UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended AugustMay 4, 20182019
|
| |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
|
| |
| Delaware | | 31-1469076 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| 6301 Fitch Path, New Albany, Ohio | | 43054 |
| (Address of principal executive offices) | | (Zip Code) |
| | |
Registrant’s telephone number, including area code: (614) 283-6500 |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Class A Common Stock, $0.01 Par Value | | ANF | | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
| | | |
| Large accelerated filer | x | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | |
| Class A Common Stock | | Outstanding at September 5, 2018June 7, 2019 |
| $.01 Par Value | | 66,749,93065,687,994 Shares |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
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| | | Page No. |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 6. | | |
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PART I. FINANCIAL INFORMATION
| |
| ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) |
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Thousands, except per share amounts)
(Unaudited)
| | | | Thirteen Weeks Ended | | Twenty-six Weeks Ended | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
| Net sales | $ | 842,414 |
| | $ | 779,321 |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
| $ | 733,972 |
| | $ | 730,899 |
|
| Cost of sales, exclusive of depreciation and amortization | 335,519 |
| | 318,426 |
| | 624,073 |
| | 580,600 |
| 289,882 |
| | 288,554 |
|
| Gross profit | 506,895 |
| | 460,895 |
| | 949,240 |
| | 859,820 |
| 444,090 |
| | 442,345 |
|
| Stores and distribution expense | 374,552 |
| | 369,295 |
| | 735,707 |
| | 729,224 |
| 358,356 |
| | 361,155 |
|
| Marketing, general and administrative expense | 123,883 |
| | 109,353 |
| | 248,780 |
| | 219,246 |
| 111,947 |
| | 124,897 |
|
| Asset impairment | 8,671 |
| | 6,135 |
| | 9,727 |
| | 6,865 |
| 1,662 |
| | 1,056 |
|
| Other operating income, net | (434 | ) | | (2,799 | ) | | (2,994 | ) | | (4,485 | ) | (617 | ) | | (2,560 | ) |
| Operating income (loss) | 223 |
| | (21,089 | ) | | (41,980 | ) | | (91,030 | ) | |
| Operating loss | | (27,258 | ) | | (42,203 | ) |
| Interest expense, net | 3,023 |
| | 4,089 |
| | 6,041 |
| | 8,209 |
| 616 |
| | 3,018 |
|
| Loss before income taxes | (2,800 | ) | | (25,178 | ) | | (48,021 | ) | | (99,239 | ) | (27,874 | ) | | (45,221 | ) |
| Income tax expense (benefit) | 24 |
| | (10,563 | ) | | (3,689 | ) | | (23,615 | ) | |
| Income tax benefit | | (9,588 | ) | | (3,713 | ) |
| Net loss | (2,824 | ) | | (14,615 | ) | | (44,332 | ) | | (75,624 | ) | (18,286 | ) | | (41,508 | ) |
| Less: Net income attributable to noncontrolling interests | 1,029 |
| | 876 |
| | 1,982 |
| | 1,567 |
| 869 |
| | 953 |
|
| Net loss attributable to A&F | $ | (3,853 | ) | | $ | (15,491 | ) | | $ | (46,314 | ) | | $ | (77,191 | ) | $ | (19,155 | ) | | $ | (42,461 | ) |
| | | | | | | | | | | |
| Net loss per share attributable to A&F | | | | | | | | | | |
| Basic | $ | (0.06 | ) | | $ | (0.23 | ) | | $ | (0.68 | ) | | $ | (1.13 | ) | $ | (0.29 | ) | | $ | (0.62 | ) |
| Diluted | $ | (0.06 | ) | | $ | (0.23 | ) | | $ | (0.68 | ) | | $ | (1.13 | ) | $ | (0.29 | ) | | $ | (0.62 | ) |
| | | | | | | | | | | |
| Weighted-average shares outstanding | | | | | | | | | | |
| Basic | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
| 66,540 |
| | 68,500 |
|
| Diluted | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
| 66,540 |
| | 68,500 |
|
| | | | | | | | | | | |
| Dividends declared per share | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.40 |
| | $ | 0.40 |
| |
| | | | | | | | | |
| Other comprehensive (loss) income | | | | | | | | | | |
| Foreign currency translation, net of tax | $ | (11,206 | ) | | $ | 19,072 |
| | $ | (19,545 | ) | | $ | 24,679 |
| $ | (2,786 | ) | | $ | (8,339 | ) |
| Derivative financial instruments, net of tax | 7,447 |
| | (10,148 | ) | | 19,707 |
| | (14,748 | ) | (53 | ) | | 12,260 |
|
| Other comprehensive (loss) income | (3,759 | ) | | 8,924 |
| | 162 |
| | 9,931 |
| (2,839 | ) | | 3,921 |
|
| Comprehensive loss | (6,583 | ) | | (5,691 | ) | | (44,170 | ) | | (65,693 | ) | (21,125 | ) | | (37,587 | ) |
| Less: Comprehensive income attributable to noncontrolling interests | 1,029 |
| | 876 |
| | 1,982 |
| | 1,567 |
| 869 |
| | 953 |
|
| Comprehensive loss attributable to A&F | $ | (7,612 | ) | | $ | (6,567 | ) | | $ | (46,152 | ) | | $ | (67,260 | ) | $ | (21,994 | ) | | $ | (38,540 | ) |
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)
| | | | August 4, 2018 | | February 3, 2018 | May 4, 2019 | | February 2, 2019 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and equivalents | $ | 581,166 |
| | $ | 675,558 |
| $ | 586,133 |
| | $ | 723,135 |
|
| Receivables | 91,719 |
| | 79,724 |
| 82,026 |
| | 73,112 |
|
| Inventories | 454,913 |
| | 424,393 |
| 432,350 |
| | 437,879 |
|
| Other current assets | 115,276 |
| | 84,863 |
| 71,803 |
| | 101,824 |
|
| Total current assets | 1,243,074 |
| | 1,264,538 |
| 1,172,312 |
| | 1,335,950 |
|
| Property and equipment, net | 691,933 |
| | 738,182 |
| 633,686 |
| | 694,855 |
|
| Operating lease right-of-use assets | | 1,252,249 |
| | — |
|
| Other assets | 325,842 |
| | 322,972 |
| 364,719 |
| | 354,788 |
|
| Total assets | $ | 2,260,849 |
| | $ | 2,325,692 |
| $ | 3,422,966 |
| | $ | 2,385,593 |
|
| Liabilities and stockholders’ equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 213,167 |
| | $ | 168,868 |
| $ | 180,041 |
| | $ | 226,878 |
|
| Accrued expenses | 311,930 |
| | 308,601 |
| 240,050 |
| | 293,579 |
|
| Short-term portion of operating lease liabilities | | 278,392 |
| | — |
|
| Income taxes payable | | 16,022 |
| | 18,902 |
|
| Short-term portion of deferred lease credits | 19,449 |
| | 19,751 |
| — |
| | 19,558 |
|
| Income taxes payable | 8,189 |
| | 10,326 |
| |
| Total current liabilities | 552,735 |
| | 507,546 |
| 714,505 |
| | 558,917 |
|
| Long-term liabilities: | | | | | | |
| Long-term portion of operating lease liabilities | | 1,207,103 |
| | — |
|
| Long-term portion of borrowings, net | | 250,736 |
| | 250,439 |
|
| Long-term portion of deferred lease credits | 75,963 |
| | 75,648 |
| — |
| | 76,134 |
|
| Long-term portion of borrowings, net | 249,920 |
| | 249,686 |
| |
| Leasehold financing obligations | 47,171 |
| | 50,653 |
| — |
| | 46,337 |
|
| Other liabilities | 187,676 |
| | 189,688 |
| 145,659 |
| | 235,145 |
|
| Total long-term liabilities | 560,730 |
| | 565,675 |
| 1,603,498 |
| | 608,055 |
|
| Stockholders’ equity | | | | | | |
| Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at August 4, 2018 and February 3, 2018, respectively | 1,033 |
| | 1,033 |
| |
| Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented | | 1,033 |
| | 1,033 |
|
| Paid-in capital | 401,483 |
| | 406,351 |
| 395,974 |
| | 405,379 |
|
| Retained earnings | 2,337,100 |
| | 2,420,552 |
| 2,296,347 |
| | 2,418,544 |
|
| Accumulated other comprehensive loss, net of tax | (94,892 | ) | | (95,054 | ) | (105,291 | ) | | (102,452 | ) |
| Treasury stock, at average cost: 36,325 and 35,105 shares at August 4, 2018 and February 3, 2018, respectively | (1,507,414 | ) | | (1,490,503 | ) | |
| Treasury stock, at average cost: 36,663 and 37,073 shares as of May 4, 2019 and February 2, 2019, respectively | | (1,493,224 | ) | | (1,513,604 | ) |
| Total Abercrombie & Fitch Co. stockholders’ equity | 1,137,310 |
| | 1,242,379 |
| 1,094,839 |
| | 1,208,900 |
|
| Noncontrolling interests | 10,074 |
| | 10,092 |
| 10,124 |
| | 9,721 |
|
| Total stockholders’ equity | 1,147,384 |
| | 1,252,471 |
| 1,104,963 |
| | 1,218,621 |
|
| Total liabilities and stockholders’ equity | $ | 2,260,849 |
| | $ | 2,325,692 |
| $ | 3,422,966 |
| | $ | 2,385,593 |
|
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 May 4, 2019 |
| | Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | Accumulated other comprehensive loss | Treasury stock | Total stockholders’ equity |
| | Shares outstanding | Par value | Shares | At average cost |
| Balance, February 2, 2019 | 66,227 |
| $ | 1,033 |
| $ | 405,379 |
| $ | 9,721 |
| $ | 2,418,544 |
| $ | (102,452 | ) | 37,073 |
| $ | (1,513,604 | ) | $ | 1,218,621 |
|
| Impact from adoption of the new lease accounting standard (Refer to Note 2 “Summary of Significant Accounting Policies”) | — |
| — |
| — |
| — |
| (75,165 | ) | — |
| — |
| — |
| (75,165 | ) |
| Net loss | — |
| — |
| — |
| 869 |
| (19,155 | ) | — |
| — |
| — |
| (18,286 | ) |
| Dividends ($0.20 per share) | — |
| — |
| — |
| — |
| (13,246 | ) | — |
| — |
| — |
| (13,246 | ) |
| Share-based compensation issuances and exercises | 410 |
| — |
| (12,037 | ) | — |
| (14,631 | ) | — |
| (410 | ) | 20,380 |
| (6,288 | ) |
| Share-based compensation expense | — |
| — |
| 2,632 |
| — |
| — |
| — |
| — |
| — |
| 2,632 |
|
| Derivative financial instruments, net of tax | — |
| — |
| — |
| — |
| — |
| (53 | ) | — |
| — |
| (53 | ) |
| Foreign currency translation adjustments, net of tax | — |
| — |
| — |
| — |
| — |
| (2,786 | ) | — |
| — |
| (2,786 | ) |
| Distributions to noncontrolling interests, net | — |
| — |
| — |
| (466 | ) | — |
| — |
| — |
| — |
| (466 | ) |
| Balance, May 4, 2019 | 66,637 |
| $ | 1,033 |
| $ | 395,974 |
| $ | 10,124 |
| $ | 2,296,347 |
| $ | (105,291 | ) | 36,663 |
| $ | (1,493,224 | ) | $ | 1,104,963 |
|
| | | | | | | | | | |
| | Thirteen Weeks Ended May 5, 2018 |
| | Common Stock | Paid-in
capital | Non-controlling interests | Retained
earnings | Accumulated other
comprehensive
loss | Treasury stock | Total
stockholders’
equity |
| | Shares
outstanding | Par
value | Shares | At average
cost |
| Balance, February 3, 2018 | 68,195 |
| $ | 1,033 |
| $ | 406,351 |
| $ | 10,092 |
| $ | 2,420,552 |
| $ | (95,054 | ) | 35,105 |
| $ | (1,490,503 | ) | $ | 1,252,471 |
|
| Impact from adoption of the new revenue recognition accounting standard | — |
| — |
| — |
| — |
| 6,944 |
| — |
| — |
| — |
| 6,944 |
|
| Net loss | — |
| — |
| — |
| 953 |
| (42,461 | ) | — |
| — |
| — |
| (41,508 | ) |
| Purchase of Common Stock | (778 | ) | — |
| — |
| — |
| — |
| — |
| 778 |
| (18,670 | ) | (18,670 | ) |
| Dividends ($0.20 per share) | — |
| — |
| — |
| — |
| (13,642 | ) | — |
| — |
| — |
| (13,642 | ) |
| Share-based compensation issuances and exercises | 399 |
| — |
| (11,274 | ) | — |
| (14,513 | ) | — |
| (399 | ) | 20,800 |
| (4,987 | ) |
| Share-based compensation expense | — |
| — |
| 4,783 |
| — |
| — |
| — |
| — |
| — |
| 4,783 |
|
| Derivative financial instruments, net of tax | — |
| — |
| — |
| — |
| — |
| 12,260 |
| — |
| — |
| 12,260 |
|
| Foreign currency translation adjustments, net of tax | — |
| — |
| — |
| — |
| — |
| (8,339 | ) | — |
| — |
| (8,339 | ) |
| Distributions to noncontrolling interests, net | — |
| — |
| — |
| (466 | ) | — |
| — |
| — |
| — |
| (466 | ) |
| Balance, May 5, 2018 | 67,816 |
| $ | 1,033 |
| $ | 399,860 |
| $ | 10,579 |
| $ | 2,356,880 |
| $ | (91,133 | ) | 35,484 |
| $ | (1,488,373 | ) | $ | 1,188,846 |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
| | | | Twenty-six Weeks Ended | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
| Operating activities | | | | | | |
| Net loss | $ | (44,332 | ) | | $ | (75,624 | ) | $ | (18,286 | ) | | $ | (41,508 | ) |
| Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | | | | |
| Adjustments to reconcile net loss to net cash used for operating activities: | | | | |
| Depreciation and amortization | 93,153 |
| | 95,502 |
| 41,042 |
| | 47,647 |
|
| Non-cash portion of operating lease expense | | (8,196 | ) | | — |
|
| Amortization of deferred lease credits prior to adoption of new lease accounting standard | | — |
| | (5,040 | ) |
| Asset impairment | 9,727 |
| | 6,865 |
| 1,662 |
| | 1,056 |
|
| Loss on disposal | 1,644 |
| | 3,824 |
| 1,991 |
| | 1,239 |
|
| Amortization of deferred lease credits | (10,609 | ) | | (10,412 | ) | |
| Benefit from deferred income taxes | (17,049 | ) | | (19,121 | ) | (9,895 | ) | | (12,290 | ) |
| Share-based compensation | 10,940 |
| | 10,396 |
| 2,632 |
| | 4,783 |
|
| Changes in assets and liabilities | | | | |
| Changes in assets and liabilities: | | | | |
| Inventories | (40,934 | ) | | (67,964 | ) | 4,962 |
| | 11,444 |
|
| Accounts payable and accrued expenses | 62,918 |
| | 2,908 |
| (74,199 | ) | | (32,186 | ) |
| Lessor construction allowances | 6,107 |
| | 5,478 |
| |
| Operating lease right-of-use assets and liabilities | | (2,666 | ) | | — |
|
| Income taxes | (1,043 | ) | | (3,135 | ) | 855 |
| | 2,526 |
|
| Long-term lease deposits | 1,452 |
| | (530 | ) | |
| Other assets | (20,319 | ) | | 9,960 |
| (10,287 | ) | | 5,902 |
|
| Other liabilities | (1,129 | ) | | (6,193 | ) | (931 | ) | | 256 |
|
| Net cash provided by (used for) operating activities | 50,526 |
| | (48,046 | ) | |
| Net cash used for operating activities | | (71,316 | ) | | (16,171 | ) |
| Investing activities | | | | | | |
| Purchases of property and equipment | (54,115 | ) | | (61,777 | ) | (43,872 | ) | | (23,700 | ) |
| Proceeds from sale of property and equipment | — |
| | 203 |
| |
| Net cash used for investing activities | (54,115 | ) | | (61,574 | ) | (43,872 | ) | | (23,700 | ) |
| Financing activities | | | | | | |
| Purchase of treasury stock | (43,670 | ) | | — |
| |
| Purchases of common stock | | — |
| | (18,670 | ) |
| Dividends paid | (27,196 | ) | | (27,159 | ) | (13,246 | ) | | (13,642 | ) |
| Other financing activities | (6,875 | ) | | (1,057 | ) | (7,076 | ) | | (5,176 | ) |
| Net cash used for financing activities | (77,741 | ) | | (28,216 | ) | (20,322 | ) | | (37,488 | ) |
| Effect of exchange rates on cash | (13,437 | ) | | 13,354 |
| (2,638 | ) | | (5,914 | ) |
| Net decrease in cash and equivalents, and restricted cash | (94,767 | ) | | (124,482 | ) | |
| Cash and equivalents, and restricted cash, beginning of period | 697,955 |
| | 567,632 |
| |
| Cash and equivalents, and restricted cash, end of period | $ | 603,188 |
| | $ | 443,150 |
| |
| Significant non-cash investing activities | | | | |
| Change in accrual for construction in progress | $ | 13,989 |
| | $ | (9,508 | ) | |
| Supplemental information | | | | |
| Cash paid for interest | $ | 6,832 |
| | $ | 6,998 |
| |
| Net decrease in cash and equivalents, and restricted cash and equivalents | | (138,148 | ) | | (83,273 | ) |
| Cash and equivalents, and restricted cash and equivalents, beginning of period | | 745,829 |
| | 697,955 |
|
| Cash and equivalents, and restricted cash and equivalents, end of period | | $ | 607,681 |
| | $ | 614,682 |
|
| Supplemental information related to non-cash activities | | | | |
| Purchases of property and equipment not yet paid at end of period | | $ | 22,771 |
| | $ | 15,874 |
|
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 117,829 |
| | $ | — |
|
| Supplemental information related to cash activities | | | | |
| Cash paid for interest related to Abercrombie & Fitch Co.’s term loan facility | | $ | 3,881 |
| | $ | 3,492 |
|
| Cash paid for income taxes | $ | 14,928 |
| | $ | 8,698 |
| $ | 2,872 |
| | $ | 6,683 |
|
| Cash received from income tax refunds | $ | 8,173 |
| | $ | 5,808 |
| $ | 7,049 |
| | $ | 6,762 |
|
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 94,245 |
| | $ | — |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
56
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 7.4. | | |
| | |
| Note 5. | | |
| | | |
| Note 6. | | |
| | |
| Note 7. | | |
| | |
| Note 8. | | |
| | | |
| Note 9. | | |
| | |
| Note 10. | | |
| | | |
Note 10.11. | | |
| | |
| Note 12. | | |
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Note 11.13. | | |
ABERCROMBIE & FITCH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASISNATURE OF PRESENTATION
Nature of BusinessBUSINESS
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch”the “Company”, or the “Company”“we”), is a global multi-brand omnichannel specialty retailer, whichwhose products are sold primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, womenMen, Women and kidsKids under the Hollister, Abercrombie & Fitch and abercrombie kids brands.brands.The 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 has operations in North America, Europe and Asia, and the Middle East.among other regions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidationconsolidation
The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities,financial position, results of operations and cash flows.
The Company has interests in a United Arab Emiratesan Emirati business venture and in a KuwaitKuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Condensed Consolidated Statements of Operations and Comprehensive Loss and MAF’s portion of equity presented as NCI on the Condensed Consolidated Balance Sheets.
Fiscal Yearyear
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year, as was the case for the year ended February 3, 2018. Fiscal years are designated in the 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 commenced. All references herein to “Fiscal 2018” and “Fiscal 2017” represent the fifty-two weekCompany’s fiscal year ending on February 2, 2019 and the fifty-three week fiscal year ended on February 3, 2018, respectively.years are as follows:
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| | | | |
| Fiscal year | | Year ended | | Number of weeks |
| Fiscal 2017 | | February 3, 2018 | | 53 |
| Fiscal 2018 | | February 2, 2019 | | 52 |
| Fiscal 2019 | | February 1, 2020 | | 52 |
| Fiscal 2020 | | January 30, 2021 | | 52 |
Interim Financial Statementsfinancial statements
The Condensed Consolidated Financial Statements as of AugustMay 4, 2018,2019, and for the thirteen and twenty-six week periods ended AugustMay 4, 20182019 and July 29, 2017,May 5, 2018, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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 20172018 filed with the SEC on April 2, 2018.1, 2019. The February 3, 20182, 2019 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2018.2019.
Recent Accounting Pronouncementsaccounting pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain recent accounting pronouncements the Company has adopted or that could affect the Company’s financial statements.adopted.
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| | | | | | |
| Accounting Standards Update (ASU) | | Description | | Date of Adoption
adoption | | Effect on the Financial Statementsfinancial statements or Other Significant Matters |
Standards adopted |
ASU 2014-09, Revenue from Contracts with Customers
| | This update superseded the revenue recognition guidance in ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
| | February 4, 2018 | | The Company adopted this guidance and all related amendments using the modified retrospective method, and applied the standard to contracts that were not complete as of the adoption date. Comparative period information has not been restated and continues to be reported under the accounting standards in effect for those periods. This guidance primarily impacts the classification and timing of the recognition of the Company’s gift card breakage and timing of direct-to-consumer revenue. Adoption of this guidance had an immaterial impact on net loss attributable to A&F in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
The cumulative effect of applying the new standard on the Condensed Consolidated Balance Sheets as of August 4, 2018 was recognized as an adjustment to the opening balance of retained earnings, increasing beginning retained earnings by $6.9 million, with corresponding reductions in accrued expenses, inventories, and other assets of $4.7 million, $6.4 million, and $2.2 million, respectively, and increases to receivables and other current assets of $6.4 million and $4.4 million, respectively.
In accordance with the new guidance, expected gift card breakage is now recognized in net sales as gift cards are redeemed. Previously, gift card breakage was recognized as other operating income when the Company determined that the likelihood of redemption was remote. Under the new guidance, direct-to-consumer revenue is recognized when control is passed to the customer, typically upon shipment or pick-up of goods. Previously, direct-to-consumer revenue was recognized upon customer acceptance, which typically occurred upon the customer’s possession of the merchandise. The Company does not expect this guidance to have a material impact on store, direct-to-consumer, wholesale, franchise or license revenues on an ongoing basis.
The Company’s revenue recognition accounting policies are discussed further in this Note 1 under “Revenue Recognition.”
|
ASU 2016-18, Statement of Cash Flows
| | This update amends the guidance in ASC 230, Statement of Cash Flows. The new guidance requires an entity to show the changes in total cash, cash equivalents and restricted cash in the statement of cash flows. Consequently, an entity is no longer required to present transfers between cash and equivalents and restricted cash.
| | February 4, 2018 | | The Company adopted this guidance under the retrospective method. For the twenty-six weeks ended July 29, 2017, adoption of this guidance resulted in a $0.8 million decrease in net cash used for operating activities and increases of $20.4 million and $21.2 million to beginning and ending cash, cash equivalents and restricted cash, respectively. In addition, captions have been updated in the Condensed Consolidated Statements of Cash Flows to reflect the inclusion of restricted cash. Restricted cash is classified as other assets on the Condensed Consolidated Balance Sheets, as was the case at year-end. |
Standards not yet adoptedsignificant matters |
ASU 2016-02, Leases | | This update supersedes the leasing guidancestandard in ASCAccounting Standards Codification (“ASC”) 840, Leases. The new guidancestandard requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity. | | February 3, 2019 | | The Company expects thatadopted this guidance will result instandard using a material increase inmodified retrospective transition method and elected to not restate comparative periods.
In conjunction with the Company’s long-term assetsadoption of this standard, the Company elected: Ÿthe package of practical expedients which, among other things, allowed the Company tocarry forward historical lease classification for leases existing before the date of adoption; and long-term liabilities on Ÿto combine lease and nonlease components for leases existing before the Company’s Condensed Consolidated Balance Sheets, and is currently evaluating additional impacts that this guidance may have on its consolidated financial statements, includingdate of adoption, as well as for any new leases.
However, the potential for impairment of right-of-use assets. The Company did not elect the practical expedient to early adoptuse hindsight when determining the lease term or assessing impairment.
Adoption of this guidance.standard resulted in the Company’s total assets and total liabilities on the Condensed Consolidated Balance Sheet each increasing by approximately $1.2 billion, primarily due to the recognition of operating lease right-of-use assets and liabilities. The Company also recognized a cumulative adjustment decreasing the opening balance of retained earnings by $0.1 billion on the date of adoption.
The adoption of this standard did not have a significant impact on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the thirteen weeks ended May 4, 2019.
The adoption of this standard did not have a significant impact on the timing or classification of the Company’s Consolidated Statement of Cash Flows, the Company’s liquidity or the Company’s debt covenant compliance under current agreements.
Additional information regarding the impact from adoption of the new lease accounting standard and updated accounting policies related to leases are provided further in this Note 2. |
ASU 2017-12, Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities | | This update amends ASC 815, Derivatives and Hedging. The new guidancestandard simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements. Under the new standard, more hedging strategies will be eligible for hedge accounting, including hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets or liabilities and partial-term hedges of fixed-rate assets or liabilities. For cash flow and net investment hedges, the guidance requires a modified retrospective approach while the amended presentation and disclosure guidance requires a prospective approach. | | February 3, 2019 | | The Company adopted this standard using a modified retrospective transition approach, while the amended presentation and disclosure standard requires a prospective approach. Upon adoption of this standard, the Company elected to include time value in its assessment of effectiveness for derivative instruments designated as cash flow hedges. Updated accounting policies related to derivatives have been updated and are provided further in this Note 2.
The adoption of this standard did not have a significant impact on the Company’s Condensed Consolidated Financial Statements for the thirteen weeks ended May 4, 2019, and is currently evaluatingnot expected to have a significant impact on the impact that this guidance will have on itsCompany’s consolidated financial statements. statements for Fiscal 2019. |
ASU 2018-15. Intangibles — Goodwill and Other —Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract | | This update amends ASC 350, Intangibles — Goodwill and Other —Internal-Use Software. The new standard allows companies to defer certain direct costs related to software as a service (“SaaS”) implementation costs and amortize them to operating expense over the term of the related SaaS arrangement. The criteria for determining whether costs associated with SaaS can be capitalized is now the same criteria applied to internal software development costs in order to assess eligibility for deferral. | | February 3, 2019 | | The Company early adopted this standard on a prospective basis and comparative periods have not been restated.
The adoption of this standard did not electhave a significant impact on the Company’s Condensed Consolidated Financial Statements for the thirteen weeks ended May 4, 2019.
The Company expects to early adopt this guidance.capitalize up to $10 million of SaaS implementation costs in Fiscal 2019. |
The following table provides the impact from adoption of the new lease accounting standard on the Company’s Condensed Consolidated Balance Sheet:
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| | | | | | | | | | | |
| (in thousands) | February 2, 2019 (as reported under previous lease accounting standard) | | Impact from adoption of new lease accounting standard | | Upon adoption on February 3, 2019 (under new lease accounting standard) (1) |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and equivalents | $ | 723,135 |
| | $ | — |
| | $ | 723,135 |
|
| Receivables | 73,112 |
| | — |
| | 73,112 |
|
| Inventories | 437,879 |
| | — |
| | 437,879 |
|
Other current assets (2) | 101,824 |
| | (31,310 | ) | | 70,514 |
|
| Total current assets | 1,335,950 |
| | (31,310 | ) | | 1,304,640 |
|
Property and equipment, net (3) | 694,855 |
| | (46,624 | ) | | 648,231 |
|
Operating lease right-of-use assets (2) | — |
| | 1,234,515 |
| | 1,234,515 |
|
Other assets (2) (5) | 354,788 |
| | 15,553 |
| | 370,341 |
|
| Total assets | $ | 2,385,593 |
| | $ | 1,172,134 |
| | $ | 3,557,727 |
|
| Liabilities and stockholders’ equity | | | | | |
| Current liabilities: | | | | | |
| Accounts payable | $ | 226,878 |
| | $ | — |
| | $ | 226,878 |
|
Accrued expenses (2) | 293,579 |
| | (13,508 | ) | | 280,071 |
|
Short-term portion of operating lease liabilities (4) | — |
| | 280,108 |
| | 280,108 |
|
Short-term portion of deferred lease credits (2) | 19,558 |
| | (19,558 | ) | | — |
|
| Income taxes payable | 18,902 |
| | — |
| | 18,902 |
|
| Total current liabilities | 558,917 |
| | 247,042 |
| | 805,959 |
|
| Long-term liabilities: | | | | | |
Long-term portion of operating lease liabilities (4) | — |
| | 1,193,946 |
| | 1,193,946 |
|
| Long-term portion of borrowings, net | 250,439 |
| | — |
| | 250,439 |
|
Long-term portion of deferred lease credits (2) | 76,134 |
| | (76,134 | ) | | — |
|
Leasehold financing obligations (3) | 46,337 |
| | (46,337 | ) | | — |
|
Other liabilities (2) (5) | 235,145 |
| | (71,218 | ) | | 163,927 |
|
| Total long-term liabilities | 608,055 |
| | 1,000,257 |
| | 1,608,312 |
|
| Stockholders’ equity | | | | | |
| Class A Common Stock | 1,033 |
| | — |
| | 1,033 |
|
| Paid-in capital | 405,379 |
| | — |
| | 405,379 |
|
Retained earnings (6) | 2,418,544 |
| | (75,165 | ) | | 2,343,379 |
|
| Accumulated other comprehensive loss, net of tax | (102,452 | ) | | — |
| | (102,452 | ) |
| Treasury stock, at average cost | (1,513,604 | ) | | — |
| | (1,513,604 | ) |
| Total Abercrombie & Fitch Co. stockholders’ equity | 1,208,900 |
| | (75,165 | ) | | 1,133,735 |
|
| Noncontrolling interests | 9,721 |
| | — |
| | 9,721 |
|
| Total stockholders’ equity | 1,218,621 |
| | (75,165 | ) | | 1,143,456 |
|
| Total liabilities and stockholders’ equity | $ | 2,385,593 |
| | $ | 1,172,134 |
| | $ | 3,557,727 |
|
| |
(1) | Amounts under “Upon adoption on February 3, 2019 (under new lease accounting standard),” are calculated as February 2, 2019 reported balances adjusted for the impact of adoption on the first day of Fiscal 2019, February 3, 2019. |
| |
(2) | Upon adoption, the Company recognized assets for the rights to use its operating leases on the Condensed Consolidated Balance Sheet. In conjunction with this recognition, the Company reclassified amounts to operating lease right-of-use assets including: short-term prepaid rent from other current assets; key money, long-term prepaid rent and leasehold acquisition costs from other assets; short-term and long-term portions of deferred lease credits; accrued rent and accrued straight-line rent from accrued expenses and other liabilities, respectively. |
| |
(3) | Upon adoption, the Company derecognized construction project assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting. In certain instances, these construction project assets had shielded other assets included within their respective asset groups from impairment, as the fair value of the construction project assets had exceeded the carrying values of their respective asset groups. In such instances, the Company recognized impairment of certain leasehold improvements and store assets upon adoption. |
| |
(4) | Upon adoption, the Company recognized operating lease liabilities on the Condensed Consolidated Balance Sheet. |
| |
(5) | Upon adoption, the Company established net deferred tax assets for operating lease right-of-use assets and operating lease liabilities. |
| |
(6) | Upon adoption, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings, primarily related to right-of-use asset impairment charges for certain of the Company’s stores where it was previously determined that the carrying value of assets was not recoverable, partially offset by benefits to retained earnings to establish net deferred tax assets and a net gain resulting from the derecognition of certain leased building assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting. |
The Company’s significant accounting policies as of AugustMay 4, 20182019 have not changed materially from those disclosed in Note 2, “SUMMARY“SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017,2018, with the exception of those discussed below:below which have been updated to reflect new accounting standards adopted in Fiscal 2019.
Revenue RecognitionLeases
The Company determines if an arrangement is a lease at inception and on the lease commencement date, the Company recognizes revenue from product sales when controlan asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.
As most of the goodCompany’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is transferred todetermined using the customer, generally upon pick up at, or shipment from, a Company location.remaining lease term as of the lease commencement date.
The Company provides shippinghas elected to combine lease and handling services to customers in certain direct-to-consumer transactions. Revenue associated withnonlease components for all leases existing before the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receiptadoption of the merchandise. new lease accounting standard, as well as for any new leases.
The measurement of lease right-of-use assets and liabilities includes amounts related shippingto:
Lease payments made prior to the lease commencement date;
Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and handlingtenant improvement costs, which are presented as a reduction to the right-of-use asset recorded;
Fixed payments related to lease components, such as rent escalation payments scheduled at the lease commencement date;
Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and
Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease.
The measurement of lease right-of-use assets and liabilities excludes amounts related to:
Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Condensed Consolidated Balance Sheets;
Variable payments related to lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in stores and distribution expensethe period incurred on the Condensed Consolidated Statements of Operations and Comprehensive Loss.Income (Loss);
Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); and
Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
RevenueCertain of the Company’s leases include options to extend the lease or to terminate the lease. The Company assesses these leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s lease right-of-use assets and liabilities. Generally, the Company’s options to extend its leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until a new agreement has been executed.
Amortization and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the lease, amortization and interest expense is recorded netin either stores and distribution expense or marketing, general and administrative expense in the Consolidated Statements of estimated returns, associate discounts, promotionsOperations and other similar customer incentives. Comprehensive Income (Loss).
The Company’s lease right-of-use assets are assessed for indicators of impairment at least quarterly, in accordance with the long-lived asset impairment policy disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net,” 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 2018.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party or third-party.
Derivative instruments
The Company estimates reservesis 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.
In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued.
For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in 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 forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, returns based on historical experience amongexclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in accumulated other factors. The sales return reserve is classified in accrued expensescomprehensive loss (“AOCL”) into earnings on the Condensed Consolidated Balance Sheets.
The Company accounts for gift cards soldalso uses foreign currency exchange forward contracts to customers by recognizing an unearned revenue liabilityhedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the timespot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of sale, which remains until income from gift cards not expected to be redeemed, referred to as gift card breakage, is recognized as revenue proportionally with gift card redemptions. Gift cards sold to customers do not expiregain or lose value over periods of inactivityloss recognition on the hedging instruments and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates.hedged items.
The Company also maintains loyalty programs, which primarily provides customers withpresents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized atCondensed Consolidated Balance Sheets. However, the earlier of redemption or expiration.Company’s derivative contracts allow net settlements under certain conditions.
Condensed Consolidated Statements of Cash Flows reconciliation
The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents, which is recorded when prepayments for future merchandise are received through gift card purchases or when loyalty rewards are earned by a customer in a sales transaction, and are classified in accrued expensesother assets on the Condensed Consolidated Balance Sheets, and are typically recognized asto the amounts shown on the Condensed Consolidated Statements of Cash Flows.
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| | | | | | | | | | | | | | | |
| (in thousands) | May 4, 2019 | | February 2, 2019 | | May 5, 2018 | | February 3, 2018 |
| Cash and equivalents | $ | 586,133 |
| | $ | 723,135 |
| | $ | 591,960 |
| | $ | 675,558 |
|
| Restricted cash and equivalents | 21,548 |
| | 22,694 |
| | 22,722 |
| | 22,397 |
|
| Cash and equivalents and restricted cash and equivalents | $ | 607,681 |
| | $ | 745,829 |
| | $ | 614,682 |
| | $ | 697,955 |
|
3. REVENUE RECOGNITION
Contract liabilities
The following table details contract liabilities representing unearned revenue within a 12-month period. Unearned revenue liabilities as of AugustMay 4, 2019, February 2, 2019, May 5, 2018 and the date of adoption, February 4, 2018, were approximately $37.5 million and $38.7 million, respectively. On the date of adoption, February 4, 2018, an adjustment related to the adoption of new revenue recognition standards decreased the beginning of period balance by $6.2 million. 3, 2018:
|
| | | | | | | | | | | | | | | |
| (in thousands) | May 4, 2019 | | February 2, 2019 | | May 5, 2018 | | February 3, 2018 |
| Unearned revenue liabilities related to the Company’s gift card program | $ | 22,067 |
| | $ | 26,062 |
| | $ | 19,246 |
| | $ | 28,939 |
|
| Unearned revenue liabilities related to the Company’s loyalty programs | $ | 19,830 |
| | $ | 19,904 |
| | $ | 16,708 |
| | $ | 15,965 |
|
For the thirteen and twenty-six weeks ended AugustMay 4, 2019 and May 5, 2018, the Company recognized revenue of approximately $20.3$15.3 million and $41.3$13.8 million, respectively, associated with gift card redemptions and gift card breakage.
For the thirteen weeks ended May 4, 2019 and May 5, 2018, the Company recognized revenue of approximately $6.5 million and $7.2 million, respectively, associated with reward redemptions and breakage related to previous deferrals of revenue resulting from the Company’s gift card and loyalty programs.
The Company also recognizesDisaggregation of revenue under wholesale arrangements, which is generally recognized upon shipment, when control passes to the wholesale partner. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers.
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Loss. For a discussion ofinformation regarding the disaggregation of revenue, refer to Note 10,12, “SEGMENT REPORTING.” The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales.
2.4. NET LOSS PER SHARE
Net 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 loss per share attributable to A&F is as follows:
| | | | Thirteen Weeks Ended | | Twenty-six Weeks Ended | Thirteen Weeks Ended |
| (in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
| Shares of Common Stock issued | 103,300 |
| | 103,300 |
| | 103,300 |
| | 103,300 |
| 103,300 |
| | 103,300 |
|
| Weighted-average treasury shares | (35,292 | ) | | (34,844 | ) | | (35,046 | ) | | (35,036 | ) | (36,760 | ) | | (34,800 | ) |
| Weighted-average — basic shares | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
| 66,540 |
| | 68,500 |
|
| Dilutive effect of share-based compensation awards | — |
| | — |
| | — |
| | — |
| — |
| | — |
|
| Weighted-average — diluted shares | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
| 66,540 |
| | 68,500 |
|
Anti-dilutive shares (1) | 3,466 |
| | 5,154 |
| | 4,033 |
| | 5,460 |
| 2,812 |
| | 4,599 |
|
| |
(1) | Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net loss per diluted share because the impact would have been anti-dilutive. |
3.
5. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
Level 3—inputs to the valuation methodology are unobservable.
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows:
| | | | Assets and Liabilities at Fair Value as of August 4, 2018 | Assets and Liabilities at Fair Value as of May 4, 2019 |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | | | | | | | |
| Trust-owned life insurance policies (at cash surrender value) | $ | — |
| | $ | 104,310 |
| | $ | — |
| | $ | 104,310 |
| |
| Money market funds | 25,073 |
| | — |
| | — |
| | 25,073 |
| |
| Derivative financial instruments | — |
| | 12,343 |
| | — |
| | 12,343 |
| |
Cash equivalents (1) | | $ | 10,149 |
| | $ | 39,660 |
| | $ | — |
| | $ | 49,809 |
|
Derivative instruments (2) | | — |
| | 2,508 |
| | — |
| | 2,508 |
|
Rabbi Trust assets (3) | | 3 |
| | 106,668 |
| | — |
| | 106,671 |
|
Restricted cash equivalents (4) | | 10,114 |
| | 4,571 |
| | — |
| | 14,685 |
|
| Total assets | $ | 25,073 |
| | $ | 116,653 |
| | $ | — |
| | $ | 141,726 |
| $ | 20,266 |
| | $ | 153,407 |
| | $ | — |
| | $ | 173,673 |
|
| | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | |
| Derivative financial instruments | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
| |
Derivative instruments (2) | | $ | — |
| | $ | 316 |
| | $ | — |
| | $ | 316 |
|
| Total liabilities | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
| $ | — |
| | $ | 316 |
| | $ | — |
| | $ | 316 |
|
| | | | Assets and Liabilities at Fair Value as of February 3, 2018 | Assets and Liabilities at Fair Value as of February 2, 2019 |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | | | | | | | |
| Trust-owned life insurance policies (at cash surrender value) | $ | — |
| | $ | 102,784 |
| | $ | — |
| | $ | 102,784 |
| |
| Money market funds | 330,649 |
| | — |
| | — |
| | 330,649 |
| |
| Derivative financial instruments | — |
| | 37 |
| | — |
| | 37 |
| |
Cash equivalents (1) | | $ | 55,558 |
| | $ | 34,440 |
| | $ | — |
| | $ | 89,998 |
|
Derivative instruments (2) | | — |
| | 2,162 |
| | — |
| | 2,162 |
|
Rabbi Trust assets (3) | | 5 |
| | 105,877 |
| | — |
| | 105,882 |
|
Restricted cash equivalents (4) | | 10,910 |
| | 4,588 |
| | — |
| | 15,498 |
|
| Total assets | $ | 330,649 |
| | $ | 102,821 |
| | $ | — |
| | $ | 433,470 |
| $ | 66,473 |
| | $ | 147,067 |
| | $ | — |
| | $ | 213,540 |
|
| | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | |
| Derivative financial instruments | $ | — |
| | $ | 9,147 |
| | $ | — |
| | $ | 9,147 |
| |
Derivative instruments (2) | | $ | — |
| | $ | 332 |
| | $ | — |
| | $ | 332 |
|
| Total liabilities | $ | — |
| | $ | 9,147 |
| | $ | — |
| | $ | 9,147 |
| $ | — |
| | $ | 332 |
| | $ | — |
| | $ | 332 |
|
| |
(1) | Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits. |
| |
(2) | Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts. |
| |
(3) | Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies. |
| |
(4) | Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits. |
The Company’s Level 2 assets and liabilities consist of:
Time deposits, which are valued at cost approximating fair value due to the short-term nature of trust-ownedthese investments;
Trust-owned life insurance policies and derivative financial instruments, primarily foreign currency exchange forward contracts.The fair value of trust-owned life insurance policies is determinedwhich are valued using the cash surrender value of the life insurance policies. The fair value ofpolicies; and
Derivative instruments, primarily foreign currency exchange forward contracts, is determinedwhich are valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Fair value of borrowings
The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets.
The carrying amount and fair value of the Company’s gross borrowings under the Company’s term loan credit facility were as follows:
| | | (in thousands) | August 4, 2018 | | February 3, 2018 | May 4, 2019 | | February 2, 2019 |
| Gross borrowings outstanding, carrying amount | $ | 253,250 |
| | $ | 253,250 |
| $ | 253,250 |
| | $ | 253,250 |
|
| Gross borrowings outstanding, fair value | $ | 254,200 |
| | $ | 253,250 |
| $ | 253,250 |
| | $ | 252,933 |
|
No borrowings were outstanding under the Company’s senior secured revolving credit facility as of AugustMay 4, 20182019 or February 3, 2018.2, 2019.
4.6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of: | | | (in thousands) | August 4, 2018 | | February 3, 2018 | May 4, 2019 | | February 2, 2019 |
| Property and equipment, at cost | $ | 2,802,253 |
| | $ | 2,821,709 |
| $ | 2,740,339 |
| | $ | 2,829,250 |
|
| Less: Accumulated depreciation and amortization | (2,110,320 | ) | | (2,083,527 | ) | (2,106,653 | ) | | (2,134,395 | ) |
| Property and equipment, net | $ | 691,933 |
| | $ | 738,182 |
| $ | 633,686 |
| | $ | 694,855 |
|
The Company incurred store asset impairment charges of $8.7$1.7 million and $9.7$1.1 million for the thirteen and twenty-six weeks ended AugustMay 4, 2019, and May 5, 2018, respectively, and $6.1 million and $6.9 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, primarily related to certain of the Company’s international Abercrombie & Fitch stores.respectively.
The Company had $35.6 million and $38.7$34.7 million of construction project assets in property and equipment, net at August 4, 2018 andas of February 3, 2018, respectively,2, 2019, related to the construction of buildings in certain lease arrangements where, under the previous lease accounting standard, the Company iswas deemed to be the owner of the construction project. Upon adoption of the new lease accounting standard, described further in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” the Company derecognized these construction project assets.
7. LEASES
The Company has 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 weeks ended May 4, 2019:
|
| | | |
| (in thousands) | May 4, 2019 |
Single lease cost (1) | $ | 92,274 |
|
Variable lease cost (2) | 42,845 |
|
| Total operating lease cost | $ | 135,119 |
|
| |
(1) | Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities. |
| |
(2) | Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs. |
The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rates used to calculate the Company’s operating lease liabilities as of May 4, 2019:
|
| | |
| May 4, 2019 |
| Weighted-average remaining lease term (years) | 6.2 |
|
| Weighted-average discount rate | 5.4 | % |
The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of May 4, 2019:
|
| | | |
| (in thousands) | |
| Fiscal 2019 (excluding the thirteen weeks ended May 4, 2019) | $ | 265,232 |
|
| Fiscal 2020 | 328,707 |
|
| Fiscal 2021 | 281,713 |
|
| Fiscal 2022 | 233,274 |
|
| Fiscal 2023 | 189,987 |
|
| Fiscal 2024 and thereafter | 466,402 |
|
| Total undiscounted operating lease payments | $ | 1,765,315 |
|
| Less: Imputed interest | (279,820 | ) |
| Present value of operating lease liabilities | $ | 1,485,495 |
|
5.As of May 4, 2019, the Company had minimum commitments related to additional operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $21.1 million.
As reported under the previous accounting standard, the following table provides a summary of operating lease commitments, including leasehold financing obligations, under noncancelable leases as of February 2, 2019:
|
| | | |
| (in thousands) | |
| Fiscal 2019 | $ | 367,622 |
|
| Fiscal 2020 | $ | 304,270 |
|
| Fiscal 2021 | $ | 205,542 |
|
| Fiscal 2022 | $ | 159,617 |
|
| Fiscal 2023 | $ | 128,626 |
|
| Fiscal 2024 and thereafter | $ | 310,003 |
|
8. INCOME TAXES
The quarterly tax provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in law, regulations, interpretations and administrative practices, relative changes ofin expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Tax Cuts and Jobs ActThe Company incurred $1.1 million of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act makes broad and significantly complex changes to the U.S. corporatediscrete income tax system by, among other things: reducing the U.S. federal corporate income tax rate from 35% to 21%; transitioning U.S. international taxation to a modified territorial tax system; and imposing a mandatory one-time deemed repatriation tax, payable over eight years, on accumulated undistributed foreign subsidiary earnings and profits as of December 31, 2017. The Company recognized provisional discrete net tax charges of $19.9 million related to the enactment of the Act in the fourth quarter of Fiscal 2017.
Due to proposed regulatory guidance issued by the Internal Revenue Service during the second quarter of Fiscal 2018, the Company recognized a measurement period charge of $2.0 million duringbenefits for the thirteen weeks ended AugustMay 4, 2018, adjusting the provisional tax amounts2019, primarily related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign earnings.
As a resultexercise of the Company's initial analysis of the impact of the Act and the measurement period adjustment, the Company has incurred discrete net income tax charges in an aggregate amount of $21.9 million since the enactment of the Act, which consists of:
$23.7 million of provisional tax expense related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits of approximately $385.8 million;
$3.8 million of provisional tax expense related to the remeasurement of the Company's ending deferred tax assets and liabilities at February 3, 2018, as a result of the U.S. federal corporate income tax rate reduction from 35% to 21%; and,
$5.6 million of tax benefit for the decrease in its federal deferred tax liability on unremitted foreign earnings.
Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts related to the enactment of the Act are provisional and assessed as of August 22, 2018. The ultimate outcome may differ from these provisional amounts and could impact the provision for income taxes in Fiscal 2018, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Act. Provisional amounts are expected to be finalized after the Company’s Fiscal 2017 U.S. corporate income tax return is filed in the fourth quarter of Fiscal 2018, but no later than one year from the enactment of the Act.
Other
certain share-based compensation awards. The Company incurred $8.2 million of discrete non-cash income tax benefits of $0.2 million and charges of $7.9 million for the thirteen and twenty-six weeks ended August 4,May 5, 2018, respectively, and charges of $0.7 million and $9.9 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively,primarily related to the expiration of certain share-based compensation awards, recognized in income tax expense (benefit) due to changes in share-based compensation accounting standards adopted by the Company in the first quarter of Fiscal 2017.
awards.
6. BORROWINGS
Asset-Based Revolving Credit Facility
On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.
On October 19, 2017, the Company, through A&F Management, entered into the Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement. As amended, the asset-based revolving credit agreement continues to provide for a senior secured revolving credit facility of up to $400 million (the “Amended ABL Facility”). The Amended ABL Facility will mature on October 19, 2022.
The provisions of the credit agreement for the Amended ABL Facility have not changed from those contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017.
As of August 4, 2018, no borrowings were outstanding under the Amended ABL Facility.
As of August 4, 2018, the Company had availability under the Amended ABL Facility of $328.1 million.
Term Loan Facility
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan credit agreement on August 7, 2014, which, as amended, provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”).
On June 22, 2018, the Company, through A&F Management, entered into the Term Loan Second Amendment, which served to reprice the Term Loan Facility. As permitted under the credit agreement applicable to the Term Loan Facility, among other things, the Term Loan Second Amendment provided for the issuance by A&F Management of refinancing term loans in an aggregate principal amount of $253.3 million in exchange for the term loans then outstanding under the Term Loan Facility, which resulted in the reduction of the applicable margins for term loans by 0.25%. Under the Term Loan Second Amendment, at the Company's option, borrowings under the Term Loan Facility will now bear interest at either (a) an adjusted LIBO rate no lower than 1.00% plus a margin of 3.50% per annum, reduced from a margin of 3.75% per annum, or (b) an alternate base rate plus a margin of 2.50% per annum, reduced from a margin of 2.75% per annum. Deferred financing fees associated with the repricing transaction were not significant. All other material provisions under the credit agreement applicable to the Term Loan Facility remained unchanged.
As of August 4, 2018, the interest rate on borrowings under the Term Loan Facility was 5.59%.
The Company’s Term Loan Facility debt is presented in the Condensed Consolidated Balance Sheets, net of the unamortized discount and fees. Net borrowings as of August 4, 2018 and February 3, 2018 were as follows:
|
| | | | | | | |
| (in thousands) | August 4, 2018 | | February 3, 2018 |
| Borrowings, gross at carrying amount | $ | 253,250 |
| | $ | 253,250 |
|
| Unamortized discount | (1,014 | ) | | (1,184 | ) |
| Unamortized fees | (2,316 | ) | | (2,380 | ) |
| Borrowings, net | 249,920 |
| | 249,686 |
|
| Less: short-term portion of borrowings, net | — |
| | — |
|
| Long-term portion of borrowings, net | $ | 249,920 |
| | 249,686 |
|
Representations, Warranties and Covenants
The Credit Facilities contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of A&F and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to the greater of 10% of the loan cap or $30 million must be maintained under the Amended ABL Facility. The Credit Facilities do not otherwise contain financial maintenance covenants. Both Credit Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with the covenants under the Credit Facilities as of August 4, 2018.
7.9. SHARE-BASED COMPENSATION
Financial Statement Impactstatement impact
The Company recognized share-based compensation expense of $6.2$2.6 million and $10.9$4.8 million for the thirteen and twenty-six weeks ended AugustMay 4, 2018, respectively,2019 and $5.5 million and $10.4 million for the thirteen and twenty-six weeks ended July 29, 2017,May 5, 2018, respectively. The Company recognized tax benefits associated with share-based compensation expense of $1.3$0.5 million and $2.2$0.9 million for the thirteen and twenty-six weeks ended AugustMay 4, 2018, respectively,2019 and $2.1 million and $4.0 million for the thirteen and twenty-six weeks ended July 29, 2017,May 5, 2018, respectively.
Restricted Stock Unitsstock units
The following table summarizes activity for restricted stock units for the twenty-sixthirteen weeks ended AugustMay 4, 2018:2019:
| | | | Service-based Restricted Stock Units | | Performance-based Restricted Stock Units | | Market-based Restricted Stock Units | Service-based Restricted Stock Units | | Performance-based Restricted Stock Units | | Market-based Restricted Stock Units |
| | Number of Underlying Shares(1) | | Weighted- Average Grant Date Fair Value | | Number of Underlying Shares | | Weighted- Average Grant Date Fair Value | | Number of Underlying Shares | | Weighted- Average Grant Date Fair Value | Number of Underlying Shares (1) | | Weighted- Average Grant Date Fair Value | | Number of Underlying Shares | | Weighted- Average Grant Date Fair Value | | Number of Underlying Shares | | Weighted- Average Grant Date Fair Value |
| Unvested at February 3, 2018 | 2,520,160 |
| | $ | 15.35 |
| | 690,174 |
| | $ | 11.82 |
| | 383,980 |
| | $ | 16.50 |
| |
| Unvested at February 2, 2019 | | 2,020,030 |
| | $ | 16.76 |
| | 801,527 |
| | $ | 13.65 |
| | 435,970 |
| | $ | 21.24 |
|
| Granted | 736,915 |
| | 21.93 |
| | 197,979 |
| | 21.77 |
| | 142,014 |
| | 33.69 |
| 617,986 |
| | 23.42 |
| | 230,464 |
| | 23.05 |
| | 115,238 |
| | 36.24 |
|
| Adjustments for performance achievement | — |
| | — |
| | (43,999 | ) | | 20.10 |
| | (36,817 | ) | | 19.04 |
| — |
| | — |
| | (90,616 | ) | | 24.06 |
| | (72,497 | ) | | 28.20 |
|
| Vested | (844,382 | ) | | 17.30 |
| | — |
| | — |
| | (7,185 | ) | | 19.04 |
| (629,090 | ) | | 17.44 |
| | — |
| | — |
| | (18,125 | ) | | 28.20 |
|
| Forfeited | (121,568 | ) | | 14.88 |
| | (12,998 | ) | | 12.17 |
| | (12,999 | ) | | 17.28 |
| (55,590 | ) | | 16.12 |
| | (4,903 | ) | | 22.94 |
| | — |
| | — |
|
| Unvested at August 4, 2018 | 2,291,125 |
| | $ | 16.78 |
| | 831,156 |
| | $ | 13.74 |
| | 468,993 |
| | $ | 21.45 |
| |
| Unvested at May 4, 2019 | | 1,953,336 |
| | $ | 18.67 |
| | 936,472 |
| | $ | 14.88 |
| | 460,586 |
| | $ | 23.63 |
|
| |
(1) | Includes 496,981370,616 unvested restricted stock units as of AugustMay 4, 2018,2019, subject to vesting requirements related to the achievement of certain performance metrics, such as operating income and net income, for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one or more installments of the award if the cumulative performance requirements are met in a subsequent year. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at 100% of their target vesting amount in the table above. |
Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria.
Service-based restricted stock units are expensed on a straight-line basis over the total award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation
expense for stock options and stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. Unrecognized compensation expense presented excludes the effect of potential forfeitures, and will be adjusted for actual forfeitures as they occur.
As of AugustMay 4, 2018,2019, there was $31.5$32.5 million, $9.1$8.6 million and $6.3$7.3 million of total unrecognized compensation cost, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 1617 months, 1314 months and 1415 months for service-based, performance-based and market-based restricted stock units, respectively.
The actual tax benefit realized for tax deductions related to the issuance of shares associated with restricted stock unitunits vesting was $1.5$4.0 million and $4.9$3.4 million for the thirteen and twenty-six weeks ended AugustMay 4, 2019 and May 5, 2018, respectively,respectively.
The amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and $0.5the exercise of stock appreciation rights was $6.3 million and $2.5$5.0 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively.May 4, 2019 and May 5, 2018, respectively, and is classified within other financing activities on the Condensed Consolidated Statements of Cash Flows.
