Abercrombie & Fitch Co. — Form 10-Q Summary
Reporting period: Thirteen weeks ended April 29, 2023, compared with April 30, 2022. The request metadata identifies “2022 Q1,” but the filing is the company’s Fiscal 2023 first-quarter Form 10-Q, filed June 6, 2023. Financial statements are unaudited.
Business Context and Reporting Period
Abercrombie & Fitch is a global, digitally led omnichannel apparel retailer operating the Abercrombie, abercrombie kids, Hollister, Gilly Hicks and Social Tourist brands. It sells through company-operated stores, digital channels and third-party arrangements across North America, EMEA and APAC.
The company reported one aggregated reportable segment comprising the Abercrombie and Hollister operating segments. During the second quarter of Fiscal 2023, management reorganized operating segments into Americas, APAC and EMEA; subsequent periods will be recast accordingly.
Key Financial Metrics
| Metric | Q1 Fiscal 2023 | Q1 Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $836.0 million | $812.8 million | Up 2.9% |
| Gross profit | $509.8 million | $449.5 million | Up $60.2 million |
| Gross margin | 61.0% | 55.3% | Up 570 basis points |
| Operating income (loss) | $34.0 million | $(9.7) million | Improved $43.7 million |
| Operating margin | 4.1% | (1.2)% | Up 530 basis points |
| Net income (loss) attributable to A&F | $16.6 million | $(16.5) million | Improved $33.0 million |
| Diluted earnings (loss) per share | $0.32 | $(0.32) | Improved $0.64 |
| Net cash used in operating activities | $(0.6) million | $(217.8) million | Improved $217.2 million |
Adjusted non-GAAP operating income was $38.4 million, or 4.6% of sales, versus an adjusted operating loss of $6.3 million, or 0.8%, in the prior-year quarter. Adjusted net income attributable to A&F was $19.8 million, or $0.39 per diluted share, compared with an adjusted loss of $14.0 million, or $(0.27) per share.
Sales and Brand Performance
- Abercrombie sales increased 14% to $436.0 million, with comparable sales up 14%.
- Hollister sales declined 7% to $400.0 million, with comparable sales down 6%.
- U.S. sales increased 9% to $636.1 million; international sales declined 12% to $199.9 million.
- Total comparable sales increased 3% on a constant-currency basis. Foreign exchange reduced reported sales by approximately $9 million, or 1%.
Margins and Expenses
- Cost of sales declined to 39.0% of revenue from 44.7%. Management attributed the improvement primarily to lower freight costs and higher average unit retail prices, partly offset by higher cotton costs and foreign exchange.
- Stores and distribution expense declined 1.8% as a percentage of sales, primarily due to lower digital marketing and fulfillment costs.
- Marketing, general and administrative expense increased to 17.1% of sales from 15.0%, primarily due to higher technology expenses and incentive-based compensation.
- Asset impairment charges were $4.4 million, compared with $3.4 million in the prior-year quarter, relating to stores and other assets.
- Net interest expense declined to $3.4 million from $7.3 million, primarily because higher deposit and money-market rates increased interest income.
Balance Sheet, Debt and Liquidity
- Cash and equivalents were $447.0 million at April 29, 2023, down from $517.6 million at January 28, 2023. Cash, including restricted cash, was $456.7 million.
- Inventories were $447.8 million, down from $505.6 million at fiscal year-end.
- Gross long-term borrowings were $299.7 million under 8.75% Senior Secured Notes due July 2025; net borrowings were $297.2 million.
- No borrowings were outstanding under the $400 million ABL Facility. Borrowing capacity available after letters of credit and required minimum excess availability was $310.8 million.
- Total liquidity was approximately $757.7 million, consisting of cash and available ABL capacity. Management stated that liquidity should be adequate to fund operations for the next 12 months.
- The company was in compliance with all debt covenants at April 29, 2023.
- Approximately $184.3 million of cash was held by foreign affiliates.
Cash Flow and Capital Allocation
- Operating cash flow was approximately breakeven, compared with $217.8 million of operating cash usage in the prior-year quarter. The improvement reflected higher receipts and lower vendor payments relative to the prior-year period.
- Capital expenditures were $46.4 million, compared with $26.3 million in the prior-year quarter. Full-year Fiscal 2023 capital expenditures were expected to be approximately $160 million.
- Cash used in financing activities was $22.0 million, principally reflecting employee tax withholding related to equity awards. The prior-year period included a $100 million share repurchase.
- No open-market share repurchases were made during the quarter. The remaining authorization was approximately $232.2 million, while the dividend program remained suspended.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, driven by Abercrombie and U.S. performance, while Hollister and international sales declined.
- Gross margin expanded 570 basis points, benefiting from lower freight costs and higher average unit retail prices.
- The company returned to GAAP operating and net profitability from losses in the prior-year quarter.
- Operating cash usage improved substantially, although the quarter still produced a small operating cash outflow.
- Cash declined by approximately $70.9 million during the quarter, primarily due to capital expenditures, financing outflows and foreign exchange effects.
- The company opened six stores and permanently closed ten, ending the period with 758 stores. Fiscal 2023 plans called for approximately 35–40 openings and 20–25 closures, subject to landlord negotiations.
Guidance, Outlook, Risks and Unusual Items
Management emphasized its Always Forward Plan, focused on brand growth, digital and omnichannel investment, technology and ERP modernization, disciplined inventory management, and balancing investments with inflation and efficiency initiatives.
The company planned to optimize Hollister’s product and brand positioning for second-half growth, invest in Abercrombie marketing and stores, support Gilly Hicks, and continue digital, data-platform and cloud-migration initiatives. The filing does not provide a specific full-year revenue or earnings guidance figure.
- Inflation in cotton, raw materials, labor and operating costs could pressure margins and may not be fully passed through to customers.
- Consumer discretionary spending, economic conditions, interest rates, supply chains, foreign exchange and geopolitical events, including the conflict in Ukraine, remain significant risks.
- Retail seasonality is material; the company generally generates its greatest sales during the back-to-school and holiday periods.
- Legal proceedings arise in the ordinary course of business, but the company could not estimate reasonably possible losses in excess of accrued amounts.
- Tax expense included adverse impacts from $20.3 million of pretax losses for which tax benefits were not recognized, primarily in Switzerland. Future valuation allowances could create additional tax expense.
- Store asset impairment charges of $4.4 million were recorded in the quarter. Approximately $11.5 million of commitments related to operating leases not yet commenced remained outstanding.
- The company adopted supplier-finance disclosure requirements without a significant financial statement impact. Supplier-finance obligations included in accounts payable were $58.1 million at quarter-end.
Investor Verification Items
- Verify the filing period: the source is Q1 Fiscal 2023, not Q1 Fiscal 2022.
- Assess whether Abercrombie’s growth can offset continued Hollister and international weakness.
- Confirm the sustainability of the 61.0% gross margin as freight benefits normalize and cotton, labor and other costs remain inflationary.
- Monitor inventory, seasonal cash generation and the ability to fund approximately $160 million of planned capital expenditures.
- Review the July 2025 maturity of the 8.75% Senior Secured Notes and continued ABL availability.
- Evaluate the impact of foreign exchange, tax valuation allowances, store impairments and unresolved legal contingencies.
- Track execution of the planned store openings, closures, digital initiatives, ERP transformation and Hollister repositioning.