What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-08 compared with 2020-06-10 · 399 added, 191 removed, 345 unchanged (63% of the section changed)

6 unchanged sentences

Current Trends and Outlook .

This section provides a discussion related to COVID-19’s impact on the Company’s business and other certain risks and challenges, as well as a summary of the Company’s performance for the thirteen weeks ended May 2, 2020 and May 4, 2019 .

Results of Operations .

This section provides an analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss for the thirteen weeks ended May 2, 2020 and May 4, 2019 .

This section provides an analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 .

Liquidity and Capital Resources .

This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of May 2, 2020 , which includes (i) an analysis of financial condition as compared to February 1, 2020 ;

(ii) an analysis of changes in cash flows for the thirteen weeks ended May 2, 2020 as compared to the thirteen weeks ended May 4, 2019 ;

and (iii) an analysis of liquidity, including a discussion related to preserving liquidity during COVID-19, the availability under credit facilities, the Company’s share repurchase and dividend programs, and outstanding debt and covenant compliance.

This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of August 1, 2020 , which includes (i) an analysis of financial condition as compared to February 1, 2020 ;

(ii) an analysis of changes in cash flows for the twenty-six weeks ended August 1, 2020 as compared to the twenty-six weeks ended August 3, 2019 ;

and (iii) an analysis of liquidity, including a discussion related to preserving liquidity during COVID-19, remaining availability under the ABL Facility, the Company’s share repurchase and dividend programs, and outstanding debt and covenant compliance.

Recent Accounting Pronouncements .

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Non-GAAP Financial Measures .

MD&A provides discussion of certain financial measures that have been determined to not be in accordance with GAAP.

MD&A provides a discussion of certain financial measures that have been determined to not be in accordance with GAAP.

This section includes certain reconciliations for non-GAAP financial measures and additional details on these financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors.

The COVID-19 pandemic poses various risks to the Company, certain of which are detailed throughout the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A.

RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019 .

Any one of these risks, or a combination of risks could result in further adverse impacts on the Company’s business, results of operations, financial condition and cash flows.

In addition, the following factors, categorized by the primary nature of the associated risk, including the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A.

RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019 , in some cases have affected and in the future could affect the Company’s financial performance and cause actual results for Fiscal 2020 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management:

The following risks, categorized by the primary nature of the associated risk, including the disclosures in “ITEM 1A.

RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019 , as well as those disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 17, 2020 and in “ITEM 1A.

RISK FACTORS” of this Quarterly Report on Form 10-Q, in some cases have affected and in the future could affect the Company’s financial performance and cause actual results for Fiscal 2020 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management.

The following risks, or a combination of risks, may be exacerbated by COVID-19 and could result in adverse impacts on the Company’s business, results of operations, financial condition and cash flows.

Macroeconomic and industry risks include:

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The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business;

The current outbreak of the novel coronavirus, or COVID‐19, has materially adversely impacted and disrupted, and may continue to materially adversely impact and cause disruption to, our business, financial performance and condition, operating results, liquidity and cash flows.

The spread of the COVID‐19 outbreak has caused significant disruptions in the United States and global economy, the extent of the impact and duration of which is not yet known.

Any future outbreak of any other highly infectious or contagious disease could have a similar impact.

Strategic risks include:

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Changes in the regulatory or compliance landscape could have a material adverse impact on our business;

Our credit facilities include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business.

The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business.

The factors listed above are not our only risks.

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CURRENT TRENDS AND OUTLOOK

As a result of COVID 19, in January 2020, we began to experience business disruptions in the APAC region, including the temporary closure of stores in China and the surrounding area, modified operating hours in certain stores that remained open, and a decline in traffic.

In late February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the U.S.

and the EMEA region experiencing significant outbreaks.

In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19.

In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks.

In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization.

In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and we have recommended associates who are able to perform their role remotely to do so.

We are reacting to the COVID-19 situation on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak.

In mid-March 2020, with the well-being of our customers, associates and business partners in mind, we temporarily closed our Company-operated stores across brands in North America and the EMEA region.

We began to reopen these stores on a rolling basis beginning in late April 2020.

We have experienced sales productivity for reopened stores of approximately 80% and 60% for the U.S.

and the EMEA region, respectively, since their reopenings as compared to last year’s levels.

The majority of our stores in the APAC region have reopened, although many with temporarily reduced operating hours.

We plan to follow the guidance of local governments to determine when we can reopen remaining stores and to evaluate whether further store closures will be necessary.

As of June 5, 2020, approximately 58% of Company-operated stores were open.

We are following guidance from government and health authorities, and complying with the requirements, to put a range of precautionary measures in place, including:

Requiring associates to use face coverings;

Encouraging or requiring customers to use face coverings, in accordance with local government direction;

In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and the Company has recommended associates who are able to perform their role remotely to do so.

The Company is reacting to COVID-19 on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak.

As a result of COVID-19, in January 2020, the Company temporarily closed the majority of its stores in the APAC region and in March 2020, the Company temporarily closed its stores across brands in North America and the EMEA region.

The majority of APAC stores were reopened during March 2020, and the Company began to reopen stores in North America and the EMEA region on a rolling basis in late April 2020.

The Company had reopened approximately 90% of Company-operated stores for in-store service as of August 1, 2020, which has since increased to approximately 95% as of September 3, 2020, representing 100% of international stores and the majority of U.S.

stores, although many with modified operating hours.

The Company plans to follow the guidance of local governments to determine when it can reopen remaining stores and to evaluate whether further store closures will be necessary.

The Company has also implemented a range of precautionary health and safety measures with the well-being of the Company’s customers, associates and business partners in mind , including:

Requiring associates to use face coverings, depending on geographic region;

Encouraging or requiring customers to use face coverings, depending on geographic region;

Conducting associate wellness checks in accordance with local government direction;

Enhancing cleaning routines;

Enhancing cleaning routines and installing plexiglass barriers in the majority of store locations;

Implementing various measures to encourage social distancing, including managing occupancy limits;

Installing plexiglass barriers at checkout in some locations;

Encouraging contactless payment options, where available;

Opening fitting rooms where permissible, with additional cleaning and social distancing procedures;

Reducing hours in select locations;

Removing returned merchandise from the sales floor for a period of time;

Continuing to offer in-store pickups for online orders at certain locations when selected during the online checkout.

Our robust digital operations across brands have continued to serve our customers during this unprecedented period of temporary store closures as our distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational.

