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 " Item 1. Financial Statements (Unaudited) ,"
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," "will," "could," "outlook," 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 Fiscal 2021 Form 10-K and otherwise in our reports and filings with theSEC , as well as the following: •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 and uncertainty related to the ongoing COVID-19 pandemic, including
lockdowns in
•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, and the strategic goals outlined in our Always Forward Plan;
•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, 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 including any
financial targets and estimates, whether as a result of new information, future
events, or otherwise.
Abercrombie & Fitch Co. 20 2022 3Q 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 and thirty-nine 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 and thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 . • Liquidity and Capital Resources . A discussion of the Company's financial condition, changes in financial condition and liquidity as ofOctober 29, 2022 , which includes (i) an analysis of financial condition as compared toJanuary 29, 2022 ; (ii) an analysis of changes in cash flows for the thirty-nine weeks endedOctober 29, 2022 , as compared to the thirty-nine weeks endedOctober 30, 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 Estimates . A discussion of the accounting estimates considered to be important to the Company's results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application.
• Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that 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. 21 2022 3Q Form 10-Q
--------------------------------------------------------------------------------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 and 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
During the second quarter of Fiscal 2022, the Company announced its Always Forward Plan, which outlines the Company's long-term strategic goals. The Always Forward Plan is anchored on three strategic growth principles, which are to: •Execute focused brand growth plans; •Accelerate an enterprise-wide digital revolution; and •Operate with financial discipline. The following focus areas for Fiscal 2022 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Plan: •Execute brand growth plans, primarily focused on continuing momentum atAbercrombie & Fitch and delivering standalone store experiences atGilly Hicks ; •Accelerate digital and technology investments in systems and people to increase flexibility, modernize foundational systems and improve the customer experience; •Operate with a more flexible cost structure, and seek expense efficiencies while protecting investments in digital, technology and store growth to fund our strategic principles; •Take a data-driven approach to store expansion in under penetrated markets •Optimize our global distribution network to increase capacity and improve delivery speed to customers; and •Integrate environmental, social and governance ("ESG") practices and standards throughout the Company.
Supply chain disruptions, impact of inflation and COVID-19
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 through year-to-date Fiscal 2022. The Company expects freight costs to stabilize compared with the elevated air freight rates and usage in 2021. However, the Company may continue to experience inflationary pressures affecting the Company's transit and other costs through at least the balance of Fiscal 2022. In order to mitigate supply chain constraints and higher freight rates, the Company took certain mitigating actions in early Fiscal 2022 that included scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where appropriate. The Company continues to take certain mitigating actions however, responses to supply chain constraints, and/or transportation delays may not be adequate to offset the impact of these headwinds. The Company has also experienced historic 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 Abercrombie & Fitch Co. 22 2022 3Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents 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 spending, which may adversely impact demand for our products. The ongoing COVID-19 pandemic remains volatile with continued uncertainty regarding its impact on the global economy. The Company has experienced various adverse impacts of the pandemic, including supply chain disruptions, inflationary pressures including higher freight and labor costs, labor shortages, weak store traffic and temporary store closures. Despite the introduction of COVID-19 vaccines, the pandemic continues to evolve, with resurgences and outbreaks occurring in various parts of the world, including those resulting from variants of the virus. While trends in the severity of new cases of COVID-19 in theU.S. have improved throughout Fiscal 2022 to date, increased caseloads in certain global regions have resulted in factory re-closures, most notably, in the APAC region in conjunction with strict lockdowns and zero-tolerance policy shutdowns inChina . The adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time. The Company will continue to assess the pandemic's impact on its operations and financial condition, and will respond as appropriate.
Inflation Reduction Act of 2022
OnAugust 16, 2022 , the Inflation Reduction Act was signed into law, with tax provisions primarily focused on implementing a 15% corporate minimum tax on global adjusted financial statement income, expected to become applicable to the Company beginning in Fiscal 2023, and a 1% excise tax on share repurchases in tax years beginning afterDecember 31, 2022 . The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes.
