Abercrombie & Fitch Co 10-Q for FY2022 Q3
Abercrombie & Fitch Co (ANF)
10-Q
2021-12-06
For: 2021-10-30
View Original
Added on
April 11, 2026
About this 10-Q
Abercrombie & Fitch Co filed this 10-Q on December 6, 2021, covering the quarter ended October 30, 2021 (FY2022 Q3).
Headline figures
Quarter ended October 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $905.16M
- up 10.4% from $819.65M a year earlier
- Net income
- $47.23M
- up 11.7% from net income of $42.27M a year earlier
- Diluted EPS
- $0.77
- up 16.7% from $0.66 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended October 30, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 001-12107
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: | ||||||||||||||
| Not Applicable | ||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). x Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | ¨ | |||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class A Common Stock | Shares outstanding as of December 1, 2021 | |||||||
| $0.01 Par Value | ||||||||
Table of Contents
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Abercrombie & Fitch Co.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Thousands, except per share amounts)
(Unaudited)
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Stores and distribution expense | |||||||||||||||||||||||
| Marketing, general and administrative expense | |||||||||||||||||||||||
| Flagship store exit charges (benefits) | ( | ( | ( | ||||||||||||||||||||
| Asset impairment | |||||||||||||||||||||||
| Other operating (income) loss, net | ( | ( | ( | ||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | |||||||||||||||||||||||
| Net income (loss) attributable to A&F | $ | $ | $ | $ | ( | ||||||||||||||||||
| Net income (loss) per share attributable to A&F | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted | $ | $ | $ | $ | ( | ||||||||||||||||||
| Weighted-average shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Other comprehensive (loss) income | |||||||||||||||||||||||
| Foreign currency translation | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Derivative financial instruments, net of tax | ( | ||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | ( | ||||||||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to A&F | $ | $ | $ | $ | ( | ||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
3
Abercrombie & Fitch Co.
Condensed Consolidated Balance Sheets
(Thousands, except par value amounts)
(Unaudited)
| October 30, 2021 | January 30, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Receivables | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Short-term portion of operating lease liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Long-term portion of operating lease liabilities | |||||||||||
| Long-term borrowings, net | |||||||||||
| Other liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Stockholders’ equity | |||||||||||
| Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss, net of tax (“AOCL”) | ( | ( | |||||||||
Treasury stock, at average cost: | ( | ( | |||||||||
| Total Abercrombie & Fitch Co. stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4
Abercrombie & Fitch Co.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except per share amounts)
(Unaudited)
| Thirteen Weeks Ended October 30, 2021 | |||||||||||||||||||||||||||||
| Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||||||
| Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||||||
| Balance, July 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of Common Stock | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||
| Share-based compensation issuances and exercises | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||
| Distributions to noncontrolling interests, net | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||
| Ending balance at October 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Thirteen Weeks Ended October 31, 2020 | |||||||||||||||||||||||||||||
| Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||||||
| Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||||||
| Balance, August 1, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||
| Share-based compensation issuances and exercises | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Distributions to noncontrolling interests, net | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||
| Ending balance at October 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5
Abercrombie & Fitch Co.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except per share amounts)
(Unaudited)
| Thirty-nine Weeks Ended October 30, 2021 | |||||||||||||||||||||||||||||
| Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||||||
| Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||||||
| Balance, January 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of Common Stock | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||
| Share-based compensation issuances and exercises | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||
| Distributions to noncontrolling interests, net | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||
| Ending balance at October 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Thirty-nine Weeks Ended October 31, 2020 | |||||||||||||||||||||||||||||
| Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||||||
| Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||||||
| Balance, February 1, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||
| Purchase of Common Stock | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||
| Dividends ($0.20 per share) | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||
| Share-based compensation issuances and exercises | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Distributions to noncontrolling interests, net | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||
| Ending balance at October 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
6
Abercrombie & Fitch Co.
Condensed Consolidated Statements of Cash Flows
(Thousands)
(Unaudited)
| Thirty-nine Weeks Ended | |||||||||||
| As Restated | |||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Asset impairment | |||||||||||
| Loss on disposal | |||||||||||
| (Benefit) provision for deferred income taxes | ( | ||||||||||
| Share-based compensation | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Operating lease right-of-use assets and liabilities | ( | ( | |||||||||
| Income taxes | ( | ||||||||||
| Other assets | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Withdrawal of funds from Rabbi Trust assets | |||||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Proceeds from issuance of senior secured notes | |||||||||||
| Purchase of senior secured notes | ( | ||||||||||
| Proceeds from borrowings under the senior secured asset-based revolving credit facility | |||||||||||
| Repayment of borrowings under the term loan facility | ( | ||||||||||
| Repayment of borrowings under the senior secures asset-based revolving credit facility | ( | ||||||||||
| Payment of debt issuance or modification costs and fees | ( | ( | |||||||||
| Purchases of Common Stock | ( | ( | |||||||||
| Dividends paid | ( | ||||||||||
| Other financing activities | ( | ( | |||||||||
| Net cash (used for) provided by financing activities | ( | ||||||||||
| Effect of foreign currency exchange rates on cash | ( | ||||||||||
| Net (decrease) increase in cash and equivalents, and restricted cash and equivalents | ( | ||||||||||
| Cash and equivalents, and restricted cash and equivalents, beginning of period | |||||||||||
| Cash and equivalents, and restricted cash and equivalents, end of period | $ | $ | |||||||||
| Supplemental information related to non-cash activities | |||||||||||
| Purchases of property and equipment not yet paid at end of period | $ | $ | |||||||||
| Operating lease right-of-use assets additions, net of terminations, impairments and other reductions | $ | $ | ( | ||||||||
| Supplemental information related to cash activities | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash received from income tax refunds | $ | $ | |||||||||
| Cash paid for amounts included in measurement of operating lease liabilities, net of abatements | $ | $ | |||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
7
Abercrombie & Fitch Co.
Index for Notes to Condensed Consolidated Financial Statements (Unaudited)
| Page No. | ||||||||
Note 1. | ||||||||
Note 2. | ||||||||
Note 3. | ||||||||
| Note 4. | ||||||||
| Note 5. | ||||||||
| Note 6. | ||||||||
| Note 7. | ||||||||
| Note 8. | ||||||||
| Note 9. | ||||||||
| Note 10. | ||||||||
| Note 11. | ||||||||
| Note 12. | ||||||||
| Note 13. | ||||||||
| Note 14. | ||||||||
| Note 15. | ||||||||
| Note 16. | ||||||||
| Note 17. | ||||||||
8
Abercrombie & Fitch Co.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. NATURE OF BUSINESS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows.
The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of these business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets.
Fiscal year
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows:
| Fiscal year | Year ended/ ending | Number of weeks | ||||||||||||
| Fiscal 2019 | February 1, 2020 | 52 | ||||||||||||
| Fiscal 2020 | January 30, 2021 | 52 | ||||||||||||
| Fiscal 2021 | January 29, 2022 | 52 | ||||||||||||
Interim financial statements
The Condensed Consolidated Financial Statements as of October 30, 2021, and for the thirteen and thirty-nine week periods ended October 30, 2021 and October 31, 2020, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2020 filed with the SEC on March 29, 2021. The January 30, 2021 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”).
In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2021.
Use of estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
9
statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) continues to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the duration and spread of COVID-19 and the emergence of new variants, such as the Delta and Omicron variants, of coronavirus, the availability and acceptance of effective vaccines, boosters or medical treatments, the impact of COVID-19 on the length or frequency of store closures, and the extent to which COVID-19 impacts worldwide macroeconomic conditions including interest rates, the speed of the economic recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Recent accounting pronouncements
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.
Restatement of previously issued financial information
As previously disclosed within “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Fiscal 2020 Form 10-K, a classification error was identified within the Company’s Condensed Consolidated Statements of Cash Flows in the Condensed Consolidated Financial Statements as of and for the periods ended May 2, 2020, August 1, 2020, and October 31, 2020, related to the presentation of the withdrawal of excess funds from the Company’s Rabbi Trust that occurred during the fiscal quarter ended May 2, 2020. This withdrawal of $50.0 million was originally presented incorrectly as a cash inflow from operating activities, rather than as a cash inflow from investing activities. The effects of the classification error on the Condensed Consolidated Statement of Cash Flows were disclosed in “Note 21. Correction of Error in Previously Reported Interim Financial Statements (Unaudited)” of the Notes to Consolidated Financial Statements included within “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’’s Fiscal 2020 Form 10-K. The effects of the classification error on the Condensed Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 31, 2020 is shown in the table below.
| Thirty-nine Weeks Ended | |||||||||||||||||
| As Originally Reported | As Restated | ||||||||||||||||
| (in thousands) | October 31, 2020 | Adjustment | October 31, 2020 | ||||||||||||||
| Net cash provided by operating activities | $ | $ | ( | $ | |||||||||||||
| Net cash used for investing activities | $ | ( | $ | $ | ( | ||||||||||||
| Net cash provided by financing activities | $ | — | $ | ||||||||||||||
| Effect of foreign currency exchange rates on cash | $ | — | $ | ||||||||||||||
| Net increase in cash and equivalents, and restricted cash and equivalents | $ | — | $ | ||||||||||||||
| Cash and equivalents, and restricted cash and equivalents, beginning of period | $ | — | $ | ||||||||||||||
| Cash and equivalents, and restricted cash and equivalents, end of period | $ | — | $ | ||||||||||||||
The Company’s Condensed Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 31, 2020 included within this Quarterly Report on Form 10-Q has been restated to reflect the correction of this error.
Condensed Consolidated Statements of Cash Flows reconciliation
The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows:
| (in thousands) | Location | October 30, 2021 | January 30, 2021 | October 31, 2020 | February 1, 2020 | ||||||||||||||||||||||||
| Cash and equivalents | Cash and equivalents | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term restricted cash and equivalents | Other assets | ||||||||||||||||||||||||||||
| Short-term restricted cash and equivalents | Other current assets | ||||||||||||||||||||||||||||
| Cash and equivalents and restricted cash and equivalents | $ | $ | $ | $ | |||||||||||||||||||||||||
10
3. IMPACT OF COVID-19
In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures. The Company has seen, and may continue to see, material adverse impacts as a result of COVID-19. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, such as the Delta and Omicron variants, and the availability and acceptance of effective vaccines, boosters or medical treatments.
During the thirteen and thirty-nine weeks ended October 31, 2020, the Company experienced a material adverse impact to net sales across brands and regions as a result of widespread temporary store closures in response to COVID-19, which was not offset by year-over-year digital sales growth. During the thirteen and thirty-nine weeks ended October 30, 2021, the vast majority of Company-operated stores were fully open for in-store service. As of October 30, 2021, there were no COVID-19 related store closures of Company-operated stores, although additional temporary store closures have subsequently been mandated in certain parts of the Europe, Middle East and Africa (“EMEA”) region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues.
During the thirteen weeks ended May 2, 2020, the Company recognized $14.8 million of charges to reduce the carrying value of inventory, primarily as a result of COVID-19 and the temporary closure of the Company’s stores, in cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Further negative developments in the COVID-19 pandemic could result in additional charges to reduce the carrying value of inventory.
As a result of COVID-19, the Company has suspended certain rent payments for periods of store closures, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. As of October 30, 2021 and January 30, 2021, the Company had $16.5 million and $24.2 million, respectively, related to suspended rent payments classified within accrued expenses on the Condensed Consolidated Balance Sheets. The Company obtained rent abatements of $1.7 million and $14.6 million, respectively, during the thirteen and thirty-nine weeks ended October 30, 2021, and $1.9 million and $18.9 million, respectively, during the thirteen and thirty-nine weeks ended October 31, 2020. All of the benefits related to these abatements were recognized within variable lease cost during the applicable periods.
During the thirteen weeks ended October 30, 2021 and October 31, 2020, the Company recognized qualified payroll-related credits reducing payroll expenses by approximately $0.6 million and $2.8 million, respectively, in the Condensed Consolidated Statements of Operations and Comprehensive Income. During the thirty-nine weeks ended October 30, 2021 and October 31, 2020, the Company recognized qualified payroll-related credits reducing payroll expenses by approximately $5.4 million and $14.7 million, respectively, in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). There are also instances where governments have provided wage subsidies through direct payments to the Company’s associates. In these instances, no benefits are recognized on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), but the Company does see a reduction in expense incurred. The Company also intends to continue to defer qualified payroll and other tax payments as permitted by applicable government laws and regulations.
The Company has recognized asset impairment charges related to the Company’s operating lease right-of-use assets and property and equipment, which are principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ASSET IMPAIRMENT,” for additional information.
The Company has also experienced other material impacts as a result of COVID-19, such as deferred tax valuation allowances and other tax charges. Refer to Note 10, “INCOME TAXES,” for additional information.
In March 2020, in an effort to improve the Company’s then near-term cash position as a precautionary measure in response to COVID-19, the Company borrowed $210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash. In July 2020, the Company took additional actions to preserve liquidity in light of the continued global uncertainty then presented by COVID-19, and completed a private offering of $350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”). The Company used the net proceeds of such offering to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering.
11
4. REVENUE RECOGNITION
Disaggregation of revenue
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 15, “SEGMENT REPORTING.”
Contract liabilities
The following table details certain contract liabilities representing unearned revenue as of October 30, 2021, January 30, 2021, October 31, 2020 and February 1, 2020:
| (in thousands) | October 30, 2021 | January 30, 2021 | October 31, 2020 | February 1, 2020 | |||||||||||||||||||
| Gift card liability | $ | $ | $ | $ | |||||||||||||||||||
| Loyalty program liability | $ | $ | $ | $ | |||||||||||||||||||
The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Revenue associated with gift card redemptions and gift card breakage | $ | $ | $ | $ | |||||||||||||||||||
| Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs | $ | $ | $ | $ | |||||||||||||||||||
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net income (loss) per share attributable to A&F follows:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Shares of Common Stock issued | |||||||||||||||||||||||
| Weighted-average treasury shares | ( | ( | ( | ( | |||||||||||||||||||
| Weighted-average — basic shares | |||||||||||||||||||||||
| Dilutive effect of share-based compensation awards | |||||||||||||||||||||||
| Weighted-average — diluted shares | |||||||||||||||||||||||
Anti-dilutive shares (1) | |||||||||||||||||||||||
(1)Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion.
6. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
•Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
•Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
•Level 3—inputs to the valuation methodology are unobservable.
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
12
The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that were measured at fair value on a recurring basis, as of October 30, 2021 and January 30, 2021, were as follows:
Assets and Liabilities at Fair Value as of October 30, 2021 | |||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Cash equivalents (1) | $ | $ | $ | $ | |||||||||||||||||||
Derivative instruments (2) | |||||||||||||||||||||||
Rabbi Trust assets (3) | |||||||||||||||||||||||
Restricted cash equivalents (1) | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Derivative instruments (2) | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
Assets and Liabilities at Fair Value as of January 30, 2021 | |||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Cash equivalents (1) | $ | $ | $ | $ | |||||||||||||||||||
Derivative instruments (2) | |||||||||||||||||||||||
Rabbi Trust assets (3) | |||||||||||||||||||||||
Restricted cash equivalents (1) | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Derivative instruments (2) | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
(1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits.
The Company’s Level 2 assets and liabilities consisted of:
•Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies;
•Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and
•Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Fair value of long-term borrowings
The Company’s borrowings under the Senior Secured Notes are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows:
| (in thousands) | October 30, 2021 | January 30, 2021 | |||||||||
| Gross borrowings outstanding, carrying amount | $ | $ | |||||||||
| Gross borrowings outstanding, fair value | $ | $ | |||||||||
13
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
| (in thousands) | October 30, 2021 | January 30, 2021 | |||||||||
| Property and equipment, at cost | $ | $ | |||||||||
| Less: Accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Refer to Note 9, “ASSET IMPAIRMENT,” for details related to property and equipment impairment charges incurred during the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020.
8. LEASES
The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
The following table provides a summary of the Company’s operating lease costs for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
Single lease cost (1) | $ | $ | $ | $ | |||||||||||||||||||
Variable lease cost (2) | |||||||||||||||||||||||
Operating lease right-of-use asset impairment (3) | |||||||||||||||||||||||
Sublease income (4) | ( | ( | |||||||||||||||||||||
| Total operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
(1)Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities.
(2)Included variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on net sales performance, and payments related to taxes, insurance, and maintenance costs, as well as the benefit of $1.7 million and $14.6 million of rent abatements during the thirteen and thirty-nine weeks ended October 30, 2021 related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The benefit related to rent abatements recognized during the thirteen and thirty-nine weeks ended October 31, 2020 was $1.9 million and $18.9 million respectively.
(3)Refer to Note 9, “ASSET IMPAIRMENT,” for details related to operating lease right-of-use asset impairment charges.
The Company has suspended rent payments for a number of stores that were closed as a result of COVID-19, and has been successful in obtaining certain rent abatements and landlord concessions of rent payable. Refer to Note 3. “IMPACT OF COVID-19”, for additional details.
As of October 30, 2021, the Company had minimum commitments related to additional operating lease contracts the terms of which have not yet commenced, primarily for its Company-operated retail stores, of approximately $8.7 million.
14
9. ASSET IMPAIRMENT
Asset impairment charges for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Operating lease right-of-use asset impairment | $ | $ | $ | $ | |||||||||||||||||||
| Property and equipment asset impairment | |||||||||||||||||||||||
| Total asset impairment | $ | $ | $ | $ | |||||||||||||||||||
Asset impairment charges for the thirteen and thirty-nine weeks ended October 30, 2021 related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the thirty-nine weeks ended October 30, 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $19.5 million, including $17.0 million related to operating lease right-of-use assets.
Asset impairment charges for the thirteen and thirty-nine weeks ended October 31, 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the thirty-nine weeks ended October 31, 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $102.2 million, including $94.2 million related to operating lease right-of-use assets.
10. INCOME TAXES
The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Impact of valuation allowances and other tax charges
During the thirteen weeks ended October 30, 2021, as a result of the improvement seen in business conditions, the Company recognized $3.5 million of tax benefits due to the expected utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. and Germany, based on information available, on which a valuation allowance had previously been established.
During the thirty-nine weeks ended October 30, 2021, as a result of the improvement seen in business conditions, the Company recognized $23.4 million of discrete tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $3.9 million due to a rate change in the U.K. The Company also recognized $13.6 million of tax benefits due to the expected utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. and Germany, based on information available, on which a valuation allowance has previously been established.
During the thirty-nine weeks ended October 31, 2020, the Company recognized $77.4 million of tax charges, ultimately giving rise to income tax expense on a consolidated pre-tax year-to-date loss. Further details regarding these adverse tax impacts are as follows:
•The Company anticipated pre-tax losses for the full fiscal year in certain jurisdictions, based on information then available, primarily due to the significant adverse impacts of COVID-19. The Company did not recognize income tax benefits on $180.7 million of pre-tax losses during the thirty-nine weeks ended October 31, 2020, resulting in an adverse tax impact of $41.8 million.
•The Company recognized charges of $35.6 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during the thirty-nine weeks ended October 31, 2020, principally as a result of the significant adverse impacts of COVID–19. These charges related to valuation allowances recognized by the Company of $10.6 million and $6.0 million related to the U.S. and Germany, respectively, as well as valuation allowances and other tax charges in certain other jurisdictions against underlying tax asset balances that existed as of February 1, 2020. The Company also recognized valuation allowances of $78.9 million related to Switzerland with a U.S. branch equally offsetting amount, which in net, did not have an impact on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
15
The Company continues to review the need for valuation allowances in certain jurisdictions, principally Japan, Korea and Switzerland, on a quarterly basis. It is reasonably possible, if business conditions continue to improve, that there could be material adjustments over the next 12 months to the total amount of valuation allowances as circumstances may be such that sufficient evidence would exist to indicate that additional deferred taxes currently subject to a valuation allowance are more likely than not to be utilized. Changes in assumptions may occur based on new information that becomes available resulting in adjustments in the period in which a determination is made.
Share-based compensation
Refer to Note 12, “SHARE-BASED COMPENSATION,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020.
11. BORROWINGS
Details on the Company’s long-term borrowings, net, as of October 30, 2021 and January 30, 2021 are as follows:
| (in thousands) | October 30, 2021 | January 30, 2021 | |||||||||
| Long-term portion of borrowings, gross at carrying amount | $ | $ | |||||||||
| Unamortized fees | ( | ( | |||||||||
| Long-term borrowings, net | $ | $ | |||||||||
Senior Secured Notes
On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, completed the private offering of the Senior Secured Notes, with $350.0 million aggregate principal amount due in 2025, at an offering price of 100% of the principal amount thereof and bearing interest at a rate of 8.75 % per annum, with semi-annual interest payments which began in January 2021. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of A&F’s wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, as trustee, and as collateral agent. During the thirty-nine weeks ended October 30, 2021, A&F Management purchased $42.3 million of its outstanding Senior Secured Notes and incurred $5.3 million of loss on extinguishment of debt, comprised of a premium of $4.7 million and the write-off of unamortized fees of $0.6 million, in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The terms of the Senior Secured Notes have not changed materially from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2020.
ABL Facility
On April 29, 2021, A&F Management, in A&F Management’s capacity as the lead borrower, and the other borrowers and guarantors party thereto, amended and restated in its entirety the Credit Agreement, dated as of August 7, 2014, as amended on September 10, 2015 and as further amended on October 19, 2017 (as amended and restated, the “Amended and Restated Credit Agreement”), among A&F Management, the other borrowers and guarantors party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent for the lenders, and the other parties thereto.
The Amended and Restated Credit Agreement continues to provide for a senior secured revolving credit facility of up to $400.0 million (the “ABL Facility”), and (i) extends the maturity date of the ABL Facility from October 19, 2022 to April 29, 2026 ; and (ii) modifies the required fee on undrawn commitments under the ABL Facility from 0.25% per annum to either 0.25% or 0.375% per annum (with the ultimate amount dependent on the conditions detailed in the Amended and Restated Credit Agreement).
Except for these changes, the terms of the ABL Facility remained substantially unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2020.
The Company did not have any borrowings outstanding under the ABL Facility as of October 30, 2021 or as of January 30, 2021.
As of October 30, 2021, availability under the ABL Facility was $301.0 million, net of $0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $270.8 million as of October 30, 2021.
Representations, warranties and covenants
16
The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity.
The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement or certain future capital markets indebtedness.
Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with all debt covenants under these agreements as of October 30, 2021.
12. SHARE-BASED COMPENSATION
Financial statement impact
The following table details share-based compensation expense and the related income tax impacts for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Income tax benefit associated with share-based compensation expense recognized (1) | $ | $ | $ | $ | |||||||||||||||||||
(1) No income tax benefit was recognized during the thirteen and thirty-nine weeks ended October 31, 2020 due to the establishment of a valuation allowance.
The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
Income tax discrete benefits realized for tax deductions related to the issuance of shares (1) | $ | $ | $ | $ | |||||||||||||||||||
Income tax discrete charges realized upon cancellation of stock appreciation rights (1) | ( | ||||||||||||||||||||||
Total income tax discrete benefits related to share-based compensation awards (1) | $ | $ | $ | $ | |||||||||||||||||||
(1) No income tax discrete charges were recognized during the thirteen and thirty-nine weeks ended October 31, 2020 due to the establishment of a valuation allowance.
The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
Employee tax withheld upon issuance of shares (1) | $ | $ | $ | $ | |||||||||||||||||||
(1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows.
17
Restricted stock units
The following table summarizes activity for restricted stock units for the thirty-nine weeks ended October 30, 2021:
| Service-based Restricted Stock Units | Performance-based Restricted Stock Units | Market-based Restricted Stock Units | |||||||||||||||||||||||||||||||||
| Number of Underlying Shares | Weighted- Average Grant Date Fair Value | Number of Underlying Shares | Weighted- Average Grant Date Fair Value | Number of Underlying Shares | Weighted- Average Grant Date Fair Value | ||||||||||||||||||||||||||||||
| Unvested at January 30, 2021 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Granted | |||||||||||||||||||||||||||||||||||
Adjustments for performance achievement | ( | ( | |||||||||||||||||||||||||||||||||
| Vested | ( | ( | |||||||||||||||||||||||||||||||||
| Forfeited | ( | ( | ( | ||||||||||||||||||||||||||||||||
Unvested at October 30, 2021 (1) | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount.
The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of October 30, 2021:
| (in thousands) | Service-based Restricted Stock Units | Performance-based Restricted Stock Units | Market-based Restricted Stock Units | ||||||||||||||
| Unrecognized compensation cost | $ | $ | $ | ||||||||||||||
| Remaining weighted-average period cost is expected to be recognized (years) | |||||||||||||||||
Additional information pertaining to restricted stock units for the thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:
| (in thousands) | October 30, 2021 | October 31, 2020 | |||||||||
| Service-based restricted stock units: | |||||||||||
| Total grant date fair value of awards granted | $ | $ | |||||||||
| Total grant date fair value of awards vested | $ | $ | |||||||||
| Performance-based restricted stock units: | |||||||||||
| Total grant date fair value of awards granted | $ | $ | |||||||||
| Total grant date fair value of awards vested | $ | $ | |||||||||
| Market-based restricted stock units: | |||||||||||
| Total grant date fair value of awards granted | $ | $ | |||||||||
| Total grant date fair value of awards vested | $ | $ | |||||||||
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:
| October 30, 2021 | October 31, 2020 | ||||||||||
| Grant date market price | $ | $ | |||||||||
| Fair value | $ | $ | |||||||||
| Assumptions: | |||||||||||
| Price volatility | % | % | |||||||||
| Expected term (years) | |||||||||||
| Risk-free interest rate | % | % | |||||||||
| Dividend yield | % | % | |||||||||
| Average volatility of peer companies | % | % | |||||||||
| Average correlation coefficient of peer companies | |||||||||||
18
Stock appreciation rights
The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended October 30, 2021:
| Number of Underlying Shares | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (years) | ||||||||||||||||||||
| Outstanding at January 30, 2021 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited or expired | ( | ||||||||||||||||||||||
Outstanding at October 30, 2021 | $ | $ | |||||||||||||||||||||
| Stock appreciation rights exercisable at October 30, 2021 | $ | $ | |||||||||||||||||||||
No stock appreciation rights were exercised during the thirty-nine weeks ended October 31, 2020. Information pertaining to stock appreciation rights exercised during the thirty-nine weeks ended October 30, 2021 follows:
| (in thousands) | October 30, 2021 | ||||
| Total grant date fair value of awards exercised | $ | ||||
13. DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-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 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 or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
As of October 30, 2021, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
| (in thousands) | Notional Amount (1) | ||||
| Euro | $ | ||||
| British pound | $ | ||||
| Canadian dollar | $ | ||||
| Japanese yen | $ | ||||
(1) Amount reported is the U.S. Dollar notional amount outstanding as of October 30, 2021.
19
The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of October 30, 2021 and January 30, 2021 were as follows:
| (in thousands) | Location | October 30, 2021 | January 30, 2021 | Location | October 30, 2021 | January 30, 2021 | |||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments | Other current assets | $ | $ | Accrued expenses | $ | $ | |||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments | Other current assets | Accrued expenses | |||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
Gain recognized in AOCL (1) | $ | $ | $ | $ | |||||||||||||||||||
Gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) | $ | $ | $ | ( | $ | ||||||||||||||||||
(1)Amount represents the change in fair value of derivative contracts. As a result of COVID-19, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments during the thirty-nine weeks ended October 31, 2020. At the time of dedesignation of these hedges, they were in a net gain position of approximately $12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation were deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occurred and the hedged items affected earnings. Subsequent to the dedesignation of these hedges, these hedge contracts were settled in Fiscal 2020.
(2)Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization.
Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months .
Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Gain (loss) recognized in other operating income, net | $ | $ | $ | $ | |||||||||||||||||||
20
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
For the thirteen and thirty-nine weeks ended October 30, 2021, the activity in AOCL was as follows:
| Thirteen Weeks Ended October 30, 2021 | |||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||||||||
| Beginning balance at July 31, 2021 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | |||||||||||||||
Reclassified gain from AOCL (1) | ( | ( | |||||||||||||||
| Tax effect | ( | ( | |||||||||||||||
| Other comprehensive (loss) income after reclassifications | ( | ( | |||||||||||||||
| Ending balance at October 30, 2021 | $ | ( | $ | $ | ( | ||||||||||||
| Thirty-nine Weeks Ended October 30, 2021 | |||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||||||||
| Beginning balance at January 30, 2021 | $ | ( | $ | ( | $ | ( | |||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | |||||||||||||||
Reclassified loss from AOCL (1) | |||||||||||||||||
| Tax effect | ( | ( | |||||||||||||||
| Other comprehensive (loss) income after reclassifications | ( | ||||||||||||||||
| Ending balance at October 30, 2021 | $ | ( | $ | $ | ( | ||||||||||||
(1) Amount represents (gain) loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
For the thirteen and thirty-nine weeks ended October 31, 2020, the activity in AOCL was as follows:
| Thirteen Weeks Ended October 31, 2020 | |||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||||||||
| Beginning balance at August 1, 2020 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
Reclassified gain from AOCL (1) | ( | ( | |||||||||||||||
Other comprehensive income (loss) after reclassifications (2) | ( | ( | |||||||||||||||
| Ending balance at October 31, 2020 | $ | ( | $ | $ | ( | ||||||||||||
| Thirty-nine Weeks Ended October 31, 2020 | |||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||||||||
| Beginning balance at February 1, 2020 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
Reclassified gain from AOCL (1) | ( | ( | |||||||||||||||
Other comprehensive income after reclassifications (2) | |||||||||||||||||
| Ending balance at October 31, 2020 | $ | ( | $ | $ | ( | ||||||||||||
(1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
(2) No income tax benefit was recognized during the period due to the establishment of a valuation allowance.
21
15. SEGMENT REPORTING
The Company’s two operating segments are brand-based: Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area.
The Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Hollister | $ | $ | $ | $ | |||||||||||||||||||
| Abercrombie | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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 orders. The Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| U.S. | $ | $ | $ | $ | |||||||||||||||||||
| EMEA | |||||||||||||||||||||||
APAC (1) | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| International | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1) Asia-Pacific Region (“APAC”)
22
16. FLAGSHIP STORE EXIT CHARGES (BENEFITS)
Reflecting a continued focus on one of the Company’s key transformation initiatives ‘Global Store Network Optimization,’ the Company continues to pivot away from its large format flagship stores and strives to open smaller, more productive omnichannel focused brand experiences. As a result, the Company has closed certain of its flagship stores and may have additional closures as it executes against this strategy.
The Company recognizes impacts related to the exit of its flagship stores in flagship store exit charges (benefits) on the Consolidated Statements of Operations and Comprehensive Income (Loss). Details of the charges (benefits) recognized during the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 related to this initiative follow:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | October 30, 2021 | October 31, 2020 | |||||||||||||||||||
| Operating lease cost | ( | ( | ( | ||||||||||||||||||||
| Gain on lease assignment | — | ( | — | ( | |||||||||||||||||||
Asset disposals and other store-closure benefits (1) | ( | ( | ( | ||||||||||||||||||||
| Employee severance and other employee transition costs (benefits) | ( | ||||||||||||||||||||||
| Total flagship store exit charges (benefits) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
(1) Amounts represent costs incurred or benefits realized associated with returning the store to its original condition, including updated estimates to previously established accruals for asset retirement obligations and costs to remove inventory and store assets .
During the thirteen weeks ended May 1, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through the fiscal year ending January 30, 2029 (“Fiscal 2028”). The new agreement resulted in an acceleration of payments and provided for a discount resulting in a reduction of operating lease liabilities of $65.0 million and a cash outflow of $63.8 million to settle all remaining obligations related to this location. This cash outflow was classified within operating lease right-of-use assets and liabilities within operating activities on the Condensed Consolidated Statement of Cash Flows during the thirty-nine weeks ended October 30, 2021. The Company recognized a gain of $0.9 million in flagship store exit benefits on the Consolidated Statement of Operations and Comprehensive Income (Loss) related to this transaction.
In addition, during Fiscal 2020, the Company announced the early exit of four European Abercrombie & Fitch flagship locations, Three of the leases were transferred through assignment while the fourth lease has been subleased to a new tenant. The Company no longer has lease obligations for the three transfers and is scheduled to receive payments to fully offset its lease obligations on the sublease. Refer to Note 8, “ LEASES,” for additional information on the sublease arrangement.
As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur future cash expenditures or incremental charges or realize benefits not currently contemplated due to events that may occur as a result of, or that are associated with, previously announced flagship store closures and flagship store closures that have not yet been finalized. At this time, the Company is not able to quantify the amount of future impacts, including any cash expenditures that may take place in future periods resulting from any potential flagship store closures given the unpredictable nature of lease exit negotiations and ultimate lease renewal decisions.
17. SUBSEQUENT EVENTS
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” to which all references to Notes in MD&A are made.
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. This section provides a general description of the Company’s business and certain segment information.
•Current Trends and Outlook. This section provides a discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, such as COVID-19, as well as a summary of the Company’s performance for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020.
•Results of Operations. This section provides an analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020.
•Liquidity and Capital Resources. This section provides a discussion of the Company’s expected primary sources and uses of cash, financial condition and liquidity as of October 30, 2021, which includes (i) an analysis of financial condition as compared to January 30, 2021; (ii) an analysis of changes in cash flows for the thirty-nine weeks ended October 30, 2021 as compared to the thirty-nine weeks ended October 31, 2020; and (iii) an analysis of liquidity, including discussion related to the Company’s Senior Secured Notes and ABL Facility, the Company’s share repurchase and dividend programs, and outstanding debt and covenant compliance.
•Recent Accounting Pronouncements. 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, are discussed, as applicable.
•Critical Accounting Policies and Estimates. This section discusses accounting policies 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 have been determined to not be 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.
The following risks, categorized by the primary nature of the associated risk, including the disclosures in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2020 in some cases have affected and in the future could affect the Company’s financial performance and cause actual results for Fiscal 2021 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. The following risks, or a combination of risks, may be exacerbated by COVID-19 and could result in adverse impacts on the Company’s business, results of operations, financial condition and cash flows.
Macroeconomic and industry risks include:
•COVID‐19 has and may continue to materially adversely impact and cause disruption to our business;
•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 impact on our business;
•Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business;
•Our failure to operate effectively in a highly competitive and constantly evolving industry could have a material adverse impact on our business;
•Fluctuations in foreign currency exchange rates could have a material adverse impact on our business;
24
•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;
•The impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience could have a material adverse impact on our business; and
•The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business.
Strategic risks include:
•Failure to successfully develop an omnichannel shopping experience, a significant component of our growth strategy, or failure to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business;
•Our failure to optimize our global store network could have a material adverse impact on our business;
•Our failure to execute our international growth strategy successfully and inability to conduct business in international markets as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business; and
•Our failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business.
Operational risks include:
•Failure to protect our reputation could have a material adverse impact on our business;
•If our information technology systems are disrupted or cease to operate effectively, it could have a material adverse impact on our business;
•We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business;
•Our reliance on our distribution centers makes us susceptible to disruptions or adverse conditions affecting our supply chain;
•Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could have a material adverse impact on our business;
•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 have a material adverse impact on our business;
•We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business; and
•In the past, we have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future. If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
Legal, tax, regulatory and compliance risks include:
•Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations could have a material adverse impact on our business;
•Our litigation exposure, or any securities litigation and shareholder activism, could have a material adverse impact on our business;
•Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business;
•Changes in the regulatory or compliance landscape could have a material adverse impact on our business; and
•The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business.
The factors listed above are not our only risks. Additional risks may arise, and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition. 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,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
25
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 Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five 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 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:
| Fiscal year | Year ended | Number of weeks | ||||||||||||
| Fiscal 2019 | February 1, 2020 | 52 | ||||||||||||
| Fiscal 2020 | January 30, 2021 | 52 | ||||||||||||
| Fiscal 2021 | January 29, 2022 | 52 | ||||||||||||
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, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively.
CURRENT TRENDS AND OUTLOOK
Focus areas for Fiscal 2021
The Company remains committed to, and confident in, its long-term vision of being and becoming a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress against initiatives that support this vision.
The Company entered Fiscal 2021 on offense, and has made progress towards recouping COVID-19 driven sales losses. Reflecting ongoing global uncertainty, the Company plans to continue to actively manage inventories, optimize its distribution center capacity for digital demand and tightly manage expenses.
The following focus areas for Fiscal 2021 serve as a framework to the Company achieving sustainable long-term operating margin expansion:
•Accelerate digital, data and technology investments to increase agility and improve the customer experience;
•Increase marketing investments to build on momentum across brands and geographies;
•Invest in Gilly Hicks and the Company’s newest brand, Social Tourist, which launched on May 20, 2021;
•Optimize store square footage, while being opportunistic in global store expansion; and
•Integrate environmental, social and governance practices and standards throughout the organization.
Global Store Network Optimization
As part of its ongoing global store network optimization initiative and stated goal of repositioning from larger format, tourist-dependent flagship locations to smaller, omni-enabled stores that cater to local customers, the Company closed its Abercrombie & Fitch brand Orchard Road, Singapore flagship location during the first quarter of Fiscal 2021. This leaves the Company with six operating flagships at the end of the third quarter of Fiscal 2021, down from seven at the beginning of Fiscal 2021 and 15 at the beginning of Fiscal 2020.
In addition, the Company closed 129 non-flagship locations and eight flagship locations during Fiscal 2020. These actions, combined with recent digital sales growth, are expected to continue to transform the Company's operating model and reposition the Company for the future as the Company continues to focus on aligning store square footage with digital penetration. 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.
26
Additional details related to store count and gross square footage follow:
Hollister (1) | Abercrombie (2) | Total Company (3) | |||||||||||||||||||||||||||||||||||||||
| U.S. | International | U.S. | International | U.S. | International | Total | |||||||||||||||||||||||||||||||||||
| Number of stores: | |||||||||||||||||||||||||||||||||||||||||
| January 30, 2021 | 347 | 150 | 190 | 48 | 537 | 198 | 735 | ||||||||||||||||||||||||||||||||||
| New | 9 | 5 | 6 | 3 | 15 | 8 | 23 | ||||||||||||||||||||||||||||||||||
| Permanently closed | (1) | (4) | (15) | (3) | (16) | (7) | (23) | ||||||||||||||||||||||||||||||||||
| October 30, 2021 | 355 | 151 | 181 | 48 | 536 | 199 | 735 | ||||||||||||||||||||||||||||||||||
Gross square footage (in thousands): | |||||||||||||||||||||||||||||||||||||||||
| October 30, 2021 | 2,344 | 1,204 | 1,224 | 387 | 3,568 | 1,591 | 5,159 | ||||||||||||||||||||||||||||||||||
(1)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 10 international franchise stores as of October 30, 2021, and 9 international franchise stores as of January 30, 2021. Excludes 14 and 12 Company-operated temporary stores as of October 30, 2021 and January 30, 2021, respectively.
(2)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 13 international franchise stores as of October 30, 2021 and 10 international franchise stores as of January 30, 2021. Excludes four and two Company-operated temporary stores as of October 30, 2021 and January 30, 2021, respectively.
(3)This store count excludes one international third-party operated multi-brand outlet store as of each of October 30, 2021 and January 30, 2021.
COVID-19
In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures. As of October 30, 2021, all Company-operated stores were fully open for in-store service. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, such as the Delta and Omicron variants, and the availability and acceptance of effective vaccines, boosters or medical treatments. The Company plans to follow the guidance of local governments to evaluate whether further store closures will be necessary.
Total net sales increased approximately 10% and 27% for the thirteen and thirty-nine weeks ended October 30, 2021 as compared to the thirteen and thirty-nine weeks ended October 31, 2020 driven largely by increased store foot traffic relative to last year which was impacted by widespread temporary store closures due to COVID-19. Digital net sales increased approximately 8% and increased 14% for the thirteen and thirty-nine weeks ended October 30, 2021 as compared to the thirteen and thirty-nine weeks ended October 31, 2020. Digital net sales remained highly penetrated, representing 46% and 47% of total net sales for the thirteen and thirty-nine weeks ended October 30, 2021.
The Company’s digital operations across brands have continued to serve the Company’s customers during periods of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational. In response to elevated digital demand during this period, the Company has leaned into its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, rolling out curbside pick-up at a majority of U.S. locations, and by utilizing ship-from-store capabilities. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current performance in the digital channel will continue.
COVID-19 has also caused disruptions to global supply chains, including temporary closures of factories. The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales. In addition, the Company has seen and expects to continue to see inflationary pressures affecting the Company’s transportation costs. In order to mitigate the risk associated with supply chain constraints, the Company has taken and expects to continue to take actions to manage through the disruption, including shipping inventory by air and shifting production as necessary and where possible, which adversely impacted the Company during the thirteen weeks ended October 30, 2021, and is likely to continue to cause increased inventory costs related to freight. It is possible that responses to extended factory closures and transportation delays are not adequate to mitigate their impact, and that these events could adversely affect the 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” of A&F’s Annual Report on Form 10-K for Fiscal 2020.
27
Summary of results
A summary of results for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:
| GAAP | Non-GAAP (1) | |||||||||||||||||||||||||
| (in thousands, except change in net sales, gross profit rate, operating income (loss) margin and per share amounts) | October 30, 2021 (2) | October 31, 2020 (3) | October 30, 2021 (2) | October 31, 2020 (3) | ||||||||||||||||||||||
| Thirteen Weeks Ended | ||||||||||||||||||||||||||
| Net sales | $ | 905,160 | $ | 819,653 | ||||||||||||||||||||||
| Change in net sales | 10.4 | % | (17.0) | % | ||||||||||||||||||||||
| Gross profit rate | 63.7 | % | 64.0 | % | ||||||||||||||||||||||
| Operating income | $ | 72,731 | $ | 58,616 | $ | 79,480 | $ | 64,945 | ||||||||||||||||||
| Operating income margin | 8.0 | % | 7.2 | % | 8.8 | % | 7.9 | % | ||||||||||||||||||
| Net income attributable to A&F | $ | 47,233 | $ | 42,271 | $ | 52,607 | $ | 48,231 | ||||||||||||||||||
| Net income per diluted share attributable to A&F | $ | 0.77 | $ | 0.66 | $ | 0.86 | $ | 0.76 | ||||||||||||||||||
| Thirty-nine Weeks Ended | ||||||||||||||||||||||||||
| Net sales | $ | 2,551,415 | $ | 2,003,340 | ||||||||||||||||||||||
| Change in net sales | 27.4 | % | (24.8) | % | ||||||||||||||||||||||
| Gross profit rate | 64.1 | % | 60.5 | % | ||||||||||||||||||||||
| Operating income (loss) | $ | 244,951 | $ | (136,368) | $ | 255,150 | $ | (79,028) | ||||||||||||||||||
Operating income (loss) margin | 9.6 | % | (6.8) | % | 10.0 | % | (3.9) | % | ||||||||||||||||||
| Net income (loss) attributable to A&F | $ | 197,501 | $ | (196,413) | $ | 205,652 | $ | (142,708) | ||||||||||||||||||
| Net income (loss) per diluted share attributable to A&F | $ | 3.10 | $ | (3.14) | $ | 3.22 | $ | (2.28) | ||||||||||||||||||
(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.”
(2) Results for Fiscal 2021 reflect tax benefits related to the release of income tax valuation allowances and the impact of a statutory rate change on the valuation of deferred tax assets. Refer to Note 10, “INCOME TAXES.”
(3) Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges. Refer to Note 10, “INCOME TAXES.”
Certain components of the Company’s Condensed Consolidated Balance Sheets as of October 30, 2021 and January 30, 2021 were as follows:
| (in thousands) | October 30, 2021 | January 30, 2021 | ||||||||||||
| Cash and equivalents | $ | 865,622 | $ | 1,104,862 | ||||||||||
| Gross long-term borrowings outstanding, carrying amount | $ | 307,730 | $ | 350,000 | ||||||||||
| Inventories | $ | 543,713 | $ | 404,053 | ||||||||||
Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended October 30, 2021 and October 31, 2020 were as follows:
| (in thousands) | October 30, 2021 | October 31, 2020 | ||||||||||||
| Net cash provided by operating activities | $ | 131,287 | $ | 108,894 | ||||||||||
| Net cash used for investing activities | $ | (62,223) | $ | (41,748) | ||||||||||
| Net cash (used for) provided by financing activities | $ | (304,358) | $ | 70,129 | ||||||||||
28
RESULTS OF OPERATIONS
The estimated basis point (“BPS”) change disclosed throughout this Results of Operations 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 and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | $ Change | % Change | |||||||||||||||||||||||||
Hollister (1) | $ | 522,311 | $ | 476,665 | $ | 45,646 | 10% | ||||||||||||||||||||||
Abercrombie (2) | 382,849 | 342,988 | 39,861 | 12% | |||||||||||||||||||||||||
| Total | $ | 905,160 | $ | 819,653 | $ | 85,507 | 10% | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | $ Change | % Change | |||||||||||||||||||||||||
Hollister(1) | $ | 1,479,202 | $ | 1,178,925 | $ | 300,277 | 25% | ||||||||||||||||||||||
Abercrombie (2) | 1,072,213 | 824,415 | 247,798 | 30% | |||||||||||||||||||||||||
| Total | $ | 2,551,415 | $ | 2,003,340 | $ | 548,075 | 27% | ||||||||||||||||||||||
(1) Includes Hollister, Gilly Hicks and Social Tourist brands.
(2) Includes Abercrombie & Fitch and abercrombie kids brands.
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 and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| U.S. | $ | 654,858 | $ | 557,814 | $ | 97,044 | 17% | ||||||||||||||||||||||
| EMEA | 179,156 | 190,214 | (11,058) | (6)% | |||||||||||||||||||||||||
| APAC | 38,215 | 43,618 | (5,403) | (12)% | |||||||||||||||||||||||||
| Other | 32,931 | 28,007 | 4,924 | 18% | |||||||||||||||||||||||||
| International | $ | 250,302 | $ | 261,839 | $ | (11,537) | (4)% | ||||||||||||||||||||||
| Total | $ | 905,160 | $ | 819,653 | $ | 85,507 | 10% | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| (in thousands) | October 30, 2021 | October 31, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| U.S. | $ | 1,810,471 | $ | 1,339,347 | $ | 471,124 | 35% | ||||||||||||||||||||||
| EMEA | 528,998 | 474,165 | 54,833 | 12% | |||||||||||||||||||||||||
| APAC | 125,489 | 117,768 | 7,721 | 7% | |||||||||||||||||||||||||
| Other | 86,457 | 72,060 | 14,397 | 20% | |||||||||||||||||||||||||
| International | $ | 740,944 | $ | 663,993 | $ | 76,951 | 12% | ||||||||||||||||||||||
| Total | $ | 2,551,415 | $ | 2,003,340 | $ | 548,075 | 27% | ||||||||||||||||||||||
For the third quarter of Fiscal 2021, net sales increased 10% as compared to the third quarter of Fiscal 2020, primarily due to an increase in stores sales as a result of increased store foot traffic relative to last year, which was impacted by widespread temporary store closures due to COVID-19, and 8% digital sales growth. Average unit retail increased year-over-year, driven by lower promotions and markdowns, with benefits from changes in foreign currency exchange rates of approximately $4 million.
For the year-to-date period of Fiscal 2021, net sales increased 27% as compared to the year-to-date period of Fiscal 2020, primarily due to an increase in units sold as a result of increased store foot traffic relative to last year, which was impacted by widespread temporary store closures due to COVID-19, and 14% digital sales growth. Average unit retail increased year-over-year, driven by less promotions and lower clearance levels, with benefits from changes in foreign currency exchange rates of approximately $33 million.
29
Cost of sales, exclusive of depreciation and amortization
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 328,916 | 36.3% | $ | 295,220 | 36.0% | 30 | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 916,552 | 35.9% | $ | 791,154 | 39.5% | (360) | ||||||||||||||||||||||
For the third quarter of Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 30 basis points as compared to the third quarter of Fiscal 2020. The year-over-year increase was driven by approximately 300 basis points of higher average unit cost from freight inflation and efforts to offset supply chain issues, almost fully offset by higher average unit retail on reduced promotions.
For the year-to-date period of Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 360 basis points as compared to the year-to-date period of Fiscal 2020. The year-over-year decline was primarily attributable to increased average unit retail on reduced promotions and markdowns.
Gross profit, exclusive of depreciation and amortization
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Gross profit, exclusive of depreciation and amortization | $ | 576,244 | 63.7% | $ | 524,433 | 64.0% | (30) | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Gross profit, exclusive of depreciation and amortization | $ | 1,634,863 | 64.1% | $ | 1,212,186 | 60.5% | 360 | ||||||||||||||||||||||
30
Stores and distribution expense
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Stores and distribution expense | $ | 351,804 | 38.9% | $ | 346,263 | 42.2% | (330) | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Stores and distribution expense | $ | 994,347 | 39.0% | $ | 978,757 | 48.9% | (990) | ||||||||||||||||||||||
For the third quarter of Fiscal 2021, stores and distribution expense increased 2% as compared to the third quarter of Fiscal 2020, primarily driven by a $13 million increase in digital sales marketing expense, a $5 million increase in digital direct expense, and a $3 million increase in digital shipping and handling expenses, reflecting 8% year-over-year digital sales growth. These increases were partially offset by a $19 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations.
For the year-to-date period of Fiscal 2021, stores and distribution expense increased 2% as compared to the year-to-date period of Fiscal 2020, primarily driven by a $36 million increase in store payroll expense, reflecting the return of certain expenses saved last year from COVID-19 temporary store closures, a $24 million increase in digital sales marketing expense, and a $15 million increase in digital shipping and handling expense reflecting 14% year-over-year digital sales growth. These increases were partially offset by a $75 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations and include approximately $18 million in benefits related to rent abatements and a favorable resolution of a flagship store closure.
Marketing, general and administrative expense
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Marketing, general and administrative expense | $ | 146,269 | 16.2% | $ | 121,000 | 14.8% | 140 | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Marketing, general and administrative expense | $ | 391,129 | 15.3% | $ | 326,509 | 16.3% | (100) | ||||||||||||||||||||||
For the third quarter of Fiscal 2021, marketing, general and administrative expense increased 21% as compared to the third quarter of Fiscal 2020, primarily driven by increased digital media spend, performance-based compensation, legal, consulting and information technology expense. These increases were partially offset by a decrease in depreciation expense.
For the year-to-date period of Fiscal 2021, marketing, general and administration expense increased 20% as compared to the year-to-date period of Fiscal 2020, primarily driven by increased digital media spend, performance-based compensation, legal, consulting and information technology expense. These increases were partially offset by a decrease in depreciation expense.
31
Flagship store exit charges (benefits)
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Flagship store exit charges (benefits) | $ | 11 | —% | $ | (8,063) | (1.0)% | 100 | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Flagship store exit charges (benefits) | $ | (1,177) | —% | $ | (12,490) | (0.6)% | 60 | ||||||||||||||||||||||
Asset impairment
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Asset impairment | $ | 6,749 | 0.7% | $ | 6,329 | 0.8% | (10) | ||||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
Asset impairment charges (1) | (6,749) | (0.7)% | (6,329) | (0.8)% | 10 | ||||||||||||||||||||||||
| Adjusted non-GAAP asset impairment | $ | — | 0.0% | $ | — | —% | — | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Asset impairment | $ | 10,199 | 0.4% | $ | 57,340 | 2.9% | (250) | ||||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
Asset impairment charges (1) | (10,199) | (0.4)% | (57,340) | (2.9)% | 250 | ||||||||||||||||||||||||
| Adjusted non-GAAP asset impairment | $ | — | 0.0% | $ | — | —% | — | ||||||||||||||||||||||
Other operating income (loss), net
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Other operating income (loss), net | $ | 1,320 | 0.1% | $ | (288) | —% | (10) | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Other operating income, net | $ | 4,586 | 0.2% | $ | 1,562 | 0.1% | 10 | ||||||||||||||||||||||
32
Operating income (loss)
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Operating income | $ | 72,731 | 8.0% | $ | 58,616 | 7.2% | 80 | ||||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
Asset impairment charges (1) | 6,749 | 0.7% | 6,329 | 0.8% | (10) | ||||||||||||||||||||||||
| Adjusted non-GAAP operating income | $ | 79,480 | 8.8% | $ | 64,945 | 7.9% | 90 | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Operating income (loss) | $ | 244,951 | 9.6% | $ | (136,368) | (6.8)% | 1,640 | ||||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
Asset impairment charges (1) | 10,199 | 0.4% | 57,340 | 2.9% | (250) | ||||||||||||||||||||||||
| Adjusted non-GAAP operating income (loss) | $ | 255,150 | 10.0% | $ | (79,028) | (3.9)% | 1,390 | ||||||||||||||||||||||
Interest expense, net
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Interest expense | $ | 7,802 | 0.9% | $ | 9,408 | 1.1% | (20) | ||||||||||||||||||||||
| Interest income | (532) | (0.1)% | (600) | (0.1)% | — | ||||||||||||||||||||||||
| Interest expense, net | $ | 7,270 | 0.8% | $ | 8,808 | 1.1% | (30) | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Interest expense | $ | 30,505 | 1.2% | $ | 22,242 | 1.1% | 10 | ||||||||||||||||||||||
| Interest income | (3,354) | (0.1)% | (2,965) | (0.1)% | — | ||||||||||||||||||||||||
| Interest expense, net | $ | 27,151 | 1.1% | $ | 19,277 | 1.0% | 10 | ||||||||||||||||||||||
For the third quarter of Fiscal 2021, interest expense, net decreased $1.5 million as compared to the third quarter of Fiscal 2020, primarily driven by lower interest expense as a result of lower borrowings in the current quarter due to the purchase of Senior Secured Notes in the second quarter of Fiscal 2021, as well as the settlement of a lease liability related to a previously closed store.
For the year-to-date period of Fiscal 2021, interest expense, net increased $7.9 million as compared to the year-to-date period of Fiscal 2020. The increase in interest expense, net, is primarily driven by the loss on the extinguishment of debt related to the purchase of Senior Secured Notes and higher interest expense in the current year, reflecting higher average borrowings outstanding at a higher interest rate.
33
Income tax expense
| Thirteen Weeks Ended | |||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||
| (in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||||||||||||||
| Income tax expense | $ | 16,383 | 25.0% | $ | 5,779 | 11.6% | |||||||||||||||||
| Excluded items: | |||||||||||||||||||||||
Tax effect of pre-tax excluded items (1) | 1,375 | 369 | |||||||||||||||||||||
| Adjusted non-GAAP income tax expense | $ | 17,758 | 24.6% | $ | 6,148 | 11.0% | |||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||
| (in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||||||||||||||
| Income tax expense | $ | 15,560 | 7.1% | $ | 38,565 | (24.8)% | |||||||||||||||||
| Excluded items: | |||||||||||||||||||||||
Tax effect of pre-tax excluded items (1) | 2,048 | 3,635 | |||||||||||||||||||||
| Adjusted non-GAAP income tax expense | $ | 17,608 | 7.7% | $ | 42,200 | (42.9)% | |||||||||||||||||
(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)” for details of pre-tax excluded items.
Net income (loss) attributable to A&F
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Net income attributable to A&F | $ | 47,233 | 5.2% | $ | 42,271 | 5.2% | — | ||||||||||||||||||||||
Excluded items, net of tax (1) | 5,374 | 0.6% | 5,960 | 0.7% | (10) | ||||||||||||||||||||||||
Adjusted non-GAAP net income attributable to A&F (2) | $ | 52,607 | 5.8% | $ | 48,231 | 5.9% | (10) | ||||||||||||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Net income (loss) attributable to A&F | $ | 197,501 | 7.7% | $ | (196,413) | (9.8)% | 1,750 | ||||||||||||||||||||||
Excluded items, net of tax (1) | 8,151 | 0.3% | 53,705 | 2.7% | (240) | ||||||||||||||||||||||||
Adjusted non-GAAP net income (loss) attributable to A&F (2) | $ | 205,652 | 8.1% | $ | (142,708) | (7.1)% | 1,520 | ||||||||||||||||||||||
(1) Excluded items presented above under “Operating income (loss),” and “Income tax expense.”
34
Net income (loss) per diluted share attributable to A&F
| Thirteen Weeks Ended | |||||||||||||||||
| October 30, 2021 | October 31, 2020 | $ Change | |||||||||||||||
| Net income per diluted share attributable to A&F | $ | 0.77 | $ | 0.66 | $0.11 | ||||||||||||
Excluded items, net of tax (1) | $ | 0.09 | $ | 0.09 | $— | ||||||||||||
| Adjusted non-GAAP net income per diluted share attributable to A&F | $ | 0.86 | $ | 0.76 | $0.10 | ||||||||||||
Impact from changes in foreign currency exchange rates | $ | — | $ | (0.05) | $0.05 | ||||||||||||
Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) | $ | 0.86 | $ | 0.71 | $0.15 | ||||||||||||
| Thirty-nine Weeks Ended | |||||||||||||||||
| October 30, 2021 | October 31, 2020 | $ Change | |||||||||||||||
| Net income (loss) per diluted share attributable to A&F | $ | 3.10 | $ | (3.14) | $6.24 | ||||||||||||
Excluded items, net of tax (1) | $ | 0.13 | $ | 0.86 | $(0.73) | ||||||||||||
| Adjusted non-GAAP net income (loss) per diluted share attributable to A&F | $ | 3.22 | $ | (2.28) | $5.50 | ||||||||||||
Impact from changes in foreign currency exchange rates | $ | — | $ | (0.02) | $0.02 | ||||||||||||
Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) | $ | 3.22 | $ | (2.30) | $5.52 | ||||||||||||
(1) Excluded items presented above under “Operating income (loss),” and “Income tax expense.”
35
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 over the next 12 months.
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 facilities 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” of A&F’s Annual Report on Form 10-K for Fiscal 2020, including being opportunistic regarding growth opportunities, such as launching the Social Tourist brand. Examples of potential investment opportunities include, but are not limited to, new store experiences and options to early terminate store leases, investments in its omnichannel initiatives and investments to increase the Company’s capacity to fulfill digital orders. 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 October 30, 2021, the Company used $62.2 million towards capital expenditures. Total capital expenditures for Fiscal 2021 are expected to be approximately $100 million as compared to $101.9 million of capital expenditures in Fiscal 2020.
The Company entered Fiscal 2021 in a strong financial position, with cash and cash equivalents of $1.1 billion and total liquidity of approximately $1.3 billion. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and delever 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 repurchasing outstanding senior secured notes.
Share repurchases and dividends
In order to preserve liquidity and maintain financial flexibility in light of COVID-19, in March 2020, the Company announced that it had temporarily suspended its share repurchase program and in May 2020, the Company announced that it had temporarily suspended its dividend program.
The Company has since resumed share repurchases and may repurchase shares in the future, dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. In November 2021, the A&F Board of Directors approved a new $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. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the objectives of offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units and returning excess cash to shareholders. 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.
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 any, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including the potential severity of impacts to the business resulting from COVID-19 and any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. A quarterly dividend, of $0.20 per share outstanding, was declared in February and paid in March of Fiscal 2020. There can be no assurance that the Company will pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.
36
Credit facilities and Senior Secured Notes
In July 2020, the Company completed the private offering of the Senior Secured Notes, and received gross proceeds of $350.0 million. The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments which began in January 2021. The Company’s debt related to the Senior Secured Notes is presented on the Condensed Consolidated Balance Sheets, net of the unamortized fees. During the thirty-nine weeks ended October 30, 2021, the Company repurchased $42.3 million of its outstanding Senior Secured Notes and incurred $5.3 million of loss on extinguishment of debt, comprised of a premium of $4.7 million and the write-off of unamortized fees of $0.6 million. As of October 30, 2021, the Company had $307.7 million of gross borrowings outstanding under the Senior Secured Notes.
In addition, the ABL Facility provides for a senior secured asset-based revolving credit facility of up to $400 million. As of October 30, 2021, 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 October 30, 2021 are as follows:
| (in thousands) | October 30, 2021 | ||||
| Borrowing base | $ | 301,850 | |||
| Less: Outstanding stand-by letters of credit | (827) | ||||
| Borrowing capacity | 301,023 | ||||
Less: Minimum excess availability (1) | (30,185) | ||||
| Borrowing available | $ | 270,838 | |||
(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 October 30, 2021, $405.5 million of the Company’s $865.6 million of cash and equivalents were held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends, if any, to A&F’s stockholders.
Analysis of cash flows
The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 30, 2021 and October 31, 2020:
| Thirty-nine Weeks Ended | |||||||||||
| October 30, 2021 | October 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Cash and equivalents, and restricted cash and equivalents, beginning of period | $ | 1,124,157 | $ | 692,264 | |||||||
| Net cash provided by operating activities | 131,287 | 108,894 | |||||||||
| Net cash used for investing activities | (62,223) | (41,748) | |||||||||
| Net cash (used for) provided by financing activities | (304,358) | 70,129 | |||||||||
| Effect of foreign currency exchange rates on cash | (8,560) | 2,269 | |||||||||
| Net (decrease) increase in cash and equivalents, and restricted cash and equivalents | (243,854) | 139,544 | |||||||||
| Cash and equivalents, and restricted cash and equivalents, end of period | $ | 880,303 | $ | 831,808 | |||||||
Operating activities - During the year-to-date period ended October 30, 2021, the Company recognized higher cash receipts as compared to the year-to-date period ended October 31, 2020 as a result of the 27% year-over-year increase in net sales as the Company experienced widespread temporary store closures in response to COVID-19 during Fiscal 2020.
The Company also took various immediate, aggressive actions during Fiscal 2020 to preserve liquidity and manage cash flows in light of COVID-19 in order to best position the business for key stakeholders, including, but not limited to (i) partnering with
37
merchandise and non-merchandise vendors in regards to payment terms; (ii) tightly managing inventory receipts to align inventory with expected market demand; and (iii) significantly reducing expenses to better align operating costs with sales. The Company also suspended rent payments for a larger proportion of its stores in Fiscal 2020 than it has in Fiscal 2021 related to stores that were closed for a period of time as a result of COVID-19. Certain payment term extensions were temporary and certain previously deferred payments have since been made. There can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.
In addition, during the year-to-date period ended October 30, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through Fiscal 2028. The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended October 30, 2021.
Investing activities - During the year-to-date period ended October 30, 2021, net cash outflows for investing activities were used for capital expenditures of $62.2 million as compared to $91.7 million for the year-to-date period ended October 31, 2020. In addition, the year-to-date period ended October 31, 2020, reflects the withdrawal of $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds, improving the Company’s near-term cash position in light of COVID-19.
Financing activities - During the year-to-date period ended October 30, 2021, net cash used by financing activities included the purchase of $42.3 million of outstanding Senior Secured Notes at a premium of $4.7 million. During the year-to-date period ended October 31, 2020, net cash provided by financing activities primarily consisted of the issuance of the Senior Secured Notes and receipt of related gross proceeds of $350.0 million and borrowings under the ABL Facility of $210.0 million. The gross proceeds from the Senior Secured Notes offering were used along with existing cash on hand, to repay all then outstanding borrowings and accrued interest under the Term Loan Facility and ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering. In addition, the Company returned $27.7 million to shareholders through share repurchases and dividends during the year-to-date period ended October 31, 2020, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19. The Company resumed share repurchase activity beginning March 2021 and repurchased approximately 6.1 million shares of A&F’s Common Stock with a market value of approximately $235.2 million during the year-to-date period ended October 30, 2021.
Off-balance sheet arrangements
As of October 30, 2021, the Company did not have any material 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.
There have been no material changes during the thirteen weeks ended October 30, 2021 in the contractual obligations as of January 30, 2021, 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 2020. 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 POLICIES AND ESTIMATES
The Company describes its critical accounting policies and estimates in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” of A&F’s Annual Report on Form 10-K for Fiscal 2020. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2020.
38
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 related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, 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 whose 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. In light of store closures related to COVID-19, the Company has not disclosed comparable sales for Fiscal 2020 or Fiscal 2021.
Excluded items
The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable:
Financial measures (1) | Excluded items | |||||||
| Asset impairment | Asset impairment charges | |||||||
| Operating income (loss) | Asset impairment charges | |||||||
Income tax expense (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.
39
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 and thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:
| (in thousands, except change in net sales, gross profit rate, operating margin and per share data) | Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||||||
| Net sales | October 30, 2021 | October 31, 2020 | % Change | October 30, 2021 | October 31, 2020 | % Change | |||||||||||||||||||||||||||||
| GAAP | $ | 905,160 | $ | 819,653 | 10% | $ | 2,551,415 | $ | 2,003,340 | 27% | |||||||||||||||||||||||||
| Impact from changes in foreign currency exchange rates | — | 3,540 | —% | — | 32,518 | (2)% | |||||||||||||||||||||||||||||
| Non-GAAP on a constant currency basis | $ | 905,160 | $ | 823,193 | 10% | $ | 2,551,415 | $ | 2,035,858 | 25% | |||||||||||||||||||||||||
| Gross profit, exclusive of depreciation and amortization expense | October 30, 2021 | October 31, 2020 | BPS Change (1) | October 30, 2021 | October 31, 2020 | BPS Change (1) | |||||||||||||||||||||||||||||
| GAAP | $ | 576,244 | $ | 524,433 | (30) | $ | 1,634,863 | $ | 1,212,186 | 360 | |||||||||||||||||||||||||
| Impact from changes in foreign currency exchange rates | — | (1,702) | 50 | — | 17,861 | 10 | |||||||||||||||||||||||||||||
| Non-GAAP on a constant currency basis | $ | 576,244 | $ | 522,731 | 20 | $ | 1,634,863 | $ | 1,230,047 | 370 | |||||||||||||||||||||||||
| Operating income (loss) | October 30, 2021 | October 31, 2020 | BPS Change (1) | October 30, 2021 | October 31, 2020 | BPS Change (1) | |||||||||||||||||||||||||||||
| GAAP | $ | 72,731 | $ | 58,616 | 80 | $ | 244,951 | $ | (136,368) | 1,640 | |||||||||||||||||||||||||
Excluded items (2) | (6,749) | (6,329) | (10) | (10,199) | (57,340) | 250 | |||||||||||||||||||||||||||||
| Adjusted non-GAAP | $ | 79,480 | $ | 64,945 | 90 | $ | 255,150 | $ | (79,028) | 1,390 | |||||||||||||||||||||||||
| Impact from changes in foreign currency exchange rates | — | (4,067) | 50 | — | (1,549) | (10) | |||||||||||||||||||||||||||||
| Adjusted non-GAAP on a constant currency basis | $ | 79,480 | $ | 60,878 | 140 | $ | 255,150 | $ | (80,577) | 1,400 | |||||||||||||||||||||||||
| Net income (loss) per diluted share attributable to A&F | October 30, 2021 | October 31, 2020 | $ Change | October 30, 2021 | October 31, 2020 | $ Change | |||||||||||||||||||||||||||||
| GAAP | $ | 0.77 | $ | 0.66 | $0.11 | $ | 3.10 | $ | (3.14) | $6.24 | |||||||||||||||||||||||||
Excluded items, net of tax (2) | (0.09) | (0.09) | — | (0.13) | (0.86) | 0.73 | |||||||||||||||||||||||||||||
| Adjusted non-GAAP | $ | 0.86 | $ | 0.76 | $0.10 | $ | 3.22 | $ | (2.28) | $5.50 | |||||||||||||||||||||||||
| Impact from changes in foreign currency exchange rates | — | (0.05) | 0.05 | — | (0.02) | 0.02 | |||||||||||||||||||||||||||||
| Adjusted non-GAAP on a constant currency basis | $ | 0.86 | $ | 0.71 | $0.15 | $ | 3.22 | $ | (2.30) | $5.52 | |||||||||||||||||||||||||
(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 and thirty-nine weeks ended October 30, 2021 and October 31, 2020 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.
40
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 $0.4 million and $0.4 million for the thirteen weeks ended October 30, 2021 and October 31, 2020, respectively, and $1.1 million and $1.4 million for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of October 30, 2021 and January 30, 2021, and are restricted in their use as noted above.
INTEREST RATE RISK
Prior 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 interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Term Loan Facility and the ABL Facility. On July 2, 2020 the Company issued the Senior Secured Notes due in 2025 with a 8.75% fixed interest rate per annum and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2021 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the associated credit agreement.
The expected transition from the widespread use of LIBO rate to alternative rates over the next several years is not expected to have a material impact on the Company’s interest expense. In addition, the Company has seen, and may continue to see, lower interest income earned on the Company’s investments and cash holdings, reflecting the lower interest rate environment.
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 all 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 exchange rate fluctuations increases as international 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 purchase 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. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.
Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $23.7 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 values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 13, “DERIVATIVE INSTRUMENTS,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of October 30, 2021 and January 30, 2021.
41
Item 4. 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 Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s principal executive officer and A&F’s 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 Executive Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended October 30, 2021. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive 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 30, 2021.
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’s fiscal quarter ended October 30, 2021 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting.
42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts.
In addition, the Company notes that in connection with the SEC’s recent modernization of the disclosures of legal proceedings required under Item 103 of Regulation S-K, the Company has elected to apply the threshold of $1 million in potential monetary sanctions (with such amount being the lesser of $1 million or 1% of the current assets of the Company on a consolidated basis) pursuant to Item 103(c)(3)(iii) of Regulation S-K in connection with determining the required disclosure with respect to environmental proceedings to which a governmental authority is a party.
Item 1A. Risk Factors.
The Company’s risk factors as of October 30, 2021 have not changed materially from those disclosed in Part I, “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of equity securities during the third quarter of Fiscal 2021 that were not registered under the Securities Act of 1933, as amended.
The following table provides information regarding the purchase of shares of Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the thirteen weeks ended October 30, 2021:
| Period (fiscal month) | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (2)(3) | |||||||||||||||||||
| August 1, 2021 through August 28, 2021 | 1,119 | $ | 37.04 | — | 6,548,813 | ||||||||||||||||||
| August 29, 2021 through October 2, 2021 | 2,193,109 | $ | 36.75 | 2,173,947 | 4,374,866 | ||||||||||||||||||
| October 3, 2021 through October 30, 2021 | 524,247 | $ | 38.80 | 517,896 | 3,856,970 | ||||||||||||||||||
| Total | 2,718,475 | $ | 37.15 | 2,691,843 | 3,856,970 | ||||||||||||||||||
(1)An aggregate of 26,632 shares of A&F’s Common Stock purchased during the thirteen weeks ended October 30, 2021 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights.
(2)On March 2, 2021, we announced that the A&F Board of Directors approved the repurchase of 10.0 million shares. On November 23, 2021 and not reflected in the table above, we announced that the A&F Board of Directors approved a new $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.
43
(3)The number shown represents, as of the end of each period, the maximum number of shares of A&F’s Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time, depending on business and market conditions.
44
Item 6. Exhibits
| Exhibit | Document | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | Non-Compete Amendment entered into between Abercrombie & Fitch Management Co. and Fran Horowitz, effective as of November 5, 2021 (the date of execution by Abercrombie & Fitch Management Co.); together with Schedule identifying executive officers of Abercrombie and Fitch Co. party to substantially identical Non-Compete Agreements with Abercrombie & Fitch Management Co.* | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* | |||||||
* Filed herewith.
** Furnished herewith.
45
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Abercrombie & Fitch Co. | ||||||||
| Date: December 6, 2021 | By: | /s/ Scott Lipesky | ||||||
| Scott Lipesky | ||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) | ||||||||
46