Abercrombie & Fitch Co. Form 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended April 30, 2016, compared with the thirteen weeks ended May 2, 2015. Although the request metadata identifies 2015 Q1, the filing itself is for the first quarter of Fiscal 2016. Results are unaudited. A&F operates Abercrombie, abercrombie kids and Hollister specialty apparel brands through stores and direct-to-consumer channels in North America, Europe, Asia and the Middle East.
Financial Results and Key Metrics
| Metric | Q1 Fiscal 2016 | Q1 Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $685.5 million | $709.4 million | Down 3% |
| Comparable sales, constant currency | Down 4% | Down 8% | Improved |
| Gross profit | $425.7 million | $411.5 million | Up $14.2 million |
| Gross margin | 62.1% | 58.0% | Up 410 basis points |
| Operating loss | $(54.9) million | $(90.2) million | Improved $35.3 million |
| Net loss attributable to A&F | $(39.6) million | $(63.2) million | Improved $23.7 million |
| Diluted loss per share | $(0.59) | $(0.91) | Improved |
| Net cash used in operating activities | $(76.3) million | $(93.8) million | Improved $17.5 million |
Sales mix: Abercrombie sales declined 5% to $323.3 million and Hollister sales declined 2% to $362.1 million. U.S. sales declined 5% to $425.4 million, while international sales were essentially flat at $260.1 million on a reported basis. Constant-currency comparable sales declined 2% in the U.S. and 7% internationally.
Expenses and margins: Stores and distribution expense declined 6% to $369.1 million, while marketing, general and administrative expense increased 6% to $114.4 million. The improved gross margin primarily reflects the absence of a $26.9 million inventory write-down recorded in the prior-year quarter. Fiscal 2016 had no non-GAAP adjustments; the prior-year quarter also included asset impairment, store closure, fixture disposal, restructuring and profit-improvement items. Excluding those prior-year items, the comparable adjusted gross margin was 61.8% and adjusted operating loss was $52.3 million.
Balance sheet and liquidity: Cash and equivalents were $491.0 million at April 30, 2016, down from $588.6 million at January 30, 2016. Inventories were $435.7 million, broadly unchanged from year-end. Gross term-loan borrowings were $293.3 million, with net borrowings of $286.6 million. No borrowings were outstanding under the $400 million asset-based revolving credit facility; the borrowing base was $279.8 million. The company paid $13.5 million in dividends and spent $26.0 million on capital expenditures during the quarter.
Cash flow: Operating cash use improved principally because of a $22.8 million return of a long-term lease deposit and lower income tax payments. Investing cash use was $21.9 million, and financing cash use was $13.3 million. Cash declined by $97.6 million during the quarter, ending at $491.0 million.
Material Changes Versus the Prior Comparable Period
- Sales declined 3%, driven by a 4% comparable-sales decline, but the comparable-sales trend improved from the prior-year decline of 8%.
- Gross margin increased substantially because the prior-year quarter included a $26.9 million inventory write-down related to aged merchandise and brand-positioning changes. On an adjusted basis, gross margin improved approximately 30 basis points.
- Operating and net losses narrowed materially, although adjusted operating loss as a percentage of sales increased approximately 60 basis points after removing prior-year unusual items.
- Marketing, general and administrative expense increased due in part to higher legal, marketing and other expenses and deleveraging from lower sales.
- The store base declined to 925 stores at April 30, 2016 from 964 stores at May 2, 2015. The company closed 10 stores during the quarter and opened three.
- Foreign currency translation produced a $20.4 million gain in other comprehensive income, while derivative instruments produced a $10.0 million loss, resulting in total other comprehensive income of $10.5 million.
Guidance, Outlook, Risks and Unusual Items
Management expected comparable sales to remain challenging in the second quarter but improve in the second half of Fiscal 2016. The company expected adverse foreign-exchange effects on sales and operating income, a full-year gross margin rate slightly above the prior-year rate of 61.9%, and second-quarter operating expenses up 2% to 3% year over year. Full-year operating expense dollars were expected to be approximately flat, the effective tax rate in the mid-to-upper 30% range, and diluted weighted-average shares approximately 68 million, excluding potential buybacks.
Fiscal 2016 capital expenditures were expected to range from $150 million to $175 million. The company planned approximately 15 new stores, including approximately 10 internationally, six new outlet stores and up to 60 U.S. store closures through natural lease expirations.
Key risks include weak consumer spending, fashion and inventory execution, international expansion, direct-to-consumer performance, competition and pricing pressure, foreign currency volatility, supply-chain and distribution disruptions, cybersecurity, litigation, tax-rate volatility, seasonal cash flows, restrictive credit-facility covenants and uncertainty associated with the interim governance structure and suspended search for a new chief executive officer.
The company had accrued approximately $20 million for certain legal contingencies, while additional claims lacked established accruals. Actual liabilities could exceed reserves. The company also held $272.1 million of its cash overseas, including $186.1 million considered indefinitely invested in foreign operations for which no U.S. tax provision had been recorded.
Other notable items include a $4.75% interest rate on the term loan, approximately $2.0 million of standby letters of credit, and $6.5 million of remaining share-repurchase authorization. No shares were repurchased under the authorization during the quarter; shares withheld for employee tax obligations totaled 136,134.
Investor Verification Checklist
- Confirm that the relevant filing period is Q1 Fiscal 2016, ended April 30, 2016, rather than 2015 Q1.
- Assess whether margin improvement is sustainable after normalizing for the prior-year $26.9 million inventory write-down and other unusual items.
- Monitor comparable sales, particularly international, flagship and tourist stores, against management’s expected second-half improvement.
- Reconcile cash use with seasonal working-capital requirements, planned capital expenditures, dividends and potential share repurchases.
- Review term-loan amortization, mandatory excess-cash-flow prepayment provisions, interest-rate exposure and ABL availability.
- Evaluate foreign-currency effects, including hedging results and the concentration of cash held by foreign affiliates.
- Review accrued and unaccrued legal contingencies, executive-transition developments and the potential impact of store closures and new-store investments.