Abercrombie & Fitch Co. Form 10-K Summary
Reporting period: The provided filing is the Form 10-K for fiscal 2019, the 52-week year ended February 1, 2020, filed March 31, 2020. The request metadata references “2018 Q4,” but the filing covers fiscal 2019 and includes comparative fiscal 2018 and quarterly data.
Business Context
Abercrombie & Fitch is a global omnichannel specialty retailer operating the Hollister, Abercrombie & Fitch, abercrombie kids and Gilly Hicks brands. Products are sold through company-operated stores, digital channels, wholesale, franchise and licensing arrangements. The company operated 854 stores at February 1, 2020, including 546 Hollister stores and 308 Abercrombie stores.
The company reports two operating segments, Hollister and Abercrombie, aggregated into one reportable segment. Fiscal 2019 sales were concentrated in the United States, which generated $2.411 billion, compared with $1.212 billion internationally.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $3.623 billion | $3.590 billion | +1% |
| Comparable sales | +1% | +3% | Declined |
| Gross profit | $2.151 billion | $2.160 billion | -$9.0 million |
| Gross margin | 59.4% | 60.2% | -80 bps |
| Operating income | $70.1 million | $127.4 million | -$57.3 million |
| Operating margin | 1.9% | 3.5% | -160 bps |
| Net income attributable to A&F | $39.4 million | $74.5 million | -$35.2 million |
| Diluted EPS | $0.60 | $1.08 | -$0.48 |
| Operating cash flow | $300.7 million | $352.9 million | -$52.2 million |
| Free cash flow | $97.9 million | $200.5 million | -$102.6 million |
| Cash and equivalents | $671.3 million | $723.1 million | -$51.9 million |
| Gross borrowings | $233.3 million | $253.3 million | -$20.0 million |
Hollister sales were essentially flat and comparable sales declined 1%, while Abercrombie sales increased 2% and comparable sales increased 3%. U.S. sales increased 4%, but international sales declined 4%. Foreign exchange movements reduced reported sales by approximately $37 million.
Cost of sales increased to 40.6% of sales from 39.8%, reflecting higher average unit costs, foreign exchange effects, shrink, freight and approximately $4 million of China tariff costs. Stores and distribution expense remained 42.8% of sales, while marketing, general and administrative expense improved to 12.8% from 13.5%.
Fourth-Quarter Information
| Fiscal 2019 fourth quarter | Amount |
|---|---|
| Net sales | $1.185 billion |
| Gross profit | $689.3 million |
| Net income attributable to A&F | $83.1 million |
| Diluted EPS | $1.29 |
Fourth-quarter fiscal 2018 net sales were $1.156 billion, net income attributable to A&F was $96.9 million and diluted EPS was $1.42. Fiscal 2019 fourth-quarter results included approximately $0.8 million of adverse impact from asset impairment and flagship store exit charges.
Liquidity, Debt and Capital Allocation
- Cash and equivalents were $671.3 million at February 1, 2020; $311.6 million was held by foreign affiliates.
- The company had $233.3 million of gross term-loan borrowings, with the term loan maturing August 7, 2021. The reported net carrying amount was $232.0 million.
- The $400 million asset-based revolving facility matured October 19, 2022. At fiscal year-end, the company had $272.0 million of stated availability and $242.0 million of incremental borrowing capacity after required reserves.
- The company repaid $20.0 million of term-loan principal, repurchased approximately $63.5 million of common stock and paid $51.5 million of dividends during fiscal 2019.
- Contractual obligations totaled $2.420 billion, including $1.820 billion of operating lease obligations, $266.2 million of purchase obligations and $233.3 million of long-term debt obligations.
- The company stated that it had adequate liquidity to fund operating activities over the following 12 months, while noting that future dividends and repurchases were subject to reassessment.
Material Changes Versus the Prior Period
- Sales grew 1%, but comparable sales growth slowed from 3% to 1%.
- Gross margin declined 80 basis points, primarily because average unit cost increased without a corresponding increase in average unit retail.
- Operating income declined 45%, including $47.3 million of flagship store exit charges in fiscal 2019 versus $5.8 million in fiscal 2018.
- Excluding selected items, adjusted operating income was $82.8 million versus $138.6 million, and adjusted diluted EPS was $0.73 versus $1.15.
- Operating cash flow fell 15%, while capital expenditures increased to $202.8 million from $152.4 million, reducing free cash flow materially.
- The company reduced its store count from 861 to 854 and gross store square footage from 6.566 million to 6.303 million. It delivered 90 new store experiences through new stores, remodels and right-sizings.
- The company adopted the new lease accounting standard, increasing reported assets and liabilities by approximately $1.2 billion and reducing opening retained earnings by $75.2 million. The adoption did not materially affect liquidity or debt covenant compliance.
Outlook, Commentary, Risks and Unusual Items
The company was pursuing a transformation strategy centered on store-network optimization, digital and omnichannel capabilities, faster product development, supply-chain diversification and customer engagement. Management continued to target long-term operating-margin expansion, but withdrew a full-year fiscal 2020 outlook because of COVID-19 uncertainty.
COVID-19 began disrupting Asia-Pacific operations in January 2020. The company temporarily closed company-operated stores in North America beginning March 15, 2020, and in Europe beginning March 16, 2020. Digital operations remained open, but management expected material reductions in sales and a material adverse impact on fiscal 2020 results, liquidity and cash flows.
As a precaution, the company borrowed $210 million under its revolving credit facility on March 26, 2020 and withdrew approximately $50 million from excess Rabbi Trust assets. The filing states that COVID-19 could result in inventory valuation adjustments, asset impairments, deferred-tax valuation allowances and reduced hedge effectiveness.
Other material considerations include dependence on third-party manufacturers and Southeast Asian sourcing, foreign-exchange exposure, competitive promotional pressure, mall traffic and lease obligations, cybersecurity, supply-chain disruption, Brexit-related uncertainty, litigation contingencies and credit-facility covenants. Flagship-store closures generated $47.3 million of fiscal 2019 charges, and additional charges or cash expenditures remain possible.
Most Important Facts for Investors to Verify
- Confirm the period being analyzed: this filing is fiscal 2019, not a standalone fiscal 2018 fourth-quarter filing.
- Assess the effect of COVID-19 store closures, digital demand, inventory levels, lease costs and future impairment charges on fiscal 2020 performance.
- Monitor liquidity after the subsequent $210 million revolver draw and $50 million Rabbi Trust withdrawal.
- Review the August 2021 term-loan maturity and the restrictive covenants governing dividends, repurchases, additional debt and investments.
- Evaluate whether margin deterioration, higher product costs, freight, shrink and promotional activity are temporary or structural.
- Review future flagship-store exits, lease obligations and potential unquantified termination or impairment costs.
- Reconcile GAAP results with management’s non-GAAP measures, particularly the treatment of flagship-store asset impairment and exit charges.