the 53rd week in Fiscal 2017, comparable sales at current year exchange rates. For inclusionfor the thirteen weeks ended November 3, 2018 are compared to the thirteen weeks ended November 4, 2017. Refer to the discussion below in this calculation, a store must have been open as“NON-GAAP FINANCIAL MEASURES” for further details on the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year. Excludes revenue other than store and online sales.comparable sales calculation.


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As of November 3, 2018, the Company had $520.5 million in cash and equivalents, and $253.3 million in gross borrowings outstanding under the Term Loan Facility. Net cash provided by operating activities was $77.2 million for the thirty-nine weeks ended November 3, 2018. The Company also used cash of $68.7 million to repurchase approximately 2.9 million shares of A&F’s Common Stock in the open market, $98.8 million for capital expenditures and $40.6 million to pay dividends during the thirty-nine weeks ended November 3, 2018.

As of October 28, 2017, the Company had $459.3 million in cash and equivalents, and $268.3 million in gross borrowings outstanding under its term loan facility.the Term Loan Facility. Net cash provided by operating activities was $29.7$31.4 million for the thirty-nine weeks ended October 28, 2017. The Company also used cash of $86.3 million for capital expenditures and $40.8 million to pay dividends during the thirty-nine weeks ended October 28, 2017.


18STORE ACTIVITY

Store count and gross square footage by brand and geography for the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively, were as follows:
 
Hollister (1)
 
Abercrombie (2)
 Total
 United States International United States International United States International
February 3, 2018394
 144
 285
 45
 679
 189
New6
 3
 4
 3
 10
 6
Closed
 
 (5) 
 (5) 
November 3, 2018400
 147
 284
 48
 684
 195
Gross square footage (in thousands):
           
November 3, 20182,705
 1,219
 2,156
 639
 4,861
 1,858
            
 
Hollister (1)
 
Abercrombie (2)
 Total
 United States International United States International United States International
January 28, 2017398
 145
 311
 44
 709
 189
New1
 
 3
 1
 4
 1
Closed(3) 
 (10) (1) (13) (1)
October 28, 2017396
 145
 304
 44
 700
 189
Gross square footage (in thousands):
           
October 28, 20172,694
 1,216
 2,355
 615
 5,049
 1,831

(1)
Excludes eight international franchise stores as of November 3, 2018, five international franchise stores as of each of February 3, 2018 and October 28, 2017, and three international franchise stores as of January 28, 2017.
(2)
Includes Abercrombie & Fitch and abercrombie kids brands. Excludes six international franchise stores as of November 3, 2018, four international franchise stores as of each of February 3, 2018 and October 28, 2017, and one international franchise store as of January 28, 2017.

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CURRENT TRENDS AND OUTLOOK

We are pleased with our third quarter performance, with net sales up slightly despite adverse impacts from the calendar shift resulting from Fiscal 2017’s 53rd week and changes in foreign currency exchange rates, and our fifth consecutive quarter of positive comparable sales, with growth across brands. We delivered comparable sales of 3%, on top of 4% last year, with continued gross profit rate stabilization. Our results forstrong U.S omnichannel business, and 16% global digital sales growth, confirm that our playbooks are working.

During the third quarter, of Fiscal 2017 reflect progress across all brands, as we continue to execute against our strategic plan. We delivered our fourth consecutive quarter of sequential comparable sales improvement, resulting in overallimproved net sales up 5% compared toincome over last year, and a returnwhile continuing to positive overall comparable sales forinvest in the quarter. We maintained strategic investment in omnichannel and marketing, while managingtransformation of our expenses effectively, resulting in operating expense leverage and profit growth. Hollister continued to leverage high levels of customer engagement to drive another strong quarter, with 10% net sales growth. Abercrombie showed further improvement and early signs of stabilization.

Webusiness. As previously discussed, these transformation initiatives are focused on the continued executionfollowing four pillars:
continuing our global store network optimization;
enhancing digital and omnichannel capabilities;
streamlining our end-to-end concept to customer process by investing in capabilities to position our supply chain for greater speed and efficiency, while leveraging data and analytics to offer the right product at the right time; and
optimizing our marketing investments, including leveraging our growing loyalty programs.

As expected, we had a solid start to the holiday season, demonstrating the effectiveness of our strategic plan, and expect the environment in the fourth quarter to remain challenging and promotional. We maintain ourcontinued focus on strategic investments in marketingthe customer. We are well-positioned to deliver top-line growth, gross profit rate expansion and omnichannel to meet our customers' needs whenever, wherever and however they choose to engage with our brands.operating expense leverage for the full year.

Fourth quarter of Fiscal 2018 outlook

For the fourth quarter of Fiscal 2017,2018, we expect:

Net sales to be down mid single digits, including the adverse effect from the calendar shift and the loss of Fiscal 2017’s 53rd week of approximately $60 million and the adverse effect from changes in foreign currency exchange rates.
Comparable sales to be up low-single digits, and net saleslow single digits.
A gross profit rate flat to up slightly from the Fiscal 2017 rate of 58.4%.
GAAP operating expense, excluding other operating income to be up mid-down in the range of 1-2% from Fiscal 2017 adjusted non-GAAP operating expense of $561 million.
Other operating income, which fluctuates due to high-single digits, including benefits from the 53rd week and changes in foreign currency exchange rates,.
The 53rd week to benefit net sales by approximately $38 million and operating income bybe approximately $2 million.
million.
Changes in foreign currency exchange rates to benefit net sales and operating income, net of hedging.
A gross profit rate down approximately 100 basis points to last year's rate of 59.3%, in line with the third quarter year-over-year decline.
Operating expense, including other operating income, to be down approximately 1% from $553.7 million last year, with expense reductions partially offset by increases in volume-related expenses from higher sales and the adverse effect from changes in foreign currency exchange rates.
The An effective tax rate to be in the mid 30s.
mid-to-upper 20s.
A weighted average dilutedfully-diluted share count of approximately 7068 million shares, excluding the effect of potential share buybacks.buybacks.
Inventory to be flat to up low single digits from Fiscal 2017 ending inventory of $424 million.

On a fullFull year basis,Fiscal 2018 outlook

For Fiscal 2018, we expect:
Net sales to be up in the range of 2% to 4%, including the adverse effect from the loss of Fiscal 2017’s 53rd week of approximately $40 million, partially offset by a benefit from foreign currency exchange rates.
Comparable sales to be up in the range of 2% to 4%.
A gross profit rate up slightly from the Fiscal 2017 rate of 59.7%.
GAAP operating expense, excluding other operating income to be up approximately 2% from Fiscal 2017 adjusted operating expense of $2 billion, including $11 million of net charges this year related to asset impairment and certain legal matters that are excluded from adjusted non-GAAP operating expense. We expect theadjusted non-GAAP operating expense to be up approximately 1.5%.
An effective tax rate to reflect a core tax rate in the midmid-to-upper 30s, which is highly sensitive at lower levelsincluding discrete non-cash net income tax charges of pre-tax earnings. Additionally, we expect theapproximately $9 million related to share-based compensation accounting standards that went into effect in Fiscal 2017. The full year effective tax rate to reflectalso includes discrete non-cash incomenet tax charges of approximately $11$2 million related to a change in share-based compensation accounting standards.the Tax Cuts and Jobs Act of 2017 provisional estimate, which are excluded from adjusted non-GAAP results.

A weighted average fully-diluted share count of approximately 69 million shares, excluding the effect of potential share buybacks.
We now expect capitalCapital expenditures to be approximately $110$145 million, including approximately $90 million for store updates and new stores, and approximately $55 million for the full year,continued rollout of omnichannel and CRM capabilities, including investments in our loyalty programs, information technology and other investments.
To deliver approximately 70 new store experiences through new store prototypes, remodeled stores and right-sizes.
To close up from our prior expectation of $100 million.to 40 stores, primarily in the U.S.

In addition to the five stores opened year to date, including two outlet stores, we expect to open four new full-price stores in the fourth quarter. We also anticipate closing up to 60 stores in the U.S. by the end
24



NON-GAAP FINANCIAL MEASURES

This Quarterly Report on Form 10-Q includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” areis useful to investors as they provideit provides a measure of the Company’s operating performance excluding the effect of certain items whichthat the Company believes do not reflect its future operating outlook, and therefore supplements investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used supplementalas a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies.

