ABERCROMBIE & FITCH CO /DE/ 10-K

Item 8. Financial Statements and Supplementary Data Abercrombie & Fitch Co. Consolidated Statements of Operations and Comprehensive Income (Loss) (Thousands, except per share amounts) Fiscal 2021 Fiscal 2020 Fiscal 2019 Net sales $ 3,712,768 $ 3,125,384 $ 3,623,073 Cost of sales, exclusive of depreciation and amortization 1,400,773 1,234,179 1,472,155 Gross profit 2,311,995 1,891,205 2,150,918 Stores and distribution expense 1,429,476 1,391,584 1,551,243 Marketing, general and administrative expense 536,815 463,843 464,615 Flagship store exit (benefits) charges ( 1,153 ) ( 11,636 ) 47,257 Asset impairment, exclusive of flagship store exit (benefits) charges 12,100 72,937 19,135 Other operating income, net ( 8,327 ) ( 5,054 ) ( 1,400 ) Operating income (loss) 343,084 ( 20,469 ) 70,068 Interest expense, net 34,110 28,274 7,737 Income (loss) before income taxes 308,974 ( 48,743 ) 62,331 Income tax expense 38,908 60,211 17,371 Net income (loss) 270,066 ( 108,954 ) 44,960 Less: Net income attributable to noncontrolling interests 7,056 5,067 5,602 Net income (loss) attributable to A&F $ 263,010 $ ( 114,021 ) $ 39,358 Net income (loss) per share attributable to A&F Basic $ 4.41 $ ( 1.82 ) $ 0.61 Diluted $ 4.20 $ ( 1.82 ) $ 0.60 Weighted-average shares outstanding Basic 59,597 62,551 64,428 Diluted 62,636 62,551 65,778 Other comprehensive income (loss) Foreign currency translation, net of tax $ ( 22,917 ) $ 12,195 $ ( 5,080 ) Derivative financial instruments, net of tax 10,518 ( 5,616 ) ( 1,354 ) Other comprehensive (loss) income ( 12,399 ) 6,579 ( 6,434 ) Comprehensive income (loss) 257,667 ( 102,375 ) 38,526 Less: Comprehensive income attributable to noncontrolling interests 7,056 5,067 5,602 Comprehensive income (loss) attributable to A&F $ 250,611 $ ( 107,442 ) $ 32,924 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Consolidated Balance Sheets (Thousands, except par value amounts) January 29, 2022 January 30, 2021 Assets Current assets: Cash and equivalents $ 823,139 $ 1,104,862 Receivables 69,102 83,857 Inventories 525,864 404,053 Other current assets 89,654 68,857 Total current assets 1,507,759 1,661,629 Property and equipment, net 508,336 550,587 Operating lease right-of-use assets 698,231 893,989 Other assets 225,165 208,697 Total assets $ 2,939,491 $ 3,314,902 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 374,829 $ 289,396 Accrued expenses 395,815 396,365 Short-term portion of operating lease liabilities 222,823 248,846 Income taxes payable 21,773 24,792 Total current liabilities 1,015,240 959,399 Long-term liabilities: Long-term portion of operating lease liabilities 697,264 957,588 Long-term portion of borrowings, net 303,574 343,910 Other liabilities 86,089 104,693 Total long-term liabilities 1,086,927 1,406,191 Stockholders’ equity Class A Common Stock - $ 0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 413,190 401,283 Retained earnings 2,386,156 2,149,470 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 114,706 ) ( 102,307 ) Treasury stock, at average cost: 50,315 and 40,901 shares at January 29, 2022 and January 30, 2021, respectively ( 1,859,583 ) ( 1,512,851 ) Total A&F stockholders’ equity 826,090 936,628 Noncontrolling interests 11,234 12,684 Total stockholders’ equity 837,324 949,312 Total liabilities and stockholders’ equity $ 2,939,491 $ 3,314,902 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, February 2, 2019 66,227 $ 1,033 $ 405,379 $ 9,721 $ 2,418,544 $ ( 102,452 ) 37,073 $ ( 1,513,604 ) $ 1,218,621 Impact from adoption of the new lease accounting standard — — — — ( 75,165 ) — — — ( 75,165 ) Net income — — — 5,602 39,358 — — — 44,960 Purchase of common stock ( 3,957 ) — — — — — 3,957 ( 63,542 ) ( 63,542 ) Dividends ($ 0.80 per share) — — — — ( 51,510 ) — — — ( 51,510 ) Share-based compensation issuances and exercises 516 — ( 14,403 ) — ( 17,482 ) — ( 516 ) 25,081 ( 6,804 ) Share-based compensation expense — — 14,007 — — — — — 14,007 Derivative financial instruments, net of tax — — — — — ( 1,354 ) — — ( 1,354 ) Foreign currency translation adjustments, net of tax — — — — — ( 5,080 ) — — ( 5,080 ) Distributions to noncontrolling interests, net — — — ( 2,955 ) — — — — ( 2,955 ) Balance, February 1, 2020 62,786 $ 1,033 $ 404,983 $ 12,368 $ 2,313,745 $ ( 108,886 ) 40,514 $ ( 1,552,065 ) $ 1,071,178 Net loss — — — 5,067 ( 114,021 ) — — — ( 108,954 ) Purchase of common stock ( 1,397 ) — — — — — 1,397 ( 15,172 ) ( 15,172 ) Dividends ($ 0.28 per share) — — — — ( 12,556 ) — — — ( 12,556 ) Share-based compensation issuances and exercises 1,010 — ( 22,382 ) — ( 37,698 ) — ( 1,010 ) 54,386 ( 5,694 ) Share-based compensation expense — — 18,682 — — — — — 18,682 Derivative financial instruments, net of tax — — — — — ( 5,616 ) — — ( 5,616 ) Foreign currency translation adjustments, net of tax — — — — — 12,195 — — 12,195 Distributions to noncontrolling interests, net — — — ( 4,751 ) — — — — ( 4,751 ) Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 Net income — — — 7,056 263,010 — — — 270,066 Purchase of common stock ( 10,200 ) — — — — — 10,200 ( 377,290 ) ( 377,290 ) Dividends ($ 0.00 per share) — — — — — — — — — Share-based compensation issuances and exercises 786 — ( 17,397 ) — ( 26,324 ) — ( 786 ) 30,558 ( 13,163 ) Share-based compensation expense — — 29,304 — — — — — 29,304 Derivative financial instruments, net of tax — — — — — 10,518 — — 10,518 Foreign currency translation adjustments, net of tax — — — — — ( 22,917 ) — — ( 22,917 ) Distributions to noncontrolling interests, net — — — ( 8,506 ) — — — — ( 8,506 ) Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Cash Flows (Thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Operating activities Net income (loss) $ 270,066 $ ( 108,954 ) $ 44,960 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 144,035 166,281 173,625 Asset impairment 12,100 72,937 22,364 Loss on disposal 5,020 16,353 6,298 Deferred income taxes ( 31,922 ) 23,986 9,150 Share-based compensation 29,304 18,682 14,007 Loss on extinguishment of debt 5,347 — — Changes in assets and liabilities Inventories ( 123,221 ) 33,312 2,270 Accounts payable and accrued expenses 77,910 186,747 10,821 Operating lease right-of use assets and liabilities ( 93,827 ) ( 55,700 ) 46,442 Income taxes ( 3,086 ) 10,753 ( 5,473 ) Other assets 396 38,632 ( 20,137 ) Other liabilities ( 14,340 ) 1,889 ( 3,642 ) Net cash provided by operating activities 277,782 404,918 300,685 Investing activities Purchases of property and equipment ( 96,979 ) ( 101,910 ) ( 202,784 ) Withdrawal of funds from Rabbi Trust assets — 50,000 — Net cash used for investing activities ( 96,979 ) ( 51,910 ) ( 202,784 ) Financing activities Proceeds from issuance of senior secured notes — 350,000 — Proceeds from borrowings under the senior secured asset-based revolving credit facility — 210,000 — Repayment of borrowings under the term loan facility — ( 233,250 ) ( 20,000 ) Repayment of borrowings under the senior secured asset-based revolving credit facility — ( 210,000 ) — Purchase of senior secured notes ( 46,969 ) — — Payment of debt issuance costs and fees ( 2,016 ) ( 7,318 ) — Purchases of common stock ( 377,290 ) ( 15,172 ) ( 63,542 ) Dividends paid — ( 12,556 ) ( 51,510 ) Other financing activities ( 20,623 ) ( 11,987 ) ( 12,821 ) Net cash (used for) provided by financing activities ( 446,898 ) 69,717 ( 147,873 ) Effect of foreign currency exchange rates on cash ( 23,694 ) 9,168 ( 3,593 ) Net (decrease) increase in cash and equivalents, and restricted cash and equivalents ( 289,789 ) 431,893 ( 53,565 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 1,124,157 692,264 745,829 Cash and equivalents, and restricted cash and equivalents, end of period $ 834,368 $ 1,124,157 $ 692,264 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 29,932 $ 16,250 $ 44,199 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions $ 29,241 $ ( 38,279 ) $ 391,753 Supplemental information related to cash activities Cash paid for interest $ 28,413 $ 26,629 $ 17,514 Cash paid for income taxes $ 74,709 $ 15,210 $ 20,717 Cash received from income tax refunds $ 2,292 $ 4,650 $ 8,773 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements received of $ 17.9 million and $ 30.7 million in Fiscal 2021 and 2020, respectively $ 364,842 $ 316,992 $ 422,850 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Index for Notes to Consolidated Financial Statements Page No. Note 1. NATURE OF BUSINESS 50 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 50 Note 3. IMPACT OF COVID-19 59 Note 4. REVENUE RECOGNITION 60 Note 5. FAIR VALUE 61 Note 6. INVENTORIES 62 Note 7. PROPERTY AND EQUIPMENT, NET 62 Note 8. LEASES 63 Note 9. ASSET IMPAIRMENT 64 Note 10. RABBI TRUST ASSETS 64 Note 11. ACCRUED EXPENSES 65 Note 12. INCOME TAXES 65 Note 13. BORROWINGS 69 Note 14. SHARE-BASED COMPENSATION 71 Note 15. DERIVATIVE INSTRUMENTS 74 Note 16. ACCUMULATED OTHER COMPREHENSIVE LOSS 75 Note 17. SAVINGS AND RETIREMENT PLANS 76 Note 18. SEGMENT REPORTING 76 Note 19. FLAGSHIP STORE EXIT (BENEFITS) CHARGES 77 Note 20. CONTINGENCIES 77 Note 21 SUBSEQUENT EVENT 78 Table of Contents Abercrombie & Fitch Co. Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally led omnichannel retailer. 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. 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. The Company operates primarily in North America, Europe and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI on the Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a 52 week year, but occasionally gives rise to an additional week, resulting in a 53 week year. Fiscal years are designated in the Consolidated Financial Statements and notes by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2019 February 1, 2020 52 Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Use of estimates The preparation of financial statements, in conformity with U.S. generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) continues to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the duration and spread of COVID-19 and the emergence of new variants of coronavirus, the availability and acceptance of effective vaccines, boosters or medical treatments, the impact of COVID-19 on the length or frequency of store closures, and the extent to which COVID-19 impacts worldwide macroeconomic conditions including interest rates, the speed of the economic recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Table of Contents Abercrombie & Fitch Co. Cash and equivalents A summary of cash and equivalents on the Consolidated Balance Sheets follows: (in thousands) January 29, 2022 January 30, 2021 Cash (1) $ 762,187 $ 796,994 Cash equivalents: (2) Time deposits 11,643 11,589 Money market funds 49,309 296,279 Cash and equivalents $ 823,139 $ 1,104,862 (1) Primarily consists of amounts on deposit with financial institutions. (2) Investments with original maturities of less than three months. Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Consolidated Statements of Cash Flows: (in thousands) Location January 29, 2022 January 30, 2021 February 1, 2020 Cash and equivalents Cash and equivalents $ 823,139 $ 1,104,862 $ 671,267 Long-term restricted cash and equivalents Other assets 11,229 14,814 18,696 Short-term restricted cash and equivalents Other current assets — 4,481 2,301 Restricted cash and equivalents (1) $ 11,229 $ 19,295 $ 20,997 Cash and equivalents and restricted cash and equivalents $ 834,368 $ 1,124,157 $ 692,264 (1) Restricted cash and equivalents primarily consists of amounts on deposit with banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements. Receivables Receivables on the Consolidated Balance Sheets primarily include credit card receivables, lessor construction allowances, value added tax (“VAT”) receivables, trade receivables, income tax receivables and other tax credits or refunds. As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Lessor construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold. Trade receivables are amounts billed by the Company to wholesale, franchise and licensing partners in the ordinary course of business. Income tax receivables represent refunds of certain tax payments along with net operating loss and credit carryback claims for which the Company expects to receive refunds within the next 12 months. Inventories Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The lower of cost and net realizable value adjustment is based on the Company’s consideration of multiple factors and assumptions including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences. Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly. Refer to Note 6, “ INVENTORIES .” The Company’s global sourcing of merchandise is generally negotiated and settled in U.S. Dollars. Other current assets Other current assets on the Consolidated Balance Sheets consists of: prepaid expenses including those related to rent, information technology maintenance and taxes; current store supplies; derivative contracts; short-term restricted cash and other. Table of Contents Abercrombie & Fitch Co. Property and equipment, net Depreciation of property and equipment is computed for financial reporting purposes on a straight-line basis using the following service lives: Category of property and equipment Service lives Information technology 3 - 7 years Furniture, fixtures and equipment 3 - 15 years Leasehold improvements 3 - 15 years Other property and equipment 3 - 20 years Buildings 30 years Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income on the Consolidated Statements of Operations and Comprehensive Income (Loss). Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized. The Company capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding seven years. Refer to Note 7, “ PROPERTY AND EQUIPMENT, NET .” Leases The Company determines if an arrangement is an operating lease at inception. For new operating leases, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term on the lease commencement date. The commencement date for new leases is when the lessor makes the leased asset available for use by the Company, typically the possession date. As the rates implicit in the Company’s leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the operating lease and the lease term for the initial measurement of the operating lease right-of-use asset and liability. For operating leases existing before the adoption of the current lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For operating leases commencing on or after the adoption of the current lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date. The Company has elected to combine lease and nonlease components for all current classes of underlying leased assets. The measurement of operating lease right-of-use assets and liabilities includes amounts related to: • Lease payments made prior to the lease commencement date; • Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded; • Fixed payments related to operating lease components, such as rent escalation payments scheduled at the lease commencement date; • Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and • Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease. The measurement of operating lease right-of-use assets and liabilities excludes amounts related to: • Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Consolidated Balance Sheets; • Variable payments related to operating lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Consolidated Statements of Operations and Comprehensive Income (Loss); • Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss); and • Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss). Table of Contents Abercrombie & Fitch Co. Certain of the Company’s operating leases include options to extend the lease or to terminate the lease. The Company assesses these operating leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s operating lease right-of-use assets and liabilities. Generally, the Company’s options to extend its operating leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss) until a new agreement has been executed. Upon the signing of the renewal agreement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of remaining lease payments over the lease term. Amortization and interest expense related to operating lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired operating lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the operating lease, amortization and interest expense are primarily recorded within stores and distribution expense, marketing, general and administrative expense, or flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party. The Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments effective February 3, 2019. Adoption of this standard resulted in the Company’s total assets and total liabilities on the Consolidated Balance Sheet each increasing by approximately $ 1.2 billion on the date of adoption, primarily due to the recognition of operating lease right-of-use assets and liabilities. Certain of these newly-established operating lease right-of-use assets related to previously impaired stores and, therefore, were assessed for impairment upon adoption. To the extent that the initial carrying amount for each such lease right-of-use asset was greater than its fair value, an asset impairment charge was recognized as an adjustment to the opening balance of retained earnings on the date of adoption. As a result, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings by $ 0.1 billion on the date of adoption. Refer to Note 8, “ LEASES .” Long-lived asset impairment For the purposes of asset impairment, the Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumption used in developing these projected cash flows used in the recoverability test is estimated sales growth rate. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in the Company’s fair value analysis are estimated sales growth rate and comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. Refer to Note 9, “ ASSET IMPAIRMENT .” Other assets Other assets on the Consolidated Balance Sheets consist primarily of the Company’s trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”), deferred tax assets, long-term deposits, intellectual property, long-term restricted cash and equivalents, long-term supplies and various other assets. Table of Contents Abercrombie & Fitch Co. Rabbi Trust assets The Rabbi Trust includes amounts, restricted in their use, to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value and are included in other assets on the Consolidated Balance Sheets. The change in cash surrender value of the life insurance policies in the Rabbi Trust is recorded in interest expense, net on the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 10, “ RABBI TRUST ASSETS .” Intellectual property Intellectual property primarily includes trademark assets associated with the Company’s international operations, consisting of finite-lived and indefinite-lived intangible assets. The Company’s finite-lived intangible assets are amortized over a useful life of 10 to 20 years. Income taxes Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company’s income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited to: changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, the settlement of tax audits and changes in tax legislation and/or regulations. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties. A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue may require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 12, “ INCOME TAXES .” Foreign currency translation and transactions The functional currencies of the Company’s foreign subsidiaries are generally the respective local currencies in the countries in which they operate. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies are translated into U.S. Dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in other operating income, net; whereas, translation adjustments and gains and losses associated with measuring inter-company loans of a long-term investment nature are reported as an element of other comprehensive income (loss). Table of Contents Abercrombie & Fitch Co. Derivative instruments The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued. For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings, except as allowable under certain extenuating circumstances. The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in AOCL on the Consolidated Balance Sheets into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at the Company’s fiscal month-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Consolidated Balance Sheets. However, the Company’s derivative instruments allow net settlements under certain conditions. Refer to Note 15, “ DERIVATIVE INSTRUMENTS . ” Stockholders’ equity A summary of the Company’s Class A Common Stock (the “Common Stock”), $ 0.01 par value, and Class B Common Stock, $ 0.01 par value, follows: (in thousands) January 29, 2022 January 30, 2021 Class A Common Stock Shares authorized 150,000 150,000 Shares issued 103,300 103,300 Shares outstanding 52,985 62,399 Class B Common Stock (1) Shares authorized 106,400 106,400 (1) No shares were issued or outstanding as of each of January 29, 2022 and January 30, 2021 . Table of Contents Abercrombie & Fitch Co. Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of stockholders. Revenue recognition The Company recognizes revenue from product sales when control of the good is transferred to the customer, generally upon pick up at, or shipment from, a Company location. The Company provides shipping and handling services to customers in certain transactions under its digital operations. Revenue associated with the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receipt of the merchandise. The related shipping and handling costs are classified in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Revenue is recorded net of estimated returns, associate discounts, promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience among other factors. The sales return reserve is classified in accrued expenses on the Consolidated Balance Sheets. The Company accounts for gift cards sold to customers by recognizing an unearned revenue liability at the time of sale, which is recognized as net sales when redeemed by the customer or when the Company has determined the likelihood of redemption to be remote, referred to as gift card breakage. Gift card breakage is recognized proportionally with gift card redemptions in net sales. Gift cards sold to customers do not expire or lose value over periods of inactivity and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates. The Company also maintains loyalty programs, which primarily provide customers with the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized at the earlier of redemption or expiration. Unearned revenue liabilities related to the Company’s gift card program and loyalty programs are classified in accrued expenses on the Consolidated Balance Sheets and are typically recognized as revenue within a 12-month period. For additional details on the Company’s unearned revenue liabilities related to the Company’s gift card and loyalty programs, refer to Note 4, “ REVENUE RECOGNITION .” The Company also recognizes revenue under wholesale arrangements, which revenue is generally recognized upon shipment, when control passes to the wholesale partner. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon the sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers. The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales. All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive Income (Loss). For a discussion of the disaggregation of revenue, refer to Note 18, “ SEGMENT REPORTING . ” Cost of sales, exclusive of depreciation and amortization Cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Income (Loss), primarily consists of cost incurred to ready inventory for sale, including product costs, freight, and import costs, as well as provisions for reserves for shrink and lower of cost and net realizable value. Gains and losses associated with the effective portion of designated foreign currency exchange forward contracts related to the hedging of intercompany inventory transactions are also recognized in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company’s cost of sales, exclusive of depreciation and amortization, and consequently gross profit, may not be comparable to those of other retailers, as inclusion of certain costs vary across the industry. Some retailers include all costs related to buying, design and distribution operations in cost of sales, while others may include either all or a portion of these costs in selling, general and administrative expenses. Table of Contents Abercrombie & Fitch Co. Stores and distribution expense Stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of: store payroll; store management; operating lease costs; utilities and other landlord expenses; depreciation and amortization, except for those amounts included in marketing, general and administrative expense; repairs and maintenance and other store support functions; marketing and other costs related to the Company’s digital operations; shipping and handling costs; and distribution center (“DC”) expense. A summary of shipping and handling costs, which includes costs incurred to store, move and prepare product for shipment and costs incurred to physically move product to our customers across channels, follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Shipping and handling costs $ 306,222 $ 291,534 $ 224,604 Marketing, general and administrative expense Marketing, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of: home office compensation and marketing, except for those departments included in stores and distribution expense; information technology; outside services, such as legal and consulting; depreciation, primarily related to IT and other home office assets; amortization related to trademark assets; costs to design and develop the Company’s merchandise; relocation; recruiting; and travel expenses. Other operating income, net Other operating income, net on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of gains and losses resulting from foreign-currency-denominated transactions. A summary of foreign-currency-denominated transactions, including those related to derivative instruments, follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Foreign-currency-denominated transaction gains $ 4,232 $ 3,933 $ 348 Interest expense, net Interest expense primarily consisted of interest expense on the Company’s long-term borrowings outstanding. Interest income primarily consisted of interest income earned on the Company’s investments and cash holdings and realized gains from the Rabbi Trust assets. A summary of interest expense, net follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Interest expense $ 37,958 $ 31,726 $ 19,908 Interest income ( 3,848 ) ( 3,452 ) ( 12,171 ) Interest expense, net $ 34,110 $ 28,274 $ 7,737 Advertising costs Advertising costs consist primarily of paid media advertising, direct digital advertising, including e-mail distribution, digital content and in-store photography and signage. Advertising costs related specifically to digital operations are expensed as incurred and the production of in-store photography and signage is expensed when the marketing campaign commences as components of stores and distribution expense. All other advertising costs are expensed as incurred as components of marketing, general and administrative expense. A summary of advertising costs follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Advertising costs $ 204,575 $ 118,537 $ 134,058 Share-based compensation The Company issues shares of Common Stock from treasury stock upon exercise of stock appreciation rights and vesting of Table of Contents Abercrombie & Fitch Co. restricted stock units, including those converted from performance share awards. As of January 29, 2022, the Company had sufficient treasury stock available to settle restricted stock units and stock appreciation rights outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time. In the event, at each reporting date as of which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (as amended effective May 20, 2020, the “2016 Directors LTIP”) and the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended effective June 9, 2021, the “2016 Associates LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards would be re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered. Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company’s Common Stock price for the most recent historical period equal to the expected term of the stock appreciation rights, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly closing price of the Common Stock, adjusted for stock splits and dividends. Service-based restricted stock units are expensed on a straight-line basis over the award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation expense for stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the issuance of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction differs from the recorded deferred tax asset, the excess tax benefit or deficit associated with the tax deduction is recognized within income tax expense. Refer to Note 14, “ SHARE-BASED COMPENSATION .” Table of Contents Abercrombie & Fitch Co. Net income (loss) per share attributable to A&F Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock. Additional information pertaining to net income (loss) per share attributable to A&F follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Shares of Common Stock issued 103,300 103,300 103,300 Weighted-average treasury shares ( 43,703 ) ( 40,749 ) ( 38,872 ) Weighted-average — basic shares 59,597 62,551 64,428 Dilutive effect of share-based compensation awards 3,039 — 1,350 Weighted-average — diluted shares 62,636 62,551 65,778 Anti-dilutive shares (1) 1,002 3,270 1,462 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have or that did not have a material impact on the Company’s consolidated financial statements. 