ABERCROMBIE & FITCH CO.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read together with the Company's
Condensed Consolidated Financial Statements and notes thereto included in this
Quarterly Report on Form 10-Q in " I tem 1. F inancial
S tatements (U naudited ) ," to which all references to Notes in
MD&A are made.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," "should," "are confident," or the negative version of those words or other comparable words 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. Factors that could cause results to differ from those expressed in the Company's forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. "Risk Factors," in the Company's Annual Report on Fiscal 2021 Form 10-K for the fiscal year endedJanuary 29, 2022 and otherwise in our reports and filings with theSEC , as well as the following:
•risks and uncertainty related to the ongoing COVID-19 pandemic and any other adverse public health developments;
•risks related to 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; •risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs;
•risks related to geopolitical conflict, including the on-going hostilities in
•risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory;
•risks related to our ability to successfully invest in customer, digital and omnichannel initiatives;
•risks related to our ability to execute on our global store network optimization initiative;
•risks related to our international growth strategy;
•risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems;
•risks associated with climate change and other corporate responsibility issues; and.
•uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
In light of the significant uncertainties in the forward-looking statements
included herein, including the uncertainty surrounding COVID-19, the inclusion
of such information should not be regarded as a representation by the Company,
or any other person, that the objectives of the Company will be achieved. The
forward-looking statements included herein are based on information presently
available to the management of the Company. Except as may be required by
applicable law, the Company assumes no obligation to publicly update or revise
its forward-looking statements even if experience or future changes make it
clear that any projected results expressed or implied therein will not be
realized.
Abercrombie & Fitch Co. 19 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company's results of operations, financial condition, and liquidity. MD&A is organized as follows:
• Overview . A general description of the Company's business and certain segment information.
• Current Trends and Outlook . A discussion related to certain of the
Company's focus areas for the current fiscal year and discussion of certain
risks and challenges as well as a summary of the Company's performance for the
thirteen weeks ended
• Results of Operations . An analysis of certain components of the Company's Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen weeks endedApril 30, 2022 andMay 1, 2021 . • Liquidity and Capital Resources . A discussion of the Company's financial condition, changes in financial condition and liquidity as ofApril 30, 2022 , which includes (i) an analysis of financial condition as compared toJanuary 29, 2022 ; (ii) an analysis of changes in cash flows for the thirteen weeks endedApril 30, 2022 as compared to the thirteen weeks endedMay 1, 2021 ; and (iii) an analysis of liquidity, including availability under the Company's credit facility, the Company's share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company's Condensed Consolidated Financial Statements. • Critical Accounting E stimates . A discussion of the accounting estimates considered to be important to the Company's results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application.
• Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors.
Abercrombie & Fitch Co. 20 2022 1Q Form 10-Q
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Table of Contents OVERVIEW Business summary The Company is a global, digitally led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company's two brand-based operating segments are Hollister, which includes the Company's Hollister,Gilly Hicks and Social Tourist brands, andAbercrombie , which includes the Company'sAbercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily inNorth America ,Europe andAsia .
The Company's fiscal year ends on the Saturday closest to
Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Seasonality Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the fall season, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively.
CURRENT TRENDS AND OUTLOOK
Focus areas for Fiscal 2022
The Company remains committed to, and confident in, its long-term vision of being and becoming a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress against initiatives that support this vision.
The following focus areas for Fiscal 2022 serve as a framework for the Company's achievement of sustainable growth and long-term operating margin expansion: •Accelerate digital, data and technology investments to increase agility and improve the customer experience; •Create a more personalized customer experience through a connected omnichannel ecosystem, •Optimize our global distribution network to expand digital capacity and improve product delivery speed •Opportunistically open new, omni-enabled stores in under penetrated markets, and •Integrate environmental, social and governance practices and standards throughout the Company.
Supply chain disruptions, inflation and changing prices
The Company has continued to see global supply chain constraints impacting our business and operations. The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales. During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures inVietnam . This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and into the first quarter of Fiscal 2022. In addition, the Company has experienced and expects to continue to experience inflationary pressures affecting the Company's freight, transit, and other costs, and such rates are likely to remain elevated throughout Fiscal 2022. In order to mitigate supply chain constraints and higher freight rates, the Company has taken and expects to continue to take actions to manage the impact, including scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where possible. It is possible that the Company's responses to factory closures, transportation delays, or freight rates will not be adequate to mitigate the impact, and that these events could continue to adversely affect the Company's business and results of operations. The Company has also experienced inflationary pressures with respect to labor, cotton and other raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to the customer through higher ticket prices. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived unfavorable conditions, consumers may reallocate available discretionary Abercrombie & Fitch Co. 21 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents spending to areas outside of our core business. In addition, as COVID-19 restrictions begin to be lifted, consumers may use any remaining discretionary spending on travel and other experiences which may adversely impact demand for our products.
