Abercrombie & Fitch Co. — Form 10-K Summary
Reporting period: The supplied filing is the Form 10-K for fiscal 2020, the 52-week year ended January 30, 2021, filed March 29, 2021. The request metadata identifies “2019 Q4,” but the filing is an annual report for fiscal 2020 rather than a fiscal 2019 quarterly filing.
Business context
Abercrombie & Fitch is a global, multi-brand omnichannel specialty retailer selling apparel, personal care products and accessories through digital channels, Company-operated stores and third-party arrangements. Its brands are organized into Hollister, including Gilly Hicks, and Abercrombie, including abercrombie kids. The Company operated 735 stores at year-end, down from 857 at the prior year-end.
Fiscal 2020 was materially affected by COVID-19, including widespread temporary store closures, reduced traffic, supply-chain disruption and changes in customer shopping behavior. Approximately 88% of Company-operated stores were open for in-store service at January 30, 2021.
Financial performance and metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3.125 billion | $3.623 billion | Down 14% |
| Gross profit | $1.891 billion | $2.151 billion | Down $260 million |
| Gross profit rate | 60.5% | 59.4% | Up 110 basis points |
| Operating income (loss) | $(20.5) million | $70.1 million | Down $90.5 million |
| Operating margin | (0.7)% | 1.9% | Down 260 basis points |
| Net income (loss) attributable to A&F | $(114.0) million | $39.4 million | Down $153.4 million |
| Diluted EPS | $(1.82) | $0.60 | Down $2.42 |
| Net cash from operating activities | $404.9 million | $300.7 million | Up $104.2 million |
| Capital expenditures | $101.9 million | $202.8 million | Down $100.9 million |
Hollister sales were $1.834 billion, down 15%, and Abercrombie sales were $1.291 billion, down 12%. U.S. sales declined 12%, international sales declined 18%, EMEA declined 14% and APAC declined 33%.
Digital sales increased approximately 39% and represented 54% of total revenue, compared with 33% in fiscal 2019. Store sales were approximately 75% of fiscal 2019 levels for stores that had reopened. Lower promotions and higher average unit retail helped increase the gross margin rate, but the benefit was more than offset by lower sales volume, higher digital shipping costs and fixed store-related expenses.
GAAP operating results included $72.9 million of asset impairment charges, principally related to COVID-19-affected stores. Excluding specified asset impairment charges, adjusted operating income was $52.5 million, or 1.7% of sales, versus $82.8 million, or 2.3%, in fiscal 2019. Fiscal 2020 net loss also included $101.4 million of adverse tax impacts, including valuation allowances and tax charges related primarily to COVID-19.
Balance sheet, debt and liquidity
- Cash and equivalents were $1.105 billion at January 30, 2021, compared with $671.3 million at February 1, 2020.
- Reported liquidity was approximately $1.3 billion, consisting of cash and available ABL capacity, versus approximately $0.9 billion in the prior year.
- Gross borrowings were $350.0 million, consisting of 8.75% senior secured notes due July 15, 2025. Net borrowings on the balance sheet were $343.9 million after unamortized fees.
- No borrowings were outstanding under the $400 million ABL Facility. Borrowing available under the facility, after letters of credit and the required minimum excess availability, was $215.1 million. The ABL Facility matures October 19, 2022.
- Operating lease obligations totaled $1.411 billion on an undiscounted basis, including $307.2 million due within one year.
- The Company was in compliance with its debt covenants at year-end.
Operating cash flow benefited from vendor payment-term arrangements, reduced inventory receipts, expense reductions, rent-payment suspensions and rent abatements. The Company cautioned that temporary payment-term extensions and deferred payments may reverse, creating incremental future cash outflows.
Material changes versus the prior comparable period
- COVID-19 drove a 14% decline in total sales and widespread store closures, while digital sales grew 39%.
- The Company closed 137 stores, including eight flagship stores, and reduced Company-operated store square footage by approximately 17%.
- The Company issued $350.0 million of senior secured notes, repaid the Term Loan Facility and repaid ABL borrowings drawn earlier in the year.
- Asset impairment charges increased to $72.9 million from $22.4 million, primarily because of weaker store cash flows.
- Net interest expense increased to $28.3 million from $7.7 million, principally because of the senior secured notes and lower interest income.
- Inventory declined to $404.1 million from $434.3 million, although the lower-of-cost-and-net-realizable-value adjustment increased to $21.1 million from $14.9 million.
- The dividend and share-repurchase programs were suspended during fiscal 2020. The Company announced plans to resume repurchases on or after March 4, 2021, subject to market and business conditions; the dividend remained suspended.
- The Company disclosed a material weakness in internal control over financial reporting relating to the classification and disclosure of cash-flow activities. Interim cash-flow statements were restated to reclassify a $50.0 million Rabbi Trust withdrawal from operating activities to investing activities.
Guidance, outlook, risks and unusual items
For fiscal 2021, management planned to conservatively manage liquidity and inventory, improve supply-chain capacity for digital fulfillment, tightly control expenses and prioritize marketing, digital and data investments. Management expected to work toward recovering fiscal 2020 sales losses while maintaining or improving the fiscal 2020 gross profit rate. Planned fiscal 2021 capital expenditures were approximately $100 million. The filing does not provide a full-year revenue or earnings forecast.
- COVID-19 remained the principal uncertainty, including possible store closures, reduced traffic, changing customer behavior, new variants, vaccine developments and macroeconomic effects.
- Supply-chain risks included port congestion, container shortages, raw-material availability, transportation costs and reliance on approximately 100 third-party vendors, primarily in Southeast Asia.
- Potential margin pressures included promotional activity, markdowns, inventory obsolescence, freight costs, labor costs and foreign-currency movements.
- International operations were exposed to Brexit-related trade barriers, duties and delivery delays, as well as regulatory, tax and political risks.
- Debt agreements restrict additional borrowings, liens, asset sales, dividends, repurchases, investments and certain corporate actions. The secured notes carry a relatively high fixed interest rate of 8.75%.
- Legal proceedings arise in the ordinary course of business. The Company could not estimate reasonably possible losses in excess of recorded legal accruals for certain matters.
- The auditor issued an unqualified opinion on the financial statements but concluded that internal control over financial reporting was not effective because of the material weakness.
Most important facts for an investor to verify
- Confirm that the applicable period is fiscal 2020 ended January 30, 2021, not “2019 Q4.”
- Review the sustainability of the 54% digital-sales mix and whether store sales recover toward pre-pandemic levels.
- Assess liquidity after normalization of vendor payments, rent payments, store operating costs and working-capital requirements.
- Evaluate the $350.0 million senior secured notes, 8.75% interest burden, 2025 maturity and covenant restrictions.
- Monitor additional store impairments, lease-exit costs, inventory markdowns and the realizability of $174.3 million of deferred-tax valuation allowances.
- Verify remediation of the material weakness and the accuracy of future cash-flow classifications and interim filings.
- Track whether share repurchases resume and whether the suspended dividend is reinstated.