3. IMPACT OF COVID-19 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 January 29, 2022, all U.S. Company-operated stores were fully open for in-store service; however, temporary store closures have subsequently been mandated in certain parts of the APAC region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. 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 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 future store closures will be necessary. During Fiscal 2020, the Company experienced a material adverse impact to net sales across brands and regions as a result of widespread temporary store closures in response to COVID-19, which was not offset by year-over-year digital sales growth. As a result, the Company recognized $ 14.8 million of charges to reduce the carrying value of inventory, primarily as a result of COVID-19 and the temporary closure of the Company’s stores, in cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Income (Loss). Further negative developments in the COVID-19 pandemic could result in additional charges to reduce the carrying value of inventory. As a result of COVID-19, the Company suspended certain rent payments for periods of store closures, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. As of January 29, 2022 and January 30, 2021, the Company had $ 13.5 million and $ 24.2 million, respectively, related to suspended rent payments classified within accrued expenses on the Consolidated Balance Sheets. The Company obtained rent abatements of $ 17.9 million and $ 30.7 million, respectively, during Fiscal 2021 and Fiscal 2020. The majority of the benefits related to these abatements was recognized within variable lease cost during the applicable periods. Table of Contents Abercrombie & Fitch Co. During Fiscal 2021 and Fiscal 2020, the Company recognized qualified payroll-related credits reducing payroll expenses by approximately $ 5.6 million and $ 18.1 millions, respectively, in the Consolidated Statements of Operations and Comprehensive Income. There are also instances where governments have provided wage subsidies through direct payments to the Company’s associates. In these instances, no benefits are recognized on the Consolidated Statements of Operations and Comprehensive Income (Loss), but the Company does see a reduction in expense incurred. The Company also intends to continue to defer qualified payroll and other tax payments as permitted by applicable government laws and regulations. The Company has recognized asset impairment charges related to the Company’s operating lease right-of-use assets and property and equipment, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ ASSET IMPAIRMENT ,” for additional information. The Company has also experienced other material impacts as a result of COVID-19, such as the establishment of deferred tax valuation allowances and other tax charges. Refer to Note 12, “ INCOME TAXES ,” for additional information. In March 2020, in an effort to improve the Company’s near-term cash position, as a precautionary measure in response to COVID-19, the Company borrowed $ 210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $ 50.0 million of additional cash. In July 2020, the Company took additional actions to preserve liquidity in light of the continued global uncertainty then presented by COVID-19, and completed a private offering of $ 350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”). The Company used the net proceeds of such offering to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 13 “ BORROWINGS ,” for additional information. As of January 29, 2022, the Company had liquidity of $ 1.1 billion as compared to liquidity of $ 1.3 billion as of January 30, 2021, comprised of cash and equivalents and borrowing available to the Company under the ABL Facility. 4. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 18, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of January 29, 2022 and January 30, 2021: (in thousands) January 29, 2022 January 30, 2021 Gift card liability $ 36,984 $ 28,561 Loyalty programs liability 22,757 20,426 The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for Fiscal 2021 and Fiscal 2020: (in thousands) Fiscal 2021 Fiscal 2020 Revenue associated with gift card redemptions and gift card breakage $ 80,088 $ 58,400 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 45,417 37,042 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue recognition ,” for discussion regarding significant accounting policies related to the Company’s revenue recognition. Table of Contents Abercrombie & Fitch Co. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows: Assets and Liabilities at Fair Value as of January 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 49,309 $ 11,643 $ — $ 60,952 Derivative instruments (2) — 4,973 — 4,973 Rabbi Trust assets (3) 1 62,272 — 62,273 Restricted cash equivalents (1) 5,391 2,326 — 7,717 Total assets $ 54,701 $ 81,214 $ — $ 135,915 Assets and Liabilities at Fair Value as of January 30, 2021 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 296,279 $ 11,589 $ — $ 307,868 Derivative instruments (2) — 79 — 79 Rabbi Trust assets (3) 1 60,789 — 60,790 Restricted cash equivalents (1) 2,943 7,775 — 10,718 Total assets $ 299,223 $ 80,232 $ — $ 379,455 Liabilities: Derivative instruments (2) $ — $ 4,694 $ — $ 4,694 Total liabilities $ — $ 4,694 $ — $ 4,694 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets and liabilities consisted of: • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under the Senior Secured Notes are carried at historical cost in the Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) January 29, 2022 January 30, 2021 Gross borrowings outstanding, carrying amount $ 307,730 $ 350,000 Gross borrowings outstanding, fair value 327,732 389,813 Table of Contents Abercrombie & Fitch Co. 6. INVENTORIES Inventories consisted of: (in thousands) January 29, 2022 January 30, 2021 Inventories at original cost $ 549,030 $ 429,993 Less: Lower of cost and net realizable value adjustment ( 17,196 ) ( 21,076 ) Less: Shrink estimate ( 5,970 ) ( 4,864 ) Inventories (1) $ 525,864 $ 404,053 (1) Includes $ 142.7 million and $ 106.0 million of inventory in transit, merchandise owned by the Company that has not yet been received at a Company distribution center, as of January 29, 2022 and January 30, 2021, respectively. A summary of the Company’s vendors based on location and the percentage of dollar cost of merchandise receipts during Fiscal 2021, and Fiscal 2020 follows: % of Total Company Merchandise Receipts (1) Location Fiscal 2021 Fiscal 2020 Vietnam 36 % 41 % China (2) 14 12 Cambodia 16 15 Other (3) 34 32 Total 100 % 100 % (1) Calculated as the cost of merchandise receipts from all vendors within a country during the respective fiscal year divided by cost of total merchandise receipts during the respective fiscal year . (2) Only a portion of the Company’s total merchandise sourced from China is subject to the additional U.S. tariffs on imported consumer goods that were effective beginning in Fiscal 2019. The Company estimates approximately 9 %, 7 % and 15 % of total merchandise receipts were directly imported to the U.S. from China in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. (3) No country included within this category sourced more than 10% of total merchandise receipts during any fiscal year presented above . Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Inventories ,” for discussion regarding significant accounting policies related to the Company’s inventories. 7. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of: (in thousands) January 29, 2022 January 30, 2021 Land $ 28,599 $ 28,599 Buildings 233,523 230,104 Furniture, fixtures and equipment 622,912 608,210 Information technology 643,244 607,062 Leasehold improvements 913,729 990,238 Construction in progress 9,483 22,744 Other 2,003 2,000 Total 2,453,493 2,488,957 Less: Accumulated depreciation ( 1,945,157 ) ( 1,938,370 ) Property and equipment, net $ 508,336 $ 550,587 Depreciation expense for Fiscal 2021, Fiscal 2020 and Fiscal 2019 was $ 141.4 million, $ 167.2 million and $ 172.6 million, respectively. Refer to Note 9, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during Fiscal 2021, Fiscal 2020 and Fiscal 2019. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net ,” for discussion regarding significant accounting policies related to the Company’s property and equipment, net. Table of Contents Abercrombie & Fitch Co. 8. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for Fiscal 2021, Fiscal 2020 and Fiscal 2019 : (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Single lease cost (1) $ 272,246 $ 346,178 $ 427,982 Variable lease cost (2) 110,889 65,310 143,472 Operating lease right-of-use asset impairment (3) 9,509 57,026 15,812 Sublease Income ( 4,292 ) — — Total operating lease cost $ 388,352 $ 468,514 $ 587,266 (1) Includes amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as $ 14.1 million and $ 30.1 million of rent abatements in Fiscal 2021 and Fiscal 2020, respectively, related to the effects of the COVID-19 pandemic that resulted in lease concessions with total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The total benefit related to rent abatements recognized during Fiscal 2021 and Fiscal 2020 was $ 17.9 million and $ 30.7 million respectively. (3) Refer to Note 9, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rate used to calculate the Company’s operating lease liabilities as of January 29, 2022 and January 30, 2021: January 29, 2022 January 30, 2021 Weighted-average remaining lease term (years) 5.3 5.7 Weighted-average discount rate 5.6 % 5.6 % The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of January 29, 2022: (in thousands) January 29, 2022 Fiscal 2022 $ 266,893 Fiscal 2023 215,464 Fiscal 2024 152,282 Fiscal 2025 131,972 Fiscal 2026 106,873 Fiscal 2027 and thereafter 190,984 Total undiscounted operating lease payments 1,064,468 Less: Imputed interest ( 144,381 ) Present value of operating lease liabilities $ 920,087 The Company has suspended rent payments for a number of stores that were closed as a result of COVID-19, and has been successful in obtaining certain rent abatements and landlord concessions of rent payable. Refer to Note 3. “ IMPACT OF COVID-19 ”, for additional details. During Fiscal 2020, the Company entered into a sublease agreement with a third party for the remaining lease term of one of its European Abercrombie & Fitch flagship store locations upon its closure. As of January 29, 2022, the Company's subleased property had a remaining lease term of 5.8 years with the sublease term from February 1, 2021 through November 30, 2027. Future minimum tenant operating lease payments remaining under this sublease as of January 29, 2022 were $ 24.0 million. The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 17.4 million as of January 29, 2022. Table of Contents Abercrombie & Fitch Co. 9. ASSET IMPAIRMENT The following table provides additional details related to long-lived asset impairment charges: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Operating lease right-of-use asset impairment (1) $ 9,509 $ 57,026 $ 15,812 Property and equipment asset impairment 2,591 15,911 6,552 Total asset impairment $ 12,100 $ 72,937 $ 22,364 (1) Includes $3.2 million of operating lease right-of-use asset impairment included in flagship store exit charges on the Consolidated Statement of Operations and Comprehensive Income for Fiscal 2019. Refer to Note 19, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .” Asset impairment charges for Fiscal 2021 were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 18.1 million, including $ 15.6 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 95.0 million, including $ 87.2 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2019 primarily related to certain of the Company’s international flagship stores. The impairment charges for Fiscal 2019 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 103.4 million, including $ 99.2 million related to operating lease right-of-use assets. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Long-lived asset impairment ,” for discussion regarding significant accounting policies related to impairment of the Company’s long-lived assets. 10. RABBI TRUST ASSETS Investments of Rabbi Trust assets consisted of the following as of January 29, 2022 and January 30, 2021: (in thousands) January 29, 2022 January 30, 2021 Trust-owned life insurance policies (at cash surrender value) $ 62,272 $ 60,789 Money market funds 1 1 Rabbi Trust assets $ 62,273 $ 60,790 Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Realized gains related to Rabbi Trust assets $ 1,483 $ 1,740 $ 3,172 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Rabbi Trust assets ,” for further discussion related to the Company’s Rabbi Trust assets. Table of Contents Abercrombie & Fitch Co. 11. ACCRUED EXPENSES Accrued expenses consisted of: (in thousands) January 29, 2022 January 30, 2021 Accrued payroll and related costs (1) $ 90,906 $ 119,978 Accrued costs related to the Company’s DCs and digital operations 48,395 56,135 Other (2) 256,514 220,252 Accrued expenses $ 395,815 $ 396,365 (1) Accrued payroll and related costs include salaries, incentive compensation, benefits, withholdings and other payroll-related costs. (2) Other primarily includes the Company’s gift card and loyalty programs liabilities, accrued taxes, accrued rent and expenses incurred but not yet paid primarily related to outside services associated with store and home office operations and construction in progress. Refer to Note 4, “ REVENUE RECOGNITION .” 12. INCOME TAXES Impact of valuation allowances and other tax charges During Fiscal 2021, as a result of the improvement seen in business conditions, the Company recognized $ 42.5 million of tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $ 3.9 million due to a rate change in the United Kingdom The Company did not recognize income tax benefits on $ 25.3 million of pre-tax losses generated in Fiscal 2021, primarily in Switzerland, resulting in adverse tax impacts of $ 4.6 million. The Company’s effective tax rate for Fiscal 2020 was impacted by $ 101.4 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss. Further details regarding these adverse tax impacts are as follows: • Due to the significant adverse impacts of COVID-19, the Company did not recognize income tax benefits on $ 203.4 million of pre-tax losses during Fiscal 2020, resulting in an adverse tax impact of $ 39.5 million. • The Company recognized charges of $ 61.9 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during Fiscal 2020, including, but not limited to, the U.S., Switzerland, Germany and Japan, principally as a result of the significant adverse impacts of COVID-19. Swiss Tax Reform In May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), effective at the federal level beginning January 2020, which resulted in the abolishment of preferential tax regimes by the cantons. In addition to the abolishment of the preferential tax regimes, the cantons needed to implement new, mandatory tax provisions in their cantonal tax law which were subject to a referendum process as well. As a result of these changes and actions taken by the Company, both of which occurred in the third quarter of Fiscal 2019, the Company increased its deferred income tax assets and liabilities, which are recorded on the Consolidated Balance Sheets within other assets and other liabilities, respectively, by $ 38.0 million during the third quarter of Fiscal 2019. In the fourth quarter of Fiscal 2019, the canton of Ticino formally enacted the tax reform effective January 1, 2020. As a result, the tax reform went into effect on January 1, 2020. The Company decreased its deferred income tax assets and liabilities by $ 13.1 million during the fourth quarter of Fiscal 2019 for a net increase of deferred income tax assets and liabilities during Fiscal 2019 of $ 24.9 million as a result of Swiss Tax Reform. In addition, the Company incurred tax benefits in Fiscal 2019 of $ 2.9 million as a result of Swiss Tax Reform. Swiss Tax Reform did not have a material impact to the Consolidated Statements of Operations and Comprehensive Income (Loss) or the Company’s cash flows during Fiscal 2021, Fiscal 2020 or Fiscal 2019. Table of Contents Abercrombie & Fitch Co. Components of income taxes Income (loss) before income taxes consisted of: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Domestic (1) $ 283,793 $ ( 33,417 ) $ 17,590 Foreign 25,181 ( 15,326 ) 44,741 Income (loss) before income taxes $ 308,974 $ ( 48,743 ) $ 62,331 (1) Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return. Income tax expense (benefit) consisted of: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Current: Federal $ 51,321 $ 9,434 $ ( 2,193 ) State 14,061 3,751 1,893 Foreign 5,448 23,041 8,521 Total current $ 70,830 $ 36,226 $ 8,221 Deferred: Federal (1) $ ( 15,401 ) $ ( 73,104 ) $ 29,012 State ( 8,995 ) 8,828 ( 107 ) Foreign (1) ( 7,526 ) 88,261 ( 19,755 ) Total deferred ( 31,922 ) 23,985 9,150 Income tax expense $ 38,908 $ 60,211 $ 17,371 (1) Fiscal 2020 includes federal deferred tax benefit of $79.0 million and foreign deferred tax expense of $88.6 million due to the establishment of an additional valuation allowance in Switzerland. Fiscal 2019 federal deferred tax expense included charges of $24.9 million and foreign deferred tax expense included benefits of $24.9 million as a result of Swiss Tax Reform. The Company’s earnings and profits from its foreign subsidiaries may be repatriated to the U.S., without incurring additional U.S. 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 may be repatriated without incurring additional tax expense. Table of Contents Abercrombie & Fitch Co. Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows: Fiscal 2021 Fiscal 2020 Fiscal 2019 U.S. federal corporate income tax rate 21.0 % 21.0 % 21.0 % Audit and other adjustments to prior years’ accruals, net 4.7 2.6 0.8 State income tax, net of U.S. federal income tax effect 4.4 2.6 1.9 Foreign taxation of non-U.S. operations (1) 3.5 32.7 5.5 Internal Revenue Code Section 162(m) 1.6 ( 5.5 ) 2.2 Additional U.S. taxation of non-U.S. operations 0.6 ( 0.2 ) ( 1.4 ) Permanent items 0.2 — 0.3 Net change in valuation allowances ( 19.7 ) ( 177.2 ) 8.2 Tax (benefit) expense recognized on share-based compensation (2) ( 1.3 ) ( 7.5 ) ( 0.9 ) Other statutory tax rate and law changes ( 1.2 ) 2.3 ( 0.9 ) Credit for increasing research activities ( 0.6 ) 2.6 ( 3.6 ) Net income attributable to noncontrolling interests ( 0.5 ) 2.2 ( 1.9 ) Trust-owned life insurance policies (at cash surrender value) ( 0.1 ) 0.7 ( 1.1 ) Credit items — 0.2 ( 0.8 ) Write-off of stock basis in subsidiary — — 3.2 Statutory tax rate and law changes due to Swiss Tax Reform — — ( 4.6 ) Total 12.6 % ( 123.5 ) % 27.9 % (1) U.S. branch operations in Canada and Puerto Rico were subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items. Effective in 2019, only Puerto Rico continues to be a branch of the U.S. (2) Refer to Note 14, “ SHARE-BASED COMPENSATION ,” for details on discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2021, Fiscal 2020, and Fiscal 2019. The impact of various tax items on the Company's effective tax rate were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. The effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items in the table above excludes items related to the Company's non-U.S. operations reported separately in the appropriate corresponding line items. For both Fiscal 2021 and Fiscal 2020, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was related to the Company's jurisdictional mix driven primarily by the Company’s operations within Switzerland. For Fiscal 2019, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Japan subsidiary, along with the Company’s NCI. For Fiscal 2019, the Company’s Japan subsidiary earned pre-tax income of $ 12.0 million with a jurisdictional effective tax rate of 35.1 %. With respect to the NCI, the subsidiary incurred pre-tax income of $ 5.6 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above. Table of Contents Abercrombie & Fitch Co. Components of deferred income tax assets and deferred income tax liabilities The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows: (in thousands) January 29, 2022 January 30, 2021 Deferred income tax assets: Operating lease liabilities $ 242,290 $ 311,286 Intangibles, foreign step-up in basis (1) 64,281 81,357 Net operating losses (NOL), tax credit and other carryforwards 52,970 56,341 Accrued expenses and reserves 30,026 32,649 Deferred compensation 16,050 16,294 Inventory 3,578 — Rent — 530 Other 45 2,171 Valuation allowances ( 110,057 ) ( 174,302 ) Total deferred income tax assets $ 299,183 $ 326,326 Deferred income tax liabilities: Operating lease right-of-use assets $ ( 202,916 ) $ ( 253,417 ) Property and equipment and intangibles ( 10,150 ) ( 15,328 ) Prepaid expenses ( 2,451 ) ( 387 ) Store supplies ( 1,811 ) ( 2,042 ) Undistributed profits of non-U.S. subsidiaries ( 1,082 ) ( 318 ) Rent ( 360 ) — Inventory — ( 1,499 ) U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis (2) — ( 183 ) Other ( 30 ) ( 3,499 ) Total deferred income tax liabilities $ ( 218,800 ) $ ( 276,673 ) Net deferred income tax assets (2) $ 80,383 $ 49,653 (1) The deferred tax asset relates to a step-up in basis associated with the intra-entity transfer of intangible assets to Switzerland which are being amortized for Swiss local tax purposes. As this subsidiary’s income is also taxable in the U.S., a corresponding U.S. deferred tax liability was recognized to reflect lower resulting foreign tax credit due to the amortization of the Swiss step-up in basis. Included in the liability section is the remaining portion of deferred tax liabilities which are properly categorized in the table above. In Fiscal 2020, a full valuation allowance was established in Switzerland and the corresponding US deferred tax liability was released. During Fiscal 2021 an agreement was reached with the Swiss taxing authorities to decrease the basis step up to be amortized in the future thus decreasing the deferred asset by $14.8 million. Because of the valuation allowance, there is no impact on consolidated tax expense for this agreement. (2) This table does not reflect deferred taxes classified within AOCL. As of January 29, 2022 and January 30, 2021, AOCL included deferred tax liabilities of $1.1 million and deferred tax assets of $0.9 million, respectively. As of January 29, 2022, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $ 52.5 million and $ 0.4 million, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryforwards will begin to expire in 2025 and a portion of state NOL carryforwards will begin to expire in 2023. Some foreign NOLs have an indefinite carryforward period. As of January 29, 2022, the Company did not have any deferred tax assets related to federal NOL and credit carryforwards that could be utilized to reduce future years’ tax liabilities. As of January 29, 2022, valuation allowances of $ 110.1 million have been established against deferred tax assets. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive (Loss) Income. The valuation allowances will remain until there is sufficient positive evidence to release them, such positive evidence would include having positive income within the jurisdiction. In such case, the Company will record an adjustment in the period in which a determination is made. The Company continues to review the need for valuation allowances on a quarterly basis. Table of Contents Abercrombie & Fitch Co. Share-based compensation Refer to Note 14, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during Fiscal 2021, Fiscal 2020 and Fiscal 2019. Other The amount of uncertain tax positions as of January 29, 2022, January 30, 2021 and February 1, 2020, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, excluding accrued interest and penalties, are as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Uncertain tax positions, beginning of the year $ 995 $ 1,794 $ 478 Gross addition for tax positions of the current year 490 235 131 Gross (reduction) addition for tax positions of prior years ( 136 ) 395 1,349 Reductions of tax positions of prior years for: Lapses of applicable statutes of limitations ( 81 ) ( 48 ) ( 151 ) Settlements during the period ( 154 ) ( 1,381 ) ( 13 ) Uncertain tax positions, end of year $ 1,114 $ 995 $ 1,794 The IRS is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2021 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2020 and prior years have been completed. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company typically has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlement of audits and expiration of statues of limitations. The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income taxes ,” for discussion regarding significant accounting policies related to the Company’s income taxes. 13. BORROWINGS Details on the Company’s long-term borrowings, net, as of January 29, 2022 and January 30, 2021 are as follows: (in thousands) January 29, 2022 January 30, 2021 Long-term portion of borrowings, gross at carrying amount $ 307,730 $ 350,000 Unamortized fees ( 4,156 ) ( 6,090 ) Long-term portion of borrowings, net $ 303,574 $ 343,910 Senior Secured Notes On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, completed the private offering of the Senior Secured Notes, with $ 350 million aggregate principal amount due in 2025 at an offering price of 100% of the principal amount thereof. The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75 % per annum, with semi-annual interest payments, which began in January 2021. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of A&F’s wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association (now known as U.S. Bank Trust National Association), as trustee, and as collateral agent. During Fiscal 2021, A&F Management purchased $ 42.3 million of its outstanding Senior Secured Notes and incurred $ 5.3 million of loss on extinguishment of debt, comprised of a repayment premium of $ 4.7 million and the write-off of unamortized fees of $ 0.6 million, in interest expense, net on the Consolidated Statements of Operations and Comprehensive Income (Loss). Table of Contents Abercrombie & Fitch Co. The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and accrued interest of $ 233.6 million and $ 110.8 million under the Term Loan Facility and the ABL Facility, respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes. The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized to interest expense over the contractual term of the Senior Secured Notes. ABL Facility On April 29, 2021, A&F Management, in A&F Management’s capacity as the lead borrower, and the other borrowers and guarantors party thereto, amended and restated in its entirety the Credit Agreement, dated as of August 7, 2014, as amended on September 10, 2015 and as further amended on October 19, 2017 (as amended and restated, the “Amended and Restated Credit Agreement”), among A&F Management, the other borrowers and guarantors party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent for the lenders, and the other parties thereto. The Amended and Restated Credit Agreement continues to provide for a senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”), and (i) extends the maturity date of the ABL Facility from October 19, 2022 to April 29, 2026 ; and (ii) modifies the required fee on undrawn commitments under the ABL Facility from 0.25 % per annum to either 0.25 % or 0.375 % per annum (with the ultimate amount dependent on the conditions detailed in the Amended and Restated Credit Agreement). The Company did not have any borrowings outstanding under the ABL Facility as of January 29, 2022 or as of January 30, 2021. The ABL Facility is subject to a borrowing base, consisting primarily of U.S. inventory, with a letter of credit sub-limit of $50 million and an accordion feature allowing A&F to increase the revolving commitment by up to $100 million subject to specified conditions. The ABL Facility is available for working capital, capital expenditures and other general corporate purposes. As of January 29, 2022, the Company had availability under the ABL Facility of $ 278.3 million, net of $ 0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing available to the Company under the ABL Facility was $ 248.3 million as of January 29, 2022. Obligations under the Amended ABL Facility are unconditionally guaranteed by A&F and certain of A&F’s subsidiaries. The ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The Amended ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. At the Company’s option, borrowings under the ABL Facility will bear interest at either (a) an adjusted LIBO rate plus a margin of 1.25 % to 1.50 % per annum, or (b) an alternate base rate plus a margin of 0.25 % to 0.50 % per annum. As of January 29, 2022, the applicable margins with respect to LIBO rate loans and base rate loans, including swing line loans, under the ABL Facility were 1.25 % and 0.25 % per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical availability during the preceding quarter. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness. The Company was in compliance with all debt covenants under the agreements related to the Senior Secured Notes and the ABL Facility as of January 29, 2022. Table of Contents Abercrombie & Fitch Co. 14. SHARE-BASED COMPENSATION Plans As of January 29, 2022, the Company had two primary share-based compensation plans: (i) the 2016 Directors LTIP, with 900,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, stock appreciation rights, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors; and (ii) the 2016 Associates LTIP, with 10,350,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company. The Company also has outstanding shares from four other share-based compensation plans under which the Company granted restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company and restricted stock units, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors in prior years. No new shares may be granted under these previously-authorized plans and any outstanding awards continue in effect in accordance with their respective terms. The 2016 Directors LTIP, a stockholder-approved plan, permits the Company to annually grant awards to non-associate directors, subject to the following limits: • For non-associate directors: awards with an aggregate fair market value on the date of the grant of no more than $ 300,000 ; • For the non-associate director occupying the role of Non-Executive Chairperson of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 500,000 ; and • For the non-associate director occupying the role of Executive Chairperson of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 2,500,000 . Under the 2016 Directors LTIP, restricted stock units are subject to a minimum vesting period ending no sooner than the earlier of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of stockholders held after the grant date. Any stock appreciation rights or stock options granted under this plan have the same minimum vesting period requirements as restricted stock units and, in addition, must have a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Directors LTIP. The 2016 Associates LTIP, a stockholder-approved plan, permits the Company to annually grant one or more types of awards covering up to an aggregate for all awards of 1.0 million of underlying shares of the Company’s Common Stock to any associate of the Company. Under the 2016 Associates LTIP, for restricted stock units that have performance-based vesting, performance must be measured over a period of at least one year and for restricted stock units that do not have performance-based vesting, vesting in full may not occur more quickly than in pro-rata installments over a period of three years from the date of the grant, with the first installment vesting no sooner than the first anniversary of the date of the grant. In addition, any stock options or stock appreciation rights granted under this plan must have a minimum vesting period of one year and a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Associates LTIP. Each of the 2016 Directors LTIP and the 2016 Associates LTIP provides for accelerated vesting of awards if there is a change of control and certain other conditions specified in each plan are met. Table of Contents Abercrombie & Fitch Co. Financial statement impact The following table details share-based compensation expense and the related income tax benefit for Fiscal 2021, Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Share-based compensation expense $ 29,304 $ 18,682 $ 14,007 Income tax benefit associated with share-based compensation expense recognized during the period (1) 3,338 — 2,649 (1) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. The following table details discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2021, Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Income tax discrete benefits (charges) realized for tax deductions related to the issuance of shares during the period $ 4,198 $ ( 1,719 ) $ 1,156 Income tax discrete charges realized upon cancellation of stock appreciation rights during the period ( 204 ) ( 1,943 ) ( 611 ) Total income tax discrete benefits (charges) related to share-based compensation awards $ 3,994 $ ( 3,662 ) $ 545 The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the Fiscal 2021, Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Employee tax withheld upon issuance of shares (1) $ 13,163 $ 5,694 $ 6,804 (1) Classified within other financing activities on the Consolidated Statements of Cash Flows. Restricted stock units The following table summarizes activity for restricted stock units for Fiscal 2021: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Unvested at January 30, 2021 3,037,098 $ 11.62 297,216 $ 22.43 721,879 $ 21.46 Granted 730,446 32.80 157,645 32.09 78,827 50.31 Adjustments for performance achievement — — ( 106,715 ) 29.92 ( 6,084 ) 33.69 Vested ( 1,089,706 ) 12.26 — — ( 100,634 ) 33.69 Forfeited ( 145,598 ) 16.67 ( 7,997 ) 29.92 ( 13,804 ) 25.13 Unvested at January 29, 2022 (1) 2,532,240 $ 17.16 340,149 $ 27.08 680,184 $ 22.81 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100 % of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of January 29, 2022: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 28,333 $ — $ 14,173 Remaining weighted-average period cost is expected to be recognized (years) 1.2 0.0 0.8 Table of Contents Abercrombie & Fitch Co. Additional information pertaining to restricted stock units for Fiscal 2021, Fiscal 2020 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Service-based restricted stock units: Total grant date fair value of awards granted $ 23,959 $ 19,843 $ 16,175 Total grant date fair value of awards vested 13,360 14,083 13,630 Total intrinsic value of awards vested 36,507 8,147 18,596 Performance-based restricted stock units: Total grant date fair value of awards granted 5,059 — 5,391 Total grant date fair value of awards vested — 4,635 — Market-based restricted stock units: Total grant date fair value of awards granted 3,966 8,443 4,176 Total grant date fair value of awards vested 3,390 4,132 511 Total intrinsic value of awards vested 3,335 3,263 181 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: Fiscal 2021 Fiscal 2020 Fiscal 2019 Grant date market price $ 31.78 $ 12.31 $ 25.34 Fair value 49.81 16.24 36.24 Assumptions: Price volatility 66 % 67 % 57 % Expected term (years) 2.9 2.4 2.9 Risk-free interest rate 0.3 % 0.2 % 2.2 % Dividend yield — — 3.2 Average volatility of peer companies 72.0 % 66.0 % 40.0 % Average correlation coefficient of peer companies 0.4694 0.4967 0.2407 Stock appreciation rights The following table summarizes stock appreciation rights activity for Fiscal 2021: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 30, 2021 384,757 $ 33.04 Granted — — Exercised ( 111,868 ) 26.95 Forfeited or expired ( 36,750 ) 54.73 Outstanding at January 29, 2022 236,139 $ 32.55 $ 1,276,809 2.3 Stock appreciation rights exercisable at January 29, 2022 236,139 $ 32.55 $ 1,276,809 2.3 No stock appreciation rights were exercised during Fiscal 2020. The grant date fair value of awards exercised during Fiscal 2021 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2019 Total grant date fair value of awards exercised $ 1,069 $ 626 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Share-based compensation ,” for discussion regarding significant accounting policies related to share-based compensation. Table of Contents Abercrombie & Fitch Co. 15. DERIVATIVE INSTRUMENTS As of January 29, 2022, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both: (in thousands) Notional Amount (1) Euro $ 60,962 British pound 32,044 Canadian dollar 10,026 Japanese yen 4,471 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of January 29, 2022. The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Consolidated Balance Sheets as of January 29, 2022 and January 30, 2021 were as follows: (in thousands) Location January 29, 2022 January 30, 2021 Location January 29, 2022 January 30, 2021 Derivatives designated as cash flow hedging instruments Other current assets $ 4,973 $ 79 Accrued expenses $ — $ 4,694 Refer to Note 5, “ FAIR VALUE , ” for further discussion of the determination of the fair value of derivative instruments. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for Fiscal 2021, Fiscal 2020 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Gain recognized in AOCL (1) $ 11,987 $ 7,619 $ 7,495 Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2) 1,263 13,235 9,160 (1) Amount represents the change in fair value of derivative instruments. As a result of COVID-19 in Fiscal 2020, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments. At the time of dedesignation of these hedges, they were in a net gain position of approximately $ 12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation were deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occurred and the hedged items affected earnings. During Fiscal 2020 and subsequent to the dedesignation of these hedges, these hedge contracts were settled. (2) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affected earnings, which was when merchandise was converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gains or losses related to foreign currency exchange forward contracts designated as cash flow hedging instruments as of January 29, 2022 will be recognized within the Consolidated Statements of Operations and Comprehensive Income (Loss) over the next 12 months. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for Fiscal 2021, Fiscal 2020 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Gain (loss) recognized in other operating income, net $ 1,205 $ 742 $ ( 298 ) Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Derivative instruments ,” for discussion regarding significant accounting policies related to the Company’s derivative instruments. Table of Contents Abercrombie & Fitch Co. 16. ACCUMULATED OTHER COMPREHENSIVE LOSS For Fiscal 2021, the activity in AOCL was as follows: Fiscal 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) Other comprehensive (loss) income before reclassifications ( 22,917 ) 11,987 ( 10,930 ) Reclassified gain from AOCL (1) — ( 1,263 ) ( 1,263 ) Tax effect — ( 206 ) ( 206 ) Other comprehensive income (loss) after reclassifications ( 22,917 ) 10,518 ( 12,399 ) Ending balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. For Fiscal 2020, the activity in AOCL was as follows: Fiscal 2020 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) Other comprehensive income before reclassifications 12,195 7,619 19,814 Reclassified gain from AOCL (1) — ( 13,235 ) ( 13,235 ) Tax effect — — — Other comprehensive income (loss) after reclassifications (2) 12,195 ( 5,616 ) 6,579 Ending balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). (2) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. Fo r Fiscal 2019, the activity in AOCL was as follows: Fiscal 2019 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 2, 2019 $ ( 104,887 ) $ 2,435 $ ( 102,452 ) Other comprehensive (loss) income before reclassifications ( 5,080 ) 7,495 2,415 Reclassified gain from AOCL (1) — ( 9,160 ) ( 9,160 ) Tax effect — 311 311 Other comprehensive (loss) income after reclassifications ( 5,080 ) ( 1,354 ) ( 6,434 ) Ending balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). Table of Contents Abercrombie & Fitch Co. 17. SAVINGS AND RETIREMENT PLANS The Company maintains the Abercrombie & Fitch Co. Savings and Retirement Plan, a qualified plan. All U.S. associates are eligible to participate in this plan if they are at least 21 years of age. In addition, the Company maintains the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan, comprised of two sub-plans (Plan I and Plan II). Plan I contains contributions made through December 31, 2004, while Plan II contains contributions made on and after January 1, 2005. Participation in these plans is based on service and compensation. The Company’s contributions to these plans are based on a percentage of associates’ eligible annual compensation. The cost of the Company’s contributions to these plans was $ 15.4 million, $ 14.1 million and $ 14.8 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. In addition, the Company maintains the Supplemental Executive Retirement Plan which provides retirement income to its former Chief Executive Officer for life, based on averaged compensation before retirement, including base salary and cash incentive compensation. As of January 29, 2022 and January 30, 2021, the Company has recorded $ 8.4 million and $ 9.2 million, respectively, in other liabilities on the Consolidated Balance Sheets related to future Supplemental Executive Retirement Plan distributions. 18. SEGMENT REPORTING The Company’s two operating segments are brand-based: Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These two operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Hollister $ 2,147,979 $ 1,834,349 $ 2,158,514 Abercrombie 1,564,789 1,291,035 1,464,559 Total $ 3,712,768 $ 3,125,384 $ 3,623,073 Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 U.S. $ 2,652,158 $ 2,127,403 $ 2,410,802 EMEA 755,072 709,451 822,202 APAC 171,701 176,636 264,895 Other 133,837 111,894 125,174 Total international $ 1,060,610 $ 997,981 $ 1,212,271 Total $ 3,712,768 $ 3,125,384 $ 3,623,073 The Company’s long-lived assets and intellectual property, which primarily relates to trademark assets associated with the Company’s international operations, by geographic area as of January 29, 2022 and January 30, 2021 were as follows: (in thousands) January 29, 2022 January 30, 2021 U.S. $ 849,298 $ 963,555 EMEA 272,348 350,136 APAC 83,830 120,256 Other 23,599 33,575 Total international $ 379,777 $ 503,967 Total $ 1,229,075 $ 1,467,522 Table of Contents Abercrombie & Fitch Co. 19. FLAGSHIP STORE EXIT (BENEFITS) CHARGES Global Store Network Optimization Reflecting a continued focus on one of the Company’s key transformation initiatives ‘Global Store Network Optimization,’ the Company continues to pivot away from its large format flagship stores and strives to open smaller, more productive omnichannel focused brand experiences. As a result, the Company has closed certain of its flagship stores and may have additional closures as it executes against this strategy. The Company recognizes impacts related to the exit of its flagship stores in flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). Details of the (benefits) charges incurred during Fiscal 2021, Fiscal 2020 and Fiscal 2019 related to this initiative follow: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Operating lease cost $ ( 841 ) $ ( 6,959 ) $ 46,716 Gain on lease assignment — ( 5,237 ) — Asset disposals and other store-closure benefits (1) ( 514 ) ( 2,658 ) ( 1,687 ) Employee severance and other employee transition costs 202 3,218 2,228 Total flagship store exit (benefits) charges $ ( 1,153 ) $ ( 11,636 ) $ 47,257 (1) Amounts represent costs incurred in returning the store to its original condition, including updates to previous accruals for asset retirement obligations and costs to remove inventory and store assets. During Fiscal 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 the fiscal year ending January 30, 2029 (“Fiscal 2028”). The new agreement resulted in an acceleration of payments and provided for a discount resulting in a reduction of operating lease liabilities of $ 65.0 million and a cash outflow of $ 63.8 million to settle all remaining obligations related to this location. This cash outflow was classified within operating lease right-of-use assets and liabilities within operating activities on the Consolidated Statement of Cash Flows. The Company recognized a gain of $ 0.9 million in flagship store exit benefits on the Consolidated Statement of Operations and Comprehensive Income (Loss) related to this transaction. As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur future cash expenditures or incremental charges or realize benefits not currently contemplated due to events that may occur as a result of, or that are associated with, previously announced flagship store closures and flagship store closures that have not yet been finalized. At this time, the Company is not able to quantify the amount of future impacts, including any cash expenditures that may take place in future periods resulting from any potential flagship store closures given the unpredictable nature of lease exit negotiations and ultimate lease renewal decisions. 20. CONTINGENCIES The Company is a defendant in lawsuits and other adversarial proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. Table of Contents Abercrombie & Fitch Co. 21. SUBSEQUENT EVENT Subsequent to end of Fiscal 2021 and through the period ending March 25, 2022, the Company repurchased 2.7 million shares of common stock at an average price of $ 30.14 per share. Shares were repurchased under the previously announced $ 500 million share repurchase authorization. The timing and amount of any future share repurchases will depend on various factors, including market and business conditions. Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Abercrombie & Fitch Co. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Abercrombie & Fitch Co. and its subsidiaries (the “Company”) as of January 29, 2022 and January 30, 2021, and the related consolidated statements of operations and comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended January 29, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases on February 3, 2019. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Table of Contents Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets – Stores As described in Notes 2, 7 and 9 to the consolidated financial statements, the Company’s consolidated property and equipment, net balance was $508.3 million and consolidated operating lease right-of-use assets balance was $698.2 million as of January 29, 2022. During fiscal 2021, the Company recognized long-lived asset store impairment charges of $12.1 million. The Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumption used in developing these projected cash flows used in the recoverability test is estimated sales growth rate. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in the Company’s fair value analysis are estimated sales growth rate and comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets - stores is a critical audit matter are (i) the significant judgment by management when developing the future undiscounted cash flows attributable to an asset group when testing for recoverability and when determining the fair value of the asset groups to measure for impairment; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimated sales growth rate when developing the future undiscounted cash flows, and comparable market rents when estimating the fair value; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long-lived assets - stores recoverability test and determination of the fair value of the asset groups. These procedures also included, among others (i) testing management’s process for developing the future undiscounted cash flows attributable to an asset group when testing for recoverability and when determining the fair value of the asset groups to measure for impairment; (ii) evaluating the appropriateness of the models used by management in determining the fair value of the asset groups; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions related to estimated sales growth rate when developing the future undiscounted cash flows and comparable market rents when estimating the fair value. Evaluating management’s assumptions related to estimated sales growth rate and comparable market rents involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset groups and the consistency with evidence obtained in other areas of the audit as it relates to estimated sales growth rate and consistency with external market data as it relates to estimated sales growth rate and comparable market rents. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness of the comparable market rents significant assumption. /s/ PricewaterhouseCoopers LLP Columbus, Ohio March 28, 2022 We have served as the Company’s auditor since 1996. Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.