Abercrombie & Fitch Co. — Form 10-Q Summary
Reporting period: The filing covers the thirteen and twenty-six weeks ended July 30, 2022, compared with July 31, 2021. Although the request metadata states “2021 Q2,” the filing is the Fiscal 2022 second-quarter Form 10-Q. A&F is a global, digitally led omnichannel apparel retailer operating the Hollister, Gilly Hicks, Social Tourist, Abercrombie & Fitch, and abercrombie kids brands.
Financial results and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | 26 weeks FY2022 | 26 weeks FY2021 |
|---|---|---|---|---|
| Net sales | $805.1 million | $864.9 million | $1.618 billion | $1.646 billion |
| Gross profit | $465.9 million | $563.5 million | $915.4 million | $1.059 billion |
| Gross margin | 57.9% | 65.2% | 56.6% | 64.3% |
| Operating income (loss) | $(2.2) million | $114.8 million | $(11.9) million | $172.2 million |
| Operating margin | (0.3%) | 13.3% | (0.7%) | 10.5% |
| Net income (loss) attributable to A&F | $(16.8) million | $108.5 million | $(33.3) million | $150.3 million |
| Diluted EPS | $(0.33) | $1.69 | $(0.65) | $2.32 |
- Cash flow: Operating cash flow was $(259.7) million in the first 26 weeks, versus $49.9 million provided in the prior-year period. The outflow primarily reflected inventory investment, vendor payments, lower cash receipts, and other working-capital changes.
- Investing and financing: Investing cash outflow was $51.6 million, including $59.6 million of capital expenditures. Financing cash outflow was $135.4 million, including $117.8 million for share repurchases.
- Cash and liquidity: Cash and equivalents were $370.0 million at July 30, 2022, down from $823.1 million at January 29, 2022. Total liquidity was approximately $729.2 million, including approximately $359.2 million of borrowing availability under the ABL Facility.
- Debt: Gross Senior Secured Notes borrowings were $307.7 million, with a fixed 8.75% interest rate and maturity in July 2025. No borrowings were outstanding under the $400 million ABL Facility. The Company reported compliance with all debt covenants.
- Balance sheet: Inventories increased to $708.0 million from $525.9 million at fiscal year-end. Total assets were $2.734 billion and total stockholders’ equity was $672.9 million.
Material changes versus the prior comparable period
- Q2 net sales declined 6.9%; year-to-date sales declined 1.7%. The decline was driven primarily by lower store sales, decreased store traffic and unfavorable foreign exchange effects of approximately $23 million in Q2 and $32 million year to date.
- Abercrombie segment sales increased 5% in Q2 and 9% year to date, while Hollister sales decreased 15% and 10%, respectively.
- International Q2 sales declined 14%, including declines of 13% in EMEA and 33% in APAC. U.S. sales declined 4% in Q2 but increased 1% year to date.
- Gross margin contracted 730 basis points in Q2 and 770 basis points year to date. Higher product costs, freight, average unit costs and foreign exchange were significant contributors.
- Stores and distribution expense increased 5% in Q2, including higher digital shipping, handling and distribution-center fulfillment costs. Marketing, general and administrative expense was broadly flat in dollars but increased as a percentage of sales.
- Q2 results included $2.2 million of asset impairment charges; year-to-date charges were $5.6 million, primarily related to certain stores and operating lease right-of-use assets.
- Interest expense, net decreased to $6.9 million in Q2 from $11.3 million, partly because the prior-year period included a $5.3 million loss on debt extinguishment.
- The Company repurchased approximately 4.3 million shares for $117.8 million during the first half of Fiscal 2022. Dividends remained suspended.
Guidance, outlook, commentary and risks
- Management’s Always Forward Plan emphasizes focused brand growth, digital and technology investment, financial discipline, store-network optimization, distribution capacity and ESG integration.
- The Company planned to open 60 stores and close 30 stores during Fiscal 2022, subject to landlord negotiations. In the first half, it opened 12 stores and closed 7, ending with 734 stores.
- Fiscal 2022 capital expenditures were expected to be approximately $150 million; $59.6 million had been spent year to date.
- Management stated that it believed liquidity was adequate to fund operating activities for the next 12 months, while noting that seasonal cash generation is concentrated in the fall selling season.
- Supply-chain constraints, factory closures, transportation delays, higher freight costs, labor and raw-material inflation, and inventory timing continued to pressure margins. The Company sought to mitigate these effects through earlier inventory receipts, additional freight vendors and reduced air freight where possible.
- Key risks include COVID-19 developments, macroeconomic deterioration, inflation, reduced discretionary spending, geopolitical conflict including Ukraine, fashion and demand risk, inventory management, international operations, digital execution, cybersecurity, climate-related matters and regulatory changes.
- Tax results were affected by unrecognized tax benefits on losses, primarily in Switzerland. The Company also maintained valuation allowances in certain jurisdictions and identified potential additional exposure if deferred tax assets are not realized.
- The Company disclosed ordinary-course litigation and stated that it could not estimate a range of reasonably possible losses in excess of accrued amounts for certain legal matters.
Investor verification checklist
- Verify whether inventory growth converts into sales and cash generation during the fall and holiday seasons, and monitor markdown risk.
- Assess whether gross-margin pressure from freight, product costs, inflation and foreign exchange moderates.
- Track Hollister performance versus continued growth at Abercrombie.
- Reconcile reported cash, foreign-held cash of $254.2 million, ABL availability and seasonal liquidity needs.
- Review the sustainability and timing of share repurchases given the operating cash outflow and suspended dividend program.
- Monitor store openings, closures, lease commitments and impairment charges under the store-network optimization plan.
- Evaluate the impact of COVID-19, geopolitical events, consumer spending trends, supply-chain disruptions and foreign currency movements on future results.