What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-08 compared with 2021-06-09 · 232 added, 112 removed, 323 unchanged (52% of the section changed)

6 unchanged sentences

• Current Trends and Outlook .

This section provides a discussion related to certain of the Company’s focus areas for the upcoming fiscal year and discussion of certain risks and challenges, such as COVID-19, as well as a summary of the Company’s performance for the thirteen weeks ended May 1, 2021 and May 2, 2020.

This section provides a discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, such as COVID-19, as well as a summary of the Company’s performance for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020.

• Results of Operations .

This section provides an analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen weeks ended May 1, 2021 and May 2, 2020.

This section provides an analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020.

• Liquidity and Capital Resources .

This section provides a discussion of the Company’s expected primary sources and uses of cash, financial condition and liquidity as of May 1, 2021, which includes (i) an analysis of financial condition as compared to January 30, 2021;

(ii) an analysis of changes in cash flows for the thirteen weeks ended May 1, 2021 as compared to the thirteen weeks ended May 2, 2020;

This section provides a discussion of the Company’s expected primary sources and uses of cash, financial condition and liquidity as of July 31, 2021, which includes (i) an analysis of financial condition as compared to January 30, 2021;

(ii) an analysis of changes in cash flows for the twenty-six weeks ended July 31, 2021 as compared to the twenty-six weeks ended August 1, 2020;

and (iii) an analysis of liquidity, including discussion related to the Company’s Senior Secured Notes and ABL Facility, the Company’s share repurchase and dividend programs, and outstanding debt and covenant compliance.

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• Non-GAAP Financial Measures .

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

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

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

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

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

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• We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could have a material adverse impact on our business;

• We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business;

• We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, eff ectively manage succession, and establish a diverse workforce could have a material adverse impact on our business;

• We identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future.

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

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

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

Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict.

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The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements.

As of May 1, 2021, the Company’s two brand-based operating segments were Hollister, which includes the Company’s Hollister and Gilly Hicks brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands.

On May 20, 2021, the Company launched its newest brand, Social Tourist.

The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands.

These five 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.

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The Company remains committed to, and confident in, its long-term vision of becoming a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress against initiatives that support this vision.

The Company entered Fiscal 2021 on the offense, and has made progress towards recouping COVID-19 driven sales losses.

Reflecting ongoing global uncertainty, the Company plans to continue to conservatively manage inventories, optimize its distribution center capacity for digital demand and tightly manage expenses while maintaining flexibility to make strategic investments in the business.

The Company entered Fiscal 2021 on offense, and has made progress towards recouping COVID-19 driven sales losses.

Reflecting ongoing global uncertainty, the Company plans to continue to conservatively manage inventories, optimize its distribution center capacity for digital demand and tightly manage expenses.

The following focus areas for Fiscal 2021 serve as a framework to the Company achieving its long-term vision of becoming a digitally-led global omnichannel apparel retailer and achieving sustainable long-term operating margin expansion:

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As part of its ongoing global store network optimization initiative and stated goal of repositioning from larger format, tourist-dependent flagship locations to smaller, omni-enabled stores that cater to local customers, the Company closed its Abercrombie & Fitch brand Orchard Road, Singapore flagship location during the first quarter of Fiscal 2021.

This leaves the Company with six operating flagships at the end of the first quarter of Fiscal 2021, down from seven at the beginning of Fiscal 2021 and 15 at the beginning of Fiscal 2020.

This leaves the Company with six operating flagships at the end of the second quarter of Fiscal 2021, down from seven at the beginning of Fiscal 2021 and 15 at the beginning of Fiscal 2020.

In addition, the Company closed 129 non-flagship locations and eight flagship locations during Fiscal 2020.

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

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

Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions.

