ABERCROMBIE & FITCH CO /DE/ 10-Q

Item 1. Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive Income (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended May 4, 2024 April 29, 2023 Net sales $ 1,020,730 $ 835,994 Cost of sales, exclusive of depreciation and amortization 343,273 326,200 Gross profit 677,457 509,794 Stores and distribution expense 371,686 336,049 Marketing, general and administrative expense 177,880 142,631 Other operating income, net ( 1,958 ) ( 2,894 ) Operating income 129,849 34,008 Interest expense 5,780 7,458 Interest income ( 10,803 ) ( 4,015 ) Interest (income) expense, net ( 5,023 ) 3,443 Income before income taxes 134,872 30,565 Income tax expense 19,794 12,718 Net income 115,078 17,847 Less: Net income attributable to noncontrolling interests 1,228 1,276 Net income attributable to A&F $ 113,850 $ 16,571 Net income per share attributable to A&F Basic $ 2.24 $ 0.33 Diluted $ 2.14 $ 0.32 Weighted-average shares outstanding Basic 50,893 49,574 Diluted 53,276 51,467 Other comprehensive (loss) income Foreign currency translation adjustments, net of tax $ ( 1,837 ) $ 311 Derivative financial instruments, net of tax 523 405 Other comprehensive (loss) income ( 1,314 ) 716 Comprehensive income 113,764 18,563 Less: Comprehensive income attributable to noncontrolling interests 1,228 1,276 Comprehensive income attributable to A&F $ 112,536 $ 17,287 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2024 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) May 4, 2024 February 3, 2024 Assets Current assets: Cash and equivalents $ 864,195 $ 900,884 Receivables 93,605 78,346 Inventories 449,267 469,466 Other current assets 102,516 88,569 Total current assets 1,509,583 1,537,265 Property and equipment, net 540,697 538,033 Operating lease right-of-use assets 699,471 678,256 Other assets 220,334 220,679 Total assets $ 2,970,085 $ 2,974,233 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 266,925 $ 296,976 Accrued expenses 402,786 436,655 Short-term portion of operating lease liabilities 188,851 179,625 Income taxes payable 61,137 53,564 Total current liabilities 919,699 966,820 Long-term liabilities: Long-term portion of operating lease liabilities 656,862 646,624 Long-term borrowings, net 213,102 222,119 Other liabilities 89,252 88,683 Total long-term liabilities 959,216 957,426 Stockholders’ equity Class A Common Stock: $ 0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 400,807 421,609 Retained earnings 2,745,382 2,643,629 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 137,282 ) ( 135,968 ) Treasury stock, at average cost: 52,198 and 52,800 shares as of May 4, 2024 and February 3, 2024, respectively ( 1,931,054 ) ( 1,895,143 ) Total Abercrombie & Fitch Co. stockholders’ equity 1,078,886 1,035,160 Noncontrolling interests 12,284 14,827 Total stockholders’ equity 1,091,170 1,049,987 Total liabilities and stockholders’ equity $ 2,970,085 $ 2,974,233 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2024 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended May 4, 2024 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, February 3, 2024 50,500 $ 1,033 $ 421,609 $ 14,827 $ 2,643,629 $ ( 135,968 ) 52,800 $ ( 1,895,143 ) $ 1,049,987 Net income — — — 1,228 113,850 — — — 115,078 Purchase of Common Stock ( 119 ) — — — — — 119 ( 15,000 ) ( 15,000 ) Share-based compensation issuances and exercises 721 — ( 32,165 ) — ( 12,097 ) — ( 721 ) ( 20,911 ) ( 65,173 ) Share-based compensation expense — — 11,363 — — — — — 11,363 Derivative financial instruments, net of tax — — — — — 523 — — 523 Foreign currency translation adjustments, net of tax — — — — — ( 1,837 ) — — ( 1,837 ) Distributions to noncontrolling interests, net — — — ( 3,771 ) — — — — ( 3,771 ) Ending balance at May 4, 2024 51,102 $ 1,033 $ 400,807 $ 12,284 $ 2,745,382 $ ( 137,282 ) 52,198 $ ( 1,931,054 ) $ 1,091,170 Thirteen Weeks Ended April 29, 2023 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 28, 2023 49,002 $ 1,033 $ 416,255 $ 11,728 $ 2,368,815 $ ( 137,527 ) 54,298 $ ( 1,953,735 ) $ 706,569 Net income — — — 1,276 16,571 — — — 17,847 Share-based compensation issuances and exercises 1,060 — ( 23,644 ) — ( 40,864 ) — ( 1,060 ) 46,149 ( 18,359 ) Share-based compensation expense — — 8,088 — — — — — 8,088 Derivative financial instruments, net of tax — — — — — 405 — — 405 Foreign currency translation adjustments, net of tax — — — — — 311 — — 311 Distributions to noncontrolling interests, net — — — ( 3,888 ) — — — — ( 3,888 ) Ending balance at April 29, 2023 50,062 $ 1,033 $ 400,699 $ 9,116 $ 2,344,522 $ ( 136,811 ) 53,238 $ ( 1,907,586 ) $ 710,973 Abercrombie & Fitch Co. 5 2024 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Thirteen Weeks Ended May 4, 2024 April 29, 2023 Operating activities Net income $ 115,078 $ 17,847 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 37,689 36,028 Asset impairment 866 4,436 Loss on disposal 811 489 Provision for deferred income taxes 3,064 9,689 Share-based compensation 11,363 8,088 Loss on extinguishment of debt 168 — Changes in assets and liabilities: Inventories 19,854 57,662 Accounts payable and accrued expenses ( 65,715 ) ( 100,802 ) Operating lease right-of-use assets and liabilities ( 1,660 ) ( 26,152 ) Income taxes 7,573 3,000 Other assets ( 34,634 ) ( 10,957 ) Other liabilities 553 112 Net cash provided by (used for) operating activities 95,010 ( 560 ) Investing activities Purchases of property and equipment ( 38,886 ) ( 46,391 ) Net cash used for investing activities ( 38,886 ) ( 46,391 ) Financing activities Purchase of senior secured notes ( 9,425 ) — Purchases of Common Stock ( 15,000 ) — Acquisition of Common stock for tax withholding obligations ( 65,173 ) ( 18,359 ) Other financing activities ( 3,353 ) ( 3,597 ) Net cash used for financing activities ( 92,951 ) ( 21,956 ) Effect of foreign currency exchange rates on cash ( 857 ) ( 1,998 ) Net decrease in cash and equivalents, and restricted cash and equivalents ( 37,684 ) ( 70,905 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 909,685 527,569 Cash and equivalents, and restricted cash and equivalents, end of period $ 872,001 $ 456,664 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 40,998 $ 48,006 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 73,686 17,857 Supplemental information related to cash activities Cash paid for interest 174 — Cash paid for income taxes 8,454 3,007 Cash received from income tax refunds 7 411 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 64,052 85,156 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2024 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 8 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 8 Note 3. REVENUE RECOGNITION 10 Note 4. NET INCOME (LOSS) PER SHARE 11 Note 5. FAIR VALUE 11 Note 6. PROPERTY AND EQUIPMENT, NET 12 Note 7. LEASES 12 Note 8. ASSET IMPAIRMENT 13 Note 9. INCOME TAXES 13 Note 10. BORROWINGS 13 Note 11. SHARE-BASED COMPENSATION 15 Note 12. DERIVATIVE INSTRUMENTS 17 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 18 Note 14. SEGMENT REPORTING 18 Abercrombie & Fitch Co. 7 2024 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its Company-owned stores and digital channels, as well as through various third-party arrangements. The Company manages its business on a geographic basis, consisting of three reportable segments: Americas; 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. The Company’s brands include Abercrombie brands, which includes Abercrombie & Fitch and abercrombie kids, and Hollister brands, which includes Hollister and Gilly Hicks. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in Emirati and Kuwaiti business ventures with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive Income and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ending Number of weeks Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Fiscal 2025 January 31, 2026 52 Interim financial statements The Condensed Consolidated Financial Statements as of May 4, 2024, and for the thirteen week periods ended May 4, 2024 and April 29, 2023, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2023 filed with the SEC on April 1, 2024 (the “Fiscal 2023 Form 10-K”). The February 3, 2024 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2024. Abercrombie & Fitch Co. 8 2024 1Q Form 10-Q Table of Contents Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of global economic conditions such as the uncertainty regarding a slowing economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, the ongoing conflicts between Russia and Ukraine or Israel and Hamas which could result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain accounting pronouncements that the company has adopted. Accounting Standards Update (ASU) Description Effect on the financial statements or other significant matters ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures The update modifies the disclosure/presentation requirements of reportable segments. The amendments in the update require the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit and loss, The amendments also require disclosure of all other segment items by reportable segment and a description of its composition. Additionally, the amendments require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and accompanying notes ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. For public business entities (PBEs), the requirement will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. Other than the new disclosure requirements, the adoption of this guidance will not have a significant impact on the Company's consolidated financial statements. Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location May 4, 2024 February 3, 2024 April 29, 2023 January 28, 2023 Cash and equivalents Cash and equivalents $ 864,195 $ 900,884 $ 446,952 $ 517,602 Long-term restricted cash and equivalents Other assets 7,807 8,801 9,712 9,967 Cash and equivalents and restricted cash and equivalents $ 872,001 $ 909,685 $ 456,664 $ 527,569 Abercrombie & Fitch Co. 9 2024 1Q Form 10-Q Table of Contents Supply Chain Finance Program Under the supply chain finance (“SCF”) program, which is administered by a third party, the Company’s vendors, at their sole discretion, are given the opportunity to sell receivables from the Company to a participating financial institution at a discount that leverages the Company’s credit profile. The commercial terms negotiated by the Company with its vendors are consistent, irrespective of whether a vendor participates in the SCF program. A participating vendor has the option to be paid by the financial institution earlier than the original invoice due date. The Company’s responsibility is limited to making payment on the terms originally negotiated by the Company with each vendor, regardless of whether the vendor sells its receivable to a financial institution. If a vendor chooses to participate in the SCF program, the Company pays the financial institution the stated amount of confirmed merchandise invoices on the stated maturity date, which is typically 75 days from the invoice date. The agreement with the financial institution does not require the Company to provide assets pledged as security or other forms of guarantees for the SCF program. As of May 4, 2024 and February 3, 2024, $ 58.0 million and $ 72.4 million of SCF program liabilities were recorded in accounts payable in the Condensed Consolidated Balance Sheets, respectively, and reflected as a cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows when settled. The following table provides activity in the SCF program for the thirteen weeks ended May 4, 2024 Thirteen Weeks Ended (in thousands) May 4, 2024 Confirmed obligations outstanding at the beginning of the period $ 72,376 Invoices confirmed during the period 75,468 Confirmed invoices paid during the period ( 89,816 ) Confirmed obligations outstanding at the end of the period $ 58,028 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of May 4, 2024, February 3, 2024, April 29, 2023 and January 28, 2023: (in thousands) May 4, 2024 February 3, 2024 April 29, 2023 January 28, 2023 Gift card liability (1) $ 40,291 $ 41,144 $ 37,630 $ 39,235 Loyalty programs liability 27,546 27,937 23,552 25,640 (1) Includes $ 9.9 million and $ 13.4 million of revenue recognized during the thirteen weeks ended May 4, 2024 and April 29, 2023, respectively, that was included in the gift card liability at the beginning of February 3, 2024 and January 28, 2023, respectively. The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Revenue associated with gift card redemptions and gift card breakage $ 30,661 $ 24,224 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 13,958 12,282 Abercrombie & Fitch Co. 10 2024 1Q Form 10-Q Table of Contents 4. NET INCOME PER SHARE Net income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of A&F’s Class A Common Stock, $0.01 par value (“Common Stock”). The following table provides additional information pertaining to net income per share attributable to A&F for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Shares of Common Stock issued 103,300 103,300 Weighted-average treasury shares ( 52,407 ) ( 53,726 ) Weighted-average — basic shares 50,893 49,574 Dilutive effect of share-based compensation awards 2,383 1,893 Weighted-average — diluted shares 53,276 51,467 Anti-dilutive shares (1) 436 2,834 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieved from zero up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The following table provides the three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of May 4, 2024 and February 3, 2024: Assets and Liabilities at Fair Value as of May 4, 2024 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 302,285 $ 17,912 $ — $ 320,197 Derivative instruments (2) — 1,613 — 1,613 Rabbi Trust assets (3) 1,164 52,863 — 54,027 Restricted cash equivalents (1) 3,285 1,441 — 4,726 Total assets $ 306,734 $ 73,829 $ — $ 380,563 Liabilities: Derivative instruments (2) $ — $ 117 $ — $ 117 Total liabilities $ — $ 117 $ — $ 117 Assets and Liabilities at Fair Value as of February 3, 2024 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 349,174 $ 26,975 $ — $ 376,149 Derivative instruments (2) — 1,092 — 1,092 Rabbi Trust assets (3) 1,164 52,521 — 53,685 Restricted cash equivalents (1) 4,282 1,420 — 5,702 Total assets $ 354,620 $ 82,008 $ — $ 436,628 Liabilities: Derivative instruments (2) $ — $ 539 $ — $ 539 Total liabilities $ — $ 539 $ — $ 539 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. Abercrombie & Fitch Co. 11 2024 1Q Form 10-Q Table of Contents The Company’s Level 2 assets and liabilities consisted of: • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75 % interest rate and mature on July 15, 2025 (the “Senior Secured Notes”), are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The following table provides the carrying amount and fair value of the Company’s long-term gross borrowings as of May 4, 2024 and February 3, 2024: (in thousands) May 4, 2024 February 3, 2024 Gross borrowings outstanding, carrying amount $ 213,906 $ 223,214 Gross borrowings outstanding, fair value (1) 215,510 226,004 (1) Classified as Level 2 measurements within the fair value hierarchy. 6. PROPERTY AND EQUIPMENT, NET The following table provides property and equipment, net as of May 4, 2024 and February 3, 2024: (in thousands) May 4, 2024 February 3, 2024 Property and equipment, at cost $ 2,529,429 $ 2,509,184 Less: Accumulated depreciation and amortization ( 1,988,732 ) ( 1,971,151 ) Property and equipment, net $ 540,697 $ 538,033 R efer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirteen weeks ended May 4, 2024 and thirteen weeks ended April 29, 2023. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Single lease cost (1) $ 59,980 $ 58,340 Variable lease cost (2) 46,169 35,695 Operating lease right-of-use asset impairment (3) 339 1,414 Sublease income ( 984 ) ( 984 ) Total operating lease cost $ 105,504 $ 94,465 (1) Includes amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for certain Company-operated retail stores, of approximately $ 72.1 million as of May 4, 2024. Abercrombie & Fitch Co. 12 2024 1Q Form 10-Q Table of Contents 8. ASSET IMPAIRMENT The following table provides asset impairment charges for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Operating lease right-of-use asset impairment $ 339 $ 1,414 Property and equipment asset impairment 527 3,022 Total asset impairment $ 866 $ 4,436 Asset impairment charges for the thirteen weeks ended May 4, 2024 and April 29, 2023 related to certain of the Company’s store assets. The store impairment charges for the thirteen weeks ended May 4, 2024 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 8.3 million, including $ 6.7 million related to operating lease right-of-use assets. 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. Impact of valuation allowances During the thirteen weeks ended May 4, 2024, the Company did not recognize income tax benefits on $ 7.6 million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 1.1 million. As of May 4, 2024, the Company had foreign net deferred tax assets of approximately $ 38.3 million, including $ 8.1 million, $ 7.4 million, and $ 12.7 million in China, Japan and the United Kingdom, respectively. While the Company believes that these net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense. During the thirteen weeks ended April 29, 2023, the Company did not recognize income tax benefits on $ 20.3 million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 3.1 million. As of February 3, 2024, there were approximately $ 7.6 million, $ 7.5 million, and $ 12.6 million of net deferred tax assets in China, Japan, and the United Kingdom, respectively. Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended May 4, 2024 and April 29, 2023. Abercrombie & Fitch Co. 13 2024 1Q Form 10-Q Table of Contents 10. BORROWINGS The following table provides details on the Company’s long-term borrowings, net, as of May 4, 2024 and February 3, 2024 : (in thousands) May 4, 2024 February 3, 2024 Long-term portion of borrowings, gross at carrying amount $ 213,906 $ 223,214 Unamortized fees ( 804 ) ( 1,095 ) Long-term borrowings, net $ 213,102 $ 222,119 Senior Secured Notes During the thirteen weeks ended May 4, 2024, A&F Management purchased $ 9.3 million of outstanding Senior Secured Notes in the open market and incurred a $ 0.2 million loss on extinguishment of debt, recognized in interest expense on the Condensed Consolidated Statements of Operations and Comprehensive Income. The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 12, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2023 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) have remained unchanged from those disclosed in Note 12, “ BORROWINGS ,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2023 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of May 4, 2024 or as of February 3, 2024. As of May 4, 2024, availability under the ABL Facility was $ 325.2 million, net of $ 0.4 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 292.7 million as of May 4, 2024. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or Abercrombie & Fitch Management Co. (“A&F Management”) to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of May 4, 2024. Abercrombie & Fitch Co. 14 2024 1Q Form 10-Q Table of Contents 11. SHARE-BASED COMPENSATION Financial statement impact The following table provides share-based compensation expense and the related income tax impacts for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Share-based compensation expense $ 11,363 $ 8,088 Income tax benefits associated with share-based compensation expense recognized 1,278 1,005 The following table provides discrete income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Income tax discrete benefits realized for tax deductions related to the issuance of shares $ 14,554 $ 1,117 Income tax discrete charges realized upon cancellation of stock appreciation rights — ( 101 ) Total income tax discrete benefits related to share-based compensation awards $ 14,554 $ 1,016 The following table provides the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Employee tax withheld upon issuance of shares (1) $ 65,173 $ 18,359 (1) Classified within financing activities on the Condensed Consolidated Statements of Cash Flows. Restricted stock units The following table provides the summarized activity for restricted stock units for the thirteen weeks ended May 4, 2024: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at February 3, 2024 1,886,085 $ 27.12 521,212 $ 30.03 260,619 $ 43.90 Granted 226,209 120.49 53,775 120.56 26,895 180.71 Adjustments for performance achievement — — 150,446 32.10 75,227 50.34 Vested ( 757,301 ) 24.37 ( 300,892 ) 32.10 ( 150,454 ) 50.34 Forfeited ( 40,864 ) 30.95 — — — — Unvested at May 4, 2024 (1) 1,314,129 $ 44.71 424,541 $ 40.76 212,287 $ 58.95 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved from zero up to 200% of their target vesting amount. The following table provides the unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of May 4, 2024: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost (in thousands) $ 53,083 $ 20,866 $ 8,037 Remaining weighted-average period cost is expected to be recognized (years) 1.5 1.6 1.6 Abercrombie & Fitch Co. 15 2024 1Q Form 10-Q Table of Contents The following table provides additional information pertaining to restricted stock units for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Service-based restricted stock units: Total grant date fair value of awards granted $ 27,256 $ 23,842 Total grant date fair value of awards vested 18,455 15,560 Performance-based restricted stock units: Total grant date fair value of awards granted 6,483 6,300 Total grant date fair value of awards vested 9,659 — Market-based restricted stock units: Total grant date fair value of awards granted 4,860 4,576 Total grant date fair value of awards vested 7,574 16,040 The following table provides the weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended May 4, 2024 April 29, 2023 Grant date market price $ 120.56 $ 28.36 Fair value 180.71 41.20 Price volatility 59 % 63 % Expected term (years) 2.9 2.9 Risk-free interest rate 4.3 % 4.6 % Dividend yield — — Average volatility of peer companies 51.8 66.0 Average correlation coefficient of peer companies 0.4866 0.5295 Stock appreciation rights The following table provides the summarized stock appreciation rights activity for the thirteen weeks ended May 4, 2024: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted-Average Remaining Contractual Life (years) Outstanding at February 3, 2024 25,600 $ 29.29 Exercised ( 25,600 ) 29.29 Forfeited or expired — — Outstanding at May 4, 2024 — $ — $ — 0.0 Stock appreciation rights exercisable at May 4, 2024 — $ — $ — 0.0 The following table provides additional information pertaining to stock appreciation rights exercised during the thirteen weeks ended May 4, 2024 and April 29, 2023: (in thousands) May 4, 2024 April 29, 2023 Total grant date fair value of awards exercised $ 267 $ 64 Abercrombie & Fitch Co. 16 2024 1Q Form 10-Q Table of Contents 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of May 4, 2024, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany transactions: (in thousands) Notional Amount (1) Euro $ 46,741 British pound 43,758 Canadian dollar 16,150 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of May 4, 2024. As of May 4, 2024, foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets and liabilities were as follows: (in thousands) Notional Amount (1) British pound $ 12,325 Euro 21,307 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of May 4, 2024 . The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The following table provides the location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of May 4, 2024 and February 3, 2024: (in thousands) Location May 4, 2024 February 3, 2024 Location May 4, 2024 February 3, 2024 Derivatives designated as cash flow hedging instruments Other current assets $ 1,163 $ 1,090 Accrued expenses $ 117 $ 539 Derivatives not designated as hedging instruments Other current assets 450 2 Accrued expenses — — Total $ 1,613 $ 1,092 $ 117 $ 539 The following table provides information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Gain (loss) recognized in AOCL (1) $ 1,029 $ ( 507 ) Gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) 483 ( 906 ) (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income over the next twelve months . Abercrombie & Fitch Co. 17 2024 1Q Form 10-Q Table of Contents The following table provides additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Gain (loss) recognized in other operating income, net $ 1,868 $ ( 547 ) 13. ACCUMULATED OTHER COMPREHENSIVE LOSS The following tables provide activity in AOCL fo r the thirteen weeks ended May 4, 2024: Thirteen Weeks Ended May 4, 2024 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 3, 2024 $ ( 136,532 ) $ 564 $ ( 135,968 ) Other comprehensive (loss) income before reclassifications ( 1,837 ) 1,029 ( 808 ) Reclassified gain from AOCL (1) — ( 483 ) ( 483 ) Tax effect — ( 23 ) ( 23 ) Other comprehensive (loss) income after reclassifications ( 1,837 ) 523 ( 1,314 ) Ending balance at May 4, 2024 $ ( 138,369 ) $ 1,087 $ ( 137,282 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income. The following tables provide activity in AOCL for the thirteen weeks ended April 29, 2023: Thirteen Weeks Ended April 29, 2023 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 28, 2023 $ ( 132,653 ) $ ( 4,874 ) $ ( 137,527 ) Other comprehensive income (loss) before reclassifications 311 ( 507 ) ( 196 ) Reclassified loss from AOCL (1) — 906 906 Tax effect — 6 6 Other comprehensive income after reclassifications 311 405 716 Ending balance at April 29, 2023 $ ( 132,342 ) $ ( 4,469 ) $ ( 136,811 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income. 14. SEGMENT REPORTING The Company’s reportable segments are based on the financial information the chief operating decision maker (“CODM”) uses to allocate resources and assess performance of its business. The Company manages its business on a geographic basis, consisting of three reportable segments: Americas; 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. The Americas reportable segment includes the results of operations in North America and South America. The EMEA reportable segment includes the results of operations in Europe, the Middle East and Africa. The APAC reportable segment includes the results of operations in the Asia-Pacific region, including Asia and Oceania. Intersegment sales and transfers are recorded at cost and are treated as a transfer of inventory. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. All prior periods presented are recast to conform to the new segment presentation. The group comprised of the Company’s (i) Chief Executive Officer and (ii) Chief Financial Officer and Chief Operating Officer functions as the Company’s CODM. The Company’s CODM manages business operations and evaluates the performance of each segment based on the net sales and operating income (loss) of the segment. Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributed to the segment. Corporate/other expenses include expenses incurred that are not directly attributed to a reportable segment and primarily relate to corporate or global functions such as design, sourcing, brand management, corporate strategy, information Abercrombie & Fitch Co. 18 2024 1Q Form 10-Q Table of Contents technology, finance, treasury, legal, human resources, and other corporate support services, as well as certain globally managed components of the planning, merchandising, and marketing functions. The Company reports inventories by segment as that information is used by the CODM in determining allocation of resources to the segments. The Company does not report its other assets by segment as that information is not used by the CODM in assessing segment performance or allocating resources. The following tables provide the Company’s segment information as of May 4, 2024 and February 3, 2024, and for the thirteen weeks ended May 4, 2024 and April 29, 2023: Net Sales Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Americas $ 820,121 $ 665,423 EMEA 164,778 138,106 APAC 35,831 32,465 Segment total $ 1,020,730 $ 835,994 Operating Income (Loss) Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Americas $ 252,347 $ 156,445 EMEA 24,501 ( 1,485 ) APAC ( 322 ) ( 2,547 ) Segment total $ 276,526 $ 152,413 Operating (loss) income not attributed to segments: Stores and distribution expense ( 3,371 ) ( 1,889 ) Marketing, general and administrative expense ( 145,264 ) ( 119,405 ) Other operating income,net 1,958 2,889 Total operating income $ 129,849 $ 34,008 Assets (in thousands) May 4, 2024 February 3, 2024 Inventories Americas $ 361,061 $ 372,371 EMEA 70,829 77,125 APAC 17,377 19,970 Total inventories $ 449,267 $ 469,466 Assets not attributed to segments 2,520,818 2,504,767 Total assets $ 2,970,085 $ 2,974,233 Brand Information The following table provides additional disaggregated revenue information, which is categorized by brand, for the thirteen weeks ended May 4, 2024 and April 29, 2023: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Abercrombie (1) $ 571,513 $ 436,044 Hollister (2) 449,217 399,950 Total $ 1,020,730 $ 835,994 (1) Abercrombie brands includes Abercrombie & Fitch and abercrombie kids. (2) Hollister brands includes Hollister and Gilly Hicks Abercrombie & Fitch Co. 19 2024 1Q Form 10-Q Table of Contents