Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 28, 2017
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-12107
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
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
Class A Common Stock, $0.01 Par Value | | New York Stock Exchange |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 ¨ | | Smaller reporting company ¨ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Aggregate market value of the Registrant’s Class A Common Stock (the only outstanding common equity of the Registrant) held by non-affiliates of the Registrant (for this purpose, executive officers and directors of the Registrant are considered affiliates) as of July 29, 2016: $1,390,361,149.
Number of shares outstanding of the Registrant’s common stock as of March 22, 2017: 67,985,481 shares of Class A Common Stock.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders, to be held on June 15, 2017, are incorporated by reference into Part III of this Annual Report on Form 10-K.
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
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PART I
GENERAL.
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer who primarily sells its products through store and direct-to-consumer operations, as well as through various wholesale, franchise and licensing arrangements. The Company offers a broad array of apparel products, including knit tops, woven shirts, graphic t-shirts, fleece, sweaters, jeans, woven pants, shorts, outerwear, dresses, intimates and swimwear; and personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands. The Company has operations in North America, Europe, Asia and the Middle East. As of January 28, 2017, the Company operated 709 stores in the United States (“U.S.”) and 189 stores outside of the U.S.
The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the consolidated financial statements and notes, as well as the remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to “Fiscal 2016” represent the fifty-two week fiscal year ended January 28, 2017; to “Fiscal 2015” represent the fifty-two week fiscal year ended January 30, 2016; and to “Fiscal 2014” represent the fifty-two week fiscal year ended January 31, 2015. In addition, all references herein to “Fiscal 2017” represent the fifty-three week fiscal year that will end on February 3, 2018.
A&F makes available free of charge on its Internet website, www.abercrombie.com, under “Investors, SEC Filings,” its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as A&F’s definitive proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains electronic filings by A&F and other issuers at www.sec.gov. In addition, the public may read and copy any materials A&F files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The Company has included its Internet website addresses throughout this filing as textual references only. The information contained within these Internet websites is not incorporated into this Annual Report on Form 10-K.
DESCRIPTION OF OPERATIONS.
Brands.
Abercrombie & Fitch. The Abercrombie & Fitch brand is the iconic global specialty retailer of high quality, casual luxury apparel and accessories for men and women. With an updated attitude that reflects the confidence of today’s 20+ consumer, Abercrombie & Fitch remains true to its 125-year heritage of creating expertly crafted products with an effortless, American style. It is the namesake brand of Abercrombie & Fitch Co.
abercrombie kids. abercrombie kids creates smart and creative apparel of enduring quality that celebrates the wide-eyed wonder of children from 3 to 14 years. Its products are made for play - tough enough to stand up to everyday adventures, while never compromising comfort, softness or safety.
Hollister. The quintessential retail brand of the global teen consumer, Hollister celebrates the liberating spirit of the endless summer inside everyone. Inspired by California’s laidback attitude, Hollister’s clothes are designed to be lived in and made your own, for wherever life takes you. Hollister provides an engaging, welcoming and unique shopping experience around the globe.
Gilly Hicks. Gilly Hicks, “the brand to start and end your day with,” carries bras, bralettes, undies, swimwear, loungewear and sleepwear. Gilly Hicks product is designed to be effortless and comfortable to align with our customers’ on-the-go, busy lifestyle.
Refer to the “RESULTS OF OPERATIONS” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K for information regarding net sales by brand and by geography.
FINANCIAL INFORMATION ABOUT SEGMENTS.
The Company determines its segments on the same basis that it uses to allocate resources and assess performance. All of the Company’s operating segments sell a similar group of products — apparel, personal care products and accessories for men, women and kids. The Company determined its brand-based operating segments as of January 28, 2017 to be Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands; and Hollister, which includes the Company's Hollister and Gilly Hicks brands. These operating segments have similar economic characteristics, classes of consumers, products and production and distribution methods, and have been aggregated into one reportable segment. Refer to Note 17, “SEGMENT REPORTING,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for further discussion of the Company’s operating segments and reportable segment.
The following charts illustrate the Company's net sales mix by brand and geography for Fiscal 2016:
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| Abercrombie(1) | | Hollister(2) | | | International | | United States |
(1) Includes Abercrombie & Fitch and abercrombie kids brands.
(2) Includes Hollister and Gilly Hicks brands.
STORE OPERATIONS.
At the end of Fiscal 2016, the Company operated 898 stores. The following table details the number of retail stores operated by the Company at January 28, 2017:
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| | Abercrombie(1) | | Hollister(2) | | Total |
United States | | 311 | | 398 | | 709 |
International | | 44 | | 145 | | 189 |
Total | | 355 | | 543 | | 898 |
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(1) | Includes Abercrombie & Fitch and abercrombie kids brands. Excludes one international franchise store as of January 28, 2017. |
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(2) | Includes Hollister and Gilly Hicks brands. Excludes three international franchise stores as of January 28, 2017. |
CUSTOMER ENGAGEMENT.
We put the customer at the center of everything we do. The Company seeks to intimately understand its customers and inspire them through rich brand experiences wherever, whenever and however they choose to shop. The Company engages with its customers through in-store interactions, social media platforms, mobile applications, loyalty programs, online surveys and customer reviews, and is continuously receiving and responding to customer feedback. Our Abercrombie and Hollister customer relationship management programs provide a platform to develop direct relationships with our customers. Our brands have a strong base of globally diverse followers on key social media platforms. The Company also engages with key influencers such as celebrities, bloggers and stylists to share its product and communicate its brand identity. The Company endeavors to be at the forefront of exploring new ways in which our customers may want to engage with our brands. This allows us to better understand who our customers are, what they value and aspire to, how they shop and behave and what they expect from our brands.
OMNICHANNEL AND DIRECT-TO-CONSUMER OPERATIONS.
As our customers increasingly shop across multiple channels, the Company has developed, and continues to expand, its robust omnichannel capabilities. These capabilities now include “ship-from-store,” “order-in-store,” “reserve-in-store” and “purchase-online-pickup-in-store.” The Company continues to invest in these and other omnichannel initiatives in order to create a more seamless shopping experience for its customers.
The Company operates 30 desktop and mobile websites for its brands globally. The websites are available in 11 languages, accept 29 currencies and ship to more than 120 countries. Total net sales through direct-to-consumer operations, including shipping and handling revenue, were $856.8 million for Fiscal 2016, representing approximately 26% of total net sales.
WHOLESALE, FRANCHISE AND LICENSING OPERATIONS .
The Company continues to expand its brand reach through various wholesale, franchise and licensing arrangements. Total net sales from wholesale, franchise and licensing operations were $36.1 million for Fiscal 2016, representing approximately 1% of total net sales. As of January 28, 2017, the Company's franchisees operated four international franchise stores, all of which are located in Mexico.
MERCHANDISE SUPPLIERS.
Meeting the Company's objective of delivering compelling, on-trend, high-quality product assortments to its customers is dependent upon its network of third-party vendors. During Fiscal 2016, the Company sourced merchandise through approximately 150 vendors located throughout the world, primarily in Asia and Central America. The Company did not source more than 10% of its merchandise from any single factory or supplier during Fiscal 2016. The Company pursues a global sourcing strategy that includes relationships with vendors in 17 countries, as well as the U.S. The Company’s foreign sourcing of merchandise is negotiated and settled in U.S. Dollars.
All product sources, including independent manufacturers and suppliers, must achieve and maintain the Company’s high quality standards, which are an integral part of the Company’s identity. The Company has established supplier product quality standards to ensure the high quality of fabrics and other materials used in the Company’s products. The Company utilizes both home office and field employees to help monitor compliance with the Company’s supplier product quality standards.
Before the Company begins production, factories, including subcontractors of the factories, must go through a quality assurance assessment to ensure they meet Company standards. All factories are contractually required to adhere to the Company's Vendor Code of Conduct, and go through social audits, which include on-site walk-throughs to appraise the physical working conditions and health and safety practices, and to review payroll and age documentation. Social audits of the factories are performed at least every two years after the initial audit. The Company partners with suppliers that respect local laws and share our dedication to utilizing best practices in human rights, labor rights, environmental practices and workplace safety.
DISTRIBUTION AND MERCHANDISE INVENTORY.
The Company's distribution network is built to deliver stock to its stores and fulfill direct-to-consumer orders with speed and efficiency. The Company’s merchandise is shipped to the Company’s distribution centers (“DCs”) where it is received and inspected before being shipped to stores or direct-to-consumer customers. The Company has two Company-owned DCs located in New Albany, Ohio, one of which is a dedicated direct-to-consumer facility, and one third-party DC located in Reno, Nevada that service our North American stores and direct-to-consumer customers outside of Europe and Asia. The Company uses a third-party DC in the Netherlands for the distribution of merchandise to stores and direct-to-consumer customers located in Europe, a third-party DC in China for the distribution of merchandise to stores and direct-to-consumer customers located in China, a third-party DC in Hong Kong for the distribution of merchandise to stores and direct-to-consumer customers located in Asia, and a third-party DC in the United Arab Emirates for the distribution of merchandise to stores located in the Middle East. The Company utilizes primarily one contract carrier to ship merchandise and related materials to its North American stores and direct-to-consumer customers, and several contract carriers for its European and Asian stores and direct-to-consumer customers.
INFORMATION SYSTEMS.
The Company’s management information systems consist of a full range of retail, merchandising and financial systems. The systems include applications related to point-of-sale, direct-to-consumer, inventory management, supply chain, planning, sourcing, merchandising and financial reporting. The Company continues to invest in technology to upgrade core systems to enhance efficiencies, including the support of its direct-to-consumer operations, omnichannel capabilities, customer relationship management tools and loyalty programs.
SEASONAL BUSINESS.
The retail apparel market has two principal selling seasons: the Spring season which includes the first and second fiscal quarters (“Spring”); and the Fall season which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School (August) and Holiday (November and December) sales periods.
TRADEMARKS.
The trademarks Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos are registered with the U.S. Patent and Trademark Office and registered or pending with the registries of countries where stores are located or likely to be located in the future. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered, and the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to renew each of its registered trademarks that remain in use.
COMPETITION.
We operate in a rapidly evolving and highly competitive retail business environment. Our competitors include individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online businesses. Additionally, there is competition for consumer discretionary spending from other product and experiential categories, such as technology, restaurants, travel and media content.
Consumers are increasingly shopping online and via mobile devices, which enable consumers to quickly and conveniently comparison shop for product availability and by price.
We compete primarily on the basis of brand experience, customer service, product selection, quality, store location and price.
ASSOCIATE RELATIONS.
As of March 22, 2017, the Company employed approximately 43,000 associates, of which approximately 35,000 were part-time associates, which equates to approximately 5,000 full-time equivalents. On average, the Company employed approximately 16,000 full-time equivalents during Fiscal 2016.
The Company believes it maintains a good relationship with its associates. However, in the normal course of business, the Company is party to lawsuits involving former and current associates.
ENVIRONMENTAL MATTERS.
Compliance with domestic and international regulations related to environmental matters has not had, nor is it expected to have, any material effect on the Company’s capital expenditures, earnings or competitive position based on information and circumstances known to the Company at this time.
OTHER INFORMATION.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information regarding the executive officers of A&F as of March 22, 2017:
Stacia Andersen, 46, has been Brand President of Abercrombie & Fitch and abercrombie kids since June 2016. Prior to joining A&F, Ms. Andersen served in various positions with Target Corporation (“Target”), a general merchandise retailer selling products through Target stores and digital channels, from 1993 until December 2015. Most recently, Ms. Andersen served as Senior Vice President Merchandising, Apparel, Accessories and Baby, from May 2014 to December 2015, and as Senior Vice President Merchandising, Home and Seasonal from October 2009 to May 2014. Prior to serving as a Senior Vice President Merchandising, Ms. Andersen served as President, Target Sourcing Services/Associated Merchandising Corporation, from February 2006 to October 2009, and before that, in various sourcing and merchandising positions.