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Permanently closed — (4) (15) (1) (15) (5) (20)

May 1, 2021 349 150 184 48 533 198 731

July 31, 2021 355 150 179 49 534 199 733

Gross square footage (in thousands) :

May 1, 2021 2,324 1,212 1,275 378 3,599 1,590 5,189

July 31, 2021 2,349 1,203 1,216 382 3,565 1,585 5,150

(1) Hollister includes the Company’s Hollister and Gilly Hicks brands.

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

Excludes 10 international franchise stores as of May 1, 2021 and nine international franchise stores as of January 30, 2021.

Excludes 12 Company-operated temporary stores as of each of May 1, 2021 and January 30, 2021.

Excludes 10 international franchise stores as of July 31, 2021, and 9 international franchise stores as of January 30, 2021.

Excludes 14 and 12 Company-operated temporary stores as of July 31, 2021 and January 30, 2021, respectively.

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

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

Excludes 12 international franchise stores as of May 1, 2021 and 10 international franchise stores as of January 30, 2021.

Excludes four and two Company-operated temporary stores as of May 1, 2021 and January 30, 2021, respectively.

(3) This store count excludes one international third-party operated multi-brand outlet store as of each of May 1, 2021 and January 30, 2021.

Excludes 12 international franchise stores as of July 31, 2021 and 10 international franchise stores as of January 30, 2021.

Excludes four and two Company-operated temporary stores as of July 31, 2021 and January 30, 2021, respectively.

(3) This store count excludes one international third-party operated multi-brand outlet store as of each of July 31, 2021 and January 30, 2021.

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

The Company continues to navigate COVID-19, including by conforming to local government guidance and monitoring health and safety measures with the well-being of the Company’s customers, associates and business partners remaining a top priority.

In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures.

As of May 1, 2021, the vast majority of Company-operated stores were fully 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.

Total net sales increased approximately 61% for the thirteen weeks ended May 1, 2021 as compared to the thirteen weeks ended May 2, 2020 driven by increased store foot traffic relative to last year which was impacted by widespread temporary store closures due to COVID-19, and year-over-year digital sales growth of approximately 45%.

As of July 31, 2021, all Company-operated stores were fully open for in-store service.

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, such as the Delta variant, and the availability and acceptance of effective vaccines, boosters or medical treatments.

The Company plans to follow the guidance of local governments to evaluate whether further store closures will be necessary.

Total net sales increased approximately 24% and 39% for the thirteen and twenty-six weeks ended July 31, 2021 as compared to the thirteen and twenty-six weeks ended August 1, 2020 driven largely by increased store foot traffic relative to last year which was impacted by widespread temporary store closures due to COVID-19.

Digital net sales decreased approximately 3% and increased 17% for the thirteen and twenty-six weeks ended July 31, 2021 as compared to the thirteen and twenty-six weeks ended August 1, 2020.

Digital net sales remained highly penetrated, representing 44% and 47% of total net sales for the thirteen and twenty-six weeks ended July 31, 2021.

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

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

The Company has seen, and 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 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, potential future outbreaks, the emergence of new variants of the coronavirus and the acceptance of effective vaccines or medical treatments.

COVID-19 has also caused disruptions to global supply chains, including recent extended closures of factories.

The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales.

In order to mitigate the risk associated with supply chain constraints, the Company has taken and expects to continue to take actions to manage through the disruption, including shipping inventory by air and shifting production as necessary and where possible, which is likely to lead to increased inventory costs related to freight.

It is possible that responses to extended factory closures are not adequate to mitigate their impact, and that these events could adversely affect the business and results of operations.

