Abercrombie & Fitch Co. — Form 10-K Summary
Reporting period: The supplied filing is the fiscal 2022 Form 10-K for the 52 weeks ended January 28, 2023, filed March 27, 2023. It does not correspond to “2021 Q4”; the filing provides annual Fiscal 2022 and Fiscal 2021 comparisons.
Business context
Abercrombie & Fitch is a global, digitally led omnichannel apparel retailer operating the Hollister, Gilly Hicks, Social Tourist, Abercrombie & Fitch and abercrombie kids brands. The company operates primarily in North America, Europe, the Middle East and Asia through digital channels, company-operated stores and third-party arrangements. Hollister and Abercrombie are operating segments aggregated into one reportable segment.
- 762 company-operated retail stores at January 28, 2023, versus 729 at January 29, 2022.
- 59 stores opened and 26 closed during Fiscal 2022; the company was a net store opener for the first time in more than a decade.
- Approximately 29,600 associates globally, including approximately 22,400 part-time associates.
Financial performance and liquidity
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $3.698 billion | $3.713 billion | Flat, down $15.0 million |
| Gross profit | $2.105 billion | $2.312 billion | Down $207.5 million |
| Gross profit rate | 56.9% | 62.3% | Down 540 bps |
| Operating income | $92.6 million | $343.1 million | Down $250.4 million |
| Operating margin | 2.5% | 9.2% | Down 670 bps |
| Net income attributable to A&F | $2.8 million | $263.0 million | Down $260.2 million |
| Diluted EPS | $0.05 | $4.20 | Down $4.15 |
| Net cash from operating activities | $(2.3) million | $277.8 million | Down $280.1 million |
| Capital expenditures | $164.6 million | $97.0 million | Up $67.6 million |
Hollister sales declined 9% to $1.963 billion, while Abercrombie sales increased 11% to $1.735 billion. U.S. sales increased 4% to $2.758 billion, but international sales declined 11% to $939.5 million, including declines of 12% in EMEA and 29% in APAC.
Cost of sales increased to 43.1% of sales from 37.7%, primarily because of higher freight and raw-material costs and adverse foreign-exchange effects. Stores and distribution expense increased 4%, including a $40 million increase in digital fulfillment expense. Marketing, general and administrative expense declined 4% to $517.6 million.
Cash and equivalents totaled $517.6 million at January 28, 2023, compared with $823.1 million a year earlier. Inventories declined to $505.6 million from $525.9 million, although the lower-of-cost-or-net-realizable-value adjustment increased to $35.7 million from $17.2 million.
Gross borrowings were $299.7 million, consisting primarily of 8.75% Senior Secured Notes due July 2025. The company had no ABL borrowings outstanding and reported $348.1 million of borrowing capacity available after required excess availability. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue was essentially flat, but profitability deteriorated substantially because of freight, labor, raw-material and other inflationary costs, foreign-exchange pressure, weaker international demand and higher digital fulfillment expense.
- Operating margin fell from 9.2% to 2.5%; GAAP net income attributable to A&F fell from $263.0 million to $2.8 million.
- Cash flow from operations changed from $277.8 million of inflow to $2.3 million of outflow, while capital expenditures increased to $164.6 million.
- The company repurchased approximately 4.8 million shares for $125.8 million, compared with approximately 10.2 million shares for $377.3 million in Fiscal 2021. Approximately $232.2 million remained under the repurchase authorization at year-end.
- The company purchased $8.0 million of Senior Secured Notes during Fiscal 2022, reducing gross debt by that amount.
- Fiscal 2021 benefited from a $42.5 million tax benefit related to the release of valuation allowances. Fiscal 2022 instead recorded an 84.5% effective tax rate, including adverse tax impacts from losses for which no tax benefit was recognized.
- Asset impairment charges increased to $14.0 million from $12.1 million, while Fiscal 2020 impairment charges had been $72.9 million.
Guidance, outlook, commentary and risks
Management did not provide a clear numerical Fiscal 2023 revenue or earnings forecast in the supplied filing. The company expects Fiscal 2023 capital expenditures of approximately $160 million and believes it has adequate liquidity to fund operations for the next twelve months.
The 2025 “Always Forward Plan” focuses on brand growth, an enterprise-wide digital transformation and financial discipline. Fiscal 2023 priorities include investing in Abercrombie marketing and stores, improving Hollister product and brand voice, expanding Gilly Hicks, modernizing data platforms, progressing the ERP and cloud-migration programs, improving digital and mobile experiences, maintaining lean inventories and balancing investments against inflation and efficiency initiatives.
Key risks include discretionary consumer spending and recessionary conditions; inflation in labor, freight, cotton and other raw materials; supply-chain disruptions and reliance on third-party manufacturers; foreign-exchange volatility; COVID-19 and other public-health events; geopolitical conflict, including Ukraine and China-related risks; inventory obsolescence and markdowns; store traffic and lease obligations; competition; cybersecurity and information-system disruptions; execution of digital, omnichannel and ERP initiatives; tax-rate volatility; litigation and regulatory compliance.
The dividend program remains suspended. The company incurred $14.0 million of asset impairment charges and has substantial contractual obligations, including $1.085 billion of undiscounted operating lease obligations, $233.6 million of purchase obligations and $299.7 million of long-term debt principal. The filing states that legal contingencies exist, but a range of reasonably possible losses in excess of accrued amounts cannot be estimated.
PricewaterhouseCoopers LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of January 28, 2023.
Important facts for investors to verify
- Confirm the requested period: the filing is Fiscal 2022 annual results, not 2021 fourth-quarter results.
- Assess whether gross-margin pressure from freight, raw materials, labor, fulfillment and foreign exchange is temporary or structural.
- Monitor Hollister recovery, Abercrombie growth and the continued weakness in EMEA and APAC.
- Evaluate liquidity relative to approximately $300 million of debt due in 2025, lease commitments and planned capital expenditures.
- Review inventory aging, markdown exposure and the increase in the lower-of-cost-or-net-realizable-value reserve.
- Consider the sustainability of cash returns given negative operating cash flow, continued share repurchases and the suspended dividend.
- Track valuation allowances and the unusually high 84.5% effective tax rate, particularly in Switzerland, Japan and other international jurisdictions.
- Review the terms and restrictions of the 8.75% Senior Secured Notes and the $400 million ABL Facility, including covenant and refinancing risks.
- Assess execution risk associated with the Always Forward Plan, ERP transformation, digital investments and store-network optimization.