What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-12-06 compared with 2021-09-08 · 145 added, 144 removed, 411 unchanged (41% 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 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.

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 thirty-nine weeks ended October 30, 2021 and October 31, 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 and twenty-six weeks ended July 31, 2021 and August 1, 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 thirty-nine weeks ended October 30, 2021 and October 31, 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 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;

This section provides a discussion of the Company’s expected primary sources and uses of cash, financial condition and liquidity as of October 30, 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 thirty-nine weeks ended October 30, 2021 as compared to the thirty-nine weeks ended October 31, 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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• 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.

If we fail to remediate our material weaknesses, or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

• In the past, we have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future.

If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

Legal, tax, regulatory and compliance risks include:

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Focus areas for Fiscal 2021

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 remains committed to, and confident in, its long-term vision of being and 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 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:

Reflecting ongoing global uncertainty, the Company plans to continue to actively 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 sustainable long-term operating margin expansion:

• Accelerate digital, data and technology investments to increase agility and improve the customer experience;

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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 second 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 third 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.

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Permanently closed (1) (4) (15) (3) (16) (7) (23)

July 31, 2021 355 150 179 49 534 199 733

October 30, 2021 355 151 181 48 536 199 735

Gross square footage (in thousands) :

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

October 30, 2021 2,344 1,204 1,224 387 3,568 1,591 5,159

(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 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.

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

Excludes 14 and 12 Company-operated temporary stores as of October 30, 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 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.

Excludes 13 international franchise stores as of October 30, 2021 and 10 international franchise stores as of January 30, 2021.

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

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

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 imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures.

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.

As of October 30, 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 coronavirus, such as the Delta and Omicron variants, 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.

Total net sales increased approximately 10% and 27% for the thirteen and thirty-nine weeks ended October 30, 2021 as compared to the thirteen and thirty-nine weeks ended October 31, 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 increased approximately 8% and increased 14% for the thirteen and thirty-nine weeks ended October 30, 2021 as compared to the thirteen and thirty-nine weeks ended October 31, 2020.

Digital net sales remained highly penetrated, representing 46% and 47% of total net sales for the thirteen and thirty-nine weeks ended October 30, 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.

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

COVID-19 has also caused disruptions to global supply chains, including temporary 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.

In addition, the Company has seen and expects to continue to see inflationary pressures affecting the Company’s transportation costs.

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 adversely impacted the Company during the thirteen weeks ended October 30, 2021, and is likely to continue to cause increased inventory costs related to freight.

It is possible that responses to extended factory closures and transportation delays 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 and twenty-six weeks ended July 31, 2021 and August 1, 2020 follows:

A summary of results for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:

GAAP Non-GAAP (1)

(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)

(in thousands, except change in net sales, gross profit rate, operating income (loss) margin and per share amounts) October 30, 2021 (2)

October 31, 2020 (3)

October 30, 2021 (2)

October 31, 2020 (3)

Thirteen Weeks Ended

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Net income per diluted share attributable to A&F $ 0.77 $ 0.66 $ 0.86 $ 0.76

Twenty-six Weeks Ended

Thirty-nine Weeks Ended

Net sales $ 2,551,415 $ 2,003,340

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Operating income (loss) margin

9.6 % (6.8) % 10.0 % (3.9) %

Net income (loss) attributable to A&F $ 197,501 $ (196,413) $ 205,652 $ (142,708)

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Refer to Note 10, “ INCOME TAXES .”

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

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

(in thousands) October 30, 2021 January 30, 2021

Cash and equivalents $ 865,622 $ 1,104,862

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Inventories $ 543,713 $ 404,053

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

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended October 30, 2021 and October 31, 2020 were as follows:

(in thousands) October 30, 2021 October 31, 2020

Net cash provided by operating activities $ 131,287 $ 108,894

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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 and twenty-six weeks ended July 31, 2021 and August 1, 2020 were as follows:

The Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:

Thirteen Weeks Ended

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

(in thousands) October 30, 2021 October 31, 2020 $ Change % Change

Hollister (1)

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Total $ 905,160 $ 819,653 $ 85,507 10%

Twenty-six Weeks Ended

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

Thirty-nine Weeks Ended

(in thousands) October 30, 2021 October 31, 2020 $ Change % Change

Hollister (1)

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

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

The Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 were as follows:

Thirteen Weeks Ended

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

(in thousands) October 30, 2021 October 31, 2020 $ Change % Change

$ 654,858 $ 557,814 $ 97,044 17%

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Total $ 905,160 $ 819,653 $ 85,507 10%

Twenty-six Weeks Ended

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

Thirty-nine Weeks Ended

(in thousands) October 30, 2021 October 31, 2020 $ Change % Change

$ 1,810,471 $ 1,339,347 $ 471,124 35%

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Total $ 2,551,415 $ 2,003,340 $ 548,075 27%

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.

For the third quarter of Fiscal 2021, net sales increased 10% as compared to the third quarter of Fiscal 2020, primarily due to an increase in stores sales 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 8% digital sales growth.

