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Item 2. Management’s Discussion and Analysis

2023-09-01 compared with 2023-06-06 · 237 added, 143 removed, 299 unchanged (56% of the section changed)

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

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

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

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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 or, its management and 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,” or the negative versions of these words or other comparable words, and similar expressions may identify forward-looking statements.

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• 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 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 continued 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 related to geopolitical conflict, including ongoing geopolitical challenges between the United States and China, 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;

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• 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 and uncertainty related to adverse public health developments, such as the COVID-19 pandemic;

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

12 unchanged sentences

• Current Trends and Outlook .

A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, as well as a summary of the Company’s performance for the thirteen weeks ended April 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 Income (Loss) for the thirteen weeks ended April 29, 2023 and April 30, 2022.

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

• Liquidity and Capital Resources .

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;

A discussion of the Company’s financial condition, changes in financial condition and liquidity as of July 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 twenty-six weeks ended July 29, 2023, as compared to the twenty-six weeks ended July 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.

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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 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.

During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, as indicated in our Always Forward Plan, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments:

Europe, the Middle East and Africa (EMEA);

and Asia-Pacific (APAC).

Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss).

There was no impact on consolidated net sales, operating income (loss) or net income (loss) per share as a result of these changes.

All prior periods presented are recast to conform to the new segment presentation.

The Company’s brands include Abercrombie brands, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister brands, 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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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

• Execute focused brand growth plans

• Drive Abercrombie brands through marketing and store investment;

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

• Optimize the Hollister product and brand voice to enable growth in the second half of Fiscal 2023;

• 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;

• Progress on 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;

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• 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 2Q Form 10-Q

• 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

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.

While freight costs have decreased 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.

The Company may be unsuccessful in passing these increased costs on to its customers through higher average unit retail (“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 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 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 new stores, while closing approximately 30 stores, during Fiscal 2023, pending negotiations with our landlord partners.

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

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

Abercrombie (1)

Hollister (2)

Total Company (3)

International U.S.

International Total

Number of stores:

January 28, 2023 180 53 380 149 560 202 762

New 1 2 1 2 2 4 6

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

April 29, 2023 179 54 377 148 556 202 758

Gross square footage (in thousands) :

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 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, 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 we are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe, the Middle East and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including ongoing geopolitical challenges between the United States and China and the ongoing hostilities 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.

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.

For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, “Item 1A.

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

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Summary of results

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

A summary of results for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 was as follows:

GAAP Non-GAAP (1)

(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

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

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Thirteen Weeks Ended

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Change in net sales 16.2 % (6.9) %

Comparable sales (2)

Gross profit rate 62.5 % 57.9 %

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Net income (loss) per share attributable to A&F 1.10 (0.33) (0.30)

Twenty-Six Weeks Ended

Net sales $ 1,771,339 $ 1,617,853

Change in net sales 9.5 % (1.7) %

Comparable sales (2)

Gross profit rate 61.8 56.6

Operating income (loss) $ 123,850 $ (11,917) $ 128,286 $ (6,325)

Operating income (loss) margin

7.0 % (0.7) % 7.2 % (0.4) %

Net income (loss) attributable to A&F.

$ 73,465 $ (33,303) $ 76,694 $ (29,240)

Net income (loss) per share attributable to A&F 1.43 (0.65) 1.49 (0.57)

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

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

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

(2) Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales.

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

In light of store closures related to COVID-19, comparable sales for periods prior to Fiscal 2023 included in the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q are not disclosed.

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

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

Cash and equivalents $ 617,339 $ 517,602

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Inventories 493,479 505,621

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)

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

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

Net cash provided by (used for) operating activities $ 216,328 $ (259,733)

Net cash used for investing activities (89,780) (51,610)

Net cash used for financing activities (23,342) (135,424)

Abercrombie & Fitch Co.

2023 2Q 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 weeks ended April 29, 2023 and April 30, 2022 were as follows:

The Company’s net sales by reportable segment for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 were as follows:

Thirteen Weeks Ended

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

(in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable

Americas $ 731,427 $ 613,244 $ 118,183 19 % 14 %

EMEA 171,962 164,827 7,135 4 6

APAC 31,956 27,020 4,936 18 26

Total $ 935,345 $ 805,091 $ 130,254 16 13

Twenty-Six Weeks Ended

(in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable

Americas $ 1,396,850 $ 1,235,205 $ 161,645 13 % 9 %

EMEA 310,068 326,554 (16,486) (5) 2

APAC 64,421 56,094 8,327 15 25

Total $ 1,771,339 $ 1,617,853 $ 153,486 9 8

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

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

For the second quarter of Fiscal 2023, net sales increased 16%, as compared to the second quarter of Fiscal 2022, primarily due to an increase in higher unit selling and AUR.

The year-over-year increase in net sales reflects a positive comparable sales of 13%, as compared to the second quarter of Fiscal 2022, with growth in the Americas, EMEA and APAC segments.

For the year-to-date period of Fiscal 2023, net sales increased 9%, as compared to the year-to-date period of Fiscal 2022, primarily due to an increase in AUR.

The year-over-year increase in net sales reflects positive comparable sales of 8%, as compared to the year-to-date period of Fiscal 2022, with comparable sales growth in the Americas, EMEA and APAC segments.

The Company’s net sales by brand for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 were as follows:

Thirteen Weeks Ended

(in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable

Abercrombie (2)

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Total $ 935,345 $ 805,091 $ 130,254 16 13

Twenty-Six Weeks Ended

(in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable

Abercrombie (2)

$ 898,755 $ 752,113 $ 146,642 19 % 19 %

Hollister (3)

872,584 865,740 6,844 1 (1)

Total $ 1,771,339 $ 1,617,853 $ 153,486 9 8

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

4 unchanged sentences

2023 2Q 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 weeks ended April 29, 2023 and April 30, 2022 were as follows:

Thirteen Weeks Ended

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

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

EMEA 139,258 163,969 (24,711) (15) (4)

APAC 33,333 29,897 3,436 11 22

27,286 33,790 (6,504) (19) (2)

International $ 199,877 $ 227,656 $ (27,779) (12) 0

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 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

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Cost of sales, exclusive of depreciation and amortization $ 350,965 37.5 % $ 339,200 42.1 % (460)

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.

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Cost of sales, exclusive of depreciation and amortization $ 677,165 38.2% $ 702,416 43.4% (520)

For the second quarter of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 460 basis points, as compared to the second quarter of Fiscal 2022.

The year-over-year decrease was primarily driven by a benefit of 400 basis points from year-over-year AUR growth and 340 basis points from lower freight costs, partially offset by 180 basis points from higher cotton costs and 60 basis points from the adverse impact from changes in foreign currency exchange rates.

For the year-to-date period of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 520 basis points, as compared to the year-to-date period of Fiscal 2022.

The year-over-year decrease was primarily attributable to a benefit from lower freight costs of approximately 540 basis points and 350 basis points from year-over-year AUR growth.

These benefits were partially offset by approximately 220 basis points from higher cotton costs and 80 basis points due to the adverse impact from changes in foreign currency exchange rates.

Gross profit, exclusive of depreciation and amortization

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Gross profit, exclusive of depreciation and amortization $ 584,380 62.5 % $ 465,891 57.9 % 460

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Gross profit, exclusive of depreciation and amortization $ 1,094,174 61.8 % $ 915,437 56.6 % 520

Stores and distribution expense

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Stores and distribution expense $ 352,730 37.7 % $ 340,791 42.3 % (460)

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.

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Stores and distribution expense $ 684,343 38.6 % $ 678,334 41.9 % (330)

For the second quarter of Fiscal 2023, stores and distribution expense increased 460 basis points, as compared to the second quarter of Fiscal 2022.

The increase was primarily driven by an increase in store occupancy expense, partially offset by a decrease in fulfillment costs as compared to the second quarter of Fiscal 2022.

For the year-to-date period of Fiscal 2023, stores and distribution expense increased 330 basis points, as compared to the year-to-date period of Fiscal 2022.

The increase was primarily driven by an increase in store occupancy expense compared to the year-to-date period of Fiscal 2022.

Abercrombie & Fitch Co.

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Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Marketing, general and administrative expense $ 144,502 15.4 % $ 124,168 15.4 % —

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.

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Marketing, general and administrative expense $ 287,133 16.2 % $ 246,317 15.2 % 100

For the second quarter of Fiscal 2023, marketing, general and administrative expense, as a percentage of net sales, was essentially flat, as compared to the second quarter of Fiscal 2022, primarily driven by an increase in technology expenses and incentive-based compensation, fully offset by decreases in payroll and marketing.

For the year-to-date period of Fiscal 2023, marketing, general and administration expense, as a percentage of net sales, increased 100 basis points as compared to the year-to-date period of Fiscal 2022, primarily due to an increase in technology expenses and incentive-based compensation.

