ABERCROMBIE & FITCH CO /DE/ - Quarter Report: 2020 August (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 1, 2020
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 001-12107
Abercrombie & Fitch Co.
(Exact name of Registrant as specified in its charter)
Delaware | 31-1469076 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
6301 Fitch Path, | New Albany, | Ohio | 43054 | |
(Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: (614) 283-6500
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A Common Stock, $0.01 Par Value | ANF | New York Stock Exchange | ||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the Registrant has submitted electronically 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). x Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A Common Stock | Shares outstanding as of September 3, 2020 | |
$0.01 Par Value | 62,373,175 | |
Table of Contents
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Abercrombie & Fitch Co.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | ||||||||||||
Net sales | $ | 698,328 | $ | 841,078 | $ | 1,183,687 | $ | 1,575,050 | |||||||
Cost of sales, exclusive of depreciation and amortization | 274,720 | 342,445 | 495,934 | 632,327 | |||||||||||
Gross profit | 423,608 | 498,633 | 687,753 | 942,723 | |||||||||||
Stores and distribution expense | 310,370 | 376,347 | 632,494 | 732,959 | |||||||||||
Marketing, general and administrative expense | 97,252 | 115,694 | 205,509 | 227,641 | |||||||||||
Flagship store exit (benefits) charges | (3,884 | ) | 44,994 | (4,427 | ) | 46,738 | |||||||||
Asset impairment, exclusive of flagship store exit charges | 8,083 | 715 | 51,011 | 2,377 | |||||||||||
Other operating (income) loss, net | (2,356 | ) | 367 | (1,850 | ) | (250 | ) | ||||||||
Operating income (loss) | 14,143 | (39,484 | ) | (194,984 | ) | (66,742 | ) | ||||||||
Interest expense, net | 7,098 | 1,370 | 10,469 | 1,986 | |||||||||||
Income (loss) before income taxes | 7,045 | (40,854 | ) | (205,453 | ) | (68,728 | ) | ||||||||
Income tax expense (benefit) | 1,253 | (11,330 | ) | 32,786 | (20,918 | ) | |||||||||
Net income (loss) | 5,792 | (29,524 | ) | (238,239 | ) | (47,810 | ) | ||||||||
Less: Net income attributable to noncontrolling interests | 328 | 1,618 | 445 | 2,487 | |||||||||||
Net income (loss) attributable to A&F | $ | 5,464 | $ | (31,142 | ) | $ | (238,684 | ) | $ | (50,297 | ) | ||||
Net income (loss) per share attributable to A&F | |||||||||||||||
Basic | $ | 0.09 | $ | (0.48 | ) | $ | (3.82 | ) | $ | (0.76 | ) | ||||
Diluted | $ | 0.09 | $ | (0.48 | ) | $ | (3.82 | ) | $ | (0.76 | ) | ||||
Weighted-average shares outstanding | |||||||||||||||
Basic | 62,527 | 65,156 | 62,543 | 65,848 | |||||||||||
Diluted | 63,286 | 65,156 | 62,543 | 65,848 | |||||||||||
Other comprehensive income (loss) | |||||||||||||||
Foreign currency translation, net of tax | $ | 8,734 | $ | (3,788 | ) | $ | 3,335 | $ | (6,574 | ) | |||||
Derivative financial instruments, net of tax | (2,407 | ) | 3,133 | 6,458 | 3,080 | ||||||||||
Other comprehensive income (loss) | 6,327 | (655 | ) | 9,793 | (3,494 | ) | |||||||||
Comprehensive income (loss) | 12,119 | (30,179 | ) | (228,446 | ) | (51,304 | ) | ||||||||
Less: Comprehensive income attributable to noncontrolling interests | 328 | 1,618 | 445 | 2,487 | |||||||||||
Comprehensive income (loss) attributable to A&F | $ | 11,791 | $ | (31,797 | ) | $ | (228,891 | ) | $ | (53,791 | ) | ||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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Abercrombie & Fitch Co.
Condensed Consolidated Balance Sheets
(Thousands, except par value amounts)
(Unaudited)
August 1, 2020 | February 1, 2020 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and equivalents | $ | 766,721 | $ | 671,267 | |||
Receivables | 88,323 | 80,251 | |||||
Inventories | 453,239 | 434,326 | |||||
Other current assets | 75,160 | 78,905 | |||||
Total current assets | 1,383,443 | 1,264,749 | |||||
Property and equipment, net | 635,703 | 665,290 | |||||
Operating lease right-of-use assets | 1,073,464 | 1,230,954 | |||||
Other assets | 216,204 | 388,672 | |||||
Total assets | $ | 3,308,814 | $ | 3,549,665 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 284,221 | $ | 219,919 | |||
Accrued expenses | 351,849 | 302,214 | |||||
Short-term portion of operating lease liabilities | 278,495 | 282,829 | |||||
Income taxes payable | 6,425 | 10,392 | |||||
Total current liabilities | 920,990 | 815,354 | |||||
Long-term liabilities: | |||||||
Long-term portion of operating lease liabilities | 1,122,853 | 1,252,634 | |||||
Long-term borrowings, net | 343,250 | 231,963 | |||||
Other liabilities | 108,111 | 178,536 | |||||
Total long-term liabilities | 1,574,214 | 1,663,133 | |||||
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 | 392,272 | 404,983 | |||||
Retained earnings | 2,025,911 | 2,313,745 | |||||
Accumulated other comprehensive loss, net of tax (“AOCL”) | (99,093 | ) | (108,886 | ) | |||
Treasury stock, at average cost: 40,935 and 40,514 shares as of August 1, 2020 and February 1, 2020, respectively | (1,514,442 | ) | (1,552,065 | ) | |||
Total Abercrombie & Fitch Co. stockholders’ equity | 805,681 | 1,058,810 | |||||
Noncontrolling interests | 7,929 | 12,368 | |||||
Total stockholders’ equity | 813,610 | 1,071,178 | |||||
Total liabilities and stockholders’ equity | $ | 3,308,814 | $ | 3,549,665 | |||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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Abercrombie & Fitch Co.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended August 1, 2020 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Balance, May 2, 2020 | 62,284 | $ | 1,033 | $ | 389,904 | $ | 7,827 | $ | 2,022,366 | $ | (105,420 | ) | 41,016 | $ | (1,517,644 | ) | $ | 798,066 | |||||||
Net income | — | — | — | 328 | 5,464 | — | — | — | 5,792 | ||||||||||||||||
Share-based compensation issuances and exercises | 81 | — | (1,376 | ) | — | (1,919 | ) | — | (81 | ) | 3,202 | (93 | ) | ||||||||||||
Share-based compensation expense | — | — | 3,744 | — | — | — | — | — | 3,744 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | (2,407 | ) | — | — | (2,407 | ) | ||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | 8,734 | — | — | 8,734 | ||||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (226 | ) | — | — | — | — | (226 | ) | ||||||||||||||
Ending balance at August 1, 2020 | 62,365 | $ | 1,033 | $ | 392,272 | $ | 7,929 | $ | 2,025,911 | $ | (99,093 | ) | 40,935 | $ | (1,514,442 | ) | $ | 813,610 | |||||||
Thirteen Weeks Ended August 3, 2019 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Balance, May 4, 2019 | 66,637 | $ | 1,033 | $ | 395,974 | $ | 10,124 | $ | 2,296,347 | $ | (105,291 | ) | 36,663 | $ | (1,493,224 | ) | $ | 1,104,963 | |||||||
Net loss | — | — | — | 1,618 | (31,142 | ) | — | — | — | (29,524 | ) | ||||||||||||||
Purchase of Common Stock | (3,545 | ) | — | — | — | — | — | 3,545 | (57,812 | ) | (57,812 | ) | |||||||||||||
Dividends ($0.20 per share) | — | — | — | — | (13,139 | ) | — | — | — | (13,139 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 54 | — | (1,316 | ) | — | (1,034 | ) | — | (54 | ) | 2,200 | (150 | ) | ||||||||||||
Share-based compensation expense | — | — | 36 | — | — | — | — | — | 36 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | 3,133 | — | — | 3,133 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | (3,788 | ) | — | — | (3,788 | ) | ||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (424 | ) | — | — | — | — | (424 | ) | ||||||||||||||
Ending 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 | |||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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Abercrombie & Fitch Co.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except per share amounts)
(Unaudited)
Twenty-six Weeks Ended August 1, 2020 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Balance, February 1, 2020 | 62,786 | $ | 1,033 | $ | 404,983 | $ | 12,368 | $ | 2,313,745 | $ | (108,886 | ) | 40,514 | $ | (1,552,065 | ) | $ | 1,071,178 | |||||||
Net loss | — | — | — | 445 | (238,684 | ) | — | — | — | (238,239 | ) | ||||||||||||||
Purchase of Common Stock | (1,397 | ) | — | — | — | — | — | 1,397 | (15,172 | ) | (15,172 | ) | |||||||||||||
Dividends ($0.20 per share) | — | — | — | — | (12,556 | ) | — | — | — | (12,556 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 976 | — | (21,617 | ) | — | (36,594 | ) | — | (976 | ) | 52,795 | (5,416 | ) | ||||||||||||
Share-based compensation expense | — | — | 8,906 | — | — | — | — | — | 8,906 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | 6,458 | — | — | 6,458 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | 3,335 | — | — | 3,335 | ||||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (4,884 | ) | — | — | — | — | (4,884 | ) | ||||||||||||||
Ending balance at August 1, 2020 | 62,365 | $ | 1,033 | $ | 392,272 | $ | 7,929 | $ | 2,025,911 | $ | (99,093 | ) | 40,935 | $ | (1,514,442 | ) | $ | 813,610 | |||||||
Twenty-six Weeks Ended August 3, 2019 | |||||||||||||||||||||||||
Common Stock | Paid-in capital | Non-controlling interests | Retained earnings | AOCL | Treasury stock | Total stockholders’ equity | |||||||||||||||||||
Shares outstanding | Par value | Shares | At average cost | ||||||||||||||||||||||
Balance, February 2, 2019 | 66,227 | $ | 1,033 | $ | 405,379 | $ | 9,721 | $ | 2,418,544 | $ | (102,452 | ) | 37,073 | $ | (1,513,604 | ) | $ | 1,218,621 | |||||||
Impact from adoption of the new lease accounting standard | — | — | — | — | (75,165 | ) | — | — | — | (75,165 | ) | ||||||||||||||
Net loss | — | — | — | 2,487 | (50,297 | ) | — | — | — | (47,810 | ) | ||||||||||||||
Purchase of Common Stock | (3,545 | ) | — | — | — | — | — | 3,545 | (57,812 | ) | (57,812 | ) | |||||||||||||
Dividends ($0.40 per share) | — | — | — | — | (26,385 | ) | — | — | — | (26,385 | ) | ||||||||||||||
Share-based compensation issuances and exercises | 464 | — | (13,353 | ) | — | (15,665 | ) | — | (464 | ) | 22,580 | (6,438 | ) | ||||||||||||
Share-based compensation expense | — | — | 2,668 | — | — | — | — | — | 2,668 | ||||||||||||||||
Derivative financial instruments, net of tax | — | — | — | — | — | 3,080 | — | — | 3,080 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | (6,574 | ) | — | — | (6,574 | ) | ||||||||||||||
Distributions to noncontrolling interests, net | — | — | — | (890 | ) | — | — | — | — | (890 | ) | ||||||||||||||
Ending 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 | |||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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Abercrombie & Fitch Co.
Condensed Consolidated Statements of Cash Flows
(Thousands)
(Unaudited)
Twenty-six Weeks Ended | |||||||
August 1, 2020 | August 3, 2019 | ||||||
Operating activities | |||||||
Net loss | $ | (238,239 | ) | $ | (47,810 | ) | |
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | |||||||
Depreciation and amortization | 82,753 | 81,541 | |||||
Asset impairment | 51,011 | 5,606 | |||||
Loss on disposal | 7,617 | 3,720 | |||||
Provision for (benefit from) deferred income taxes | 23,037 | (22,589 | ) | ||||
Share-based compensation | 8,906 | 2,668 | |||||
Changes in assets and liabilities: | |||||||
Inventories | (18,378 | ) | (51,297 | ) | |||
Accounts payable and accrued expenses | 122,004 | 4,201 | |||||
Operating lease right-of-use assets and liabilities | (20,266 | ) | 39,351 | ||||
Income taxes | (7,379 | ) | (5,011 | ) | |||
Other assets | 29,940 | (46,638 | ) | ||||
Withdrawal of funds from Rabbi Trust assets | 50,000 | — | |||||
Other liabilities | 5,227 | 203 | |||||
Net cash provided by (used for) operating activities | 96,233 | (36,055 | ) | ||||
Investing activities | |||||||
Purchases of property and equipment | (75,621 | ) | (94,224 | ) | |||
Net cash used for investing activities | (75,621 | ) | (94,224 | ) | |||
Financing activities | |||||||
Proceeds from issuance of senior secured notes | 350,000 | — | |||||
Proceeds from borrowings under the senior secured asset-based revolving credit facility | 210,000 | — | |||||
Repayment of borrowings under the term loan facility | (233,250 | ) | — | ||||
Repayment of borrowings under the senior secured asset-based revolving credit facility | (210,000 | ) | — | ||||
Payment of debt issuance costs and fees | (6,558 | ) | — | ||||
Purchases of Common Stock | (15,172 | ) | (57,812 | ) | |||
Dividends paid | (12,556 | ) | (26,385 | ) | |||
Other financing activities | (11,135 | ) | (7,727 | ) | |||
Net cash provided by (used for) financing activities | 71,329 | (91,924 | ) | ||||
Effect of foreign currency exchange rates on cash | 1,785 | (2,455 | ) | ||||
Net increase (decrease) in cash and equivalents, and restricted cash and equivalents | 93,726 | (224,658 | ) | ||||
Cash and equivalents, and restricted cash and equivalents, beginning of period | 692,264 | 745,829 | |||||
Cash and equivalents, and restricted cash and equivalents, end of period | $ | 785,990 | $ | 521,171 | |||
Supplemental information related to non-cash activities | |||||||
Purchases of property and equipment not yet paid at end of period | $ | 34,865 | $ | 33,826 | |||
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 23,119 | $ | 204,499 | |||
Supplemental information related to cash activities | |||||||
Cash paid for interest | $ | 8,127 | $ | 7,688 | |||
Cash paid for income taxes | $ | 8,460 | $ | 16,434 | |||
Cash received from income tax refunds | $ | 1,426 | $ | 8,565 | |||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 122,128 | $ | 200,457 | |||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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Abercrombie & Fitch Co.
Index for Notes to Condensed Consolidated Financial Statements (Unaudited)
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Abercrombie & Fitch Co.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. NATURE OF BUSINESS
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or 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 primarily 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 Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows:
Fiscal year | Year ended | Number of weeks | ||
Fiscal 2019 | February 1, 2020 | 52 | ||
Fiscal 2020 | January 30, 2021 | 52 | ||
Interim financial statements
The Condensed Consolidated Financial Statements as of August 1, 2020, and for the thirteen and twenty-six week periods ended August 1, 2020 and August 3, 2019, 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 2019 filed with the SEC on March 31, 2020. The February 1, 2020 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 2020.
Use of estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the COVID-19 pandemic and its impact on the length or frequency of store closures, and the extent to which
9
COVID-19 will impact worldwide macroeconomic conditions including interest rates, the speed of the anticipated recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Recent accounting pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements.
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 | August 1, 2020 | February 1, 2020 | August 3, 2019 | February 2, 2019 | ||||||||||||
Cash and equivalents | Cash and equivalents | $ | 766,721 | $ | 671,267 | $ | 499,757 | $ | 723,135 | ||||||||
Long-term restricted cash and equivalents | Other assets | 19,269 | 18,696 | 18,877 | 22,694 | ||||||||||||
Short-term restricted cash and equivalents | Other current assets | — | 2,301 | 2,537 | — | ||||||||||||
Cash and equivalents and restricted cash and equivalents | $ | 785,990 | $ | 692,264 | $ | 521,171 | $ | 745,829 | |||||||||
3. IMPACT OF COVID-19
Recent developments
The Company has seen, and may continue to see, material adverse impacts as a result of COVID-19. Current circumstances are dynamic and future impacts, including the duration and impact on overall customer demand, are uncertain.
In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19. In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and the Company has recommended associates who are able to perform their role remotely to do so. The Company is reacting to COVID-19 on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak. The Company has also implemented a range of precautionary health and safety measures with the well-being of the Company’s customers, associates and business partners in mind.
As a result of COVID-19, in January 2020, the Company temporarily closed the majority of its stores in the APAC region and in March 2020, the Company temporarily closed its stores across brands in North America and the EMEA region. The majority of APAC stores were reopened during March 2020, and the Company began to reopen stores in North America and the EMEA region on a rolling basis in late April 2020. As of August 1, 2020, approximately 90% of Company-operated stores had reopened for in-store service, although many with modified operating hours. The Company plans to follow the guidance of local governments to determine when it can reopen stores that have been closed due to COVID-19 and to evaluate whether further store closures will be necessary.
The Company’s digital operations across brands have continued to serve the Company’s customers during this unprecedented period of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational.
Impact of COVID-19
The Company has seen, and may continue to see material reductions in sales across brands and regions as a result of COVID-19. Total net sales decreased approximately 17% and 25% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively. The year-over-year decrease in total net sales was primarily driven by temporary widespread store closures and a decline in traffic as compared to the previous year as a result of COVID-19. The year-over-year decline in store sales was partially offset by digital sales growth of approximately 56% and 41% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively.
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Primarily as a result of COVID-19 and the temporary closure of the Company’s stores, the Company recognized $14.8 million of charges to reduce the carrying value of inventory in cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the thirteen weeks ended May 2, 2020.
During the thirteen and twenty-six weeks ended August 1, 2020, reductions in revenue have not been offset by proportional decreases in expense, as the Company continued to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. During this period, the Company suspended rent payments for a significant number of stores that were closed, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides refundable employee retention tax credits for wages paid to employees who are unable to work during the COVID–19 outbreak and the deferral of the employer–paid portion of social security taxes. Similar relief programs have also been established throughout the EMEA and APAC regions. Based on the Company's evaluation of the CARES Act and legislation across regions, the Company qualifies for certain payroll tax credits, and such government subsidies have been treated as offsets to the related operating expenses when recognized. During the thirteen and twenty-six weeks ended August 1, 2020, the Company recognized qualified payroll tax credits reducing payroll expenses by approximately $3.1 million and $11.8 million, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with $3.6 million of expected relief classified in receivables on the Condensed Consolidated Balance Sheet as of August 1, 2020. The Company intends to continue to defer qualified payroll and other tax payments as permitted by the CARES Act and other regional legislation.
The Company also recognized asset impairment charges related to the Company’s right-of-use assets and property and equipment of $8.1 million and $51.0 million during the thirteen and twenty-six weeks ended August 1, 2020, respectively, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ASSET IMPAIRMENT,” for additional information.
In addition, the Company has also experienced other material impacts as a result of COVID-19, such as deferred tax valuation allowances and other tax charges during the twenty-six weeks ended August 1, 2020, adversely impacting results by $84.1 million. Refer to Note 11, “INCOME TAXES,” for additional information.
Balance sheet, cash flow and liquidity
During the twenty-six weeks ended August 1, 2020, the Company has taken various actions to preserve liquidity and manage cash flows in order to best position the business for key stakeholders, including (i) partnering with merchandise and non-merchandise vendors in regards to payment terms; (ii) reducing and recadencing inventory receipts to better align inventory with expected market demand; (iii) significantly reducing expenses to better align operating costs with sales; and (iv) temporarily suspending its share repurchase program in March 2020 and its dividend program in May 2020. In addition, despite the Company’s recent history of partnering with its vendors regarding payment terms, there can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.
As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) to improve its near-term cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash. In July 2020, the Company completed a private offering of $350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”) and used the net proceeds to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 12, “BORROWINGS,” and Note 10, “ RABBI TRUST ASSETS,” for additional information.
As of August 1, 2020, the Company had liquidity of $1.061 billion as compared to $913.8 million as of February 1, 2020, comprising cash and equivalents and actual incremental borrowing available to the Company under the ABL Facility.
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4. REVENUE RECOGNITION
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 16, “SEGMENT REPORTING.”
Contract liabilities
The following table details certain contract liabilities representing unearned revenue as of August 1, 2020, February 1, 2020, August 3, 2019 and February 2, 2019:
(in thousands) | August 1, 2020 | February 1, 2020 | August 3, 2019 | February 2, 2019 | |||||||||||
Gift card liability | $ | 22,461 | $ | 28,844 | $ | 20,056 | $ | 26,062 | |||||||
Loyalty program liability | $ | 19,674 | $ | 23,051 | $ | 21,073 | $ | 19,904 | |||||||
The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Revenue associated with gift card redemptions and gift card breakage | $ | 10,066 | $ | 12,792 | $ | 21,075 | $ | 28,076 | |||||||
Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs | $ | 7,982 | $ | 8,028 | $ | 13,691 | $ | 14,546 | |||||||
5. 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 | Twenty-six Weeks Ended | ||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||
Shares of Common Stock issued | 103,300 | 103,300 | 103,300 | 103,300 | |||||||
Weighted-average treasury shares | (40,773 | ) | (38,144 | ) | (40,757 | ) | (37,452 | ) | |||
Weighted-average — basic shares | 62,527 | 65,156 | 62,543 | 65,848 | |||||||
Dilutive effect of share-based compensation awards | 759 | — | — | — | |||||||
Weighted-average — diluted shares | 63,286 | 65,156 | 62,543 | 65,848 | |||||||
Anti-dilutive shares (1) | 2,026 | 3,318 | 2,123 | 3,065 | |||||||
(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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6. 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, as of August 1, 2020 and February 1, 2020 were as follows:
Assets at Fair Value as of August 1, 2020 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents (1) | $ | 10,267 | $ | 29,340 | $ | — | $ | 39,607 | |||||||
Rabbi Trust assets (2) | 1 | 60,027 | — | 60,028 | |||||||||||
Restricted cash equivalents (3) | 6,751 | 5,895 | — | 12,646 | |||||||||||
Total assets | $ | 17,019 | $ | 95,262 | $ | — | $ | 112,281 | |||||||
Assets and Liabilities at Fair Value as of February 1, 2020 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents (1) | $ | 225 | $ | 58,447 | $ | — | $ | 58,672 | |||||||
Derivative instruments (4) | — | 1,969 | — | 1,969 | |||||||||||
Rabbi Trust assets (2) | 1 | 109,048 | — | 109,049 | |||||||||||
Restricted cash equivalents (3) | 9,765 | 4,601 | — | 14,366 | |||||||||||
Total assets | $ | 9,991 | $ | 174,065 | $ | — | $ | 184,056 | |||||||
Liabilities: | |||||||||||||||
Derivative instruments (4) | $ | — | $ | 1,460 | $ | — | $ | 1,460 | |||||||
Total liabilities | $ | — | $ | 1,460 | $ | — | $ | 1,460 | |||||||
(1) | Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits. |
(2) | Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies. |
(3) | Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits. |
(4) | Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts. |
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. |
Fair value of long-term borrowings
The Company’s borrowings under the Term Loan Facility and the Senior Secured Notes are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows:
(in thousands) | August 1, 2020 | February 1, 2020 | |||||
Gross borrowings outstanding, carrying amount | $ | 350,000 | $ | 233,250 | |||
Gross borrowings outstanding, fair value | $ | 350,875 | $ | 233,979 | |||
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7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
(in thousands) | August 1, 2020 | February 1, 2020 | |||||
Property and equipment, at cost | $ | 2,780,621 | $ | 2,744,967 | |||
Less: Accumulated depreciation and amortization | (2,144,918 | ) | (2,079,677 | ) | |||
Property and equipment, net | $ | 635,703 | $ | 665,290 | |||
Refer to Note 9, “ASSET IMPAIRMENT,” for details related to property and equipment impairment charges incurred during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019.
8. LEASES
The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
During the thirteen and twenty-six weeks ended August 1, 2020, the Company suspended rent payments for a significant number of stores that were closed as a result of COVID-19, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
The following table provides a summary of the Company’s operating lease costs for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Single lease cost (1) | $ | 87,698 | $ | 121,270 | $ | 181,189 | $ | 213,544 | |||||||
Variable lease cost (2) | 19,433 | 60,238 | 47,335 | 103,083 | |||||||||||
Operating lease right-of-use asset impairment (3) | 5,410 | 3,589 | 40,418 | 3,589 | |||||||||||
Total operating lease cost | $ | 112,541 | $ | 185,097 | $ | 268,942 | $ | 320,216 | |||||||
(1) | Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities. |
(2) | Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as rent abatements agreed upon during the period. |
(3) | Refer to Note 9, “ASSET IMPAIRMENT,” for details related to operating lease right-of-use asset impairment charges. |
During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company paid $122.1 million and $200.5 million, respectively, for amounts included in measurement of operating lease liabilities, net of rent abatements agreed upon during the period which are classified as a component variable lease cost as noted in the above table. These payments are included within operating activities on the Condensed Consolidated Statements of Cash Flows.
During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company obtained operating lease right-of-use assets of $23.1 million and $204.5 million, respectively, in exchange for operating lease liabilities.
As of August 1, 2020, the Company had minimum commitments related to additional operating lease contracts the terms of which have not yet commenced, primarily for its Company-operated retail stores, of approximately $2.8 million.
9. ASSET IMPAIRMENT
Asset impairment charges for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Operating lease right-of-use asset impairment (1) | $ | 5,410 | $ | 3,589 | $ | 40,418 | $ | 3,589 | |||||||
Property and equipment asset impairment | 2,673 | 355 | 10,593 | 2,017 | |||||||||||
Total asset impairment | $ | 8,083 | $ | 3,944 | $ | 51,011 | $ | 5,606 | |||||||
(1) | Includes $3.2 million of operating lease right-of-use asset impairment related to flagship store exit charges for each of the thirteen and twenty-six weeks ended August 3, 2019. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.” |
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Asset impairment charges for the thirteen weeks and twenty-six weeks ended August 1, 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the twenty-six weeks ended August 1, 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $135.5 million, including $124.6 million related to operating lease right-of-use assets.
Asset impairment charges for the thirteen weeks and twenty-six weeks ended August 3, 2019, primarily related to the Company’s SoHo, New York City Hollister flagship. The impairment charges for the twenty-six weeks ended August 3, 2019 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $8.2 million, including $7.0 million related to operating lease right-of-use assets.
10. RABBI TRUST ASSETS
As a precautionary measure and to preserve liquidity in light of the circumstances surrounding COVID-19, during the twenty-six weeks ended August 1, 2020, the Company withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash.
Investments of Rabbi Trust assets consisted of the following as of August 1, 2020 and February 1, 2020:
(in thousands) | August 1, 2020 | February 1, 2020 | |||||
Trust-owned life insurance policies (at cash surrender value) | $ | 60,027 | $ | 109,048 | |||
Money market funds | 1 | 1 | |||||
Rabbi Trust assets | $ | 60,028 | $ | 109,049 | |||
Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Realized gains related to Rabbi Trust assets | $ | 388 | $ | 798 | $ | 978 | $ | 1,589 | |||||||
11. INCOME TAXES
The quarterly 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 provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Impact of valuation allowances and other tax charges during Fiscal 2020
The Company’s effective tax rate for the twenty-six weeks ended August 1, 2020 was impacted by $84.1 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax year-to-date loss. Further details regarding these adverse tax impacts are as follows:
• | The Company anticipates pre-tax losses for the full fiscal year in certain jurisdictions, based on information currently available, primarily due to the significant adverse impacts of COVID-19. The Company did not recognize income tax benefits on $204.1 million of pre-tax losses during the twenty-six weeks ended August 1, 2020, resulting in an adverse tax impact of $47.6 million. |
• | The Company recognized charges of $36.5 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during the twenty-six weeks ended August 1, 2020, principally as a result of the significant adverse impacts of COVID–19. These charges related to valuation allowances recognized by the Company of $10.6 million and $6.0 million related to the U.S. and Germany, respectively, as well as valuation allowances and other tax charges in certain other jurisdictions against underlying tax asset balances that existed as of February 1, 2020. The Company also recognized valuation allowances of $78.9 million related to Switzerland with a U.S. branch equally offsetting amount, which in net, did not have an impact on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Changes in assumptions may occur based on new information that becomes available resulting in adjustments in the period in which a determination is made. |
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Global legislation in response to COVID-19
In March 2020, the CARES Act was enacted into U.S. law, intended to provide economic relief to those impacted by COVID-19 and enhance business’ liquidity. The Company continues to examine impacts that the provisions of the CARES Act may have on U.S. income taxes; however, the Company does not currently expect that these provisions will have a material impact on its income taxes.
The Company is still assessing the applicability of other recently passed global legislation, including the potential income tax measures offered in international jurisdictions where the Company’s operations have also been impacted by COVID-19.
Share-based compensation
Refer to Note 13, “SHARE-BASED COMPENSATION,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended August 3, 2019.
12. BORROWINGS
Details on the Company’s long-term borrowings, net, as of August 1, 2020 and February 1, 2020 are as follows:
(in thousands) | August 1, 2020 | February 1, 2020 | |||||
Long-term portion of borrowings, gross at carrying amount | $ | 350,000 | $ | 233,250 | |||
Unamortized fees | (6,750 | ) | (355 | ) | |||
Unamortized discount | — | (932 | ) | ||||
Long-term borrowings, net | $ | 343,250 | $ | 231,963 | |||
Senior Secured Notes
On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of the Company, completed the private offering of the Senior Secured Notes, with a $350 million aggregate principal amount due in 2025 at an offering price of 100% of the principal amount thereof. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, as trustee, and as collateral agent.
The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments beginning in January 2021.
The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and accrued interest of $233.6 million and $110.8 million under the Term Loan Facility and the ABL Facility, respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes.
The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized over the contractual term of the Senior Secured Notes.
ABL Facility
The ABL Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors) and later amended on October 19, 2017, provides for a senior secured asset-based revolving credit facility of up to $400 million (the “ABL Facility”).
The ABL Facility will mature on October 19, 2022.
As a precautionary measure and to improve the Company’s cash position in light of the circumstances surrounding COVID-19, during the thirteen weeks ended May 2, 2020, the Company borrowed $210.0 million under the ABL Facility. During the thirteen weeks ended August 1, 2020, the Company used net proceeds from the offering of the Senior Secured Notes and cash on hand to repay all outstanding borrowings under the ABL Facility.
The Company did not have any borrowings outstanding under the ABL Facility as of August 1, 2020 or as of February 1, 2020.
As of August 1, 2020, the Company had availability under the ABL Facility of $327.5 million, net of $0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, actual incremental borrowing available to the Company under the ABL Facility was $294.6 million as of August 1, 2020.
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The provisions under the credit agreement applicable to the ABL Facility have not changed from those described in Note 12, “BORROWINGS,” in 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 2019.
Term Loan Facility
The Term Loan Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors) and later amended on June 22, 2018, provided for a term loan facility of $300 million.
The Company had gross borrowings outstanding under the Term Loan Facility of $233.3 million as of February 1, 2020. During the thirteen weeks ended August 1, 2020, the Company used a portion of the proceeds from the issuance of the Senior Secured Notes to repay all outstanding borrowings under the Term Loan Facility and upon repayment the Term Loan Facility was terminated effective as of July 2, 2020.
The Term Loan Facility was previously scheduled to mature on August 7, 2021.
Representations, warranties and covenants
The aforementioned agreements contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity.
The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness.
Certain of these agreements also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with all debt covenants under the aforementioned agreements as of August 1, 2020.
13. SHARE-BASED COMPENSATION
Financial statement impact
The following table details share-based compensation expense and the related income tax impacts for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Share-based compensation expense | $ | 3,744 | $ | 36 | $ | 8,906 | $ | 2,668 | |||||||
Income tax (expense) benefit associated with share-based compensation expense recognized (1) | $ | — | $ | (195 | ) | $ | — | $ | 355 | ||||||
(1) | No income tax benefit was recognized related to share-based compensation expense during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction. |
The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Income tax discrete (charges) benefits realized for tax deductions related to the issuance of shares (1) | $ | — | $ | (70 | ) | $ | — | $ | 1,169 | ||||||
Income tax discrete charges realized upon cancellation of stock appreciation rights (1) | — | — | — | (165 | ) | ||||||||||
Total income tax discrete (charges) benefits related to share-based compensation awards | $ | — | $ | (70 | ) | $ | — | $ | 1,004 | ||||||
(1) | No income tax benefits or charges related to these items were recognized during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction. |
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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 twenty-six weeks ended August 1, 2020 and August 3, 2019:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Employee tax withheld upon issuance of shares (1) | $ | 93 | $ | 150 | $ | 5,416 | $ | 6,438 | |||||||
(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 twenty-six weeks ended August 1, 2020:
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 1, 2020 | 1,676,831 | $ | 18.68 | 747,056 | $ | 15.11 | 421,784 | $ | 23.05 | |||||||||||
Granted | 1,814,294 | 7.58 | — | — | — | — | ||||||||||||||
Adjustments for performance achievement | — | — | 38,381 | 11.37 | 134,122 | 11.79 | ||||||||||||||
Vested | (726,341 | ) | 17.67 | (481,304 | ) | 9.63 | (350,447 | ) | 11.79 | |||||||||||
Forfeited | (41,100 | ) | 15.73 | (6,917 | ) | 22.80 | (3,485 | ) | 35.61 | |||||||||||
Unvested at August 1, 2020 (2) | 2,723,684 | $ | 11.59 | 297,216 | $ | 22.43 | 201,974 | $ | 34.89 | |||||||||||
(1) | Includes 79,028 unvested restricted stock units as of August 1, 2020, 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. |
(2) | Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Certain unvested shares related to restricted stock units with performance-based vesting conditions can be achieved at up to 200% of their target vesting amount. |
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 August 1, 2020:
(in thousands) | Service-based Restricted Stock Units | Performance-based Restricted Stock Units | Market-based Restricted Stock Units | ||||||||
Unrecognized compensation cost | $ | 26,520 | $ | — | $ | 2,567 | |||||
Remaining weighted-average period cost is expected to be recognized (years) | 1.3 | 0.0 | 0.8 | ||||||||
Additional information pertaining to restricted stock units for the twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:
(in thousands) | August 1, 2020 | August 3, 2019 | |||||
Service-based restricted stock units: | |||||||
Total grant date fair value of awards granted | $ | 13,752 | $ | 16,052 | |||
Total grant date fair value of awards vested | $ | 12,834 | $ | 12,576 | |||
Performance-based restricted stock units: | |||||||
Total grant date fair value of awards granted | $ | — | $ | 5,379 | |||
Total grant date fair value of awards vested | $ | 4,635 | $ | — | |||
Market-based restricted stock units: | |||||||
Total grant date fair value of awards granted | $ | — | $ | 4,176 | |||
Total grant date fair value of awards vested | $ | 4,132 | $ | 511 | |||
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No market-based restricted stock units were granted during the twenty-six weeks ended August 1, 2020. The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-six weeks ended August 3, 2019 were as follows:
August 3, 2019 | |||
Grant date market price | $ | 25.34 | |
Fair value | $ | 36.24 | |
Assumptions: | |||
Price volatility | 57 | % | |
Expected term (years) | 2.9 | ||
Risk-free interest rate | 2.2 | % | |
Dividend yield | 3.2 | % | |
Average volatility of peer companies | 40.0 | % | |
Average correlation coefficient of peer companies | 0.2407 | ||
Stock appreciation rights
The following table summarizes stock appreciation rights activity for the twenty-six weeks ended August 1, 2020:
Number of Underlying Shares | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (years) | |||||||||
Outstanding at February 1, 2020 | 796,725 | $ | 40.06 | |||||||||
Granted | — | — | ||||||||||
Exercised | — | — | ||||||||||
Forfeited or expired | (382,225 | ) | 47.87 | |||||||||
Outstanding at August 1, 2020 | 414,500 | $ | 32.86 | $ | — | 3.7 | ||||||
Stock appreciation rights exercisable at August 1, 2020 | 414,500 | $ | 32.86 | $ | — | 3.7 | ||||||
Stock appreciation rights expected to become exercisable in the future as of August 1, 2020 | — | $ | — | $ | — | 0.0 | ||||||
No stock appreciation rights were exercised during the twenty-six weeks ended August 1, 2020. Additional information pertaining to stock appreciation rights for the twenty-six weeks ended August 3, 2019 follows:
(in thousands) | August 3, 2019 | ||
Total grant date fair value of awards exercised | $ | 586 | |
14. DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign currency denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign currency denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”) into earnings.
The Company also uses foreign currency exchange forward contracts to hedge certain foreign–currency–denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter–end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
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The Company did not have any outstanding foreign currency exchange forward contracts as of August 1, 2020, although the Company may enter into these contracts in future periods. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheet as of February 1, 2020 were as follows:
(in thousands) | Location | February 1, 2020 | Location | February 1, 2020 | |||||||
Derivatives designated as cash flow hedging instruments | Other current assets | $ | 1,869 | Accrued expenses | $ | 1,377 | |||||
Derivatives not designated as hedging instruments | Other current assets | 100 | Accrued expenses | 83 | |||||||
Total | $ | 1,969 | $ | 1,460 | |||||||
The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
As a result of COVID–19, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments. At the time of dedesignation of these hedges, they were in a net gain position of approximately $12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation are deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occur and the hedged items affect earnings. During the twenty-six weeks ended August 1, 2020 and subsequent to the dedesignation of these hedges, these hedge contracts were settled.
Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Gain recognized in AOCL (1) | $ | — | $ | 4,791 | $ | 12,235 | $ | 7,053 | |||||||
Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2) | $ | 2,407 | $ | 1,763 | $ | 5,777 | $ | 4,303 | |||||||
(1) | Amount represents the change in fair value of derivative contracts. |
(2) | Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. |
Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (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 twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Gain recognized in other operating (income) loss, net | $ | — | $ | 906 | $ | 742 | $ | 1,181 | |||||||
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15. ACCUMULATED OTHER COMPREHENSIVE LOSS
For the thirteen and twenty-six weeks ended August 1, 2020, the activity in accumulated other comprehensive loss was as follows:
Thirteen Weeks Ended August 1, 2020 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at May 2, 2020 | $ | (115,366 | ) | $ | 9,946 | $ | (105,420 | ) | |||
Other comprehensive income before reclassifications | 8,734 | — | 8,734 | ||||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (2,407 | ) | (2,407 | ) | ||||||
Other comprehensive income (loss) after reclassifications (2) | 8,734 | (2,407 | ) | 6,327 | |||||||
Ending balance at August 1, 2020 | $ | (106,632 | ) | $ | 7,539 | $ | (99,093 | ) | |||
Twenty-six Weeks Ended August 1, 2020 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at February 1, 2020 | $ | (109,967 | ) | $ | 1,081 | $ | (108,886 | ) | |||
Other comprehensive income before reclassifications | 3,335 | 12,235 | 15,570 | ||||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (5,777 | ) | (5,777 | ) | ||||||
Other comprehensive income after reclassifications (2) | 3,335 | 6,458 | 9,793 | ||||||||
Ending balance at August 1, 2020 | $ | (106,632 | ) | $ | 7,539 | $ | (99,093 | ) | |||
(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). |
(2) | No tax effect was recognized during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction. |
For the thirteen and twenty-six weeks ended August 3, 2019, the activity in accumulated other comprehensive loss was as follows:
Thirteen Weeks Ended August 3, 2019 | |||||||||||
(in thousands) | Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Derivative Financial Instruments | Total | ||||||||
Beginning balance at May 4, 2019 | $ | (107,673 | ) | $ | 2,382 | $ | (105,291 | ) | |||
Other comprehensive (loss) income before reclassifications | (3,788 | ) | 4,791 | 1,003 | |||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (1,763 | ) | (1,763 | ) | ||||||
Tax effect | — | 105 | 105 | ||||||||
Other comprehensive (loss) income after reclassifications | (3,788 | ) | 3,133 | (655 | ) | ||||||
Ending balance at August 3, 2019 | $ | (111,461 | ) | $ | 5,515 | $ | (105,946 | ) | |||
Twenty-six Weeks Ended August 3, 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 | (6,574 | ) | 7,053 | 479 | |||||||
Reclassified gain from accumulated other comprehensive loss (1) | — | (4,303 | ) | (4,303 | ) | ||||||
Tax effect | — | 330 | 330 | ||||||||
Other comprehensive (loss) income after reclassifications | (6,574 | ) | 3,080 | (3,494 | ) | ||||||
Ending balance at August 3, 2019 | $ | (111,461 | ) | $ | 5,515 | $ | (105,946 | ) | |||
(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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16. 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 Company’s net sales by operating segment for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Hollister | $ | 429,248 | $ | 504,758 | $ | 702,260 | $ | 933,203 | |||||||
Abercrombie | 269,080 | 336,320 | 481,427 | 641,847 | |||||||||||
Total | $ | 698,328 | $ | 841,078 | $ | 1,183,687 | $ | 1,575,050 | |||||||
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
U.S. | $ | 458,671 | $ | 543,472 | $ | 781,533 | $ | 1,013,130 | |||||||
EMEA | 171,297 | 200,642 | 283,951 | 374,586 | |||||||||||
APAC | 41,814 | 67,350 | 74,150 | 132,926 | |||||||||||
Other | 26,546 | 29,614 | 44,053 | 54,408 | |||||||||||
International | $ | 239,657 | $ | 297,606 | $ | 402,154 | $ | 561,920 | |||||||
Total | $ | 698,328 | $ | 841,078 | $ | 1,183,687 | $ | 1,575,050 | |||||||
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17. FLAGSHIP STORE EXIT (BENEFITS) CHARGES
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 impacts related to the exit of its flagship stores in flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). Details of the (benefits) charges incurred during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 related to this initiative were as follows:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||
Single lease cost (1) | $ | (5,230 | ) | $ | 23,269 | $ | (5,230 | ) | $ | 23,269 | |||||
Variable lease cost (2) | — | 20,218 | — | 20,218 | |||||||||||
Operating lease right-of-use asset impairment | — | 3,229 | — | 3,229 | |||||||||||
Operating lease cost | (5,230 | ) | 46,716 | (5,230 | ) | 46,716 | |||||||||
Asset disposals and other store-closure costs (3) | (3,205 | ) | (1,675 | ) | (3,205 | ) | (1,687 | ) | |||||||
Employee severance and other employee transition costs | 4,551 | (47 | ) | 4,008 | 1,709 | ||||||||||
Total flagship store exit (benefits) charges | $ | (3,884 | ) | $ | 44,994 | $ | (4,427 | ) | $ | 46,738 | |||||
(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) | Amounts represent costs incurred or benefits associated with returning the store to its original condition, including updated estimates to previously established 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 Sheets. 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.
As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur future cash expenditures, incremental charges or realize benefits 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 future impacts, including any 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 Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ITEM 1. FINANCIAL STATEMENTS (UNAUDITED),” to which all references to Notes in MD&A are made.
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 discussion related to COVID-19’s impact on the Company’s business and other certain risks and challenges, as well as a summary of the Company’s performance for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019. |
• | 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 twenty-six weeks ended August 1, 2020 and August 3, 2019. |
• | Liquidity and Capital Resources. This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of August 1, 2020, which includes (i) an analysis of financial condition as compared to February 1, 2020; (ii) an analysis of changes in cash flows for the twenty-six weeks ended August 1, 2020 as compared to the twenty-six weeks ended August 3, 2019; and (iii) an analysis of liquidity, including a discussion related to preserving liquidity during COVID-19, remaining availability under the ABL Facility, the Company’s share repurchase and dividend programs, and outstanding debt and covenant compliance. |
• | Recent Accounting Pronouncements. The recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements, are discussed, as applicable. |
• | 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 a discussion of certain financial measures that have been determined to not be in accordance with 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. |
The following risks, categorized by the primary nature of the associated risk, including the disclosures in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019, as well as those disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 17, 2020 and in “ITEM 1A. RISK FACTORS” of this Quarterly Report on Form 10-Q, in some cases have affected and in the future could affect the Company’s financial performance and cause actual results for Fiscal 2020 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. The following risks, or a combination of risks, may be exacerbated by COVID-19 and could result in adverse impacts on the Company’s business, results of operations, financial condition and cash flows.
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 impact on our business; |
• | Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business; |
• | Our failure to operate in a highly competitive and constantly evolving industry could have a material adverse impact on our business; |
• | Fluctuations in foreign currency exchange rates could have a material adverse impact on our business; |
• | 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; |
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• | The impact of war, acts of terrorism, mass casualty events or civil unrest could have a material adverse impact on our business; |
• | The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business; and |
• | The current outbreak of the novel coronavirus, or COVID‐19, has materially adversely impacted and disrupted, and may continue to materially adversely impact and cause disruption to, our business, financial performance and condition, operating results, liquidity and cash flows. The spread of the COVID‐19 outbreak has caused significant disruptions in the United States and global economy, the extent of the impact and duration of which is not yet known. Any future outbreak of any other highly infectious or contagious disease could have a similar impact. |
Strategic risks include:
• | Failure to successfully develop an omnichannel shopping experience, a significant component of our growth strategy, or failure to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business; |
• | Our failure to optimize our global store network could have a material adverse impact on our business; and |
• | Our failure to execute our international growth strategy successfully and inability to conduct business in international markets as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business. |
Operational risks include:
• | Failure to protect our reputation could have a material adverse impact on our business; |
• | If our information technology systems are disrupted or cease to operate effectively it could have a material adverse impact on our business; |
• | We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business; |
• | Our reliance on our distribution centers 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 have a material adverse impact on our business; |
• | 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 have a material adverse impact on our business; and |
• | We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, or effectively manage succession could have a material adverse impact on our business. |
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 and could have a material adverse impact on our business; |
• | Our litigation exposure, or any securities litigation and shareholder activism, could have a material adverse impact on our business; |
• | Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business; |
• | Changes in the regulatory or compliance landscape could have a material adverse impact on our business; and |
• | The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on 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.
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, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
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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 primarily 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.
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows:
Fiscal year | Year ended | Number of weeks | ||
Fiscal 2018 | February 2, 2019 | 52 | ||
Fiscal 2019 | February 1, 2020 | 52 | ||
Fiscal 2020 | January 30, 2021 | 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 and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the fall season, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively.
CURRENT TRENDS AND OUTLOOK
COVID-19
In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19. In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and the Company has recommended associates who are able to perform their role remotely to do so. The Company is reacting to COVID-19 on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak.
As a result of COVID-19, in January 2020, the Company temporarily closed the majority of its stores in the APAC region and in March 2020, the Company temporarily closed its stores across brands in North America and the EMEA region. The majority of APAC stores were reopened during March 2020, and the Company began to reopen stores in North America and the EMEA region on a rolling basis in late April 2020. The Company had reopened approximately 90% of Company-operated stores for in-store service as of August 1, 2020, which has since increased to approximately 95% as of September 3, 2020, representing 100% of international stores and the majority of U.S. stores, although many with modified operating hours. The Company plans to follow the guidance of local governments to determine when it can reopen remaining stores and to evaluate whether further store closures will be necessary.
The Company has also implemented a range of precautionary health and safety measures with the well-being of the Company’s customers, associates and business partners in mind, including:
• | Requiring associates to use face coverings, depending on geographic region; |
• | Encouraging or requiring customers to use face coverings, depending on geographic region; |
• | Conducting associate wellness checks in accordance with local government direction; |
• | Enhancing cleaning routines and installing plexiglass barriers in the majority of store locations; |
• | Implementing various measures to encourage social distancing, including managing occupancy limits; |
• | Encouraging contactless payment options, where available; |
• | Opening fitting rooms where permissible, with additional cleaning procedures for clothing that has been tried on; |
• | Removing returned merchandise from the sales floor for a period of time where mandated by local government; |
• | Reducing store hours in select locations; |
• | Continuing to offer Purchase-Online-Pickup-in-Store, including curbside pick-up at a majority of U.S. locations; |
• | Following recommended cleaning and distancing measures in the Company's distribution centers; and |
• | Maximizing work-from-home and digital collaboration alternatives to minimize in-person meetings whenever possible. |
26
The Company has seen, and may continue to see material reductions in sales across brands and regions as a result of COVID-19. Total net sales decreased approximately 17% and 25% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively, primarily driven by temporary store closures and a decline in traffic as compared to the previous year as a result of COVID-19. For the U.S. and the EMEA region, which collectively accounted for 89% of total net sales in Fiscal 2019, the Company experienced sales productivity for reopened stores of approximately 75% and 60% , respectively, as compared to last year’s levels during the thirteen weeks ended August 1, 2020.
The Company’s digital operations across brands have continued to serve the Company’s customers during this unprecedented period of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational. Digital sales increased approximately 56% and 41% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current performance in the digital channel will continue.
The Company has seen, and expects to continue to see, material adverse impacts as a result of COVID-19. As a result, for the third quarter of Fiscal 2020, the Company expects net sales to be down in the range of 15% to 20% as compared to last year. The current circumstances and the impacts of COVID-19 on the Company’s operations, including the duration and impact on overall customer demand, are dynamic, and this sales expectation assumes that the back-to-school selling season, which generally occurs in August, will extend through September and potentially October as school resumes throughout the U.S. and the weather becomes more seasonal.
The Company is also focused on managing inventories and the impacts COVID-19 has had, and continues to have, on its global supply chain, including potential disruptions of product deliveries. The Company sources the majority of its merchandise outside of the U.S. through arrangements with vendors primarily located in southeast Asia and, as of August 1, 2020, the vast majority of the factories the Company partners with were operating at full capacity. In order to complete production, these manufacturing factories are dependent on raw materials from fabric mills that are primarily located in the APAC region. The Company continues to collaborate with its third-party partners to mitigate significant delays in delivery of merchandise. During Fiscal 2020, the Company has reduced certain orders that were not already in production, delayed and recadenced deliveries and implemented various strategies to tightly manage inventories, including utilizing ship-from-store capabilities in select locations.
Despite these near-term challenges presented by COVID-19, the Company remains committed to, and confident in, its long-term vision. The Company continues to evaluate opportunities to make progress against its key transformation initiatives while balancing the near-term challenges and unprecedented uncertainty presented by COVID-19. The Company’s progress executing against the following key transformation initiatives has created the foundation to allow the Company to respond quickly to COVID-19:
• | Optimizing the global store network; |
• | Enhancing digital and omnichannel capabilities; |
• | Increasing the speed and efficiency of the concept-to-customer product life cycle by further investing in capabilities to position the 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 customer engagement through loyalty programs and marketing optimization. |
The Company entered this period of uncertainty with a healthy liquidity position and has taken and continues to take immediate, aggressive and prudent actions, including reevaluating all expenditures, to balance short and long-term liquidity needs, in order to best position the business for its key stakeholders. Actions to preserve liquidity and manage cash flows during Fiscal 2020, include, but are not limited to:
• | Partnering with merchandise and non-merchandise vendors in regards to payment terms; |
• | Recadencing inventory receipts to better align inventory with expected market demand; |
• | Reducing expenses to better align operating costs with sales; |
• | Borrowing $210.0 million under the ABL Facility in March 2020 which was then repaid in July 2020 along with the Term Loan Facility, using proceeds from the issuance of the Senior Secured Notes and existing cash on hand; |
• | Withdrawing $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds; |
• | Temporarily suspending the Company's share repurchase and dividend programs; and |
• | Assessing government policy and economic stimulus responses to COVID-19 for both business and individuals. |
In addition, despite the Company’s recent history of partnering with its vendors regarding payment terms, there can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.
As of August 1, 2020, the Company had liquidity of $1.061 billion as compared to $913.8 million as of February 1, 2020, comprising cash and equivalents and actual incremental borrowing available to the Company under the ABL Facility.
It is possible that our preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations. For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019.
27
United Kingdom’s withdrawal from the European Union (“Brexit”)
In June 2016, the United Kingdom passed a referendum to recommend withdrawing from the European Union. Although the United Kingdom left the European Union in January 2020, the final terms of the United Kingdom’s withdrawal remain unclear. The Company believes that this referendum and the uncertainty surrounding the terms of the United Kingdom’s withdrawal adversely impacted international sales results in Fiscal 2019, with decreased traffic and declining values of the Euro and British Pound as compared to the U.S. Dollar over Fiscal 2018.
Upon withdrawal from the European Union in January 2020, the United Kingdom entered a transition period during which there will be on-going negotiations. During this transition period, the United Kingdom’s existing trading relationship with the European Union will remain in place and it will continue to follow the European Union's rules. It is not clear at this time what, if any, agreements will be reached by the current December 31, 2020 transition period deadline, or the impact that COVID-19 may have on the negotiation timeline.
There is continued uncertainty related to the impact on consumer behavior, trade relations, economic conditions, foreign currency exchange rates and the free movement of goods, services, people and capital between the United Kingdom and the European Union during this time of transition. The United Kingdom’s withdrawal from the European Union could also adversely impact other areas of the business, including, but not limited to, an increase in duties and delays in the delivery of merchandise from the Company’s Netherlands distribution center to its 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 the Company’s 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, the Company is: collaborating across the organization and testing 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. It is possible that preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect the business and results of operations.
Global Store Network Optimization
A component of optimizing the Company’s global store fleet is pivoting away from large format flagship stores and striving towards opening 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 the Company executes against this strategy. Although some of these closures may be completed through natural lease expirations, certain other of the Company’s leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges or realize benefits related to these actions.
For context, at the beginning of Fiscal 2019, the Company had 19 flagship stores, and as of the end of the second quarter of Fiscal 2020, the Company had 15 flagship stores. Details related to recently closed flagship stores follow:
Brand (1) | Flagship location | Timing of store closure | ||
Abercrombie & Fitch | Pedder Street, Hong Kong Special Administrative Region, China | First quarter of Fiscal 2017 | ||
Abercrombie & Fitch | Copenhagen, Denmark | First quarter of Fiscal 2019 | ||
Hollister | SoHo, New York City, U.S. | Second quarter of Fiscal 2019 | ||
Abercrombie | Milan, Italy | Fourth quarter of Fiscal 2019 | ||
abercrombie kids (2) | London, United Kingdom | Fourth quarter of Fiscal 2019 | ||
(1) | Abercrombie includes the 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. |
(2) | The abercrombie kids store in London will be converted to corporate office space and the location will be utilized as the Company’s EMEA regional headquarters. |
28
Additional details related to store count and gross square footage follow:
Hollister (1) | Abercrombie (2) | Total Company | ||||||||||||||||||
U.S. | International | U.S. | International | U.S. | International | Total | ||||||||||||||
Number of stores: | ||||||||||||||||||||
February 1, 2020 | 391 | 155 | 256 | 52 | 647 | 207 | 854 | |||||||||||||
New | 1 | 2 | 2 | 4 | 3 | 6 | 9 | |||||||||||||
Permanently closed | (6) | (2) | (5) | — | (11) | (2) | (13) | |||||||||||||
August 1, 2020 | 386 | 155 | 253 | 56 | 639 | 211 | 850 | |||||||||||||
Gross square footage (in thousands): | ||||||||||||||||||||
August 1, 2020 | 2,568 | 1,265 | 1,811 | 633 | 4,379 | 1,898 | 6,277 | |||||||||||||
(1) | Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes nine international franchise stores as of each of August 1, 2020 and February 1, 2020. Excludes 15 Company-operated temporary stores as of August 1, 2020 and 16 as of February 1, 2020. |
(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 eight international franchise stores as of each of August 1, 2020 and seven as of February 1, 2020. Excludes six Company-operated temporary stores as of August 1, 2020 and eight as of February 1, 2020. |
Summary of results
A summary of results for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:
GAAP | Non-GAAP (1) | |||||||||||||||
(in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) | August 1, 2020 (2) | August 3, 2019 (3) | August 1, 2020 (2) | August 3, 2019 (3) | ||||||||||||
Thirteen Weeks Ended | ||||||||||||||||
Net sales | $ | 698,328 | $ | 841,078 | ||||||||||||
Change in net sales | (17.0 | )% | (0.2 | )% | ||||||||||||
Gross profit rate | 60.7 | % | 59.3 | % | ||||||||||||
Operating income (loss) | $ | 14,143 | $ | (39,484 | ) | $ | 22,226 | $ | (39,484 | ) | ||||||
Operating income (loss) margin | 2.0 | % | (4.7 | )% | 3.2 | % | (4.7 | )% | ||||||||
Net income (loss) attributable to A&F | $ | 5,464 | $ | (31,142 | ) | $ | 14,713 | $ | (31,142 | ) | ||||||
Net income (loss) per diluted share attributable to A&F | $ | 0.09 | $ | (0.48 | ) | $ | 0.23 | $ | (0.48 | ) | ||||||
Twenty-six Weeks Ended | ||||||||||||||||
Net sales | $ | 1,183,687 | $ | 1,575,050 | ||||||||||||
Change in net sales | (24.8 | )% | 0.1 | % | ||||||||||||
Gross profit rate | 58.1 | % | 59.9 | % | ||||||||||||
Operating loss | $ | (194,984 | ) | $ | (66,742 | ) | $ | (143,973 | ) | $ | (66,742 | ) | ||||
Operating loss margin | (16.5 | )% | (4.2 | )% | (12.2 | )% | (4.2 | )% | ||||||||
Net loss attributable to A&F | $ | (238,684 | ) | $ | (50,297 | ) | $ | (190,939 | ) | $ | (50,297 | ) | ||||
Net loss per diluted share attributable to A&F | $ | (3.82 | ) | $ | (0.76 | ) | $ | (3.05 | ) | $ | (0.76 | ) | ||||
(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) | Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges. Refer to Note 11, “INCOME TAXES.” |
(3) | Results for Fiscal 2019 reflect significant adverse impacts related to flagship store exit charges. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.” |
Certain components of the Company’s Condensed Consolidated Balance Sheets as of August 1, 2020 and February 1, 2020 were as follows:
(in thousands) | August 1, 2020 | February 1, 2020 | ||||||
Cash and equivalents | $ | 766,721 | $ | 671,267 | ||||
Gross long-term borrowings outstanding, carrying amount | $ | 350,000 | $ | 233,250 | ||||
Inventories | $ | 453,239 | $ | 434,326 | ||||
Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended August 1, 2020 and August 3, 2019 were as follows:
(in thousands) | August 1, 2020 | August 3, 2019 | ||||||
Net cash provided by (used) for operating activities | $ | 96,233 | $ | (36,055 | ) | |||
Net cash used for investing activities | $ | (75,621 | ) | $ | (94,224 | ) | ||
Net cash provided by (used) for financing activities | $ | 71,329 | $ | (91,924 | ) | |||
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RESULTS OF OPERATIONS
Net sales
The Company’s net sales by operating segment for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
Thirteen Weeks Ended | |||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | $ Change | % Change | |||||||||
Hollister | $ | 429,248 | $ | 504,758 | $ | (75,510 | ) | (15)% | |||||
Abercrombie (1) | 269,080 | 336,320 | (67,240 | ) | (20)% | ||||||||
Total | $ | 698,328 | $ | 841,078 | $ | (142,750 | ) | (17)% | |||||
Twenty-six Weeks Ended | |||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | $ Change | % Change | |||||||||
Hollister | $ | 702,260 | $ | 933,203 | $ | (230,943 | ) | (25)% | |||||
Abercrombie (1) | 481,427 | 641,847 | (160,420 | ) | (25)% | ||||||||
Total | $ | 1,183,687 | $ | 1,575,050 | $ | (391,363 | ) | (25)% | |||||
(1) | Includes Abercrombie & Fitch and abercrombie kids brands. |
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
Thirteen Weeks Ended | |||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | $ Change | % Change | |||||||||
U.S. | $ | 458,671 | $ | 543,472 | $ | (84,801 | ) | (16)% | |||||
EMEA | 171,297 | 200,642 | (29,345 | ) | (15)% | ||||||||
APAC | 41,814 | 67,350 | (25,536 | ) | (38)% | ||||||||
Other | 26,546 | 29,614 | (3,068 | ) | (10)% | ||||||||
International | $ | 239,657 | $ | 297,606 | $ | (57,949 | ) | (19)% | |||||
Total | $ | 698,328 | $ | 841,078 | $ | (142,750 | ) | (17)% | |||||
Twenty-six Weeks Ended | |||||||||||||
(in thousands) | August 1, 2020 | August 3, 2019 | $ Change | % Change | |||||||||
U.S. | $ | 781,533 | $ | 1,013,130 | $ | (231,597 | ) | (23)% | |||||
EMEA | 283,951 | 374,586 | (90,635 | ) | (24)% | ||||||||
APAC | 74,150 | 132,926 | (58,776 | ) | (44)% | ||||||||
Other | 44,053 | 54,408 | (10,355 | ) | (19)% | ||||||||
International | $ | 402,154 | $ | 561,920 | $ | (159,766 | ) | (28)% | |||||
Total | $ | 1,183,687 | $ | 1,575,050 | $ | (391,363 | ) | (25)% | |||||
For the second quarter of Fiscal 2020, net sales decreased 17% as compared to the second quarter of Fiscal 2019, primarily due to a decrease in units sold driven by temporary store closures and a decline in store traffic across brands as a result of COVID-19, partially offset by 56% digital sales growth. Average unit retail increased year-over-year, driven by less promotions and lower clearance levels, with changes in foreign currency exchange rates adversely impacted net sales by $2 million.
For the year-to-date period of Fiscal 2020, net sales decreased 25% as compared to the year-to-date period of Fiscal 2019, primarily due to a decrease in units sold driven by temporary store closures and a decline in store traffic across brands as a result of COVID-19, partially offset by 41% digital sales growth. Average unit retail decreased year-over-year, driven by strategic and targeted promotions in response to the retail environment, with changes in foreign currency exchange rates adversely impacting net sales by $9 million. Excluding the adverse impact of changes in foreign currency exchange rates, net sales for the year-to-date period of Fiscal 2020 decreased 24% as compared to the year-to-date period of Fiscal 2019.
30
Cost of sales, exclusive of depreciation and amortization
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Cost of sales, exclusive of depreciation and amortization | $ | 274,720 | 39.3% | $ | 342,445 | 40.7% | (140) | ||||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Cost of sales, exclusive of depreciation and amortization | $ | 495,934 | 41.9% | $ | 632,327 | 40.1% | 180 | ||||||
(1) | The estimated basis point (“BPS”) change has been rounded based on the change in the percentage of net sales. |
For the second quarter of Fiscal 2020, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 140 basis points as compared to the second quarter of Fiscal 2019. The year-over-year decline was primarily attributable to increased average unit retail without a corresponding increase in average unit cost, which was flat year-over-year.
For the year-to-date period of Fiscal 2020, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 180 basis points as compared to the year-to-date period of Fiscal 2019, primarily driven by adverse impacts of approximately $15 million related to charges reducing the carrying value of inventory during the first quarter of Fiscal 2020.
Gross profit, exclusive of depreciation and amortization
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Gross profit, exclusive of depreciation and amortization | $ | 423,608 | 60.7% | $ | 498,633 | 59.3% | 140 | ||||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Gross profit, exclusive of depreciation and amortization | $ | 687,753 | 58.1% | $ | 942,723 | 59.9% | (180) | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
31
Stores and distribution expense
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Stores and distribution expense | $ | 310,370 | 44.4% | $ | 376,347 | 44.7% | (30) | ||||||
Twenty-six Weeks Ended | |||||||||||||
November 2, 2019 | November 3, 2018 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Stores and distribution expense | $ | 632,494 | 53.4% | $ | 732,959 | 46.5% | 690 | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
For the second quarter of Fiscal 2020, stores and distribution expense decreased 18% as compared to the second quarter of Fiscal 2019, primarily driven by a $38 million reduction in payroll expense driven by temporary store closures in response to COVID-19, net of a benefit of $3 million related to expected government subsidies in certain jurisdictions where the Company qualifies. The Company also experienced a $26 million reduction in store occupancy expense driven by temporary store closures in response to COVID-19. These reductions in expense were partially offset by a $10 million increase in shipping and handling expense related to 56% year-over-year digital sales growth.
For the second quarter of Fiscal 2020, stores and distribution expense as a percentage of net sales decreased by approximately 30 basis points as compared to the second quarter of Fiscal 2019.
For the year-to-date period of Fiscal 2020, stores and distribution expense decreased 14% as compared to the year-to-date period of Fiscal 2019, primarily driven by a $66 million reduction in payroll expense driven by temporary store closures in response to COVID-19, net of a benefit of $12 million related to expected government subsidies in certain jurisdictions where the Company qualifies. The Company also experienced a $40 million reduction in store occupancy expense driven by temporary store closures in response to COVID-19. These reductions in expense were partially offset by a $19 million increase in shipping and handling expense related to 41% year-over-year digital sales growth.
For the year-to-date period of Fiscal 2020, stores and distribution expense as a percentage of net sales increased by approximately 690 basis points as compared to the year-to-date period of Fiscal 2019, primarily due to the deleverage associated with lost sales from temporary store closures in response to COVID-19.
Marketing, general and administrative expense
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Marketing, general and administrative expense | $ | 97,252 | 13.9% | $ | 115,694 | 13.8% | 10 | ||||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Marketing, general and administrative expense | $ | 205,509 | 17.4% | $ | 227,641 | 14.5% | 290 | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
For the second quarter of Fiscal 2020, marketing, general and administrative expense decreased 16% as compared to the second quarter of Fiscal 2019, primarily driven by reductions in marketing, payroll and other controllable expenses.
For the year-to-date period of Fiscal 2020, marketing, general and administrative expense decreased 10% as compared to the year-to-date period of Fiscal 2019, primarily driven by marketing and other controllable expenses. For the year-to-date period of Fiscal 2020, marketing, general and administrative expense as a percentage of net sales increased by approximately 290 basis points as compared to the year-to-date period of Fiscal 2019, primarily due to the deleverage associated with lost sales from temporary store closures in response to COVID-19.
32
Flagship store exit (benefits) charges
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Flagship store exit (benefits) charges | $ | (3,884 | ) | (0.6)% | $ | 44,994 | 5.3% | (590) | |||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Flagship store exit (benefits) charges | $ | (4,427 | ) | (0.4)% | $ | 46,738 | 3.0% | (340) | |||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
Flagship store exit charges for the second quarter and year-to-date period of Fiscal 2019, primarily relate to the closure of the Company’s SoHo, New York City Hollister flagship store. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.”
Asset impairment, exclusive of flagship store exit charges
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Asset impairment, exclusive of flagship store exit charges | $ | 8,083 | 1.2% | $ | 715 | 0.1% | 110 | ||||||
Excluded items: | |||||||||||||
Asset impairment charges (2) | (8,083 | ) | (1.2)% | — | 0.0% | (120) | |||||||
Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges | $ | — | 0.0% | $ | 715 | 0.1% | (10) | ||||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Asset impairment, exclusive of flagship store exit charges | $ | 51,011 | 4.3% | $ | 2,377 | 0.2% | 410 | ||||||
Excluded items: | |||||||||||||
Asset impairment charges (2) | (51,011 | ) | (4.3)% | — | 0.0% | (430) | |||||||
Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges | $ | — | 0.0% | $ | 2,377 | 0.2% | (20) | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
(2) |
Other operating income (loss), net
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Other operating income (loss), net | $ | 2,356 | 0.3% | $ | (367 | ) | —% | (30) | |||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Other operating income, net | $ | 1,850 | 0.2% | $ | 250 | —% | (20) | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
33
Operating income (loss)
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 (1) | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (2) | ||||||||||
Operating income (loss) | $ | 14,143 | 2.0% | $ | (39,484 | ) | (4.7)% | 670 | |||||
Excluded items: | |||||||||||||
Asset impairment charges (3) | 8,083 | 1.2% | — | 0.0% | 120 | ||||||||
Adjusted non-GAAP operating income (loss) | $ | 22,226 | 3.2% | $ | (39,484 | ) | (4.7)% | 790 | |||||
Impact from changes in foreign currency exchange rates | — | 0.0% | 926 | 0.1% | (10) | ||||||||
Adjusted non-GAAP operating income (loss) on a constant currency basis (3) | $ | 22,226 | 3.2% | $ | (38,558 | ) | (4.6)% | 780 | |||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (2) | ||||||||||
Operating loss | $ | (194,984 | ) | (16.5)% | $ | (66,742 | ) | (4.2)% | (1,230) | ||||
Excluded items: | |||||||||||||
Asset impairment charges (3) | 51,011 | 4.3% | — | 0.0% | 430 | ||||||||
Adjusted non-GAAP operating loss | $ | (143,973 | ) | (12.2)% | $ | (66,742 | ) | (4.2)% | (800) | ||||
Impact from changes in foreign currency exchange rates | — | 0.0% | (2,189 | ) | (0.1)% | 10 | |||||||
Adjusted non-GAAP operating loss on a constant currency basis (3) | $ | (143,973 | ) | (12.2)% | $ | (68,931 | ) | (4.4)% | (780) | ||||
(1) | Fiscal 2019 results include $45.0 million of flagship store exit charges for the thirteen weeks ended August 3, 2019. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.” |
(2) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
(3) |
Interest expense, net
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (1) | ||||||||||
Interest expense | $ | 7,761 | 1.1% | $ | 4,479 | 0.5% | 60 | ||||||
Interest income | (663 | ) | (0.1)% | (3,109 | ) | (0.4)% | 30 | ||||||
Interest expense, net | $ | 7,098 | 1.0% | $ | 1,370 | 0.2% | 80 | ||||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (1) | ||||||||||
Interest expense | $ | 12,834 | 1.1% | $ | 9,011 | 0.6% | 50 | ||||||
Interest income | (2,365 | ) | (0.2)% | (7,025 | ) | (0.4)% | 20 | ||||||
Interest expense, net | $ | 10,469 | 0.9% | $ | 1,986 | 0.1% | 80 | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
For the second quarter of Fiscal 2020, interest expense, net increased $5.7 million as compared to the second quarter of Fiscal 2019. For the year-to-date period of Fiscal 2020, interest expense, net increased $8.5 million as compared to the year-to-date period of Fiscal 2019.
The increase in interest expense, net, for the aforementioned periods is primarily driven by lower interest income earned on the company’s investments and cash holdings and higher interest expense in the current year, reflecting an increase in interest expense related to certain of the Company’s long-term obligations and incremental expense in connection with the issuance of the Senior Secured Notes, the proceeds of which were primarily used to repay the then outstanding borrowings under the Company’s credit facilities.
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Income tax expense (benefit)
Thirteen Weeks Ended | |||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||
(in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||
Income tax expense (benefit) | $ | 1,253 | 17.8% | $ | (11,330 | ) | 27.7% | ||||
Excluded items: | |||||||||||
Tax effect of pre-tax excluded items (1) | (1,166 | ) | — | ||||||||
Adjusted non-GAAP income tax expense (benefit) | $ | 87 | 0.6% | $ | (11,330 | ) | 27.7% | ||||
Twenty-six Weeks Ended | |||||||||||
August 1, 2020 | August 3, 2019 | ||||||||||
(in thousands, except ratios) | Effective Tax Rate | Effective Tax Rate | |||||||||
Income tax expense (benefit) | $ | 32,786 | (16.0)% | $ | (20,918 | ) | 30.4% | ||||
Deduct: | |||||||||||
Tax effect of pre-tax excluded items (1) | 3,266 | ||||||||||
Adjusted non-GAAP income tax (benefit) expense | $ | 36,052 | (23.3)% | $ | (20,918 | ) | 30.4% | ||||
(1) | The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “Operating income (loss)” for details of pre-tax excluded items. |
The Company’s effective tax rate for the year-to-date period of Fiscal 2020 was adversely impacted by $84.1 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss. These adverse tax impacts are as follows:
• | The Company did not recognize income tax benefits on $204.1 million of pre-tax losses generated in the twenty-six weeks ended August 1, 2020 in certain jurisdictions as the Company currently anticipates pre-tax losses in these jurisdictions for the fiscal year, resulting in adverse tax impacts of $47.6 million. |
• | The Company recognized discrete charges of $36.5 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions, including, but not limited to Switzerland, Germany and the U.S. principally as a result of the significant adverse impacts of COVID-19. |
Net income (loss) attributable to A&F
Thirteen Weeks Ended | |||||||||||||
August 1, 2020 | August 3, 2019 (1) | ||||||||||||
(in thousands) | % of Net sales | % of Net sales | BPS Change (2) | ||||||||||
Net income (loss) attributable to A&F | $ | 5,464 | 0.8% | $ | (31,142 | ) | (3.7)% | 450 | |||||
Excluded items, net of tax (3) | 9,249 | 1.3% | — | 0.0% | 130 | ||||||||
Adjusted non-GAAP net income (loss) attributable to A&F | $ | 14,713 | 2.1% | $ | (31,142 | ) | (3.7)% | 580 | |||||
Twenty-six Weeks Ended | |||||||||||||
August 1, 2020 (4) | August 3, 2019 (1) | ||||||||||||
(in thousands) | % of Net Sales | % of Net Sales | BPS Change (3) | ||||||||||
Net loss attributable to A&F | $ | (238,684 | ) | (20.2)% | $ | (50,297 | ) | (3.2)% | (1,700) | ||||
Excluded items, net of tax (3) | 47,745 | 4.0% | — | 0.0% | 400 | ||||||||
Adjusted non-GAAP net loss attributable to A&F | $ | (190,939 | ) | (16.1)% | $ | (50,297 | ) | (3.2)% | (1,290) | ||||
(1) | Results for Fiscal 2019 reflect significant adverse impacts related to flagship store exit charges. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.” |
(2) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
(3) | Excluded items presented above under “Operating income (loss),” and “Income tax expense (benefit).” |
(4) | Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges. Refer to Note 11, “INCOME TAXES.” |
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Net income (loss) per diluted share attributable to A&F
Thirteen Weeks Ended | |||||||||
August 1, 2020 (1) | August 3, 2019 (2) | $ Change | |||||||
Net income (loss) per diluted share attributable to A&F | $ | 0.09 | $ | (0.48 | ) | $0.57 | |||
Excluded items, net of tax (3) | 0.15 | — | 0.15 | ||||||
Adjusted non-GAAP net income (loss) per diluted share attributable to A&F | $ | 0.23 | $ | (0.48 | ) | $0.71 | |||
Impact from changes in foreign currency exchange rates | — | 0.02 | (0.02) | ||||||
Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis | $ | 0.23 | $ | (0.46 | ) | $0.69 | |||
Twenty-six Weeks Ended | |||||||||
August 1, 2020 (1) | August 3, 2019 (2) | $ Change | |||||||
Net loss per diluted share attributable to A&F | $ | (3.82 | ) | $ | (0.76 | ) | (3.06) | ||
Excluded items, net of tax (3) | 0.76 | — | 0.76 | ||||||
Adjusted non-GAAP net loss per diluted share attributable to A&F | $ | (3.05 | ) | $ | (0.76 | ) | (2.29) | ||
Impact from changes in foreign currency exchange rates | — | (0.02 | ) | 0.02 | |||||
Adjusted non-GAAP net loss per diluted share attributable to A&F on a constant currency basis | $ | (3.05 | ) | $ | (0.79 | ) | (2.26) | ||
(1) | Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges. Refer to Note 11, “INCOME TAXES.” |
(2) | Results for Fiscal 2019 reflect significant adverse impacts related to flagship store exit charges. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.” |
(3) | Excluded items presented above under “Operating income (loss),” and “Income tax expense (benefit).” |
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LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s capital allocation strategy, priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors. The Company’s current capital allocation strategy is to prioritize navigating the near-term challenges that COVID-19 presents and continuing to fund operating activities. The Company believes that it will have adequate liquidity to fund operating activities over the next 12 months.
Primary sources and uses of cash
The Company’s business has two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “Credit facilities and Senior Secured Notes”.
As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210.0 million under the ABL Facility to improve its near-term cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash. In July 2020, the Company completed the issuance of the Senior Secured Notes and received gross proceeds of $350.0 million. The Company used the net proceeds from the offering of the Senior Secured Notes, along with existing cash on hand, to repay outstanding borrowings and accrued interest under the Term Loan Facility and the ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes.
Over the next twelve months, the Company expects its primary cash requirements to be towards funding operating activities, including the acquisition of inventory, and obligations related to compensation, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company entered this period of uncertainty with a healthy liquidity position and has taken and continues to take immediate, aggressive and prudent actions, including reevaluating all expenditures, in order to balance the Company’s short and long-term liquidity needs and best position the business for key stakeholders.
The Company also evaluates opportunities for investments in line with its key transformation initiatives that have positioned the business to quickly respond to the COVID-19 pandemic and strives to invest in projects that have high expected returns. These improvements may include new store experiences or investments in its omnichannel initiatives or loyalty programs. In addition, the Company evaluates store closures, including flagship lease buyouts and options to early terminate store leases. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended August 1, 2020, the Company used $75.6 million towards capital expenditures. Total capital expenditures for Fiscal 2020 are expected to be approximately $100 million, down from $202.8 million of capital expenditures in Fiscal 2019.
Share repurchases and dividends
In order to preserve liquidity and maintain financial flexibility in light COVID-19, in March 2020, the Company announced that it had temporarily suspended its share repurchase program and in May 2020, the Company announced that it had temporarily suspended its dividend program. The Company will review these temporary suspensions throughout the year to determine, in light of facts and circumstances at that time, whether and when to reinstate these programs.
Dividends are declared at the discretion of A&F’s Board of Directors. A quarterly dividend, of $0.20 per share outstanding, was declared in February for Fiscal 2020 and in each of February, May, August and November in Fiscal 2019 and Fiscal 2018. Dividends were paid in March for Fiscal 2020, and each of March, June, September and December in Fiscal 2019 and Fiscal 2018. A&F’s Board of Directors reviews the dividend on a quarterly basis and establishes the dividend amount based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including the potential severity of impacts to the business resulting from COVID-19 and any restrictions related to the company’s agreements related to the Senior Secured Notes and ABL Facility. There can be no assurance that the Company will reinstate its dividend program in the future or, if dividends are paid, that they will be in amounts similar to past dividends.
Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the primary objective to offset dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares repurchased may be in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Exchange Act, through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS” for the number of shares remaining available for purchase under the Company’s June 2019 publicly announced stock repurchase authorization.
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Credit facilities and Senior Secured Notes
In July 2020, the Company completed the private offering of the Senior Secured Notes, and received gross proceeds of $350.0 million. The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments beginning in January 2021. The Company’s debt related to the Senior Secured Notes is presented on the Condensed Consolidated Balance Sheet, net of the unamortized fees. As of August 1, 2020, the Company had $350.0 million of gross borrowings outstanding under the Senior Secured Notes.
In addition, the ABL Facility provides for a senior secured credit facility of up to $400 million. As of August 1, 2020, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on October 19, 2022.
Details regarding the remaining borrowing capacity under the ABL Facility as of August 1, 2020 are as follows:
(in thousands) | August 1, 2020 | ||
Borrowing base | $ | 328,249 | |
Less: Outstanding stand-by letters of credit | (789 | ) | |
Borrowing capacity | 327,460 | ||
Less: Minimum excess availability (1) | (32,825 | ) | |
Actual incremental borrowing available | $ | 294,635 | |
(1) | The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. |
Income taxes
The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S., without incurring additional federal income tax. The Company has determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional taxes.
As of August 1, 2020, $350.3 million of the Company’s $766.7 million of cash and equivalents were held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends, if any, to A&F’s stockholders.
Analysis of cash flows
The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended August 1, 2020 and August 3, 2019:
Twenty-six Weeks Ended | |||||||
August 1, 2020 | August 3, 2019 | ||||||
(in thousands) | |||||||
Cash and equivalents, and restricted cash and equivalents, beginning of period | $ | 692,264 | $ | 745,829 | |||
Net cash provided by (used for) operating activities | 96,233 | (36,055 | ) | ||||
Net cash used for investing activities | (75,621 | ) | (94,224 | ) | |||
Net cash provided by (used for) financing activities | 71,329 | (91,924 | ) | ||||
Effect of foreign currency exchange rates on cash | 1,785 | (2,455 | ) | ||||
Net increase (decrease) in cash and equivalents, and restricted cash and equivalents | 93,726 | (224,658 | ) | ||||
Cash and equivalents, and restricted cash and equivalents, end of period | $ | 785,990 | $ | 521,171 | |||
Operating activities - The year-over-year change in operating cash flows was primarily due to actions taken by the Company during Fiscal 2020 to preserve liquidity and manage cash flows in light of COVID-19, including, but not limited to:
• | Partnering with merchandise and non-merchandise vendors regarding payment terms; |
• | Reducing and recadencing inventory receipts to better align inventory with expected market demand; |
• | Reducing expenses to better align operating costs with sales; |
• | Withdrawing $50.0 million from the overfunded Rabbi Trust assets, the majority of excess funds; and |
• | Suspending rent payments for a significant number of stores that were closed during Fiscal 2020 as a result of COVID-19, which, coupled with rent abatements and changes in payment cadence, attributed to a year-over-year decrease in cash paid for operating lease liabilities. |
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These benefits to operating cash flows were partially offset by lower cash receipts as a result of a 25% decrease in net sales from last year driven by temporary store closures and a decline in store traffic in response to COVID-19 during Fiscal 2020.
The Company continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. In addition, despite the Company’s recent history of partnering with its vendors regarding payment terms, there can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.
Investing activities - For the twenty-six weeks ended August 1, 2020, net cash outflows for investing activities were used for capital expenditures of $75.6 million as compared to $94.2 million for the twenty-six weeks ended August 3, 2019, reflecting actions taken in Fiscal 2020 to preserve liquidity and manage cash flows in light of the COVID-19 pandemic.
Financing activities - For the twenty-six weeks ended August 1, 2020, net cash provided by financing activities primarily consisted of the issuance of the Senior Secured Notes and receipt of related gross proceeds of $350.0 million and borrowings under the ABL Facility of $210.0 million. The gross proceeds from the Senior Secured Notes offering were used along with existing cash on hand, to repay all then outstanding borrowings and accrued interest under the Term Loan Facility and ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering. In addition, the Company returned $27.7 million to shareholders during the twenty-six weeks ended August 1, 2020, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19, as compared to $84.2 million during the twenty-six weeks ended August 3, 2019.
Off-balance sheet arrangements
As of August 1, 2020, 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 thirteen weeks ended August 1, 2020, the Company issued the Senior Secured Notes, which mature in July 2025. The Company received $350.0 million in proceeds from this transaction and repaid all outstanding borrowings under the ABL Facility and Term Loan Facility. Based on the aggregate principal amount of the Senior Secured Notes outstanding as of August 1, 2020, estimated interest payments related to the Senior Secured Notes are as follows:
(in thousands) | Total | Fiscal 2020 | Fiscal 2021-Fiscal 2023 | Fiscal 2024-Fiscal 2025 | Fiscal 2026 and thereafter | |||||||||||||||
Interest payments due by period | $ | 154,231 | $ | 16,418 | $ | 91,875 | $ | 45,938 | $ | — | ||||||||||
Other than the items described above, there have been no material changes during the thirteen weeks ended August 1, 2020, in the contractual obligations as of February 1, 2020, 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).
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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 2019. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements.
CRITICAL ACCOUNTING 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 2019. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2019.
Policy | Effect if Actual Results Differ from Assumptions | |
Long-lived Assets | ||
Long-lived assets, primarily operating 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 store 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. Fair value of the Company’s store-related assets is determined at the individual store level based on the highest and best use of the asset group. The key assumptions used in the Company’s fair value analysis may include discounted future store cash flows and comparable market rents. | 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 as of August 1, 2020 and not impaired, had long-lived assets with a net book value of $146.0 million, which included $133.0 million of operating lease right-of-use assets, as of August 1, 2020. Store assets that were previously-impaired as of August 1, 2020, had a remaining net book value of $162.2 million, which included $146.9 million of operating lease right-of-use assets, as of August 1, 2020. | |
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NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures 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 asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, therefore supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies.
Comparable sales
At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) 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 and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, the Company has not disclosed comparable sales for Fiscal 2020.
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 | |
Asset impairment, exclusive of flagship store exit charges | Certain asset impairment charges | |
Operating income (loss) | Certain asset impairment charges | |
Income tax expense (benefit) (2) | Tax effect of pre-tax excluded items | |
Net income (loss) and net income (loss) per share attributable to A&F (2) | Pre-tax excluded items and the tax effect of pre-tax excluded items | |
(1) | Certain of these financial measures are also expressed as a percentage of net sales. |
(2) | The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. |
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Financial information on a constant currency basis
The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate.
A reconciliation of financial metrics on a constant currency basis to GAAP for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:
(in thousands, except change in net sales, gross profit rate, operating margin and per share data) | Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||
Net sales | August 1, 2020 | August 3, 2019 | % Change | August 1, 2020 | August 3, 2019 | % Change | |||||||||||||
GAAP | $ | 698,328 | $ | 841,078 | (17)% | $ | 1,183,687 | $ | 1,575,050 | (25)% | |||||||||
Impact from changes in foreign currency exchange rates | — | (2,125 | ) | —% | — | (8,948 | ) | 1% | |||||||||||
Non-GAAP on a constant currency basis | $ | 698,328 | $ | 838,953 | (17)% | $ | 1,183,687 | $ | 1,566,102 | (24)% | |||||||||
Gross profit, exclusive of depreciation and amortization expense | August 1, 2020 | August 3, 2019 | BPS Change (1) | August 1, 2020 | August 3, 2019 | BPS Change (1) | |||||||||||||
GAAP | $ | 423,608 | $ | 498,633 | 140 | $ | 687,753 | $ | 942,723 | (180) | |||||||||
Impact from changes in foreign currency exchange rates | — | (1,408 | ) | — | — | (7,456 | ) | 20 | |||||||||||
Non-GAAP on a constant currency basis | $ | 423,608 | $ | 497,225 | 140 | $ | 687,753 | $ | 935,267 | (160) | |||||||||
Operating income (loss) | August 1, 2020 | August 3, 2019 | BPS Change (1) | August 1, 2020 | August 3, 2019 | BPS Change (1) | |||||||||||||
GAAP | $ | 14,143 | $ | (39,484 | ) | 670 | $ | (194,984 | ) | $ | (66,742 | ) | (1,230) | ||||||
Excluded items (2) | (8,083 | ) | — | (120) | (51,011 | ) | — | (430) | |||||||||||
Adjusted non-GAAP | $ | 22,226 | $ | (39,484 | ) | 790 | $ | (143,973 | ) | $ | (66,742 | ) | (800) | ||||||
Impact from changes in foreign currency exchange rates | — | 926 | (10) | — | (2,189 | ) | 10 | ||||||||||||
Adjusted non-GAAP on a constant currency basis | $ | 22,226 | $ | (38,558 | ) | 780 | $ | (143,973 | ) | $ | (68,931 | ) | (780) | ||||||
Net income (loss) per diluted share attributable to A&F (3) | August 1, 2020 | August 3, 2019 | $ Change | August 1, 2020 | August 3, 2019 | $ Change | |||||||||||||
GAAP | $ | 0.09 | $ | (0.48 | ) | $0.57 | $ | (3.82 | ) | $ | (0.76 | ) | $(3.06) | ||||||
Excluded items, net of tax (2) | (0.15 | ) | — | (0.15) | (0.76 | ) | — | (0.76) | |||||||||||
Adjusted non-GAAP | $ | 0.23 | $ | (0.48 | ) | $0.71 | $ | (3.05 | ) | $ | (0.76 | ) | $(2.29) | ||||||
Impact from changes in foreign currency exchange rates | — | 0.02 | (0.02) | — | (0.02 | ) | 0.02 | ||||||||||||
Adjusted non-GAAP on a constant currency basis | $ | 0.23 | $ | (0.46 | ) | $0.69 | $ | (3.05 | ) | $ | (0.79 | ) | $(2.26) | ||||||
(1) | The estimated basis point change has been rounded based on the change in the percentage of net sales. |
(2) | Excluded items for the thirteen and twenty-six weeks ended August 1, 2020 consist of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. |
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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 $0.4 million and $1.0 million for the thirteen and twenty-six weeks ended August 1, 2020, respectively, and $0.8 million and $1.6 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively. These gains 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 August 1, 2020 and February 1, 2020, and are restricted in their use as noted above.
INTEREST RATE RISK
Prior to July 2, 2020, our exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Term Loan Facility and ABL Facility. On July 2, 2020 the Company issued the Senior Secured Notes due in 2025 with a 8.75% fixed interest rate per annum and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then existing market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value.
This analysis for the remainder of Fiscal 2020 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the credit agreement. 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 the Company’s interest expense.
FOREIGN CURRENCY EXCHANGE RATE RISK
A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase.
A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.
Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items.
The Company has no outstanding foreign currency exchange contracts as of August 1, 2020, although the Company may enter into these contracts in future periods. Refer to Note 14, “DERIVATIVE INSTRUMENTS,” for the fair value of then outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of February 1, 2020.
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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 A&F’s principal executive officer and A&F’s 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 August 1, 2020. 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 August 1, 2020, 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 August 1, 2020 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting.
As the COVID-19 pandemic evolves, the Company will continue to monitor and assess any potential impacts COVID-19 may have on the design and operating effectiveness of the Company’s internal controls.
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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. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts.
Item 1A. Risk Factors.
The Company’s risk factors as of August 1, 2020 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 2019 and those furnished under “Item 7.01, Regulation FD Disclosure” of A&F’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 17, 2020, other than those disclosed below due to the issuance of the Senior Secured Notes and termination of the Term Loan Facility during the thirteen weeks ended August 1, 2020. The COVID-19 pandemic may exacerbate the risks discussed within the aforementioned Annual Report on Form 10-K and Current Report on Form 8-K, certain of which have had and could continue to have a material effect on the Company.
The risk factor titled “Our credit facilities include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business” has been modified to read in full as follows:
The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business.
Our senior secured asset-based revolving credit agreement, as amended (the “ABL Facility”) expires on October 19, 2022 and our senior secured notes, which have a fixed 8.75% interest rate, will mature on July 15, 2025 (the “Senior Secured Notes”). Both our ABL Facility and the indenture governing our Senior Secured Notes contain restrictive covenants that, subject to specified exemptions, restrict, among other things, the following: our ability to incur, assume or guarantee additional indebtedness; grant or incur liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends or make distributions on our capital stock; redeem or repurchase capital stock; change the nature of our business; and consolidate or merge with or into, or sell substantially all of our assets to another entity.
If an event of default occurs, any outstanding obligations under the Senior Secured Notes and the ABL Facility could be declared immediately due and payable or the lenders could foreclose on or exercise other remedies with respect to the assets securing the indebtedness under the Senior Secured Notes and the ABL Facility. In addition, there is no assurance that we would have the cash resources available to repay such accelerated obligations. In addition, the Senior Secured Notes and ABL Facility are secured by certain of our real property, intellectual property, general intangibles and receivables, among other things, and lenders may exercise remedies against the collateral in the event of our default.
We have, and expect to continue to have, a level of indebtedness. In addition, we may, from time to time, incur additional indebtedness. We may need to refinance all or a portion of our existing indebtedness before maturity, including the Senior Secured Notes, and any indebtedness under the ABL Facility. There can be no assurance that we would be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all. Changes in market conditions could potentially impact the size and terms of a replacement facility or facilities in
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the future. The inability to obtain credit on commercially reasonable terms in the future could adversely impact our liquidity and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of equity securities during the second quarter of Fiscal 2020 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 August 1, 2020:
Period (fiscal month) | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (3) | ||||||||
May 3, 2020 through May 30, 2020 | 2,487 | $ | 12.67 | — | 3,218,058 | |||||||
May 31, 2020 through July 4, 2020 | 3,873 | $ | 12.13 | — | 3,218,058 | |||||||
July 5, 2020 through August 1, 2020 | 1,089 | $ | 10.39 | — | 3,218,058 | |||||||
Total | 7,449 | $ | 12.05 | — | 3,218,058 | |||||||
(1) | All 7,449 shares of A&F’s Common Stock purchased during the thirteen weeks ended August 1, 2020 were withheld for tax payments due upon the vesting of employee restricted stock units. |
(2) | On June 12, 2019, A&F’s Board of Directors authorized the repurchase of 5.0 million shares of A&F’s Common Stock, which was announced on June 12, 2019. |
(3) | The number shown represents, as of the end of each period, the maximum number of shares of A&F’s Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time, depending on business and market conditions. The Company has temporarily suspended its share repurchase program in order to preserve liquidity and maintain financial flexibility in light of the circumstances surrounding COVID-19. |
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Item 6. Exhibits
Exhibit | Document | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
31.1 | ||
31.2 | ||
32.1 | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* | |
* | Filed herewith. |
** | Furnished herewith. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Abercrombie & Fitch Co. | ||
Date: September 8, 2020 | By: | /s/ Scott Lipesky |
Scott Lipesky | ||
Senior Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) | ||
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