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

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Summary of results

A summary of results for the thirteen weeks ended May 1, 2021 and May 2, 2020 follows:

A summary of results for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020 follows:

GAAP Non-GAAP (1)

(in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) May 1, 2021 May 2, 2020 (2)

May 1, 2021 May 2, 2020 (2)

(in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) July 31, 2021 (2)

August 1, 2020 (3)

July 31, 2021 (2)

August 1, 2020 (3)

Thirteen Weeks Ended

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Gross profit rate 65.2 % 60.7 %

Operating income $ 114,787 $ 14,143 $ 115,573 $ 22,226

Operating income margin 13.3 % 2.0 % 13.4 % 3.2 %

Net income attributable to A&F $ 108,500 $ 5,464 $ 109,062 $ 14,713

Net income per diluted share attributable to A&F $ 1.69 $ 0.09 $ 1.70 $ 0.23

Twenty-six Weeks Ended

Net sales $ 1,646,255 $ 1,183,687

Change in net sales 39.1 % (24.8) %

Gross profit rate 64.3 % 58.1 %

Operating income (loss) $ 172,220 $ (194,984) $ 175,670 $ (143,973)

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Net income (loss) per diluted share attributable to A&F $ 2.32 $ (3.82) $ 2.36 $ (3.05)

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

(1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the Non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .”

(2) Results for Fiscal 2021 reflect tax benefits related to the release of income tax valuation allowances and the impact of a statutory rate change on the valuation of deferred tax assets.

Refer to Note 10, “ INCOME TAXES .”

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

Refer to Note 10, “ INCOME TAXES .”

Certain components of the Company’s Condensed Consolidated Balance Sheets as of May 1, 2021 and January 30, 2021 were as follows:

(in thousands) May 1, 2021 January 30, 2021

Certain components of the Company’s Condensed Consolidated Balance Sheets as of July 31, 2021 and January 30, 2021 were as follows:

(in thousands) July 31, 2021 January 30, 2021

Cash and equivalents $ 921,504 $ 1,104,862

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Inventories $ 415,604 $ 404,053

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended May 1, 2021 and May 2, 2020 were as follows:

(in thousands) May 1, 2021 May 2, 2020

Net cash used for operating activities $ (131,350) $ (140,776)

Net cash (used for) provided by investing activities $ (14,404) $ 3,010

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended July 31, 2021 and August 1, 2020 were as follows:

(in thousands) July 31, 2021 August 1, 2020

Net cash provided by operating activities $ 49,945 $ 46,233

Net cash used for investing activities $ (35,269) $ (25,621)

Net cash (used for) provided by financing activities $ (200,247) $ 71,329

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

The Company’s net sales by operating segment for the thirteen weeks ended May 1, 2021 and May 2, 2020 were as follows:

The Company’s net sales by operating segment for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020 were as follows:

Thirteen Weeks Ended

(in thousands) May 1, 2021 May 2, 2020 $ Change % Change

(in thousands) July 31, 2021 August 1, 2020 $ Change % Change

Hollister (1)

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Total $ 864,850 $ 698,328 $ 166,522 24%

(1) Includes Hollister and Gilly Hicks brands.

Twenty-six Weeks Ended

(in thousands) July 31, 2021 August 1, 2020 $ Change % Change

Hollister (1)

$ 956,891 $ 702,260 $ 254,631 36%

Abercrombie (2)

689,364 481,427 207,937 43%

Total $ 1,646,255 $ 1,183,687 $ 462,568 39%

(1) Includes Hollister, Gilly Hicks and Social Tourist brands.

(2) Includes Abercrombie & Fitch and abercrombie kids brands.

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

The Company’s net sales by geographic area for the thirteen weeks ended May 1, 2021 and May 2, 2020 were as follows:

The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020 were as follows:

Thirteen Weeks Ended

(in thousands) May 1, 2021 May 2, 2020 $ Change % Change

(in thousands) July 31, 2021 August 1, 2020 $ Change % Change

$ 601,767 $ 458,671 $ 143,096 31%

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Total $ 864,850 $ 698,328 $ 166,522 24%

For the first quarter of Fiscal 2021, net sales increased 61% as compared to the first quarter of Fiscal 2020, primarily due to an increase in units sold as a result of increased store foot traffic relative to last year, which was impacted by widespread temporary store closures due to COVID-19, and 45% digital sales growth.

