What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-06-06 compared with 2022-12-06 · 158 added, 266 removed, 284 unchanged (60% of the section changed)

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

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

Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” or the negative versions of these words or other comparable words, 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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“Risk Factors,” in the Company’s Fiscal 2022 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 changes in global economic and financial conditions, including volatility in the financial markets as a result of the failure, or rumored failure, of financial institutions, 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;

• risks related to natural disasters and other unforeseen catastrophic events;

• risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory;

• 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, and the strategic goals outlined in our Always Forward Plan;

• risks related to our international growth strategy;

• risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems;

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

• risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons;

• risks related to fluctuations in foreign currency exchange rates;

• risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations;

• risks related to our ability to execute on our strategic and growth initiatives, including those outlined in our Always Forward Plan;

• risks related to international operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions;

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

• risks related to cybersecurity threats and privacy or data security breaches;

• risks related to the potential loss or disruption of our information systems;

• risks related to the continued validity of our trademarks and our ability to protect our intellectual property;

• risks associated with climate change and other corporate responsibility issues;

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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 thirty-nine weeks ended October 29, 2022 and October 30, 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 weeks ended April 29, 2023 and April 30, 2022.

• 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 thirty-nine weeks ended October 29, 2022 and October 30, 2021.

An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen weeks ended April 29, 2023 and April 30, 2022.

• Liquidity and Capital Resources .

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.

A discussion of the Company’s financial condition, changes in financial condition and liquidity as of April 29, 2023, which includes (i) an analysis of financial condition as compared to January 28, 2023;

(ii) an analysis of changes in cash flows for the thirteen weeks ended April 29, 2023, as compared to the thirteen weeks ended April 30, 2022;

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

• Recent Accounting Pronouncements .

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

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

These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style.

The Company operates primarily in North America, Europe, and Asia.

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

These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style.

The Company operates primarily in North America, Europe, Middle East, and Asia.

The Company’s fiscal year ends on the Saturday closest to January 31.

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Fiscal 2022 January 28, 2023 52

Fiscal 2023 February 3, 2024 53

Fiscal 2024 February 1, 2025 52

Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seasons:

the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”).

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 and 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 due to back-to-school and holiday sales periods, respectively.

CURRENT TRENDS AND OUTLOOK

Focus areas for Fiscal 2023

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:

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

The Always Forward Plan, which outlines the Company’s long-term strategic goals, including growing shareholder value is anchored on three strategic growth principles, which are to:

• Execute focused brand growth plans;

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The following focus areas for Fiscal 2023 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 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, 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 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

• Execute brand growth plans

• Drive Abercrombie brands through marketing and store investment;

• Optimize the Hollister product and brand voice to enable second half growth;

• Support Gilly Hicks growth with an evolved assortment mix

• Accelerate an enterprise-wide digital revolution

• Complete current phase of our modernization efforts around key data platforms;

• Continue to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey;

• Improve our digital and app experience across key parts of the customer journey

• Operate with financial discipline

• Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year;

• Properly balance investments, inflation and efficiency efforts to improve profitability

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

satisfactory margins.

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

Supply chain and impact of inflation

Previously, the Company experienced inflationary pressures with respect to labor, cotton, freight and other raw materials and other costs, which has negatively impacted expenses and margins.

While freight costs have stabilized and supply chain constraints are waning, there continues to be inflationary pressures with respect to cotton and other raw materials, as well as other operating costs.

Continued inflationary pressures could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins.

The Company may be unsuccessful in passing these increased costs on to its customers through higher AUR.

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, 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 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.

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

The adverse consequences of the current economic environment continue to impact the Company and may persist for some time.

The Company will continue to assess impacts on its operations and financial condition, and will respond as it deems appropriate.

Global Store Network Optimization

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 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.

The Company has a goal of opening 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 year-to-date period of Fiscal 2023, the Company opened six new stores, while closing 10 stores.

As part of this focus, the Company plans to be a net store opener again this year with approximately 35-40 new stores, while closing approximately 20-25 stores, during Fiscal 2023, 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.

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

Hollister (1)

Abercrombie (1)

Hollister (2)

Total Company (3)

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Permanently closed (2) (1) (4) (3) (6) (4) (10)

October 29, 2022 367 156 174 54 541 210 751

April 29, 2023 179 54 377 148 556 202 758

Gross square footage (in thousands) :

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 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.

April 29, 2023 1,146 350 2,407 1,120 3,553 1,470 5,023

(1) 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 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.

