What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-12-06 compared with 2022-09-07 · 177 added, 177 removed, 373 unchanged (49% of the section changed)

8 unchanged sentences

Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A.

“Risk Factors,” in the Company’s Annual Report on Fiscal 2021 Form 10-K for the fiscal year ended January 29, 2022 and otherwise in our reports and filings with the SEC, as well as the following:

• risks and uncertainty related to the ongoing COVID-19 pandemic and any other adverse public health developments;

“Risk Factors,” in the Company’s Fiscal 2021 Form 10-K and otherwise in our reports and filings with the SEC, as well as the following:

• risks related to changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits;

• risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs;

• risks and uncertainty related to the ongoing COVID-19 pandemic, including lockdowns in China, and any other adverse public health developments;

• risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience;

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• risks related to our ability to successfully invest in customer, digital and omnichannel initiatives;

• risks related to our ability to execute on our global store network optimization initiative;

• risks related to our ability to execute on our global store network optimization initiative, and the strategic goals outlined in our Always Forward Plan;

• risks related to our international growth strategy;

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• uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.

In light of the significant uncertainties in the forward-looking statements included herein, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved.

In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved.

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

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• 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 and twenty-six weeks ended July 30, 2022 and July 31, 2021.

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 and thirty-nine weeks ended October 29, 2022 and October 30, 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 and twenty-six weeks ended July 30, 2022 and July 31, 2021.

An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021.

• Liquidity and Capital Resources .

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;

A discussion of the Company’s financial condition, changes in financial condition and liquidity as of October 29, 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 thirty-nine weeks ended October 29, 2022, as compared to the thirty-nine weeks ended October 30, 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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Focus areas for Fiscal 2022

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

During the second quarter of Fiscal 2022, 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:

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• 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:

The following focus areas for Fiscal 2022 serve as a framework for the Company achieving sustainable growth and progressing toward the 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

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

• Take 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.

Supply chain disruptions, impact of inflation and COVID-19

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 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.

This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and through year-to-date Fiscal 2022.

The Company expects freight costs to stabilize compared with the elevated air freight rates and usage in 2021.

However, the Company may continue to experience inflationary pressures affecting the Company’s transit and other costs through at least the balance of Fiscal 2022.

In order to mitigate supply chain constraints and higher freight rates, the Company took certain mitigating actions in early Fiscal 2022 that included scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where appropriate.

The Company continues to take certain mitigating actions however, responses to supply chain constraints, and/or transportation delays may not be adequate to offset the impact of these headwinds.

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

Abercrombie & Fitch Co.

2022 3Q 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.

satisfactory margins.

The Company may be unsuccessful in passing these increased costs on to the customer through higher ticket prices.

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 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.

In periods of perceived unfavorable conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products.

The ongoing COVID-19 pandemic remains volatile with continued uncertainty regarding its impact on the global economy.

The Company has experienced various adverse impacts of the pandemic, including supply chain disruptions, inflationary pressures including higher freight and labor costs, labor shortages, weak store traffic and temporary store closures.

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

While trends in the severity of new cases of COVID-19 in the U.S.

have improved throughout Fiscal 2022 to date, increased caseloads in certain global regions have resulted in factory re-closures, most notably, in the APAC region in conjunction with strict lockdowns and zero-tolerance policy shutdowns in China.

The adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time.

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

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.

On August 16, 2022, the Inflation Reduction Act was signed into law, with tax provisions primarily focused on implementing a 15% corporate minimum tax on global adjusted financial statement income, expected to become applicable to the Company beginning in Fiscal 2023, and a 1% excise tax on share repurchases in tax years beginning after December 31, 2022.

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

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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.

The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the year-to-date period of Fiscal 2022, the Company opened 31 new stores, while closing 9 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.

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Permanently closed — (3) (4) (2) (4) (5) (9)

July 30, 2022 358 155 172 49 530 204 734

October 29, 2022 367 156 174 54 541 210 751

Gross square footage (in thousands) :

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

October 29, 2022 2,387 1,210 1,133 370 3,520 1,580 5,100

(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 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.

Excludes 10 international franchise stores as of October 29, 2022 and 9 international franchise stores as of January 29, 2022.

Excludes 14 Company-operated temporary stores as of October 29, 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 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.

2022 2Q Form 10-Q

Excludes 19 international franchise stores as of October 29, 2022 and 14 international franchise stores as of January 29, 2022.

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

Impact of global events and uncertainty

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 the MD&A, management continues to monitor certain other global events.

As 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, management continues to monitor 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.

It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations.

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “Forward-looking Statements and Risk Factors” in “Item 1A.

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Summary of results

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

A summary of results for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows:

GAAP Non-GAAP (1)

(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

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

October 29, 2022

October 30, 2021

October 29, 2022

October 30, 2021

Thirteen Weeks Ended

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Gross profit rate 59.2 63.7

Operating (loss) income $ (2,191) $ 114,787 $ (21) $ 115,573

Operating (loss) income margin (0.3) % 13.3 % 0.0 % 13.4 %

Net (loss) income attributable to A&F $ (16,834) $ 108,500 $ (15,275) $ 109,062

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

Operating income $ 17,543 $ 72,731 $ 21,287 $ 79,480

Operating income margin

2.0 % 8.0 % 2.4 % 8.8 %

Twenty-Six Weeks Ended

Net (loss) income attributable to A&F $ (2,214) $ 47,233 $ 554 $ 52,607

Net (loss) income per share attributable to A&F (0.04) 0.77 0.01 0.86

Thirty-Nine Weeks Ended

Net sales $ 2,497,937 $ 2,551,415

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Gross profit rate 57.5 64.1

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

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

Operating income $ 5,626 $ 244,951 $ 14,962 $ 255,150

Operating income margin

0.2 % 9.6 % 0.6 % 10.0 %

Net (loss) income attributable to A&F $ (35,517) $ 197,501 $ (28,686) $ 205,652

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

Net (loss) income per share attributable to A&F (0.70) 3.10 (0.57) 3.22

(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 July 30, 2022 and January 29, 2022 were as follows:

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

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

(in thousands) October 29, 2022 January 29, 2022

Cash and equivalents $ 257,332 $ 823,139

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Inventories 741,963 525,864

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

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended October 29, 2022 and October 30, 2021 were as follows:

(in thousands) October 29, 2022 October 30, 2021

Net cash (used for) provided by operating activities $ (301,194) $ 131,287

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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.

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:

The Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows:

Thirteen Weeks Ended

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

(in thousands) October 29, 2022 October 30, 2021 $ Change % Change

Hollister (1)

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Total $ 880,084 $ 905,160 $ (25,076) (3)

Twenty-Six Weeks Ended

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

Thirty-Nine Weeks Ended

(in thousands) October 29, 2022 October 30, 2021 $ Change % Change

Hollister (1)

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

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

The Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows:

Thirteen Weeks Ended

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

(in thousands) October 29, 2022 October 30, 2021 $ Change % Change

$ 674,555 $ 654,858 $ 19,697 3%

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APAC 28,293 38,215 (9,922) (26)

Other 32,442 31,015 1,427 5%

37,410 32,931 4,479 14

International $ 205,529 $ 250,302 $ (44,773) (18)

Total $ 880,084 $ 905,160 $ (25,076) (3)

Twenty-Six Weeks Ended

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

Thirty-Nine Weeks Ended

(in thousands) October 29, 2022 October 30, 2021 $ Change % Change

$ 1,837,760 $ 1,810,471 $ 27,289 2%

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APAC 85,968 125,489 (39,521) (31)

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

103,634 86,457 17,177 20

International $ 660,177 $ 740,944 $ (80,767) (11)

Total 2,497,937 2,551,415 (53,478) (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.

(1) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada

For the third quarter of Fiscal 2022, net sales decreased 3%, as compared to the third quarter of Fiscal 2021, primarily due to the adverse impact from changes in foreign currency exchange rates of approximately $27 million.

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 the adverse impact from changes in foreign currency exchange rates of approximately $59 million.

Abercrombie & Fitch Co.

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Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

Cost of sales, exclusive of depreciation and amortization $ 359,268 40.8% $ 328,916 36.3% 450

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

Cost of sales, exclusive of depreciation and amortization $ 1,061,684 42.5% $ 916,552 35.9% 660

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 third quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 450 basis points, as compared to the third quarter of Fiscal 2021.

The year-over-year increase was primarily driven by higher freight and raw material costs, which contributed 370 basis points to the increase, as well as 60 basis points from the adverse impact from changes in foreign currency exchange rates.

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 660 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.

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

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

Gross profit, exclusive of depreciation and amortization $ 520,816 59.2% $ 576,244 63.7% (450)

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

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Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

Stores and distribution expense $ 367,333 41.7% $ 351,815 38.9% 280

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

Stores and distribution expense $ 1,045,667 41.9% $ 993,170 38.9% 300

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.

For the third quarter of Fiscal 2022, stores and distribution expense increased 4%, as compared to the third quarter of Fiscal 2021.

The $16 million increase was driven by increased digital shipping and handling costs as compared to the third quarter of Fiscal 2021.

For the year-to-date period of Fiscal 2022, stores and distribution expense increased 5%, the increase can primarily be attributed to increased digital shipping and handling costs as compared to the year-to-date period of Fiscal 2021.

Abercrombie & Fitch Co.

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Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

Marketing, general and administrative expense $ 133,201 15.1% $ 146,269 16.2% (110)

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

Marketing, general and administrative expense $ 379,518 15.2% $ 391,129 15.3% (10)

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.

For the third quarter of Fiscal 2022, marketing, general and administrative expense, as a percentage of net sales, decreased 110 basis points as compared to the third quarter of Fiscal 2021, primarily driven by a reduction in marketing and advertising expenses, as well as lower incentive-based compensation as compared to the third quarter of Fiscal 2021.

For the year-to-date period of Fiscal 2022, marketing, general and administration expense, as a percentage of net sales, decreased 10 basis points as compared to the year-to-date period of Fiscal 2021, primarily due to a reduction in marketing and advertising expenses, as well as lower incentive-based compensation.

Asset impairment

Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

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Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 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

Other operating income, net $ 1,005 0.1% $ 1,320 0.1% —

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

Other operating income, net $ 3,894 0.2% $ 4,586 0.2% —

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

Operating income

Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

Operating (loss) income $ (2,191) (0.3)% $ 114,787 13.3% (1,360)

Operating income $ 17,543 2.0% $ 72,731 8.0% (600)

Excluded items:

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3,744 0.4 6,749 0.7 (30)

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

Adjusted non-GAAP operating income $ 21,287 2.4 $ 79,480 8.8 (640)

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

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

Operating income $ 5,626 0.2% $ 244,951 9.6% (940)

Excluded items:

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9,336 0.4 10,199 0.4 —

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

Adjusted non-GAAP operating income $ 14,962 0.6 $ 255,150 10.0 (940)

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

1 unchanged sentence

Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

2 unchanged sentences

Interest expense, net $ 7,295 0.8 $ 7,270 0.8 —

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

2 unchanged sentences

Interest expense, net $ 21,519 0.9 $ 27,151 1.1 (20)

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.

For the third quarter of Fiscal 2022, interest expense, net was flat, as compared to the third quarter of Fiscal 2021.

For the year-to-date period of Fiscal 2022, interest expense, net decreased $5.6 million, as compared to the year-to-date period of Fiscal 2021.

The decrease was primarily driven by lower premiums paid related to debt repurchases during Fiscal 2022, as compared to Fiscal 2021.

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

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)

Income tax expense

Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

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

Income tax expense $ 10,966 107.0% $ 16,383 25.0%

Excluded items:

Tax effect of pre-tax excluded items (1)

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

Adjusted non-GAAP income tax expense $ 11,942 85.4 $ 17,758 24.6

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

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

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

Income tax expense $ 14,413 (90.7)% $ 15,560 7.1%

Excluded items:

2 unchanged sentences

(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.

Refer to “ Operating (loss) income ” and “ NON-GAAP FINANCIAL MEASURES ,” for details of pre-tax excluded items.

Refer to “ Operating income ” and “ NON-GAAP FINANCIAL MEASURES ” for details of pre-tax excluded items.

Refer to Note 9, “ INCOME TAXES .”

1 unchanged sentence

Thirteen Weeks Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

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

2 unchanged sentences

2,768 0.4 5,374 0.6 (20)

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

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

$ 554 0.1 $ 52,607 5.8 (570)

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 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)

Net (loss) income attributable to A&F $ (35,517) (1.4)% $ 197,501 7.7% (910)

Excluded items, net of tax (1)

6,831 0.3 8,151 0.3 —

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

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

$ (28,686) (1.1) $ 205,652 8.1 (920)

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

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

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

1 unchanged sentence

2022 3Q Form 10-Q

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

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

Thirteen Weeks Ended

July 30, 2022 July 31, 2021 $ Change

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

October 29, 2022 October 30, 2021 $ Change

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

$ (0.04) $ 0.77 $(0.81)

1 unchanged sentence

0.05 0.09 (0.04)

Adjusted non-GAAP net (loss) income per diluted share attributable to A&F (0.30) 1.70 (2.00)

Adjusted non-GAAP net income per diluted share attributable to A&F

0.01 0.86 (0.85)

Impact from changes in foreign currency exchange rates — (0.10) 0.10

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

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

0.01 0.76 (0.75)

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)

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021 $ Change

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

$ (0.70) $ 3.10 $(3.80)

Excluded items, net of tax (1)

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

(0.57) 3.22 (3.79)

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 — (0.14) 0.14

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

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

(0.57) 3.08 (3.65)

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

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

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

17 unchanged sentences

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

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

For the year-to-date period ended October 29, 2022, the Company used $120.3 million towards capital expenditures.

Total capital expenditures for Fiscal 2022 are expected to be approximately $170 million.

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

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.

As of October 29, 2022, the Company had cash and cash equivalents of $257.3 million and total liquidity of approximately $616.8 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.

1 unchanged sentence

Share repurchases and dividends

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 July 30, 2022, the Company repurchased approximately 4.3 million shares for approximately $117.8 million .

In November 2021, A&F’s 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 October 29, 2022, the Company repurchased approximately 4.8 million shares for approximately $125.8 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.

10 unchanged sentences

Credit facility and Senior Secured Notes

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

As of October 29, 2022, the Company had $299.7 million of gross borrowings outstanding under the Senior Secured Notes.

During the thirteen weeks ended October 29, 2022, A&F Management purchased $8.0 million of outstanding Senior Secured Notes and incurred a $0.1 million gain on extinguishment of debt, recognized in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

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

As of October 29, 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 July 30, 2022 are as follows:

(in thousands) July 30, 2022

Borrowing base $ 400,000

Details regarding the remaining borrowing capacity under the ABL Facility as of October 29, 2022 are as follows:

(in thousands) October 29, 2022

Loan cap $ 400,000

Outstanding stand-by letters of credit (554)

1 unchanged sentence

Minimum excess availability (1)

Borrowing available $ 359,249

Borrowing capacity available $ 359,446

(1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility.

4 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 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.

operations or to fund investing and financing cash flow activities.

As of October 29, 2022, $179.6 million of the Company’s $257.3 million of cash and equivalents were held by foreign affiliates.

Refer to Note 9, “ INCOME TAXES .”

Analysis of cash flows

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

Twenty-Six Weeks Ended

July 30, 2022 July 31, 2021

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 29, 2022 and October 30, 2021:

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

(in thousands)

6 unchanged sentences

Cash and equivalents, and restricted cash and equivalents, end of period $ 267,006 $ 880,303

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.

Operating activities - During the year-to-date period ended October 29, 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 October 30, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019.

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

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

The new agreement resulted in an

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

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.

acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended October 30, 2021.

Investing activities - During the year-to-date period ended October 29, 2022, net cash used for investing activities was primarily used for capital expenditures of $120.3 million, partially offset by the proceeds from the withdrawal of $12.0 million of excess funds from rabbi trust assets and the sale of property and equipment of $11.9 million, as compared to net cash used for investing activities of $62.2 million for the year-to-date period ended October 30, 2021, primarily used for capital expenditures.

Financing activities - During the year-to-date period ended October 29, 2022, net cash used for financing activities included the purchase of approximately 4.8 million shares of Common Stock with a market value of approximately $125.8 million, as well as the purchase of $8 million of outstanding Senior Secured Notes.

During the year-to-date period ended October 30, 2021, net cash used by financing activities included the purchase of $42.3 million of outstanding Senior Secured Notes at a premium of $4.7 million.

In addition, the Company purchased approximately 6.1 million shares of Common Stock with a market value of approximately $235.2 million.

16 unchanged sentences

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’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, 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.

10 unchanged sentences

Excluded items

Operating (loss) income Asset impairment charges

Income tax expense (benefit) (2)

Operating income Asset impairment charges

Income tax expense (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 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

A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows:

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

Net sales October 29, 2022 October 30, 2021 % Change October 29, 2022 October 30, 2021 % Change

GAAP $ 880,084 $ 905,160 (3)% $ 2,497,937 $ 2,551,415 (2)%

1 unchanged sentence

Non-GAAP on a constant currency basis $ 880,084 $ 878,300 0 $ 2,497,937 $ 2,492,902 —

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)

Gross profit, exclusive of depreciation and amortization expense October 29, 2022 October 30, 2021 BPS Change (1)

October 29, 2022 October 30, 2021 BPS Change (1)

GAAP $ 520,816 $ 576,244 (450) $ 1,436,253 $ 1,634,863 (660)

1 unchanged sentence

Non-GAAP on a constant currency basis $ 520,816 $ 553,825 (390) $ 1,436,253 $ 1,593,044 (640)

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

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

Operating income October 29, 2022 October 30, 2021 BPS Change (1)

October 29, 2022 October 30, 2021 BPS Change (1)

GAAP $ 17,543 $ 72,731 (600) $ 5,626 $ 244,951 (940)

4 unchanged sentences

Adjusted non-GAAP on a constant currency basis $ 21,287 $ 71,139 (570) $ 14,962 $ 243,165 (920)

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

Net (loss) income per share attributable to A&F October 29, 2022 October 30, 2021 $ Change October 29, 2022 October 30, 2021 $ Change

GAAP $ (0.04) $ 0.77 $(0.81) $ (0.70) $ 3.10 $(3.80)

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 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.

(2) Excluded items for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 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