Changes in comparable sales areFinancial information on a constant currency basis

The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by convertingapplying the current period’s foreign currency exchange rates to the prior year storeyear’s results and onlineis net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates for Fiscal 2018 is calculated using a 27% effective tax rate.

Comparable sales at current year exchange rates. For

In addition, the purposeCompany provides comparable sales, defined as the aggregate of this calculation, a store must(1) year-over-year sales for stores that have been open as the same brand at least one year and itswhose square footage musthas not have been expanded or reduced by more than 20% within the past year. Excludesyear, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales excludes revenue other than store and onlinedirect-to-consumer sales. Due to the calendar shift in Fiscal 2018, resulting from the 53rd week in Fiscal 2017, comparable sales for the Fiscal 2018 quarterly periods ended May 5, 2018, August 4, 2018, November 3, 2018 and February 2, 2019 are to be compared to the thirteen weeks ended May 6, 2017, August 5, 2017, November 4, 2017 and February 3, 2018, respectively. Management uses comparable sales to understand the drivers of year-over-year changes in net sales as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.

Calendar shift impact

The estimated impact from the calendar shift, resulting from Fiscal 2017’s 53rd week, is calculated on a constant currency basis using the difference between net sales for the thirteen weeks and thirty-nine weeks ended November 4, 2017 and reported net sales for the thirteen and thirty-nine weeks ended October 28, 2017. In addition, the estimated impact from the calendar shift on net income (loss) per diluted share is calculated using the gross profit rate differential between shifted weeks, an assumption for the variable component of operating expenses for changes in net sales, a 27% effective tax rate and the prior year period’s weighted-average diluted shares.

Excluded items

The following financial measures are disclosed on a GAAP basis and as applicable, on aan adjusted non-GAAP basis excluding the following items, relating to legal charges, asset impairment, indemnification recovery, and claims settlement benefits: marketing, general and administrative expense; other operating income, net; operating income (loss); income tax expense (benefit); effective tax rate; net

19



income (loss) attributable to A&F; and net income (loss) per diluted share attributable to A&F. Certain of these GAAP and non-GAAP measures are also expressed as a percentage of net sales. The income tax effect of non-GAAP items is calculated as the difference in income tax benefit with and without the non-GAAP adjustments to income before income taxes based upon the tax laws and statutory income tax rates of the applicable tax jurisdictions.

STORE ACTIVITY

Store count and gross square footage by brand for the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively, were as follows:applicable:
 
Hollister (1)
 
Abercrombie (2)
 Total
 United States International United States International United States International
January 28, 2017398
 145
 311
 44
 709
 189
New1
 
 3
 1
 4
 1
Closed(3) 
 (10) (1) (13) (1)
October 28, 2017396
 145
 304
 44
 700
 189
Gross square feet (in thousands):           
October 28, 20172,694
 1,216
 2,355
 615
 5,049
 1,831
            
 
Hollister (1)
 
Abercrombie (2)
 Total
 United States International United States International United States International
January 30, 2016414
 139
 340
 39
 754
 178
New3
 5
 3
 2
 6
 7
Closed(5) 
 (10) 
 (15) 
October 29, 2016412
 144
 333
 41
 745
 185
Gross square feet (in thousands):
           
October 29, 20162,828
 1,212
 2,548
 631
 5,376
 1,843
Financial measures (1)
Excluded items
Marketing, general and administrative expenseBenefits and charges related to certain legal matters
Operating income (loss)Asset impairment; benefits and charges related to certain legal matters
Net income (loss) and net income (loss) per share attributable to A&F (2)
Asset impairment; benefits and charges related to certain legal matters; discrete net tax charges related to the Act; and the tax effect of excluded items

(1)
Excludes five international franchise storesCertain of these financial measures are also expressed as a percentage of October 28, 2017, three international franchise stores as of January 28, 2017 and October 29, 2016, and two international franchise stores as of January 30, 2016.net sales.
(2)
Includes Abercrombie & Fitch
The Company also presents income tax expense (benefit) and abercrombie kids brands. Excludes four international franchise storesthe effective tax rate on both a GAAP and on an adjusted non-GAAP basis excluding the items listed under “Operating income (loss),” as applicable, in the table above and discrete net tax charges related to the Act. The tax effect of October 28, 2017excluded items is the difference between the tax provision calculation on a GAAP basis and one international franchise store as of January 28, 2017, October 29, 2016 and January 30, 2016.on an adjusted non-GAAP basis.

2025



RESULTS OF OPERATIONS

THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2018 VERSUS OCTOBER 28, 2017 VERSUS OCTOBER 29, 2016

Net Salessales
Thirteen Weeks Ended   Thirteen Weeks Ended   
October 28, 2017 October 29, 2016   November 3, 2018 October 28, 2017   
(in thousands)Net Sales Net Sales $ Change % ChangeNet Sales Net Sales $ Change % Change 
Change in Comparable
Sales (1)
Hollister$508,086
 $463,479
 $44,607
 10%$515,125
 $508,086
 $7,039
 1% 4%
Abercrombie(1)(2)
351,026
 358,255
 (7,229) (2)%346,069
 351,026
 (4,957) (1)% 1%
Total net sales$859,112
 $821,734
 $37,378
 5%$861,194
 $859,112
 $2,082
 0% 3%
            
United States$554,673
 $531,449
 $23,224
 4%$562,590
 $554,673
 $7,917
 1% 6%
International304,439
 290,285
 14,154
 5%298,604
 304,439
 (5,835) (2)% (3)%
Total net sales$859,112
 $821,734
 $37,378
 5%$861,194
 $859,112
 $2,082
 0% 3%
 Thirty-nine Weeks Ended    
 October 28, 2017 October 29, 2016    
(in thousands)Net Sales Net Sales $ Change % Change
Hollister$1,329,401
 $1,245,710
 $83,691
 7%
Abercrombie(1)
970,131
 1,044,667
 (74,536) (7)%
Total net sales$2,299,532
 $2,290,377
 $9,155
 0%
        
United States$1,434,019
 $1,435,633
 $(1,614) 0%
International865,513
 854,744
 10,769
 1%
Total net sales$2,299,532
 $2,290,377
 $9,155
 0%
Thirteen Weeks Ended Thirty-nine Weeks EndedThirty-nine Weeks Ended   
October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017   
Change in Comparable Sales(2)
    
(in thousands)Net Sales Net Sales $ Change % Change 
Change in Comparable
Sales (1)
Hollister8% 0% 6% (1)%$1,439,589
 $1,329,401
 $110,188
 8% 4%
Abercrombie(1)(2)
(2)% (14)% (6)% (10)%994,918
 970,131
 24,787
 3% 2%
Total company4% (6)% 0% (5)%
Total net sales$2,434,507
 $2,299,532
 $134,975
 6% 3%
       
United States6% (5)% 1% (4)%$1,543,162
 $1,434,019
 $109,143
 8% 7%
International0% (10)% (1)% (7)%891,345
 865,513
 25,832
 3% (2)%
Total company4% (6)% 0% (5)%
Total net sales$2,434,507
 $2,299,532
 $134,975
 6% 3%

(1)
Comparable sales are calculated on a constant currency basis. Due to the calendar shift resulting from the 53rd week in Fiscal 2017, comparable sales for the thirteen weeks ended November 3, 2018 are compared to the thirteen weeks ended November 4, 2017. Comparable sales for the thirty-nine weeks ended November 3, 2018 are compared to the thirty-nine weeks ended November 4, 2017. Refer to NON-GAAP FINANCIAL MEASURES, for further details on the comparable sales calculation.
(2) 
Includes Abercrombie & Fitch and abercrombie kids brands.
(2)
Changes in comparable sales are calculated on a constant currency basis by converting prior year store and online sales at current year exchange rates. For inclusion in this calculation, a store must have been open as the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year. Excludes revenue other than store and online sales.

