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Item 7. Management’s Discussion and Analysis

2021-03-29 compared with 2020-03-31 · 390 added, 426 removed, 203 unchanged (80% of the section changed)

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• Results of Operations .

This section provides an analysis of certain components of the Company’s Consolidated Statements of Operations and Comprehensive Income for Fiscal 2019 as compared to Fiscal 2018 .

This section provides an analysis of certain components of the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income for Fiscal 2020 as compared to Fiscal 2019.

• Liquidity and Capital Resources .

This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of February 1, 2020 , which includes (i) an analysis of financial condition as compared to February 2, 2019 , (ii) an analysis of changes in cash flows for Fiscal 2019 as compared to Fiscal 2018 , (iii) an analysis of liquidity, including the availability under credit facilities, payments of dividends, and outstanding debt and covenant compliance, (iv) a summary of contractual and other obligations as of February 1, 2020 and (v) discussion related to preserving liquidity during COVID-19.

This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of January 30, 2021, which includes (i) an analysis of changes in cash flows for Fiscal 2020 as compared to Fiscal 2019, (ii) an analysis of liquidity, including the availability under credit facilities, payments of dividends, and outstanding debt and covenant compliance, (iii) a summary of contractual and other obligations as of January 30, 2021 and (iv) a discussion related to actions taken during Fiscal 2020 to preserve liquidity in light of COVID-19.

• Recent Accounting Pronouncements .

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• Critical Accounting Policies and Estimates .

This section discusses accounting policies considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application.

• Non-GAAP Financial Measures .

MD&A provides a 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 accounting principles generally accepted in the U.S.

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.

A discussion of the Company’s financial condition, changes in financial condition and results of operations for Fiscal 2019 as compared to Fiscal 2018, is incorporated by reference from “ ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ,” in PART II of A&F’s Annual Report on Form 10-K for Fiscal 2018 , filed with the SEC on April 1, 2019 .

Certain prior year amounts have been reclassified for consistency with the current year presentation of flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income.

This change in presentation resulted in decreases of $5.8 million and $2.4 million in stores and distribution expense, and corresponding increases in flagship store exit charges for Fiscal 2018 and Fiscal 2017, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ,” in PART II of A&F’s Annual Report on Form 10-K for Fiscal 2019, filed with the SEC on March 31, 2020.

Safe harbor statement under the Private Securities Litigation Reform Act of 1995

The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control.

The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by the Company, its management or its spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control.

Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements.

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Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

A discussion of material risks that could affect the Company’s financial performance and cause actual results to differ materially from those expressed or implied in any of the forward-looking statements is included in “ ITEM 1A.

RISK FACTORS ,” of this Annual Report on Form 10-K.

Business summary

The Company is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its Company-owned store and digital channels, as well as through various third-party wholesale, franchise and licensing arrangements.

The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands .

The Company is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements.

The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Company’s two brand-based operating segments:

Hollister, which includes the Company’s Hollister and Gilly Hicks brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands.

The brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style.

The Company primarily has operations in North America, Europe and Asia, among other regions.

The Company’s two operating segments are brand-based:

Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands.

The Company operates primarily in North America, Europe and Asia.

The Company’s fiscal year ends on the Saturday closest to January 31.

All references herein to the Company’s fiscal years are as follows:

Number of weeks

February 2, 2019

February 1, 2020

January 30, 2021

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 we could have significant fluctuations in certain asset and liability accounts.

The Company experiences its greatest sales activity during the fall season, the third and fourth fiscal quarters, due to Back-to-School and Holiday sales periods, respectively.

Fiscal year Year ended/ ending Number of weeks

Fiscal 2019 February 1, 2020 52

Fiscal 2020 January 30, 2021 52

Fiscal 2021 January 29, 2022 52

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

The Company experiences its greatest sales activity during Fall, due to Back-to-School and Holiday sales periods, respectively.

Key performance indicators

The following measurements are among the key performance indicators reviewed by various members of management to gauge the Company’s results:

Change in net sales and comparable sales;

The following measurements are among the key performance indicators reviewed by various members of the Company’s management to gauge the Company’s results:

• Changes in net sales and comparable sales;

• Comparative results of operations on a constant currency basis with the prior year’s results converted at the current year’s foreign currency exchange rate to remove the impact of foreign currency exchange rate fluctuation;

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• Marketing, general and administrative expense as a percentage of net sales;

Operating income and operating income as a percentage of net sales (“operating income margin”);

• Operating income and operating income as a percentage of net sales (“operating margin”);

• Net income and net income attributable to A&F;

Inventory per gross square foot and inventory to net sales ratio;

• Cash flow and liquidity measures, such as the Company’s current ratio, working capital and free cash flow;

• Inventory metrics, such as inventory turnover;

• Return on invested capital and return on equity;

• Store metrics, such as net sales per gross square foot, and store 4-wall operating margins;

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• Transactional metrics, such as traffic and conversion, performance across key product categories, average unit retail, average unit cost, average units per transaction and average transaction values;

Return on invested capital and return on equity;

Customer-centric metrics such as customer satisfaction, brand health scores and certain metrics related to the loyalty programs.

• Customer-centric metrics such as customer satisfaction, customer retention and acquisition, and certain metrics related to the loyalty programs.

While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics within this MD&A.

CURRENT TRENDS AND OUTLOOK

As a result of COVID 19, in January 2020, we began to experience business disruptions in the Asia-Pacific 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 Asia-Pacific region, with Europe and the United States experiencing significant outbreaks.

Impact of COVID-19

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 Europe, Middle East and Africa (“EMEA”) 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.

We are monitoring and reacting to the COVID-19 situation on a daily basis, including by conforming to local government and global health organizations’ guidance;

implementing global travel restrictions;

and recommending associates who are able to perform their role remotely to do so.

With the wellbeing of our customers, associates and business partners in mind, we temporarily closed our Company-operated stores across brands in North America and Europe, effective March 15, 2020 and March 16, 2020, respectively, and expect these stores to remain closed until further notice.

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

We plan to follow the guidance of local governments and health organizations to determine when we can reopen these stores and to evaluate whether further store closures in the Asia-Pacific region will be necessary.

As the situation continues to evolve rapidly, we are not currently able to predict the timing of store reopenings, which may occur on a location-by-location basis.

Our robust digital operations across brands remain open to serve our customers during this unprecedented period of temporary store closures.

We are also monitoring 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 Asia-Pacific region.

We are collaborating with our third-party partners to mitigate significant delays in delivery of merchandise, as certain factories have been closed, and certain other factories are operating at a limited capacity.

We entered this period of uncertainty with a healthy liquidity position and are taking immediate, aggressive and prudent actions, including reevaluating all expenditures, to enhance our ability to meet the business’ short-term liquidity needs, in order to best position the business for our key stakeholders, including our associates, customers and shareholders.

As a precautionary measure, in March 2020, we borrowed $210 million under the asset-based revolving credit facility to improve our cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, which provided us with $50 million of additional cash.

We continue to partner with our vendors, landlords, and lenders to preserve liquidity and mitigate risk during this unprecedented COVID-19 outbreak.

In addition, we are actively monitoring and assessing the rapidly emerging government policy and economic stimulus responses to COVID-19.

We have seen, and expect to continue to see material reductions in sales across brands and regions as a result of COVID-19.

In addition, these reductions in revenue have not been offset by proportional decreases in expense, as we continue to incur store occupancy costs such as operating lease costs and depreciation expense, and certain other costs such as compensation and administrative expenses, resulting in a negative effect on the relationship between our costs and revenues.

In addition, we could experience other material impacts as a result of COVID-19, including, but not limited to, charges from potential adjustments of the carrying amount of inventory, asset impairment charges, deferred tax valuation allowances and changes in the effectiveness of our hedging instruments.

