Abercrombie & Fitch Co. 2022 Third-Quarter Form 10-Q Summary
Period: The filing covers the thirteen and thirty-nine weeks ended October 29, 2022, compared with October 30, 2021. The request metadata identifies “2021 Q3,” but the filing is the Fiscal 2022 third-quarter Form 10-Q, filed December 6, 2022.
Business Context and Reporting Period
Abercrombie & Fitch is a global, digitally-led omnichannel apparel retailer operating the Hollister, Gilly Hicks, Social Tourist, Abercrombie & Fitch and abercrombie kids brands. The company reports one aggregated segment comprising the Hollister and Abercrombie brand groups and operates primarily in North America, Europe and Asia.
Fiscal 2022 is a 52-week year ending January 28, 2023. Retail results are seasonal, with the fall and fourth quarters generally producing the highest sales.
Key Financial Metrics
| Metric | 13 weeks ended Oct. 29, 2022 | 13 weeks ended Oct. 30, 2021 | 39 weeks ended Oct. 29, 2022 | 39 weeks ended Oct. 30, 2021 |
|---|---|---|---|---|
| Net sales | $880.1 million | $905.2 million | $2.498 billion | $2.551 billion |
| Gross profit / margin | $520.8 million / 59.2% | $576.2 million / 63.7% | $1.436 billion / 57.5% | $1.635 billion / 64.1% |
| Operating income / margin | $17.5 million / 2.0% | $72.7 million / 8.0% | $5.6 million / 0.2% | $245.0 million / 9.6% |
| Net income attributable to A&F | $(2.2) million | $47.2 million | $(35.5) million | $197.5 million |
| Diluted earnings per share | $(0.04) | $0.77 | $(0.70) | $3.10 |
| Adjusted operating income | $21.3 million | $79.5 million | $15.0 million | $255.2 million |
| Adjusted diluted EPS | $0.01 | $0.86 | $(0.57) | $3.22 |
Year-to-date cost of sales increased to 42.5% of sales from 35.9%, primarily due to higher freight and raw-material costs and unfavorable foreign exchange. Stores and distribution expense increased 5% year to date, principally because of higher digital shipping and handling costs. Marketing, general and administrative expense declined modestly as a percentage of sales.
- Brand performance: Third-quarter Hollister sales declined 12% to $457.8 million, while Abercrombie sales increased 10% to $422.3 million. Year-to-date changes were down 11% and up 10%, respectively.
- Geography: Third-quarter U.S. sales increased 3%, while international sales declined 18%; year-to-date U.S. sales increased 2% and international sales declined 11%.
- Cash and liquidity: Cash and equivalents were $257.3 million at October 29, 2022, down from $823.1 million at January 29, 2022. Total liquidity was approximately $616.8 million, including ABL availability.
- Inventory: Inventory was $742.0 million, up from $525.9 million at fiscal year-end, reflecting seasonal inventory investment and supply-chain considerations.
- Cash flow: Year-to-date operating cash flow was $(301.2) million versus $131.3 million provided in the prior-year period. Investing cash outflow was $96.4 million, including $120.3 million of capital expenditures. Financing cash outflow was $154.9 million.
- Debt: Gross Senior Secured Notes outstanding were $299.7 million, with $296.5 million of long-term borrowings net of fees. The notes bear fixed interest at 8.75% and mature July 15, 2025. No ABL borrowings were outstanding.
- ABL capacity: The company reported $359.4 million of borrowing capacity after letters of credit and required minimum excess availability. It was in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 2.8%; on a constant-currency basis, sales were approximately flat. Year-to-date sales declined 2.1%, but were approximately flat on a constant-currency basis.
- Gross margin contracted 450 basis points in the quarter and 660 basis points year to date.
- Quarterly operating margin fell 600 basis points, and year-to-date operating margin fell 940 basis points.
- The company shifted from net income attributable to A&F of $47.2 million in the prior-year quarter to a $2.2 million loss. Year-to-date results shifted from $197.5 million of income to a $35.5 million loss.
- Operating cash flow deteriorated by $432.5 million year to date, driven primarily by inventory purchases, vendor payments, lower cash receipts and other working-capital changes.
- The company repurchased approximately 4.8 million shares for $125.8 million year to date, compared with approximately 6.1 million shares for $235.2 million in the prior-year period. Approximately $232.2 million remained available under the repurchase authorization at October 29, 2022.
- The company purchased $8.0 million principal amount of Senior Secured Notes during the quarter and recognized a $0.1 million gain on extinguishment.
Guidance, Outlook, Commentary and Risks
- Management stated that it expects adequate liquidity to fund operating activities for the next twelve months.
- Fiscal 2022 capital expenditures were expected to be approximately $170 million; $120.3 million had been spent year to date.
- The company planned to open 60 stores and close 30 stores during Fiscal 2022, subject to landlord negotiations. Through October 29, it had opened 31 stores and closed 9, resulting in 751 stores.
- The Always Forward strategy focuses on brand growth, digital and technology investment, cost flexibility, data-driven store expansion, distribution-network optimization and ESG initiatives.
- Management expected freight costs to stabilize relative to elevated 2021 levels but anticipated continuing inflationary pressure on transit, labor, cotton, raw materials and other costs through at least the balance of Fiscal 2022.
- Principal risks include weaker consumer discretionary spending, inflation, supply-chain disruption, foreign-exchange volatility, COVID-19 and China lockdowns, geopolitical conflict including Ukraine, inventory and fashion-trend execution, cybersecurity, international operations and store-network execution.
- Income tax expense was affected by unrecognized tax benefits on losses, primarily in Switzerland. The company also maintained valuation allowances in certain jurisdictions, including Switzerland and Japan; additional allowances could increase future tax expense.
- Asset impairment charges were $3.7 million in the quarter and $9.3 million year to date. The filing does not provide a clear numerical range for potential losses from legal proceedings beyond recorded accruals.
- The dividend program remained suspended. The company stated that reinstatement would depend on future Board determinations and financial conditions.
Investor Verification Items
- Verify the filing period because the provided metadata says 2021 Q3, while the filing reports Fiscal 2022 third-quarter results ended October 29, 2022.
- Assess whether inventory can be converted into sales without additional markdowns and whether gross margin recovers from the 57.5% year-to-date level.
- Monitor cash generation, holiday-season sales, working-capital requirements and the decline in cash from $823.1 million to $257.3 million.
- Evaluate the sustainability of the Abercrombie brand’s growth and the continuing weakness in Hollister and international markets.
- Confirm the company’s ability to fund approximately $170 million of Fiscal 2022 capital expenditures while maintaining liquidity and repurchasing shares.
- Review the maturity and refinancing requirements for the $299.7 million Senior Secured Notes due July 2025 and the restrictions imposed by debt covenants.
- Track foreign-exchange exposure, freight and raw-material costs, store impairments, tax valuation allowances and unresolved legal contingencies.