For the third quarter of Fiscal 2017,2018, net sales increased 5%were up slightly as compared to the third quarter of Fiscal 2016, primarily attributable to a 4% increase2017, with units sold approximately flat year-over-year and average unit retail up slightly. The year-over-year change in comparablenet sales with a 8% increase in comparable sales for Hollister, partially offset by a 2% decrease in comparable sales for Abercrombie. reflects:
Changes in foreign currency exchange rates, benefitedwhich adversely impacted net sales by approximately $7 million, or 1%.;
The calendar shift resulting from Fiscal 2017’s 53rd week, which adversely impacted net sales by approximately $20 million, or 2%; and,
Positive comparable sales of 3%, which do not include impacts from changes in foreign currency exchange rates or the calendar shift.

For the year-to-date period of Fiscal 2017,2018, net sales increased slightly6% as compared to the year-to-date period of Fiscal 2016.2017, primarily attributable to an increase in units sold. The year-over-year change in net sales reflects:
Changes in foreign currency exchange rates, which benefited net sales by approximately $26 million, or 1%;
The calendar shift resulting from Fiscal 2017’s 53rd week, which benefited net sales by approximately $20 million, or 1%; and,
Positive comparable sales of 3%, which do not include impacts from changes in foreign currency exchange rates or the calendar shift.

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Cost of Sales, Exclusivesales, exclusive of Depreciationdepreciation and Amortizationamortization
Thirteen Weeks EndedThirteen Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Cost of sales, exclusive of depreciation and amortization$332,485
 38.7% $310,995
 37.8%$333,375
 38.7% $332,485
 38.7%
        
Gross profit$526,627
 61.3% $510,739
 62.2%$527,819
 61.3% $526,627
 61.3%
Thirty-nine Weeks EndedThirty-nine Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Cost of sales, exclusive of depreciation and amortization$913,085
 39.7% $876,810
 38.3%$957,448
 39.3% $913,085
 39.7%
        
Gross profit$1,386,447
 60.3% $1,413,567
 61.7%$1,477,059
 60.7% $1,386,447
 60.3%

For the third quarter of Fiscal 2017,2018, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased bywas approximately 90 basis pointsflat as compared to the third quarter of Fiscal 2016, primarily due to lower average unit cost that was more than offset by lower average unit retail, in an environment that remained promotional, and includes the adverse effects from changes in foreign currency exchange rates of approximately 10 basis points.2017.

For the year-to-date period of Fiscal 2018 cost of sales, exclusive of depreciation increased $44.4 million as compared to the year-to-date period of Fiscal 2017, primarily driven by the year-over-year increase in net sales and an increase in freight costs. For the year-to-date period of Fiscal 2018 cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increaseddecreased by approximately 14040 basis points as compared to the year-to-date period of Fiscal 2016,2017 primarily due to costs increasing at a lower average unit cost that was morerate than offset by lower average unit retail,the relative increase in an environment that remained promotional, and includes the adverse effects from changes in foreign currency exchange rates of approximately 20 basis points.net sales.

Stores and Distribution Expensedistribution expense
Thirteen Weeks EndedThirteen Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Stores and distribution expense$375,944
 43.8% $386,609
 47.0%$371,859
 43.2% $375,944
 43.8%
Thirty-nine Weeks EndedThirty-nine Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Stores and distribution expense$1,105,168
 48.1% $1,138,644
 49.7%$1,107,566
 45.5% $1,105,168
 48.1%

For the third quarter of Fiscal 2017,2018, stores and distribution expense as a percentage of net sales decreased by approximately 32060 basis points as compared to the third quarter of Fiscal 2016,2017, primarily due to expense reduction efforts and the leveraging effect from increased net sales,within store occupancy expense, partially offset by higher direct-to-consumer expense.expense as a percentage of total net sales. For the third quarter of Fiscal 2018, store occupancy expense, a component of stores and distribution expense which includes rent, depreciation, utilities and other store expenses, decreased as a percentage of net sales by approximately 130 basis points as compared to the third quarter of Fiscal 2017.

For the year-to-date period of Fiscal 2017,2018, stores and distribution expense as a percentage of net sales decreased by approximately 160260 basis points as compared to the year-to-date period of Fiscal 2016,2017, primarily due to the leveraging effect from higher net sales and expense reduction efforts,reductions within store occupancy expense, partially offset by higher direct-to-consumer expense.

For the third quarterexpense as a percentage of Fiscal 2017, shippingtotal net sales and handling costs incurred to physically move product$3.9 million of lease termination charges related to the customer, associated with direct-to-consumer operations, including costs incurred toA&F flagship store move and prepare product for shipment, were $31.6 million as compared to $27.1 million for the third quarter of Fiscal 2016.lease in Copenhagen. For the year-to-date period of Fiscal 2017, shipping and handling costs were $92.8 million2018, store occupancy expense decreased as a percentage of net sales by approximately 210 basis points as compared to $77.3 million for the year-to-date period of Fiscal 2016.2017.

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Table of Contents


Marketing, Generalgeneral and Administrative Expenseadministrative expense
Thirteen Weeks EndedThirteen Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Marketing, general and administrative expense$124,533
 14.5% $105,307
 12.8%$117,181
 13.6% $124,533
 14.5%
Deduct: legal charges(1)
(11,070) (1.3)% 
 0.0%
Deduct: indemnification recovery(2)

 0.0% 6,000
 0.7%
Deduct:    
Benefits (charges) related to certain legal matters (1)
3,005
 0.3% (11,070) (1.3)%
Adjusted non-GAAP marketing, general and administrative expense$113,463
 13.2% $111,307
 13.5%$120,186
 14.0% $113,463
 13.2%
Thirty-nine Weeks EndedThirty-nine Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Marketing, general and administrative expense$343,779
 14.9% $331,473
 14.5%$365,961
 15.0% $343,779
 14.9%
Deduct: legal charges(1)
(11,070) (0.5)%   0.0%
Deduct: indemnification recovery(2)

 0.0% 6,000
 0.3%
Deduct:    
Charges related to certain legal matters (2)
(2,595) (0.1)% (11,070) (0.5)%
Adjusted non-GAAP marketing, general and administrative expense$332,709
 14.5% $337,473
 14.7%$363,366
 14.9% $332,709
 14.5%

(1) 
IncludesThe third quarter of Fiscal 2018 includes benefits of $3.0 million related to an update of previously accrued legal charges in connection with a class action settlement, which received final court approval in the fourth quarter of Fiscal 2018. The third quarter of Fiscal 2017 includes legal charges of $11.1 million in connection with a proposed settlement of two related class action claims related to alleged wage and hour practices dating back to 2009. actions, which received final court approval in the fourth quarter of Fiscal 2018. See Note 11, “CONTINGENCIES.”
(2) 
Includes
The year-to-date period of Fiscal 2018 includes legal charges of $5.6 million and benefits related to an indemnification recovery of certain$3.0 million, each updating previously accrued legal charges in connection with class action settlements, which were recognizedreceived final court approval in the secondfourth quarter of Fiscal 2015.2018. The year-to-date period of Fiscal 2017 includes legal charges of $11.1 million in connection with a proposed settlement of two related class actions, which received final court approval in the fourth quarter of Fiscal 2018. See Note 11, “CONTINGENCIES.”

For the third quarter of Fiscal 2018, marketing, general and administrative expense as a percentage of net sales decreased by approximately 90 basis points as compared to the third quarter of Fiscal 2017, primarily due to the net year-over-year impact of items presented above and expense reduction efforts, partially offset by increases in marketing and expenses related to the transformation of the business. Excluding items presented above, third quarter of Fiscal 2018 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales increased by approximately 17080 basis points as compared to the third quarter of Fiscal 2016, primarily due to certain items presented above. In addition, increases in performance-based compensation and marketing expenses were more than offset by expense reduction efforts and2017.

For the leveraging effect from increased net sales. Excluding certain items presented above, third quarteryear-to-date period of Fiscal 2017 adjusted non-GAAP2018, marketing, general and administrative expense as a percentage of net sales decreasedincreased by approximately 3010 basis points as compared to the third quarter of Fiscal 2016.

