Abercrombie & Fitch Co. Form 10-Q Summary
Reporting period: Thirteen weeks ended May 1, 2021, compared with May 2, 2020. Although the request metadata identifies “2020 Q1,” the filing is the Company’s first quarter of Fiscal 2021. The filing was signed June 9, 2021.
Business Context
Abercrombie & Fitch is a digitally led global omnichannel apparel retailer operating the Hollister, Gilly Hicks, Abercrombie & Fitch and abercrombie kids brands. Social Tourist launched on May 20, 2021, after the reporting period. The Company operated 731 stores at May 1, 2021, including six flagship locations, compared with 735 stores at January 30, 2021.
Financial Performance
| Metric | Q1 Fiscal 2021 | Q1 Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $781.4 million | $485.4 million | Up 61% |
| Gross profit | $495.1 million | $264.1 million | Up $231.0 million |
| Gross margin | 63.4% | 54.4% | Up 900 bps |
| Operating income (loss) | $57.4 million | $(209.1) million | Improved $266.6 million |
| Operating margin | 7.3% | (43.1)% | Up 5,040 bps |
| Net income (loss) attributable to A&F | $41.8 million | $(244.1) million | Improved $285.9 million |
| Diluted EPS | $0.64 | $(3.90) | Improved $4.54 |
- Hollister sales were $442.4 million, up 62%; Abercrombie sales were $339.0 million, up 60%.
- U.S. sales increased 72% to $553.8 million; international sales increased 40% to $227.6 million.
- Digital sales increased approximately 45%, while higher store traffic benefited from the comparison with widespread COVID-19-related closures in the prior year.
- Cost of sales declined to 36.6% of sales from 45.6%, primarily because of higher average unit retail, reduced promotions and lower markdowns.
- Stores and distribution expense decreased 2% to $316.6 million, while marketing, general and administrative expense increased 12% to $120.9 million.
- Interest expense, net increased to $8.6 million from $3.4 million, primarily due to higher average borrowings at higher rates and lower interest income.
- Adjusted non-GAAP operating income was $60.1 million, or 7.7% of sales; adjusted diluted EPS was $0.67. These measures exclude asset impairment charges and related tax effects.
Cash Flow, Liquidity and Capital Structure
- Cash and equivalents were $909.0 million at May 1, 2021, down from $1.105 billion at January 30, 2021. Cash, including restricted cash, was $924.2 million.
- Operating cash flow was negative $131.4 million, compared with negative $140.8 million in the prior-year quarter.
- Capital expenditures were $14.4 million; management expected approximately $100 million of Fiscal 2021 capital expenditures.
- Financing cash flow was negative $53.2 million, including $35.2 million of common-stock repurchases. The dividend remained suspended.
- Gross long-term borrowings were $350.0 million, consisting of 8.75% senior secured notes due July 2025. Net borrowings were $344.3 million.
- The $400 million ABL Facility had no borrowings outstanding. Borrowing availability was $222.5 million after outstanding letters of credit and required minimum excess availability.
- The Company reported compliance with all debt covenants and stated that it expected adequate liquidity to fund operations over the following 12 months.
- Approximately $374.9 million of the $909.0 million of cash and equivalents was held by foreign affiliates.
Material Changes Versus the Prior Comparable Period
- Results improved substantially as most Company-operated stores reopened and digital demand remained strong; the prior-year quarter was heavily affected by COVID-19 closures.
- Gross margin expanded 900 basis points due primarily to lower promotions and markdowns.
- Prior-year results included $42.9 million of asset impairment charges, $14.8 million of COVID-19-related inventory charges and $90.9 million of adverse tax charges. Current-period asset impairment charges were $2.7 million.
- The Company settled remaining obligations for the former SoHo Hollister flagship location, paying $63.8 million and reducing operating lease liabilities by $65.0 million; it recognized a $0.9 million benefit.
- The ABL Facility was amended and extended from October 2022 to April 2026, with substantially unchanged terms except for the undrawn-commitment fee provisions.
- The Company repurchased approximately 1.1 million shares for $35.2 million during the quarter and had 8.9 million shares remaining under its repurchase authorization at May 1, 2021.
- The prior-year cash flow statement was restated to reclassify a $50.0 million Rabbi Trust withdrawal from operating activities to investing activities.
Outlook, Commentary and Risks
- Management remained focused on digital, data and technology investments; increased marketing; investment in Gilly Hicks and Social Tourist; store-square-footage optimization; and environmental, social and governance initiatives.
- The Company planned to manage inventories conservatively, optimize distribution-center capacity for digital demand, tightly control expenses and retain flexibility for strategic investments.
- COVID-19 continued to create uncertainty regarding store closures, consumer demand, new variants, vaccines, macroeconomic conditions and future operating costs. Temporary closures remained primarily in EMEA at May 1, 2021.
- Management expected future capital expenditures of approximately $100 million but did not provide specific revenue or earnings guidance in the provided filing text.
- Key risks include changing consumer preferences and fashion trends, competitive pressure, digital execution, store-network optimization, supply-chain disruption, foreign-exchange volatility, cybersecurity, litigation, tax-rate volatility, restrictive debt covenants and the identified material weakness in internal control over financial reporting.
- Disclosure controls were not effective because of the previously identified material weakness involving cash-flow classification and disclosure. Remediation procedures had been implemented but were not yet considered fully effective.
- Rent abatements of $7.8 million were obtained during the quarter, with $26.1 million of suspended rent payments classified in accrued expenses at May 1, 2021. Future lease-exit costs or benefits could not be quantified.
Investor Verification Items
- Verify the period designation: the filing covers Q1 Fiscal 2021, not Q1 Fiscal 2020.
- Assess whether sales and margin growth are sustainable after normalization of the COVID-19 comparison and reopening benefits.
- Monitor operating cash flow, lease-related cash obligations and the impact of the $63.8 million SoHo settlement on liquidity.
- Review the maturity, 8.75% coupon and covenant restrictions of the senior secured notes, as well as remaining ABL availability.
- Track the status of remediation of the material weakness in cash-flow controls.
- Evaluate the effect of continuing store closures, future flagship exits, rent negotiations and potential impairment charges.
- Confirm the resumption and pace of share repurchases and whether the suspended dividend program is reinstated.