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-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-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 all of the unrealized gains or losses related to designated cash flow hedges as of October 28, 2017 will be recognized in cost of sales, exclusive of depreciation and amortization, over the next twelve months.AOCL into earnings.
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 orand upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
|
| | | | | | | | | | | |
| | 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 reclassifications | 22,228 |
| | (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 | ) |
| | | | | | | | |
(1)
Abercrombie & Fitch Co. | Amount represents gains 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).17 | 2023 1Q Form 10-Q |
The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended October 29, 2016 was as follows:
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended October 29, 2016 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
| Beginning balance at July 30, 2016 | $ | (106,132 | ) | | $ | 1,197 |
| | $ | (104,935 | ) |
| Other comprehensive (loss) income before reclassifications | (12,194 | ) | | 4,986 |
| | (7,208 | ) |
Reclassified from accumulated other comprehensive loss (2) | — |
| | (450 | ) | | (450 | ) |
| Tax effect | — |
| | (599 | ) | | (599 | ) |
| Other comprehensive (loss) income | (12,194 | ) | | 3,937 |
| | (8,257 | ) |
| Ending balance at October 29, 2016 | $ | (118,326 | ) | | $ | 5,134 |
| | $ | (113,192 | ) |
|
| | | | | | | | | | | |
| | Thirty-nine Weeks Ended October 29, 2016 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
Beginning balance at January 30, 2016
| $ | (119,196 | ) | | $ | 4,577 |
| | $ | (114,619 | ) |
| Other comprehensive income before reclassifications | 870 |
| | 3,026 |
| | 3,896 |
|
Reclassified from accumulated other comprehensive loss (2) | — |
| | (2,551 | ) | | (2,551 | ) |
| Tax effect | — |
| | 82 |
| | 82 |
|
| Other comprehensive income | 870 |
| | 557 |
| | 1,427 |
|
| Ending balance at October 29, 2016 | $ | (118,326 | ) | | $ | 5,134 |
| | $ | (113,192 | ) |
| |
(2)
| Amount represents gains 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). |
10.14. SEGMENT REPORTING
The Company hasCompany’s two operating segments: (a) Hollister, and (b)segments are brand-based: Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist 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 operating segment and geographic area.
The following table provides the Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 28, 2017April 29, 2023 and October 29, 2016.April 30, 2022 were as follows:
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| (in thousands) | April 29, 2023 | | April 30, 2022 | | | | |
| Abercrombie | 436,044 | | | 383,928 | | | | | |
| Hollister | $ | 399,950 | | | $ | 428,834 | | | | | |
| Total | $ | 835,994 | | | $ | 812,762 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| (in thousands) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
| Hollister | $ | 508,086 |
| | $ | 463,479 |
| | $ | 1,329,401 |
| | $ | 1,245,710 |
|
| Abercrombie | 351,026 |
| | 358,255 |
| | 970,131 |
| | 1,044,667 |
|
| Total | $ | 859,112 |
| | $ | 821,734 |
| | $ | 2,299,532 |
| | $ | 2,290,377 |
|
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital and wholesale orders. The following table provides the Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 28, 2017April 29, 2023 and October 29, 2016.April 30, 2022 were as follows:
| | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | |
| (in thousands) | April 29, 2023 | | April 30, 2022 | | | | |
| U.S. | $ | 636,117 | | | $ | 585,106 | | | | | |
EMEA (1) | 139,258 | | | 163,969 | | | | | |
APAC (2) | 33,333 | | | 29,897 | | | | | |
Other (3) | 27,286 | | | 33,790 | | | | | |
| International | $ | 199,877 | | | $ | 227,656 | | | | | |
| Total | $ | 835,994 | | | $ | 812,762 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| (in thousands) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
| United States | $ | 554,673 |
| | $ | 531,449 |
| | $ | 1,434,019 |
| | $ | 1,435,633 |
|
| Europe | 192,698 |
| | 187,184 |
| | 543,578 |
| | 541,711 |
|
| Other | 111,741 |
| | 103,101 |
| | 321,935 |
| | 313,033 |
|
| Total | $ | 859,112 |
| | $ | 821,734 |
| | $ | 2,299,532 |
| | $ | 2,290,377 |
|
(2) Asia-Pacific region (“APAC”).
11. CONTINGENCIES
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. 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 reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. As of October 28, 2017, the Company had accrued charges of approximately $15.9 million for certain legal contingencies, which are classified(3) Other includes all sales that do not fall within other current liabilities on the accompanying Condensed Consolidated Balance Sheet. Actual liabilities may differ from the amounts recorded, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There are certain claims and legal proceedings pending against the Company for which accruals have not been established.
The Company is 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, 2013, alleges 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, Abercrombie kids, Hollister, and Gilly Hicks stores in California. Four subclasses of associates have since been certified, and the matter is now before the United States, (“U.S.”) District Court forEMEA, or APAC regions, which are derived primarily in Canada.
15. SUBSEQUENT EVENT
During the Central Districtsecond quarter of California. TheFiscal 2023, operating segments were reorganized into three geographic operating segments: Americas, Asia-Pacific (APAC), and Europe, the Middle East and Africa (EMEA). Beginning with the second lawsuit, filed on December 15, 2015, alleges that associates were required to purchase uniforms without reimbursement in violationquarter of federal law, and laws of the states of New York, Florida and Massachusetts, as well as derivative putative state law claims and seeks to pursue such claims on a class and collective basis. This matter is now before the U.S. District Court for the Southern District of Ohio and is stayed pending mediation. Both matters have been mediated, and the parties have reached a framework for settling both cases on a class-wide basis through a proposed $25.0 million claims-made settlement agreement. The parties continue to negotiate the details of the proposed settlement, and the ultimate settlement amount is dependent upon the actual claims made by members of the classes and is also subject to the 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 what 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. 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 may be subject to an incremental loss of as much as $11.9 million, and there can be no absolute assurance that a settlementFiscal 2023, all periods presented will be finalized and approved or of the ultimate outcome of the litigation.recast to conform to this classification.
| | | | | | | | |
| Abercrombie & Fitch Co. | 18 | 2023 1Q Form 10-Q |
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
BUSINESS SUMMARY
The Company is a specialty retailer who primarily sells its products through storefollowing Management’s Discussion and direct-to-consumer operations, as well as through various wholesale, franchiseAnalysis of Financial Condition and licensing arrangements. The Company offers a broad arrayResults 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 2017” represent the fifty-three week fiscal year that will end on February 3, 2018, and to “Fiscal 2016” represent the fifty-two week fiscal year that ended January 28, 2017.