For the year-to-date period of Fiscal 2017, primarily due to increases in marketing and expenses related to the transformation of the business, partially offset by the leveraging effect from increased net sales, the net year-over-year impact of items presented above and expense reduction efforts. Excluding items presented above, year-to-date Fiscal 2018 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales increased by approximately 40 basis points as compared to the year-to-date period of Fiscal 2016, primarily due to due certain items presented above, higher performance-based compensation and marketing expenses, partially offset by expense reduction efforts. Excluding certain items presented above, year-to-date Fiscal 2017 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased approximately 20 basis points as compared to the year-to-date period of Fiscal 2016.2017.

Asset Impairmentimpairment

For the third quarter of Fiscal 2017, theThe Company incurred store asset impairment charges of $3.5 million. There were no asset impairment charges$0.7 million and $10.4 million for the third quarter and year-to-date period of Fiscal 2016. For2018, respectively, and $3.5 million and $10.3 million for the third quarter and year-to-date period of Fiscal 2017, respectively, primarily related to certain of the Company incurred store asset impairment charges of $10.3 million as compared to $6.4 million for the year-to-date period of Fiscal 2016.Company’s international Abercrombie & Fitch stores.


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Other Operating Income, Netoperating income, net
Thirteen Weeks EndedThirteen Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Other operating income, net$70
 0.0% $822
 0.1%$1,557
 0.2% $70
 0.0%
Thirty-nine Weeks EndedThirty-nine Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales  % of Net Sales   % of Net Sales
Other operating income, net$4,555
 0.2% $16,835
 0.7%$4,551
 0.2% $4,555
 0.2%
Deduct: claims settlement benefits(1)

 0.0% (12,282) (0.5)%
Adjusted non-GAAP other operating income, net$4,555
 0.2% $4,553
 0.2%

(1)
Includes benefits related to a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill.

For the third quarter of Fiscal 2017,2018, other operating income, net as a percentage of net sales decreasedincreased by approximately 1020 basis points as compared to the third quarter of Fiscal 2016,2017, primarily due to year-over-year changes inhigher foreign currency exchange rate related gains, and losses.partially offset by a change in classification of gift card breakage, discussed further in Note 1, “BASIS OF PRESENTATION.”

For the year-to-date period of Fiscal 2017, other operating income, net was $4.6 million as compared to $16.8 million for the year-to-date period of Fiscal 2016. Excluding $12.3 million of claims settlement benefits last year, year-to-date Fiscal 2017 adjusted non-GAAP2018, other operating income, net as a percentage of net sales was approximately flat as compared to the year-to-date period of Fiscal 2016.2017 as higher foreign currency exchange rate related gains were offset by a change in classification of gift card breakage, discussed further in Note 1, “BASIS OF PRESENTATION.”

Operating Income (Loss)income (loss)
 Thirteen Weeks Ended
 October 28, 2017 October 29, 2016
(in thousands)  % of Net Sales   % of Net Sales
Operating income$22,740
 2.6% $19,645
 2.4%
Deduct: legal charges(1)
11,070
 1.3% 
 0.0%
Deduct: asset impairment3,480
 0.4% 
 0.0%
Deduct: indemnification recovery(2)

 0.0% (6,000) (0.7)%
Adjusted non-GAAP operating income$37,290
 4.3% $13,645
 1.7%
 Thirty-nine Weeks Ended
 October 28, 2017 October 29, 2016
(in thousands)  % of Net Sales   % of Net Sales
Operating loss$(68,290) (3.0)% $(46,071) (2.0)%
Deduct: legal charges(1)
11,070
 0.5% 
 0.0%
Deduct: asset impairment9,615
 0.4% 6,356
 0.3%
Deduct: indemnification recovery(2)

 0.0% (6,000) (0.3)%
Deduct: claims settlement benefits(3)

 0.0% (12,282) (0.5)%
Adjusted non-GAAP operating loss$(47,605) (2.1)% $(57,997) (2.5)%
 Thirteen Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales
Operating income$39,680
 4.6% $22,740
 2.6%
Deduct:       
Asset impairment
 0.0% 3,480
 0.4%
(Benefits) charges related to certain legal matters (1)
(3,005) (0.3)% 11,070
 1.3%
Adjusted non-GAAP operating income$36,675
 4.3% $37,290
 4.3%
 Thirty-nine Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales
Operating loss$(2,300) (0.1)% $(68,290) (3.0)%
Deduct:       
Certain asset impairment8,671
 0.4% 9,615
 0.4%
Charges related to certain legal matters (2)
2,595
 0.1% 11,070
 0.5%
Adjusted non-GAAP operating income (loss)$8,966
 0.4% $(47,605) (2.1)%

(1) 
IncludesThe third quarter of Fiscal 2018 includes benefits of $3.0 million related to an update of previously accrued legal charges in connection with a class action settlement, which received final court approval in the fourth quarter of Fiscal 2018. The third quarter of Fiscal 2017 includes legal charges of $11.1 million in connection with a proposed settlement of two related class action claims related to alleged wage and hour practices dating back to 2009. actions, which received final court approval in the fourth quarter of Fiscal 2018.See Note 11, “CONTINGENCIES.”
(2) 
Includes
The year-to-date period of Fiscal 2018 includes legal charges of $5.6 million and benefits related to an indemnification recovery of certain$3.0 million, each updating previously accrued legal charges in connection with class action settlements, which were recognizedreceived final court approval in the secondfourth quarter of Fiscal 2015.
(3)
Includes benefits related to2018. The year-to-date period of Fiscal 2017 includes legal charges of $11.1 million in connection with a proposed settlement of certain economic loss claims associated withtwo related class actions, which received final court approval in the April 2010 Deepwater Horizon oil spill.fourth quarter of Fiscal 2018. See Note 11, “CONTINGENCIES.”

For the third quarter of Fiscal 2017,2018, operating income as a percentage of net sales increased by approximately 20 basis pointswas $39.7 million as compared to $22.7 million for the third quarter of Fiscal 2016, primarily driven by expense reduction efforts and the leveraging effect of operating expenses from increased net sales, partially offset by a reduction in the gross profit rate, the net year-over-year impact of certain items presented above and higher performance-based compensation and marketing expenses.2017. Excluding certain items presented above, third quarter of Fiscal 20172018 adjusted non-GAAP operating income as a percentage of net sales increased by approximately 260 basis pointswas $36.7 million, as compared to $37.3 million for the third quarter of Fiscal 2016.2017. Changes in foreign currency exchange rates benefited operating income by approximately $0.9 million.$4 million, net of hedging.

For the year-to-date period of Fiscal 2018, operating loss was $2.3 million as compared to $68.3 million for the year-to-date period of Fiscal 2017. Excluding items presented above, year-to-date Fiscal 2018 adjusted non-GAAP operating income was $9.0 million as compared to adjusted non-GAAP operating loss of $47.6 million for the year-to-date period of Fiscal 2017. Changes in foreign currency exchange rates benefited operating loss by approximately $10 million, net of hedging.

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For the year-to-date period of Fiscal 2017, operating loss as a percent ofInterest expense, net sales increased by approximately 100 basis points as compared to the year-to-date period of Fiscal 2016, primarily driven by a reduction in the gross profit rate, the net year-over-year impact of certain items presented above, higher performance-based compensation and marketing expenses, partially offset by expense reduction efforts. Excluding certain items presented above, year-to-date Fiscal 2017 adjusted non-GAAP operating loss as a percentage of net sales decreased by approximately 40 basis points as compared to the year-to-date period of Fiscal 2016.
 Thirteen Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales
Interest expense$5,643
 0.7% $6,114
 0.7%
Interest income(2,786) (0.3)% (1,543) (0.2)%
Interest expense, net$2,857
 0.3% $4,571
 0.5%
 Thirty-nine Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales
Interest expense$17,000
 0.7% $16,781
 0.7%
Interest income(8,102) (0.3)% (4,001) (0.2)%
Interest expense, net$8,898
 0.4% $12,780
 0.6%

Interest Expense, Net
 Thirteen Weeks Ended
 October 28, 2017 October 29, 2016
(in thousands)  % of Net Sales   % of Net Sales
Interest expense$6,114
 0.7% $5,751
 0.7%
Interest income(1,543) (0.2)% (1,142) (0.1)%
Interest expense, net$4,571
 0.5% $4,609
 0.6%
 Thirty-nine Weeks Ended
 October 28, 2017 October 29, 2016
(in thousands)  % of Net Sales   % of Net Sales
Interest expense$16,781
 0.7% $17,099
 0.7%
Interest income(4,001) (0.2)% (3,243) (0.1)%
Interest expense, net$12,780
 0.6% $13,856
 0.6%

For the third quarter of Fiscal 2017 and the third quarter of Fiscal 2016, interest expense, net was $4.6 million, which primarily consists of interest expense on borrowings outstanding under the Company's term loan facility,Company’s Term Loan Facility, partially offset by realized gains from the trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”) and interest income earned on the Company'sCompany’s investments and cash holdings.