The current circumstances are dynamic and the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, cannot be reasonably estimated at this time, although we anticipate COVID-19 will have a material adverse impact on our business, results of operations, financial condition and cash flows in Fiscal 2020.

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 “ ITEM 1A.

RISK FACTORS ,” included in this Annual Report on Form 10-K.

Long-term growth plans

As the COVID-19 situation allows, we continue to evaluate opportunities to make progress on initiatives that position the business for sustainable long-term growth that align with our strategic pillars on a market-by-market basis.

We remain committed to putting our customers at the center of everything that we do and meeting our customers’ needs whenever, wherever and however they choose to shop.

We aim to anticipate our customers’ needs through a test-and-learn mentality, which we have worked to embed throughout our organization.

Our plans for long-term growth are best categorized into three planned phases:

Stabilizing while Transforming

Fiscal 2015 through Fiscal 2017

Growing while Transforming

Accelerating Growth

During Phase I, “ Stabilizing while Transforming,” we transformed the organization by centering it around the customer, which included developing playbooks with the customer in mind, that align product, brand voice and experience.

Transforming the organization included implementing a new brand-centric organizational structure, with branded core customer-facing functions.

This built the foundation for the growth experienced across brands, channels and geographies in the fourth quarter of Fiscal 2017.

As our brands gained momentum, we ended this phase with a strong balance sheet, reduced fixed costs and improved real estate productivity.

We are currently in Phase II, “ Growing while Transforming.” We remain committed to our long-term vision and continue to position ourselves to make progress against our key transformation initiatives while balancing the near-term challenges and unprecedented uncertainty presented by COVID-19.

Our key transformation initiatives are as follows:

Optimizing our global store network;

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 continue 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 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, the emergence of new variants of the coronavirus and the availability and acceptance of effective vaccines or medical treatments.

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.

As of January 30, 2021 and March 24, 2021, approximately 88% and 91% of Company-operated stores were open for in-store service, respectively, with temporary store closures primarily in the EMEA region.

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:

• 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 and installing plexiglass barriers in the majority of store locations;

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

• Encouraging contactless payment options, where available;

• 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;

• 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;

• 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 14% for Fiscal 2020 as compared to Fiscal 2019, primarily driven by temporary store closures and a decline in traffic as compared to the previous year as a result of COVID-19.

During Fiscal 2020, sales for stores that had reopened were approximately 75% of Fiscal 2019 levels.

The Company has experienced other material impacts as a result of COVID-19, including, but not limited to, deferred tax valuation allowances, long-lived asset impairment, adjustments of the carrying amount of inventory and changes in the effectiveness of its hedging instruments.

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.

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 pickup 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 entered into a short-term lease for an additional distribution center and partnered with incremental carriers.

Digital net sales increased approximately 39% for Fiscal 2020 as compared to Fiscal 2019, resulting in digital sales accounting for 54% of total revenues in Fiscal 2020 compared to 33% in Fiscal 2019.

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 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 January 30, 2021, 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, especially in light of disruptions across the supply chain, including port congestion and shipping container shortages.

During Fiscal 2020, the Company 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.

The Company’s progress executing against the following key transformation initiatives created the foundation to allow the Company to respond quickly to COVID-19 in Fiscal 2020:

• 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 our loyalty programs and marketing optimization.

Over Fiscal 2018 and Fiscal 2019, the first two years of Phase II, “ Growing while Transforming,” we have made significant progress against our transformation initiatives as we:

Delivered 157 new store experiences through new stores, remodels and right-sizes;

Reduced store gross square footage by 6% and closed four large footprint, underperforming flagship stores;

Implemented omnichannel capabilities, including Purchase Online Pick Up in Store and in Order in Store;

Equipped our associates with handheld devices to improve shopping and checkout;

Reduced our product development calendar by multiple weeks;

Lowered our reliance on China manufacturing with 22% of our merchandise receipts in Fiscal 2019 sourced from China, down from 42% in Fiscal 2017, based on dollar cost;

Introduced local customer and product-facing teams in our new London and Shanghai regional headquarters;

Evolved our loyalty programs, Club Cali and myAbercrombie, and rolled these programs out in China.

We ended Fiscal 2019 on a strong note, and recorded our third consecutive full year of sales growth, despite the adverse impact from changes in foreign currency exchange rates of $37 million .

In Fiscal 2019, Abercrombie outperformed Hollister and the United States outperformed international.

In the near-term, we are focused on navigating the recent challenges presented by COVID-19, as discussed above.

We believe there is too much uncertainty to provide an estimated impact of COVID-19 at this time or a full year outlook for Fiscal 2020.

Refer to “ COVID-19 ,” provided within this “CURRENT TRENDS AND OUTLOOK,” section for further discussion.

We remain committed to our long-term vision.

Upon completion of Phase II, “Growing while Transforming” we will move to Phase III, “Accelerating Growth.” In Phase III we will aim to take market share in the U.S.

and grow our business globally while continuing to focus on our long-term profitability target of doubling Fiscal 2017 adjusted non-GAAP operating income margin of 2.9% through top-line growth, gross profit rate expansion and operating expense leverage.

We are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions and, as a result, we are mindful of macroeconomic risks and global challenges that could adversely impact certain areas of our business.

As a result, in addition to the events listed below, we continue to monitor certain other global events.

Our team continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop contingency plans to assist in mitigating potential impacts.

It is possible that our preparations for the events listed below 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 “ ITEM 1A.

RISK FACTORS ,” included in this Annual Report on Form 10-K.

• 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 Fiscal 2020 with a healthy liquidity position, however in light of COVID-19 the Company took immediate, aggressive and prudent actions, including re-evaluating all expenditures, to balance short-term and long-term liquidity needs, in order to best position the business for the Company’s stakeholders during Fiscal 2020.

Actions to preserve liquidity and manage cash flows during Fiscal 2020, included, but were not limited to the following:

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

• Managed inventory receipts tightly to align inventory with expected market demand;

• Reduced expenses to better align operating costs with sales;

• Assessed government policy and economic stimulus responses to COVID-19 for both business and individuals;

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

• Withdrew $50.0 million from the overfunded Rabbi Trust assets, representing the majority of excess funds in March 2020;

• Announced the temporary suspension of the Company's share repurchase and dividend programs in March 2020 and May 2020, respectively;

• Completed a private offering of $350.0 million aggregate principal amount of Senior Secured Notes in July 2020.

Reflecting ongoing global uncertainty and the near-term challenges that COVID-19 presents, such as continued temporary store closures, uncertainty surrounding the global economy and customer discretionary spending habits, the Company plans to conservatively manage cash and liquidity in the first half of Fiscal 2021, while prioritizing investments in the business and continuing to fund operating activities.

Regarding returns to shareholders, although the dividend program remains suspended, the Company recently announced that it plans to resume share repurchases beginning on or after March 4, 2021, dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.

As of January 30, 2021, the Company had liquidity of $1.3 billion as compared to $0.9 billion as of February 1, 2020, comprised of cash and equivalents and borrowing available to the Company under the ABL Facility.

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.

For further information about how COVID-19 could impact our operations, refer to “ ITEM 1A.

RISK FACTORS ,” of this Annual Report on Form 10-K.

Global Store Network Optimization

Reflecting a continued focus on our key transformation initiative ‘Global Store Network Optimization,’ we delivered new store experiences across brands during Fiscal 2018 and Fiscal 2019 .

Details related to our new store experiences follow:

Type of new store experience

A component of optimizing our global store network 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 at end of Fiscal 2019 , we had 15 flagship stores.

Details related to previously announced flagship store closures follow:

Flagship location

Actual or expected flagship store closure date

Abercrombie & Fitch

Pedder Street, Hong Kong SAR, China

Closed in the first quarter of Fiscal 2017

Abercrombie & Fitch

Copenhagen, Denmark

Closed in the first quarter of Fiscal 2019

SoHo, New York City, U.S.

Closed in the second quarter of Fiscal 2019

Closed in the fourth quarter of Fiscal 2019

abercrombie kids (2)

London, United Kingdom

Closed in the fourth quarter of Fiscal 2019

Abercrombie & Fitch

Fukuoka, Japan

Expected to close in the second half of Fiscal 2020

5 th Avenue, New York City, U.S.

Expected to close by the end of Fiscal 2021

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.

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

Store count and gross square footage by brand and geography as of February 2, 2019 and February 1, 2020 were as follows:

Reflecting a continued focus on its key transformation initiative ‘Global Store Network Optimization,’ the Company delivered new store experiences across brands during Fiscal 2020 and Fiscal 2019.

Details related to these new store experiences follow:

Type of new store experience Fiscal 2020 Fiscal 2019

New stores 15 40

Remodels 4 24

Right-sizes 6 26

A component of optimizing the Company’s global store network is pivoting away from large format tourist-dependent flagship stores and opening smaller, omni-enabled stores that cater to local customers.

As a result, the Company closed twelve flagship locations during Fiscal 2019 and Fiscal 2020.

This leaves the Company with seven operating flagships at the end of Fiscal 2020, down from 15 at the beginning of the year.

Future closures could be completed through natural lease expirations, while certain

other 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 related to these actions.

In addition, the Company closed 129 non-flagship locations, resulting in 137 total store closures during Fiscal 2020.

Store optimization efforts in Fiscal 2020 reduced total Company store gross square footage by approximately 1.1 million gross square feet, or 17%, as compared to Fiscal 2019 year-end.

The actions taken in Fiscal 2020, combined with ongoing digital sales growth, are expected to continue to transform the Company's operating model and reposition the Company for the future as the Company continues to focus on aligning store square footage with digital penetration.

Store count and gross square footage by brand and geography as of February 1, 2020 and January 30, 2021 were as follows:

Hollister (1)

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Total Company (3)

United States

International

United States

International

United States

International

United States International United States International United States International Total

Number of stores:

February 1, 2020 (4)

February 1, 2020

392 155 257 53 649 208 857

New 3 3 4 5 7 8 15

Closed (48) (8) (71) (10) (119) (18) (137)

January 30, 2021 347 150 190 48 537 198 735

Gross square footage (in thousands) :

February 1, 2020 (4)

February 1, 2020

Excludes nine international franchise stores as of February 1, 2020 and eight as of February 2, 2019 .

Excludes 17 U.S.

Company-operated temporary stores as of February 1, 2020 .

2,605 1,263 1,829 617 4,434 1,880 6,314

January 30, 2021 2,309 1,219 1,311 393 3,620 1,612 5,232

(1) Hollister includes the Hollister and Gilly Hicks brands.

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

Excludes nine international franchise stores as of each of January 30, 2021 and February 1, 2020.

Excludes 12 Company-operated temporary stores as of January 30, 2021 and 15 as of February 1, 2020.

(2) Abercrombie includes the Abercrombie & Fitch and abercrombie kids brands.

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

Excludes seven international franchise stores as of each of February 1, 2020 and February 2, 2019 .

Excludes eight U.S.

Company-operated temporary stores as of February 1, 2020 .

China tariffs

Recently, there has been uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S.

and other countries, such as the threat of additional tariffs on imported consumer goods from China.

A summary of certain recent tariffs impacting our business include:

Additional tariffs imposed on fashion accessories, handbags and hats of up to 25%, which were effective beginning September 2018 at the starting rate of 10% and increased from 10% to 25% in May 2019 (“List 3”);

Additional tariffs imposed on select apparel and footwear of up to 25%, which were effective beginning September 2019 at the starting rate of 15% and decreased to 7.5% in February 2020 (“List 4A”).

List 3 and List 4A tariffs adversely impacted Fiscal 2019 cost of merchandise and gross profit by approximately $4 million.

These tariffs are not expected to have a significant year-over-year impact on cost of merchandise and gross profit in Fiscal 2020.

We continue to focus on the diversification of our global supply chain.

Our team had taken actions to proactively prepare for the impacts of these tariffs, including shifting production into other countries and regions to both existing and new partners as necessary.

Only a portion of our total goods sourced from China are imported into the U.S.

and are subject to these additional tariffs.

For context, approximately 15% and 25% of total merchandise receipts were sourced from China and imported to the U.S.

in Fiscal 2019 and Fiscal 2018, respectively, and we expect to reduce this percentage in Fiscal 2020.

Excludes 10 international franchise stores as of January 30, 2021 and seven as of February 1, 2020.

Excludes two Company-operated temporary stores as of January 30, 2021 and six as of February 1, 2020.

(3) This store count excludes one international third-party operated multi-brand outlet store as of January 30, 2021.

(4) Prior period numbers have been revised due to a change in the temporary store definition to only include store leases with original terms of 18 months or less.

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

In June 2016, the United Kingdom passed a referendum to recommend withdrawing from the European Union.

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

As a result, there is continued uncertainty related to 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.

We believe that this referendum and the uncertainty surrounding the terms of United Kingdom’s withdrawal throughout the year adversely impacted international sales results in Fiscal 2019.

We experienced decreased traffic in the United Kingdom and declining values of the Euro and British Pound as compared to the U.S.

Dollar over the last year.

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;

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.

Upon withdrawal from the European Union in January 2020 (“Brexit"), the United Kingdom entered into a formal transition period that expired on December 31, 2020, during which the United Kingdom and the European Union negotiated a post-Brexit trade agreement.

The ultimate impact of Brexit on the Company will depend on the effects of this agreement, which went into effect on January 1, 2021.

There is continued uncertainty related to the ultimate 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 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:

collaborated across the organization and tested systems;

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

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

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

Impact of global events and uncertainty

As a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions and, as a result, management is are mindful of macroeconomic risks and global challenges that could adversely impact certain areas of the business.

As a result, in addition to the events listed within MD&A, management continues to monitor certain other global events.

The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop contingency plans to assist in mitigating potential impacts.

It is possible that the Company’s preparations for the events discussed within MD&A are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations.

For a discussion of material risks that have the potential to cause actual results to differ materially from expectations, refer to “ ITEM 1A.

RISK FACTORS ,” included in this Annual Report on Form 10-K.

Focus areas for Fiscal 2021

Reflecting ongoing global uncertainty and the near-term challenges COVID-19 presents, in Fiscal 2021, the Company plans to continue to conservatively manage inventories, position its supply chain to optimize its capacity to fulfill digital orders and tightly manage expenses.

For Fiscal 2021, the Company plans to make progress recovering sales losses experienced in Fiscal 2020 as a result of COVID-19, while maintaining or improving on gross profit rate from Fiscal 2020 levels.

While the Company expects to see certain savings in operating expenses in Fiscal 2021, reflecting Fiscal 2020 permanent store closures and rent negotiations, certain operating expenses related to stores that were temporarily closed in Fiscal 2020 due to COVID-19 are expected to return in Fiscal 2021.

The Company plans to reposition expense savings towards customer-facing areas, specifically targeting the acceleration of marketing, digital and data investments.

The Company continues to evaluate opportunities to invest in and make progress on initiatives that position the business for sustainable long-term growth that align with the strategic pillars as described within “ ITEM 1.

BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES ,” included in this Annual Report on Form 10-K.

Summary of results

A summary of results for Fiscal 2020 and Fiscal 2019 follows:

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

Change in net sales

Comparable sales (2)

GAAP Non-GAAP (1)

(in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) Fiscal 2020 Fiscal 2019 Fiscal 2020 Fiscal 2019

Net sales $ 3,125,384 $ 3,623,073

Change in net sales from the prior fiscal year (14) % 1 %

Gross profit rate (2)

Operating income (4)

Operating income margin (4)

Net income attributable to A&F (4)

Net income per diluted share attributable to A&F (4)

60.5 % 59.4 %

Operating (loss) income (3)

$ (20,469) $ 70,068 $ 52,468 $ 82,820

Operating (loss) income margin (0.7) % 1.9 % 1.7 % 2.3 %

Net (loss) income attributable to A&F (3) (4)

$ (114,021) $ 39,358 $ (45,383) $ 48,097

Net (loss) income per diluted share attributable to A&F (3) (4)

$ (1.82) $ 0.60 $ (0.73) $ 0.73

(1) Refer to “ RESULTS OF OPERATIONS ” for details on excluded items.

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 .”

Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales.

Refer to the discussion below in “ NON-GAAP FINANCIAL MEASURES ,” for further details on the comparable sales calculation.

(2) Gross profit is derived from cost of sales, exclusive of depreciation and amortization.

Fiscal 2019 results include $47.3 million of flagship store exit charges, which adversely impacted operating margin by 130 basis points and net income per diluted share attributable to A&F by approximately $0.53 per share, net of estimated tax effect.

Refer to Note 19 , “ FLAGSHIP STORE EXIT CHARGES .”

Further details related to sales for Fiscal 2019 and Fiscal 2018 are as follows:

Change in Net Sales

Comparable Sales (1)

United States

International

Total company

Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales.

Refer to the discussion below in “ NON-GAAP FINANCIAL MEASURES ,” for further details on the comparable sales calculation.

Certain components of the Company’s Consolidated Balance Sheets and Consolidated Statements of Cash Flows for Fiscal 2019 and Fiscal 2018 were as follows:

(3) Fiscal 2019 results included $47 million of flagship store exit charges, which adversely impacted net income per diluted share attributable to A&F by approximately $0.53 per share, net of estimated tax effect.

Refer to Note 19, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .”

(4) Fiscal 2020 results included $101 million of adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges as a result of the COVID-19 pandemic, which adversely impacted net loss per diluted share by or $1.61 per share.

Refer to Note 12, “ INCOME TAXES .”

Certain components of the Company’s Consolidated Balance Sheets as of February 1, 2020 and January 30, 2021 and Consolidated Statements of Cash Flows for Fiscal 2020 and Fiscal 2019 were as follows:

(in thousands)

Balance sheet data

Balance Sheets data January 30, 2021 February 1, 2020

Cash and equivalents $ 1,104,862 $ 671,267

Gross borrowings outstanding, carrying amount $ 350,000 $ 233,250

Statements of Cash Flows data

Inventories $ 404,053 $ 434,326

Statement of Cash Flows data Fiscal 2020 Fiscal 2019

Net cash provided by operating activities $ 404,918 $ 300,685

Purchases of property and equipment

Purchases of common stock

Dividends paid

Repayment of term loan facility borrowings

Net cash used for investing activities $ (51,910) $ (202,784)

Net cash provided by (used for) financing activities $ 69,717 $ (147,873)

RESULTS OF OPERATIONS

(in thousands)

Comparable Sales (1)

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

(in thousands) Fiscal 2020 Fiscal 2019 $ Change % Change

Hollister $ 1,834,349 $ 2,158,514 $ (324,165) (15)%

Abercrombie 1,291,035 1,464,559 (173,524) (12)%

Total Company $ 3,125,384 $ 3,623,073 $ (497,689) (14)%

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 Fiscal 2020 and Fiscal 2019 were as follows:

(in thousands) Fiscal 2020 Fiscal 2019 $ Change % Change

United States $ 2,127,403 $ 2,410,802 $ (283,399) (12)%

EMEA 709,451 822,202 $ (112,751) (14)%

APAC 176,636 264,895 $ (88,259) (33)%

Other 111,894 125,174 $ (13,280) (11)%

International $ 997,981 $ 1,212,271 $ (214,290) (18)%

Total Company $ 3,125,384 $ 3,623,073 $ (497,689) (14)%

Total Company on a non-GAAP constant currency basis (1)

Calculated on a constant currency basis.

Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details.

Includes Abercrombie & Fitch and abercrombie kids brands.

For Fiscal 2019 , net sales increased 1% as compared to Fiscal 2018 , primarily due to an increase in units sold.

Average unit retail was approximately flat year-over-year with changes in foreign currency exchange rates adversely impacting net sales by $37 million or 1% .

In addition, the Company estimates that COVID-19 adversely impacted Fiscal 2019 net sales by approximately $4 million.

Excluding the adverse impact of changes in foreign currency exchange rates, net sales for Fiscal 2019 increased 2% as compared to Fiscal 2018 .

For Fiscal 2020, net sales decreased 14% as compared to Fiscal 2019, primarily due to a decrease in units sold driven by reduced store traffic, including as it related to temporary store closures as a result of COVID-19, partially offset by 39% digital sales growth.

Average unit retail increased year-over-year, driven by lower promotions, with benefits from changes in foreign currency exchange rates of approximately $22 million.

Cost of sales, exclusive of depreciation and amortization

(in thousands)

% of Net Sales

BPS Change (1)

Fiscal 2020 Fiscal 2019

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

Cost of sales, exclusive of depreciation and amortization $ 1,234,179 39.5% $ 1,472,155 40.6% (110)

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

For Fiscal 2019 , cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased approximately 80 basis points as compared to Fiscal 2018 , primarily due to an increase in average unit cost, without a corresponding increase in average unit retail.

The increase in average unit cost reflects the adverse impact from changes in foreign currency exchange rates, net of hedging, of approximately 30 basis points, higher year-over-year shrink of approximately 20 basis points, increased freight costs and the adverse impact from List 3 and List 4A China tariffs of approximately 10 basis points.

% of Net Sales

Gross profit on a non-GAAP constant currency basis (2)

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

Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details.

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

For Fiscal 2020, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased approximately 110 basis points as compared to Fiscal 2019, reflecting benefits of approximately 30 basis points from changes in foreign currency exchange rates.

The year-over-year decrease was primarily attributable to increased average unit retail driven by lower promotions.

Average unit cost remained relatively flat, reflecting, among other items, adverse impacts of approximately 50 basis points related to charges to reduce the carrying value of inventory during the thirteen weeks ended May 2, 2020, primarily as a result of COVID-19 and the temporary closure of the Company’s stores and benefits of approximately 30 basis points from inventory shrink favorability.

Gross profit, exclusive of depreciation and amortization

Fiscal 2020 Fiscal 2019

% of Net Sales % of Net Sales BPS Change

Gross profit, exclusive of depreciation and amortization $ 1,891,205 60.5% $ 2,150,918 59.4% 110

Stores and distribution expense

(in thousands)

% of Net Sales

BPS Change (1)

Fiscal 2020 Fiscal 2019

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

Stores and distribution expense $ 1,391,584 44.5% $ 1,551,243 42.8% 170

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

For Fiscal 2019 , stores and distribution expense as a percentage of net sales was approximately flat compared to Fiscal 2018 , reflecting a decrease in store occupancy expense as a percentage of net sales of approximately 50 basis points, a decrease in compensation costs and decreased marketing expense related to the Company’s digital operations.

These decreases were offset primarily due to an increase in shipping and handling costs as a percentage of total net sales of approximately 60 basis points.

For Fiscal 2020, stores and distribution expense decreased 10% as compared to Fiscal 2019, primarily driven by a $117 million reduction in store occupancy expense, reflecting the impact of COVID-19 on operations including temporary store closures and benefits from rent abatements recognized as variable lease cost and a $92 million reduction in payroll expense, which was inclusive of a benefit of $18 million related to government subsidies in certain jurisdictions where the Company qualifies.

These reductions in expense were partially offset by a $67 million increase in shipping and handling expense related to the 39% year-over-year digital sales growth.

Marketing, general and administrative expense

(in thousands)

% of Net Sales

BPS Change (1)

Fiscal 2020 Fiscal 2019

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

Marketing, general and administrative expense $ 463,843 14.8% $ 464,615 12.8% 200

Net charges related to certain legal matters (2)

Adjusted non-GAAP marketing, general and administrative expense

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

Amount reflects net legal charges in connection with a then proposed settlement of a class action claim, which received final court approval and was paid in the fourth quarter of Fiscal 2018.

See Note 20 , “ CONTINGENCIES .”

For Fiscal 2019 , marketing, general and administrative expense as a percentage of net sales decreased approximately 70 basis points as compared to Fiscal 2018 , primarily due to a decrease in performance-based compensation and consulting expenses.

These decreases were partially offset by increased information technology expense and executive severance charges.

Excluding the net charges related to certain legal matters presented above, Fiscal 2019 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased approximately 60 basis points as compared to Fiscal 2018 .

Flagship store exit charges

(in thousands)

% of Net Sales

BPS Change (1)

Flagship store exit charges

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

For Fiscal 2019 , flagship store exit charges as a percentage of net sales increased approximately 110 basis points as compared to Fiscal 2018 , primarily driven by the closure of the Company’s SoHo Hollister flagship in New York City during the second quarter of Fiscal 2019.

Refer to Note 19 , “ FLAGSHIP STORE EXIT CHARGES ,” for additional information on flagship store exit charges incurred in Fiscal 209 and Fiscal 2018.

For Fiscal 2020, marketing, general and administrative expense was approximately flat as compared to Fiscal 2019, reflecting reductions in marketing and other controllable expenses, and an increase in payroll expense as a result of higher performance-based compensation.

Flagship store exit (benefits) charges

Fiscal 2020 Fiscal 2019

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

Flagship store exit (benefits) charges $ (11,636) (0.4)% $ 47,257 1.3% (170)

For Fiscal 2020, flagship store exit benefits primarily related to the closure of several international Abercrombie & Fitch flagship stores.

Flagship store exit charges for Fiscal 2019 primarily related to the closure of the Company’s SoHo Hollister flagship in New York City.

Refer to Note 19, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .

Asset impairment, exclusive of flagship store exit charges

(in thousands)

% of Net Sales

BPS Change (1)

Fiscal 2020 Fiscal 2019

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

Asset impairment, exclusive of flagship store exit charges $ 72,937 2.3% $ 19,135 0.5% 180

Flagship store asset impairment charges (2)

Excluded items:

Asset impairment charges (1)

(72,937) (2.3)% (12,752) (0.4)% (190)

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.

Amounts reflect asset impairment charges related to certain of the Company’s flagship stores not associated with exit activities.

$ — 0.0% $ 6,383 0.2% (20)

(1) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details.

Refer to Note 9, “ ASSET IMPAIRMENT ,” for further discussion.

Other operating income, net

(in thousands)

% of Net Sales

BPS Change (1)

Fiscal 2020 Fiscal 2019

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

Other operating income, net $ 5,054 0.2% $ 1,400 0.0% 20

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

For Fiscal 2019 , other operating income, net, as a percentage of net sales decreased approximately 20 basis points as compared to Fiscal 2018 , primarily due to a decrease in foreign currency exchange related gains of approximately 10 basis points, reflecting the impact of the adoption of the new derivative accounting standard in Fiscal 2019 .

Refer to Note 2 , “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ,” for further discussion of the new derivative accounting standard.

Operating income

Fiscal 2019 (1)

(in thousands)

% of Net Sales

BPS Change (2)

Operating income

Flagship store asset impairment charges (3)

Net charges related to certain legal matters (4)

For Fiscal 2020, other operating income, net, increased as compared to Fiscal 2019, primarily due to foreign currency exchange related gains in Fiscal 2020.

Operating (loss) income

Fiscal 2020 Fiscal 2019

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

Operating (loss) income $ (20,469) (0.7)% $ 70,068 1.9% (260)

Excluded items:

Asset impairment charges (1)

72,937 2.3% 12,752 0.4% 190

Adjusted non-GAAP operating income $ 52,468 1.7% $ 82,820 2.3% (60)

Adjusted non-GAAP operating income on a constant currency basis

Fiscal 2019 results were adversely impacted by $47.3 million of pre-tax flagship store exit charges.

Refer to Note 19 , “ FLAGSHIP STORE EXIT CHARGES .”

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

Amounts reflect asset impairment charges related to certain of the Company’s flagship stores not associated with exit activities.

Amount reflects net legal charges in connection with a then proposed settlement of a class action claim, which received final court approval and was paid in the fourth quarter of Fiscal 2018.

Refer to Note 20 , “ CONTINGENCIES .”

(1) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details.

Interest expense, net

(in thousands)

% of Net Sales

BPS Change (1)

Fiscal 2020 Fiscal 2019

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

Interest expense $ 31,726 1.0% $ 19,908 0.5% 50

1 unchanged sentence

Interest expense, net $ 28,274 0.9% $ 7,737 0.2% 70

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

For Fiscal 2019 , interest expense, net as a percentage of net sales decreased approximately 10 basis points as compared to Fiscal 2018 .

Interest expense as a percentage of net sales decreased as compared to last year, primarily driven by the elimination of landlord financing obligations and the related interest expense upon adoption of the new lease accounting standard in Fiscal 2019, partially offset by an increase in interest expense related to certain of the Company’s long-term obligations.

For Fiscal 2020, interest expense, net, increased primarily driven by higher interest expense in the current year related to the issuance of the Senior Secured Notes, as well as lower interest income earned on the Company’s investments and cash holdings.

Income tax expense

(in thousands, except ratios)

Effective Tax Rate

Fiscal 2020 Fiscal 2019

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

Income tax expense $ 60,211 (123.5)% $ 17,371 27.9%

Excluded items:

Tax effect of pre-tax excluded items (1)

Benefits related to the Tax Cuts and Jobs Act of 2017 (2)

Adjusted non-GAAP income tax expense $ 64,510 266.6% $ 21,384 28.5%

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

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

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

Refer to Note 11 , “ INCOME TAXES ,” for details on the impact of the Tax Cuts and Jobs Act of 2017.

The effective tax rates for Fiscal 2019 and Fiscal 2018 were impacted by discrete items related to share-based compensation awards discussed within Note 14 , “ SHARE-BASED COMPENSATION .” The Fiscal 2018 effective tax rate also benefited from discrete income tax items related to the then provisional estimate of the Tax Cuts and Jobs Act of 2017.

The Company’s effective tax rate for Fiscal 2020 was impacted by $101.4 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss.

These adverse tax impacts were as follows:

• The Company did not recognize income tax benefits on $203.4 million of pre-tax losses generated in Fiscal 2020 in certain jurisdictions, resulting in adverse tax impacts of $39.5 million.

• The Company recognized charges of $61.9 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions, including, but not limited to, the U.S., Switzerland, Germany and Japan principally as a result of the significant adverse impacts of COVID-19.

Refer to Note 12, “ INCOME TAXES ,” for further discussion on factors that impacted the effective tax rate in Fiscal 2020 and Fiscal 2019.

Net income attributable to A&F

Fiscal 2019 (1)

(in thousands)

% of Net Sales

BPS Change (2)

Net income attributable to A&F

Net (loss) income attributable to A&F

Fiscal 2020 Fiscal 2019

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

Net (loss) income attributable to A&F $ (114,021) (3.6)% $ 39,358 1.1% (470)

Excluded items, net of tax (1)

68,638 2.2% 8,739 0.2% 200

Adjusted non-GAAP net income attributable to A&F (2)

Fiscal 2019 results were adversely impacted by $47.3 million of pre-tax flagship store exit charges.

Refer to Note 19 , “ FLAGSHIP STORE EXIT CHARGES .”

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

Excludes items presented above under “ Operating income , ” and “ Income tax expense .

Net income per diluted share attributable to A&F

Fiscal 2019 (1)

Net income per diluted share attributable to A&F

Adjusted non-GAAP net income per diluted share attributable to A&F (2)

Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2)

Fiscal 2019 results include $47.3 million of pre-tax flagship store exit charges, which adversely impacted net income per diluted share by $0.53, net of estimated tax effect.

Refer to Note 19 , “ FLAGSHIP STORE EXIT CHARGES .”

Excludes items presented above under “ Operating income , ” and “ Income tax expense .

$ (45,383) (1.5)% $ 48,097 1.3% (280)

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

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

Fiscal 2020 Fiscal 2019 $ Change

Net (loss) income per diluted share attributable to A&F $ (1.82) $ 0.60 $(2.42)

Excluded items, net of tax (1)

1.10 0.13 0.97

Adjusted non-GAAP net (loss) income per diluted share attributable to A&F $ (0.73) $ 0.73 $(1.46)

Impact from changes in foreign currency exchange rates — 0.29 (0.29)

Adjusted non-GAAP net (loss) income per diluted share attributable to A&F on a constant currency basis (2)

$ (0.73) $ 1.02 $(1.75)

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

(2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details.

LIQUIDITY AND CAPITAL RESOURCES

Historical sources and uses of cash

Seasonality of cash flows

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

Regarding returns to shareholders, although the dividend program remains suspended, the Company recently announced that it plans to resume share repurchases on or after March 4, 2021, dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.

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

Primary sources and uses of cash

The Company’s business has two principal selling seasons:

the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”).

The Company experiences its greatest sales activity during the fall season, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively.

Spring and Fall.

The Company experiences its greatest sales activity during Fall, due to back-to-school and holiday sales periods.

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 revolving credit facility available as a source of additional funding.

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 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 to October 19, 2022.

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

As of February 1, 2020 , the Company had not drawn on the Amended ABL Facility, but had availability under the Amended ABL facility of $272.0 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 and under the Amended ABL Facility was $242.0 million as of February 1, 2020 .

As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210 million under the Amended ABL Facility to improve its cash position.

Refer to Note 22, “ SUBSEQUENT EVENTS ,” for further discussion.

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”).

The Term Loan Facility will mature on August 7, 2021.

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% .

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

Cash flows from operating, investing and financing activities

The table below provides certain components of the Company’s Consolidated Statements of Cash Flows for Fiscal 2019 and Fiscal 2018 :

(in thousands)

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

Net cash provided by operating activities

Net cash used for investing activities

Net cash used for financing activities

Effects of foreign currency exchange rate changes on cash

Net decrease in cash and equivalents, and restricted cash and equivalents

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

Operating activities - For both Fiscal 2019 and Fiscal 2018 , the primary source of cash from operations was from the sale of merchandise, largely generated in the Fall season.

The year-over-year decrease in cash flows from operating activities for Fiscal 2019 as compared to Fiscal 2018 reflects:

a lower net income in the current year as compared to the prior year;

changes in the timing of payments to vendors, including increased payments in the first quarter of Fiscal 2019 as compared to the prior year;

partially offset by decreased incentive compensation payments in Fiscal 2019 as compared to the prior year and changes in inventories.

Investing activities - For Fiscal 2019 and Fiscal 2018 , net cash outflows for investing activities were used for purchases of property and equipment.

Financing activities - For Fiscal 2019 , net cash used for financing activities primarily consisted of the repurchase of approximately 4.0 million shares of A&F’s Common Stock in the open market with a market value of approximately $63.5 million , dividend payments of $51.5 million and voluntary debt repayments of $20.0 million .

For Fiscal 2018 , net cash used for financing activities consisted primarily of the repurchase of approximately 2.9 million shares of A&F’s Common Stock in the open market with a market value of approximately $68.7 million and dividend payments of $53.7 million .

Future cash requirements and sources of cash

The Company’s capital allocation strategy, priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors, including the potential severity of impacts to the business resulting from COVID-19.

Primary sources of cash

The Company’s primary source of cash to execute against its capital allocation strategy is its operating cash flows, largely generated in the Fall season, used to fund operations throughout the fiscal year and to reinvest in the business to support future growth.

The Company entered this period of uncertainty with a healthy liquidity position and is taking immediate, aggressive and prudent actions, including reevaluating all expenditures, to enhance the Company’s ability to meet the business’ short-term liquidity needs, in order to best position the business for its key stakeholders, including the Company’s associates, customers and shareholders.

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

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

Primary uses of cash

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.

In response to COVID-19, the Company is taking immediate, aggressive and prudent actions, including reevaluating all expenditures, to enhance the Company’s ability to meet the business’ short-term liquidity needs.

As a result, over the next twelve months, the Company’s 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.

The Company also evaluates opportunities for investments in line with our key transformation initiatives that position the business for sustainable long-term growth 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.

In addition, the Company evaluates store closures, including flagship lease buyouts and options to early terminate store leases.

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 ”.

In an effort to improve the Company’s near-term cash position, 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 $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds.

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 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 evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “ I TEM 1.

BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES ”.

Examples of potential investment opportunities include, but are not limited to, new store experiences and options to early terminate store leases, investments in its omnichannel initiatives and investments to increase the Company’s capacity to fulfill digital orders.

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.

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 Fiscal 2020, the Company used $101.9 million towards capital expenditures, down from $202.8 million of capital expenditures in Fiscal 2019.

Total capital expenditures for Fiscal 2021 are expected to be approximately $100 million.

Share repurchases and dividends

In response to COVID-19, in line with the Company’s cash preservation strategy, the Company continues to assess its plans for share repurchases and dividends.

Historically, the Company has returned cash to stockholders through dividends and completes share repurchases as deemed appropriate by utilizing free cash flow generated from operations or proceeds from the Amended ABL Facility.

Dividends are declared at the discretion of A&F’s Board of Directors.

A quarterly dividend, of $0.20 per share outstanding, was declared in each of February, May, August and November in Fiscal 2019 and Fiscal 2018.

Dividends were paid in 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 Facilities.

There can be no assurance that the Company will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

In response to COVID-19, in March 2020, the Company announced that it does not plan to repurchase any shares of its Common Stock for the foreseeable future.

The Company may repurchase 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.

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 has since announced it plans to resume share repurchase activity beginning on or after March 4, 2021.

The timing and amount of any future share repurchases will depend on various factors, including market and business conditions.

The Company’s dividend program remains suspended.

The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate.

Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the objectives of offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units and returning excess cash to shareholders.

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 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ” for additional

information regarding the Company’s share repurchases during the fourth quarter of Fiscal 2019 and the number of shares remaining available for purchase under the Company’s June 2019 publicly announced stock repurchase authorization.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES ” for additional information regarding the Company’s share repurchases during the fourth quarter of Fiscal 2020 and the number of shares remaining available for purchase under the Company’s publicly announced stock repurchase authorization.

Dividends are declared at the discretion of A&F’s Board of Directors.

A quarterly dividend, of $0.20 per share outstanding, was declared in February for Fiscal 2020 and in each of February, May, August and November in Fiscal 2019.

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

A&F’s Board of Directors reviews and establishes a dividend amount, if any, 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 under the Company’s agreements related to the Senior Secured Notes and the ABL Facility.

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

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 which began in January 2021.

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

As of January 30, 2021, 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 January 30, 2021, the Company did not have any borrowings outstanding under the ABL Facility.

The ABL Facility matures on October 19, 2022.

Details regarding borrowing available to the Company under the ABL Facility as of January 30, 2021 follow:

(in thousands) January 30, 2021

Borrowing base $ 245,951

Outstanding stand-by letters of credit (871)

Borrowing capacity 245,080

Minimum excess availability (1)

Borrowing available under the ABL Facility $ 215,080

(1) 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 13, “ BORROWINGS ,” for additional information.

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

The Company has determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes.

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 February 1, 2020 , $311.6 million of the Company’s $671.3 million of cash and equivalents was held by foreign affiliates.

The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes.

As of January 30, 2021, $410.1 million of the Company’s $1.1 billion 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 to A&F’s stockholders.

In December 2017, the Tax Cuts and Jobs Act of 2017 was signed into law and, in May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing.

Refer to Note 11 , “ INCOME TAXES ,” for additional details regarding the impact these events had on the Company’s Consolidated Financial Statements.

operations or to fund investing and financing activities.

Refer to Note 12, “ INCOME TAXES ,” for additional details regarding the impact certain events related to the Company’s income taxes had on the Company’s Consolidated Financial Statements.

Analysis of cash flows

The table below provides certain components of the Company’s Consolidated Statements of Cash Flows for Fiscal 2020 and Fiscal 2019:

(in thousands) Fiscal 2020 Fiscal 2019

Cash and equivalents, and restricted cash and equivalents, beginning of period $ 692,264 $ 745,829

Net cash provided by operating activities 404,918 300,685

Net cash used for investing activities (51,910) (202,784)

Net cash provided by (used for) financing activities 69,717 (147,873)

Effects of foreign currency exchange rate changes on cash 9,168 (3,593)

Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 431,893 (53,565)

Cash and equivalents, and restricted cash and equivalents, end of period $ 1,124,157 $ 692,264

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

• Reducing expenses to align operating costs with sales;

• 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 14% 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.

While the Company has been successful in obtaining certain rent abatements and landlord concessions of rent payable during Fiscal 2020 as a result of COVID-19 store closures, the Company continues to engage with its landlords to find a mutually beneficial and agreeable path forward for certain of its other leases.

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.

Investing activities - For Fiscal 2020, net cash outflows for investing activities were used for capital expenditures of $101.9 million as compared to $202.8 million in Fiscal 2019, reflecting actions taken in Fiscal 2020 to preserve liquidity and manage cash flows in light of the COVID-19 pandemic.

Fiscal 2020 net cash used for investing activities also reflects the withdrawal of $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds.

Financing activities - For Fiscal 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 the ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering.

In addition, the Company repurchased approximately 1.4 million shares of A&F’s Common Stock with a market value of approximately $15.2 million and paid dividends of $12.6 million during Fiscal 2020, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19.

For Fiscal 2019, net cash used for financing activities consisted primarily of the repurchase of approximately 4.0 million shares of A&F’s Common Stock in the open market with a market value of approximately $63.5 million, dividend payments of $51.5 million and voluntary debt repayments of $20.0 million.

Contractual obligations

As of February 1, 2020 , the Company’s contractual obligations were as follows:

As of January 30, 2021, the Company’s contractual obligations were as follows:

Payments due by period

(in thousands)

Less than 1 year

More than 5 years

(in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years

Operating lease obligations (1)

$ 1,410,687 $ 307,174 $ 498,827 $ 304,323 $ 300,363

Purchase obligations (2)

249,761 208,153 25,001 5,718 10,889

Long-term debt obligations (3)

350,000 — — 350,000 —

Other obligations (4)

Finance lease obligations

259,524 87,489 86,352 60,073 25,610

Total $ 2,269,972 $ 602,816 $ 610,180 $ 720,114 $ 336,862

(1) Operating lease obligations consist of the Company’s future undiscounted operating lease payments, including future fixed lease payments associated with closed flagship stores.

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(2) Purchase obligations primarily consist of non-cancelable purchase orders for merchandise to be delivered during Fiscal 2021 and commitments for fabric expected to be used during upcoming seasons.

In addition, purchase obligations include agreements to purchase goods or services, including information technology contracts and third-party distribution center service contracts.

Long-term debt obligations consist of principal payments under the Term Loan Facility.

In addition, purchase obligations include agreements to purchase goods or services, including, but not limited to, information technology, digital and marketing contracts, as well as estimated obligations related to the Company’s 13-year, 100% renewable energy supply agreement for its global home office and Company-owned distribution centers which is expected to begin in the Company’s fiscal year ending January 28, 2023.

(3) Long-term debt obligations consist of principal payments under the Senior Secured Notes.

Refer to Note 13, “ BORROWINGS ,” for further discussion.

(4) Other obligations consists of:

asset retirement obligations;

interest payments related to the Senior Secured Notes assuming normally scheduled principal payments;

estimated asset retirement obligations;

accrued rent related to stores where the Company suspended payments in light of COVID-19 temporary store closures and continues to engage with its landlords on a agreeable path forward;

the amount of the employer-paid portion of social security taxes deferred in light of COVID-19;

payments from the Supplemental Executive Retirement Plan;

known and scheduled payments related to the Company’s deferred compensation and supplemental retirement plans;

tax payments associated with the provisional, mandatory one-time deemed repatriation tax on accumulated foreign earnings, net payable over eight years pursuant to the Act;

estimated interest payments related to the Term Loan Facility based on the interest rate as of February 1, 2020 assuming normally scheduled principal payments;

and minimum contractual obligations related to leases signed but not yet commenced of $3.1 million, primarily related to the Company’s stores.

Refer to Note 11 , “ INCOME TAXES ,” Note 12 , “ BORROWINGS ,” Note 13 , “ OTHER LIABILITIES ,” and Note 17 , “ SAVINGS AND RETIREMENT PLANS ,” for further discussion.

In the fourth quarter of Fiscal 2019, the Company entered into a nine year service and distribution agreement for a facility to be located in the Phoenix, Arizona area, with services expected to commence in Fiscal 2021.

Due to uncertainty as to the ultimate minimum commitments related this agreement, these expected obligations are excluded from the contractual obligations table.

Due to uncertainty as to the amounts and timing of future payments, tax related to uncertain tax positions, including accrued interest and penalties, of $2.3 million as of February 1, 2020 is excluded from the contractual obligations table.

Deferred taxes are also excluded in the preceding table.

and minimum contractual obligations related to leases signed but not yet commenced, primarily related to the Company’s stores.

Refer to Note 8, “ LEASES ,” Note 12, “ INCOME TAXES ,” Note 13, “ BORROWINGS ,” and Note 17, “ SAVINGS AND RETIREMENT PLANS ,” for further discussion.

In Fiscal 2019, the Company entered into a nine-year service and distribution agreement for a facility to be located in the Phoenix, Arizona area, with services expected to commence in Fiscal 2021.

Due to uncertainty as to the ultimate minimum commitments related to this agreement, these expected obligations are excluded from the contractual obligations table.

Due to uncertainty as to the amounts and timing of future payments, tax related to uncertain tax positions, including accrued interest and penalties, of $1.1 million as of January 30, 2021 is excluded from the contractual obligations table.

Deferred taxes are also excluded in the contractual obligations table.

For further discussion, refer to Note 12, “ INCOME TAXES .”

A&F has historically paid quarterly dividends on its Common Stock.

Due to the fact that future dividends are subject to determination and approval by A&F’s Board of Directors, there are no amounts included in the contractual obligations table related to dividends.

As of January 30, 2021, the Company had recorded $6.1 million and $42.5 million of obligations related to its deferred compensation and supplemental retirement plans in accrued expenses and other liabilities on the Consolidated Balance Sheet, respectively.

Amounts payable with known payment dates of $19.2 million have been classified in the contractual obligations table based on those scheduled payment dates.

However, it is not reasonably practicable to estimate the timing and amounts for the remainder of these obligations, therefore, those amounts have been excluded in the contractual obligations table.

A&F had historically paid quarterly dividends on its Common Stock.

Due to the fact that the dividend program is currently suspended and given the payment of future dividends are subject to determination and approval by A&F’s Board of Directors, there are no amounts included in the contractual obligations table related to dividends.

Off-balance sheet arrangements

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

As of January 30, 2021, the Company did not have any material off-balance sheet arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 , “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recent accounting pronouncements ,” for recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s Consolidated Financial Statements.

The Company describes its significant accounting policies in Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .” The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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The Company believes the following policies are the most critical to the portrayal of the Company’s financial condition and results of operations.

Effect if Actual Results Differ from Assumptions

Policy Effect if Actual Results Differ from Assumptions

Revenue Recognition

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The Company determines its estimates of these factors based on historical redemption patterns.

The Company does not expect material changes to the underlying assumptions used to estimate deferred revenue associated with loyalty programs as of February 1, 2020.

The Company does not expect material changes to the underlying assumptions used to estimate deferred revenue associated with loyalty programs as of January 30, 2021.

However, actual results could vary from estimates and could result in material gains or losses.

An increase or decrease of 10% in the Company’s point expiration and reward redemption estimates as of February 1, 2020 would have affected pre-tax income by approximately $4.0 million for Fiscal 2019.

An increase of 10% in the Company’s point expiration and reward redemption estimates as of January 30, 2021 would have affected pre-tax loss by approximately $3.4 million for Fiscal 2020.

Inventory Valuation

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The LCNRV adjustment reduces inventory to its net realizable value based on the Company’s consideration of multiple factors and assumptions, including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences.

The Company does not expect material changes to the underlying assumptions used to measure the LCNRV estimate as of February 1, 2020.

The Company does not expect material changes to the underlying assumptions used to measure the LCNRV estimate as of January 30, 2021.

However, actual results could vary from estimates and could significantly impact the ending inventory valuation at cost, as well as gross profit.

An increase or decrease in the LCNRV adjustment of 10% would have affected pre-tax income by approximately $1.5 million for Fiscal 2019.

An increase or decrease in the LCNRV adjustment of 10% would have affected pre-tax loss by approximately $2.1 million for Fiscal 2020.

The provision for income taxes is determined using the asset and liability approach.

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Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

The Company does not expect material changes in the judgments, assumptions or interpretations used to calculate the tax provision for Fiscal 2020.

However, changes in these judgments, assumptions or interpretations may occur and should those changes be significant, they could have a material impact on the Company’s income tax provision.

As of the end of Fiscal 2019, the Company had recorded valuation allowances of $8.9 million.

The Company continues to review the need for valuation allowances on a quarterly basis.

It is reasonably possible, if business conditions improve, that there could be material adjustments over the next 12 months to the total amount of valuation allowances as circumstances may be such that sufficient evidence would exist to indicate that some or all of the deferred taxes currently subject to a valuation allowance will be utilized.

The Company does not expect that sufficient evidence to release the valuation allowance is likely to exist at any time prior to the fourth quarter of Fiscal 2021, and there is no guarantee that such evidence will exist or that deferred taxes will be utilized.

Changes in these judgments, assumptions or interpretations may occur and should those changes be significant, they could have a material impact on the Company’s income tax provision.

As January 30, 2021, the Company had recorded valuation allowances of $174.3 million.

Legal Contingencies

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Actual liabilities may differ from the amounts recorded, and there can be no assurance that the final resolution of legal contingencies will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Effect if Actual Results Differ from Assumptions

Policy Effect if Actual Results Differ from Assumptions

Long-lived Assets

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The key assumptions used in the Company’s fair value analysis may include discounted future store cash flows and comparable market rents.

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 February 1, 2020 and not impaired, had long-lived assets with a net book value of $139.6 million, which included $128.4 million of operating lease right-of-use assets as of February 1, 2020.

These stores had undiscounted cash flows which were in the range of 100% to 150% of their respective net asset values.

Store assets that were impaired during Fiscal 2019, had a remaining net book value of $126.7 million, which included $121.7 million of operating lease right-of-use assets, as of February 1, 2020.

Store assets that were tested for impairment as of January 30, 2021 and not impaired, had long-lived assets with a net book value of $82.5 million, which included $72.1 million of operating lease right-of-use assets as of January 30, 2021.

Store assets that were previously impaired as of January 30, 2021, had a remaining net book value of $115.3 million, which included $106.7 million of operating lease right-of-use assets, as of January 30, 2021.

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

The Company’s lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term.

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The Company estimates its incremental borrowing rate on a quarterly basis, based on the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

The Company does not expect material changes to the underlying assumptions used to measure its lease liabilities as of February 1, 2020.

An increase or decrease of 10% in the Company’s weighted-average discount rate as of February 1, 2020, would impact both the Company’s total assets and total liabilities by less than 1% and would not have a material impact on the Company’s pre-tax income for Fiscal 2019.

The Company does not expect material changes to the underlying assumptions used to measure its lease liabilities as of January 30, 2021.

An increase or decrease of 10% in the Company’s weighted-average discount rate as of January 30, 2021, would impact both the Company’s total assets and total liabilities by less than 1% and would not have a material impact on the Company’s pre-tax loss for Fiscal 2020.

NON-GAAP FINANCIAL MEASURES

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The Company believes that each of the non-GAAP financial measures presented in this “ ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, such as certain flagship asset impairment charges, and thereby supplements investors’ understanding of comparability of operations across periods.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, such as certain asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, therefore supplementing investors’ understanding of comparability of operations across periods.

Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance.

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Comparable sales

The Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations.

At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations.

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.

Historically, management had used 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 can be 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 Fiscal 2020.

Excluded items

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Excluded items

Marketing, general and administrative expense

Net charges related to certain legal matters

Asset impairment, exclusive of flagship store exit charges

Flagship store asset impairment charges

Operating income

Net charges related to certain legal matters and flagship store asset impairment charges

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

Net charges related to certain legal matters;

flagship store asset impairment charges;

discrete net tax benefits related to the Tax Cuts and Jobs Act of 2017;

and the tax effect of pre-tax excluded items

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

Operating (loss) income Certain asset impairment charges

Income tax expense (2)

Tax effect of pre-tax excluded items

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

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

(1) Certain of these financial measures are also expressed as a percentage of net sales.

The Company also presents income tax expense and the effective tax rate on both a GAAP and on an adjusted non-GAAP basis excluding the items listed under “ Operating income ,” as applicable, in the table above and discrete net tax benefits related to the Act.

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

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A reconciliation of financial metrics on a constant currency basis to GAAP for Fiscal 2020 and Fiscal 2019 is as follows:

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

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

Net sales Fiscal 2020 Fiscal 2019 % Change

GAAP $ 3,125,384 $ 3,623,073 (14)%

Impact from changes in foreign currency exchange rates — 22,459 (1)%

Net sales on a constant currency basis $ 3,125,384 $ 3,645,532 (14)%

BPS Change (1)

Gross profit Fiscal 2020 Fiscal 2019 BPS Change (1)

GAAP $ 1,891,205 $ 2,150,918 110

Impact from changes in foreign currency exchange rates — 26,522 (30)

Gross profit on a constant currency basis $ 1,891,205 $ 2,177,440 80

Operating income

BPS Change (1)

Operating (loss) income Fiscal 2020 Fiscal 2019 BPS Change (1)

GAAP $ (20,469) $ 70,068 (260)

Excluded items (2)

(72,937) (12,752) (190)

Adjusted non-GAAP $ 52,468 $ 82,820 (60)

1 unchanged sentence

Adjusted non-GAAP on a constant currency basis $ 52,468 $ 103,145 (110)

Net income per diluted share attributable to A&F

Net (loss) income per diluted share attributable to A&F Fiscal 2020 Fiscal 2019 $ Change

GAAP $ (1.82) $ 0.60 $(2.42)

Excluded items, net of tax (2)

(1.10) (0.13) (0.97)

Adjusted non-GAAP $ (0.73) $ 0.73 $(1.46)

5 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis