ABERCROMBIE & FITCH CO /DE/ - Quarter Report: 2019 November (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 2, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
Delaware | 31-1469076 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
6301 Fitch Path, | New Albany, | Ohio | 43054 |
(Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code: (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A Common Stock, $0.01 Par Value | ANF | New York Stock Exchange | ||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ 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). ☒ Yes ☐ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A Common Stock | Shares outstanding as of December 6, 2019 | |
$.01 Par Value | 62,748,098 | |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
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2
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) |
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | ||||||||||||
Net sales | $ | 863,472 | $ | 861,194 | $ | 2,438,522 | $ | 2,434,507 | |||||||
Cost of sales, exclusive of depreciation and amortization | 344,541 | 333,375 | 976,868 | 957,448 | |||||||||||
Gross profit | 518,931 | 527,819 | 1,461,654 | 1,477,059 | |||||||||||
Stores and distribution expense | 377,697 | 371,859 | 1,110,656 | 1,103,758 | |||||||||||
Marketing, general and administrative expense | 114,075 | 117,181 | 341,716 | 365,961 | |||||||||||
Flagship store exit charges | 285 | — | 47,023 | 3,808 | |||||||||||
Asset impairment, exclusive of flagship store exit charges | 12,610 | 656 | 14,987 | 10,383 | |||||||||||
Other operating income, net | (215 | ) | (1,557 | ) | (465 | ) | (4,551 | ) | |||||||
Operating income (loss) | 14,479 | 39,680 | (52,263 | ) | (2,300 | ) | |||||||||
Interest expense, net | 2,922 | 2,857 | 4,908 | 8,898 | |||||||||||
Income (loss) before income taxes | 11,557 | 36,823 | (57,171 | ) | (11,198 | ) | |||||||||
Income tax expense (benefit) | 3,987 | 12,047 | (16,931 | ) | 8,358 | ||||||||||
Net income (loss) | 7,570 | 24,776 | (40,240 | ) | (19,556 | ) | |||||||||
Less: Net income attributable to noncontrolling interests | 1,047 | 857 | 3,534 | 2,839 | |||||||||||
Net income (loss) attributable to A&F | $ | 6,523 | $ | 23,919 | $ | (43,774 | ) | $ | (22,395 | ) | |||||
Net income (loss) per share attributable to A&F | |||||||||||||||
Basic | $ | 0.10 | $ | 0.36 | $ | (0.67 | ) | $ | (0.33 | ) | |||||
Diluted | $ | 0.10 | $ | 0.35 | $ | (0.67 | ) | $ | (0.33 | ) | |||||
Weighted-average shares outstanding | |||||||||||||||
Basic | 63,099 | 66,818 | 64,932 | 67,775 | |||||||||||
Diluted | 63,911 | 68,308 | 64,932 | 67,775 | |||||||||||
Other comprehensive loss | |||||||||||||||
Foreign currency translation, net of tax | $ | 1,355 | $ | (3,095 | ) | $ | (5,219 | ) | $ | (22,640 | ) | ||||
Derivative financial instruments, net of tax | (3,654 | ) | (681 | ) | (574 | ) | 19,026 | ||||||||
Other comprehensive loss | (2,299 | ) | (3,776 | ) | (5,793 | ) | (3,614 | ) | |||||||
Comprehensive income (loss) | 5,271 | 21,000 | (46,033 | ) | (23,170 | ) | |||||||||
Less: Comprehensive income attributable to noncontrolling interests | 1,047 | 857 | 3,534 | 2,839 | |||||||||||
Comprehensive income (loss) attributable to A&F | $ | 4,224 | $ | 20,143 | $ | (49,567 | ) | $ | (26,009 | ) | |||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
3
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)
November 2, 2019 | February 2, 2019 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and equivalents | $ | 410,775 | $ | 723,135 | |||
Receivables | 92,736 | 73,112 | |||||
Inventories | 590,883 | 437,879 | |||||
Other current assets | 86,275 | 101,824 | |||||
Total current assets | 1,180,669 | 1,335,950 | |||||
Property and equipment, net | 665,862 | 694,855 | |||||
Operating lease right-of-use assets | 1,223,512 | — | |||||
Other assets | 415,962 | 354,788 | |||||
Total assets | $ | 3,486,005 | $ | 2,385,593 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 269,578 | $ | 226,878 | |||
Accrued expenses | 269,334 | 293,579 | |||||
Short-term portion of operating lease liabilities | 284,694 | — | |||||
Income taxes payable | 13,728 | 18,902 | |||||
Short-term portion of deferred lease credits | — | 19,558 | |||||
Total current liabilities | 837,334 | 558,917 | |||||
Long-term liabilities: | |||||||
Long-term portion of operating lease liabilities | 1,234,502 | — | |||||
Long-term portion of borrowings, net | 241,343 | 250,439 | |||||
Long-term portion of deferred lease credits | — | 76,134 | |||||
Leasehold financing obligations | — | 46,337 | |||||
Other liabilities | 178,460 | 235,145 | |||||
Total long-term liabilities | 1,654,305 | 608,055 | |||||
Stockholders’ equity | |||||||
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented | 1,033 | 1,033 | |||||
Paid-in capital | 399,981 | 405,379 | |||||
Retained earnings | 2,244,150 | 2,418,544 | |||||
Accumulated other comprehensive loss, net of tax | (108,245 | ) | (102,452 | ) | |||
Treasury stock, at average cost: 40,543 and 37,073 shares as of November 2, 2019 and February 2, 2019, respectively | (1,553,407 | ) | (1,513,604 | ) | |||
Total Abercrombie & Fitch Co. stockholders’ equity | 983,512 | 1,208,900 | |||||
Noncontrolling interests | 10,854 | 9,721 | |||||
Total stockholders’ equity | 994,366 | 1,218,621 | |||||
Total liabilities and stockholders’ equity | $ | 3,486,005 | $ | 2,385,593 | |||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended November 2, 2019 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | Accumulated other comprehensive loss | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Beginning balance at August 3, 2019 | 63,146 | $ | 1,033 | $ | 394,694 | $ | 11,318 | $ | 2,251,032 | $ | (105,946 | ) | 40,154 | $ | (1,548,836 | ) | $ | 1,003,295 | |||||||
Net income | — | — | — | 1,047 | 6,523 | — | — | — | 7,570 | ||||||||||||||||
Purchase of common stock | (412 | ) | — | — | — | — | — | 412 | (5,730 | ) | (5,730 | ) | |||||||||||||
Dividends ($0.20 per share) | — | — | — | — | (12,574 | ) | — | — | — | (12,574 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 23 | — | (509 | ) | — | (831 | ) | — | (23 | ) | 1,159 | (181 | ) | ||||||||||||
Share-based compensation expense | — | — | 5,796 | — | — | — | — | — | 5,796 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | (3,654 | ) | — | — | (3,654 | ) | ||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | 1,355 | — | — | 1,355 | ||||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (1,511 | ) | — | — | — | — | (1,511 | ) | ||||||||||||||
Ending balance at November 2, 2019 | 62,757 | $ | 1,033 | $ | 399,981 | $ | 10,854 | $ | 2,244,150 | $ | (108,245 | ) | 40,543 | $ | (1,553,407 | ) | $ | 994,366 | |||||||
Thirteen Weeks Ended November 3, 2018 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | Accumulated other comprehensive loss | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Beginning balance at August 4, 2018 | 66,975 | $ | 1,033 | $ | 401,483 | $ | 10,074 | $ | 2,337,100 | $ | (94,892 | ) | 36,325 | $ | (1,507,414 | ) | $ | 1,147,384 | |||||||
Net income | — | — | — | 857 | 23,919 | — | — | — | 24,776 | ||||||||||||||||
Purchase of common stock | (1,184 | ) | — | — | — | — | — | 1,184 | (25,000 | ) | (25,000 | ) | |||||||||||||
Dividends ($0.20 per share) | — | — | — | — | (13,354 | ) | — | — | — | (13,354 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 52 | — | (1,271 | ) | — | (1,955 | ) | — | (52 | ) | 2,640 | (586 | ) | ||||||||||||
Share-based compensation expense | — | — | 5,957 | — | — | — | — | — | 5,957 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | (681 | ) | — | — | (681 | ) | ||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | (3,095 | ) | — | — | (3,095 | ) | ||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (1,111 | ) | — | — | — | — | (1,111 | ) | ||||||||||||||
Ending balance at November 3, 2018 | 65,843 | $ | 1,033 | $ | 406,169 | $ | 9,820 | $ | 2,345,710 | $ | (98,668 | ) | 37,457 | $ | (1,529,774 | ) | $ | 1,134,290 | |||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Thousands, except per share amounts)
(Unaudited)
Thirty-nine Weeks Ended November 2, 2019 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | Accumulated other comprehensive loss | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Beginning balance at February 2, 2019 | 66,227 | $ | 1,033 | $ | 405,379 | $ | 9,721 | $ | 2,418,544 | $ | (102,452 | ) | 37,073 | $ | (1,513,604 | ) | $ | 1,218,621 | |||||||
Impact from adoption of the new lease accounting standard (Refer to Note 2, “Summary of Significant Accounting Policies”) | — | — | — | — | (75,165 | ) | — | — | — | (75,165 | ) | ||||||||||||||
Net loss | — | — | — | 3,534 | (43,774 | ) | — | — | — | (40,240 | ) | ||||||||||||||
Purchase of common stock | (3,957 | ) | — | — | — | — | — | 3,957 | (63,542 | ) | (63,542 | ) | |||||||||||||
Dividends ($0.60 per share) | — | — | — | — | (38,959 | ) | — | — | — | (38,959 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 487 | — | (13,862 | ) | — | (16,496 | ) | — | (487 | ) | 23,739 | (6,619 | ) | ||||||||||||
Share-based compensation expense | — | — | 8,464 | — | — | — | — | — | 8,464 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | (574 | ) | — | — | (574 | ) | ||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | (5,219 | ) | — | — | (5,219 | ) | ||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (2,401 | ) | — | — | — | — | (2,401 | ) | ||||||||||||||
Ending balance at November 2, 2019 | 62,757 | $ | 1,033 | $ | 399,981 | $ | 10,854 | $ | 2,244,150 | $ | (108,245 | ) | 40,543 | $ | (1,553,407 | ) | $ | 994,366 | |||||||
Thirty-nine Weeks Ended November 3, 2018 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | Accumulated other comprehensive loss | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Beginning balance at February 3, 2018 | 68,195 | $ | 1,033 | $ | 406,351 | $ | 10,092 | $ | 2,420,552 | $ | (95,054 | ) | 35,105 | $ | (1,490,503 | ) | $ | 1,252,471 | |||||||
Impact from adoption of the new revenue recognition accounting standard | — | — | — | — | 6,944 | — | — | — | 6,944 | ||||||||||||||||
Net loss | — | — | — | 2,839 | (22,395 | ) | — | — | — | (19,556 | ) | ||||||||||||||
Purchase of common stock | (2,931 | ) | — | — | — | — | — | 2,931 | (68,670 | ) | (68,670 | ) | |||||||||||||
Dividends ($0.60 per share) | — | — | — | — | (40,550 | ) | — | — | — | (40,550 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 579 | — | (17,078 | ) | — | (18,841 | ) | — | (579 | ) | 29,399 | (6,520 | ) | ||||||||||||
Share-based compensation expense | — | — | 16,896 | — | — | — | — | — | 16,896 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | 19,026 | — | — | 19,026 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | (22,640 | ) | — | — | (22,640 | ) | ||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (3,111 | ) | — | — | — | — | (3,111 | ) | ||||||||||||||
Ending balance at November 3, 2018 | 65,843 | $ | 1,033 | $ | 406,169 | $ | 9,820 | $ | 2,345,710 | $ | (98,668 | ) | 37,457 | $ | (1,529,774 | ) | $ | 1,134,290 | |||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
6
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Thirty-nine Weeks Ended | |||||||
November 2, 2019 | November 3, 2018 | ||||||
Operating activities | |||||||
Net loss | $ | (40,240 | ) | $ | (19,556 | ) | |
Adjustments to reconcile net loss to net cash (used for) provided by operating activities: | |||||||
Depreciation and amortization | 124,910 | 136,263 | |||||
Amortization of deferred lease credits prior to adoption of new lease accounting standard | — | (16,129 | ) | ||||
Asset impairment | 18,216 | 10,383 | |||||
Loss on disposal | 5,326 | 3,191 | |||||
Benefit from deferred income taxes | (20,631 | ) | (1,509 | ) | |||
Share-based compensation | 8,464 | 16,896 | |||||
Changes in assets and liabilities: | |||||||
Inventories | (154,791 | ) | (159,421 | ) | |||
Accounts payable and accrued expenses | 34,752 | 105,452 | |||||
Operating lease right-of-use assets and liabilities | 42,990 | — | |||||
Income taxes | (2,264 | ) | (3,171 | ) | |||
Other assets | (47,138 | ) | 6,274 | ||||
Other liabilities | (3,433 | ) | (1,428 | ) | |||
Net cash (used for) provided by operating activities | (33,839 | ) | 77,245 | ||||
Investing activities | |||||||
Purchases of property and equipment | (154,373 | ) | (98,768 | ) | |||
Net cash used for investing activities | (154,373 | ) | (98,768 | ) | |||
Financing activities | |||||||
Purchases of common stock | (63,542 | ) | (68,670 | ) | |||
Dividends paid | (38,959 | ) | (40,550 | ) | |||
Repayment of term loan facility borrowings | (10,000 | ) | — | ||||
Other financing activities | (10,407 | ) | (8,761 | ) | |||
Net cash used for financing activities | (122,908 | ) | (117,981 | ) | |||
Effect of foreign currency exchange rates on cash | (2,686 | ) | (16,068 | ) | |||
Net decrease in cash and equivalents, and restricted cash and equivalents | (313,806 | ) | (155,572 | ) | |||
Cash and equivalents, and restricted cash and equivalents, beginning of period | 745,829 | 697,955 | |||||
Cash and equivalents, and restricted cash and equivalents, end of period | $ | 432,023 | $ | 542,383 | |||
Supplemental information related to non-cash activities | |||||||
Purchases of property and equipment not yet paid at end of period | $ | 36,951 | $ | 22,091 | |||
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 293,281 | $ | — | |||
Supplemental information related to cash activities | |||||||
Cash paid for interest | $ | 12,022 | $ | 10,428 | |||
Cash paid for income taxes | $ | 18,697 | $ | 17,712 | |||
Cash received from income tax refunds | $ | 8,570 | $ | 7,477 | |||
Cash paid for operating lease liabilities | $ | 311,275 | $ | — | |||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
7
ABERCROMBIE & FITCH CO.
