ABERCROMBIE & FITCH CO /DE/ 10-K

Item 8. Financial Statements and Supplementary Data Abercrombie & Fitch Co. Consolidated Statements of Operations and Comprehensive (Loss) Income (Thousands, except per share amounts) Fiscal 2020 Fiscal 2019 Fiscal 2018 Net sales $ 3,125,384 $ 3,623,073 $ 3,590,109 Cost of sales, exclusive of depreciation and amortization 1,234,179 1,472,155 1,430,193 Gross profit 1,891,205 2,150,918 2,159,916 Stores and distribution expense 1,391,584 1,551,243 1,536,216 Marketing, general and administrative expense 463,843 464,615 484,863 Flagship store exit (benefits) charges ( 11,636 ) 47,257 5,806 Asset impairment, exclusive of flagship store exit charges 72,937 19,135 11,580 Other operating income, net ( 5,054 ) ( 1,400 ) ( 5,915 ) Operating (loss) income ( 20,469 ) 70,068 127,366 Interest expense, net 28,274 7,737 10,999 (Loss) income before income taxes ( 48,743 ) 62,331 116,367 Income tax expense 60,211 17,371 37,559 Net (loss) income ( 108,954 ) 44,960 78,808 Less: Net income attributable to noncontrolling interests 5,067 5,602 4,267 Net (loss) income attributable to A&F $ ( 114,021 ) $ 39,358 $ 74,541 Net (loss) income per share attributable to A&F Basic $ ( 1.82 ) $ 0.61 $ 1.11 Diluted $ ( 1.82 ) $ 0.60 $ 1.08 Weighted-average shares outstanding Basic 62,551 64,428 67,350 Diluted 62,551 65,778 69,137 Other comprehensive income (loss) Foreign currency translation, net of tax $ 12,195 $ ( 5,080 ) $ ( 19,940 ) Derivative financial instruments, net of tax ( 5,616 ) ( 1,354 ) 12,542 Other comprehensive income (loss) 6,579 ( 6,434 ) ( 7,398 ) Comprehensive (loss) income ( 102,375 ) 38,526 71,410 Less: Comprehensive income attributable to noncontrolling interests 5,067 5,602 4,267 Comprehensive (loss) income attributable to A&F $ ( 107,442 ) $ 32,924 $ 67,143 The accompanying Notes are an integral part of these Consolidated Financial Statements. 49 Table of Contents Abercrombie & Fitch Co. Consolidated Balance Sheets (Thousands, except par value amounts) January 30, 2021 February 1, 2020 Assets Current assets: Cash and equivalents $ 1,104,862 $ 671,267 Receivables 83,857 80,251 Inventories 404,053 434,326 Other current assets 68,857 78,905 Total current assets 1,661,629 1,264,749 Property and equipment, net 550,587 665,290 Operating lease right-of-use assets 893,989 1,230,954 Other assets 208,697 388,672 Total assets $ 3,314,902 $ 3,549,665 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 289,396 $ 219,919 Accrued expenses 396,365 302,214 Short-term portion of operating lease liabilities 248,846 282,829 Income taxes payable 24,792 10,392 Total current liabilities 959,399 815,354 Long-term liabilities: Long-term portion of operating lease liabilities 957,588 1,252,634 Long-term portion of borrowings, net 343,910 231,963 Other liabilities 104,693 178,536 Total long-term liabilities 1,406,191 1,663,133 Stockholders’ equity Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 401,283 404,983 Retained earnings 2,149,470 2,313,745 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 102,307 ) ( 108,886 ) Treasury stock, at average cost: 40,901 and 40,514 shares at January 30, 2021 and February 1, 2020, respectively ( 1,512,851 ) ( 1,552,065 ) Total Abercrombie & Fitch Co. stockholders’ equity 936,628 1,058,810 Noncontrolling interests 12,684 12,368 Total stockholders’ equity 949,312 1,071,178 Total liabilities and stockholders’ equity $ 3,314,902 $ 3,549,665 The accompanying Notes are an integral part of these Consolidated Financial Statements. 50 Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, February 3, 2018 68,195 $ 1,033 $ 406,351 $ 10,092 $ 2,420,552 $ ( 95,054 ) 35,105 $ ( 1,490,503 ) $ 1,252,471 Impact from adoption of the new revenue recognition accounting standard — — — — 6,944 — — — 6,944 Net income — — — 4,267 74,541 — — — 78,808 Purchase of common stock ( 2,931 ) — — — — — 2,931 ( 68,670 ) ( 68,670 ) Dividends ($0.80 per share) — — — — ( 53,714 ) — — — ( 53,714 ) Share-based compensation issuances and exercises 963 — ( 22,727 ) — ( 29,779 ) — ( 963 ) 45,569 ( 6,937 ) Share-based compensation expense — 21,755 — — — — — 21,755 Derivative financial instruments, net of tax — — — — — 12,542 — — 12,542 Foreign currency translation adjustments, net of tax — — — — — ( 19,940 ) — — ( 19,940 ) Distributions to noncontrolling interests, net — — — ( 4,638 ) — — — — ( 4,638 ) Balance, February 2, 2019 66,227 $ 1,033 $ 405,379 $ 9,721 $ 2,418,544 $ ( 102,452 ) 37,073 $ ( 1,513,604 ) $ 1,218,621 Impact from adoption of the new lease accounting standard — — — — ( 75,165 ) — — — ( 75,165 ) Net income — — — 5,602 39,358 — — — 44,960 Purchase of common stock ( 3,957 ) — — — — — 3,957 ( 63,542 ) ( 63,542 ) Dividends ($0.80 per share) — — — — ( 51,510 ) — — — ( 51,510 ) Share-based compensation issuances and exercises 516 — ( 14,403 ) — ( 17,482 ) — ( 516 ) 25,081 ( 6,804 ) Share-based compensation expense — — 14,007 — — — — — 14,007 Derivative financial instruments, net of tax — — — — — ( 1,354 ) — — ( 1,354 ) Foreign currency translation adjustments, net of tax — — — — — ( 5,080 ) — — ( 5,080 ) Distributions to noncontrolling interests, net — — — ( 2,955 ) — — — — ( 2,955 ) Balance, February 1, 2020 62,786 $ 1,033 $ 404,983 $ 12,368 $ 2,313,745 $ ( 108,886 ) 40,514 $ ( 1,552,065 ) $ 1,071,178 Net income (loss) — — — 5,067 ( 114,021 ) — — — ( 108,954 ) Purchase of common stock ( 1,397 ) — — — — — 1,397 ( 15,172 ) ( 15,172 ) Dividends ($0.20 per share) — — — — ( 12,556 ) — — — ( 12,556 ) Share-based compensation issuances and exercises 1,010 — ( 22,382 ) — ( 37,698 ) — ( 1,010 ) 54,386 ( 5,694 ) Share-based compensation expense — — 18,682 — — — — — 18,682 Derivative financial instruments, net of tax — — — — — ( 5,616 ) — — ( 5,616 ) Foreign currency translation adjustments, net of tax — — — — — 12,195 — — 12,195 Distributions to noncontrolling interests, net — — — ( 4,751 ) — — — — ( 4,751 ) Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 The accompanying Notes are an integral part of these Consolidated Financial Statements. 51 Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Cash Flows (Thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Operating activities Net (loss) income $ ( 108,954 ) $ 44,960 $ 78,808 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization 166,281 173,625 178,030 Asset impairment 72,937 22,364 11,580 Loss on disposal 16,353 6,298 6,020 Amortization of deferred lease credits prior to adoption of new lease accounting standard — — ( 21,320 ) Provision for deferred income taxes 23,986 9,150 5,946 Share-based compensation 18,682 14,007 21,755 Changes in assets and liabilities Inventories 33,312 2,270 ( 23,820 ) Accounts payable and accrued expenses 186,747 10,821 63,155 Operating lease right-of use assets and liabilities ( 55,700 ) 46,442 — Income taxes 10,753 ( 5,473 ) 5,409 Other assets 38,632 ( 20,137 ) 33,302 Other liabilities 1,889 ( 3,642 ) ( 5,932 ) Net cash provided by operating activities 404,918 300,685 352,933 Investing activities Purchases of property and equipment ( 101,910 ) ( 202,784 ) ( 152,393 ) Withdrawal of funds from Rabbi Trust assets 50,000 — — Net cash used for investing activities ( 51,910 ) ( 202,784 ) ( 152,393 ) Financing activities Proceeds from issuance of senior secured notes 350,000 — — Proceeds from borrowings under the senior secured asset-based revolving credit facility 210,000 — — Repayment of borrowings under the term loan facility ( 233,250 ) ( 20,000 ) — Repayment of borrowings under the senior secured asset-based revolving credit facility ( 210,000 ) — — Payment of debt issuance costs and fees ( 7,318 ) — — Purchases of common stock ( 15,172 ) ( 63,542 ) ( 68,670 ) Dividends paid ( 12,556 ) ( 51,510 ) ( 53,714 ) Other financing activities ( 11,987 ) ( 12,821 ) ( 9,307 ) Net cash provided by (used for) financing activities 69,717 ( 147,873 ) ( 131,691 ) Effect of foreign currency exchange rates on cash 9,168 ( 3,593 ) ( 20,975 ) Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 431,893 ( 53,565 ) 47,874 Cash and equivalents, and restricted cash and equivalents, beginning of period 692,264 745,829 697,955 Cash and equivalents, and restricted cash and equivalents, end of period $ 1,124,157 $ 692,264 $ 745,829 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 16,250 $ 44,199 $ 17,299 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions $ ( 38,279 ) $ 391,753 $ — Supplemental information related to cash activities Cash paid for interest $ 26,629 $ 17,514 $ 14,221 Cash paid for income taxes $ 15,210 $ 20,717 $ 24,331 Cash received from income tax refunds $ 4,650 $ 8,773 $ 9,631 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements received of $30.7 million in Fiscal 2020 $ 316,992 $ 422,850 $ — The accompanying Notes are an integral part of these Consolidated Financial Statements. 52 Table of Contents Abercrombie & Fitch Co. Index for Notes to Consolidated Financial Statements Page No. Note 1. NATURE OF BUSINESS 54 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 54 Note 3. IMPACT OF COVID-19 63 Note 4. REVENUE RECOGNITION 65 Note 5. FAIR VALUE 66 Note 6. INVENTORIES 67 Note 7. PROPERTY AND EQUIPMENT, NET 67 Note 8. LEASES 68 Note 9. ASSET IMPAIRMENT 70 Note 10. RABBI TRUST ASSETS 70 Note 11. ACCRUED EXPENSES 71 Note 12. INCOME TAXES 71 Note 13. BORROWINGS 75 Note 14. SHARE-BASED COMPENSATION 77 Note 15. DERIVATIVE INSTRUMENTS 80 Note 16. ACCUMULATED OTHER COMPREHENSIVE LOSS 81 Note 17. SAVINGS AND RETIREMENT PLANS 82 Note 18. SEGMENT REPORTING 82 Note 19. FLAGSHIP STORE EXIT (BENEFITS) CHARGES 83 Note 20. CONTINGENCIES 83 Note 21. CORRECTION OF ERROR IN PREVIOUSLY REPORTED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 85 53 Table of Contents Abercrombie & Fitch Co. Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or 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 operates primarily in North America, Europe and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Consolidated Statements of Operations and Comprehensive (Loss) Income and MAF’s portion of equity presented as NCI on the Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Consolidated Financial Statements and Notes thereto by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2018 February 2, 2019 52 Fiscal 2019 February 1, 2020 52 Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the COVID-19 pandemic and its impact on the length or frequency of store closures, and the extent to which COVID-19 will impact worldwide macroeconomic conditions including interest rates, the speed of the economic recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods. 54 Table of Contents Abercrombie & Fitch Co. Cash and equivalents A summary of cash and equivalents on the Consolidated Balance Sheets follows: (in thousands) January 30, 2021 February 1, 2020 Cash (1) $ 796,994 $ 612,595 Cash equivalents: (2) Time deposits 11,589 58,447 Money market funds 296,279 225 Cash and equivalents $ 1,104,862 $ 671,267 (1) Primarily consists of amounts on deposit with financial institutions. (2) Investments with original maturities of less than three months. Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Consolidated Statements of Cash Flows: (in thousands) Location January 30, 2021 February 1, 2020 February 2, 2019 Cash and equivalents Cash and equivalents $ 1,104,862 $ 671,267 $ 723,135 Long-term restricted cash and equivalents Other assets 14,814 18,696 22,694 Short-term restricted cash and equivalents Other current assets 4,481 2,301 — Restricted cash and equivalents (1) $ 19,295 $ 20,997 $ 22,694 Cash and equivalents and restricted cash and equivalents $ 1,124,157 $ 692,264 $ 745,829 (1) Restricted cash and equivalents primarily consists of amounts on deposit with banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements. Receivables Receivables on the Consolidated Balance Sheets primarily include credit card receivables, lessor construction allowances, value added tax (“VAT”) receivables, trade receivables, income tax receivables and other tax credits or refunds. As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Lessor construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold. Trade receivables are amounts billed by the Company to wholesale, franchise and licensing partners in the ordinary course of business. Income tax receivables represent refunds of certain tax payments along with net operating loss and credit carryback claims for which the Company expects to receive refunds within the next 12 months. Inventories Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The lower of cost and net realizable value adjustment is 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. Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly. Refer to Note 6, “ INVENTORIES .” The Company’s global sourcing of merchandise is generally negotiated and settled in U.S. Dollars. Other current assets Other current assets on the Consolidated Balance Sheets consists of: prepaid expenses including those related to rent, information technology maintenance and taxes; current store supplies; derivative contracts; short-term restricted cash and other. 55 Table of Contents Abercrombie & Fitch Co. Property and equipment, net Depreciation of property and equipment is computed for financial reporting purposes on a straight-line basis using the following service lives: Category of property and equipment Service lives Information technology 3 - 7 years Furniture, fixtures and equipment 3 - 15 years Leasehold improvements 3 - 15 years Other property and equipment 3 - 20 years Buildings 30 years Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized. The Company capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding seven years. Refer to Note 7, “ PROPERTY AND EQUIPMENT, NET .” Leases The Company determines if an arrangement is an operating lease at inception. For new operating leases, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term on the lease commencement date. The commencement date for new leases is when the lessor makes the leased asset available for use by the Company, typically the possession date. As the rates implicit in the Company’s leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the operating lease and the lease term for the initial measurement of the operating lease right-of-use asset and liability. For operating leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For operating leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date. The Company has elected to combine lease and nonlease components for all current classes of underlying leased assets. The measurement of operating lease right-of-use assets and liabilities includes amounts related to: • Lease payments made prior to the lease commencement date; • Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded; • Fixed payments related to operating lease components, such as rent escalation payments scheduled at the lease commencement date; • Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and • Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease. The measurement of operating lease right-of-use assets and liabilities excludes amounts related to: • Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Consolidated Balance Sheets; • Variable payments related to operating lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Consolidated Statements of Operations and Comprehensive (Loss) Income; • Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive (Loss) Income; and 56 Table of Contents Abercrombie & Fitch Co. • Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive (Loss) Income. Certain of the Company’s operating leases include options to extend the lease or to terminate the lease. The Company assesses these operating leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s operating lease right-of-use assets and liabilities. Generally, the Company’s options to extend its operating leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Consolidated Statements of Operations and Comprehensive (Loss) Income until a new agreement has been executed. Upon signing of the renewal agreement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of remaining lease payments over the lease term. Amortization and interest expense related to operating lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired operating lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the operating lease, amortization and interest expense are primarily recorded within stores and distribution expense, marketing, general and administrative expense, or flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party. Refer to Note 8, “ LEASES .” Long-lived asset impairment For the purposes of asset impairment, the Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumptions used in developing these projected cash flows used in the recoverability test include estimates of future sales, gross profit and, to a lesser extent, operating expenses. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in estimating fair value of an asset group may include discounted estimates of future cash flows from operating the store or comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. Refer to Note 9, “ ASSET IMPAIRMENT .” Other assets Other assets on the Consolidated Balance Sheets consist primarily of the Company’s trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”), deferred tax assets, long-term deposits, intellectual property, long-term restricted cash and equivalents, long-term supplies and various other assets. Rabbi Trust assets The Rabbi Trust includes amounts, restricted in their use, to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value and are included in other assets on the 57 Table of Contents Abercrombie & Fitch Co. Consolidated Balance Sheets. The change in cash surrender value of the Rabbi Trust is recorded in interest expense, net on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Refer to Note 10, “ RABBI TRUST ASSETS .” Intellectual property Intellectual property primarily includes trademark assets associated with the Company’s international operations, consisting of finite-lived and indefinite-lived intangible assets. The Company’s finite-lived intangible assets are amortized over a useful life of 10 to 20 years. Income taxes Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company’s income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited to: changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, the settlement of tax audits and changes in tax legislation and/or regulations. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties. A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue may require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Refer to Note 12, “ INCOME TAXES .” Foreign currency translation and transactions The functional currencies of the Company’s foreign subsidiaries are generally the respective local currencies in the countries in which they operate. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies are translated into U.S. Dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in other operating income, net; whereas, translation adjustments and gains and losses associated with measuring inter-company loans of a long-term investment nature are reported as an element of other comprehensive income (loss). Derivative instruments The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. 58 Table of Contents Abercrombie & Fitch Co. In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued. For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings, except as allowable under certain extenuating circumstances. The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings on the Consolidated Balance Sheets. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at the Company’s fiscal month-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions. Refer to Note 15, “ DERIVATIVE INSTRUMENTS . ” Stockholders’ equity A summary of the Company’s Class A Common Stock (the “Common Stock”), $ 0.01 par value, and Class B Common Stock, $ 0.01 par value, follows: (in thousands) January 30, 2021 February 1, 2020 Class A Common Stock Shares authorized 150,000 150,000 Shares issued 103,300 103,300 Shares outstanding 62,399 62,786 Class B Common Stock (1) Shares authorized 106,400 106,400 (1) No shares were issued or outstanding as of each of January 30, 2021 and February 1, 2020. Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of stockholders. 59 Table of Contents Abercrombie & Fitch Co. Revenue recognition The Company recognizes revenue from product sales when control of the good is transferred to the customer, generally upon pick up at, or shipment from, a Company location. The Company provides shipping and handling services to customers in certain transactions under its digital operations. Revenue associated with the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receipt of the merchandise. The related shipping and handling costs are classified in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Revenue is recorded net of estimated returns, associate discounts, promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience among other factors. The sales return reserve is classified in accrued expenses on the Consolidated Balance Sheets. The Company accounts for gift cards sold to customers by recognizing an unearned revenue liability at the time of sale, which is recognized as net sales when redeemed by the customer or when the Company has determined the likelihood of redemption to be remote, referred to as gift card breakage. Gift card breakage is recognized proportionally with gift card redemptions in net sales. Gift cards sold to customers do not expire or lose value over periods of inactivity and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates. The Company also maintains loyalty programs, which primarily provide customers with the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized at the earlier of redemption or expiration. Unearned revenue liabilities related to the Company’s gift card program and loyalty programs are classified in accrued expenses on the Consolidated Balance Sheets and are typically recognized as revenue within a 12-month period. For additional details on the Company’s unearned revenue liabilities related to the Company’s gift card and loyalty programs, refer to Note 4, “ REVENUE RECOGNITION .” The Company also recognizes revenue under wholesale arrangements, which is generally recognized upon shipment, when control passes to the wholesale partner. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon the sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers. The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales. All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive (Loss) Income. For a discussion of the disaggregation of revenue, refer to Note 18, “ SEGMENT REPORTING . ” Cost of sales, exclusive of depreciation and amortization Cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive (Loss) Income, primarily consists of cost incurred to ready inventory for sale, including product costs, freight, and import costs, as well as provisions for reserves for shrink and lower of cost and net realizable value. Gains and losses associated with the effective portion of designated foreign currency exchange forward contracts related to the hedging of intercompany inventory transactions are also recognized in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company’s cost of sales, exclusive of depreciation and amortization, and consequently gross profit, may not be comparable to those of other retailers, as inclusion of certain costs vary across the industry. Some retailers include all costs related to buying, design and distribution operations in cost of sales, while others may include either all or a portion of these costs in selling, general and administrative expenses. Stores and distribution expense Stores and distribution expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income primarily consists of: store payroll; store management; operating lease costs in Fiscal 2020 and Fiscal 2019 and rent expense in Fiscal 2018; utilities and other landlord expenses; depreciation and amortization, except for those amounts included in marketing, 60 Table of Contents Abercrombie & Fitch Co. general and administrative expense; repairs and maintenance and other store support functions; marketing and other costs related to the Company’s digital operations; shipping and handling costs; and distribution center (“DC”) expense. A summary of shipping and handling costs, which includes costs incurred to store, move and prepare product for shipment and costs incurred to physically move product to our customers across channels, follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Shipping and handling costs $ 291,534 $ 224,604 $ 201,614 Marketing, general and administrative expense Marketing, general and administrative expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income primarily consists of: home office compensation and marketing, except for those departments included in stores and distribution expense; information technology; outside services, such as legal and consulting; depreciation, primarily related to IT and other home office assets; amortization related to trademark assets; costs to design and develop the Company’s merchandise; relocation; recruiting; and travel expenses. Other operating income, net Other operating income, net on the Consolidated Statements of Operations and Comprehensive (Loss) Income primarily consists of gains and losses resulting from foreign-currency-denominated transactions. A summary of foreign-currency-denominated transactions, including those related to derivative instruments, follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Foreign-currency-denominated transaction gains $ 3,933 $ 348 $ 5,267 Interest expense, net For Fiscal 2020 and Fiscal 2019, interest expense primarily consisted of interest expense on the Company’s long-term borrowings outstanding. For Fiscal 2018, interest expense primarily consisted of borrowings outstanding under the Company’s Term Loan Facility and interest expense related to landlord financing obligations, which were eliminated along with the related interest expense upon adoption of the new lease accounting standard in Fiscal 2019. For Fiscal 2020, Fiscal 2019 and Fiscal 2018, interest income primarily consisted of interest income earned on the Company’s investments and cash holdings and realized gains from the Rabbi Trust assets. A summary of interest expense, net follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Interest expense (1) $ 31,726 $ 19,908 $ 22,788 Interest income ( 3,452 ) ( 12,171 ) ( 11,789 ) Interest expense, net $ 28,274 $ 7,737 $ 10,999 (1) Includes interest expense related to landlord financing obligations of $ 5.5 million for Fiscal 2018. Landlord financing obligations were eliminated with the adoption of the new lease accounting standard at the beginning of Fiscal 2019. Advertising costs Advertising costs consist primarily of paid media advertising, direct digital advertising, including e-mail distribution, digital content and in-store photography and signage. Advertising costs related specifically to digital operations are expensed as incurred and the production of in-store photography and signage is expensed when the marketing campaign commences as components of stores and distribution expense. All other advertising costs are expensed as incurred as components of marketing, general and administrative expense. A summary of advertising costs follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Advertising costs $ 118,537 $ 134,058 $ 136,553 61 Table of Contents Abercrombie & Fitch Co. Share-based compensation The Company issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of January 30, 2021, the Company had sufficient treasury stock available to settle restricted stock units and stock appreciation rights outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time. In the event, at each reporting date as of which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (as amended effective May 20, 2020, the “2016 Directors LTIP”) and the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended effective May 20, 2020, the “2016 Associates LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards would be re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered. Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company’s Common Stock price for the most recent historical period equal to the expected term of the stock appreciation rights, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly closing price of the Common Stock, adjusted for stock splits and dividends. Service-based restricted stock units are expensed on a straight-line basis over the award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation expense for stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the issuance of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction differs from the recorded deferred tax asset, the excess tax benefit or deficit associated with the tax deduction is recognized within income tax expense. Refer to Note 14, “ SHARE-BASED COMPENSATION .” 62 Table of Contents Abercrombie & Fitch Co. Net (loss) income per share attributable to A&F Net (loss) income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock. Additional information pertaining to net (loss) income per share attributable to A&F follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Shares of Common Stock issued 103,300 103,300 103,300 Weighted-average treasury shares ( 40,749 ) ( 38,872 ) ( 35,950 ) Weighted-average — basic shares 62,551 64,428 67,350 Dilutive effect of share-based compensation awards — 1,350 1,787 Weighted-average — diluted shares 62,551 65,778 69,137 Anti-dilutive shares (1) 3,270 1,462 1,838 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net (loss) income per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. Recent accounting pronouncements The Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments effective February 3, 2019. Adoption of this standard resulted in the Company’s total assets and total liabilities on the Consolidated Balance Sheet each increasing by approximately $1.2 billion on the date of adoption, primarily due to the recognition of operating lease right-of-use assets and liabilities. Certain of these newly-established operating lease right-of-use assets related to previously impaired stores and, therefore, were assessed for impairment upon adoption. To the extent that the initial carrying amount for each such lease right-of-use asset was greater than its fair value, an asset impairment charge was recognized as an adjustment to the opening balance of retained earnings on the date of adoption. As a result, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings by $0.1 billion on the date of adoption. The Company adopted this standard using a modified retrospective transition method and elected to not restate comparative periods. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have or that did not have a material impact on the Company’s consolidated financial statements. 3. IMPACT OF COVID-19 Recent developments The Company has seen, and may continue to see, material adverse impacts as a result of COVID-19. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of the coronavirus and the availability and acceptance of effective vaccines or medical treatments. In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19. In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and 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 the COVID-19 outbreak. 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. 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 63 Table of Contents Abercrombie & Fitch Co. region on a rolling basis in late April 2020. As of January 30, 2021, approximately 88% of Company-operated stores were open for in-store service 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’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 pick-up at a majority of U.S. locations, and by utilizing ship-from-store capabilities. In addition, to prepare for the Fiscal 2020 holiday season, the Company entered into a short-term lease for an additional distribution center and partnered with incremental carriers. Impact of COVID-19 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. The year-over-year decrease in total net sales was primarily driven by temporary widespread store closures and a decline in store traffic as compared to the previous year as a result of COVID-19. The year-over-year decline in store sales was partially offset by digital sales growth of approximately 39% for Fiscal 2020 as compared to Fiscal 2019. During the thirteen weeks ended May 2, 2020, the Company recognized $ 14.8 million of charges to reduce the carrying value of inventory, primarily as a result of COVID-19 and the temporary closure of the Company’s stores, in cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive (Loss) income. These charges represented the majority of inventory write-down charges related to COVID-19 incurred during Fiscal 2020. During Fiscal 2020, reductions in revenue were not offset by proportional decreases in expense, as the Company continued to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. During Fiscal 2020, the Company suspended rent payments for a significant number of stores that were closed, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. The Company has elected to account for all qualifying lease concessions, those that are a direct consequence of COVID-19 and that result in revised lease consideration that is substantially the same or less than the original consideration, as if the enforceable rights and obligations associated with the concession existed in the original lease agreement. The Company obtained $ 30.7 million of rent abatements during Fiscal 2020 and recognized $30.1 million of benefits related to these abatements within variable lease cost during Fiscal 2020. Lease concessions granted as part of an agreement that substantially increases the total consideration as a result of the inclusion of additional terms, such as rent payments associated with a lease term extension, are treated as lease modifications. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses on the Consolidated Balance Sheets in the period during which rent was due, while continuing to recognize operating lease cost in the Consolidated Statements of Operations and Comprehensive (Loss) Income. As of January 30, 2021, the Company had $ 24.2 million related to these suspended payments classified within accrued expenses on the Consolidated Balance Sheets. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides refundable employee retention tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and the deferral of the employer-paid portion of social security taxes. Similar relief programs have also been established throughout the EMEA and APAC regions. Based on the Company's evaluation of the CARES Act and legislation across regions, the Company qualifies for certain payroll tax credits, and such government subsidies have been treated as offsets to the related operating expenses when recognized. During Fiscal 2020, the Company recognized qualified payroll tax credits and government subsidies reducing payroll expenses by approximately $ 18.1 million on the Consolidated Statements of Operations and Comprehensive (Loss) Income. There are also instances where governments have provided wage subsidies through direct payments to the Company’s associates. In these instances, no benefits are recognized on the Consolidated Statements of Operations and Comprehensive (Loss) Income, but the Company does see a reduction in expense incurred as compared to Fiscal 2019. The Company also intends to continue to defer qualified payroll and other tax payments as permitted by the CARES Act and other regional legislation. The Company also recognized asset impairment charges related to the Company’s right-of-use assets and property and equipment of $72.9 million during Fiscal 2020, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ ASSET IMPAIRMENT ,” for additional information. 