Additional information pertaining to restricted stock units for the twenty-sixthirteen weeks ended AugustMay 4, 20182019 and July 29, 2017May 5, 2018 follows:
| | | (in thousands) | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
| Service-based restricted stock units: | | | | | | |
| Total grant date fair value of awards granted | $ | 16,161 |
| | $ | 15,948 |
| $ | 14,473 |
| | $ | 14,627 |
|
| Total grant date fair value of awards vested | 14,608 |
| | 16,806 |
| 10,971 |
| | 10,774 |
|
| | | | | | | |
| Performance-based restricted stock units: | | | | | | |
| Total grant date fair value of awards granted | $ | 4,310 |
| | $ | 4,774 |
| $ | 5,312 |
| | $ | 3,026 |
|
| Total grant date fair value of awards vested | — |
| | — |
| — |
| | — |
|
| | | | | | | |
| Market-based restricted stock units: | | | | | | |
| Total grant date fair value of awards granted | $ | 4,784 |
| | $ | 2,793 |
| $ | 4,176 |
| | $ | 4,784 |
|
| Total grant date fair value of awards vested | 137 |
| | — |
| 511 |
| | 137 |
|
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-sixthirteen weeks ended AugustMay 4, 20182019 and July 29, 2017May 5, 2018 were as follows:
|
| | | | | | | |
| | August 4, 2018 | | July 29, 2017 |
| Grant date market price | $ | 23.59 |
| | $ | 11.43 |
|
| Fair value | $ | 33.69 |
| | $ | 11.79 |
|
| Assumptions: | | | |
| Price volatility | 54 | % | | 47 | % |
| Expected term (years) | 2.9 |
| | 2.9 |
|
| Risk-free interest rate | 2.4 | % | | 1.5 | % |
| Dividend yield | 3.4 | % | | 7.0 | % |
| Average volatility of peer companies | 37.4 | % | | 35.2 | % |
| Average correlation coefficient of peer companies | 0.2709 |
| | 0.2664 |
|
|
| | | | | | | |
| | May 4, 2019 | | May 5, 2018 |
| Grant date market price | $ | 25.34 |
| | $ | 23.59 |
|
| Fair value | $ | 36.24 |
| | $ | 33.69 |
|
| Assumptions: | | | |
| Price volatility | 57 | % | | 54 | % |
| Expected term (years) | 2.9 |
| | 2.9 |
|
| Risk-free interest rate | 2.2 | % | | 2.4 | % |
| Dividend yield | 3.2 | % | | 3.4 | % |
| Average volatility of peer companies | 40.0 | % | | 37.4 | % |
| Average correlation coefficient of peer companies | 0.2407 |
| | 0.2709 |
|
Stock Appreciation Rightsappreciation rights
The following table summarizes stock appreciation rights activity for the twenty-sixthirteen weeks ended AugustMay 4, 2018:2019:
|
| | | | | | | | | | | | |
| | Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life |
| Outstanding at February 3, 2018 | 3,010,720 |
| | $ | 49.35 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | (50,190 | ) | | 22.21 |
| | | | |
| Forfeited or expired | (1,614,371 | ) | | 54.67 |
| | | | |
| Outstanding at August 4, 2018 | 1,346,159 |
| | $ | 44.13 |
| | $ | 867,381 |
| | 3.4 |
| Stock appreciation rights exercisable at August 4, 2018 | 1,248,775 |
| | $ | 45.80 |
| | $ | 612,390 |
| | 3.1 |
| Stock appreciation rights expected to become exercisable in the future as of August 4, 2018 | 92,143 |
| | $ | 22.68 |
| | $ | 239,589 |
| | 6.7 |
|
| | | | | | | | | | | | |
| | Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life (years) |
| Outstanding at February 2, 2019 | 1,041,867 |
| | $ | 37.81 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | (43,463 | ) | | 22.41 |
| | | | |
| Forfeited or expired | (52,725 | ) | | 33.96 |
| | | | |
| Outstanding at May 4, 2019 | 945,679 |
| | $ | 38.75 |
| | $ | 2,217,851 |
| | 3.4 |
| Stock appreciation rights exercisable at May 4, 2019 | 936,341 |
| | $ | 38.93 |
| | $ | 2,126,591 |
| | 3.4 |
| Stock appreciation rights expected to become exercisable in the future as of May 4, 2019 | 8,989 |
| | $ | 20.72 |
| | $ | 87,773 |
| | 6.3 |
As of AugustMay 4, 2018, there was $0.5 million of2019, total unrecognized compensation cost related to stock appreciation rights. The unrecognized compensation costrights was insignificant and is expected to be recognized over a weighted-average period of 53 months.
The grant date fair value of stock appreciation rights that were exercisedvested during the twenty-sixthirteen weeks ended AugustMay 4, 2019 and May 5, 2018 and July 29, 2017 was $1.2$2.4 million and $2.2$0.9 million, respectively.
Stock Options
The following table summarizes stock option activity for the twenty-six weeks ended August 4, 2018:
|
| | | | | | | | | | | | | |
| | Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life |
| Outstanding at February 3, 2018 | 87,200 |
| | $ | 78.20 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | — |
| | — |
| | | | |
| Forfeited or expired | (87,200 | ) | | 78.20 |
| | | | |
| Outstanding at August 4, 2018 | — |
| | $ | — |
| | $ | — |
| | — |
|
| Stock options exercisable at August 4, 2018 | — |
| | $ | — |
| | $ | — |
| | — |
|
As of August 4, 2018, there was no unrecognized compensation cost related to stock options.
8. DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign currency denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign currency denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”). Under the current accounting guidance, substantially all of the unrealized gains or losses related to designated cash flow hedges as of August 4, 2018 would be recognized in cost of sales, exclusive of depreciation and amortization, over the next twelve months. Refer to Note 1, “BASIS OF PRESENTATION,” for further discussion of recent accounting pronouncements related to derivative instruments that could affect the Company's financial statements.
The Company presents its derivative assets and derivative liabilities at their gross fair values on the Condensed Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions.10. DERIVATIVE INSTRUMENTS
As of AugustMay 4, 2018,2019, 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) | Notional Amount (1) |
| Euro | $ | 159,768 |
| $ | 61,003 |
|
| British pound | $ | 73,692 |
| $ | 28,562 |
|
| Canadian dollar | $ | 29,989 |
| $ | 11,890 |
|
| Japanese yen | $ | 15,960 |
| $ | 6,654 |
|
| |
(1) | Amounts reported are the U.S. Dollar notional amounts outstanding as of AugustMay 4, 2018.2019. |
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 AugustMay 4, 2018, the Company had outstanding the following2019, foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets/liabilities:assets and liabilities were as follows:
| | | (in thousands) | Notional Amount(1) | Notional Amount (1) |
| Euro | $ | 8,818 |
| |
| Chinese yuan | | $ | 22,218 |
|
| Japanese yen | $ | 3,294 |
| $ | 896 |
|
| |
(1) | AmountsAmount reported areis the U.S. Dollar notional amountsamount outstanding as of AugustMay 4, 2018.2019. |
The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of AugustMay 4, 20182019 and February 3, 20182, 2019 were as follows:
| | | (in thousands) | Location | | August 4,
2018 | | February 3,
2018 | | Location | | August 4,
2018 | | February 3,
2018 | Location | | May 4,
2019 | | February 2,
2019 | | Location | | May 4,
2019 | | February 2,
2019 |
| Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | | | | Derivatives designated as hedging instruments: | | | | | | | | |
| Foreign currency exchange forward contracts | | $ | 12,198 |
| | $ | 37 |
| | $ | 28 |
| | $ | 9,108 |
| Other current assets | | $ | 2,508 |
| | $ | 2,162 |
| | Accrued expenses | | $ | 258 |
| | $ | 15 |
|
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | | | | | | | Derivatives not designated as hedging instruments: | | | | | | | | |
| Foreign currency exchange forward contracts | | $ | 145 |
| | $ | — |
| | $ | — |
| | $ | 39 |
| Other current assets | | $ | — |
| | $ | — |
| | Accrued expenses | | $ | 58 |
| | $ | 317 |
|
| Total | Other current assets | | $ | 12,343 |
| | $ | 37 |
| | Accrued expenses | | $ | 28 |
| | $ | 9,147 |
| | $ | 2,508 |
| | $ | 2,162 |
| | $ | 316 |
| | $ | 332 |
|
Refer to Note 3,5, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative instruments.
The location and amounts of derivative gains and losses for the thirteen and twenty-six weeks ended AugustMay 4, 20182019 and July 29, 2017May 5, 2018 on the Condensed Consolidated Statements of Operations and Comprehensive Loss were as follows:
| | | (in thousands) | | Thirteen Weeks Ended | | Twenty-six Weeks Ended | | Thirteen Weeks Ended |
| Derivatives not designated as hedging instruments: | Location | | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | Location | | May 4, 2019 | | May 5, 2018 |
| Foreign currency exchange forward contracts gain (loss) | Other operating income, net | | $ | 1,894 |
| | $ | (523 | ) | | $ | 4,595 |
| | $ | (551 | ) | |
| Foreign currency exchange forward contracts gain | | Other operating income, net | | $ | 275 |
| | $ | 2,702 |
|
| | | | Effective Portion | | Ineffective Portion and Amount Excluded from Effectiveness Testing | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in AOCL on Derivative Contracts (1) | | Location of Gain (Loss) Reclassified from AOCL into Earnings | | Amount of Gain (Loss) Reclassified from AOCL into Earnings (2) | | Location of Gain Recognized in Earnings on Derivative Contracts | | Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (3) | Gain Recognized in AOCL on Derivative Contracts(1) | | Location | | Gain (Loss) Reclassified from AOCL into Earnings (2) |
| | Thirteen Weeks Ended | Thirteen Weeks Ended |
| (in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 | | May 4, 2019 | | May 5, 2018 |
| Derivatives in cash flow hedging relationships: | Derivatives in cash flow hedging relationships: | | | | | | | | | Derivatives in cash flow hedging relationships: | | | | |
| Foreign currency exchange forward contracts | $ | 8,058 |
| | $ | (11,029 | ) | | Cost of sales, exclusive of depreciation and amortization | | $ | (150 | ) | | $ | 545 |
| | Other operating income, net | | $ | 1,686 |
| | $ | 634 |
| $ | 2,263 |
| | $ | 8,607 |
| | Cost of sales, exclusive of depreciation and amortization | | $ | 2,541 |
| | $ | (5,072 | ) |
| | | | | | | | | | | | | |
| | Twenty-six Weeks Ended | |
| (in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | |
| Derivatives in cash flow hedging relationships: | | | | | | | | | |
| Foreign currency exchange forward contracts | $ | 16,665 |
| | $ | (12,402 | ) | | Cost of sales, exclusive of depreciation and amortization | | $ | (5,222 | ) | | $ | 4,081 |
| | Other operating income, net | | $ | 3,055 |
| | $ | 1,161 |
| |
| |
(1) | The amount represents the change in fair value of derivative contracts due to changes in spot rates.contracts. |
| |
(2) | The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is soldconverted to the Company’s customers. |
| |
(3)
| The amount represents the change in fair valuecost of derivative contracts due to changes in the difference between the spot pricesales, exclusive of deprecation and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.amortization. |
Substantially all of the unrealized gains or losses related to designated cash flow hedges as of May 4, 2019 will be recognized in cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months.
18
9.11. ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended AugustMay 4, 20182019 was as follows:
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended August 4, 2018 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
| Beginning balance at May 5, 2018 | $ | (93,286 | ) | | $ | 2,153 |
| | $ | (91,133 | ) |
| Other comprehensive (loss) income before reclassifications | (11,206 | ) | | 8,058 |
| | (3,148 | ) |
Reclassified from accumulated other comprehensive loss (1) | — |
| | 150 |
| | 150 |
|
| Tax effect | — |
| | (761 | ) | | (761 | ) |
| Other comprehensive (loss) income | (11,206 | ) | | 7,447 |
| | (3,759 | ) |
| Ending balance at August 4, 2018 | $ | (104,492 | ) | | $ | 9,600 |
| | $ | (94,892 | ) |
| | | | Twenty-six Weeks Ended August 4, 2018 | Thirteen Weeks Ended May 4, 2019 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
| Beginning balance at February 3, 2018 | $ | (84,947 | ) | | $ | (10,107 | ) | | $ | (95,054 | ) | |
| Beginning balance at February 2, 2019 | | $ | (104,887 | ) | | $ | 2,435 |
| | $ | (102,452 | ) |
| Other comprehensive (loss) income before reclassifications | (19,545 | ) | | 16,665 |
| | (2,880 | ) | (2,786 | ) | | 2,263 |
| | (523 | ) |
Reclassified from accumulated other comprehensive loss (1) | — |
| | 5,222 |
| | 5,222 |
| — |
| | (2,541 | ) | | (2,541 | ) |
| Tax effect | — |
| | (2,180 | ) | | (2,180 | ) | — |
| | 225 |
| | 225 |
|
| Other comprehensive (loss) income | (19,545 | ) | | 19,707 |
| | 162 |
| |
| Ending balance at August 4, 2018 | $ | (104,492 | ) | | $ | 9,600 |
| | $ | (94,892 | ) | |
| Other comprehensive loss | | (2,786 | ) | | (53 | ) | | (2,839 | ) |
| Ending balance at May 4, 2019 | | $ | (107,673 | ) | | $ | 2,382 |
| | $ | (105,291 | ) |
| |
(1) | Amount represents lossesgain reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statement of Operations and Comprehensive Loss. |
The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended July 29, 2017May 5, 2018 was as follows:
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended July 29, 2017 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
| Beginning balance at April 29, 2017 | $ | (120,520 | ) | | $ | 225 |
| | $ | (120,295 | ) |
| Other comprehensive (loss) income before reclassifications | 19,072 |
| | (11,029 | ) | | 8,043 |
|
Reclassified from accumulated other comprehensive loss (2) | — |
| | (545 | ) | | (545 | ) |
| Tax effect | — |
| | 1,426 |
| | 1,426 |
|
| Other comprehensive (loss) income | 19,072 |
| | (10,148 | ) | | 8,924 |
|
| Ending balance at July 29, 2017 | $ | (101,448 | ) | | $ | (9,923 | ) | | $ | (111,371 | ) |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended July 29, 2017 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
Beginning balance at January 28, 2017
| $ | (126,127 | ) | | $ | 4,825 |
| | $ | (121,302 | ) |
| Other comprehensive income before reclassifications | 24,679 |
| | (12,402 | ) | | 12,277 |
|
Reclassified from accumulated other comprehensive loss (2) | — |
| | (4,081 | ) | | (4,081 | ) |
| Tax effect | — |
| | 1,735 |
| | 1,735 |
|
| Other comprehensive income | 24,679 |
| | (14,748 | ) | | 9,931 |
|
| Ending balance at July 29, 2017 | $ | (101,448 | ) | | $ | (9,923 | ) | | $ | (111,371 | ) |
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended May 5, 2018 |
| (in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
| Beginning balance at February 3, 2018 | $ | (84,947 | ) | | $ | (10,107 | ) | | $ | (95,054 | ) |
| Other comprehensive (loss) income before reclassifications | (8,339 | ) | | 8,607 |
| | 268 |
|
Reclassified from accumulated other comprehensive loss (1) | — |
| | 5,072 |
| | 5,072 |
|
| Tax effect | — |
| | (1,419 | ) | | (1,419 | ) |
| Other comprehensive (loss) income | (8,339 | ) | | 12,260 |
| | 3,921 |
|
| Ending balance at May 5, 2018 | $ | (93,286 | ) | | $ | 2,153 |
| | $ | (91,133 | ) |
| |
(2)(1)
| Amount represents gainsloss reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statement of Operations and Comprehensive Loss. |
10.12. SEGMENT REPORTING
The Company’s two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective areas.operating segment and geographic area.
The following table provides the Company’s net sales by operating segment for the thirteen and twenty-six weeks ended AugustMay 4, 20182019 and July 29, 2017.May 5, 2018.
| | | | Thirteen Weeks Ended | | Twenty-six Weeks Ended | Thirteen Weeks Ended |
| (in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
| Hollister | $ | 500,836 |
| | $ | 446,639 |
| | $ | 924,464 |
| | $ | 821,315 |
| $ | 428,448 |
| | $ | 423,628 |
|
| Abercrombie | 341,578 |
| | 332,682 |
| | 648,849 |
| | 619,105 |
| 305,524 |
| | 307,271 |
|
| Total | $ | 842,414 |
| | $ | 779,321 |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
| $ | 733,972 |
| | $ | 730,899 |
|
The following table provides the Company’s net sales by geographic area for the thirteen and twenty-six weeks ended AugustMay 4, 20182019 and July 29, 2017.May 5, 2018.
| | | | Thirteen Weeks Ended | | Twenty-six Weeks Ended | Thirteen Weeks Ended |
| (in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
| United States | $ | 531,446 |
| | $ | 470,280 |
| | $ | 980,572 |
| | $ | 879,347 |
| $ | 469,658 |
| | $ | 449,126 |
|
| Europe | 192,354 |
| | 195,895 |
| | 362,014 |
| | 350,880 |
| 158,245 |
| | 169,660 |
|
| Other | 118,614 |
| | 113,146 |
| | 230,727 |
| | 210,193 |
| 106,069 |
| | 112,113 |
|
| Total | $ | 842,414 |
| | $ | 779,321 |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
| $ | 733,972 |
| | $ | 730,899 |
|
13. SUBSEQUENT EVENTS
11. CONTINGENCIESOn May 22, 2019, the Company determined that it will be ceasing operations of its SoHo Hollister flagship store in New York City, and expects to close this store in the second quarter of Fiscal 2019. In addition, on May 28, 2019, the Company exercised an option to terminate its Fukuoka, Japan A&F flagship store lease, and expects to close this store in the second half of Fiscal 2020. These actions represent important ongoing steps in the Company’s global store network optimization efforts as it continues to pivot away from large format stores to smaller, omnichannel focused brand experiences.
As a result of these store closures, the Company expects to incur pre-tax net lease-related charges of $45 million during the second quarter of Fiscal 2019, primarily related to the present value of future lease payments associated with these stores that will be due subsequent to their closure. The Company expects future lease payments associated with these stores of approximately $105 million, which are expected to be paid subsequent to the dates of the respective actions through the fiscal year ending January 30, 2029 (“Fiscal 2028”). These future lease payments are not expected to exceed $15 million in any fiscal year.
The estimated amounts for the charges and future cash expenditures described above are preliminary and are dependent on the Company is a defendant in lawsuits and other adversary proceedings arising infulfilling certain obligations required pursuant to the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred,related lease agreements. Actual amounts may be materially different from these estimates and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery ofmay also incur additional facts. As of August 4, 2018, the Company had accrued charges for legal contingencies, including the certain legal matters detailed below, of approximately $23 million, which are classified within accrued expenses on the accompanying Condensed Consolidated Balance Sheet. The estimated liability represents what the Company believes to be reasonable estimates of the loss exposures related to its legal matters. Actual liabilities may differ from the amounts recorded,or future cash expenditures not currently contemplated due to uncertainties regarding final settlement agreement negotiations, actual claims rate experience, court approvals and the termsevents that may occur as a result of, any approval by the courts, and there can be no assuranceor that final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company may be subject to estimated incremental losses of as much as approximately $20 million. There are certain claims and legal proceedings pending against the Company for which accruals have not been established.
Certain Legal Matters
The Company is a defendant in two separate class action lawsuits filed by former associates of the Company who are represented by the same counsel. The first lawsuit, filed in 2013, alleges failure to indemnify business expenses and a series of derivative claims for compelled patronization, inaccurate wage statements, waiting time penalties, minimum wage violations and unfair competition under California state law on behalf of all non-exempt hourly associates at Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks stores in California. Four subclasses of associates were certified, and the matter was before a U.S. District Court of California. The second lawsuit, filed in 2015, alleges that associates were required to purchase uniforms without reimbursement in violation of federal law, and laws of the states of New York, Florida and Massachusetts, as well as derivative putative state law claims and seeks to pursue such claims on a class and collective basis. On December 12, 2017, a U.S. District Court of California granted the parties’ stipulation to transfer the first lawsuit pending and combine itassociated with, the second lawsuit then pending before a U.S. District Court of Ohio.
