Q3 2014 Form 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 1, 2014
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
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Delaware | 31-1469076 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
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.
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Class A Common Stock | | Outstanding at December 8, 2014 |
$.01 Par Value | | 69,335,903 Shares |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Thousands, except share and per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
NET SALES | $ | 911,453 |
| | $ | 1,033,293 |
| | $ | 2,624,486 |
| | $ | 2,817,760 |
|
Cost of Goods Sold | 344,383 |
| | 382,253 |
| | 992,801 |
| | 1,009,431 |
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GROSS PROFIT | 567,070 |
| | 651,040 |
| | 1,631,685 |
| | 1,808,329 |
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Stores and Distribution Expense | 413,551 |
| | 481,232 |
| | 1,257,422 |
| | 1,402,080 |
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Marketing, General and Administrative Expense | 104,981 |
| | 126,750 |
| | 339,595 |
| | 363,176 |
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Restructuring Charges | — |
| | 44,708 |
| | 6,053 |
| | 44,708 |
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Asset Impairment | 16,706 |
| | 43,571 |
| | 16,706 |
| | 43,571 |
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Other Operating Income, Net | (1,534 | ) | | (9,851 | ) | | (9,444 | ) | | (15,079 | ) |
OPERATING INCOME (LOSS) | 33,366 |
| | (35,370 | ) | | 21,353 |
| | (30,127 | ) |
Interest Expense, Net | 5,572 |
| | 1,655 |
| | 9,589 |
| | 5,032 |
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INCOME (LOSS) BEFORE TAXES | 27,794 |
| | (37,025 | ) | | 11,764 |
| | (35,159 | ) |
Tax Expense (Benefit) | 9,567 |
| | (21,381 | ) | | 4,331 |
| | (23,682 | ) |
NET INCOME (LOSS) | $ | 18,227 |
| | $ | (15,644 | ) | | $ | 7,433 |
| | $ | (11,477 | ) |
NET INCOME (LOSS) PER SHARE: | | | | | | | |
BASIC | $ | 0.26 |
| | $ | (0.20 | ) | | $ | 0.10 |
| | $ | (0.15 | ) |
DILUTED | $ | 0.25 |
| | $ | (0.20 | ) | | $ | 0.10 |
| | $ | (0.15 | ) |
WEIGHTED-AVERAGE SHARES OUTSTANDING: | | | | | | | |
BASIC | 70,814 |
| | 76,456 |
| | 72,577 |
| | 77,387 |
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DILUTED | 72,128 |
| | 76,456 |
| | 73,870 |
| | 77,387 |
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DIVIDENDS DECLARED PER SHARE | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.60 |
| | $ | 0.60 |
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OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Foreign Currency Translation Adjustments | $ | (39,119 | ) | | $ | 10,959 |
| | $ | (35,545 | ) | | $ | (8,530 | ) |
Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes | 9,071 |
| | (4,571 | ) | | 11,345 |
| | 5,288 |
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Other Comprehensive Income (Loss) | $ | (30,048 | ) | | $ | 6,388 |
| | $ | (24,200 | ) | | $ | (3,242 | ) |
COMPREHENSIVE INCOME (LOSS) | $ | (11,821 | ) | | $ | (9,256 | ) | | $ | (16,767 | ) | | $ | (14,719 | ) |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
ABERCROMBIE & FITCH CO.
CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
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| (unaudited) | | |
| November 1, 2014 | | February 1, 2014 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and Equivalents | $ | 320,564 |
| | $ | 600,116 |
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Receivables | 65,083 |
| | 67,965 |
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Inventories | 617,542 |
| | 530,192 |
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Deferred Income Taxes | 17,543 |
| | 21,835 |
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Other Current Assets | 116,160 |
| | 100,458 |
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TOTAL CURRENT ASSETS | 1,136,892 |
| | 1,320,566 |
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PROPERTY AND EQUIPMENT, NET | 1,050,795 |
| | 1,131,341 |
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OTHER ASSETS | 387,882 |
| | 399,090 |
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TOTAL ASSETS | $ | 2,575,569 |
| | $ | 2,850,997 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts Payable | $ | 197,606 |
| | $ | 130,715 |
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Accrued Expenses | 273,362 |
| | 322,834 |
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Deferred Lease Credits | 28,972 |
| | 36,165 |
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Income Taxes Payable | 9,251 |
| | 63,508 |
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Short-Term Portion of Borrowings, Net | 2,102 |
| | 15,000 |
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TOTAL CURRENT LIABILITIES | 511,293 |
| | 568,222 |
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LONG-TERM LIABILITIES: | | | |
Deferred Lease Credits | 119,229 |
| | 140,799 |
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Long-Term Portion of Borrowings, Net | 291,836 |
| | 120,000 |
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Leasehold Financing Obligations | 55,467 |
| | 60,726 |
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Other Liabilities | 202,285 |
| | 231,757 |
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TOTAL LONG-TERM LIABILITIES | 668,817 |
| | 553,282 |
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STOCKHOLDERS’ EQUITY: | | | |
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of November 1, 2014 and February 1, 2014 | 1,033 |
| | 1,033 |
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Paid-In Capital | 432,370 |
| | 433,620 |
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Retained Earnings | 2,520,209 |
| | 2,556,270 |
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Accumulated Other Comprehensive Income (Loss), net of tax | (45,117 | ) | | (20,917 | ) |
Treasury Stock, at Average Cost: 33,964 and 26,898 shares at November 1, 2014 and February 1, 2014, respectively | (1,513,036 | ) | | (1,240,513 | ) |
TOTAL STOCKHOLDERS’ EQUITY | 1,395,459 |
| | 1,729,493 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,575,569 |
| | $ | 2,850,997 |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
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| Thirty-Nine Weeks Ended |
| November 1, 2014 | | November 2, 2013 |
OPERATING ACTIVITIES: | | | |
Net Income (Loss) | $ | 7,433 |
| | $ | (11,477 | ) |
Impact of Other Operating Activities on Cash Flows: | | | |
Depreciation and Amortization | 174,966 |
| | 180,609 |
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Non-Cash Charge for Asset Impairment | 16,706 |
| | 81,511 |
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Loss on Disposal / Write-off of Assets | 3,580 |
| | 10,976 |
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Lessor Construction Allowances | 11,669 |
| | 16,693 |
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Amortization of Deferred Lease Credits | (29,525 | ) | | (31,326 | ) |
Deferred Taxes | (1,408 | ) | | (60,805 | ) |
Share-Based Compensation | 17,396 |
| | 40,210 |
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Changes in Assets and Liabilities: | | | |
Inventories | (90,485 | ) | | (341,831 | ) |
Accounts Payable and Accrued Expenses | 3,049 |
| | (49,175 | ) |
Income Taxes | (55,239 | ) | | (54,239 | ) |
Other Assets | (15,739 | ) | | (1,053 | ) |
Other Liabilities | (12,939 | ) | | (10,254 | ) |
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES | 29,464 |
| | (230,161 | ) |
INVESTING ACTIVITIES: | | | |
Capital Expenditures | (132,183 | ) | | (124,033 | ) |
Other Investing | — |
| | (6,316 | ) |
NET CASH USED FOR INVESTING ACTIVITIES | (132,183 | ) | | (130,349 | ) |
FINANCING ACTIVITIES: | | | |
Excess Tax Benefit from Share-Based Compensation | 304 |
| | 2,432 |
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Proceeds from Share-Based Compensation | 254 |
| | 213 |
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Purchase of Treasury Stock | (285,038 | ) | | (115,806 | ) |
Repayments of Borrowings | (195,000 | ) | | (11,250 | ) |
Proceeds from Borrowings | 357,000 |
| | 150,000 |
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Debt Issuance Costs | (861 | ) | | — |
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Change in Outstanding Checks and Other | 882 |
| | (1,024 | ) |
Dividends Paid | (43,494 | ) | | (46,643 | ) |
NET CASH USED FOR FINANCING ACTIVITIES | (165,953 | ) | | (22,078 | ) |
EFFECT OF EXCHANGE RATES ON CASH | (10,880 | ) | | (3,392 | ) |
NET DECREASE IN CASH AND EQUIVALENTS: | (279,552 | ) | | (385,980 | ) |
Cash and Equivalents, Beginning of Period | 600,116 |
| | 643,505 |
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CASH AND EQUIVALENTS, END OF PERIOD | $ | 320,564 |
| | $ | 257,525 |
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SIGNIFICANT NON-CASH INVESTING ACTIVITIES: | | | |
Change in Accrual for Construction in Progress | $ | 1,054 |
| | $ | (2,191 | ) |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. (“A&F”), through its wholly-owned subsidiaries (collectively, A&F and its wholly-owned subsidiaries are referred to as the “Company”), is a specialty retailer of high-quality, casual apparel for men, women and kids with an active, youthful lifestyle.
The accompanying Consolidated Financial Statements include the historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2014” represent the 52-week fiscal year that will end on January 31, 2015, and to “Fiscal 2013” represent the 52-week fiscal year that ended February 1, 2014.
The Consolidated Financial Statements as of November 1, 2014 and for the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these 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 2013 filed with the SEC on March 31, 2014. The February 1, 2014 consolidated balance sheet data 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 (“U.S. GAAP”).
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position and 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 2014.
The thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013 include the correction of certain errors relating to prior years. Amounts recorded out-of-period included a reduction to pre-tax income of $0.6 million and $3.3 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively, and an unrelated tax charge of $0.4 million for the thirteen and thirty-nine weeks ended November 1, 2014. The effect of these corrections decreased net income by $0.8 million and $2.4 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively. Amounts recorded out-of-period also included a reduction to pre-tax loss of $2.1 million, and an unrelated tax benefit of $1.9 million, for the thirteen weeks ended November 3, 2013, and a reduction to pre-tax loss of $6.3 million, and an unrelated tax benefit of $0.7 million, for the thirty-nine weeks ended November 2, 2013. The effect of these corrections reduced net loss by $3.0 million and $4.7 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. The Company does not believe these corrections were material to any current or prior interim or annual periods that were affected.
To conform with current year presentation, charges related to the restructuring of the Gilly Hicks brand of $40.1 million and asset impairments of $43.6 million for thirteen and thirty-nine weeks ended November 2, 2013 have been reclassified from stores and distribution expense to restructuring charges in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss). Additionally, $4.6 million of charges related to the restructuring of the Gilly Hicks brand for the thirteen and thirty-nine weeks ended November 2, 2013 have been reclassified from marketing, general and administrative expenses to restructuring charges in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss).
The Consolidated Financial Statements as of November 1, 2014 and for the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013 included herein have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of such firm follows the Notes to Consolidated Financial Statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the consolidated financial statements because their report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
2. SEGMENT REPORTING
The Company determines its segments on the same basis that it uses to allocate resources and assess performance. All of the Company’s segments sell a similar group of products—casual sportswear apparel, personal care products and accessories for men, women and kids and bras, underwear and sleepwear for girls. The Company has three reportable segments: U.S. Stores, International Stores, and Direct-to-Consumer. Corporate functions, interest income and expense, and other income and expense are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included in Other.
The U.S. Stores reportable segment includes the results of store operations in the United States and Puerto Rico. The International Stores reportable segment includes the results of store operations in Canada, Europe, Asia, Australia and the Middle East. The Direct-to-Consumer reportable segment includes the results of operations directly associated with on-line operations, both U.S. and international.
Operating income is the primary measure of profit the Company uses to make decisions regarding the allocation of resources to its segments. For the U.S. Stores and the International Stores reportable segments, operating income is defined as aggregate income directly attributable to individual stores on a four-wall basis plus sell-off of excess merchandise to authorized third-party resellers. Four-wall operating income includes: net sales, cost of merchandise, selling payroll and related costs, rent, utilities, depreciation, repairs and maintenance, supplies and packaging and other store sales-related expenses including credit card and bank fees and indirect taxes. Operating income also reflects pre-opening charges related to stores not yet in operation. For the Direct-to-Consumer reportable segment, operating income is defined as aggregate income attributable to the direct-to-consumer business: net sales, shipping and handling revenue, call center costs, fulfillment and shipping expense, charge card fees and direct-to-consumer operations management and support expenses. The U.S. Stores, the International Stores and the Direct-to-Consumer segments exclude marketing, general and administrative expense; store management and support functions such as regional and district management and other functions not dedicated to an individual store, as well as distribution center costs. All costs excluded from the three reportable segments are included in Other.
The following table provides the Company’s segment information for the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013.
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(in thousands) | U.S. Stores |
| International Stores |
| Direct-to- Consumer Operations |
| Segment Total |
| Other(1) |
| Total |
Thirteen Weeks Ended November 1, 2014 |
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Net Sales | $ | 475,717 |
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| $ | 248,221 |
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| $ | 187,515 |
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| $ | 911,453 |
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| $ | — |
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| $ | 911,453 |
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Operating Income (Loss) (2) | 71,764 |
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| 44,927 |
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| 59,439 |
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| 176,130 |
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| (142,764 | ) |
| 33,366 |
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Thirteen Weeks Ended November 2, 2013 |
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Net Sales | $ | 561,788 |
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| $ | 296,937 |
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| $ | 174,568 |
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| $ | 1,033,293 |
|
| $ | — |
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| $ | 1,033,293 |
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Operating Income (Loss)(3) | 29,512 |
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| 40,641 |
|
| 65,602 |
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| 135,755 |
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| (171,125 | ) |
| (35,370 | ) |
Thirty-Nine Weeks Ended November 1, 2014 | | | | | | | | | | | |
Net Sales | $ | 1,324,066 |
| | $ | 768,985 |
| | $ | 531,435 |
| | $ | 2,624,486 |
| | $ | — |
| | $ | 2,624,486 |
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Operating Income (Loss) (4) | 153,745 |
| | 152,043 |
| | 170,533 |
| | 476,321 |
| | (454,968 | ) | | 21,353 |
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Thirty-Nine Weeks Ended November 2, 2013 | | | | | | | | | | | |
Net Sales | $ | 1,515,079 |
| | $ | 841,096 |
| | $ | 461,585 |
| | $ | 2,817,760 |
| | $ | — |
| | $ | 2,817,760 |
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Operating Income (Loss)(5) | 128,205 |
| | 160,821 |
| | 176,793 |
| | 465,819 |
| | (495,946 | ) | | (30,127 | ) |
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(1) | Includes corporate functions not dedicated to an individual store or direct-to-consumer operations such as Design, Merchandising, Sourcing, Planning, Allocation, Store Management and Support, Marketing, Distribution Center Operations, Information Technology, Real Estate, Finance, Legal, Human Resources and other corporate overhead. |
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(2) | Includes charges related to store-related asset impairments, store closures, the restructuring of the Gilly Hicks brand, the Company's profit improvement initiative and legal, advisory and other charges related to certain corporate governance matters, of which $6.0 million is included in U.S. Stores, $13.0 million is included in International Stores, $0.1 million is included in Direct-to-Consumer Operations and $1.2 million is included in Other for the thirteen week period ended November 1, 2014. |
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(3) | Includes charges related to store-related asset impairments, the restructuring of the Gilly Hicks brand and the Company's profit improvement initiative of which $51.5 million is included in U.S. Stores, $32.2 million is included in International Stores and $12.2 million is included in Other for the thirteen week period ended November 2, 2013. |
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(4) | Includes charges related to store-related asset impairments, store closures, the restructuring of the Gilly Hicks brand, the Company's profit improvement initiative and legal, advisory and other charges related to certain corporate governance matters of which $5.5 million is included in U.S. stores, $20.7 million is included in International Stores, $0.1 million is included in Direct-to-Consumer Operations and $11.9 million is included in Other for the thirty-nine week period ended November 1, 2014. |
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(5) | Includes charges related to store-related asset impairments, the restructuring of the Gilly Hicks brand and the Company's profit improvement initiative of which $51.5 million is included in U.S. stores, $32.2 million is included in International Stores and $14.7 million is included in Other for the thirty-nine week period ended November 2, 2013. |
Net Sales:
Net sales includes net merchandise sales through stores and direct-to-consumer operations, including shipping and handling revenue. Direct-to-consumer net sales are reported by geographic area based on the location of the customer.
Brand Information
Net sales by brand were as follows:
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| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
(in thousands) | November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
Abercrombie & Fitch | $ | 358,421 |
| | $ | 387,553 |
| | $ | 1,025,849 |
| | $ | 1,068,978 |
|
abercrombie | 81,281 |
| | 90,080 |
| | 220,637 |
| | 239,258 |
|
Hollister | 468,118 |
| | 534,011 |
| | 1,354,330 |
| | 1,443,706 |
|
Gilly Hicks | 3,633 |
| | 21,649 |
| | 23,670 |
| | 65,818 |
|
Total | $ | 911,453 |
| | $ | 1,033,293 |
| | $ | 2,624,486 |
| | $ | 2,817,760 |
|
Geographic Information
Net sales by geographic area were as follows:
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| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
(in thousands) | November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
United States | $ | 594,713 |
| | $ | 674,871 |
| | $ | 1,645,354 |
| | $ | 1,807,027 |
|
Europe | 222,631 |
| | 272,212 |
| | 706,641 |
| | 776,630 |
|
Other | 94,109 |
| | 86,210 |
| | 272,491 |
| | 234,103 |
|
Total | $ | 911,453 |
| | $ | 1,033,293 |
| | $ | 2,624,486 |
| | $ | 2,817,760 |
|
3. SHARE-BASED COMPENSATION
The Company issues stock appreciation rights and restricted stock units, including those with service, performance and market vesting conditions. The Company recognized share-based compensation expense of $6.0 million and $17.4 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively, and $13.3 million and $40.2 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. The Company also recognized tax benefits related to share-based compensation expense of $2.3 million and $6.6 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively, and $5.0 million and $15.3 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively.
Stock Options
The Company did not grant any stock options during the thirty-nine weeks ended November 1, 2014 or November 2, 2013. Below is a summary of stock option activity for the thirty-nine weeks ended November 1, 2014:
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| | | | | | | | | | | | |
| Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life |
Outstanding at February 1, 2014 | 532,400 |
| | $ | 65.37 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | (7,500 | ) | | 33.74 |
| | | | |
Forfeited or expired | (25,175 | ) | | 68.76 |
| | | | |
Outstanding at November 1, 2014 | 499,725 |
| | $ | 65.67 |
| | $ | 803,620 |
| | 2.0 |
Stock options exercisable at November 1, 2014 | 499,725 |
| | $ | 65.67 |
| | $ | 803,620 |
| | 2.0 |
The total intrinsic value of stock options which were exercised during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was insignificant.
