Abercrombie & Fitch Co. Form 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2015, compared with May 3, 2014. The source filing is Fiscal 2015 first quarter, although the request metadata states “2014 Q1.” Financial statements are unaudited and were reviewed by PricewaterhouseCoopers LLP.
Business Context
Abercrombie & Fitch is a specialty apparel retailer operating Abercrombie, abercrombie kids and Hollister brands through stores and direct-to-consumer channels in North America, Europe, Asia and the Middle East. The company operated 956 stores at May 2, 2015, compared with 989 a year earlier.
Financial Results and Key Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $709.4 million | $822.4 million | Down 14% |
| Comparable sales | Down 8% | Down 4% | Worsened 4 percentage points |
| Gross profit | $411.5 million | $511.7 million | Down 20% |
| Gross margin | 58.0% | 62.2% | Down 420 basis points |
| Operating loss | $90.2 million | $31.5 million | Worsened $58.7 million |
| Operating margin | (12.7%) | (3.8%) | Down 890 basis points |
| Net loss | $63.2 million | $23.7 million | Worsened $39.6 million |
| Diluted loss per share | $0.91 | $0.32 | Worsened $0.59 |
| Net cash used in operating activities | $93.8 million | $40.1 million | Higher use of $53.6 million |
Adjusted non-GAAP net loss was $37.2 million, or $0.53 per diluted share, compared with $13.0 million, or $0.17 per diluted share, in the prior-year quarter. The filing excludes certain items including inventory write-downs, impairment, restructuring, store closure and transformation costs.
Sales declined across both brands: Abercrombie sales fell 12% to $339.8 million and Hollister sales fell 12% to $369.7 million. U.S. sales declined 11%, while international sales declined 18%, including an estimated $45.8 million adverse foreign-exchange impact.
Liquidity, Debt and Cash Flow
- Cash and equivalents were $383.2 million at May 2, 2015, down from $520.7 million at January 31, 2015.
- Gross term-loan borrowings were $298.5 million; borrowings were presented net at $292.4 million. The term loan carried a 4.75% interest rate and matures August 7, 2021.
- No borrowings were outstanding under the $400 million asset-based revolving credit facility. The borrowing base was $268.1 million at May 2, 2015, and approximately $9.0 million of letters of credit were outstanding at June 4, 2015.
- Capital expenditures were $29.9 million, and dividends paid were $13.9 million during the quarter.
- Inventory was $441.0 million, compared with $460.8 million at January 31, 2015. The lower-of-cost-or-market reserve increased materially as the company accelerated disposition of aged merchandise.
- Total assets were $2.36 billion and stockholders’ equity was $1.31 billion at May 2, 2015.
Material Changes and Unusual Items
- A $26.9 million inventory write-down reduced gross margin by approximately 380 basis points and related to aged merchandise that did not support the company’s prospective brand positioning.
- The company recorded $6.1 million of non-cash asset impairment, primarily for store fixtures and an aircraft held for sale.
- Restructuring produced a $1.6 million benefit, primarily from a true-up of Gilly Hicks lease-termination estimates. Cumulative Gilly Hicks restructuring charges were approximately $88.8 million.
- Foreign currency movements reduced reported sales and adversely affected gross margin. The company recognized a $5.4 million net other comprehensive loss, principally from derivative instruments.
- Interest expense, net increased to $4.6 million from $2.0 million, primarily due to higher debt balances and interest rates.
- The company did not repurchase shares under its public authorization during the quarter. Approximately 9.0 million shares remained available for repurchase; 119,731 shares were withheld for employee tax obligations.
Guidance, Outlook and Risks
Management characterized the quarter as difficult and stated that turnaround initiatives were in the early stages. The company expected sequential improvement in comparable sales during the second quarter and back half of Fiscal 2015, but continued to expect foreign currency to be a significant headwind. Gross margin was expected to benefit from lower average unit costs but remain pressured by currency effects.
- Fiscal 2015 capital expenditures were projected at approximately $150 million.
- Planned openings included 17 full-price international stores, five full-price North American stores and nine U.S. outlet stores.
- Approximately 60 U.S. stores were expected to close through natural lease expirations.
- Management expected additional expense savings but excluded potential impairment, store-closing, business-transformation and restructuring charges from its operating-expense outlook.
- The sustainable income-tax rate was expected to return to the mid-to-upper 30% range over time, while the Fiscal 2015 rate remained sensitive to geographic earnings mix and profitability.
Key risks include continued weak consumer demand and comparable sales, inventory and fashion risk, foreign-exchange volatility, execution of the brand-based organizational transition, international expansion, direct-to-consumer investments, CEO selection, competition and pricing pressure, cybersecurity and information-technology disruptions, litigation, tax-rate volatility, seasonal cash-flow requirements and restrictive credit-facility covenants. The company also noted that legal liabilities could exceed recorded reserves.
Investor Verification Items
- Verify the filing period: the document covers Q1 Fiscal 2015 ended May 2, 2015, not Q1 Fiscal 2014.
- Assess whether comparable-sales trends, international performance and foreign-exchange pressure improved as projected.
- Monitor inventory levels, reserve adequacy and the financial impact of clearing aged merchandise.
- Reconcile GAAP losses with management’s non-GAAP adjustments and determine whether excluded costs are recurring.
- Evaluate liquidity against seasonal operating cash needs, planned capital expenditures, dividends and term-loan obligations.
- Track execution of store openings, approximately 60 planned U.S. closures and the broader turnaround program.
- Review subsequent filings for CEO appointment developments, litigation outcomes, impairment charges and changes in credit-facility availability.