Abercrombie & Fitch Co. 10-Q Summary
Reporting period: Thirteen weeks ended April 30, 2022, compared with thirteen weeks ended May 1, 2021. The supplied metadata identifies “2021 Q1,” but the filing is the Company’s Fiscal 2022 first-quarter Form 10-Q.
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 reports the Hollister and Abercrombie operating segments, which are aggregated into one reportable segment. It operated 728 stores at April 30, 2022, after opening four stores and closing five legacy stores during the quarter.
Financial performance and liquidity
| Metric | Q1 Fiscal 2022 | Q1 Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $812.8 million | $781.4 million | 4.0% |
| Gross profit | $449.5 million | $495.1 million | (9.2%) |
| Gross margin | 55.3% | 63.4% | (810 bps) |
| Operating income (loss) | $(9.7) million | $57.4 million | $(67.2) million |
| Operating margin | (1.2%) | 7.3% | (850 bps) |
| Net income (loss) attributable to A&F | $(16.5) million | $41.8 million | $(58.2) million |
| Diluted EPS | $(0.32) | $0.64 | $(0.96) |
| Net cash used in operating activities | $(217.8) million | $(131.4) million | $(86.4) million |
- Segment sales: Hollister declined 3% to $428.8 million; Abercrombie increased 13% to $383.9 million.
- Geographic sales: U.S. sales increased 6% to $585.1 million; EMEA increased 3% to $164.0 million; APAC declined 35% to $29.9 million, primarily reflecting pandemic-related disruptions.
- Cost pressures: Cost of sales increased to 44.7% of sales from 36.6%. Management attributed the deterioration primarily to approximately $80 million of higher average unit costs from freight inflation, partly offset by lower promotions, markdowns and higher ticket prices.
- Operating expenses: Stores and distribution expense increased 7% to $337.5 million, partly because the prior-year period benefited from COVID-19 rent abatements and payroll credits. Marketing, general and administrative expense increased 1% to $122.1 million.
- Cash and liquidity: Cash and equivalents were $468.4 million at April 30, 2022, down from $823.1 million at January 29, 2022. Total cash, including restricted cash, was $478.5 million. Management reported total liquidity of approximately $0.8 billion, including approximately $314.4 million of borrowing availability under the ABL Facility.
- Debt: Gross Senior Secured Notes outstanding were $307.7 million, with an 8.75% fixed interest rate and July 15, 2025 maturity. There were no ABL borrowings outstanding, and the Company was in compliance with its debt covenants.
- Inventory and capital spending: Inventory increased to $562.5 million from $525.9 million at fiscal year-end. Capital expenditures were $26.3 million during the quarter; full-year Fiscal 2022 capital expenditures were expected to be approximately $150 million.
- Share repurchases: The Company repurchased approximately 3.3 million shares for $100.0 million during the quarter. Approximately $258.0 million remained available under the repurchase authorization at April 30, 2022. The dividend program remained suspended.
Material changes versus the prior comparable period
- Sales grew 4%, but gross profit fell 9% and the Company moved from operating and net income to operating and net losses.
- Adjusted operating loss, excluding asset impairment charges, was $6.3 million compared with adjusted operating income of $60.1 million in the prior-year quarter.
- Adjusted diluted EPS was $(0.27), compared with $0.67 in the prior-year quarter.
- Operating cash usage increased substantially, reflecting inventory purchases, vendor payments and lease-related timing. The prior-year period also included a $63.8 million accelerated payment to settle obligations related to the former SoHo Hollister flagship store.
- Foreign currency movements reduced reported sales by approximately $9 million. Foreign currency translation adjustments reduced other comprehensive income by $10.4 million.
- Asset impairment charges increased to $3.4 million from $2.7 million and related to stores across brands, geographies and formats.
Outlook, commentary and risks
- Management remained focused on digital, data and technology investment; connected omnichannel capabilities; distribution-network optimization; selective new-store openings; and environmental, social and governance initiatives.
- The Company planned to open approximately 60 new stores and close approximately 30 stores during Fiscal 2022, subject to landlord negotiations.
- Supply-chain constraints, factory closures in Vietnam, elevated air freight, labor costs, cotton and raw-material costs, and broader inflation were expected to pressure margins through Fiscal 2022. The Company planned earlier inventory receipts, additional freight vendors and reduced air freight usage where possible.
- COVID-19 continued to cause temporary store closures in parts of APAC, while all U.S. stores were open at quarter-end. Management warned that closures could reduce sales without proportionate reductions in occupancy and other fixed costs.
- Management stated that it expected adequate liquidity to fund operations over the next 12 months. Retail seasonality remains significant, with the third and fourth quarters typically generating the greatest sales activity.
- No formal quarterly or full-year revenue or earnings guidance is clearly provided in the filing text.
- Key risks include consumer discretionary weakness, fashion and demand risk, inventory management, supply-chain disruption, inflation, labor shortages, COVID-19, geopolitical conflict including Ukraine, foreign exchange, cybersecurity, data privacy, climate-related matters and store-network execution.
- Legal proceedings arise in the ordinary course of business. The Company stated that it could not estimate a range of reasonably possible losses in excess of recorded accruals for certain legal matters.
Important facts for investors to verify
- Whether freight, labor and raw-material inflation continues to compress gross margin and whether price increases can offset those costs.
- Inventory levels, markdown exposure and working-capital needs as the Company enters its more important fall and holiday selling seasons.
- The effect of APAC COVID-19 restrictions, foreign exchange movements and geopolitical developments on international sales.
- Progress and economics of the planned store openings, legacy-store closures and global store-network optimization.
- Cash generation, continued share repurchases and the balance between shareholder returns, capital expenditures and debt reduction.
- Availability under the ABL Facility, covenant compliance and the refinancing or repayment requirements for the Senior Secured Notes maturing in 2025.
- The extent to which reported results rely on non-GAAP adjustments, including $3.4 million of asset impairment charges in the current quarter.