Global Store Network Optimization
As part of its ongoing global store network optimization initiative, the Company
has a stated goal of repositioning from larger format locations, such as,
tourist dependent and flagship locations, to smaller, omni-enabled stores that
cater to local customers. The Company continues to focus on aligning store
square footage with digital penetration, and during the first quarter of Fiscal
2022, the Company opened 4 new format stores, while closing 5 legacy stores. As
part of this focus, the Company plans to open 60 new stores, while closing 30
stores, during Fiscal 2022, pending negotiations with our landlord partners.
Future closures could be completed through natural lease expirations, while
certain other leases include early termination options that can be exercised
under specific conditions. The Company may also elect to exit or modify other
leases, and could incur charges related to these actions.Additional details
related to store count and gross square footage follow:
Hollister (1) Abercrombie (2) Total Company (3)
U.S. International U.S. International U.S. International TotalNumber of stores:January 29, 2022 351 154 173 51 524 205 729 New 1 2 1 - 2 2 4 Permanently closed - - (3) (2) (3) (2) (5)April 30, 2022 352 156 171 49 523 205 728 Gross square footage (in thousands):April 30, 2022 2,318 1,218 1,146 347 3,464 1,565 5,029 (1)Hollister includes the Company's Hollister and Gilly Hicks brands. Locations withGilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 8 international franchise stores as ofApril 30, 2022 , andJanuary 29, 2022 . Excludes 13 Company-operated temporary stores as ofApril 30, 2022 and 14 Company-operated temporary stores as ofJanuary 29, 2022 . (2)Abercrombie includes the Company'sAbercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts withinAbercrombie & Fitch stores are represented as a single store count. Excludes 14 international franchise stores as ofApril 30, 2022 andJanuary 29, 2022 . Excludes 5 Company-operated temporary stores as of each ofApril 30, 2022 andJanuary 29, 2022 .
(3)This store count excludes one international third-party operated multi-brand
outlet store as of each of
COVID-19
There continues to be uncertainty surrounding ongoing COVID-19 pandemic and its impact on the global economy, including government-mandated restrictions, supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. As ofApril 30, 2022 , allU.S. stores were fully open for in-store service; however, temporary store closures have been mandated in certain parts of the APAC region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company's costs and revenues. The Company's digital operations across brands have continued to serve the Company's customers during periods of temporary store closures. In response to elevated digital demand during this period, the Company leveraged its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority ofU.S. locations, and by utilizing ship-from-store capabilities, including same-day delivery across its entireU.S. store fleet. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current level of digital penetration will continue when stores operate at full capacity AlthoughU.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. The extent of future impacts of COVID-19 on the Company's business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, and the availability and acceptance of effective vaccines, boosters or medical treatments. Abercrombie & Fitch Co. 22 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Impact of global events and uncertainty We are a global multi-brand omnichannel specialty retailer, with operations inNorth America ,Europe andAsia , among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict inUkraine , that could adversely impact certain areas of the business. As a result, in addition to the events listed within MD&A, management continues to monitor certain other global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company's preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading "FORWARD-LOOKING STATEMENTS AND RISK FACTORS" in "ITEM 1A. RISK FACTORS" on the Fiscal 2021 Form 10-K.
Summary of results
A summary of results for the thirteen weeks endedApril 30, 2022 andMay 1, 2021 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating (loss) income margin and per share amounts) April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021 Thirteen Weeks Ended Net sales$ 812,762 $ 781,405 Change in net sales 4.0 % 61.0 % Gross profit rate 55.3 % 63.4 % Operating (loss) income$ (9,726) $
57,433
(1.2) % 7.3 % (0.8) % 7.7 %
Net (loss) income attributable to
A&F $ (16,469) $
41,768
(0.32) 0.64 (0.27) 0.67
(1) Discussion as to why the Company believes that these non-GAAP financial
measures are useful to investors and a reconciliation of the Non-GAAP measures
to the most directly comparable financial measure calculated and presented in
accordance with GAAP are provided below under " NON-GAAP FINANCIAL MEASURES ."
