Abercrombie & Fitch Co. Form 10-Q Summary
Filing-period note: The request identifies “2019 Q3,” but the supplied filing is for the thirteen and thirty-nine weeks ended October 31, 2020, with comparisons to November 2, 2019. Fiscal 2020 ends January 30, 2021.
Business Context and Reporting Period
Abercrombie & Fitch is a global omnichannel specialty retailer operating the Hollister, Abercrombie & Fitch and abercrombie kids brands through company-operated stores, digital channels, wholesale, franchise and licensing arrangements. The reportable operating segments are Hollister and Abercrombie.
Results were materially affected by COVID-19-related store closures, reduced traffic, modified store operations and increased digital demand. Approximately 97% of company-operated stores were open for in-store service as of October 31, 2020, although additional reclosures occurred after quarter-end.
Key Financial Metrics
| Metric | Q3 Fiscal 2020 | Q3 Fiscal 2019 | Year-to-date Fiscal 2020 | Year-to-date Fiscal 2019 |
|---|---|---|---|---|
| Net sales | $819.7 million | $863.5 million | $2.003 billion | $2.439 billion |
| Gross profit | $524.4 million | $518.9 million | $1.212 billion | $1.462 billion |
| Gross margin | 64.0% | 60.1% | 60.5% | 59.9% |
| Operating income (loss) | $58.6 million | $14.5 million | $(136.4) million | $(52.3) million |
| Operating margin | 7.2% | 1.7% | (6.8)% | (2.1)% |
| Net income (loss) attributable to A&F | $42.3 million | $6.5 million | $(196.4) million | $(43.8) million |
| Diluted EPS | $0.66 | $0.10 | $(3.14) | $(0.67) |
Digital sales increased approximately 43% in the quarter and 42% year to date, partially offsetting store-sales declines. Hollister sales decreased 7% in the quarter and 19% year to date; Abercrombie sales decreased 2% and 17%, respectively.
Year-to-date operating results included $57.3 million of asset impairment charges, primarily related to COVID-19-affected stores, and approximately $77.4 million of adverse tax impacts from unrecognized tax benefits, valuation allowances and other tax charges. Excluding specified impairment charges, non-GAAP operating income was $64.9 million in the quarter and a loss of $79.0 million year to date.
Cash Flow, Debt and Liquidity
| Metric | October 31, 2020 | February 1, 2020 |
|---|---|---|
| Cash and equivalents | $812.9 million | $671.3 million |
| Total cash, equivalents and restricted cash | $831.8 million | $692.3 million |
| Inventories | $545.5 million | $434.3 million |
| Gross long-term borrowings | $350.0 million | $233.3 million |
| Actual incremental ABL availability | $345.2 million | Not provided |
| Reported liquidity | $1.158 billion | $913.8 million |
Year-to-date operating cash flow was $158.9 million, compared with cash used of $33.8 million in the prior-year period. Capital expenditures were $91.7 million versus $154.4 million, and management expected full-year fiscal 2020 capital expenditures of approximately $110 million.
In July 2020, the Company issued $350.0 million of 8.75% senior secured notes due July 15, 2025. Proceeds were used to repay the term loan and ABL borrowings. The Company had no ABL borrowings outstanding at quarter-end and remained in compliance with debt covenants. The ABL Facility matures October 19, 2022.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 5.1%; year-to-date sales declined 17.8%, primarily because of store closures and lower traffic.
- Digital sales growth, lower promotions and improved average unit retail supported a 390-basis-point quarterly gross-margin improvement.
- Quarterly operating income improved substantially, but year-to-date operating losses widened because of COVID-19-related impairments, lower sales and unfavorable fixed-cost absorption.
- Year-to-date net loss attributable to A&F increased to $196.4 million from $43.8 million, principally reflecting tax charges and impairments.
- Debt was refinanced into $350.0 million of senior secured notes, while the prior term loan was terminated and ABL borrowings were repaid.
- Share repurchases and dividends were suspended to preserve liquidity. The Company returned $27.7 million to shareholders before the suspensions, compared with $102.5 million in the prior-year period.
- Flagship-store optimization generated $12.5 million of year-to-date benefits, compared with $47.0 million of prior-year charges. Four European Abercrombie flagship exits removed approximately $85 million of lease liabilities; eight operating flagships were expected at fiscal year-end versus 15 at the beginning of the year.
Guidance, Outlook, Commentary and Risks
Management stated that it believed liquidity was adequate to fund operating activities over the next 12 months. The filing does not provide a clear full-year sales or earnings forecast. The Company expected approximately $110 million of fiscal 2020 capital expenditures.
Management remained focused on store-network optimization, digital and omnichannel capabilities, supply-chain speed and efficiency, and customer engagement. It cautioned that future results remain highly uncertain because of COVID-19 duration, store reclosures, customer demand, supply-chain disruptions, government actions and vaccine or treatment developments.
- Vendor payment-term extensions and suspended rent payments supported near-term cash flow but may not continue; previously deferred payments could create future cash outflows.
- Inventory was $545.5 million, and the Company recognized approximately $14.8 million of inventory carrying-value charges in the first quarter.
- Store impairments depend on projected sales, gross profit, operating expenses, cash flows and market rents; adverse operating results could produce additional charges.
- Senior secured debt and the ABL Facility contain restrictive covenants limiting additional debt, liens, asset sales, dividends, repurchases and other corporate actions.
- Legal proceedings arise in the ordinary course; the Company could not estimate reasonably possible losses beyond recorded accruals.
- International operations remain exposed to foreign-exchange movements, Brexit-related trade barriers, supply-chain issues and macroeconomic weakness.
Investor Verification Checklist
- Confirm that the intended comparison is Q3 Fiscal 2020 rather than Q3 Fiscal 2019, based on the supplied filing date and reporting period.
- Reconcile GAAP results with management’s non-GAAP figures, particularly the $57.3 million of asset impairments and the $77.4 million of adverse tax impacts.
- Assess whether digital growth can offset store-traffic weakness and whether store reclosures affect holiday-season performance.
- Monitor inventory levels, markdown exposure, vendor payment normalization and future rent obligations.
- Verify liquidity after seasonal inventory investment, deferred payments, lease obligations and the beginning of cash interest payments on the 8.75% notes in January 2021.
- Review debt covenants, ABL availability and the Company’s ability to refinance or repay the 2025 senior secured notes.