No stock options vested during the thirty-nine weeks ended November 1, 2014 or November 2, 2013.
As of November 1, 2014, all compensation cost related to outstanding stock options had been fully recognized.
Stock Appreciation Rights
The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended November 1, 2014:
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| | | | | | | | | | | | |
| Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life |
Outstanding at February 1, 2014 | 8,982,959 |
| | $ | 40.76 |
| | | | |
Granted | 395,300 |
| | 38.62 |
| | | | |
Exercised | (92,475 | ) | | 26.92 |
| | | | |
Forfeited or expired | (198,275 | ) | | 47.92 |
| | | | |
Outstanding at November 1, 2014 | 9,087,509 |
| | $ | 40.65 |
| | $ | 21,081,713 |
| | 2.8 |
Stock appreciation rights exercisable at November 1, 2014 | 8,352,634 |
| | $ | 40.38 |
| | $ | 21,068,363 |
| | 2.3 |
Stock appreciation rights expected to become exercisable in the future as of November 1, 2014 | 666,668 |
| | $ | 43.96 |
| | $ | 10,598 |
| | 8.6 |
The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model. The weighted-average assumptions used in the Black-Scholes option-pricing model for stock appreciation rights granted during the thirty-nine weeks ended ended November 1, 2014 and November 2, 2013, were as follows:
|
| | | | | | | | | | | | | | | |
| Executive Officers other than the CEO | | All Other Associates |
| November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
Grant date market price | $ | 37.85 |
| | $ | 46.57 |
| | $ | 38.58 |
| | $ | 45.46 |
|
Exercise price | $ | 38.44 |
| | $ | 46.57 |
| | $ | 38.79 |
| | $ | 45.46 |
|
Fair value | $ | 14.04 |
| | $ | 20.34 |
| | $ | 13.56 |
| | $ | 16.82 |
|
Assumptions: | | | | | | | |
Price volatility | 50 | % | | 61 | % | | 50 | % | | 54 | % |
Expected term (years) | 4.9 |
| | 4.7 |
| | 4.1 |
| | 4.1 |
|
Risk-free interest rate | 1.6 | % | | 0.7 | % | | 1.4 | % | | 0.6 | % |
Dividend yield | 2.0 | % | | 1.8 | % | | 1.9 | % | | 1.8 | % |
Compensation expense for stock appreciation rights is recognized on a straight-line basis over the awards’ requisite service period, net of forfeitures. As of November 1, 2014, there was $8.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 16 months.
The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was $1.5 million and $8.5 million, respectively. The grant date fair value of stock appreciation rights that vested during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was $7.3 million and $25.0 million, respectively.
Restricted Stock Units
The following table summarizes activity for restricted stock units with performance and/or service vesting conditions for the thirty-nine weeks ended November 1, 2014:
|
| | | | | | |
| Number of Underlying Shares | | Weighted-Average Grant Date Fair Value |
Unvested at February 1, 2014 | 1,426,579 |
| | $ | 46.00 |
|
Granted (1) | 632,925 |
| | 34.75 |
|
Vested | (352,359 | ) | | 48.32 |
|
Forfeited | (211,931 | ) | | 44.04 |
|
Unvested at November 1, 2014 | 1,495,214 |
| | $ | 40.35 |
|
| |
(1) | Includes 158,922 shares, which represents "target performance," related to grants of restricted stock units with performance vesting conditions at their targeted vesting amount. The number of shares that ultimately vest can vary from 0% - 200% of target depending on the level of achievement of performance criteria. |
The fair value of restricted stock units with performance and/or service vesting conditions is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining the fair value, the Company does not take into account any performance-based vesting requirements. The performance-based vesting requirements are taken into account in determining the number of awards expected to vest and the related expense.
Restricted stock units with only service vesting conditions and restricted stock units with fixed performance vesting thresholds without graded vesting features are expensed on a straight-line basis over the total requisite service period, net of forfeitures. Restricted stock units with annually determined vesting thresholds are expensed on a graded vesting basis, net of forfeitures. As of November 1, 2014, there was $30.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units with performance and/or service conditions. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 15 months.
The total fair value of restricted stock units with service and/or performance vesting conditions granted during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was $22.0 million and $33.3 million, respectively. The total grant date fair value of restricted stock units with service and/or performance vesting conditions which vested during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was $17.0 million and $14.6 million, respectively.
The following table summarizes activity for restricted stock units with market vesting conditions for the thirty-nine weeks ended November 1, 2014:
|
| | | | | | |
| Number of Underlying Shares | | Weighted-Average Grant Date Fair Value |
Unvested at February 1, 2014 | — |
| | $ | — |
|
Granted (1) | 79,458 |
| | 45.02 |
|
Vested | — |
| | — |
|
Forfeited | (1,666 | ) | | 46.86 |
|
Unvested at November 1, 2014 | 77,792 |
| | $ | 44.98 |
|
| |
(1) | Reflects the target vesting amount granted. However, the number of shares that ultimately vest can vary from 0% - 200% of target depending on market performance. |
The fair value of restricted stock units with market vesting conditions is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company's total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. The weighted-average assumptions used in the Monte Carlo simulation during the thirty-nine weeks ended November 1, 2014, were as follows:
|
| | | | | | | |
| Chief Executive Officer | | Other Executive Officers |
Grant date market price | $ | 38.50 |
| | $ | 38.50 |
|
Fair value | $ | 43.96 |
| | $ | 46.86 |
|
Assumptions: | | | |
Price volatility | 50 | % | | 50 | % |
Expected term (years) | 2.8 |
| | 2.8 |
|
Risk-free interest rate | 0.8 | % | | 0.8 | % |
Dividend yield | 2.1 | % | | 2.1 | % |
Average volatility of peer companies | 37.3 | % | | 37.3 | % |
Average correlation coefficient of peer companies | 0.3786 |
| | 0.3786 |
|
Restricted stock units with market vesting conditions without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures. As of November 1, 2014, there was $2.6 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units with market vesting conditions. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 11 months.
The total fair value of restricted stock units with market vesting conditions granted during the thirty-nine weeks ended November 1, 2014 was $3.6 million.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per basic and diluted share is computed based on the weighted-average number of outstanding shares of Common Stock.
Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):
|
| | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
(in thousands) | November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
Shares of Common Stock issued | 103,300 |
| | 103,300 |
| | 103,300 |
| | 103,300 |
|
Treasury shares | (32,486 | ) | | (26,844 | ) | | (30,723 | ) | | (25,913 | ) |
Weighted-Average — Basic Shares | 70,814 |
| | 76,456 |
| | 72,577 |
| | 77,387 |
|
Dilutive effect of share-based compensation awards | 1,314 |
| | — |
| | 1,293 |
| | — |
|
Weighted-Average — Diluted Shares | 72,128 |
| | 76,456 |
| | 73,870 |
| | 77,387 |
|
Anti-Dilutive Shares (1) | 5,566 |
| | 11,023 |
| | 5,621 |
| | 11,127 |
|
| |
(1) | Reflects the number of shares subject to outstanding share-based compensation awards but excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. |
On February 27, 2014, A&F entered into an Accelerated Share Repurchase Agreement ("ASR Agreement") with a financial institution in order to repurchase shares of A&F's Common Stock during the term of the ASR Agreement which extended through April 2014. Pursuant to the ASR Agreement, A&F paid $150 million and, in exchange, approximately 3.1 million shares were initially delivered to A&F and accounted for as a reduction to stockholders' equity. The transaction contemplated by the ASR Agreement was completed during the first quarter of Fiscal 2014, at which time A&F received approximately 0.7 million additional shares. The total number of shares delivered upon settlement of the ASR Agreement was based upon the volume weighted average price of the A&F’s Common Stock over the term of the ASR Agreement, less an agreed discount.
During the second quarter of Fiscal 2014, A&F repurchased approximately 1.5 million additional shares of A&F’s Common Stock in the open market at a market value of approximately $60 million. During the third quarter of Fiscal 2014, A&F repurchased approximately 2.0 million additional shares of A&F's Common Stock in the open market at a market value of approximately $75 million.
5. CASH AND EQUIVALENTS
Cash and equivalents consisted of:
|
| | | | | | | |
(in thousands) | November 1, 2014 | | February 1, 2014 |
Cash and equivalents: | | | |
Cash | $ | 300,768 |
| | $ | 452,116 |
|
Cash equivalents | 19,796 |
| | 148,000 |
|
Total cash and equivalents | $ | 320,564 |
| | $ | 600,116 |
|
Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, all of which have original maturities of less than three months. Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $16.1 million on November 1, 2014 and $26.7 million on February 1, 2014. Restricted cash includes various cash deposits with international banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements.
6. RABBI TRUST ASSETS
Investments of Rabbi Trust assets consisted of the following:
|
| | | | | | | |
(in thousands) | November 1, 2014 | | February 1, 2014 |
Rabbi Trust assets: | | | |
Trust-owned life insurance policies (at cash surrender value) | $ | 92,643 |
| | $ | 90,198 |
|
Money market funds | 24 |
| | 24 |
|
Total Rabbi Trust assets | $ | 92,667 |
| | $ | 90,222 |
|
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective 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 Chief Executive Officer 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 trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.8 million for each of the thirteen weeks ended November 1, 2014 and November 2, 2013, and $2.4 million and $2.5 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively, recorded in Interest Expense, Net on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted in their use as noted above.
