What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-07 compared with 2022-06-08 · 232 added, 126 removed, 318 unchanged (53% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ I tem 1.

F inancial S tatements (U naudited ) ,” to which all references to Notes in MD&A are made.

Financial Statements (Unaudited) ,” to which all references to Notes in MD&A are made.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” or the negative version of those words or other comparable words and similar expressions may identify forward-looking statements.

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

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

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The forward-looking statements included herein are based on information presently available to the management of the Company.

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

Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements including any financial targets and estimates, whether as a result of new information, future events, or otherwise.

Abercrombie & Fitch Co.

4 unchanged sentences

• Current Trends and Outlook .

A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges as well as a summary of the Company’s performance for the thirteen weeks ended April 30, 2022 and May 1, 2021.

• Results of Operations .

An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen weeks ended April 30, 2022 and May 1, 2021.

An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021.

• Liquidity and Capital Resources .

A discussion of the Company’s financial condition, changes in financial condition and liquidity as of April 30, 2022, which includes (i) an analysis of financial condition as compared to January 29, 2022;

(ii) an analysis of changes in cash flows for the thirteen weeks ended April 30, 2022 as compared to the thirteen weeks ended May 1, 2021;

A discussion of the Company’s financial condition, changes in financial condition and liquidity as of July 30, 2022, which includes (i) an analysis of financial condition as compared to January 29, 2022;

(ii) an analysis of changes in cash flows for the twenty-six weeks ended July 30, 2022, as compared to the twenty-six weeks ended July 31, 2021;

and (iii) an analysis of liquidity, including availability under the Company’s credit facility, the Company’s share repurchase program, and outstanding debt and covenant compliance.

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A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements.

• Critical Accounting E stimates .

• Critical Accounting Estimates .

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

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

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

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

CURRENT TRENDS AND OUTLOOK

Focus areas for Fiscal 2022

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

The following focus areas for Fiscal 2022 serve as a framework for the Company’s achievement of sustainable growth and long-term operating margin expansion:

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

• Create a more personalized customer experience through a connected omnichannel ecosystem,

• Optimize our global distribution network to expand digital capacity and improve product delivery speed

• Opportunistically open new, omni-enabled stores in under penetrated markets, and

• Integrate environmental, social and governance practices and standards throughout the Company.

Supply chain disruptions, inflation and changing prices

During the second quarter, the Company announced its Always Forward Plan, which outlines the Company’s long-term strategic goals.

The Always Forward Plan is anchored on three strategic growth principles, which are to:

• Execute focused brand growth plans;

• Accelerate an enterprise-wide digital revolution;

• Operate with financial discipline.

The following focus areas for fiscal 2022 serve as a framework to the company achieving sustainable growth and progressing toward the 2025 Always Forward Plan:

• Execute brand growth plans, primarily focused on continuing momentum at Abercrombie & Fitch and delivering standalone store experiences at Gilly Hicks;

• Accelerate digital and technology investments in systems and people to increase flexibility, modernize foundational systems and improve the customer experience;

• Operate with a more flexible cost structure, and seeking expense efficiencies while protecting investments in digital, technology and store growth to fund our strategic principles;

• Taking a data-driven approach to store expansion in under penetrated markets

• Optimize our global distribution network to increase capacity and improve delivery speed to customers;

• Integrate environmental, social and governance (“ESG”) practices and standards throughout the Company.

Supply chain disruptions and impact of inflation

The Company has continued to see global supply chain constraints impacting our business and operations.

In order to mitigate supply chain constraints and higher freight rates, the Company has taken, and expects to continue to take, certain mitigating actions including scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where possible.

The Company’s responses to factory closures, transportation delays, and/or freight rates may not be adequate to offset the impact of these headwinds.

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

During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures in Vietnam.

This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and into the first quarter of Fiscal 2022.

In addition, the Company has experienced and expects to continue to experience inflationary pressures affecting the Company’s freight, transit, and other costs, and such rates are likely to remain elevated throughout Fiscal 2022.

In order to mitigate supply chain constraints and higher freight rates, the Company has taken and expects to continue to take actions to manage the impact, including scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where possible.