For the third quarter and the year-to-date period of Fiscal 2018, interest expense, net as a percentage of net sales decreased as compared to the third quarter and year-to-date period of Fiscal 2017 interest expense, net was $12.8 million as comparedby approximately 20 basis points and 20 basis points, respectively, primarily due to $13.9 million for the year-to-date period of Fiscal 2016, which primarily consists of interest expense on borrowings outstanding under the Company's term loan facility, partially offset by realized gains from the trust-owned life insurance policies held in the Rabbi Trust andhigher interest income earned on the Company'sCompany’s investments and cash holdings.

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Income Tax Expense (Benefit)tax expense (benefit)
Thirteen Weeks EndedThirteen Weeks Ended
October 28, 2017 October 29, 2016November 3, 2018 October 28, 2017
(in thousands, except ratios)  Effective Tax Rate   Effective Tax Rate  Effective Tax Rate   Effective Tax Rate
Income tax expense$7,553
 41.6% $6,762
 45.0%$12,047
 32.7% $7,553
 41.6%
Add back: tax effect of excluded items(1)
4,117
 
479
 
Deduct:    
Tax effect of excluded items (1)
(1,064) 
4,117
 
Tax Cuts and Jobs Act of 2017 net charges (2)
(405) 
 
Adjusted non-GAAP income tax expense$11,670
 35.7% $7,241
 80.1%$10,578
 31.3% $11,670
 35.7%
 Thirty-nine Weeks Ended
 October 28, 2017 October 29, 2016
(in thousands, except ratios)  Effective Tax Rate   Effective Tax Rate
Income tax benefit$(16,062) 19.8% $(17,540) 29.3%
Add back (deduct): tax effect of excluded items(1)
5,727
   (1,768)  
Adjusted non-GAAP income tax benefit$(10,335) 17.1% $(19,308) 26.9%
 Thirty-nine Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands, except ratios)  Effective Tax Rate   Effective Tax Rate
Income tax expense (benefit)$8,358
 (74.6)% $(16,062) 19.8%
Deduct:       
Tax effect of excluded items (1)
3,166
   5,727
  
Tax Cuts and Jobs Act of 2017 net charges (2)
(2,447)   
  
Adjusted non-GAAP income tax expense (benefit)$9,077
 13,348.5% $(10,335) 17.1%

(1) 
Refer to Operating Income (Loss)income (loss)for details of excluded items. The Company computed the tax effect of excluded items asis the difference between the effective tax rate calculated withprovision calculation on a GAAP basis and withouton an adjusted non-GAAP basis.
(2)
Discrete tax charges related to the non-GAAP adjustments on income (loss) before taxes and provisionAct. See Note 5, “INCOME TAXES,” for income taxes.further discussion.

For the third quarter of Fiscal 2017,2018, the effective tax rate which is sensitive at lower levels of pre-tax earnings, was 41.6%32.7% as compared to 45.0%41.6% for the third quarter of Fiscal 2016. The change in2017. In the third quarter of Fiscal 2018, the effective tax rate was primarily drivenimpacted by changes in leveldiscrete income tax net charges of $0.4 million related to the provisional estimate of the Act and mixdiscrete non-cash income tax charges related to the expiration of consolidated pre-taxcertain share-based compensation awards of $1.8 million. In the third quarter of Fiscal 2017, the effective tax rate was impacted by discrete non-cash income amongst operating jurisdictions.tax charges related to the expiration of certain share-based compensation awards of $0.2 million. Excluding certain items presented above in the table under “Operating Income (Loss)income (loss),” and charges related to the Act, the third quarter Fiscal 20172018 adjusted non-GAAP effective tax rate was 35.7%31.3% as compared to 80.1%35.7% for the third quarter of Fiscal 2016.2017.

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For the year-to-date period of Fiscal 2017,2018, the effective tax rate was 19.8%-74.6% as compared to 29.3%19.8% for the year-to-date period of Fiscal 2016. The2017. In both the Fiscal 2018 and Fiscal 2017 year-to-date period, the effective tax rate was impacted by discrete non-cash income tax charges related to the expiration of certain share-based compensation awards of $9.8 million and $10.1 million, respectively. In addition, for the year-to-date period of Fiscal 2018 the effective tax rate was also impacted by a discrete income tax net charges of $2.4 million related to the provisional estimate of the Act. Excluding items presented above in the table under “Operating income (loss),” and charges related to the Act, the year-to-date Fiscal 2018 adjusted non-GAAP effective tax rate, which is highly sensitive at lower levels of pre-tax earnings, was not meaningful as compared to 17.1% for the year-to-date period of Fiscal 2017.

For the third quarter and the year-to-date period of Fiscal 2018, the year-over-year change in the effective tax rate, which is highly sensitive at lower levels of pre-tax earnings, was primarily driven by discrete non-cash income tax charges of $10.1 million related to the adoption of ASU 2016-09 in the first quarter of Fiscal 2017, as well as changes in the level and mix of consolidated pre-tax earnings between operating and valuation allowance jurisdictions. Excluding certain items presented abovejurisdictions and the reduction in the table under “Operating Income (Loss),” the year-to-date Fiscal 2017 adjusted non-GAAP effectiveU.S. federal corporate income tax rate was 17.1%from 35% to 21% as compared to 26.9% fora result of the year-to-date periodenactment of the Act in the fourth quarter of Fiscal 2016.2017.

Net Income (Loss)income (loss) and Net Income (Loss)income (loss) per Share Attributableshare attributable to A&F
 Thirteen Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales
Net income attributable to A&F$23,919
 2.8% $10,075
 1.2%
Adjusted non-GAAP net income attributable to A&F (1)
$22,383
 2.6% $20,508
 2.4%
 
   
  
Net income per diluted share attributable to A&F$0.35
 
 $0.15
 
Adjusted non-GAAP net income per diluted share attributable to A&F (1)
$0.33
   $0.30
  
 Thirty-nine Weeks Ended
 November 3, 2018 October 28, 2017
(in thousands)  % of Net Sales   % of Net Sales
Net loss attributable to A&F$(22,395) (0.9)% $(67,116) (2.9)%
Adjusted non-GAAP net loss attributable to A&F (1)
$(11,848) (0.5)% $(52,158) (2.3)%
        
Net loss per diluted share attributable to A&F$(0.33)   $(0.98)  
Adjusted non-GAAP net loss per diluted share attributable to A&F (1)
$(0.17)   $(0.76)  

(1)
Excludes items presented above under “Operating income (loss),” and “Income tax expense (benefit).

For the third quarter of Fiscal 2017, net income and2018, net income per diluted share attributable to A&F were $10.1 million and $0.15, respectively,was $0.35 as compared to net$0.15 for the third quarter of Fiscal 2017. Excluding items presented above under “Operating income (loss),andIncome tax expense (benefit),” third quarter of Fiscal 2018 adjusted non-GAAP net income per diluted share attributable to A&F of $7.9 million and $0.12, respectively, for the third quarter of Fiscal 2016. Excluding certain items presented above under “Operating Income (Loss)” and “Income Tax Expense (Benefit),third quarter Fiscal 2017 adjusted non-GAAP net income andwas $0.33, as compared to $0.30 last year. The year-over-year change in net income per diluted share attributable to A&F were $20.5 millionreflects:
Changes in foreign currency exchange rates, which benefited net income per diluted share attributable to A&F by approximately $0.05, net of hedging; and, $0.30, respectively, as compared to $1.4 million and $0.02 for the third quarter of Fiscal 2016.
The calendar shift resulting from Fiscal 2017’s 53rd week, which was estimated to have adversely impacted net income per diluted share attributable to A&F by approximately $0.05.