Average unit retail increased year-over-year, driven by lower promotions and markdowns, with benefits from changes in foreign currency exchange rates of approximately $4 million.

For the year-to-date period of Fiscal 2021, net sales increased 27% 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 14% 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.

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 $33 million.

Cost of sales, exclusive of depreciation and amortization

Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

Cost of sales, exclusive of depreciation and amortization $ 328,916 36.3% $ 295,220 36.0% 30

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

Cost of sales, exclusive of depreciation and amortization $ 916,552 35.9% $ 791,154 39.5% (360)

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 third quarter of Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 30 basis points as compared to the third quarter of Fiscal 2020.

The year-over-year increase was driven by approximately 300 basis points of higher average unit cost from freight inflation and efforts to offset supply chain issues, almost fully offset by higher average unit retail on reduced promotions.

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 360 basis points as compared to the year-to-date period of Fiscal 2020.

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Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

Gross profit, exclusive of depreciation and amortization $ 576,244 63.7% $ 524,433 64.0% (30)

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

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Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

Stores and distribution expense $ 351,804 38.9% $ 346,263 42.2% (330)

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

Stores and distribution expense $ 994,347 39.0% $ 978,757 48.9% (990)

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.

For the third quarter of Fiscal 2021, stores and distribution expense increased 2% as compared to the third quarter of Fiscal 2020, primarily driven by a $13 million increase in digital sales marketing expense, a $5 million increase in digital direct expense, and a $3 million increase in digital shipping and handling expenses, reflecting 8% year-over-year digital sales growth.

These increases were partially offset by a $19 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations.

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 $36 million increase in store payroll expense, reflecting the return of certain expenses saved last year from COVID-19 temporary store closures, a $24 million increase in digital sales marketing expense, and a $15 million increase in digital shipping and handling expense reflecting 14% year-over-year digital sales growth.

These increases were partially offset by a $75 million reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations and include approximately $18 million in benefits related to rent abatements and a favorable resolution of a flagship store closure.

Marketing, general and administrative expense

Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

Marketing, general and administrative expense $ 146,269 16.2% $ 121,000 14.8% 140

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

Marketing, general and administrative expense $ 391,129 15.3% $ 326,509 16.3% (100)

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.

For the third quarter of Fiscal 2021, marketing, general and administrative expense increased 21% as compared to the third 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.

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

Flagship store exit benefits

Flagship store exit charges (benefits)

Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 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

Flagship store exit charges (benefits) $ 11 —% $ (8,063) (1.0)% 100

Thirty-nine Weeks Ended

October 30, 2021 October 31, 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 .”

Flagship store exit charges (benefits) $ (1,177) —% $ (12,490) (0.6)% 60

Refer to Note 16, “ FLAGSHIP STORE EXIT CHARGE S ( BENEFITS ) .”

Asset impairment

Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

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

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

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Refer to Note 9, “ ASSET IMPAIRMENT .”

Other operating income, net

Other operating income (loss), net

Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

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

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Other operating income (loss), net $ 1,320 0.1% $ (288) —% (10)

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

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Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

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Adjusted non-GAAP operating income $ 79,480 8.8% $ 64,945 7.9% 90

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

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Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

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Interest expense, net $ 7,270 0.8% $ 8,808 1.1% (30)

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

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Interest expense, net $ 27,151 1.1% $ 19,277 1.0% 10

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 third quarter of Fiscal 2021, interest expense, net decreased $1.5 million as compared to the third quarter of Fiscal 2020, primarily driven by lower interest expense as a result of lower borrowings in the current quarter due to the purchase of Senior Secured Notes in the second quarter of Fiscal 2021, as well as the settlement of a lease liability related to a previously closed store.

For the year-to-date period of Fiscal 2021, interest expense, net increased $7.9 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

Income tax expense

Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

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

Income tax expense $ 16,383 25.0% $ 5,779 11.6%

Excluded items:

Tax effect of pre-tax excluded items (1)

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

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

Adjusted non-GAAP income tax expense $ 17,758 24.6% $ 6,148 11.0%

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

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

Income tax expense $ 15,560 7.1% $ 38,565 (24.8)%

Excluded items:

Tax effect of pre-tax excluded items (1)

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

Adjusted non-GAAP income tax expense $ 17,608 7.7% $ 42,200 (42.9)%

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

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Thirteen Weeks Ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

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

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5,374 0.6% 5,960 0.7% (10)

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

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

$ 52,607 5.8% $ 48,231 5.9% (10)

Twenty-six Weeks Ended

July 31, 2021 (3)

August 1, 2020

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

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

4 unchanged sentences

$ 205,652 8.1% $ (142,708) (7.1)% 1,520

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

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

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

1 unchanged sentence

Thirteen Weeks Ended

July 31, 2021 August 1, 2020 $ Change

October 30, 2021 October 31, 2020 $ Change

Net income per diluted share attributable to A&F $ 0.77 $ 0.66 $0.11

6 unchanged sentences

$ 0.86 $ 0.71 $0.15

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020 $ Change

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020 $ Change

Net income (loss) per diluted share attributable to A&F $ 3.10 $ (3.14) $6.24

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

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

For the year-to-date period ended October 30, 2021, the Company used $62.2 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.

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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.

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

Share repurchases and dividends

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

Although the dividend program remains suspended, the Company has since resumed share repurchases and may repurchase shares in the future, dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.

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

The Company has since resumed share repurchases and may repurchase shares in the future, dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.

In November 2021, the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available.

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.

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Refer to “ ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ” of Part II of this Quarterly Report on Form 10-Q for the number of shares remaining available for purchase under the Company’s publicly announced stock repurchase authorization.

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

A quarterly dividend, of $0.20 per share outstanding, was declared in February and paid in March for Fiscal 2020.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization.

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

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

A&F’s Board of Directors reviews and establishes a dividend amount, if any, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including the potential severity of impacts to the business resulting from COVID-19 and any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility.

A quarterly dividend, of $0.20 per share outstanding, was declared in February and paid in March of Fiscal 2020.

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

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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.

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.

During the thirty-nine weeks ended October 30, 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 October 30, 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 July 31, 2021, the Company did not have any borrowings outstanding under the ABL Facility.

As of October 30, 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 July 31, 2021 are as follows:

(in thousands) July 31, 2021

Details regarding the remaining borrowing capacity under the ABL Facility as of October 30, 2021 are as follows:

(in thousands) October 30, 2021

Borrowing base $ 301,850

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

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

As of October 30, 2021, $405.5 million of the Company’s $865.6 million of cash and equivalents were held by foreign affiliates.

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

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Analysis of cash flows

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

Twenty-six Weeks Ended

July 31, 2021 August 1, 2020

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 30, 2021 and October 31, 2020:

Thirty-nine Weeks Ended

October 30, 2021 October 31, 2020

(in thousands)

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Cash and equivalents, and restricted cash and equivalents, end of period $ 880,303 $ 831,808

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;

Operating activities - During the year-to-date period ended October 30, 2021, the Company recognized higher cash receipts as compared to the year-to-date period ended October 31, 2020 as a result of the 27% year-over-year increase in net sales as the Company experienced widespread temporary store closures in response to COVID-19 during Fiscal 2020.

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

(ii) tightly managing inventory receipts to align inventory with expected market demand;

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

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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 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.

In addition, during the year-to-date period ended October 30, 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 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 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 October 30, 2021.

Investing activities - During the year-to-date period ended October 30, 2021, net cash outflows for investing activities were used for capital expenditures of $62.2 million as compared to $91.7 million for the year-to-date period ended October 31, 2020.

In addition, the year-to-date period ended October 31, 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 October 30, 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 October 31, 2020, net cash provided by financing activities primarily consisted of the issuance of the Senior Secured Notes and receipt of related gross proceeds of $350.0 million and borrowings under the ABL Facility of $210.0 million.

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

In addition, the Company returned $27.7 million to shareholders 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.

In addition, the Company returned $27.7 million to shareholders through share repurchases and dividends during the year-to-date period ended October 31, 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 6.1 million shares of A&F’s Common Stock with a market value of approximately $235.2 million during the year-to-date period ended October 30, 2021.

Off-balance sheet arrangements

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

As of October 30, 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 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).

There have been no material changes during the thirteen weeks ended October 30, 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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Operating income (loss) Asset impairment charges

Income tax (benefit) expense (2)

Income tax 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 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

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 thirty-nine weeks ended October 30, 2021 and October 31, 2020 follows:

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

Net sales October 30, 2021 October 31, 2020 % Change October 30, 2021 October 31, 2020 % Change

GAAP $ 905,160 $ 819,653 10% $ 2,551,415 $ 2,003,340 27%

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Non-GAAP on a constant currency basis $ 905,160 $ 823,193 10% $ 2,551,415 $ 2,035,858 25%

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)

Gross profit, exclusive of depreciation and amortization expense October 30, 2021 October 31, 2020 BPS Change (1)

October 30, 2021 October 31, 2020 BPS Change (1)

GAAP $ 576,244 $ 524,433 (30) $ 1,634,863 $ 1,212,186 360

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Non-GAAP on a constant currency basis $ 576,244 $ 522,731 20 $ 1,634,863 $ 1,230,047 370

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

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

Operating income (loss) October 30, 2021 October 31, 2020 BPS Change (1)

October 30, 2021 October 31, 2020 BPS Change (1)

GAAP $ 72,731 $ 58,616 80 $ 244,951 $ (136,368) 1,640

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Adjusted non-GAAP on a constant currency basis $ 79,480 $ 60,878 140 $ 255,150 $ (80,577) 1,400

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

Net income (loss) per diluted share attributable to A&F October 30, 2021 October 31, 2020 $ Change October 30, 2021 October 31, 2020 $ Change

GAAP $ 0.77 $ 0.66 $0.11 $ 3.10 $ (3.14) $6.24

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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 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.

(2) Excluded items for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 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