Abercrombie & Fitch Co. Form 10-Q Summary
Filing period: Thirteen and thirty-nine weeks ended October 28, 2017, compared with October 29, 2016. The supplied filing is for Fiscal 2017 third quarter, not 2016 Q3 as indicated in the request metadata. Fiscal 2017 is a 53-week year ending February 3, 2018. Results are unaudited and seasonally affected by the fall and holiday selling periods.
Business Context
Abercrombie & Fitch is a specialty apparel and accessories retailer operating through stores, direct-to-consumer, wholesale, franchise and licensing channels across North America, Europe, Asia and the Middle East. Reportable brands are Hollister and Abercrombie, which includes Abercrombie & Fitch and abercrombie kids.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | Year-to-date 2017 | Year-to-date 2016 |
|---|---|---|---|---|
| Net sales | $859.1 million | $821.7 million | $2.300 billion | $2.290 billion |
| Gross profit / margin | $526.6 million / 61.3% | $510.7 million / 62.2% | $1.386 billion / 60.3% | $1.414 billion / 61.7% |
| Operating income (loss) | $22.7 million | $19.6 million | $(68.3) million | $(46.1) million |
| Net income (loss) attributable to A&F | $10.1 million | $7.9 million | $(67.1) million | $(44.8) million |
| Diluted EPS | $0.15 | $0.12 | $(0.98) | $(0.66) |
| Operating cash flow | Not separately provided | Not separately provided | $29.7 million | $22.1 million |
| Capital expenditures | Not separately provided | Not separately provided | $86.3 million | $96.8 million |
Q3 comparable sales increased 4%, including 8% for Hollister and a 2% decline for Abercrombie. Year-to-date comparable sales were flat overall, with Hollister up 6% and Abercrombie down 6%.
Liquidity, Debt and Balance Sheet
- Cash and equivalents were $459.3 million at October 28, 2017, down from $547.2 million at January 28, 2017.
- Inventories increased to $570.5 million from $399.8 million at fiscal year-end, requiring close monitoring given the promotional retail environment.
- Gross term-loan borrowings were $268.3 million; carrying value of long-term borrowings was $263.9 million. The term loan bears interest at 4.99% and matures August 7, 2021.
- No borrowings were outstanding under the $400 million asset-based revolving credit facility. The facility was amended and extended to mature October 19, 2022; the November 30, 2017 borrowing base was $397.0 million.
- Operating, investing and financing activities generated uses of cash of approximately $29.7 million provided, $86.1 million used and $43.2 million used, respectively, for the first 39 weeks. Dividends paid were $40.8 million.
- The Company had approximately $276.3 million of cash held by foreign affiliates and $1.9 million of standby letters of credit outstanding at October 28, 2017.
Material Changes Versus Prior Comparable Period
- Q3 sales increased 5%, driven by comparable-sales improvement and approximately a 1% benefit from foreign currency changes. Hollister sales rose 10%, while Abercrombie sales declined 2%.
- Gross margin declined 90 basis points in Q3 and 140 basis points year-to-date, principally because lower average unit retail prices and promotional activity more than offset lower product costs.
- Stores and distribution expense declined to 43.8% of sales from 47.0% in Q3, reflecting cost reductions and sales leverage. Year-to-date expense declined to 48.1% of sales from 49.7%.
- Q3 GAAP operating income and net income increased despite a $11.1 million legal charge related to proposed wage-and-hour settlements and $3.5 million of store impairment charges. Excluding specified items, adjusted operating income was $37.3 million versus $13.6 million.
- Year-to-date GAAP losses widened, but adjusted operating loss improved to $47.6 million from $58.0 million. Year-to-date results include a $10.1 million non-cash tax charge from adopting ASU 2016-09.
- The store base declined to 889 locations from 940 at the comparable prior-year date, including 16 net U.S. closures during the first 39 weeks. Management expects up to 60 U.S. stores to close during Fiscal 2017.
Guidance, Outlook and Unusual Items
- Management expects Q4 comparable sales to increase at a low-single-digit rate and net sales to increase at a mid- to high-single-digit rate, including the 53rd week and foreign-exchange benefits.
- The 53rd week is expected to add approximately $38 million of sales and $2 million of operating income.
- Q4 gross margin is expected to decline approximately 100 basis points from the prior-year 59.3% rate. Operating expense, including other operating income, is expected to decline approximately 1% from $553.7 million.
- Management expects a Q4 effective tax rate in the mid-30% range and a diluted share count of approximately 70 million, excluding potential buybacks.
- Full-year capital expenditures are now expected to be approximately $110 million, up from the prior $100 million expectation. Four new full-price stores are expected to open in Q4.
- Two class-action lawsuits are subject to a proposed $25.0 million claims-made settlement, pending final terms and court approval. The Company recorded an $11.1 million Q3 charge and estimated total liability of $13.1 million; incremental exposure could be as much as $11.9 million.
- Key risks include promotional pressure, inventory execution, changing fashion trends, consumer spending, international and foreign-exchange exposure, supply-chain and information-technology disruptions, litigation, taxes, leases and restrictive debt covenants.
Investor Verification Items
- Confirm that the applicable filing period is Q3 Fiscal 2017 ended October 28, 2017, rather than 2016 Q3.
- Assess whether Hollister’s growth can offset continued Abercrombie comparable-sales declines.
- Monitor inventory growth, markdown activity and the projected Q4 gross-margin decline.
- Verify cash generation after inventory purchases, capital expenditures, dividends and potential share repurchases.
- Track the proposed wage-and-hour settlement, court approval, claims experience and possible incremental liability.
- Evaluate compliance with debt covenants and sensitivity to interest-rate and foreign-currency movements.