7. 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. |
| |
• | 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, measured at fair value, within it were as follows:
|
| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value as of November 1, 2014 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
ASSETS: | | | | | | | |
Money market funds | $ | 19,820 |
| | $ | — |
| | $ | — |
| | $ | 19,820 |
|
Derivative financial instruments | — |
| | 8,095 |
| | — |
| | 8,095 |
|
Total assets measured at fair value | $ | 19,820 |
| | $ | 8,095 |
| | $ | — |
| | $ | 27,915 |
|
LIABILITIES: | | | | | | | |
Derivative financial instruments | — |
| | 133 |
| | — |
| | 133 |
|
Total liabilities measured at fair value | $ | — |
| | $ | 133 |
| | $ | — |
| | $ | 133 |
|
|
| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value as of February 1, 2014 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
ASSETS: | | | | | | | |
Money market funds | $ | 148,024 |
| | $ | — |
| | $ | — |
| | $ | 148,024 |
|
Derivative financial instruments | — |
| | 969 |
| | — |
| | 969 |
|
Total assets measured at fair value | $ | 148,024 |
| | $ | 969 |
| | $ | — |
| | $ | 148,993 |
|
LIABILITIES: | | | | | | | |
Derivative financial instruments | — |
| | 2,555 |
| | — |
| | 2,555 |
|
Total liabilities measured at fair value | $ | — |
| | $ | 2,555 |
| | $ | — |
| | $ | 2,555 |
|
The level 2 assets and liabilities consist of derivative financial instruments, primarily forward foreign currency exchange contracts. The fair value of forward foreign currency exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Disclosures of Fair Value of Other Assets and Liabilities:
The Company’s borrowings under the 2014 Credit Facilities and the 2011 and 2012 Credit Agreements are carried at historical cost in the accompanying Consolidated Balance Sheets. For disclosure purposes, the Company estimated the fair value of borrowings outstanding using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt. The inputs used to value the borrowings outstanding are considered to be Level 2 instruments.
The carrying amount of gross borrowings outstanding under the Term Loan Facility was $300.0 million and the fair value of such borrowings was $296.6 million as of November 1, 2014. The carrying amount of borrowings outstanding under the 2012 Term Loan Agreement approximated fair value and was $135.0 million as of February 1, 2014. No borrowings were outstanding under the ABL Facility and the 2011 Credit Agreement as of November 1, 2014 and February 1, 2014, respectively. See Note 12, "BORROWINGS," for further discussion of the Credit Facilities.
8. INVENTORIES
Inventories are principally valued at the lower of cost or market on a weighted-average cost basis. The Company writes down inventory through a lower of cost or market adjustment, the impact of which is reflected in Cost of Goods Sold on the Consolidated Statements of Operations and Comprehensive Income (Loss). This adjustment is based on management's judgment regarding future demand and market conditions and analysis of historical experience. The lower of cost or market reserve for inventory was $10.5 million and $22.1 million at November 1, 2014 and February 1, 2014, respectively.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each period that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. The shrink reserve was $5.1 million and $13.6 million at November 1, 2014 and February 1, 2014, respectively.
The inventory balance, net of reserves, was $617.5 million and $530.2 million at November 1, 2014 and February 1, 2014, respectively. These balances included inventory in transit balances of $68.3 million and $76.4 million at November 1, 2014 and February 1, 2014, respectively. Inventory in transit is merchandise considered to be owned by the Company that has not yet been received at a Company distribution center.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of (in thousands): |
| | | | | | | |
| November 1, 2014 | | February 1, 2014 |
Property and equipment, at cost | $ | 2,904,092 |
| | $ | 2,885,712 |
|
Accumulated depreciation and amortization | (1,853,297 | ) | | (1,754,371 | ) |
Property and equipment, net | $ | 1,050,795 |
| | $ | 1,131,341 |
|
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows.
Fair value of the Company's store-related assets is determined at the individual store level, primarily using a discounted cash flow model that utilizes level 3 inputs. The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales, gross margin performance, and operating expenses. In instances where the discounted cash flow analysis indicated a negative value at the store level, the market exit price based on historical experience, and other comparable market data where applicable, was used to determine the fair value by asset type.
In the third quarter of Fiscal 2014, the Company incurred non-cash asset impairment charges of $16.7 million, as it was determined that the carrying value of certain store-related assets would not be recoverable and exceeded fair value. The asset impairment charges primarily related to the Company's Abercrombie & Fitch flagship store location in the Ginza district of Tokyo, Japan, as well as three other Abercrombie & Fitch stores, five Hollister stores and nine abercrombie kids stores.
In certain lease arrangements, the Company is involved in the construction of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in Property and Equipment, Net and the related financing obligation in Leasehold Financing Obligations on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company had $44.6 million and $52.3 million of construction project assets in Property and Equipment, Net at November 1, 2014 and February 1, 2014, respectively.
10. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective terms of the related leases, consisted of the following (in thousands):
|
| | | | | | | |
| November 1, 2014 | | February 1, 2014 |
Deferred lease credits | $ | 522,559 |
| | $ | 543,040 |
|
Amortized deferred lease credits | (374,358 | ) | | (366,076 | ) |
Total deferred lease credits, net | $ | 148,201 |
| | $ | 176,964 |
|
11. INCOME TAXES
The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items occurring during the quarter. The effective tax rates for the thirteen weeks ended November 1, 2014 and November 2, 2013 were 34.4% and 57.7%, respectively. The effective tax rates for the thirty-nine weeks ended November 1, 2014 and November 2, 2013 were 36.8% and 67.4%, respectively. The Fiscal 2013 year-to-date effective tax rate reflects a benefit resulting from the settlement of certain state tax audits and a $4.9 million benefit related to other discrete tax matters in the third quarter.
Income taxes paid directly to taxing authorities, net of refunds received, for the thirteen weeks ended November 1, 2014 and November 2, 2013 were approximately $7.1 million and $1.0 million, respectively. Income taxes paid directly to taxing authorities, net of refunds received, for the thirty-nine weeks ended November 1, 2014 and November 2, 2013 were approximately $68.4 million and $109.2 million, respectively. These amounts include payments and refunds for income and withholding taxes incurred related to the current year and prior years.
12. BORROWINGS
In 2011, the Company entered into an unsecured credit agreement (the “2011 Credit Agreement”) which, as amended most recently on November 4, 2013, provided for a $350 million revolving credit facility. In 2012, the Company entered into a term loan agreement (the “2012 Term Loan Agreement” and, together with the 2011 Credit Agreement, the “2011 and 2012 Credit Agreements”) which, as amended most recently on November 4, 2013, provided for a $150 million term loan facility. No borrowings were outstanding under the 2011 Credit Agreement and $135.0 million in borrowings were outstanding under the 2012 Term Loan Agreement as of February 1, 2014.
On August 7, 2014, in connection with the Company entering into new credit agreements, all amounts outstanding under the 2011 and 2012 Credit Agreements were repaid in full, and the 2011 and 2012 Credit Agreements were terminated. The new credit agreements are discussed below.
Asset-Based Revolving Credit Facility and Term Loan Facility
On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement. The agreement provides for a senior secured revolving credit facility of up to $400 million (the “ABL Facility”), subject to a borrowing base. The ABL Facility is available for working capital, capital expenditures and other general corporate purposes.
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan agreement on August 7, 2014, which provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the ABL Facility, the “2014 Credit Facilities”). A portion of the proceeds of the Term Loan Facility were used to repay the outstanding balance of approximately $127.5 million under the Company’s 2012 Term Loan Agreement, to repay outstanding borrowings of approximately $60 million under the Company’s 2011 Credit Agreement and to pay fees and expenses associated with the transaction.
Debt Discount and Deferred Financing Fees
The Term Loan Facility was issued at a 1.0% discount. In addition, the Company recorded deferred financing fees associated with the issuance of the 2014 Credit Facilities of $5.8 million in aggregate, of which $3.2 million was paid to lenders. The Company
is amortizing the debt discount and deferred financing fees over the respective contractual terms of the 2014 Credit Facilities. The Company's Term Loan debt is presented in the Consolidated Balance Sheets, net of the unamortized discount and fees paid to lenders. Net borrowings as of November 1, 2014 were as follows:
|
| | | |
(in thousands) | November 1, 2014 |
Borrowings, gross at carrying amount | $ | 300,000 |
|
Unamortized discount | (2,893 | ) |
Unamortized fees paid to lenders | (3,169 | ) |
Borrowings, net | $ | 293,938 |
|
No borrowings were outstanding under the ABL Facility as of November 1, 2014.
Maturity, Amortization and Prepayments
The ABL Facility will mature on August 7, 2019. The Term Loan Facility will mature on August 7, 2021 and will amortize at a rate equal to 0.25% of the original principal amount per quarter, beginning with the fourth quarter of Fiscal 2014. The Term Loan Facility is subject to (a) beginning in 2016, an annual mandatory prepayment in an amount equal to 0% to 50% of the Company’s excess cash flows in the preceding fiscal year, depending on the Company’s leverage ratio and (b) certain other mandatory prepayments upon receipt by the Company of proceeds of certain debt issuances, asset sales and casualty events, subject to certain exceptions specified therein, including reinvestment rights.
Guarantees and Security
All obligations under the 2014 Credit Facilities are unconditionally guaranteed by A&F and certain of its subsidiaries. The ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The Term Loan Facility is secured by a second-priority security interest in the same collateral, with certain exceptions. The Term Loan Facility is also secured by a first-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. The ABL Facility is secured by a second-priority security interest in the same collateral.
Interest and Fees
Amounts borrowed under the ABL Facility bear interest, at the Company’s option, at either an adjusted LIBOR rate plus a margin of 1.25% to 1.75% per annum, or an alternate base rate plus a margin of 0.25% to 0.75% per annum. The initial applicable margins with respect to LIBOR loans and base rate loans, including swing line loans, under the ABL Facility are 1.50% and 0.50% per annum, respectively, and are subject to adjustment each fiscal quarter beginning January 31, 2015, based on average historical excess availability during the preceding quarter. The Company is also required to pay a fee of 0.25% per annum on undrawn commitments under the ABL Facility. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility.
At the Company’s option, borrowings under the Term Loan Facility will bear interest at either (a) an adjusted LIBOR rate no lower than 1.00% plus a margin of 3.75% per annum or (b) an alternate base rate plus a margin of 2.75% per annum. Customary agency fees are also payable in respect of the Term Loan Facility.
The interest rate on borrowings under the Term Loan Facility was 4.75% as of November 1, 2014.
Representations, Warranties and Covenants
The 2014 Credit Facilities contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of A&F and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to the greater of 10% of the loan cap or $30 million must be maintained under the ABL Facility. The 2014 Credit Facilities do not otherwise contain financial maintenance covenants.
The Company was in compliance with the covenants under the 2014 Credit Facilities as of November 1, 2014.
13. LEASEHOLD FINANCING OBLIGATIONS
As of November 1, 2014 and February 1, 2014, the Company had $55.5 million and $60.7 million, respectively, of long-term liabilities related to leasehold financing obligations. In certain lease arrangements, the Company is deemed to be involved in the construction of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in Property and Equipment, Net and a liability of a corresponding amount related to the financing obligation in Leasehold Financing Obligations on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company does not report rent expense for the portion of the rent payment determined to be related to the assets which are determined to be owned for accounting purposes. Rather, that portion of the rental payments under the lease is recognized as a reduction of the financing obligation and interest expense.
Total interest expense related to leasehold financing obligations was $1.5 million and $1.7 million for the thirteen weeks ended November 1, 2014 and November 2, 2013, respectively. Total interest expense related to leasehold financing obligations was $4.8 million and $5.0 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively.
14. DERIVATIVES
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivatives, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
In order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative is not highly effective.
For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded as a component of Other Comprehensive Income (Loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative’s time value is recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative contract related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated inter-company inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated inter-company receivables. Fluctuations in exchange rates will either increase or decrease the Company’s inter-company equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. These forward contracts typically have a maximum term of 12 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 Income (Loss). Substantially all of the unrealized gains or losses related to designated cash flow hedges as of November 1, 2014 will be recognized in cost of goods sold over the next twelve months.
The Company presents its derivative assets and derivative liabilities at their gross fair values on the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions.
As of November 1, 2014, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated inter-company inventory sales, the resulting settlement of the foreign-currency-denominated inter-company accounts receivable, or both:
|
| | | |
| Notional Amount(1) |
Euro | $ | 76,926 |
|
British Pound | $ | 34,003 |
|
Canadian Dollar | $ | 14,377 |
|
| |
(1) | Amounts are reported in thousands and in U.S. Dollar equivalent as of November 1, 2014. |
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 exchange rates result in transaction gains/(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 instrument and the hedged item.
As of November 1, 2014, the Company had outstanding the following foreign currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:
|
| | | |
| Notional Amount(1) |
Swiss Franc | $ | 7,925 |
|
British Pound | $ | 6,400 |
|
| |
(1) | Amounts are reported in thousands and in U.S. Dollar equivalent as of November 1, 2014. |
The location and amounts of derivative fair values on the Consolidated Balance Sheets as of November 1, 2014 and February 1, 2014 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
(in thousands) | Balance Sheet Location | | November 1, 2014 | | February 1, 2014 | | Balance Sheet Location | | November 1, 2014 | | February 1, 2014 |
Derivatives Designated as Hedging Instruments: | | | | | | | | | | |
Foreign Currency Exchange Forward Contracts | Other Current Assets | | $ | 7,881 |
| | $ | 691 |
| | Other Liabilities | | $ | — |
| | $ | 2,503 |
|
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | |
Foreign Currency Exchange Forward Contracts | Other Current Assets | | $ | 214 |
| | $ | 278 |
| | Other Liabilities | | $ | 133 |
| | $ | 52 |
|
Total | Other Current Assets | | $ | 8,095 |
| | $ | 969 |
| | Other Liabilities | | $ | 133 |
| | $ | 2,555 |
|
Refer to Note 7, “FAIR VALUE,” for further discussion of the determination of the fair value of derivatives.
The location and amounts of derivative gains and losses for the thirteen and thirty-nine week periods ended November 1, 2014 and November 2, 2013 on the Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows:
|
| | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| | | November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
(in thousands) | Location | | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) |
Derivatives not designated as Hedging Instruments: | | | | | | | | |
Foreign Exchange Forward Contracts | Other Operating Income, Net | | $ | 793 |
| | $ | (805 | ) | | $ | 564 |
| | $ | 456 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (Effective Portion) (a) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (b) | | Location of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing) (c) |
| Thirteen Weeks Ended |
(in thousands) | November 1, 2014 | | November 2, 2013 | | | | November 1, 2014 | | November 2, 2013 | | | | November 1, 2014 | | November 2, 2013 |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | |
Foreign Currency Exchange Forward Contracts | $ | 9,265 |
| | $ | (3,748 | ) | | Cost of Goods Sold | | $ | (856 | ) | | $ | 1,359 |
| | Other Operating Income, Net | | $ | 78 |
| | $ | (9 | ) |
| | | | | | | | | | | | | | | |
| Thirty-Nine Weeks Ended |
(in thousands) | November 1, 2014 | | November 2, 2013 | | | | November 1, 2014 | | November 2, 2013 | | | | November 1, 2014 | | November 2, 2013 |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | |
Foreign Currency Exchange Forward Contracts | $ | 8,128 |
| | $ | 7,515 |
| | Cost of Goods Sold | | $ | (4,212 | ) | | $ | 1,581 |
| | Other Operating Income, Net | | $ | 248 |
| | $ | 167 |
|
| |
(a) | The amount represents the change in fair value of derivative contracts due to changes in spot rates. |
| |
(b) | The amount represents the reclassification from OCI into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers. |
| |
(c) | The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings. |
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The activity in accumulated other comprehensive income (loss), for the thirteen and thirty-nine weeks ended November 1, 2014 was as follows:
|
| | | | | | | | | | | |
| Thirteen Weeks Ended November 1, 2014 |
(in thousands) | Unrealized Gain (Loss) on Derivative Financial Instruments | | Foreign Currency Translation Adjustment | | Total |
Beginning balance at August 2, 2014 | $ | 108 |
| | $ | (15,177 | ) | | $ | (15,069 | ) |
Other comprehensive income (loss) before reclassifications | 9,265 |
| | (39,119 | ) | | (29,854 | ) |
Reclassified from accumulated other comprehensive income (loss) (1) | 856 |
| | — |
| | 856 |
|
Tax effect on derivative financial instruments | (1,050 | ) | | — |
| | (1,050 | ) |
Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes | 9,071 |
| | (39,119 | ) | | (30,048 | ) |
Ending balance at November 1, 2014 | $ | 9,179 |
| | $ | (54,296 | ) | | $ | (45,117 | ) |
|
| | | | | | | | | | | |
| Thirty-Nine Weeks Ended November 1, 2014 |
(in thousands) | Unrealized Gain (Loss) on Derivative Financial Instruments | | Foreign Currency Translation Adjustment | | Total |
Beginning balance at February 1, 2014 | $ | (2,166 | ) | | $ | (18,751 | ) | | $ | (20,917 | ) |
Other comprehensive income (loss) before reclassifications | 8,128 |
| | (35,545 | ) | | (27,417 | ) |
Reclassified from accumulated other comprehensive income (loss) (1) | 4,212 |
| | — |
| | 4,212 |
|
Tax effect on derivative financial instruments | (995 | ) | | — |
| | (995 | ) |
Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes | 11,345 |
| | (35,545 | ) | | (24,200 | ) |
Ending balance at November 1, 2014 | $ | 9,179 |
| | $ | (54,296 | ) | | $ | (45,117 | ) |
| |
(1) | For the thirteen and thirty-nine weeks ended November 1, 2014, the gain or loss was reclassified from Other Comprehensive Income (Loss) to the Cost of Goods Sold line item on the Consolidated Statement of Operations and Comprehensive Income (Loss). |
The activity in accumulated other comprehensive income (loss), for the thirteen and thirty-nine weeks ended November 2, 2013 was as follows:
|
| | | | | | | | | | | |
| Thirteen Weeks Ended November 2, 2013 |
(in thousands) | Unrealized Gain (Loss) on Derivative Financial Instruments | | Foreign Currency Translation Adjustment | | Total |
Beginning balance at August 3, 2013 | $ | 2,639 |
| | $ | (25,557 | ) | | $ | (22,918 | ) |
Other comprehensive income (loss) before reclassifications | (3,748 | ) | | 10,959 |
| | 7,211 |
|
Reclassified from accumulated other comprehensive income (loss)(2) | (1,359 | ) | | — |
| | (1,359 | ) |
Tax effect on derivative financial instruments | 536 |
| | — |
| | 536 |
|
Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes | (4,571 | ) | | 10,959 |
| | 6,388 |
|
Ending balance at November 2, 2013 | $ | (1,932 | ) | | $ | (14,598 | ) | | $ | (16,530 | ) |
|
| | | | | | | | | | | |
| Thirty-Nine Weeks Ended November 2, 2013 |
(in thousands) | Unrealized Gain (Loss) on Derivative Financial Instruments | | Foreign Currency Translation Adjustment | | Total |
Beginning balance at February 2, 2013 | $ | (7,220 | ) | | $ | (6,068 | ) | | $ | (13,288 | ) |
Other comprehensive income (loss) before reclassifications | 7,515 |
| | (8,530 | ) | | (1,015 | ) |
Reclassified from accumulated other comprehensive income (loss)(2) | (1,581 | ) | | — |
| | (1,581 | ) |
Tax effect on derivative financial instruments | (646 | ) | | — |
| | (646 | ) |
Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes | 5,288 |
| | (8,530 | ) | | (3,242 | ) |
Ending balance at November 2, 2013 | $ | (1,932 | ) | | $ | (14,598 | ) | | $ | (16,530 | ) |
| |
(2) | For the thirteen and thirty-nine weeks ended November 2, 2013, the gain or loss was reclassified from Other Comprehensive Income (Loss) to the Cost of Goods Sold line item on the Consolidated Statement of Operations and Comprehensive Income (Loss). |
16. GILLY HICKS RESTRUCTURING
As previously announced, on November 1, 2013, A&F’s Board of Directors approved the closure of the Company’s 24 stand-alone Gilly Hicks stores. The Company substantially completed the store closures as planned by the end of the first quarter of Fiscal 2014. The Company continues to offer Gilly Hicks products through Hollister stores and direct-to-consumer channels.
As a result of exiting the Gilly Hicks branded stores, the Company currently estimates that it will incur aggregate pre-tax charges of approximately $89 million, of which $6.1 million of charges, primarily related to lease terminations, was recognized during the thirty-nine weeks ended November 1, 2014.
Below is a summary of the aggregate pre-tax charges incurred through November 1, 2014 related to the closure of the Gilly Hicks branded stores (in thousands):
|
| | | |
Lease Terminations and Store Closure Costs | $ | 48,395 |
|
Asset Impairment | 37,940 |
|
Other | 1,218 |
|
Total Charges (1) | $ | 87,553 |
|
| |
(1) | As of November 1, 2014, the Company incurred aggregate pre-tax charges related to restructuring plans for the Gilly Hicks brand of $50.2 million for the U.S. Stores segment and $37.4 million for the International Stores segment. |
The remaining charges, primarily lease-related, including the net present value of payments related to lease terminations, potential sub-lease losses and other lease-related costs of approximately $1.4 million, are expected to be recognized over the remaining lease terms. These estimates are based on a number of significant assumptions and could change materially.
Costs associated with exit or disposal activities are recorded when the liability is incurred. Below is a roll forward of the liabilities recognized on the Consolidated Balance Sheet as of November 1, 2014, related to the closure of the Gilly Hicks stores (in thousands):
|
| | | |
Accrued Liability as of February 1, 2014 | $ | 42,507 |
|
Costs Incurred | 11,361 |
|
Cash Payments | (47,533 | ) |
Accrued Liability as of November 1, 2014 | $ | 6,335 |
|
17. CONTINGENCIES
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against the Company for which accruals have not been established.
18. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board ("FASB") issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which amends ASC 740, “Income Taxes.” The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the potential impact of this standard.
In June 2014, FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period," which amends ASC 718, "Compensation—Stock Compensation." The amendment provides guidance on the treatment of shared-based payments awards with a specific performance target, requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
19. SUBSEQUENT EVENTS
On December 8, 2014, Michael S. Jeffries retired from his positions as Chief Executive Officer and director of the Company, effective immediately. The Company's Board of Directors appointed Arthur C. Martinez, Chairman of the Board, to serve as Executive Chairman of the Company, and formed an Office of the Chairman, whose members are Arthur C. Martinez, Jonathan Ramsden, Chief Operating Officer, Christos E. Angelides, Brand President of Abercrombie & Fitch, and Fran Horowitz, Brand President of Hollister, until a new Chief Executive Officer is appointed.
Mr. Jeffries’ employment with the Company will terminate on December 31, 2014. In connection with his retirement, Mr. Jeffries entered into a Retirement Agreement with the Company, providing him compensation as if his employment had been terminated without cause pursuant to his Employment Agreement dated December 9, 2013. In addition to any benefits Mr. Jeffries is entitled to upon retirement, as set forth in the Company's most recent definitive proxy statement on Schedule 14A, filed with the SEC on May 13, 2014, this will result in additional payments of approximately $5.5 million in cash and benefits continuation, and a pre-tax charge of approximately $4.6 million in the fourth quarter of Fiscal 2014.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying consolidated balance sheet of Abercrombie & Fitch Co. as of November 1, 2014, and the related consolidated statements of operations and comprehensive income (loss) for the thirteen and thirty-nine week periods ended November 1, 2014 and November 2, 2013 and the consolidated statements of cash flows for the thirty-nine week periods ended November 1, 2014 and November 2, 2013. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of February 1, 2014, and the related consolidated statements of operation and comprehensive income, of stockholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated March 31, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 1, 2014, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
December 11, 2014
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The Company is a specialty retailer that operates stores in North America, Europe, Asia, Australia and the Middle East and direct-to-consumer operations in North America, Europe and Asia that service its brands throughout the world. The Company sells casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. The Company also sells bras, underwear, personal care products, sleepwear and at-home products for girls through direct-to-consumer operations and Hollister stores under the Gilly Hicks brand.
The modern Abercrombie & Fitch is the next generation of effortless All-American style. The essence of laidback sophistication with an element of simplicity, A&F sets the standard for great taste. From classic campus experiences to collecting moments while traveling, A&F brings stories of adventure and discovery to life. Confident and engaging, the Abercrombie & Fitch legacy is rooted in a heritage of quality craftsmanship and focused on a future of creative ambition. abercrombie kids is the next generation of All-American cool. The essence of fun and friendship, a&f kids celebrates each moment by sharing its effortless great taste with the world. From documenting school spirit days and team sports to traveling abroad and experiencing new cultures, a&f kids tells stories filled with youthful excitement and a touch of mischief. Confident and independent, abercrombie kids stands for quality, on-trend style, and creative imagination. Each day brings a new discovery, a chance for adventure, and the opportunity to make history. Hollister is the fantasy of Southern California. Inspired by beautiful beaches, open blue skies, and sunshine, Hollister lives the dream of an endless summer. Spontaneous, with a bit of edge and a sense of humor, it never takes itself too seriously. Hollister’s laidback lifestyle is naturally infused with authentic surf and skate culture, making every design effortlessly cool and totally accessible. Hollister brings Southern California to the world.
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2014” represent the 52-week fiscal year that will end on January 31, 2015, and to “Fiscal 2013” represent the 52-week fiscal year that ended February 1, 2014.
On December 8, 2014, Michael S. Jeffries retired from his positions as Chief Executive Officer and director of the Company, effective immediately. The Company's Board of Directors appointed Arthur C. Martinez, Chairman of the Board, to serve as Executive Chairman of the Company, and formed an Office of the Chairman, whose members are Arthur C. Martinez, Jonathan Ramsden, Chief Operating Officer, Christos E. Angelides, Brand President of Abercrombie & Fitch, and Fran Horowitz, Brand President of Hollister, until a new Chief Executive Officer is appointed.
Mr. Jeffries’ employment with the Company will terminate on December 31, 2014. In connection with his retirement, Mr. Jeffries entered into a Retirement Agreement with the Company, providing him compensation as if his employment had been terminated without cause pursuant to his Employment Agreement dated December 9, 2013. In addition to any benefits Mr. Jeffries is entitled to upon retirement, as set forth in the Company's most recent definitive proxy statement on Schedule 14A, filed with the SEC on May 13, 2014, this will result in additional payments of approximately $5.5 million in cash and benefits continuation, and a pre-tax charge of approximately $4.6 million in the fourth quarter of Fiscal 2014.
RESULTS OF OPERATIONS
During the third quarter of Fiscal 2014, net sales decreased 12% to $911.5 million from $1.033 billion for the third quarter of Fiscal 2013. The gross profit rate for the third quarter of Fiscal 2014 was 62.2% compared to 63.0% for the third quarter of Fiscal 2013. Operating income was $33.4 million for the third quarter of Fiscal 2014 compared to an operating loss of $35.4 million for the third quarter of Fiscal 2013. The Company had net income of $18.2 million and net income per diluted share of $0.25 for the third quarter of Fiscal 2014 compared to a net loss of $15.6 million and net loss per diluted share of $0.20 for the third quarter of Fiscal 2013.
During the Fiscal 2014 year-to-date period, net sales decreased 7% to $2.624 billion from $2.818 billion for the comparable period of Fiscal 2013. The gross profit rate for the Fiscal 2014 year-to-date period was 62.2% compared to 64.2% for the comparable period of Fiscal 2013. The Company reported an operating income of $21.4 million for the Fiscal 2014 year-to-date period compared to an operating loss of $30.1 million for the comparable period of Fiscal 2013. The Company had a net income of $7.4 million
and net income per diluted share of $0.10 for the Fiscal 2014 year-to-date period compared to a net loss of $11.5 million and net loss per diluted share of $0.15 for the comparable period of Fiscal 2013.
Excluding certain charges detailed in the GAAP to non-GAAP financial measures reconciliation below, the Company reported adjusted non-GAAP net income of $30.4 million and adjusted non-GAAP net income per diluted share of $0.42 for the third quarter of Fiscal 2014 compared to adjusted non-GAAP net income of $40.5 million and adjusted non-GAAP net income per diluted share of $0.52 for the third quarter of Fiscal 2013. For the Fiscal 2014 year-to-date period, the Company reported adjusted non-GAAP net income of $31.5 million and adjusted non-GAAP net income per diluted share of $0.43 compared to adjusted non-GAAP net income of $46.4 million and adjusted non-GAAP net income per diluted share of $0.59 for the comparable period of Fiscal 2013.
The Company believes that the non-GAAP financial measures discussed above are useful to investors as they provide the ability to measure the Company’s operating performance and compare it against that of prior periods without reference to the impact of charges related to store-related asset impairment, store closures, the Gilly Hicks brand restructuring, the Company's profit improvement initiative, and legal, advisory and other charges related to certain corporate governance matters. These non-GAAP financial measures should not be used as alternatives to operating income (loss), net income (loss), or net income (loss) per diluted share and are also not intended to be indicators of the ongoing operating performance of the Company or to supersede or replace the Company’s GAAP financial measures. The table below reconciles the GAAP financial measures to the non-GAAP financial measures for the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 1, 2014 | | November 2, 2013 | |
(in thousands, except per share amounts) | | Operating Income (Loss) | | Net Income (Loss) | | Net Income (Loss) per Diluted Share(3) | | Operating Income (Loss) | | Net Income (Loss) | | Net Income (Loss) per Diluted Share(3) | |
Thirteen Weeks Ended | | | | | | | | | | | | | |
GAAP | | $ | 33,366 |
| | $ | 18,227 |
| | $ | 0.25 |
| | $ | (35,370 | ) | | $ | (15,644 | ) | | $ | (0.20 | ) | |
Excluded Charges (1) | | 20,268 |
| | 12,179 |
| | 0.17 |
| | 95,869 |
| | 56,189 |
| | 0.72 |
| |
Non-GAAP | | $ | 53,634 |
| | $ | 30,406 |
| | $ | 0.42 |
| | $ | 60,499 |
| | $ | 40,545 |
| | $ | 0.52 |
| (3) |
Thirty-Nine Weeks Ended | | | | | | | | | | | | | |
GAAP | | $ | 21,353 |
| | $ | 7,433 |
| | $ | 0.10 |
| | $ | (30,127 | ) | | $ | (11,477 | ) | | $ | (0.15 | ) | |
Excluded Charges (2) | | 38,249 |
| | 24,056 |
| | 0.33 |
| | 98,444 |
| | 57,834 |
| | 0.74 |
| |
Non-GAAP | | $ | 59,602 |
| | $ | 31,489 |
| | $ | 0.43 |
| | $ | 68,317 |
| | $ | 46,357 |
| | $ | 0.59 |
| (3) |
| |
(1) | Excluded charges for the thirteen weeks ended November 1, 2014 included $16.7 million in pre-tax charges related to store-related asset impairment, $2.3 million in pre-tax charges related to lease terminations and store closures, $0.7 million in pre-tax charges related to the Company's profit improvement initiative and $0.6 million in pre-tax charges related to legal, advisory and other charges related to certain corporate governance matters. Excluded charges for the thirteen weeks ended November 2, 2013 included $43.6 million in pre-tax charges related to store-related asset impairment, $44.7 million in pre-tax charges related to the restructuring of the Gilly Hicks brand and $7.6 million in pre-tax charges related to the Company's profit improvement initiative. |
| |
(2) | Excluded charges for the thirty-nine weeks ended November 1, 2014 include $16.7 million in pre-tax charges related to store-related asset impairment, $2.3 million in pre-tax charges related to lease terminations and store closures, $6.1 million in pre-tax charges related to the restructuring of the Gilly Hicks brand, $5.7 million in pre-tax charges related to the Company's profit improvement initiative and $7.5 million in pre-tax charges for legal, advisory and other charges related to certain corporate governance matters. Excluded charges for the thirty-nine weeks ended November 2, 2013 included $44.7 million in pre-tax charges related to the restructuring of the Gilly Hicks brand, $43.6 million in pre-tax charges related to store asset impairment, and $10.1 million in pre-tax charges related to the Company's profit improvement initiative. |
| |
(3) | Adjusted non-GAAP net income per diluted share is based on diluted weighted-average shares outstanding of 77.7 million and 79.0 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. |
As of November 1, 2014, the Company had $320.6 million in cash and equivalents, and $300.0 million in gross borrowings outstanding under its term loan facility. Net cash provided by operating activities was $29.5 million for the thirty-nine weeks ended November 1, 2014, primarily related to operating income, adjusted for non-cash items, which was partially offset by inventory purchases. The Company used cash of $132.2 million for capital expenditures, $285.0 million to repurchase approximately 7.3 million shares of A&F’s Common Stock and $43.5 million for dividends paid during the thirty-nine weeks ended November 1, 2014. In addition, the Company had net proceeds of $162.0 million from borrowings during the thirty-nine weeks ended November 1, 2014.
Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.
The following table presents the amounts shown in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and thirty-nine week periods ended November 1, 2014 and November 2, 2013, expressed as a percentage of net sales:
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| | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
NET SALES | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of Goods Sold | 37.8 | % | | 37.0 | % | | 37.8 | % | | 35.8 | % |
GROSS PROFIT | 62.2 | % | | 63.0 | % | | 62.2 | % | | 64.2 | % |
Stores and Distribution Expense | 45.4 | % | | 46.6 | % | | 47.9 | % | | 49.8 | % |
Marketing, General and Administrative Expense | 11.5 | % | | 12.3 | % | | 12.9 | % | | 12.9 | % |
Restructuring Charges | — | % | | 4.3 | % | | 0.2 | % | | 1.6 | % |
Asset Impairment | 1.8 | % | | 4.2 | % | | 0.6 | % | | 1.5 | % |
Other Operating Income, Net | (0.1 | )% | | (1.0 | )% | | (0.4 | )% | | (0.5 | )% |
OPERATING INCOME (LOSS) | 3.6 | % | | (3.4 | )% | | 0.8 | % | | (1.1 | )% |
Interest Expense, Net | 0.6 | % | | 0.2 | % | | 0.4 | % | | 0.2 | % |
INCOME (LOSS) BEFORE TAXES | 3.0 | % | | (3.6 | )% | | 0.4 | % | | (1.2 | )% |
Tax Expense (Benefit) | 1.0 | % | | (2.1 | )% | | 0.2 | % | | (0.8 | )% |
NET INCOME (LOSS) | 2.0 | % | | (1.5 | )% | | 0.3 | % | | (0.4 | )% |
Financial Summary
The following summarized financial and statistical data compare the thirteen and thirty-nine week periods ended November 1, 2014 to the thirteen and thirty-nine week periods ended November 2, 2013:
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| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| November 1, 2014 | | November 2, 2013 | | November 1, 2014 | | November 2, 2013 |
Net sales by segment (millions) | $ | 911.5 |
| | $ | 1,033.3 |
| | $ | 2,624.5 |
| | $ | 2,817.8 |
|
U.S. Stores | $ | 475.7 |
| | $ | 561.8 |
| | $ | 1,324.1 |
| | $ | 1,515.1 |
|
International Stores | $ | 248.2 |
| | $ | 296.9 |
| | $ | 769.0 |
| | $ | 841.1 |
|
Direct-to-Consumer | $ | 187.5 |
| | $ | 174.6 |
| | $ | 531.4 |
| | $ | 461.6 |
|
Net sales as a % of total sales | | | | | | | |
U.S. Stores | 52 | % | | 54 | % | | 51 | % | | 54 | % |
International Stores | 27 | % | | 29 | % | | 29 | % | | 30 | % |
Direct-to-Consumer | 21 | % | | 17 | % | | 20 | % | | 16 | % |
| | | | | | | |
Net sales by brand (millions)* | $ | 911.5 |
| | $ | 1,033.3 |
| | $ | 2,624.5 |
| | $ | 2,817.8 |
|
Abercrombie & Fitch | $ | 358.4 |
| | $ | 387.6 |
| | $ | 1,025.8 |
| | $ | 1,069.0 |
|
abercrombie | $ | 81.3 |
| | $ | 90.1 |
| | $ | 220.6 |
| | $ | 239.3 |
|
Hollister | $ | 468.1 |
| | $ | 534.0 |
| | $ | 1,354.3 |
| | $ | 1,443.7 |
|
Gilly Hicks** | $ | 3.6 |
| | $ | 21.6 |
| | $ | 23.7 |
| | $ | 65.8 |
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Increase (decrease) in comparable sales*** | (10 | )% | | (14 | )% | | (7 | )% | | (13 | )% |
Abercrombie & Fitch | (6 | )% | | (13 | )% | | (3 | )% | | (11 | )% |
abercrombie | (10 | )% | | (4 | )% | | (8 | )% | | (4 | )% |
Hollister | (12 | )% | | (16 | )% | | (10 | )% | | (15 | )% |
Increase (decrease) in comparable sales by geography*** | | | | | | | |
U.S. | (7 | )% | | (14 | )% | | (6 | )% | | (13 | )% |
International | (15 | )% | | (15 | )% | | (10 | )% | | (13 | )% |
Increase (decrease) in comparable sales by channel*** | | | | | | | |
Total Stores | (14 | )% | | (18 | )% | | (12 | )% | | (16 | )% |
Direct-to-Consumer | 8 | % | | 11 | % | | 15 | % | | 6 | % |
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* | Totals may not foot due to rounding. |
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** | Net sales reflects the activity of stores open during the period and direct-to-consumer sales. |
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*** | A store is included in comparable sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year. Comparable sales include comparable direct-to-consumer sales. |
CURRENT TRENDS AND OUTLOOK
In what continues to be a challenging retail environment, particularly among younger consumers, the third quarter of Fiscal 2014 proved to be more difficult than expected, with a weakening in trends across all brands and channels. Total Company comparable sales for the quarter were down 10%, with U.S. comparable store sales down 10% and international comparable store sales down 22%. Direct-to-consumer comparable sales were up 8% in the third quarter, but positive by a lower percentage than in the first and second quarters. Reduced heavy logo business continued to weigh heavily on our results, contributing approximately 12 percentage points to our down 10% total comparable sales for the third quarter, with non-logo business comping up slightly. On the international front, comparable sales were negative in almost all markets, but we are encouraged by positive comparable sales in China, which improved from the second quarter. The quarter also marked the opening of our first Chinese mall-based A&F store in Chengdu, which is performing strongly, and encourages us to believe in the growth potential of both of our major brands in China.
While we anticipate business conditions will remain difficult, we continue to take strategic steps to position the Company for future top-line growth and operating margin improvement to drive long-term value for stockholders.
We remain focused on improving the productivity and profitability of our U.S. stores, through initiatives around our assortment, marketing and brand engagement, through the opening of high productivity outlet stores and through closures of underperforming stores. We are pleased with results from the Hollister stores we have converted to a redesigned storefront, and we expect to allocate capital to accelerate the roll-out in both the U.S. and Europe in 2015. Regarding store closures, we still expect to close approximately 60 stores during Fiscal 2014 and a similar number in each of the next few years, primarily through natural lease expirations.
We are pleased with key metrics we are seeing from our marketing initiatives. Across both brands, fan growth in platforms such as Instagram, Facebook and Twitter is up by over 25% year-over-year and total social engagement during the quarter was more than four times greater than last year. In addition, according to our social listening tool Crimson Hexagon, net brand sentiment is up close to 30% for A&F and up close to 40% for Hollister since the beginning of the year. Going forward, we believe our greatest opportunity remains in improving top of funnel metrics, specifically brand consideration.
We continued the roll-out of our omnichannel efforts during the third quarter. Ship-from-store is now live in approximately 370 stores and order-in-store is live in approximately 660 stores, all within the U.S. We believe these initiatives will be both sales and margin accretive during the fourth quarter and beyond. In addition, we continue to expect to have reserve-in-store and in-store-pickup activated during 2015, and we are working on a roll-out of omnichannel capabilities in Europe. During the quarter we also launched localized Asia direct-to-consumer capabilities, including local desktop and mobile sites in Japan, China, Hong Kong, Singapore and Taiwan; regional fulfillment from Hong Kong and local fulfillment within China; and a Hollister storefront on Tmall. We are still in the early stages, but we have seen a clear improvement in both traffic and conversion.
We continue to pursue other initiatives to grow the international penetration of our brands, including our first franchising arrangement in Mexico, which encompasses both the A&F and Hollister brands, where our first store is set to open in late Spring 2015.
We continue to make excellent progress on expense reduction, enabling us to partially mitigate lower than projected sales and gross margin dollars. Our next steps in our profit improvement initaitive include institutionalizing the process changes implemented during 2014, and continuing to drive for more efficiencies in our core processes.
Related to our move to a brand-based organizational model, we are very pleased to have welcomed Fran Horowitz and Christos Angelides to the Company during the quarter as our Hollister and A&F/Kids brand presidents, respectively.
Looking forward, we expect Fiscal 2014 full year adjusted non-GAAP diluted earnings per share to be in the range of $1.50 to $1.65. This guidance is based on the assumption that fourth quarter total comparable sales will be down by a mid-to-high single-digit percentage. The guidance also assumes a gross margin rate for the fourth quarter higher than last year, but lower than the third quarter year-to-date rate.
The guidance assumes a full year effective tax rate in the upper 30’s, which remains sensitive to the mix between international and domestic income. The guidance also assumes a full year weighted average share count of approximately 73.1 million shares.
The guidance does not include charges related to the Gilly Hicks restructuring, the Company's profit improvement initiative, certain corporate governance matters, other potential impairment and store closure charges or any charges related to the Chief Executive Officer's retirement, as discussed in Note 19, "SUBSEQUENT EVENTS" of the Notes to the Consolidated Financial Statements.
THIRD QUARTER AND YEAR-TO-DATE RESULTS
Net Sales
Net sales for the third quarter of Fiscal 2014 were $911.5 million, a decrease of 12% from net sales of $1.033 billion during the third quarter of Fiscal 2013. The net sales decrease was primarily attributable to a 10% decrease in total comparable sales. Including direct-to-consumer sales, U.S. sales decreased 12% to $594.7 million and international sales decreased 12% to $316.7 million. The impact of changes in foreign currency adversely affected sales by approximately $8.8 million for the thirteen weeks ended November 1, 2014 (based on converting prior year sales at current year exchange rates).
Year-to-date net sales in Fiscal 2014 were $2.624 billion, a decrease of 7% from net sales of $2.818 billion during the year-to-date period in Fiscal 2013. The net sales decrease was attributable to a 7% decrease in total comparable sales. Including direct-to-consumer sales, U.S. sales decreased 9% to $1.645 billion and international sales decreased 3% to $979.1 million. The impact of changes in foreign currency benefited sales by approximately $16.0 million for the thirty-nine weeks ended November 1, 2014.
By brand, comparable sales for the third quarter of Fiscal 2014, including direct-to-consumer, were as follows: Abercrombie & Fitch decreased 6%, abercrombie kids decreased 10% and Hollister decreased 12%. Across the brands, the male and female business performed comparably.
Total comparable sales for the quarter, including direct-to-consumer sales, decreased 10% with comparable U.S. sales decreasing 7% and comparable international sales decreasing 15%. Within the quarter, comparable sales were weakest in September and October.
Direct-to-consumer sales, including shipping and handling revenue, for the third quarter of Fiscal 2014 were $187.5 million, an increase of 7% from Fiscal 2013 third quarter direct-to-consumer sales of $174.6 million. The direct-to-consumer sales increase was primarily driven by an increase in the international business. The direct-to-consumer business, including shipping and handling revenue, accounted for 20.6% of total net sales in the third quarter of Fiscal 2014 compared to 16.9% in the third quarter of Fiscal 2013.
Direct-to-consumer sales, including shipping and handling revenue, for the Fiscal 2014 year-to-date period were $531.4 million, an increase of 15% from Fiscal 2013 year-to-date direct-to-consumer sales of $461.6 million. The direct-to-consumer sales increase was primarily driven by an increase in the international business. The direct-to-consumer business, including shipping and handling revenue, accounted for 20.2% of total net sales for the year-to-date period of Fiscal 2014 compared to 16.4% in the Fiscal 2013 year-to-date period.
Gross Profit
Gross profit for the third quarter of Fiscal 2014 was $567.1 million compared to $651.0 million for the comparable period in Fiscal 2013. The gross profit rate (gross profit divided by net sales) for the third quarter of Fiscal 2014 was 62.2%, a decrease of 80 basis points from the third quarter of Fiscal 2013 rate of 63.0%.
Year-to-date gross profit for Fiscal 2014 was $1.632 billion compared to $1.808 billion for the comparable period in Fiscal 2013. The gross profit rate for the year-to-date period of Fiscal 2014 was 62.2%, down 200 basis points from the year-to-date period of Fiscal 2013 rate of 64.2%.
The decrease in the gross profit rate for both the third quarter and year-to-date period was primarily driven by increased promotional activity, including shipping promotions in the direct-to-consumer business, partially offset by lower average unit cost in the third quarter.
Stores and Distribution Expense
Stores and distribution expense for the third quarter of Fiscal 2014 was $413.6 million, down from $481.2 million for the comparable period in Fiscal 2013. Stores and distribution expense included $2.3 million of charges in the third quarter of Fiscal 2014 and $0.6 million of charges in the third quarter of Fiscal 2013 related to lease terminations, store closures and the Company's profit improvement initiative. Excluding these charges, the stores and distribution expense rate for the quarter was 45.1% of net sales, down 140 basis points from 46.5% of net sales in the third quarter of Fiscal 2013.
Stores and distribution expense for the Fiscal 2014 year-to-date period was $1.257 billion compared to $1.402 billion for the comparable period in Fiscal 2013. Stores and distribution expense included $4.4 million of charges for the thirty-nine weeks
ended November 1, 2014 and $0.6 million of charges for thirty-nine weeks ended November 2, 2013 related to lease terminations, store closures and the Company's profit improvement initiative. Excluding these charges, the stores and distribution expense rate for the Fiscal 2014 year-to-date period was 47.7% of net sales, down 200 basis points from 49.7% of net sales for the same period of Fiscal 2013.