For the year-to-date period of Fiscal 2017, net loss and2018, net loss per diluted share attributable to A&F were $67.1 million and $0.98, respectively,was $0.33 as compared to net loss$0.98 for the year-to-date period of Fiscal 2017. Excluding items presented above under “Operating income (loss), andIncome tax expense (benefit),” year-to-date Fiscal 2018 adjusted non-GAAP net loss per diluted share attributable to A&F of $44.8 million and $0.66, respectively, for the year-to-date period of Fiscal 2016. Excluding certain items presented above under “Operating Income (Loss)” and “Income Tax Expense (Benefit),year-to-date Fiscal 2017 adjusted non-GAAP net loss andwas $0.17, as compared to $0.76 last year. The year-over-year change in net loss per diluted share attributable to A&F were $52.2 millionreflects:
Changes in foreign currency exchange rates, which benefited net loss per diluted share attributable to A&F by approximately $0.11, net of hedging; and, $0.76, respectively, as compared to $55.0 million and $0.81 for the year-to-date period of Fiscal 2016.
The calendar shift resulting from Fiscal 2017’s 53rd week, which was estimated to have benefited net loss per diluted share attributable to A&F by approximately $0.14.

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LIQUIDITY AND CAPITAL RESOURCES

HISTORICAL SOURCES AND USES OF CASH

Seasonality of Cash Flowscash flows

The Company’s business has two principal selling seasons: the Springspring season, which includes the first and second fiscal quarters (“Spring”) and the Fallfall season, which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in the Fall, season, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has a revolving credit facility available as a source of additional funding.

Asset-Based Revolving Credit FacilityFacilities

As ofOn August 7, 2014, A&F, through its subsidiary A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.

On October 19, 2017, the Company, amendedthrough A&F Management, entered into the ABL Second Amendment, amending and extended its senior secured revolving credit agreement, which was set to expire on August 7, 2019. As amended,extending the maturity date of the asset-based revolving credit agreement to October 19, 2022. The Amended ABL Facility continues to provide availabilityfor a senior secured credit facility of up to $400 million (the “Amended ABL Facility”), subject to a borrowing base, consisting primarily of U.S. inventory. The Amended ABL Facility is available for working capital, capital expenditures and other general corporate purposes.  The Amended ABL Facility will mature on October 19, 2022. No borrowings were outstanding under the Amended ABL Facility as of October 28, 2017.

At the Company’s option, borrowings under the Amended ABL Facility will bear interest, at either (a) an adjusted LIBOR rate plus a margin of 1.25% to 1.50% per annum, or (b) an alternate base rate plus a margin of 0.25% to 0.50% per annum based on average historical availability during the preceding quarter. The Company is also required to pay a fee of 0.25% per annum on undrawn commitments under the Amended ABL Facility. Customary agency fees and letter of credit fees are also payable pursuant to the Amended ABL Facility.million.

As of November 30, 2017,3, 2018, the borrowing base on the Amended ABL Facility was $397.0$400.0 million.

The Company uses, in the ordinary course of business, stand-by letters of credit under the Amended ABL Facility. As of November 30, 2017,3, 2018 and February 3, 2018, the Company had not drawn on the Amended ABL Facility, but had approximately $1.9 million in outstanding stand-by letters of credit under the Amended ABL Facility.Facility of approximately $1.1 million and $1.9 million, respectively. The Company has no other off-balance sheet arrangements.

Term Loan Facility

The Company isA&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also party toentered into a term loan agreement on August 7, 2014, which provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”). The Term Loan Facility was issued at a $3 million or 1.0% discount. In addition,of $300 million.

On June 22, 2018, the Company, recorded deferred financing fees associated withthrough A&F Management, entered into the issuance ofTerm Loan Second Amendment, which, among other things, repriced the Term Loan Facility andby reducing the asset-based revolving credit agreement entered into on August 7, 2014 (and amended as of October 19, 2017 in the form of the Amended ABL Facility) of $5.8 million in aggregate, of which $3.2 million was paid to Term Loan Facility lenders. The Company also recorded deferred financing fees associated with the issuance of the ABL Second Amendment of $0.9 million. The Company is amortizing the debt discount and deferred financing fees over the respective contractual terms of the Credit Facilities.applicable margins for term loans by 0.25%.

The Company’s Term Loan debt is presentedmaterial provisions of the Credit Facilities have not changed from those disclosed in Note 11, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017, except as described in Note 6, “BORROWINGS” of the Notes to Condensed Consolidated Balance Sheets, netFinancial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of the unamortized discount and fees. Net borrowings as of October 28, 2017 and January 28, 2017 were as follows:
(in thousands)October 28, 2017 January 28, 2017
Borrowings, gross at carrying amount$268,250
 $268,250
Unamortized discount(1,470) (1,764)
Unamortized fees(2,870) (3,494)
Borrowings, net263,910
 262,992
Less: short-term portion of borrowings, net
 
Long-term portion of borrowings, net$263,910
 262,992

The Term Loan Facility will maturethis Quarterly Report on August 7, 2021 and amortizes at a rate equal to 0.25% of the original principal amount per quarter, beginning with the fourth quarter of Fiscal 2014. The Term Loan Facility is subject to (a) an annual mandatory prepayment in an amount equal to 0% to 50% of the Company’s excess cash flows in the preceding fiscal year, depending on the Company’s leverage ratio and (b) certain other mandatory prepayments upon receipt by the Company of proceeds of certain debt issuances, asset sales and casualty events, subject to certain exceptions specified therein, including reinvestment rights, less any voluntary

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payments made. The Company made a repayment of $25 million in January 2017, in prepayment of its scheduled Fiscal 2017 through Fiscal 2021 amortization and a portion of the amount of principal due at maturity.

At the Company’s option, borrowings under the Term Loan Facility will bear interest at either (a) an adjusted LIBOR rate no lower than 1.00% plus a margin of 3.75% per annum or (b) an alternate base rate plus a margin of 2.75% per annum. Customary agency fees are also payable pursuant to the Term Loan Facility. The interest rate on borrowings under the Term Loan Facility was 4.99% as of October 28, 2017.Form 10-Q.

Operating Activitiesactivities

NetFor the thirty-nine weeks ended November 3, 2018, net cash provided by operating activities was $29.7$77.2 million as compared to $31.4 million for the thirty-nine weeks ended October 28, 2017 compared to $22.1 million for the thirty-nine weeks ended October 29, 2016.2017. The year-over-year change in cash flow associated with operating activities was primarily due to higher cash receipts from increased net sales, the timing ofdecreased rent payments, refunds received fromand increased payments to vendors in the fourth quarter of Fiscal 2017 which resulted in lower cash payments in Fiscal 2018 as compared to the prior year tax returns and a year-over-year decrease in incentive compensation payments.year. These year-over-year changes were partially offset by greater inventory purchasesan increase in incentive compensation payments in Fiscal 2018 primarily related to Fiscal 2017 performance, and income tax refunds received in Fiscal 2017 and proceeds from lease deposits returned and $12.3 million of claims settlement benefits received in Fiscal 2016.prior year tax returns.

Investing Activitiesactivities

Cash outflows for investing activities forFor the thirty-nine weeks ended November 3, 2018 and October 28, 2017, and October 29, 2016cash used for investing activities included capital expenditures of $86.3$98.8 million and $96.8$86.3 million, respectively, primarily for store updates and new stores, as well as direct-to-consumer and omnichannel and information technology investments.

Financing Activities
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Cash outflowsFinancing activities

For the thirty-nine weeks ended November 3, 2018, cash used for financing activities consisted primarily for the repurchase of approximately 2.9 million shares of A&F’s Common Stock in the open market with a market value of approximately $68.7 million and dividend payments of $40.6 million. For the thirty-nine weeks ended October 28, 2017, and October 29, 2016cash used for financing activities consisted primarily of dividend payments of $40.8 million and $40.5 million, respectively.

As of October 28, 2017, A&F had the ability to repurchase up to 6.5 million shares as part of the A&F Board of Directors’ previously approved authorization.million.

FUTURE CASH REQUIREMENTS AND SOURCES OF CASH

The Company’s capital allocation strategy remains to prioritize investments in the business to build on the foundation for sustainable long-term growth and invest in projects that have the highest expected return, and to evaluate opportunities to accelerate potential investments, including improvements in customer experience, both in stores and online. These improvements include store remodels and right-sizes, new store openings, and acceleration of our transformation efforts. The Company also evaluates store closures quarterly, including flagship lease buyouts and kick-outs. In addition, the Company returns cash to stockholders through dividends and completes share repurchases as deemed appropriate. Capital allocation priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors.

To execute its capital allocation strategy, the Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the fiscal year and to reinvest in the business to support future growth. The Company also has availability under the Amended ABL Facility as a source of additional funding. Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, leases, any obligations related to lease buyouts or kickouts we may exercise, taxes and other operating activities, as well as to fund capital expenditures, marketing initiatives, quarterly dividends to stockholders subject to approval by A&F’s Board of Directors and debt service requirements, including voluntary debt prepayments, or required repayments, if any, based on annual excess cash flows, as defined in the term loan agreement. The Company has availability undercredit agreement applicable to the Amended ABL Facility as a source of additional funding.

The Company expects total capital expenditures to be approximately $110 million for Fiscal 2017, primarily for store updates, new stores, as well as direct-to-consumer and omnichannel and information technology investments.Term Loan Facility.

The Company may repurchase shares of its Common Stock and, if it were to do so, would anticipate funding such repurchases by utilizing free cash flow generated from operations or proceeds from the Amended ABL Facility. As of November 3, 2018, A&F had the ability to repurchase up to 3.6 million shares as part of the A&F Board of Directors’ previously approved authorization.

Income taxes

As of October 28, 2017, $276.3November 3, 2018, certain foreign subsidiaries have lent approximately $266.9 million to certain U.S. subsidiaries resulting in $331.9 million of the Company’s $459.3$520.5 million of cash and equivalents wasbeing held by foreign affiliates.U.S. subsidiaries. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends to A&F’s stockholders. UnremittedAs a result of the adoption of a modified territorial system under the Act, future earnings from foreign affiliatessubsidiaries are generally would becomenot subject to additional federal tax upon repatriation. Because of the complexities associated with the Act, the Company has not fully concluded on its position with respect to reinvestment of remaining and future foreign earnings and whether its existing international structure for the various jurisdictions is the optimal structure for the future, but expects to complete this assessment in Fiscal 2018.

In the third quarter of Fiscal 2018, the Company decided to repatriate $250 million of the Company’s undistributed foreign earnings to the U.S. incomein the fourth quarter of Fiscal 2018. See Note 5, “INCOME TAXES,” for further discussion, including the impact of provisional tax if remittedexpense at the state level. If additional funds were to be repatriated to the U.S., there could be implications at the state and foreign levels.

Capital expenditures

For Fiscal 2018, the Company expects capital expenditures to be approximately $145 million, primarily for store updates and new stores, as dividends or lentwell as direct-to-consumer, omnichannel and information technology and other investments.

Other

The Company expects cash payments to A&F or a U.S. affiliate.be paid in the fourth quarter of Fiscal 2018, in connection with certain legal matters, which received final court approval in the fourth quarter of Fiscal 2018. See Note 11, “CONTINGENCIES.”


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OFF-BALANCE SHEET ARRANGEMENTS

The Company uses, in the ordinary course of business, stand-by letters of credit under the Amended ABL Facility. The Company had $1.9 million in stand-by letters of credit outstanding as of October 28, 2017. The Company has no other off-balance sheet arrangements.

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CONTRACTUAL OBLIGATIONS

The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. During the thirteenthirty-nine weeks ended October 28, 2017,November 3, 2018, there were no material changes in the contractual obligations as of January 28, 2017,February 3, 2018, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

RECENT ACCOUNTING PRONOUNCEMENTS

The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2016. See2017. Refer to Note 1, “BASIS OF PRESENTATION--Recent Accounting Pronouncementsaccounting pronouncements” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q for recent accounting pronouncements, including the dates of adoption or expected dates of adoption, as applicable, and estimated effects on the Condensed Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company describes its critical accounting policies and estimates in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”,OPERATIONS,” of A&F's&F’s Annual Report on Form 10-K for Fiscal 2016.2017. There have been no other significant changes in critical accounting policies and estimates since the end of Fiscal 2016.2017, except as described in Note 1, “BASIS OF PRESENTATION--Recent accounting pronouncements” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q.


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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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 Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements.

The following factors, including the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2016, in some cases have affected and in the future could affect the Company’s financial performance and could cause actual results for Fiscal 2017 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management:

changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity;
our inability to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability;
our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours;
direct-to-consumer sales channels are a significant component of our growth strategy, and the failure to successfully develop our position in these channels could have an adverse impact on our results of operations;
our ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks;
our inability to successfully implement our strategic plans could have a negative impact on our growth and profitability;
our failure to protect our reputation could have a material adverse effect on our brands;
our business could suffer if our information technology systems are disrupted or cease to operate effectively;
we may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss;
fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations;
changes in the cost, availability and quality of raw materials, labor, transportation and trade relations could cause manufacturing delays and increase our costs;
we depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs;
our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around;
we rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business;
our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain;
our litigation exposure could have a material adverse effect on our financial condition and results of operations;
our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets;
fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results;
extreme weather conditions and the seasonal nature of our business may cause net sales to fluctuate and negatively impact our results of operations;
our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters, pandemic disease and other unexpected events, any of which could result in an interruption to our business and adversely affect our operating results;
the impact of war or acts of terrorism could have a material adverse effect on our operating results and financial condition;
changes in the regulatory or compliance landscape could adversely affect our business and results of operations;
our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business; and,
compliance with changing regulations and standards for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results.

This list of important factors is not inclusive.

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Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

The following factors, categorized by the primary nature of the associated risk, including the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2017, in some cases have affected and in the future could affect the Company’s financial performance and could cause actual results for Fiscal 2018 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management:

Macroeconomic and industry risks include:
Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity;
Failure to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability;
Our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours;
Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations;
Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; and,
The impact of war, acts of terrorism or civil unrest could have a material adverse effect on our operating results and financial condition.

Strategic risks include:
The expansion of our direct-to-consumer sales channels and omnichannel initiatives are significant components of our growth strategy, and the failure to successfully develop our position across all channels could have an adverse impact on our results of operations;
Our international growth strategy and ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks; and,
Failure to successfully implement our strategic plans could have a negative impact on our growth and profitability.

Operational risks include:
Failure to protect our reputation could have a material adverse effect on our brands;
Our business could suffer if our information technology systems are disrupted or cease to operate effectively;
We may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss;
Our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain;
Changes in cost, availability and quality of raw materials, labor, transportation, and trade relations could cause manufacturing delays and increase our costs;
We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs;
We rely on the experience and skills of our senior executive officers and associates, the loss of whom could have a material adverse effect on our business; and,
Extreme weather conditions, including natural disasters, pandemic disease and other unexpected events, could negatively impact our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, which could result in an interruption to our business and adversely affect our operating results.


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Legal, tax, regulatory and compliance risks include:
Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations;
Our litigation exposure could have a material adverse effect on our financial condition and results of operations;
Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets;
Changes in the regulatory or compliance landscape and compliance with changing regulations for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results; and,
Our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business.

The factors listed above are not our only risks. Additional risks may arise and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition.


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investment Securitiessecurities

The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.8 million for each of the thirteen weeks ended October 28, 2017 and October 29, 2016 and $2.3 million for eachthe thirteen and thirty-nine weeks ended November 3, 2018, respectively, and realized gains of $0.8 million and $2.3 million for the thirteen and thirty-nine weeks ended October 28, 2017, and October 29, 2016, respectively, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Rabbi Trust assets are included in other assets on the Condensed Consolidated Balance Sheets as of October 28, 2017November 3, 2018 and January 28, 2017,February 3, 2018, and are restricted in their use as noted above.

