Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 4, 2018
OR |
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
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Delaware | 31-1469076 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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6301 Fitch Path, New Albany, Ohio | 43054 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class A Common Stock | | Outstanding at September 5, 2018 |
$.01 Par Value | | 66,749,930 Shares |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) |
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Thousands, except per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-six Weeks Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Net sales | $ | 842,414 |
| | $ | 779,321 |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
|
Cost of sales, exclusive of depreciation and amortization | 335,519 |
| | 318,426 |
| | 624,073 |
| | 580,600 |
|
Gross profit | 506,895 |
| | 460,895 |
| | 949,240 |
| | 859,820 |
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Stores and distribution expense | 374,552 |
| | 369,295 |
| | 735,707 |
| | 729,224 |
|
Marketing, general and administrative expense | 123,883 |
| | 109,353 |
| | 248,780 |
| | 219,246 |
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Asset impairment | 8,671 |
| | 6,135 |
| | 9,727 |
| | 6,865 |
|
Other operating income, net | (434 | ) | | (2,799 | ) | | (2,994 | ) | | (4,485 | ) |
Operating income (loss) | 223 |
| | (21,089 | ) | | (41,980 | ) | | (91,030 | ) |
Interest expense, net | 3,023 |
| | 4,089 |
| | 6,041 |
| | 8,209 |
|
Loss before income taxes | (2,800 | ) | | (25,178 | ) | | (48,021 | ) | | (99,239 | ) |
Income tax expense (benefit) | 24 |
| | (10,563 | ) | | (3,689 | ) | | (23,615 | ) |
Net loss | (2,824 | ) | | (14,615 | ) | | (44,332 | ) | | (75,624 | ) |
Less: Net income attributable to noncontrolling interests | 1,029 |
| | 876 |
| | 1,982 |
| | 1,567 |
|
Net loss attributable to A&F | $ | (3,853 | ) | | $ | (15,491 | ) | | $ | (46,314 | ) | | $ | (77,191 | ) |
| | | | | | | |
Net loss per share attributable to A&F | | | | | | | |
Basic | $ | (0.06 | ) | | $ | (0.23 | ) | | $ | (0.68 | ) | | $ | (1.13 | ) |
Diluted | $ | (0.06 | ) | | $ | (0.23 | ) | | $ | (0.68 | ) | | $ | (1.13 | ) |
| | | | | | | |
Weighted-average shares outstanding | | | | | | | |
Basic | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
|
Diluted | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
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| | | | | | | |
Dividends declared per share | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.40 |
| | $ | 0.40 |
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| | | | | | | |
Other comprehensive (loss) income | | | | | | | |
Foreign currency translation, net of tax | $ | (11,206 | ) | | $ | 19,072 |
| | $ | (19,545 | ) | | $ | 24,679 |
|
Derivative financial instruments, net of tax | 7,447 |
| | (10,148 | ) | | 19,707 |
| | (14,748 | ) |
Other comprehensive (loss) income | (3,759 | ) | | 8,924 |
| | 162 |
| | 9,931 |
|
Comprehensive loss | (6,583 | ) | | (5,691 | ) | | (44,170 | ) | | (65,693 | ) |
Less: Comprehensive income attributable to noncontrolling interests | 1,029 |
| | 876 |
| | 1,982 |
| | 1,567 |
|
Comprehensive loss attributable to A&F | $ | (7,612 | ) | | $ | (6,567 | ) | | $ | (46,152 | ) | | $ | (67,260 | ) |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
3
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)
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| August 4, 2018 | | February 3, 2018 |
Assets | | | |
Current assets: | | | |
Cash and equivalents | $ | 581,166 |
| | $ | 675,558 |
|
Receivables | 91,719 |
| | 79,724 |
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Inventories | 454,913 |
| | 424,393 |
|
Other current assets | 115,276 |
| | 84,863 |
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Total current assets | 1,243,074 |
| | 1,264,538 |
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Property and equipment, net | 691,933 |
| | 738,182 |
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Other assets | 325,842 |
| | 322,972 |
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Total assets | $ | 2,260,849 |
| | $ | 2,325,692 |
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Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 213,167 |
| | $ | 168,868 |
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Accrued expenses | 311,930 |
| | 308,601 |
|
Short-term portion of deferred lease credits | 19,449 |
| | 19,751 |
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Income taxes payable | 8,189 |
| | 10,326 |
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Total current liabilities | 552,735 |
| | 507,546 |
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Long-term liabilities: | | | |
Long-term portion of deferred lease credits | 75,963 |
| | 75,648 |
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Long-term portion of borrowings, net | 249,920 |
| | 249,686 |
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Leasehold financing obligations | 47,171 |
| | 50,653 |
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Other liabilities | 187,676 |
| | 189,688 |
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Total long-term liabilities | 560,730 |
| | 565,675 |
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Stockholders’ equity | | | |
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at August 4, 2018 and February 3, 2018, respectively | 1,033 |
| | 1,033 |
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Paid-in capital | 401,483 |
| | 406,351 |
|
Retained earnings | 2,337,100 |
| | 2,420,552 |
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Accumulated other comprehensive loss, net of tax | (94,892 | ) | | (95,054 | ) |
Treasury stock, at average cost: 36,325 and 35,105 shares at August 4, 2018 and February 3, 2018, respectively | (1,507,414 | ) | | (1,490,503 | ) |
Total Abercrombie & Fitch Co. stockholders’ equity | 1,137,310 |
| | 1,242,379 |
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Noncontrolling interests | 10,074 |
| | 10,092 |
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Total stockholders’ equity | 1,147,384 |
| | 1,252,471 |
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Total liabilities and stockholders’ equity | $ | 2,260,849 |
| | $ | 2,325,692 |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
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| Twenty-six Weeks Ended |
| August 4, 2018 | | July 29, 2017 |
Operating activities | | | |
Net loss | $ | (44,332 | ) | | $ | (75,624 | ) |
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | | | |
Depreciation and amortization | 93,153 |
| | 95,502 |
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Asset impairment | 9,727 |
| | 6,865 |
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Loss on disposal | 1,644 |
| | 3,824 |
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Amortization of deferred lease credits | (10,609 | ) | | (10,412 | ) |
Benefit from deferred income taxes | (17,049 | ) | | (19,121 | ) |
Share-based compensation | 10,940 |
| | 10,396 |
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Changes in assets and liabilities | | | |
Inventories | (40,934 | ) | | (67,964 | ) |
Accounts payable and accrued expenses | 62,918 |
| | 2,908 |
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Lessor construction allowances | 6,107 |
| | 5,478 |
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Income taxes | (1,043 | ) | | (3,135 | ) |
Long-term lease deposits | 1,452 |
| | (530 | ) |
Other assets | (20,319 | ) | | 9,960 |
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Other liabilities | (1,129 | ) | | (6,193 | ) |
Net cash provided by (used for) operating activities | 50,526 |
| | (48,046 | ) |
Investing activities | | | |
Purchases of property and equipment | (54,115 | ) | | (61,777 | ) |
Proceeds from sale of property and equipment | — |
| | 203 |
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Net cash used for investing activities | (54,115 | ) | | (61,574 | ) |
Financing activities | | | |
Purchase of treasury stock | (43,670 | ) | | — |
|
Dividends paid | (27,196 | ) | | (27,159 | ) |
Other financing activities | (6,875 | ) | | (1,057 | ) |
Net cash used for financing activities | (77,741 | ) | | (28,216 | ) |
Effect of exchange rates on cash | (13,437 | ) | | 13,354 |
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Net decrease in cash and equivalents, and restricted cash | (94,767 | ) | | (124,482 | ) |
Cash and equivalents, and restricted cash, beginning of period | 697,955 |
| | 567,632 |
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Cash and equivalents, and restricted cash, end of period | $ | 603,188 |
| | $ | 443,150 |
|
Significant non-cash investing activities | | | |
Change in accrual for construction in progress | $ | 13,989 |
| | $ | (9,508 | ) |
Supplemental information | | | |
Cash paid for interest | $ | 6,832 |
| | $ | 6,998 |
|
Cash paid for income taxes | $ | 14,928 |
| | $ | 8,698 |
|
Cash received from income tax refunds | $ | 8,173 |
| | $ | 5,808 |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5
ABERCROMBIE & FITCH CO.
INDEX FOR NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note 1. | | |
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Note 2. | | |
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Note 3. | | |
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Note 4. | | |
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Note 5. | | |
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Note 6. | | |
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Note 7. | | |
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Note 8. | | |
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Note 9. | | |
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Note 10. | | |
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Note 11. | | |
ABERCROMBIE & FITCH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Nature of Business
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, multi-brand, specialty retailer, which primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The Company has operations in North America, Europe, Asia and the Middle East.
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.
The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Condensed Consolidated Statements of Operations and Comprehensive Loss and MAF’s portion of equity presented as NCI on the Condensed Consolidated Balance Sheets.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal 2018” and “Fiscal 2017” represent the fifty-two week fiscal year ending on February 2, 2019 and the fifty-three week fiscal year ended on February 3, 2018, respectively.
Interim Financial Statements
The Condensed Consolidated Financial Statements as of August 4, 2018, and for the thirteen and twenty-six week periods ended August 4, 2018 and July 29, 2017, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2017 filed with the SEC on April 2, 2018. The February 3, 2018 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2018.
Recent Accounting Pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s financial statements. The following table provides a brief description of recent accounting pronouncements the Company has adopted or that could affect the Company’s financial statements.
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Accounting Standards Update (ASU) | | Description | | Date of Adoption | | Effect on the Financial Statements or Other Significant Matters |
Standards adopted |
ASU 2014-09, Revenue from Contracts with Customers | | This update superseded the revenue recognition guidance in ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. | | February 4, 2018 | | The Company adopted this guidance and all related amendments using the modified retrospective method, and applied the standard to contracts that were not complete as of the adoption date. Comparative period information has not been restated and continues to be reported under the accounting standards in effect for those periods. This guidance primarily impacts the classification and timing of the recognition of the Company’s gift card breakage and timing of direct-to-consumer revenue. Adoption of this guidance had an immaterial impact on net loss attributable to A&F in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
The cumulative effect of applying the new standard on the Condensed Consolidated Balance Sheets as of August 4, 2018 was recognized as an adjustment to the opening balance of retained earnings, increasing beginning retained earnings by $6.9 million, with corresponding reductions in accrued expenses, inventories, and other assets of $4.7 million, $6.4 million, and $2.2 million, respectively, and increases to receivables and other current assets of $6.4 million and $4.4 million, respectively.
In accordance with the new guidance, expected gift card breakage is now recognized in net sales as gift cards are redeemed. Previously, gift card breakage was recognized as other operating income when the Company determined that the likelihood of redemption was remote. Under the new guidance, direct-to-consumer revenue is recognized when control is passed to the customer, typically upon shipment or pick-up of goods. Previously, direct-to-consumer revenue was recognized upon customer acceptance, which typically occurred upon the customer’s possession of the merchandise. The Company does not expect this guidance to have a material impact on store, direct-to-consumer, wholesale, franchise or license revenues on an ongoing basis.
The Company’s revenue recognition accounting policies are discussed further in this Note 1 under “Revenue Recognition.” |
ASU 2016-18, Statement of Cash Flows | | This update amends the guidance in ASC 230, Statement of Cash Flows. The new guidance requires an entity to show the changes in total cash, cash equivalents and restricted cash in the statement of cash flows. Consequently, an entity is no longer required to present transfers between cash and equivalents and restricted cash. | | February 4, 2018 | | The Company adopted this guidance under the retrospective method. For the twenty-six weeks ended July 29, 2017, adoption of this guidance resulted in a $0.8 million decrease in net cash used for operating activities and increases of $20.4 million and $21.2 million to beginning and ending cash, cash equivalents and restricted cash, respectively. In addition, captions have been updated in the Condensed Consolidated Statements of Cash Flows to reflect the inclusion of restricted cash. Restricted cash is classified as other assets on the Condensed Consolidated Balance Sheets, as was the case at year-end. |
Standards not yet adopted |
ASU 2016-02, Leases | | This update supersedes the leasing guidance in ASC 840, Leases. The new guidance requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity. | | February 3, 2019 | | The Company expects that this guidance will result in a material increase in the Company’s long-term assets and long-term liabilities on the Company’s Condensed Consolidated Balance Sheets, and is currently evaluating additional impacts that this guidance may have on its consolidated financial statements, including the potential for impairment of right-of-use assets. The Company did not elect to early adopt this guidance. |
ASU 2017-12, Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities | | This update amends ASC 815, Derivatives and Hedging. The new guidance simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements. Under the new standard, more hedging strategies will be eligible for hedge accounting, including hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets or liabilities and partial-term hedges of fixed-rate assets or liabilities. For cash flow and net investment hedges, the guidance requires a modified retrospective approach while the amended presentation and disclosure guidance requires a prospective approach. | | February 3, 2019 | | The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements. The Company did not elect to early adopt this guidance. |
The Company’s significant accounting policies as of August 4, 2018 have not changed materially from those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017, with the exception of those discussed below:
Revenue Recognition
The Company recognizes revenue from product sales when control of the good is transferred to the customer, generally upon pick up at, or shipment from, a Company location.
The Company provides shipping and handling services to customers in certain direct-to-consumer transactions. Revenue associated with the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receipt of the merchandise. The related shipping and handling costs are classified in stores and distribution expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Revenue is recorded net of estimated returns, associate discounts, promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience among other factors. The sales return reserve is classified in accrued expenses on the Condensed Consolidated Balance Sheets.
The Company accounts for gift cards sold to customers by recognizing an unearned revenue liability at the time of sale, which remains until income from gift cards not expected to be redeemed, referred to as gift card breakage, is recognized as revenue proportionally with gift card redemptions. Gift cards sold to customers do not expire or lose value over periods of inactivity and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates.
The Company also maintains loyalty programs, which primarily provides customers with the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized at the earlier of redemption or expiration.
Unearned revenue liabilities are primarily recorded when prepayments for future merchandise are received through gift card purchases or when loyalty rewards are earned by a customer in a sales transaction, and are classified in accrued expenses on the Condensed Consolidated Balance Sheets and are typically recognized as revenue within a 12-month period. Unearned revenue liabilities as of August 4, 2018 and the date of adoption, February 4, 2018, were approximately $37.5 million and $38.7 million, respectively. On the date of adoption, February 4, 2018, an adjustment related to the adoption of new revenue recognition standards decreased the beginning of period balance by $6.2 million. For the thirteen and twenty-six weeks ended August 4, 2018, the Company recognized revenue of approximately $20.3 million and $41.3 million, respectively, related to previous deferrals of revenue resulting from the Company’s gift card and loyalty programs.
The Company also recognizes revenue under wholesale arrangements, which is generally recognized upon shipment, when control passes to the wholesale partner. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers.
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Loss. For a discussion of the disaggregation of revenue, refer to Note 10, “SEGMENT REPORTING.” The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales.
2. NET LOSS PER SHARE
Net loss per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”).
Additional information pertaining to net loss per share attributable to A&F is as follows:
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| Thirteen Weeks Ended | | Twenty-six Weeks Ended |
(in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Shares of Common Stock issued | 103,300 |
| | 103,300 |
| | 103,300 |
| | 103,300 |
|
Weighted-average treasury shares | (35,292 | ) | | (34,844 | ) | | (35,046 | ) | | (35,036 | ) |
Weighted-average — basic shares | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
|
Dilutive effect of share-based compensation awards | — |
| | — |
| | — |
| | — |
|
Weighted-average — diluted shares | 68,008 |
| | 68,456 |
| | 68,254 |
| | 68,264 |
|
Anti-dilutive shares (1) | 3,466 |
| | 5,154 |
| | 4,033 |
| | 5,460 |
|
| |
(1) | Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net loss per diluted share because the impact would have been anti-dilutive. |
3. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
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• | Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. |
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• | Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. |
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• | Level 3—inputs to the valuation methodology are unobservable. |
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis were as follows:
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| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value as of August 4, 2018 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Trust-owned life insurance policies (at cash surrender value) | $ | — |
| | $ | 104,310 |
| | $ | — |
| | $ | 104,310 |
|
Money market funds | 25,073 |
| | — |
| | — |
| | 25,073 |
|
Derivative financial instruments | — |
| | 12,343 |
| | — |
| | 12,343 |
|
Total assets | $ | 25,073 |
| | $ | 116,653 |
| | $ | — |
| | $ | 141,726 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
|
Total liabilities | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
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| Assets and Liabilities at Fair Value as of February 3, 2018 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Trust-owned life insurance policies (at cash surrender value) | $ | — |
| | $ | 102,784 |
| | $ | — |
| | $ | 102,784 |
|
Money market funds | 330,649 |
| | — |
| | — |
| | 330,649 |
|
Derivative financial instruments | — |
| | 37 |
| | — |
| | 37 |
|
Total assets | $ | 330,649 |
| | $ | 102,821 |
| | $ | — |
| | $ | 433,470 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 9,147 |
| | $ | — |
| | $ | 9,147 |
|
Total liabilities | $ | — |
| | $ | 9,147 |
| | $ | — |
| | $ | 9,147 |
|
The Level 2 assets and liabilities consist of trust-owned life insurance policies and derivative financial instruments, primarily foreign currency exchange forward contracts.The fair value of trust-owned life insurance policies is determined using the cash surrender value of the life insurance policies. The fair value of foreign currency exchange forward contracts is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Fair value of borrowings
The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets.
The carrying amount and fair value of the Company’s gross borrowings under the term loan credit facility were as follows:
|
| | | | | | | |
(in thousands) | August 4, 2018 | | February 3, 2018 |
Gross borrowings outstanding, carrying amount | $ | 253,250 |
| | $ | 253,250 |
|
Gross borrowings outstanding, fair value | $ | 254,200 |
| | $ | 253,250 |
|
No borrowings were outstanding under the Company’s senior secured revolving credit facility as of August 4, 2018 or February 3, 2018.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of: |
| | | | | | | |
(in thousands) | August 4, 2018 | | February 3, 2018 |
Property and equipment, at cost | $ | 2,802,253 |
| | $ | 2,821,709 |
|
Less: Accumulated depreciation and amortization | (2,110,320 | ) | | (2,083,527 | ) |
Property and equipment, net | $ | 691,933 |
| | $ | 738,182 |
|
The Company incurred store asset impairment charges of $8.7 million and $9.7 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, and $6.1 million and $6.9 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, primarily related to certain of the Company’s international Abercrombie & Fitch stores.
The Company had $35.6 million and $38.7 million of construction project assets in property and equipment, net at August 4, 2018 and February 3, 2018, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.
5. INCOME TAXES
The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in law, regulations, interpretations and administrative practices, relative changes of expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act makes broad and significantly complex changes to the U.S. corporate income tax system by, among other things: reducing the U.S. federal corporate income tax rate from 35% to 21%; transitioning U.S. international taxation to a modified territorial tax system; and imposing a mandatory one-time deemed repatriation tax, payable over eight years, on accumulated undistributed foreign subsidiary earnings and profits as of December 31, 2017. The Company recognized provisional discrete net tax charges of $19.9 million related to the enactment of the Act in the fourth quarter of Fiscal 2017.
Due to proposed regulatory guidance issued by the Internal Revenue Service during the second quarter of Fiscal 2018, the Company recognized a measurement period charge of $2.0 million during the thirteen weeks ended August 4, 2018, adjusting the provisional tax amounts related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign earnings.
As a result of the Company's initial analysis of the impact of the Act and the measurement period adjustment, the Company has incurred discrete net income tax charges in an aggregate amount of $21.9 million since the enactment of the Act, which consists of:
| |
• | $23.7 million of provisional tax expense related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits of approximately $385.8 million; |
| |
• | $3.8 million of provisional tax expense related to the remeasurement of the Company's ending deferred tax assets and liabilities at February 3, 2018, as a result of the U.S. federal corporate income tax rate reduction from 35% to 21%; and, |
| |
• | $5.6 million of tax benefit for the decrease in its federal deferred tax liability on unremitted foreign earnings. |
Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts related to the enactment of the Act are provisional and assessed as of August 22, 2018. The ultimate outcome may differ from these provisional amounts and could impact the provision for income taxes in Fiscal 2018, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Act. Provisional amounts are expected to be finalized after the Company’s Fiscal 2017 U.S. corporate income tax return is filed in the fourth quarter of Fiscal 2018, but no later than one year from the enactment of the Act.
Other
The Company incurred discrete non-cash income tax benefits of $0.2 million and charges of $7.9 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, and charges of $0.7 million and $9.9 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, related to the expiration of certain share-based compensation awards, recognized in income tax expense (benefit) due to changes in share-based compensation accounting standards adopted by the Company in the first quarter of Fiscal 2017.
6. BORROWINGS
Asset-Based Revolving Credit Facility
On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.
On October 19, 2017, the Company, through A&F Management, entered into the Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement. As amended, the asset-based revolving credit agreement continues to provide for a senior secured revolving credit facility of up to $400 million (the “Amended ABL Facility”). The Amended ABL Facility will mature on October 19, 2022.
The provisions of the credit agreement for the Amended ABL Facility have not changed from those contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2017.
As of August 4, 2018, no borrowings were outstanding under the Amended ABL Facility.
As of August 4, 2018, the Company had availability under the Amended ABL Facility of $328.1 million.
Term Loan Facility
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan credit agreement on August 7, 2014, which, as amended, provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”).
On June 22, 2018, the Company, through A&F Management, entered into the Term Loan Second Amendment, which served to reprice the Term Loan Facility. As permitted under the credit agreement applicable to the Term Loan Facility, among other things, the Term Loan Second Amendment provided for the issuance by A&F Management of refinancing term loans in an aggregate principal amount of $253.3 million in exchange for the term loans then outstanding under the Term Loan Facility, which resulted in the reduction of the applicable margins for term loans by 0.25%. Under the Term Loan Second Amendment, at the Company's option, borrowings under the Term Loan Facility will now bear interest at either (a) an adjusted LIBO rate no lower than 1.00% plus a margin of 3.50% per annum, reduced from a margin of 3.75% per annum, or (b) an alternate base rate plus a margin of 2.50% per annum, reduced from a margin of 2.75% per annum. Deferred financing fees associated with the repricing transaction were not significant. All other material provisions under the credit agreement applicable to the Term Loan Facility remained unchanged.
As of August 4, 2018, the interest rate on borrowings under the Term Loan Facility was 5.59%.
The Company’s Term Loan Facility debt is presented in the Condensed Consolidated Balance Sheets, net of the unamortized discount and fees. Net borrowings as of August 4, 2018 and February 3, 2018 were as follows:
|
| | | | | | | |
(in thousands) | August 4, 2018 | | February 3, 2018 |
Borrowings, gross at carrying amount | $ | 253,250 |
| | $ | 253,250 |
|
Unamortized discount | (1,014 | ) | | (1,184 | ) |
Unamortized fees | (2,316 | ) | | (2,380 | ) |
Borrowings, net | 249,920 |
| | 249,686 |
|
Less: short-term portion of borrowings, net | — |
| | — |
|
Long-term portion of borrowings, net | $ | 249,920 |
| | 249,686 |
|
Representations, Warranties and Covenants
The Credit Facilities contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of A&F and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to the greater of 10% of the loan cap or $30 million must be maintained under the Amended ABL Facility. The Credit Facilities do not otherwise contain financial maintenance covenants. Both Credit Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with the covenants under the Credit Facilities as of August 4, 2018.
7. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of $6.2 million and $10.9 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, and $5.5 million and $10.4 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively. The Company recognized tax benefits associated with share-based compensation expense of $1.3 million and $2.2 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, and $2.1 million and $4.0 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the twenty-six weeks ended August 4, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| Service-based Restricted Stock Units | | Performance-based Restricted Stock Units | | Market-based Restricted Stock Units |
| Number of Underlying Shares(1) | | Weighted- Average Grant Date Fair Value | | Number of Underlying Shares | | Weighted- Average Grant Date Fair Value | | Number of Underlying Shares | | Weighted- Average Grant Date Fair Value |
Unvested at February 3, 2018 | 2,520,160 |
| | $ | 15.35 |
| | 690,174 |
| | $ | 11.82 |
| | 383,980 |
| | $ | 16.50 |
|
Granted | 736,915 |
| | 21.93 |
| | 197,979 |
| | 21.77 |
| | 142,014 |
| | 33.69 |
|
Adjustments for performance achievement | — |
| | — |
| | (43,999 | ) | | 20.10 |
| | (36,817 | ) | | 19.04 |
|
Vested | (844,382 | ) | | 17.30 |
| | — |
| | — |
| | (7,185 | ) | | 19.04 |
|
Forfeited | (121,568 | ) | | 14.88 |
| | (12,998 | ) | | 12.17 |
| | (12,999 | ) | | 17.28 |
|
Unvested at August 4, 2018 | 2,291,125 |
| | $ | 16.78 |
| | 831,156 |
| | $ | 13.74 |
| | 468,993 |
| | $ | 21.45 |
|
| |
(1) | Includes 496,981 unvested restricted stock units as of August 4, 2018, subject to vesting requirements related to the achievement of certain performance metrics, such as operating income and net income, for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one or more installments of the award if the cumulative performance requirements are met in a subsequent year. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at 100% of their target vesting amount in the table above. |
Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria.
Service-based restricted stock units are expensed on a straight-line basis over the total award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation
expense for stock options and stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. Unrecognized compensation expense presented excludes the effect of potential forfeitures, and will be adjusted for actual forfeitures as they occur.
As of August 4, 2018, there was $31.5 million, $9.1 million and $6.3 million of total unrecognized compensation cost, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 16 months, 13 months and 14 months for service-based, performance-based and market-based restricted stock units, respectively.
The actual tax benefit realized for tax deductions related to the issuance of shares associated with restricted stock unit vesting was $1.5 million and $4.9 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, and $0.5 million and $2.5 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively.
Additional information pertaining to restricted stock units for the twenty-six weeks ended August 4, 2018 and July 29, 2017 follows:
|
| | | | | | | |
(in thousands) | August 4, 2018 | | July 29, 2017 |
Service-based restricted stock units: | | | |
Total grant date fair value of awards granted | $ | 16,161 |
| | $ | 15,948 |
|
Total grant date fair value of awards vested | 14,608 |
| | 16,806 |
|
| | | |
Performance-based restricted stock units: | | | |
Total grant date fair value of awards granted | $ | 4,310 |
| | $ | 4,774 |
|
Total grant date fair value of awards vested | — |
| | — |
|
| | | |
Market-based restricted stock units: | | | |
Total grant date fair value of awards granted | $ | 4,784 |
| | $ | 2,793 |
|
Total grant date fair value of awards vested | 137 |
| | — |
|
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-six weeks ended August 4, 2018 and July 29, 2017 were as follows:
|
| | | | | | | |
| August 4, 2018 | | July 29, 2017 |
Grant date market price | $ | 23.59 |
| | $ | 11.43 |
|
Fair value | $ | 33.69 |
| | $ | 11.79 |
|
Assumptions: | | | |
Price volatility | 54 | % | | 47 | % |
Expected term (years) | 2.9 |
| | 2.9 |
|
Risk-free interest rate | 2.4 | % | | 1.5 | % |
Dividend yield | 3.4 | % | | 7.0 | % |
Average volatility of peer companies | 37.4 | % | | 35.2 | % |
Average correlation coefficient of peer companies | 0.2709 |
| | 0.2664 |
|
Stock Appreciation Rights
The following table summarizes stock appreciation rights activity for the twenty-six weeks ended August 4, 2018:
|
| | | | | | | | | | | | |
| Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life |
Outstanding at February 3, 2018 | 3,010,720 |
| | $ | 49.35 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | (50,190 | ) | | 22.21 |
| | | | |
Forfeited or expired | (1,614,371 | ) | | 54.67 |
| | | | |
Outstanding at August 4, 2018 | 1,346,159 |
| | $ | 44.13 |
| | $ | 867,381 |
| | 3.4 |
Stock appreciation rights exercisable at August 4, 2018 | 1,248,775 |
| | $ | 45.80 |
| | $ | 612,390 |
| | 3.1 |
Stock appreciation rights expected to become exercisable in the future as of August 4, 2018 | 92,143 |
| | $ | 22.68 |
| | $ | 239,589 |
| | 6.7 |
As of August 4, 2018, there was $0.5 million of total unrecognized compensation cost related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 5 months.
The grant date fair value of stock appreciation rights that were exercised during the twenty-six weeks ended August 4, 2018 and July 29, 2017 was $1.2 million and $2.2 million, respectively.
Stock Options
The following table summarizes stock option activity for the twenty-six weeks ended August 4, 2018:
|
| | | | | | | | | | | | | |
| Number of Underlying Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life |
Outstanding at February 3, 2018 | 87,200 |
| | $ | 78.20 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | — |
| | — |
| | | | |
Forfeited or expired | (87,200 | ) | | 78.20 |
| | | | |
Outstanding at August 4, 2018 | — |
| | $ | — |
| | $ | — |
| | — |
|
Stock options exercisable at August 4, 2018 | — |
| | $ | — |
| | $ | — |
| | — |
|
As of August 4, 2018, there was no unrecognized compensation cost related to stock options.
8. DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign currency denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign currency denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”). Under the current accounting guidance, substantially all of the unrealized gains or losses related to designated cash flow hedges as of August 4, 2018 would be recognized in cost of sales, exclusive of depreciation and amortization, over the next twelve months. Refer to Note 1, “BASIS OF PRESENTATION,” for further discussion of recent accounting pronouncements related to derivative instruments that could affect the Company's financial statements.
The Company presents its derivative assets and derivative liabilities at their gross fair values on the Condensed Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions.
As of August 4, 2018, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign currency denominated intercompany inventory sales, the resulting settlement of the foreign currency denominated intercompany accounts receivable, or both:
|
| | | |
(in thousands) | Notional Amount(1) |
Euro | $ | 159,768 |
|
British pound | $ | 73,692 |
|
Canadian dollar | $ | 29,989 |
|
Japanese yen | $ | 15,960 |
|
| |
(1) | Amounts reported are the U.S. Dollar notional amounts outstanding as of August 4, 2018. |
The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
As of August 4, 2018, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets/liabilities:
|
| | | |
(in thousands) | Notional Amount(1) |
Euro | $ | 8,818 |
|
Japanese yen | $ | 3,294 |
|
| |
(1) | Amounts reported are the U.S. Dollar notional amounts outstanding as of August 4, 2018. |
The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of August 4, 2018 and February 3, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | Location | | August 4, 2018 | | February 3, 2018 | | Location | | August 4, 2018 | | February 3, 2018 |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contracts | | | $ | 12,198 |
| | $ | 37 |
| | | | $ | 28 |
| | $ | 9,108 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contracts | | | $ | 145 |
| | $ | — |
| | | | $ | — |
| | $ | 39 |
|
Total | Other current assets | | $ | 12,343 |
| | $ | 37 |
| | Accrued expenses | | $ | 28 |
| | $ | 9,147 |
|
Refer to Note 3, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative instruments.
The location and amounts of derivative gains and losses for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017 on the Condensed Consolidated Statements of Operations and Comprehensive Loss were as follows:
|
| | | | | | | | | | | | | | | | | |
(in thousands) | | | Thirteen Weeks Ended | | Twenty-six Weeks Ended |
Derivatives not designated as hedging instruments: | Location | | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Foreign currency exchange forward contracts gain (loss) | Other operating income, net | | $ | 1,894 |
| | $ | (523 | ) | | $ | 4,595 |
| | $ | (551 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effective Portion | | Ineffective Portion and Amount Excluded from Effectiveness Testing |
| Amount of Gain (Loss) Recognized in AOCL on Derivative Contracts (1) | | Location of Gain (Loss) Reclassified from AOCL into Earnings | | Amount of Gain (Loss) Reclassified from AOCL into Earnings (2) | | Location of Gain Recognized in Earnings on Derivative Contracts | | Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (3) |
| Thirteen Weeks Ended |
(in thousands) | August 4, 2018 | | July 29, 2017 | | | | August 4, 2018 | | July 29, 2017 | | | | August 4, 2018 | | July 29, 2017 |
Derivatives in cash flow hedging relationships: | | | | | | | | | | |
Foreign currency exchange forward contracts | $ | 8,058 |
| | $ | (11,029 | ) | | Cost of sales, exclusive of depreciation and amortization | | $ | (150 | ) | | $ | 545 |
| | Other operating income, net | | $ | 1,686 |
| | $ | 634 |
|
| | | | | | | | | | | | | | | |
| Twenty-six Weeks Ended |
(in thousands) | August 4, 2018 | | July 29, 2017 | | | | August 4, 2018 | | July 29, 2017 | | | | August 4, 2018 | | July 29, 2017 |
Derivatives in cash flow hedging relationships: | | | | | | | | | | |
Foreign currency exchange forward contracts | $ | 16,665 |
| | $ | (12,402 | ) | | Cost of sales, exclusive of depreciation and amortization | | $ | (5,222 | ) | | $ | 4,081 |
| | Other operating income, net | | $ | 3,055 |
| | $ | 1,161 |
|
| |
(1) | The amount represents the change in fair value of derivative contracts due to changes in spot rates. |
| |
(2) | The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers. |
| |
(3) | The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings. |
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended August 4, 2018 was as follows:
|
| | | | | | | | | | | |
| Thirteen Weeks Ended August 4, 2018 |
(in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
Beginning balance at May 5, 2018 | $ | (93,286 | ) | | $ | 2,153 |
| | $ | (91,133 | ) |
Other comprehensive (loss) income before reclassifications | (11,206 | ) | | 8,058 |
| | (3,148 | ) |
Reclassified from accumulated other comprehensive loss (1) | — |
| | 150 |
| | 150 |
|
Tax effect | — |
| | (761 | ) | | (761 | ) |
Other comprehensive (loss) income | (11,206 | ) | | 7,447 |
| | (3,759 | ) |
Ending balance at August 4, 2018 | $ | (104,492 | ) | | $ | 9,600 |
| | $ | (94,892 | ) |
|
| | | | | | | | | | | |
| Twenty-six Weeks Ended August 4, 2018 |
(in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
Beginning balance at February 3, 2018 | $ | (84,947 | ) | | $ | (10,107 | ) | | $ | (95,054 | ) |
Other comprehensive (loss) income before reclassifications | (19,545 | ) | | 16,665 |
| | (2,880 | ) |
Reclassified from accumulated other comprehensive loss (1) | — |
| | 5,222 |
| | 5,222 |
|
Tax effect | — |
| | (2,180 | ) | | (2,180 | ) |
Other comprehensive (loss) income | (19,545 | ) | | 19,707 |
| | 162 |
|
Ending balance at August 4, 2018 | $ | (104,492 | ) | | $ | 9,600 |
| | $ | (94,892 | ) |
| |
(1) | Amount represents losses reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statement of Operations and Comprehensive Loss. |
The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended July 29, 2017 was as follows:
|
| | | | | | | | | | | |
| Thirteen Weeks Ended July 29, 2017 |
(in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
Beginning balance at April 29, 2017 | $ | (120,520 | ) | | $ | 225 |
| | $ | (120,295 | ) |
Other comprehensive (loss) income before reclassifications | 19,072 |
| | (11,029 | ) | | 8,043 |
|
Reclassified from accumulated other comprehensive loss (2) | — |
| | (545 | ) | | (545 | ) |
Tax effect | — |
| | 1,426 |
| | 1,426 |
|
Other comprehensive (loss) income | 19,072 |
| | (10,148 | ) | | 8,924 |
|
Ending balance at July 29, 2017 | $ | (101,448 | ) | | $ | (9,923 | ) | | $ | (111,371 | ) |
|
| | | | | | | | | | | |
| Twenty-six Weeks Ended July 29, 2017 |
(in thousands) | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Derivative Financial Instruments | | Total |
Beginning balance at January 28, 2017
| $ | (126,127 | ) | | $ | 4,825 |
| | $ | (121,302 | ) |
Other comprehensive income before reclassifications | 24,679 |
| | (12,402 | ) | | 12,277 |
|
Reclassified from accumulated other comprehensive loss (2) | — |
| | (4,081 | ) | | (4,081 | ) |
Tax effect | — |
| | 1,735 |
| | 1,735 |
|
Other comprehensive income | 24,679 |
| | (14,748 | ) | | 9,931 |
|
Ending balance at July 29, 2017 | $ | (101,448 | ) | | $ | (9,923 | ) | | $ | (111,371 | ) |
| |
(2) | Amount represents gains reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statement of Operations and Comprehensive Loss. |
10. SEGMENT REPORTING
The Company’s two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective areas.
The following table provides the Company’s net sales by operating segment for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017.
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-six Weeks Ended |
(in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Hollister | $ | 500,836 |
| | $ | 446,639 |
| | $ | 924,464 |
| | $ | 821,315 |
|
Abercrombie | 341,578 |
| | 332,682 |
| | 648,849 |
| | 619,105 |
|
Total | $ | 842,414 |
| | $ | 779,321 |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
|
The following table provides the Company’s net sales by geographic area for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017.
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-six Weeks Ended |
(in thousands) | August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
United States | $ | 531,446 |
| | $ | 470,280 |
| | $ | 980,572 |
| | $ | 879,347 |
|
Europe | 192,354 |
| | 195,895 |
| | 362,014 |
| | 350,880 |
|
Other | 118,614 |
| | 113,146 |
| | 230,727 |
| | 210,193 |
|
Total | $ | 842,414 |
| | $ | 779,321 |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
|
11. CONTINGENCIES
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities 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 August 4, 2018, the Company had accrued charges for legal contingencies, including the certain legal matters detailed below, of approximately $23 million, which are classified within accrued expenses on the accompanying Condensed Consolidated Balance Sheet. The estimated liability represents what the Company believes to be reasonable estimates of the loss exposures related to its legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, actual claims rate experience, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company may be subject to estimated incremental losses of as much as approximately $20 million. There are certain claims and legal proceedings pending against the Company for which accruals have not been established.
Certain Legal Matters
The Company is a defendant in two separate class action lawsuits filed by former associates of the Company who are represented by the same counsel. The first lawsuit, filed in 2013, alleges failure to indemnify business expenses and a series of derivative claims for compelled patronization, inaccurate wage statements, waiting time penalties, minimum wage violations and unfair competition under California state law on behalf of all non-exempt hourly associates at Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks stores in California. Four subclasses of associates were certified, and the matter was before a U.S. District Court of California. The second lawsuit, filed in 2015, alleges that associates were required to purchase uniforms without reimbursement in violation of federal law, and laws of the states of New York, Florida and Massachusetts, as well as derivative putative state law claims and seeks to pursue such claims on a class and collective basis. On December 12, 2017, a U.S. District Court of California granted the parties’ stipulation to transfer the first lawsuit pending and combine it with the second lawsuit then pending before a U.S. District Court of Ohio.
Both matters were mediated and the parties signed a $25.0 million claims-made settlement agreement which, subject to final approval by a U.S. District Court of Ohio, is intended to result in a full and final settlement of all claims in both lawsuits on a class-wide basis. On February 16, 2018, a U.S. District Court of Ohio granted preliminary approval of the proposed settlement and ordered that notice of the proposed settlement be given to the absent members of the settlement class. The ultimate settlement amount is dependent upon the actual claims made by members of the class and is also subject to final approval by the U.S. District Court of Ohio and could be subject to appeal by class members. A final approval hearing is set to occur in the third quarter of Fiscal 2018.
In addition to the matters discussed above, the Company is a defendant in certain other class action lawsuits filed by former associates of the Company. These lawsuits, currently assigned to the same judge in a U.S. District Court of California, allege non-exempt hourly associates of the Company were not properly compensated, in violation of federal and California law, for call-in practices requiring associates to engage in certain pre-shift activities in order to determine whether they should report to work and the Company’s alleged failure to pay reporting time pay and all wages earned at termination. In addition, these lawsuits include derivative claims alleging inaccurate wage statements and unfair competition under California state law on behalf of non-exempt hourly associates. One of these lawsuits was mediated and the parties involved have signed a $9.6 million settlement agreement, and on August 13, 2018, a U.S. District Court of California granted preliminary approval of the proposed settlement. The ultimate settlement is subject to final approval by the U.S. District Court of California and could be subject to appeal from class members, objection from class members or revocation of the settlement agreement under certain circumstances. A final approval hearing is set to occur in the fourth quarter of Fiscal 2018.
There can be no absolute assurance that settlements will be finalized or approved or of the ultimate outcomes of the litigations.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
BUSINESS SUMMARY
The Company is a global, multi-brand, specialty retailer, which primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The 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. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2018” represent the fifty-two-week fiscal year ending on February 2, 2019, and to “Fiscal 2017” represent the fifty-three-week fiscal year that ended February 3, 2018.
Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.
SUMMARY RESULTS OF OPERATIONS
The table below summarizes the Company’s results of operations and reconciles financial measures determined in accordance with accounting principles generally accepted in the U.S. (“GAAP”) to non-GAAP financial measures for the thirteen and twenty-six week periods ended August 4, 2018 and July 29, 2017. 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.”
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | August 4, 2018 | | July 29, 2017 |
(in thousands, except change in comparable sales, gross profit rate and per share amounts) | | GAAP | | Excluded Items (1) | | Non-GAAP | | GAAP | | Excluded Items (1) | | Non-GAAP |
Thirteen Weeks Ended | | | | | | | | | | | | |
Net sales | | $ | 842,414 |
| | $ | — |
| | $ | 842,414 |
| | $ | 779,321 |
| | $ | — |
| | $ | 779,321 |
|
Change in net sales | | 8 | % | | | | | | | | | | |
Change in comparable sales (2) | | | | | | 3 | % | | | | | | (1 | )% |
Gross profit rate | | 60.2 | % | | — | % | | 60.2 | % | | 59.1 | % | | — | % | | 59.1 | % |
Operating income (loss) | | $ | 223 |
| | $ | (8,671 | ) | | $ | 8,894 |
| | $ | (21,089 | ) | | $ | (6,135 | ) | | $ | (14,954 | ) |
Net (loss) income attributable to A&F | | $ | (3,853 | ) | | $ | (8,024 | ) | | $ | 4,171 |
| | $ | (15,491 | ) | | $ | (4,525 | ) | | $ | (10,966 | ) |
Net (loss) income per diluted share attributable to A&F | | $ | (0.06 | ) | | $ | (0.12 | ) | | $ | 0.06 |
| | $ | (0.23 | ) | | $ | (0.07 | ) | | $ | (0.16 | ) |
| | | | | | | | | | | | |
Twenty-six Weeks Ended | | | | | | | | | | | | |
Net sales | | $ | 1,573,313 |
| | $ | — |
| | $ | 1,573,313 |
| | $ | 1,440,420 |
| | $ | — |
| | $ | 1,440,420 |
|
Change in net sales | | 9 | % | | | | | | | | | | |
Change in comparable sales (2) | | | | | | 4 | % | | | | | | (2 | )% |
Gross profit rate | | 60.3 | % | | — | % | | 60.3 | % | | 59.7 | % | | — | % | | 59.7 | % |
Operating loss | | $ | (41,980 | ) | | $ | (14,271 | ) | | $ | (27,709 | ) | | $ | (91,030 | ) | | $ | (6,135 | ) | | $ | (84,895 | ) |
Net loss attributable to A&F | | $ | (46,314 | ) | | $ | (12,083 | ) | | $ | (34,231 | ) | | $ | (77,191 | ) | | $ | (4,525 | ) | | $ | (72,666 | ) |
Net loss per diluted share attributable to A&F | | $ | (0.68 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) | | $ | (1.13 | ) | | $ | (0.07 | ) | | $ | (1.06 | ) |
| |
(2) | Comparable sales are calculated on a constant currency basis. Due to the calendar shift resulting from the 53rd week in Fiscal 2017, comparable sales for the thirteen weeks ended August 4, 2018 are compared to the thirteen weeks ended August 5, 2017. Refer to the discussion below in “NON-GAAP FINANCIAL MEASURES” for further details on the comparable sales calculation. |
As of August 4, 2018, the Company had $581.2 million in cash and equivalents, and $253.3 million in gross borrowings outstanding under the Term Loan Facility. Net cash provided by operating activities was $50.5 million for the twenty-six weeks ended August 4, 2018. The Company also used cash of $43.7 million to repurchase approximately 1.7 million shares of A&F’s Common Stock in the open market, $54.1 million for capital expenditures and $27.2 million to pay dividends during the twenty-six weeks ended August 4, 2018.
As of July 29, 2017, the Company had $421.9 million in cash and equivalents, and $268.3 million in gross borrowings outstanding under the Term Loan Facility. Net cash used for operating activities was $48.0 million for the twenty-six weeks ended July 29, 2017. The Company also used cash of $61.8 million for capital expenditures and $27.2 million to pay dividends during the twenty-six weeks ended July 29, 2017.
STORE ACTIVITY
Store count and gross square footage by brand and geography for the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively, were as follows:
|
| | | | | | | | | | | | | | | | | |
| Hollister (1) | | Abercrombie (2) | | Total |
| United States | | International | | United States | | International | | United States | | International |
February 3, 2018 | 394 |
| | 144 |
| | 285 |
| | 45 |
| | 679 |
| | 189 |
|
New | 2 |
| | — |
| | 1 |
| | 2 |
| | 3 |
| | 2 |
|
Closed | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | — |
|
August 4, 2018 | 396 |
| | 144 |
| | 283 |
| | 47 |
| | 679 |
| | 191 |
|
Gross square footage (in thousands): | | | | | | | | | | | |
August 4, 2018 | 2,685 |
| | 1,196 |
| | 2,182 |
| | 631 |
| | 4,867 |
| | 1,827 |
|
| | | | | | | | | | | |
| Hollister (1) | | Abercrombie (2) | | Total |
| United States | | International | | United States | | International | | United States | | International |
January 28, 2017 | 398 |
| | 145 |
| | 311 |
| | 44 |
| | 709 |
| | 189 |
|
New | 1 |
| | — |
| | 2 |
| | — |
| | 3 |
| | — |
|
Closed | (2 | ) | | — |
| | (7 | ) | | (1 | ) | | (9 | ) | | (1 | ) |
July 29, 2017 | 397 |
| | 145 |
| | 306 |
| | 43 |
| | 703 |
| | 188 |
|
Gross square footage (in thousands): | | | | | | | | | | | |
July 29, 2017 | 2,706 |
| | 1,216 |
| | 2,376 |
| | 610 |
| | 5,082 |
| | 1,826 |
|
| |
(1) | Excludes seven international franchise stores as of August 4, 2018, five international franchise stores as of each of February 3, 2018 and July 29, 2017, and three international franchise stores as of January 28, 2017. |
| |
(2) | Includes Abercrombie & Fitch and abercrombie kids brands. Excludes six international franchise stores as of August 4, 2018, four international franchise stores as of February 3, 2018, three international franchise stores as of July 29, 2017 and one international franchise store as of January 28, 2017. |
CURRENT TRENDS AND OUTLOOK
We are pleased with our second quarter performance, which capped off a strong first half of the year and demonstrated further progress our strategic transformation. During the second quarter, we delivered both top and bottom line growth, while continuing to invest in our key transformation initiatives. As previously discussed, these initiatives are focused on the following four pillars:
| |
• | optimizing our global store network; |
| |
• | enhancing our digital commerce fulfillment and omnichannel capabilities; |
| |
• | streamlining our end-to-end concept to customer processes; and |
| |
• | optimizing our marketing investments, including leveraging our growing loyalty programs. |
Our second quarter results reflect another quarter of improved profitability fueled by sales growth across both brands, gross profit expansion and operating expense leverage as we continue to execute our playbooks. Hollister continued its momentum with another quarter of strong sales performance and Abercrombie posted its third consecutive quarter of positive sales growth, both led by strength in the United States.
Our customers remain at the center of all we do, and that singular focus continues to improve brand health metrics and drive our brands forward. We remain on track to achieve our Fiscal 2018 expectations and our longer term Fiscal 2020 targets, as we work towards our objective of being a leading global omnichannel retailer.
For Fiscal 2018, we expect:
| |
• | Comparable sales to be up in the range of 2% to 4%. |
| |
• | Net sales to be up in the range of 2% to 4%, with net sales in the third quarter to be approximately flat to last year, including the adverse effects from the calendar shift and changes in foreign currency exchange rates. |
| |
– | The calendar shift and the loss of Fiscal 2017’s 53rd week to adversely impact net sales by approximately $40 million, with benefits to first quarter and second quarter net sales of approximately $10 million and $30 million, respectively, to be more than offset by adverse impacts to third quarter and fourth quarter net sales of approximately $20 million and $60 million, respectively |
| |
• | A gross profit rate up slightly from the Fiscal 2017 rate of 59.7%. |
| |
• | GAAP operating expense to now be up approximately 2.5% from Fiscal 2017 adjusted operating expense of $2 billion, including approximately $14 million of charges related to asset impairment and certain legal matters that are excluded from adjusted non-GAAP operating expense. For the third quarter of Fiscal 2018, GAAP operating expense is expected to be up in the range of 2% to 3% from Fiscal 2017 adjusted non-GAAP operating expense of $489 million. |
| |
• | A weighted average fully-diluted share count of approximately 69 million shares, excluding the effect of potential share buybacks. |
In addition, we expect to end the third quarter of Fiscal 2018 with inventories to be up low- to mid-single digits in advance of the peak holiday selling periods.
For Fiscal 2018, the Company now expects the full year effective tax rate to be in the mid-to-upper 30s, including discrete non-cash income tax charges of approximately $9 million related to the expiration of certain share-based compensation awards, of which approximately $8 million has been recognized to date. The full year effective tax rate also includes discrete tax charges of $2 million, which are excluded from adjusted non-GAAP results, adjusting the Tax Cuts and Jobs Act of 2017 provisional estimate. For the third quarter of Fiscal 2018, the Company expects the effective tax rate to be in the mid 30s.
With regard to capital allocation, we continue to target capital expenditures to be in the range of $135 million to $140 million for the full year.
We plan to open 22 full-price stores in Fiscal 2018, including 13 Hollister and nine Abercrombie stores. In addition, we expect to remodel or right-size close to 50 stores to the new prototype formats. We also anticipate closing up to 60 stores primarily in the U.S. during Fiscal 2018 through natural lease expirations, with the the final number being dependent on lease negotiations and business outcomes.
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is useful to investors as it provides a measure of the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, and therefore supplements investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies.
Financial Information on a Constant Currency Basis
The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates for Fiscal 2018 is calculated using a 27% effective tax rate.
Comparable Sales
In addition, the Company provides 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 the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales excludes revenue other than store and direct-to-consumer sales. Due to the calendar shift in Fiscal 2018, resulting from the 53rd week in Fiscal 2017, comparable sales for the Fiscal 2018 quarterly periods ended May 5, 2018, August 4, 2018, November 3, 2018 and February 2, 2019 are to be compared to the thirteen weeks ended May 6, 2017, August 5, 2017, November 4, 2017 and February 3, 2018, respectively. Management uses comparable sales to understand the drivers of net sales year-over-year changes as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.
Calendar Shift Impact on Net Sales
The impact on net sales from the calendar shift, resulting from the loss of Fiscal 2017’s 53rd week, is calculated as the difference between net sales for the thirteen weeks ended May 6, 2017, August 5, 2017, November 4, 2017 and February 3, 2018 and reported net sales for the fiscal quarters ended April 29, 2017, July 29, 2017, October 28, 2017 and February 3, 2018, respectively. The impact on net sales from the calendar shift, resulting from the loss of Fiscal 2017’s 53rd week for the year-to-date period ended August 4, 2018 is calculated as the difference between the twenty-six weeks ended August 5, 2017 and reported net sales for the year-to-date period ended July 29, 2017.
Excluded Items
The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable:
|
| | |
Financial measures (1) | | Excluded items |
Marketing, general and administrative expense | | Certain legal charges |
Operating income (loss) | | Asset impairment; certain legal charges |
Net (loss) income and net (loss) income per share attributable to A&F (2) | | Asset impairment; certain legal charges; discrete net tax charges related to the Act; and the tax effect of excluded items |
| |
(1) | Certain of these financial measures are also expressed as a percentage of net sales. |
| |
(2) | The Company also presents income tax expense (benefit) and the effective tax rate on both a GAAP and on an adjusted non-GAAP basis excluding the items listed under “Operating income (loss),” as applicable, in the table above and discrete net tax charges related to the Act. The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. |
RESULTS OF OPERATIONS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 4, 2018 VERSUS JULY 29, 2017
Net Sales
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | | | | | |
| August 4, 2018 | | July 29, 2017 | | | | | | |
(in thousands) | Net Sales | | Net Sales | | $ Change | | % Change | | Change in Comparable Sales (1) |
Hollister | $ | 500,836 |
| | $ | 446,639 |
| | $ | 54,197 |
| | 12% | | 4% |
Abercrombie (2) | 341,578 |
| | 332,682 |
| | 8,896 |
| | 3% | | 2% |
Total net sales | $ | 842,414 |
| | $ | 779,321 |
| | $ | 63,093 |
| | 8% | | 3% |
| | | | | | | | | |
United States | $ | 531,446 |
| | $ | 470,280 |
| | $ | 61,166 |
| | 13% | | 7% |
International | 310,968 |
| | 309,041 |
| | 1,927 |
| | 1% | | (4)% |
Total net sales | $ | 842,414 |
| | $ | 779,321 |
| | $ | 63,093 |
| | 8% | | 3% |
|
| | | | | | | | | | | | | | | |
| Twenty-six Weeks Ended | | | | | | |
| August 4, 2018 | | July 29, 2017 | | | | | | |
(in thousands) | Net Sales | | Net Sales | | $ Change | | % Change | | Change in Comparable Sales (1) |
Hollister | $ | 924,464 |
| | $ | 821,315 |
| | $ | 103,149 |
| | 13% | | 5% |
Abercrombie (2) | 648,849 |
| | 619,105 |
| | 29,744 |
| | 5% | | 2% |
Total net sales | $ | 1,573,313 |
| | $ | 1,440,420 |
| | $ | 132,893 |
| | 9% | | 4% |
| | | | | | | | | |
United States | $ | 980,572 |
| | $ | 879,347 |
| | $ | 101,225 |
| | 12% | | 7% |
International | 592,741 |
| | 561,073 |
| | 31,668 |
| | 6% | | (2)% |
Total net sales | $ | 1,573,313 |
| | $ | 1,440,420 |
| | $ | 132,893 |
| | 9% | | 4% |
| |
(1) | Comparable sales are calculated on a constant currency basis. Due to the calendar shift resulting from the 53rd week in Fiscal 2017, comparable sales for the thirteen weeks ended August 4, 2018 are compared to the thirteen weeks ended August 5, 2017. Comparable sales for the twenty-six weeks ended August 4, 2018 are compared to the twenty-six weeks ended August 5, 2017. Refer to “NON-GAAP FINANCIAL MEASURES” in “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” for further details on the comparable sales calculation. |
| |
(2) | Includes Abercrombie & Fitch and abercrombie kids brands. |
For the second quarter of Fiscal 2018, net sales increased 8% as compared to the second quarter of Fiscal 2017, primarily attributable to an increase in units sold, partially offset by lower average unit retail driven by product mix. Changes in foreign currency exchange rates benefited net sales by approximately $8 million, or 1%. The calendar shift resulting from Fiscal 2017’s 53rd week benefited net sales by approximately $30 million, or 4%. Comparable sales, which do not include impacts from changes in foreign currency exchange rates or the calendar shift, increased 3%, with a 4% increase in comparable sales for Hollister and a 2% increase in comparable sales for Abercrombie.
For the year-to-date period of Fiscal 2018, net sales increased 9% as compared to the year-to-date period of Fiscal 2017, primarily attributable to an increase in units sold and slightly higher average unit retail driven by benefits from changes in foreign currency exchange rates. Changes in foreign currency exchange rates benefited net sales by approximately of approximately $33 million, or 2%. The calendar shift resulting from Fiscal 2017’s 53rd week benefited net sales by approximately $40 million, or 3%. Comparable sales, which do not include impacts from changes in foreign currency exchange rates or the calendar shift, increased 4%, with a 5% increase in comparable sales for Hollister and a 2% increase in comparable sales for Abercrombie.
Cost of Sales, Exclusive of Depreciation and Amortization
|
| | | | | | | | | | | |
| Thirteen Weeks Ended |
| August 4, 2018 | | July 29, 2017 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Cost of sales, exclusive of depreciation and amortization | $ | 335,519 |
| | 39.8% | | $ | 318,426 |
| | 40.9% |
| | | | | | | |
Gross profit | $ | 506,895 |
| | 60.2% | | $ | 460,895 |
| | 59.1% |
|
| | | | | | | | | | | |
| Twenty-six Weeks Ended |
| August 4, 2018 | | July 29, 2017 |
(in thousands) | | | % of Net Sales | | | | % of Net Sales |
Cost of sales, exclusive of depreciation and amortization | $ | 624,073 |
| |