Abercrombie & Fitch Co. Form 10-Q Summary
Period: Thirteen weeks ended May 3, 2014, compared with May 4, 2013. The request metadata identifies “2013 Q1,” but the filing is for the first quarter of Fiscal 2014. Financial statements are unaudited and were reviewed by PricewaterhouseCoopers LLP.
Business Context and Reporting Period
Abercrombie & Fitch is a specialty retailer of casual apparel, accessories and personal-care products sold through U.S. and international stores and direct-to-consumer channels under the Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands. At May 3, 2014, the Company operated 998 stores and approximately 7.7 million gross square feet.
The Company reported a difficult teen-retail environment, with declining store comparable sales but strong direct-to-consumer growth. Fiscal 2014 is the 52-week year ending January 31, 2015.
Key Financial Metrics
| Metric | Q1 Fiscal 2014 | Q1 Fiscal 2013 | Change |
|---|---|---|---|
| Net sales | $822.4 million | $838.8 million | Down 2% |
| Gross profit | $511.7 million | $553.2 million | Down 8% |
| Gross margin | 62.2% | 65.9% | Down 370 basis points |
| Operating income (loss) | $(31.5) million | $(13.9) million | Loss increased |
| Net income (loss) | $(23.7) million | $(7.2) million | Loss increased |
| Diluted loss per share | $(0.32) | $(0.09) | Lower |
| Operating margin | (3.8)% | (1.7)% | Down 210 basis points |
| Net margin | (2.9)% | (0.9)% | Down 200 basis points |
| Net cash used in operating activities | $(40.1) million | $(143.6) million | Use decreased |
| Capital expenditures | $37.8 million | $42.4 million | Down |
Adjusted non-GAAP operating loss was $15.9 million, and adjusted non-GAAP net loss was $13.0 million, or $0.17 per diluted share, excluding $15.6 million of charges related to Gilly Hicks restructuring, the profit improvement initiative and corporate-governance matters.
Revenue and Operating Performance
- U.S. Stores sales declined to $399.1 million from $448.6 million; International Stores sales declined to $252.9 million from $257.4 million; and Direct-to-Consumer sales increased to $170.4 million from $132.7 million.
- Direct-to-consumer sales increased 28% and represented 20.7% of total sales versus 15.8% in the prior-year quarter.
- Total comparable sales declined 4%, including declines of 4% in the U.S. and 5% internationally. Store comparable sales declined 11%, while direct-to-consumer comparable sales increased 27%.
- Comparable sales decreased 1% for Abercrombie & Fitch, 6% for abercrombie kids and 7% for Hollister.
- Gross margin contracted primarily because of increased promotional activity, shipping promotions and a higher mix of fall-clearance merchandise.
- Stores and distribution expense declined 7% to $417.6 million, although direct-to-consumer shipping and handling costs increased to $21.6 million from $14.8 million.
- Marketing, general and administrative expense increased to $123.6 million from $118.8 million, including $9.2 million of identified charges.
Cash Flow, Liquidity and Debt
- Cash and equivalents were $357.1 million at May 3, 2014, down from $600.1 million at February 1, 2014. Restricted cash was $17.7 million.
- Current assets were $1.05 billion versus current liabilities of $470.1 million, implying reported current-asset coverage of approximately 2.2 times.
- Inventory was $486.0 million, down from $530.2 million at February 1, 2014, but 6% above the comparable prior-year quarter-end balance cited by management.
- Net cash used in operating activities was $40.1 million, primarily reflecting inventory and income-tax-related cash flows. Net cash used in investing activities was $37.8 million.
- Financing cash use was $171.7 million, including $150.0 million for an accelerated share repurchase, $14.7 million of dividends and $3.8 million of debt repayment.
- Term Loan borrowings were $131.3 million, down from $135.0 million at February 1, 2014. The weighted-average borrowing rate was 2.07%.
- The Company had no borrowings under its $350 million revolving credit facility and had $9.5 million of standby letters of credit outstanding. It was in compliance with applicable debt covenants at May 3, 2014.
- Dividends declared were $0.20 per share. The Company repurchased 3.8257 million shares for $150.0 million and had approximately 12.5 million shares remaining under repurchase authorizations.
Material Changes Versus the Prior Comparable Period
- Sales declined 2%, while gross profit fell 8% and gross margin declined 370 basis points.
- GAAP operating loss more than doubled to $31.5 million, and GAAP net loss increased to $23.7 million from $7.2 million.
- Direct-to-consumer sales grew substantially and offset part of the store-channel weakness.
- The Company recognized $5.6 million of first-quarter restructuring charges and $15.6 million of total excluded charges for its adjusted results.
- Gilly Hicks stand-alone store closures were substantially completed by the end of the quarter. The Company had incurred $87.1 million of cumulative pre-tax restructuring charges through May 3, 2014.
- Cash declined primarily because of the share repurchase, dividends, debt repayment, operating cash use and capital expenditures.
- Weighted-average basic shares declined to 74.5 million from 78.3 million, principally reflecting share repurchases.
Guidance, Outlook, Risks and Unusual Items
- Management maintained adjusted non-GAAP fiscal 2014 diluted EPS guidance of $2.15 to $2.35, including the accelerated share repurchase.
- Guidance assumes total comparable sales down 3% to 4%, a slightly lower full-year gross margin rate than Fiscal 2013, an approximately 35% tax rate and approximately 74.5 million weighted-average shares.
- Guidance excludes Gilly Hicks restructuring charges, profit-improvement charges, corporate-governance matters and other impairment or store-closure charges.
- The profit-improvement initiative remains targeted to generate at least $175 million of savings; management expects average unit cost to decline in the second half of the year.
- Fiscal 2014 capital expenditures are expected to be approximately $210 million to $220 million. Planned initiatives include 15 international full-price stores, 8 to 10 outlet stores, 75 to 100 new Hollister storefronts and omnichannel investments.
- Management expects to close approximately 60 to 70 U.S. stores through natural lease expirations and planned order-in-store, ship-from-store and other omnichannel rollouts.
- Remaining Gilly Hicks restructuring charges were estimated at approximately $1.9 million, primarily lease-related, but estimates could change materially.
- Key risks include weak consumer spending, fashion and inventory risk, promotional pressure, international expansion, foreign-exchange volatility, direct-to-consumer execution, supply-chain and technology disruptions, litigation, tax-rate volatility, store impairment and debt-covenant compliance.
- The filing reports a $16.3 million net deferred tax asset in Japan whose realization depends on future taxable profits. A future valuation allowance could increase tax expense.
- The Company disclosed prior-period error corrections recorded out of period, including a $1.5 million increase in pre-tax loss in the current quarter; management stated the corrections were not material to the affected periods.
Investor Verification Items
- Reconcile the requested “2013 Q1” period with the filing’s actual May 3, 2014 reporting period.
- Assess whether the direct-to-consumer growth can offset continued store comparable-sales declines and promotional pressure.
- Track gross-margin recovery, inventory levels, markdown activity and the expected second-half average-unit-cost reductions.
- Verify the timing and cash impact of the remaining Gilly Hicks obligations and other excluded restructuring or governance charges.
- Evaluate liquidity after the $150 million share repurchase, seasonal operating cash needs, dividends and planned $210 million to $220 million of capital expenditures.
- Monitor compliance with the revolving-credit and term-loan covenants as the required coverage ratio increases over time.
- Compare future GAAP results with management’s adjusted EPS guidance, which excludes material unusual items and is sensitive to tax rates, comparable sales and additional repurchases.