Global Store Network Optimization
The Company has a 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 use data to inform its focus
on aligning store square footage with digital penetration, and during the
year-to-date period of Fiscal 2022, the Company opened 31 new stores, while
closing 9 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 16 5 5 5 21 10 31 Permanently closed - (3) (4) (2) (4) (5) (9)October 29, 2022 367 156 174 54 541 210 751 Gross square footage (in thousands):October 29, 2022 2,387 1,210 1,133 370 3,520 1,580 5,100 (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 10 international franchise stores as ofOctober 29, 2022 and 9 international franchise stores as ofJanuary 29, 2022 . Excludes 14 Company-operated temporary stores as ofOctober 29, 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 19 international franchise stores as ofOctober 29, 2022 and 14 international franchise stores as ofJanuary 29, 2022 . Excludes 4 Company-operated temporary stores as of each ofOctober 29, 2022 and 5 Company-operated temporary stores as ofJanuary 29, 2022 .
(3)This store count excludes one international third-party operated multi-brand
outlet store as of each of
Impact of global events and uncertainty
As 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, management continues to monitor global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company's preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. Abercrombie & Fitch Co. 23 2022 3Q Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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 and thirty-nine weeks ended
GAAP Non-GAAP (1)
(in thousands, except change in net
sales, gross profit rate, operating
income margin and per share amounts) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021
Thirteen Weeks Ended
Net sales $ 880,084 $ 905,160
Change in net sales (2.8) % 10.4 %
Gross profit rate 59.2 63.7
Operating income $ 17,543 $ 72,731 $ 21,287 $ 79,480
Operating income margin 2.0 % 8.0 % 2.4 % 8.8 %
Net (loss) income attributable to
A&F $ (2,214) $ 47,233 $ 554 $ 52,607
Net (loss) income per share
attributable to A&F (0.04) 0.77 0.01 0.86
Thirty-Nine Weeks Ended
Net sales $ 2,497,937 $ 2,551,415
Change in net sales (2.1) % 27.4 %
Gross profit rate 57.5 64.1
Operating income $ 5,626 $ 244,951 $ 14,962 $ 255,150
Operating income margin 0.2 % 9.6 % 0.6 % 10.0 %
Net (loss) income attributable to
A&F $ (35,517) $ 197,501 $ (28,686) $ 205,652
Net (loss) income per share
attributable to A&F (0.70) 3.10 (0.57) 3.22
(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
October 29, January 29,
(in thousands) 2022 2022
Cash and equivalents $ 257,332 $ 823,139
Gross long-term borrowings outstanding, carrying amount 299,730 307,730
Inventories 741,963 525,864
Certain components of the Company's Condensed Consolidated Statements of Cash
Flows for the thirty-nine week periods ended October 29, 2022 and October 30,
2021 were as follows:
October 29, October 30,
(in thousands) 2022 2021
Net cash (used for) provided by operating activities $ (301,194) $ 131,287
Net cash used for investing activities (96,391) (62,223)
Net cash used for financing activities (154,906) (304,358)
Abercrombie & Fitch Co. 24 2022 3Q 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
The Company's net sales by operating segment for the thirteen and thirty-nine
weeks ended
Thirteen Weeks Ended
(in thousands) October 29, 2022 October 30, 2021 $ Change % Change
Hollister (1) $ 457,752 $ 522,311 $ (64,559) (12)%
Abercrombie (2) 422,332 382,849 39,483 10
Total $ 880,084 $ 905,160 $ (25,076) (3)
Thirty-Nine Weeks Ended
(in thousands) October 29, 2022 October 30, 2021 $ Change % Change
Hollister (1) $ 1,323,492 $ 1,479,202 $ (155,710) (11)%
Abercrombie (2) 1,174,445 1,072,213 102,232 10
Total $ 2,497,937 $ 2,551,415 $ (53,478) (2)
(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 and thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 were as follows: Thirteen Weeks Ended (in thousands) October 29, 2022 October 30, 2021 $ Change % Change U.S. $ 674,555 $ 654,858$ 19,697 3% EMEA 139,826 179,156 (39,330) (22) APAC 28,293 38,215 (9,922) (26) Other (1) 37,410 32,931 4,479 14 International $ 205,529 $ 250,302$ (44,773) (18) Total $ 880,084 $ 905,160$ (25,076) (3) Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 $ Change % Change U.S.$ 1,837,760 $ 1,810,471 $ 27,289 2% EMEA 470,575 528,998 (58,423) (11) APAC 85,968 125,489 (39,521) (31) Other (1) 103,634 86,457 17,177 20 International $ 660,177 $ 740,944$ (80,767) (11) Total 2,497,937 2,551,415 (53,478) (2)
(1) Other includes all sales that do not fall within
For the third quarter of Fiscal 2022, net sales decreased 3%, as compared to the third quarter of Fiscal 2021, primarily due to the adverse impact from changes in foreign currency exchange rates of approximately$27 million . For the year-to-date period of Fiscal 2022, net sales decreased 2%, as compared to the year-to-date period of Fiscal 2021, primarily due to the adverse impact from changes in foreign currency exchange rates of approximately$59 million . Abercrombie & Fitch Co. 25 2022 3Q Form 10-Q
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Cost of sales, exclusive of depreciation and amortization
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Cost of sales, exclusive of depreciation
and amortization $ 359,268 40.8% $ 328,916 36.3% 450
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Cost of sales, exclusive of depreciation
and amortization $ 1,061,684 42.5% $ 916,552 35.9% 660
For the third quarter of Fiscal 2022, cost of sales, exclusive of depreciation
and amortization, as a percentage of net sales increased by approximately 450
basis points, as compared to the third quarter of Fiscal 2021. The
year-over-year increase was primarily driven by higher freight and raw material
costs, which contributed 370 basis points to the increase, as well as 60 basis
points from the adverse impact from changes in foreign currency exchange rates.
For the year-to-date period of Fiscal 2022, cost of sales, exclusive of
depreciation and amortization, as a percentage of net sales increased by
approximately 660 basis points, as compared to the year-to-date period of Fiscal
2021. The year-over-year increase was primarily attributable to elevated freight
and raw material costs, as well as the adverse impact from changes in foreign
currency exchange rates.
Gross profit, exclusive of depreciation and amortization
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Gross profit, exclusive of depreciation and
amortization $ 520,816 59.2% $ 576,244 63.7% (450)
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Gross profit, exclusive of depreciation and
amortization $ 1,436,253 57.5% $ 1,634,863 64.1% (660)
Stores and distribution expense
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Stores and distribution expense $ 367,333 41.7% $ 351,815 38.9% 280
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Stores and distribution expense $ 1,045,667 41.9% $ 993,170 38.9% 300
For the third quarter of Fiscal 2022, stores and distribution expense increased
4%, as compared to the third quarter of Fiscal 2021. The $16 million increase
was driven by increased digital shipping and handling costs as compared to the
third quarter of Fiscal 2021.
For the year-to-date period of Fiscal 2022, stores and distribution expense increased 5%, the increase can primarily be attributed to increased digital shipping and handling costs as compared to the year-to-date period of Fiscal 2021.
Abercrombie & Fitch Co. 26 2022 3Q Form 10-Q
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Marketing, general and administrative expense
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Marketing, general and administrative
expense $ 133,201 15.1% $ 146,269 16.2% (110)
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Marketing, general and administrative
expense $ 379,518 15.2% $ 391,129 15.3% (10)
For the third quarter of Fiscal 2022, marketing, general and administrative
expense, as a percentage of net sales, decreased 110 basis points as compared to
the third quarter of Fiscal 2021, primarily driven by a reduction in marketing
and advertising expenses, as well as lower incentive-based compensation as
compared to the third quarter of Fiscal 2021.
For the year-to-date period of Fiscal 2022, marketing, general and administration expense, as a percentage of net sales, decreased 10 basis points as compared to the year-to-date period of Fiscal 2021, primarily due to a reduction in marketing and advertising expenses, as well as lower incentive-based compensation.
Asset impairment
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Asset impairment $ 3,744 0.4% $ 6,749 0.7% (30)
Excluded items:
Asset impairment charges (1) (3,744) (0.4) (6,749) (0.7) 30
Adjusted non-GAAP asset impairment $ - - $ - - -
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Asset impairment $ 9,336 0.4% $ 10,199 0.4% -
Excluded items:
Asset impairment charges (1) (9,336) (0.4) (10,199) (0.4) -
Adjusted non-GAAP asset impairment $ - - $ - - -
(1) Refer to " NON-GAAP FINANCIAL MEASURES " for further details.
Refer to Note 8, " ASSET IMPAIRMENT ."
Abercrombie & Fitch Co. 27 2022 3Q Form 10-Q
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Other operating income, net
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Other operating income, net $ 1,005 0.1% $ 1,320 0.1% -
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Other operating income, net $ 3,894 0.2% $ 4,586 0.2% -
Operating income
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Operating income $ 17,543 2.0% $ 72,731 8.0% (600)
Excluded items:
Asset impairment charges (1) 3,744 0.4 6,749 0.7 (30)
Adjusted non-GAAP operating income $ 21,287 2.4 $ 79,480 8.8 (640)
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Operating income $ 5,626 0.2% $ 244,951 9.6% (940)
Excluded items:
Asset impairment charges (1) 9,336 0.4 10,199 0.4 -
Adjusted non-GAAP operating income $ 14,962 0.6 $ 255,150 10.0 (940)
(1) Refer to " NON-GAAP FINANCIAL MEASURES " for further details.
Interest expense, net
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Interest expense $ 7,586 0.9% $ 7,802 0.9% -
Interest income (291) (0.1) (532) (0.1) -
Interest expense, net $ 7,295 0.8 $ 7,270 0.8 -
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Interest expense $ 23,055 0.9% $ 30,505 1.2% (30)
Interest income (1,536) - (3,354) (0.1) 10
Interest expense, net $ 21,519 0.9 $ 27,151 1.1 (20)
For the third quarter of Fiscal 2022, interest expense, net was flat, as
compared to the third quarter of Fiscal 2021. For the year-to-date period of
Fiscal 2022, interest expense, net decreased $5.6 million , as compared to the
year-to-date period of Fiscal 2021. The decrease was primarily driven by lower
premiums paid related to debt repurchases during Fiscal 2022, as compared to
Fiscal 2021.
Abercrombie & Fitch Co. 28 2022 3Q Form 10-Q
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Income tax expense
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(in thousands, except ratios) Effective Tax Rate Effective Tax Rate
Income tax expense $ 10,966 107.0% $ 16,383 25.0%
Excluded items:
Tax effect of pre-tax excluded items (1) 976 1,375
Adjusted non-GAAP income tax expense $ 11,942 85.4 $ 17,758 24.6
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands, except ratios) Effective Tax Rate Effective Tax Rate
Income tax expense $ 14,413 (90.7)% $ 15,560 7.1%
Excluded items:
Tax effect of pre-tax excluded items (1) 2,505 2,048
Adjusted non-GAAP income tax expense $ 16,918 (258.3) $ 17,608 7.7
(1) The tax effect of pre-tax excluded items is the difference between the tax
provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer
to "Operating income" 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
October 29, 2022 October 30, 2021
(in thousands) % of Net sales % of Net sales BPS Change
Net (loss) income attributable to A&F $ (2,214) (0.3)% $ 47,233 5.2% (550)
Excluded items, net of tax (1) 2,768 0.4 5,374 0.6 (20)
Adjusted non-GAAP net income attributable
to A&F (2) $ 554 0.1 $ 52,607 5.8 (570)
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands) % of Net Sales % of Net Sales BPS Change
Net (loss) income attributable to A&F $ (35,517) (1.4)% $ 197,501 7.7% (910)
Excluded items, net of tax (1) 6,831 0.3 8,151 0.3 -
Adjusted non-GAAP net (loss) income
attributable to A&F (2) $ (28,686) (1.1) $ 205,652 8.1 (920)
(1) Excluded items presented above under "Operating income," and "Income tax
expense"
(2) Refer to " NON-GAAP FINANCIAL MEASURES " for further details.
Abercrombie & Fitch Co. 29 2022 3Q Form 10-Q
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Net (loss) income per share attributable to A&F
Thirteen Weeks Ended
October 29,
2022 October 30, 2021 $ ChangeNet (loss) income per dilutive share attributable to A&F
$ (0.04) $ 0.77$(0.81) Excluded items, net of tax (1) 0.05 0.09 (0.04) Adjusted non-GAAP net income per diluted share attributable to A&F 0.01 0.86 (0.85) Impact from changes in foreign currency exchange rates - (0.10) 0.10 Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) 0.01 0.76 (0.75) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 $ Change
Net (loss) income per dilutive share attributable to A&F
$ (0.70) $ 3.10$(3.80) Excluded items, net of tax (1) 0.13 0.13 -
Adjusted non-GAAP net (loss) income per diluted share attributable to A&F
(0.57) 3.22 (3.79)
Impact from changes in foreign currency exchange
rates - (0.14) 0.14
Adjusted non-GAAP net (loss) income per diluted share attributable to A&F on a constant currency basis (2) (0.57)
3.08 (3.65)
(1) Excluded items presented above under "Operating income," and "Income tax
expense."
(2) Refer to " NON-GAAP FINANCIAL MEASURES " for further details.
Abercrombie & Fitch Co. 30 2022 3Q 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 for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company's share repurchase activity and suspended dividend program, please see below under "Share repurchases and dividends."
Primary sources and uses of cash
The Company's business has two principal selling seasons: the spring season,
which includes the first and second fiscal quarters ("Spring") and the fall
season, which includes the third and fourth fiscal quarters ("Fall"). The
Company generally experiences its greatest sales activity during the Fall
season, due to the back-to-school and holiday sales periods. The Company relies
on excess operating cash flows, which are largely generated in Fall, to fund
operations throughout the year and to reinvest in the business to support future
growth. The Company also has the ABL Facility available as a source of
additional funding, which is described further below under "Credit facility and
Senior Secured Notes".
Over the next twelve months, the Company expects its primary cash requirements
to be directed towards prioritizing investments in the business and continuing
to fund operating activities, including the acquisition of inventory, and
obligations related to compensation, marketing, leases and any lease buyouts or
modifications it may exercise, taxes and other operating activities.
The Company evaluates opportunities for investments in the business that are in
line with initiatives that position the business for sustainable long-term
growth that align with its strategic pillars as described within "Item 1.
Business - STRATEGY AND KEY BUSINESS PRIORITIES" included on the Fiscal 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 October 29, 2022 , the Company used $120.3 million towards capital
expenditures. Total capital expenditures for Fiscal 2022 are expected to be
approximately $170 million .
The Company measures liquidity using total cash and cash equivalents and
incremental borrowing available under the ABL Facility. As of October 29, 2022 ,
the Company had cash and cash equivalents of $257.3 million and total liquidity
of approximately $616.8 million , compared with cash and cash equivalents of
$823.1 million 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 , A&F's 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 endedOctober 29, 2022 , the Company repurchased approximately 4.8 million shares for approximately$125.8 million . Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to " Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds " of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company's publicly announced stock repurchase authorization. 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. 31 2022 3Q Form 10-Q
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Credit facility and Senior Secured Notes
As ofOctober 29, 2022 , the Company had$299.7 million of gross borrowings outstanding under the Senior Secured Notes. During the thirteen weeks endedOctober 29, 2022 , A&F Management purchased$8.0 million of outstanding Senior Secured Notes and incurred a$0.1 million gain on extinguishment of debt, recognized in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. 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 ofOctober 29, 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) October 29, 2022 Loan cap $ 400,000 Less: Outstanding stand-by letters of credit (554) Borrowing capacity 399,446 Less: Minimum excess availability (1) (40,000) Borrowing capacity available $ 359,446
(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 ofOctober 29, 2022 ,$179.6 million of the Company's$257.3 million of cash and equivalents were held by foreign affiliates.
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 thirty-nine weeks ended
Thirty-Nine Weeks Ended
October 29, 2022 October 30, 2021
(in thousands)
Cash and equivalents, and restricted cash and equivalents, $ 834,368 $ 1,124,157
beginning of period
Net cash (used for) provided by operating activities (301,194) 131,287
Net cash used for investing activities (96,391) (62,223)
Net cash used for financing activities (154,906) (304,358)
Effect of foreign currency exchange rates on cash (14,871) (8,560)
Net decrease in cash and equivalents, and restricted cash and equivalents
(567,362) (243,854)
Cash and equivalents, and restricted cash and equivalents, $ 267,006 $ 880,303 end of period
Operating activities - During the year-to-date period endedOctober 29, 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 as well as decreased cash receipts as a result of the 2% year-over-year decrease in net sales. In addition, during the year-to-date period endedOctober 30, 2021 , the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store 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 Abercrombie & Fitch Co. 32 2022 3Q Form 10-Q
-------------------------------------------------------------------------------- Table of Contents acceleration of payments and provided for a discount resulting in an operating cash outflow of$63.8 million during the year-to-date period endedOctober 30, 2021 . Investing activities - During the year-to-date period endedOctober 29, 2022 , net cash used for investing activities was primarily used for capital expenditures of$120.3 million , partially offset by the proceeds from the withdrawal of$12.0 million of excess funds from rabbi trust assets and the sale of property and equipment of$11.9 million , as compared to net cash used for investing activities of$62.2 million for the year-to-date period endedOctober 30, 2021 , primarily used for capital expenditures. Financing activities - During the year-to-date period endedOctober 29, 2022 , net cash used for financing activities included the purchase of approximately 4.8 million shares of Common Stock with a market value of approximately$125.8 million , as well as the purchase of$8 million of outstanding Senior Secured Notes. During the year-to-date period endedOctober 30, 2021 , net cash used by financing activities included the purchase of$42.3 million of outstanding Senior Secured Notes at a premium of$4.7 million . In addition, the Company purchased approximately 6.1 million shares of Common Stock with a market value of approximately$235.2 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 in the Company's contractual obligations sinceJanuary 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. 33 2022 3Q Form 10-Q
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NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial
measures calculated and presented on both a GAAP and a non-GAAP basis. The
Company believes that each of the non-GAAP financial measures presented in this
" Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations " is useful to investors as it provides a meaningful
basis to evaluate the Company's operating performance excluding the effect of
certain items that the Company believes may not reflect its future operating
outlook, such as certain asset impairment charges, thereby supplementing
investors' understanding of comparability of operations across periods.
Management used these non-GAAP financial measures during the periods presented
to assess the Company's performance and to develop expectations for future
operating performance. These non-GAAP financial measures should be used as a
supplement to, and not as an alternative to, the Company's GAAP financial
results, and may not be calculated in the same manner as similar measures
presented by other companies.
Comparable sales
At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, with the prior year's net sales converted at the current year's foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year's net sales converted at the current year's foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company's revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. 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 income Asset impairment charges
Income tax 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. 34 2022 3Q Form 10-Q
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Financial information on a constant currency basis
The Company provides certain financial information on a constant currency basis
to enhance investors' understanding of underlying business trends and operating
performance by removing the impact of foreign currency exchange rate
fluctuations. Management also uses financial information on a constant currency
basis to award employee performance-based compensation. The effect from foreign
currency exchange rates, calculated on a constant currency basis, is determined
by applying the current period's foreign currency exchange rates to the prior
year's results and is net of the year-over-year impact from hedging. The per
diluted share effect from foreign currency exchange rates is calculated using a
26% effective tax rate.
A reconciliation of non-GAAP financial metrics on a constant currency basis to
financial measures calculated and presented in accordance with GAAP for the
thirteen and thirty-nine weeks ended
(in thousands, except change in
net sales, gross profit rate,
operating margin and per share
data) Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 29, October 30,
Net sales 2022 2021 % Change October 29, 2022 October 30, 2021 % Change
GAAP $ 880,084 $ 905,160 (3)% $ 2,497,937 $ 2,551,415 (2)%
Impact from changes in foreign
currency exchange rates - (26,860) 3 - (58,513) 2
Non-GAAP on a constant currency basis$ 880,084 $ 878,300 0$ 2,497,937 $ 2,492,902 - Gross profit, exclusive of depreciation and amortization October 29, October 30, expense 2022 2021 BPS Change (1) October 29, 2022 October 30, 2021 BPS Change (1) GAAP$ 520,816 $ 576,244 (450)$ 1,436,253 $ 1,634,863
(660)
Impact from changes in foreign currency exchange rates - (22,419) 60 - (41,819)
20
Non-GAAP on a constant currency basis$ 520,816 $ 553,825 (390)$ 1,436,253 $ 1,593,044 (640) October 29, October 30, Operating income 2022 2021 BPS Change (1) October 29, 2022 October 30, 2021 BPS Change (1) GAAP$ 17,543 $ 72,731 (600) $ 5,626 $ 244,951 (940) Excluded items (2) (3,744) (6,749) 30 (9,336) (10,199) 0 Adjusted non-GAAP$ 21,287 $ 79,480 (640) $ 14,962 $ 255,150 (940) Impact from changes in foreign currency exchange rates - (8,341) 70 - (11,985)
20
Adjusted non-GAAP on a constant currency basis$ 21,287 $ 71,139 (570) $ 14,962 $ 243,165 (920) Net (loss) income per share October 29, October 30, attributable to A&F 2022 2021 $ Change October 29, 2022 October 30, 2021 $ Change GAAP$ (0.04) $ 0.77 $(0.81) $ (0.70) $ 3.10$(3.80) Excluded items, net of tax (2) (0.05) (0.09) 0.04 (0.13) (0.13) - Adjusted non-GAAP$ 0.01 $ 0.86 $(0.85) $ (0.57) $ 3.22$(3.79) Impact from changes in foreign currency exchange rates - (0.10) 0.10 - (0.14)
0.14
Adjusted non-GAAP on a constant currency basis$ 0.01 $ 0.76 $(0.75) $ (0.57) $ 3.08$(3.65) (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen and thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 35 2022 3Q Form 10-Q
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