Twenty-six Weeks Ended

(in thousands) July 31, 2021 August 1, 2020 $ Change % Change

$ 1,155,613 $ 781,533 $ 374,080 48%

EMEA 349,842 283,951 65,891 23%

APAC 87,274 74,150 13,124 18%

Other 53,526 44,053 9,473 22%

International $ 490,642 $ 402,154 $ 88,488 22%

Total $ 1,646,255 $ 1,183,687 $ 462,568 39%

For the second quarter of Fiscal 2021, net sales increased 24% as compared to the second quarter of Fiscal 2020, primarily due to an increase in units sold as a result of increased store foot traffic relative to last year, which was impacted by widespread temporary store closures due to COVID-19, partially offset by a 3% decrease in digital sales.

Average unit retail increased year-over-year, driven by lower promotions and markdowns, with benefits from changes in foreign currency exchange rates of approximately $17 million.

For the year-to-date period of Fiscal 2021, net sales increased 39% as compared to the year-to-date period of Fiscal 2020, primarily due to an increase in units sold as a result of increased store foot traffic relative to last year, which was impacted by widespread temporary store closures due to COVID-19, and 17% digital sales growth.

Average unit retail increased year-over-

year, driven by less promotions and lower clearance levels, with benefits from changes in foreign currency exchange rates of approximately $29 million.

Cost of sales, exclusive of depreciation and amortization

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Cost of sales, exclusive of depreciation and amortization $ 301,365 34.8% $ 274,720 39.3% (450)

For the first quarter of Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 900 basis points as compared to the first quarter of Fiscal 2020.

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Cost of sales, exclusive of depreciation and amortization $ 587,636 35.7% $ 495,934 41.9% (620)

For the second quarter of Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 450 basis points as compared to the second quarter of Fiscal 2020.

The year-over-year decline was primarily attributable to increased average unit retail on reduced promotions and markdowns.

For the year-to-date period of Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 620 basis points as compared to the year-to-date period of Fiscal 2020.

The year-over-year decline was primarily attributable to increased average unit retail on reduced promotions and markdowns.

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Gross profit, exclusive of depreciation and amortization $ 563,485 65.2% $ 423,608 60.7% 450

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Gross profit, exclusive of depreciation and amortization $ 1,058,619 64.3% $ 687,753 58.1% 620

Stores and distribution expense

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Stores and distribution expense $ 325,935 37.7% $ 310,370 44.4% (670)

For the first quarter of Fiscal 2021, stores and distribution expense decreased 2% as compared to the first quarter of Fiscal 2020, primarily driven by a $32 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations.

The decrease in store occupancy expense was partially offset by a $13 million increase in store payroll expense, reflecting the return of certain expenses saved last year from COVID-19 temporary store closures, and a $9 million increase in digital shipping and handling expense reflecting 45% year-over-year digital sales growth.

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Stores and distribution expense $ 642,543 39.0% $ 632,494 53.4% (1,440)

For the second quarter of Fiscal 2021, stores and distribution expense increased 5% as compared to the second quarter of Fiscal 2020, primarily driven by a $22 million increase in store payroll expense, reflecting the return of certain expenses saved last year from COVID-19 temporary store closures and an $8 million increase in digital sales marketing expense.

These increases were partially offset by a $25 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations and include approximately $9 million in benefits related to rent abatements and a matter related to a prior flagship closure.

For the year-to-date period of Fiscal 2021, stores and distribution expense increased 2% as compared to the year-to-date period of Fiscal 2020, primarily driven by a $35 million increase in store payroll expense, reflecting the return of certain expenses saved last year from COVID-19 temporary store closures, a $12 million increase in digital shipping and handling expense reflecting 17% year-over-year digital sales growth and an $11 million increase in digital sales marketing expense.

These increases were partially offset by a $56 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations and include approximately $17 million in benefits related to rent abatements and a matter related to a prior flagship closure.