We experienced 25% digital sales growth for the first quarter of Fiscal 2020 as compared to the first quarter of Fiscal 2019, with month-over-month acceleration in digital sales growth since temporary store closures were enacted in mid-March.

This growth has further accelerated in May.

Despite the recent strength in digital sales, we have historically generated the majority of our revenue through stores and there can be no assurance that the current performance in the digital channel will continue.

We are focused on managing inventories and the impacts COVID-19 has had, and continues to have, on our global supply chain, including potential disruptions of product deliveries.

We source the majority of our merchandise outside of the U.S.

through arrangements with vendors primarily located in southeast Asia.

In order to complete production, these vendors’ manufacturing factories are dependent on raw materials from fabric mills that are primarily located in the APAC region.

We continue to collaborate with our third-party partners to mitigate significant delays in delivery of merchandise as certain factories are operating at a limited capacity.

During the first quarter of Fiscal 2020, we reduced certain orders that were not already in production, delayed and recadenced deliveries and implemented various strategies to tightly manage inventories, including utilizing our ship-from-store capabilities in select locations to unlock in-store inventory.

We remain committed to, and confident in, our long-term vision and continue to evaluate opportunities to make progress against our key transformation initiatives while balancing the near-term challenges and unprecedented uncertainty presented by COVID-19.

Our progress executing against the following key transformation initiatives has created the foundation to allow us to quickly respond to COVID-19:

Optimizing our global store network;

Opening fitting rooms where permissible, with additional cleaning procedures for clothing that has been tried on;

Removing returned merchandise from the sales floor for a period of time where mandated by local government;

Reducing store hours in select locations;

Continuing to offer Purchase-Online-Pickup-in-Store, including curbside pick-up at a majority of U.S.

Following recommended cleaning and distancing measures in the Company's distribution centers;

Maximizing work-from-home and digital collaboration alternatives to minimize in-person meetings whenever possible.

The Company has seen, and may continue to see material reductions in sales across brands and regions as a result of COVID-19.

Total net sales decreased approximately 17% and 25% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively, primarily driven by temporary store closures and a decline in traffic as compared to the previous year as a result of COVID-19.

and the EMEA region, which collectively accounted for 89% of total net sales in Fiscal 2019, the Company experienced sales productivity for reopened stores of approximately 75% and 60% , respectively, as compared to last year’s levels during the thirteen weeks ended August 1, 2020 .

The Company’s digital operations across brands have continued to serve the Company’s customers during this unprecedented period of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational.

Digital sales increased approximately 56% and 41% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively.

Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current performance in the digital channel will continue.

The Company has seen, and expects to continue to see, material adverse impacts as a result of COVID-19.

As a result, for the third quarter of Fiscal 2020, the Company expects net sales to be down in the range of 15% to 20% as compared to last year.

The current circumstances and the impacts of COVID-19 on the Company’s operations, including the duration and impact on overall customer demand, are dynamic, and this sales expectation assumes that the back-to-school selling season, which generally occurs in August, will extend through September and potentially October as school resumes throughout the U.S.

and the weather becomes more seasonal.

The Company is also focused on managing inventories and the impacts COVID-19 has had, and continues to have, on its global supply chain, including potential disruptions of product deliveries.

The Company sources the majority of its merchandise outside of the U.S.

through arrangements with vendors primarily located in southeast Asia and, as of August 1, 2020, the vast majority of the factories the Company partners with were operating at full capacity.

In order to complete production, these manufacturing factories are dependent on raw materials from fabric mills that are primarily located in the APAC region.

The Company continues to collaborate with its third-party partners to mitigate significant delays in delivery of merchandise.

During Fiscal 2020, the Company has reduced certain orders that were not already in production, delayed and recadenced deliveries and implemented various strategies to tightly manage inventories, including utilizing ship-from-store capabilities in select locations.

Despite these near-term challenges presented by COVID-19, the Company remains committed to, and confident in, its long-term vision.

The Company continues to evaluate opportunities to make progress against its key transformation initiatives while balancing the near-term challenges and unprecedented uncertainty presented by COVID-19.

The Company’s progress executing against the following key transformation initiatives has created the foundation to allow the Company to respond quickly to COVID-19:

Optimizing the global store network;

Enhancing digital and omnichannel capabilities;

Increasing the speed and efficiency of our concept-to-customer product life cycle by further investing in capabilities to position our supply chain for greater speed, agility and efficiency, while leveraging data and analytics to offer the right product at the right time and the right price;

Improving our customer engagement through loyalty programs and marketing optimization.

We entered this period of uncertainty with a healthy liquidity position and have taken and continue to take immediate, aggressive and prudent actions, including reevaluating all expenditures, to balance our short and long-term liquidity needs, in order to best position the business for our key stakeholders.

We have taken and continue to take various actions to preserve liquidity and manage cash flows, including, but not limited to:

Increasing the speed and efficiency of the concept-to-customer product life cycle by further investing in capabilities to position the supply chain for greater speed, agility and efficiency, while leveraging data and analytics to offer the right product at the right time and the right price;

Improving customer engagement through loyalty programs and marketing optimization.

The Company entered this period of uncertainty with a healthy liquidity position and has taken and continues to take immediate, aggressive and prudent actions, including reevaluating all expenditures, to balance short and long-term liquidity needs, in order to best position the business for its key stakeholders.

Actions to preserve liquidity and manage cash flows during Fiscal 2020, include, but are not limited to:

Partnering with merchandise and non-merchandise vendors in regards to payment terms;

Reducing and recadencing inventory receipts to better align inventory with expected market demand;

Recadencing inventory receipts to better align inventory with expected market demand;

Reducing expenses to better align operating costs with sales;

Implementing various compensation actions related to our store and corporate associates, as well as our non-associate directors;

Borrowing $210.0 million under our Amended ABL Facility in March 2020 to improve our cash position;

Withdrawing $50.0 million from the overfunded Rabbi Trust assets in March 2020, which represented the majority of excess funds;

Suspending our share repurchase program in March 2020 and suspending the dividend program in May 2020.

We believe these suspensions to be temporary and plan to review throughout the year to determine, in light of facts and circumstances at that time, whether and when to reinstate these programs.

As of May 2, 2020 we had liquidity of $763.4 million as compared to $913.8 million as of February 1, 2020.

We have seen, and may continue to see, material adverse impacts as a result of COVID-19.

Current circumstances are dynamic and future impacts, including the duration and impact on overall customer demand, are uncertain.