INDEX FOR NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Page No. | ||
Note 1. | ||
Note 2. | ||
Note 3. | ||
Note 4. | ||
Note 5. | ||
Note 6. | ||
Note 7. | ||
Note 8. | ||
Note 9. | ||
Note 10. | ||
Note 11. | ||
Note 12. | ||
Note 13. | ||
Note 14. | ||
8
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”, or “we”) is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its Company-owned store and digital channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company has operations in North America, Europe and Asia, among other regions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows.
The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of 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 consolidated financial statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows:
Fiscal year | Fiscal year ended | Number of weeks | ||
Fiscal 2018 | February 2, 2019 | 52 | ||
Fiscal 2019 | February 1, 2020 | 52 | ||
Interim financial statements
The Condensed Consolidated Financial Statements as of November 2, 2019, and for the thirteen and thirty-nine week periods ended November 2, 2019 and November 3, 2018, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2018 filed with the SEC on April 1, 2019. The February 2, 2019 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“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 2019.
Certain prior year amounts have been reclassified for consistency with the current year presentation of flagship store exit charges on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
9
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 not expected to have a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain recent accounting pronouncements the Company has adopted.
Accounting Standards Update (ASU) | Description | Effect on the financial statements or other significant matters | ||
Leases (ASU 2016-02) Date of adoption: February 3, 2019 | This update supersedes the leasing standard in Accounting Standards Codification (“ASC”) 840, Leases. The new standard requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity. | The Company adopted this standard using a modified retrospective transition method and elected to not restate comparative periods. In conjunction with the adoption of this standard, the Company elected: - the package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification for leases existing before the date of adoption; and - to combine lease and nonlease components for all current classes of underlying leased assets. However, the Company did not elect the practical expedient to use hindsight when determining the lease term or assessing impairment. Adoption of this standard resulted in the Company’s total assets and total liabilities on the Condensed Consolidated Balance Sheet each increasing by approximately $1.2 billion, primarily due to the recognition of operating lease right-of-use assets and liabilities. The Company also recognized a cumulative adjustment decreasing the opening balance of retained earnings by $0.1 billion on the date of adoption. The adoption of this standard did not have a significant impact on the timing or classification of the Company’s Consolidated Statement of Cash Flows, the Company’s liquidity or the Company’s debt covenant compliance under current agreements. Additional information regarding the impact from adoption of the new lease accounting standard and updated accounting policies related to leases are provided further in this Note 2. | ||
Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12) Date of adoption: February 3, 2019 | This update amends ASC 815, Derivatives and Hedging. The new standard simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements. | The Company adopted this standard using a modified retrospective transition approach, while the amended presentation and disclosure standard requires a prospective approach. Upon adoption of this standard, the Company elected to include time value in its assessment of effectiveness for derivative instruments designated as cash flow hedges. Updated accounting policies related to derivatives have been updated and are provided further in this Note 2. The adoption of this standard did not have a significant impact on the Company’s Condensed Consolidated Financial Statements for the thirteen and thirty-nine weeks ended November 2, 2019, and is not expected to have a significant impact on the Company’s consolidated financial statements for Fiscal 2019. | ||
Intangibles — Goodwill and Other —Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15) Date of adoption: February 3, 2019 | This update amends ASC 350, Intangibles — Goodwill and Other —Internal-Use Software. The new standard allows companies to defer certain direct costs related to software as a service (“SaaS”) implementation costs and amortize them to operating expense over the term of the related SaaS arrangement. The criteria for determining whether costs associated with SaaS can be capitalized are now the same criteria applied to internal software development costs in order to assess eligibility for deferral. | The Company early adopted this standard on a prospective basis and comparative periods have not been restated. The Company expects to capitalize up to $5.0 million of SaaS implementation costs in Fiscal 2019, of which $3.0 million has been capitalized in the thirty-nine weeks ended November 2, 2019. Amortization expense related to capitalized SaaS implementation costs was $0.5 million and $0.7 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively. | ||
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The following table provides the impact from adoption of the new lease accounting standard on the Company’s Condensed Consolidated Balance Sheet:
(in thousands) | February 2, 2019 (as reported under previous lease accounting standard) | Impact from adoption of new lease accounting standard | Upon adoption on February 3, 2019 (under new lease accounting standard) (1) | ||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and equivalents | $ | 723,135 | $ | — | $ | 723,135 | |||||
Receivables | 73,112 | — | 73,112 | ||||||||
Inventories | 437,879 | — | 437,879 | ||||||||
Other current assets (2) | 101,824 | (31,310 | ) | 70,514 | |||||||
Total current assets | 1,335,950 | (31,310 | ) | 1,304,640 | |||||||
Property and equipment, net (3) | 694,855 | (46,624 | ) | 648,231 | |||||||
Operating lease right-of-use assets (2) | — | 1,234,515 | 1,234,515 | ||||||||
Other assets (2) (5) | 354,788 | 15,553 | 370,341 | ||||||||
Total assets | $ | 2,385,593 | $ | 1,172,134 | $ | 3,557,727 | |||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 226,878 | $ | — | $ | 226,878 | |||||
Accrued expenses (2) | 293,579 | (13,508 | ) | 280,071 | |||||||
Short-term portion of operating lease liabilities (4) | — | 280,108 | 280,108 | ||||||||
Short-term portion of deferred lease credits (2) | 19,558 | (19,558 | ) | — | |||||||
Income taxes payable | 18,902 | — | 18,902 | ||||||||
Total current liabilities | 558,917 | 247,042 | 805,959 | ||||||||
Long-term liabilities: | |||||||||||
Long-term portion of operating lease liabilities (4) | — | 1,193,946 | 1,193,946 | ||||||||
Long-term portion of borrowings, net | 250,439 | — | 250,439 | ||||||||
Long-term portion of deferred lease credits (2) | 76,134 | (76,134 | ) | — | |||||||
Leasehold financing obligations (3) | 46,337 | (46,337 | ) | — | |||||||
Other liabilities (2) (5) | 235,145 | (71,218 | ) | 163,927 | |||||||
Total long-term liabilities | 608,055 | 1,000,257 | 1,608,312 | ||||||||
Stockholders’ equity | |||||||||||
Class A Common Stock | 1,033 | — | 1,033 | ||||||||
Paid-in capital | 405,379 | — | 405,379 | ||||||||
Retained earnings (6) | 2,418,544 | (75,165 | ) | 2,343,379 | |||||||
Accumulated other comprehensive loss, net of tax | (102,452 | ) | — | (102,452 | ) | ||||||
Treasury stock, at average cost | (1,513,604 | ) | — | (1,513,604 | ) | ||||||
Total Abercrombie & Fitch Co. stockholders’ equity | 1,208,900 | (75,165 | ) | 1,133,735 | |||||||
Noncontrolling interests | 9,721 | — | 9,721 | ||||||||
Total stockholders’ equity | 1,218,621 | (75,165 | ) | 1,143,456 | |||||||
Total liabilities and stockholders’ equity | $ | 2,385,593 | $ | 1,172,134 | $ | 3,557,727 | |||||
(1) | Amounts under “Upon adoption on February 3, 2019 (under new lease accounting standard),” are calculated as February 2, 2019 reported balances adjusted for the impact of adoption on the first day of Fiscal 2019, February 3, 2019. |
(2) | Upon adoption, the Company recognized assets for the rights to use its operating leases on the Condensed Consolidated Balance Sheet. In conjunction with this recognition, the Company reclassified amounts to operating lease right-of-use assets including: short-term prepaid rent from other current assets; key money, long-term prepaid rent and leasehold acquisition costs from other assets; short-term and long-term portions of deferred lease credits; accrued rent and accrued straight-line rent from accrued expenses and other liabilities, respectively. |
(3) | Upon adoption, the Company derecognized construction project assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting. In certain instances, these construction project assets had shielded other assets included within their respective asset groups from impairment, as the fair value of the construction project assets had exceeded the carrying values of their respective asset groups. In such instances, the Company recognized impairment of certain leasehold improvements and store assets upon adoption. |
(4) | Upon adoption, the Company recognized operating lease liabilities on the Condensed Consolidated Balance Sheet. |
(5) | Upon adoption, the Company established net deferred tax assets for operating lease right-of-use assets and operating lease liabilities. |
(6) | Upon adoption, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings, primarily related to right-of-use asset impairment charges for certain of the Company’s stores where it was previously determined that the carrying value of assets was not recoverable, partially offset by benefits to retained earnings to establish net deferred tax assets and a net gain resulting from the derecognition of certain leased building assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting. |
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The Company’s significant accounting policies as of November 2, 2019 have not changed materially from those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2018, with the exception of those discussed below which have been updated to reflect new accounting standards adopted in Fiscal 2019.
Leases
The Company determines if an arrangement is a lease at inception. On the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.
As the rates implicit in the Company's leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the lease and the lease term for the initial measurement of the lease right-of-use asset and liability. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.
The Company has elected to combine lease and nonlease components for all current classes of underlying leased assets.
The measurement of lease right-of-use assets and liabilities includes amounts related to:
• | Lease payments made prior to the lease commencement date; |
• | Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded; |
• | Fixed payments related to lease components, such as rent escalation payments scheduled at the lease commencement date; |
• | Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and |
• | Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease. |
The measurement of lease right-of-use assets and liabilities excludes amounts related to:
• | Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Condensed Consolidated Balance Sheets; |
• | Variable payments related to lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); |
• | Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); and |
• | Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). |
Certain of the Company’s leases include options to extend the lease or to terminate the lease. The Company assesses these leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s lease right-of-use assets and liabilities. Generally, the Company’s options to extend its leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until a new agreement has been executed.
Amortization and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the lease, amortization and interest expense is recorded within stores and distribution expense, marketing, general and administrative expense, or flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss).
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The Company’s lease right-of-use assets are assessed for indicators of impairment at least quarterly, in accordance with the long-lived asset impairment policy disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of A&F’s Annual Report on Form 10-K for Fiscal 2018.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party or third party.
Derivative instruments
The Company 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.
In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued.
For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”) into earnings on the Condensed Consolidated Balance Sheets.
The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Condensed Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions.
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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 | November 2, 2019 | February 2, 2019 | November 3, 2018 | February 3, 2018 | ||||||||||||
Cash and equivalents | Cash and equivalents | $ | 410,775 | $ | 723,135 | $ | 520,523 | $ | 675,558 | ||||||||
Long-term restricted cash and equivalents | Other assets | 18,698 | 22,694 | 21,860 | 22,397 | ||||||||||||
Short-term restricted cash and equivalents | Other current assets | $ | 2,550 | $ | — | $ | — | $ | — | ||||||||
Cash and equivalents and restricted cash and equivalents | $ | 432,023 | $ | 745,829 | $ | 542,383 | $ | 697,955 | |||||||||
3. REVENUE RECOGNITION
Contract liabilities
The following table details certain contract liabilities representing unearned revenue as of November 2, 2019, February 2, 2019, November 3, 2018 and February 3, 2018:
(in thousands) | November 2, 2019 | February 2, 2019 | November 3, 2018 | February 3, 2018 | |||||||||||
Unearned revenue liabilities related to the Company’s gift card program | $ | 19,855 | $ | 26,062 | $ | 17,351 | $ | 28,939 | |||||||
Unearned revenue liabilities related to the Company’s loyalty programs | $ | 21,396 | $ | 19,904 | $ | 24,287 | $ | 15,965 | |||||||
The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Recognized revenue associated with gift card redemptions and gift card breakage | $ | 12,653 | $ | 11,163 | $ | 40,729 | $ | 37,001 | |||||||
Recognized revenue associated with reward redemptions and breakage related to the Company’s loyalty programs | $ | 9,249 | $ | 8,725 | $ | 23,795 | $ | 24,150 | |||||||
Disaggregation of revenue
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 13, “SEGMENT REPORTING.”
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net income (loss) per share attributable to A&F is as follows:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||
Shares of Common Stock issued | 103,300 | 103,300 | 103,300 | 103,300 | |||||||
Weighted-average treasury shares | (40,201 | ) | (36,482 | ) | (38,368 | ) | (35,525 | ) | |||
Weighted-average — basic shares | 63,099 | 66,818 | 64,932 | 67,775 | |||||||
Dilutive effect of share-based compensation awards | 812 | 1,490 | — | — | |||||||
Weighted-average — diluted shares | 63,911 | 68,308 | 64,932 | 67,775 | |||||||
Anti-dilutive shares (1) | 2,912 | 1,925 | 1,572 | 3,827 | |||||||
(1) | Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. |
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5. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
• | Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. |
• | Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. |
• | Level 3—inputs to the valuation methodology are unobservable. |
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows:
Assets and Liabilities at Fair Value as of November 2, 2019 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents (1) | $ | 222 | $ | 25,920 | $ | — | $ | 26,142 | |||||||
Derivative instruments (2) | — | 2,478 | — | 2,478 | |||||||||||
Rabbi Trust assets (3) | 1 | 108,271 | — | 108,272 | |||||||||||
Restricted cash equivalents (4) | 9,812 | 5,511 | — | 15,323 | |||||||||||
Total assets | $ | 10,035 | $ | 142,180 | $ | — | $ | 152,215 | |||||||
Liabilities: | |||||||||||||||
Derivative instruments (2) | $ | — | $ | 1,767 | $ | — | $ | 1,767 | |||||||
Total liabilities | $ | — | $ | 1,767 | $ | — | $ | 1,767 | |||||||
Assets and Liabilities at Fair Value as of February 2, 2019 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents (1) | $ | 55,558 | $ | 34,440 | $ | — | $ | 89,998 | |||||||
Derivative instruments (2) | — | 2,162 | — | 2,162 | |||||||||||
Rabbi Trust assets (3) | 5 | 105,877 | — | 105,882 | |||||||||||
Restricted cash equivalents (4) | 10,910 | 4,588 | — | 15,498 | |||||||||||
Total assets | $ | 66,473 | $ | 147,067 | $ | — | $ | 213,540 | |||||||
Liabilities: | |||||||||||||||
Derivative instruments (2) | $ | — | $ | 332 | $ | — | $ | 332 | |||||||
Total liabilities | $ | — | $ | 332 | $ | — | $ | 332 | |||||||
(1) | Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits. |
(2) | Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts. |
(3) | Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies. |
(4) | Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits. |
The Company’s Level 2 assets and liabilities consist of:
• | Time deposits, which are valued at cost approximating fair value due to the short-term nature of these investments; |
• | Trust-owned life insurance policies, which are valued using the cash surrender value of the life insurance policies; and |
• | Derivative instruments, primarily foreign currency exchange forward contracts, which are valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. |
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Fair value of borrowings
The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of gross borrowings under the Company’s term loan credit facility were as follows:
(in thousands) | November 2, 2019 | February 2, 2019 | |||||
Gross borrowings outstanding, carrying amount | $ | 243,250 | $ | 253,250 | |||
Gross borrowings outstanding, fair value | $ | 243,706 | $ | 252,933 | |||
No borrowings were outstanding under the Company’s senior secured revolving credit facility as of November 2, 2019 or February 2, 2019.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
(in thousands) | November 2, 2019 | February 2, 2019 | |||||
Property and equipment, at cost | $ | 2,773,862 | $ | 2,829,250 | |||
Less: Accumulated depreciation and amortization | (2,108,000 | ) | (2,134,395 | ) | |||
Property and equipment, net | $ | 665,862 | $ | 694,855 | |||
The Company had $34.7 million of construction project assets in property and equipment, net as of February 2, 2019, related to the construction of buildings in certain lease arrangements where, under the previous lease accounting standard, the Company was deemed to be the owner of the construction project. Upon adoption of the new lease accounting standard, described further in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” the Company derecognized these construction project assets.
Refer to Note 8, “ASSET IMPAIRMENT,” for details related to property and equipment impairment charges incurred during the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018.
7. LEASES
The Company has leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
The following table provides a summary of the Company’s operating lease costs for the thirteen and thirty-nine weeks ended November 2, 2019:
(in thousands) | Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||
Single lease cost (1) | $ | 104,726 | $ | 318,270 | |||
Variable lease cost (2) | 25,990 | 129,073 | |||||
Operating lease right-of-use asset impairment (3) | 9,047 | 12,636 | |||||
Total operating lease cost | $ | 139,763 | $ | 459,979 | |||
(1) | Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities. Includes $23.3 million of charges included in flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended November 2, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.” |
(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. Includes $20.2 million of charges included in flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended November 2, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.” |
(3) | Includes $3.2 million of asset charges included in flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended November 2, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.” |
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The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rates used to calculate the Company’s operating lease liabilities as of November 2, 2019:
November 2, 2019 | ||
Weighted-average remaining lease term (years) | 6.1 | |
Weighted-average discount rate | 5.5 | % |
The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of November 2, 2019:
(in thousands) | |||
Fiscal 2019 (excluding the thirty-nine weeks ended November 2, 2019) | $ | 76,951 | |
Fiscal 2020 | 371,357 | ||
Fiscal 2021 | 311,061 | ||
Fiscal 2022 | 262,530 | ||
Fiscal 2023 | 219,723 | ||
Fiscal 2024 and thereafter | 560,067 | ||
Total undiscounted operating lease payments | $ | 1,801,689 | |
Less: Imputed interest | (282,493 | ) | |
Present value of operating lease liabilities | $ | 1,519,196 | |
As of November 2, 2019, the Company had minimum commitments related to additional operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $22.5 million.
As reported under the previous accounting standard, the following table provides a summary of operating lease commitments, including leasehold financing obligations, under noncancelable leases as of February 2, 2019:
(in thousands) | |||
Fiscal 2019 | $ | 367,622 | |
Fiscal 2020 | 304,270 | ||
Fiscal 2021 | 205,542 | ||
Fiscal 2022 | 159,617 | ||
Fiscal 2023 | 128,626 | ||
Fiscal 2024 and thereafter | 310,003 | ||
Total | $ | 1,475,680 | |
8. ASSET IMPAIRMENT
The following table provides additional details related to long-lived asset impairment charges for thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018.
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Operating lease right-of-use asset impairment (1) | $ | 9,047 | $ | — | $ | 12,636 | $ | — | |||||||
Property and equipment asset impairment | 3,563 | 656 | 5,580 | 10,383 | |||||||||||
Total asset impairment | $ | 12,610 | $ | 656 | $ | 18,216 | $ | 10,383 | |||||||
(1) | Includes $3.2 million of operating lease right-of-use asset impairment included in flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended November 2, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.” |
Long-lived asset impairment charges for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 primarily related to the Company’s flagship store assets whose carrying value exceeded fair value.
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9. INCOME TAXES
The quarterly tax provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in law, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Tax Cuts and Jobs Act of 2017
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act made broad and significantly complex changes to the U.S. corporate income tax system by, among other things: reducing the U.S. federal corporate income tax rate from 35% to 21%; transitioning U.S. international taxation to a modified territorial tax system; and imposing a mandatory one-time deemed repatriation tax, payable over eight years, on accumulated undistributed foreign subsidiary earnings and profits as of December 31, 2017. Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts related to the enactment of the Act were provisional as of November 3, 2018. Provisional amounts were finalized after the Company’s Fiscal 2017 U.S. corporate income tax return was filed in the fourth quarter of Fiscal 2018, no later than one year from the enactment of the Act.
Primarily due to regulatory guidance issued by the Internal Revenue Service in Fiscal 2018, the Company recognized measurement period charges of $0.4 million and $2.4 million during the thirteen and thirty-nine weeks ended November 3, 2018.
Swiss Tax Reform
In May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), effective at the federal level beginning January 2020, which will result in the abolishment of preferential tax regimes by the cantons. In addition to the abolishment of the preferential tax regimes, the cantons will need to implement new, mandatory tax provisions in their cantonal tax law which are subject to a referendum process as a result of Swiss Tax Reform. As a result of changes in Swiss tax law and actions taken by the Company, both of which occurred during the third quarter of Fiscal 2019, the Company increased its deferred income tax assets and liabilities, which are recorded on the Condensed Balance Sheet within other assets and other liabilities, respectively, by $38.0 million during the third quarter of Fiscal 2019. Swiss Tax Reform did not have an impact to the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) or the Company’s cash flows during the period.
Share-based compensation
Refer to Note 10, “SHARE-BASED COMPENSATION,” for details on discrete income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018.
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10. SHARE-BASED COMPENSATION
Financial statement impact
The following table details share-based compensation expense and the related income tax benefit for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Share-based compensation expense | $ | 5,796 | $ | 5,957 | $ | 8,464 | $ | 16,896 | |||||||
Income tax benefit associated with share-based compensation expense recognized during the period | $ | 1,211 | $ | 1,252 | $ | 1,566 | $ | 3,426 | |||||||
The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Income tax discrete benefits realized for tax deductions related to the issuance of shares during the period | $ | 6 | $ | 106 | $ | 1,175 | $ | 1,131 | |||||||
Income tax discrete charges realized upon cancellation of stock appreciation rights during the period | (447 | ) | (1,942 | ) | (611 | ) | (10,883 | ) | |||||||
Total income tax discrete benefits (charges) related to share-based compensation awards | $ | (441 | ) | $ | (1,836 | ) | $ | 564 | $ | (9,752 | ) | ||||
The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Employee tax withheld upon issuance of shares (1) | $ | 181 | $ | 586 | $ | 6,619 | $ | 6,520 | |||||||
(1) | Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. |
Restricted stock units
The following table summarizes activity for restricted stock units for the thirty-nine weeks ended November 2, 2019:
Service-based Restricted Stock Units | Performance-based Restricted Stock Units | Market-based Restricted Stock Units | ||||||||||||||||||
Number of Underlying Shares (1) | Weighted- Average Grant Date Fair Value | Number of Underlying Shares | Weighted- Average Grant Date Fair Value | Number of Underlying Shares | Weighted- Average Grant Date Fair Value | |||||||||||||||
Unvested at February 2, 2019 | 2,020,030 | $ | 16.76 | 801,527 | $ | 13.65 | 435,970 | $ | 21.24 | |||||||||||
Granted | 731,886 | 22.10 | 234,984 | 22.89 | 115,238 | 36.24 | ||||||||||||||
Adjustments for performance achievement | — | — | (90,616 | ) | 24.06 | (72,497 | ) | 28.20 | ||||||||||||
Vested | (736,858 | ) | 17.76 | — | — | (18,125 | ) | 28.20 | ||||||||||||
Forfeited | (288,194 | ) | 16.62 | (198,022 | ) | 13.08 | (38,802 | ) | 29.90 | |||||||||||
Unvested at November 2, 2019 | 1,726,864 | $ | 18.62 | 747,873 | $ | 15.41 | 421,784 | $ | 23.05 | |||||||||||
(1) | Includes 259,016 unvested restricted stock units as of November 2, 2019, subject to vesting requirements related to the achievement of certain performance metrics, such as operating income and net income, for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one or more installments of the award if the cumulative performance requirements are met in a subsequent year. |
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Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying common stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at 100% of their target vesting amount in the table above.
Service-based restricted stock units are expensed on a straight-line basis over the award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation expense for stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures.
The following table details unrecognized compensation cost and the remaining weighted-average period these costs are expected to be recognized for restricted stock units as of November 2, 2019:
(in thousands) | Service-based Restricted Stock Units | Performance-based Restricted Stock Units | Market-based Restricted Stock Units | |||||
Unrecognized compensation cost | 23,655 | 2,684 | 4,667 | |||||
Remaining weighted-average period cost is expected to be recognized (years) | 1.3 | 1.1 | 1.0 | |||||
Additional information pertaining to restricted stock units for the thirty-nine weeks ended November 2, 2019 and November 3, 2018 follows:
(in thousands) | November 2, 2019 | November 3, 2018 | |||||
Service-based restricted stock units: | |||||||
Total grant date fair value of awards granted | $ | 16,175 | $ | 16,652 | |||
Total grant date fair value of awards vested | $ | 13,087 | $ | 15,873 | |||
Performance-based restricted stock units: | |||||||
Total grant date fair value of awards granted | $ | 5,379 | $ | 4,310 | |||
Total grant date fair value of awards vested | $ | — | $ | — | |||
Market-based restricted stock units: | |||||||
Total grant date fair value of awards granted | $ | 4,176 | $ | 4,784 | |||
Total grant date fair value of awards vested | $ | 511 | $ | 137 | |||
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirty-nine weeks ended November 2, 2019 and November 3, 2018 were as follows:
November 2, 2019 | November 3, 2018 | ||||||
Grant date market price | $ | 25.34 | $ | 23.59 | |||
Fair value | $ | 36.24 | $ | 33.69 | |||
Assumptions: | |||||||
Price volatility | 57 | % | 54 | % | |||
Expected term (years) | 2.9 | 2.9 | |||||
Risk-free interest rate | 2.2 | % | 2.4 | % | |||
Dividend yield | 3.2 | % | 3.4 | % | |||
Average volatility of peer companies | 40.0 | % | 37.4 | % | |||
Average correlation coefficient of peer companies | 0.2407 | 0.2709 | |||||
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Stock appreciation rights
The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended November 2, 2019:
Number of Underlying Shares | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (years) | |||||||||
Outstanding at February 2, 2019 | 1,041,867 | $ | 37.81 | |||||||||
Granted | — | — | ||||||||||
Exercised | (43,463 | ) | 22.41 | |||||||||
Forfeited or expired | (201,679 | ) | 32.27 | |||||||||
Outstanding at November 2, 2019 | 796,725 | $ | 40.06 | $ | — | 2.6 | ||||||
Stock appreciation rights exercisable at November 2, 2019 | 796,100 | $ | 40.08 | $ | — | 2.6 | ||||||
Stock appreciation rights expected to become exercisable in the future as of November 2, 2019 | 607 | $ | 22.55 | $ | — | 6.2 | ||||||
Additional information pertaining to stock appreciation rights for the thirty-nine weeks ended November 2, 2019 and November 3, 2018 follows:
(in thousands) | November 2, 2019 | November 3, 2018 | |||||
Total grant date fair value of awards exercised | $ | 620 | $ | 1,279 | |||
11. DERIVATIVE INSTRUMENTS
As of November 2, 2019, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
(in thousands) | Notional Amount (1) | ||
Euro | $ | 183,360 | |
British pound | $ | 86,097 | |
Canadian dollar | $ | 29,673 | |
Japanese yen | $ | 17,336 | |
(1) | Amounts reported are the U.S. Dollar notional amounts outstanding as of November 2, 2019. |
As of November 2, 2019, 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) | ||
Chinese yuan | $ | 21,230 | |
Euro | $ | 17,347 | |
British pound | $ | 3,884 | |
(1) | Amount reported is the U.S. Dollar notional amount outstanding as of November 2, 2019. |
The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of November 2, 2019 and February 2, 2019 were as follows:
(in thousands) | Location | November 2, 2019 | February 2, 2019 | Location | November 2, 2019 | February 2, 2019 | |||||||||||||
Derivatives designated as cash flow hedging instruments | Other current assets | $ | 2,476 | $ | 2,162 | Accrued expenses | $ | 1,613 | $ | 15 | |||||||||
Derivatives not designated as hedging instruments | Other current assets | 2 | — | Accrued expenses | 154 | 317 | |||||||||||||
Total | $ | 2,478 | $ | 2,162 | $ | 1,767 | $ | 332 | |||||||||||
Refer to Note 5, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative instruments.
Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 follows:
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Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
(Loss) gain recognized in AOCL (1) | $ | (1,136 | ) | $ | 2,051 | $ | 5,918 | $ | 18,716 | ||||||
Gain (loss) reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2) | $ | 2,541 | $ | 2,814 | $ | 6,845 | $ | (2,408 | ) | ||||||
(1) | Amount represents the change in fair value of derivative contracts. |
(2) | Amount represents gain (loss) reclassified from accumulated other comprehensive loss 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 gains or losses related to foreign currency exchange forward contracts designated as cash flow hedging instruments as of November 2, 2019 will be recognized in cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months.
Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 follows:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | ||||||||||||
(Loss) gain recognized in other operating income, net | $ | (1,023 | ) | $ | (1,912 | ) | $ | 157 | $ | 2,684 | ||||||
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended November 2, 2019 was as follows:
Thirteen Weeks Ended November 2, 2019 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at August 3, 2019 | $ | (111,461 | ) | $ | 5,515 | $ | (105,946 | ) | |||
Other comprehensive income (loss) before reclassifications | 1,355 | (1,136 | ) | 219 | |||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (2,541 | ) | (2,541 | ) | ||||||
Tax effect | — | 23 | 23 | ||||||||
Other comprehensive income (loss) after reclassifications | 1,355 | (3,654 | ) | (2,299 | ) | ||||||
Ending balance at November 2, 2019 | $ | (110,106 | ) | $ | 1,861 | $ | (108,245 | ) | |||
Thirty-nine Weeks Ended November 2, 2019 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at February 2, 2019 | $ | (104,887 | ) | $ | 2,435 | $ | (102,452 | ) | |||
Other comprehensive (loss) income before reclassifications | (5,219 | ) | 5,918 | 699 | |||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (6,845 | ) | (6,845 | ) | ||||||
Tax effect | — | 353 | 353 | ||||||||
Other comprehensive loss after reclassifications | (5,219 | ) | (574 | ) | (5,793 | ) | |||||
Ending balance at November 2, 2019 | $ | (110,106 | ) | $ | 1,861 | $ | (108,245 | ) | |||
(1) | Amount represents gain reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). |
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The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended November 3, 2018 was as follows:
Thirteen Weeks Ended November 3, 2018 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at August 4, 2018 | $ | (104,492 | ) | $ | 9,600 | $ | (94,892 | ) | |||
Other comprehensive (loss) income before reclassifications | (3,111 | ) | 2,051 | (1,060 | ) | ||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (2,814 | ) | (2,814 | ) | ||||||
Tax effect | 16 | 82 | 98 | ||||||||
Other comprehensive loss after reclassifications | (3,095 | ) | (681 | ) | (3,776 | ) | |||||
Ending balance at November 3, 2018 | $ | (107,587 | ) | $ | 8,919 | $ | (98,668 | ) | |||
Thirty-nine Weeks Ended November 3, 2018 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at February 3, 2018 | $ | (84,947 | ) | $ | (10,107 | ) | $ | (95,054 | ) | ||
Other comprehensive (loss) income before reclassifications | (22,656 | ) | 18,716 | (3,940 | ) | ||||||
Reclassified loss from accumulated other comprehensive loss (1) | — | 2,408 | 2,408 | ||||||||
Tax effect | 16 | (2,098 | ) | (2,082 | ) | ||||||
Other comprehensive (loss) income after reclassifications | (22,640 | ) | 19,026 | (3,614 | ) | ||||||
Ending balance at November 3, 2018 | $ | (107,587 | ) | $ | 8,919 | $ | (98,668 | ) | |||
(1) | Amount represents gain or loss reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). |
13. SEGMENT REPORTING
The Company’s two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area.
The following table provides the Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018.
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Hollister | $ | 514,772 | $ | 515,125 | $ | 1,447,975 | $ | 1,439,589 | |||||||
Abercrombie | 348,700 | 346,069 | 990,547 | 994,918 | |||||||||||
Total | $ | 863,472 | $ | 861,194 | $ | 2,438,522 | $ | 2,434,507 | |||||||
The following table provides the Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018.
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
United States | $ | 583,593 | $ | 562,590 | $ | 1,596,723 | $ | 1,543,162 | |||||||
Europe | 177,844 | 187,516 | 518,905 | 549,530 | |||||||||||
Other | 102,035 | 111,088 | 322,894 | 341,815 | |||||||||||
Total | $ | 863,472 | $ | 861,194 | $ | 2,438,522 | $ | 2,434,507 | |||||||
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14. FLAGSHIP STORE EXIT CHARGES
Global Store Network Optimization
Reflecting a continued focus on one of the Company’s key transformation initiatives ‘Global Store Network Optimization,’ the Company continues to pivot away from its large format flagship stores and strives to open smaller, more productive omnichannel focused brand experiences. As a result, the Company has closed certain of its flagship stores and may have additional closures as it executes against this strategy.
The Company recognizes charges related to the exit of its flagship stores in flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). Details of the charges incurred during the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 related to this initiative were as follows:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||
(in thousands) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||
Single lease cost (1) | $ | — | $ | — | $ | 23,269 | $ | — | |||||||
Variable lease cost (2) | — | — | 20,218 | — | |||||||||||
Operating lease right-of-use asset impairment | — | — | 3,229 | — | |||||||||||
Operating lease cost | — | — | 46,716 | — | |||||||||||
Lease termination fees (3) | — | — | — | 3,688 | |||||||||||
Asset disposals and other store-closure costs (4) | — | — | (1,687 | ) | — | ||||||||||
Employee severance and other employee transition costs | 285 | — | 1,994 | 120 | |||||||||||
Total flagship store exit charges | $ | 285 | $ | — | $ | 47,023 | $ | 3,808 | |||||||
(1) | Amounts represent accelerated amortization associated with the operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. |
(2) | Amounts represent the remeasurement of the lease liability to reflect variable lease costs that became fixed upon decision to close flagship stores. |
(3) | Under the new lease accounting standard, which the Company adopted on February 3, 2019, similar charges would be incorporated into the above table as a component of operating lease cost. |
(4) | Amounts represent costs incurred in returning the store to its original condition, including updates to previous accruals for asset retirement obligations and costs to remove inventory and store assets. |
Future fixed lease payments associated with closed flagship stores are reflected within short-term and long-term operating lease liabilities on the Condensed Consolidated Balance Sheet. These payments are scheduled to be paid through the fiscal year ending January 30, 2029 (“Fiscal 2028”) and are not expected to exceed $15 million in aggregate in any fiscal year. Refer to Note 7, “LEASES,” for a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows.
As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur incremental charges or future cash expenditures not currently contemplated due to events that may occur as a result of, or that are associated with, previously announced flagship store closures and flagship store closures that have not yet been finalized. At this time, the Company is not able to quantify the amount of charges or future cash expenditures that may take place in future periods resulting from any potential flagship store closures given the unpredictable nature of lease exit negotiations and ultimate lease renewal decisions.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s unaudited Condensed Consolidated Financial Statements and notes thereto, which are included in this Quarterly Report on Form 10-Q in “ITEM 1. FINANCIAL STATEMENTS.”
INTRODUCTION
MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows:
• | Overview. This section provides a general description of the Company’s business and certain segment information. |
• | Current Trends and Outlook. This section provides a summary of the Company’s performance for the thirteen and |
thirty-nine weeks ended November 2, 2019 and November 3, 2018. In addition, this section discusses certain of management’s expectations for the upcoming fiscal year.
• | Results of Operations. This section provides an analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018. |
• | Liquidity and Capital Resources. This section provides a discussion of the Company’s financial condition and liquidity as of November 2, 2019, which includes (i) an analysis of financial condition as compared to February 2, 2019; (ii) an analysis of changes in cash flows for the thirty-nine weeks ended November 2, 2019 as compared to the thirty-nine weeks ended November 3, 2018; (iii) and an analysis of liquidity, including the availability under credit facilities, payments of dividends, and outstanding debt and covenant compliance. |
• | Recent Accounting Pronouncements. The recent accounting pronouncements the Company has adopted, including the dates of adoption and anticipated effects on the Company’s unaudited Condensed Consolidated Financial Statements, are included in this Quarterly Report on Form 10-Q in “ITEM 1. FINANCIAL STATEMENTS.” |
• | Critical Accounting Policies and Estimates. This section discusses accounting policies considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. |
• | Non-GAAP Financial Measures. MD&A provides discussion of certain financial measures that have been determined to not be in accordance with accounting principles generally accepted in the U.S. (“GAAP”). This section includes certain reconciliations for non-GAAP financial measures and additional details on these financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. |
Safe harbor statement under the Private Securities Litigation Reform Act of 1995
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
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The following factors, categorized by the primary nature of the associated risk, including the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2018, in some cases have affected and in the future could affect the Company’s financial performance and could cause actual results for Fiscal 2019 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management:
Macroeconomic and industry risks include:
• | Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity; |
• | Failure to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability; |
• | Our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours; |
• | Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations; |
• | Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; and |
• | The impact of war, acts of terrorism or civil unrest could have a material adverse effect on our operating results and financial condition. |
Strategic risks include:
• | The expansion of our direct-to-consumer sales channels and omnichannel initiatives are significant components of our growth strategy, and the failure to successfully develop our position across all channels could have an adverse impact on our results of operations; |
• | Our international growth strategy and ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks; and |
• | Failure to successfully implement our strategic plans could have a negative impact on our growth and profitability. |
Operational risks include:
• | Failure to protect our reputation could have a material adverse effect on our brands; |
• | Our business could suffer if our information technology systems are disrupted or cease to operate effectively; |
• | We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss; |
• | Our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain; |
• | Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could cause manufacturing delays and increase our costs; |
• | We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs; |
• | We rely on the experience and skills of our senior executive officers and associates, the loss of whom could have a material adverse effect on our business; and |
• | Extreme weather conditions, including natural disasters, pandemic disease and other unexpected events, could negatively impact our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, which could result in an interruption to our business and adversely affect our operating results. |
Legal, tax, regulatory and compliance risks include:
• | Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations; |
• | Our litigation exposure could have a material adverse effect on our financial condition and results of operations; |
• | Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets; |
• | Changes in the regulatory or compliance landscape and compliance with changing regulations for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results; and |
• | Our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business. |
The factors listed above are not our only risks. Additional risks may arise and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.
26
OVERVIEW
Business summary
The Company is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its Company-owned store and digital channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company has operations in North America, Europe and Asia, among other regions.
The Company’s two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment.
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year, as was the case for the fiscal year ended February 3, 2018. All references herein to the Company’s fiscal years are as follows:
Fiscal year | Fiscal year ended | Number of weeks | ||
Fiscal 2017 | February 3, 2018 | 53 | ||
Fiscal 2018 | February 2, 2019 | 52 | ||
Fiscal 2019 | February 1, 2020 | 52 | ||
Fiscal 2020 | January 30, 2021 | 52 | ||
Fiscal 2021 | January 29, 2022 | 52 | ||
Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.
27
CURRENT TRENDS AND OUTLOOK
Throughout the lifetime of our Company, we have taken strides to transform our brands as consumer habits and shopping preferences change. We aim to keep pace with and anticipate our customers’ needs through a test-and-learn mentality, which has been embedded throughout our organization. Our plans for long-term growth are centered around our strategic pillars and are best categorized into three planned phases:
• | Phase I: Stabilizing while Transforming |
– | Fiscal 2015 through Fiscal 2017 |
• | Phase II: Growing while Transforming |
– | Fiscal 2018 through Fiscal 2020 |
• | Phase III: Accelerating Growth |
– | Fiscal 2021 and thereafter |
Fiscal 2019 is the second year of Phase II, “Growing while Transforming,” which we expect to continue through Fiscal 2020. We have developed the following key transformation initiatives which, along with accelerating top-line growth, are essential to achieving our previously disclosed Fiscal 2020 profitability target of doubling Fiscal 2017 adjusted non-GAAP operating income margin of 2.9%:
• | Optimizing our global store network; |
• | Enhancing digital and omnichannel capabilities; |
• | Increasing the speed and efficiency of our concept-to-consumer product life cycle by further investing in capabilities to position our supply chain for greater speed, agility and efficiency, while leveraging data and analytics to offer the right product at the right time and the right price; and |
• | Improving our customer engagement through our loyalty programs and marketing optimization. |
For the third quarter of Fiscal 2019, net sales and comparable sales were approximately flat as compared to last year, as strength in the U.S., was offset by international headwinds. On a constant currency basis, we delivered our third consecutive quarter of revenue growth and our ninth consecutive quarter of positive U.S. comparable sales. A summary of results for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 is as follows:
GAAP | Non-GAAP (1) | |||||||||||||||
(in thousands, except change in net sales, comparable sales, gross profit rate, operating margin and per share amounts) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | ||||||||||||
Thirteen Weeks Ended | ||||||||||||||||
Net sales | $ | 863,472 | $ | 861,194 | ||||||||||||
Change in net sales | 0.3 | % | 0.2 | % | ||||||||||||
Comparable sales (2) | 0 | % | 3 | % | ||||||||||||
Gross profit rate | 60.1 | % | 61.3 | % | ||||||||||||
Operating income | $ | 14,479 | $ | 39,680 | $ | 24,947 | $ | 36,675 | ||||||||
Operating income margin | 1.7 | % | 4.6 | % | 2.9 | % | 4.3 | % | ||||||||
Net income attributable to A&F | $ | 6,523 | $ | 23,919 | $ | 14,506 | $ | 22,383 | ||||||||
Net income per diluted share attributable to A&F | $ | 0.10 | $ | 0.35 | $ | 0.23 | $ | 0.33 | ||||||||
Thirty-nine Weeks Ended | ||||||||||||||||
Net sales | $ | 2,438,522 | $ | 2,434,507 | ||||||||||||
Change in net sales | 0.2 | % | 5.9 | % | ||||||||||||
Comparable sales (2) | 0 | % | 3 | % | ||||||||||||
Gross profit rate | 59.9 | % | 60.7 | % | ||||||||||||
Operating (loss) income (3) | $ | (52,263 | ) | $ | (2,300 | ) | $ | (41,795 | ) | $ | 8,966 | |||||
Operating (loss) income margin | (2.1 | )% | (0.1 | )% | (1.7 | )% | 0.4 | % | ||||||||
Net loss attributable to A&F | $ | (43,774 | ) | $ | (22,395 | ) | $ | (35,791 | ) | $ | (11,848 | ) | ||||
Net loss per diluted share attributable to A&F | $ | (0.67 | ) | $ | (0.33 | ) | $ | (0.55 | ) | $ | (0.17 | ) | ||||
(1) | Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors is 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. |
(3) | The thirty-nine week periods ended November 2, 2019 and November 3, 2018 include $47.0 million and $3.8 million of flagship store exit charges, respectively. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.” |
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Certain components of the Company’s Condensed Consolidated Balance Sheets as of November 2, 2019 and February 2, 2019 were as follows:
(in thousands) | November 2, 2019 | February 2, 2019 | ||||||
Cash and equivalents | $ | 410,775 | $ | 723,135 | ||||
Long-term portion of borrowings, gross at carrying amount | $ | 243,250 | $ | 253,250 | ||||
Inventories | $ | 590,883 | $ | 437,879 | ||||
Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended November 2, 2019 and November 3, 2018 were as follows:
November 2, 2019 | November 3, 2018 | |||||||
Net cash (used for) provided by operating activities | $ | (33,839 | ) | $ | 77,245 | |||
Purchases of property and equipment | $ | (154,373 | ) | $ | (98,768 | ) | ||
Purchases of common stock | $ | (63,542 | ) | $ | (68,670 | ) | ||
Dividends paid | $ | (38,959 | ) | $ | (40,550 | ) | ||
Repayment of term loan facility borrowings | $ | (10,000 | ) | $ | — | |||
For the full year of Fiscal 2019, we expect:
• | Net sales to be in the range of flat to up 1% from Fiscal 2018 net sales of $3.59 billion, driven by comparable sales and net new store contribution, partially offset by an adverse impact from changes in foreign currency exchange rates of approximately $40 million of which approximately $35 million has been reflected in year-to-date results; |
• | Comparable sales to be in the range of flat to up 1%, against positive comparable sales of 3% last year; |
• | Gross profit rate to be down approximately 100 basis points from the Fiscal 2018 rate of 60.2%, reflecting a combined adverse impact of 40 basis points from changes in foreign currency exchange rates and anticipated China tariffs; |
• | Operating expense, excluding other operating income, to be up in the range 2% to 3% from Fiscal 2018 adjusted non-GAAP operating expense of $2.03 billion, reflecting second quarter flagship store exit charges this year of $45 million and third quarter asset impairment charges this year of $13 million; |
• | Effective tax rate to be in the mid 20s; |
• | Diluted weighted-average shares outstanding of approximately 66 million shares, excluding the effect of potential share buybacks; and |
• | Capital investments of approximately $200 million. |
Certain risks and challenges
We are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions and, as a result, we are mindful of macroeconomic risks and challenges that could adversely impact certain areas of our business.
In particular, there continues to be uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, such as the threat of additional tariffs on imported consumer goods from China. A summary of certain recent tariffs impacting our business include:
• | Additional tariffs imposed on fashion accessories, handbags and hats of up to 25%, which were effective beginning September 2018 at the starting rate of 10% and increased from 10% to 25% in May 2019 (“List 3”); and |
• | Additional tariffs imposed on select apparel and footwear of up to 25%, which were effective beginning September 2019 at the starting rate of 15% (“List 4A”). |
These List 3 and List 4A tariffs have not had a material impact on results for the thirteen and thirty-nine week periods ended November 2, 2019. List 3 and List 4A tariffs are expected to have a direct adverse impact on Fiscal 2019 cost of merchandise and gross profit of approximately $5 million. This impact is based on the List 4A starting rate of 15% and the List 3 rate of 25%.
We believe we have a number of measures available to help mitigate this risk and continue to focus on the diversification of our global supply chain. Our team has taken actions to proactively prepare for potential impacts, including shifting production into other countries and regions to both existing and new partners as necessary. Only a portion of our total goods sourced from China are imported into the U.S. and are subject to these additional tariffs. For context, in Fiscal 2018 approximately 25% of our total global merchandise receipts were sourced from China and imported to the U.S. and we expect to reduce this percentage to 16% for Fiscal 2019 and to the low-teens for Fiscal 2020.
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In addition, in June 2016, the United Kingdom passed a referendum to recommend withdrawing from the European Union. The United Kingdom is now scheduled to exit the European Union no later than January 31, 2020 and the final terms of the United Kingdom’s withdrawal remain unclear. As a result, there is continued uncertainty related to consumer behavior, economic conditions, foreign currency exchange rates and the free movement of goods, services, people and capital between the United Kingdom and the European Union. We believe that this referendum and the uncertainty surrounding the terms of United Kingdom’s withdrawal has adversely impacted international results in Fiscal 2019, and we have experienced decreased traffic in the United Kingdom and declining values of the Euro and British Pound as compared to the U.S. Dollar over last year. The United Kingdom’s withdrawal from the European Union could also adversely impact other areas of our business, including, but not limited to, an increase in duties and delays in the delivery of merchandise from our Netherlands DC to our customers in the United Kingdom if trade barriers materialize. The United Kingdom’s withdrawal from the European Union could also adversely impact the operations of our vendors and of our other third-party partners. In order to mitigate the risks associated with the United Kingdom’s withdrawal from the European Union, our team is: collaborating across the organization and testing our systems; working with external partners to develop contingency plans for potential adverse impacts; and taking actions to reduce, to the extent possible, the potential impact of any incremental duty exposure.
We also continue to monitor certain other events of global, political unrest, such as the ongoing protests in Hong Kong which have impacted our business and resulted in temporary store closures. Our team is developing contingency plans as it continues to assess the potential impacts these protests and similar events may have on the business in future periods.
It is possible that our preparations for these events are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations. For further discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to “ITEM 1A. RISK FACTORS,” included in A&F’s Annual Report on Form 10-K for Fiscal 2018.
Global Store Network Optimization
Reflecting a continued focus on our key transformation initiative ‘Global Store Network Optimization,’ we expect to deliver approximately 85 new store experiences in Fiscal 2019 across brands, including approximately: 40 new stores; 25 remodeled stores; and 20 right-sizes.
We also expect to close up to 40 stores in Fiscal 2019, primarily in the U.S. through natural lease expirations. In addition to natural lease expirations, certain other of our leases also include early termination options that can be exercised under specific conditions, allowing for significant lease flexibility. We may also elect to exit or modify our other leases, and could incur charges related to these actions.
