What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-07 compared with 2020-09-08 · 266 added, 353 removed, 391 unchanged (61% of the section changed)

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• 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 and twenty-six weeks ended August 1, 2020 and August 3, 2019 .

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 and thirty-nine weeks ended October 31, 2020 and November 2, 2019.

• Results of Operations .

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 .

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 thirty-nine weeks ended October 31, 2020 and November 2, 2019.

• Liquidity and Capital Resources .

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.

This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of October 31, 2020, which includes (i) an analysis of changes in cash flows for the thirty-nine weeks ended October 31, 2020 as compared to the thirty-nine weeks ended November 2, 2019;

and (ii) 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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All references herein to the Company’s fiscal years are as follows:

Number of weeks

February 2, 2019

February 1, 2020

January 30, 2021

Fiscal year Year ended Number of weeks

Fiscal 2018 February 2, 2019 52

Fiscal 2019 February 1, 2020 52

Fiscal 2020 January 30, 2021 52

Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts.

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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 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.

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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 had reopened approximately 97% of Company-operated stores for in-store service as of October 31, 2020.

Since October 31, 2020, the Company has experienced additional store reclosures in response to COVID-19, primarily in the EMEA region, most of which have since reopened.

As of December 4, 2020 approximately 98% of the Company-operated stores were open for in-store service.

The Company plans to follow the guidance of local governments to determine when it can reopen closed 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:

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• Reducing store hours in select locations;

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

• Continuing to offer Purchase-Online-Pickup-in-Store;

• Increasing its omnichannel capabilities by introducing curbside pick-up at a majority of U.S.

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

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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 .

Total net sales decreased approximately 5% and 18% for the thirteen and thirty-nine weeks ended October 31, 2020 as compared to the comparable periods ended November 2, 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%, as compared to last year’s levels during the thirteen weeks ended October 31, 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.

In response to elevated digital demand during this period, the Company has increased its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pick-up at a majority of U.S.

locations, and by utilizing ship-from-store capabilities.

In addition, to prepare for the Fiscal 2020 holiday season, the Company has entered into a short-term lease for an additional distribution center and has partnered with incremental carriers.

Digital sales increased approximately 43% and 42% for the thirteen and thirty-nine weeks ended October 31, 2020 as compared to the comparable periods ended November 2, 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 has seen, and may continue to see, material adverse impacts as a result of COVID-19.

The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID- 19 and the availability and acceptance of an effective vaccine or medical treatments.

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.

through arrangements with vendors primarily located in southeast Asia and, as of October 31, 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.

During Fiscal 2020, the Company has reduced certain orders that were not already in production, delayed and altered the cadence of 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.

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

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

• Tightly managing inventory receipts to align inventory with expected market demand;

• Reducing expenses to better align operating costs with sales;

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;

• Borrowed $210.0 million under the ABL Facility in March 2020 which was then repaid in July 2020 along with the Term Loan Facility;

• Completed a private offering of $350.0 million aggregate principal amount of senior secured notes;

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

• Temporarily suspended 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.

In addition, despite the Company's recent history of partnering with its vendors regarding payment terms, certain payment term extensions were temporary and certain previously deferred payments have since been made.

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 October 31, 2020, the Company had liquidity of $1.158 billion as compared to $913.8 million as of February 1, 2020, comprised of 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.

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

as well as the discussion provided 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.

United Kingdom’s withdrawal from the European Union (“Brexit”)

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Global Store Network Optimization

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.

As a result, the Company has closed certain of its flagship stores and may have additional closures in the future 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.

As part of its ongoing global store network optimization, the Company recently announced the early exit of four European Abercrombie & Fitch flagship locations.

The Dusseldorf flagship closed during the third quarter of Fiscal 2020, and the London, Munich and Paris flagships will close by the end of Fiscal 2020, all well ahead of their natural lease expirations.

Three of the leases will be transferred through assignment while the fourth lease will be subleased to a new tenant.

The Company no longer has lease obligations beyond Fiscal 2020 for the three transfers and is scheduled to receive payments to fully offset its lease obligations on the sublease.

In addition to these four early lease exits, the Brussels, Madrid and Fukuoka Abercrombie & Fitch flagships are expected to close by the end of Fiscal 2020 due to natural lease expirations.

These recent actions removed approximately $85 million of lease liabilities from the balance sheet, and will leave the Company with eight operating flagships at the end of Fiscal 2020, down from 15 at the beginning of Fiscal 2020.

Details related to recently closed flagship stores follow:

Flagship location

Timing of store closure

Abercrombie & Fitch

Pedder Street, Hong Kong Special Administrative Region, China

First quarter of Fiscal 2017

Abercrombie & Fitch

Copenhagen, Denmark

First quarter of Fiscal 2019

SoHo, New York City, U.S.

Flagship location Timing of store closure

Abercrombie & Fitch Pedder Street, Hong Kong Special Administrative Region, China First quarter of Fiscal 2017

Abercrombie & Fitch Copenhagen, Denmark First quarter of Fiscal 2019

Hollister SoHo, New York City, U.S.

Second quarter of Fiscal 2019

Fourth quarter of Fiscal 2019

Abercrombie Milan, Italy Fourth quarter of Fiscal 2019

abercrombie kids (2)

London, United Kingdom

Fourth quarter of Fiscal 2019

London, United Kingdom Fourth quarter of Fiscal 2019

Abercrombie Dusseldorf, Germany Third quarter of Fiscal 2020

(1) 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 the Company’s EMEA regional headquarters.

(2) The abercrombie kids store in London is expected to be converted to corporate office space to be utilized as the Company’s EMEA regional headquarters.

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

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Total Company

International

International U.S.

International Total

Number of stores:

February 1, 2020 391 155 256 52 647 207 854

New 2 2 4 4 6 6 12

Permanently closed (7) (3) (5) (2) (12) (5) (17)

August 1, 2020

October 31, 2020 386 154 255 54 641 208 849

Gross square footage (in thousands) :

August 1, 2020

October 31, 2020 2,568 1,257 1,817 575 4,385 1,832 6,217

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

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 .

Excludes nine international franchise stores as of each of October 31, 2020 and February 1, 2020.

Excludes 15 Company-operated temporary stores as of October 31, 2020 and 16 as of February 1, 2020.

(2) 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 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 .

Excludes eight international franchise stores as of October 31, 2020 and seven as of February 1, 2020.

Excludes five Company-operated temporary stores as of October 31, 2020 and eight as of February 1, 2020.

Summary of results

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)

A summary of results for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 follows:

GAAP Non-GAAP (1)

(in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) October 31, 2020 (2)

November 2, 2019 (3)

October 31, 2020 (2)

November 2, 2019 (3)

Thirteen Weeks Ended

Net sales $ 819,653 $ 863,472

Change in net sales (5.1) % 0.3 %

Gross profit rate 64.0 % 60.1 %

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

Operating income $ 58,616 $ 14,479 $ 64,945 $ 24,947

Operating income margin 7.2 % 1.7 % 7.9 % 2.9 %

Net income attributable to A&F $ 42,271 $ 6,523 $ 48,231 $ 14,506

Net income per diluted share attributable to A&F $ 0.66 $ 0.10 $ 0.76 $ 0.23

Thirty-nine Weeks Ended

Net sales $ 2,003,340 $ 2,438,522

Change in net sales (17.8) % 0.2 %

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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

Certain components of the Company’s Condensed Consolidated Balance Sheets as of October 31, 2020 and February 1, 2020 were as follows:

(in thousands) October 31, 2020 February 1, 2020

Cash and equivalents

$ 812,881 $ 671,267

Gross long-term borrowings outstanding, carrying amount $ 350,000 $ 233,250

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)

August 1, 2020

August 3, 2019

$ 545,548 $ 434,326

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended October 31, 2020 and November 2, 2019 were as follows:

(in thousands) October 31, 2020 November 2, 2019

Net cash provided by (used for) operating activities $ 158,894 $ (33,839)

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RESULTS OF OPERATIONS

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:

The Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 were as follows:

Thirteen Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

(in thousands) October 31, 2020 November 2, 2019 $ Change % Change

Hollister $ 476,665 $ 514,772 $ (38,107) (7)%

Abercrombie (1)

Twenty-six Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

342,988 348,700 (5,712) (2)%

Total $ 819,653 $ 863,472 $ (43,819) (5)%

Thirty-nine Weeks Ended

(in thousands) October 31, 2020 November 2, 2019 $ Change % Change

Hollister $ 1,178,925 $ 1,447,975 $ (269,050) (19)%

Abercrombie (1)

824,415 990,547 (166,132) (17)%

Total $ 2,003,340 $ 2,438,522 $ (435,182) (18)%

(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 and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:

The Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 were as follows:

Thirteen Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

(in thousands) October 31, 2020 November 2, 2019 $ Change % Change

$ 557,814 $ 583,593 $ (25,779) (4)%

EMEA 190,214 191,977 (1,763) (1)%

APAC 43,618 55,910 (12,292) (22)%

Other 28,007 31,992 (3,985) (12)%

International $ 261,839 $ 279,879 $ (18,040) (6)%

Twenty-six Weeks Ended

(in thousands)

August 1, 2020

August 3, 2019

Total $ 819,653 $ 863,472 $ (43,819) (5)%

Thirty-nine Weeks Ended

(in thousands) October 31, 2020 November 2, 2019 $ Change % Change

$ 1,339,347 $ 1,596,723 $ (257,376) (16)%

EMEA 474,165 566,563 (92,398) (16)%

APAC 117,768 188,836 (71,068) (38)%

Other 72,060 86,400 (14,340) (17)%

International $ 663,993 $ 841,799 $ (177,806) (21)%

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 .

Total $ 2,003,340 $ 2,438,522 $ (435,182) (18)%

For the third quarter of Fiscal 2020, net sales decreased 5% as compared to the third quarter of Fiscal 2019, primarily due to a decrease in units sold driven by reduced store traffic, including as it relates to temporary store closures as a result of COVID-19, partially offset by 43% digital sales growth.

Average unit retail increased year-over-year, driven by less promotions and lower clearance levels, with benefits from changes in foreign currency exchange rates of approximately $12 million.

Excluding the benefit from changes in foreign currency exchange rates, net sales for the third quarter of Fiscal 2020 decreased 6% as compared to the third quarter of Fiscal 2019.

For the year-to-date period of Fiscal 2020, net sales decreased 18% as compared to the year-to-date period of Fiscal 2019, primarily due to a decrease in units sold driven by reduced store traffic, including as it relates to temporary store closures as a result of COVID-19, partially offset by 42% digital sales growth.

Average unit retail increased year-over-year, driven by less promotions and lower clearance levels, with benefits from changes in foreign currency exchange rates of approximately $3 million.

Excluding the benefit from changes in foreign currency exchange rates, net sales for the year-to-date period of Fiscal 2020 decreased 18% 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)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Cost of sales, exclusive of depreciation and amortization $ 295,220 36.0% $ 344,541 39.9% (390)

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Cost of sales, exclusive of depreciation and amortization $ 791,154 39.5% $ 976,868 40.1% (60)

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

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.

For the third quarter of Fiscal 2020, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 390 basis points as compared to the third quarter of Fiscal 2019.

The year-over-year decline was primarily attributable to increased average unit retail and lower average unit cost, benefiting from inventory shrink favorability and changes in foreign currency exchange rates.

For the year-to-date period of Fiscal 2020, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 60 basis points as compared to the year-to-date period of Fiscal 2019.

The year-over-year decline reflects benefits from inventory shrink favorability and changes in foreign currency exchange rates, as well as adverse impacts related to charges reducing the carrying value of inventory during the first quarter of Fiscal 2020 of approximately $15 million.

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Gross profit, exclusive of depreciation and amortization $ 524,433 64.0% $ 518,931 60.1% 390

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Gross profit, exclusive of depreciation and amortization $ 1,212,186 60.5% $ 1,461,654 59.9% 60

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Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Stores and distribution expense $ 346,263 42.2% $ 377,697 43.7% (150)

Twenty-six Weeks Ended

November 2, 2019

November 3, 2018

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

November 2, 2019 November 3, 2018

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Stores and distribution expense $ 978,757 48.9% $ 1,110,656 45.5% 340

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

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 $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.

For the third quarter of Fiscal 2020, stores and distribution expense decreased 8% as compared to the third quarter of Fiscal 2019, primarily driven by a $24 million reduction in store occupancy expense and a $11 million reduction in payroll expense, which was net of a benefit of $3 million related to expected government subsidies in certain jurisdictions where the Company qualifies, reflecting the impact of COVID-19 on operations including temporary store closures.

These reductions in expense were partially offset by a $10 million increase in shipping and fulfillment expense related to 43% year-over-year digital sales growth.

For the year-to-date period of Fiscal 2020, stores and distribution expense decreased 12% as compared to the year-to-date period of Fiscal 2019, primarily driven by a $77 million reduction in payroll expense, which was net of a benefit of $15 million related to expected government subsidies in certain jurisdictions where the Company qualifies, and a $64 million reduction in store occupancy expense, reflecting the impact of COVID-19 on operations including temporary store closures.

These reductions in expense were partially offset by a $31 million increase in shipping and fulfillment expense related to 42% year-over-year digital sales growth.

Marketing, general and administrative expense

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Marketing, general and administrative expense $ 121,000 14.8% $ 114,075 13.2% 160

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Marketing, general and administrative expense $ 326,509 16.3% $ 341,716 14.0% 230

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

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.

For the third quarter of Fiscal 2020, marketing, general and administrative expense increased 6% as compared to the third quarter of Fiscal 2019, primarily driven by an increase in payroll expense as a result of higher performance-based compensation expense, partially offset by lower non-customer facing and in-store marketing costs.

For the year-to-date period of Fiscal 2020, marketing, general and administrative expense decreased 4% as compared to the year-to-date period of Fiscal 2019, primarily by driven by lower marketing and other controllable expenses, partially offset by an increase in payroll expense as a result of higher performance-based compensation expense.

Flagship store exit (benefits) charges

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Flagship store exit (benefits) charges $ (8,063) (1.0)% $ 285 —% (100)

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Flagship store exit (benefits) charges $ (12,490) (0.6)% $ 47,023 1.9% (250)

(1) 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.

Flagship store exit benefits in Fiscal 2020 primarily relate to the planned closure of several international Abercrombie & Fitch flagship stores.

Flagship store exit charges for 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 .”

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Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Asset impairment, exclusive of flagship store exit charges $ 6,329 0.8% $ 12,610 1.5% (70)

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Asset impairment charges (2)

(6,329) (0.8)% (10,468) (1.2)% 40

Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges $ — 0.0% $ 2,142 0.2% (20)

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Asset impairment, exclusive of flagship store exit charges $ 57,340 2.9% $ 14,987 0.6% 230

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Asset impairment charges (2)

(57,340) (2.9)% (10,468) (0.4)% (250)

Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges $ — 0.0% $ 4,519 0.2% (20)

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Refer to Note 9, “ ASSET IMPAIRMENT .”

Other operating income (loss), net

Other operating (loss) income, net

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

Other operating income (loss), net

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Other operating (loss) income, net $ (288) —% $ 215 —% —

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Other operating income, net $ 1,562 0.1% $ 465 —% 10

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Thirteen Weeks Ended

August 1, 2020

August 3, 2019 (1)

(in thousands)

% of Net sales

BPS Change (2)

Operating income (loss)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Operating income $ 58,616 7.2% $ 14,479 1.7% 550

Excluded items:

Asset impairment charges (2)

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)

6,329 0.8% 10,468 1.2% (40)

Adjusted non-GAAP operating income $ 64,945 7.9% $ 24,947 2.9% 500

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Operating loss $ (136,368) (6.8)% $ (52,263) (2.1)% (470)

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Asset impairment charges (2)

57,340 2.9% 10,468 0.4% 250

Adjusted non-GAAP operating loss $ (79,028) (3.9)% $ (41,795) (1.7)% (220)

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 .”

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

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Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net sales

BPS Change (1)

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Interest expense $ 9,408 1.1% $ 5,500 0.6% 50

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Interest expense, net $ 8,808 1.1% $ 2,922 0.3% 80

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands)

% of Net Sales

BPS Change (1)

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Interest expense $ 22,242 1.1% $ 14,518 0.6% 50

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

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 third quarter of Fiscal 2020, interest expense, net increased $5.9 million as compared to the third quarter of Fiscal 2019.

For the year-to-date period of Fiscal 2020, interest expense, net increased $14.4 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.

The increase in interest expense, net, for the aforementioned periods is primarily driven by higher interest expense in the current year, reflecting incremental expense in connection with the issuance of the Senior Secured Notes and an increase in interest expense related to certain of the Company’s long-term obligations, as well as lower interest income earned on the Company’s investments and cash holdings.

Income tax expense (benefit)

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

(in thousands, except ratios)

Effective Tax Rate

Income tax expense (benefit)

October 31, 2020 November 2, 2019

(in thousands, except ratios) Effective Tax Rate Effective Tax Rate

Income tax expense $ 5,779 11.6% $ 3,987 34.5%

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax expense (benefit)

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

(in thousands, except ratios)

Effective Tax Rate

Adjusted non-GAAP income tax expense $ 6,148 11.0% $ 6,472 29.4%

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands, except ratios) Effective Tax Rate Effective Tax Rate

Income tax expense (benefit) $ 38,565 (24.8)% $ (16,931) 29.6%

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax (benefit) expense

Adjusted non-GAAP income tax expense (benefit) $ 42,200 (42.9)% $ (14,446) 30.9%

(1) 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 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.

The Company’s effective tax rate for the year-to-date period of Fiscal 2020 was impacted by $77.4 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 $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 did not recognize income tax benefits on $180.7 million of pre-tax losses generated in the thirty-nine weeks ended October 31, 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 $41.8 million.

• The Company recognized discrete charges of $35.6 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.

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Thirteen Weeks Ended

August 1, 2020

August 3, 2019 (1)

(in thousands)

% of Net sales

BPS Change (2)

Net income (loss) attributable to A&F

October 31, 2020 November 2, 2019

(in thousands) % of Net sales % of Net sales BPS Change (1)

Net income attributable to A&F $ 42,271 5.2% $ 6,523 0.8% 440

Excluded items, net of tax (2)

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)

5,960 0.7% 7,983 0.9% (20)

Adjusted non-GAAP net income attributable to A&F $ 48,231 5.9% $ 14,506 1.7% 420

Thirty-nine Weeks Ended

October 31, 2020 (3)

November 2, 2019

(in thousands) % of Net Sales % of Net Sales BPS Change (1)

Net loss attributable to A&F $ (196,413) (9.8)% $ (43,774) (1.8)% (800)

Excluded items, net of tax (2)

53,705 2.7% 7,983 0.3% 240

Adjusted non-GAAP net loss attributable to A&F $ (142,708) (7.1)% $ (35,791) (1.5)% (560)

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

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

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

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Thirteen Weeks Ended

August 1, 2020 (1)

August 3, 2019 (2)

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

October 31, 2020 November 2, 2019 $ Change

Net income per diluted share attributable to A&F $ 0.66 $ 0.10 $0.56

Excluded items, net of tax (1)

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

$ 0.09 $ 0.12 $(0.03)

Adjusted non-GAAP net income per diluted share attributable to A&F $ 0.76 $ 0.23 $0.53

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)

$ — $ 0.15 $(0.15)

Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis $ 0.76 $ 0.37 $0.39

Thirty-nine Weeks Ended

October 31, 2020 (2)

November 2, 2019 $ Change

Net loss per diluted share attributable to A&F $ (3.14) $ (0.67) $(2.47)

Excluded items, net of tax (1)

$ 0.86 $ 0.12 $0.74

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

$ (2.28) $ (0.55) $(1.73)

Impact from changes in foreign currency exchange rates

$ — $ 0.12 $(0.12)

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

$ (2.28) $ (0.43) $(1.85)

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

(2) 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

The Company’s capital allocation strategy, priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors.

The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors.

The Company’s current capital allocation strategy is to prioritize navigating the near-term challenges that COVID-19 presents and continuing to fund operating activities.

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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.

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

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, in order to balance the Company’s short and long-term liquidity needs and best position the business for key stakeholders.

The Company also evaluates opportunities for investments in line with its key transformation initiatives that have positioned the business to quickly respond to the COVID-19 pandemic and strives to invest in projects that have high expected returns.

The Company also evaluates opportunities for investments in line with its key transformation initiatives, which have positioned the business to quickly respond to the COVID-19 pandemic, and strives to invest in projects that have high expected returns.

These improvements may include new store experiences or investments in its omnichannel initiatives or loyalty programs.

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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.

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

For the year-to-date period ended October 31, 2020, the Company used $91.7 million towards capital expenditures.

Total capital expenditures for Fiscal 2020 are expected to be approximately $110 million, down from $202.8 million of capital expenditures in Fiscal 2019.

Share repurchases and dividends

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.

In order to preserve liquidity and maintain financial flexibility in light of 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.

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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 agreements related to the Senior Secured Notes and ABL Facility.

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 agreements related to the Senior Secured Notes and the ABL Facility.

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.

Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the primary objective to offset dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units.

Shares repurchased may be in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Exchange Act, through privately negotiated transactions or other transactions or by a combination of such methods.

Shares may be repurchased in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Exchange Act, through privately negotiated transactions or other transactions or by a combination of such methods.

Refer to “ ITEM 2.

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.

UNREGISTERED SALES

OF EQUITY SECURITIES AND USE OF PROCEEDS ” of Part II of this Quarterly Report on Form 10-Q 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

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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.

As of October 31, 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 asset-based revolving credit facility of up to $400 million.

As of October 31, 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

Details regarding the remaining borrowing capacity under the ABL Facility as of October 31, 2020 are as follows:

(in thousands) October 31, 2020

Borrowing base $ 384,544

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

As of October 31, 2020, $316.4 million of the Company’s $812.9 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.

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Analysis of cash flows

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

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 31, 2020 and November 2, 2019:

Thirty-nine Weeks Ended

October 31, 2020 November 2, 2019

(in thousands)

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• 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.

• Reducing and altering the cadence of inventory receipts to align inventory with expected market demand;

• Reducing expenses to align operating costs with sales;

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

• Suspending rent payments for a significant number of stores that were closed for a period of time 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 the 18% 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.

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.

Investing activities - For the thirty-nine weeks ended October 31, 2020, net cash outflows for investing activities were used for capital expenditures of $91.7 million as compared to $154.4 million for the thirty-nine weeks ended November 2, 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 thirty-nine weeks ended October 31, 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 .

In addition, the Company returned $27.7 million to shareholders during the thirty-nine weeks ended October 31, 2020, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19, as compared to $102.5 million during the thirty-nine weeks ended November 2, 2019.

Off-balance sheet arrangements

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

As of October 31, 2020, the Company did not have any material off-balance sheet arrangements.

Contractual obligations

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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

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

Based on the aggregate principal amount of the Senior Secured Notes outstanding as of October 31, 2020, estimated interest payments related to the Senior Secured Notes are as follows:

(in thousands) Total Fiscal 2020 Fiscal 2021-Fiscal 2023 Fiscal 2024-Fiscal 2025 Fiscal 2026 and thereafter

Interest payments due by period $ 154,231 $ 16,418 $ 91,875 $ 45,938 $ —

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).

There have been no material changes during the thirteen weeks ended October 31, 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

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There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2019.

Effect if Actual Results Differ from Assumptions

In Fiscal 2020, the Company incurred significant asset impairment charges which were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats.

Additional details regarding the Company's long-lived assets are as follows:

Policy Effect if Actual Results Differ from Assumptions

Long-lived Assets

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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 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.

Store assets that were tested for impairment as of October 31, 2020 and not impaired, had long-lived assets with a net book value of $132.2 million, which included $108.8 million of operating lease right-of-use assets, as of October 31, 2020.

Store assets that were previously impaired as of October 31, 2020, had a remaining net book value of $124.8 million, which included $114.1 million of operating lease right-of-use assets, as of October 31, 2020.

NON-GAAP FINANCIAL MEASURES

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Excluded items

Asset impairment, exclusive of flagship store exit charges

Certain asset impairment charges

Operating income (loss)

Certain asset impairment charges

Asset impairment, exclusive of flagship store exit charges Certain asset impairment charges

Operating income (loss) Certain asset impairment charges

Income tax expense (benefit) (2)

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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 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

Twenty-six Weeks Ended

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

A reconciliation of financial metrics on a constant currency basis to GAAP for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 follows:

(in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Thirty-nine Weeks Ended

Net sales October 31, 2020 November 2, 2019 % Change October 31, 2020 November 2, 2019 % Change

GAAP $ 819,653 $ 863,472 (5)% $ 2,003,340 $ 2,438,522 (18)%

Impact from changes in foreign currency exchange rates — 11,896 (1)% — 2,948 —%

Non-GAAP on a constant currency basis $ 819,653 $ 875,368 (6)% $ 2,003,340 $ 2,441,470 (18)%

Gross profit, exclusive of depreciation and amortization expense

August 1, 2020

August 3, 2019

BPS Change (1)

August 1, 2020

August 3, 2019

BPS Change (1)

Gross profit, exclusive of depreciation and amortization expense October 31, 2020 November 2, 2019 BPS Change (1)

October 31, 2020 November 2, 2019 BPS Change (1)

GAAP $ 524,433 $ 518,931 390 $ 1,212,186 $ 1,461,654 60

Impact from changes in foreign currency exchange rates — 14,779 (90) — 7,323 (30)

Non-GAAP on a constant currency basis $ 524,433 $ 533,710 300 $ 1,212,186 $ 1,468,977 30

Operating income (loss)

August 1, 2020

August 3, 2019

BPS Change (1)

August 1, 2020

August 3, 2019

BPS Change (1)

Operating income (loss) October 31, 2020 November 2, 2019 BPS Change (1)

October 31, 2020 November 2, 2019 BPS Change (1)

GAAP $ 58,616 $ 14,479 550 $ (136,368) $ (41,795) (470)

Excluded items (2)

(6,329) (10,468) 50 (57,340) — (250)

Adjusted non-GAAP $ 64,945 $ 24,947 500 $ (79,028) $ (41,795) (220)

2 unchanged sentences

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

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

October 31, 2020 November 2, 2019 $ Change October 31, 2020 November 2, 2019 $ Change

GAAP $ 0.66 $ 0.10 $0.56 $ (3.14) $ (0.67) $(2.47)

Excluded items, net of tax (2)

(0.09) (0.12) 0.03 (0.86) (0.12) (0.74)

Adjusted non-GAAP $ 0.76 $ 0.23 $0.53 $ (2.28) $ (0.55) $(1.73)

2 unchanged sentences

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

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.

(2) Excluded items for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 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