Abercrombie & Fitch Co. Form 10-K Summary
Business context and reporting period
Abercrombie & Fitch Co. is a specialty apparel retailer operating the Abercrombie, abercrombie kids, Hollister and Gilly Hicks brands through stores, direct-to-consumer channels, wholesale, franchise and licensing arrangements. The filing covers Fiscal 2016, the 52-week year ended January 28, 2017. The supplied request metadata references “2015 Q4,” but the filing is an annual report for Fiscal 2016.
At year-end, the Company operated 898 stores: 709 in the United States and 189 internationally. Direct-to-consumer sales were $856.8 million, approximately 26% of net sales, and wholesale, franchise and licensing sales were $36.1 million, approximately 1% of net sales.
Financial performance and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net sales | $3,326.7 million | $3,518.7 million |
| Comparable sales change | (5)% | (3)% |
| Gross profit | $2,028.6 million | $2,157.5 million |
| Gross margin | 61.0% | 61.3% |
| Operating income | $15.2 million | $72.8 million |
| Operating margin | 0.5% | 2.1% |
| Net income attributable to A&F | $4.0 million | $35.6 million |
| Diluted earnings per share | $0.06 | $0.51 |
| Net cash from operating activities | $184.6 million | $309.9 million |
| Capital expenditures | $140.8 million | $143.2 million |
| Free cash flow | $43.7 million | $166.7 million |
Fiscal 2016 ended with cash and equivalents of $547.2 million, working capital of $653.3 million and a current ratio of 2.34. Borrowings, net, were $263.0 million, consisting of the term loan; gross term-loan borrowings were $268.3 million. No borrowings were outstanding under the $400 million asset-based revolving credit facility, which had a $239.9 million borrowing base at year-end.
The Company paid $54.1 million in dividends and $25.0 million in debt repayments during Fiscal 2016. The quarterly dividend was $0.20 per share, or $0.80 per share for the year. Total contractual obligations were $2.24 billion, including $1.56 billion of operating lease obligations.
Material changes versus the prior comparable period
- Net sales declined 5%, driven primarily by a 5% comparable-sales decline. Abercrombie sales fell 9% to $1.49 billion, while Hollister sales declined 2% to $1.84 billion; Hollister comparable sales were flat.
- United States sales decreased 7% and international sales decreased 3%. Management cited adverse foreign-currency effects, particularly internationally.
- Gross margin decreased to 61.0% from 61.3%. On an adjusted basis, Fiscal 2015 included a $20.6 million inventory write-down, making underlying margin comparisons less favorable for Fiscal 2016.
- Operating income fell 79% to $15.2 million. Operating expenses increased as a percentage of sales because of negative sales deleveraging, higher direct-to-consumer expense and higher marketing expense.
- Net income attributable to A&F fell to $4.0 million from $35.6 million. The Fiscal 2016 effective tax rate was unusually high at 321.9% because of low pretax income and jurisdictional mix; the Company recorded an $11.2 million tax benefit.
- Operating cash flow decreased $125.4 million to $184.6 million, largely because of lower earnings, incentive compensation payments and the absence of the prior-year benefit from extended vendor payment terms.
- The store base declined from 932 to 898. Fiscal 2016 included 18 new stores and 54 closures, while gross store square footage declined from 7.29 million to 7.01 million square feet.
- Fiscal 2016 included $7.9 million of non-cash asset impairment charges, a $12.3 million Deepwater Horizon claims-settlement benefit and $6.0 million of indemnification recovery. Fiscal 2015 included a $20.6 million inventory write-down, $18.2 million of impairment charges and $15.8 million of proposed legal settlement charges.
Guidance, outlook, risks and unusual items
Management expected Fiscal 2017 comparable sales to improve but remain challenging in the first half, with Hollister comparable sales expected to maintain or grow and Abercrombie trends expected to improve. Foreign currency was expected to continue adversely affecting sales and operating income. Management targeted a gross margin rate approximately flat with the Fiscal 2016 adjusted rate of 61.0% and expected net operating expense to decline approximately 3% after actions intended to reduce expense by approximately $100 million.
Fiscal 2017 plans included approximately $100 million of capital expenditures, six full-price store openings, two outlet openings and approximately 60 U.S. store closures through natural lease expirations. Management expected a core tax rate in the mid-30% range but anticipated an approximately $9 million discrete non-cash tax charge in the first quarter from new share-based compensation accounting.
Key risks include weak consumer discretionary spending, changing fashion preferences and inventory markdowns, intense store and online competition, reliance on direct-to-consumer growth, foreign-currency volatility, international operating and geopolitical risks, supply-chain and third-party manufacturing dependence, cyberattacks and information-system disruptions, mall traffic declines, litigation, tax uncertainty and restrictive debt covenants.
Legal contingencies accrued at year-end were approximately $6 million, although additional claims existed without established accruals. Net deferred tax assets were approximately $90.4 million and depend on future taxable profits in the relevant jurisdictions. Approximately $126.6 million of foreign earnings were considered indefinitely reinvested; potential U.S. tax on repatriation was estimated at approximately $25 million.
Management and the independent auditor concluded that internal control over financial reporting was effective as of January 28, 2017. Fran Horowitz became chief executive officer and Joanne Crevoiserat became chief operating officer and chief financial officer in February 2017.
Important facts for investors to verify
- Confirm the applicable period: this is Fiscal 2016, ended January 28, 2017, rather than a 2015 quarterly filing.
- Reconcile GAAP results with management’s non-GAAP results; adjusted Fiscal 2016 operating income was $3.3 million and adjusted net loss attributable to A&F was $4.1 million.
- Assess whether the expected comparable-sales recovery, especially at Abercrombie, materialized and whether Hollister maintained momentum.
- Monitor gross margin, markdowns, inventory reserves and the effect of foreign-currency movements.
- Evaluate liquidity against the $268.3 million term-loan maturity in Fiscal 2021, lease commitments, seasonal working-capital needs and debt covenant restrictions.
- Verify the sustainability of the $0.80 annual dividend given low earnings and reduced free cash flow.
- Track store closures, store impairments, direct-to-consumer investments and the achievement of the planned expense reductions.
- Review tax-rate volatility, deferred-tax-asset realizability, unremitted foreign earnings and the anticipated share-based compensation tax charges.