Borrowing $210.0 million under the ABL Facility in March 2020 which was then repaid in July 2020 along with the Term Loan Facility, using proceeds from the issuance of the Senior Secured Notes and existing cash on hand;

Withdrawing $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds;

Temporarily suspending the Company's share repurchase and dividend programs;

Assessing government policy and economic stimulus responses to COVID-19 for both business and individuals.

In addition, despite the Company’s recent history of partnering with its vendors regarding payment terms, there can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.

As of August 1, 2020 , the Company had liquidity of $1.061 billion as compared to $913.8 million as of February 1, 2020, comprising cash and equivalents and actual incremental borrowing available to the Company under the ABL Facility.

It is possible that our preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations.

For discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A.

For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A.

RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019 .

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Although the United Kingdom left the European Union in January 2020, the final terms of the United Kingdom’s withdrawal remain unclear.

We believe that this referendum and the uncertainty surrounding the terms of the United Kingdom’s withdrawal adversely impacted international sales results in Fiscal 2019, with decreased traffic and declining values of the Euro and British Pound as compared to the U.S.

The Company believes that this referendum and the uncertainty surrounding the terms of the United Kingdom’s withdrawal adversely impacted international sales results in Fiscal 2019, with decreased traffic and declining values of the Euro and British Pound as compared to the U.S.

Dollar over Fiscal 2018.

Upon withdrawal from the Europe Union in January 2020, the United Kingdom entered a transition period during which there will be on-going negotiations.

Upon withdrawal from the European Union in January 2020, the United Kingdom entered a transition period during which there will be on-going negotiations.

During this transition period, the United Kingdom’s existing trading relationship with the European Union will remain in place and it will continue to follow the European Union's rules.

It is not clear at this time what, if any, agreements will

be reached by the current December 31, 2020 transition period deadline, or the impact that COVID-19 may have on the negotiation timeline .

It is not clear at this time what, if any, agreements will be reached by the current December 31, 2020 transition period deadline, or the impact that COVID-19 may have on the negotiation timeline .

There is continued uncertainty related to the impact on consumer behavior, trade relations, economic conditions, foreign currency exchange rates and the free movement of goods, services, people and capital between the United Kingdom and the European Union during this time of transition.

The United Kingdom’s withdrawal from the European Union could also adversely impact other areas of our business, including, but not limited to, an increase in duties and delays in the delivery of merchandise from our Netherlands distribution center to our customers in the United Kingdom if trade barriers materialize.

The United Kingdom’s withdrawal from the European Union could also adversely impact the operations of our vendors and of our other third-party partners.

In order to mitigate the risks associated with the United Kingdom’s withdrawal from the European Union, our team is:

collaborating across the organization and testing our systems;

The United Kingdom’s withdrawal from the European Union could also adversely impact other areas of the business, including, but not limited to, an increase in duties and delays in the delivery of merchandise from the Company’s Netherlands distribution center to its customers in the United Kingdom if trade barriers materialize.

The United Kingdom’s withdrawal from the European Union could also adversely impact the operations of the Company’s vendors and of our other third-party partners.

In order to mitigate the risks associated with the United Kingdom’s withdrawal from the European Union, the Company is:

collaborating across the organization and testing systems;

working with external partners to develop contingency plans for potential adverse impacts;

and taking actions to reduce, to the extent possible, the potential impact of any incremental duty exposure.

RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2019 .

It is possible that preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect the business and results of operations.

Global Store Network Optimization

A component of optimizing our global store fleet is pivoting away from large format flagship stores as we strive to open smaller, more productive omnichannel focused brand experiences.

As a result, we have closed certain of our flagship stores and may have additional closures as we execute against this strategy.

Although some of these closures may be completed through natural lease expirations, certain other of our leases include early termination options that can be exercised under specific conditions.

We may also elect to exit or modify our other leases, and could incur charges related to these actions.

For context, at the beginning of Fiscal 2019 , we had 19 flagship stores, and as of the end of the first quarter of Fiscal 2020 , we had 15 flagship stores.

Details related to recently closed flagship stores are as follows:

A component of optimizing the Company’s global store fleet is pivoting away from large format flagship stores and striving towards opening smaller, more productive omnichannel focused brand experiences.

As a result, the Company has closed certain of its flagship stores and may have additional closures as the Company executes against this strategy.

Although some of these closures may be completed through natural lease expirations, certain other of the Company’s leases include early termination options that can be exercised under specific conditions.

The Company may also elect to exit or modify other leases, and could incur charges or realize benefits related to these actions.

For context, at the beginning of Fiscal 2019 , the Company had 19 flagship stores, and as of the end of the second quarter of Fiscal 2020 , the Company had 15 flagship stores.

Details related to recently closed flagship stores follow:

Flagship location

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Abercrombie includes the Abercrombie & Fitch and abercrombie kids brands and, when used in the table above, signifies a location with an abercrombie kids carveout within an Abercrombie & Fitch store that would be represented as a single store count.

The abercrombie kids store in London will be converted to corporate office space and the location will be utilized as our EMEA regional headquarters.

Additional details related to store count and gross square footage are as follows:

The abercrombie kids store in London will be converted to corporate office space and the location will be utilized as the Company’s EMEA regional headquarters.

Additional details related to store count and gross square footage follow:

Hollister (1)

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Permanently closed

Number of stores currently open (3)

Percent of stores currently open (3)

August 1, 2020

Gross square footage (in thousands) :

August 1, 2020

Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count.

Excludes 10 international franchise stores as of May 2, 2020 and nine as of February 1, 2020 .

Excludes 14 Company-operated temporary stores as of May 2, 2020 and 16 as of February 1, 2020 .

Excludes nine international franchise stores as of each of August 1, 2020 and February 1, 2020 .

Excludes 15 Company-operated temporary stores as of August 1, 2020 and 16 as of February 1, 2020 .

Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands.

Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count.

Excludes eight international franchise stores as of May 2, 2020 and seven as of February 1, 2020 .

Excludes four Company-operated temporary stores as of May 2, 2020 and eight as of February 1, 2020 .

In response to COVID-19, the Company temporarily closed certain of its Company-operated stores.

These figures relate to the number of stores open as of June 5, 2020.

Stores that have reopened after being temporarily closed as a result of the COVID-19 pandemic may reflect modified operating hours.

Excludes eight international franchise stores as of each of August 1, 2020 and seven as of February 1, 2020 .

Excludes six Company-operated temporary stores as of August 1, 2020 and eight as of February 1, 2020 .