Certain components of the Company's Condensed Consolidated Balance Sheets as of
(in thousands) April 30, 2022 January 29, 2022 Cash and equivalents$ 468,378 $ 823,139 Gross long-term borrowings outstanding, carrying amount 307,730 307,730 Inventories 562,510 525,864 Certain components of the Company's Condensed Consolidated Statements of Cash Flows for the thirteen week periods endedApril 30, 2022 andMay 1, 2021 were as follows: (in thousands) April 30, 2022 May 1, 2021
Net cash used for operating activities
Net cash used for investing activities (18,541) (14,404)
Net cash used for financing activities (116,945) (53,191)
Abercrombie & Fitch Co. 23 2022 1Q Form 10-Q
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RESULTS OF OPERATIONS
The estimated basis point ("BPS") change disclosed throughout this Results of
Operations section has been rounded based on the change in the percentage of net
sales.
Net sales
For the first quarter of Fiscal 2022, net sales increased 4% as compared to the
first quarter of Fiscal 2021, primarily due to an increase in stores sales, as
well as an increase average unit retail driven by lower promotions and
markdowns, partially offset by the adverse impact from changes in foreign
currency exchange rates of approximately $9 million .
The Company's net sales by operating segment for the thirteen weeks ended
Thirteen Weeks Ended
(in thousands) April 30, 2022 May 1, 2021 $ Change % Change
Hollister (1) $ 428,834 $ 442,408 $ (13,574) (3)%
Abercrombie (2) 383,928 338,997 44,931 13%
Total $ 812,762 $ 781,405 $ 31,357 4%
(1) Includes Hollister,
(2) Includes Abercrombie & Fitch and abercrombie kids brands.
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company's net sales by geographic area for the thirteen weeks endedApril 30, 2022 andMay 1, 2021 were as follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 $ Change % Change U.S.$ 585,106 $ 553,846 $ 31,260 6% EMEA 163,969 159,002 4,967 3% APAC 29,897 46,046 (16,149) (35)% Other 33,790 22,511 11,279 50% International$ 227,656 $ 227,559 $ 97 0% Total$ 812,762 $ 781,405 $ 31,357 4%
Cost of sales, exclusive of depreciation and amortization
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Cost of sales, exclusive of depreciation
and amortization $ 363,216 44.7% $ 286,271 36.6% 810
For the first quarter of Fiscal 2022, cost of sales, exclusive of depreciation
and amortization, as a percentage of net sales increased by approximately 810
basis points as compared to the first quarter of Fiscal 2021. The year-over-year
increase was driven by approximately $80 million higher average unit cost from
freight inflation partially offset by higher average unit retail on lower
promotions and higher ticket prices.
Abercrombie & Fitch Co. 24 2022 1Q Form 10-Q
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Gross profit, exclusive of depreciation and amortization
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Gross profit, exclusive of depreciation and
amortization $ 449,546 55.3% $ 495,134 63.4% (810)
Stores and distribution expense
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Stores and distribution expense $ 337,543 41.5% $ 315,508 40.4% 110
For the first quarter of Fiscal 2022, stores and distribution expense increased
7% as compared to the first quarter of Fiscal 2021. Approximately half of the
$22 million increase was due to the lapping of COVID19-related rent abatements
and payroll credits last year, with the remaining primarily due to an increase
in marketing and digital fulfillment expenses. These increases were partially
offset by a reduction in store occupancy expense reflecting a decrease in store
count and favorable rent negotiations.
Marketing, general and administrative expense
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Marketing, general and administrative
expense $ 122,149 15.0% $ 120,947 15.5% (50)
For the first quarter of Fiscal 2022, marketing, general and administrative
expense increased 1% as compared to the first quarter of Fiscal 2021, primarily
driven by increased digital media spend, consulting and information technology
expense. These increases were partially offset by a decrease in depreciation
expense.
Asset impairment
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Asset impairment $ 3,422 0.4% $ 2,664 0.3% 10
Excluded items:
Asset impairment charges (1) (3,422) (0.4)% (2,664) (0.3)% (10)
Adjusted non-GAAP asset impairment $ - 0.0% $ - -% -
(1) Refer to " NON-GAAP FINANCIAL MEASURES ," for further details.
Refer to Note 8, " ASSET IMPAIRMENT ."
Abercrombie & Fitch Co. 25 2022 1Q Form 10-Q
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Other operating income, net
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Other operating income, net $ 3,842 0.5% $ 1,418 0.2% (30)
For the first quarter of Fiscal 2022, other operating income, net increased $2.4
million as compared to the first quarter of Fiscal 2021, primarily driven by
gains on foreign currency exchange forward contracts and a gain on the sale of
property and equipment.
Operating (loss) income
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Operating (loss) income $ (9,726) (1.2)% $ 57,433 7.3% (850)
Excluded items:
Asset impairment charges (1) 3,422 0.4% 2,664 0.3% 10
Adjusted non-GAAP operating (loss) income $ (6,304) (0.8)% $ 60,097 7.7% (850)
(1) Refer to " NON-GAAP FINANCIAL MEASURES ," for further details.
Interest expense, net
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Interest expense $ 7,809 1.0% $ 9,143 1.2% (20)
Interest income (502) (0.1)% (537) (0.1)% -
Interest expense, net $ 7,307 0.9% $ 8,606 1.1% (20)
For the first quarter of Fiscal 2022, interest expense, net decreased $1.3
million as compared to the first quarter of Fiscal 2021, primarily driven by
lower interest expense as a result of lower borrowings in the current quarter
due to the purchase of Senior Secured Notes in the second quarter of Fiscal
2021.
Abercrombie & Fitch Co. 26 2022 1Q Form 10-Q
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Income tax (benefit) expense
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands, except ratios) Effective Tax Rate Effective Tax Rate
Income tax (benefit) expense $ (2,187) 12.8% $ 6,121 12.5%
Excluded items:
Tax effect of pre-tax excluded items (1) 918 449
Adjusted non-GAAP income tax (benefit) expense
9.3%$ 6,570 12.8% (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to "Operating (loss) income" and " NON-GAAP FINANCIAL MEASURES ," for details of pre-tax excluded items.
Refer to Note 9, " INCOME TAXES ."
Net (loss) income attributable to A&F
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Net (loss) income attributable to A&F $ (16,469) (2.0)% $ 41,768 5.3% (730)
Excluded items, net of tax (1) 2,504 0.3% 2,215 0.3% -
Adjusted non-GAAP net (loss) income
attributable to A&F (2) $ (13,965) (1.7)% $ 43,983 5.6% (730)
(1) Excluded items presented above under "Operating (loss) income," and "Income tax (benefit) expense"
(2) Refer to " NON-GAAP FINANCIAL MEASURES ," for further details.
Net (loss) income per diluted share attributable to A&F
Thirteen Weeks Ended
April 30, 2022 May 1, 2021 $ Change
Net (loss) income attributable to A&F per diluted
share $ (0.32) $ 0.64 $(0.96)
Excluded items, net of tax (1) 0.05 0.03 0.02
Adjusted non-GAAP net (loss) income per diluted share attributable to A&F
(0.27) 0.67 (0.94)
Impact from changes in foreign currency exchange
rates - 0.05 (0.05)
Adjusted non-GAAP net (loss) income per diluted share attributable to A&F on a constant currency basis (2) (0.27)
0.72 (0.99)
(1) Excluded items presented above under "Operating (loss) income," and "Income tax (benefit) expense."
(2) Refer to " NON-GAAP FINANCIAL MEASURES ," for further details.
Abercrombie & Fitch Co. 27 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's capital allocation strategy, priorities and investments are reviewed by A&F's Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities over the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company's share repurchase activity and suspended dividend program, please see below under "Share repurchases and dividends."
Primary sources and uses of cash
The Company's business has two principal selling seasons: the spring season,
which includes the first and second fiscal quarters ("Spring") and the fall
season, which includes the third and fourth fiscal quarters ("Fall"). The
Company generally experiences its greatest sales activity during the Fall
season, due to the back-to-school and holiday sales periods. The Company relies
on excess operating cash flows, which are largely generated in Fall, to fund
operations throughout the year and to reinvest in the business to support future
growth. The Company also has the ABL Facility available as a source of
additional funding, which is described further below under "Credit facility and
Senior Secured Notes".
Over the next twelve months, the Company expects its primary cash requirements
to be directed towards prioritizing investments in the business and continuing
to fund operating activities, including the acquisition of inventory, and
obligations related to compensation, marketing, leases and any lease buyouts or
modifications it may exercise, taxes and other operating activities.
The Company evaluates opportunities for investments in the business that are in
line with initiatives that position the business for sustainable long-term
growth that align with its strategic pillars as described within "Item 1.
Business - STRATEGY AND KEY BUSINESS PRIORITIES" included on the Fiscal 2021
Form 10-K, including being opportunistic regarding growth opportunities.
Examples of potential investment opportunities include, but are not limited to,
new store experiences, and investments in its digital and omnichannel
initiatives. Historically, the Company has utilized free cash flow generated
from operations to fund any discretionary capital expenditures, which have been
prioritized towards new store experiences, as well as digital and omnichannel
investments, information technology, and other projects. For the year-to-date
period ended April 30, 2022 , the Company used $26.3 million towards capital
expenditures. Total capital expenditures for Fiscal 2022 are expected to be
approximately $150 million .
The Company measures liquidity using total cash and cash equivalents and
incremental borrowing available under the ABL Facility. As of April 30, 2022 ,
the Company has cash and cash equivalents of $0.5 billion and total liquidity of
approximately $0.8 billion . This compares with cash and cash equivalents of
$0.8 billion and total liquidity of approximately $1.1 billion at the beginning
of Fiscal 2022. This allows the Company to evaluate potential opportunities to
strategically deploy excess cash and/or deleverage the balance sheet, depending
on various factors, such as market and business conditions, including the
Company's ability to accelerate investments in the business. Such opportunities
include, but are not limited to, returning cash to shareholders through share
repurchases or repurchasing outstanding Senior Secured Notes.
Share repurchases and dividends
InNovember 2021 , the A&F Board of Directors approved a new$500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period endedApril 30, 2022 , the Company repurchased approximately 3.3 million shares and returned approximately$100.0 million to shareholder through repurchases. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to " I tem 2. U nregistered
S ales of E quity S ecurities and U se
of Proceeds " of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company's publicly announced stock repurchase authorization. InMay 2020 , the Company announced that it had temporarily suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F's Board of Directors. A&F's Board of Directors reviews and establishes a dividend amount, if at all, based on A&F's financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company's agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Abercrombie & Fitch Co. 28 2022 1Q Form 10-Q
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Credit facility and Senior Secured Notes
As of
In addition, the Amended and Restated Credit Agreement provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to$400 million . As ofApril 30, 2022 , the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures onApril 29, 2026 .
Details regarding the remaining borrowing capacity under the ABL Facility as of
(in thousands) April 30, 2022 Borrowing base$ 350,232 Less: Outstanding stand-by letters of credit (791) Borrowing capacity 349,441 Less: Minimum excess availability (1) (35,023) Borrowing available$ 314,418
(1) The Company must maintain excess availability equal to the greater of 10%
of the loan cap or
Refer to Note 10, " BORROWINGS ."
Income taxes
The Company's earnings and profits from its foreign subsidiaries could be repatriated to theU.S. without incurring additional federal income tax. The Company determined that the balance of the Company's undistributed earnings and profits from its foreign subsidiaries as ofFebruary 2, 2019 are considered indefinitely reinvested outside of theU.S. , and if these funds were to be repatriated to theU.S. , the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned afterFebruary 2, 2019 , in such a manner that these funds could be repatriated without incurring additional tax expense. As ofApril 30, 2022 ,$317.0 million of the Company's$468.4 million of cash and equivalents were held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund itsU.S. operations or to fund investing and financing cash flow activities.
Refer to Note 9, " INCOME TAXES ."
Analysis of cash flows
The table below provides certain components of the Company's Condensed Consolidated Statements of Cash Flows for the thirteen weeks endedApril 30, 2022 andMay 1, 2021 : Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) Cash and equivalents, and restricted cash and equivalents,$ 834,368 $ 1,124,157 beginning of period Net cash used for operating activities (217,787) (131,350) Net cash used for investing activities (18,541) (14,404) Net cash used for financing activities (116,945) (53,191) Effect of foreign currency exchange rates on cash (2,617) (1,021)
Net decrease in cash and equivalents, and restricted cash and equivalents
(355,890) (199,966)
Cash and equivalents, and restricted cash and equivalents,
$ 924,191 end of period Operating activities - During the year-to-date period endedApril 30, 2022 , net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates, partially offset by increased cash receipts as a result of the 4% year-over-year increase in net sales. In addition, during the year-to-date period endedMay 1, 2021 , the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store inNew York City , which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of$80.1 million pursuant to the lease agreements through Fiscal 2028. The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of$63.8 million during the year-to-date period endedMay 1, 2021 . Abercrombie & Fitch Co. 29 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Investing activities - During the year-to-date period endedApril 30, 2022 , net cash used for investing activities were primarily used for capital expenditures of$26.3 million , partially offset by the proceeds from the sale of property and equipment of$7.8 million . This compared net cash used for investing activities of capital expenditures of$14.4 million for the year-to-date period endedMay 1, 2021 . Financing activities - During the year-to-date period endedApril 30, 2022 , net cash used for financing activities included the purchase of approximately 3.3 million shares of Common Stock with a market value of approximately$100.0 million . During the year-to-date period endedMay 1, 2021 , net cash used for financing activities primarily consisted of the purchase of approximately 1.1 million shares of Common Stock with a market value of approximately$35.2 million .
Contractual obligations
The Company's contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company's short-term and long-term liquidity and capital resource needs. There have been no material changes during the thirteen weeks endedApril 30, 2022 in the contractual obligations as ofJanuary 29, 2022 , with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company's merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company's operations).
RECENT ACCOUNTING PRONOUNCEMENTS
The Company describes its significant accounting policies in Note 2, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" included on the Fiscal 2021 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company's consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The Company describes its critical accounting estimates in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included on the Fiscal 2021 Form 10-K. There have been no significant changes in
critical accounting policies and estimates since the end of Fiscal 2021.
Abercrombie & Fitch Co. 30 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this " I tem 2. M anagement ' s D iscussion and
A nalysis of F inancial C ondition and R esults of O perations " is useful to investors as it provides a meaningful basis to evaluate the Company's operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges related to the Company's flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, thereby supplementing investors' understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company's performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company's GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies.
Comparable sales
At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year's net sales converted at the current year's foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year's net sales converted at the current year's foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company's revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, the Company has not disclosed comparable sales since Fiscal 2019.
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
Operating (loss) income Asset impairment charges
Income tax (benefit) expense (2) Tax effect of pre-tax excluded items Net (loss) income and net (loss) income per Pre-tax excluded items and the tax effect of share attributable to A&F (2) pre-tax excluded
items
(1) Certain of these financial measures are also expressed as a percentage of
net sales.
(2) The tax effect of excluded items is the difference between the tax
provision calculation on a GAAP basis and on an adjusted non-GAAP basis.
Abercrombie & Fitch Co. 31 2022 1Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors' understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period's foreign currency exchange rates to the prior year's results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate.
A reconciliation of non-GAAP financial metrics on a constant currency basis to
financial measures calculated and presented in accordance with GAAP for the
thirteen weeks ended
(in thousands, except change in net sales, gross profit rate, operating margin and per share data)
Thirteen Weeks Ended
Net sales April 30, 2022 May 1, 2021 % Change
GAAP $ 812,762 $ 781,405 4%
Impact from changes in foreign currency exchange rates - (8,529) 1%
Non-GAAP on a constant currency basis $ 812,762 $ 772,876 5%
Gross profit, exclusive of depreciation and amortization expense
April 30, 2022 May 1, 2021 BPS Change (1)
GAAP $ 449,546 $ 495,134 (810)
Impact from changes in foreign currency exchange rates - (3,283) (20)
Non-GAAP on a constant currency basis $ 449,546 $ 491,851 (830)
Operating (loss) income April 30, 2022 May 1, 2021 BPS Change (1)
GAAP $ (9,726) $ 57,433 (850)
Excluded items (2) (3,422) (2,664) (10)
Adjusted non-GAAP $ (6,304) $ 60,097 (860)
Impact from changes in foreign currency exchange rates - 4,341 (50)
Adjusted non-GAAP on a constant currency basis $ (6,304) $ 64,438 (910)
Net (loss) income attributable to A&F per diluted share
May 1, 2021 $ Change
GAAP $ (0.32) $ 0.64 $(0.96)
Excluded items, net of tax (2) (0.05) (0.03) (0.02)
Adjusted non-GAAP $ (0.27) $ 0.67 $(0.94)
Impact from changes in foreign currency exchange rates - 0.05 (0.05)
Adjusted non-GAAP on a constant currency basis $ (0.27) $ 0.72 $(0.99)
(1) The estimated basis point change has been rounded based on the change in
the percentage of net sales.
(2) Excluded items for the thirteen weeks ended April 30, 2022 and May 1, 2021
consisted of pre-tax store asset impairment charges and the tax effect of
pre-tax excluded items.
Abercrombie & Fitch Co. 32 2022 1Q Form 10-Q
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