Abercrombie & Fitch Co. — Form 10-K Summary
Reporting period: The provided filing is the Form 10-K for the 52-week fiscal year ended January 28, 2012, referred to as Fiscal 2011. The request metadata identifies “2010 Q4,” but the filing is an annual report covering Fiscal 2011 and comparative Fiscal 2010. Fiscal 2012 was expected to contain 53 weeks and end February 2, 2013.
Business Context
- Specialty retailer operating Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands through stores and direct-to-consumer websites.
- Operated 1,045 stores at year-end: 946 in the United States and 99 internationally.
- Reportable segments were U.S. Stores, International Stores and Direct-to-Consumer.
- Direct-to-consumer sales, including shipping and handling revenue, were $552.6 million, or 13.3% of total sales.
Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $4.158 billion | $3.469 billion | Up 20% |
| Gross profit | $2.519 billion | $2.212 billion | Up 14% |
| Gross margin | 60.6% | 63.8% | Down 320 basis points |
| Operating income | $190.0 million | $231.9 million | Down 18% |
| Operating margin | 4.6% | 6.7% | Down 210 basis points |
| Net income from continuing operations | $126.9 million | $150.3 million | Down 16% |
| Diluted EPS from continuing operations | $1.42 | $1.67 | Down 15% |
| Net income | $127.7 million | $150.3 million | Down 15% |
| Cash flow from operations | $365.2 million | $391.8 million | Down $26.6 million |
| Capital expenditures | $318.6 million | $160.9 million | Up $157.7 million |
Revenue and Operating Trends
- U.S. Stores sales increased 6% to $2.711 billion.
- International Stores sales increased 74% to $876.6 million.
- Direct-to-Consumer sales increased 36% to $552.6 million.
- Comparable store sales increased 5% overall: Abercrombie & Fitch up 3%, abercrombie kids up 4% and Hollister up 8%.
- Hollister remained the largest brand by sales at $2.022 billion, up 30%; Gilly Hicks sales increased 81% to $73.0 million.
- Gross margin declined primarily because of higher average unit costs, record cotton costs and increased markdowns in a promotional U.S. retail environment.
Liquidity, Debt and Capital Allocation
- Cash and equivalents were $583.5 million at January 28, 2012, compared with $826.4 million a year earlier.
- Working capital was $783.4 million and the current ratio was 2.11.
- The Company had no borrowings under its $350 million unsecured revolving credit facility at year-end and was in compliance with its covenants.
- Reported long-term debt was $57.9 million, substantially related to landlord financing obligations.
- The Company repurchased approximately 3.5 million shares for $196.6 million and paid $61.0 million in dividends during Fiscal 2011.
- As of January 28, 2012, approximately 6.2 million shares remained available under the repurchase authorization.
- On February 24, 2012, the Company entered into a $300 million term loan facility maturing February 23, 2017; no draws had been made as of the filing.
Material Changes Versus Fiscal 2010
- Sales growth accelerated through international store expansion, higher comparable store sales and direct-to-consumer growth, but profitability declined.
- Gross margin fell 320 basis points, while operating margin fell 210 basis points.
- Fiscal 2011 included $68.0 million of store-related impairment charges covering 79 stores, $14.6 million of asset write-downs, $19.0 million of store closure and lease-exit charges, $10.0 million of legal settlement charges and $13.4 million of auction-rate securities impairment.
- The Company closed 68 U.S. chain stores during Fiscal 2011, following 64 closures in Fiscal 2010, while opening five Abercrombie & Fitch flagship stores and 39 international Hollister stores.
- Inventory increased to $569.8 million from $385.9 million, and the inventory valuation reserve increased to $72.3 million from $24.4 million.
- Capital expenditures nearly doubled, primarily because of international stores, flagship locations, distribution center projects and information technology investments.
- A fourth-quarter cumulative lease-accounting correction recognized approximately $33 million of long-lived assets and a corresponding financing obligation; management stated that the correction was not material to the affected periods.
Outlook, Risks and Unusual Items
- Management expected significant Fiscal 2012 margin improvement from lower average unit costs, improved performance from new international stores and direct-to-consumer growth.
- Fiscal 2012 planning assumed approximately flat same-store sales, strong EPS growth and approximately $400 million of capital expenditures.
- Management expected to open Abercrombie & Fitch flagship stores in Hamburg, Hong Kong, Munich, Amsterdam and Dublin and approximately 40 international Hollister stores.
- The Company planned to consolidate its two New Albany, Ohio distribution centers by the end of Fiscal 2012, with expected efficiency benefits and potential sale or lease of the second facility.
- Principal risks include discretionary consumer demand, fashion and inventory execution, promotional pricing, raw material and transportation costs, international expansion, foreign exchange, supply-chain and distribution concentration, information technology disruptions, litigation, tax changes and store impairment.
- Operating lease commitments totaled $3.054 billion, including $389.5 million due within one year. The filing also disclosed $208.9 million of purchase obligations and $19.5 million of unrecognized tax benefits excluded from the contractual-obligations table.
- A California wage-and-hour matter was subject to a proposed class settlement for which the Company increased its litigation reserve; the settlement required court approval. A separate California seating-related class action remained in litigation.
- The Company held $99.5 million of auction-rate securities and recognized a $13.4 million other-than-temporary impairment after changing its intent regarding their sale.
Important Facts for Investors to Verify
- Whether Fiscal 2012 margin improvement occurred as projected, particularly the benefit from lower cotton and merchandise costs.
- International store productivity, profitability and returns on the substantially increased capital investment.
- Direct-to-consumer growth, fulfillment costs and whether online sales are incremental or diverting store sales.
- Inventory levels, markdown rates and the adequacy of the $72.3 million inventory valuation reserve.
- Progress and costs of distribution center consolidation and the potential disposition of the second facility.
- Utilization, covenants and repayment terms of the $300 million term loan and the revolving credit facility.
- Final resolution and cash cost of the California wage-and-hour settlement and other legal contingencies.
- Liquidity and valuation risks associated with the auction-rate securities portfolio.
- Potential dilution or cash-settlement requirements from outstanding stock appreciation rights and other equity awards.