ABERCROMBIE & FITCH CO /DE/ 10-Q

Item 2. 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 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 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. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Fiscal 2023 Form 10-K and otherwise in our reports and filings with the SEC, as well as the following: • risks related to changes in global economic and financial conditions, including inflation, and the resulting impact on consumer spending generally and on our operating results, financial condition, and expense management, and our ability to adequately mitigate the impact; • risks related to geopolitical conflict, armed conflict, such as the conflicts between Russia and Ukraine or Israel and Hamas and the possible expansion of conflict in the surrounding areas , including the impact of such conflicts on international trade, supplier delivery or increased freight costs, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to natural disasters and other unforeseen catastrophic events; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives; • risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons; • risks related to fluctuations in foreign currency exchange rates; • risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations; • risks related to our ability to execute on, and maintain the success of, our strategic and growth initiatives, including those outlined in our 2025 Always Forward Plan; • risks related to global 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 adverse public health developments; • risks related to cybersecurity threats and privacy or data security breaches; • risks related to the potential loss or disruption of our information systems; • risks related to the continued validity of our trademarks and our ability to protect our intellectual property; • risks associated with climate change and other corporate responsibility issues; • risks related to reputational harm to the Company, its officers, and directors; • risks related to actual or threatened litigation; and • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements, including any financial targets and estimates, whether as a result of new information, future events, or otherwise. As used herein, “Abercrombie & Fitch Co.,” “the Company,” “we,” “us,” “our,” and similar terms include Abercrombie & Fitch Co. and its subsidiaries, unless the context indicates otherwise. Abercrombie & Fitch Co. 20 2024 1Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • 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 May 4, 2024 and April 29, 2023. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income for the thirteen weeks ended May 4, 2024 and April 29, 2023. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of May 4, 2024, which includes (i) an analysis of financial condition as compared to February 3, 2024; (ii) an analysis of changes in cash flows for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023; and (iii) an analysis of liquidity, including availability under the Company’s ABL Facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 21 2024 1Q Form 10-Q Table of Contents OVERVIEW Business summary 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. The Company’s fiscal year ends on the Saturday closest to January 31. 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 Seasonality Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the Fall season due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for fiscal 2024 In June of Fiscal 2022, we announced our 2025 Always Forward Plan, which outlines our long-term strategy and goals, including growing shareholder value. The 2025 Always Forward Plan is anchored on our strategic growth principles, which are to: • Execute focused growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline The 2025 Always Forward Plan growth principles serve as a framework for the Company achieving sustainable and profitable growth and profitability in Fiscal 2024. Below are some additional details specific to Fiscal 2024 objectives within the 2025 Always Forward Plan: Execute focused growth plans by: • driving sales growth across regions and brands primarily through marketing and store investment. • using our playbooks globally to align the brands’ products, voices, and experiences with customers, both digitally and in-store; and • using testing and chase strategies to deliver compelling assortments and product collections across genders. Accelerate an enterprise-wide digital revolution to improve the customer and associate experience by: • continuing to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey; and • investing in digital and technology to improve experiences across key parts of the customer journey while delivering a consistent omnichannel experience. Operate with financial discipline by: • actively managing inventory levels and positioning Abercrombie brands and Hollister brands to chase inventory as appropriate throughout the year; and • funding our growth strategies while properly balancing investments, impacts of inflation and efficiency efforts. Abercrombie & Fitch Co. 22 2024 1Q Form 10-Q Table of Contents Current macroeconomic conditions and impact of inflation Macroeconomic conditions, including inflation, higher interest rates, the geopolitical landscape, political uncertainty including elections in several countries, foreign exchange rate fluctuations, and declines in consumer discretionary spending continue to negatively impact the global economy. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. The Company continues to experience pricing volatility with respect to cotton, raw materials and freight costs. While cotton and raw material costs have decreased from prior year-end levels, freight costs have recently been increasing. Continued inflationary pressures and pricing volatility could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins. Global events and supply chain disruptions As 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 the ongoing armed conflicts between Russia and Ukraine or Israel and Hamas, and conflict in the surrounding areas, which could adversely impact certain areas of the business. Starting in late Fiscal 2023, disruptions to ocean vessels in the Red Sea resulted in delayed deliveries to the EMEA region. Such disruptions have also increased freight costs, which may impact the Company through the remainder of Fiscal 2024. The Company has taken certain mitigating actions in response to these events, including increasing air freight usage where appropriate and prioritizing critical orders earlier to allow for longer lead times. Further mitigating actions may be needed, particularly if there is prolonged or escalating conflict in the Red Sea. Management continues to monitor global events and assess the potential impacts that these events and similar events may have on the business in future periods. Although management also develops and updates contingency plans to assist in mitigating potential impacts, it is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. Global store network optimization The Company has a goal of finding the right size, right location and right economics for 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 2024, the Company opened 1 new store, while closing 13 stores. As part of this focus, the Company has updated and increased its store investment plan to include approximately 60 new stores, while closing approximately 40 stores, during Fiscal 2024, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Pillar Two Model Rules In 2021, the Organization for Economic Cooperation and Development (“OECD”) released Pillar Two Global Anti-Base Erosion model rules (“Pillar Two Rules”), designed to ensure large corporations are taxed at a minimum rate of 15% in all countries of operation. Although the U.S. has not yet enacted legislation implementing Pillar Two Rules, other countries where the Company does business, including the U.K. and Germany, have enacted legislation implementing Pillar Two Rules which are effective from January 1, 2024. The implementation of the Pillar Two Rules in each jurisdiction in which it operates did not have a material impact on the Company’s effective tax rate. The Company will continue to evaluate the impact as additional jurisdictions implement legislation and provide further guidance. 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 2023 Form 10-K. Abercrombie & Fitch Co. 23 2024 1Q Form 10-Q Table of Contents Summary of results A summary of results for the thirteen weeks ended May 4, 2024 and April 29, 2023 was as follows: GAAP Non-GAAP (1) Thirteen Weeks Ended May 4, 2024 April 29, 2023 May 4, 2024 April 29, 2023 Net sales (in thousands) $ 1,020,730 $ 835,994 Change in net sales 22.1 % 2.9 % Comparable sales (2) 21 % 3 % Gross profit rate 66.4 % 61.0 % Operating income (in thousands) $ 129,849 $ 34,008 $ 129,849 $ 38,444 Operating income margin 12.7 % 4.1 % 12.7 % 4.6 % Net income attributable to A&F (in thousands) $ 113,850 $ 16,571 $ 113,850 $ 19,820 Net income per share attributable to A&F 2.14 0.32 2.14 0.39 (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 .” (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. Certain components of the Company’s Condensed Consolidated Balance Sheets as of May 4, 2024 and February 3, 2024 were as follows: (in thousands) May 4, 2024 February 3, 2024 Cash and equivalents $ 864,195 $ 900,884 Inventories 449,267 469,466 Gross long-term borrowings outstanding, carrying amount 213,906 223,214 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended May 4, 2024 and April 29, 2023 were as follows: (in thousands) May 4, 2024 April 29, 2023 Net cash provided by (used for) operating activities $ 95,010 $ (560) Net cash used for investing activities (38,886) (46,391) Net cash used for financing activities (92,951) (21,956) 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. Net sales Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. The Company’s net sales by reportable segment for the thirteen weeks ended May 4, 2024 and April 29, 2023 were as follows: Thirteen Weeks Ended (in thousands, except ratios) May 4, 2024 April 29, 2023 $ Change % Change Comparable Sales (1 ) By segment: Americas $ 820,121 $ 665,423 $ 154,698 23 % 21 % EMEA 164,778 138,106 26,672 19 23 APAC 35,831 32,465 3,366 10 22 Total $ 1,020,730 $ 835,994 $ 184,736 22 21 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. Abercrombie & Fitch Co. 24 2024 1Q Form 10-Q Table of Contents For the first quarter of Fiscal 2024, net sales increased 22%, as compared to the first quarter of Fiscal 2023, primarily due to broad-based net sales growth across segments, mainly driven by a higher AUR as a result of lower promotional activity. The year-over-year increase in net sales reflects a positive comparable sales of 21%, as compared to the first quarter of Fiscal 2023, with double-digit comparable sales growth in the Americas, EMEA and APAC segments. The Company’s net sales by brand for the thirteen weeks ended May 4, 2024 and April 29, 2023 were as follows: Thirteen Weeks Ended (in thousands, except ratios) May 4, 2024 April 29, 2023 $ Change % Change Comparable Sales (1) Abercrombie (2) $ 571,513 $ 436,044 $ 135,469 31 % 29 % Hollister (3) 449,217 399,950 49,267 12 13 Total $ 1,020,730 $ 835,994 $ 184,736 22 21 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. (2) Includes Abercrombie & Fitch and abercrombie kids. (3) Includes Hollister and Gilly Hicks. Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 343,273 33.6 % $ 326,200 39.0 % (540) For the first quarter of Fiscal 2024, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 540 basis points, as compared to the first quarter of Fiscal 2023. The year-over-year percentage decline was primarily attributable to lower cotton and raw material costs as well as increased average unit retail. Year-over-year decreases in the Americas and EMEA region were primarily driven by lower discounts and clearance selling. The APAC region also benefited from lower raw material costs, partially offset by the impact of changes in foreign currency. Abercrombie & Fitch Co. 25 2024 1Q Form 10-Q Table of Contents Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 677,457 66.4 % $ 509,794 61.0 % 540 Stores and distribution expense Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 371,686 36.4 % $ 336,049 40.2 % (380) For the first quarter of Fiscal 2024, stores and distribution expense, as a percentage of net sales decreased, as compared to the first quarter of Fiscal 2023. The decrease was primarily driven by expense leverage as a result of net sales growth, slightly offset with increases in distribution center and order fulfillment costs as compared to the first quarter of 2023. Marketing, general and administrative expense Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 177,880 17.4 % $ 142,631 17.1 % 30 For the first quarter of Fiscal 2024, marketing, general and administrative expense, as a percentage of net sales, increased 30 basis points, as compared to the first quarter of Fiscal 2023, primarily driven by an increase in marketing expense and investments in technology and people. Other operating income, net Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Other operating income, net $ 1,958 0.2 % $ 2,894 0.3 % (10) Operating income Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Operating income $ 129,849 12.7 % $ 34,008 4.1 % 860 Excluded items: Asset impairment charges (1) — — 4,436 0.5 (50) Adjusted non-GAAP operating income ⁽¹⁾ $ 129,849 12.7 $ 38,444 4.6 810 (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 26 2024 1Q Form 10-Q Table of Contents Interest (income) expense, net Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Interest expense $ 5,780 0.6 % $ 7,458 0.9 % (30) Interest income (10,803) (1.1) (4,015) (0.5) (60) Interest (income) expense, net $ (5,023) (0.5) $ 3,443 0.4 (90) For the first quarter of Fiscal 2024, interest (income) expense, net decreased $8.5 million, as compared to the first quarter of Fiscal 2023, as a result of lower borrowings due to the purchase of Senior Secured Notes as well as an increase in interest income due to the increase in balance and rates received on deposits and money market accounts. Income tax expense Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 19,794 14.7 % $ 12,718 41.6 % Excluded items: Tax effect of pre-tax excluded items (1) — 1,187 Adjusted non-GAAP income tax expense ⁽¹⁾ $ 19,794 14.7 $ 13,905 39.7 (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating income ” and “ NON-GAAP FINANCIAL MEASURES ” for details of pre-tax excluded items. Compared with the first quarter of Fiscal 2023, the change in the effective tax rates during the first quarter of Fiscal 2024 is due to higher levels of pre-tax income offset by a larger tax benefit on share based compensation. Refer to Note 9, “ INCOME TAXES .” Net income attributable to A&F Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands) % of Net sales % of Net sales BPS Change Net income attributable to A&F $ 113,850 11.2 % $ 16,571 2.0 % 920 Excluded items, net of tax (1) — — 3,249 0.4 (40) Adjusted non-GAAP net income attributable to A&F (2) $ 113,850 11.2 $ 19,820 2.4 880 (1) Excluded items presented above under “ Operating income ,” and “ Income tax expense ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 27 2024 1Q Form 10-Q Table of Contents Net income per share attributable to A&F Thirteen Weeks Ended May 4, 2024 April 29, 2023 $ Change Net income per diluted share attributable to A&F $ 2.14 $ 0.32 $ 1.82 Excluded items, net of tax (1) — 0.06 (0.06) Adjusted non-GAAP net income per diluted share attributable to A&F 2.14 0.39 1.75 Impact from changes in foreign currency exchange rates — — — Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) 2.14 0.39 1.75 (1) Excluded items presented above under “ Operating income ,” and “ Income tax expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. EBITDA and adjusted EBITDA Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Net income $ 115,078 11.3 % $ 17,847 2.1 % 920 Income tax expense 19,794 1.9 12,718 1.5 40 Interest (income) expense, net (5,023) (0.5) 3,443 0.4 (90) Depreciation and amortization 37,689 3.7 36,028 4.4 (70) EBITDA (1) $ 167,538 16.4 % $ 70,036 8.4 % 800 Excluded items: Asset impairment charges (1) — — 4,436 0.5 (50) Adjusted EBITDA (1) $ 167,538 16.4 % $ 74,472 8.9 % 750 (1) EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. EBITDA is defined as net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for asset impairment. Abercrombie & Fitch Co. 28 2024 1Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy and priorities are reviewed by A&F’s Board of Directors quarterly considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next twelve months. 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 or repurchase shares of its Common Stock. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “ Share repurchases and dividends .” Primary sources and uses of cash The Company’s business has two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. 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, data and technology leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. In addition, the Company continuously evaluates potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities may include, but are not limited to, purchasing outstanding Senior Secured Notes or share repurchases. 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 Part I, “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2023 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 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 May 4, 2024, the Company used $38.9 million towards capital expenditures. Total capital expenditures for Fiscal 2024 are expected to be approximately $170 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of May 4, 2024, the Company had cash and cash equivalents of $864.2 million and total liquidity of approximately $1.2 billion, compared with cash and cash equivalents of $900.9 million and total liquidity of approximately $1.2 billion at the beginning of Fiscal 2024. Share repurchases and dividends 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 May 4, 2024, the Company repurchased approximately 0.1 million shares of its common stock pursuant to this share repurchase authorization for approximately $15.0 million. The Company has $217 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. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ 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 share repurchase authorization. Abercrombie & Fitch Co. 29 2024 1Q Form 10-Q Table of Contents The Company’s dividend program is currently suspended in order to preserve liquidity and maintain financial flexibility. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. 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. Credit facility and Senior Secured Notes As of May 4, 2024, the Company had $213.9 million of gross borrowings outstanding under the 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. 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 May 4, 2024, 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 May 4, 2024 are as follows: (in thousands) May 4, 2024 Loan cap $ 325,648 Less: Outstanding stand-by letters of credit (430) Borrowing capacity 325,218 Less: Minimum excess availability (1) (32,565) Borrowing capacity available $ 292,653 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. 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 May 4, 2024, $249.9 million of the Company’s $864.2 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 May 4, 2024 and April 29, 2023: Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 909,685 $ 527,569 Net cash provided by (used for) operating activities 95,010 (560) Net cash used for investing activities (38,886) (46,391) 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, end of period $ 872,001 $ 456,664 Abercrombie & Fitch Co. 30 2024 1Q Form 10-Q Table of Contents Operating activities - During the year-to-date period ended May 4, 2024, net cash provided by operating activities included increased cash receipts as a result of the 22% year-over-year increase in net sales. 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 May 4, 2024, net cash used for investing activities was primarily used for capital expenditures of $38.9 million. Net cash used for investing activities for the year-to-date period ended April 29, 2023 was primarily used for capital expenditures of $46.4 million. Financing activities - During the year-to-date period ended May 4, 2024, net cash used for financing activities included $65 million related to shares of Common Stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards, the purchase of approximately 0.1 million shares of Common Stock with a market value of approximately $15.0 million and the purchase of $9.3 million of outstanding Senior Secured Notes at a premium of $0.1 million. 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. Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits, and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes in the Company’s contractual obligations since February 3, 2024, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2023 Form 10-K. 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. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2023 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2023. NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales 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 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 can be a useful metric as it can Abercrombie & Fitch Co. 31 2024 1Q Form 10-Q Table of Contents 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. Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicable: Financial measures (1) Excluded items Operating income Asset impairment charges Income tax expense (2) Tax effect of pre-tax excluded items Net income and net income per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (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. Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. Reconciliations 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 May 4, 2024 and April 29, 2023 were as follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Net sales May 4, 2024 April 29, 2023 % Change GAAP $ 1,020,730 $ 835,994 22 % Impact from changes in foreign currency exchange rates — (551) — Non-GAAP on a constant currency basis $ 1,020,730 $ 835,443 22 Gross profit, exclusive of depreciation and amortization expense May 4, 2024 April 29, 2023 BPS Change (1) GAAP $ 677,457 $ 509,794 540 Impact from changes in foreign currency exchange rates — 930 (10) Non-GAAP on a constant currency basis $ 677,457 $ 510,724 530 Operating income May 4, 2024 April 29, 2023 BPS Change (1) GAAP $ 129,849 $ 34,008 860 Excluded items (2) — (4,436) 50 Adjusted non-GAAP $ 129,849 $ 38,444 810 Impact from changes in foreign currency exchange rates — 463 (10) Adjusted non-GAAP on a constant currency basis $ 129,849 $ 38,907 800 Net income per share attributable to A&F May 4, 2024 April 29, 2023 $ Change GAAP $ 2.14 $ 0.32 $ 1.82 Excluded items, net of tax (2) — (0.06) 0.06 Adjusted non-GAAP $ 2.14 $ 0.39 $ 1.75 Impact from changes in foreign currency exchange rates — — — Adjusted non-GAAP on a constant currency basis $ 2.14 $ 0.39 $ 1.75 (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 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 32 2024 1Q Form 10-Q Table of Contents EBITDA and adjusted EBITDA The company provides EBITDA and Adjusted EBITDA as supplemental measures used by the Company's executive management to assess the Company's performance. We also believe these supplemental performance measures are meaningful information for investors and other interested parties to use in computing the Company's core financial performance over multiple periods and with other companies by excluding the impact of differences in tax jurisdictions, debt service levels and capital investment. Reconciliations of non-GAAP EBITDA and adjusted EBITDA to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended May 4, 2024 and April 29, 2023 were as follows: Thirteen Weeks Ended May 4, 2024 % of Net Sales April 29, 2023 % of Net Sales Net income $ 115,078 11.3 % $ 17,847 2.1 % Income tax expense 19,794 1.9 12,718 1.5 Interest (income) expense, net (5,023) (0.5) 3,443 0.4 Depreciation and amortization 37,689 3.7 36,028 4.4 EBITDA (1) $ 167,538 16.4 % $ 70,036 8.4 % Adjustments to EBITDA Asset impairment (1) — — 4,436 0.5 Adjusted EBITDA (1) $ 167,538 16.4 % $ 74,472 8.9 % (1) EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. EBITDA is defined as net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for asset impairment. Abercrombie & Fitch Co. 33 2024 1Q Form 10-Q Table of Contents