It is possible that the Company’s responses to factory closures, transportation delays, or freight rates will not be adequate to mitigate the impact, and that these events could continue to adversely affect the Company’s business and results of operations.

The Company has also experienced inflationary pressures with respect to labor, cotton and other raw materials and other costs.

This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and into the first half of Fiscal 2022.

The Company has experienced and expects to continue to experience inflationary pressures affecting the Company’s freight, transit, and other costs, and we anticipate that these inflationary headwinds will continue through at least the balance of Fiscal 2022.

Abercrombie & Fitch Co.

2022 2Q Form 10-Q

The Company has also experienced historic inflationary pressures with respect to labor, cotton and other raw materials and other costs.

Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain satisfactory margins.

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Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending.

In periods of perceived unfavorable conditions, consumers may reallocate available discretionary

Abercrombie & Fitch Co.

2022 1Q Form 10-Q

spending to areas outside of our core business.

In addition, as COVID-19 restrictions begin to be lifted, consumers may use any remaining discretionary spending on travel and other experiences which may adversely impact demand for our products.

In periods of perceived unfavorable conditions, consumers may reallocate available discretionary spending to areas outside of our core business.

Consumers may use any remaining discretionary spending on travel and other experiences which may adversely impact demand for our products.

Inflation Reduction Act of 2022

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases.

The Inflation Reduction Act of 2022 will become effective beginning in Fiscal 2024.

The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes.

Global Store Network Optimization

As part of its ongoing global store network optimization initiative, the Company has a stated goal of repositioning from larger format locations, such as, tourist dependent and flagship locations, to smaller, omni-enabled stores that cater to local customers.

The Company continues to focus on aligning store square footage with digital penetration, and during the first quarter of Fiscal 2022, the Company opened 4 new format stores, while closing 5 legacy stores.

The Company has a goal of repositioning from larger format locations, such as, tourist dependent and flagship locations, to smaller, omni-enabled stores that cater to local customers.

The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the first half of Fiscal 2022, the Company opened 12 new stores, while closing 7 stores.

As part of this focus, the Company plans to open 60 new stores, while closing 30 stores, during Fiscal 2022, pending negotiations with our landlord partners.

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

The Company may also elect to exit or modify other leases, and could incur charges related to these actions.Additional details related to store count and gross square footage follow:

The Company may also elect to exit or modify other leases, and could incur charges related to these actions.

Additional details related to store count and gross square footage follow:

Hollister (1)

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Permanently closed — (2) (3) (2) (3) (4) (7)

April 30, 2022 352 156 171 49 523 205 728

July 30, 2022 358 155 172 49 530 204 734

Gross square footage (in thousands) :

April 30, 2022 2,318 1,218 1,146 347 3,464 1,565 5,029

July 30, 2022 2,353 1,207 1,149 350 3,502 1,557 5,059

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

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

Excludes 8 international franchise stores as of April 30, 2022, and January 29, 2022.

Excludes 13 Company-operated temporary stores as of April 30, 2022 and 14 Company-operated temporary stores as of January 29, 2022.

Excludes 9 international franchise stores as of July 30, 2022 and 8 international franchise stores as of January 29, 2022.

Excludes 15 Company-operated temporary stores as of July 30, 2022 and 14 Company-operated temporary stores as of January 29, 2022.

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

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

Excludes 14 international franchise stores as of April 30, 2022 and January 29, 2022.

Excludes 5 Company-operated temporary stores as of each of April 30, 2022 and January 29, 2022.

(3) This store count excludes one international third-party operated multi-brand outlet store as of each of April 30, 2022, and January 29, 2022.

There continues to be uncertainty surrounding ongoing COVID-19 pandemic and its impact on the global economy, including government-mandated restrictions, supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages.

As of April 30, 2022, all U.S.

stores were fully open for in-store service;

however, temporary store closures have 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.

The Company’s digital operations across brands have continued to serve the Company’s customers during periods of temporary store closures.

In response to elevated digital demand during this period, the Company leveraged its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority of U.S.

locations, and by utilizing ship-from-store capabilities, including same-day delivery across its entire U.S.

Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current level of digital penetration will continue when stores operate at full capacity

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.

Excludes 16 international franchise stores as of July 30, 2022 and 14 international franchise stores as of January 29, 2022.

