Document
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-12107
 
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
 
Delaware
31-1469076
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
6301 Fitch Path, New Albany, Ohio
43054
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
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.
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.
Class A Common Stock
 
Outstanding at December 1, 2016
$.01 Par Value
 
67,674,988 Shares



Table of Contents


ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS

 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

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PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Thousands, except per share amounts)
(Unaudited)



 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
Net sales
$
821,734

 
$
878,572

 
$
2,290,377

 
$
2,405,750

Cost of sales, exclusive of depreciation and amortization
310,995

 
318,785

 
876,810

 
924,552

Gross profit
510,739

 
559,787

 
1,413,567

 
1,481,198

Stores and distribution expense
386,609

 
392,942

 
1,138,644

 
1,173,773

Marketing, general and administrative expense
105,307

 
117,698

 
331,473

 
345,077

Restructuring benefit

 

 

 
(1,598
)
Asset impairment

 
12,076

 
6,356

 
18,209

Other operating income, net
(822
)
 
(3,919
)
 
(16,835
)
 
(7,018
)
Operating income (loss)
19,645

 
40,990

 
(46,071
)
 
(47,245
)
Interest expense, net
4,609

 
4,586

 
13,856

 
13,792

Income (loss) before taxes
15,036

 
36,404

 
(59,927
)
 
(61,037
)
Income tax expense (benefit)
6,762

 
(5,881
)
 
(17,540
)
 
(40,688
)
Net income (loss)
8,274

 
42,285

 
(42,387
)
 
(20,349
)
Less: Net income attributable to noncontrolling interests
393

 
394

 
2,448

 
1,816

Net income (loss) attributable to A&F
$
7,881

 
$
41,891

 
$
(44,835
)
 
$
(22,165
)
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to A&F
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.61

 
$
(0.66
)
 
$
(0.32
)
Diluted
$
0.12

 
$
0.60

 
$
(0.66
)
 
$
(0.32
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
67,975

 
68,866

 
67,848

 
69,363

Diluted
68,277

 
69,265

 
67,848

 
69,363

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation, net of tax
$
(12,194
)
 
$
(1,491
)
 
$
870

 
$
(11,362
)
Derivative financial instruments, net of tax
3,937

 
(2,952
)
 
557

 
(11,288
)
Other comprehensive (loss) income
(8,257
)
 
(4,443
)
 
1,427

 
(22,650
)
Comprehensive income (loss)
17

 
37,842

 
(40,960
)
 
(42,999
)
Less: Comprehensive income attributable to noncontrolling interests
393

 
394

 
2,448

 
1,816

Comprehensive (loss) income attributable to A&F
$
(376
)
 
$
37,448

 
$
(43,408
)
 
$
(44,815
)


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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Table of Contents


ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)

 


 
October 29, 2016
 
January 30, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
469,720

 
$
588,578

Receivables
71,235

 
56,868

Inventories, net
516,146

 
436,701

Other current assets
93,170

 
96,833

Total current assets
1,150,271

 
1,178,980

Property and equipment, net
827,996

 
894,178

Other assets
358,201

 
359,881

Total assets
$
2,336,468

 
$
2,433,039

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
228,880

 
$
184,175

Accrued expenses
266,761

 
321,237

Short-term portion of deferred lease credits
20,623

 
23,303

Income taxes payable
7,654

 
5,988

Short-term portion of borrowings, net
2,204

 

Total current liabilities
526,122

 
534,703

Long-term liabilities:
 
 
 
Long-term portion of deferred lease credits
77,800

 
89,256

Long-term portion of borrowings, net
285,029

 
286,235

Leasehold financing obligations
48,810

 
47,440

Other liabilities
179,085

 
179,683

Total long-term liabilities
590,724

 
602,614

Stockholders’ equity
 
 
 
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of October 29, 2016 and January 30, 2016
1,033

 
1,033

Paid-in capital
394,135

 
407,029

Retained earnings
2,440,069

 
2,530,196

Accumulated other comprehensive loss, net of tax
(113,192
)
 
(114,619
)
Treasury stock, at average cost: 35,617 and 35,952 shares at October 29, 2016 and January 30, 2016, respectively
(1,510,378
)
 
(1,532,576
)
Total Abercrombie & Fitch Co. stockholders’ equity
1,211,667

 
1,291,063

Noncontrolling interests
7,955

 
4,659

Total stockholders’ equity
1,219,622

 
1,295,722

Total liabilities and stockholders’ equity
$
2,336,468

 
$
2,433,039



The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
 


 
Thirty-nine Weeks Ended
 
October 29, 2016
 
October 31, 2015
Operating activities
 
 
 
Net loss
$
(42,387
)
 
$
(20,349
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
146,666

 
160,364

Asset impairment
6,356

 
18,209

Loss on disposal
1,914

 
6,312

Amortization of deferred lease credits
(18,601
)
 
(21,482
)
Benefit from deferred income taxes
(26,817
)
 
(36,747
)
Share-based compensation
16,691

 
21,681

Changes in assets and liabilities
 
 
 
Inventories, net
(91,375
)
 
(141,725
)
Accounts payable and accrued expenses
9,533

 
148,832

Lessor construction allowances
4,976

 
4,743

Income taxes
(6,463
)
 
(34,249
)
Return of long-term lease deposit
22,801

 

Other assets
(3,692
)
 
(9,268
)
Other liabilities
1,776

 
(29,781
)
Net cash provided by operating activities
21,378

 
66,540

Investing activities
 
 
 
Purchases of property and equipment
(96,814
)
 
(105,216
)
Proceeds from sale of property and equipment
4,098

 
11,109

Other investing activities

 
9,544

Net cash used for investing activities
(92,716
)
 
(84,563
)
Financing activities
 
 
 
Purchase of treasury stock

 
(50,033
)
Repayments of borrowings

 
(2,250
)
Dividends paid
(40,526
)
 
(41,704
)
Other financing activities
(4,126
)
 
147

Net cash used for financing activities
(44,652
)
 
(93,840
)
Effect of exchange rates on cash
(2,868
)
 
(3,234
)
Net decrease in cash and equivalents
(118,858
)
 
(115,097
)
Cash and equivalents, beginning of period
588,578

 
520,708

Cash and equivalents, end of period
$
469,720

 
$
405,611

Significant non-cash investing activities
 
 
 
Change in accrual for construction in progress
$
(12,453
)
 
$
22,882

Supplemental information
 
 
 
Cash paid for interest
$
11,538

 
$
12,220

Cash paid for income taxes, net of refunds
$
20,516

 
$
45,100



The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5

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ABERCROMBIE & FITCH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Nature of Business

Abercrombie & Fitch Co. (“A&F”), through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer of branded apparel and accessories. The Company operates stores in North America, Europe, Asia and the Middle East and direct-to-consumer operations in North America, Europe and Asia that serve its customers throughout the world.

Principles of Consolidation

The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.

The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the assets, liabilities, results of operations and cash flows of these VIEs.

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal 2016” and “Fiscal 2015” represent the fifty-two week fiscal years ending on January 28, 2017 and ended on January 30, 2016, respectively.

Interim Financial Statements

The Condensed Consolidated Financial Statements as of October 29, 2016, and for the thirteen and thirty-nine week periods ended October 29, 2016 and October 31, 2015, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2015 filed with the SEC on March 28, 2016. The January 30, 2016 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position 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 2016.

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Recent Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements that could affect the Company’s financial statements:
Accounting Standards Update (ASU)
 
Description
 
Date of
Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards not yet adopted
ASU 2015-11, Simplifying the Measurement of Inventory
 
This update amends ASC 330, Inventory. The new guidance applies to inventory measured using first-in, first-out (FIFO) or average cost. Under this amendment, inventory should be measured at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
 
January 29, 2017*
 
The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.
ASU 2016-09, Compensation—Stock Compensation
 
This update amends ASC 718, Compensation. Under the new guidance, tax benefits and certain tax deficiencies arising from the vesting of share-based payments will be recognized as income tax benefits or expenses in the statement of operations, whereas under the current guidance such benefits and deficiencies are recorded in additional paid-in-capital. The cash flow effects of the tax benefit will be reported in cash flows from operating activities, whereas they are currently reported in cash flows from financing activities. This guidance also allows for entities to make a policy election to estimate forfeitures or account for them when they occur.
 
January 29, 2017*
 
The Company is currently evaluating the method of adoption and the impact that this standard will have on its consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers
 
This update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The new guidance 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 which the entity expects to be entitled to in exchange for those goods or services.
 
February 4, 2018
 
The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
ASU 2016-02, Leases
 
This update supersedes the leasing requirements in ASC 840, Leases. The new guidance requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.
 
February 3, 2019*
 
The Company is currently evaluating the impact that this standard will have on its consolidated financial statements, but expects that it will result in a significant increase in the Company’s long-term assets and long-term liabilities on the Company's consolidated balance sheets.

* Early adoption is permitted.

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2. 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.

The following table presents weighted-average shares outstanding and anti-dilutive shares:
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
(in thousands)
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
Shares of common stock issued
103,300

 
103,300

 
103,300

 
103,300

Weighted-average treasury shares
(35,325
)
 
(34,434
)
 
(35,452
)
 
(33,937
)
Weighted-average — basic shares
67,975

 
68,866

 
67,848

 
69,363

Dilutive effect of share-based compensation awards
302

 
399

 

 

Weighted-average — diluted shares
68,277

 
69,265

 
67,848

 
69,363

Anti-dilutive shares (1)
6,126

 
10,205

 
6,209

 
12,154


(1) 
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive.


3. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:

Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
Level 3—inputs to the valuation methodology are unobservable.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution within it of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were as follows:
 
Assets and Liabilities at Fair Value as of October 29, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Trust-owned life insurance policies (at cash surrender value)
$

 
$
98,896

 
$

 
$
98,896

Money market funds
21

 

 

 
21

Derivative financial instruments

 
6,460

 

 
6,460

Total assets
$
21

 
$
105,356

 
$

 
$
105,377

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
$

 
$
262

 
$

 
$
262

 
Assets at Fair Value as of January 30, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
311,349

 
$

 
$

 
$
311,349

Derivative financial instruments

 
4,166

 

 
4,166

Total assets
$
311,349

 
$
4,166

 
$

 
$
315,515


The Level 2 assets and liabilities consist of trust-owned life insurance policies and derivative financial instruments, primarily foreign currency exchange forward contracts. The fair value of foreign currency exchange forward contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.


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Fair value of borrowings:

The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. For disclosure purposes, the Company estimated the fair value of borrowings outstanding based on market rates for similar types of debt, which are considered to be Level 2 inputs.

The carrying amount and fair value of the Company’s term loan facility were as follows:
(in thousands)
October 29, 2016
 
January 30, 2016
Gross borrowings outstanding, carrying amount
$
293,250

 
$
293,250

Gross borrowings outstanding, fair value
$
293,250

 
$
284,453


No borrowings were outstanding under the Company’s senior secured revolving credit facility as of October 29, 2016 or January 30, 2016.


4. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:
(in thousands)
October 29, 2016
 
January 30, 2016
Property and equipment, at cost
$
2,805,449

 
$
2,792,437

Less: Accumulated depreciation and amortization
(1,977,453
)
 
(1,898,259
)
Property and equipment, net
$
827,996

 
$
894,178


Long-lived assets, primarily comprised of leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, other than temporary adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable.

Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumptions used in the Company’s undiscounted future cash flow models include sales, gross margin and, to a lesser extent, operating expenses.

An impairment loss would be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, the loss would be measured as the excess of the carrying amount of the asset group over its fair value. The key assumptions used in estimating the fair value of impaired assets may include projected cash flows and discount rate.

There were no non-cash asset impairment charges for the thirteen weeks ended October 29, 2016. The Company incurred non-cash asset impairment charges of $6.4 million for the thirty-nine weeks ended October 29, 2016.

The Company incurred non-cash asset impairment charges of $12.1 million for the thirteen weeks ended October 31, 2015 and $18.2 million for the thirty-nine weeks ended October 31, 2015.

The Company had $37.0 million and $37.3 million of construction project assets in property and equipment, net at October 29, 2016 and January 30, 2016, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.

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5. INCOME TAXES

The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in law, regulations, and administrative practices, relative changes of expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax income (loss).


6. SHARE-BASED COMPENSATION

The Company recognized share-based compensation expense of $5.7 million and $16.7 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, and $7.6 million and $21.7 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively. The Company also recognized tax benefits related to share-based compensation of $2.2 million and $6.3 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, and $2.6 million and $7.4 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively.

Stock Options

The following table summarizes stock option activity for the thirty-nine weeks ended October 29, 2016:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 30, 2016
271,000

 
$
63.05

 
 
 
 
Granted

 

 
 
 
 
Exercised
(2,000
)
 
22.87

 
 
 
 
Forfeited or expired
(79,200
)
 
31.53

 
 
 
 
Outstanding at October 29, 2016
189,800

 
$
76.62

 
$

 
0.9
Stock options exercisable at October 29, 2016
189,800

 
$
76.62

 
$

 
0.9

Stock Appreciation Rights

The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended October 29, 2016:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 30, 2016
5,301,115

 
$
45.02

 
 
 
 
Granted

 

 
 
 
 
Exercised
(10,483
)
 
22.45

 
 
 
 
Forfeited or expired
(1,194,207
)
 
37.27

 
 
 
 
Outstanding at October 29, 2016
4,096,425

 
$
47.43

 
$

 
3.0
Stock appreciation rights exercisable at October 29, 2016
3,524,010

 
$
50.69

 
$

 
2.1
Stock appreciation rights expected to become exercisable in the future as of October 29, 2016
502,927

 
$
27.60

 
$

 
8.1

As of October 29, 2016, there was $3.7 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 13 months.

The grant date fair value of stock appreciation rights that vested during the thirty-nine weeks ended October 29, 2016 and October 31, 2015 was $4.1 million and $4.5 million, respectively.

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Restricted Stock Units

The following table summarizes activity for restricted stock units for the thirty-nine weeks ended October 29, 2016:
 
Service-based Restricted
Stock Units
 
Performance-based Restricted
Stock Units
 
Market-based Restricted
Stock Units
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
Unvested at January 30, 2016
1,671,597

 
$
28.13

 
185,500

 
$
23.42

 
117,711

 
$
25.00

Granted
1,119,848

 
25.28

 
129,725

 
25.70

 
129,734

 
31.01

Adjustments for performance achievement

 

 

 

 

 

Vested
(603,789
)
 
30.37

 
(32,625
)
 
36.12

 

 

Forfeited
(236,871
)
 
26.75

 
(78,677
)
 
24.22

 
(62,553
)
 
31.91

Unvested at October 29, 2016
1,950,785

 
$
25.97

 
203,923

 
$
22.53

 
184,892

 
$
26.89


Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying common stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For an award with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. Unvested shares related to restricted stock units with performance-based vesting conditions are reflected at 100% of their target vesting amount in the table above.

Service-based restricted stock units are expensed on a straight-line basis over the total requisite service period, net of forfeitures. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis, net of forfeitures. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures.

As of October 29, 2016, there was $30.7 million, $1.3 million and $3.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 16 months, 15 months and 14 months for service-based, performance-based and market-based restricted stock units, respectively.

Additional information pertaining to restricted stock units for the thirty-nine weeks ended October 29, 2016 and October 31, 2015 follows:
(in thousands)
October 29, 2016
 
October 31, 2015
Service-based restricted stock units:
 
 
 
Total grant date fair value of awards granted
$
28,310

 
$
21,725

Total grant date fair value of awards vested
18,337

 
17,956

 
 
 
 
Performance-based restricted stock units:
 
 
 
Total grant date fair value of awards granted
$
3,334

 
$
2,278

Total grant date fair value of awards vested
1,178

 
1,861

 
 
 
 
Market-based restricted stock units:
 
 
 
Total grant date fair value of awards granted
$
4,023

 
$
2,158

Total grant date fair value of awards vested

 


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The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirty-nine weeks ended October 29, 2016 and October 31, 2015 were as follows:
 
October 29, 2016
 
October 31, 2015
Grant date market price
$
28.06

 
$
22.46

Fair value
$
31.01

 
$
19.04

Assumptions:
 
 
 
Price volatility
45
%
 
45
%
Expected term (years)
2.7

 
2.8

Risk-free interest rate
1.0
%
 
0.9
%
Dividend yield
3.0
%
 
3.5
%
Average volatility of peer companies
34.5
%
 
34.0
%
Average correlation coefficient of peer companies
0.3415

 
0.3288



7. DERIVATIVE INSTRUMENTS

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”). Substantially all of the unrealized gains or losses related to designated cash flow hedges as of October 29, 2016 will be recognized in cost of sales, exclusive of depreciation and amortization, over the next twelve months.

The Company presents its derivative assets and derivative liabilities at their gross fair values on the Condensed Consolidated Balance Sheets. However, the Company's master netting and other similar arrangements allow net settlements under certain conditions.

As of October 29, 2016, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
(in thousands)
Notional Amount(1)
Euro
$
82,321

British pound
$
34,335

Canadian dollar
$
16,949

Japanese yen
$
9,615


(1) 
Amounts reported are the U.S. Dollar notional amounts outstanding as of October 29, 2016.

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 instruments and the hedged items.

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As of October 29, 2016, the Company had no outstanding foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets/liabilities.

The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of October 29, 2016 and January 30, 2016 were as follows:
(in thousands)
Location
 
October 29,
2016
 
January 30,
2016
 
Location
 
October 29,
2016
 
January 30,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
Other current assets
 
$
6,460

 
$
4,097

 
Accrued expenses
 
$
262

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
Other current assets
 
$

 
$
69

 
Accrued expenses
 
$

 
$

Total
Other current assets
 
$
6,460

 
$
4,166

 
Accrued expenses
 
$
262

 
$


Refer to Note 3, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative instruments.

The location and amounts of derivative gains and losses for the thirteen and thirty-nine weeks ended October 29, 2016 and October 31, 2015 on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows:
 
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
 
 
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
(in thousands)
Location
 
Gain/(Loss)
 
Gain/(Loss)
 
Gain/(Loss)
 
Gain/(Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
Other operating income, net
 
$
152

 
$
10

 
$
295

 
$
434

 
 
Effective Portion
 
Ineffective Portion and Amount Excluded from Effectiveness Testing
 
Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (1)
 
Location of Gain (Loss) Reclassified from AOCL into Earnings
 
Amount of Gain (Loss) Reclassified from AOCL into Earnings (2)
 
Location of Gain Recognized in Earnings on Derivative Contracts
 
Amount of Gain  Recognized in Earnings on Derivative Contracts (3)
 
Thirteen Weeks Ended
(in thousands)
October 29,
2016
 
October 31,
2015
 
 
 
October 29,
2016
 
October 31,
2015
 
 
 
October 29,
2016
 
October 31,
2015
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
$
4,986

 
$
933

 
Cost of sales, exclusive of depreciation and amortization
 
$
450

 
$
2,886

 
Other operating income, net
 
$
695

 
$
58

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Thirty-nine Weeks Ended
(in thousands)
October 29, 2016
 
October 31, 2015
 
 
 
October 29, 2016
 
October 31, 2015
 
 
 
October 29, 2016
 
October 31, 2015
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
$
3,026

 
$
3,318

 
Cost of sales, exclusive of depreciation and amortization
 
$
2,551

 
$
13,761

 
Other operating income, net
 
$
1,308

 
$
297


(1) 
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
(2) 
The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
(3) 
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.
 

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8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended October 29, 2016 was as follows:
 
Thirteen Weeks Ended October 29, 2016
(in thousands)
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total
Beginning balance at July 30, 2016
$
(106,132
)
 
$
1,197

 
$
(104,935
)
Other comprehensive (loss) income before reclassifications
(12,194
)
 
4,986

 
(7,208
)
Reclassified from accumulated other comprehensive loss (1)

 
(450
)
 
(450
)
Tax effect

 
(599
)
 
(599
)
Other comprehensive (loss) income
(12,194
)
 
3,937

 
(8,257
)
Ending balance at October 29, 2016
$
(118,326
)
 
$
5,134

 
$
(113,192
)
 
Thirty-nine Weeks Ended October 29, 2016
(in thousands)
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total
Beginning balance at January 30, 2016
$
(119,196
)
 
$
4,577

 
$
(114,619
)
Other comprehensive income before reclassifications
870

 
3,026

 
3,896

Reclassified from accumulated other comprehensive loss (1)

 
(2,551
)
 
(2,551
)
Tax effect

 
82

 
82

Other comprehensive income
870

 
557

 
1,427

Ending balance at October 29, 2016
$
(118,326
)
 
$
5,134

 
$
(113,192
)

(1)  
For the thirteen and thirty-nine weeks ended October 29, 2016, a loss was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

The activity in accumulated other comprehensive loss for the thirteen and thirty-nine weeks ended October 31, 2015 was as follows:
 
Thirteen Weeks Ended October 31, 2015
(in thousands)
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total
Beginning balance at August 1, 2015
$
(106,551
)
 
$
4,764

 
$
(101,787
)
Other comprehensive loss before reclassifications
(1,384
)
 
(123
)
 
(1,507
)
Reclassified from accumulated other comprehensive loss (2)

 
(2,886
)
 
(2,886
)
Tax effect
(107
)
 
57

 
(50
)
Other comprehensive loss
(1,491
)
 
(2,952
)
 
(4,443
)
Ending balance at October 31, 2015
$
(108,042
)
 
$
1,812

 
$
(106,230
)

 
Thirty-nine Weeks Ended October 31, 2015
(in thousands)
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total
Beginning balance at January 31, 2015
$
(96,680
)
 
$
13,100

 
$
(83,580
)
Other comprehensive (loss) income before reclassifications
(11,255
)
 
2,263

 
(8,992
)
Reclassified from accumulated other comprehensive loss (2)

 
(13,761
)
 
(13,761
)
Tax effect
(107
)
 
210

 
103

Other comprehensive loss
(11,362
)
 
(11,288
)
 
(22,650
)
Ending balance at October 31, 2015
$
(108,042
)
 
$
1,812

 
$
(106,230
)

(2) 
For the thirteen and thirty-nine weeks ended October 31, 2015, a loss was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).


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9. SEGMENT REPORTING

The Company has two operating segments: Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands; and Hollister. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, and have been aggregated into one reportable segment.

The following table provides the Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 29, 2016 and October 31, 2015.
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
(in thousands)
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
Abercrombie
$
358,255

 
$
411,259

 
$
1,044,667

 
$
1,131,626

Hollister
463,479

 
467,313

 
1,245,710

 
1,274,124

Total
$
821,734

 
$
878,572

 
$
2,290,377

 
$
2,405,750


The following table provides the Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 29, 2016 and October 31, 2015.
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
(in thousands)
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
United States
$
531,449

 
$
572,736

 
$
1,435,633

 
$
1,536,151

Europe
187,184

 
206,538

 
541,711

 
572,772

Other
103,101

 
99,298

 
313,033

 
296,827

Total
$
821,734

 
$
878,572

 
$
2,290,377

 
$
2,405,750



10. 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 losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. As of October 29, 2016, the Company had accrued charges of approximately $4 million for certain legal contingencies. In addition, there are certain claims and legal proceedings pending against the Company for which accruals have not been established. 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.


11. SUBSEQUENT EVENTS

On November 11, 2016, the Company exercised a lease kick-out option for its A&F flagship store in Hong Kong. The Company expects the closure of this store to be substantially complete by the end of the second quarter of Fiscal 2017. As a result of this decision, the Company expects to incur a lease termination charge of approximately $16 million during the fourth quarter of Fiscal 2016. In addition, the Company estimates the net cash outflow associated with this lease termination to be approximately $16 million, consisting of two payments of approximately $8 million each, with the first payment expected to be paid in the fourth quarter of Fiscal 2016 and the second payment expected to be paid in the second quarter of Fiscal 2017.

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Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

BUSINESS SUMMARY

The Company is a specialty retailer that operates stores in North America, Europe, Asia and the Middle East and direct-to-consumer operations in North America, Europe and Asia that serve its customers 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’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 2016” represent the fifty-two week fiscal year that will end on January 28, 2017, and to “Fiscal 2015” represent the fifty-two week fiscal year that ended January 30, 2016.

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.

SUMMARY RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations and reconciles GAAP financial measures to non-GAAP financial measures for the thirteen and thirty-nine week periods ended October 29, 2016 and October 31, 2015. Additional discussion about why the Company believes that these non-GAAP financial measures are useful to investors is provided below under “NON-GAAP FINANCIAL MEASURES.”
 
 
October 29, 2016
 
October 31, 2015
(in thousands, except change in comparable sales, gross profit rate and per share amounts)
 
GAAP
 
Excluded Items(1)
 
Non-GAAP
 
GAAP
 
Excluded Items(1)
 
Non-GAAP
Thirteen Weeks Ended
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
821,734

 
$

 
$
821,734

 
$
878,572

 
$

 
$
878,572

Change in comparable sales(2)
 
(6
)%
 
%
 
(6
)%
 
(1
)%
 
 %
 
(1
)%
Gross profit rate
 
62.2
 %
 
%
 
62.2
 %
 
63.7
 %
 
(0.3
)%
 
63.4
 %
Operating income
 
$
19,645

 
$
(6,000
)
 
$
13,645

 
$
40,990

 
$
10,086

 
$
51,076

Net income attributable to A&F
 
$
7,881

 
$
(6,479
)
 
$
1,402

 
$
41,891

 
$
(8,974
)
 
$
32,917

Net income per diluted share attributable to A&F
 
$
0.12

 
$
(0.09
)
 
$
0.02

 
$
0.60

 
$
(0.12
)
 
$
0.48

 
 
 
 
 
 
 
 
 
 
 
 
 
Thirty-nine Weeks Ended
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,290,377

 
$

 
$
2,290,377

 
$
2,405,750

 
$

 
$
2,405,750

Change in comparable sales(2)
 
(5
)%
 
%
 
(5
)%
 
(4
)%
 
 %
 
(4
)%
Gross profit rate
 
61.7
 %
 
%
 
61.7
 %
 
61.6
 %
 
0.9
 %
 
62.5
 %
Operating (loss) income
 
$
(46,071
)
 
$
(11,926
)
 
$
(57,997
)
 
$
(47,245
)
 
$
62,466

 
$
15,221

Net (loss) income attributable to A&F
 
$
(44,835
)
 
$
(10,158
)
 
$
(54,993
)
 
$
(22,165
)
 
$
26,505

 
$
4,340

Net (loss) income per diluted share attributable to A&F
 
$
(0.66
)
 
$
(0.15
)
 
$
(0.81
)
 
$
(0.32
)
 
$
0.38

 
$
0.06


(1) 
Refer to “RESULTS OF OPERATIONS” for details on excluded items.

(2) 
Changes in comparable sales are calculated on a constant currency basis by converting prior year store and online sales at current year exchange rates. For inclusion in this calculation, a store must have been open as the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year.

As of October 29, 2016, the Company had $469.7 million in cash and equivalents, and $293.3 million in gross borrowings outstanding under its term loan facility. Net cash provided by operating activities was $21.4 million for the thirty-nine weeks ended October 29, 2016. The Company also used cash of $96.8 million for capital expenditures and $40.5 million to pay dividends during the thirty-nine weeks ended October 29, 2016.

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CURRENT TRENDS AND OUTLOOK

The Company's results for the third quarter of Fiscal 2016 reflect improvement in Hollister from last quarter that was more than offset by a decline in A&F performance, as flagship and tourist locations continued to be a major headwind, particularly in international markets. In addition, gross margin was pressured, as an A&F assortment weighted toward seasonal categories underperformed, resulting in greater than expected promotional activity.

In Hollister, comparable sales improved throughout the quarter and we expect the comparable sales trend to further improve in the fourth quarter. For the A&F brand, we began to articulate a redefined identity during the quarter. While we anticipate the A&F business will remain challenging through the balance of the fiscal year, we continue to evolve the brand through significant changes in product, customer experience and marketing.

For the fourth quarter of Fiscal 2016, we expect:
Comparable sales to be challenging, but modestly improved from the third quarter.
Continued adverse impact from foreign currency on sales and operating income.
A gross margin rate down slightly to last year's adjusted non-GAAP rate of 60.7%, driven by lower average unit retail, partially offset by lower average unit cost.
Operating expense, including a lease termination charge of approximately $16 million, to be up about 1% from last year's adjusted non-GAAP operating expense of $554 million, with the lease termination charge partially offset by savings from lower sales and expense reduction efforts.
A weighted average diluted share count of approximately 68 million shares, excluding the effect of potential share buybacks.

For the full year, the Company expects the effective tax rate to remain sensitive at lower levels of pre-tax earnings.

We expect capital expenditures to be approximately $140 million for the full year.

In addition to the 13 stores opened year-to-date, including five outlet stores, we plan to open seven new stores in the fourth quarter, including five in China and two in the U.S. We also anticipate closing approximately 35 stores in the U.S. in the fourth quarter through natural lease expirations, in addition to the 15 stores closed year-to-date.

Excluded from the Company’s outlook are the effects of certain potential items, such as asset impairment charges, litigation charges and insurance recoveries.

NON-GAAP FINANCIAL MEASURES

This Quarterly Report on Form 10-Q includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” are useful to investors as they provide a measure of the Company’s operating performance excluding the effect of certain items which the Company believes do not reflect its future operating outlook, and therefore supplements investors’ understanding of comparability across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used supplemental to, not as an alternative to, the Company’s GAAP financial results, and may not be the same as similar measures presented by other companies.

Changes in comparable sales are calculated on a constant currency basis by converting prior year store and online sales at current year exchange rates. For the purpose of this calculation, a store must have been open as the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year.

In addition, the following financial measures are disclosed on a GAAP basis and, as applicable, on a non-GAAP basis excluding items relating to asset impairment, indemnification recovery, claims settlement benefits, inventory write-down, net, legal settlement charges, store fixture disposal, profit improvement initiative, lease termination and store closure costs and restructuring benefit: cost of sales, exclusive of depreciation and amortization; gross profit; stores and distribution expense; marketing, general and administrative expense; other operating income, net; operating income (loss); income tax expense (benefit); effective tax rate; net income (loss) attributable to A&F; and net income (loss) per diluted share attributable to A&F. Certain of these GAAP and non-GAAP measures are also expressed as a percentage of net sales. The income tax effect of non-GAAP items is calculated as the difference in income tax expense (benefit) with and without the non-GAAP adjustments to income before income taxes based upon the tax laws and statutory income tax rates of the affected tax jurisdictions.

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RESULTS OF OPERATIONS

STORE ACTIVITY

Store count and gross square footage by brand for the thirteen weeks ended October 29, 2016 and October 31, 2015, respectively, were as follows:
 
Abercrombie (1)(2)
 
Hollister (3)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
July 30, 2016
333

 
39

 
411

 
143

 
744

 
182

New
1

 
2

 
2

 
1

 
3

 
3

Closed
(1
)
 

 
(1
)
 

 
(2
)
 

October 29, 2016
333

 
41

 
412

 
144

 
745

 
185

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
October 29, 2016
2,548

 
631

 
2,828

 
1,212

 
5,376

 
1,843

 
 
 
 
 
 
 
 
 
 
 
 
 
Abercrombie (1)
 
Hollister (3)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
August 1, 2015
354

 
34

 
429

 
137

 
783

 
171

New
7

 
2

 
2

 
2

 
9

 
4

Closed
(2
)
 

 

 

 
(2
)
 

October 31, 2015
359

 
36

 
431

 
139

 
790

 
175

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
October 31, 2015
2,743

 
584

 
2,966

 
1,185

 
5,709

 
1,769


(1)
Includes Abercrombie & Fitch and abercrombie kids brands.

(2)
Excludes one international franchise store as of October 29, 2016 and July 30, 2016.

(3)
Excludes three international franchise stores as of October 29, 2016, two international franchise stores as of July 30, 2016 and October 31, 2015 and one international franchise store as of August 1, 2015.

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Table of Contents


Store count and gross square footage by brand for the thirty-nine weeks ended October 29, 2016 and October 31, 2015, respectively, were as follows:
 
Abercrombie (1)(2)
 
Hollister (3)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
January 30, 2016
340

 
39

 
414

 
139

 
754

 
178

New
3

 
2

 
3

 
5

 
6

 
7

Closed
(10
)
 

 
(5
)
 

 
(15
)
 

October 29, 2016
333

 
41

 
412

 
144

 
745

 
185

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
October 29, 2016
2,548

 
631

 
2,828

 
1,212

 
5,376

 
1,843

 
 
 
 
 
 
 
 
 
 
 
 
 
Abercrombie (1)
 
Hollister (3)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
January 31, 2015
361

 
32

 
433

 
135

 
794

 
167

New
11

 
4

 
2

 
6

 
13

 
10

Closed
(13
)
 

 
(4
)
 
(2
)
 
(17
)
 
(2
)
October 31, 2015
359

 
36

 
431

 
139

 
790

 
175

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
October 31, 2015
2,743

 
584

 
2,966

 
1,185

 
5,709

 
1,769


(1)
Includes Abercrombie & Fitch and abercrombie kids brands.

(2)
Excludes one international franchise store as of October 29, 2016 and January 30, 2016.

(3)
Excludes three international franchise stores as of October 29, 2016 and two international franchise stores as of January 30, 2016 and October 31, 2015.

19

Table of Contents


Net Sales
 
Thirteen Weeks Ended
 
 
 
 
 
October 29, 2016
 
October 31, 2015
 
 
 
 
(in thousands)
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
$ Change
 
Net Sales
% Change
Abercrombie(2)
$
358,255

 
(14)%
 
$
411,259

 
(5)%
 
$
(53,004
)
 
(13)%
Hollister
463,479

 
—%
 
467,313

 
3%
 
(3,834
)
 
(1)%
Total net sales
$
821,734

 
(6)%
 
$
878,572

 
(1)%
 
$
(56,838
)
 
(6)%
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
531,449

 
(5)%
 
$
572,736

 
(3)%
 
$
(41,287
)
 
(7)%
International
290,285

 
(10)%
 
305,836

 
1%
 
(15,551
)
 
(5)%
Total net sales
$
821,734

 
(6)%
 
$
878,572

 
(1)%
 
$
(56,838
)
 
(6)%
 
Thirty-nine Weeks Ended
 
 
 
 
 
October 29, 2016
 
October 31, 2015
 
 
 
 
(in thousands)
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
$ Change
 
Net Sales
% Change
Abercrombie(2)
$
1,044,667

 
(10)%
 
$
1,131,626

 
(7)%
 
$
(86,959
)
 
(8)%
Hollister
1,245,710

 
(1)%
 
1,274,124

 
(2)%
 
(28,414
)
 
(2)%
Total net sales
$
2,290,377

 
(5)%
 
$
2,405,750

 
(4)%
 
$
(115,373
)
 
(5)%
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
1,435,633

 
(4)%
 
$
1,536,151

 
(5)%
 
$
(100,518
)
 
(7)%
International
854,744

 
(7)%
 
869,599

 
(4)%
 
(14,855
)
 
(2)%
Total net sales
$
2,290,377

 
(5)%
 
$
2,405,750

 
(4)%
 
$
(115,373
)
 
(5)%

(1) 
Changes in comparable sales are calculated on a constant currency basis by converting prior year store and online sales at current year exchange rates. For inclusion in this calculation, a store must have been open as the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year.

(2) 
Includes Abercrombie & Fitch and abercrombie kids brands.

For the third quarter of Fiscal 2016, net sales decreased 6% compared to the third quarter of Fiscal 2015, primarily attributable to a 6% decrease in comparable sales, driven by the Abercrombie brand.

For the year-to-date period of Fiscal 2016, net sales decreased 5% compared to the year-to-date period of Fiscal 2015, primarily attributable to a 5% decrease in comparable sales, mainly driven by the Abercrombie brand.

20

Table of Contents


Cost of Sales, Exclusive of Depreciation and Amortization
 
Thirteen Weeks Ended
 
October 29, 2016
 
October 31, 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
Cost of sales, exclusive of depreciation and amortization
$
310,995

 
37.8%
 
$
318,785

 
36.3%
Recovery on inventory write-down

 
—%
 
2,573

 
0.3%
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization
$
310,995

 
37.8%
 
$
321,358

 
36.6%
 
 
 
 
 
 
 
 
Gross profit
$
510,739

 
62.2%
 
$
559,787

 
63.7%
Recovery on inventory write-down

 
—%
 
(2,573
)
 
(0.3)%
Adjusted non-GAAP gross profit
$
510,739

 
62.2%
 
$
557,214

 
63.4%
 
Thirty-nine Weeks Ended
 
October 29, 2016
 
October 31, 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
Cost of sales, exclusive of depreciation and amortization
$
876,810

 
38.3%
 
$
924,552

 
38.4%
Inventory write-down, net(1)

 
—%
 
(21,667
)
 
(0.9)%
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization
$
876,810

 
38.3%
 
$
902,885

 
37.5%
 
 
 
 
 
 
 
 
Gross profit
$
1,413,567

 
61.7%
 
$
1,481,198

 
61.6%
Inventory write-down, net(1)

 
—%
 
21,667

 
0.9%
Adjusted non-GAAP gross profit
$
1,413,567

 
61.7%
 
$
1,502,865

 
62.5%

(1)
Inventory write-down charges related to a first quarter of Fiscal 2015 decision to accelerate the disposition of certain aged merchandise, net of recoveries.

For the third quarter of Fiscal 2016, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 160 basis points compared to the third quarter of Fiscal 2015, primarily due to the adverse effects from changes in foreign currency exchange rates of approximately 60 basis points and the net impact of lower average unit retail partially offset by lower average unit cost.

For the year-to-date period of Fiscal 2016, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 10 basis points compared to the year-to-date period of Fiscal 2015, which included a $21.7 million net inventory write-down. Excluding the $21.7 million net inventory write-down, year-to-date Fiscal 2016 adjusted non-GAAP cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 80 basis points as compared to the year-to-date period of Fiscal 2015, primarily due to the adverse effects from changes in foreign currency exchange rates of approximately 80 basis points and the net impact of higher average unit cost substantially offset by higher average unit retail.

21

Table of Contents


Stores and Distribution Expense
 
Thirteen Weeks Ended
 
October 29, 2016
 
October 31, 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
Stores and distribution expense
$
386,609

 
47.0%
 
$
392,942

 
44.7%
Store fixture disposal

 
—%
 
(583
)
 
(0.1)%
Adjusted non-GAAP stores and distribution expense
$
386,609

 
47.0%
 
$
392,359

 
44.7%