Both matters were mediated and the parties signed a $25.0 million claims-made settlement agreement which, subject to final approval by a U.S. District Court of Ohio, is intended to result in a full and final settlement of all claims in both lawsuits on a class-wide basis. On February 16, 2018, a U.S. District Court of Ohio granted preliminary approval of the proposed settlement and ordered that notice of the proposed settlement be given to the absent members of the settlement class. The ultimate settlement amount is dependent upon the actual claims made by members of the class and is also subject to final approval by the U.S. District Court of Ohio and could be subject to appeal by class members. A final approval hearing is set to occur in the third quarter of Fiscal 2018.
In addition to the matters discussed above, the Company is a defendant in certain other class action lawsuits filed by former associates of the Company. These lawsuits, currently assigned to the same judge in a U.S. District Court of California, allege non-exempt hourly associates of the Company were not properly compensated, in violation of federal and California law, for call-in practices requiring associates to engage in certain pre-shift activities in order to determine whether they should report to work and the Company’s alleged failure to pay reporting time pay and all wages earned at termination. In addition, these lawsuits include derivative claims alleging inaccurate wage statements and unfair competition under California state law on behalf of non-exempt hourly associates. One of these lawsuits was mediated and the parties involved have signed a $9.6 million settlement agreement, and on August 13, 2018, a U.S. District Court of California granted preliminary approval of the proposed settlement. The ultimate settlement is subject to final approval by the U.S. District Court of California and could be subject to appeal from class members, objection from class members or revocation of the settlement agreement under certain circumstances. A final approval hearing is set to occur in the fourth quarter of Fiscal 2018.
There can be no absolute assurance that settlements will be finalized or approved or of the ultimate outcomes of the litigations.store closures.
| |
| 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 unaudited Condensed Consolidated Financial Statements and notes thereto, which are included in this Quarterly Report on Form 10-Q in “ITEM 1. FINANCIAL STATEMENTS.”
INTRODUCTION
BUSINESS SUMMARY
The CompanyMD&A is provided as a global, multi-brand, specialty retailer, which primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids undersupplement to the Hollister, Abercrombie & Fitch and abercrombie kids brands. The Company has operations in North America, Europe, Asia and the Middle East.
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statementsaccompanying Condensed Consolidated Financial Statements and notes by the calendar year in which the fiscal year commences. All references hereinthereto to “Fiscal 2018” represent the fifty-two-week fiscal year ending on February 2, 2019, and to “Fiscal 2017” represent the fifty-three-week fiscal year that ended February 3, 2018.
Due to the seasonal naturehelp provide an understanding of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.
SUMMARY RESULTS OF OPERATIONS
The table below summarizes the Company’s results of operations, financial condition, and reconciles financial measures determined in accordance with accounting principles generally accepted in the U.S. (“GAAP”) to non-GAAP financial measures for the thirteen and twenty-six week periods ended August 4, 2018 and July 29, 2017. Additional discussion about why the Company believes that these non-GAAP financial measures are useful to investorsliquidity. MD&A is provided below under “NON-GAAP FINANCIAL MEASURES.”
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | August 4, 2018 | | July 29, 2017 |
| (in thousands, except change in comparable sales, gross profit rate and per share amounts) | | GAAP | | Excluded Items (1) | | Non-GAAP | | GAAP | | Excluded Items (1) | | Non-GAAP |
| Thirteen Weeks Ended | | | | | | | | | | | | |
| Net sales | | $ | 842,414 |
| | $ | — |
| | $ | 842,414 |
| | $ | 779,321 |
| | $ | — |
| | $ | 779,321 |
|
| Change in net sales | | 8 | % | | | | | | | | | | |
Change in comparable sales (2) | | | | | | 3 | % | | | | | | (1 | )% |
| Gross profit rate | | 60.2 | % | | — | % | | 60.2 | % | | 59.1 | % | | — | % | | 59.1 | % |
| Operating income (loss) | | $ | 223 |
| | $ | (8,671 | ) | | $ | 8,894 |
| | $ | (21,089 | ) | | $ | (6,135 | ) | | $ | (14,954 | ) |
| Net (loss) income attributable to A&F | | $ | (3,853 | ) | | $ | (8,024 | ) | | $ | 4,171 |
| | $ | (15,491 | ) | | $ | (4,525 | ) | | $ | (10,966 | ) |
| Net (loss) income per diluted share attributable to A&F | | $ | (0.06 | ) | | $ | (0.12 | ) | | $ | 0.06 |
| | $ | (0.23 | ) | | $ | (0.07 | ) | | $ | (0.16 | ) |
| | | | | | | | | | | | | |
| Twenty-six Weeks Ended | | | | | | | | | | | | |
| Net sales | | $ | 1,573,313 |
| | $ | — |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
| | $ | — |
| | $ | 1,440,420 |
|
| Change in net sales | | 9 | % | | | | | | | | | | |
Change in comparable sales (2) | | | | | | 4 | % | | | | | | (2 | )% |
| Gross profit rate | | 60.3 | % | | — | % | | 60.3 | % | | 59.7 | % | | — | % | | 59.7 | % |
| Operating loss | | $ | (41,980 | ) | | $ | (14,271 | ) | | $ | (27,709 | ) | | $ | (91,030 | ) | | $ | (6,135 | ) | | $ | (84,895 | ) |
| Net loss attributable to A&F | | $ | (46,314 | ) | | $ | (12,083 | ) | | $ | (34,231 | ) | | $ | (77,191 | ) | | $ | (4,525 | ) | | $ | (72,666 | ) |
| Net loss per diluted share attributable to A&F | | $ | (0.68 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) | | $ | (1.13 | ) | | $ | (0.07 | ) | | $ | (1.06 | ) |
| |
(1)
• | OverviewRefer to. “RESULTS OF OPERATIONS” for details on excluded items.This section provides a general description of the Company’s business and certain segment information. |
| |
(2)
• | Current Trends and OutlookComparable sales are calculated on. This section provides a constant currency basis. Due tosummary of the calendar shift resulting from the 53rd week in Fiscal 2017, comparable salesCompany’s performance for the thirteen weeks ended AugustMay 4, 2018 are2019 and May 5, 2018. In addition, this section discusses certain of management’s expectations for the upcoming fiscal year. |
| |
| • | Results of Operations. This section provides an analysis of certain components of the Company’s Consolidated Statements of Operations and Comprehensive Lossfor the thirteen weeks ended May 4, 2019 and May 5, 2018. |
| |
| • | Liquidity and Capital Resources. This section provides a discussion of the Company’s financial condition and liquidity as of May 4, 2019, which includes (i) an analysis of financial condition as compared to February 2, 2019; (ii) an analysis of changes in cash flows for the thirteen weeks ended May 4, 2019 as compared to the thirteen weeks ended AugustMay 5, 2017. Refer to2018; (iii) and an analysis of liquidity, including the discussion below in “NON-GAAP FINANCIAL MEASURES” for further details on the comparable sales calculation.availability under credit facilities, payments of dividends, and outstanding debt and covenant compliance. |
As of August 4, 2018, the Company had $581.2 million in cash and equivalents, and $253.3 million in gross borrowings outstanding under the Term Loan Facility. Net cash provided by operating activities was $50.5 million for the twenty-six weeks ended August 4, 2018. The Company also used cash of $43.7 million to repurchase approximately 1.7 million shares of A&F’s Common Stock in the open market, $54.1 million for capital expenditures and $27.2 million to pay dividends during the twenty-six weeks ended August 4, 2018.
As of July 29, 2017, the Company had $421.9 million in cash and equivalents, and $268.3 million in gross borrowings outstanding under the Term Loan Facility. Net cash used for operating activities was $48.0 million for the twenty-six weeks ended July 29, 2017. The Company also used cash of $61.8 million for capital expenditures and $27.2 million to pay dividends during the twenty-six weeks ended July 29, 2017.
STORE ACTIVITY
Store count and gross square footage by brand and geography for the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively, were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Hollister (1) | | Abercrombie (2) | | Total |
| | United States | | International | | United States | | International | | United States | | International |
| February 3, 2018 | 394 |
| | 144 |
| | 285 |
| | 45 |
| | 679 |
| | 189 |
|
| New | 2 |
| | — |
| | 1 |
| | 2 |
| | 3 |
| | 2 |
|
| Closed | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | — |
|
| August 4, 2018 | 396 |
| | 144 |
| | 283 |
| | 47 |
| | 679 |
| | 191 |
|
| Gross square footage (in thousands): | | | | | | | | | | | |
| August 4, 2018 | 2,685 |
| | 1,196 |
| | 2,182 |
| | 631 |
| | 4,867 |
| | 1,827 |
|
| | | | | | | | | | | | |
| | Hollister (1) | | Abercrombie (2) | | Total |
| | United States | | International | | United States | | International | | United States | | International |
| January 28, 2017 | 398 |
| | 145 |
| | 311 |
| | 44 |
| | 709 |
| | 189 |
|
| New | 1 |
| | — |
| | 2 |
| | — |
| | 3 |
| | — |
|
| Closed | (2 | ) | | — |
| | (7 | ) | | (1 | ) | | (9 | ) | | (1 | ) |
| July 29, 2017 | 397 |
| | 145 |
| | 306 |
| | 43 |
| | 703 |
| | 188 |
|
Gross square footage (in thousands): | | | | | | | | | | | |
| July 29, 2017 | 2,706 |
| | 1,216 |
| | 2,376 |
| | 610 |
| | 5,082 |
| | 1,826 |
|
| |
(1)
• | Recent Accounting PronouncementsExcludes. seven international franchise stores asThe recent accounting pronouncements the Company has adopted including the dates of August 4, 2018, five international franchise stores as of each of February 3, 2018adoption and July 29, 2017, and three international franchise stores as of January 28, 2017.anticipated effects on the Company’s unaudited Condensed Consolidated Financial Statements are included in this Quarterly Report on Form 10-Q in “ITEM 1. FINANCIAL STATEMENTS.” |
| |
(2)
| Includes Abercrombie & Fitch and abercrombie kids brands. Excludes six international franchise stores as of August 4, 2018, four international franchise stores as of February 3, 2018, three international franchise stores as of July 29, 2017 and one international franchise store as of January 28, 2017.
|
CURRENT TRENDS AND OUTLOOK
We are pleased with our second quarter performance, which capped off a strong first half of the year and demonstrated further progress our strategic transformation. During the second quarter, we delivered both top and bottom line growth, while continuing to invest in our key transformation initiatives. As previously discussed, these initiatives are focused on the following four pillars:
optimizing our global store network;
enhancing our digital commerce fulfillment and omnichannel capabilities;
streamlining our end-to-end concept to customer processes; and
optimizing our marketing investments, including leveraging our growing loyalty programs.
Our second quarter results reflect another quarter of improved profitability fueled by sales growth across both brands, gross profit expansion and operating expense leverage as we continue to execute our playbooks. Hollister continued its momentum with another quarter of strong sales performance and Abercrombie posted its third consecutive quarter of positive sales growth, both led by strength in the United States.
Our customers remain at the center of all we do, and that singular focus continues to improve brand health metrics and drive our brands forward. We remain on track to achieve our Fiscal 2018 expectations and our longer term Fiscal 2020 targets, as we work towards our objective of being a leading global omnichannel retailer.
For Fiscal 2018, we expect:
Comparable sales to be up in the range of 2% to 4%.
Net sales to be up in the range of 2% to 4%, with net sales in the third quarter to be approximately flat to last year, including the adverse effects from the calendar shift and changes in foreign currency exchange rates.
| |
– | The calendar shift and the loss of Fiscal 2017’s 53rd week to adversely impact net sales by approximately $40 million, with benefits to first quarter and second quarter net sales of approximately $10 million and $30 million, respectively, to be more than offset by adverse impacts to third quarter and fourth quarter net sales of approximately $20 million and $60 million, respectively
|
A gross profit rate up slightly from the Fiscal 2017 rate of 59.7%.
GAAP operating expense to now be up approximately 2.5% from Fiscal 2017 adjusted operating expense of $2 billion, including approximately $14 million of charges related to asset impairment and certain legal matters that are excluded from adjusted non-GAAP operating expense. For the third quarter of Fiscal 2018, GAAP operating expense is expected to be up in the range of 2% to 3% from Fiscal 2017 adjusted non-GAAP operating expense of $489 million.
A weighted average fully-diluted share count of approximately 69 million shares, excluding the effect of potential share buybacks.
In addition, we expect to end the third quarter of Fiscal 2018 with inventories to be up low- to mid-single digits in advance of the peak holiday selling periods.
For Fiscal 2018, the Company now expects the full year effective tax rate to be in the mid-to-upper 30s, including discrete non-cash income tax charges of approximately $9 million related to the expiration of certain share-based compensation awards, of which approximately $8 million has been recognized to date. The full year effective tax rate also includes discrete tax charges of $2 million, which are excluded from adjusted non-GAAP results, adjusting the Tax Cuts and Jobs Act of 2017 provisional estimate. For the third quarter of Fiscal 2018, the Company expects the effective tax rate to be in the mid 30s.
With regard to capital allocation, we continue to target capital expenditures to be in the range of $135 million to $140 million for the full year.
We plan to open 22 full-price stores in Fiscal 2018, including 13 Hollister and nine Abercrombie stores. In addition, we expect to remodel or right-size close to 50 stores to the new prototype formats. We also anticipate closing up to 60 stores primarily in the U.S. during Fiscal 2018 through natural lease expirations, with the the final number being dependent on lease negotiations and business outcomes.
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is useful to investors as it provides a measure of the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, and therefore supplements investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used 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.
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. 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 for Fiscal 2018 is calculated using a 27% effective tax rate.
Comparable Sales
In addition, the Company provides comparable sales, defined as the aggregate of (1) year-over-year 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) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales excludes revenue other than store and direct-to-consumer sales. Due to the calendar shift in Fiscal 2018, resulting from the 53rd week in Fiscal 2017, comparable sales for the Fiscal 2018 quarterly periods ended May 5, 2018, August 4, 2018, November 3, 2018 and February 2, 2019 are to be compared to the thirteen weeks ended May 6, 2017, August 5, 2017, November 4, 2017 and February 3, 2018, respectively. Management uses comparable sales to understand the drivers of net sales year-over-year changes as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.
Calendar Shift Impact on Net Sales
The impact on net sales from the calendar shift, resulting from the loss of Fiscal 2017’s 53rd week, is calculated as the difference between net sales for the thirteen weeks ended May 6, 2017, August 5, 2017, November 4, 2017 and February 3, 2018 and reported net sales for the fiscal quarters ended April 29, 2017, July 29, 2017, October 28, 2017 and February 3, 2018, respectively. The impact on net sales from the calendar shift, resulting from the loss of Fiscal 2017’s 53rd week for the year-to-date period ended August 4, 2018 is calculated as the difference between the twenty-six weeks ended August 5, 2017 and reported net sales for the year-to-date period ended July 29, 2017.
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 |
Marketing, general and administrative expense | | Certain legal charges |
Operating income (loss) | | Asset impairment; certain legal charges |
Net (loss) income and net (loss) income per share attributable to A&F (2)
| | Asset impairment; certain legal charges; discrete net tax charges related to the Act; and the tax effect of excluded items |
| |
(1)
| Certain of these financial measures are also expressed as a percentage of net sales. |
RESULTS OF OPERATIONS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 4, 2018 VERSUS JULY 29, 2017
Net Sales
|
| | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | | | |
| | August 4, 2018 | | July 29, 2017 | | | | | | |
| (in thousands) | Net Sales | | Net Sales | | $ Change | | % Change | | Change in Comparable Sales (1) |
| Hollister | $ | 500,836 |
| | $ | 446,639 |
| | $ | 54,197 |
| | 12% | | 4% |
Abercrombie (2) | 341,578 |
| | 332,682 |
| | 8,896 |
| | 3% | | 2% |
| Total net sales | $ | 842,414 |
| | $ | 779,321 |
| | $ | 63,093 |
| | 8% | | 3% |
| | | | | | | | | | |
| United States | $ | 531,446 |
| | $ | 470,280 |
| | $ | 61,166 |
| | 13% | | 7% |
| International | 310,968 |
| | 309,041 |
| | 1,927 |
| | 1% | | (4)% |
| Total net sales | $ | 842,414 |
| | $ | 779,321 |
| | $ | 63,093 |
| | 8% | | 3% |
|
| | | | | | | | | | | | | | | |
| | Twenty-six Weeks Ended | | | | | | |
| | August 4, 2018 | | July 29, 2017 | | | | | | |
| (in thousands) | Net Sales | | Net Sales | | $ Change | | % Change | | Change in Comparable Sales (1) |
| Hollister | $ | 924,464 |
| | $ | 821,315 |
| | $ | 103,149 |
| | 13% | | 5% |
Abercrombie (2) | 648,849 |
| | 619,105 |
| | 29,744 |
| | 5% | | 2% |
| Total net sales | $ | 1,573,313 |
| | $ | 1,440,420 |
| | $ | 132,893 |
| | 9% | | 4% |
| | | | | | | | | | |
| United States | $ | 980,572 |
| | $ | 879,347 |
| | $ | 101,225 |
| | 12% | | 7% |
| International | 592,741 |
| | 561,073 |
| | 31,668 |
| | 6% | | (2)% |
| Total net sales | $ | 1,573,313 |
| | $ | 1,440,420 |
| | $ | 132,893 |
| | 9% | | 4% |
| |
(1)
• | Non-GAAP Financial MeasuresComparable sales. This section provides a discussion of certain financial measures provided with MD&A that have been determined to not be in accordance with accounting principles generally accepted in the U.S. (“GAAP”), including information on why the Company believes the non-GAAP financial measures provided within MD&A are calculated on a constant currency basis. Dueuseful to the calendar shift resulting from the 53rd week in Fiscal 2017, comparable sales for the thirteen weeks ended August 4, 2018 are compared to the thirteen weeks ended August 5, 2017. Comparable sales for the twenty-six weeks ended August 4, 2018 are compared to the twenty-six weeks ended August 5, 2017. Refer to “NON-GAAP FINANCIAL MEASURES” in “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” for further details on the comparable sales calculation. |
| |
(2)
| Includes Abercrombie & Fitch and abercrombie kids brands. |
For the second quarter of Fiscal 2018, net sales increased 8% as compared to the second quarter of Fiscal 2017, primarily attributable to an increase in units sold, partially offset by lower average unit retail driven by product mix. Changes in foreign currency exchange rates benefited net sales by approximately $8 million, or 1%. The calendar shift resulting from Fiscal 2017’s 53rd week benefited net sales by approximately $30 million, or 4%. Comparable sales, which do not include impacts from changes in foreign currency exchange rates or the calendar shift, increased 3%, with a 4% increase in comparable sales for Hollister and a 2% increase in comparable sales for Abercrombie.