Marketing, general and administrative expense

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Marketing, general and administrative expense $ 123,913 14.3% $ 97,252 13.9% 40

For the first quarter of Fiscal 2021, marketing, general and administrative expense increased 12% as compared to the first quarter of Fiscal 2020, primarily driven by increased performance-based compensation and digital media spend, partially offset by lower non-customer-facing controllable expenses and in-store marketing costs.

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Marketing, general and administrative expense $ 244,860 14.9% $ 205,509 17.4% (250)

For the second quarter of Fiscal 2021, marketing, general and administrative expense increased 27% as compared to the second quarter of Fiscal 2020, primarily driven by increased digital media spend, performance-based compensation, legal, consulting and information technology expense.

These increases were partially offset by a decrease in depreciation expense.

For the year-to-date period of Fiscal 2021, marketing, general and administration expense increased 19% as compared to the year-to-date period of Fiscal 2020, primarily driven by increased digital media spend, performance-based compensation, legal, consulting and information technology expense.

These increases were partially offset by a decrease in depreciation expense.

Flagship store exit benefits

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Flagship store exit benefits $ (88) —% $ (3,884) (0.6)% 60

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Flagship store exit benefits $ (1,188) (0.1)% $ (4,427) (0.4)% 30

Refer to Note 16, “ FLAGSHIP STORE EXIT BENEFITS .”

Asset impairment, exclusive of flagship store exit charges

Asset impairment

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Asset impairment, exclusive of flagship store exit charges $ 2,664 0.3% $ 42,928 8.8% (850)

Asset impairment $ 786 0.1% $ 8,083 1.2% (110)

Excluded items:

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(786) (0.1)% (8,083) (1.2)% 110

Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges $ — 0.0% $ — —% —

Adjusted non-GAAP asset impairment $ — 0.0% $ — —% —

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Asset impairment $ 3,450 0.2% $ 51,011 4.3% (410)

Excluded items:

Asset impairment charges (1)

(3,450) (0.2)% (51,011) (4.3)% 410

Adjusted non-GAAP asset impairment $ — 0.0% $ — —% —

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

Refer to Note 9, “ ASSET IMPAIRMENT .”

Other operating income (loss), net

Other operating income, net

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Other operating income (loss), net $ 1,418 0.2% $ (506) (0.1)% (30)

Other operating income, net $ 1,848 0.2% $ 2,356 0.3% 10

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Other operating income, net $ 3,266 0.2% $ 1,850 0.2% —

Operating income (loss)

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Operating income $ 114,787 13.3% $ 14,143 2.0% 1,130

Excluded items:

Asset impairment charges (1)

786 0.1% 8,083 1.2% (110)

Adjusted non-GAAP operating income $ 115,573 13.4% $ 22,226 3.2% 1,020

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Operating income (loss) $ 172,220 10.5% $ (194,984) (16.5)% 2,700

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Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

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Interest expense, net $ 11,275 1.3% $ 7,098 1.0% 30

For the first quarter of Fiscal 2021, interest expense, net increased $5.2 million as compared to the first quarter of Fiscal 2020.

The increase in interest expense, net, is primarily driven by higher interest expense in the current year, reflecting higher average borrowings outstanding at a higher interest rate, as well as lower interest income earned on the Company’s investments and cash holdings.

Income tax expense

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Interest expense $ 22,703 1.4% $ 12,834 1.1% 30

Interest income (2,822) (0.2)% (2,365) (0.2)% —

Interest expense, net $ 19,881 1.2% $ 10,469 0.9% 30

For the second quarter of Fiscal 2021, interest expense, net increased $4.2 million as compared to the second quarter of Fiscal 2020 primarily driven by the loss on the extinguishment of debt related to the purchase of Senior Secured Notes.

For the year-to-date period of Fiscal 2021, interest expense, net increased $9.4 million as compared to the year-to-date period of Fiscal 2020.

The increase in interest expense, net, is primarily driven by the loss on the extinguishment of debt related to the purchase of Senior Secured Notes and higher interest expense in the current year, reflecting higher average borrowings outstanding at a higher interest rate.