Asset impairment

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Asset impairment $ — —% $ 2,170 0.3% (30)

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Adjusted non-GAAP asset impairment (1)

$ — — $ — — —

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Asset impairment $ 4,436 0.3% $ 5,592 0.3% —

Excluded items:

Asset impairment charges (1)

(4,436) (0.3) (5,592) (0.3) —

Adjusted non-GAAP asset impairment (1)

$ — — $ — — —

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

Refer to Note 8, “ ASSET IMPAIRMENT .”

Other operating income, net

Other operating income (loss), net

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Other operating income (loss), net $ 2,694 0.3 % $ (953) (0.1) % 40

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Other operating income, net $ 5,588 0.3 % $ 2,889 0.2 % 10

Abercrombie & Fitch Co.

2023 2Q Form 10-Q

Operating income (loss)

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Operating income (loss) $ 89,842 9.6 % $ (2,191) (0.3) % 990

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Adjusted non-GAAP operating income (loss) ⁽¹⁾ $ 89,842 9.6 $ (21) 0.0 960

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Operating income (loss) $ 123,850 7.0 % $ (11,917) (0.7) % 770

Excluded items:

Asset impairment charges (1)

4,436 0.3 5,592 0.3 —

Adjusted non-GAAP operating income (loss) $ 128,286 7.2 $ (6,325) (0.4) 760

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

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

Interest expense, net

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net sales % of Net sales BPS Change

Interest expense $ 7,635 0.8 % $ 7,660 1.0 % (20)

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Interest expense, net $ 1,097 0.1 $ 6,917 0.9 (80)

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)

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands, except ratios) % of Net Sales % of Net Sales BPS Change

Interest expense $ 15,093 0.9 % $ 15,469 1.0 % (10)

Interest income (10,553) (0.6) (1,245) (0.1) (50)

Interest expense, net $ 4,540 0.3 $ 14,224 0.9 (60)

For the second quarter of Fiscal 2023, interest expense, net decreased $5.8 million, as compared to the second quarter of Fiscal 2022, as a result of higher interest income due to the increase in balance and rates received on deposits and money market accounts.

For the year-to-date period of Fiscal 2023, interest expense, net decreased $9.7 million, as compared to the year-to-date period of Fiscal 2022, as a result of higher interest income due to the increase in balance and rates received on deposits and money market accounts.

Abercrombie & Fitch Co.

2023 2Q Form 10-Q

Income tax expense

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

July 29, 2023 July 30, 2022

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

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

Income tax expense $ 30,014 33.8 % $ 5,634 (61.9) %

Excluded items:

Tax effect of pre-tax excluded items (1)

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

Adjusted non-GAAP income tax expense ⁽¹⁾ $ 30,014 33.8 $ 6,245 (90.0)

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

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

Income tax expense $ 42,732 35.8 % $ 3,447 (13.2) %

Excluded items:

Tax effect of pre-tax excluded items (1)

Adjusted non-GAAP income tax expense $ 43,939 35.5 $ 4,976 (24.2)

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

The change in the effective tax rates during the second quarter and year-to-date period of Fiscal 2023 is due to higher levels of income offsetting tax losses for which no benefit is recognized incurred outside of the U.S.

Refer to Note 9, “ INCOME TAXES .”

1 unchanged sentence

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

July 29, 2023 July 30, 2022

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

4 unchanged sentences

$ 56,894 6.1 $ (15,275) (1.9) 800

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

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

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

Net income (loss) attributable to A&F.

$ 73,465 4.1 % $ (33,303) (2.1) % 620

Excluded items, net of tax (1)

3,229 0.2 4,063 0.3 (10)

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

$ 76,694 4.3 $ (29,240) (1.8) 610

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

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

Abercrombie & Fitch Co.

2023 2Q Form 10-Q

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

Thirteen Weeks Ended

April 29, 2023 April 30, 2022 $ Change

July 29, 2023 July 30, 2022 $ Change

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

7 unchanged sentences

1.10 (0.32) 1.42

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

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022 $ Change

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

$ 1.43 $ (0.65) $2.08

Excluded items, net of tax (1)

0.06 0.08 (0.02)

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

1.49 (0.57) 2.06

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)

1.49 (0.71) 2.20

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

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

4 unchanged sentences

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

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

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

For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “ Share repurchases and dividends .”

6 unchanged sentences

Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities.

The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “Item 1.

Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2022 Form 10-K, including being opportunistic regarding growth opportunities.

Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in its digital and omnichannel initiatives.

Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in the Company’s digital and omnichannel initiatives.

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

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

For the year-to-date period ended July 29, 2023, the Company used $89.8 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 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.

As of July 29, 2023, the Company had cash and cash equivalents of $617.3 million and total liquidity of approximately $974.3 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.

2 unchanged sentences

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.

During the year-to-date period ended July 29, 2023, the Company did not repurchase any shares of its common stock pursuant to this share repurchase authorization.

The Company has $232 million in share repurchase authorization remaining under the authorization approved in November 2021.

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.

1 unchanged sentence

Refer to “ Item 2.

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

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

2 unchanged sentences

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

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

There can be no

Abercrombie & Fitch Co.

2023 2Q Form 10-Q

assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

Credit facility and Senior Secured Notes

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

As of July 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.

As of July 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 April 29, 2023 are as follows:

(in thousands) April 29, 2023

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

(in thousands) July 29, 2023

Loan cap $ 397,087

9 unchanged sentences

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

As of April 29, 2023, $184.3 million of the Company’s $447.0 million of cash and equivalents were held by foreign affiliates.

As of July 29, 2023, $205.9 million of the Company’s $617.3 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 thirteen weeks ended April 29, 2023 and April 30, 2022:

Thirteen Weeks Ended

April 29, 2023 April 30, 2022

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

Twenty-Six Weeks Ended

July 29, 2023 July 30, 2022

(in thousands)

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

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

Net cash provided by (used for) operating activities 216,328 (259,733)

Net cash used for investing activities (89,780) (51,610)

1 unchanged sentence

Effect of foreign currency exchange rates on cash (3,672) (7,567)

Net decrease in cash and equivalents, and restricted cash and equivalents (70,905) (355,890)

Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 99,534 (454,334)

Cash and equivalents, and restricted cash and equivalents, end of period $ 627,103 $ 380,034

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.

Operating activities - During the year-to-date period ended July 29, 2023, net cash provided by operating activities included increased cash receipts as a result of the 9% 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 July 29, 2023, net cash used for investing activities was primarily used for capital expenditures of $89.8 million.

Net cash used for investing activities for the year-to-date period ended July 30, 2022 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.

Abercrombie & Fitch Co.

2023 2Q Form 10-Q

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

Contractual obligations

18 unchanged sentences

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

Comparable sales exclude revenue other than store and digital sales.

Comparable sales excludes revenue other than store and digital sales.

Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores.

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

Abercrombie & Fitch Co.

2023 2Q Form 10-Q

Excluded items

3 unchanged sentences

Operating income (loss) Asset impairment charges

Income tax expense (benefit) (2)

Income tax expense (2)

Tax effect of pre-tax excluded items

3 unchanged sentences

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

Abercrombie & Fitch Co.

2023 1Q Form 10-Q

Financial information on a constant currency basis

3 unchanged sentences

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

A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended April 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

Reconciliations 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 29, 2023 and July 30, 2022 were as 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 29, 2023 July 30, 2022 % Change July 29, 2023 July 30, 2022 % Change

GAAP $ 935,345 $ 805,091 16 % $ 1,771,339 $ 1,617,853 9%

1 unchanged sentence

Non-GAAP on a constant currency basis $ 935,345 $ 807,964 16 $ 1,771,339 $ 1,612,129 10

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

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

July 29, 2023 July 30, 2022 BPS Change (1)

GAAP $ 584,380 $ 465,891 460 $ 1,094,174 $ 915,437 520

1 unchanged sentence

Non-GAAP on a constant currency basis $ 584,380 $ 462,914 520 $ 1,094,174 $ 899,860 600

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

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

July 29, 2023 July 30, 2022 BPS Change (1)

GAAP $ 89,842 $ (2,191) 990 $ 123,850 $ (11,917) 770

4 unchanged sentences

Adjusted non-GAAP on a constant currency basis $ 89,842 $ (992) 970 $ 128,286 $ (15,935) 820

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

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

GAAP $ 1.10 $ (0.33) $ 1.43 $ 1.43 $ (0.65) $2.08

5 unchanged sentences

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

(2) Excluded items for the thirteen weeks ended April 29, 2023 and April 30, 2022 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items.

(2) Excluded items for the thirteen and twenty-six weeks ended July 29, 2023 and July 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