Summary of results

A summary of results for the thirteen weeks ended May 2, 2020 and May 4, 2019 follows:

A summary of results for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:

(in thousands, except change in net sales, gross profit rate, operating margin and per share amounts)

August 1, 2020 (2)

August 3, 2019 (3)

August 1, 2020 (2)

August 3, 2019 (3)

Thirteen Weeks Ended

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Gross profit rate

Operating income (loss)

Operating income (loss) margin

Net income (loss) attributable to A&F

Net income (loss) per diluted share attributable to A&F

Twenty-six Weeks Ended

Change in net sales

Gross profit rate

Operating loss

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Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors is provided below under “ NON-GAAP FINANCIAL MEASURES .”

Certain components of the Company’s Condensed Consolidated Balance Sheets as of May 2, 2020 and February 1, 2020 were as follows:

Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges.

Refer to Note 11, “ INCOME TAXES .”

Results for Fiscal 2019 reflect significant adverse impacts related to flagship store exit charges.

Refer to Note 17, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .”

Certain components of the Company’s Condensed Consolidated Balance Sheets as of August 1, 2020 and February 1, 2020 were as follows:

(in thousands)

August 1, 2020

February 1, 2020

Cash and equivalents

Gross short-term borrowings outstanding, carrying amount

Gross long-term borrowings outstanding, carrying amount

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended May 2, 2020 and May 4, 2019 were as follows:

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended August 1, 2020 and August 3, 2019 were as follows:

(in thousands)

Net cash used for operating activities

Purchases of property and equipment

Purchases of Common Stock

Dividends paid

Proceeds from Amended ABL Facility borrowings

August 1, 2020

August 3, 2019

Net cash provided by (used) for operating activities

Net cash used for investing activities

Net cash provided by (used) for financing activities

RESULTS OF OPERATIONS

The Company’s net sales by operating segment for the thirteen weeks ended May 2, 2020 and May 4, 2019 were as follows:

The Company’s net sales by operating segment for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:

Thirteen Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

Abercrombie (1)

Twenty-six Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

Abercrombie (1)

Includes Abercrombie & Fitch and abercrombie kids brands.

Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders.

The Company’s net sales by geographic area for the thirteen weeks ended May 2, 2020 and May 4, 2019 were as follows:

The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:

Thirteen Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

International

For the first quarter of Fiscal 2020 , net sales decreased 34% as compared to the first quarter of Fiscal 2019 , primarily due to a decrease in units sold driven by temporary store closures across brands in response to COVID-19.

Lost sales from temporary store closures were partially offset by approximately 25% digital sales growth.

Average unit retail decreased year-over-year, driven by strategic and targeted promotions in response to the current retail environment, with changes in foreign currency exchange rates adversely impacting net sales by $7 million , or 1% .

Excluding the adverse impact of changes in foreign currency exchange rates, net sales for the first quarter of Fiscal 2020 decreased 33% as compared to the first quarter of Fiscal 2019 .

Twenty-six Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

International

For the second quarter of Fiscal 2020 , net sales decreased 17% as compared to the second quarter of Fiscal 2019 , primarily due to a decrease in units sold driven by temporary store closures and a decline in store traffic across brands as a result of COVID-19, partially offset by 56% digital sales growth.

Average unit retail increased year-over-year, driven by less promotions and lower clearance levels, with changes in foreign currency exchange rates adversely impacted net sales by $2 million .

For the year-to-date period of Fiscal 2020 , net sales decreased 25% as compared to the year-to-date period of Fiscal 2019 , primarily due to a decrease in units sold driven by temporary store closures and a decline in store traffic across brands as a result of COVID-19, partially offset by 41% digital sales growth.

Average unit retail decreased year-over-year, driven by strategic and targeted promotions in response to the retail environment, with changes in foreign currency exchange rates adversely impacting net sales by $9 million .

Excluding the adverse impact of changes in foreign currency exchange rates, net sales for the year-to-date period of Fiscal 2020 decreased 24% as compared to the year-to-date period of Fiscal 2019 .

Cost of sales, exclusive of depreciation and amortization

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

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Cost of sales, exclusive of depreciation and amortization

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Cost of sales, exclusive of depreciation and amortization

The estimated basis point (“BPS”) change has been rounded based on the change in the percentage of net sales.

For the first quarter of Fiscal 2020 , cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 610 basis points as compared to the first quarter of Fiscal 2019 .

Current year results reflect the adverse impacts of approximately $15 million, or 300 basis points, of charges to reduce the carrying value of inventory, primarily as a result of the continued effects of COVID-19.

The remainder of the year-over-year decline is primarily attributable to decreased average unit retail due to strategic and targeted promotions in response to the current retail environment without a corresponding decrease in average unit cost and an adverse impact from changes in foreign currency exchange rates of approximately 30 basis points.

For the second quarter of Fiscal 2020 , cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 140 basis points as compared to the second quarter of Fiscal 2019 .

The year-over-year decline was primarily attributable to increased average unit retail without a corresponding increase in average unit cost, which was flat year-over-year.

For the year-to-date period of Fiscal 2020 , cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 180 basis points as compared to the year-to-date period of Fiscal 2019 , primarily driven by adverse impacts of approximately $15 million related to charges reducing the carrying value of inventory during the first quarter of Fiscal 2020.

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

2 unchanged sentences

BPS Change (1)

Gross profit, exclusive of depreciation and amortization

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Gross profit, exclusive of depreciation and amortization

The estimated basis point change has been rounded based on the change in the percentage of net sales.

Gross profit is derived from net sales less cost of sales, exclusive of depreciation and amortization.

Stores and distribution expense

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

3 unchanged sentences

Stores and distribution expense

Twenty-six Weeks Ended

November 2, 2019

November 3, 2018

(in thousands)

% of Net Sales

BPS Change (1)

Stores and distribution expense

The estimated basis point change has been rounded based on the change in the percentage of net sales.

For the first quarter of Fiscal 2020 , stores and distribution expense decreased 10% as compared to the first quarter of Fiscal 2019 , primarily driven by a $28 million reduction in payroll expense driven by temporary store closures in response to COVID-19, net of a benefit of $9 million related to expected government subsidies in certain jurisdictions where the Company qualifies.

For the second quarter of Fiscal 2020 , stores and distribution expense decreased 18% as compared to the second quarter of Fiscal 2019 , primarily driven by a $38 million reduction in payroll expense driven by temporary store closures in response to COVID-19, net of a benefit of $3 million related to expected government subsidies in certain jurisdictions where the Company qualifies.

The Company also experienced a $26 million reduction in store occupancy expense driven by temporary store closures in response to COVID-19.

These reductions in expense were partially offset by a $9 million increase in shipping and handling expense related to 25% growth in digital sales year-over-year.

For the first quarter of Fiscal 2020 , stores and distribution expense as a percentage of net sales increased by approximately 1,780 basis points as compared to the first quarter of Fiscal 2019 , primarily due to the deleverage associated with lost sales from temporary store closures in response to COVID-19.

These reductions in expense were partially offset by a $10 million increase in shipping and handling expense related to 56% year-over-year digital sales growth.

For the second quarter of Fiscal 2020 , stores and distribution expense as a percentage of net sales decreased by approximately 30 basis points as compared to the second quarter of Fiscal 2019 .

For the year-to-date period of Fiscal 2020 , stores and distribution expense decreased 14% as compared to the year-to-date period of Fiscal 2019 , primarily driven by a $66 million reduction in payroll expense driven by temporary store closures in response to COVID-19, net of a benefit of $12 million related to expected government subsidies in certain jurisdictions where the Company qualifies.

The Company also experienced a $40 million reduction in store occupancy expense driven by temporary store closures in response to COVID-19.

These reductions in expense were partially offset by a $19 million increase in shipping and handling expense related to 41% year-over-year digital sales growth.

For the year-to-date period of Fiscal 2020 , stores and distribution expense as a percentage of net sales increased by approximately 690 basis points as compared to the year-to-date period of Fiscal 2019 , primarily due to the deleverage associated with lost sales from temporary store closures in response to COVID-19.

Marketing, general and administrative expense

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

3 unchanged sentences

Marketing, general and administrative expense

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Marketing, general and administrative expense

The estimated basis point change has been rounded based on the change in the percentage of net sales.

For the first quarter of Fiscal 2020 , marketing, general and administrative expense decreased 3% as compared to the first quarter of Fiscal 2019 , primarily driven by reductions in certain expenses related to the Company’s transformation initiatives and a decrease in marketing expense.

For the first quarter of Fiscal 2020 , marketing, general and administrative expense as a percentage of net sales increased by approximately 700 basis points as compared to the first quarter of Fiscal 2019 primarily due to the deleverage associated with lost sales from temporary store closures in response to COVID-19.

For the second quarter of Fiscal 2020 , marketing, general and administrative expense decreased 16% as compared to the second quarter of Fiscal 2019 , primarily driven by reductions in marketing, payroll and other controllable expenses.

For the year-to-date period of Fiscal 2020 , marketing, general and administrative expense decreased 10% as compared to the year-to-date period of Fiscal 2019 , primarily driven by marketing and other controllable expenses.

For the year-to-date period of Fiscal 2020 , marketing, general and administrative expense as a percentage of net sales increased by approximately 290 basis points as compared to the year-to-date period of Fiscal 2019 , primarily due to the deleverage associated with lost sales from temporary store closures in response to COVID-19.

Flagship store exit (benefits) charges

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

3 unchanged sentences

Flagship store exit (benefits) charges

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Flagship store exit (benefits) charges

The estimated basis point change has been rounded based on the change in the percentage of net sales.

Flagship store exit charges for the second quarter and year-to-date period of Fiscal 2019 , primarily relate to the closure of the Company’s SoHo, New York City Hollister flagship store.

Refer to Note 17 , “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .”

1 unchanged sentence

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

6 unchanged sentences

Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Asset impairment, exclusive of flagship store exit charges

Excluded items:

Asset impairment charges (2)

Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges

The estimated basis point change has been rounded based on the change in the percentage of net sales.

1 unchanged sentence

Refer to Note 9 , “ ASSET IMPAIRMENT .”

Other operating loss (income), net

Other operating income (loss), net

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

2 unchanged sentences

BPS Change (1)

Other operating (loss) income, net

Other operating income (loss), net

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Other operating income, net

The estimated basis point change has been rounded based on the change in the percentage of net sales.

Operating loss

Operating income (loss)

Thirteen Weeks Ended

August 1, 2020

August 3, 2019 (1)

(in thousands)

2 unchanged sentences

BPS Change (2)

Operating income (loss)

Excluded items:

Asset impairment charges (3)

Adjusted non-GAAP operating income (loss)

Impact from changes in foreign currency exchange rates

Adjusted non-GAAP operating income (loss) on a constant currency basis (3)

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (2)

Operating loss

2 unchanged sentences

Adjusted non-GAAP operating loss

Adverse impact from changes in foreign currency exchange rates

Impact from changes in foreign currency exchange rates

Adjusted non-GAAP operating loss on a constant currency basis (3)

Fiscal 2019 results include $45.0 million of flagship store exit charges for the thirteen weeks ended August 3, 2019 .

Refer to Note 17, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .”

The estimated basis point change has been rounded based on the change in the percentage of net sales.

2 unchanged sentences

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

5 unchanged sentences

Interest expense, net

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Interest expense

Interest income

Interest expense, net

The estimated basis point change has been rounded based on the change in the percentage of net sales.

For the first quarter of Fiscal 2020 , interest expense, net increased $2.8 million as compared to the first quarter of Fiscal 2019 .

The year-over-year increase in interest expense, net, is primarily due to lower interest income earned on the Company’s investments and cash holdings and an increase in interest expense related to certain of the Company’s long-term obligations.

For the second quarter of Fiscal 2020 , interest expense, net increased $5.7 million as compared to the second quarter of Fiscal 2019 .

For the year-to-date period of Fiscal 2020 , interest expense, net increased $8.5 million as compared to the year-to-date period of Fiscal 2019 .

The increase in interest expense, net, for the aforementioned periods is primarily driven by lower interest income earned on the company’s investments and cash holdings and higher interest expense in the current year, reflecting an increase in interest expense related to certain of the Company’s long-term obligations and incremental expense in connection with the issuance of the Senior Secured Notes, the proceeds of which were primarily used to repay the then outstanding borrowings under the Company’s credit facilities.

Income tax expense (benefit)

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands, except ratios)

5 unchanged sentences

Adjusted non-GAAP income tax expense (benefit)

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands, except ratios)

Effective Tax Rate

Income tax expense (benefit)

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax (benefit) expense

The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis.

Refer to “ Operating loss ” for details of pre-tax excluded items.

The Company’s effective tax rate for the first quarter of Fiscal 2020 was adversely impacted by $90.9 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss and adversely impacting first quarter of Fiscal 2020 net loss per diluted share by $1.45.

Refer to “ Operating income (loss) ” for details of pre-tax excluded items.

The Company’s effective tax rate for the year-to-date period of Fiscal 2020 was adversely impacted by $84.1 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss.

These adverse tax impacts are as follows:

The Company did not recognize income tax benefits on $212.0 million of pre-tax losses generated in the first quarter of Fiscal 2020 in certain jurisdictions as the Company currently anticipates pre-tax losses in these jurisdictions for the fiscal year, resulting in adverse tax impacts of $56.6 million.

The Company did not recognize income tax benefits on $204.1 million of pre-tax losses generated in the twenty-six weeks ended August 1, 2020 in certain jurisdictions as the Company currently anticipates pre-tax losses in these jurisdictions for the fiscal year, resulting in adverse tax impacts of $47.6 million .

The Company recognized discrete charges of $36.5 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions, including, but not limited to Switzerland, Germany and the U.S.

1 unchanged sentence

Refer to Note 11 , “ INCOME TAXES .”

Net loss attributable to A&F

Net income (loss) attributable to A&F

Thirteen Weeks Ended

May 2, 2020 (1)

August 1, 2020

August 3, 2019 (1)

(in thousands)

2 unchanged sentences

BPS Change (2)

Net income (loss) attributable to A&F

Excluded items, net of tax (3)

Adjusted non-GAAP net income (loss) attributable to A&F

Twenty-six Weeks Ended

August 1, 2020 (4)

August 3, 2019 (1)

(in thousands)

% of Net Sales

BPS Change (3)

Net loss attributable to A&F

1 unchanged sentence

Adjusted non-GAAP net loss attributable to A&F

Results for the first quarter of Fiscal 2020 reflect adverse tax impacts of $90.9 million, or $1.45 per diluted share, related to valuation allowances on deferred tax assets and other tax charges.

Results for Fiscal 2019 reflect significant adverse impacts related to flagship store exit charges.

Refer to Note 17, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .”

The estimated basis point change has been rounded based on the change in the percentage of net sales.

Excluded items presented above under “ Operating loss ,” and “ Income tax expense (benefit).

Net loss per diluted share attributable to A&F

Excluded items presented above under “ Operating income (loss) ,” and “ Income tax expense (benefit).

Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges.

Refer to Note 11, “ INCOME TAXES .”

Net income (loss) per diluted share attributable to A&F

Thirteen Weeks Ended

May 2, 2020 (1)

August 1, 2020 (1)

August 3, 2019 (2)

Net income (loss) per diluted share attributable to A&F

Excluded items, net of tax (3)

Adjusted non-GAAP net income (loss) per diluted share attributable to A&F

Impact from changes in foreign currency exchange rates

Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis

Twenty-six Weeks Ended

August 1, 2020 (1)

August 3, 2019 (2)

Net loss per diluted share attributable to A&F

1 unchanged sentence

Adjusted non-GAAP net loss per diluted share attributable to A&F

Adverse impact from changes in foreign currency exchange rates

Impact from changes in foreign currency exchange rates

Adjusted non-GAAP net loss per diluted share attributable to A&F on a constant currency basis

Results for the first quarter of Fiscal 2020 reflect adverse tax impacts of $90.9 million, or $1.45 per diluted share, related to valuation allowances on deferred tax assets and other tax charges.

Excluded items presented above under “ Operating loss ,” and “ Income tax expense (benefit).

Results for Fiscal 2020 reflect significant adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges.

Refer to Note 11, “ INCOME TAXES .”

Results for Fiscal 2019 reflect significant adverse impacts related to flagship store exit charges.

Refer to Note 17, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .”

Excluded items presented above under “ Operating income (loss) ,” and “ Income tax expense (benefit).

LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

The Company believes that it will have adequate liquidity to fund operating activities over the next 12 months.

The Company had cash and equivalents of $704.0 million and $671.3 million as of May 2, 2020 and February 1, 2020 , respectively.

As of May 30, 2020, subsequent to the end of the first quarter of Fiscal 2020, the Company had cash and equivalents of approximately $730 million.

Primary sources of cash

Primary sources and uses of cash

The Company’s business has two principal selling seasons:

2 unchanged sentences

The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth.

The Company also has an asset-based senior secured revolving credit facility available as a source of additional funding.

As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210 million under the asset-based revolving credit facility to improve its cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50 million of additional cash.

As of May 2, 2020 , the Company had remaining availability under the Amended ABL Facility of $89.4 million, net of $0.8 million in outstanding stand-by letters of credit.

As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the Amended ABL Facility, actual incremental borrowing available to the Company under the Amended ABL Facility was approximately $59.4 million as of May 2, 2020 .

Primary uses of cash

The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facilities and Senior Secured Notes ”.

As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210.0 million under the ABL Facility to improve its near-term cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash.

In July 2020, the Company completed the issuance of the Senior Secured Notes and received gross proceeds of $350.0 million.

The Company used the net proceeds from the offering of the Senior Secured Notes, along with existing cash on hand, to repay outstanding borrowings and accrued interest under the Term Loan Facility and the ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes.

Over the next twelve months, the Company expects its primary cash requirements to be towards funding operating activities, including the acquisition of inventory, and obligations related to compensation, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities.

4 unchanged sentences

Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects.

Total capital expenditures for Fiscal 2020 are expected to be approximately $100 million, of which approximately $47 million occurred during the first quarter of Fiscal 2020.

At times, the Company may utilize excess liquidity, towards debt service requirements, including voluntary debt prepayments, or required repayments, if any, based on annual excess cash flows, as defined in the term loan credit agreement applicable to the Term Loan Facility.

For the year-to-date period ended August 1, 2020 , the Company used $75.6 million towards capital expenditures.

Total capital expenditures for Fiscal 2020 are expected to be approximately $100 million , down from $202.8 million of capital expenditures in Fiscal 2019.

Share repurchases and dividends

In response to COVID-19, in March 2020, the Company announced that it has temporarily suspended its share repurchase program and in May 2020, the Company announced that it has temporarily suspended its dividend program, in order to preserve liquidity and maintain financial flexibility.

In order to preserve liquidity and maintain financial flexibility in light COVID-19, in March 2020, the Company announced that it had temporarily suspended its share repurchase program and in May 2020, the Company announced that it had temporarily suspended its dividend program.

The Company will review these temporary suspensions throughout the year to determine, in light of facts and circumstances at that time, whether and when to reinstate these programs.

2 unchanged sentences

Dividends were paid in March for Fiscal 2020, and each of March, June, September and December in Fiscal 2019 and Fiscal 2018.

A&F’s Board of Directors reviews the dividend on a quarterly basis and establishes the dividend amount based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including the potential severity of impacts to the business resulting from COVID-19 and any restrictions related to the Company’s Credit

There can be no assurance that the Company will reinstate its dividend program in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

2 unchanged sentences

Refer to “ ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ” for additional information regarding the Company’s share repurchases during the first quarter of Fiscal 2020 made prior to the temporary suspension of the share repurchase program, as well as for the number of shares remaining available for purchase under the Company’s June 2019 publicly announced stock repurchase authorization.

Credit facilities

On August 7, 2014, the Company, through its subsidiary Abercrombie & Fitch Management Co.

(“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based senior secured revolving credit agreement.

On October 19, 2017, the Company, through its subsidiary A&F Management, entered into a Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement.

As amended, the asset-based senior secured revolving credit agreement continues to provide for a senior secured credit facility of up to $400 million (the “Amended ABL Facility”).

On August 7, 2014, the Company, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), entered into a term loan agreement, which provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”).

On June 22, 2018, the Company, through its subsidiary A&F Management, entered into a Second Amendment to Term Loan Credit Agreement, which, among other things, repriced the Term Loan Facility by reducing the applicable margins for term loans by 0.25%.

As of May 2, 2020 , the Company had approximately $210.0 million in gross borrowings outstanding under the Amended ABL Facility at an interest rate of 1.82%.

The Amended ABL Facility matures on October 19, 2022.

As of May 2, 2020 , the Company had remaining availability under the Amended ABL Facility of $89.4 million, net of $0.8 million in outstanding stand-by letters of credit.

As of May 2, 2020 , the Company had approximately $233.3 million in gross borrowings outstanding under the Term Loan Facility at an interest rate of 4.50%.

The Term Loan Facility matures on August 7, 2021.

The Credit Facilities are further described in Note 12 , “ BORROWINGS .”

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ” for the number of shares remaining available for purchase under the Company’s June 2019 publicly announced stock repurchase authorization.

Credit facilities and Senior Secured Notes

In July 2020, the Company completed the private offering of the Senior Secured Notes, and received gross proceeds of $350.0 million .

The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments beginning in January 2021.

The Company’s debt related to the Senior Secured Notes is presented on the Condensed Consolidated Balance Sheet, net of the unamortized fees.

As of August 1, 2020 , the Company had $350.0 million of gross borrowings outstanding under the Senior Secured Notes.

In addition, the ABL Facility provides for a senior secured credit facility of up to $400 million.

As of August 1, 2020 , the Company did not have any borrowings outstanding under the ABL Facility.

The ABL Facility matures on October 19, 2022.

Details regarding the remaining borrowing capacity under the ABL Facility as of August 1, 2020 are as follows:

(in thousands)

August 1, 2020

Borrowing base

Outstanding stand-by letters of credit

Borrowing capacity

Minimum excess availability (1)

Actual incremental borrowing available

The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility.

Refer to Note 12 , “ BORROWINGS .”

The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S., without incurring additional federal income tax.

1 unchanged sentence

The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional taxes.

As of May 2, 2020 , $285.1 million of the Company’s $704.0 million of cash and equivalents was held by foreign affiliates.

As of August 1, 2020 , $350.3 million of the Company’s $766.7 million of cash and equivalents were held by foreign affiliates.

The Company is not dependent on dividends from its foreign affiliates to fund its U.S.

operations or pay dividends, if any, to A&F’s stockholders.

The Company’s income taxes are further described in Note 11 , “ INCOME TAXES .”

Refer to Note 11 , “ INCOME TAXES .”

Analysis of cash flows

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 2, 2020 and May 4, 2019 :

Thirteen Weeks Ended

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended August 1, 2020 and August 3, 2019 :

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

Cash and equivalents, and restricted cash and equivalents, beginning of period

Net cash used for operating activities

Net cash provided by (used for) operating activities

Net cash used for investing activities

3 unchanged sentences

Cash and equivalents, and restricted cash and equivalents, end of period

Operating activities - The year-over-year change in cash flow associated with operating activities was primarily due to lower cash receipts as a result of a 34% decrease in net sales from last year driven by temporary store closures in response to COVID-19 during the first quarter of Fiscal 2020.

This decrease in cash receipts was partially mitigated by actions taken by the Company during the first quarter of Fiscal 2020 to preserve liquidity and manage cash flows including (i) partnering with merchandise and non-merchandise vendors in regards to payment terms;

(ii) reducing and recadencing inventory receipts to better align inventory with expected market demand;

(iii) significantly reducing expenses to better align operating costs with sales;

and (iv) implementing various compensation actions related to the Company’s store and corporate associates, as well as A&F’s non-associate directors.

In addition, during the first quarter of Fiscal 2020, the Company withdrew the majority of excess funds from the overfunded Rabbi Trust assets as a precautionary measure in response to COVID-19, providing the Company with $50 million of additional cash.

Investing activities - For the thirteen weeks ended May 2, 2020 , net cash outflows for investing activities were used for capital expenditures of $47.0 million as compared to $43.9 million for the thirteen weeks ended May 4, 2019 .

Based on actions taken to preserve liquidity and manage cash flows in light of the COVID-19 pandemic, the Company expects capital expenditures for Fiscal 2020 to be approximately $100 million as compared to $203 million of capital expenditures in Fiscal 2019.

Financing activities - For the thirteen weeks ended May 2, 2020 , net cash provided by financing activities primarily consisted of $210.0 million in proceeds from the Amended ABL Facility, partially offset by share repurchases made and dividends declared prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs to increase financial flexibility in light of COVID-19 of approximately $27.7 million in aggregate.

For the thirteen weeks ended May 4, 2019 , net cash used for financing activities consisted primarily of dividend payments of $13.2 million .

Operating activities - The year-over-year change in operating cash flows was primarily due to actions taken by the Company during Fiscal 2020 to preserve liquidity and manage cash flows in light of COVID-19, including, but not limited to:

Partnering with merchandise and non-merchandise vendors regarding payment terms;

Reducing and recadencing inventory receipts to better align inventory with expected market demand;

Reducing expenses to better align operating costs with sales;

Withdrawing $50.0 million from the overfunded Rabbi Trust assets, the majority of excess funds;

Suspending rent payments for a significant number of stores that were closed during Fiscal 2020 as a result of COVID-19, which, coupled with rent abatements and changes in payment cadence, attributed to a year-over-year decrease in cash paid for operating lease liabilities.

These benefits to operating cash flows were partially offset by lower cash receipts as a result of a 25% decrease in net sales from last year driven by temporary store closures and a decline in store traffic in response to COVID-19 during Fiscal 2020.

The Company continues to engage with its landlords to find a mutually beneficial and agreeable path forward.

To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost.

Investing activities - For the twenty-six weeks ended August 1, 2020 , net cash outflows for investing activities were used for capital expenditures of $75.6 million as compared to $94.2 million for the twenty-six weeks ended August 3, 2019 , reflecting actions taken in Fiscal 2020 to preserve liquidity and manage cash flows in light of the COVID-19 pandemic.

Financing activities - For the twenty-six weeks ended August 1, 2020 , net cash provided by financing activities primarily consisted of the issuance of the Senior Secured Notes and receipt of related gross proceeds of $350.0 million and borrowings under the ABL Facility of $210.0 million.

The gross proceeds from the Senior Secured Notes offering were used along with existing cash on hand, to repay all then outstanding borrowings and accrued interest under the Term Loan Facility and ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering.

In addition, the Company returned $27.7 million to shareholders during the twenty-six weeks ended August 1, 2020, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19, as compared to $84.2 million during the twenty-six weeks ended August 3, 2019 .

Off-balance sheet arrangements

As of May 2, 2020 , the Company did not have any material off-balance sheet arrangements.

As of August 1, 2020 , the Company did not have any material off-balance sheet arrangements.

Contractual obligations

1 unchanged sentence

These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs.

Other than the Company’s short-term draw on the Amended ABL Facility of $210 million in March 2020 to increase its cash position and enhance liquidity in light of the uncertainty surrounding the impact of COVID-19, there have been no material changes during the thirteen weeks ended May 2, 2020 , in the contractual obligations as of February 1, 2020 , with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

During the thirteen weeks ended August 1, 2020, the Company issued the Senior Secured Notes, which mature in July 2025.

The Company received $350.0 million in proceeds from this transaction and repaid all outstanding borrowings under the ABL Facility and Term Loan Facility.

Based on the aggregate principal amount of the Senior Secured Notes outstanding as of August 1, 2020 , estimated interest payments related to the Senior Secured Notes are as follows:

(in thousands)

Fiscal 2021-Fiscal 2023

Fiscal 2024-Fiscal 2025

Fiscal 2026 and thereafter

Interest payments due by period

Other than the items described above, there have been no material changes during the thirteen weeks ended August 1, 2020 , in the contractual obligations as of February 1, 2020 , with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

RECENT ACCOUNTING PRONOUNCEMENTS

19 unchanged sentences

If actual results are not consistent with the estimates and assumptions used, there may be a material impact on the Company’s financial condition or results of operation.

Store assets that were tested for impairment as of May 2, 2020 and not impaired, had long-lived assets with a net book value of $121.8 million, which included $110.0 million of operating lease right-of-use assets as of May 2, 2020.

Store assets that were previously-impaired as of May 2, 2020, had a remaining net book value of $164.4 million, which included $151.3 million of operating lease right-of-use assets, as of May 2, 2020.

Store assets that were tested for impairment as of August 1, 2020 and not impaired, had long-lived assets with a net book value of $146.0 million, which included $133.0 million of operating lease right-of-use assets, as of August 1, 2020.

Store assets that were previously-impaired as of August 1, 2020, had a remaining net book value of $162.2 million, which included $146.9 million of operating lease right-of-use assets, as of August 1, 2020.

NON-GAAP FINANCIAL MEASURES

7 unchanged sentences

Comparable sales exclude revenue other than store and digital sales.

Management uses comparable sales to understand the drivers of year-over-year changes in net sales as well as a performance metric for certain performance-based restricted stock units.

The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores.

Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores.

The most directly comparable GAAP financial measure is change in net sales.

In light of store closures related to COVID-19, the Company has not disclosed comparable sales for the first quarter of Fiscal 2020.

In light of store closures related to COVID-19, the Company has not disclosed comparable sales for Fiscal 2020.

Excluded items

4 unchanged sentences

Certain asset impairment charges

Operating loss

Operating income (loss)

Certain asset impairment charges

1 unchanged sentence

Tax effect of pre-tax excluded items

Net loss and net loss per share attributable to A&F (2)

Net income (loss) and net income (loss) per share attributable to A&F (2)

Pre-tax excluded items and the tax effect of pre-tax excluded items

6 unchanged sentences

The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate.

A reconciliation of financial metrics on a constant currency basis to GAAP for the thirteen weeks ended May 2, 2020 and May 4, 2019 follows:

A reconciliation of financial metrics on a constant currency basis to GAAP for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:

(in thousands, except change in net sales, gross profit rate, operating margin and per share data)

Thirteen Weeks Ended

Adverse impact from changes in foreign currency exchange rates

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

Impact from changes in foreign currency exchange rates

Non-GAAP on a constant currency basis

Gross profit, exclusive of depreciation and amortization expense

August 1, 2020

August 3, 2019

BPS Change (1)

Adverse impact from changes in foreign currency exchange rates

August 1, 2020

August 3, 2019

BPS Change (1)

Impact from changes in foreign currency exchange rates

Non-GAAP on a constant currency basis

Operating loss

Operating income (loss)

August 1, 2020

August 3, 2019

BPS Change (1)

August 1, 2020

August 3, 2019

BPS Change (1)

Excluded items (2)

Adjusted non-GAAP

Adverse impact from changes in foreign currency exchange rates

Impact from changes in foreign currency exchange rates

Adjusted non-GAAP on a constant currency basis

Net loss per diluted share attributable to A&F (3)

Net income (loss) per diluted share attributable to A&F (3)

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

Excluded items, net of tax (2)

Adjusted non-GAAP

Adverse impact from changes in foreign currency exchange rates

Impact from changes in foreign currency exchange rates

Adjusted non-GAAP on a constant currency basis

The estimated basis point change has been rounded based on the change in the percentage of net sales.

Excluded items this year consist of pre-tax store asset impairment charges of $42.9 million and the tax effect of pre-tax excluded items.

Net loss per diluted share for the thirteen weeks ended May 2, 2020 reflects adverse tax impacts of $90.9 million, or $1.45 per diluted share, related to valuation allowances on deferred tax assets and other tax charges.

Excluded items for the thirteen and twenty-six weeks ended August 1, 2020 consist of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis