Abercrombie & Fitch Co. 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2020, compared with May 4, 2019. The supplied filing is for Fiscal 2020 first quarter, despite request metadata identifying “2019 Q1.” Results are unaudited and were substantially affected by the COVID-19 pandemic.
Business context
Abercrombie & Fitch is a global omnichannel specialty retailer operating the Hollister, Abercrombie & Fitch and abercrombie kids brands through company-operated stores, digital channels, wholesale, franchise and licensing arrangements. The company had 849 company-operated stores as of May 2, 2020; approximately 58% were open as of June 5, 2020.
Key financial metrics
| Metric | Q1 Fiscal 2020 | Q1 Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $485.4 million | $734.0 million | Down 33.9% |
| Gross profit | $264.1 million | $444.1 million | Down 40.5% |
| Gross margin | 54.4% | 60.5% | Down 610 bps |
| Operating loss | $209.1 million | $27.3 million | Worsened by $181.9 million |
| Operating margin | (43.1%) | (3.7%) | Down 3,940 bps |
| Net loss attributable to A&F | $244.1 million | $19.2 million | Worsened by $225.0 million |
| Diluted loss per share | $3.90 | $0.29 | Worsened by $3.61 |
| Cash flow from operations | $(90.8) million | $(71.3) million | Higher use of $19.5 million |
| Capital expenditures | $47.0 million | $43.9 million | Increased $3.1 million |
Digital sales increased approximately 25% to more than $275 million, partially offsetting store-closure-related declines. Hollister sales declined 36% to $273.0 million, while Abercrombie segment sales declined 30% to $212.3 million. U.S. sales declined 31%, EMEA declined 35%, APAC declined 51% and other international sales declined 29%.
Liquidity, debt and balance sheet
- Cash and equivalents were $704.0 million at May 2, 2020, compared with $671.3 million at February 1, 2020.
- Total cash, restricted cash and equivalents were $722.3 million at May 2, 2020, compared with $607.7 million at May 4, 2019.
- Liquidity was $763.4 million, consisting of cash and actual incremental ABL borrowing availability, versus $913.8 million at February 1, 2020.
- The company borrowed $210.0 million under its $400 million asset-based revolving credit facility. Remaining availability was $89.4 million, but actual incremental borrowing capacity was $59.4 million after required availability reserves.
- Long-term term-loan borrowings were $233.3 million gross at a 4.50% interest rate, maturing August 7, 2021. The ABL facility carried a 1.82% interest rate and matures October 19, 2022.
- The company was in compliance with its credit-facility covenants at May 2, 2020.
- Inventories were $426.6 million, compared with $434.3 million at February 1, 2020. Total assets were $3.29 billion and total stockholders’ equity was $798.1 million.
Material changes versus the prior comparable period
- COVID-19-related store closures drove the 34% sales decline and significant operating deleverage. Stores and distribution expense declined 10% in dollars but rose to 66.4% of sales from 48.6%.
- Cost of sales increased to 45.6% of sales from 39.5%, including approximately $14.8 million of inventory valuation charges.
- The company recorded $42.9 million of asset impairment charges, principally for store lease right-of-use assets and property and equipment affected by weaker store cash flows.
- Income tax expense was $31.5 million despite a pretax loss, reflecting $90.9 million of adverse tax impacts, including unrecognized tax benefits on certain losses and valuation allowances.
- Operating cash use increased as lower sales receipts outweighed cost-control actions. Financing cash inflow of $171.7 million primarily reflected the $210.0 million ABL borrowing.
- The company withdrew $50.0 million from overfunded Rabbi Trust assets, suspended share repurchases in March 2020 and suspended dividends in May 2020.
- Capital expenditures for Fiscal 2020 were expected to be approximately $100 million, compared with $203 million in Fiscal 2019.
Guidance, outlook, commentary and risks
- Management stated that it believed liquidity would be adequate to fund operating activities over the next 12 months, but emphasized that COVID-19 impacts remained dynamic and uncertain.
- Reopened-store sales productivity was approximately 80% of prior-year levels in the U.S. and 60% in EMEA. Store reopening timing remained dependent on government guidance, and further closures were possible.
- Management continued to prioritize global store-network optimization, digital and omnichannel capabilities, supply-chain speed and efficiency, and customer engagement.
- Supply-chain risks included limited factory capacity, delayed merchandise deliveries and dependence on third-party manufacturers and APAC-based fabric mills.
- Other material risks included uncertain consumer demand, foreign-exchange volatility, Brexit-related trade and duty exposure, restrictive credit-facility covenants, lease obligations, litigation and potential further impairment charges.
- The company had no outstanding foreign-currency forward contracts at May 2, 2020. Previously designated hedges generated a net gain of approximately $12.6 million upon dedesignation, with substantially all unrealized gains expected to be recognized in cost of sales over the following 12 months as underlying transactions occur.
- Management identified no material changes to previously disclosed risk factors, but stated that COVID-19 could exacerbate those risks. Legal contingencies were not quantifiable beyond recorded accruals based on currently available information.
Most important facts to verify
- Whether store reopening trends and digital growth offset continued weakness in physical-store productivity.
- Actual remaining ABL capacity, covenant compliance and the repayment or refinancing plan for the term loan maturing in August 2021.
- Whether additional store impairments, inventory markdowns or tax valuation allowances will be required.
- The timing and conditions for reinstating dividends and share repurchases.
- Cash burn, working-capital requirements and the sustainability of management’s stated 12-month liquidity assessment.
- Whether supply-chain disruptions, Brexit outcomes or renewed COVID-19 restrictions materially affect inventory availability and customer demand.