A component of optimizing our global store fleet is pivoting away from large format flagship stores as we strive to open smaller, more productive omnichannel focused brand experiences. As a result, we have closed certain of our flagship stores and may have additional closures as we execute against this strategy. For context, at the beginning of Fiscal 2019, we had 19 flagship stores, and as of the end of the third quarter of Fiscal 2019, we had 17 flagship stores. In addition to the two flagship stores closed during the thirty-nine weeks ended November 2, 2019, we have also announced an additional four flagship closures. Details related to previously announced flagship store closures are as follows:
Brand (1) | Location | Actual or expected flagship store closure date | ||
Abercrombie & Fitch | Pedder Street, Hong Kong Special Administrative Region, China | Closed in the first quarter of Fiscal 2017 | ||
Abercrombie & Fitch | Copenhagen, Denmark | Closed in the first quarter of Fiscal 2019 | ||
Hollister | SoHo, New York City, United States | Closed in the second quarter of Fiscal 2019 | ||
Abercrombie | Milan, Italy | Expected to close by the end of Fiscal 2019 | ||
Hollister | 5th Avenue, New York City, United States | Expected to close by the end of Fiscal 2020 | ||
Abercrombie & Fitch | Fukuoka, Japan | Expected to close in the second half of Fiscal 2020 | ||
abercrombie kids | London, United Kingdom | * | ||
* | Closure date has not been finalized. |
(1) | Abercrombie includes the Company’s Abercrombie & Fitch and abercrombie kids brands and, when used in the table above, signifies a location with an abercrombie kids carveout within an Abercrombie & Fitch store that would be represented as a single store count. |
For details on flagship store exit charges incurred during the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018, refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.”
30
Store count and gross square footage by brand and geography for the thirty-nine weeks ended November 2, 2019 and November 3, 2018 were as follows:
Thirty-nine weeks ended November 2, 2019 | ||||||||||||||||||||
Hollister (1) | Abercrombie (2) | Total Company | ||||||||||||||||||
United States | International | United States | International | United States | International | Total | ||||||||||||||
Number of stores: | ||||||||||||||||||||
February 2, 2019 | 393 | 149 | 270 | 49 | 663 | 198 | 861 | |||||||||||||
New | 10 | 5 | 10 | 2 | 20 | 7 | 27 | |||||||||||||
Closed | (3 | ) | — | (3 | ) | (1 | ) | (6 | ) | (1 | ) | (7 | ) | |||||||
November 2, 2019 | 400 | 154 | 277 | 50 | 677 | 204 | 881 | |||||||||||||
Gross square footage: | ||||||||||||||||||||
November 2, 2019 (in thousands) | 2,659 | 1,261 | 2,001 | 635 | 4,660 | 1,896 | 6,556 | |||||||||||||
Thirty-nine weeks ended November 3, 2018 | ||||||||||||||||||||
Hollister (1) | Abercrombie (2) | Total Company | ||||||||||||||||||
United States | International | United States | International | United States | International | Total | ||||||||||||||
Number of stores: | ||||||||||||||||||||
February 3, 2018 | 394 | 144 | 285 | 45 | 679 | 189 | 868 | |||||||||||||
New | 6 | 3 | 4 | 3 | 10 | 6 | 16 | |||||||||||||
Closed | — | — | (5 | ) | — | (5 | ) | — | (5 | ) | ||||||||||
November 3, 2018 | 400 | 147 | 284 | 48 | 684 | 195 | 879 | |||||||||||||
Gross square footage: | ||||||||||||||||||||
November 3, 2018 (in thousands) | 2,705 | 1,219 | 2,156 | 639 | 4,861 | 1,858 | 6,719 | |||||||||||||
(1) | Excludes nine international franchise stores as of each of November 2, 2019 and August 3, 2019 and eight as of February 2, 2019. Excludes 10 U.S. Company-operated temporary stores as of November 2, 2019 and six as of August 3, 2019. |
(2) | Abercrombie includes the company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes seven international franchise stores as of each of November 2, 2019, August 3, 2019 and February 2, 2019. Excludes seven U.S. Company-operated temporary stores as of November 2, 2019 and four as of August 3, 2019. |
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RESULTS OF OPERATIONS
THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 2, 2019 VERSUS NOVEMBER 3, 2018
Net sales
Thirteen Weeks Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||||||
(in thousands) | Net Sales | Net Sales | $ Change | % Change | Comparable Sales (1) | ||||||||||
Hollister | $ | 514,772 | $ | 515,125 | $ | (353 | ) | 0% | (2)% | ||||||
Abercrombie (2) | 348,700 | 346,069 | 2,631 | 1% | 3% | ||||||||||
Total company | $ | 863,472 | $ | 861,194 | $ | 2,278 | 0% | 0% | |||||||
United States | $ | 583,593 | $ | 562,590 | $ | 21,003 | 4% | 3% | |||||||
International | 279,879 | 298,604 | (18,725 | ) | (6)% | (8)% | |||||||||
Total company | $ | 863,472 | $ | 861,194 | $ | 2,278 | 0% | 0% | |||||||
Thirty-nine Weeks Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||||||
(in thousands) | Net Sales | Net Sales | $ Change | % Change | Comparable Sales (1) | ||||||||||
Hollister | $ | 1,447,975 | $ | 1,439,589 | $ | 8,386 | 1% | 0% | |||||||
Abercrombie (2) | 990,547 | 994,918 | (4,371 | ) | 0% | 1% | |||||||||
Total net sales | $ | 2,438,522 | $ | 2,434,507 | $ | 4,015 | 0% | 0% | |||||||
United States | $ | 1,596,723 | $ | 1,543,162 | $ | 53,561 | 3% | 3% | |||||||
International | 841,799 | 891,345 | (49,546 | ) | (6)% | (5)% | |||||||||
Total net sales | $ | 2,438,522 | $ | 2,434,507 | $ | 4,015 | 0% | 0% | |||||||
(1) | Calculated on a constant currency basis. Refer to “NON-GAAP FINANCIAL MEASURES,” for further details. |
(2) | Includes Abercrombie & Fitch and abercrombie kids brands. |
For the third quarter of Fiscal 2019, net sales were approximately flat as compared to the third quarter of Fiscal 2018, reflecting an increase in units sold, partially offset by a decrease in average unit retail driven by the adverse impact from changes in foreign currency exchange rates. Excluding the adverse impact of changes in foreign currency exchange rates, net sales for the third quarter of Fiscal 2019 increased 1% as compared to the third quarter of Fiscal 2018.
For the year-to-date period of Fiscal 2019, net sales were approximately flat as compared to the year-to-date period of Fiscal 2018, reflecting an increase in units sold, partially offset by a decrease in average unit retail driven by the adverse impact from changes in foreign currency exchange rates. Excluding the adverse impact of changes in foreign currency exchange rates, net sales for the year-to-date period of Fiscal 2019 increased 2% as compared to the year-to-date period of Fiscal 2018.
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Cost of sales, exclusive of depreciation and amortization
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Cost of sales, exclusive of depreciation and amortization | $ | 344,541 | 39.9% | $ | 333,375 | 38.7% | |||||
Gross profit | $ | 518,931 | 60.1% | $ | 527,819 | 61.3% | |||||
Gross profit on a non-GAAP constant currency basis (1) | $ | 518,931 | 60.1% | $ | 519,288 | 60.9% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Cost of sales, exclusive of depreciation and amortization | $ | 976,868 | 40.1% | $ | 957,448 | 39.3% | |||||
Gross profit | $ | 1,461,654 | 59.9% | $ | 1,477,059 | 60.7% | |||||
Gross profit on a non-GAAP constant currency basis (1) | $ | 1,461,654 | 59.9% | $ | 1,452,058 | 60.5% | |||||
(1) |
For the third quarter of Fiscal 2019, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 120 basis points as compared to the third quarter of Fiscal 2018, reflecting the adverse impact from higher year-over-year shrink of approximately 50 basis points as a result of physical inventory counts completed in the third quarter of Fiscal 2019, and the adverse impact from changes in foreign currency exchange rates, net of hedging, of approximately 40 basis points.
For the year-to-date period of Fiscal 2019, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 80 basis points as compared to the year-to-date period of Fiscal 2018, primarily due to lower average unit retail without a corresponding decrease in average unit cost, the adverse impact from higher year-over-year shrink of approximately 20 basis points as a result of physical inventory counts completed in the third quarter of Fiscal 2019 and the adverse impact from changes in foreign currency exchange rates, net of hedging, of approximately 20 basis points.
Stores and distribution expense
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Stores and distribution expense | $ | 377,697 | 43.7% | $ | 371,859 | 43.2% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Stores and distribution expense | $ | 1,110,656 | 45.5% | $ | 1,103,758 | 45.3% | |||||
For the third quarter of Fiscal 2019, stores and distribution expense as a percentage of net sales increased by approximately 50 basis points as compared to the third quarter of Fiscal 2018, primarily due to increased shipping and handling expense and increased depreciation expense on omnichannel investments, partially offset by a decrease in store occupancy expense as a percentage of net sales of approximately 50 basis points.
For the year-to-date period of Fiscal 2019, stores and distribution expense as a percentage of net sales increased by approximately 20 basis points as compared to the year-to-date period of Fiscal 2018, primarily due to increased shipping and handling expense, increased depreciation expense on omnichannel investments, partially offset by a decrease in store occupancy expense as a percentage of net sales of approximately 50 basis points.
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Marketing, general and administrative expense
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Marketing, general and administrative expense | $ | 114,075 | 13.2% | $ | 117,181 | 13.6% | |||||
Deduct: | |||||||||||
Benefits related to certain legal matters (1) | — | 0.0% | 3,005 | 0.3% | |||||||
Adjusted non-GAAP marketing, general and administrative expense | $ | 114,075 | 13.2% | $ | 120,186 | 14.0% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Marketing, general and administrative expense | $ | 341,716 | 14.0% | $ | 365,961 | 15.0% | |||||
Deduct: | |||||||||||
Net charges related to certain legal matters (1) | — | 0.0% | (2,595 | ) | (0.1)% | ||||||
Adjusted non-GAAP marketing, general and administrative expense | $ | 341,716 | 14.0% | $ | 363,366 | 14.9% | |||||
(1) | Amounts reflect legal charges and benefits in connection with a then proposed settlement of a class action claim, which received final court approval and was paid in the fourth quarter of Fiscal 2018. |
For the third quarter of Fiscal 2019, marketing, general and administrative expense as a percentage of net sales decreased by approximately 40 basis points as compared to the third quarter of Fiscal 2018, primarily due to decreased consulting, marketing and performance-based compensation expense. The aforementioned decreases were partially offset by increased information technology expense and the impact of benefits related to certain legal matters included in last year’s results, the latter of which was a benefit of 30 basis points to third quarter of Fiscal 2018 results. Excluding the benefits related to certain legal matters presented above, third quarter of Fiscal 2019 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased by approximately 80 basis points as compared to the third quarter of Fiscal 2018.
For the year-to-date period of Fiscal 2019, marketing, general and administrative expense as a percentage of net sales decreased by approximately 100 basis points as compared to the year-to-date period of Fiscal 2018, primarily due to decreased performance-based compensation, consulting, and depreciation expense, as well as the impact of charges related to certain legal matters included in last year’s results, the last of which was an adverse impact of 10 basis points to year-to-date Fiscal 2018 results. The aforementioned decreases were partially offset by increases in information technology expense and executive employee severance charges. Excluding the net charges related to certain legal matters presented above, year-to-date Fiscal 2019 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased by approximately 90 basis points as compared to the year-to-date period of Fiscal 2018.
Flagship store exit charges
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Flagship store exit charges | $ | 285 | 0.0% | $ | — | 0.0% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Flagship store exit charges | $ | 47,023 | 1.9% | $ | 3,808 | 0.2% | |||||
For the year-to-date period of Fiscal 2019, flagship store exit charges as a percentage of net sales increased by approximately 170 basis points as compared to the year-to-date period of Fiscal 2018, primarily related to the closure of the SoHo Hollister flagship in New York City during the second quarter of Fiscal 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.”
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Asset impairment, exclusive of flagship store exit charges
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Asset impairment, exclusive of flagship store exit charges | $ | 12,610 | 1.5% | $ | 656 | 0.1% | |||||
Deduct: | |||||||||||
Flagship asset impairment charges (1) | (10,468 | ) | (1.2)% | — | 0.0% | ||||||
Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges | $ | 2,142 | 0.2% | $ | 656 | 0.1% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Asset impairment, exclusive of flagship store exit charges | $ | 14,987 | 0.6% | $ | 10,383 | 0.4% | |||||
Deduct: | |||||||||||
Certain flagship asset impairment charges (1) | (10,468 | ) | (0.4)% | (8,671 | ) | (0.4)% | |||||
Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges | $ | 4,519 | 0.2% | $ | 1,712 | 0.1% | |||||
(1) | Amounts reflect asset impairment charges related to certain of the Company’s international Abercrombie flagship stores. |
For the third quarter and year-to-date period of Fiscal 2019, asset impairment, exclusive of flagship store exit charges, as a percentage of net sales increased by approximately 140 basis points and 20 basis points as compared to the third quarter and year-to-date period of Fiscal 2018, respectively. Refer to Note 8, “ASSET IMPAIRMENT.”
Other operating income, net
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Other operating income, net | $ | 215 | 0.0% | $ | 1,557 | 0.2% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Other operating income, net | $ | 465 | 0.0% | $ | 4,551 | 0.2% | |||||
For both the third quarter and year-to-date period of Fiscal 2019, other operating income, net as a percentage of net sales decreased by approximately 20 basis points as compared to the third quarter and year-to-date period of Fiscal 2018, respectively, reflecting lower foreign currency exchange rate related gains and the impact resulting from the adoption of the new derivative accounting standard in Fiscal 2019. Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further discussion of the new derivative accounting standard.
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Operating income (loss)
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Operating income | $ | 14,479 | 1.7% | $ | 39,680 | 4.6% | |||||
Deduct: | |||||||||||
Flagship asset impairment charges (2) | 10,468 | 1.2% | — | 0.0% | |||||||
Benefit related to certain legal matters (3) | — | 0.0% | (3,005 | ) | (0.3)% | ||||||
Adjusted non-GAAP operating income | $ | 24,947 | 2.9% | $ | 36,675 | 4.3% | |||||
Adjusted non-GAAP operating income on a constant currency basis (1) | $ | 24,947 | 2.9% | $ | 31,269 | 3.7% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Operating loss | $ | (52,263 | ) | (2.1)% | $ | (2,300 | ) | (0.1)% | |||
Deduct: | |||||||||||
Certain flagship asset impairment charges (2) | 10,468 | 0.4% | 8,671 | 0.4% | |||||||
Net charges related to certain legal matters (3) | — | 0.0% | 2,595 | 0.1% | |||||||
Adjusted non-GAAP operating (loss) income | $ | (41,795 | ) | (1.7)% | $ | 8,966 | 0.4% | ||||
Adjusted non-GAAP operating loss on a constant currency basis (1) | $ | (41,795 | ) | (1.7)% | $ | (3,070 | ) | (0.1)% | |||
(1) |
(2) | Amounts reflect asset impairment charges related to certain of the Company’s international Abercrombie flagship stores. |
(3) | Amounts reflect legal charges and benefits in connection with a then proposed settlement of a class action claim, which received final court approval and was paid in the fourth quarter of Fiscal 2018. |
Interest expense, net
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Interest expense | $ | 5,500 | 0.6% | $ | 5,643 | 0.7% | |||||
Interest income | (2,578 | ) | (0.3)% | (2,786 | ) | (0.3)% | |||||
Interest expense, net | $ | 2,922 | 0.3% | $ | 2,857 | 0.3% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Interest expense | $ | 14,518 | 0.6% | $ | 17,000 | 0.7% | |||||
Interest income | (9,610 | ) | (0.4)% | (8,102 | ) | (0.3)% | |||||
Interest expense, net | $ | 4,908 | 0.2% | $ | 8,898 | 0.4% | |||||
For the third quarter Fiscal 2019, interest expense, net as a percentage of net sales was approximately flat as compared to the third quarter of Fiscal 2018. Interest expense as a percentage of sales decreased by approximately 10 basis points year-over-year, primarily driven by the elimination of landlord financing obligations and the related interest expense upon the adoption of the new lease accounting standard in Fiscal 2019, partially offset by an increase in interest expense related to certain of the Company’s long-term obligations.
For the year-to-date period of Fiscal 2019, interest expense, net as a percentage of net sales decreased by approximately 20 basis points as compared to the year-to-date period of Fiscal 2018. Interest expense as a percentage of sales decreased by approximately 10 basis points year-over-year, primarily driven by the elimination of landlord financing obligations and the related interest expense upon adoption of the new lease accounting standard in Fiscal 2019, partially offset by an increase in interest expense related to certain of the Company’s long-term obligations. Interest income as a percentage of sales increased by approximately 10 basis points year-over-year primarily driven by higher interest income earned on the Company’s investments and cash holdings.
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Income tax expense (benefit)
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||
Income tax expense | $ | 3,987 | 34.5% | $ | 12,047 | 32.7% | |||||
Deduct: | |||||||||||
Tax effect of pre-tax excluded items (1) | 2,485 | (1,064 | ) | ||||||||
Tax Cuts and Jobs Act of 2017 charges (2) | — | (405 | ) | ||||||||
Adjusted non-GAAP income tax expense | $ | 6,472 | 29.4% | $ | 10,578 | 31.3% | |||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||
Income tax (benefit) expense | $ | (16,931 | ) | 29.6% | $ | 8,358 | (74.6)% | ||||
Deduct: | |||||||||||
Tax effect of pre-tax excluded items (1) | 2,485 | 3,166 | |||||||||
Tax Cuts and Jobs Act of 2017 charges (2) | — | (2,447 | ) | ||||||||
Adjusted non-GAAP income tax (benefit) expense | $ | (14,446 | ) | 30.9% | $ | 9,077 | 13,348.5% | ||||
(1) | Refer to “Operating income (loss)” for details of pre-tax excluded items. 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. |
(2) |
The year-over-year change in the effective tax rate in Fiscal 2019 as compared to Fiscal 2018, was primarily driven by changes in the level and mix of consolidated pre-tax earnings between operating and valuation allowance jurisdictions as well as discrete items.
The effective tax rate for the third quarter of Fiscal 2019 and the third quarter of Fiscal 2018 was impacted by discrete tax items related to share-based compensation awards discussed within Note 10, “SHARE-BASED COMPENSATION.” The effective tax rate for the third quarter of Fiscal 2018 was also impacted by discrete income tax charges detailed in the table above related to the then provisional estimate of the Tax Cuts and Jobs Act of 2017.
The effective tax rate for the year-to-date period of Fiscal 2019 and the year-to-date period of Fiscal 2018 was impacted by discrete items related to share-based compensation awards discussed within Note 10, “SHARE-BASED COMPENSATION.” The year-to-date Fiscal 2018 effective tax rate, which was highly sensitive at lower levels of pre-tax earnings, was also impacted by discrete income tax charges detailed in the table above related to the then provisional estimate of the Tax Cuts and Jobs Act of 2017.
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Net income (loss) and Net income (loss) per share attributable to A&F
Thirteen Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Net income attributable to A&F | $ | 6,523 | 0.8% | $ | 23,919 | 2.8% | |||||
Adjusted non-GAAP net income attributable to A&F (1) | $ | 14,506 | 1.7% | $ | 22,383 | 2.6% | |||||
Net income per diluted share attributable to A&F | $ | 0.10 | $ | 0.35 | |||||||
Adjusted non-GAAP net income per diluted share attributable to A&F (1) | $ | 0.23 | $ | 0.33 | |||||||
Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) | $ | 0.23 | $ | 0.27 | |||||||
Thirty-nine Weeks Ended | |||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||
(in thousands) | % of Net Sales | % of Net Sales | |||||||||
Net loss attributable to A&F | $ | (43,774 | ) | (1.8)% | $ | (22,395 | ) | (0.9)% | |||
Adjusted non-GAAP net loss attributable to A&F (1) | $ | (35,791 | ) | (1.5)% | $ | (11,848 | ) | (0.5)% | |||
Net loss per diluted share attributable to A&F | $ | (0.67 | ) | $ | (0.33 | ) | |||||
Adjusted non-GAAP net loss per diluted share attributable to A&F (1) | $ | (0.55 | ) | $ | (0.17 | ) | |||||
Adjusted non-GAAP net loss per diluted share attributable to A&F on a constant currency basis (2) | $ | (0.55 | ) | $ | (0.31 | ) | |||||
(1) | Excludes items presented above under “Operating income (loss),” and “Income tax expense (benefit).” |
(2) |
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LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL SOURCES AND USES OF CASH
Seasonality of cash flows
The Company’s business has two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during Fall due to Back-to-School and Holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has a revolving credit facility available as a source of additional funding.
Credit Facilities
On August 7, 2014, the Company, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.
On October 19, 2017, the Company, through its subsidiary A&F Management, entered into a Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement to October 19, 2022. As amended, the asset-based revolving credit agreement continues to provide for a senior secured credit facility of up to $400 million (the “Amended ABL Facility”).
As of November 2, 2019, the borrowing base on the Amended ABL Facility was $400.0 million.
The Company uses, in the ordinary course of business, stand-by letters of credit under the existing Amended ABL Facility. As of both November 2, 2019 and February 2, 2019, the Company had not drawn on the Amended ABL Facility, but had approximately $0.4 million of outstanding stand-by letters of credit under the Amended ABL Facility.
As of November 2, 2019, the Company had availability under the Amended ABL Facility of $399.6 million. In addition, excess availability equal to the greater of 10% of the loan cap or $30 million must be maintained under the Amended ABL Facility.
On August 7, 2014, the Company, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), entered into a term loan agreement, which provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”). The Term Loan Facility will mature on August 7, 2021.
On June 22, 2018, the Company, through its subsidiary A&F Management, entered into a Second Amendment to Term Loan Credit Agreement, which, among other things, repriced the Term Loan Facility by reducing the applicable margins for term loans by 0.25%.
The Company’s term loan debt is presented on the Condensed Consolidated Balance Sheets, net of the unamortized discount and fees. Net borrowings as of November 2, 2019 and February 2, 2019 were as follows:
(in thousands) | November 2, 2019 | February 2, 2019 | |||||
Long-term portion of borrowings, gross at carrying amount | $ | 243,250 | $ | 253,250 | |||
Unamortized discount | (525 | ) | (845 | ) | |||
Unamortized fees | (1,382 | ) | (1,966 | ) | |||
Long-term portion of borrowings, net | 241,343 | 250,439 | |||||
Less: short-term portion of borrowings, net | — | — | |||||
Long-term portion of borrowings, net | $ | 241,343 | $ | 250,439 | |||
The interest rate on borrowings under the Term Loan Facility was 5.33% as of November 2, 2019.
The Company was in compliance with the covenants under the Credit Facilities as of November 2, 2019.
The material provisions of the Credit Facilities have not changed from those disclosed in Note 10, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2018.
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Cash flows from operating, investing, and financing activities
The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended November 2, 2019 and November 3, 2018:
Thirty-nine Weeks Ended | |||||||
November 2, 2019 | November 3, 2018 | ||||||
(in thousands) | |||||||
Cash and equivalents, and restricted cash and equivalents, beginning of period | $ | 745,829 | $ | 697,955 | |||
Net cash (used for) provided by operating activities | (33,839 | ) | $ | 77,245 | |||
Net cash used for investing activities | (154,373 | ) | (98,768 | ) | |||
Net cash used for financing activities | (122,908 | ) | (117,981 | ) | |||
Effects of foreign currency exchange rate changes on cash | (2,686 | ) | (16,068 | ) | |||
Net decrease in cash and equivalents, and restricted cash and equivalents | (313,806 | ) | (155,572 | ) | |||
Cash and equivalents, and restricted cash and equivalents, end of period | $ | 432,023 | $ | 542,383 | |||
Operating activities - For both the thirty-nine weeks ended November 2, 2019 and November 3, 2018, the primary source of cash from operations was merchandise sales which were approximately flat year-over-year. The year-over-year decrease in cash flows from operating activities for the thirty-nine weeks ended November 2, 2019 as compared to the thirty-nine weeks ended November 3, 2018 reflects: a larger year-to-date loss before income taxes in the current year as compared to the prior year, resulting in increased benefits from deferred tax assets; changes in the timing of payments to vendors, resulting in increased payments in the first quarter of Fiscal 2019 as compared to the prior year; and decreased incentive compensation payments in Fiscal 2019 as compared to the prior year.
Investing activities - For the thirty-nine weeks ended November 2, 2019 and November 3, 2018, net cash outflows for investing activities were used for purchases of property and equipment.
Financing activities - For the thirty-nine weeks ended November 2, 2019, net cash used for financing activities primarily consisted of the repurchase of approximately 4.0 million shares of A&F’s Common Stock in the open market with a market value of approximately $63.5 million, dividend payments of $39.0 million and a voluntary debt repayment of $10.0 million. For the thirty-nine weeks ended November 3, 2018, net cash used for financing activities consisted primarily of the repurchase of approximately 2.9 million shares of A&F’s Common Stock in the open market with a market value of approximately $68.7 million and dividend payments of $40.6 million.
FUTURE CASH REQUIREMENTS AND SOURCES OF CASH
The Company’s capital allocation strategy remains to prioritize investments in the business to build on the foundation for sustainable long-term growth and seeks to invest in projects that have high expected returns. The Company also evaluates opportunities to accelerate potential investments, including improvements in customer experience, both in stores and online. These improvements include store remodels and right-sizes, new store openings, and acceleration of our transformation efforts. The Company also evaluates store closures, including flagship lease buyouts and options to early terminate its store leases. In addition, the Company returns cash to stockholders through dividends and completes share repurchases as deemed appropriate. Dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews the dividend on a quarterly basis and establishes the dividend rate based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors which the Board of Directors deems relevant. Capital allocation priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors.
To execute its capital allocation strategy, the Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the fiscal year and to reinvest in the business to support future growth. The Company also has availability under the Amended ABL Facility as a source of additional funding. Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, leases, any lease buyouts or options to terminate store leases the Company may exercise, taxes and other operating activities, as well as to fund capital expenditures, marketing initiatives, quarterly dividends to stockholders subject to approval by A&F’s Board of Directors and debt service requirements, including voluntary debt prepayments, or required repayments, if any, based on annual excess cash flows, as defined in the term loan agreement applicable to the Term Loan Facility.
The Company may repurchase shares of its Common Stock from time to time, dependent on market and business conditions, with the primary objective to offset dilution from issuances of Common Stock associated with the exercise of employee stock appreciation
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rights and vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, through privately negotiated transactions or other transactions or by a combination of such methods. The Company would anticipate funding such repurchases by utilizing free cash flow generated from operations or proceeds from the Amended ABL Facility. Refer to “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for additional information regarding the Company’s share repurchases during the third quarter of Fiscal 2019 and the number of shares remaining available for purchase under publicly announced stock repurchase authorizations.
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 has determined that the remaining 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 earning and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional taxes.
As of November 2, 2019, $191.4 million of the Company’s $410.8 million of cash and equivalents was held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends to A&F’s stockholders.
In December 2017, the Tax Cuts and Jobs Act of 2017 was signed into law and, in May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing. Refer to Note 9, “INCOME TAXES,” for additional details regarding the impact these events had on the Company’s consolidated financial statements.
Capital investments
For Fiscal 2019, the Company expects capital investments to be approximately $200 million, prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects.
OFF-BALANCE SHEET ARRANGEMENTS
As of November 2, 2019, the Company did not have any material off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. During the thirty-nine weeks ended November 2, 2019, there were no material changes in the contractual obligations as of February 2, 2019, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).
RECENT ACCOUNTING PRONOUNCEMENTS
The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2018. Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q for recent accounting pronouncements the Company has adopted, including the dates of adoption and estimated effects on the Condensed Consolidated Financial Statements.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company describes its critical accounting policies and estimates in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” of A&F’s Annual Report on Form 10-K for Fiscal 2018. There have been no other significant changes in critical accounting policies and estimates since the end of Fiscal 2018, except as described below and in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Recent accounting pronouncements” of the Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q.
Policy | Effect if Actual Results Differ from Assumptions | |
Impairment of long-lived assets | ||
Long-lived assets, primarily lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable. Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumptions used in the Company’s undiscounted future cash flow models include sales, gross profit and, to a lesser extent, operating expenses. An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. The fair value of the asset group is determined based on the highest and best use of the asset group, which may include consideration of market rent for the lease right–of–use assets included in the asset group. The Company also may utilize assumptions related to projected store cash flows when estimating the fair value of impaired assets. | If actual results are not consistent with the estimates and assumptions used, there may be a material impact on the Company’s financial condition or results of operation. Store assets that were tested for impairment and not impaired during the thirteen weeks ended November 2, 2019, had long-lived assets with a net book value of $69.7 million, which included $61.9 million of operating lease right-of-use assets as of November 2, 2019. These stores had undiscounted cash flows which were in the range of 100% to 150% of their respective net asset values. Store assets that were impaired as of November 2, 2019 had a remaining net book value of $134.4 million, which included $128.1 million of operating lease right-of-use assets. | |
Leases | ||
The Company’s lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term. The Company’s lease liabilities represent the Company’s obligation to make lease payments arising from the lease. On the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term on the Condensed Consolidated Balance Sheets. In measuring the Company’s lease liabilities, the remaining lease payments are discounted to present value using a discount rate. As the rates implicit in the Company's leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the lease and the lease term for the initial measurement of the lease right-of-use asset and liability. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date. The Company estimates its incremental borrowing rate on a quarterly basis, based on the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. | The Company does not expect material changes to the underlying assumptions used to measure its lease liabilities as of November 2, 2019. An increase or decrease of 10% in the Company’s weighted-average discount rate as of November 2, 2019, would impact both the Company’s total assets and total liabilities by less than 1% and would not have a material impact on the Company’s pre-tax income for Fiscal 2019. | |
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NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, such as certain flagship asset impairment charges, and thereby supplements investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies.
Comparable sales
The Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.
Excluded items
The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable:
Financial measures (1) | Excluded items | |
Marketing, general and administrative expense | Benefit and net charges related to certain legal matters | |
Asset impairment, exclusive of flagship store exit charges | Flagship asset impairment charges | |
Operating income (loss) | Benefit and net charges related to certain legal matters and flagship asset impairment charges | |
Net income (loss) and net income (loss) per share attributable to A&F (2) | Benefits and charges related to certain legal matters; flagship asset impairment charges; discrete net tax charges related to the Tax Cuts and Jobs Act of 2017; 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 Company also presents income tax (benefit) expense and the effective tax rate on both a GAAP and on an adjusted non-GAAP basis excluding the items listed under “Operating income (loss),” as applicable, in the table above and discrete net tax charges related to the Act. The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. |
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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 for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 is calculated using a 27% effective tax rate.
A reconciliation of constant currency financial measures for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 follows:
(in thousands, except change in net sales, gross profit rate, operating margin and per share data) | Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||
Net sales | November 2, 2019 | November 3, 2018 | % Change | November 2, 2019 | November 3, 2018 | % Change | |||||||||||||
GAAP | $ | 863,472 | $ | 861,194 | 0% | $ | 2,438,522 | $ | 2,434,507 | 0% | |||||||||
Impact from changes in foreign currency exchange rates | — | (8,302 | ) | 1% | — | (34,547 | ) | 1% | |||||||||||
Net sales on a constant currency basis | $ | 863,472 | $ | 852,892 | 1% | $ | 2,438,522 | $ | 2,399,960 | 2% | |||||||||
Gross profit (1) | November 2, 2019 | November 3, 2018 | BPS Change (2) | November 2, 2019 | November 3, 2018 | BPS Change (2) | |||||||||||||
GAAP | $ | 518,931 | $ | 527,819 | (120) | $ | 1,461,654 | $ | 1,477,059 | (80) | |||||||||
Impact from changes in foreign currency exchange rates | — | (8,531 | ) | 40 | — | (25,001 | ) | 20 | |||||||||||
Gross profit on a constant currency basis | $ | 518,931 | $ | 519,288 | (80) | $ | 1,461,654 | $ | 1,452,058 | (60) | |||||||||
Operating income (loss) | November 2, 2019 | November 3, 2018 | BPS Change (2) | November 2, 2019 | November 3, 2018 | BPS Change (2) | |||||||||||||
GAAP | $ | 14,479 | $ | 39,680 | (290) | $ | (52,263 | ) | $ | (2,300 | ) | (200) | |||||||
Excluded items (3) | (10,468 | ) | 3,005 | (150) | (10,468 | ) | (11,266 | ) | 10 | ||||||||||
Adjusted non-GAAP | $ | 24,947 | $ | 36,675 | (140) | $ | (41,795 | ) | $ | 8,966 | (210) | ||||||||
Impact from changes in foreign currency exchange rates | — | (5,406 | ) | 60 | — | (12,036 | ) | 50 | |||||||||||
Adjusted non-GAAP on a constant currency basis | $ | 24,947 | $ | 31,269 | (80) | $ | (41,795 | ) | $ | (3,070 | ) | (160) | |||||||
Net income (loss) per diluted share attributable to Abercrombie & Fitch Co. | November 2, 2019 | November 3, 2018 | $ Change | November 2, 2019 | November 3, 2018 | $ Change | |||||||||||||
GAAP | $ | 0.10 | $ | 0.35 | $(0.25) | $ | (0.67 | ) | $ | (0.33 | ) | $(0.34) | |||||||
Excluded items, net of tax (3) | (0.12 | ) | 0.02 | (0.14) | (0.12 | ) | (0.16 | ) | 0.04 | ||||||||||
Adjusted non-GAAP | $ | 0.23 | $ | 0.33 | $(0.10) | $ | (0.55 | ) | $ | (0.17 | ) | $(0.38) | |||||||
Impact from changes in foreign currency exchange rates | — | (0.06 | ) | 0.06 | — | (0.13 | ) | 0.13 | |||||||||||
Adjusted non-GAAP on a constant currency basis | $ | 0.23 | $ | 0.27 | $(0.04) | $ | (0.55 | ) | $ | (0.31 | ) | $(0.24) | |||||||
(1) | Gross profit is derived from cost of sales, exclusive of depreciation and amortization. |
(2) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
(3) |
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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 of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.8 million and $2.4 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, and realized gains of $0.8 million and $2.3 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The Rabbi Trust assets are included in other assets on the Condensed Consolidated Balance Sheets as of November 2, 2019 and February 2, 2019, and are restricted in their use as noted above.
Interest rate risks
As of November 2, 2019, the Company has approximately $243.3 million in gross borrowings outstanding under its Term Loan Facility and no borrowings outstanding under its Amended ABL Facility. The Credit Facilities carry interest rates that are tied to LIBO rate, or an alternate base rate, plus a margin. The interest rate on the Term Loan Facility has a 100 basis point LIBO rate floor, and assuming no changes in the Company’s financial structure as it stands, an increase in the interest rate on borrowings under the Term Loan Facility as of November 2, 2019 of 100 basis points would increase Fiscal 2019 annual interest expense by approximately $2.5 million. This hypothetical analysis for Fiscal 2019 may differ from the actual change in interest expense due to potential changes in interest rates or gross borrowings outstanding under the Company’s Credit Facilities. The expected transition from the widespread use of LIBO rate to alternative rates over the next several years is not expected to have a material impact on interest expense on borrowings outstanding under the Company’s Credit Facilities.
Foreign 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 sale of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Refer to Note 11, “DERIVATIVE INSTRUMENTS,” for the fair value of outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of November 2, 2019 and February 2, 2019.
Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $35.6 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair value would be largely offset by the net change in fair values of the underlying hedged items.
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ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure controls and procedures
A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Senior Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended November 2, 2019. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Senior Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of November 2, 2019, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in internal control over financial reporting
There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during A&F’s fiscal quarter ended November 2, 2019 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 is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” of this Quarterly Report on Form 10-Q. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and cannot estimate a range of reasonably possible losses for these legal matters.
Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of 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.
ITEM 1A. | RISK FACTORS |
The Company’s risk factors as of November 2, 2019 have not changed materially from those disclosed in Part I, “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2018.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no sales of equity securities during the third quarter of Fiscal 2019 that were not registered under the Securities Act of 1933, as amended.
The following table provides information regarding the purchase of shares of Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the thirteen weeks ended November 2, 2019:
Period (Fiscal Month) | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (3) | ||||||||
August 4, 2019 through August 31, 2019 | 1,967 | $ | 15.77 | — | 5,027,107 | |||||||
September 1, 2019 through October 5, 2019 | 284,915 | $ | 13.90 | 279,200 | 4,747,907 | |||||||
October 6, 2019 through November 2, 2019 | 136,745 | $ | 14.05 | 132,461 | 4,615,446 | |||||||
Total | 423,627 | $ | 13.96 | 411,661 | 4,615,446 | |||||||
(1) | 11,966 shares of A&F’s Common Stock purchased during the thirteen weeks ended November 2, 2019 represented shares withheld for tax payments due upon the vesting of employee restricted stock units. |
(2) | Amounts represent shares of A&F’s Common Stock repurchased during the thirteen weeks ended November 2, 2019 pursuant to A&F’s publicly announced stock repurchase authorizations. On August 14, 2012, A&F’s Board of Directors authorized the repurchase of 10.0 million shares of A&F’s Common Stock, which was announced on August 15, 2012. On June 12, 2019, A&F’s Board of Directors authorized the repurchase of an additional 5.0 million shares of A&F’s Common Stock, which was announced on June 12, 2019. As of November 2, 2019, no shares remain available for repurchase under the August 14, 2012 repurchase authorization. |
(3) | The number shown represents, as of the end of each period, the maximum number of shares of A&F’s Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorizations described in footnote 2 above. The shares may be purchased, from time to time, depending on business and market conditions. |
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ITEM 6. EXHIBITS
Exhibit No. | Document |
3.1 | |
3.2 | |
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 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.
ABERCROMBIE & FITCH CO. | ||
Date: December 11, 2019 | By | /s/ Scott Lipesky |
Scott Lipesky | ||
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Authorized Officer) | ||
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