(EDGAR Online via COMTEX) -- 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 thereto included in this Quarterly Report on Form 10-Q in " I tem 1. F inancial
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," "should," "are confident," or the negative version of those 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 Annual Report on Fiscal 2021 Form 10-K for the fiscal year ended January 29, 2022 and otherwise in our reports and filings with the SEC, as well as the following:
risks and uncertainty related to the ongoing COVID-19 pandemic and any other adverse public health developments;
risks related to changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits;
risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs;
risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience;
risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory;
risks related to our ability to successfully invest in customer, digital and omnichannel initiatives;
risks related to our ability to execute on our global store network optimization initiative;
risks related to our international growth strategy;
risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems;
risks associated with climate change and other corporate responsibility issues; 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, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. 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 even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Abercrombie & Fitch Co. 19 2022 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 April 30, 2022 and May 1, 2021.
Results of Operations . An analysis of certain components of the Company's Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen weeks ended April 30, 2022 and May 1, 2021.
Liquidity and Capital Resources . A discussion of the Company's financial condition, changes in financial condition and liquidity as of April 30, 2022, which includes (i) an analysis of financial condition as compared to January 29, 2022; (ii) an analysis of changes in cash flows for the thirteen weeks ended April 30, 2022 as compared to the thirteen weeks ended May 1, 2021; and (iii) an analysis of liquidity, including availability under the Company's credit facility, the Company's share repurchase program, and outstanding debt and covenant compliance.
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 E stimates . 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. 20 2022 1Q Form 10-Q
Table of Contents OVERVIEW
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 digital channels and Company-owned stores, as well as through various third-party arrangements. The Company's two brand-based operating segments are Hollister, which includes the Company's Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company's Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia.
The Company's 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 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53
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, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively.
CURRENT TRENDS AND OUTLOOK
Focus areas for Fiscal 2022
The Company remains committed to, and confident in, its long-term vision of being and becoming a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress against initiatives that support this vision.
The following focus areas for Fiscal 2022 serve as a framework for the Company's achievement of sustainable growth and long-term operating margin expansion:
Supply chain disruptions, inflation and changing prices
The Company has continued to see global supply chain constraints impacting our business and operations. The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales. During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures in Vietnam. This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and into the first quarter of Fiscal 2022. In addition, the Company has experienced and expects to continue to experience inflationary pressures affecting the Company's freight, transit, and other costs, and such rates are likely to remain elevated throughout Fiscal 2022.
In order to mitigate supply chain constraints and higher freight rates, the Company has taken and expects to continue to take actions to manage the impact, including scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where possible. It is possible that the Company's responses to factory closures, transportation delays, or freight rates will not be adequate to mitigate the impact, and that these events could continue to adversely affect the Company's business and results of operations.
The Company has also experienced inflationary pressures with respect to labor, cotton and other raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to the customer through higher ticket prices. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived unfavorable conditions, consumers may reallocate available discretionary
Abercrombie & Fitch Co. 21 2022 1Q Form 10-Q
Table of Contents
Global Store Network Optimization
As part of its ongoing global store network optimization initiative, the Company has a stated goal of repositioning from larger format locations, such as, tourist dependent and flagship locations, to smaller, omni-enabled stores that cater to local customers. The Company continues to focus on aligning store square footage with digital penetration, and during the first quarter of Fiscal 2022, the Company opened 4 new format stores, while closing 5 legacy stores. As part of this focus, the Company plans to open 60 new stores, while closing 30 stores, during Fiscal 2022, pending negotiations with our landlord partners.
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.Additional details related to store count and gross square footage follow:
Hollister (1) Abercrombie (2) Total Company (3) U.S. International U.S. International U.S. International Total Number of stores: January 29, 2022 351 154 173 51 524 205 729 New 1 2 1 - 2 2 4 Permanently closed - - (3) (2) (3) (2) (5) April 30, 2022 352 156 171 49 523 205 728 Gross square footage (in thousands): April 30, 2022 2,318 1,218 1,146 347 3,464 1,565 5,029
(1)Hollister includes the Company's Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 8 international franchise stores as of April 30, 2022, and January 29, 2022. Excludes 13 Company-operated temporary stores as of April 30, 2022 and 14 Company-operated temporary stores as of January 29, 2022.
(2)Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 14 international franchise stores as of April 30, 2022 and January 29, 2022. Excludes 5 Company-operated temporary stores as of each of April 30, 2022 and January 29, 2022.
(3)This store count excludes one international third-party operated multi-brand outlet store as of each of April 30, 2022, and January 29, 2022.
There continues to be uncertainty surrounding ongoing COVID-19 pandemic and its impact on the global economy, including government-mandated restrictions, supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. As of April 30, 2022, all U.S. stores were fully open for in-store service; however, temporary store closures have been mandated in certain parts of the APAC region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company's costs and revenues.
The Company's digital operations across brands have continued to serve the Company's customers during periods of temporary store closures. In response to elevated digital demand during this period, the Company leveraged its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority of U.S. locations, and by utilizing ship-from-store capabilities, including same-day delivery across its entire U.S. store fleet. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current level of digital penetration will continue when stores operate at full capacity
Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. The extent of future impacts of COVID-19 on the Company's business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, and the availability and acceptance of effective vaccines, boosters or medical treatments.
Abercrombie & Fitch Co. 22 2022 1Q Form 10-Q
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We are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business. As a result, in addition to the events listed within MD&A, management continues to monitor certain other global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company's preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations.
For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading "FORWARD-LOOKING STATEMENTS AND RISK FACTORS" in "ITEM 1A.
Summary of results
A summary of results for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows:
GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating (loss) income margin and per share amounts) April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021 Thirteen Weeks Ended Net sales $ 812,762 $ 781,405 Change in net sales 4.0 % 61.0 % Gross profit rate 55.3 % 63.4 % Operating (loss) income $ (9,726) $ 57,433 $ (6,304) $ 60,097 Operating (loss) income margin (1.2) % 7.3 % (0.8) % 7.7 % Net (loss) income attributable to A&F $ (16,469) $ 41,768 $ (13,965) $ 43,983 Net (loss) income attributable to A&F per dilutive share (0.32) 0.64 (0.27) 0.67
(1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the Non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under " NON-GAAP FINANCIAL MEASURES ."
Certain components of the Company's Condensed Consolidated Balance Sheets as of April 30, 2022 and January 29, 2022 were as follows:
(in thousands) April 30, 2022 January 29, 2022 Cash and equivalents $ 468,378 $ 823,139 Gross long-term borrowings outstanding, carrying amount 307,730 307,730 Inventories 562,510 525,864
Certain components of the Company's Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended April 30, 2022 and May 1, 2021 were as follows:
(in thousands) April 30, 2022 May 1, 2021 Net cash used for operating activities $ (217,787) $ (131,350) Net cash used for investing activities (18,541) (14,404) Net cash used for financing activities (116,945) (53,191)
Abercrombie & Fitch Co. 23 2022 1Q Form 10-Q
Table of Contents 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.
For the first quarter of Fiscal 2022, net sales increased 4% as compared to the first quarter of Fiscal 2021, primarily due to an increase in stores sales, as well as an increase average unit retail driven by lower promotions and markdowns, partially offset by the adverse impact from changes in foreign currency exchange rates of approximately $9 million.
The Company's net sales by operating segment for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows:
Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 $ Change % Change Hollister (1) $ 428,834 $ 442,408 $ (13,574) (3)% Abercrombie (2) 383,928 338,997 44,931 13% Total $ 812,762 $ 781,405 $ 31,357 4%
(1) Includes Hollister, Gilly Hicks and Social Tourist brands.
(2) Includes Abercrombie & Fitch and abercrombie kids brands.
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company's net sales by geographic area for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows:
Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 $ Change % Change U.S. $ 585,106 $ 553,846 $ 31,260 6% EMEA 163,969 159,002 4,967 3% APAC 29,897 46,046 (16,149) (35)% Other 33,790 22,511 11,279 50% International $ 227,656 $ 227,559 $ 97 0% Total $ 812,762 $ 781,405 $ 31,357 4%
Cost of sales, exclusive of depreciation and amortization
Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation
For the first quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 810 basis points as compared to the first quarter of Fiscal 2021. The year-over-year increase was driven by approximately $80 million higher average unit cost from freight inflation partially offset by higher average unit retail on lower promotions and higher ticket prices.
Abercrombie & Fitch Co. 24 2022 1Q Form 10-Q
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Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and
Stores and distribution expense Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change
For the first quarter of Fiscal 2022, stores and distribution expense increased 7% as compared to the first quarter of Fiscal 2021. Approximately half of the $22 million increase was due to the lapping of COVID19-related rent abatements and payroll credits last year, with the remaining primarily due to an increase in marketing and digital fulfillment expenses. These increases were partially offset by a reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations.
Marketing, general and administrative expense . . .
Jun 08, 2022
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