Robert E. Bostrom, 64, has been Senior Vice President, General Counsel and Corporate Secretary of A&F since January 2014. Since August 2014, Mr. Bostrom has been a member of the Board of Directors of NeuLion, Inc. From December 2012 to December 2013, Mr. Bostrom was Co-Chairman of the Financial Regulatory and Compliance Practice of Greenberg Traurig LLP, an international law firm. From August 2011 to November 2012, Mr. Bostrom was Co-Head of the Global Financial Institutions and Funds Sector of Dentons US LLP (formerly, SNR Denton), an international law firm. From February 2006 to August 2011, Mr. Bostrom was Executive Vice President, General Counsel and Corporate Secretary of the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). Prior to Freddie Mac, Mr. Bostrom was the Managing Partner of the New York office of Winston & Strawn LLP, a Member of that firm’s Executive Committee and Head of its Financial Institutions Practice.
Joanne C. Crevoiserat, 53, has been Executive Vice President, Chief Operating Officer and Chief Financial Officer of A&F since February 2017, Executive Vice President and Chief Financial Officer of A&F since May 2014. Ms. Crevoiserat served as Interim Principal Executive Officer of A&F from June 2016 to February 2017 and a member of the Office of the Chairman of A&F from October 2015 to February 2017. Prior to joining A&F, Ms. Crevoiserat served in a number of senior management roles at Kohl’s Inc., which operates family-oriented department stores and a website featuring apparel, footwear, accessories, soft home products and housewares. From June 2012 to April 2014, Ms. Crevoiserat was the Executive Vice President of Finance of Kohl’s and from November 2008 to June 2012, she served as the Executive Vice President of Merchandise Planning and Allocation of Kohl’s. Prior to her time with Kohl’s, Ms. Crevoiserat held senior finance positions with Wal-Mart Stores and May Department Stores, including Chief Financial Officer of the Filene’s, Foley’s and Famous-Barr brands.
Fran Horowitz, 53, has been Chief Executive Officer and a director of A&F since February 2017. Prior thereto, she had served as President & Chief Merchandising Officer for all brands of A&F since December 2015 and was a member of the Office of the Chairman of A&F from December 2014 to February 2017. Ms. Horowitz also held the position of Brand President of Hollister from October 2014 to December 2015. Before joining Hollister, from October 2013 to October 2014, Ms. Horowitz served as the President of Ann Taylor Loft, a division of Ann Inc., the parent company of three specialty retail fashion brands in North America. Prior to her time with Ann Taylor Loft, from February 2005 to October 2012, she held various roles at Express, Inc., a specialty apparel and accessories retailer of women’s and men’s merchandise, including Executive Vice President of Women’s Merchandising and Design from May 2010 to November 2012. Before her time with Express, Inc., Ms. Horowitz spent 13 years at Bloomingdale’s in various women’s merchandising roles, including Vice President Divisional Merchandise Manager. Since March 2017, Ms. Horowitz has served on the Board of Directors of SeriousFun Children's Network, Inc., a Connecticut non-profit corporation.
Kristin Scott, 49, has been Brand President of Hollister since August 2016. Before joining Hollister, she served in various positions with Victoria’s Secret, a specialty retailer of women’s intimate and other apparel which sells products at Victoria’s Secret stores and online, from December 2007 until April 2016. Most recently, Ms. Scott served as Executive Vice President, GMM Merchandising from March 2013 to April 2016, Senior Vice President, GMM Merchandising from March 2009 to March 2013 and Senior Vice President, GMM Merchandising - Stores from December 2007 to March 2009. Prior to her time with Victoria’s Secret, Ms. Scott served in merchandising positions at the Vice President level with Gap Outlet, Marshall Fields and Target.
As previously announced, in conjunction with the appointment of Fran Horowitz to Chief Executive Officer of A&F, the Board dissolved the Office of the Chairman, effective February 1, 2017. The Office of the Chairman was formed in December 2014 to allow for effective management of the Company during a transition in leadership. The executive officers serve at the pleasure of the Board of Directors of A&F.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS.
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by us, our management or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which may be beyond our control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements.
Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. The following factors, among others, could affect our financial performance and could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements:
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• | changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity; |
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• | our inability to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability; |
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• | our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours; |
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• | direct-to-consumer sales channels are a significant component of our growth strategy, and the failure to successfully develop our position in these channels could have an adverse impact on our results of operations; |
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• | our ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks; |
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• | our inability to successfully implement our strategic plans could have a negative impact on our growth and profitability; |
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• | our failure to protect our reputation could have a material adverse effect on our brands; |
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• | our business could suffer if our information technology systems are disrupted or cease to operate effectively; |
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• | we may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss; |
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• | fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations; |
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• | changes in the cost, availability and quality of raw materials, labor, transportation and trade relations could cause manufacturing delays and increase our costs; |
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• | we depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs; |
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• | our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; |
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• | we rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business; |
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• | our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain; |
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• | our litigation exposure could have a material adverse effect on our financial condition and results of operations; |
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• | our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets; |
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• | fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results; |
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• | extreme weather conditions and the seasonal nature of our business may cause net sales to fluctuate and negatively impact our results of operations; |
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• | our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters, pandemic disease and other unexpected events, any of which could result in an interruption to our business and adversely affect our operating results; |
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• | the impact of war or acts of terrorism could have a material adverse effect on our operating results and financial condition; |
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• | changes in the regulatory or compliance landscape could adversely affect our business and results of operations; |
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• | our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business; and, |
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• | compliance with changing regulations and standards for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results. |
This list of important factors is not exclusive.
The following sets forth a description of the preceding risk factors that we believe may be relevant to an understanding of our business. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.
Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity.
Our business depends on consumer demand for our merchandise. Consumer purchases of discretionary items, including our merchandise, can be adversely impacted by recessionary periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect worldwide economic conditions including unemployment, consumer credit availability, consumer debt levels, reductions in net worth based on declines in the financial, residential real estate and mortgage markets, sales and personal income tax rates, fuel and energy prices, interest rates, consumer confidence in future economic and political conditions, consumer perceptions of personal well-being and security, the value of the U.S. Dollar versus foreign currencies and other macroeconomic factors. Additionally, changes in consumer preferences and discretionary spending habits may negatively impact the specialty retail market. Global economic uncertainty and changing consumer preferences and discretionary spending habits could have a material adverse effect on our results of operations, liquidity and capital resources if reduced consumer demand for our merchandise should occur. It could also impact our ability to fund growth and/or result in our becoming reliant on external financing, the availability and cost of which may be uncertain.
The economic conditions and factors described above could adversely affect the productivity of our stores, as well as adversely affect the pace of opening new stores, or their productivity once opened. Finally, the economic environment may exacerbate some of the risks noted below, including consumer demand, strain on available resources, our international growth strategy, availability of real estate, interruption of the flow of merchandise from key vendors and manufacturers, and foreign currency exchange rate fluctuations.
Our inability to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability.
Our success largely depends on our ability to anticipate and gauge the fashion preferences of our customers and provide merchandise that satisfies constantly shifting demands in a timely manner. Because we enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, pricing shifts, and the sub-optimal selection and timing of merchandise purchases. Moreover, there can be no assurance that we will continue to anticipate consumer demands and accurately plan inventory successfully in the future. Changing consumer preferences and fashion trends, whether we are able to anticipate, identify and respond to them or not, could adversely impact our sales. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to sell through excess inventory and therefore, lower than planned margins. A distressed economic and retail environment, in which many of our competitors continue to engage in aggressive promotional activities increases the importance of reacting appropriately to changing consumer preferences and fashion trends. Conversely, if we underestimate consumer demand for our merchandise, or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales. Any of these events could significantly harm our operating results and financial condition.
Our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours.
The sale of apparel and personal care products through stores and direct-to-consumer channels is a highly competitive business with numerous participants, including individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online businesses. The substantial sales growth in the direct-to-consumer channel within the last few years has encouraged the entry of many new competitors and an increase in competition from established companies. We face a variety of competitive challenges, including:
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• | anticipating and quickly responding to changing consumer demands or preferences better than our competitors; |
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• | maintaining favorable brand recognition and effective marketing of our products to consumers in several diverse demographic markets; |
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• | sourcing merchandise efficiently; |
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• | developing innovative, high-quality merchandise in styles that appeal to our consumers and in ways that favorably distinguish us from our competitors; and, |
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• | countering the aggressive pricing and promotional activities of many of our competitors without diminishing the aspirational nature of our brands and brand equity. |
In light of the competitive challenges we face, we may not be able to compete successfully in the future. Further, increases in competition could reduce our sales and harm our operating results and business.
Direct-to-consumer sales channels are a significant component of our growth strategy, and the failure to successfully develop our position in these channels could have an adverse impact on our results of operations.
We sell merchandise for each brand over the Internet, both domestically and internationally. Consumers are increasingly shopping online and via mobile devices, and we have made significant investments in capital spending and labor to develop these channels, invested in digital media to attract new customers and developed localized fulfillment, shipping and customer service operations. There is no assurance that we will be able to continue to successfully maintain or expand our direct-to-consumer sales channels and respond to shifting consumer traffic patterns and direct-to-consumer buying trends. As omnichannel retailing continues to grow and evolve, our customers increasingly interact with our brands through a variety of media including smart phones and tablets, and our success depends on our ability to introduce innovative means of engaging our customers. Our inability to adequately respond to these risks and uncertainties or to successfully maintain and expand our direct-to-consumer business may have an adverse impact on our results of operations.
In addition, direct-to-consumer operations are subject to numerous risks, including reliance on third-party computer hardware/software and service providers, data breaches, violations of state, federal or international laws, including those relating to online privacy, credit card fraud, telecommunication failures and electronic break-ins and similar disruptions, and disruption of Internet service. Changes in foreign governmental regulations may also negatively impact our ability to deliver product to our customers. Our failure to successfully respond to these risks might adversely affect sales in our direct-to-consumer business as well as damage our reputation and brands.
Our ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks.
We are subject to domestic laws, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If any of our overseas operations, or our associates or agents, violate such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Additionally, we may face operational issues that could negatively affect our reputation, business and operating results, unless we can:
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• | address the different operational characteristics present in each country in which we operate, including employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements; |
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• | hire, train and retain qualified personnel; |
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• | maintain good relations with individual associates and groups of associates; |
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• | avoid work stoppages or other labor-related issues in our European stores where associates are represented by workers’ councils and unions; |
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• | retain acceptance from foreign customers; |
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• | manage inventory effectively to meet the needs of existing stores on a timely basis; |
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• | manage foreign currency exchange risks effectively. |
Failure to address one or more of the factors above could have a material adverse effect on our results of operations.
Our inability to successfully implement our strategic plans could have a negative impact on our growth and profitability.
Our ability to execute our long-term strategies successfully and in a timely fashion is subject to various risks and uncertainties as described under this “Risk Factors” section. Specifically, these risks can be categorized into market risk, execution risk and customer acceptance risk. Market risk includes consumer spending, actions of brand competitors and changes in demographics or preferences of our target customer. Achieving the goals of our long-term strategy is also dependent on us executing the strategy successfully. Finally, the initiatives we implement in connection with our long-term strategy may not resonate with our customers. It may take longer than anticipated to generate the expected benefits from our long-term strategy and there can be no guarantee that these initiatives will result in improved operating results. In addition, failure to successfully implement our long-term strategy could have a negative impact on our growth and profitability.
Our failure to protect our reputation could have a material adverse effect on our brands.
Our ability to maintain our reputation is critical to our brands. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity, if our third-party vendors fail to comply with our vendor code of conduct, if any third parties with which we have a business relationship fail to represent our brands in a manner consistent with our brand image and customer experience standards or as a result of a cyber-attack. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor, health and safety, accounting or environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Public perception about our products or our stores, whether justified or not, could impair our reputation, involve us in litigation, damage our brands and have a material adverse effect on our business. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations and financial condition, as well as require additional resources to rebuild our reputation.
Our business could suffer if our information technology systems are disrupted or cease to operate effectively.
We rely heavily on our information technology systems to operate our websites; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise on a timely basis; and maintain cost-efficient operations. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of our computer hardware and software systems and maintain cyber security. Despite efforts to prevent such an occurrence, our information technology systems may be vulnerable from time to time to damage or interruption from computer viruses, power outages, third-party intrusions, inadvertent or intentional breach by our employees and other technical malfunctions. If our systems are damaged, or fail to function properly, we may have to make monetary investments to repair or replace the systems, and we could endure delays in our operations.
While we regularly evaluate our information technology systems and requirements, we are aware of the inherent risks associated with replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance
and understanding. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade our systems, could cause information, including data related to customer orders, to be lost or delayed. Such a loss or delay, especially if the disruption or slowdown occurred during our peak selling seasons, could have a material adverse effect on our results of operations.
We may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss.
In the standard course of business, we process customer information, including payment information, through our stores and direct-to-consumer programs. Rapidly evolving technologies and types of cyber-attacks may result in this information being compromised or breached. The retail industry in particular has been the target of many recent cyber-attacks, and as a result, there is heightened concern over the security of personal information transmitted over or accessible through the Internet, consumer identity theft and user privacy. We endeavor to protect consumer identity and payment information through the implementation of security technologies, processes and procedures. It is possible that an individual or group could defeat our security measures and access sensitive customer and associate information. Actual or anticipated cyber-attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protective technologies, train employees, and engage third-party experts and consultants. Exposure of customer data through any means could materially harm the Company by, but not limited to, reputation loss, regulatory fines and penalties, legal liability and costs of litigation.
Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations.
The functional currency of our foreign subsidiaries is generally the local currency in which each entity operates, while our consolidated financial statements are presented in U.S. Dollars. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. Dollars at exchange rates in effect during, or at the end of the reporting period. In addition, our international subsidiaries transact in currencies other than their functional currency, including intercompany transactions, which results in foreign currency transaction gains or losses. Furthermore, we purchase substantially all of our inventory in U.S. Dollars. As a result, our sales and gross profit rate from international operations will be negatively impacted during periods of a strengthened U.S. dollar relative to the functional currencies of our foreign subsidiaries, as was the case in Fiscal 2016. Additionally, tourism spending may be affected by changes in currency exchange rates, and as a result, sales in our flagship stores and other stores with higher tourism traffic have, at times, been adversely impacted, and may continue to be adversely impacted, by fluctuations in currency exchange rates. Certain events, such as the June 2016 decision by the United Kingdom to leave the European Union (“Brexit”) and the November 2016 U.S. elections have increased global economic and political uncertainty and caused volatility in foreign currency exchange rates. Our business and results of operations may be impacted by these developments. For Fiscal 2016, 63.8%, 23.1% and 13.1% of the Company's net sales were attributable to the U.S., Europe and other geographic areas, respectively.
Changes in cost, availability and quality of raw materials, labor, transportation, and trade relations could cause manufacturing delays and increase our costs.
Changes in the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise could have a material adverse effect on our cost of sales, or our ability to meet customer demand. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton, as well as the cost of compliance with sourcing laws. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. Such factors may be exacerbated by legislation and regulations associated with global climate change. In addition, the cost of labor at many of our third-party manufacturers has been increasing significantly, and as the middle class in developing countries continues to grow, it is unlikely such cost pressure will abate. The Company is also susceptible to fluctuations in the cost of transportation. We may not be able to pass all or a portion of higher raw materials prices or labor or transportation costs on to our customers, which could adversely affect our gross margin and results of our operations. The results of the November 2016 U.S. elections have introduced greater uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries. Major developments in trade relations, such as the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.
We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs.
We do not own or operate any manufacturing facilities. As a result, the continued success of our operations is tied to our timely receipt of quality merchandise from third-party manufacturers. We source the majority of our merchandise outside of the U.S. through arrangements with approximately 150 vendors which includes foreign manufacturers located throughout the world, primarily in Asia and Central America. Political, social or economic instability in Asia and Central America, or in other regions in which our manufacturers are located, could cause disruptions in trade, including exports to the U.S. A manufacturer’s inability to ship orders in a timely manner or meet our quality standards could cause delays in responding to consumer demands and negatively affect consumer confidence or negatively impact our competitive position, any of which could have a material adverse effect on our financial condition and results of operations.
Other events that could disrupt the timely delivery of our merchandise include new trade law provisions or regulations, reliance on a limited number of shipping carriers, significant labor disputes and significant delays in the delivery of cargo due to port security considerations. Furthermore, we are susceptible to increases in fuel costs which may increase the cost of distribution. If we are not able to pass this cost on to our customers, our financial condition and results of operations could be adversely affected.
Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around.
In order to generate customer traffic, we locate many of our stores in prominent locations within successful shopping malls or street locations. Our stores benefit from the ability of the malls’ “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic in the vicinity of our stores. We cannot control the loss of an anchor or other significant tenant in a shopping mall in which we have a store; the development of new shopping malls in the U.S. or around the world; the availability or cost of appropriate locations; competition with other retailers for prominent locations; or the success of individual shopping malls. All of these factors may impact our ability to meet our productivity targets for our domestic stores and our growth objectives for our international stores and could have a material adverse effect on our financial condition or results of operations. In addition, some malls that were in prominent locations when we opened our stores may cease to be viewed as prominent. If this trend continues or if the popularity of mall shopping continues to decline generally among our customers, our sales may decline, which would impact our gross profits and net income.
Part of our future growth is dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs.
We rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business.
Our senior executive officers closely supervise all aspects of our business including the design of our merchandise and the operation of our stores. Our senior executive officers have substantial experience and expertise in the retail business and have an integral role in the growth and success of our brands. If we were to lose the benefit of the involvement of multiple senior executives, our business could be adversely affected. Competition for such senior executive officers is intense, and we cannot be sure we will be able to attract, retain and develop a sufficient number of qualified senior executive officers in future periods.
Our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain.
We rely on two Company-owned DCs and five third-party DCs to manage the receipt, storage, sorting, packing and distribution of our merchandise. The Company has two Company-owned DCs located in New Albany, Ohio, one of which is a dedicated direct-to-consumer facility, and one third-party DC located in Reno, Nevada that service our North American stores and direct-to-consumer customers outside of Europe and Asia. The Company uses a third-party DC in the Netherlands for the distribution of merchandise to stores and direct-to-consumer customers located in Europe, a third-party DC in China for the distribution of merchandise to stores and direct-to-consumer customers located in China, a third-party DC in Hong Kong for the distribution of merchandise to stores and direct-to-consumer customers located in Asia, and a third-party DC in the United Arab Emirates for the distribution of merchandise to stores located in the Middle East. The Company utilizes primarily one contract carrier to ship merchandise and related materials to its North American stores and direct-to-consumer customers, and several contract carriers for its European and Asian stores and direct-to-consumer customers. As a result, our operations are susceptible to local and regional factors, such as system failures, accidents, economic and weather conditions, natural disasters, demographic and population changes, as well as other unforeseen events and circumstances. If our distribution operations were disrupted, our ability to replace inventory in our stores and process direct-to-consumer and wholesale orders could be interrupted and sales could be negatively impacted.
Our litigation exposure could have a material adverse effect on our financial condition and results of operations.
We, along with third parties we do business with, are involved, from time to time, in litigation arising in the ordinary course of business. Litigation matters may include, but are not limited to, contract disputes, employment-related actions, labor relations, commercial litigation, intellectual property rights and shareholder actions. Any litigation that we become a party to could be costly and time consuming and could divert our management and key personnel from our business operations. Our current litigation exposure could be impacted by litigation trends, discovery of damaging facts with respect to legal matters pending against us or determinations by judges, juries or other finders of fact that are not in accordance with management’s evaluation of existing claims. Should management’s evaluation prove incorrect, our exposure could greatly exceed expectations and have a material adverse effect on our financial condition, results of operations or cash flows.
Our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets.
We believe our core trademarks, Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos, are an essential element of our strategy. We have obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries of countries where stores are located or likely to be located in the future. In addition, we own registrations and have pending applications for other trademarks in the U.S. and have applied for or obtained registrations from the registries in many foreign countries in which our stores or our manufacturers are located. There can be no assurance that we will obtain registrations that have been applied for or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. Although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third-party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected.
Because we have not yet registered all of our trademarks in all categories, or in all foreign countries in which we source or offer our merchandise now, or may in the future, our international expansion and our merchandising of products using these marks could be limited. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom we are not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. Our inability to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our merchandise in those non-U.S. jurisdictions.
Fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results.
We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could
be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows. In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows. In addition, tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate.
A number of proposals for broad U.S. corporate tax reform are currently being considered by various legislative and administrative bodies, including a border-adjustment tax, other increased taxes on imports, and limiting the ability to defer U.S. taxation on earnings outside the U.S. Such changes could have a material adverse effect on our business, results of operations and liquidity.
Extreme weather conditions and the seasonal nature of our business may cause net sales to fluctuate and negatively impact our results of operations.
Historically, our operations have been seasonal, with a significant amount of net sales and operating income occurring in the fourth fiscal quarter. Severe weather conditions and changes in weather patterns can influence customer trends, consumer traffic and shopping habits. As a result of this seasonality, net sales and net income during any fiscal quarter cannot be used as an accurate indicator of our annual results. Unseasonable weather may diminish demand for our seasonal merchandise. In addition, severe weather can also decrease customer traffic in our stores and reduce sales and profitability. As a result of this seasonality, net sales and net income during any fiscal quarter cannot be used as an accurate indicator of our annual results. Any factors negatively affecting us during the third and fourth fiscal quarters of any year, including inclement weather, could have a material adverse effect on our financial condition and results of operations for the entire year.
Our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters, pandemic disease and other unexpected events, any of which could result in an interruption to our business and adversely affect our operating results.
Our retail stores, corporate offices, distribution centers, infrastructure projects and direct-to-consumer operations, as well as the operations of our vendors and manufacturers, are vulnerable to damage from natural disasters, pandemic disease and other unexpected events. If any of these events result in damage to our facilities, systems or stores, or the facilities or systems of our vendors or manufacturers, we may experience interruptions in our business until the damage is repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage which exceeds our applicable insurance coverage.
The impact of war or acts of terrorism could have a material adverse effect on our operating results and financial condition.
The continued threat of terrorism and the associated heightened security measures and military actions in response to acts of terrorism have disrupted commerce. Further acts of terrorism or future conflicts may disrupt commerce and undermine consumer confidence and consumer spending by causing domestic and/or tourist traffic in malls and the Company’s flagship and other stores to decline, which could negatively impact our sales revenue. Furthermore, an act of terrorism or war, or the threat thereof, or any other unforeseen interruption of commerce, could negatively impact our business by interfering with our ability to obtain merchandise from foreign manufacturers. Our inability to obtain merchandise from our foreign manufacturers or substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our operating results and financial condition.
Changes in the regulatory or compliance landscape could adversely affect our business and results of operations.
We are subject to numerous laws and regulations, including customs, truth-in-advertising, securities laws, consumer protection, general privacy, health information privacy, identity theft, online privacy, employee health and safety, international minimum wage laws, unsolicited commercial communication and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, intellectual property, promotion and sale of merchandise and the operation of retail stores, direct-to-consumer operations and distribution centers. Laws and regulations at the state, federal and international levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. If these laws and regulations were to change, or were violated by our management, associates, suppliers, vendors or other parties with whom we do business, the costs of certain merchandise could increase, or we could experience delays in shipments of our merchandise, be subject to fines or penalties, temporary or permanent store closures, increased regulatory scrutiny or suffer reputational harm, which could reduce demand for our merchandise and adversely affect our business and results of operations. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation including the areas referenced above, could adversely affect our business and results of operations.
Our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business.
Our Asset-Based Revolving Credit Agreement, as amended, expires on August 7, 2019 and our Term Loan Agreement, as amended, has a maturity date of August 7, 2021. Both our Asset-Based Revolving Credit Agreement and our Term Loan Agreement contain restrictive covenants that, subject to specified exemptions, restrict our ability to incur indebtedness, grant liens, make certain investments, pay dividends or distributions on our capital stock and engage in mergers. The inability to obtain credit on commercially reasonable terms in the future when these facilities expire could adversely impact our liquidity and results of operations. In addition, market conditions could potentially impact the size and terms of a replacement facility or facilities.
Compliance with changing regulations and standards for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results.
Changing regulatory requirements for corporate governance and public disclosure, including SEC regulations and the Financial Accounting Standards Board’s accounting standards requirements are creating additional complexities for public companies. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”), was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas.
Stockholder activism, the current political environment, financial reform legislation and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations. In addition, the expected future requirement to transition to, or converge with, international financial reporting standards may create uncertainty and additional complexities. These changing regulatory requirements may lead to additional compliance costs, as well as the diversion of our management’s time and attention from strategic business activities and could have a significant effect on our reported results for the affected periods.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
The Company’s headquarters and support functions occupy 501 acres, consisting of the home office, distribution and shipping facilities centralized on a campus-like setting in New Albany, Ohio, all of which are owned by the Company. Additionally, the Company leases small facilities to house its design and sourcing support centers in Hong Kong, New York City, New York and Los Angeles, California, as well as offices in the United Kingdom, Japan, Switzerland, Italy, Hong Kong and China.
All of the retail stores operated by the Company, as of March 22, 2017, are located in leased facilities, primarily in shopping centers. The leases expire at various dates, between 2017 and 2031.
The Company’s home office, distribution and shipping facilities, design support centers and stores are currently suitable and adequate.
As of March 22, 2017, the Company’s 897 stores were located as follows:
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| | | | | | | | | | |
U.S. & U.S. Territories: |
Alabama | 3 |
| | Louisiana | 5 |
| | Ohio | 26 |
|
Arizona | 14 |
| | Maine | 3 |
| | Oklahoma | 4 |
|
Arkansas | 3 |
| | Maryland | 12 |
| | Oregon | 6 |
|
California | 105 |
| | Massachusetts | 27 |
| | Pennsylvania | 28 |
|
Colorado | 6 |
| | Michigan | 18 |
| | Rhode Island | 2 |
|
Connecticut | 15 |
| | Minnesota | 9 |
| | South Carolina | 8 |
|
Delaware | 5 |
| | Mississippi | 3 |
| | Tennessee | 13 |
|
District Of Columbia | 1 |
| | Missouri | 4 |
| | Texas | 66 |
|
Florida | 67 |
| | Montana | 1 |
| | Utah | 5 |
|
Georgia | 19 |
| | Nebraska | 2 |
| | Vermont | 1 |
|
Hawaii | 7 |
| | Nevada | 9 |
| | Virginia | 21 |
|
Idaho | 2 |
| | New Hampshire | 9 |
| | Washington | 16 |
|
Illinois | 26 |
| | New Jersey | 36 |
| | West Virginia | 3 |
|
Indiana | 10 |
| | New Mexico | 3 |
| | Wisconsin | 8 |
|
Iowa | 4 |
| | New York | 42 |
| | Puerto Rico | 2 |
|
Kansas | 5 |
| | North Carolina | 16 |
| | | |
Kentucky | 8 |
| | North Dakota | 1 |
| | | |
| | | | | | | |
International: |
Austria | 6 |
| | Hong Kong | 3 |
| | Republic of Korea | 3 |
|
Belgium | 3 |
| | Ireland | 2 |
| | Singapore | 1 |
|
Canada | 18 |
| | Italy | 11 |
| | Spain | 12 |
|
China | 27 |
| | Japan | 11 |
| | Sweden | 3 |
|
Denmark | 1 |
| | Kuwait | 2 |
| | United Kingdom | 34 |
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France | 15 |
| | Netherlands | 4 |
| | United Arab Emirates | 6 |
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Germany | 25 |
| | Poland | 1 |
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ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits and other adversarial 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 January 28, 2017, the Company had accrued charges of approximately $6 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.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
A&F’s Class A Common Stock (the “Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.” The table below sets forth the high and low sales prices of A&F’s Common Stock on the New York Stock Exchange for Fiscal 2016 and Fiscal 2015:
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| | | | | | | | |
| | Sales Price |
| | High | | Low |
Fiscal 2016 | | | | |
4th quarter | | $ | 17.35 |
| | $ | 11.29 |
|
3rd quarter | | $ | 23.29 |
| | $ | 14.71 |
|
2nd quarter | | $ | 27.37 |
| | $ | 16.49 |
|
1st quarter | | $ | 32.83 |
| | $ | 23.45 |
|
Fiscal 2015 | | | | |
4th quarter | | $ | 28.21 |
| | $ | 18.55 |
|
3rd quarter | | $ | 22.25 |
| | $ | 15.42 |
|
2nd quarter | | $ | 23.72 |
| | $ | 19.36 |
|
1st quarter | | $ | 26.50 |
| | $ | 19.34 |
|
Dividends are declared at the discretion of A&F’s Board of Directors. A quarterly dividend, of $0.20 per share outstanding, was declared in each of February, May, August and November in Fiscal 2016 and Fiscal 2015. Dividends were paid in each of March, June, September and December in Fiscal 2016. A&F’s Board of Directors reviews the dividend on a quarterly basis and establishes the dividend rate based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors which the directors deem relevant.
As of March 22, 2017, there were approximately 3,200 stockholders of record. However, when including investors holding shares in broker accounts under street name A&F estimates that there are approximately 34,300 stockholders.
The following table provides information regarding the purchase of shares of the Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the quarterly period ended January 28, 2017:
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| | | | | | | | | | | | | |
Period (fiscal month) | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Number of Shares that May Yet be Purchased under the Plans or Programs(3) |
October 30, 2016 through November 26, 2016 | | 1,284 |
| | $ | 15.37 |
| | — |
| | 6,503,656 |
|
November 27, 2016 through December 31, 2016 | | 16,544 |
| | $ | 14.62 |
| | — |
| | 6,503,656 |
|
January 1, 2017 through January 28, 2017 | | 9,155 |
| | $ | 11.71 |
| | — |
| | 6,503,656 |
|
Total | | 26,983 |
| | $ | 13.67 |
| | — |
| | 6,503,656 |
|
| |
(1) | All of the 26,983 shares of A&F’s Common Stock purchased during the thirteen-week period ended January 28, 2017 represented shares which were withheld for tax payments due upon the exercise of employee stock appreciation rights and the vesting of restricted stock units and restricted share awards. |
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(2) | No shares were repurchased during the thirteen-week period ended January 28, 2017 pursuant to A&F’s publicly announced stock repurchase authorization. On August 14, 2012, A&F’s Board of Directors authorized the repurchase of 10.0 million shares of A&F’s Common Stock, which was announced on August 15, 2012. |
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(3) | The number shown represents, as of the end of each period, the maximum number of shares of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time-to-time, depending on market conditions. |
During Fiscal 2015, A&F repurchased approximately 2.5 million shares of A&F’s Common Stock in the open market with a cost of approximately $50.0 million. Repurchases made during Fiscal 2015 were pursuant to authorizations of A&F’s Board of Directors.
The following graph shows the changes, over the five-year period ended January 28, 2017 (the last day of A&F’s Fiscal 2016) in the value of $100 invested in (i) shares of A&F’s Common Stock; (ii) the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”); (iii) the Standard & Poor’s Midcap 400 Stock Index (the “S&P Midcap 400 Index”); and (iv) the Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail Index”), including reinvestment of dividends. The plotted points represent the closing price on the last trading day of the fiscal year indicated.
PERFORMANCE GRAPH(1)
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Abercrombie & Fitch Co., the S&P 500 Index, the S&P Midcap 400 Index and the S&P Apparel Retail Index
*$100 invested on 1/28/12 in stock or 1/28/12 in index, including reinvestment of dividends. Indexes calculated on month-end basis.
Copyright© 2017 Standard & Poor's, a division of S&P Global. All rights reserved.
In Fiscal 2013, A&F was removed as a component of the S&P 500 Index and became a component of the S&P Midcap 400 Index.
(1) This graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to SEC Regulation 14A or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that A&F specifically requests that the graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.
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ITEM 6. | SELECTED FINANCIAL DATA |
(Thousands, except per share and per square foot amounts, ratios and store data)
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| | | | | | | | | | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | | Fiscal 2013 | | Fiscal 2012(1) |
Statements of operations data | | | | | | | | | |
Net sales | $ | 3,326,740 |
| | $ | 3,518,680 |
| | $ | 3,744,030 |
| | $ | 4,116,897 |
| | $ | 4,510,805 |
|
Gross profit | $ | 2,028,568 |
| | $ | 2,157,543 |
| | $ | 2,313,570 |
| | $ | 2,575,435 |
| | $ | 2,816,709 |
|
Operating income | $ | 15,188 |
| | $ | 72,838 |
| | $ | 113,519 |
| | $ | 80,823 |
| | $ | 374,233 |
|
Net income attributable to A&F | $ | 3,956 |
| | $ | 35,576 |
| | $ | 51,821 |
| | $ | 54,628 |
| | $ | 237,011 |
|
Net income per basic share attributable to A&F | $ | 0.06 |
| | $ | 0.52 |
| | $ | 0.72 |
| | $ | 0.71 |
| | $ | 2.89 |
|
Net income per diluted share attributable to A&F | $ | 0.06 |
| | $ | 0.51 |
| | $ | 0.71 |
| | $ | 0.69 |
| | $ | 2.85 |
|
Basic weighted-average shares outstanding | 67,878 |
| | 68,880 |
| | 71,785 |
| | 77,157 |
| | 81,940 |
|
Diluted weighted-average shares outstanding | 68,284 |
| | 69,417 |
| | 72,937 |
| | 78,666 |
| | 83,175 |
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Cash dividends declared per share | $ | 0.80 |
| | $ | 0.80 |
| | $ | 0.80 |
| | $ | 0.80 |
| | $ | 0.70 |
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Balance sheet data | | | | | | | | | |
Working capital(2) | $ | 653,300 |
| | $ | 644,277 |
| | $ | 679,016 |
| | $ | 752,344 |
| | $ | 617,023 |
|
Current ratio(3) | 2.34 |
| | 2.20 |
| | 2.40 |
| | 2.32 |
| | 1.89 |
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Cash and equivalents | $ | 547,189 |
| | $ | 588,578 |
| | $ | 520,708 |
| | $ | 600,116 |
| | $ | 643,505 |
|
Total assets | $ | 2,295,757 |
| | $ | 2,433,039 |
| | $ | 2,505,167 |
| | $ | 2,850,997 |
| | $ | 2,987,401 |
|
Borrowings, net | $ | 262,992 |
| | $ | 286,235 |
| | $ | 293,412 |
| | $ | 135,000 |
| | $ | — |
|
Leasehold financing obligations | $ | 46,397 |
| | $ | 47,440 |
| | $ | 50,521 |
| | $ | 60,726 |
| | $ | 63,942 |
|
Total stockholders’ equity | $ | 1,252,039 |
| | $ | 1,295,722 |
| | $ | 1,389,701 |
| | $ | 1,729,493 |
| | $ | 1,818,268 |
|
Return on average stockholders’ equity(4) | — | % | | 3 | % | | 3 | % | | 3 | % | | 13 | % |
Other financial and operating data | | | | | | | | | |
Net cash provided by operating activities | $ | 184,591 |
| | $ | 309,941 |
| | $ | 312,480 |
| | $ | 175,493 |
| | $ | 684,171 |
|
Net cash used for investing activities | $ | (136,746 | ) | | $ | (122,567 | ) | | $ | (175,074 | ) | | $ | (173,861 | ) | | $ | (247,238 | ) |
Net cash used for financing activities | $ | (83,793 | ) | | $ | (106,875 | ) | | $ | (181,453 | ) | | $ | (40,831 | ) | | $ | (380,071 | ) |
Capital expenditures | $ | 140,844 |
| | $ | 143,199 |
| | $ | 174,624 |
| | $ | 163,924 |
| | $ | 339,862 |
|
Free cash flow(5) | $ | 43,747 |
| | $ | 166,742 |
| | $ | 137,856 |
| | $ | 11,569 |
| | $ | 344,309 |
|
Comparable sales(6) | (5 | )% | | (3 | )% | | (8 | )% | | (11 | )% | | (1 | )% |
Net store sales per average gross square foot | $ | 343 |
| | $ | 360 |
| | $ | 381 |
| | $ | 417 |
| | $ | 485 |
|
Total number of stores open | 898 |
| | 932 |
| | 969 |
| | 1,006 |
| | 1,041 |
|
Total store square footage at end of period | 7,007 |
| | 7,292 |
| | 7,517 |
| | 7,736 |
| | 7,958 |
|
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(1) | Fiscal 2012 was a fifty-three week year. |
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(2) | Working capital is computed by subtracting current liabilities from current assets. |
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(3) | Current ratio is computed by dividing current assets by current liabilities. |
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(4) | Return on average stockholders’ equity is computed by dividing net income attributable to A&F by the average stockholders’ equity balance. |
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(5) | Free cash flow is computed by subtracting capital expenditures from the GAAP financial measure of net cash provided by operating activities, both of which are disclosed above in the table preceding the measure of free cash flow. The Company believes that the non-GAAP measure of free cash flow is useful to investors to understand available cash flows generated from operations less cash flows used for capital expenditures. The closest GAAP financial measure is net cash provided by operating activities. The non-GAAP financial measure of free cash flow should not be used in isolation or as an alternative to net cash provided by operating activities or an indicator of the ongoing performance of the Company. It is also not intended to supersede or replace the Company’s GAAP financial measure. |
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(6) | Comparable sales is defined as the aggregate of: (1) year-over-year sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation, and (2) year-over-year direct-to-consumer sales with prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation. Beginning with Fiscal 2012, comparable sales include comparable direct-to-consumer sales. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
BUSINESS SUMMARY
The Company is a specialty retailer who primarily sells its products through store and direct-to-consumer operations, as well as through various wholesale, franchise and licensing arrangements. The Company offers a broad array of apparel products, including knit tops, woven shirts, graphic t-shirts, fleece, sweaters, jeans, woven pants, shorts, outerwear, dresses, intimates and swimwear; and personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands. The Company has operations in North America, Europe, Asia and the Middle East.
The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year. For purposes of this “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” the fifty-two week period ended January 28, 2017 is compared to the fifty-two week period ended January 30, 2016 and the fifty-two week period ended January 30, 2016 is compared to the fifty-two week period ended January 31, 2015.
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.
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 fifty-two week periods ended January 28, 2017 and January 30, 2016. 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.”
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28, 2017 | | January 30, 2016 |
(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 |
Fifty-two Weeks Ended | | | | | | | | | | | | |
Net sales | | $ | 3,326,740 |
| | $ | — |
| | $ | 3,326,740 |
| | $ | 3,518,680 |
| | $ | — |
| | $ | 3,518,680 |
|
Change in comparable sales(2) | | (5 | )% | | — | % | | (5 | )% | | (3 | )% | | — | % | | (3 | )% |
Gross profit rate | | 61.0 | % | | — | % | | 61.0 | % | | 61.3 | % | | 0.6 | % | | 61.9 | % |
Operating income | | $ | 15,188 |
| | $ | (11,926 | ) | | $ | 3,262 |
| | $ | 72,838 |
| | $ | 63,657 |
| | $ | 136,495 |
|
Net income (loss) attributable to A&F | | $ | 3,956 |
| | $ | (8,026 | ) | | $ | (4,070 | ) | | $ | 35,576 |
| | $ | 42,471 |
| | $ | 78,047 |
|
Net income (loss) per diluted share attributable to A&F | | $ | 0.06 |
| | $ | (0.12 | ) | | $ | (0.06 | ) | | $ | 0.51 |
| | $ | 0.61 |
| | $ | 1.12 |
|
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(1) | Refer to “RESULTS OF OPERATIONS,” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” for details on excluded items. |
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(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 January 28, 2017, the Company had $547.2 million in cash and equivalents, and $268.3 million in gross borrowings outstanding under its term loan facility. Net cash provided by operating activities was $184.6 million for Fiscal 2016. The Company also used cash of $140.8 million for capital expenditures, $54.1 million to pay dividends and $25.0 million to pay down debt during Fiscal 2016.
CURRENT TRENDS AND OUTLOOK
Despite a challenging retail environment in Fiscal 2016, the performance of our largest brand, Hollister, demonstrates the potential for our brands when brand voice, product and brand experience are aligned and attuned to our customer. The Abercrombie brand revitalization continues, with many of the lessons learned from Hollister being applied to position Abercrombie for future growth.
Overall we continue to make significant progress on our strategic initiatives. We stayed close to our customers and began to communicate evolved identities for each of our brands. In addition, we made improvements to the customer experience through the roll out of store remodels and a loyalty program for Hollister and to the seamless shopping experience through investments in direct-to-consumer and omnichannel capabilities across both brands. We also continue to execute our store closure and right sizing program.
While the environment is likely to remain challenging in Fiscal 2017, we continue to execute on our strategic priorities to position our business for sustainable growth.
For Fiscal 2017, we expect:
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• | The comparable sales trend to improve for the full year, but to remain challenging for the first half; with Hollister comparable sales to maintain or grow and the Abercrombie comparable sales trend to improve. |
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• | Continued adverse effects from foreign currency on sales and operating income. |
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• | A gross margin rate flat to the Fiscal 2016 adjusted non-GAAP rate of 61.0%, but to be pressured in the first quarter. |
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• | Actions already taken to reduce expense by approximately $100 million, enabling investments in revenue driving activities and resulting in net operating expense down approximately 3% from Fiscal 2016 adjusted non-GAAP operating expense of $2.025 billion, with a commitment to pursue further expense reductions throughout the year. |
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• | Net income attributable to noncontrolling interests of approximately $4 million. |
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• | A weighted average diluted share count of approximately 68 million shares, excluding the effect of potential share buybacks. |
We expect the core tax rate for the full year to be in the mid 30s and to remain highly sensitive to jurisdictional mix and at lower levels of pre-tax earnings. In addition, we also expect to incur a discrete non-cash income tax charge of approximately $9 million in the first quarter of Fiscal 2017 as a result of a change in share-based compensation accounting standards, the adverse effect of which will be included in the effective tax rate.
With regard to capital allocation, we are targeting capital expenditures to be approximately $100 million for Fiscal 2017, including approximately $70 million for store updates and new stores and approximately $20 million for direct-to-consumer and omnichannel capabilities and IT investments to support growth and continuous profit improvement initiatives.
We plan to open approximately six full-price stores in Fiscal 2017, including approximately four in the U.S and approximately two in international markets. We also plan to open approximately two new outlet stores. In addition, we anticipate closing approximately 60 stores in the U.S. during Fiscal 2017 through natural lease expirations.
NON-GAAP FINANCIAL MEASURES
This Annual Report on Form 10-K 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 7. 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.
KEY BUSINESS INDICATORS
The following measurements are among the key business indicators reviewed by various members of management to gauge the Company’s results:
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• | Comparable sales, defined as the aggregate of: (1) year-over-year sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with prior year’s net sales converted at the current year’s foreign currency exchange rate to remove the impact of currency fluctuation, and (2) year-over-year direct-to-consumer sales with prior year’s net sales converted at the current year’s foreign currency exchange rate to remove the impact of currency fluctuation; |
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• | Comparative results of operations with prior year’s results converted at the current year’s foreign currency exchange rate to remove the impact of currency fluctuation; |
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• | Gross profit and gross margin rate; |
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• | Cost of sales, exclusive of depreciation and amortization, as a percentage of net sales; |
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• | Selling margin, defined as sales price less original cost, by brand and product category; |
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• | Stores and distribution expense as a percentage of net sales; |
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• | Marketing, general and administrative expense as a percentage of net sales; |
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• | Operating income and operating income as a percentage of net sales; |
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• | Net income and net income attributable to A&F; |
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• | Inventory per gross square foot and inventory to sales ratio; |
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• | Cash flow and liquidity determined by the Company’s current ratio, working capital and free cash flow; |
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• | Store metrics such as sales per gross square foot, average number of transactions per store and store contribution (defined as store sales less direct costs of operating the store); |
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• | Transactional metrics such as traffic and conversion, average unit retail price, average unit cost, average units per transaction and average transaction values; and |
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• | Return on invested capital and return on equity. |
While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
FISCAL 2016 COMPARED TO FISCAL 2015
Net Sales
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| | | | | | | | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 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) | $ | 1,487,024 |
| | (11)% | | $ | 1,640,992 |
| | (6)% | | $ | (153,968 | ) | | (9)% |
Hollister | 1,839,716 |
| | —% | | 1,877,688 |
| | —% | | (37,972 | ) | | (2)% |
Total net sales | $ | 3,326,740 |
| | (5)% | | $ | 3,518,680 |
| | (3)% | | $ | (191,940 | ) | | (5)% |
| | | | | | | | | | | |
United States | $ | 2,123,808 |
| | (5)% | | $ | 2,282,040 |
| | (3)% | | $ | (158,232 | ) | | (7)% |
International | 1,202,932 |
| | (6)% | | 1,236,640 |
| | (1)% | | (33,708 | ) | | (3)% |
Total net sales | $ | 3,326,740 |
| | (5)% | | $ | 3,518,680 |
| | (3)% | | $ | (191,940 | ) | | (5)% |
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(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. |
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(2) | Includes Abercrombie & Fitch and abercrombie kids brands. |
For Fiscal 2016, net sales decreased 5% compared to Fiscal 2015, primarily attributable to a 5% decrease in comparable sales, which was driven by the Abercrombie brand.
Cost of Sales, Exclusive of Depreciation and Amortization
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| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Cost of sales, exclusive of depreciation and amortization | $ | 1,298,172 |
| | 39.0% | | $ | 1,361,137 |
| | 38.7% |
Inventory write-down, net(1) | — |
| | —% | | (20,647 | ) | | (0.6)% |
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization | $ | 1,298,172 |
| | 39.0% | | $ | 1,340,490 |
| | 38.1% |
| | | | | | | |
Gross profit | $ | 2,028,568 |
| | 61.0% | | $ | 2,157,543 |
| | 61.3% |
Inventory write-down, net(1) | — |
| | —% | | 20,647 |
| | 0.6% |
Adjusted non-GAAP gross profit | $ | 2,028,568 |
| | 61.0% | | $ | 2,178,190 |
| | 61.9% |
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(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 Fiscal 2016, cost of sales, exclusive of depreciation and amortization as a percentage of net sales increased by approximately 30 basis points for Fiscal 2016 as compared to Fiscal 2015, which included a $20.6 million net inventory write-down. Excluding the $20.6 million net inventory write-down, Fiscal 2016 adjusted non-GAAP cost of sales, exclusive of depreciation and amortization as a percentage of net sales increased by approximately 90 basis points as compared to Fiscal 2015, primarily due to the adverse effects from changes in foreign currency exchange rates of approximately 60 basis points and lower average unit retail.
Stores and Distribution Expense
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| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Stores and distribution expense | $ | 1,578,460 |
| | 47.4% | | $ | 1,604,214 |
| | 45.6% |
Store fixture disposal | — |
| | —% | | (4,200 | ) | | (0.1)% |
Lease termination and store closure costs | — |
| | —% | | (1,756 | ) | | —% |
Charges related to the Company's profit improvement initiative | — |
| | —% | | (709 | ) | | —% |
Adjusted non-GAAP stores and distribution expense | $ | 1,578,460 |
| | 47.4% | | $ | 1,597,549 |
| | 45.4% |
For Fiscal 2016, stores and distribution expense as a percentage of net sales increased by approximately 190 basis points as compared to Fiscal 2015, primarily due to the deleveraging effect from negative comparable sales, higher direct-to-consumer expense and a lease termination charge of $15.6 million related to the A&F flagship store in Hong Kong, partially offset by benefits from foreign currency exchange rates, the realization of savings on lower sales and expense reduction efforts. Excluding certain items presented in the table above, Fiscal 2016 adjusted non-GAAP stores and distribution expense as a percent of net sales increased by approximately 200 basis points as compared to Fiscal 2015.
For Fiscal 2016, shipping and handling costs, including costs incurred to store, move and prepare product for shipment and costs incurred to physically move product to the customer, associated with direct-to-consumer operations were $125.4 million as compared to $115.0 million for Fiscal 2015.
For Fiscal 2016, handling costs, including costs incurred to store, move and prepare product for shipment to stores, were $41.5 million as compared to $44.5 million for Fiscal 2015.
Shipping and handling costs are included in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Marketing, General and Administrative Expense
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| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Marketing, general and administrative expense | $ | 453,202 |
| | 13.6% | | $ | 470,321 |
| | 13.4% |
Indemnification recovery(1) | 6,000 |
| | 0.2% | | — |
| | —% |
Legal settlement charges(2) | — |
| | —% | | (15,753 | ) | | (0.4)% |
Charges related to the Company's profit improvement initiative | — |
| | —% | | (1,770 | ) | | (0.1)% |
Adjusted non-GAAP marketing, general and administrative expense | $ | 459,202 |
| | 13.8% | | $ | 452,798 |
| | 12.9% |
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(1) | Includes benefits related to an indemnification recovery of certain legal settlements which were recognized in the second quarter of Fiscal 2015. |
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(2) | Accrued expense for certain proposed legal settlements. |
For Fiscal 2016, marketing, general and administrative expense as a percentage of net sales increased by approximately 30 basis points as compared to Fiscal 2015, primarily due to the deleveraging effect from negative comparable sales and higher marketing expenses, partially offset by the net year-over-year impact of certain items presented in the table above, lower compensation expense and expense reduction efforts. Excluding certain items presented in the table above, Fiscal 2016 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales increased by approximately 90 basis points as compared to Fiscal 2015.
Restructuring Benefit
For Fiscal 2015, benefits associated with the restructuring of the Gilly Hicks brand were $1.6 million.
Asset Impairment
For Fiscal 2016, the Company incurred non-cash asset impairment charges of $7.9 million, primarily related to the Company’s abercrombie kids flagship store in London, as compared to $18.2 million for Fiscal 2015, primarily related to the Company’s Abercrombie & Fitch flagship store in Hong Kong and a decision to remove certain store fixtures in connection with changes to the Abercrombie and Hollister store experiences.
Other Operating Income, Net
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| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Other operating income, net | $ | 26,212 |
| | 0.8% | | $ | 6,441 |
| | 0.2% |
Claims settlement benefits(1) | (12,282 | ) | | (0.4)% | | — |
| | —% |
Lease termination and store closure costs(2) | — |
| | —% | | 2,211 |
| | 0.1% |
Adjusted non-GAAP other operating income, net | $ | 13,930 |
| | 0.4% | | $ | 8,652 |
| | 0.2% |
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(1) | Includes benefits related to a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill. |
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(2) | Includes charges related to a release of cumulative translation adjustment as the Company substantially completed the liquidation of its Australian operations. |
For Fiscal 2016, other operating income, net was $26.2 million and included $12.3 million of claims settlement benefits, as compared to $6.4 million for Fiscal 2015. Excluding certain items presented in the table above, Fiscal 2016 adjusted other operating income, net as a percentage of net sales increased 20 basis points as compared to Fiscal 2015, primarily due to higher gift card breakage due to the initial recognition of international gift card breakage of $4.8 million and higher foreign currency related gains, partially offset by insurance recoveries last year of $2.2 million.
Operating Income
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| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Operating income | $ | 15,188 |
| | 0.5% | | $ | 72,838 |
| | 2.1% |
Asset impairment | 6,356 |
| | 0.2% | | 18,209 |
| | 0.5% |
Indemnification recovery(1) | (6,000 | ) | | (0.2)% | | — |
| | —% |
Claims settlement benefits(2) | (12,282 | ) | | (0.4)% | | — |
| | —% |
Inventory write-down, net(3) | — |
| | —% | | 20,647 |
| | 0.6% |
Legal settlement charges(4) | — |
| | —% | | 15,753 |
| | 0.4% |
Store fixture disposal | — |
| | —% | | 4,200 |
| | 0.1% |
Lease termination and store closure costs | — |
| | —% | | 3,967 |
| | 0.1% |
Charges related to the Company's profit improvement initiative | — |
| | —% | | 2,479 |
| | 0.1% |
Restructuring benefit | — |
| | —% | | (1,598 | ) | | —% |
Adjusted non-GAAP operating income | $ | 3,262 |
| | 0.1% | | $ | 136,495 |
| | 3.9% |
| |
(1) | Includes benefits related to an indemnification recovery of certain legal settlements which were recognized in the second quarter of Fiscal 2015. |
| |
(2) | Includes benefits related to a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill. |
| |
(3) | Includes inventory write-down charges related to a first quarter of Fiscal 2015 decision to accelerate the disposition of certain aged merchandise, net of recoveries. |
| |
(4) | Accrued expense for certain proposed legal settlements. |
For Fiscal 2016, operating income as a percentage of net sales decreased by approximately 160 basis points as compared to Fiscal 2015, primarily driven by the deleveraging effect from negative comparable sales, a reduction in the gross profit rate and higher marketing and direct-to-consumer expense, partially offset by the net year-over-year impact of certain items in the above table and expense reduction efforts. Excluding certain items presented in the table above, Fiscal 2016 adjusted non-GAAP operating income as a percentage of net sales was approximately 10 basis points as compared to adjusted non-GAAP operating income of approximately 390 basis points for Fiscal 2015.
Interest Expense, Net
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Interest expense | $ | 23,078 |
| | 0.7% | | $ | 22,601 |
| | 0.6% |
Interest income | (4,412 | ) | | (0.1)% | | (4,353 | ) | | (0.1)% |
Interest expense, net | $ | 18,666 |
| | 0.6% | | $ | 18,248 |
| | 0.5% |
Income Tax (Benefit) Expense
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
Income tax (benefit) expense | $ | (11,196 | ) | | 321.9% | | $ | 16,031 |
| | 29.4% |
Tax effect of excluded items(1) | (3,900 | ) | |
| | 21,186 |
| | |
Adjusted non-GAAP tax income tax (benefit) expense | $ | (15,096 | ) | | 98.0% | | $ | 37,217 |
| | 31.5% |
| |
(1) | Refer to “Operating Income,” for details of excluded items. The Company computed the tax effect of excluded items as the difference between the effective tax rate calculated with and without the non-GAAP adjustments on income (loss) before taxes and provision for income taxes. |
After October 31, 2015, the Company began recognizing deferred U.S. income taxes on undistributed net income generated by foreign subsidiaries, which is no longer considered to be indefinitely invested outside of the U.S. This change is reflected in the Company’s income tax expense recognized for Fiscal 2016 and Fiscal 2015.
The Company's effective tax rate is sensitive to jurisdictional mix and lower absolute levels of consolidated pre-tax earnings. The effective tax rate was 321.9% for Fiscal 2016 compared to 29.4% for Fiscal 2015. Excluding certain items, as presented above in the table under “Operating Income,” the adjusted non-GAAP effective tax rate was 98.0% for Fiscal 2016 compared to 31.5% for Fiscal 2015. The effective tax rate and the adjusted non-GAAP effective tax rate for Fiscal 2016 reflect a benefit of $4.5 million related to the realization of foreign currency losses and a discrete benefit of $2.4 million related to a tax regulatory change. In
Fiscal 2015, the effective tax rate and the adjusted non-GAAP effective tax rate reflect discrete benefits of $7.4 million and $5.4 million, respectively, related to a release of a valuation allowance and other discrete tax items.
As of January 28, 2017, the Company had approximately $90.4 million in net deferred tax assets, which included approximately $13.5 million and $11.3 million of net deferred tax assets in Japan and Switzerland, respectively. The realization of the net deferred tax assets will depend upon the future generation of sufficient taxable profits in these jurisdictions. While the Company believes it is more likely than not that the net deferred tax assets will be realized, it is not certain. Should circumstances change, the net deferred tax assets may become subject to a valuation allowance in the future. Additional valuation allowances would result in additional tax expense.
Net Income and Net Income per Share Attributable to A&F
For Fiscal 2016, net income and net income per diluted share attributable to A&F were $4.0 million and $0.06, respectively, as compared to net income and net income per diluted share attributable to A&F of $35.6 million and $0.51, respectively, for Fiscal 2015. Excluding certain items above under “Operating Income," and “Income Tax (Benefit) Expense,” Fiscal 2016 adjusted non-GAAP net loss and net loss per diluted share attributable to A&F were $4.1 million and $0.06, respectively, as compared to adjusted non-GAAP net income and net income per diluted share attributable to A&F of $78.0 million and $1.12, respectively, for Fiscal 2015.
FISCAL 2015 COMPARED TO FISCAL 2014
Net Sales
|
| | | | | | | | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 | | | | |
(in thousands) | Net Sales | | Change in Comparable Sales | | Net Sales | | Change in Comparable Sales | | Net Sales $ Change | | Net Sales % Change |
Abercrombie(1) | $ | 1,640,992 |
| | (6)% | | $ | 1,771,299 |
| | (5)% | | $ | (130,307 | ) | | (7)% |
Hollister | 1,877,688 |
| | —% | | 1,947,869 |
| | (10)% | | (70,181 | ) | | (4)% |
Other(2) | — |
| | —% | | 24,862 |
| | —% | | (24,862 | ) | | —% |
Total net sales | $ | 3,518,680 |
| | (3)% | | $ | 3,744,030 |
| | (8)% | | $ | (225,350 | ) | | (6)% |
| | | | | | | | | | | |
United States | $ | 2,282,040 |
| | (3)% | | $ | 2,408,427 |
| | (6)% | | $ | (126,387 | ) | | (5)% |
International | 1,236,640 |
| | (1)% | | 1,335,603 |
| | (12)% | | (98,963 | ) | | (7)% |
Total net sales | $ | 3,518,680 |
| | (3)% | | $ | 3,744,030 |
| | (8)% | | $ | (225,350 | ) | | (6)% |
| |
(1) | Includes Abercrombie & Fitch and abercrombie kids brands. |
| |
(2) | Represents net sales from the Company’s Gilly Hicks operations. |
For Fiscal 2015, net sales decreased 6% compared to Fiscal 2014, primarily attributable to the adverse effect from changes in foreign currency exchange rates (based on converting prior year sales at current year foreign currency exchange rates) of approximately $153 million, or approximately 4%, and a 3% decrease in comparable sales, partially offset by the net impact of store openings, closings and remodels.
Cost of Sales, Exclusive of Depreciation and Amortization
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Cost of sales, exclusive of depreciation and amortization | $ | 1,361,137 |
| | 38.7% | | $ | 1,430,460 |
| | 38.2% |
Inventory write-down, net(1) | (20,647 | ) | | (0.6)% | | — |
| | —% |
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization | $ | 1,340,490 |
| | 38.1% | | $ | 1,430,460 |
| | 38.2% |
| | | | | | | |
Gross profit | $ | 2,157,543 |
| | 61.3% | | $ | 2,313,570 |
| | 61.8% |
Inventory write-down, net(1) | 20,647 |
| | 0.6% | | — |
| | —% |
Adjusted non-GAAP gross profit | $ | 2,178,190 |
| | 61.9% | | $ | 2,313,570 |
| | 61.8% |
| |
(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 Fiscal 2015, cost of sales, exclusive of depreciation and amortization as a percentage of net sales increased by approximately 50 basis points as compared to Fiscal 2014, primarily due to the adverse effects from changes in foreign currency exchange rates and a net inventory write-down of $20.6 million in Fiscal 2015, partially offset by an increase in average unit retail on a constant currency basis (based on converting prior year sales at current year foreign currency exchange rates, divided by number of units sold) and a decrease in average unit cost. Excluding the $20.6 million net inventory write-down, Fiscal 2015 adjusted non-GAAP cost of sales, exclusive of depreciation and amortization as a percentage of net sales decreased by approximately 10 basis points as compared to Fiscal 2014.
Stores and Distribution Expense
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Stores and distribution expense | $ | 1,604,214 |
| | 45.6% | | $ | 1,703,051 |
| | 45.5% |
Store fixture disposal | (4,200 | ) | | (0.1)% | | — |
| | —% |
Lease termination and store closure costs | (1,756 | ) | | —% | | (5,612 | ) | | (0.1)% |
Charges related to the Company's profit improvement initiative | (709 | ) | | —% | | (2,723 | ) | | (0.1)% |
Adjusted non-GAAP stores and distribution expense | $ | 1,597,549 |
| | 45.4% | | $ | 1,694,716 |
| | 45.3% |
For Fiscal 2015, stores and distribution expense as a percentage of net sales increased by approximately 10 basis points as compared to Fiscal 2014, primarily due to the deleveraging effect from lower net sales and higher direct-to-consumer expense, partially offset by expense reduction efforts.
For Fiscal 2015, shipping and handling costs, including costs incurred to store, move and prepare product for shipment and costs incurred to physically move product to the customer, associated with direct-to-consumer operations were $115.0 million as compared to $108.1 million for Fiscal 2014.
For Fiscal 2015, handling costs, including costs incurred to store, move and prepare product for shipment to stores, were $44.5 million as compared to $52.2 million for Fiscal 2014.
Shipping and handling costs are included in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Marketing, General and Administrative Expense
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Marketing, general and administrative expense | $ | 470,321 |
| | 13.4% | | $ | 458,820 |
| | 12.3% |
Legal settlement charges(1) | (15,753 | ) | | (0.4)% | | — |
| | —% |
Charges related to the Company's profit improvement initiative | (1,770 | ) | | (0.1)% | | (3,776 | ) | | (0.1)% |
Corporate governance matters(2) | — |
| | —% | | (12,644 | ) | | (0.3)% |
Adjusted non-GAAP marketing, general and administrative expense | $ | 452,798 |
| | 12.9% | | $ | 442,400 |
| | 11.8% |
| |
(1) | Accrued expense for certain proposed legal settlements. |
| |
(2) | Includes legal, advisory and other charges related to certain corporate governance matters. |
For Fiscal 2015, marketing, general and administrative expense as a percentage of net sales increased by approximately 110 basis points as compared to Fiscal 2014, primarily driven by by the deleveraging effect of from lower net sales, higher compensation related expense and certain proposed legal settlement charges of $15.8 million, partially offset by the net year-over-year impact of corporate governance matters related charges and expense reduction efforts.
Restructuring (Benefit) Charge
For Fiscal 2015, benefits associated with the restructuring of the Gilly Hicks brand were $1.6 million as compared to charges of $8.4 million in Fiscal 2014.
Asset Impairment
For Fiscal 2015, the Company incurred non-cash asset impairment charges of $18.2 million as compared to $45.0 million for Fiscal 2014, primarily related to stores whose asset carrying values were determined not to be recoverable and exceeded fair value. For Fiscal 2015, the non-cash asset impairment charges primarily related to the Company's Abercrombie & Fitch flagship store in Hong Kong as well as certain fixtures that were removed in connection with changes to the Abercrombie and Hollister store experiences. For Fiscal 2014, store-related asset impairment charges primarily related to the Company's Abercrombie & Fitch flagship store locations in Tokyo, Japan and Seoul, Korea, as well as nine Hollister stores and nine abercrombie kids stores. Additionally, the Company incurred charges of approximately $11.3 million in Fiscal 2014 to record the expected loss on the sale of the Company-owned aircraft.
Other Operating Income, Net
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Other operating income, net | $ | 6,441 |
| | 0.2% | | $ | 15,239 |
| | 0.4% |
Lease termination and store closure costs(1) | 2,211 |
| | 0.1% | | — |
| | —% |
Adjusted non-GAAP other operating income, net | $ | 8,652 |
| | 0.2% | | $ | 15,239 |
| | 0.4% |
| |
(1) | Includes charges related to a release of cumulative translation adjustment as the Company substantially completed the liquidation of its Australian operations. |
For Fiscal 2015, other operating income, net was $6.4 million as compared to $15.2 million for Fiscal 2014. For Fiscal 2015, other operating income, net included income of $2.2 million related to insurance recoveries and $4.7 million related to gift card breakage, partially offset by losses of $1.5 million related to foreign currency transactions. For Fiscal 2014, other operating income, net included income of $10.2 million related to insurance recoveries and $5.8 million related to gift card breakage, and losses of $2.0 million related to foreign currency transactions.
Operating Income
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Operating income | $ | 72,838 |
| | 2.1% | | $ | 113,519 |
| | 3.0% |
Inventory write-down, net(1) | 20,647 |
| | 0.6% | | — |
| | —% |
Asset impairment(2) | 18,209 |
| | 0.5% | | 44,988 |
| | 1.2% |
Legal settlement charges(3) | 15,753 |
| | 0.4% | | — |
| | —% |
Store fixture disposal | 4,200 |
| | 0.1% | | — |
| | —% |
Charges related to the Company's profit improvement initiative | 2,479 |
| | 0.1% | | 6,499 |
| | 0.2% |
Lease termination and store closure costs(4) | 3,967 |
| | 0.1% | | 5,612 |
| | 0.1% |
Restructuring (benefit) charge | (1,598 | ) | | —% | | 8,431 |
| | 0.2% |
Corporate governance matters(5) | — |
| | —% | | 12,644 |
| | 0.3% |
Adjusted non-GAAP operating income | $ | 136,495 |
| | 3.9% | | $ | 191,693 |
| | 5.1% |
| |
(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. |
| |
(2) | Includes impairment charges related to stores whose asset carrying values were determined not to be recoverable and exceeded fair value, for Fiscal 2014, a fair value adjustment to the Company-owned aircraft, and for Fiscal 2015, certain store fixtures in connection with changes to the Abercrombie and Hollister store experiences. |
| |
(3) | Includes charges related to certain proposed legal settlements. |
| |
(4) | Includes charges related to lease terminations and store closures, including charges related to a release of cumulative translation adjustment as the Company substantially completed the liquidation of its Australian operations. |
| |
(5) | Includes legal, advisory and other charges related to certain corporate governance matters. |
For Fiscal 2015, operating income as a percentage of net sales decreased by approximately 100 basis points as compared to Fiscal 2014, primarily due to the deleveraging effect of negative comparable sales, higher direct-to-consumer costs and higher compensation related expense, partially offset by expense reduction efforts, an increase in average unit retail on a constant currency basis (based on converting prior year sales at current year foreign currency exchange rates, divided by number of units sold), a decrease in average unit cost and the the year-over-year impact of certain items presented in the above table. Excluding certain items presented in the table above, Fiscal 2015 adjusted non-GAAP operating income as a percentage of net sales decreased approximately 120 basis points as compared to Fiscal 2014.
Interest Expense, Net
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Interest expense | $ | 22,601 |
| | 0.6% | | $ | 18,305 |
| | 0.5% |
Interest income | (4,353 | ) | | (0.1)% | | (3,940 | ) | | (0.1)% |
Interest expense, net | $ | 18,248 |
| | 0.5% | | $ | 14,365 |
| | 0.4% |
For Fiscal 2015 interest expense, net increased as compared to Fiscal 2014, primarily due to an increase in the average principal balance and a higher interest rate on debt outstanding.
Income Tax Expense
|
| | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in thousands, except ratios) | | | Effective Tax Rate | | | | Effective Tax Rate |
Income tax expense | $ | 16,031 |
| | 29.4% | | $ | 47,333 |
| | 47.7% |
Tax effect of excluded items(1) | 21,186 |
| | | | 17,686 |
| | |
Adjusted non-GAAP income tax expense | $ | 37,217 |
| | 31.5% | | $ | 65,019 |
| | 36.7% |
| |
(1) | Refer to “Operating Income,” for details of excluded items. The Company computed the tax effect of excluded items as the difference between the effective tax rate calculated with and without the non-GAAP adjustments on income (loss) before taxes and provision for income taxes. |
With respect to the Company’s annual effective tax rate, undistributed net income generated by foreign subsidiaries after October 31, 2015 is no longer considered to be indefinitely invested outside of the U.S. Accordingly, the Company recognized deferred U.S. income taxes on net income generated after October 31, 2015. This change is reflected in the Company’s income tax expense recognized for Fiscal 2015.
For Fiscal 2015, the Company's income tax expense as a percentage of income before taxes was 29.4% as compared to 47.7% for Fiscal 2014. Excluding certain items presented above in the table "Operating Income," Fiscal 2015 adjusted non-GAAP income tax expense as a percentage of income before taxes was 31.5% for Fiscal 2015 compared to 36.7% for Fiscal 2014. The effective tax rate and the adjusted non-GAAP effective tax rate for Fiscal 2015 reflect discrete benefits of $7.4 million and $5.4 million, respectively, related to a release of a valuation allowance and other discrete tax items.
Net Income and Net Income per Share Attributable to A&F
For Fiscal 2015, net income and net income per diluted share attributable to A&F was $35.6 million and $0.51, respectively, as compared to net income and net income per diluted share attributable to A&F of $51.8 million and $0.71, respectively, for Fiscal 2014. Excluding certain items presented above under “Operating Income,” and “Income Tax Expense,” Fiscal 2015 adjusted non-GAAP net income and net income per diluted share attributable to A&F was $78.0 million and $1.12, respectively, as compared to adjusted non-GAAP net income and net income per diluted share attributable to A&F of $112.3 million and $1.54, respectively, for Fiscal 2014.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL SOURCES AND USES OF CASH
Seasonality of Cash Flows
The Company’s business has two principal selling seasons: the Spring season, which includes the first and second fiscal quarters (“Spring”), and the Fall season, which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has a revolving credit facility available as a source of additional funding.
Asset-Based Revolving Credit Facility
The Company has a senior secured revolving credit facility with availability 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. The ABL Facility will mature on August 7, 2019. No borrowings were outstanding under the ABL Facility as of January 28, 2017.
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 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.
As of January 28, 2017, the borrowing base on the ABL Facility was $239.9 million. As of March 22, 2017, the Company had not drawn on the ABL Facility, but had approximately $1.7 million in outstanding stand-by letters of credit under the ABL Facility.
Term Loan Facility
The Company has a term loan agreement, which provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the ABL Facility, the “2014 Credit Facilities”). The Term Loan Facility was issued at a $3 million, or 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 January 28, 2017 and January 30, 2016 were as follows:
|
| | | | | | | |
(in thousands) | January 28, 2017 |
| | January 30, 2016 |
|
Borrowings, gross at carrying amount | $ | 268,250 |
| | $ | 293,250 |
|
Unamortized discount | (1,764 | ) | | (1,929 | ) |
Unamortized fees paid to lenders | (3,494 | ) | | (5,086 | ) |
Borrowings, net | 262,992 |
| | 286,235 |
|
Less: short-term portion of borrowings, net | — |
| | — |
|
Long-term portion of borrowings, net | $ | 262,992 |
| | $ | 286,235 |
|
The Term Loan Facility will mature on August 7, 2021 and amortizes 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, less any voluntary payments made. The Company made a repayment of $25 million in January 2017, in prepayment of its scheduled Fiscal 2017 through Fiscal 2021 amortization and a portion of the amount of principal due at maturity.
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 pursuant to the Term Loan Facility. The interest rate on borrowings under the Term Loan Facility was 4.75% as of January 28, 2017.
The Company’s credit facilities are described in Note 11, “BORROWINGS” of the Notes to the Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K.
Operating Activities
Net cash provided by operating activities was $184.6 million for Fiscal 2016 compared to $309.9 million for Fiscal 2015 and $312.5 million for Fiscal 2014. The year-over-year decrease in net cash provided by operating activities for Fiscal 2016 as compared to Fiscal 2015 was primarily driven by lower net income, adjusted for non-cash items, the extension of vendor payment terms in the second quarter of Fiscal 2015 and incentive compensation payments in the first quarter of Fiscal 2016, partially offset by the return of long-term lease deposits of $26.6 million and a $25.1 million decrease in cash paid for income taxes. Significant changes in the underlying drivers of net cash provided by operating activities for Fiscal 2015 as compared to Fiscal 2014 related primarily to changes in accounts payable and accrued expenses and inventories, net. For Fiscal 2015, the Company had a $51.1 million net cash inflow associated with an increase in accounts payable and accrued expenses resulting from the Company's extension of vendor payment terms, as compared to a $37.4 million net cash outflow for Fiscal 2014 associated with a decrease in accounts payable and accrued expenses driven by cash payments related to Gilly Hicks restructuring for Fiscal 2014. The Company also experienced $41.6 million less of a cash inflow from the year-over-year reduction in inventory balances for Fiscal 2015 as compared to Fiscal 2014.
Investing Activities
Cash outflows for investing activities in Fiscal 2016, Fiscal 2015 and Fiscal 2014 were used primarily for store updates and new store construction, direct-to-consumer and omnichannel capabilities and information technology investments. Fiscal 2015 cash investing activities also included proceeds from the sale of a Company-owned aircraft.
Financing Activities
For Fiscal 2016, cash outflows for financing activities consisted primarily of the payment of dividends of $54.1 million and the repayment of borrowings of $25.0 million. For Fiscal 2015, cash outflows for financing activities consisted primarily of the payment of dividends of $55.1 million and the repurchase of A&F’s Common Stock of $50.0 million. For Fiscal 2014, cash outflows for financing activities consisted primarily of the repurchase of A&F’s Common Stock of $285.0 million, the repayment of borrowings of $195.8 million and the payment of dividends of $57.4 million. For Fiscal 2014, cash inflows from financing activities consisted primarily of proceeds from borrowings of $357.0 million.
During Fiscal 2015, A&F repurchased approximately 2.5 million shares of A&F’s Common Stock in the open market with a market value of approximately $50.0 million. During Fiscal 2014, A&F repurchased approximately 7.3 million shares of A&F’s Common Stock, of which approximately 3.5 million shares with a market value of approximately $135.0 million were purchased in the open market and approximately 3.8 million shares with an aggregate cost of $150.0 million were purchased pursuant to an accelerated share repurchase agreement.
As of January 28, 2017, A&F had approximately 6.5 million remaining shares available for repurchase as part of the A&F Board of Directors’ previously approved authorizations.
FUTURE CASH REQUIREMENTS AND SOURCES OF CASH
Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, leases, taxes and other operating activities, as well as to fund capital expenditures, marketing initiatives, quarterly dividends to stockholders subject to approval by A&F’s Board of Directors and debt service, including voluntary repayments, or required repayments, if any, based on annual excess cash flows, as defined in the term loan agreement. The Company has availability under the ABL Facility as a source of additional funding.
The Company may repurchase shares of its Common Stock and, if it were to do so, would anticipate funding such repurchases by utilizing free cash flow generated from operations or proceeds from the ABL Facility.
As of January 28, 2017, $305.3 million of the Company’s $547.2 million of cash and equivalents was held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends to A&F’s stockholders. Unremitted earnings from foreign affiliates generally would become subject to U.S. income tax if remitted as dividends or lent to A&F or a U.S. affiliate. As of January 28, 2017, approximately $80 million, consisting primarily of previously taxed income and net income for which U.S. deferred taxes have been provided, could be repatriated to the U.S. without any additional U.S. income tax expense.
OFF-BALANCE SHEET ARRANGEMENTS
The Company uses in the ordinary course of business stand-by letters of credit under the existing ABL Facility. The Company had $1.7 million in stand-by letters of credit outstanding as of January 28, 2017. The Company has no other off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments due by period |
(in thousands) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating lease obligations (1) | | $ | 1,556,771 |
| | $ | 352,811 |
| | $ | 514,967 |
| | $ | 319,284 |
| | $ | 369,709 |
|
Long-term debt obligations | | 268,250 |
| | — |
| | — |
| | 268,250 |
| | — |
|
Purchase obligations | | 276,718 |
| | 230,223 |
| | 35,610 |
| | 10,516 |
| | 369 |
|
Other obligations (2) | | 137,919 |
| | 25,506 |
| | 31,217 |
| | 40,189 |
| | 41,007 |
|
Capital lease obligations | | 2,425 |
| | 1,610 |
| | 790 |
| | 25 |
| | — |
|
Totals | | $ | 2,242,083 |
| | $ | 610,150 |
| | $ | 582,584 |
| | $ | 638,264 |
| | $ | 411,085 |
|
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(1) | Includes leasehold financing obligations of $46.4 million. Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for additional information. |
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(2) | Includes estimated interest payments based on the interest rate as of January 28, 2017 and assuming normally scheduled principal payments. |
Long-term debt obligations consist of principal payments under the Term Loan Agreement. Refer to Note 11, “BORROWINGS,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for additional information.
Operating lease obligations consist primarily of non-cancelable future minimum lease commitments related to store operating leases. See Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Leased facilities,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, for further discussion. Excluded from the obligations above are amounts related to portions of lease terms that are currently cancelable at the Company’s discretion. While included in the obligations above, in many instances, the Company has options to terminate certain leases if stated sales volume levels are not met or the Company ceases operations in a given country.
Operating lease obligations do not include common area maintenance (“CAM”), insurance, marketing or tax payments for which the Company is also obligated. Total expense related to CAM, insurance, marketing and taxes was $164.0 million in Fiscal 2016.
The purchase obligations category represents purchase orders for merchandise to be delivered during Fiscal 2017 and commitments for fabric expected to be used during upcoming seasons. In addition, purchase obligations include agreements to purchase goods or services including information technology contracts and third-party distribution center service contracts.
Other obligations consist primarily of asset retirement obligations and the Supplemental Executive Retirement Plan. See Note 16, “SAVINGS AND RETIREMENT PLANS,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, for further discussion.
Due to uncertainty as to the amounts and timing of future payments, the contractual obligations table above does not include tax (including accrued interest and penalties) of $1.5 million related to uncertain tax positions at January 28, 2017. Deferred taxes are also not included in the preceding table. For further discussion, see Note 10, “INCOME TAXES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K.
A&F has historically paid quarterly dividends on its Common Stock. There are no amounts included in the above table related to dividends due to the fact that dividends are subject to determination and approval by A&F’s Board of Directors.
STORE ACTIVITY
During the year, the Company opened ten international full-price stores, two international outlet stores, four U.S. full-price stores and four U.S. outlet stores. In addition, the Company closed 53 U.S. stores and one international store.
Store count and gross square footage by brand and geography for Fiscal 2016 and Fiscal 2015, respectively were as follows:
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| | | | | | | | | | | | | | | | | |
| Abercrombie (1) | | Hollister (2) | | Total |
| United States | | International | | United States | | International | | United States | | International |
January 31, 2015 | 361 |
| | 32 |
| | 433 |
| | 135 |
| | 794 |
| | 167 |
|
New | 13 |
| | 7 |
| | 2 |
| | 8 |
| | 15 |
| | 15 |
|
Closed | (34 | ) | | — |
| | (21 | ) | | (4 | ) | | (55 | ) | | (4 | ) |
January 30, 2016 | 340 |
| | 39 |
| | 414 |
| | 139 |
| | 754 |
| | 178 |
|
New | 5 |
| | 6 |
| | 3 |
| | 6 |
| | 8 |
| | 12 |
|
Closed | (34 | ) | | (1 | ) | | (19 | ) | | — |
| | (53 | ) | | (1 | ) |
January 28, 2017 | 311 |
| | 44 |
| | 398 |
| | 145 |
| | 709 |
| | 189 |
|
Gross square feet (in thousands): | | | | | | | | | | | |
January 30, 2016 | 2,634 |
| | 619 |
| | 2,856 |
| | 1,183 |
| | 5,490 |
| | 1,802 |
|
January 28, 2017 | 2,411 |
| | 641 |
| | 2,737 |
| | 1,218 |
| | 5,148 |
| | 1,859 |
|
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(1) | Abercrombie includes the Company’s Abercrombie & Fitch and abercrombie kids brands. Prior period store counts have been restated to combine Abercrombie & Fitch stores with abercrombie kids carveouts into one store. The change reduced total stores by eight stores as of January 31, 2015. Excludes one international franchise store as of January 28, 2017 and January 30, 2016. |
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(2) | Excludes three international franchise stores as of January 28, 2017 and two international franchise stores as of January 30, 2016. |
CAPITAL EXPENDITURES
Capital expenditures totaled $140.8 million, $143.2 million and $174.6 million for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. A summary of capital expenditures is as follows:
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| | | | | | | | | | | | |
(in thousands) | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
New store construction, store refreshes and remodels | | $ | 73,053 |
| | $ | 71,675 |
| | $ | 86,316 |
|
Home office, distribution centers and information technology | | 67,791 |
| | 71,524 |
| | 88,291 |
|
Total capital expenditures | | $ | 140,844 |
| | $ | 143,199 |
| | $ | 174,607 |
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The Company expects capital expenditures to be approximately $100 million for Fiscal 2017, which will be prioritized toward store updates and new stores, as well as direct-to-consumer and omnichannel and information technology investments to support growth initiatives.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - Recent accounting pronouncements,” of the Notes to the Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K for recent accounting pronouncements, including the expected dates of adoption and anticipated effects on our Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
The Company believes the following policies are the most critical to the portrayal of the Company’s financial condition and results of operations.
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Policy | | Effect if Actual Results Differ from Assumptions |
Revenue Recognition | | |
The Company reserves for sales returns through estimates based on historical returns experience, recent sales activity and various other assumptions that management believes to be reasonable. | | The Company has not made any material changes in the accounting methodology used to determine the sales return reserve over the past three fiscal years. |
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