64 Table of Contents Abercrombie & Fitch Co. In addition, the Company has also experienced other material impacts as a result of COVID-19, such as deferred tax valuation allowances and other tax charges during Fiscal 2020, adversely impacting results by $ 101.4 million. Refer to Note 12, “ INCOME TAXES ,” for additional information. Balance sheet, cash flow and liquidity During Fiscal 2020, in light of COVID-19, the Company took various actions to preserve liquidity and manage cash flows in order to best position the business for key stakeholders, including (i) partnering with merchandise and non-merchandise vendors in regards to payment terms; (ii) tightly managing inventory receipts to align inventory with expected market demand; (iii) significantly reducing expenses to better align operating costs with sales; and (iv) temporarily suspending its share repurchase program in March 2020 and its dividend program in May 2020. 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. 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 its senior secured asset-based revolving credit facility (the “ABL Facility”) and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $ 50.0 million of additional cash. In July 2020, the Company completed a private offering of $350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”) and used the net proceeds of such offering to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 13, “ BORROWINGS ,” and Note 10, “ RABBI TRUST ASSETS ,” for additional information. 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. 4. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive (Loss) Income. For information regarding the disaggregation of revenue, refer to Note 18, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of January 30, 2021 and February 1, 2020: (in thousands) January 30, 2021 February 1, 2020 Gift card liability $ 28,561 $ 28,844 Loyalty programs liability $ 20,426 $ 23,051 The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2020 Fiscal 2019 Revenue associated with gift card redemptions and gift card breakage $ 58,400 $ 70,164 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs $ 37,042 $ 35,701 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue recognition ,” for discussion regarding significant accounting policies related to the Company’s revenue. 65 Table of Contents Abercrombie & Fitch Co. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows: Assets and Liabilities at Fair Value as of January 30, 2021 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 296,279 $ 11,589 $ — $ 307,868 Derivative instruments (2) — 79 — 79 Rabbi Trust assets (3) 1 60,789 — 60,790 Restricted cash equivalents (4) 2,943 7,775 — 10,718 Total assets $ 299,223 $ 80,232 $ — $ 379,455 Liabilities: Derivative instruments (2) $ — $ 4,694 $ — $ 4,694 Total liabilities $ — $ 4,694 $ — $ 4,694 Assets and Liabilities at Fair Value as of February 1, 2020 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 225 $ 58,447 $ — $ 58,672 Derivative instruments (2) — 1,969 — 1,969 Rabbi Trust assets (3) 1 109,048 — 109,049 Restricted cash equivalents (4) 9,765 4,601 — 14,366 Total assets $ 9,991 $ 174,065 $ — $ 184,056 Liabilities: Derivative instruments (2) $ — $ 1,460 $ — $ 1,460 Total liabilities $ — $ 1,460 $ — $ 1,460 (1) Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits. (2) Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts. (3) Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies. (4) Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits. The Company’s Level 2 assets and liabilities consist of: • Time deposits, which are valued at cost approximating fair value due to the short-term nature of these investments; • Trust-owned life insurance policies which are valued using the cash surrender value of the life insurance policies; and • Derivative instruments, primarily foreign currency exchange forward contracts, which are valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. 66 Table of Contents Abercrombie & Fitch Co. Fair value of borrowings The Company’s borrowings under the Senior Secured Notes as of January 30, 2021 and the Term Loan Facility as of February 1, 2020 are carried at historical cost in the Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) January 30, 2021 February 1, 2020 Gross borrowings outstanding, carrying amount $ 350,000 $ 233,250 Gross borrowings outstanding, fair value $ 389,813 $ 233,979 No borrowings were outstanding under the Company’s ABL Facility as of January 30, 2021 or February 1, 2020. Refer to Note 13, “ BORROWINGS ,” for further discussion of the Company’s credit facilities. 6. INVENTORIES Inventories consisted of: (in thousands) January 30, 2021 February 1, 2020 Inventories at original cost $ 429,993 $ 456,335 Less: Lower of cost and net realizable value adjustment ( 21,076 ) ( 14,925 ) Less: Shrink estimate ( 4,864 ) ( 7,084 ) Inventories (1) $ 404,053 $ 434,326 (1) Includes $ 106.0 million and $ 92.3 million of inventory in transit, merchandise owned by the Company that has not yet been received at a Company distribution center, as of January 30, 2021 and February 1, 2020, respectively. A summary of the Company’s vendors based on location and the percentage of dollar cost of merchandise receipts during Fiscal 2020, Fiscal 2019 and Fiscal 2018 follows: % of Total Company Merchandise Receipts (1) Location Fiscal 2020 Fiscal 2019 Fiscal 2018 Vietnam 41 % 36 % 29 % Cambodia 15 % 9 % 3 % China (2) 12 % 22 % 36 % Other (3) 32 % 33 % 32 % Total 100 % 100 % 100 % (1) Calculated as the cost of merchandise receipts from all vendors within a country during the respective fiscal year divided by cost of total merchandise receipts during the respective fiscal year. (2) Only a portion of the Company’s total merchandise sourced from China is subject to the additional U.S. tariffs on imported consumer goods that were effective beginning in Fiscal 2019. The Company estimates approximately 7 %, 15 % and 25 % of total merchandise receipts were directly imported to the U.S. from China in Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. (3) No country included within this category sourced more than 10% of total merchandise receipts during any fiscal year presented above. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Inventories ,” for discussion regarding significant accounting policies related to the Company’s inventories. 67 Table of Contents Abercrombie & Fitch Co. 7. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of: (in thousands) January 30, 2021 February 1, 2020 Land $ 28,599 $ 28,599 Buildings 230,104 230,281 Furniture, fixtures and equipment 608,210 674,885 Information technology 607,062 609,917 Leasehold improvements 990,238 1,138,372 Construction in progress 22,744 60,913 Other 2,000 2,000 Total 2,488,957 2,744,967 Less: Accumulated depreciation ( 1,938,370 ) ( 2,079,677 ) Property and equipment, net $ 550,587 $ 665,290 Depreciation expense for Fiscal 2020, Fiscal 2019 and Fiscal 2018 was $ 167.2 million, $ 172.6 million and $ 172.8 million, respectively. Refer to Note 9, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during Fiscal 2020, Fiscal 2019 and Fiscal 2018. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net ,” for discussion regarding significant accounting policies related to the Company’s property and equipment, net. 8. LEASES The Company has leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. During Fiscal 2020, the Company suspended rent payments for a significant number of stores that were closed as a result of COVID-19. In addition, 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. Refer to Note 3. “ IMPACT OF COVID-19 ”, for additional details related to these items. In addition, during Fiscal 2020, the Company entered into a sublease agreement with a third party for the remaining lease term of one of its European Abercrombie & Fitch flagship store locations upon its closure. As of January 30, 2021, the Company's subleased property had a remaining lease term of 6.8 years with the sublease term from February 1, 2021 through November 30, 2027. The sublease arrangement provides for rent and occupancy-related costs such as taxes, utilities and maintenance costs. Initial sublease terms provide for rent escalations based on the index under the lease, which were estimated upon initial measurement of the operating lease right-of-use asset and liability. The sublease agreement does not include residual value guarantees. Consistent with the Company's real estate leases, the sublease contains usage restrictions, but does not contain financial covenants and restrictions. Future minimum tenant operating lease payments remaining under this sublease as of January 30, 2021 were $30.3 million. 68 Table of Contents Abercrombie & Fitch Co. The following table provides a summary of the Company’s operating lease costs for Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2020 Fiscal 2019 Single lease cost (1) $ 346,178 $ 427,982 Variable lease cost (2) 65,310 143,472 Operating lease right-of-use asset impairment (3) 57,026 15,812 Total operating lease cost $ 468,514 $ 587,266 (1) Includes amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as $30.1 million of rent abatements in Fiscal 2020 related to the effects of the COVID-19 pandemic that resulted in lease concessions with total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. (3) Refer to Note 9, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. As reported under the previous accounting standard, the following table provides a summary of rent expense for Fiscal 2018: (in thousands) Fiscal 2018 Store rent expense: Fixed minimum (1) $ 365,229 Contingent 18,189 Deferred lease credits amortization ( 21,320 ) Total store rent expense 362,098 Buildings, equipment and other 8,800 Total rent expense $ 370,898 (1) Includes lease termination fees of $ 4.0 million for Fiscal 2018. Under the new lease accounting standard, which the Company adopted on February 3, 2019, similar charges would be a component of operating lease cost. The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rate used to calculate the Company’s operating lease liabilities as of January 30, 2021 and February 1, 2020: January 30, 2021 February 1, 2020 Weighted-average remaining lease term (years) 5.7 6.2 Weighted-average discount rate 5.6 % 5.4 % The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of January 30, 2021: (in thousands) January 30, 2021 Fiscal 2021 307,174 Fiscal 2022 272,868 Fiscal 2023 225,959 Fiscal 2024 162,672 Fiscal 2025 141,651 Fiscal 2026 and thereafter 300,363 Total undiscounted operating lease payments $ 1,410,687 Less: Imputed interest ( 204,253 ) Present value of operating lease liabilities $ 1,206,434 The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 4.7 million as of January 30, 2021. 69 Table of Contents Abercrombie & Fitch Co. 9. ASSET IMPAIRMENT The following table provides additional details related to long-lived asset impairment charges: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Operating lease right-of-use asset impairment (1) $ 57,026 $ 15,812 $ — Property and equipment asset impairment 15,911 6,552 11,580 Total asset impairment $ 72,937 $ 22,364 $ 11,580 (1) Includes $3.2 million of operating lease right-of-use asset impairment included in flagship store exit charges on the Consolidated Statement of Operations and Comprehensive Income for Fiscal 2019. Refer to Note 19, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .” Asset impairment charges for Fiscal 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $95.0 million, including $87.2 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2019 primarily related to certain of the Company’s international flagship stores. The impairment charges for Fiscal 2019 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $103.4 million, including $99.2 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2018 primarily related to certain of the Company’s international flagship stores. The impairment charges for Fiscal 2018 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $2.6 million. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Long-lived asset impairment ,” for discussion regarding significant accounting policies related to impairment of the Company’s long-lived assets. 10. RABBI TRUST ASSETS In an effort to improve the Company’s near-term cash position, as a precautionary measure in response to COVID-19, during Fiscal 2020, the Company withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $ 50.0 million of additional cash. Investments of Rabbi Trust assets consisted of the following as of January 30, 2021 and February 1, 2020: (in thousands) January 30, 2021 February 1, 2020 Trust-owned life insurance policies (at cash surrender value) $ 60,789 $ 109,048 Money market funds 1 1 Rabbi Trust assets $ 60,790 $ 109,049 Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for Fiscal 2020, Fiscal 2019 and Fiscal 2018 were as follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Realized gains related to Rabbi Trust assets $ 1,740 $ 3,172 $ 3,084 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Rabbi Trust assets ,” for further discussion related to the Company’s Rabbi Trust assets. 70 Table of Contents Abercrombie & Fitch Co. 11. ACCRUED EXPENSES Accrued expenses consisted of: (in thousands) January 30, 2021 February 1, 2020 Accrued payroll and related costs (1) $ 119,978 $ 58,588 Accrued costs related to the Company’s DCs and digital operations 56,135 38,334 Other (2) 220,252 205,292 Accrued expenses $ 396,365 $ 302,214 (1) Accrued payroll and related costs include salaries, incentive compensation, benefits, withholdings and other payroll-related costs. (2) Other primarily includes the Company’s gift card and loyalty programs liabilities, accrued taxes, accrued rent and expenses incurred but not yet paid primarily related to outside services associated with store and home office operations and construction in progress. Refer to Note 4, “ REVENUE RECOGNITION .” 12. INCOME TAXES Impact of valuation allowances and other tax charges during Fiscal 2020 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. Further details regarding these adverse tax impacts are as follows: • Due to the significant adverse impacts of COVID-19, the Company did not recognize income tax benefits on $ 203.4 million of pre-tax losses during Fiscal 2020, resulting in an adverse tax impact 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 during Fiscal 2020, including, but not limited to, the U.S., Switzerland, Germany and Japan, principally as a result of the significant adverse impacts of COVID-19. Global legislation in response to COVID-19 In March 2020, the CARES Act was enacted into U.S. law, intended to provide economic relief to those impacted by COVID-19 and enhance business’ liquidity. The CARES Act did not have a material impact on the Company’s U.S. income taxes in Fiscal 2020 and based on information currently available, the Company does not currently expect that these provisions will have a material impact on its income taxes in the future. The Company is still assessing the applicability of other recently passed and proposed global legislation, including the potential income tax measures offered in international jurisdictions where the Company’s operations have also been impacted by COVID-19. Swiss Tax Reform In May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), effective at the federal level beginning January 2020, which resulted in the abolishment of preferential tax regimes by the cantons. In addition to the abolishment of the preferential tax regimes, the cantons needed to implement new, mandatory tax provisions in their cantonal tax law which were subject to a referendum process as well. As a result of these changes and actions taken by the Company, both of which occurred in the third quarter of Fiscal 2019, the Company increased its deferred income tax assets and liabilities, which are recorded on the Consolidated Balance Sheets within other assets and other liabilities, respectively, by $38.0 million during the third quarter of Fiscal 2019. In the fourth quarter of Fiscal 2019, the canton of Ticino formally enacted the tax reform effective January 1, 2020. As a result, the tax reform went into effect on January 1, 2020. The Company decreased its deferred income tax assets and liabilities by $13.1 million during the fourth quarter of Fiscal 2019 for a net increase of deferred income tax assets and liabilities during Fiscal 2019 of $ 24.9 million as a result of Swiss Tax Reform. In addition, the Company incurred tax benefits in Fiscal 2019 of $2.9 million as a result of Swiss Tax Reform. Swiss Tax Reform did not have a material impact to the Consolidated Statements of Operations and Comprehensive (Loss) Income or the Company’s cash flows during Fiscal 2020 or Fiscal 2019. Tax Cuts and Jobs Act of 2017 In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law and made broad and significantly complex changes to the U.S. corporate income tax system. Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts related to the enactment of the Act, for Fiscal 2017 and up to one year from the enactment of the Act, were provisional and subject to further analysis, interpretation and clarification of the Act. The Company updated its interpretations and assumptions, which resulted in net benefits of $ 3.5 million recognized in Fiscal 2018 during the 71 Table of Contents Abercrombie & Fitch Co. measurement period, primarily due to regulatory guidance issued by the U.S. Internal Revenue Service (the “IRS”). The Company completed its accounting related to the Act in the fourth quarter of Fiscal 2018. Components of income taxes (Loss) income before income taxes consisted of: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Domestic (1) $ ( 33,417 ) $ 17,590 $ 53,858 Foreign ( 15,326 ) 44,741 62,509 (Loss) income before income taxes $ ( 48,743 ) $ 62,331 $ 116,367 (1) Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return. Income tax expense consisted of: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Current: Federal $ 9,434 $ ( 2,193 ) $ 7,460 State 3,751 1,893 3,645 Foreign 23,041 8,521 20,508 Total current $ 36,226 $ 8,221 $ 31,613 Deferred: Federal (1) $ ( 73,104 ) $ 29,012 $ 5,319 State 8,828 ( 107 ) 1,183 Foreign (1) 88,261 ( 19,755 ) ( 556 ) Total deferred 23,985 9,150 5,946 Income tax expense $ 60,211 $ 17,371 $ 37,559 (1) As a result of COVID-19, Fiscal 2020 includes federal deferred tax benefit of $79.0 million and foreign deferred tax expense of $88.6 million due to the establishment of an additional valuation allowance in Switzerland. As a result of Swiss Tax Reform, Fiscal 2019 federal deferred tax expense included charges of $24.9 million and foreign deferred tax expense included benefits of $24.9 million. 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 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 tax expense. 72 Table of Contents Abercrombie & Fitch Co. Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows: Fiscal 2020 Fiscal 2019 Fiscal 2018 U.S. federal corporate income tax rate 21.0 % 21.0 % 21.0 % Net change in valuation allowances ( 177.2 ) 8.2 0.7 Foreign taxation of non-U.S. operations (1) 32.7 5.5 ( 0.9 ) Write-off of stock basis in subsidiary — 3.2 — Internal Revenue Code Section 162(m) ( 5.5 ) 2.2 1.0 State income tax, net of U.S. federal income tax effect 2.6 1.9 3.6 Audit and other adjustments to prior years’ accruals, net 2.6 0.8 ( 0.1 ) Permanent items — 0.3 0.2 Statutory tax rate and law changes due to Swiss Tax Reform — ( 4.6 ) — Credit for increasing research activities 2.6 ( 3.6 ) ( 1.7 ) Net income attributable to noncontrolling interests 2.2 ( 1.9 ) ( 0.8 ) Additional U.S. taxation of non-U.S. operations ( 0.2 ) ( 1.4 ) 5.1 Trust-owned life insurance policies (at cash surrender value) 0.7 ( 1.1 ) ( 0.6 ) Other statutory tax rate and law changes 2.3 ( 0.9 ) ( 0.1 ) Tax (benefit) expense recognized on share-based compensation (2) ( 7.5 ) ( 0.9 ) 8.3 Credit items 0.2 ( 0.8 ) ( 0.6 ) Tax Cuts and Jobs Act of 2017 — — ( 3.0 ) Other items, net — — 0.2 Total ( 123.5 ) % 27.9 % 32.3 % (1) Prior to 2019, U.S. branch operations in Canada and Puerto Rico were subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items. Effective in 2019, only Puerto Rico continues to be a branch of the U.S. (2) Refer to Note 14, “ SHARE-BASED COMPENSATION ,” for details on discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2020, Fiscal 2019, and Fiscal 2018. The impact of various tax items on the Company's effective tax rate were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. The effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items in the table above excludes items related to the Company's non-U.S. operations reported separately in the appropriate corresponding line items. For Fiscal 2020, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was related to the Company's jurisdictional mix driven primarily by the Company’s operations within Switzerland. For Fiscal 2019, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Japan subsidiary, along with the Company’s NCI. For Fiscal 2019, the Company’s Japan subsidiary earned pre-tax income of $ 12.0 million with a jurisdictional effective tax rate of 35.1 %. With respect to the NCI, the subsidiary incurred pre-tax income of $ 5.6 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above. For Fiscal 2018, the impact of foreign taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s Swiss subsidiary, along with the Company’s NCI. For Fiscal 2018, the Company’s Swiss subsidiary earned pre-tax income of $ 24.9 million with a jurisdictional effective tax rate of 12.9 %. With respect to the NCI, the subsidiaries incurred pre-tax income of $ 4.3 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above. 73 Table of Contents Abercrombie & Fitch Co. Components of deferred income tax assets and deferred income tax liabilities The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows: (in thousands) January 30, 2021 February 1, 2020 Deferred income tax assets: Operating lease liabilities $ 311,286 $ 370,068 Intangibles, foreign step-up in basis (1) 81,357 77,565 Deferred compensation 16,294 19,849 Accrued expenses and reserves 32,649 13,571 Net operating losses (NOL), tax credit and other carryforwards 56,341 13,204 Rent 530 2,727 Prepaid expenses — 1,246 Other 2,171 3,613 Valuation allowances ( 174,302 ) ( 8,916 ) Total deferred income tax assets $ 326,326 $ 492,927 Deferred income tax liabilities: Operating lease right-of-use assets $ ( 253,417 ) $ ( 319,005 ) U.S. offset to foreign step-up in basis (1) — ( 77,565 ) Property, equipment and intangibles ( 15,328 ) ( 17,236 ) Inventory ( 1,499 ) ( 3,537 ) Store supplies ( 2,042 ) ( 2,843 ) U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis (2) ( 183 ) ( 1,654 ) Prepaid expenses ( 387 ) — Undistributed profits of non-U.S. subsidiaries ( 318 ) ( 587 ) Other ( 3,499 ) ( 488 ) Total deferred income tax liabilities $ ( 276,673 ) $ ( 422,915 ) Net deferred income tax assets (2) $ 49,653 $ 70,012 (1) The deferred tax asset relates to a step-up in basis associated with the intra-entity transfer of intangible assets to Switzerland which are being amortized for Swiss local tax purposes. As this subsidiary’s income is also taxable in the U.S., a corresponding U.S. deferred tax liability was recognized to reflect lower resulting foreign tax credit due to the amortization of the Swiss step-up in basis. Included in the liability section is the remaining portion of deferred tax liabilities which are properly categorized in the table above. In Fiscal 2020, a full valuation allowance was established in Switzerland and the corresponding US deferred tax liability was released. (2) This table does not reflect deferred taxes classified within AOCL. As of January 30, 2021, AOCL included deferred tax assets of $0.9 million. As of February 1, 2020, AOCL included an insignificant amount of deferred tax assets. As of January 30, 2021, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $ 55.2 million and $ 1.1 million, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryforwards will begin to expire in 2024 and a portion of state NOL carryforwards will begin to expire in 2023. Some foreign NOLs have an indefinite carryforward period. As of January 30, 2021, the Company did not have any deferred tax assets related to federal NOL and credit carryforwards that could be utilized to reduce future years’ tax liabilities. As of January 30, 2021, valuation allowances of $ 174.3 million have been established against deferred tax assets. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive (Loss) Income. The valuation allowances will remain until there is sufficient positive evidence to release them, such as positive income within the jurisdiction. In such case, the Company will recognize an adjustment in the period in which a determination is made. The Company continues to review the need for valuation allowances on a quarterly basis and 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. 74 Table of Contents Abercrombie & Fitch Co. Share-based compensation Refer to Note 14, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during Fiscal 2020, Fiscal 2019 and Fiscal 2018. Other The amount of uncertain tax positions as of January 30, 2021, February 1, 2020 and February 2, 2019, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, excluding accrued interest and penalties, are as follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Uncertain tax positions, beginning of the year $ 1,794 $ 478 $ 1,113 Gross addition for tax positions of the current year 235 131 151 Gross addition (reduction) for tax positions of prior years 395 1,349 ( 3 ) Reductions of tax positions of prior years for: Lapses of applicable statutes of limitations ( 48 ) ( 151 ) ( 218 ) Settlements during the period ( 1,381 ) ( 13 ) ( 16 ) Changes in judgment / excess reserve — — ( 549 ) Uncertain tax positions, end of year $ 995 $ 1,794 $ 478 The IRS is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2020 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2019 and prior years have been completed. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company typically has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlement of audits and expiration of statues of limitations. The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income taxes ,” for discussion regarding significant accounting policies related to the Company’s income taxes. 13. BORROWINGS Details on the Company’s long-term borrowings, net, as of January 30, 2021 and February 1, 2020 are as follows: (in thousands) January 30, 2021 February 1, 2020 Long-term portion of borrowings, gross at carrying amount $ 350,000 $ 233,250 Unamortized fees ( 6,090 ) ( 932 ) Unamortized discount — ( 355 ) Long-term portion of borrowings, net $ 343,910 $ 231,963 Senior Secured Notes On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, completed the private offering of the Senior Secured Notes, with $350 million aggregate principal amount due in 2025 at an offering price of 100% of the principal amount thereof. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of A&F’s wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, as trustee, and as collateral agent. 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. 75 Table of Contents Abercrombie & Fitch Co. The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and accrued interest of $233.6 million and $110.8 million under the Term Loan Facility and the ABL Facility, respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes. The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized to interest expense over the contractual term of the Senior Secured Notes. Senior Secured Asset-based Revolving Credit Facility The credit agreement for the ABL Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries of A&F as borrowers or guarantors) and later amended on October 19, 2017, provides for a senior secured asset-based revolving credit facility of up to $ 400 million. In an effort to improve the Company’s near-term cash position, as a precautionary measure in response to COVID-19, during the thirteen weeks ended May 2, 2020, the Company borrowed $210.0 million under the ABL Facility. During the thirteen weeks ended August 1, 2020, the Company used a portion of the net proceeds from the offering of the Senior Secured Notes and cash on hand to repay all outstanding borrowings under the ABL Facility. The Company did not have any borrowings outstanding under the ABL Facility as of January 30, 2021 or as of February 1, 2020. The ABL Facility is subject to a borrowing base, consisting primarily of U.S. inventory, with a letter of credit sub-limit of $50 million and an accordion feature allowing A&F to increase the revolving commitment by up to $100 million subject to specified conditions. The ABL Facility is available for working capital, capital expenditures and other general corporate purposes. As of January 30, 2021, the Company had availability under the ABL Facility of $ 245.1 million, net of $ 0.9 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 ABL Facility, borrowing available to the Company under the ABL Facility was $ 215.1 million as of January 30, 2021. The ABL Facility will mature on October 19, 2022 . Obligations under the Amended ABL Facility are unconditionally guaranteed by A&F and certain of A&F’s subsidiaries. The ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The Amended ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. At the Company’s option, borrowings under the ABL Facility will bear interest at either (a) an adjusted LIBO rate plus a margin of 1.25 % to 1.50 % per annum, or (b) an alternate base rate plus a margin of 0.25 % to 0.50 % per annum. As of January 30, 2021, the applicable margins with respect to LIBO rate loans and base rate loans, including swing line loans, under the ABL Facility were 1.25 % and 0.25 % per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical availability during the preceding quarter. The Company is also required to pay a fee of 0.25 % per annum on undrawn commitments under the ABL Facility. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility. Term Loan Facility On August 7, 2014, the Company, through its subsidiary A&F Management as the borrower (with A&F and certain of A&F’s subsidiaries as guarantors), entered into a term loan agreement, which provided for a term loan facility of $300 million. The Company had gross borrowings outstanding under the Term Loan Facility of $233.3 million as of February 1, 2020. During Fiscal 2020, the Company used a portion of the proceeds from the issuance of the Senior Secured Notes to repay all outstanding borrowings under the Term Loan Facility and upon repayment the Term Loan Facility was terminated effective as of July 2, 2020. The Term Loan Facility had been scheduled to mature on August 7, 2021. 76 Table of Contents Abercrombie & Fitch Co. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness. The Company was in compliance with all debt covenants under the agreements related to the Senior Secured Notes and the ABL Facility as of January 30, 2021. 14. SHARE-BASED COMPENSATION Plans As of January 30, 2021, the Company had two primary share-based compensation plans: (i) the 2016 Directors LTIP, with 900,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, stock appreciation rights, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors; and (ii) the 2016 Associates LTIP, with 9,250,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company. The Company also has outstanding shares from four other share-based compensation plans under which the Company granted restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company and restricted stock units, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors in prior years. No new shares may be granted under these previously-authorized plans and any outstanding awards continue in effect in accordance with their respective terms. The 2016 Directors LTIP, a stockholder-approved plan, permits the Company to annually grant awards to non-associate directors, subject to the following limits: • For non-associate directors: awards with an aggregate fair market value on the date of the grant of no more than $ 300,000 ; • For the non-associate director occupying the role of Non-Executive Chairman of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 500,000 ; and • For the non-associate director occupying the role of Executive Chairman of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 2,500,000 . Under the 2016 Directors LTIP, restricted stock units are subject to a minimum vesting period ending no sooner than the earlier of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of stockholders held after the grant date. Any stock appreciation rights or stock options granted under this plan have the same minimum vesting period requirements as restricted stock units and, in addition, must have a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Directors LTIP. The 2016 Associates LTIP, a stockholder-approved plan, permits the Company to annually grant one or more types of awards covering up to an aggregate for all awards of 1.0 million of underlying shares of the Company’s Common Stock to any associate of the Company. Under the 2016 Associates LTIP, for restricted stock units that have performance-based vesting, performance must be measured over a period of at least one year and for restricted stock units that do not have performance-based vesting, vesting in full may not occur more quickly than in pro-rata installments over a period of three years from the date of the grant, with the first installment vesting no sooner than the first anniversary of the date of the grant. In addition, any stock options or stock appreciation rights granted under this plan must have a minimum vesting period of one year and a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Associates LTIP. Each of the 2016 Directors LTIP and the 2016 Associates LTIP provides for accelerated vesting of awards if there is a change of control and certain other conditions specified in each plan are met. 77 Table of Contents Abercrombie & Fitch Co. Financial statement impact The following table details share-based compensation expense and the related income tax benefit for Fiscal 2020, Fiscal 2019 and Fiscal 2018: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Share-based compensation expense $ 18,682 $ 14,007 $ 21,755 Income tax benefit associated with share-based compensation expense recognized during the period (1) $ — $ 2,649 $ 4,562 (1) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. The following table details discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2020, Fiscal 2019 and Fiscal 2018: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Income tax discrete (charges) benefits realized for tax deductions related to the issuance of shares during the period $ ( 1,719 ) $ 1,156 $ 1,270 Income tax discrete (charges) benefits realized upon cancellation of stock appreciation rights during the period ( 1,943 ) ( 611 ) ( 10,908 ) Total income tax discrete benefits (charges) related to share-based compensation awards $ ( 3,662 ) $ 545 $ ( 9,638 ) The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the Fiscal 2020, Fiscal 2019 and Fiscal 2018: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Employee tax withheld upon issuance of shares (1) $ 5,694 $ 6,804 $ 6,937 (1) Classified within other financing activities on the Consolidated Statements of Cash Flows. Restricted stock units The following table summarizes activity for restricted stock units for Fiscal 2020: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at February 1, 2020 1,676,831 $ 18.68 747,056 $ 15.11 421,784 $ 23.05 Granted 2,299,339 8.63 — — 519,905 16.24 Adjustments for performance achievement — — 38,381 11.37 134,122 11.79 Vested ( 811,253 ) 17.36 ( 481,304 ) 9.63 ( 350,447 ) 11.79 Forfeited ( 127,819 ) 13.70 ( 6,917 ) 22.80 ( 3,485 ) 35.61 Unvested at January 30, 2021 (2) 3,037,098 $ 11.62 297,216 $ 22.43 721,879 $ 21.46 (1) Includes 66,624 unvested restricted stock units as of January 30, 2021, subject to vesting requirements related to the achievement of certain performance metrics, such as operating income and net income, for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one or more installments of the award if the cumulative performance requirements are met in a subsequent year. (2) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100 % of their target vesting amount in the table above. Certain unvested shares related to restricted stock units with performance-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period these costs are expected to be recognized for restricted stock units as of January 30, 2021: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 24,148 $ — $ 8,628 Remaining weighted-average period cost is expected to be recognized (years) 1.2 0.0 1.0 78 Table of Contents Abercrombie & Fitch Co. Additional information pertaining to restricted stock units for Fiscal 2020, Fiscal 2019 and Fiscal 2018 follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Service-based restricted stock units: Total grant date fair value of awards granted $ 19,843 $ 16,175 $ 17,167 Total grant date fair value of awards vested $ 14,083 $ 13,630 $ 17,100 Performance-based restricted stock units: Total grant date fair value of awards granted $ — $ 5,391 $ 4,339 Total grant date fair value of awards vested $ 4,635 $ — $ — Market-based restricted stock units: Total grant date fair value of awards granted $ 8,443 $ 4,176 $ 4,784 Total grant date fair value of awards vested $ 4,132 $ 511 $ 137 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during Fiscal 2020, Fiscal 2019 and Fiscal 2018 were as follows: Fiscal 2020 Fiscal 2019 Fiscal 2018 Grant date market price $ 12.31 $ 25.34 $ 23.59 Fair value $ 16.24 $ 36.24 $ 33.69 Assumptions: Price volatility 67 % 57 % 54 % Expected term (years) 2.4 2.9 2.9 Risk-free interest rate 0.2 % 2.2 % 2.4 % Dividend yield — % 3.2 % 3.4 % Average volatility of peer companies 66.0 % 40.0 % 37.4 % Average correlation coefficient of peer companies 0.4967 0.2407 0.2709 Stock appreciation rights The following table summarizes stock appreciation rights activity for Fiscal 2020: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at February 1, 2020 796,725 $ 40.06 Granted — — Exercised — — Forfeited or expired ( 411,968 ) 46.63 Outstanding at January 30, 2021 384,757 $ 33.04 $ 177,195 3.2 Stock appreciation rights exercisable at January 30, 2021 384,757 $ 33.04 $ 177,195 3.2 Stock appreciation rights expected to become exercisable in the future as of January 30, 2021 — $ — $ — 0.0 79 Table of Contents Abercrombie & Fitch Co. No stock appreciation rights were exercised during Fiscal 2020. Additional information pertaining to stock appreciation rights for Fiscal 2019 and Fiscal 2018 follows: (in thousands) Fiscal 2019 Fiscal 2018 Total grant date fair value of awards exercised $ 626 $ 1,366 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Share-based compensation ,” for discussion regarding significant accounting policies related to share-based compensation. 15. DERIVATIVE INSTRUMENTS As of January 30, 2021, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both: (in thousands) Notional Amount (1) Euro $ 92,220 British pound $ 29,603 Canadian dollar $ 11,239 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of January 30, 2021. The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Consolidated Balance Sheets as of January 30, 2021 and February 1, 2020 were as follows: (in thousands) Location January 30, 2021 February 1, 2020 Location January 30, 2021 February 1, 2020 Derivatives designated as cash flow hedging instruments Other current assets $ 79 $ 1,869 Accrued expenses $ 4,694 $ 1,377 Derivatives not designated as hedging instruments Other current assets — 100 Accrued expenses — 83 Total $ 79 $ 1,969 $ 4,694 $ 1,460 Refer to Note 5, “ FAIR VALUE , ” for further discussion of the determination of the fair value of derivative instruments. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for Fiscal 2020, Fiscal 2019 and Fiscal 2018 follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Gain recognized in AOCL (1) $ 7,619 $ 7,495 $ 18,700 Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2) $ 13,235 $ 9,160 $ 4,727 (1) Amount represents the change in fair value of derivative contracts. (2) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. As a result of COVID-19 in Fiscal 2020, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments. At the time of dedesignation of these hedges, they were in a net gain position of approximately $ 12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation were deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occurred and the hedged items affected earnings. During Fiscal 2020 and subsequent to the dedesignation of these hedges, these hedge contracts were settled. Substantially all of the unrealized gains or losses related to foreign currency exchange forward contracts designated as cash flow hedging instruments as of January 30, 2021 will be recognized within the Consolidated Statements of Operations and Comprehensive (Loss) Income over the next twelve months. 80 Table of Contents Abercrombie & Fitch Co. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for Fiscal 2020, Fiscal 2019 and Fiscal 2018 follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Gain (loss) recognized in other operating income, net $ 742 $ ( 298 ) $ 3,722 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Derivative instruments ,” for discussion regarding significant accounting policies related to the Company’s derivative instruments. 16. ACCUMULATED OTHER COMPREHENSIVE LOSS For Fiscal 2020, the activity in AOCL was as follows: Fiscal 2020 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) Other comprehensive income before reclassifications 12,195 7,619 19,814 Reclassified gain from AOCL (1) — ( 13,235 ) ( 13,235 ) Other comprehensive income (loss) after reclassifications (2) 12,195 ( 5,616 ) 6,579 Ending balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. (2) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. For Fiscal 2019, the activity in AOCL was as follows: Fiscal 2019 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 2, 2019 $ ( 104,887 ) $ 2,435 $ ( 102,452 ) Other comprehensive (loss) income before reclassifications ( 5,080 ) 7,495 2,415 Reclassified gain from AOCL (1) — ( 9,160 ) ( 9,160 ) Tax effect — 311 311 Other comprehensive loss after reclassifications ( 5,080 ) ( 1,354 ) ( 6,434 ) Ending balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Fo r Fiscal 2018, the activity in AOCL was as follows: Fiscal 2018 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 3, 2018 $ ( 84,947 ) $ ( 10,107 ) $ ( 95,054 ) Other comprehensive (loss) income before reclassifications ( 19,956 ) 18,700 ( 1,256 ) Reclassified gain from AOCL (1) — ( 4,727 ) ( 4,727 ) Tax effect 16 ( 1,431 ) ( 1,415 ) Other comprehensive (loss) income after reclassifications ( 19,940 ) 12,542 ( 7,398 ) Ending balance at February 2, 2019 $ ( 104,887 ) $ 2,435 $ ( 102,452 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. 81 Table of Contents Abercrombie & Fitch Co. 17. SAVINGS AND RETIREMENT PLANS The Company maintains the Abercrombie & Fitch Co. Savings and Retirement Plan, a qualified plan. All U.S. associates are eligible to participate in this plan if they are at least 21 years of age. In addition, the Company maintains the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement, comprised of two sub-plans (Plan I and Plan II). Plan I contains contributions made through December 31, 2004, while Plan II contains contributions made on and after January 1, 2005. Participation in these plans is based on service and compensation. The Company’s contributions to these plans are based on a percentage of associates’ eligible annual compensation. The cost of the Company’s contributions to these plans was $ 14.1 million, $ 14.8 million and $ 15.1 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. In addition, the Company maintains the Supplemental Executive Retirement Plan which provides retirement income to its former Chief Executive Officer for life, based on averaged compensation before retirement, including base salary and cash incentive compensation. As of January 30, 2021 and February 1, 2020, the Company has recorded $ 9.2 million and $ 9.5 million, respectively, in other liabilities on the Consolidated Balance Sheets related to future Supplemental Executive Retirement Plan distributions. 18. SEGMENT REPORTING The Company’s two operating segments are brand-based: Hollister, which includes the Company’s Hollister and Gilly Hicks brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for Fiscal 2020, Fiscal 2019 and Fiscal 2018 were as follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Hollister $ 1,834,349 $ 2,158,514 $ 2,152,538 Abercrombie 1,291,035 1,464,559 1,437,571 Total $ 3,125,384 $ 3,623,073 $ 3,590,109 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 on the basis of the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2020, Fiscal 2019 and Fiscal 2018 were as follows: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 U.S. $ 2,127,403 $ 2,410,802 $ 2,321,700 EMEA 709,451 822,202 845,889 APAC 176,636 264,895 289,911 Other 111,894 125,174 132,609 Total international $ 997,981 $ 1,212,271 $ 1,268,409 Total $ 3,125,384 $ 3,623,073 $ 3,590,109 The Company’s long-lived assets and intellectual property, which primarily relates to trademark assets associated with the Company’s international operations, by geographic area as of January 30, 2021 and February 1, 2020 were as follows: (in thousands) January 30, 2021 February 1, 2020 U.S. $ 963,555 $ 1,211,630 EMEA 350,136 482,449 APAC 120,256 175,519 Other 33,575 50,791 Total international $ 503,967 $ 708,759 Total $ 1,467,522 $ 1,920,389 82 Table of Contents Abercrombie & Fitch Co. 19. FLAGSHIP STORE EXIT (BENEFITS) CHARGES Global Store Network Optimization Reflecting a continued focus on one of the Company’s key transformation initiatives ‘Global Store Network Optimization,’ the Company continues to pivot away from its large format flagship stores and strives to open smaller, more productive omnichannel focused brand experiences. As a result, the Company has closed certain of its flagship stores and may have additional closures as it executes against this strategy. As part of this ongoing effort, the Company closed eight flagship store locations in Fiscal 2020 and four flagship store locations in Fiscal 2019. Three of the leases related to Fiscal 2020 flagship store closures were transferred through assignment while the fourth lease was subleased to a new tenant upon its closure. The Company no longer has lease obligations beyond Fiscal 2020 for the three transfers and is scheduled to receive payments to fully offset its lease obligations on the sublease. Refer to Note 8, “ LEASES ,” for additional information on the sublease arrangement. Future fixed lease payments associated with closed flagship stores are reflected within short-term and long-term operating lease liabilities on the Consolidated Balance Sheets. Future fixed lease payments associated with flagship stores that were closed as of January 30, 2021, excluding the subleased flagship store, are scheduled to be paid through the fiscal year ending January 30, 2029 (“Fiscal 2028”) and are not expected to exceed $15 million in aggregate in any fiscal year. The Company recognizes impacts related to the exit of its flagship stores in flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Details of the (benefits) charges incurred during Fiscal 2020, Fiscal 2019 and Fiscal 2018 related to this initiative follow: (in thousands) Fiscal 2020 Fiscal 2019 Fiscal 2018 Operating lease cost ( 6,959 ) 46,716 — Gain on lease assignment ( 5,237 ) — — Lease termination fees (1) — — 3,688 Asset disposals and other store-closure costs (2) ( 2,658 ) ( 1,687 ) — Employee severance and other employee transition costs 3,218 2,228 2,118 Total flagship store exit (benefits) charges $ ( 11,636 ) $ 47,257 $ 5,806 (1) Under the new lease accounting standard, which the Company adopted on February 3, 2019, similar charges would be incorporated into the above table as a component of operating lease cost. (2) Amounts represent costs incurred in returning the store to its original condition, including updates to previous accruals for asset retirement obligations and costs to remove inventory and store assets. As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur future cash expenditures or incremental charges or realize benefits not currently contemplated due to events that may occur as a result of, or that are associated with, previously announced flagship store closures and flagship store closures that have not yet been finalized. At this time, the Company is not able to quantify the amount of future impacts, including any cash expenditures that may take place in future periods resulting from any potential flagship store closures given the unpredictable nature of lease exit negotiations and ultimate lease renewal decisions. 20. CONTINGENCIES The Company is a defendant in lawsuits and other adversarial proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of legal matters 83 Table of Contents Abercrombie & Fitch Co. will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. Certain legal matters The Company was a defendant in two separate class action lawsuits filed by former associates of the Company who are represented by the same counsel. The first lawsuit, filed in 2013, alleged failure to indemnify business expenses and a series of derivative claims for compelled patronization, inaccurate wage statements, waiting time penalties, minimum wage violations and unfair competition under California state law on behalf of all non-exempt hourly associates at Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks stores in California. Four subclasses of associates were certified, and the matter was before a U.S. District Court in California. The second lawsuit, filed in 2015, alleged that associates were required to purchase uniforms without reimbursement in violation of federal law, and laws of the states of New York, Florida and Massachusetts, as well as derivative putative state law claims and sought to pursue such claims on a class and collective basis. On December 12, 2017, a U.S. District Court in California granted the parties’ stipulation to transfer and combine the first-filed lawsuit with the second-filed lawsuit then pending before a U.S. District Court in Ohio. Both matters were mediated and the parties signed a settlement with a maximum potential payment of $ 25.0 million subject to a claim process. On February 16, 2018, a U.S. District Court in Ohio granted preliminary approval of the proposed settlement and ordered that notice of the proposed settlement be given to the absent members of the settlement class. On November 7, 2018, the U.S. District Court in Ohio granted final approval of the proposed settlement, which resulted in a full and final settlement of all claims in both lawsuits on a class-wide basis for an ultimate settlement amount of approximately $ 10.1 million, which was paid by the Company in the fourth quarter of Fiscal 2018, based on the actual claims made by members of the class. In addition to the matters discussed above, the Company was a defendant in certain other class action lawsuits filed by former associates of the Company. These lawsuits, assigned to the same judge in a U.S. District Court in California, alleged non-exempt hourly associates of the Company were not properly compensated, in violation of federal and California law, for call-in practices requiring associates to engage in certain pre-shift activities in order to determine whether they should report to work and the Company’s alleged failure to pay reporting time pay and all wages earned at termination. In addition, these lawsuits included derivative claims alleging inaccurate wage statements and unfair competition under California state law on behalf of non-exempt hourly associates. One of these lawsuits was mediated and the parties involved have signed a $ 9.6 million settlement agreement, which was preliminarily approved by a U.S. District Court in California. On November 20, 2018, the U.S. District Court in California granted final approval of the proposed settlement, which resulted in a full and final settlement of all claims made therein for an ultimate settlement amount of $ 9.6 million, which was paid by the Company in the fourth quarter of Fiscal 2018. In Fiscal 2018, the Company recognized net charges of $ 2.6 million in connection with the legal matters discussed above. 84 Table of Contents Abercrombie & Fitch Co. 21. CORRECTION OF ERROR IN PREVIOUSLY REPORTED INTERIM FINANCIAL STATEMENTS (UNAUDITED) Correction of error in previously reported interim financial statements Subsequent to filing the Company’s Quarterly Reports on Form 10-Q for the periods ended May 2, 2020, August 1, 2020, and October 31, 2020 (collectively, the “Fiscal 2020 Quarterly Reports on Form 10-Q”), a classification error was identified within the Company’s condensed consolidated statements of cash flows related to the presentation of the withdrawal of excess funds from the over-funded Rabbi Trust assets that occurred during the fiscal quarter ended May 2, 2020. The withdrawal of $50 million of excess funds from the Company’s Rabbi Trust was incorrectly presented as a cash inflow from operating activities, rather than as a cash inflow from investing activities, in the Condensed Consolidated Statements of Cash Flows included within each of the Fiscal 2020 Quarterly Reports on Form 10-Q. Based on quantitative and qualitative assessments, the incorrect presentation of such amounts is considered material to the Condensed Consolidated Financial Statements as of and for the periods ended May 2, 2020, August 1, 2020, and October 31, 2020, which will be restated. This classification error did not have an impact on the cash balances or on the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Stockholders’ Equity, included within each of the Fiscal 2020 Quarterly Reports on Form 10-Q. The effects of the classification error on the Condensed Consolidated Statements of Cash Flows are shown in the tables below. Thirteen Weeks Ended As Originally Reported As Restated (in thousands) May 2, 2020 Adjustment May 2, 2020 Net cash used for operating activities $ ( 90,776 ) $ ( 50,000 ) $ ( 140,776 ) Net cash (used for) provided by investing activities $ ( 46,990 ) $ 50,000 $ 3,010 Net cash provided by financing activities $ 171,668 — $ 171,668 Effect of foreign currency exchange rates on cash $ ( 3,891 ) — $ ( 3,891 ) Net increase in cash and equivalents, and restricted cash and equivalents $ 30,011 — $ 30,011 Cash and equivalents, and restricted cash and equivalents, beginning of period $ 692,264 — $ 692,264 Cash and equivalents, and restricted cash and equivalents, end of period $ 722,275 — $ 722,275 Twenty-six Weeks Ended As Originally Reported As Restated (in thousands) August 1, 2020 Adjustment August 1, 2020 Net cash provided by operating activities $ 96,233 $ ( 50,000 ) $ 46,233 Net cash used for investing activities $ ( 75,621 ) $ 50,000 $ ( 25,621 ) Net cash provided by financing activities $ 71,329 — $ 71,329 Effect of foreign currency exchange rates on cash $ 1,785 — $ 1,785 Net increase in cash and equivalents, and restricted cash and equivalents $ 93,726 — $ 93,726 Cash and equivalents, and restricted cash and equivalents, beginning of period $ 692,264 — $ 692,264 Cash and equivalents, and restricted cash and equivalents, end of period $ 785,990 — $ 785,990 Thirty-nine Weeks Ended As Originally Reported As Restated (in thousands) October 31, 2020 Adjustment October 31, 2020 Net cash provided by operating activities $ 158,894 $ ( 50,000 ) $ 108,894 Net cash used for investing activities $ ( 91,748 ) $ 50,000 $ ( 41,748 ) Net cash provided by financing activities $ 70,129 — $ 70,129 Effect of foreign currency exchange rates on cash $ 2,269 — $ 2,269 Net increase in cash and equivalents, and restricted cash and equivalents $ 139,544 — $ 139,544 Cash and equivalents, and restricted cash and equivalents, beginning of period $ 692,264 — $ 692,264 Cash and equivalents, and restricted cash and equivalents, end of period $ 831,808 — $ 831,808 85 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Abercrombie & Fitch Co. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Abercrombie & Fitch Co. and its subsidiaries (the “Company”) as of January 30, 2021 and February 1, 2020, and the related consolidated statements of operations and comprehensive (loss) income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 30, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of January 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to ineffective design and maintenance of controls by the Company to research and apply relevant accounting guidance in assessing the appropriate classification of cash flow activities associated with new transaction types. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the January 30, 2021 financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases on February 3, 2019. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions 86 Table of Contents of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets – Stores As described in Notes 2, 7 and 9 to the consolidated financial statements, the Company’s consolidated property and equipment, net balance was $550.6 million and consolidated operating lease right-of-use assets balance was $894.0 million as of January 30, 2021. During fiscal 2020, the Company recognized long-lived asset store impairment charges of $72.9 million. The Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews its asset groups for indicators of impairment, which include but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumptions used in developing these projected cash flows used in the recoverability test include estimates of future sales, gross profit and, to a lesser extent, operating expenses. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in estimating fair value of an asset group may include discounted estimates of future cash flows from operating the store or comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets - stores is a critical audit matter are (i) the significant judgment by management when testing long-lived asset groups for recoverability and determining the fair value of the asset groups to measure impairment; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the assumptions used in management’s future cash flow projections related to estimates of future sales, gross profit and comparable market rents; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long-lived assets - stores recoverability test and determination of the fair value of the asset groups. These procedures also included, among others (i) testing management’s process for developing the estimates; (ii) evaluating the appropriateness of the models used by management in developing the fair value measurements; (iii) testing the completeness, accuracy, and relevance of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions, related to estimates of future sales, gross profit and comparable market rents. Evaluating whether management’s assumptions related to estimates of future sales, gross profit and comparable market rents were reasonable considering (i) the current and past performance of the asset groups; (ii) the consistency with external market data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness of the Company’s comparable market rents assumption. /s/ PricewaterhouseCoopers LLP Columbus, Ohio March 29, 2021 We have served as the Company’s auditor since 1996. 87 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.