Excludes 4 Company-operated temporary stores as of each of July 30, 2022 and 5 Company-operated temporary stores as of January 29, 2022.

(3) This store count excludes one international third-party operated multi-brand outlet store as of each of July 30, 2022 and January 29, 2022.

There continues to be uncertainty surrounding ongoing COVID-19 pandemic and its impact on the global economy, supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages.

Despite the introduction of COVID-19 vaccines, the pandemic remains volatile and continues to evolve, with resurgences and outbreaks occurring in various parts of the world, including those resulting from variants of the virus.

Certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages, inflationary pressures, and disruptions of global supply chains and temporary store closures.

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

The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, and the availability and acceptance of effective vaccines, boosters or medical treatments.

The Company will continue to assess the pandemic’s impact on its operations and financial situation, and will respond as appropriate.

Abercrombie & Fitch Co.

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We are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business.

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

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

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

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Summary of results

A summary of results for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows:

A summary of results for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 follows:

GAAP Non-GAAP (1)

(in thousands, except change in net sales, gross profit rate, operating (loss) income margin and per share amounts) April 30, 2022

April 30, 2022

(in thousands, except change in net sales, gross profit rate, operating (loss) income margin and per share amounts) July 30, 2022

July 31, 2021

July 30, 2022

July 31, 2021

Thirteen Weeks Ended

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(0.33) 1.69 (0.30) 1.70

Twenty-Six Weeks Ended

Net sales $ 1,617,853 $ 1,646,255

Change in net sales (1.7) % 39.1 %

Gross profit rate 56.6 % 64.3 %

Operating (loss) income $ (11,917) $ 172,220 $ (6,325) $ 175,670

Operating (loss) income margin (0.7) % 10.5 % (0.4) % 10.7 %

Net (loss) income attributable to A&F $ (33,303) $ 150,268 $ (29,240) $ 153,045

Net (loss) income attributable to A&F per dilutive share (0.65) 2.32 (0.57) 2.36

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

Certain components of the Company’s Condensed Consolidated Balance Sheets as of April 30, 2022 and January 29, 2022 were as follows:

(in thousands) April 30, 2022 January 29, 2022

Certain components of the Company’s Condensed Consolidated Balance Sheets as of July 30, 2022 and January 29, 2022 were as follows:

(in thousands) July 30, 2022 January 29, 2022

Cash and equivalents $ 369,957 $ 823,139

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Inventories 708,024 525,864

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended April 30, 2022 and May 1, 2021 were as follows:

(in thousands) April 30, 2022 May 1, 2021

Net cash used for operating activities $ (217,787) $ (131,350)

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended July 30, 2022 and July 31, 2021 were as follows:

(in thousands) July 30, 2022 July 31, 2021

Net cash (used for) provided by operating activities $ (259,733) $ 49,945

Net cash used for investing activities (51,610) (35,269)

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

For the first quarter of Fiscal 2022, net sales increased 4% as compared to the first quarter of Fiscal 2021, primarily due to an increase in stores sales, as well as an increase average unit retail driven by lower promotions and markdowns, partially offset by the adverse impact from changes in foreign currency exchange rates of approximately $9 million.

The Company’s net sales by operating segment for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows:

The Company’s net sales by operating segment for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows:

Thirteen Weeks Ended

(in thousands) April 30, 2022 May 1, 2021 $ Change % Change

(in thousands) July 30, 2022 July 31, 2021 $ Change % Change

Hollister (1)

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Total $ 805,091 $ 864,850 $ (59,759) (7)%

Twenty-Six Weeks Ended

(in thousands) July 30, 2022 July 31, 2021 $ Change % Change

Hollister (1)

$ 865,740 $ 956,891 $ (91,151) (10)%

Abercrombie (2)

752,113 689,364 62,749 9%

Total $ 1,617,853 $ 1,646,255 $ (28,402) (2)%

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

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

The Company’s net sales by geographic area for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows:

The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows:

Thirteen Weeks Ended

(in thousands) April 30, 2022 May 1, 2021 $ Change % Change

(in thousands) July 30, 2022 July 31, 2021 $ Change % Change

$ 578,086 $ 601,767 $ (23,681) (4)%

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Total $ 805,091 $ 864,850 $ (59,759) (7)%

Twenty-Six Weeks Ended

(in thousands) July 30, 2022 July 31, 2021 $ Change % Change

$ 1,163,190 $ 1,155,613 $ 7,577 1%

EMEA 330,749 349,842 (19,093) (5)%

APAC 57,675 87,274 (29,599) (34)%

Other 66,239 53,526 12,713 24%

International $ 454,663 $ 490,642 $ (35,979) (7)%

Total 1,617,853 1,646,255 (28,402) (2)%

For the second quarter of Fiscal 2022, net sales decreased 7%, as compared to the second quarter of Fiscal 2021, primarily due to a decrease in store sales as well as the adverse impact from changes in foreign currency exchange rates of approximately $23 million, partially offset by an increase in average unit retail.

For the year-to-date period of Fiscal 2022, net sales decreased 2%, as compared to the year-to-date period of Fiscal 2021, primarily due to a decrease in basket size, as a result of decreased store traffic relative to last year, as well as the adverse impact from changes in foreign currency exchange rates of approximately $32 million, partially offset by higher average unit retail year-over-year, driven by less promotions and lower clearance levels.

Abercrombie & Fitch Co.

2022 2Q Form 10-Q

Cost of sales, exclusive of depreciation and amortization

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

Cost of sales, exclusive of depreciation and amortization $ 339,200 42.1% $ 301,365 34.8% 730

For the first quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 810 basis points as compared to the first quarter of Fiscal 2021.

The year-over-year increase was driven by approximately $80 million higher average unit cost from freight inflation partially offset by higher average unit retail on lower promotions and higher ticket prices.

Abercrombie & Fitch Co.

2022 1Q Form 10-Q

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Cost of sales, exclusive of depreciation and amortization $ 702,416 43.4% $ 587,636 35.7% 770

For the second quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 730 basis points as compared to the second quarter of Fiscal 2021.

The year-over-year increase was primarily driven by higher product costs, which contributed 750 basis points to the increase, as well as the adverse impact from changes in foreign currency exchange rates which accounted for 30 basis points.

These impacts were partially offset by higher average unit retail at Abercrombie.

For the year-to-date period of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 770 basis points, as compared to the year-to-date period of Fiscal 2021.

The year-over-year increase was primarily attributable to increased freight and average unit costs, as well as the adverse impact from changes in foreign currency exchange rates.

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

Gross profit, exclusive of depreciation and amortization $ 465,891 57.9% $ 563,485 65.2% (730)

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Gross profit, exclusive of depreciation and amortization $ 915,437 56.6% $ 1,058,619 64.3% (770)

Stores and distribution expense

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

Stores and distribution expense $ 340,791 42.3% $ 325,847 37.7% 460

For the first quarter of Fiscal 2022, stores and distribution expense increased 7% as compared to the first quarter of Fiscal 2021.

Approximately half of the $22 million increase was due to the lapping of COVID19-related rent abatements and payroll credits last year, with the remaining primarily due to an increase in marketing and digital fulfillment expenses.

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Stores and distribution expense $ 678,334 41.9% $ 641,355 39.0% 290

For the second quarter of Fiscal 2022, stores and distribution expense increased 5%.

as compared to the second quarter of Fiscal 2021.

The $15 million increase was related to $8.5 million in higher digital shipping and handling costs, as well as $6.5 million in DC fulfillment, compared to the second quarter of Fiscal 2021.

For the year-to-date period of Fiscal 2022, stores and distribution expense increased 6%, as compared to the year-to-date period of Fiscal 2021, approximately half of the increase was related to higher shipping and DC fulfillment, as well as higher payroll expense.

Abercrombie & Fitch Co.

2022 2Q Form 10-Q

Marketing, general and administrative expense

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

Marketing, general and administrative expense $ 124,168 15.4% $ 123,913 14.3% 110

For the first quarter of Fiscal 2022, marketing, general and administrative expense increased 1% as compared to the first quarter of Fiscal 2021, primarily driven by increased digital media spend, consulting and information technology expense.

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Marketing, general and administrative expense $ 246,317 15.2% $ 244,860 14.9% 30

For the second quarter of Fiscal 2022, marketing, general and administrative expense, as a percent of net sales increased 110 basis points as compared to the second quarter of Fiscal 2021, primarily driven by increased compensation costs, due to higher average salaries, which was partially offset by decrease in marketing expense as compared to the second quarter of Fiscal 2021.

For the year-to-date period of Fiscal 2022, marketing, general and administration expense, as a percent of net sales increased 30 basis points as compared to the year-to-date period of Fiscal 2021, primarily driven by increased payroll, consulting, and information technology expense.

These increases were partially offset by a decrease in legal and incentive compensation expenses.

Asset impairment

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Asset impairment $ 5,592 0.3% $ 3,450 0.2% 10

Excluded items:

Asset impairment charges (1)

(5,592) (0.3)% (3,450) (0.2)% (10)

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

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

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Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

Other operating expense (income), net $ (953) (0.1)% $ 1,848 0.2% 30

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Other operating income, net $ 2,889 0.2% $ 3,266 0.2% —

For the first quarter of Fiscal 2022, other operating income, net increased $2.4 million as compared to the first quarter of Fiscal 2021, primarily driven by gains on foreign currency exchange forward contracts and a gain on the sale of property and equipment.

For the second quarter of Fiscal 2022, other operating expense, net decreased $2.8 million, as compared to the second quarter of Fiscal 2021, primarily driven by losses on foreign currency exchange forward contracts.

Operating (loss) income

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

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Adjusted non-GAAP operating (loss) income $ (21) 0.0% $ 115,573 13.4% (1,340)

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Operating income (loss) $ (11,917) (0.7)% $ 172,220 10.5% (1,120)

Excluded items:

Asset impairment charges (1)

5,592 0.3% 3,450 0.2% 10

Adjusted non-GAAP operating income (loss) $ (6,325) (0.4)% $ 175,670 10.7% (1,110)

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

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Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

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Interest expense, net $ 6,917 0.9% $ 11,275 1.3 (40)

For the first quarter of Fiscal 2022, interest expense, net decreased $1.3 million as compared to the first quarter of Fiscal 2021, primarily driven by lower interest expense as a result of lower borrowings in the current quarter due to the purchase of Senior Secured Notes in the second quarter of Fiscal 2021.

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Interest expense $ 15,469 1.0% $ 22,703 1.4% (40)

Interest income (1,245) (0.1)% (2,822) (0.2) 10

Interest expense, net $ 14,224 0.9% $ 19,881 1.2 (30)

For the second quarter of Fiscal 2022, interest expense, net decreased $4.4 million, as compared to the second quarter of Fiscal 2021, primarily driven by lower interest expense as a result of lower borrowings and the one-time $5.3 million loss on the extinguishment of debt related to the purchase of Senior Secured Notes recognized in second quarter of 2021.

Abercrombie & Fitch Co.

2022 2Q Form 10-Q

Income tax (benefit) expense

For the year-to-date period of Fiscal 2022, interest expense, net decreased $5.7 million as compared to the year-to-date period of Fiscal 2021.

primarily driven by lower interest expense as a result of lower borrowings and the one-time loss on the extinguishment of debt related to the purchase of Senior Secured Notes recognized in second quarter of 2021.

Income tax expense (benefit)

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

Income tax (benefit) expense $ (2,187) 12.8% $ 6,121 12.5%

Income tax expense (benefit) $ 5,634 (61.9)% $ (6,944) (6.7)%

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax (benefit) expense $ (1,269) 9.3% $ 6,570 12.8%

Adjusted non-GAAP income tax expense (benefit) $ 6,245 (90.0)% $ (6,720) (6.4)%

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Income tax expense (benefit) $ 3,447 (13.2)% $ (823) (0.5)%

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax expense $ 4,976 (24.2)% $ (150) (0.1)%

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

3 unchanged sentences

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

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$ (15,275) (1.9)% $ 109,062 12.6% (1,450)

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

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

Net income (loss) attributable to A&F $ (33,303) (2.1)% $ 150,268 9.1% (1,120)

Excluded items, net of tax (1)

4,063 0.3% 2,777 0.2% 10

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

$ (29,240) (1.8)% $ 153,045 9.3% (1,110)

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

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

Abercrombie & Fitch Co.

2022 2Q Form 10-Q

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

Thirteen Weeks Ended

April 30, 2022 May 1, 2021 $ Change

July 30, 2022 July 31, 2021 $ Change

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

6 unchanged sentences

(0.30) 1.61 (1.91)

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021 $ Change

Net income (loss) per diluted share attributable to A&F $ (0.65) $ 2.32 $(2.97)

Excluded items, net of tax (1)

0.08 0.04 $0.04

Adjusted non-GAAP net income (loss) per diluted share attributable to A&F (0.57) 2.36 $(2.93)

Impact from changes in foreign currency exchange rates — (0.04) $0.04

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

(0.57) 2.32 $(2.89)

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

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

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

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

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

The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes.

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

For the year-to-date period ended April 30, 2022, the Company used $26.3 million towards capital expenditures.

For the year-to-date period ended July 30, 2022, the Company used $59.6 million towards capital expenditures.

Total capital expenditures for Fiscal 2022 are expected to be approximately $150 million.

The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility.

As of April 30, 2022, the Company has cash and cash equivalents of $0.5 billion and total liquidity of approximately $0.8 billion.

This compares with cash and cash equivalents of $0.8 billion and total liquidity of approximately $1.1 billion at the beginning of Fiscal 2022.

As of July 30, 2022, the Company had cash and cash equivalents of $370.0 million and total liquidity of approximately $729.2 million, compared with cash and cash equivalents of $823.1 million and total liquidity of approximately $1.1 billion at the beginning of Fiscal 2022.

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

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

During the year-to-date period ended April 30, 2022, the Company repurchased approximately 3.3 million shares and returned approximately $100.0 million to shareholder through repurchases.

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

During the year-to-date period ended July 30, 2022, the Company repurchased approximately 4.3 million shares for approximately $117.8 million .

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

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

Refer to “ I tem 2.

U nregistered S ales of E quity S ecurities and U se of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization.

Refer to “ Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization.

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

6 unchanged sentences

Credit facility and Senior Secured Notes

As of April 30, 2022, the Company had $307.7 million of gross borrowings outstanding under the Senior Secured Notes.

As of July 30, 2022, the Company had $307.7 million of gross borrowings outstanding under the Senior Secured Notes.

In addition, the Amended and Restated Credit Agreement provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million.

As of April 30, 2022, the Company did not have any borrowings outstanding under the ABL Facility.

As of July 30, 2022, the Company did not have any borrowings outstanding under the ABL Facility.

The ABL Facility matures on April 29, 2026.

Details regarding the remaining borrowing capacity under the ABL Facility as of April 30, 2022 are as follows:

(in thousands) April 30, 2022

Details regarding the remaining borrowing capacity under the ABL Facility as of July 30, 2022 are as follows:

(in thousands) July 30, 2022

Borrowing base $ 400,000

9 unchanged sentences

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

As of April 30, 2022, $317.0 million of the Company’s $468.4 million of cash and equivalents were held by foreign affiliates.

As of July 30, 2022, $254.2 million of the Company’s $370.0 million of cash and equivalents were held by foreign affiliates.

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

2 unchanged sentences

Analysis of cash flows

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 30, 2022 and May 1, 2021:

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 30, 2022 and July 31, 2021:

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

(in thousands)

Cash and equivalents, and restricted cash and equivalents, beginning of period $ 834,368 $ 1,124,157

Net cash used for operating activities (217,787) (131,350)

Net cash (used for) provided by operating activities (259,733) 49,945

Net cash used for investing activities (51,610) (35,269)

3 unchanged sentences

Cash and equivalents, and restricted cash and equivalents, end of period $ 380,034 $ 936,039

Operating activities - During the year-to-date period ended April 30, 2022, net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates, partially offset by increased cash receipts as a result of the 4% year-over-year increase in net sales.

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

Operating activities - During the year-to-date period ended July 30, 2022, net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates as well as decreased cash receipts as a result of the 2% year-over-year decrease in net sales.

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

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

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

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

Abercrombie & Fitch Co.

2022 2Q Form 10-Q

Investing activities - During the year-to-date period ended April 30, 2022, net cash used for investing activities were primarily used for capital expenditures of $26.3 million, partially offset by the proceeds from the sale of property and equipment of $7.8 million.

This compared net cash used for investing activities of capital expenditures of $14.4 million for the year-to-date period ended May 1, 2021.

Financing activities - During the year-to-date period ended April 30, 2022, net cash used for financing activities included the purchase of approximately 3.3 million shares of Common Stock with a market value of approximately $100.0 million.

During the year-to-date period ended May 1, 2021, net cash used for financing activities primarily consisted of the purchase of approximately 1.1 million shares of Common Stock with a market value of approximately $35.2 million.

Investing activities - During the year-to-date period ended July 30, 2022, net cash used for investing activities was primarily used for capital expenditures of $59.6 million, partially offset by the proceeds from the sale of property and equipment of $8.0 million, as compared to net cash used for investing activities of capital expenditures of $35.3 million for the year-to-date period ended July 31, 2021.

Financing activities - During the year-to-date period ended July 30, 2022, net cash used for financing activities included the purchase of approximately 4.3 million shares of Common Stock with a market value of approximately $117.8 million.

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

In addition, the Company purchased approximately 3.5 million shares of Common Stock with a market value of approximately $135.2 million.

Contractual obligations

1 unchanged sentence

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

There have been no material changes during the thirteen weeks ended April 30, 2022 in the contractual obligations as of January 29, 2022, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

There have been no material changes in the Company’s contractual obligations since January 29, 2022, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

RECENT ACCOUNTING PRONOUNCEMENTS

10 unchanged sentences

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

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

M anagement ’ s D iscussion and A nalysis of F inancial C ondition and R esults of O perations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, thereby supplementing investors’ understanding of comparability of operations across periods.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, thereby supplementing investors’ understanding of comparability of operations across periods.

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

1 unchanged sentence

Comparable sales

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

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

Comparable sales exclude revenue other than store and digital sales.

7 unchanged sentences

Operating (loss) income Asset impairment charges

Income tax (benefit) expense (2)

Income tax expense (benefit) (2)

Tax effect of pre-tax excluded items

10 unchanged sentences

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

A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows:

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

Net sales April 30, 2022 May 1, 2021 % Change

A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 follows:

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

Net sales July 30, 2022 July 31, 2021 % Change July 30, 2022 July 31, 2021 % Change

GAAP $ 805,091 $ 864,850 (7)% $ 1,617,853 $ 1,646,255 (2)%

1 unchanged sentence

Non-GAAP on a constant currency basis $ 805,091 $ 841,726 (4)% $ 1,617,853 $ 1,614,203 —%

Gross profit, exclusive of depreciation and amortization expense April 30, 2022 May 1, 2021 BPS Change (1)

Gross profit, exclusive of depreciation and amortization expense July 30, 2022 July 31, 2021 BPS Change (1)

July 30, 2022 July 31, 2021 BPS Change (1)

GAAP $ 465,891 $ 563,485 (730) $ 915,437 $ 1,058,619 (770)

1 unchanged sentence

Non-GAAP on a constant currency basis $ 465,891 $ 547,368 (710) $ 915,437 $ 1,039,219 (780)

Operating (loss) income April 30, 2022 May 1, 2021 BPS Change (1)

Operating (loss) income July 30, 2022 July 31, 2021 BPS Change (1)

July 30, 2022 July 31, 2021 BPS Change (1)

GAAP $ (2,191) $ 114,787 (1,360) $ (11,917) $ 172,220 (1,120)

4 unchanged sentences

Adjusted non-GAAP on a constant currency basis $ (21) $ 107,589 (1,280) $ (6,325) $ 172,027 (1,110)

Net (loss) income attributable to A&F per diluted share April 30, 2022 May 1, 2021 $ Change

Net (loss) income attributable to A&F per diluted share July 30, 2022 July 31, 2021 $ Change July 30, 2022 July 31, 2021 $ Change

GAAP $ (0.33) $ 1.69 $(2.02) $ (0.65) $ 2.32 $(2.97)

5 unchanged sentences

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

(2) Excluded items for the thirteen weeks ended April 30, 2022 and May 1, 2021 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.

(2) Excluded items for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.

Abercrombie & Fitch Co.

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis