Abercrombie & Fitch Co. Form 10-Q Summary
Reporting-period note: The request metadata identifies “2020 Q3,” but the filing is for the thirteen and thirty-nine weeks ended October 30, 2021, with comparisons to October 31, 2020. The interim financial statements are unaudited.
Business Context and Reporting Period
Abercrombie & Fitch is a global, digitally led omnichannel apparel retailer operating the Hollister, Gilly Hicks, Social Tourist, Abercrombie & Fitch and abercrombie kids brands. The company reports two operating segments, Hollister and Abercrombie, aggregated into one reportable segment, and operates primarily in North America, Europe and Asia.
Results cover Fiscal 2021’s third quarter and year-to-date period. Retail seasonality is significant, with the third and fourth quarters generally benefiting from back-to-school and holiday demand.
Financial Performance and Liquidity
| Metric | Q3 2021 | Q3 2020 | 39 Weeks 2021 | 39 Weeks 2020 |
|---|---|---|---|---|
| Net sales | $905.2 million | $819.7 million | $2.551 billion | $2.003 billion |
| Gross profit | $576.2 million | $524.4 million | $1.635 billion | $1.212 billion |
| Gross margin | 63.7% | 64.0% | 64.1% | 60.5% |
| Operating income (loss) | $72.7 million | $58.6 million | $245.0 million | $(136.4) million |
| Operating margin | 8.0% | 7.2% | 9.6% | (6.8)% |
| Net income (loss) attributable to A&F | $47.2 million | $42.3 million | $197.5 million | $(196.4) million |
| Diluted EPS | $0.77 | $0.66 | $3.10 | $(3.14) |
Q3 sales increased 10.4%; year-to-date sales increased 27.4%. Digital sales increased approximately 8% in Q3 and 14% year to date, representing 46% and 47% of total sales, respectively. Hollister sales rose 10% in Q3 and 25% year to date; Abercrombie sales rose 12% and 30%, respectively.
Q3 gross margin declined 30 basis points, primarily because freight inflation and supply-chain mitigation increased average unit cost by approximately 300 basis points, largely offset by higher average unit retail and lower promotions. Year-to-date gross margin improved 360 basis points due primarily to reduced promotions and markdowns.
Adjusted, non-GAAP Q3 operating income was $79.5 million, or 8.8% of sales, excluding $6.7 million of asset impairment charges. Year-to-date adjusted operating income was $255.2 million, or 10.0% of sales, excluding $10.2 million of impairments.
Cash and equivalents were $865.6 million at October 30, 2021, compared with $1.105 billion at January 30, 2021. Inventories increased to $543.7 million from $404.1 million. Net cash provided by operating activities was $131.3 million, compared with $108.9 million in the prior-year period. Capital expenditures were $62.2 million, and net cash used in financing activities was $304.4 million, including $235.2 million of share repurchases.
Gross long-term borrowings were $307.7 million, consisting of 8.75% senior secured notes due 2025. The company had no ABL borrowings and reported $270.8 million of borrowing capacity under its ABL facility after required excess availability. Management stated that all debt covenants were satisfied.
Material Changes Versus the Prior Comparable Period
- Results improved substantially from the COVID-19-affected 2020 period, when widespread store closures caused a year-to-date operating loss and net loss.
- Most company-operated stores were open for in-store service as of October 30, 2021, compared with widespread closures in the prior-year period. Subsequent closures occurred in parts of EMEA.
- Store and distribution expense increased 2% in Q3, but declined as a percentage of sales to 38.9% from 42.2%. Year-to-date expense increased 2% while declining to 39.0% of sales from 48.9%.
- Marketing, general and administrative expense increased 21% in Q3 and 20% year to date, reflecting higher digital media, performance-based compensation, legal, consulting and information technology costs.
- The company repurchased $42.3 million principal amount of senior secured notes during the year to date and recognized a $5.3 million loss on extinguishment of debt.
- The company repurchased approximately 6.1 million common shares for $235.2 million year to date. In November 2021, the board approved a new $500 million repurchase authorization.
- Prior-year cash-flow information was restated to reclassify a $50.0 million Rabbi Trust withdrawal from operating activities to investing activities; total cash change was unaffected.
Outlook, Commentary, Risks and Unusual Items
Management stated that it expects adequate liquidity to fund operations over the next twelve months. Fiscal 2021 capital expenditures were expected to be approximately $100 million. Planned priorities include digital, data and technology investments, marketing, Gilly Hicks and Social Tourist, omnichannel capabilities, store-network optimization and environmental, social and governance initiatives.
Management continues to shift from large, tourist-dependent flagship stores toward smaller, more productive omnichannel locations. The company had 735 stores at October 30, 2021, including six operating flagships, compared with 15 flagships at the beginning of Fiscal 2020.
Key risks include COVID-19 and new variants, potential store closures, supply-chain disruptions, freight inflation, inventory availability and markdown risk, changing consumer demand and fashion trends, competition, foreign-currency movements, cyber and information-technology risks, dependence on third-party manufacturers and distribution infrastructure, lease obligations, restrictive debt covenants and tax-rate volatility.
Unusual items included $10.2 million of year-to-date asset impairments, tax benefits from releasing valuation allowances and a U.K. tax-rate change, $5.3 million of debt-extinguishment loss, and a $63.8 million cash payment to settle remaining obligations related to the former SoHo Hollister flagship lease. The company also reported $16.5 million of suspended rent payments at October 30, 2021.
The filing does not provide a clear full-year revenue or earnings guidance range. Comparable sales were not disclosed because COVID-19-related store closures limited comparability.
Important Facts for Investors to Verify
- Confirm the applicable period: this filing is Fiscal 2021 Q3, not 2020 Q3.
- Assess the sustainability of sales and margin gains after the easy comparison against COVID-19-related closures in 2020.
- Monitor inventory growth, freight inflation, supply-chain reliability and potential markdown exposure.
- Evaluate liquidity after substantial share repurchases, the new $500 million authorization and the company’s seasonal cash-flow needs.
- Review the 8.75% senior secured notes, ABL availability, covenant restrictions and future debt-repurchase activity.
- Track further COVID-19-related closures, impairment charges, rent concessions and flagship-store exit costs.
- Separate GAAP results from non-GAAP measures and identify the effects of tax valuation-allowance releases and other discrete tax items.
- Review legal contingencies: the company states that it cannot estimate reasonably possible losses beyond accrued amounts for certain matters.