Abercrombie & Fitch Co. Form 10-Q Summary
Reporting period: Thirteen weeks ended April 29, 2017, compared with April 30, 2016. The supplied metadata identifies “2016 Q1,” but the filing itself is for the first quarter of Fiscal 2017.
Business Context and Reporting Period
Abercrombie & Fitch is a specialty apparel and accessories retailer operating through stores, direct-to-consumer channels, wholesale, franchise and licensing arrangements. Its principal brands are Hollister, Abercrombie and abercrombie kids, with operations in North America, Europe, Asia and the Middle East. Results are seasonal, with the Fall period generally generating the highest sales.
Financial Performance and Position
| Metric | Q1 Fiscal 2017 | Q1 Fiscal 2016 |
|---|---|---|
| Net sales | $661.1 million | $685.5 million |
| Comparable sales change | (3)% | (4)% |
| Gross profit | $398.9 million | $425.7 million |
| Gross margin | 60.3% | 62.1% |
| Operating loss | $69.9 million | $54.9 million |
| Net loss attributable to A&F | $61.7 million | $39.6 million |
| Diluted loss per share | $0.91 | $0.59 |
| Net cash used in operating activities | $84.3 million | $75.7 million |
- Hollister sales increased 3% to $374.7 million, while Abercrombie sales declined 11% to $286.4 million. U.S. sales declined 4% and international sales declined 3%.
- Cost of sales increased to 39.7% of sales from 37.9%, reducing gross margin by approximately 180 basis points. Lower average unit retail, including an approximately 50-basis-point foreign-exchange impact, was partially offset by lower average unit cost.
- Stores and distribution expense declined in dollars but increased to 54.4% of sales from 53.8%. Direct-to-consumer shipping and handling costs increased to $29.7 million from $22.8 million.
- Marketing, general and administrative expense declined to $109.9 million from $114.4 million and was 16.6% of sales versus 16.7%.
- Asset impairment charges were $0.7 million, compared with none in the prior-year quarter.
- Cash and equivalents were $421.4 million at April 29, 2017, down from $547.2 million at January 28, 2017. Inventory was $398.8 million, broadly unchanged from year-end.
- Gross term-loan borrowings were $268.3 million, with net borrowings of $263.4 million. No borrowings were outstanding under the $400 million asset-based revolving credit facility; its borrowing base was $253.7 million.
- Capital expenditures were $32.1 million, dividends paid were $13.6 million, and cash decreased by $125.7 million during the quarter.
- Total assets were $2.16 billion and total stockholders’ equity was $1.18 billion at quarter-end.
Material Changes Versus the Prior Comparable Period
- Sales decreased 4%, while comparable sales improved modestly from a 4% decline to a 3% decline.
- Gross margin contracted 180 basis points, and operating loss increased by $15.0 million.
- Net loss attributable to A&F increased by $22.1 million, and diluted loss per share increased from $0.59 to $0.91.
- Operating cash use increased by $8.6 million, while capital expenditures increased by $6.1 million.
- The Company adopted ASU 2016-09, resulting in a $9.3 million discrete non-cash income tax charge in the quarter. The Company expects approximately $11 million of related non-cash tax charges for Fiscal 2017.
- The store base decreased to 705 U.S. stores and 188 international stores from 754 and 178, respectively, at the comparable prior-year date.
Guidance, Outlook, Risks and Unusual Items
- Management expects the second-quarter retail environment to remain promotional and challenging, with comparable-sales trend improvement anticipated in the second half of Fiscal 2017.
- Fiscal 2017 expectations include continued foreign-currency pressure; gross margin slightly below the prior year’s adjusted non-GAAP rate of 61.0%; operating expense at least 3% below the prior year’s adjusted non-GAAP amount of $2.025 billion; approximately $4 million of net income attributable to noncontrolling interests; and approximately 68 million diluted weighted-average shares, excluding potential buybacks.
- Management expects a core effective tax rate in the low 30s, approximately $100 million of capital expenditures, about seven new full-price stores, two new outlet stores and approximately 60 U.S. store closures through natural lease expirations.
- Key risks include weak consumer spending, fashion and inventory execution, promotional pricing, competition, direct-to-consumer execution, foreign-exchange volatility, international operations, supply-chain disruption, cybersecurity, litigation, tax-rate volatility, seasonality and restrictive debt covenants.
- Legal proceedings arise in the ordinary course. The filing states that certain claims lack established accruals and that ultimate liabilities could exceed recorded reserves.
- The Company held $289.0 million of cash overseas. Management stated that it is not dependent on foreign-affiliate dividends to fund U.S. operations or dividends.
- Outstanding foreign-currency forward contracts had aggregate disclosed notional amounts covering euros, British pounds, Canadian dollars and Japanese yen. A hypothetical 10% U.S. dollar devaluation would reduce derivative fair values by approximately $14.8 million, substantially offset by the hedged exposures.
Important Facts for Investors to Verify
- Confirm whether Hollister’s comparable-sales momentum and the planned second-half recovery materialize.
- Monitor gross-margin pressure from promotions, average unit retail, foreign exchange and product costs.
- Assess liquidity through the seasonal cash-burn period, including inventory needs, dividends, capital expenditures and debt service.
- Review the terms, covenants and mandatory prepayment provisions of the term loan and ABL facility.
- Evaluate the execution and financial impact of the planned store openings, approximately 60 U.S. closures and brand-revitalization investments.
- Adjust tax-rate and earnings expectations for the ASU 2016-09 non-cash charges and the sensitivity of the effective tax rate at low pre-tax income levels.
- Track contingencies, unaccrued legal claims and foreign-exchange exposures.