Income tax (benefit) expense

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Income tax expense $ 6,121 12.5% $ 31,533 (14.8)%

Income tax (benefit) expense $ (6,944) (6.7)% $ 1,253 17.8%

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax expense $ 6,570 12.8% $ 35,965 (21.2)%

Adjusted non-GAAP income tax (benefit) expense $ (6,720) (6.4)% $ 87 0.6%

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

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

Income tax (benefit) expense $ (823) (0.5)% $ 32,786 (16.0)%

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax (benefit) expense $ (150) (0.1)% $ 36,052 (23.3)%

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

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Thirteen Weeks Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 2020

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

Net income attributable to A&F $ 108,500 12.5% $ 5,464 0.8% 1,170

Excluded items, net of tax (1)

562 0.1% 9,249 1.3% (120)

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

$ 109,062 12.6% $ 14,713 2.1% 1,050

Twenty-six Weeks Ended

July 31, 2021 (3)

August 1, 2020

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

Net income (loss) attributable to A&F $ 150,268 9.1% $ (238,684) (20.2)% 2,930

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

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

$ 153,045 9.3% $ (190,939) (16.1)% 2,540

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

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

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

Thirteen Weeks Ended

May 1, 2021 May 2, 2020 $ Change

July 31, 2021 August 1, 2020 $ Change

Net income per diluted share attributable to A&F $ 1.69 $ 0.09 $1.60

Excluded items, net of tax (1)

$ 0.01 $ 0.15 $(0.14)

Adjusted non-GAAP net income per diluted share attributable to A&F $ 1.70 $ 0.23 $1.47

Impact from changes in foreign currency exchange rates

$ — $ 0.04 $(0.04)

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

$ 1.70 $ 0.27 $1.43

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020 $ Change

Net income (loss) per diluted share attributable to A&F $ 2.32 $ (3.82) $6.14

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

BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES” of A&F’s Annual Report on Form 10-K for Fiscal 2020, including being opportunistic regarding growth opportunities, such as launching Social Tourist.

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

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

For the year-to-date period ended May 1, 2021, the Company used $14.4 million towards capital expenditures.

For the year-to-date period ended July 31, 2021, the Company used $35.3 million towards capital expenditures.

Total capital expenditures for Fiscal 2021 are expected to be approximately $100 million as compared to $101.9 million of capital expenditures in Fiscal 2020.

The Company entered Fiscal 2021 in a strong financial position, with cash and cash equivalents of $1.1 billion and total liquidity of approximately $1.3 billion.

This allows the Company to evaluate potential opportunities to strategically deploy excess cash and delever the balance sheet, depending on various factors, such as market and business conditions.

In Fiscal 2021, the Company has and continues to focus on such opportunities including, but not limited to, accelerating investments in the business, returning cash to shareholders through share repurchases, and repurchasing outstanding senior secured notes.

This allows the Company to evaluate potential opportunities to strategically deploy excess cash and delever the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.

Such opportunities include, but are not limited to, repurchasing outstanding senior secured notes or returning cash to shareholders through share repurchases.

Share repurchases and dividends

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

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

Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods.

Refer to “ ITEM 2.

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

As of May 1, 2021, the Company had $350.0 million of gross borrowings outstanding under the Senior Secured Notes.

During the thirteen weeks ended July 31, 2021, the Company repurchased $42.3 million of its outstanding Senior Secured Notes and incurred $5.3 million of loss on extinguishment of debt, comprised of a premium of $4.7 million and the write-off of unamortized fees of $0.6 million.

As of July 31, 2021, the Company had $307.7 million of gross borrowings outstanding under the Senior Secured Notes.

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

As of May 1, 2021, the Company did not have any borrowings outstanding under the ABL Facility.

As of July 31, 2021, the Company did not have any borrowings outstanding under the ABL Facility.

The ABL Facility matures on April 29, 2026.

Details regarding the remaining borrowing capacity under the ABL Facility as of May 1, 2021 are as follows:

(in thousands) May 1, 2021

Details regarding the remaining borrowing capacity under the ABL Facility as of July 31, 2021 are as follows:

(in thousands) July 31, 2021

Borrowing base $ 279,400

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Refer to Note 11, “ BORROWINGS .”

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’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.

As of May 1, 2021, $374.9 million of the Company’s $909.0 million of cash and equivalents were held by foreign affiliates.

As of July 31, 2021, $436.0 million of the Company’s $921.5 million of cash and equivalents were held by foreign affiliates.

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

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Analysis of cash flows

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 1, 2021 and May 2, 2020:

Thirteen Weeks Ended

May 1, 2021 May 2, 2020

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 31, 2021 and August 1, 2020:

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

(in thousands)

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

Net cash used for operating activities (131,350) (140,776)

Net cash (used for) provided by investing activities (14,404) 3,010

Net cash provided by operating activities 49,945 46,233

Net cash used for investing activities (35,269) (25,621)

Net cash (used for) provided by financing activities (200,247) 71,329

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Cash and equivalents, and restricted cash and equivalents, end of period $ 936,039 $ 785,990

Operating activities - During the year-to-date period ended May 1, 2021, the Company recognized higher cash receipts as compared to the year-to-date period ended May 2, 2020 as a result of the 61% year-over-year increase in net sales as the Company experienced widespread temporary store closures in response to COVID-19 during Fiscal 2020.

Operating activities - During the year-to-date period ended July 31, 2021, the Company recognized higher cash receipts as compared to the year-to-date period ended August 1, 2020 as a result of the 39% year-over-year increase in net sales as the Company experienced widespread temporary store closures in response to COVID-19 during Fiscal 2020.

The Company also took various immediate, aggressive actions during Fiscal 2020 to preserve liquidity and manage cash flows in light of COVID-19 in order to best position the business for key stakeholders, including, but not limited to (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;

(ii) tightly managing inventory receipts to align

inventory with expected market demand;

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

The Company also suspended rent payments for a larger proportion of its stores in Fiscal 2020 than it has in Fiscal 2021 related to

stores that were closed for a period of time as a result of COVID-19.

The Company also suspended rent payments for a larger proportion of its stores in Fiscal 2020 than it has in Fiscal 2021 related to stores that were closed for a period of time as a result of COVID-19.

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 addition, during the year-to-date period ended May 1, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019.

In addition, during the year-to-date period ended July 31, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019.

Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through Fiscal 2028.

The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended May 1, 2021.

Investing activities - During the year-to-date period ended May 1, 2021, net cash outflows for investing activities were used for capital expenditures of $14.4 million as compared to $47.0 million for the year-to-date period ended May 2, 2020.

In addition, the year-to-date period ended May 2, 2020, reflects the withdrawal of $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds, improving the Company’s near-term cash position in light of COVID-19.

Financing activities - During the year-to-date period ended May 2, 2020, in an effort to further improve the Company’s near-term cash position as a precautionary measure in response to COVID-19, the Company borrowed $210.0 million under the ABL Facility.

The Company repaid all outstanding borrowings under the ABL Facility in July 2020, using a portion of the net proceeds from the offering of the Senior Secured Notes and cash on hand.

In addition, during the year-to-date period ended May 2, 2020, the Company repurchased approximately 1.4 million shares of A&F’s Common Stock with a market value of approximately $15.2 million and paid dividends of $12.6 million, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19.

The Company resumed share repurchase activity beginning March 2021 and repurchased approximately 1.1 million shares of A&F’s Common Stock with a market value of approximately $35.2 million during the year-to-date period ended May 1, 2021.

The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended July 31, 2021.

Investing activities - During the year-to-date period ended July 31, 2021, net cash outflows for investing activities were used for capital expenditures of $35.3 million as compared to $75.6 million for the year-to-date period ended August 1, 2020.

In addition, the year-to-date period ended August 1, 2020, reflects the withdrawal of $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds, improving the Company’s near-term cash position in light of COVID-19.