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 OPERATIONS
The table below summarizes the Company's results of operations and reconciles GAAP financial measures to non-GAAP financial measures for the thirteen and thirty-nine week periods ended October 28, 2017 and October 29, 2016. 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 |
| (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 |
| Thirteen Weeks Ended | | | | | | | | | | | | |
| Net sales | | $ | 859,112 |
| | $ | — |
| | $ | 859,112 |
| | $ | 821,734 |
| | $ | — |
| | $ | 821,734 |
|
Change in comparable sales(2) | | | | | | 4 | % | | | | | | (6 | )% |
| Gross profit rate | | 61.3 | % | | — | % | | 61.3 | % | | 62.2 | % | | — | % | | 62.2 | % |
| Operating income | | $ | 22,740 |
| | $ | (14,550 | ) | | $ | 37,290 |
| | $ | 19,645 |
| | $ | 6,000 |
| | $ | 13,645 |
|
| Net income attributable to A&F | | $ | 10,075 |
| | $ | (10,433 | ) | | $ | 20,508 |
| | $ | 7,881 |
| | $ | 6,479 |
| | $ | 1,402 |
|
| Net income per diluted share attributable to A&F | | $ | 0.15 |
| | $ | (0.15 | ) | | $ | 0.30 |
| | $ | 0.12 |
| | $ | 0.09 |
| | $ | 0.02 |
|
| | | | | | | | | | | | | |
| Thirty-nine Weeks Ended | | | | | | | | | | | | |
| Net sales | | $ | 2,299,532 |
| | $ | — |
| | $ | 2,299,532 |
| | $ | 2,290,377 |
| | $ | — |
| | $ | 2,290,377 |
|
Change in comparable sales(2) | | | | | | 0 | % | | | | | | (5 | )% |
| Gross profit rate | | 60.3 | % | | — | % | | 60.3 | % | | 61.7 | % | | — | % | | 61.7 | % |
| Operating loss | | $ | (68,290 | ) | | $ | (20,685 | ) | | $ | (47,605 | ) | | $ | (46,071 | ) | | $ | 11,926 |
| | $ | (57,997 | ) |
| Net loss attributable to A&F | | $ | (67,116 | ) | | $ | (14,958 | ) | | $ | (52,158 | ) | | $ | (44,835 | ) | | $ | 10,158 |
| | $ | (54,993 | ) |
| Net loss per diluted share attributable to A&F | | $ | (0.98 | ) | | $ | (0.22 | ) | | $ | (0.76 | ) | | $ | (0.66 | ) | | $ | 0.15 |
| | $ | (0.81 | ) |
| |
(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. |
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. Net cash provided by operating activities was $29.7 million for the thirty-nine weeks ended October 28, 2017. The Company 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.
CURRENT TRENDS AND OUTLOOK
Our results for 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 overall net sales up 5% compared to last year and a return to positive overall comparable sales for the quarter. We maintained strategic investment in omnichannel and marketing, while managing 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.
We are focused on the continued execution of our strategic plan, and expect the environment in the fourth quarter to remain challenging and promotional. We maintain our focus on strategic investments in marketing and omnichannel to meet our customers' needs whenever, wherever and however they choose to engage with our brands.
For the fourth quarter of Fiscal 2017, we expect:
Comparable sales to be up low-single digits, and net sales to be up mid- 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 by approximately $2 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 effective tax rate to be in the mid 30s.
A weighted average diluted share count of approximately 70 million shares, excluding the effect of potential share buybacks.
On a full year basis, we expect the effective tax rate to reflect a core tax rate in the mid 30s, which is highly sensitive at lower levels of pre-tax earnings. Additionally, we expect the full year effective tax rate to reflect discrete non-cash income tax charges of approximately $11 million related to a change in share-based compensation accounting standards.
We now expect capital expenditures to be approximately $110 million for the full year, up from our prior expectation of $100 million.
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 of Fiscal 2017 through natural lease expirations, including the 14 stores closed year to date.
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” are useful to investors as they provide a measure of the Company’s operating performance excluding the effect of certain items which the Company believes do not reflect its future operating outlook, and therefore supplements investors’ understanding of comparability 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 measuresOperations (“MD&A”) should be used supplemental to, not as an alternative to, the Company’s GAAP financial results, and may not be the same as similar measures presented by other companies.
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 the purpose of 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.
In addition, the following financial measures are disclosed on a GAAP basis and, as applicable, on a non-GAAP basis excluding 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
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:
|
| | | | | | | | | | | | | | | | | |
| | Hollister (1) | | Abercrombie (2) | | Total |
| | United States | | International | | United States | | International | | United States | | International |
| January 28, 2017 | 398 |
| | 145 |
| | 311 |
| | 44 |
| | 709 |
| | 189 |
|
| New | 1 |
| | — |
| | 3 |
| | 1 |
| | 4 |
| | 1 |
|
| Closed | (3 | ) | | — |
| | (10 | ) | | (1 | ) | | (13 | ) | | (1 | ) |
| October 28, 2017 | 396 |
| | 145 |
| | 304 |
| | 44 |
| | 700 |
| | 189 |
|
| Gross square feet (in thousands): | | | | | | | | | | | |
| October 28, 2017 | 2,694 |
| | 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, 2016 | 414 |
| | 139 |
| | 340 |
| | 39 |
| | 754 |
| | 178 |
|
| New | 3 |
| | 5 |
| | 3 |
| | 2 |
| | 6 |
| | 7 |
|
| Closed | (5 | ) | | — |
| | (10 | ) | | — |
| | (15 | ) | | — |
|
| October 29, 2016 | 412 |
| | 144 |
| | 333 |
| | 41 |
| | 745 |
| | 185 |
|
Gross square feet (in thousands): | | | | | | | | | | | |
| October 29, 2016 | 2,828 |
| | 1,212 |
| | 2,548 |
| | 631 |
| | 5,376 |
| | 1,843 |
|
| |
(1)
| Excludes five international franchise stores as 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. |
| |
(2)
| Includes Abercrombie & Fitch and abercrombie kids brands. Excludes four international franchise stores as of October 28, 2017 and one international franchise store as of January 28, 2017, October 29, 2016 and January 30, 2016. |
RESULTS OF OPERATIONS
THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 28, 2017 VERSUS OCTOBER 29, 2016
Net Sales
|
| | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | |
| | October 28, 2017 | | October 29, 2016 | | | | |
| (in thousands) | Net Sales | | Net Sales | | $ Change | | % Change |
| Hollister | $ | 508,086 |
| | $ | 463,479 |
| | $ | 44,607 |
| | 10% |
Abercrombie(1) | 351,026 |
| | 358,255 |
| | (7,229 | ) | | (2)% |
| Total net sales | $ | 859,112 |
| | $ | 821,734 |
| | $ | 37,378 |
| | 5% |
| | | | | | | | |
| United States | $ | 554,673 |
| | $ | 531,449 |
| | $ | 23,224 |
| | 4% |
| International | 304,439 |
| | 290,285 |
| | 14,154 |
| | 5% |
| Total net sales | $ | 859,112 |
| | $ | 821,734 |
| | $ | 37,378 |
| | 5% |
|
| | | | | | | | | | | | | |
| | 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% |
| International | 865,513 |
| | 854,744 |
| | 10,769 |
| | 1% |
| Total net sales | $ | 2,299,532 |
| | $ | 2,290,377 |
| | $ | 9,155 |
| | 0% |
|
| | | | | | | |
| | Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Change in Comparable Sales(2) | | | | | | | |
| Hollister | 8% | | 0% | | 6% | | (1)% |
Abercrombie(1) | (2)% | | (14)% | | (6)% | | (10)% |
| Total company | 4% | | (6)% | | 0% | | (5)% |
| | | | | | | | |
| United States | 6% | | (5)% | | 1% | | (4)% |
| International | 0% | | (10)% | | (1)% | | (7)% |
| Total company | 4% | | (6)% | | 0% | | (5)% |
| |
(1)
| 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, net sales increased 5% as compared to the third quarter of Fiscal 2016, primarily attributable to a 4% increase in comparable sales, with a 8% increase in comparable sales for Hollister, partially offset by a 2% decrease in comparable sales for Abercrombie. Changes in foreign currency exchange rates benefited net sales by approximately 1%.
For the year-to-date period of Fiscal 2017, net sales increased slightly as compared to the year-to-date period of Fiscal 2016.
Cost of Sales, Exclusive of Depreciation and Amortization
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Cost of sales, exclusive of depreciation and amortization | $ | 332,485 |
| | 38.7% | | $ | 310,995 |
| | 37.8% |
| | | | | | | | |
| Gross profit | $ | 526,627 |
| | 61.3% | | $ | 510,739 |
| | 62.2% |
|
| | | | | | | | | | | |
| | Thirty-nine Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Cost of sales, exclusive of depreciation and amortization | $ | 913,085 |
| | 39.7% | | $ | 876,810 |
| | 38.3% |
| | | | | | | | |
| Gross profit | $ | 1,386,447 |
| | 60.3% | | $ | 1,413,567 |
| | 61.7% |
For the third quarter of Fiscal 2017, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 90 basis points 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.
For the year-to-date period of Fiscal 2017, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 140 basis points as compared to the year-to-date period 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 20 basis points.
Stores and Distribution Expense
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Stores and distribution expense | $ | 375,944 |
| | 43.8% | | $ | 386,609 |
| | 47.0% |
|
| | | | | | | | | | | |
| | Thirty-nine Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Stores and distribution expense | $ | 1,105,168 |
| | 48.1% | | $ | 1,138,644 |
| | 49.7% |
For the third quarter of Fiscal 2017, stores and distribution expense as a percentage of net sales decreased by approximately 320 basis points as compared to the third quarter of Fiscal 2016, primarily due to expense reduction efforts and the leveraging effect from increased net sales, partially offset by higher direct-to-consumer expense.
For the year-to-date period of Fiscal 2017, stores and distribution expense as a percentage of net sales decreased by approximately 160 basis points as compared to the year-to-date period of Fiscal 2016, primarily due to expense reduction efforts, partially offset by higher direct-to-consumer expense.
For the third quarter of Fiscal 2017, shipping and handling costs incurred to physically move product to the customer, associated with direct-to-consumer operations, including costs incurred to store, move and prepare product for shipment, were $31.6 million as compared to $27.1 million for the third quarter of Fiscal 2016. For the year-to-date period of Fiscal 2017, shipping and handling costs were $92.8 million as compared to $77.3 million for the year-to-date period of Fiscal 2016.
Marketing, General and Administrative Expense
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Marketing, general and administrative expense | $ | 124,533 |
| | 14.5% | | $ | 105,307 |
| | 12.8% |
Deduct: legal charges(1) | (11,070 | ) | | (1.3)% | | — |
| | 0.0% |
Deduct: indemnification recovery(2) | — |
| | 0.0% | | 6,000 |
| | 0.7% |
| Adjusted non-GAAP marketing, general and administrative expense | $ | 113,463 |
| | 13.2% | | $ | 111,307 |
| | 13.5% |
|
| | | | | | | | | | | |
| | Thirty-nine Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Marketing, general and administrative expense | $ | 343,779 |
| | 14.9% | | $ | 331,473 |
| | 14.5% |
Deduct: legal charges(1) | (11,070 | ) | | (0.5)% | | | | 0.0% |
Deduct: indemnification recovery(2) | — |
| | 0.0% | | 6,000 |
| | 0.3% |
| Adjusted non-GAAP marketing, general and administrative expense | $ | 332,709 |
| | 14.5% | | $ | 337,473 |
| | 14.7% |
| |
(1)
| Includes legal charges in connection with a proposed settlement of two class action claims related to alleged wage and hour practices dating back to 2009. See Note 11, “CONTINGENCIES.” |
| |
(2)
| Includes benefits related to an indemnification recovery of certain legal settlements which were recognized in the second quarter of Fiscal 2015. |
For the third quarter of Fiscal 2017, marketing, general and administrative expense as a percentage of net sales increased by approximately 170 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 and the leveraging effect from increased net sales. Excluding certain items presented above, third quarter Fiscal 2017 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased approximately 30 basis points as compared to the third quarter of Fiscal 2016.
For the year-to-date period of Fiscal 2017, 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.
Asset Impairment
For the third quarter of Fiscal 2017, the Company incurred store asset impairment charges of $3.5 million. There were no asset impairment charges for the third quarter of Fiscal 2016. For the year-to-date period of Fiscal 2017, 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.
Other Operating Income, Net
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Other operating income, net | $ | 70 |
| | 0.0% | | $ | 822 |
| | 0.1% |
|
| | | | | | | | | | | |
| | Thirty-nine Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Other operating income, net | $ | 4,555 |
| | 0.2% | | $ | 16,835 |
| | 0.7% |
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, other operating income, net as a percentage of net sales decreased by approximately 10 basis points as compared to the third quarter of Fiscal 2016, primarily due to year-over-year changes in foreign currency related gains and losses.
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-GAAP other operating income, net as a percentage of net sales was approximately flat as compared to the year-to-date period of Fiscal 2016.
Operating 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 impairment | 3,480 |
| | 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 impairment | 9,615 |
| | 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)% |
| |
(1)
| Includes legal charges in connection with a proposed settlement of two class action claims related to alleged wage and hour practices dating back to 2009. See Note 11, “CONTINGENCIES.” |
| |
(2)
| Includes benefits related to an indemnification recovery of certain legal settlements which were recognized in the second quarter of Fiscal 2015. |
| |
(3)
| 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, operating income as a percentage of net sales increased by approximately 20 basis points as compared to 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. Excluding certain items presented above, third quarter Fiscal 2017 adjusted non-GAAP operating income as a percentage of net sales increased by approximately 260 basis points as compared to the third quarter of Fiscal 2016. Changes in foreign currency exchange rates benefited operating income by approximately $0.9 million.
For the year-to-date period of Fiscal 2017, operating loss as a percent of 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.
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, 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's investments and cash holdings.
For the year-to-date period of Fiscal 2017, interest expense, net was $12.8 million as compared 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 and interest income earned on the Company's investments and cash holdings.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | October 28, 2017 | | October 29, 2016 |
| (in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
| Income tax expense | $ | 7,553 |
| | 41.6% | | $ | 6,762 |
| | 45.0% |
Add back: tax effect of excluded items(1) | 4,117 |
| |
|
| 479 |
| | |
| Adjusted non-GAAP income tax expense | $ | 11,670 |
| | 35.7% | | $ | 7,241 |
| | 80.1% |
|
| | | | | | | | | | | |
| | 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% |
| |
(1)
| Refer to “Operating Income (Loss)” for details of excluded items. The Company computed the tax effect of excluded items as the difference between the effective tax rate calculated with and without the non-GAAP adjustments on income (loss) before taxes and provision for income taxes.
|
For the third quarter of Fiscal 2017, the effective tax rate, which is sensitive at lower levels of pre-tax earnings, was 41.6% as compared to 45.0% for the third quarter of Fiscal 2016. The change in the effective tax rate was primarily driven by changes in level and mix of consolidated pre-tax income amongst operating jurisdictions. Excluding certain items presented above in the table under “Operating Income (Loss),” the third quarter Fiscal 2017 adjusted non-GAAP effective tax rate was 35.7% as compared to 80.1% for the third quarter Fiscal 2016.
For the year-to-date period of Fiscal 2017, the effective tax rate was 19.8% as compared to 29.3% for the year-to-date period of Fiscal 2016. The change in the effective tax rate 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 above in the table under “Operating Income (Loss),” the year-to-date Fiscal 2017 adjusted non-GAAP effective tax rate was 17.1% as compared to 26.9% for the year-to-date period of Fiscal 2016.
Net Income (Loss) and Net Income (Loss) per Share Attributable to A&F
For the third quarter of Fiscal 2017, net income and net income per diluted share attributable to A&F were $10.1 million and $0.15, respectively, as compared to net income and 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 and net income per diluted share attributable to A&F were $20.5 million and $0.30, respectively, as compared to $1.4 million and $0.02 for the third quarter of Fiscal 2016.
For the year-to-date period of Fiscal 2017, net loss and net loss per diluted share attributable to A&F were $67.1 million and $0.98, respectively, as compared to net loss and 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 and net loss per diluted share attributable to A&F were $52.2 million and $0.76, respectively, as compared to $55.0 million and $0.81 for the year-to-date period of Fiscal 2016.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL SOURCES AND USES OF CASH
Seasonality of Cash Flows
The Company’s business has two principal selling seasons: the Spring season which includes the first and second fiscal quarters (“Spring”) and the Fall 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 Facility
As of October 19, 2017, the Company amended and extended its senior secured revolving credit agreement, which was set to expire on August 7, 2019. As amended, the asset-based revolving credit agreement continues to provide availability 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.
As of November 30, 2017, the borrowing base on the Amended ABL Facility was $397.0 million. As of November 30, 2017, 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.
Term Loan Facility
The Company is also party to a term loan agreement, which provides for a term loan facility of $300 million (the “Term Loan Facility” and,read 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, the Company recorded deferred financing fees associated with the issuance of the Term Loan Facility and 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.
The Company’s Term Loan debt is presented in the Condensed Consolidated Balance Sheets, net 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, net | 263,910 |
| | 262,992 |
|
| Less: short-term portion of borrowings, net | — |
| | — |
|
| Long-term portion of borrowings, net | $ | 263,910 |
| | 262,992 |
|
The Term Loan Facility will mature 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
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.
Operating Activities
Net cash provided by operating activities was $29.7 million for the thirty-nine weeks ended October 28, 2017 compared to $22.1 million for the thirty-nine weeks ended October 29, 2016. 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 of rent payments, refunds received from prior year tax returns and a year-over-year decrease in incentive compensation payments. These year-over-year changes were partially offset by greater inventory purchases in Fiscal 2017 and proceeds from lease deposits returned and $12.3 million of claims settlement benefits received in Fiscal 2016.
Investing Activities
Cash outflows for investing activities for the thirty-nine weeks ended October 28, 2017 and October 29, 2016 included capital expenditures of $86.3 million and $96.8 million, respectively, primarily for store updates and new stores, as well as direct-to-consumer and omnichannel and information technology investments.
Financing Activities
Cash outflows for the thirty-nine weeks ended October 28, 2017 and October 29, 2016 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.
FUTURE CASH REQUIREMENTS AND SOURCES OF CASH
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, 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 required repayments, if any, based on annual excess cash flows, as defined in the term loan agreement. The Company has availability under 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.
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 October 28, 2017, $276.3 million of the Company’s $459.3 million of cash and equivalents was held by foreign affiliates. 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. Unremitted earnings from foreign affiliates generally would become subject to U.S. income tax if remitted as dividends or lent to A&F or a U.S. affiliate.
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.
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 thirteen weeks ended October 28, 2017, there were no material changes in the contractual obligations as of January 28, 2017, 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. See Note 1, “BASIS OF PRESENTATION--Recent Accounting Pronouncements” of the Notes to Condensed Consolidated Financial Statements and notes thereto 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 Consolidatedin “Item 1. Financial Statements.Statements (Unaudited),” to which all references to Notes in MD&A are made.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company describes its critical accounting policies and estimates in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, of A&F's Annual Report on Form 10-K for Fiscal 2016. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2016.
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,” “should,” “are confident,” “will,” “could,” “outlook,” or the negative versions of these words or other comparable words, 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.
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. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Fiscal 2022 Form 10-K and otherwise in our reports and filings with the SEC, as well as the following:
•risks related to changes in global economic and financial conditions, including volatility in the financial markets as a result of the failure, or rumored failure, of financial institutions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits;
•risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs;
•risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience;
•risks related to natural disasters and other unforeseen catastrophic events;
•risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory;
•risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives;
•risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons;
•risks related to fluctuations in foreign currency exchange rates;
•risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations;
•risks related to our ability to execute on our strategic and growth initiatives, including those outlined in our Always Forward Plan;
•risks related to international operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions;
•risks and uncertainty related to the COVID-19 pandemic and any other adverse public health developments:
•risks related to cybersecurity threats and privacy or data security breaches;
•risks related to the potential loss or disruption of our information systems;
•risks related to the continued validity of our trademarks and our ability to protect our intellectual property;
•risks associated with climate change and other corporate responsibility issues; and
•uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
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 experienceincluding any financial targets and estimates, whether as a result of new information, future events, or futureotherwise.
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| Abercrombie & Fitch Co. | 19 | 2023 1Q Form 10-Q |
INTRODUCTION
MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows:
•Overview.A general description of the Company’s business and certain segment information. •Current Trends and Outlook.A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, as well as a summary of the Company’s performance for the thirteen weeks ended April 29, 2023 and April 30, 2022. •Results of Operations.An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)for the thirteen weeks ended April 29, 2023 and April 30, 2022. •Liquidity and Capital Resources.A discussion of the Company’s financial condition, changes make it clearin financial condition and liquidity as of April 29, 2023, which includes (i) an analysis of financial condition as compared to January 28, 2023; (ii) an analysis of changes in cash flows for the thirteen weeks ended April 29, 2023, as compared to the thirteen weeks ended April 30, 2022; and (iii) an analysis of liquidity, including availability under the Company’s ABL Facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. •Recent Accounting Pronouncements.A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. •Critical Accounting Estimates. A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. •Non-GAAP Financial Measures. MD&A provides a discussion of certain financial measures that any projected results expressed or implied therein willhave been determined to not be realized.presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors.
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| Abercrombie & Fitch Co. | 20 | 2023 1Q Form 10-Q |
OVERVIEW
Business summary
The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, Middle East, and Asia.
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows:
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| Fiscal year | | Year ended/ ending | | Number of weeks |
| Fiscal 2022 | | January 28, 2023 | | 52 |
| Fiscal 2023 | | February 3, 2024 | | 53 |
| Fiscal 2024 | | February 1, 2025 | | 52 |
Seasonality
Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). 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 and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the Fall season due to back-to-school and holiday sales periods, respectively.
CURRENT TRENDS AND OUTLOOK
Focus areas for Fiscal 2023
The Company remains committed to, and confident in, its long-term vision of being a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress toward initiatives that support this vision as outlined in its Always Forward Plan.
The Always Forward Plan, which outlines the Company’s long-term strategic goals, including growing shareholder value is anchored on three strategic growth principles, which are to:
•Execute focused brand growth plans;
•Accelerate an enterprise-wide digital revolution; and
•Operate with financial discipline.
The following focus areas for Fiscal 2023 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Plan:
•Execute brand growth plans
•Drive Abercrombie brands through marketing and store investment;
•Optimize the Hollister product and brand voice to enable second half growth; and
•Support Gilly Hicks growth with an evolved assortment mix
•Accelerate an enterprise-wide digital revolution
•Complete current phase of our modernization efforts around key data platforms;
•Continue to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey; and
•Improve our digital and app experience across key parts of the customer journey
•Operate with financial discipline
•Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year; and
•Properly balance investments, inflation and efficiency efforts to improve profitability
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| Abercrombie & Fitch Co. | 21 | 2023 1Q Form 10-Q |
Supply chain and impact of inflation
Previously, the Company experienced inflationary pressures with respect to labor, cotton, freight and other raw materials and other costs, which has negatively impacted expenses and margins. While freight costs have stabilized and supply chain constraints are waning, there continues to be inflationary pressures with respect to cotton and other raw materials, as well as other operating costs. Continued inflationary pressures could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to its customers through higher AUR.
Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products.
The adverse consequences of the current economic environment continue to impact the Company and may persist for some time. The Company will continue to assess impacts on its operations and financial condition, and will respond as it deems appropriate.
Global Store Network Optimization
The Company has a goal of opening smaller, omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the year-to-date period of Fiscal 2023, the Company opened six new stores, while closing 10 stores. As part of this focus, the Company plans to be a net store opener again this year with approximately 35-40 new stores, while closing approximately 20-25 stores, during Fiscal 2023, pending negotiations with our landlord partners.
Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Additional details related to store count and gross square footage follow:
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| Abercrombie (1) | | Hollister (2) | | Total Company (3) |
| U.S. | | International | | U.S. | | International | | U.S. | | International | | Total |
| Number of stores: | | | | | | | | | | | | | |
| January 28, 2023 | 180 | | | 53 | | | 380 | | | 149 | | | 560 | | | 202 | | | 762 | |
| New | 1 | | | 2 | | | 1 | | | 2 | | | 2 | | | 4 | | | 6 | |
| Permanently closed | (2) | | | (1) | | | (4) | | | (3) | | | (6) | | | (4) | | | (10) | |
| April 29, 2023 | 179 | | | 54 | | | 377 | | | 148 | | | 556 | | | 202 | | | 758 | |
Gross square footage (in thousands): | | | | | | | | | | | | | |
| April 29, 2023 | 1,146 | | | 350 | | | 2,407 | | | 1,120 | | | 3,553 | | | 1,470 | | | 5,023 | |
(1)Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 22 international franchise stores as of April 29, 2023 and 23 international franchise stores as of January 28, 2023. Excludes three Company-operated temporary stores as of each of April 29, 2023 and January 28, 2023.
(2)Hollister includes the Company’s Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 13 international franchise stores as of April 29, 2023 and 12 international franchise stores as of January 28, 2023. Excludes 20 Company-operated temporary stores as of April 29, 2023 and 16 Company-operated temporary stores as of January 28, 2023.
(3)This store count excludes one international third-party operated multi-brand outlet store as of each of April 29, 2023 and January 28, 2023.
Impact of global events and uncertainty
As we are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe, Middle East and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business. As a result, management continues to monitor global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations.
For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “Forward-looking Statements and Risk Factors” in “Item 1A. Risk Factors” on the Fiscal 2022 Form 10-K.
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| Abercrombie & Fitch Co. | 22 | 2023 1Q Form 10-Q |
Summary of results
A summary of results for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows:
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| | GAAP | | Non-GAAP (1) |
| (in thousands, except change in net sales, gross profit rate, operating income (loss) margin and per share amounts) | | April 29, 2023 | | April 30, 2022 | | April 29, 2023 | | April 30, 2022 |
| Thirteen Weeks Ended | | | | | | | | |
| Net sales | | $ | 835,994 | | | $ | 812,762 | | | | | |
| Change in net sales | | 2.9 | % | | 4.0 | % | | | | |
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| Gross profit rate | | 61.0 | % | | 55.3 | % | | | | |
| Operating income (loss) | | $ | 34,008 | | | $ | (9,726) | | | $ | 38,444 | | | $ | (6,304) | |
| Operating income (loss) margin | | 4.1 | % | | (1.2) | % | | 4.6 | % | | (0.8) | % |
| Net income (loss) attributable to A&F | | $ | 16,571 | | | $ | (16,469) | | | $ | 19,820 | | | $ | (13,965) | |
| Net income (loss) per share attributable to A&F | | 0.32 | | | (0.32) | | | 0.39 | | | (0.27) | |
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(1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “NON-GAAP FINANCIAL MEASURES.”
Certain components of the Company’s Condensed Consolidated Balance Sheets as of April 29, 2023 and January 28, 2023 were as follows:
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| (in thousands) | | April 29, 2023 | | January 28, 2023 |
| Cash and equivalents | | $ | 446,952 | | | $ | 517,602 | |
| Gross long-term borrowings outstanding, carrying amount | | 299,730 | | | 299,730 | |
| Inventories | | 447,806 | | | 505,621 | |
Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended April 29, 2023 and April 30, 2022 were as follows:
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| (in thousands) | | April 29, 2023 | | April 30, 2022 |
| Net cash used for operating activities | | $ | (560) | | | $ | (217,787) | |
| Net cash used for investing activities | | (46,391) | | | (18,541) | |
| Net cash used for financing activities | | (21,956) | | | (116,945) | |
RESULTS OF OPERATIONS
The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales.
Net sales
The Company’s net sales by operating segment for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows:
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| Thirteen Weeks Ended | | | | | | |
| (in thousands) | April 29, 2023 | | April 30, 2022 | | $ Change | | % Change | | Comparable Sales (1) |
Abercrombie (2) | $ | 436,044 | | | $ | 383,928 | | | $ | 52,116 | | | 14 | % | | 14 | % |
Hollister (3) | 399,950 | | | 428,834 | | | (28,884) | | | (7) | | | (6) | |
| Total | $ | 835,994 | | | $ | 812,762 | | | $ | 23,232 | | | 3 | | | 3 | |
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(1)Comparable sales are calculated on a constant currency basis. Refer to “NON-GAAP FINANCIAL MEASURES,” for further details on the comparable sales calculation.
(2)Includes Abercrombie & Fitch and abercrombie kids brands.
(3)Includes Hollister, Gilly Hicks, and Social Tourist brands.
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| Abercrombie & Fitch Co. | 23 | 2023 1Q Form 10-Q |
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows:
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| Thirteen Weeks Ended | | | | | | |
| (in thousands) | April 29, 2023 | | April 30, 2022 | | $ Change | | % Change | | Comparable Sales (1) |
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| U.S. | $ | 636,117 | | | $ | 585,106 | | | $ | 51,011 | | | 9 | % | | 4 | % |
| EMEA | 139,258 | | | 163,969 | | | (24,711) | | | (15) | | | (4) | |
| APAC | 33,333 | | | 29,897 | | | 3,436 | | | 11 | | | 22 | |
Other (2) | 27,286 | | | 33,790 | | | (6,504) | | | (19) | | | (2) | |
| International | $ | 199,877 | | | $ | 227,656 | | | $ | (27,779) | | | (12) | | | 0 | |
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| Total | $ | 835,994 | | | $ | 812,762 | | | $ | 23,232 | | | 3 | | | 3 | |
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(1)Comparable sales are calculated on a constant currency basis. Refer to “NON-GAAP FINANCIAL MEASURES,” for further details on the comparable sales calculation.
(2)Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada.
For the first quarter of Fiscal 2023, net sales increased 3% primarily due to an increase in AUR. The year-over-year increase in net sales reflects a positive comparable sales of 3%, as compared to the first quarter of Fiscal 2022, with growth in the U.S. partially offset by a decline in International. This was partially offset by the adverse impact from changes in foreign currency exchange rates of approximately 1% or $9 million.
Cost of sales, exclusive of depreciation and amortization
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Cost of sales, exclusive of depreciation and amortization | $ | 326,200 | | | 39.0 | % | | $ | 363,216 | | | 44.7 | % | | (570) | |
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For the first quarter of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 570 basis points, as compared to the first quarter of Fiscal 2022. The year-over-year decrease was primarily driven by a benefit of 760 basis points from lower freight costs and 230 basis points from year-over-year AUR growth partially offset by 320 basis points from higher cotton costs and 100 basis points from the adverse impact from changes in foreign currency exchange rates.
Gross profit, exclusive of depreciation and amortization
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Gross profit, exclusive of depreciation and amortization | $ | 509,794 | | | 61.0 | % | | $ | 449,546 | | | 55.3 | % | | 570 | |
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Stores and distribution expense
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Stores and distribution expense | $ | 331,613 | | | 39.7 | % | | $ | 337,543 | | | 41.5 | % | | (180) | |
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For the first quarter of Fiscal 2023, stores and distribution expense decreased 180 basis points, as compared to the first quarter of Fiscal 2022. The $6 million decrease was primarily driven by a decrease in digital marketing and fulfillment costs as compared to the first quarter of Fiscal 2022.
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| Abercrombie & Fitch Co. | 24 | 2023 1Q Form 10-Q |
Marketing, general and administrative expense
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Marketing, general and administrative expense | $ | 142,631 | | | 17.1 | % | | $ | 122,149 | | | 15.0 | % | | 210 | |
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For the first quarter of Fiscal 2023, marketing, general and administrative expense, as a percentage of net sales, increased 210 basis points, as compared to the first quarter of Fiscal 2022, primarily driven by an increase in technology expenses and incentive-based compensation.
Asset impairment
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Asset impairment | $ | 4,436 | | | 0.5% | | $ | 3,422 | | | 0.4% | | 10 | |
| Excluded items: | | | | | | | | | |
Asset impairment charges (1) | (4,436) | | | (0.5) | | (3,422) | | | (0.4) | | (10) | |
| Adjusted non-GAAP asset impairment | $ | — | | | — | | $ | — | | | — | | — | |
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Other operating income, net
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Other operating income, net | $ | 2,894 | | | 0.3 | % | | $ | 3,842 | | | 0.5 | % | | 20 | |
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Operating income (loss)
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Operating income (loss) | $ | 34,008 | | | 4.1 | % | | $ | (9,726) | | | (1.2) | % | | 530 | |
| Excluded items: | | | | | | | | | |
Asset impairment charges (1) | 4,436 | | | 0.5 | | | 3,422 | | | 0.4 | | | 10 | |
| Adjusted non-GAAP operating income (loss) ⁽¹⁾ | $ | 38,444 | | | 4.6 | | | $ | (6,304) | | | (0.8) | | | 540 | |
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| Abercrombie & Fitch Co. | 25 | 2023 1Q Form 10-Q |
Interest expense, net
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Interest expense | $ | 7,458 | | | 0.9 | % | | $ | 7,809 | | | 1.0 | % | | (10) | |
| Interest income | (4,015) | | | (0.5) | | | (502) | | | (0.1) | | | (40) | |
| Interest expense, net | $ | 3,443 | | | 0.4 | | | $ | 7,307 | | | 0.9 | | | (50) | |
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For the first quarter of Fiscal 2023, interest expense, net was lower, as a result of higher interest income due to the increase in rates received on deposits and money market accounts, compared to the first quarter of Fiscal 2022.
Income tax expense (benefit)
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| Thirteen Weeks Ended |
| April 29, 2023 | | April 30, 2022 |
| (in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
| Income tax expense (benefit) | $ | 12,718 | | | 41.6 | % | | $ | (2,187) | | | 12.8 | % |
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Tax effect of pre-tax excluded items (1) | 1,187 | | | | | 918 | | | |
| Adjusted non-GAAP income tax expense (benefit) ⁽¹⁾ | $ | 13,905 | | | 39.7 | % | | $ | (1,269) | | | 9.3 | % |
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(1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “Operating income (loss)” and “NON-GAAP FINANCIAL MEASURES” for details of pre-tax excluded items.
Net income (loss) attributable to A&F
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | |
| (in thousands) | | | % of Net sales | | | | % of Net sales | | BPS Change |
| Net income (loss) attributable to A&F | $ | 16,571 | | | 2.0 | % | | $ | (16,469) | | | (2.0) | % | | 400 | |
Excluded items, net of tax (1) | 3,249 | | | 0.4 | | | 2,504 | | | 0.3 | | | 10 | |
Adjusted non-GAAP net income (loss) attributable to A&F (2) | $ | 19,820 | | | 2.4 | | | $ | (13,965) | | | (1.7) | | | 410 | |
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(1) Excluded items presented above under “Operating income (loss),” and “Income tax expense (benefit)”
Net income (loss) per share attributable to A&F
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| Thirteen Weeks Ended | | |
| April 29, 2023 | | April 30, 2022 | | $ Change |
| Net income (loss) per diluted share attributable to A&F | $ | 0.32 | | | $ | (0.32) | | | $ | 0.64 | |
Excluded items, net of tax (1) | 0.06 | | | 0.05 | | | 0.01 | |
| Adjusted non-GAAP net income (loss) per diluted share attributable to A&F | 0.39 | | | (0.27) | | | 0.66 | |
| Impact from changes in foreign currency exchange rates | — | | | (0.12) | | | 0.12 | |
Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) | 0.39 | | | (0.39) | | | 0.78 | |
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(1) Excluded items presented above under “Operating income (loss),” and “Income tax expense (benefit).”
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| Abercrombie & Fitch Co. | 26 | 2023 1Q Form 10-Q |
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “Share repurchases and dividends.”
Primary sources and uses of cash
The Company’s business has two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “Credit facility and Senior Secured Notes”.
Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities.
The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2022 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in its digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended April 29, 2023, the Company used $46.4 million towards capital expenditures. Total capital expenditures for Fiscal 2023 are expected to be approximately $160 million.
The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of April 29, 2023, the Company had cash and cash equivalents of $447.0 million and total liquidity of approximately $757.7 million, compared with cash and cash equivalents of $517.6 million and total liquidity of approximately $865.7 million at the beginning of Fiscal 2023. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or purchasing outstanding Senior Secured Notes.
Share repurchases and dividends
In November 2021, A&F’s Board of Directors approved a $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended April 29, 2023, the Company did not repurchase any shares of its common stock.
Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization.
In May 2020, the Company announced that it had suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.
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| Abercrombie & Fitch Co. | 27 | 2023 1Q Form 10-Q |
Credit facility and Senior Secured Notes
As of April 29, 2023, the Company had $299.7 million of gross borrowings outstanding under the Senior Secured Notes.
In addition, the Amended and Restated Credit Agreement, as amended by the First Amendment (as defined below) provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to$400 million. As of April 29, 2023, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026.
Details regarding the remaining borrowing capacity under the ABL Facility as of April 29, 2023 are as follows:
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| (in thousands) | April 29, 2023 |
| Loan cap | $ | 345,995 | |
| Less: Outstanding stand-by letters of credit | (610) | |
| Borrowing capacity | 345,385 | |
Less: Minimum excess availability (1) | (34,600) | |
| Borrowing capacity available | $ | 310,785 | |
(1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility.
Income taxes
The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of April 29, 2023, $184.3 million of the Company’s $447.0 million of cash and equivalents were held by foreign affiliates.
Analysis of cash flows
The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 29, 2023 and April 30, 2022:
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| Thirteen Weeks Ended |
| April 29, 2023 | | April 30, 2022 |
| (in thousands) | | | |
| Cash and equivalents, and restricted cash and equivalents, beginning of period | $ | 527,569 | | | $ | 834,368 | |
| Net cash used for operating activities | (560) | | | (217,787) | |
| Net cash used for investing activities | (46,391) | | | (18,541) | |
| Net cash used for financing activities | (21,956) | | | (116,945) | |
| Effect of foreign currency exchange rates on cash | (1,998) | | | (2,617) | |
| Net decrease in cash and equivalents, and restricted cash and equivalents | (70,905) | | | (355,890) | |
| Cash and equivalents, and restricted cash and equivalents, end of period | $ | 456,664 | | | $ | 478,478 | |
Operating activities - During the year-to-date period ended April 29, 2023, net cash used for operating activities included increased cash receipts as a result of the 3% year-over-year increase in net sales as well as increased payments to vendors in the fourth quarter of Fiscal 2022 which resulted in lower cash payments in the first quarter of Fiscal 2023.
Investing activities - During the year-to-date period ended April 29, 2023, net cash used for investing activities was primarily used for capital expenditures of $46.4 million. This compared to net cash used for investing activities of $26.3 million for the year-to-date period ended April 30, 2022, which was primarily used for capital expenditures, partially offset by the proceeds from the sale of property and equipment of $7.8 million.
Financing activities - During the year-to-date period ended April 29, 2023, net cash used for financing activities included amounts related to shares of common stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards. During the year-to-date period ended April 30, 2022, net cash used by financing activities included the purchase of approximately 3.3 million shares of Common Stock with a market value of approximately $100.0 million.
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| Abercrombie & Fitch Co. | 28 | 2023 1Q Form 10-Q |
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.
There have been no material changes in the Company’s contractual obligations since January 28, 2023, 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” included on the Fiscal 2022 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2022 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2022.
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented 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” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges, thereby supplementing 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 as 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.
Comparable sales
At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, 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) digital net 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 exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and 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.
Excluded items
The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable:
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Financial measures (1) | | Excluded items |
| Operating income (loss) | | Asset impairment charges |
Income tax expense (benefit) (2) | | Tax effect of pre-tax excluded items |
Net income (loss) and net income (loss) per share attributable to A&F (2) | | Pre-tax excluded items and the tax effect of pre-tax excluded items |
(1) Certain of these financial measures are also expressed as a percentage of net sales.
(2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis.
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| Abercrombie & Fitch Co. | 29 | 2023 1Q Form 10-Q |
Financial 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. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate.
A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows:
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| (in thousands, except change in net sales, gross profit rate, operating margin and per share data) | Thirteen Weeks Ended | | |
| Net sales | April 29, 2023 | | April 30, 2022 | | % Change | | | | | | |
| GAAP | $ | 835,994 | | | $ | 812,762 | | | 3 | % | | | | | | |
| Impact from changes in foreign currency exchange rates | — | | | (8,597) | | | 1 | | | | | | | |
| Non-GAAP on a constant currency basis | $ | 835,994 | | | $ | 804,165 | | | 4 | | | | | | | |
| Gross profit, exclusive of depreciation and amortization expense | April 29, 2023 | | April 30, 2022 | | BPS Change (1) | | | | | | |
| GAAP | $ | 509,794 | | | $ | 449,546 | | | 570 | | | | | | | |
| Impact from changes in foreign currency exchange rates | — | | | (12,601) | | | 100 | | | | | | | |
| Non-GAAP on a constant currency basis | $ | 509,794 | | | $ | 436,945 | | | 670 | | | | | | | |
| Operating income (loss) | April 29, 2023 | | April 30, 2022 | | BPS Change (1) | | | | | | |
| GAAP | $ | 34,008 | | | $ | (9,726) | | | 530 | | | | | | | |
Excluded items (2) | (4,436) | | | (3,422) | | | (10) | | | | | | | |
| Adjusted non-GAAP | $ | 38,444 | | | $ | (6,304) | | | 540 | | | | | | | |
| Impact from changes in foreign currency exchange rates | — | | | (8,639) | | | 110 | | | | | | | |
| Adjusted non-GAAP on a constant currency basis | $ | 38,444 | | | $ | (14,943) | | | 650 | | | | | | | |
| Net income (loss) per share attributable to A&F | April 29, 2023 | | April 30, 2022 | | $ Change | | | | | | |
| GAAP | $ | 0.32 | | | $ | (0.32) | | | $ | 0.64 | | | | | | | |
Excluded items, net of tax (2) | (0.06) | | | (0.05) | | | (0.01) | | | | | | | |
| Adjusted non-GAAP | $ | 0.39 | | | $ | (0.27) | | | $ | 0.66 | | | | | | | |
| Impact from changes in foreign currency exchange rates | — | | | (0.12) | | | 0.12 | | | | | | | |
| Adjusted non-GAAP on a constant currency basis | $ | 0.39 | | | $ | (0.39) | | | $ | 0.78 | | | | | | | |
(1) The estimated basis point change has been rounded based on the change in the percentage of net sales.
(2) Excluded items for the thirteen weeks ended April 29, 2023 and April 30, 2022 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.
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| Abercrombie & Fitch Co. | 30 | 2023 1Q Form 10-Q |
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Investment Securities
INVESTMENT SECURITIES
The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments.
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$0.3 million and $0.4 million for each of the thirteen weeks ended October 28, 2017April 29, 2023 and October 29, 2016 and $2.3 million for each of the thirty-nine weeks ended October 28, 2017 and October 29, 2016,April 30, 2022, respectively which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The Rabbi Trust assets arewere included in other assets on the Condensed Consolidated Balance Sheets as of October 28, 2017April 29, 2023 and January 28, 2017,2023 and are restricted in their use as noted above.
Interest Rate RisksINTEREST RATE RISK
AsPrior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of October 28, 2017,interest expense from fluctuations in the Company has approximately $268.3 million in gross borrowings outstanding under itsLIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and nothe ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes and repaid all outstanding borrowings outstanding under its senior secured revolving credit facility (the “Amended ABL Facility” and, together with the Term Loan Facility and the “Credit Facilities”).ABL Facility, thereby eliminating any then-existing cash flow market risk due to changes in interest rates. The Credit Facilities carry interest rates thatSenior Secured Notes are tiedexposed to LIBOR, or an alternate base rate, plus a margin. The interest rate on the Term Loan Facility has a 100 basis point LIBOR floor, and assuming norisk that is limited to 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 million.fair value. This hypothetical analysis for the fifty-three weeks ending February 3, 2018Fiscal 2023 may differ from the actual change in interest expenseresults due to potential changes in interest rates or gross borrowings outstanding under the Company’sABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Facilities.Agreement.
Foreign ExchangeIn July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment”) to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate, Riskas well as to make other conforming changes.
FOREIGN CURRENCY EXCHANGE 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 these 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 foreign currency fluctuationexchange rate fluctuations increases as international expansion increases.operations relative to domestic operations increase.
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 salepurchase 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 foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstandingOutstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.
The fair value of outstanding foreign currency exchange forward contracts included in other current assets was $1.3 million and $6.0 million as of October 28, 2017 and January 28, 2017, respectively. The fair value of outstanding foreign currency exchange forward contracts included in other liabilities was $3.6 million and $0.5 million as of October 28, 2017 and January 28, 2017, respectively. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. TheAs of April 29, 2023, 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$14.8 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 valuevalues would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “DERIVATIVE INSTRUMENTS,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of April 29, 2023 and January 28, 2023. | | | | | | | | |
| Abercrombie & Fitch Co. | 31 | 2023 1Q Form 10-Q |
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ITEMItem 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
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”))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 officerA&F’s Principal Executive Officer and the principal financial officer,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 SeniorExecutive Vice President and Chief Financial Officer and Chief Operating 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.April 29, 2023. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the SeniorExecutive 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, the end of the period covered by this Quarterly Report on Form 10-Q.April 29, 2023.
Changes in Internal Control Over Financial Reporting
CHANGES IN INTERNAL 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’sthe fiscal quarter ended October 28, 2017April 29, 2023 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting.
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| Abercrombie & Fitch Co. | 32 | 2023 1Q Form 10-Q |
32
PART II. OTHER INFORMATION
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:April 29, 2023: