ABERCROMBIE & FITCH CO /DE/
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended
May 4, 2024
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number
001-12107
(Exact name of Registrant as specified in its charter)
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Registrant’s telephone number, including area code:
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| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
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Yes
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No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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x | Accelerated filer |
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Smaller reporting company |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
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No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class A Common Stock |
Shares outstanding as of June 5, 2024
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| $0.01 Par Value |
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Table of Contents
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Abercrombie & Fitch Co. |
2
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2024 1Q Form 10-Q
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Abercrombie & Fitch Co.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Thousands, except per share amounts)
(Unaudited)
| Thirteen Weeks Ended | |||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||
| Net sales | $ |
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$ |
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| Cost of sales, exclusive of depreciation and amortization |
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| Gross profit |
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| Stores and distribution expense |
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| Marketing, general and administrative expense |
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| Other operating income, net |
(
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(
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| Operating income |
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| Interest expense |
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| Interest income |
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(
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| Interest (income) expense, net |
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| Income before income taxes |
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| Income tax expense |
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| Net income |
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| Less: Net income attributable to noncontrolling interests |
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| Net income attributable to A&F | $ |
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$ |
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| Net income per share attributable to A&F | |||||||||||
| Basic | $ |
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$ |
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| Diluted | $ |
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$ |
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| Weighted-average shares outstanding | |||||||||||
| Basic |
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| Diluted |
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| Other comprehensive (loss) income | |||||||||||
| Foreign currency translation adjustments, net of tax | $ |
(
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$ |
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| Derivative financial instruments, net of tax |
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| Other comprehensive (loss) income |
(
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| Comprehensive income |
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| Less: Comprehensive income attributable to noncontrolling interests |
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| Comprehensive income attributable to A&F | $ |
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$ |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| Abercrombie & Fitch Co. |
3
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2024 1Q Form 10-Q
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Abercrombie & Fitch Co.
Condensed Consolidated Balance Sheets
(Thousands, except par value amounts)
(Unaudited)
| May 4, 2024 | February 3, 2024 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ |
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$ |
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| Receivables |
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| Inventories |
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| Other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Operating lease right-of-use assets |
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| Other assets |
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| Total assets | $ |
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$ |
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| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ |
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$ |
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| Accrued expenses |
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| Short-term portion of operating lease liabilities |
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| Income taxes payable |
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| Total current liabilities |
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| Long-term liabilities: | |||||||||||
| Long-term portion of operating lease liabilities |
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| Long-term borrowings, net |
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| Other liabilities |
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| Total long-term liabilities |
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| Stockholders’ equity | |||||||||||
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Class A Common Stock: $
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| Paid-in capital |
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| Retained earnings |
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| Accumulated other comprehensive loss, net of tax (“AOCL”) |
(
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(
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Treasury stock, at average cost:
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(
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(
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| Total Abercrombie & Fitch Co. stockholders’ equity |
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| Noncontrolling interests |
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity | $ |
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$ |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| Abercrombie & Fitch Co. |
4
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2024 1Q Form 10-Q
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Abercrombie & Fitch Co.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except per share amounts)
(Unaudited)
| Thirteen Weeks Ended May 4, 2024 | |||||||||||||||||||||||||||||
| Common Stock |
Paid-in
capital |
Non-controlling interests |
Retained
earnings |
AOCL | Treasury stock |
Total
stockholders’ equity |
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Shares
outstanding |
Par
value |
Shares |
At average
cost |
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| Balance, February 3, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Net income | — | — | — |
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— | — | — |
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| Purchase of Common Stock |
(
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— | — | — | — | — |
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(
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(
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| Share-based compensation issuances and exercises |
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— |
(
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— |
(
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— |
(
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(
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(
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| Share-based compensation expense | — | — |
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— | — | — | — | — |
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| Derivative financial instruments, net of tax | — | — | — | — | — |
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— | — |
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| Foreign currency translation adjustments, net of tax | — | — | — | — | — |
(
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— | — |
(
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| Distributions to noncontrolling interests, net | — | — | — |
(
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— | — | — | — |
(
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| Ending balance at May 4, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Thirteen Weeks Ended April 29, 2023 | |||||||||||||||||||||||||||||
| Common Stock |
Paid-in
capital |
Non-controlling interests |
Retained
earnings |
AOCL | Treasury stock |
Total
stockholders’ equity |
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Shares
outstanding |
Par
value |
Shares |
At average
cost |
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| Balance, January 28, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Net income | — | — | — |
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— | — | — |
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| Share-based compensation issuances and exercises |
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— |
(
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— |
(
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— |
(
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(
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| Share-based compensation expense | — | — |
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— | — | — | — | — |
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| Derivative financial instruments, net of tax | — | — | — | — | — |
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— | — |
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| Foreign currency translation adjustments, net of tax | — | — | — | — | — |
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— | — |
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| Distributions to noncontrolling interests, net | — | — | — |
(
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— | — | — | — |
(
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| Ending balance at April 29, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Abercrombie & Fitch Co. |
5
|
2024 1Q Form 10-Q
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Abercrombie & Fitch Co.
Condensed Consolidated Statements of Cash Flows
(Thousands)
(Unaudited)
| Thirteen Weeks Ended | |||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ |
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$ |
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Adjustments to reconcile net income to net cash provided by (used for) operating activities:
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| Depreciation and amortization |
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| Asset impairment |
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| Loss on disposal |
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| Provision for deferred income taxes |
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| Share-based compensation |
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| Loss on extinguishment of debt |
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| Changes in assets and liabilities: | |||||||||||
| Inventories |
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| Accounts payable and accrued expenses |
(
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(
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| Operating lease right-of-use assets and liabilities |
(
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(
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| Income taxes |
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| Other assets |
(
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(
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| Other liabilities |
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| Net cash provided by (used for) operating activities |
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(
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| Investing activities | |||||||||||
| Purchases of property and equipment |
(
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(
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| Net cash used for investing activities |
(
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(
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| Financing activities | |||||||||||
| Purchase of senior secured notes |
(
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| Purchases of Common Stock |
(
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Acquisition of Common stock for tax withholding obligations
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(
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(
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| Other financing activities |
(
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(
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| Net cash used for financing activities |
(
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(
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| Effect of foreign currency exchange rates on cash |
(
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(
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| Net decrease in cash and equivalents, and restricted cash and equivalents |
(
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(
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| Cash and equivalents, and restricted cash and equivalents, beginning of period |
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| Cash and equivalents, and restricted cash and equivalents, end of period | $ |
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$ |
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| Supplemental information related to non-cash activities | |||||||||||
| Purchases of property and equipment not yet paid at end of period | $ |
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$ |
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| Operating lease right-of-use assets additions, net of terminations, impairments and other reductions |
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| Supplemental information related to cash activities | |||||||||||
| Cash paid for interest |
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| Cash paid for income taxes |
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| Cash received from income tax refunds |
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| Cash paid for amounts included in measurement of operating lease liabilities, net of abatements |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| Abercrombie & Fitch Co. |
6
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2024 1Q Form 10-Q
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Abercrombie & Fitch Co.
Index for Notes to Condensed Consolidated Financial Statements (Unaudited)
| Page No. | ||||||||
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Note 1.
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Note 2.
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Note 3.
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Note 4.
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Note 5.
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Note 6.
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Note 7.
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Note 8.
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Note 9.
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Note 10.
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Note 11.
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Note 12.
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Note 13.
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Note 14.
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| Abercrombie & Fitch Co. |
7
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2024 1Q Form 10-Q
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Abercrombie & Fitch Co.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.
NATURE OF BUSINESS
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as 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 Company-owned stores and digital channels, as well as through various third-party arrangements.
The Company manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows.
The Company has interests in Emirati and Kuwaiti business ventures with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive Income
and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets.
Fiscal year
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows:
| Fiscal year | Year ended/ending | Number of weeks | ||||||||||||
| Fiscal 2023 | February 3, 2024 | 53 | ||||||||||||
| Fiscal 2024 | February 1, 2025 | 52 | ||||||||||||
| Fiscal 2025 | January 31, 2026 | 52 | ||||||||||||
Interim financial statements
The Condensed Consolidated Financial Statements as of May 4, 2024, and for the thirteen week periods ended May 4, 2024 and April 29, 2023, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2023 filed with the SEC on April 1, 2024 (the “Fiscal 2023 Form 10-K”). The February 3, 2024 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”).
In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2024.
| Abercrombie & Fitch Co. |
8
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2024 1Q Form 10-Q
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Use of estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of global economic conditions such as the uncertainty regarding a slowing economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, the ongoing conflicts between Russia and Ukraine or Israel and Hamas which could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Recent accounting pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain accounting pronouncements that the company has adopted.
| Accounting Standards Update (ASU) | Description | Effect on the financial statements or other significant matters | ||||||||||||
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ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
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The update modifies the disclosure/presentation requirements of reportable segments. The amendments in the update require the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit and loss, The amendments also require disclosure of all other segment items by reportable segment and a description of its composition. Additionally, the amendments require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.
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The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and accompanying notes | ||||||||||||
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ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures
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The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. For public business entities (PBEs), the requirement will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted.
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Other than the new disclosure requirements, the adoption of this guidance will not have a significant impact on the Company's consolidated financial statements.
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Condensed Consolidated Statements of Cash Flows reconciliation
The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows:
| (in thousands) | Location | May 4, 2024 | February 3, 2024 | April 29, 2023 | January 28, 2023 | ||||||||||||||||||||||||
| Cash and equivalents | Cash and equivalents | $ |
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$ |
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$ |
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$ |
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| Long-term restricted cash and equivalents | Other assets |
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| Cash and equivalents and restricted cash and equivalents | $ |
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$ |
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$ |
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$ |
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| Abercrombie & Fitch Co. |
9
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2024 1Q Form 10-Q
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Supply Chain Finance Program
Under the supply chain finance (“SCF”) program, which is administered by a third party, the Company’s vendors, at their sole discretion, are given the opportunity to sell receivables from the Company to a participating financial institution at a discount that leverages the Company’s credit profile. The commercial terms negotiated by the Company with its vendors are consistent, irrespective of whether a vendor participates in the SCF program. A participating vendor has the option to be paid by the financial institution earlier than the original invoice due date. The Company’s responsibility is limited to making payment on the terms originally negotiated by the Company with each vendor, regardless of whether the vendor sells its receivable to a financial institution. If a vendor chooses to participate in the SCF program, the Company pays the financial institution the stated amount of confirmed merchandise invoices on the stated maturity date, which is typically
75
days from the invoice date. The agreement with the financial institution does not require the Company to provide assets pledged as security or other forms of guarantees for the SCF program.
As of May 4, 2024 and February 3, 2024, $
58.0
million and $
72.4
million of SCF program liabilities were recorded in
in the Condensed Consolidated Balance Sheets, respectively, and reflected as a cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows when settled.
The following table provides activity in the SCF program for the thirteen weeks ended May 4, 2024
| Thirteen Weeks Ended | |||||
| (in thousands) | May 4, 2024 | ||||
| Confirmed obligations outstanding at the beginning of the period | $ |
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| Invoices confirmed during the period |
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| Confirmed invoices paid during the period |
(
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| Confirmed obligations outstanding at the end of the period | $ |
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3.
REVENUE RECOGNITION
Disaggregation of revenue
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. For information regarding the disaggregation of revenue, refer to Note 14, “
SEGMENT REPORTING
.
”
Contract liabilities
The following table details certain contract liabilities representing unearned revenue as of May 4, 2024, February 3, 2024, April 29, 2023 and January 28, 2023:
| (in thousands) | May 4, 2024 | February 3, 2024 | April 29, 2023 | January 28, 2023 | |||||||||||||||||||
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Gift card liability
(1)
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$ |
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$ |
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$ |
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$ |
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| Loyalty programs liability |
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(1)
Includes $
9.9
million and $
13.4
million of revenue recognized during the thirteen weeks ended May 4, 2024 and April 29, 2023, respectively, that was included in the gift card liability at the beginning of February 3, 2024 and January 28, 2023, respectively.
The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Revenue associated with gift card redemptions and gift card breakage | $ |
|
$ |
|
|||||||
| Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs |
|
|
|||||||||
| Abercrombie & Fitch Co. |
10
|
2024 1Q Form 10-Q
|
||||||
4.
NET INCOME PER SHARE
Net income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of A&F’s Class A Common Stock, $0.01 par value (“Common Stock”). The following table provides
additional information pertaining to net income per share attributable to A&F for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Shares of Common Stock issued |
|
|
|||||||||
| Weighted-average treasury shares |
(
|
(
|
|||||||||
| Weighted-average — basic shares |
|
|
|||||||||
| Dilutive effect of share-based compensation awards |
|
|
|||||||||
| Weighted-average — diluted shares |
|
|
|||||||||
|
Anti-dilutive shares
(1)
|
|
|
|||||||||
(1)
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieved from zero up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion.
5.
FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
•
Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
•
Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
•
Level 3—inputs to the valuation methodology are unobservable.
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The following table provides the three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of May 4, 2024 and February 3, 2024:
|
Assets and Liabilities at Fair Value as of May 4, 2024
|
|||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
|
Cash equivalents
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Derivative instruments
(2)
|
|
|
|
|
|||||||||||||||||||
|
Rabbi Trust assets
(3)
|
|
|
|
|
|||||||||||||||||||
|
Restricted cash equivalents
(1)
|
|
|
|
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Liabilities: | |||||||||||||||||||||||
|
Derivative instruments
(2)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Assets and Liabilities at Fair Value as of February 3, 2024
|
|||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
|
Cash equivalents
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Derivative instruments
(2)
|
|
|
|
|
|||||||||||||||||||
|
Rabbi Trust assets
(3)
|
|
|
|
|
|||||||||||||||||||
|
Restricted cash equivalents
(1)
|
|
|
|
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Liabilities: | |||||||||||||||||||||||
|
Derivative instruments
(2)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits.
(2)
Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts.
| Abercrombie & Fitch Co. |
11
|
2024 1Q Form 10-Q
|
||||||
The Company’s Level 2 assets and liabilities consisted of:
•
Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies;
•
Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and
•
Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Fair value of long-term borrowings
The Company’s borrowings under its senior secured notes, which have a fixed
8.75
% interest rate and mature on July 15, 2025 (the “Senior Secured Notes”), are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets.
The following table provides the carrying amount and fair value of the Company’s long-term gross borrowings as of May 4, 2024 and February 3, 2024:
| (in thousands) | May 4, 2024 | February 3, 2024 | |||||||||
| Gross borrowings outstanding, carrying amount | $ |
|
$ |
|
|||||||
|
Gross borrowings outstanding, fair value
(1)
|
|
|
|||||||||
(1)
Classified as Level 2 measurements within the fair value hierarchy.
6.
PROPERTY AND EQUIPMENT, NET
The following table provides
property and equipment, net as of May 4, 2024 and February 3, 2024:
| (in thousands) | May 4, 2024 | February 3, 2024 | |||||||||
| Property and equipment, at cost | $ |
|
$ |
|
|||||||
| Less: Accumulated depreciation and amortization |
(
|
(
|
|||||||||
| Property and equipment, net | $ |
|
$ |
|
|||||||
7.
LEASES
The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
The following table provides a summary of the Company’s operating lease costs for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
|
Single lease cost
(1)
|
$ |
|
$ |
|
|||||||
|
Variable lease cost
(2)
|
|
|
|||||||||
|
Operating lease right-of-use asset impairment
(3)
|
|
|
|||||||||
|
Sublease income
|
(
|
(
|
|||||||||
| Total operating lease cost | $ |
|
$ |
|
|||||||
(1)
Includes amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities.
(2)
Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs.
(3)
Refer to Note 8, “
ASSET IMPAIRMENT
,” for details related to operating lease right-of-use asset impairment charges.
The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for certain Company-operated retail stores, of approximately $
72.1
million as of May 4, 2024.
| Abercrombie & Fitch Co. |
12
|
2024 1Q Form 10-Q
|
||||||
8.
ASSET IMPAIRMENT
The following table provides
asset impairment charges for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Operating lease right-of-use asset impairment | $ |
|
$ |
|
|||||||
| Property and equipment asset impairment |
|
|
|||||||||
| Total asset impairment | $ |
|
$ |
|
|||||||
9.
INCOME TAXES
The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Impact of valuation allowances
During the thirteen weeks ended May 4, 2024, the Company did not recognize income tax benefits on $
7.6
million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $
1.1
million.
As of May 4, 2024, the Company had foreign net deferred tax assets of approximately $
38.3
million, including $
8.1
million, $
7.4
million, and $
12.7
million in China, Japan and the United Kingdom, respectively. While the Company believes that these net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense.
During the thirteen weeks ended April 29, 2023, the Company did not recognize income tax benefits on $
20.3
million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $
3.1
million.
As of February 3, 2024, there were approximately $
7.6
million, $
7.5
million, and $
12.6
million of net deferred tax assets in China, Japan, and the United Kingdom, respectively.
Share-based compensation
Refer to Note 11, “
SHARE-BASED COMPENSATION
,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended May 4, 2024 and April 29, 2023.
| Abercrombie & Fitch Co. |
13
|
2024 1Q Form 10-Q
|
||||||
10.
BORROWINGS
The following table provides
details on the Company’s long-term borrowings, net, as of May 4, 2024 and February 3, 2024 :
| (in thousands) | May 4, 2024 | February 3, 2024 | |||||||||
| Long-term portion of borrowings, gross at carrying amount | $ |
|
$ |
|
|||||||
| Unamortized fees |
(
|
(
|
|||||||||
| Long-term borrowings, net | $ |
|
$ |
|
|||||||
Senior Secured Notes
During the thirteen weeks ended May 4, 2024, A&F Management purchased $
9.3
million of outstanding Senior Secured Notes in the open market and incurred a $
0.2
million loss on extinguishment of debt, recognized in interest expense on the Condensed Consolidated Statements of Operations and Comprehensive Income. The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 12, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2023 Form 10-K.
ABL Facility
The terms of the Company’s senior secured revolving credit facility of up to $
400.0
million (the “ABL Facility”) have remained unchanged from those disclosed in Note 12, “
BORROWINGS
,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2023 Form 10-K.
The Company did not have any borrowings outstanding under the ABL Facility as of May 4, 2024 or as of February 3, 2024.
As of May 4, 2024, availability under the ABL Facility was $
325.2
million, net of $
0.4
million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $
292.7
million as of May 4, 2024.
Representations, warranties and covenants
The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or Abercrombie & Fitch Management Co. (“A&F Management”) to another entity.
The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness.
Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with all debt covenants under these agreements as of May 4, 2024.
| Abercrombie & Fitch Co. |
14
|
2024 1Q Form 10-Q
|
||||||
11.
SHARE-BASED COMPENSATION
Financial statement impact
The following table provides share-based compensation expense and the related income tax impacts for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Share-based compensation expense | $ |
|
$ |
|
|||||||
|
Income tax benefits associated with share-based compensation expense recognized
|
|
|
|||||||||
The following table provides discrete income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
|
Income tax discrete benefits realized for tax deductions related to the issuance of shares
|
$ |
|
$ |
|
|||||||
| Income tax discrete charges realized upon cancellation of stock appreciation rights |
|
(
|
|||||||||
|
Total income tax discrete benefits related to share-based compensation awards
|
$ |
|
$ |
|
|||||||
The following table provides the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
|
Employee tax withheld upon issuance of shares
(1)
|
$ |
|
$ |
|
|||||||
(1)
Classified within financing activities on the Condensed Consolidated Statements of Cash Flows.
Restricted stock units
The following table provides the summarized activity for restricted stock units for the thirteen weeks ended May 4, 2024:
|
Service-based Restricted
Stock Units |
Performance-based Restricted
Stock Units |
Market-based Restricted
Stock Units |
|||||||||||||||||||||||||||||||||
|
Number of
Underlying Shares |
Weighted-
Average Grant Date Fair Value |
Number of
Underlying Shares |
Weighted-
Average Grant Date Fair Value |
Number of
Underlying Shares |
Weighted-
Average Grant Date Fair Value |
||||||||||||||||||||||||||||||
| Unvested at February 3, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||||||||||||||||||
| Granted |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Adjustments for performance achievement
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Vested |
(
|
|
(
|
|
(
|
|
|||||||||||||||||||||||||||||
| Forfeited |
(
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Unvested at May 4, 2024
(1)
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||||||||||||||||||
(1)
Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved from zero up to 200% of their target vesting amount.
The following table provides the unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of May 4, 2024:
|
Service-based Restricted
Stock Units |
Performance-based Restricted
Stock Units |
Market-based Restricted
Stock Units |
|||||||||||||||
|
Unrecognized compensation cost
(in thousands)
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Remaining weighted-average period cost is expected to be recognized (years) |
|
|
|
||||||||||||||
| Abercrombie & Fitch Co. |
15
|
2024 1Q Form 10-Q
|
||||||
The following table provides
additional information pertaining to restricted stock units for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Service-based restricted stock units: | |||||||||||
| Total grant date fair value of awards granted | $ |
|
$ |
|
|||||||
| Total grant date fair value of awards vested |
|
|
|||||||||
| Performance-based restricted stock units: | |||||||||||
| Total grant date fair value of awards granted |
|
|
|||||||||
| Total grant date fair value of awards vested |
|
|
|||||||||
| Market-based restricted stock units: | |||||||||||
| Total grant date fair value of awards granted |
|
|
|||||||||
| Total grant date fair value of awards vested |
|
|
|||||||||
The following table provides the weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||
| Grant date market price | $ |
|
$ |
|
|||||||
| Fair value |
|
|
|||||||||
| Price volatility |
|
% |
|
% | |||||||
| Expected term (years) |
|
|
|||||||||
| Risk-free interest rate |
|
% |
|
% | |||||||
| Dividend yield |
|
|
|||||||||
| Average volatility of peer companies |
|
|
|||||||||
| Average correlation coefficient of peer companies |
|
|
|||||||||
Stock appreciation rights
The following table provides the summarized stock appreciation rights activity for the thirteen weeks ended May 4, 2024:
|
Number of
Underlying Shares |
Weighted-Average
Exercise Price |
Aggregate
Intrinsic Value
(in thousands)
|
Weighted-Average
Remaining Contractual Life (years) |
||||||||||||||||||||
| Outstanding at February 3, 2024 |
|
$ |
|
||||||||||||||||||||
| Exercised |
(
|
|
|||||||||||||||||||||
| Forfeited or expired |
|
|
|||||||||||||||||||||
|
Outstanding at May 4, 2024
|
|
$ |
|
$ |
|
|
|||||||||||||||||
| Stock appreciation rights exercisable at May 4, 2024 |
|
$ |
|
$ |
|
|
|||||||||||||||||
The following table provides additional information pertaining to stock appreciation rights exercised during the thirteen weeks ended May 4, 2024 and April 29, 2023:
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Total grant date fair value of awards exercised | $ |
|
$ |
|
|||||||
| Abercrombie & Fitch Co. |
16
|
2024 1Q Form 10-Q
|
||||||
12.
DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings.
The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
As of May 4, 2024, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany transactions:
| (in thousands) |
Notional Amount
(1)
|
||||
| Euro | $ |
|
|||
| British pound |
|
||||
| Canadian dollar |
|
||||
(1)
Amounts reported are the U.S. Dollar notional amounts outstanding as of May 4, 2024.
As of May 4, 2024, foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets and liabilities were as follows:
| (in thousands) |
Notional Amount
(1)
|
||||
| British pound | $ |
|
|||
| Euro |
|
||||
The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The following table provides the location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of May 4, 2024 and February 3, 2024:
| (in thousands) | Location | May 4, 2024 | February 3, 2024 | Location | May 4, 2024 | February 3, 2024 | |||||||||||||||||||||||||||||
| Derivatives designated as cash flow hedging instruments |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
|||||||||||||||||||||||||
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Total
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
The following table provides
information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
|
Gain (loss) recognized in AOCL
(1)
|
$ |
|
$ |
(
|
|||||||
|
Gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization
(2)
|
|
(
|
|||||||||
(1)
Amount represents the change in fair value of derivative instruments.
(2)
Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization.
Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income over the next
twelve months
.
| Abercrombie & Fitch Co. |
17
|
2024 1Q Form 10-Q
|
||||||
The following table provides additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
|
Gain (loss) recognized in other operating income, net
|
$ |
|
$ |
(
|
|||||||
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables provide activity in AOCL fo
r the thirteen weeks ended May 4, 2024:
| Thirteen Weeks Ended May 4, 2024 | |||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||||||||
| Beginning balance at February 3, 2024 | $ |
(
|
$ |
|
$ |
(
|
|||||||||||
| Other comprehensive (loss) income before reclassifications |
(
|
|
(
|
||||||||||||||
|
Reclassified gain from AOCL
(1)
|
|
(
|
(
|
||||||||||||||
| Tax effect |
|
(
|
(
|
||||||||||||||
| Other comprehensive (loss) income after reclassifications |
(
|
|
(
|
||||||||||||||
| Ending balance at May 4, 2024 | $ |
(
|
$ |
|
$ |
(
|
|||||||||||
(1)
Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income.
The following tables provide activity in AOCL for the thirteen weeks ended April 29, 2023:
| Thirteen Weeks Ended April 29, 2023 | |||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||||||||
| Beginning balance at January 28, 2023 | $ |
(
|
$ |
(
|
$ |
(
|
|||||||||||
| Other comprehensive income (loss) before reclassifications |
|
(
|
(
|
||||||||||||||
|
Reclassified loss from AOCL
(1)
|
|
|
|
||||||||||||||
| Tax effect |
|
|
|
||||||||||||||
| Other comprehensive income after reclassifications |
|
|
|
||||||||||||||
| Ending balance at April 29, 2023 | $ |
(
|
$ |
(
|
$ |
(
|
|||||||||||
(1)
Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income.
14.
SEGMENT REPORTING
The Company’s reportable segments are based on the financial information the chief operating decision maker (“CODM”) uses to allocate resources and assess performance of its business.
The group comprised of the Company’s (i) Chief Executive Officer and (ii) Chief Financial Officer and Chief Operating Officer functions as the Company’s CODM. The Company’s CODM manages business operations and evaluates the performance of each segment based on the net sales and operating income (loss) of the segment.
Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributed to the segment. Corporate/other expenses include expenses incurred that are not directly attributed to a reportable segment and primarily relate to corporate or global functions such as design, sourcing, brand management, corporate strategy, information
| Abercrombie & Fitch Co. |
18
|
2024 1Q Form 10-Q
|
||||||
technology, finance, treasury, legal, human resources, and other corporate support services, as well as certain globally managed components of the planning, merchandising, and marketing functions.
The Company reports inventories by segment as that information is used by the CODM in determining allocation of resources to the segments. The Company does not report its other assets by segment as that information is not used by the CODM in assessing segment performance or allocating resources.
The following tables provide the Company’s segment information as of May 4, 2024 and February 3, 2024, and for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Net Sales | |||||||||||
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Americas | $ |
|
$ |
|
|||||||
| EMEA |
|
|
|||||||||
| APAC |
|
|
|||||||||
| Segment total | $ |
|
$ |
|
|||||||
|
Operating Income (Loss)
|
|||||||||||
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
| Americas | $ |
|
$ |
|
|||||||
| EMEA |
|
(
|
|||||||||
| APAC |
(
|
(
|
|||||||||
| Segment total | $ |
|
$ |
|
|||||||
|
Operating (loss) income not attributed to segments:
|
|||||||||||
| Stores and distribution expense |
(
|
(
|
|||||||||
| Marketing, general and administrative expense |
(
|
(
|
|||||||||
| Other operating income,net |
|
|
|||||||||
| Total operating income | $ |
|
$ |
|
|||||||
| Assets | |||||||||||
| (in thousands) | May 4, 2024 | February 3, 2024 | |||||||||
| Inventories | |||||||||||
| Americas | $ |
|
$ |
|
|||||||
| EMEA |
|
|
|||||||||
| APAC |
|
|
|||||||||
| Total inventories | $ |
|
$ |
|
|||||||
|
Assets not attributed to segments
|
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
Brand Information
The following table provides additional disaggregated revenue information, which is categorized by brand, for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| (in thousands) | May 4, 2024 | April 29, 2023 | |||||||||
|
Abercrombie
(1)
|
$ |
|
$ |
|
|||||||
|
Hollister
(2)
|
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
(1)
Abercrombie brands includes
Abercrombie & Fitch and abercrombie kids.
(2)
Hollister brands includes Hollister and Gilly Hicks
| Abercrombie & Fitch Co. |
19
|
2024 1Q Form 10-Q
|
||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements 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 or, its management and spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” or the negative versions of these words or other comparable words, and similar expressions may identify forward-looking statements. 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 2023 Form 10-K and otherwise in our reports and filings with the SEC, as well as the following:
•
risks related to changes in global economic and financial conditions, including inflation, and the resulting impact on consumer spending generally and on our operating results, financial condition, and expense management, and our ability to adequately mitigate the impact;
•
risks related to geopolitical conflict, armed conflict, such as the conflicts between Russia and Ukraine or Israel and Hamas
and the possible expansion of conflict in the surrounding areas
, including the impact of such conflicts on international trade, supplier delivery or increased freight costs, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience;
•
risks related to natural disasters and other unforeseen catastrophic events;
•
risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory;
•
risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives;
•
risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons;
•
risks related to fluctuations in foreign currency exchange rates;
•
risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations;
•
risks related to our ability to execute on, and maintain the success of, our strategic and growth initiatives, including those outlined in our 2025 Always Forward Plan;
•
risks related to global operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions;
•
risks and uncertainty related to adverse public health developments;
•
risks related to cybersecurity threats and privacy or data security breaches;
•
risks related to the potential loss or disruption of our information systems;
•
risks related to the continued validity of our trademarks and our ability to protect our intellectual property;
•
risks associated with climate change and other corporate responsibility issues;
•
risks related to reputational harm to the Company, its officers, and directors;
•
risks related to actual or threatened litigation; 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. As used herein, “Abercrombie & Fitch Co.,” “the Company,” “we,” “us,” “our,” and similar terms include Abercrombie & Fitch Co. and its subsidiaries, unless the context indicates otherwise.
| Abercrombie & Fitch Co. |
20
|
2024 1Q Form 10-Q
|
||||||
INTRODUCTION
MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows:
•
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 May 4, 2024 and April 29, 2023.
•
Results of Operations
.
An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income
for the thirteen weeks ended May 4, 2024 and April 29, 2023.
•
Liquidity and Capital Resources
.
A discussion of the Company’s financial condition, changes in financial condition and liquidity as of May 4, 2024, which includes (i) an analysis of financial condition as compared to February 3, 2024; (ii) an analysis of changes in cash flows for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023; and (iii) an analysis of liquidity, including availability under the Company’s ABL Facility, the Company’s share repurchase program, and outstanding debt and covenant compliance.
•
Recent Accounting Pronouncements
.
A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements.
•
Critical Accounting Estimates
.
A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application.
•
Non-GAAP Financial Measures
.
MD&A provides a discussion of certain financial measures that 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
|
2024 1Q Form 10-Q
|
||||||
OVERVIEW
Business summary
The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its Company-owned stores and digital channels, as well as through various third-party arrangements.
The Company manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income.
The Company’s brands include Abercrombie brands, which includes Abercrombie & Fitch and abercrombie kids, and Hollister brands, which includes Hollister and Gilly Hicks. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style.
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows:
| Fiscal year | Year ended/ending | Number of weeks | ||||||||||||
| Fiscal 2023 | February 3, 2024 | 53 | ||||||||||||
| Fiscal 2024 | February 1, 2025 | 52 | ||||||||||||
| Fiscal 2025 | January 31, 2026 | 52 | ||||||||||||
Seasonality
Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the Fall season due to back-to-school and holiday sales periods, respectively.
CURRENT TRENDS AND OUTLOOK
Focus areas for fiscal 2024
In June of Fiscal 2022, we announced our 2025 Always Forward Plan, which outlines our long-term strategy and goals, including growing shareholder value. The 2025 Always Forward Plan is anchored on our strategic growth principles, which are to:
•
Execute focused growth plans;
•
Accelerate an enterprise-wide digital revolution; and
•
Operate with financial discipline
The 2025 Always Forward Plan growth principles serve as a framework for the Company achieving sustainable and profitable growth and profitability in Fiscal 2024. Below are some additional details specific to Fiscal 2024 objectives within the 2025 Always Forward Plan:
Execute focused growth plans by:
•
driving sales growth across regions and brands primarily through marketing and store investment.
•
using our playbooks globally to align the brands’ products, voices, and experiences with customers, both digitally and in-store; and
•
using testing and chase strategies to deliver compelling assortments and product collections across genders.
Accelerate an enterprise-wide digital revolution to improve the customer and associate experience by:
•
continuing to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey; and
•
investing in digital and technology to improve experiences across key parts of the customer journey while delivering a consistent omnichannel experience.
Operate with financial discipline by:
•
actively managing inventory levels and positioning Abercrombie brands and Hollister brands to chase inventory as appropriate throughout the year; and
•
funding our growth strategies while properly balancing investments, impacts of inflation and efficiency efforts.
| Abercrombie & Fitch Co. |
22
|
2024 1Q Form 10-Q
|
||||||
Current macroeconomic conditions and impact of inflation
Macroeconomic conditions, including inflation, higher interest rates, the geopolitical landscape, political uncertainty including elections in several countries, foreign exchange rate fluctuations, and declines in consumer discretionary spending continue to negatively impact the global economy. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. The Company continues to experience pricing volatility with respect to cotton, raw materials and freight costs. While cotton and raw material costs have decreased from prior year-end levels, freight costs have recently been increasing. Continued inflationary pressures and pricing volatility could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins.
Global events and supply chain disruptions
As a global multi-brand omnichannel specialty retailer, with operations in North America, Europe, the Middle East, and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the ongoing armed conflicts between Russia and Ukraine or Israel and Hamas, and conflict in the surrounding areas, which could adversely impact certain areas of the business. Starting in late Fiscal 2023, disruptions to ocean vessels in the Red Sea resulted in delayed deliveries to the EMEA region. Such disruptions have also increased freight costs, which may impact the Company through the remainder of Fiscal 2024. The Company has taken certain mitigating actions in response to these events, including increasing air freight usage where appropriate and prioritizing critical orders earlier to allow for longer lead times. Further mitigating actions may be needed, particularly if there is prolonged or escalating conflict in the Red Sea.
Management continues to monitor global events and assess the potential impacts that these events and similar events may have on the business in future periods. Although management also develops and updates 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.
Global store network optimization
The Company has a goal of finding the right size, right location and right economics for 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 2024, the Company opened 1 new store, while closing 13 stores. As part of this focus, the Company has updated and increased its store investment plan to include approximately 60 new stores, while closing approximately 40 stores, during Fiscal 2024, 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.
Pillar Two Model Rules
In 2021, the Organization for Economic Cooperation and Development (“OECD”) released Pillar Two Global Anti-Base Erosion model rules (“Pillar Two Rules”), designed to ensure large corporations are taxed at a minimum rate of 15% in all countries of operation. Although the U.S. has not yet enacted legislation implementing Pillar Two Rules, other countries where the Company does business, including the U.K. and Germany, have enacted legislation implementing Pillar Two Rules which are effective from January 1, 2024. The implementation of the Pillar Two Rules in each jurisdiction in which it operates did not have a material impact on the Company’s effective tax rate. The Company will continue to evaluate the impact as additional jurisdictions implement legislation and provide further guidance.
For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, “Item 1A. Risk Factors” on the Fiscal 2023 Form 10-K.
| Abercrombie & Fitch Co. |
23
|
2024 1Q Form 10-Q
|
||||||
Summary of results
A summary of results for the thirteen weeks ended May 4, 2024 and April 29, 2023 was as follows:
| GAAP |
Non-GAAP
(1)
|
|||||||||||||||||||||||||
| Thirteen Weeks Ended |
May 4, 2024
|
April 29, 2023
|
May 4, 2024
|
April 29, 2023
|
||||||||||||||||||||||
|
Net sales
(in thousands)
|
$ | 1,020,730 | $ | 835,994 | ||||||||||||||||||||||
| Change in net sales | 22.1 | % | 2.9 | % | ||||||||||||||||||||||
|
Comparable sales
(2)
|
21 | % | 3 | % | ||||||||||||||||||||||
| Gross profit rate | 66.4 | % | 61.0 | % | ||||||||||||||||||||||
|
Operating income
(in thousands)
|
$ | 129,849 | $ | 34,008 | $ | 129,849 | $ | 38,444 | ||||||||||||||||||
|
Operating income margin
|
12.7 | % | 4.1 | % | 12.7 | % | 4.6 | % | ||||||||||||||||||
|
Net income attributable to A&F
(in thousands)
|
$ | 113,850 | $ | 16,571 | $ | 113,850 | $ | 19,820 | ||||||||||||||||||
| Net income per share attributable to A&F | 2.14 | 0.32 | 2.14 | 0.39 | ||||||||||||||||||||||
(1)
Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “
NON-GAAP FINANCIAL MEASURES
.”
(2)
Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales. Refer to the discussion below in “
NON-GAAP FINANCIAL MEASURES
,” for further details on the comparable sales calculation.
Certain components of the Company’s Condensed Consolidated Balance Sheets as of May 4, 2024 and February 3, 2024 were as follows:
| (in thousands) | May 4, 2024 | February 3, 2024 | ||||||||||||
| Cash and equivalents | $ | 864,195 | $ | 900,884 | ||||||||||
| Inventories | 449,267 | 469,466 | ||||||||||||
| Gross long-term borrowings outstanding, carrying amount | 213,906 | 223,214 | ||||||||||||
Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended May 4, 2024 and April 29, 2023 were as follows:
| (in thousands) | May 4, 2024 | April 29, 2023 | ||||||||||||
| Net cash provided by (used for) operating activities | $ | 95,010 | $ | (560) | ||||||||||
| Net cash used for investing activities | (38,886) | (46,391) | ||||||||||||
| Net cash used for financing activities | (92,951) | (21,956) | ||||||||||||
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
Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. The Company’s net sales by reportable segment for the thirteen weeks ended May 4, 2024 and April 29, 2023 were as follows:
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| (in thousands, except ratios) | May 4, 2024 | April 29, 2023 | $ Change | % Change |
Comparable
Sales
(1
)
|
||||||||||||||||||||||||
| By segment: | |||||||||||||||||||||||||||||
| Americas | $ | 820,121 | $ | 665,423 | $ | 154,698 | 23 | % | 21 | % | |||||||||||||||||||
| EMEA | 164,778 | 138,106 | 26,672 | 19 | 23 | ||||||||||||||||||||||||
| APAC | 35,831 | 32,465 | 3,366 | 10 | 22 | ||||||||||||||||||||||||
| Total | $ | 1,020,730 | $ | 835,994 | $ | 184,736 | 22 | 21 | |||||||||||||||||||||
(1)
Comparable sales are calculated on a constant currency basis. Refer to
“
NON-GAAP FINANCIAL MEASURES,
”
for further details on the comparable sales calculation.
| Abercrombie & Fitch Co. |
24
|
2024 1Q Form 10-Q
|
||||||
For the first quarter of Fiscal 2024, net sales increased 22%, as compared to the first quarter of Fiscal 2023, primarily due to broad-based net sales growth across segments, mainly driven by a higher AUR as a result of lower promotional activity. The year-over-year increase in net sales reflects a positive comparable sales of 21%, as compared to the first quarter of Fiscal 2023, with double-digit comparable sales growth in the Americas, EMEA and APAC segments.
The Company’s net sales by brand for the thirteen weeks ended May 4, 2024 and April 29, 2023 were as follows:
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| (in thousands, except ratios) | May 4, 2024 | April 29, 2023 | $ Change | % Change |
Comparable
Sales
(1)
|
||||||||||||||||||||||||
|
Abercrombie
(2)
|
$ | 571,513 | $ | 436,044 | $ | 135,469 | 31 | % | 29 | % | |||||||||||||||||||
|
Hollister
(3)
|
449,217 | 399,950 | 49,267 | 12 | 13 | ||||||||||||||||||||||||
| Total | $ | 1,020,730 | $ | 835,994 | $ | 184,736 | 22 | 21 | |||||||||||||||||||||
(1)
Comparable sales are calculated on a constant currency basis. Refer to
“
NON-GAAP FINANCIAL MEASURES,
”
for further details on the comparable sales calculation.
(2)
Includes Abercrombie & Fitch and abercrombie kids.
(3)
Includes Hollister and Gilly Hicks.
Cost of sales, exclusive of depreciation and amortization
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 343,273 | 33.6 | % | $ | 326,200 | 39.0 | % | (540) | ||||||||||||||||||||
For the first quarter of Fiscal 2024, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 540 basis points, as compared to the first quarter of Fiscal 2023. The year-over-year percentage decline was primarily attributable to lower cotton and raw material costs as well as increased average unit retail. Year-over-year decreases in the Americas and EMEA region were primarily driven by lower discounts and clearance selling. The APAC region also benefited from lower raw material costs, partially offset by the impact of changes in foreign currency.
| Abercrombie & Fitch Co. |
25
|
2024 1Q Form 10-Q
|
||||||
Gross profit, exclusive of depreciation and amortization
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Gross profit, exclusive of depreciation and amortization | $ | 677,457 | 66.4 | % | $ | 509,794 | 61.0 | % | 540 | ||||||||||||||||||||
Stores and distribution expense
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Stores and distribution expense | $ | 371,686 | 36.4 | % | $ | 336,049 | 40.2 | % | (380) | ||||||||||||||||||||
For the first quarter of Fiscal 2024, stores and distribution expense, as a percentage of net sales decreased, as compared to the first quarter of Fiscal 2023. The decrease was primarily driven by expense leverage as a result of net sales growth, slightly offset with increases in distribution center and order fulfillment costs as compared to the first quarter of 2023.
Marketing, general and administrative expense
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Marketing, general and administrative expense | $ | 177,880 | 17.4 | % | $ | 142,631 | 17.1 | % | 30 | ||||||||||||||||||||
For the first quarter of Fiscal 2024, marketing, general and administrative expense, as a percentage of net sales, increased 30 basis points, as compared to the first quarter of Fiscal 2023, primarily driven by an increase in marketing expense and investments in technology and people.
Other operating income, net
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Other operating income, net | $ | 1,958 | 0.2 | % | $ | 2,894 | 0.3 | % | (10) | ||||||||||||||||||||
Operating income
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Operating income | $ | 129,849 | 12.7 | % | $ | 34,008 | 4.1 | % | 860 | ||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
|
Asset impairment charges
(1)
|
— | — | 4,436 | 0.5 | (50) | ||||||||||||||||||||||||
| Adjusted non-GAAP operating income ⁽¹⁾ | $ | 129,849 | 12.7 | $ | 38,444 | 4.6 | 810 | ||||||||||||||||||||||
| Abercrombie & Fitch Co. |
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Interest (income) expense, net
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Interest expense | $ | 5,780 | 0.6 | % | $ | 7,458 | 0.9 | % | (30) | ||||||||||||||||||||
| Interest income | (10,803) | (1.1) | (4,015) | (0.5) | (60) | ||||||||||||||||||||||||
| Interest (income) expense, net | $ | (5,023) | (0.5) | $ | 3,443 | 0.4 | (90) | ||||||||||||||||||||||
For the first quarter of Fiscal 2024, interest (income) expense, net decreased $8.5 million, as compared to the first quarter of Fiscal 2023, as a result of lower borrowings due to the purchase of Senior Secured Notes as well as an increase in interest income due to the increase in balance and rates received on deposits and money market accounts.
Income tax expense
| Thirteen Weeks Ended | |||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||
| (in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||||||||||||||
| Income tax expense | $ | 19,794 | 14.7 | % | $ | 12,718 | 41.6 | % | |||||||||||||||
| Excluded items: | |||||||||||||||||||||||
|
Tax effect of pre-tax excluded items
(1)
|
— | 1,187 | |||||||||||||||||||||
| Adjusted non-GAAP income tax expense ⁽¹⁾ | $ | 19,794 | 14.7 | $ | 13,905 | 39.7 | |||||||||||||||||
(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.
Compared with the first quarter of Fiscal 2023, the change in the effective tax rates during the first quarter of Fiscal 2024 is due to higher levels of pre-tax income offset by a larger tax benefit on share based compensation.
Net income attributable to A&F
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Net income attributable to A&F | $ | 113,850 | 11.2 | % | $ | 16,571 | 2.0 | % | 920 | ||||||||||||||||||||
|
Excluded items, net of tax
(1)
|
— | — | 3,249 | 0.4 | (40) | ||||||||||||||||||||||||
|
Adjusted non-GAAP net income attributable to A&F
(2)
|
$ | 113,850 | 11.2 | $ | 19,820 | 2.4 | 880 | ||||||||||||||||||||||
(1)
Excluded items presented above under “
Operating income
,” and “
Income tax expense
”
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Net income per share attributable to A&F
| Thirteen Weeks Ended | |||||||||||||||||
| May 4, 2024 | April 29, 2023 | $ Change | |||||||||||||||
|
Net income per diluted share attributable to A&F
|
$ | 2.14 | $ | 0.32 | $ | 1.82 | |||||||||||
|
Excluded items, net of tax
(1)
|
— | 0.06 | (0.06) | ||||||||||||||
|
Adjusted non-GAAP net income per diluted share attributable to A&F
|
2.14 | 0.39 | 1.75 | ||||||||||||||
| Impact from changes in foreign currency exchange rates | — | — | — | ||||||||||||||
|
Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis
(2)
|
2.14 | 0.39 | 1.75 | ||||||||||||||
(1)
Excluded items presented above under “
Operating income
,” and “
Income tax expense
.
”
EBITDA and adjusted EBITDA
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | % of Net sales | % of Net sales | BPS Change | ||||||||||||||||||||||||||
| Net income | $ | 115,078 | 11.3 | % | $ | 17,847 | 2.1 | % | 920 | ||||||||||||||||||||
| Income tax expense | 19,794 | 1.9 | 12,718 | 1.5 | 40 | ||||||||||||||||||||||||
| Interest (income) expense, net | (5,023) | (0.5) | 3,443 | 0.4 | (90) | ||||||||||||||||||||||||
| Depreciation and amortization | 37,689 | 3.7 | 36,028 | 4.4 | (70) | ||||||||||||||||||||||||
|
EBITDA
(1)
|
$ | 167,538 | 16.4 | % | $ | 70,036 | 8.4 | % | 800 | ||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
|
Asset impairment charges
(1)
|
— | — | 4,436 | 0.5 | (50) | ||||||||||||||||||||||||
|
Adjusted EBITDA
(1)
|
$ | 167,538 | 16.4 | % | $ | 74,472 | 8.9 | % | 750 | ||||||||||||||||||||
(1)
EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. EBITDA is defined as net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for asset impairment.
| Abercrombie & Fitch Co. |
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LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s capital allocation strategy and priorities are reviewed by A&F’s Board of Directors quarterly considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next twelve months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, repurchase, or restructure its ABL Facility and/or the Senior Secured Notes or repurchase shares of its Common Stock. 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, data and technology leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. In addition, the Company continuously evaluates 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 may include, but are not limited to, purchasing outstanding Senior Secured Notes or share repurchases.
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 Part I, “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2023 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 the Company’s 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 May 4, 2024, the Company used $38.9 million towards capital expenditures. Total capital expenditures for Fiscal 2024 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 May 4, 2024, the Company had cash and cash equivalents of $864.2 million and total liquidity of approximately $1.2 billion, compared with cash and cash equivalents of $900.9 million and total liquidity of approximately $1.2 billion at the beginning of Fiscal 2024.
Share repurchases and dividends
In November 2021, A&F’s Board of Directors approved a $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended May 4, 2024, the Company repurchased approximately 0.1 million shares of its common stock pursuant to this share repurchase authorization for approximately $15.0 million.
The Company has $217 million in share repurchase authorization remaining under the authorization approved in November 2021.
Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced share repurchase authorization.
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The Company’s dividend program is currently suspended in order to preserve liquidity and maintain financial flexibility. 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.
Credit facility and Senior Secured Notes
As of May 4, 2024, the Company had $213.9 million of gross borrowings outstanding under the Senior Secured Notes. During the thirteen weeks ended May 4, 2024, A&F Management purchased $9.3 million of outstanding Senior Secured Notes in the open market and incurred a $0.2 million loss on extinguishment of debt, recognized in interest expense on the Condensed Consolidated Statements of Operations and Comprehensive Income.
In addition, the Amended and Restated Credit Agreement, as amended by the First Amendment (as defined below), provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to
$400 million. As of May 4, 2024, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026.
Details regarding the remaining borrowing capacity under the ABL Facility as of May 4, 2024 are as follows:
| (in thousands) | May 4, 2024 | ||||
| Loan cap | $ | 325,648 | |||
| Less: Outstanding stand-by letters of credit | (430) | ||||
| Borrowing capacity | 325,218 | ||||
|
Less: Minimum excess availability
(1)
|
(32,565) | ||||
| Borrowing capacity available | $ | 292,653 | |||
(1)
The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility.
Income taxes
The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of May 4, 2024, $249.9 million of the Company’s $864.2 million of cash and equivalents were held by foreign affiliates.
Analysis of cash flows
The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 4, 2024 and April 29, 2023:
| Thirteen Weeks Ended | |||||||||||
| May 4, 2024 | April 29, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cash and equivalents, and restricted cash and equivalents, beginning of period | $ | 909,685 | $ | 527,569 | |||||||
| Net cash provided by (used for) operating activities | 95,010 | (560) | |||||||||
| Net cash used for investing activities | (38,886) | (46,391) | |||||||||
| Net cash used for financing activities | (92,951) | (21,956) | |||||||||
| Effect of foreign currency exchange rates on cash | (857) | (1,998) | |||||||||
| Net decrease in cash and equivalents, and restricted cash and equivalents | (37,684) | (70,905) | |||||||||
| Cash and equivalents, and restricted cash and equivalents, end of period | $ | 872,001 | $ | 456,664 | |||||||
| Abercrombie & Fitch Co. |
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Operating activities
-
During the year-to-date period ended May 4, 2024, net cash provided by operating activities included increased cash receipts as a result of the 22% year-over-year increase in net sales. During the year-to-date period ended April 29, 2023, net cash used for operating activities included increased cash receipts as a result of the 3% year-over-year increase in net sales as well as increased payments to vendors in the fourth quarter of Fiscal 2022 which resulted in lower cash payments in the first quarter of Fiscal 2023.
Investing activities
-
During the year-to-date period ended May 4, 2024, net cash used for investing activities was primarily used for capital expenditures of $38.9 million. Net cash used for investing activities for the year-to-date period ended April 29, 2023 was primarily used for capital expenditures of $46.4 million.
Financing activities
-
During the year-to-date period ended May 4, 2024, net cash used for financing activities included $65 million related to shares of Common Stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards, the purchase of approximately 0.1 million shares of Common Stock with a market value of approximately $15.0 million and the purchase of $9.3 million of outstanding Senior Secured Notes at a premium of $0.1 million. During the year-to-date period ended April 29, 2023, net cash used for financing activities included amounts related to shares of Common Stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards.
Contractual obligations
The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits, and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs.
There have been no material changes in the Company’s contractual obligations since February 3, 2024, 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 2023 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 2023 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2023.
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
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 excludes 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 can be a useful metric as it can
| Abercrombie & Fitch Co. |
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assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.
Excluded items
The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable:
|
Financial measures
(1)
|
Excluded items | |||||||
| Operating income | Asset impairment charges | |||||||
|
Income tax expense
(2)
|
Tax effect of pre-tax excluded items | |||||||
|
Net income and net income per share attributable to A&F
(2)
|
Pre-tax excluded items and the tax effect of pre-tax excluded items | |||||||
(1)
Certain of these financial measures are also expressed as a percentage of net sales.
(2)
The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis.
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.
Reconciliations 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 May 4, 2024 and April 29, 2023 were as follows:
| (in thousands, except change in net sales, gross profit rate, operating margin and per share data) | Thirteen Weeks Ended | ||||||||||||||||
| Net sales | May 4, 2024 | April 29, 2023 | % Change | ||||||||||||||
| GAAP | $ | 1,020,730 | $ | 835,994 | 22 | % | |||||||||||
| Impact from changes in foreign currency exchange rates | — | (551) | — | ||||||||||||||
| Non-GAAP on a constant currency basis | $ | 1,020,730 | $ | 835,443 | 22 | ||||||||||||
| Gross profit, exclusive of depreciation and amortization expense | May 4, 2024 | April 29, 2023 |
BPS Change
(1)
|
||||||||||||||
| GAAP | $ | 677,457 | $ | 509,794 | 540 | ||||||||||||
| Impact from changes in foreign currency exchange rates | — | 930 | (10) | ||||||||||||||
| Non-GAAP on a constant currency basis | $ | 677,457 | $ | 510,724 | 530 | ||||||||||||
| Operating income | May 4, 2024 | April 29, 2023 |
BPS Change
(1)
|
||||||||||||||
| GAAP | $ | 129,849 | $ | 34,008 | 860 | ||||||||||||
|
Excluded items
(2)
|
— | (4,436) | 50 | ||||||||||||||
| Adjusted non-GAAP | $ | 129,849 | $ | 38,444 | 810 | ||||||||||||
| Impact from changes in foreign currency exchange rates | — | 463 | (10) | ||||||||||||||
| Adjusted non-GAAP on a constant currency basis | $ | 129,849 | $ | 38,907 | 800 | ||||||||||||
| Net income per share attributable to A&F | May 4, 2024 | April 29, 2023 | $ Change | ||||||||||||||
| GAAP | $ | 2.14 | $ | 0.32 | $ | 1.82 | |||||||||||
|
Excluded items, net of tax
(2)
|
— | (0.06) | 0.06 | ||||||||||||||
| Adjusted non-GAAP | $ | 2.14 | $ | 0.39 | $ | 1.75 | |||||||||||
| Impact from changes in foreign currency exchange rates | — | — | — | ||||||||||||||
| Adjusted non-GAAP on a constant currency basis | $ | 2.14 | $ | 0.39 | $ | 1.75 | |||||||||||
(1)
The estimated basis point change has been rounded based on the change in the percentage of net sales.
(2)
Excluded items for the thirteen weeks ended April 29, 2023 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.
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EBITDA and adjusted EBITDA
The company provides EBITDA and Adjusted EBITDA as supplemental measures used by the Company's executive management to assess the Company's performance. We also believe these supplemental performance measures are meaningful information for investors and other interested parties to use in computing the Company's core financial performance over multiple periods and with other companies by excluding the impact of differences in tax jurisdictions, debt service levels and capital investment.
Reconciliations of non-GAAP EBITDA and adjusted EBITDA to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended May 4, 2024 and April 29, 2023 were as follows:
| Thirteen Weeks Ended | ||||||||||||||||||||
| May 4, 2024 |
% of
Net Sales |
April 29, 2023 |
% of
Net Sales |
|||||||||||||||||
| Net income | $ | 115,078 | 11.3 | % | $ | 17,847 | 2.1 | % | ||||||||||||
| Income tax expense | 19,794 | 1.9 | 12,718 | 1.5 | ||||||||||||||||
| Interest (income) expense, net | (5,023) | (0.5) | 3,443 | 0.4 | ||||||||||||||||
| Depreciation and amortization | 37,689 | 3.7 | 36,028 | 4.4 | ||||||||||||||||
|
EBITDA
(1)
|
$ | 167,538 | 16.4 | % | $ | 70,036 | 8.4 | % | ||||||||||||
| Adjustments to EBITDA | ||||||||||||||||||||
|
Asset impairment
(1)
|
— | — | 4,436 | 0.5 | ||||||||||||||||
|
Adjusted EBITDA
(1)
|
$ | 167,538 | 16.4 | % | $ | 74,472 | 8.9 | % | ||||||||||||
(1)
EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. EBITDA is defined as net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for asset impairment.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
INVESTMENT SECURITIES
The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments.
The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II, and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies, which are recorded at cash surrender value. The change in cash surrender value resulted in realized gains of $0.3 million and $0.3 million for the thirteen weeks ended May 4, 2024 and April 29, 2023, respectively. The realized gains were recorded in interest (income) expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income.
The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of May 4, 2024 and February 3, 2024 and are restricted in their use as noted above.
INTEREST RATE RISK
Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then-existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2024 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications ceased after June 30, 2023. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment”) to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate, as well as to make other conforming changes.
FOREIGN CURRENCY EXCHANGE RATE RISK
A&F’s international subsidiaries generally operate with functional currencies other than the U.S. dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets, and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase.
A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.
Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. As of May 4, 2024, the Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $7.1 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “
DERIVATIVE INSTRUMENTS
,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of May 4, 2024 and February 3, 2024.
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Item 4. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President, Chief Financial Officer and Chief Operating Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended May 4, 2024. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President, Chief Financial Officer and Chief Operating Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of May 4, 2024.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended May 4, 2024 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its affiliates are defendants in lawsuits and other adversary proceedings that may range from individual actions involving a single plaintiff to class action lawsuits. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible, and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “
Item 1. Financial Statements (Unaudited)
,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts.
In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required.
Item 1A. Risk Factors
The Company’s risk factors as of May 4, 2024 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” of the Fiscal 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of equity securities during the first quarter of Fiscal 2024 that were not registered under the Securities Act of 1933, as amended.
The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended May 4, 2024:
| Period (fiscal month) |
Total Number of Shares Purchased
(1)
|
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(2)(3)
|
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| February 4, 2024 through March 2, 2024 | 1,339 | $ | 121.37 | — | $ | 232,184,768 | |||||||||||||||||
| March 3, 2024 through April 6, 2024 | 582,642 | 127.36 | 79,731 | 221,844,410 | |||||||||||||||||||
| April 7, 2024 through May 4, 2024 | 42,217 | 116.83 | 39,733 | 217,184,802 | |||||||||||||||||||
| Total | 626,198 | 126.64 | 119,464 | 217,184,802 | |||||||||||||||||||
(1)
An aggregate of 506,734 shares of Common Stock purchased during the thirteen weeks ended May 4, 2024 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights.
(2)
On November 23, 2021, the Company announced that 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 for repurchase.
(3)
The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced share repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions.
Item 5. Other Information
During the thirteen weeks ended May 4, 2024,
no
director or officer of the Company adopted a new “Rule 10b5-1 trading arrangement ” or “non-Rule 10b5-1 trading arrangement,” and
no
director or officer of the Company modified or terminated an
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existing “Rule 10b5-1 trading arrangement ” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K under the Exchange Act.
Item 6. Exhibits
| Exhibit | Document | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
|
10.1
|
||||||||
|
10.2
|
Form of Performance Share Award Agreement used to evidence the grant of performance share awards to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 12, 2024
,
incorporated herein by reference to Exhibit 10.
43
to A&F’s
Annual Report on Form 10-K for the fiscal year ended
February 3, 2
0
24
(File No. 001-12107)
|
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|
10.3
|
|
|||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* | |||||||
* Filed herewith.
** Furnished herewith.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: June 7, 2024
|
By: |
/s/ Scott D. Lipesky
|
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| Scott D. Lipesky | ||||||||
|
Executive Vice President, Chief Financial Officer and Chief Operating Officer
(Principal Financial Officer, Principal Accounting Officer and Authorized Officer) |
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TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial Statements (unaudited)printItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 5. Other InformationprintItem 6. Exhibitsprint