Financing activities - During the year-to-date period ended July 31, 2021, net cash used by financing activities included the purchase of $42.3 million of outstanding Senior Secured Notes at a premium of $4.7 million.

During the year-to-date period ended August 1, 2020, net cash provided by financing activities primarily consisted of the issuance of the Senior Secured Notes and receipt of related gross proceeds of $350.0 million and borrowings under the ABL Facility of $210.0 million.

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

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

The Company resumed share repurchase activity beginning March 2021 and repurchased approximately 3.5 million shares of A&F’s Common Stock with a market value of approximately $135.2 million during the year-to-date period ended July 31, 2021.

Off-balance sheet arrangements

As of May 1, 2021, the Company did not have any material off-balance sheet arrangements.

As of July 31, 2021, the Company did not have any material off-balance sheet arrangements.

Contractual obligations

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

There have been no material changes during the thirteen weeks ended May 1, 2021 in the contractual obligations as of January 30, 2021, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

There have been no material changes during the thirteen weeks ended July 31, 2021 in the contractual obligations as of January 30, 2021, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

RECENT ACCOUNTING PRONOUNCEMENTS

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NON-GAAP FINANCIAL MEASURES

This Quarterly Report on Form 10-Q includes discussion of certain financial measures on both a GAAP and a non-GAAP basis.

This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis.

The Company believes that each of the non-GAAP financial measures presented in this “ ITEM 2.

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

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

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

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Comparable sales

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

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

Comparable sales exclude revenue other than store and digital sales.

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Excluded items

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

Asset impairment Asset impairment charges

Operating income (loss) Asset impairment charges

Income tax expense (2)

Income tax (benefit) expense (2)

Tax effect of pre-tax excluded items

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

A reconciliation of financial metrics on a constant currency basis to GAAP for the thirteen weeks ended May 1, 2021 and May 2, 2020 follows:

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

Net sales May 1, 2021 May 2, 2020 % Change

A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020 follows:

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

Net sales July 31, 2021 August 1, 2020 % Change July 31, 2021 August 1, 2020 % Change

GAAP $ 864,850 $ 698,328 24% $ 1,646,255 $ 1,183,687 39%

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Non-GAAP on a constant currency basis $ 864,850 $ 715,034 21% $ 1,646,255 $ 1,212,666 36%

Gross profit, exclusive of depreciation and amortization expense May 1, 2021 May 2, 2020 BPS Change (1)

Gross profit, exclusive of depreciation and amortization expense July 31, 2021 August 1, 2020 BPS Change (1)

July 31, 2021 August 1, 2020 BPS Change (1)

GAAP $ 563,485 $ 423,608 450 $ 1,058,619 $ 687,753 620

1 unchanged sentence

Non-GAAP on a constant currency basis $ 563,485 $ 435,786 430 $ 1,058,619 $ 707,316 600

Operating income (loss) May 1, 2021 May 2, 2020 BPS Change (1)

Operating income (loss) July 31, 2021 August 1, 2020 BPS Change (1)

July 31, 2021 August 1, 2020 BPS Change (1)

GAAP $ 114,787 $ 14,143 1,130 $ 172,220 $ (194,984) 2,700

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Adjusted non-GAAP on a constant currency basis $ 115,573 $ 25,644 980 $ 175,670 $ (141,455) 2,240

Net income (loss) per diluted share attributable to A&F May 1, 2021 May 2, 2020 $ Change

Net income (loss) per diluted share attributable to A&F July 31, 2021 August 1, 2020 $ Change July 31, 2021 August 1, 2020 $ Change

GAAP $ 1.69 $ 0.09 $1.60 $ 2.32 $ (3.82) $6.14

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

(2) Excluded items for the thirteen weeks ended May 1, 2021 and May 2, 2020 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.

(2) Excluded items for the thirteen and twenty-six weeks ended July 31, 2021 and August 1, 2020 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis