Abercrombie & Fitch Co. Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended July 31, 2021, compared with August 1, 2020. Although the request metadata identifies “2020 Q2,” the supplied filing is the Fiscal 2021 second-quarter Form 10-Q, filed September 8, 2021.
Business Context and Reporting Period
Abercrombie & Fitch is a 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 and Asia through digital channels, company-operated stores and third-party arrangements.
As of July 31, 2021, all company-operated stores were open for in-store service, compared with widespread temporary closures in the prior-year period due to COVID-19. The company operated 733 stores, including 534 U.S. and 199 international locations.
Financial Results and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Year-to-date 2021 | Year-to-date 2020 |
|---|---|---|---|---|
| Net sales | $864.9 million | $698.3 million | $1.646 billion | $1.184 billion |
| Net sales change | 23.8% | (17.0)% | 39.1% | (24.8)% |
| Gross profit | $563.5 million | $423.6 million | $1.059 billion | $687.8 million |
| Gross margin | 65.2% | 60.7% | 64.3% | 58.1% |
| Operating income (loss) | $114.8 million | $14.1 million | $172.2 million | $(195.0) million |
| Operating margin | 13.3% | 2.0% | 10.5% | (16.5)% |
| Net income (loss) attributable to A&F | $108.5 million | $5.5 million | $150.3 million | $(238.7) million |
| Diluted EPS | $1.69 | $0.09 | $2.32 | $(3.82) |
Hollister generated Q2 sales of $514.5 million, up 20%, while Abercrombie generated $350.4 million, up 30%. U.S. sales increased 31% in Q2 and international sales increased 10%. Digital sales declined 3% in Q2 but increased 17% year-to-date, representing 44% and 47% of total sales, respectively.
Net cash provided by operating activities was $49.9 million year-to-date, compared with $46.2 million in the prior-year period. Capital expenditures were $35.3 million, compared with $75.6 million. Net cash used in financing activities was $200.2 million, primarily reflecting share repurchases and debt repurchases. Cash and equivalents were $921.5 million at July 31, 2021, compared with $1.105 billion at January 30, 2021.
Inventories were $415.6 million, compared with $404.1 million at fiscal year-end. Current assets were $1.502 billion and current liabilities were $887.2 million.
Gross borrowings were $307.7 million, net long-term borrowings were $303.0 million, and the company had no ABL borrowings outstanding. The company reported $248.6 million of borrowing availability under its ABL facility after required excess availability and standby letters of credit. The company was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales and profitability improved substantially as stores reopened and store traffic recovered from COVID-19-related closures in the prior year.
- Gross margin expanded by 450 basis points in Q2 and 620 basis points year-to-date, primarily because of higher average unit retail, reduced promotions and lower markdowns.
- Operating expenses increased in absolute terms as store payroll, digital marketing, shipping and handling, performance-based compensation, legal, consulting and information technology costs normalized or increased.
- Asset impairment declined to $0.8 million in Q2 and $3.5 million year-to-date from $8.1 million and $51.0 million, respectively, in the prior-year periods.
- The company repurchased $42.3 million of senior secured notes during Q2, recognizing a $5.3 million loss on extinguishment of debt.
- The company repurchased approximately 3.5 million common shares for $135.2 million year-to-date. Dividends remained suspended.
- A prior-year cash-flow classification error was corrected. The $50.0 million Rabbi Trust withdrawal was reclassified from operating to investing activities in the comparative cash-flow statement.
- The previously disclosed material weakness related to cash-flow presentation and disclosure was reported as remediated as of July 31, 2021.
Guidance, Outlook, Commentary and Risks
Management stated that it expects adequate liquidity to fund operations over the next 12 months. Fiscal 2021 capital expenditures were expected to be approximately $100 million. Priorities include digital, data and technology investment; marketing; development of Gilly Hicks and Social Tourist; store-square-footage optimization; omnichannel fulfillment; and environmental, social and governance initiatives.
Management planned to manage inventories conservatively, optimize distribution-center capacity and tightly manage expenses. The company expected to continue repositioning its store network away from large, tourist-dependent flagships toward smaller omnichannel locations. Six operating flagship stores remained at the end of Q2, compared with 15 at the beginning of Fiscal 2020.
COVID-19, including the Delta variant, remained a material uncertainty. Potential effects include renewed store closures, reduced consumer demand, supply-chain disruption, factory closures, higher freight costs and changes in macroeconomic conditions. Other significant risks include fashion and inventory execution, competition, foreign-currency fluctuations, international operations, mall traffic, cyber and information-technology risks, supply-chain dependence, labor and raw-material costs, litigation, tax-rate volatility and restrictive debt covenants.
Q2 income tax benefit included discrete benefits from releasing valuation allowances and a U.K. statutory rate change. These items materially affected reported earnings and may not recur. The company also noted that future flagship-store exits may generate additional charges, cash expenditures or benefits that cannot currently be quantified.
Important Facts for Investors to Verify
- Confirm that the applicable filing period is July 31, 2021 rather than 2020 Q2.
- Assess the sustainability of the 65.2% Q2 gross margin and 13.3% operating margin after COVID-19 comparisons normalize.
- Separate recurring earnings from discrete tax benefits, asset impairments, rent abatements and the debt-extinguishment loss.
- Monitor digital sales trends, store traffic, inventory levels and the effect of supply-chain and freight disruptions.
- Review liquidity after $135.2 million of year-to-date share repurchases and the remaining $248.6 million of ABL borrowing availability.
- Evaluate the 8.75% senior secured notes due 2025, debt-repurchase activity and compliance with restrictive covenants.
- Track future store closures, lease settlements and potential flagship-store exit charges.
- Review the corrected prior-period cash-flow presentation and confirm the reported remediation of the material weakness.