Interest Rate Risksrate risks

As of October 28, 2017,November 3, 2018, the Company has approximately $268.3$253.3 million in gross borrowings outstanding under its term loan facility (the “TermTerm Loan Facility”)Facility and no borrowings outstanding under its senior secured revolving credit facility (the “AmendedAmended ABL Facility” and, together with the Term Loan Facility, the “Credit Facilities”).Facility. The Credit Facilities carry interest rates that are tied to LIBOR,LIBO rate, or an alternate base rate, plus a margin. The interest rate on the Term Loan Facility has a 100 basis point LIBORLIBO rate floor, and assuming no changes in the Company’s financial structure as it stands, an increase in market interest rates of 100 basis points would increase annual interest expense by approximately $3.0$2.6 million. This hypothetical analysis for the fifty-threefifty-two weeks ending February 3, 20182, 2019 may differ from the actual change in interest expense due to potential changes in interest rates or gross borrowings outstanding under the Company’s Credit Facilities.


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Foreign Exchange Rate Riskexchange rate risk

A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate revenues, expenses, assets and liabilitiesall components of its condensed consolidated financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation increases as international expansion increases.

A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the sale of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.

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The fair value of outstanding foreign currency exchange forward contracts included in other current assets was $1.3 million and $6.0$11.1 million as of October 28, 2017November 3, 2018 and January 28, 2017, respectively.insignificant as of February 3, 2018. The fair value of outstanding foreign currency exchange forward contracts included in other liabilitiesaccrued expenses was $3.6 million and $0.5$9.1 million as of October 28, 2017 and January 28, 2017, respectively.February 3, 2018. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. The resultsSuch a hypothetical devaluation would decrease derivative contract fair values by approximately $20.9$17.6 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair value would be largely offset by the net change in fair values of the underlying hedged items.


ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controlscontrols and Proceduresprocedures

A&F 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 A&F 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 A&F’s management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required 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.

A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Senior Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended October 28, 2017.November 3, 2018. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Senior Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of October 28, 2017,November 3, 2018, the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reportinginternal control over financial reporting

There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during A&F’s fiscal quarter ended October 28, 2017November 3, 2018 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

See Note 11, “CONTINGENCIES,”The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the Notesresolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company's accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Financial StatementsBalance Sheet included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome of or potential liability, and cannot estimate a range of reasonably possible losses for these legal matters.

Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts.


ITEM 1A.RISK FACTORS

The Company'sCompany’s risk factors as of October 28, 2017November 3, 2018 have not changed materially from those disclosed in Part I, “ITEM 1A. RISK FACTORS” of A&F's&F’s Annual Report on Form 10-K for Fiscal 2016.2017.



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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of equity securities during the third quarter of Fiscal 20172018 that were not registered under the Securities Act of 1933.1933, as amended.

The following table provides information regarding the purchase of shares of Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the thirteen weeks ended October 28, 2017:November 3, 2018:
Period (Fiscal Month)
Total Number of Shares Purchased (1)
 Average Price Paid per Share 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (3)
July 30, 2017 through August 26, 2017460
 $9.87
 
 6,503,656
August 27, 2017 through September 30, 20177,524
 $13.02
 
 6,503,656
October 1, 2017 through October 28, 20174,963
 $13.01
 
 6,503,656
Total12,947
 $12.91
 
 6,503,656
Period (Fiscal Month)
Total Number of Shares Purchased (1)
 Average Price Paid per Share 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (3)
August 5, 2018 through September 1, 20182,811
 $25.85
 
 4,756,426
September 2, 2018 through October 6, 20181,202,648
 $21.12
 1,184,488
 3,571,938
October 7, 2018 through November 3, 20185,575
 $18.15
 
 3,571,938
Total1,211,034
 $21.12
 1,184,488
 3,571,938

(1) 
All of the 12,94726,546 shares of A&F’s Common Stock purchased during the thirteen weeks ended October 28, 2017November 3, 2018 represented shares which were withheld for tax payments due upon the vesting of employee restricted stock units.units, classified in other financing activities on the Condensed Consolidated Statements of Cash Flows.
(2) 
No1,184,488 shares of A&F’s Common Stock were repurchased during the thirteen weeks ended October 28, 2017November 3, 2018 pursuant to A&F’s publicly announced stock repurchase authorization. On August 14, 2012, A&F’s Board of Directors authorized the repurchase of 10.0 million shares of A&F’s Common Stock, which was announced on August 15, 2012.
(3) 
The number shown represents, as of the end of each period, the maximum number of shares of A&F’s Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time-to-time, depending on market conditions.

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ITEM 6.     EXHIBITS
Exhibit No.Document
10.1
10.2
10.3
10.4
10.5
10.6
31.1
31.2
32.1
101
The following materials from Abercrombie & Fitch Co.’s Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2017,November 3, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Thirteen and Thirty-nine Weeks Ended November 3, 2018 and October 28, 2017 and October 29, 2016;2017; (ii) Condensed Consolidated Balance Sheets at October 28, 2017November 3, 2018 and January 28, 2017;February 3, 2018; (iii) Condensed Consolidated Statements of Cash Flows for the Thirty-nine Weeks Ended November 3, 2018 and October 28, 2017 and October 29, 2016;2017; and (iv) Notes to Condensed Consolidated Financial Statements.*
 
*Filed herewith.
**Furnished herewith.
Certain portions of this exhibit have been omitted based upon a request for confidential treatment, of the confidential information included therein, filed with the Securities and Exchange Commission (the "SEC"). The non-public confidential information has been separately filed with the SEC in connection with that request.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 ABERCROMBIE & FITCH CO.
Date: December 4, 201712, 2018By/s/ Scott Lipesky
  Scott Lipesky
  
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized Officer)

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EXHIBIT INDEX

Exhibit No.Document
10.1Offer Letter from Abercrombie & Fitch to Scott Lipesky, executed by Mr. Lipesky on August 29, 2017, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K, dated and filed September 6, 2017 (File No. 001-12107).
10.2Executive Agreement entered into between Abercrombie & Fitch Management Co. and Scott Lipesky, effective as of September 7, 2017, the execution date by Abercrombie & Fitch Management Co.*
10.3Second Amendment to Credit Agreement, dated as of October 19, 2017, among Abercrombie & Fitch Management Co., as lead borrower, the other borrowers and guarantors party thereto, the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent for the lenders (including, as Annex A thereto, the composite Credit Agreement dated as of August 7, 2014, as amended on September 10, 2015 and as further amended on October 19, 2017).* †
10.4Confirmation, Ratification and Amendment of Ancillary Loan Documents, made as of October 19, 2017, among Abercrombie & Management Co., for itself and as lead borrower for the other borrowers party thereto, the guarantors party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent.* †
10.5Letter Agreement between Abercrombie & Fitch Co. and Stacia Andersen, executed by Abercrombie & Fitch Co. on December 8, 2016.*
10.6Abercrombie & Fitch Co. Associate Stock Purchase Plan (October 1, 2007 Restatement, reflecting amendment and restatement effective as of October 1, 2007 of Associate Stock Purchase Plan which was originally adopted effective July 1, 1998).*
31.1Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2Certifications by Senior Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1Certifications by Chief Executive Officer (Principal Executive Officer) and Senior Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101
The following materials from Abercrombie & Fitch Co.’s Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Thirteen and Thirty-nine Weeks Ended October 28, 2017 and October 29, 2016; (ii) Condensed Consolidated Balance Sheets at October 28, 2017 and January 28, 2017; (iii) Condensed Consolidated Statements of Cash Flows for the Thirty-nine Weeks Ended October 28, 2017 and October 29, 2016; and (iv) Notes to Condensed Consolidated Financial Statements.*
*Filed herewith.
**Furnished herewith.
Certain portions of this exhibit have been omitted based upon a request for confidential treatment, of the confidential information included therein, filed with the Securities and Exchange Commission (the "SEC"). The non-public confidential information has been separately filed with the SEC in connection with that request.

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