For the year-to-date period of Fiscal 2018, net sales increased 9% as compared to the year-to-date period of Fiscal 2017, primarily attributable to an increase in units sold and slightly higher average unit retail driven by benefits from changes in foreign currency exchange rates. Changes in foreign currency exchange rates benefited net sales by approximately of approximately $33 million, or 2%. The calendar shift resulting from Fiscal 2017’s 53rd week benefited net sales by approximately $40 million, or 3%. Comparable sales, which do not include impacts from changes in foreign currency exchange rates or the calendar shift, increased 4%, with a 5% increase in comparable sales for Hollister and a 2% increase in comparable sales for Abercrombie.
Cost of Sales, Exclusive of Depreciation and Amortization
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Cost of sales, exclusive of depreciation and amortization | $ | 335,519 |
| | 39.8% | | $ | 318,426 |
| | 40.9% |
| | | | | | | | |
| Gross profit | $ | 506,895 |
| | 60.2% | | $ | 460,895 |
| | 59.1% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Cost of sales, exclusive of depreciation and amortization | $ | 624,073 |
| | 39.7% | | $ | 580,600 |
| | 40.3% |
| | | | | | | | |
| Gross profit | $ | 949,240 |
| | 60.3% | | $ | 859,820 |
| | 59.7% |
For the second quarter of Fiscal 2018, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 110 basis points as compared to the second quarter of Fiscal 2017, primarily due to lower costs.
For the year-to-date period of Fiscal 2018, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 60 basis points as compared to the year-to-date period of Fiscal 2017, primarily due to lower costs.
Stores and Distribution Expense
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Stores and distribution expense | $ | 374,552 |
| | 44.5% | | $ | 369,295 |
| | 47.4% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Stores and distribution expense | $ | 735,707 |
| | 46.8% | | $ | 729,224 |
| | 50.6% |
For the second quarter of Fiscal 2018, stores and distribution expense as a percentage of net sales decreased by approximately 290 basis points as compared to the second quarter of Fiscal 2017, primarily due to the leveraging effect from higher net sales and expense reduction efforts, partially offset by higher direct-to-consumer expense. For the second quarter of Fiscal 2018, store occupancy expense, including rent, depreciation, utilities and other store expenses, as a percentage of net sales decreased by approximately 230 basis points as compared to the second quarter of Fiscal 2017.
For the year-to-date period of Fiscal 2018, stores and distribution expense as a percentage of net sales decreased by approximately 380 basis points as compared to the year-to-date period of Fiscal 2017, primarily due to the leveraging effect from higher net sales and expense reductions, partially offset by higher direct-to-consumer expense and $3.9 million of lease termination charges related to the A&F flagship store lease in Copenhagen. For the year-to-date period of Fiscal 2018, store occupancy expense as a percentage of net sales decreased by approximately 260 basis points as compared to the year-to-date period of Fiscal 2017.
Marketing, General and Administrative Expense
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Marketing, general and administrative expense | $ | 123,883 |
| | 14.7% | | $ | 109,353 |
| | 14.0% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Marketing, general and administrative expense | $ | 248,780 |
| | 15.8% | | $ | 219,246 |
| | 15.2% |
| Deduct: | | | | | | | |
Certain legal charges (1) | (5,600 | ) | | (0.4)% | | — |
| | 0.0% |
| Adjusted non-GAAP marketing, general and administrative expense | $ | 243,180 |
| | 15.5% | | $ | 219,246 |
| | 15.2% |
| |
(1)
| Includes legal charges in connection with the proposed settlement of a class action claim, subject to final court approval, related to alleged wage and hour practices. See Note 11, “CONTINGENCIES.”investors. |
For the second quarter of Fiscal 2018, marketing, general and administrative expense as a percentage of net sales increased by approximately 70 basis points as compared to the second quarter of Fiscal 2017, primarily due to increases in marketing, performance-based compensation and expenses related to the transformation of our business that more than offset the leveraging effect from increased net sales and expense reduction efforts.
For the year-to-date period of Fiscal 2018, marketing, general and administrative expense as a percentage of net sales increased by approximately 60 basis points as compared to the year-to-date period of Fiscal 2017, primarily due to increases in marketing, performance-based compensation, $5.6 million of certain legal charges and expenses related to the transformation of our business that more than offset the leveraging effect from increased net sales and expense reduction efforts. Excluding $5.6 million of certain legal charges in Fiscal 2018, year-to-date Fiscal 2018 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales increased approximately 30 basis points as compared to the year-to-date period of Fiscal 2017.
Asset Impairment
The Company incurred store asset impairment charges of $8.7 million and $9.7 million for the second quarter and year-to-date period of Fiscal 2018, respectively, and $6.1 million and $6.9 million for the second quarter and year-to-date period of Fiscal 2017, respectively, primarily related to certain of the Company’s international Abercrombie & Fitch stores.
Other Operating Income, Net
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Other operating income, net | $ | 434 |
| | 0.1% | | $ | 2,799 |
| | 0.4% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Other operating income, net | $ | 2,994 |
| | 0.2% | | $ | 4,485 |
| | 0.3% |
For the second quarter and the year-to-date period of Fiscal 2018, other operating income, net as a percentage of net sales decreased by approximately 30 basis points and 10 basis points, respectively, as compared to the second quarter and year-to-date period of Fiscal 2017. These decreases were primarily due to lower foreign currency exchange rate related gains and a change in classification of gift card breakage which was previously recognized in other operating income, but beginning in Fiscal 2018 is recognized in net sales on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Operating Income (Loss)
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Operating income (loss) | $ | 223 |
| | 0.0% | | $ | (21,089 | ) | | (2.7)% |
| Deduct: | | | | | | | |
| Asset impairment | 8,671 |
| | 1.0% | | 6,135 |
| | 0.8% |
| Adjusted non-GAAP operating income (loss) | $ | 8,894 |
| | 1.1% | | $ | (14,954 | ) | | (1.9)% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Operating loss | $ | (41,980 | ) | | (2.7)% | | $ | (91,030 | ) | | (6.3)% |
| Deduct: | | | | | | | |
| Certain asset impairment | 8,671 |
| | 0.6% | | 6,135 |
| | 0.4% |
Certain legal charges (1) | 5,600 |
| | 0.4% | | — |
| | 0.0% |
| Adjusted non-GAAP operating loss | $ | (27,709 | ) | | (1.8)% | | $ | (84,895 | ) | | (5.9)% |
| |
(1)
| Includes legal charges in connection with the proposed settlement of a class action claim, subject to final court approval, related to alleged wage and hour practices. See Note 11, “CONTINGENCIES.” |
For the second quarter of Fiscal 2018, operating income was $0.2 million as compared to a loss of $21.1 million for the second quarter of Fiscal 2017. Excluding items presented above, second quarter of Fiscal 2018 adjusted non-GAAP operating income was $8.9 million, as compared to adjusted non-GAAP operating loss of $15.0 million for the second quarter of Fiscal 2017. Changes in foreign currency exchange rates benefited operating income (loss) by approximately $1 million.
For the year-to-date period of Fiscal 2018, operating loss was $42.0 million as compared to a loss of $91.0 million for the year-to-date period of Fiscal 2017. Excluding items presented above, year-to-date Fiscal 2018 adjusted non-GAAP operating loss was $27.7 million as compared to adjusted non-GAAP operating loss of $84.9 million for the year-to-date period of Fiscal 2017. Changes in foreign currency exchange rates benefited operating loss by approximately $4 million.
Interest Expense, Net
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Interest expense | $ | 5,695 |
| | 0.7% | | $ | 5,334 |
| | 0.7% |
| Interest income | (2,672 | ) | | (0.3)% | | (1,245 | ) | | (0.2)% |
| Interest expense, net | $ | 3,023 |
| | 0.4% | | $ | 4,089 |
| | 0.5% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Interest expense | $ | 11,357 |
| | 0.8% | | $ | 10,667 |
| | 0.7% |
| Interest income | (5,316 | ) | | (0.4)% | | (2,458 | ) | | (0.2)% |
| Interest expense, net | $ | 6,041 |
| | 0.4% | | $ | 8,209 |
| | 0.6% |
Interest expense, net primarily consists of interest expense on borrowings outstandingSafe harbor statement under the Company’s Term Loan Facility, partially offset by realized gains from the trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”) and interest income earned on the Company’s investments and cash holdings.
For the second quarter and the year-to-date periodPrivate Securities Litigation Reform Act of Fiscal 2018, interest expense, net as a percentage of net sales decreased by as compared to the second quarter and year-to-date period of Fiscal 2017 by approximately 10 basis points and 20 basis points, respectively, primarily due to higher interest income earned on the Company’s investments and cash holdings.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
| Income tax expense (benefit) | $ | 24 |
| | (0.9)% | | $ | (10,563 | ) | | 42.0% |
| Deduct: | | | | | | | |
Tax effect of excluded items (1) | (1,395 | ) | |
|
| 1,610 |
| | |
Tax Cuts and Jobs Act of 2017 charges (2) | 2,042 |
| | | | — |
| | |
| Adjusted non-GAAP income tax expense (benefit) | $ | 671 |
| | 11.4% | | $ | (8,953 | ) | | 47.0% |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
| Income tax benefit | $ | (3,689 | ) | | 7.7% | | $ | (23,615 | ) | | 23.8% |
| Deduct: | | | | | | | |
Tax effect of excluded items (1) | 146 |
| | | | 1,610 |
| | |
Tax Cuts and Jobs Act of 2017 charges (2) | 2,042 |
| | | | — |
| | |
| Adjusted non-GAAP income tax benefit | $ | (1,501 | ) | | 4.4% | | $ | (22,005 | ) | | 23.6% |
| |
(1)
| Refer to “Operating Income (Loss)” for details of excluded items. 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.
|
| |
(2)
| Discrete tax charges related to the Act. See Note 5, “INCOME TAXES,” for further discussion. |
For the second quarter of Fiscal 2018, the effective tax rate was -0.9% as compared to 42.0% for the second quarter of Fiscal 2017. In the second quarter of Fiscal 2018, the effective tax rate was impacted by discrete income tax charges of $2.0 million related to the provisional estimate of the Act. Excluding items presented above in the table under “Operating Income (Loss),” and charges related to the Act, the second quarter Fiscal 2018 adjusted non-GAAP effective tax rate was 11.4% as compared to 47.0% for the second quarter of Fiscal 2017.
For the year-to-date period of Fiscal 2018, the effective tax rate was 7.7% as compared to 23.8% for the year-to-date period of Fiscal 2017. In both the Fiscal 2018 and Fiscal 2017 year-to-date period, the effective tax rate was impacted by discrete non-cash income tax charges related to the expiration of certain share-based compensation awards of $7.9 million and $9.9 million, respectively. In addition, for the year-to-date period of Fiscal 2018 the effective tax rate was also impacted by a discrete income tax charge of $2.0 million related to the provisional estimate of the Act. Excluding items presented above in the table under “Operating Income (Loss),” and charges related to the Act, the year-to-date Fiscal 2018 adjusted non-GAAP effective tax rate was 4.4% as compared to 23.6% for the year-to-date period of Fiscal 2017.
For the second quarter and the year-to-date period of Fiscal 2018, the year-over-year change in the effective tax rate, which is highly sensitive at lower levels of pre-tax earnings, was primarily driven by changes in the level and mix of consolidated pre-tax earnings between operating and valuation allowance jurisdictions and the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the enactment of the Act in the fourth quarter of Fiscal 2017.
Net Loss and Net Loss per Share Attributable to A&F
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Net loss attributable to A&F | $ | (3,853 | ) | | (0.5)% | | $ | (15,491 | ) | | (2.0)% |
Adjusted non-GAAP net income (loss) attributable to A&F (1) | $ | 4,171 |
| | 0.5% | | $ | (10,966 | ) | | (1.4)% |
| |
| | | |
| | |
| Net loss per diluted share attributable to A&F | $ | (0.06 | ) | |
| | $ | (0.23 | ) | |
|
Adjusted non-GAAP net income (loss) per diluted share attributable to A&F (1) | $ | 0.06 |
| | | | $ | (0.16 | ) | | |
|
| | | | | | | | | | | |
| | Twenty-six Weeks Ended |
| | August 4, 2018 | | July 29, 2017 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Net loss attributable to A&F | $ | (46,314 | ) | | (2.9)% | | $ | (77,191 | ) | | (5.4)% |
Adjusted non-GAAP net loss attributable to A&F (1) | $ | (34,231 | ) | | (2.2)% | | $ | (72,666 | ) | | (5.0)% |
| | | | | | | | |
| Net loss per diluted share attributable to A&F | $ | (0.68 | ) | | | | $ | (1.13 | ) | | |
Adjusted non-GAAP net loss per diluted share attributable to A&F (1) | $ | (0.50 | ) | | | | $ | (1.06 | ) | | |
| |
(1)
| Excludes items presented above under “Operating Income (Loss),” and “Income Tax Expense (Benefit).”
|
For the second quarter of Fiscal 2018, net loss per diluted share attributable to A&F was $0.06 as compared to a loss of $0.23 for the second quarter of Fiscal 2017. Excluding items presented above under “Operating Income (Loss),” and “Income Tax Expense (Benefit),” second quarter of Fiscal 2018 adjusted non-GAAP net income per diluted share attributable to A&F was $0.06, as compared to a loss of $0.16 last year. Changes in foreign currency exchange rates benefited net income (loss) per share attributable to A&F by approximately $0.01.
For the year-to-date period of Fiscal 2018, net loss per diluted share attributable to A&F was $0.68 as compared to a loss of $1.13 for the year-to-date period of Fiscal 2017. Excluding items presented above under “Operating Income (Loss),” and “Income Tax Expense (Benefit),” year-to-date Fiscal 2018 adjusted non-GAAP net loss per diluted share attributable to A&F was $0.50, as compared to a loss of $1.06 last year. Changes in foreign currency exchange rates benefited net loss per diluted share attributable to A&F by approximately $0.03.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL SOURCES AND USES OF CASH
Seasonality of Cash Flows
The Company’s business has two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during Fall due to Back-to-School and Back-to-Fall sales periods, for Hollister and Abercrombie, respectively, 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 a revolving credit facility available as a source of additional funding.
Credit Facilities
On August 7, 2014, A&F, through its subsidiary A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.
On October 19, 2017, the Company, through A&F Management, entered into the ABL Second Amendment, amending and extending the maturity date of the asset-based revolving credit agreement to October 19, 2022. The Amended ABL Facility continues to provide for a senior secured credit facility of up to $400 million.
As of August 4, 2018, the borrowing base on the Amended ABL Facility was $329.1 million.
The Company uses, in the ordinary course of business, stand-by letters of credit under the Amended ABL Facility. As of August 4, 2018 and February 3, 2018, the Company had not drawn on the Amended ABL Facility, but had outstanding stand-by letters of credit under the Amended ABL Facility of approximately $1.1 million and $1.9 million, respectively. The Company has no other off-balance sheet arrangements.
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan agreement on August 7, 2014, which provides for a Term Loan Facility of $300 million.
On June 22, 2018, the Company, through A&F Management, entered into the Term Loan Second Amendment, which, among other things, repriced the Term Loan Facility by reducing the applicable margins for term loans by 0.25%.
The material provisions of the Credit Facilities have not changed from those disclosed in Note 11, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017, except as described in Note 6, “BORROWINGS” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q.
Operating Activities
For the twenty-six weeks ended August 4, 2018, net cash provided by operating activities was $50.5 million as compared to $48.0 million for the twenty-six weeks ended July 29, 2017. The year-over-year change in cash flow associated with operating activities was primarily due to higher cash receipts from increased net sales, decreased rent payments due to timing, and increased payments to vendors in the fourth quarter of Fiscal 2017 which resulted in lower cash payments in Fiscal 2018 Spring season as compared to the prior year. These year-over-year changes were partially offset by incentive compensation payments in Fiscal 2018 related to Fiscal 2017 performance and an increase in income tax payments.
Investing Activities
For the twenty-six weeks ended August 4, 2018 and July 29, 2017, cash used for investing activities included capital expenditures of $54.1 million and $61.8 million, respectively, primarily for store updates and new stores, as well as direct-to-consumer and omnichannel and information technology investments.
Financing Activities
For the twenty-six weeks ended August 4, 2018, cash used for financing activities consisted primarily for the repurchase of approximately 1.7 million shares of A&F’s Common Stock in the open market with a market value of approximately $43.7 million and dividend payments of $27.2 million. For the twenty-six weeks ended July 29, 2017, cash used for financing activities consisted primarily of dividend payments of $27.2 million.
FUTURE CASH REQUIREMENTS AND SOURCES OF CASH
The Company’s capital allocation strategy remains to prioritize investments in the business to build on the foundation for sustainable long-term growth and invest in projects that have the highest return, including improvements in customer experience, both in stores and online. In addition, the Company prioritizes returning cash to stockholders through dividends and share repurchases as appropriate. Capital allocation priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors.
To execute on these priorities, the Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the fiscal year and to reinvest in the business to support future growth. The Company also has availability under the Amended ABL Facility as a source of additional funding. Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, leases, any obligations related to lease buyouts or kickouts we may exercise, taxes and other operating activities, as well as to fund capital expenditures, marketing initiatives, quarterly dividends to stockholders subject to approval by A&F’s Board of Directors and debt service requirements, including voluntary debt prepayments, or required repayments, if any, based on annual excess cash flows, as defined in the credit agreement applicable to the Term Loan Facility.
The Company may repurchase shares of its Common Stock and, if it were to do so, would anticipate funding such repurchases by utilizing free cash flow generated from operations or proceeds from the Amended ABL Facility. As of August 4, 2018, A&F had the ability to repurchase up to 4.8 million shares as part of the A&F Board of Directors’ previously approved authorization.
Income Taxes
As of August 4, 2018, certain foreign subsidiaries have lent approximately $266.4 million to certain U.S. subsidiaries resulting in
$350.2 million of the Company’s $581.2 million of cash and equivalents being held by U.S. subsidiaries. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends to A&F’s stockholders. As a result of the adoption of a modified territorial system under the Act, future earnings from foreign subsidiaries are generally not subject to additional federal tax upon repatriation. If funds were to be legally repatriated to the U.S., there could be implications at the state and foreign levels. Because of the complexities associated with the Act, the Company has not fully concluded on its position with respect to reinvestment of foreign earnings and whether its existing international structure for the various jurisdictions is the optimal structure for the future, but expects to complete this assessment in Fiscal 2018.
Capital Expenditures
For Fiscal 2018, the Company expects capital expenditures to be in the range of $135 million to $140 million, primarily for store updates and new stores, as well as direct-to-consumer, omnichannel and information technology investments.
CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. During the twenty-six weeks ended August 4, 2018, there were no material changes in the contractual obligations as of February 3, 2018, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).
RECENT ACCOUNTING PRONOUNCEMENTS
The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017. Refer to Note 1, “BASIS OF PRESENTATION--Recent Accounting Pronouncements” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q for recent accounting pronouncements, including the dates of adoption or expected dates of adoption, as applicable, and estimated effects on the Condensed Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company describes its critical accounting policies and estimates in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” of A&F’s Annual Report on Form 10-K for Fiscal 2017. There have been no other significant changes in critical accounting policies and estimates since the end of Fiscal 2017, except as described in Note 1, “BASIS OF PRESENTATION--Recent Accounting Pronouncements” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
The following factors, categorized by the primary nature of the associated risk, including the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2017,2018, in some cases have affected and in the future could affect the Company’s financial performance and could cause actual results for Fiscal 20182019 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management:
Macroeconomic and industry risks include:
Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity;
Failure to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability;
Our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours;
Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations;
Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; and
The impact of war, acts of terrorism or civil unrest could have a material adverse effect on our operating results and financial condition.
Strategic risks include:
The expansion of our direct-to-consumer sales channels and omnichannel initiatives are significant components of our growth strategy, and the failure to successfully develop our position across all channels could have an adverse impact on our results of operations;
Our international growth strategy and ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks; and
Failure to successfully implement our strategic plans could have a negative impact on our growth and profitability.
Operational risks include:
Failure to protect our reputation could have a material adverse effect on our brands;
Our business could suffer if our information technology systems are disrupted or cease to operate effectively;
We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss;
Our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain;
Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could cause manufacturing delays and increase our costs;
We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs;
We rely on the experience and skills of our senior executive officers and associates, the loss of whom could have a material adverse effect on our business; and
Extreme weather conditions, including natural disasters, pandemic disease and other unexpected events, could negatively impact our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, which could result in an interruption to our business and adversely affect our operating results.
Legal, tax, regulatory and compliance risks include:
Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations;
Our litigation exposure could have a material adverse effect on our financial condition and results of operations;
Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets;
Changes in the regulatory or compliance landscape and compliance with changing regulations for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results; and
Our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business.
The factors listed above are not our only risks. Additional risks may arise and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.
OVERVIEW
Business summary
The Company is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for Men, Women and Kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands.The 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 has operations in North America, Europe and Asia, among other regions.
The Company’s two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment.
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2019” represent the fifty-two-week fiscal year that will end on February 1, 2020, and to “Fiscal 2018” represent the fifty-two-week fiscal year that ended February 2, 2019.
Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.
CURRENT TRENDS AND OUTLOOK
Throughout the lifetime of our Company, we have taken strides to transform our brands as consumer habits and shopping preferences change. We aim to keep pace with and anticipate our customers’ needs through a test-and-learn mentality, which has been embedded throughout our organization. Our plans for long-term growth are centered around our strategic pillars and are best categorized into three planned phases:
Phase I: Stabilizing while Transforming
| |
| – | Fiscal 2015 through Fiscal 2017 |
Phase II: Growing while Transforming
| |
| – | Fiscal 2018 through Fiscal 2020 |
Phase III: Accelerating Growth
| |
| – | Fiscal 2021 and thereafter |
Fiscal 2019 is the second year of Phase II, “Growing while Transforming,” which we expect to continue through Fiscal 2020. We have developed the following key transformation initiatives in order to deliver on our previously disclosed Fiscal 2020 targets:
Optimizing our global store network;
Enhancing digital and omnichannel capabilities;
Increasing the speed and efficiency of our concept-to-consumer product life cycle by further investing in capabilities to position our supply chain for greater speed, agility and efficiency, while leveraging data and analytics to offer the right product at the right time and the right price; and
Improving our customer engagement through our loyalty programs and marketing optimization.
We are pleased with our first quarter performance, with net sales up slightly despite adverse impacts from changes in foreign currency exchange rates. We delivered our seventh consecutive quarter of positive comparable sales, with growth in both Hollister and Abercrombie. During the first quarter, we saw operating loss margin improvement and a net loss reduction compared to last year, driven by top-line growth and operating expense leverage.
For the full year of Fiscal 2019, we expect:
Net sales to be up in the range of 2% to 4%, driven by positive comparable sales and net new store contribution, partially offset by an adverse impact from changes in foreign currency exchange rates;
Comparable sales to be up low-single digits, on top of 3% last year;
Gross profit rate to be up slightly from the Fiscal 2018 rate of 60.2%, assuming no changes from the tariffs in place as of May 4, 2019;
Operating expense, excluding other operating income, to be up in the range of 4% to 5% from Fiscal 2018 adjusted non-GAAP operating expense of $2.03 billion, including net lease-related charges related to the flagship store actions discussed below of approximately $45 million. If not for the $45 million resulting from these actions, we would have expected operating expense to be consistent with previously issued expectations of up approximately 2% from Fiscal 2018 adjusted non-GAAP operating expense;
The effective tax rate to be in the mid 20s;
A weighted average diluted share count of approximately 68 million shares, excluding the effect of potential share buybacks; and
Capital investments of approximately $200 million.
We remain on track for our Fiscal 2020 targets, which were previously disclosed at our 2018 Investor Day, including doubling our Fiscal 2017 adjusted non-GAAP operating income margin of 2.9%.
Global store network optimization
Reflecting our continued focus on global store network optimization, during the second quarter of Fiscal 2019 we determined that we will be ceasing operations of our SoHo Hollister flagship store in New York City, and we exercised an option to terminate our Fukuoka, Japan A&F flagship store lease. We also announced that we have exercised an option to terminate our Milan, Italy A&F flagship store lease. These actions build on the completed closures of the Pedder Street, Hong Kong and Copenhagen, Denmark A&F flagship locations and represent important ongoing steps in the our global store network optimization efforts as we continue to pivot away from large format stores to smaller, omnichannel focused brand experiences.
Details related to the timing of these store closures are as follows:
Pedder Street, Hong Kong A&F flagship store closure was completed in the first quarter of Fiscal 2017.
Copenhagen, Denmark A&F flagship store closure was completed in the first quarter of Fiscal 2019.
SoHo Hollister flagship store in New York City is expected to close in the second quarter of Fiscal 2019.
Milan, Italy A&F flagship store is expected to close by the end of Fiscal 2019.
Fukuoka, Japan A&F flagship store is expected to close in the second half of Fiscal 2020.
As a result of the SoHo and Fukuoka store closures, we expect to incur pre-tax net lease-related charges of approximately $45 million during the second quarter of Fiscal 2019, primarily related to the present value of future lease payments associated with these stores that will be due subsequent to their closure. We expect future lease payments associated with these stores of approximately $105 million, which are expected to be paid subsequent to the dates of the respective actions through the fiscal year ending January 30, 2029 (“Fiscal 2028”). These future lease payments are not expected to exceed $15 million in any fiscal year. The Copenhagen and Milan store closures are not expected to result in significant charges in Fiscal 2019.
We plan to continue our global store network optimization efforts and expect to deliver approximately 85 new store experiences in Fiscal 2019 across brands, including approximately 40 new stores, approximately 25 remodeled stores and approximately 20 right-sizes. We also expect to close up to 40 stores in Fiscal 2019, primarily in the U.S., primarily through natural lease expirations. In addition to natural lease expirations, certain other of our leases also include early termination options that can be exercised under specific conditions, allowing for significant lease flexibility. We may also elect to exit or modify its other leases, and could incur charges related to these actions.
Certain risks and challenges
There has been greater uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, such as the threat of additional tariffs on imported consumer goods from China.
In May 2019, tariffs on certain imported merchandise from China to the U.S. increased from 10% to 25%. Our products affected by this increase include fashion accessories, handbags and hats, and we do not expect this increase to have a material impact on our business and results of operations for Fiscal 2019. In addition, additional tariffs of up to 25% were proposed on certain other imported merchandise from China to the U.S., including apparel and footwear. The imposition of these additional tariffs or retaliatory trade measures in response to existing or future tariffs imposed, may have a material adverse effect on our business and results of operations, including an adverse effect on economic growth in both our domestic and international markets.
To mitigate this risk, our team has taken actions to proactively prepare for potential impacts, including shifting production into other countries and regions to both existing and new partners as necessary. We believe we have a number of tools available to help further mitigate this risk and we continue to focus on the diversification of our global supply chain. For context, in Fiscal 2018, approximately 25% of our merchandise receipts were imported from China to the U.S. We continue to believe we have the ability to reduce this percentage to under 20% in Fiscal 2019.
In addition, the June 2016 decision by the United Kingdom to leave the European Union continues to result in uncertainty related to the free movement of goods, services, people and capital between the United Kingdom and the European Union, consumer behavior, economic conditions and foreign currency exchange rates. The potential impacts of United Kingdom’s withdrawal from the European Union remain unclear and could adversely impact certain areas of our business, including, but not limited to, an increase in duties and delays in the delivery of merchandise from our Netherlands DC to our stores and direct-to-consumer customers in the United Kingdom if trade barriers materialize at ports of entry and departure. The potential impacts of United Kingdom’s withdrawal from the European Union could also adversely impact the operations of our vendors.
To mitigate this risk, our team has begun to proactively prepare for potential adverse impacts by collaborating across the organization as well as working with external partners to develop the necessary contingency plans. We have also taken actions to reduce, to the extent possible, the potential material impact of any incremental duty exposure.
It is possible that our preparations for these events are not adequate and that these events could adversely affect our business and results of operations. For further discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to “ITEM 1A. RISK FACTORS,” included in A&F’s Annual Report on Form 10-K for Fiscal 2018.
SUMMARY OF RESULTS
The table below summarizes our results of operations determined in accordance with GAAP and non-GAAP financial measures, and other financial data for the thirteen week periods ended May 4, 2019 and May 5, 2018. Discussion on why the Company believes that these non-GAAP financial measures are useful to investors is provided below under “NON-GAAP FINANCIAL MEASURES.”
|
| | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended |
| | | May 4, 2019 | | May 5, 2018 |
| (in thousands, except change in net sales, comparable sales, gross profit rate, operating loss margin and per share amounts) | | GAAP | | Non-GAAP (1) | | GAAP | | Non-GAAP (1) |
| Statements of operations data | | | | | | | | |
| Net sales | | $ | 733,972 |
| |
| | $ | 730,899 |
| |
|
| Change in net sales | | 0 | % | | | | 11 | % | | |
Comparable sales (2) | | | | 1 | % | | | | 5 | % |
| Gross profit rate | | 60.5 | % | | | | 60.5 | % | | |
| Operating loss | | $ | (27,258 | ) | | $ | (27,258 | ) | | $ | (42,203 | ) | | $ | (36,603 | ) |
| Operating loss margin | | (3.7 | )% | | (3.7 | )% | | (5.8 | )% | | (5.0 | )% |
| Net loss attributable to A&F | | $ | (19,155 | ) | | $ | (19,155 | ) | | $ | (42,461 | ) | | $ | (38,402 | ) |
| Net loss per diluted share attributable to A&F | | $ | (0.29 | ) | | $ | (0.29 | ) | | $ | (0.62 | ) | | $ | (0.56 | ) |
| Statements of cash flows data | | | | | | | | |
| Net cash used for operating activities | | $ | (71,316 | ) | | | | $ | (16,171 | ) | | |
| Purchases of property and equipment | | $ | (43,872 | ) | | | | $ | (23,700 | ) | | |
| Dividends paid | | $ | (13,246 | ) | | | | $ | (13,642 | ) | | |
| Purchase of treasury stock | | $ | — |
| | | | $ | (18,670 | ) | | |
| |
(2) | Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales. Refer to the discussion below in “NON-GAAP FINANCIAL MEASURES,” for further details on the comparable sales calculation. |
The table below provides certain components of the Company’s Condensed Consolidated Balance Sheets as of May 4, 2019 and February 2, 2019.
|
| | | | | | | | |
| (in thousands) | | May 4, 2019 | | February 2, 2019 |
| Cash and equivalents | | $ | 586,133 |
| | $ | 723,135 |
|
| Borrowings, gross at carrying amount | | $ | 253,250 |
| | $ | 253,250 |
|
| Inventories | | $ | 432,350 |
| | $ | 437,879 |
|
STORE ACTIVITY
Store count and gross square footage by brand and geography for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively, were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Hollister (1) | | Abercrombie (2) | | Total Company |
| | United States | | International | | United States | | International | | United States | | International | | Total |
| February 2, 2019 | 393 |
| | 149 |
| | 270 |
| | 49 |
| | 663 |
| | 198 |
| | 861 |
|
| New | 1 |
| | — |
| | — | | — |
| | 1 |
| | — |
| | 1 |
|
| Closed | (1 | ) | | — |
| | (3 | ) | | (1 | ) | | (4 | ) | | (1 | ) | | (5 | ) |
| May 4, 2019 | 393 |
| | 149 |
| | 267 |
| | 48 |
| | 660 |
| | 197 |
| | 857 |
|
Gross square footage (in thousands): |
| May 4, 2019 | 2,656 |
| | 1,231 |
| | 1,991 |
| | 625 |
| | 4,647 |
| | 1,856 |
| | 6,503 |
|
| | | | | | | | | | | | | | |
| | Hollister (1) | | Abercrombie (2) | | Total Company |
| | United States | | International | | United States | | International | | United States | | International | | Total |
| February 3, 2018 | 394 |
| | 144 |
| | 285 |
| | 45 |
| | 679 |
| | 189 |
| | 868 |
|
| New | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Closed | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| May 5, 2018 | 395 |
| | 144 |
| | 285 |
| | 45 |
| | 680 |
| | 189 |
| | 869 |
|
Gross square footage (in thousands): |
| May 5, 2018 | 2,685 |
| | 1,200 |
| | 2,206 |
| | 619 |
| | 4,891 |
| | 1,819 |
| | 6,710 |
|
| |
(1) | Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes nine international franchise stores as of May 4, 2019, eight international franchise stores as of February 2, 2019, six international franchise stores as of May 5, 2018, and five international franchise stores as of February 3, 2018. |
| |
(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 seven international franchise stores as of May 4, 2019, seven international franchise stores as of February 2, 2019, six international franchise stores as of May 5, 2018, and four international franchise stores as of February 3, 2018. |
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 4, 2019 VERSUS MAY 5, 2018
Net sales
|
| | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | | | |
| | May 4, 2019 | | May 5, 2018 | | | | | | |
| (in thousands) | Net Sales | | Net Sales | | $ Change | | % Change | | Comparable Sales (1) |
| Hollister | $ | 428,448 |
| | $ | 423,628 |
| | $ | 4,820 |
| | 1% | | 2% |
Abercrombie (2) | 305,524 |
| | 307,271 |
| | (1,747 | ) | | (1)% | | 1% |
| Total company | $ | 733,972 |
| | $ | 730,899 |
| | $ | 3,073 |
| | 0% | | 1% |
| | | | | | | | | | |
| United States | $ | 469,658 |
| | $ | 449,126 |
| | $ | 20,532 |
| | 5% | | 4% |
| International | 264,314 |
| | 281,773 |
| | (17,459 | ) | | (6)% | | (4)% |
| Total company | $ | 733,972 |
| | $ | 730,899 |
| | $ | 3,073 |
| | 0% | | 1% |
| |
(1) | Comparable sales are calculated on a constant currency basis. Refer to “NON-GAAP FINANCIAL MEASURES,” for further details on the comparable sales calculation. |
| |
(2) | Includes Abercrombie & Fitch and abercrombie kids brands. |
For the first quarter of Fiscal 2019, net sales increased slightly as compared to the first quarter of Fiscal 2018, with an increase in units sold partially offset by a decrease in average unit retail. The year-over-year change in net sales reflects:
Changes in foreign currency exchange rates, which adversely impacted net sales by approximately $16 million, or 2%; and
Positive comparable sales of 1%.
Cost of sales, exclusive of depreciation and amortization
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Cost of sales, exclusive of depreciation and amortization | $ | 289,882 |
| | 39.5% | | $ | 288,554 |
| | 39.5% |
| | | | | | | | |
| Gross profit | $ | 444,090 |
| | 60.5% | | $ | 442,345 |
| | 60.5% |
For the first quarter of Fiscal 2019, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales was approximately flat as compared to the first quarter of Fiscal 2018.
Stores and distribution expense
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Stores and distribution expense | $ | 358,356 |
| | 48.8% | | $ | 361,155 |
| | 49.4% |
For the first quarter of Fiscal 2019, stores and distribution expense as a percentage of net sales decreased by approximately 60 basis points as compared to the first quarter of Fiscal 2018, primarily due to decreased store occupancy expense as a percentage of net sales resulting in approximately 120 basis points of leverage, partially offset by increased direct-to-consumer expense as a percentage of total net sales. The year-over-year decrease in store occupancy expense as a percentage of net sales was primarily driven by reductions in depreciation expense and rent expense, the latter of which was driven by the impact of the $3.9 million of lease termination charges related to the Copenhagen A&F flagship store on last year’s results.
Marketing, general and administrative expense
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Marketing, general and administrative expense | $ | 111,947 |
| | 15.3% | | $ | 124,897 |
| | 17.1% |
| Deduct: | | | | | | | |
Charges related to certain legal matters (1) | — |
| | 0.0% | | (5,600 | ) | | (0.8)% |
| Adjusted non-GAAP marketing, general and administrative expense | $ | 111,947 |
| | 15.3% | | $ | 119,297 |
| | 16.3% |
| |
(1) | Includes legal charges in connection with a then proposed settlement of a class action claim, which received final court approval and was paid in the fourth quarter of Fiscal 2018. |
For the first quarter of Fiscal 2019, marketing, general and administrative expense as a percentage of net sales decreased by approximately 180 basis points as compared to the first quarter of Fiscal 2018, primarily due to the impact of the $5.6 million of charges related to certain legal matters on last year’s results, decreased compensation costs, and a reduction in depreciation expense on information technology assets. Excluding the $5.6 million of charges related to certain legal matters presented above, first quarter of Fiscal 2019 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased by approximately 100 basis points as compared to the first quarter of Fiscal 2018.
Asset impairment
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Asset impairment | $ | 1,662 |
| | 0.2% | | $ | 1,056 |
| | 0.1% |
The Company incurred store asset impairment charges of $1.7 million and $1.1 million for the first quarter of Fiscal 2019 and Fiscal 2018, respectively.
Other operating income, net
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Other operating income, net | $ | 617 |
| | 0.1% | | $ | 2,560 |
| | 0.4% |
For the first quarter of Fiscal 2019, other operating income, net as a percentage of net sales decreased by approximately 30 basis points as compared to the first quarter of Fiscal 2018, primarily due to lower foreign currency exchange rate related gains, including the impact resulting from the adoption of the new derivative accounting standard. Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further discussion of the new derivative accounting standard.
Operating loss
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Operating loss | $ | (27,258 | ) | | (3.7)% | | $ | (42,203 | ) | | (5.8)% |
| Deduct: | | | | | | | |
Charges related to certain legal matters (1) | — |
| | 0.0% | | 5,600 |
| | 0.8% |
| Adjusted non-GAAP operating loss | $ | (27,258 | ) | | (3.7)% | | $ | (36,603 | ) | | (5.0)% |
| |
(1) | Includes legal charges in connection with a then proposed settlement of a class action claim, which received final court approval and was paid in the fourth quarter of Fiscal 2018. |
For the first quarter of Fiscal 2019, operating loss as a percentage of net sales improved 210 basis points as compared to the first quarter of Fiscal 2018. Excluding items presented above, first quarter of Fiscal 2019 adjusted non-GAAP operating loss as a percentage of net sales improved 130 basis points as compared to the first quarter of Fiscal 2018. The year-over-year change in operating income reflects changes in foreign currency exchange rates, which adversely impacted operating loss by approximately $2 million, net of hedging.
Interest expense, net
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Interest expense | $ | 4,532 |
| | 0.6% | | $ | 5,662 |
| | 0.8% |
| Interest income | (3,916 | ) | | (0.5)% | | (2,644 | ) | | (0.4)% |
| Interest expense, net | $ | 616 |
| | 0.1% | | $ | 3,018 |
| | 0.4% |
For the first quarter of Fiscal 2019, interest expense, net as a percentage of net sales decreased as compared to the first quarter of Fiscal 2018 by approximately 30 basis points. This decrease is primarily due to the elimination of leasehold financing obligations and corresponding interest expense related to these obligations upon adoption of the new lease accounting standard. In addition, higher interest income earned on the Company’s investments and cash holdings contributed to the decrease in interest expense, net as a percentage of net sales.
Income tax benefit
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
| Income tax benefit | $ | (9,588 | ) | | 34.4% | | $ | (3,713 | ) | | 8.2% |
| Deduct: | | | | | | | |
Tax effect of excluded items (1) | — |
| |
|
| 1,541 |
| | |
| Adjusted non-GAAP income tax benefit | $ | (9,588 | ) | | 34.4% | | $ | (2,172 | ) | | 5.5% |
| |
(1) | Refer to “Operating loss” for details of excluded items. 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. |
For the first quarter of Fiscal 2019, the year-over-year change in the effective tax rate as compared to the first quarter of Fiscal 2018, which is highly sensitive at lower levels of pre-tax earnings, was primarily driven by changes in the level and mix of consolidated pre-tax earnings between operating and valuation allowance jurisdictions. In the first quarter of Fiscal 2019, the effective tax rate was impacted by discrete income tax benefits of $1.1 million as compared to discrete non-cash income tax charges of $8.2 million in the first quarter of Fiscal 2018, related to the exercise and expiration of certain share-based compensation awards.
Net loss and Net loss per share attributable to A&F
|
| | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | May 4, 2019 | | May 5, 2018 |
| (in thousands) | | | % of Net Sales | | | | % of Net Sales |
| Net loss attributable to A&F | $ | (19,155 | ) | | (2.6)% | | $ | (42,461 | ) | | (5.8)% |
Adjusted non-GAAP net loss attributable to A&F (1) | $ | (19,155 | ) | | (2.6)% | | $ | (38,402 | ) | | (5.3)% |
| |
| | | |
| | |
| Net loss per diluted share attributable to A&F | $ | (0.29 | ) | |
| | $ | (0.62 | ) | |
|
Adjusted non-GAAP net loss per diluted share attributable to A&F (1) | $ | (0.29 | ) | | | | $ | (0.56 | ) | | |
| |
(1) | Excludes items presented above under “Operating loss,” and “Income tax benefit.” |
For the first quarter of Fiscal 2019, net loss per diluted share attributable to A&F was $0.29 as compared to $0.62 for the first quarter of Fiscal 2018. Excluding items presented above under “Operating loss,” and “Income tax benefit,” first quarter of Fiscal 2018 adjusted non-GAAP net loss per diluted share attributable to A&F was $0.56. The year-over-year change in net loss per diluted share attributable to A&F reflects changes in foreign currency exchange rates, which adversely impacted net loss per diluted share attributable to A&F by approximately $0.02, net of hedging.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL SOURCES AND USES OF CASH
Seasonality of cash flows
The Company’s business has two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during Fall due to 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 a revolving credit facility available as a source of additional funding.
Credit Facilities
On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.
On October 19, 2017, the Company, through its subsidiary A&F Management, entered into the Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement to October 19, 2022. As amended, the asset-based revolving credit agreement continues to provide for a senior secured credit facility of up to $400 million (the “Amended ABL Facility”).
As of May 4, 2019, the borrowing base on the Amended ABL Facility was $277.0 million.
The Company uses, in the ordinary course of business, stand-by letters of credit under the existing Amended ABL Facility. As of both May 4, 2019 and February 2, 2019, the Company had not drawn on the Amended ABL Facility, but had approximately $0.4 million of outstanding stand-by letters of credit under the Amended ABL Facility.
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan agreement on August 7, 2014, which provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”).
On June 22, 2018, A&F, through its subsidiary A&F Management, entered into the Term Loan Second Amendment, which, among other things, repriced the Term Loan Facility by reducing the applicable margins for term loans by 0.25%.
The interest rate on borrowings under the Term Loan Facility was 5.99% as of May 4, 2019.
The Company’s Term Loan debt is presented in the Condensed Consolidated Balance Sheets, net of the unamortized discount and fees. Net borrowings as of May 4, 2019 and February 2, 2019 were as follows:
|
| | | | | | | |
| (in thousands) | May 4, 2019 | | February 2, 2019 |
| Borrowings, gross at carrying amount | $ | 253,250 |
| | $ | 253,250 |
|
| Unamortized discount | (761 | ) | | (845 | ) |
| Unamortized fees | (1,753 | ) | | (1,966 | ) |
| Borrowings, net | 250,736 |
| | 250,439 |
|
| Less: short-term portion of borrowings, net | — |
| | — |
|
| Long-term portion of borrowings, net | $ | 250,736 |
| | $ | 250,439 |
|
The material provisions of the Credit Facilities have not changed from those disclosed in Note 10, “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 2018.
Operating activities
For the thirteen weeks ended May 4, 2019, net cash used for operating activities was $71.3 million as compared to net cash used for operating activities of $16.2 million for the thirteen weeks ended May 5, 2018. The year-over-year change in cash flow associated with operating activities was primarily driven by increased payments to vendors in the first quarter of Fiscal 2019 as compared to the prior year, partially offset by decreased incentive compensation payments in Fiscal 2019 as compared to the prior year.
Investing activities
For the thirteen weeks ended May 4, 2019 and May 5, 2018, net cash outflows for investing activities were used primarily for purchases of property and equipment of $43.9 million and $23.7 million, respectively.
Financing activities
For the thirteen weeks ended May 4, 2019, net cash used for financing activities primarily consisted of dividend payments of $13.2 million. For the thirteen weeks ended May 5, 2018, cash used for financing activities consisted primarily of the repurchase of approximately 0.8 million shares of A&F’s Common Stock in the open market with a market value of approximately $18.7 million and dividend payments of $13.6 million.
FUTURE CASH REQUIREMENTS AND SOURCES OF CASH
The Company’s capital allocation strategy remains to prioritize investments in the business to build on the foundation for sustainable long-term growth and seeks to invest in projects that have high expected returns. The Company also evaluates opportunities to accelerate potential investments, including improvements in customer experience, both in stores and online. These improvements include store remodels and right-sizes, new store openings, and acceleration of our transformation efforts. The Company also evaluates store closures, including flagship lease buyouts and options to early terminate its store leases. In addition, the Company returns cash to stockholders through dividends and completes share repurchases as deemed appropriate. Dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews the dividend on a quarterly basis and establishes the dividend rate based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors which the Board of Directors deems relevant. Capital allocation priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors.
To execute its capital allocation strategy, the Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the fiscal year and to reinvest in the business to support future growth. The Company also has availability under the Amended ABL Facility as a source of additional funding. Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, leases, any lease buyouts or options to terminate store leases the Company may exercise, taxes and other operating activities, as well as to fund capital expenditures, marketing initiatives, quarterly dividends to stockholders subject to approval by A&F’s Board of Directors and debt service requirements, including voluntary debt prepayments, or required repayments, if any, based on annual excess cash flows, as defined in the term loan agreement applicable to the Term Loan Facility.
The Company may repurchase shares of its Common Stock from time to time, dependent on market and business conditions, with the primary objective to offset dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, through privately negotiated transactions or other transactions or by a combination of such methods. The Company would anticipate funding such repurchases by utilizing free cash flow generated from operations or proceeds from the Amended ABL Facility.
As of May 4, 2019, the Company had the authority to repurchase approximately 3.6 million shares as part of the A&F Board of Directors’ previously approved authorization. On June 12, 2019, the A&F Board of Directors authorized the repurchase of an additional 5.0 million shares, bringing the shares available for purchase as of June 12, 2019 under its publicly announced share repurchase authorizations to approximately 7.6 million shares.
Income taxes
The Company has determined that the remaining balance of the Company’s undistributed earnings and profits from its foreign subsidiaries are considered indefinitely reinvested outside of the U.S., and that these earnings and profits could be repatriated without incurring additional federal income tax. If additional funds were to be repatriated to the U.S., the Company could incur an insignificant amount of state income taxes and foreign withholding taxes.
As of May 4, 2019, $247.7 million of the Company’s $586.1 million of cash and equivalents was held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends to A&F’s stockholders.
Capital investments
For Fiscal 2019, the Company expects capital investments to be approximately $200 million, prioritized towards new store experiences, as well as direct-to-consumer and omnichannel investments, information technology, and other projects.
OFF-BALANCE SHEET ARRANGEMENTS
The Company uses, in the ordinary course of business, stand-by letters of credit under the Amended ABL Facility. The Company has no other off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. During the thirteen weeks ended May 4, 2019, there were no material changes in the contractual obligations as of February 2, 2019, 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 2018. Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q for recent accounting pronouncements, including the dates of adoption and estimated effects on the Condensed Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company describes its critical accounting policies and estimates in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” of A&F’s Annual Report on Form 10-K for Fiscal 2018. There have been no other significant changes in critical accounting policies and estimates since the end of Fiscal 2018, except as described below and in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Recent accounting pronouncements” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q. |
| | |
| Policy | | Effect if Actual Results Differ from Assumptions |
| Impairment of long-lived assets | | |
Long-lived assets, primarily lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable.
Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumptions used in the Company’s undiscounted future cash flow models include sales, gross profit and, to a lesser extent, operating expenses.
An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. The fair value of the asset group is determined based on the highest and best use of the asset group, which may include consideration of market rent for the right to use leased assets included in the asset group. The Company also may utilize assumptions related to projected store cash flows when estimating the fair value of impaired assets. | | If actual results are not consistent with the estimates and assumptions used, there may be a material impact on the Company’s financial condition or results of operation.
Store assets that were tested for impairment and not impaired as of May 4, 2019, had long-lived assets with a net book value of $115.0 million, which included $99.0 million of operating lease right-of-use assets under the new lease accounting standard. These stores had undiscounted cash flows which were in the range of 100% to 150% of their respective net asset values.
Store assets that were impaired as of May 4, 2019 had a remaining net book value of $140.3 million, which included $139.0 million of operating lease right-of-use assets under the new lease accounting standard. |
| Leases | | |
The Company’s lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term. The Company’s lease liabilities represent the Company’s obligation to make lease payments arising from the lease. At the lease commencement date, the Company’s lease right-of-use assets and liabilities are recognized on the Condensed Consolidated Balance Sheets, based on the present value of remaining lease payments over the lease term.
In measuring the Company’s lease liabilities, the remaining lease payments are discounted to present value using a discount rate. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the remaining lease term as of the date of adoption.
The Company estimates its incremental borrowing rate on a quarterly basis, based on the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. | | The Company does not expect material changes to the underlying assumptions used to measure its lease liabilities as of May 4, 2019. However, actual results could vary from estimates and could result in material gains or losses.
An increase or decrease of 10% in the Company’s weighted-average discount rate as of May 4, 2019, would impact both the Company’s total assets and total liabilities by less than 1% and would not have a material impact on the Company’s pre-tax income for Fiscal 2019. |
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” 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 do not reflect its future operating outlook, and 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.
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. 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 for the thirteen weeks ended May 4, 2019 and May 5, 2018 is calculated using a 27% effective tax rate.
Comparable sales
In addition, the Company provides comparable sales, defined as the percentage year-over-year change in the aggregate of (1) 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) direct-to-consumer sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and direct-to-consumer sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.
Excluded items
The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable:
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Financial measures (1) | | Excluded items |
| Marketing, general and administrative expense | | Certain legal charges |
| Operating loss | | Certain legal charges |
Net loss and net loss per share attributable to A&F (2) | | Certain legal charges; and the tax effect of pre-tax excluded items |
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(1) | Certain of these financial measures are also expressed as a percentage of net sales. |
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(2) | The Company also presents income tax benefit and the effective tax rate on both a GAAP and on an adjusted non-GAAP basis excluding the items listed under “Operating loss,” as applicable, in the table above. The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. |
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Investment Securitiessecurities
The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments.
The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.8 million and $1.5 million for each of the thirteen and twenty-six weeks ended AugustMay 4, 2018, respectively,2019 and realized gains of $0.8 million and $1.5 million for the thirteen and twenty-six weeks ended July 29, 2017,May 5, 2018, respectively, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
The Rabbi Trust assets are included in other assets on the Condensed Consolidated Balance Sheets as of AugustMay 4, 20182019 and February 3, 2018,2, 2019, and are restricted in their use as noted above.
Interest Rate Risksrate risks
As of AugustMay 4, 2018,2019, the Company has approximately $253.3 million in gross borrowings outstanding under its Term Loan Facility and no borrowings outstanding under its Amended ABL Facility. The Credit Facilities carry interest rates that are tied to LIBO rate, or an alternate base rate, plus a margin. The interest rate on the Term Loan Facility has a 100 basis point LIBO rate floor, and assuming no changes in the Company’s financial structure as it stands, an increase in marketthe interest ratesrate on borrowings under the Term Loan Facility as of May 4, 2019 of 100 basis points would increase Fiscal 2019 annual interest expense by approximately $2.6 million. This hypothetical analysis for the fifty-two weeks ending February 2,Fiscal 2019 may differ from the actual change in interest expense due to potential changes in interest rates or gross borrowings outstanding under the Company’s Credit Facilities.
LIBO rate to alternative rates over the next several years is not expected to have a material impact on interest expense on borrowings outstanding under the Company’s Credit Facilities.
Foreign Exchange Rate Riskexchange rate risk
A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of its condensed consolidatedthese financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency fluctuationexchange rate fluctuations increases as international expansion increases.operations relative to domestic operations increase.
A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the sale of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.
The fair value of outstanding foreign currency exchange forward contracts included in other current assets was $12.3$2.5 million as of AugustMay 4, 20182019 and insignificantwas $2.2 million as of February 3, 2018.2, 2019. The fair value of outstanding foreign currency exchange forward contracts included in accrued expenses was insignificant as of August 4, 2018 and was $9.1$0.3 million as of each of May 4, 2019 and February 3, 2018.2, 2019. 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 $27.7$12.8 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair value would be largely offset by the net change in fair values of the underlying hedged items.
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| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controlscontrols and Proceduresprocedures
A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Senior Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended AugustMay 4, 2018.2019. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Senior Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of AugustMay 4, 2018,2019, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reportinginternal control over financial reporting
There were no changes induring A&F’s fiscal quarter ended May 4, 2019 that materially affected, or are reasonably likely to materially affect, 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 August 4, 2018 that materially affected, or are reasonably likelyexcept for those described below:
On February 3, 2019, the Company adopted the new lease accounting standard, ASU 2016-02, Leases. As part of the adoption of the new lease accounting standard, the Company completed upgrades to materially affect, A&F’sits lease administration software, modified certain existing internal control over financial reporting.controls and processes and implemented new internal controls and processes.
PART II. OTHER INFORMATION
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. LegalThe Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company’s assessmentCompany also determines estimates of the current exposure could changereasonably possible losses or ranges of reasonably possible losses in the eventexcess of the discovery of additional facts. As of August 4, 2018, the Company hadrelated 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 of approximately $23 million for certain legal contingencies which are classified within accrued expenses on the Condensed Consolidated Balance Sheet included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and cannot estimate a range of reasonably possible losses for these legal matters.
Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of theselegal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There are certain claims and legal proceedings pending againstThe Company’s assessment of the Company for which accruals have not been established.current exposure could change in the event of the discovery of additional facts.
The Company’s risk factors as of AugustMay 4, 20182019 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 2017.2018.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no sales of equity securities during the secondfirst quarter of Fiscal 20182019 that were not registered under the Securities Act of 1933.1933, as amended.
The following table provides information regarding the purchase of shares of Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the thirteen weeks ended AugustMay 4, 2018:2019:
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| Period (Fiscal Month) | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (3) |
| May 6, 2018 through June 2, 2018 | 12,156 |
| | $ | 25.41 |
| | — |
| | 5,725,494 |
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| June 3, 2018 through July 7, 2018 | 661,298 |
| | $ | 25.83 |
| | 636,690 |
| | 5,088,804 |
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| July 8, 2018 through August 4, 2018 | 333,526 |
| | $ | 25.70 |
| | 332,378 |
| | 4,756,426 |
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| Total | 1,006,980 |
| | $ | 25.78 |
| | 969,068 |
| | 4,756,426 |
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| Period (Fiscal Month) | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (3) |
| February 3, 2019 through March 2, 2019 | 3,125 |
| | $ | 20.75 |
| | — |
| | 3,571,938 |
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| March 3, 2019 through April 6, 2019 | 238,473 |
| | $ | 25.86 |
| | — |
| | 3,571,938 |
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| April 7, 2019 through May 4, 2019 | 2,184 |
| | $ | 27.34 |
| | — |
| | 3,571,938 |
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| Total | 243,782 |
| | $ | 25.80 |
| | — |
| | 3,571,938 |
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(1) | 37,912243,782 shares of A&F’s Common Stock purchased during the thirteen weeks ended AugustMay 4, 20182019 represented shares which were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights and vesting of employee restricted stock units.rights. |
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(2) | 969,068No shares of A&F’s Common Stock were repurchased during the thirteen weeks ended AugustMay 4, 20182019 pursuant to A&F’s publicly announced stock repurchase authorization. On August 14, 2012, A&F’s Board of Directors authorized the repurchase of 10.0 million shares of A&F’s Common Stock, which was announced on August 15, 2012. |
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(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,time to time, depending on market conditions. |
ITEM 6. EXHIBITS
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| Exhibit No. | Document |
| 10.1 | |
| 10.2 | |
| 10.3 | |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 101 | The following materials from Abercrombie & Fitch Co.’s Quarterly Report on Form 10-Q for the quarterly period ended AugustMay 4, 2018,2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations and Comprehensive Loss for the Thirteen and Twenty-six Weeks Ended AugustMay 4, 20182019 and July 29, 2017;May 5, 2018; (ii) Condensed Consolidated Balance Sheets at AugustMay 4, 20182019 and February 3, 2018;2, 2019; (iii) Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen Weeks Ended May 4, 2019 and May 5, 2018 (iv) Condensed Consolidated Statements of Cash Flows for the Twenty-sixThirteen Weeks Ended AugustMay 4, 20182019 and July 29, 2017;May 5, 2018; and (iv)(v) Notes to Condensed Consolidated Financial Statements.* |
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.
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| | ABERCROMBIE & FITCH CO. |
Date: September 10, 2018June 12, 2019 | By | /s/ Scott Lipesky |
| | | Scott Lipesky |
| | | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Authorized Officer) |