Abercrombie & Fitch Co. Form 10-Q Summary
Reporting period: The provided filing is for the thirteen and thirty-nine weeks ended October 27, 2012, corresponding to Fiscal 2012 third quarter and year-to-date periods. The request metadata identifies 2011 Q3, but the filing text clearly reports 2012 results and compares them with October 29, 2011. Abercrombie & Fitch is a specialty apparel retailer operating the Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands through U.S. and international stores and direct-to-consumer channels.
Financial Results and Position
| Metric | Q3 Fiscal 2012 | Q3 Fiscal 2011 | Year-to-date Fiscal 2012 | Year-to-date Fiscal 2011 |
|---|
| Net sales | $1.170 billion | $1.076 billion | $3.042 billion | $2.829 billion |
| Gross profit | $731.6 million | $646.5 million | $1.902 billion | $1.773 billion |
| Gross margin | 62.5% | 60.1% | 62.5% | 62.7% |
| Operating income | $112.4 million | $79.9 million | $145.7 million | $165.8 million |
| Operating margin | 9.6% | 7.4% | 4.8% | 5.9% |
| Net income | $71.5 million | $50.9 million | $90.0 million | $108.1 million |
| Diluted EPS | $0.87 | $0.57 | $1.07 | $1.20 |
- Q3 sales increased 9%, operating income increased 41%, and diluted EPS increased 53% year over year.
- Year-to-date sales increased 8%, but operating income declined 12% and net income declined 17%.
- Year-to-date comparable store sales declined 6%, following a 3% Q3 decline. Q3 comparable sales decreased 4% for Abercrombie & Fitch, 3% for abercrombie kids and 1% for Hollister.
- Q3 gross-margin expansion reflected lower average unit costs and favorable international mix, partly offset by lower average unit retail and foreign-exchange effects. Year-to-date gross margin decreased modestly because of expense deleverage from negative comparable sales.
- Direct-to-consumer sales, including shipping and handling revenue, grew 20% in Q3 and 28% year to date. International sales increased 37% in Q3 and 36% year to date, while U.S. sales were approximately flat in Q3 and declined 2% year to date.
Cash Flow, Liquidity and Capital Structure
| Metric | October 27, 2012 | January 28, 2012 |
|---|
| Cash and equivalents | $349.7 million | $583.5 million |
| Current marketable securities | $19.9 million | $84.7 million |
| Borrowings | $60.0 million | None |
| Current assets | $1.162 billion | $1.489 billion |
| Stockholders’ equity | $1.663 billion | $1.862 billion |
- Year-to-date operating cash flow was $219.3 million, compared with $59.7 million in the prior-year period.
- Capital expenditures were $278.0 million, primarily for international stores, store projects, home office, distribution centers and information technology.
- The Company repurchased approximately 6.3 million shares for $265.5 million and paid $43.7 million in dividends year to date.
- Cash declined by $233.8 million year to date after investing and financing uses. The Company sold $80.7 million of marketable securities.
- The unsecured revolving credit agreement provides up to $350 million and had approximately $290 million available, less immaterial letters of credit, at quarter end. A separate $300 million term loan facility was available but undrawn.
- The Company was in compliance with applicable leverage, coverage and other debt covenants at October 27, 2012. The credit agreement matures in 2016 and the term loan facility matures in 2017.
Material Changes Versus the Prior Comparable Period
- Q3 performance improved substantially despite negative comparable-store sales, driven by international store growth, direct-to-consumer growth and improved merchandise margins.
- The sales mix shifted toward international stores and direct-to-consumer operations. International stores represented approximately 26% of Q3 sales versus 20% in the prior year; direct-to-consumer operations represented approximately 14% versus 12%.
- U.S. store count declined to 936 from 1,014, while international stores increased to 131 from 78. Total store count declined to 1,067 from 1,092.
- Year-to-date stores and distribution expense increased to 46.4% of sales from 45.5%, and marketing, general and administrative expense increased to 11.6% from 11.5%, contributing to lower year-to-date operating margin.
- Treasury stock increased significantly because of the $265.5 million repurchase program; weighted-average diluted shares declined to 84.0 million from 90.2 million year to date.
- Inventory declined to $536.3 million from $569.8 million at fiscal year-end and from $679.3 million at October 29, 2011.
Guidance, Outlook, Risks and Unusual Items
- Management projected full-year Fiscal 2012 diluted EPS of approximately $2.85 to $3.00, including the 53rd fiscal week. The guidance assumes a mid-single-digit comparable-store sales decline in Q4, a slightly higher Q4 gross margin than the 62.5% year-to-date rate, and approximately 83.1 million diluted weighted-average shares.
- Guidance excludes potential impairment or other real-estate charges and assumes no additional Q4 share repurchases.
- Management expected to close 55 to 60 U.S. stores during Fiscal 2012, including 11 already closed, and expected approximately $360 million of full-year capital expenditures.
- Management cited improved inventory flow, more trend-right merchandise, lower product costs and sequential improvement in U.S. and international trends, but remained cautious because of the holiday season and macroeconomic uncertainty, particularly in Europe.
- Key risks include fashion and inventory execution, negative comparable-store sales, international expansion, foreign-exchange movements, consumer spending and economic conditions, store closures, supply-chain and distribution disruptions, information-technology failures, litigation, impairment charges and debt-covenant compliance.
- The Company held $19.9 million of auction-rate securities valued using Level 3 discounted-cash-flow assumptions and had recorded $5.3 million of cumulative other-than-temporary impairment charges. The Company intended to sell the remaining securities.
- No property-impairment charge was recorded during the first thirty-nine weeks. Inventory valuation reserves totaled $45.2 million, and a 10% change in the reserve would have affected Q3 pretax income by approximately $4.5 million.
- The Company had accrued for a proposed employment-related class-action settlement. The court granted final approval on November 5, 2012, after the reporting date; the filing does not state the settlement amount.
- There were no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no material changes in contractual obligations other than normal seasonal changes and new borrowings.
Investor Verification Checklist
- Verify that the intended period is Fiscal 2012 Q3, because the supplied filing is dated for the quarter ended October 27, 2012 rather than 2011 Q3.
- Assess whether international and direct-to-consumer growth can offset continued negative comparable-store sales and planned U.S. store closures.
- Reconcile cash usage, capital expenditures, share repurchases, dividends and borrowings with the decline in cash and liquidity.
- Evaluate the sustainability of the Q3 gross-margin improvement and the effect of inventory reserves, markdowns and foreign exchange.
- Compare actual Q4 results with the $2.85 to $3.00 full-year diluted EPS guidance and its assumptions regarding comparable sales and gross margin.
- Review the final employment-related litigation settlement amount and any subsequent impairment or real-estate charges, which were excluded from guidance.
- Monitor liquidity, variable-rate debt exposure, debt covenants, auction-rate securities and the impact of currency movements on international results.