Excludes 22 international franchise stores as of April 29, 2023 and 23 international franchise stores as of January 28, 2023.

Excludes three Company-operated temporary stores as of each of April 29, 2023 and January 28, 2023.

(2) 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 13 international franchise stores as of April 29, 2023 and 12 international franchise stores as of January 28, 2023.

Excludes 20 Company-operated temporary stores as of April 29, 2023 and 16 Company-operated temporary stores as of January 28, 2023.

(3) This store count excludes one international third-party operated multi-brand outlet store as of each of April 29, 2023 and January 28, 2023.

Impact of global events and uncertainty

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 we are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe, Middle East 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.

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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.

Risk Factors” on the Fiscal 2022 Form 10-K.

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

Summary of results

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

A summary of results for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows:

GAAP Non-GAAP (1)

(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

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

April 29, 2023

April 30, 2022

April 29, 2023

April 30, 2022

Thirteen Weeks Ended

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Gross profit rate 61.0 % 55.3 %

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

Operating income margin

2.0 % 8.0 % 2.4 % 8.8 %

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

Change in net sales (2.1) % 27.4 %

Gross profit rate 57.5 64.1

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

Operating income margin

Operating income (loss) $ 34,008 $ (9,726) $ 38,444 $ (6,304)

Operating income (loss) margin

4.1 % (1.2) % 4.6 % (0.8) %

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

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

Net income (loss) attributable to A&F $ 16,571 $ (16,469) $ 19,820 $ (13,965)

Net income (loss) per share attributable to A&F 0.32 (0.32) 0.39 (0.27)

(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 October 29, 2022 and January 29, 2022 were as follows:

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

Certain components of the Company’s Condensed Consolidated Balance Sheets as of April 29, 2023 and January 28, 2023 were as follows:

(in thousands) April 29, 2023 January 28, 2023

Cash and equivalents $ 446,952 $ 517,602

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Inventories 447,806 505,621

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

Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended April 29, 2023 and April 30, 2022 were as follows:

(in thousands) April 29, 2023 April 30, 2022

Net cash used for operating activities $ (560) $ (217,787)

Net cash used for investing activities (46,391) (18,541)

Net cash used for financing activities (21,956) (116,945)

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

RESULTS OF OPERATIONS

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 thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows:

The Company’s net sales by operating segment for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows:

Thirteen Weeks Ended

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

Hollister (1)

$ 457,752 $ 522,311 $ (64,559) (12)%

(in thousands) April 29, 2023 April 30, 2022 $ Change % Change Comparable

Abercrombie (2)

$ 436,044 $ 383,928 $ 52,116 14 % 14 %

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

Thirty-Nine Weeks Ended

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

Hollister (3)

399,950 428,834 (28,884) (7) (6)

Abercrombie (2)

1,174,445 1,072,213 102,232 10

Total $ 835,994 $ 812,762 $ 23,232 3 3

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

(1) Comparable sales are calculated on a constant currency basis.

Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation.

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

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

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

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 thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows:

The Company’s net sales by geographic area for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows:

Thirteen Weeks Ended

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

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

EMEA 139,826 179,156 (39,330) (22)

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

37,410 32,931 4,479 14

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

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

Thirty-Nine Weeks Ended

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

(in thousands) April 29, 2023 April 30, 2022 $ Change % Change Comparable

$ 636,117 $ 585,106 $ 51,011 9 % 4 %

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Total $ 835,994 $ 812,762 $ 23,232 3 3

(1) Comparable sales are calculated on a constant currency basis.

Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation.

(2) 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.

2022 3Q Form 10-Q

For the first quarter of Fiscal 2023, net sales increased 3% primarily due to an increase in AUR.

The year-over-year increase in net sales reflects a positive comparable sales of 3%, as compared to the first quarter of Fiscal 2022, with growth in the U.S.

partially offset by a decline in International.

This was partially offset by the adverse impact from changes in foreign currency exchange rates of approximately 1% or $9 million.

Cost of sales, exclusive of depreciation and amortization

Thirteen 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 $ 359,268 40.8% $ 328,916 36.3% 450

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

Cost of sales, exclusive of depreciation and amortization $ 326,200 39.0 % $ 363,216 44.7 % (570)

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 elevated freight and raw material costs, as well as the adverse impact from changes in foreign currency exchange rates.

For the first quarter of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 570 basis points, as compared to the first quarter of Fiscal 2022.

The year-over-year decrease was primarily driven by a benefit of 760 basis points from lower freight costs and 230 basis points from year-over-year AUR growth partially offset by 320 basis points from higher cotton costs and 100 basis points from the adverse impact from changes in foreign currency exchange rates.

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

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)

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

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Thirteen Weeks Ended

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

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

Stores and distribution expense $ 331,613 39.7 % $ 337,543 41.5 % (180)

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.

For the first quarter of Fiscal 2023, stores and distribution expense decreased 180 basis points, as compared to the first quarter of Fiscal 2022.

The $6 million decrease was primarily driven by a decrease in digital marketing and fulfillment costs as compared to the first quarter of Fiscal 2022.

Abercrombie & Fitch Co.

2 unchanged sentences

Thirteen Weeks Ended

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)

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

Marketing, general and administrative expense $ 142,631 17.1 % $ 122,149 15.0 % 210

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.

For the first quarter of Fiscal 2023, marketing, general and administrative expense, as a percentage of net sales, increased 210 basis points, as compared to the first quarter of Fiscal 2022, primarily driven by an increase in technology expenses and incentive-based compensation.

Asset impairment

Thirteen Weeks Ended

October 29, 2022 October 30, 2021

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

Asset impairment $ 3,744 0.4% $ 6,749 0.7% (30)

Excluded items:

Asset impairment charges (1)

(3,744) (0.4) (6,749) (0.7) 30

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

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

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Refer to Note 8, “ ASSET IMPAIRMENT .”

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

Other operating income, net

Thirteen Weeks Ended

October 29, 2022 October 30, 2021

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

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

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

Other operating income, net $ 2,894 0.3 % $ 3,842 0.5 % 20

Operating income

Operating income (loss)

Thirteen Weeks Ended

October 29, 2022 October 30, 2021

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

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

Excluded items:

Asset impairment charges (1)

3,744 0.4 6,749 0.7 (30)

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

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

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

Operating income (loss) $ 34,008 4.1 % $ (9,726) (1.2) % 530

Excluded items:

1 unchanged sentence

4,436 0.5 3,422 0.4 10

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

Adjusted non-GAAP operating income (loss) ⁽¹⁾ $ 38,444 4.6 $ (6,304) (0.8) 540

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

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

Interest expense, net

Thirteen Weeks Ended

October 29, 2022 October 30, 2021

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

Interest expense $ 7,586 0.9% $ 7,802 0.9% —

Interest income (291) (0.1) (532) (0.1) —

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

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

2 unchanged sentences

Interest expense, net $ 3,443 0.4 $ 7,307 0.9 (50)

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

Income tax expense

For the first quarter of Fiscal 2023, interest expense, net was lower, as a result of higher interest income due to the increase in rates received on deposits and money market accounts, compared to the first quarter of Fiscal 2022.

Income tax expense (benefit)

Thirteen Weeks Ended

October 29, 2022 October 30, 2021

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

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 $ 11,942 85.4 $ 17,758 24.6

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

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

Income tax expense (benefit) $ 12,718 41.6 % $ (2,187) 12.8 %

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax expense $ 16,918 (258.3) $ 17,608 7.7

Adjusted non-GAAP income tax expense (benefit) ⁽¹⁾ $ 13,905 39.7 % $ (1,269) 9.3 %

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

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

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

Refer to Note 9, “ INCOME TAXES .”

Net (loss) income attributable to A&F

Net income (loss) attributable to A&F

Thirteen Weeks Ended

October 29, 2022 October 30, 2021

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

Net (loss) income attributable to A&F $ (2,214) (0.3)% $ 47,233 5.2% (550)

Excluded items, net of tax (1)

2,768 0.4 5,374 0.6 (20)

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

$ 554 0.1 $ 52,607 5.8 (570)

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

April 29, 2023 April 30, 2022

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

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

Net income (loss) attributable to A&F $ 16,571 2.0 % $ (16,469) (2.0) % 400

Excluded items, net of tax (1)

3,249 0.4 2,504 0.3 10

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

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

$ 19,820 2.4 $ (13,965) (1.7) 410

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

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

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

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

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

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

Thirteen Weeks Ended

October 29, 2022 October 30, 2021 $ Change

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

April 29, 2023 April 30, 2022 $ Change

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

$ 0.32 $ (0.32) $ 0.64

1 unchanged sentence

0.06 0.05 0.01

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 income per diluted share attributable to A&F on a constant currency basis (2)

0.01 0.76 (0.75)

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

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

0.39 (0.27) 0.66

Impact from changes in foreign currency exchange rates — (0.12) 0.12

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

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

0.39 (0.39) 0.78

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

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

(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 October 29, 2022, the Company used $120.3 million towards capital expenditures.

For the year-to-date period ended April 29, 2023, the Company used $46.4 million towards capital expenditures.

Total capital expenditures for Fiscal 2023 are expected to be approximately $160 million.

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

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.

As of April 29, 2023, the Company had cash and cash equivalents of $447.0 million and total liquidity of approximately $757.7 million, compared with cash and cash equivalents of $517.6 million and total liquidity of approximately $865.7 million at the beginning of Fiscal 2023.

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.

Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or repurchasing outstanding Senior Secured Notes.

Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or purchasing outstanding Senior Secured Notes.

Share repurchases and dividends

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.

In November 2021, A&F’s Board of Directors approved a $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 29, 2023, the Company did not repurchase any shares of its common stock.

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.

2 unchanged sentences

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.

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

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

5 unchanged sentences

Credit facility and 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 October 29, 2022, the Company did not have any borrowings outstanding under the ABL Facility.

As of April 29, 2023, the Company had $299.7 million of gross borrowings outstanding under the Senior Secured Notes.

In addition, the Amended and Restated Credit Agreement, as amended by the First Amendment (as defined below) provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million.

As of April 29, 2023, 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 October 29, 2022 are as follows:

(in thousands) October 29, 2022

Details regarding the remaining borrowing capacity under the ABL Facility as of April 29, 2023 are as follows:

(in thousands) April 29, 2023

Loan cap $ 345,995

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

As of April 29, 2023, $184.3 million of the Company’s $447.0 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 thirty-nine weeks ended October 29, 2022 and October 30, 2021:

Thirty-Nine Weeks Ended

October 29, 2022 October 30, 2021

The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 29, 2023 and April 30, 2022:

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

(in thousands)

Cash and equivalents, and restricted cash and equivalents, beginning of period $ 527,569 $ 834,368

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

Net cash used for operating activities (560) (217,787)

Net cash used for investing activities (46,391) (18,541)

3 unchanged sentences

Cash and equivalents, and restricted cash and equivalents, end of period $ 456,664 $ 478,478

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

Operating activities - During the year-to-date period ended April 29, 2023, net cash used for operating activities included increased cash receipts as a result of the 3% year-over-year increase in net sales as well as increased payments to vendors in the fourth quarter of Fiscal 2022 which resulted in lower cash payments in the first quarter of Fiscal 2023.

Investing activities - During the year-to-date period ended April 29, 2023, net cash used for investing activities was primarily used for capital expenditures of $46.4 million.

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

Financing activities - During the year-to-date period ended April 29, 2023, net cash used for financing activities included amounts related to shares of common stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards.

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

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

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.

Contractual obligations

10 unchanged sentences

There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2022.

Abercrombie & Fitch Co.

2022 3Q Form 10-Q

NON-GAAP FINANCIAL MEASURES

9 unchanged sentences

The most directly comparable GAAP financial measure is change in net sales.

In light of store closures related to COVID-19, the Company has not disclosed comparable sales since Fiscal 2019.

Excluded items

2 unchanged sentences

Excluded items

Operating income Asset impairment charges

Income tax expense (2)

Operating income (loss) Asset impairment charges

Income tax expense (benefit) (2)

Tax effect of pre-tax excluded items

Net (loss) income and net (loss) income per share attributable to A&F (2)

Net income (loss) and net income (loss) per share attributable to A&F (2)

Pre-tax excluded items and the tax effect of pre-tax excluded items

8 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 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

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 29, 2023 and April 30, 2022 follows:

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

Net sales April 29, 2023 April 30, 2022 % Change

GAAP $ 835,994 $ 812,762 3 %

1 unchanged sentence

Non-GAAP on a constant currency basis $ 835,994 $ 804,165 4

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)

Gross profit, exclusive of depreciation and amortization expense April 29, 2023 April 30, 2022 BPS Change (1)

GAAP $ 509,794 $ 449,546 570

1 unchanged sentence

Non-GAAP on a constant currency basis $ 509,794 $ 436,945 670

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

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

Operating income (loss) April 29, 2023 April 30, 2022 BPS Change (1)

GAAP $ 34,008 $ (9,726) 530

4 unchanged sentences

Adjusted non-GAAP on a constant currency basis $ 38,444 $ (14,943) 650

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

Net income (loss) per share attributable to A&F April 29, 2023 April 30, 2022 $ Change

GAAP $ 0.32 $ (0.32) $ 0.64

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 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.

(2) Excluded items for the thirteen weeks ended April 29, 2023 and April 30, 2022 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