NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 “Abercrombie & Fitch” or the “Company”), is a specialty retailer that operates stores and direct-to-consumer operations. Through these channels, the Company sells a broad array of products, including: casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters and outerwear; personal care products; and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids, and Hollister brands. The Company operates stores in North America, Europe, Asia and the Middle East and direct-to-consumer operations in North America, Europe and Asia that serve its customers throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.
The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. ("MAF"), each of which meets the definition of a variable interest entity (“VIE”). 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 MAF's portion of net income presented as net income attributable to noncontrolling interests ("NCI") in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF's portion of equity presented as NCI in the Consolidated Balance Sheets.
The fifty-two week periods ended
January 30, 2016
and January 31, 2015 include the correction of certain immaterial errors relating to prior periods. Amounts recorded out-of-period for the fifty-two week period ended January 30, 2016 included a reduction to pre-tax income of
$2.0 million
and an unrelated tax benefit of
$3.2 million
. The effect of these corrections increased net income attributable to A&F for the fifty-two weeks ended January 30, 2016 by
$1.6 million
. Amounts recorded out-of-period for the fifty-two week period ended January 31, 2015 included a reduction to pre-tax income of
$2.9 million
and an unrelated tax benefit of
$0.4 million
. The effect of these corrections decreased net income attributable to A&F for the fifty-two weeks ended January 31, 2015 by
$2.2 million
. The Company does not believe these corrections were material to any current or prior interim or annual periods that were affected.
Fiscal year
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal
2015
” represent the fifty-two week fiscal year ended
January 30, 2016
; to “Fiscal
2014
” represent the fifty-two week fiscal year ended
January 31, 2015
; and to “Fiscal
2013
” represent the fifty-two week fiscal year ended
February 1, 2014
. In addition, all references herein to “Fiscal
2016
” represent the fifty-two week fiscal year that will end on
January 28, 2017
.
Use of estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, 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.
Cash and equivalents
Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, with original maturities of less than
three months
.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted cash
Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was
$20.6 million
and
$14.8 million
on
January 30, 2016
and
January 31, 2015
, respectively. Restricted cash includes various cash deposits with international banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements.
Receivables
Receivables primarily include credit card receivables, construction allowances, value added tax (“VAT”) receivables and other tax credits or refunds.
As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold.
Inventories, net
Inventories are valued at the lower of cost or market on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost or market adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Income (Loss). The lower of cost or market reserve is based on an analysis of historical experience, composition and aging of the inventory and management's judgment regarding future demand and market conditions.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each period that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. See Note 4, “
INVENTORIES, NET,
” for further discussion.
Other current assets
Other current assets include prepaid rent, current store supplies, derivative contracts and other prepaids.
Property and equipment
Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis using the following service lives:
|
|
|
|
Category of Property and Equipment
|
|
Service Lives
|
Information technology
|
|
3 - 7 years
|
Furnitures, fixtures and equipment
|
|
3 - 15 years
|
Leasehold improvements
|
|
3 - 15 years
|
Other property and equipment
|
|
3 - 20 years
|
Buildings
|
|
30 years
|
Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized.
Long-lived assets, primarily comprised of leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, other than temporary adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management's expectations for future operations and projected cash flows. The key assumptions used in the Company's undiscounted future cash flow models include sales, gross margin and, to a lesser extent, operating expenses.
An impairment loss would be recognized when these undiscounted future cash flows are less than carrying amount of the asset group. In the circumstance of impairment, the loss would be measured as the excess of the carrying amount of the asset group over its fair value. The key assumptions used in estimating the fair value of impaired assets may include projected cash flows and discount rate. See Note 5, “
PROPERTY AND EQUIPMENT, NET,
” for further discussion.
The Company expenses all internal-use software costs incurred in the preliminary project stage and capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding
seven
years.
Income taxes
Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company's income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company's operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited to: changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, the settlement of tax audits and changes in tax legislation and/or regulations.
At the beginning of the fourth quarter of Fiscal 2015, the Company restructured its international operations to support its omnichannel initiatives. As a result of the restructuring, the Company no longer believes that future net income as of the date of the restructuring will be indefinitely reinvested and as such is providing a deferred U.S. income tax liability for the additional taxes due upon a future repatriation.
See Note 10, “
INCOME TAXES,
” for a discussion regarding the Company’s policies for uncertain tax positions.
Foreign currency translation and transactions
The functional currencies of the Company’s foreign subsidiaries are generally the respective local currencies in the countries in which they operate. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies are translated into U.S. Dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in the results of operations; whereas, translation adjustments and inter-company loans of a long-term investment nature are reported as an element of Other Comprehensive Income (Loss). Foreign currency transactions resulted in a loss of
$1.5 million
for Fiscal
2015
, a loss of
$2.0 million
for Fiscal
2014
and a gain of
$2.9 million
for Fiscal
2013
.
Derivative instruments
See Note 14, “
DERIVATIVE INSTRUMENTS.
”
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stockholders’ equity
At
January 30, 2016
and
January 31, 2015
, there were
150.0 million
shares of A&F’s Class A Common Stock,
$0.01
par value, authorized, of which
67.3 million
and
69.4 million
were outstanding at
January 30, 2016
and
January 31, 2015
, respectively, and
106.4 million
shares of Class B Common Stock,
$0.01
par value, authorized, of which
none
were outstanding at
January 30, 2016
and
January 31, 2015
.
Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to
one
vote per share while holders of Class B Common Stock are entitled to
three
votes per share on all matters submitted to a vote of stockholders.
Revenue recognition
The Company recognizes store sales at the time the customer takes possession of the merchandise. Direct-to-consumer sales are recorded based on an estimated date for customer receipt of merchandise, which is based on shipping terms and historical delivery transit times. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as net sales and the related direct shipping and handling costs are classified as stores and distribution expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss). Sales are recorded net of an allowance for estimated returns, associate discounts, and promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience. The sales return reserve was
$8.9 million
,
$9.5 million
and
$8.0 million
at
January 30, 2016
,
January 31, 2015
and
February 1, 2014
, respectively.
The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. Gift cards sold to customers do not expire or lose value over periods of inactivity. The liability remains on the Company’s books until the Company recognizes income from gift cards. Income from gift cards is recognized at the earlier of redemption by the customer (recognized as net sales) or when the Company determines that the likelihood of redemption is remote, referred to as gift card breakage (recognized as other operating income). The Company determines the probability of the gift card being redeemed to be remote based on historical redemption patterns. The gift card liability was
$36.4 million
and
$36.9 million
at
January 30, 2016
and
January 31, 2015
, respectively.
The Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates. The Company recognized in other operating income gift card breakage of
$4.7 million
,
$5.8 million
and
$8.8 million
for
Fiscal 2015
,
Fiscal 2014
and
Fiscal 2013
, respectively.
The Company does not include tax amounts collected as part of the sales transaction in its net sales results.
Cost of sales, exclusive of depreciation and amortization
Cost of sales, exclusive of depreciation and amortization, is primarily comprised of cost incurred to ready inventory for sale, including product costs, freight, and import cost, as well as provisions for reserves for shrink and lower of cost or market. Gains and losses associated with foreign currency exchange contracts related to hedging of inventory purchases are also recognized in cost of sales, exclusive of depreciation and amortization when the inventory being hedged is sold.
Stores and distribution expense
Stores and distribution expense includes store payroll, store management, rent, utilities and other landlord expenses, depreciation and amortization, repairs and maintenance and other store support functions, as well as direct-to-consumer expense and distribution center (“DC”) expense.
Shipping and handling costs, including costs incurred to store, move and prepare merchandise for shipment, and costs incurred to physically move merchandise to customers, associated with direct-to-consumer operations, were
$115.0 million
,
$108.1 million
and
$93.4 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively. Handling costs, including costs incurred to store, move and prepare merchandise for shipment to stores, were
$44.5 million
,
$52.2 million
and
$53.9 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively. These amounts are recorded in stores and distribution expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss).
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Costs incurred to physically move merchandise to stores is recorded in cost of sales, exclusive of depreciation and amortization in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss).
Marketing, general & administrative expense
Marketing, general and administrative expense includes: photography and social media; store marketing; home office compensation, except for those departments included in stores and distribution expense; information technology; outside services such as legal and consulting; relocation; recruiting; samples; and travel expenses.
Restructuring charge
Restructuring charge consists of exit costs and other costs associated with the reorganization of the Company's operations, including employee termination costs, lease contract termination costs, impairment of assets, and any other qualifying exit costs. Costs associated with exit or disposal activities are recorded when the liability is incurred or when such costs are deemed probable and estimable and represent the Company's best estimates.
Other operating income, net
Other operating income, net included income of
$2.2 million
,
$10.2 million
and
$9.0 million
related to insurance recoveries for Fiscal
2015
, Fiscal
2014
and
Fiscal 2013
, respectively; and income of
$4.7 million
,
$5.8 million
and
$8.8 million
for Fiscal
2015
, Fiscal
2014
and
Fiscal 2013
, respectively, related to gift card balances whose likelihood of redemption has been determined to be remote.
Advertising costs
Advertising costs are comprised of in-store photography, e-mail distribution and other digital direct advertising and other media advertising and are reported on the Consolidated Statements of Operations and Comprehensive Income (Loss). Advertising costs related specifically to direct-to-consumer operations are expensed as incurred as a component of stores and distribution expense. The production of in-store photography and signage are expensed when the marketing campaign commences as a component of marketing, general and administrative expense. All other advertising costs are expensed as incurred as a component of marketing, general and administrative expense. The Company recognized
$80.7 million
,
$84.6 million
and
$68.1 million
in advertising expense in
Fiscal 2015
,
Fiscal 2014
and
Fiscal 2013
, respectively.
Leased facilities
The Company leases property for its stores under operating leases. Lease agreements may contain construction allowances, rent escalation clauses and/or contingent rent provisions.
Annual store rent is comprised of a fixed minimum amount and/or contingent rent based on a percentage of sales. For construction allowances, the Company records a deferred lease credit on the Consolidated Balance Sheets and amortizes the deferred lease credit as a reduction of rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) over the term of the lease. For scheduled rent escalation clauses during the lease term, the Company records minimum rental expense on a straight-line basis over the term of the lease on the Consolidated Statements of Operations and Comprehensive Income (Loss). The difference between rent expense and the amounts paid under the lease, less amounts attributable to the repayment of construction allowances recorded as deferred rent, is included in accrued expenses and other liabilities on the Consolidated Balance Sheets. The term over which the Company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on the date of initial possession, which is generally when the Company enters the space and begins construction.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheets, and the corresponding rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) on a ratable basis over the measurement period when it is determined that achieving the specified levels during the fiscal year is probable. In addition, most leases require payment of real estate taxes, insurance and certain common area maintenance costs in addition to future minimum lease payments.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of rent expense follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2015
|
|
2014
|
|
2013
|
Store rent:
|
|
|
|
|
|
Fixed minimum
(1)
|
$
|
404,836
|
|
|
$
|
432,794
|
|
|
$
|
464,937
|
|
Contingent
|
10,161
|
|
|
8,886
|
|
|
8,624
|
|
Deferred lease credits amortization
|
(28,619
|
)
|
|
(38,437
|
)
|
|
(45,899
|
)
|
Total store rent expense
|
386,378
|
|
|
403,243
|
|
|
427,662
|
|
Buildings, equipment and other
|
3,849
|
|
|
4,619
|
|
|
4,987
|
|
Total rent expense
|
$
|
390,227
|
|
|
$
|
407,862
|
|
|
$
|
432,649
|
|
(1)
Includes lease termination fees of
$3.3 million
,
$12.4 million
and
$39.2 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively. Fiscal
2015
includes a benefit of
$1.6 million
related to better than expected lease exit terms associated with the closure of the Gilly Hicks stand-alone stores. Fiscal
2014
and Fiscal
2013
include lease termination fees of
$6.8 million
and
$39.1 million
, respectively, related to the Gilly Hicks restructuring.
At
January 30, 2016
, the Company was committed to non-cancelable leases with remaining terms of
one
to
15
years. Excluded from the obligations below are portions of lease terms that are currently cancelable at the Company's discretion without condition. While included in the obligations below, in many instances the Company has options to terminate certain leases if stated sales volume levels are not met or the Company ceases operations in a given country, which may be subject to lease termination policies. A summary of operating lease commitments, including leasehold financing obligations, under non-cancelable leases follows:
|
|
|
|
|
(in thousands)
|
|
Fiscal 2016
|
$
|
388,501
|
|
Fiscal 2017
|
$
|
327,244
|
|
Fiscal 2018
|
$
|
240,877
|
|
Fiscal 2019
|
$
|
193,747
|
|
Fiscal 2020
|
$
|
155,732
|
|
Thereafter
|
$
|
423,303
|
|
Leasehold financing obligations
In certain lease arrangements, the Company is involved in the construction of a building and is deemed to be the owner of the construction project. In those instances, the Company records an asset for the amount of the total project costs, including the portion funded by the landlord, and an amount related to the value attributed to the pre-existing leased building in property and equipment, net, and a corresponding financing obligation in leasehold financing obligations, on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company allocates a portion of its rent obligation to the assets which are owned for accounting purposes as a reduction of the financing obligation and interest expense. As of
January 30, 2016
and
January 31, 2015
, the Company had
$47.4 million
and
$50.5 million
, respectively, of long-term liabilities related to leasehold financing obligations. Total interest expense related to landlord financing obligations was
$5.3 million
,
$6.2 million
and
$6.6 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively.
Store pre-opening expenses
Pre-opening expenses related to new store openings are expensed as incurred and are reflected as a component of "stores and distribution expense."
Design and development costs
Costs to design and develop the Company’s merchandise are expensed as incurred and are reflected as a component of “marketing, general and administrative expense.”
Net income per share
Net income per basic and diluted share is computed based on the weighted-average number of outstanding shares of common stock.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents weighted-average shares outstanding and anti-dilutive shares:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2015
|
|
2014
|
|
2013
|
Shares of common stock issued
|
103,300
|
|
|
103,300
|
|
|
103,300
|
|
Weighted-average treasury shares
|
(34,420
|
)
|
|
(31,515
|
)
|
|
(26,143
|
)
|
Weighted-average — basic shares
|
68,880
|
|
|
71,785
|
|
|
77,157
|
|
Dilutive effect of share-based compensation awards
|
537
|
|
|
1,152
|
|
|
1,509
|
|
Weighted-average — diluted shares
|
69,417
|
|
|
72,937
|
|
|
78,666
|
|
Anti-dilutive shares
(1)
|
8,967
|
|
|
6,144
|
|
|
4,630
|
|
|
|
(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.
|
Share-based compensation
See Note 13, “
SHARE-BASED COMPENSATION
.”
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent accounting pronouncements
The following table provides a brief description of recent accounting pronouncements that could affect the Company's financial statements:
|
|
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effective Date
|
|
Effect on the Financial Statements or Other Significant Matters
|
Standards adopted
|
ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
|
|
This standard amends ASC 835,
Interest—Imputation of Interest.
The amendment provides guidance on the financial statement presentation of debt issuance costs as a direct reduction of a liability when associated with a liability.
|
|
February 1, 2015
|
|
The adoption of this guidance impacted the Company's consolidated financial statements by approximately $0.6 million.
|
ASU 2015-15,
Simplifying the Presentation of Debt Issuance Costs
|
|
This standard amends ASC 835,
Interest—Imputation of Interest.
The amendment provides guidance on the financial statement presentation of debt issuance costs associated with line-of-credit arrangements as an asset regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
|
|
August 2, 2015
|
|
The adoption of this guidance did not have any impact on the Company's consolidated financial statements.
|
ASU 2015-17
, Income Taxes: Balance Sheet Classification of Deferred Taxes
|
|
This standard requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position.
|
|
November 1, 2015
|
|
The adoption of this standard resulted in the prospective reclassification of all current deferred tax assets and liabilities to noncurrent in the Company's consolidated balance sheet.
|
Standards not yet adopted
|
ASU 2014-09,
Revenue from Contracts with Customers
|
|
This standard supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)." The new ASC guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
|
|
February 4, 2018
|
|
The Company is currently evaluating the potential impact of this standard.
|
ASU 2014-15
, Presentation of Financial Statements—Going Concern
|
|
This standard requires, for each annual and interim reporting period, an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern.
|
|
January 30, 2016*
|
|
The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.
|
ASU 2015-11,
Simplifying the Measurement of Inventory
|
|
This standard amends ASC 330,
Inventory
. This amendment applies to inventory measured using first-in, first-out (FIFO) or average cost. Under this amendment, inventory should be measured at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
|
|
January 29, 2017*
|
|
The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.
|
ASU 2016-02,
Leases
|
|
This standard supersedes the leasing requirements in "Leases (Topic 840)." The new ASC guidance requires an entity to recognize lease assets and lease liabilities, classified as operating leases, on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.
|
|
Febuary 4, 2019*
|
|
The Company is currently evaluating the potential impact of this standard.
|
* Early adoption is permitted.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. 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 three levels of the hierarchy and the distribution within it of the Company’s assets and liabilities, measured at fair value on a recurring basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of January 30, 2016
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
311,349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
311,349
|
|
Derivative financial instruments
|
—
|
|
|
4,166
|
|
|
—
|
|
|
4,166
|
|
Total assets measured at fair value
|
$
|
311,349
|
|
|
$
|
4,166
|
|
|
$
|
—
|
|
|
$
|
315,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of January 31, 2015
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
122,047
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
122,047
|
|
Derivative financial instruments
|
—
|
|
|
10,293
|
|
|
—
|
|
|
10,293
|
|
Total assets measured at fair value
|
$
|
122,047
|
|
|
$
|
10,293
|
|
|
$
|
—
|
|
|
$
|
132,340
|
|
The level 2 assets and liabilities consist of derivative financial instruments, primarily forward foreign currency exchange contracts. The fair value of forward foreign currency exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Disclosures of Fair Value of Other Assets and Liabilities:
The Company’s borrowings under the Company's credit facilities are carried at historical cost in the accompanying Consolidated Balance Sheets. For disclosure purposes, the Company estimated the fair value of borrowings outstanding based on market rates for similar types of debt. The inputs used to value the borrowings outstanding are considered to be Level 2 instruments.
The carrying amount and fair value of the Company's term loan facility were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Gross borrowings outstanding, carrying amount
|
$
|
293,250
|
|
|
$
|
299,250
|
|
Gross borrowings outstanding, fair value
|
$
|
284,453
|
|
|
$
|
295,135
|
|
No borrowings were outstanding under the Company's asset-based revolving credit facility as of
January 30, 2016
and
January 31, 2015
. See Note 11, "
BORROWINGS,
" for further discussion of the Company's credit facilities.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. INVENTORIES, NET
Inventories, net consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Inventories
|
$
|
466,918
|
|
|
$
|
484,865
|
|
Less: Lower of cost or market reserve
|
(19,616
|
)
|
|
(12,707
|
)
|
Less: Shrink reserve
|
(10,601
|
)
|
|
(11,364
|
)
|
Inventories, net
|
$
|
436,701
|
|
|
$
|
460,794
|
|
The inventory balance, net of reserves, included inventory in transit from vendors of
$71.7 million
and
$56.1 million
at
January 30, 2016
and
January 31, 2015
, respectively. Inventory in transit is considered to be merchandise owned by the Company that has not yet been received at a Company distribution center.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Land
|
$
|
37,451
|
|
|
$
|
37,473
|
|
Buildings
|
287,081
|
|
|
286,820
|
|
Furniture, fixtures and equipment
|
682,013
|
|
|
653,929
|
|
Information technology
|
479,269
|
|
|
427,879
|
|
Leasehold improvements
|
1,283,613
|
|
|
1,338,206
|
|
Construction in progress
|
19,875
|
|
|
49,836
|
|
Other
|
3,135
|
|
|
3,107
|
|
Total
|
$
|
2,792,437
|
|
|
$
|
2,797,250
|
|
Less: Accumulated depreciation and amortization
|
(1,898,259
|
)
|
|
(1,830,249
|
)
|
Property and equipment, net
|
$
|
894,178
|
|
|
$
|
967,001
|
|
Long-lived assets, primarily comprised of property and equipment, are tested for impairment periodically or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and undiscounted projected cash flows.
Fair value of the Company's store-related assets is determined at the individual store level, primarily using a discounted cash flow model that utilizes Level 3 inputs. The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales, gross margin performance and operating expenses. In instances where the discounted cash flow analysis indicates a negative value at the store level, the market exit price based on historical experience, and other comparable market data where applicable, is used to determine the fair value by asset type.
In Fiscal 2015, the Company incurred non-cash asset impairment charges of
$18.2 million
as it was determined that the carrying value of certain assets would not be recoverable and exceeded fair value. The asset impairment charges primarily related to the Company's Abercrombie & Fitch flagship store in Hong Kong.
In Fiscal 2014, the Company incurred non-cash asset impairment charges of
$45.0 million
, excluding impairment charges incurred in connection with the Gilly Hicks restructuring, as it was determined that the carrying value of certain assets would not be recoverable and exceeded fair value. The asset impairment charges primarily related to the Company's Abercrombie & Fitch flagship store locations in Tokyo, Japan and Seoul, Korea, as well as
nine
abercrombie kids stores and
nine
Hollister stores. Additionally, in connection with the Company's plan to sell its corporate aircraft, the asset was classified as available-for-sale and the Company incurred charges of approximately
$11.3 million
to record the expected loss on the disposal of the asset. The fair value of the Company's corporate aircraft was determined using a market approach utilizing level 2 inputs.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In Fiscal 2013, the Company incurred non-cash asset impairment charges of
$46.7 million
, excluding impairment charges incurred in connection with the Gilly Hicks restructuring, as a result of the impact of sales trends on the profitability of a number of stores identified in the third quarter of Fiscal 2013 as well as fiscal year-end review of store-related long-lived assets. The non-cash asset impairment charges primarily related to
23
Abercrombie & Fitch stores,
four
abercrombie kids stores, and
70
Hollister stores. In addition, the Company incurred charges of
$37.9 million
related to the Gilly Hicks restructuring.
The Company had
$37.3 million
and
$40.1 million
of construction project assets in property and equipment, net at
January 30, 2016
and
January 31, 2015
, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.
6. RABBI TRUST ASSETS
Investments of Rabbi Trust assets consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Rabbi Trust assets:
|
|
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
96,567
|
|
|
$
|
93,424
|
|
Money market funds
|
23
|
|
|
24
|
|
Total Rabbi Trust assets
|
$
|
96,590
|
|
|
$
|
93,448
|
|
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of
$3.1 million
,
$3.2 million
and
$2.6 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively, recorded in interest expense, net on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Rabbi Trust assets are included in other assets on the Consolidated Balance Sheets and are restricted in their use as noted above.
7. OTHER ASSETS
Other assets consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Rabbi Trust
|
$
|
96,590
|
|
|
$
|
93,448
|
|
Deferred tax assets
|
89,677
|
|
|
96,999
|
|
Long-term deposits
|
64,098
|
|
|
64,415
|
|
Intellectual property
|
28,057
|
|
|
27,943
|
|
Long-term supplies
|
25,475
|
|
|
31,565
|
|
Restricted cash
|
20,581
|
|
|
14,835
|
|
Prepaid income tax on intercompany items
|
7,344
|
|
|
9,968
|
|
Other
|
28,059
|
|
|
34,021
|
|
Other assets
|
$
|
359,881
|
|
|
$
|
373,194
|
|
Long-term supplies include, but are not limited to, hangers, frames, sign holders, security tags, back-room supplies and construction materials. Intellectual property primarily includes trademark assets associated with the Company's international operations, consisting of finite-lived and indefinite-lived intangible assets of approximately $
14.4 million
and
$13.7 million
, respectively, as of
January 30, 2016
, and finite-lived and indefinite-lived intangible assets of approximately
$15.3 million
and
$12.6 million
, respectively, as of
January 31, 2015
. The Company's finite-lived intangible assets are amortized over a useful life of
10
to
20
years. Restricted cash includes various cash deposits with international banks that are used as collateral for customary non-debt
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
banking commitments and deposits into trust accounts to conform to standard insurance security requirements. Other includes prepaid leases and various other assets.
8. ACCRUED EXPENSES
Accrued expenses consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Accrued payroll and related costs
|
$
|
60,464
|
|
|
$
|
56,384
|
|
Gift card liability
|
36,384
|
|
|
36,936
|
|
Accrued taxes
|
37,203
|
|
|
34,629
|
|
Construction in progress
|
43,129
|
|
|
30,661
|
|
Accrued rent
|
24,739
|
|
|
25,607
|
|
Other
|
119,318
|
|
|
98,519
|
|
Accrued expenses
|
$
|
321,237
|
|
|
$
|
282,736
|
|
Accrued payroll and related costs include salaries, incentive compensation, benefits, withholdings and other payroll related costs. Other accrued expenses include expenses incurred but not yet paid related to outside services associated with store and home office operations.
9. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective terms of the related leases, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
|
January 31, 2015
|
Deferred lease credits
|
$
|
472,279
|
|
|
$
|
490,452
|
|
Amortized deferred lease credits
|
(359,720
|
)
|
|
(357,430
|
)
|
Total deferred lease credits, net
|
112,559
|
|
|
133,022
|
|
Less: short-term portion of deferred lease credits
|
(23,303
|
)
|
|
(26,629
|
)
|
Long-term portion of deferred lease credits
|
$
|
89,256
|
|
|
$
|
106,393
|
|
10. INCOME TAXES
Income before taxes was comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
Domestic
|
$
|
8,412
|
|
|
$
|
100,115
|
|
|
$
|
37,325
|
|
Foreign
|
46,178
|
|
|
(961
|
)
|
|
35,952
|
|
Total
|
$
|
54,590
|
|
|
$
|
99,154
|
|
|
$
|
73,277
|
|
Domestic income above includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties, including those related to international direct-to-consumer operations and interest through October 31, 2015.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for tax expense consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(3,124
|
)
|
|
$
|
21,287
|
|
|
$
|
52,579
|
|
State
|
(434
|
)
|
|
1,944
|
|
|
(4,988
|
)
|
Foreign
|
12,120
|
|
|
28,614
|
|
|
17,851
|
|
|
8,562
|
|
|
51,845
|
|
|
65,442
|
|
Deferred:
|
|
|
|
|
|
Federal
|
9,224
|
|
|
8,971
|
|
|
(36,732
|
)
|
State
|
3,297
|
|
|
1,783
|
|
|
(4,606
|
)
|
Foreign
|
(5,052
|
)
|
|
(15,266
|
)
|
|
(5,455
|
)
|
|
7,469
|
|
|
(4,512
|
)
|
|
(46,793
|
)
|
Total provision
|
$
|
16,031
|
|
|
$
|
47,333
|
|
|
$
|
18,649
|
|
Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
U.S. Federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income tax, net of U.S. federal income tax effect
|
4.6
|
|
|
4.3
|
|
|
(4.1
|
)
|
Foreign taxation of non-U.S. operations
|
(10.2
|
)
|
|
5.4
|
|
|
2.0
|
|
U.S. taxation of non-U.S. operations
|
20.0
|
|
|
—
|
|
|
—
|
|
Net change in valuation allowances
|
(8.7
|
)
|
|
6.6
|
|
|
0.1
|
|
Audit and other adjustments to prior years' accruals
|
(8.7
|
)
|
|
(1.3
|
)
|
|
(5.6
|
)
|
Statutory tax rate and law changes
|
4.2
|
|
|
0.2
|
|
|
—
|
|
Permanent items
|
(4.6
|
)
|
|
(1.1
|
)
|
|
—
|
|
Credit items
|
(2.3
|
)
|
|
(1.2
|
)
|
|
(2.8
|
)
|
Other items, net
|
0.1
|
|
|
(0.2
|
)
|
|
0.9
|
|
Total
|
29.4
|
%
|
|
47.7
|
%
|
|
25.5
|
%
|
The jurisdictional location of pre-tax income (loss) may represent a significant component of the Company's effective tax rate as income tax rates outside the U.S. are generally lower than the U.S. statutory income tax rate. Furthermore, the impact of changes in the jurisdictional location of pre-tax income (loss) on the Company's effective tax rate will be greater at lower levels of consolidated pre-tax income (loss). The taxation of non-U.S. operations line item in the table above excludes items related to the Company's non-U.S. operations reported separately in the appropriate corresponding line items.
For Fiscal 2015, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's subsidiaries in Australia, Switzerland and Hong Kong. For Fiscal 2015, the Company's Australian subsidiary incurred pre-tax losses of
$4.9 million
, with no jurisdictional tax effect, related to the closure of the Company’s Australian operations. For Fiscal 2015, the Company’s Swiss subsidiary earned pre-tax income of
$1.9 million
with a jurisdictional effective tax rate of negative
745%
. The Swiss jurisdictional effective tax rate included the impact of the Company’s omnichannel restructuring as well as the release of a valuation allowance. For Fiscal 2015, the Company's subsidiary in Hong Kong incurred pre-tax losses of
$6.8 million
with a jurisdictional effective tax rate of
15.8%
, slightly below the statutory tax rate of
16.5%
.
For Fiscal 2014, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Australian and Swiss subsidiaries. For Fiscal 2014, the Company's Australian subsidiary incurred pre-tax losses of
$8.4 million
with a jurisdictional effective tax rate of negative
5.6%
. The Australian jurisdictional effective tax rate included the impact of the closure of the Company's Australian operations. For Fiscal 2014, the Company's Swiss subsidiary incurred pretax losses of
$2.6 million
with a jurisdictional effective tax rate of negative
218.4%
. The Swiss jurisdictional effective tax rate included the impact of the establishment of a valuation allowance.
For Fiscal 2013, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Japanese subsidiary. For Fiscal 2013, the Company's Japanese subsidiary reported
$3.4 million
of pretax income with a jurisdictional effective tax rate of
127.8%
, which included the impact of discrete tax items.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Deferred tax assets:
|
|
|
|
Deferred compensation
|
$
|
62,679
|
|
|
$
|
83,157
|
|
Accrued expenses and reserves
|
19,862
|
|
|
17,695
|
|
Rent
|
36,929
|
|
|
38,881
|
|
Net operating losses (NOL) and credit carryforwards
|
14,248
|
|
|
14,897
|
|
Investments in subsidiaries
|
2,895
|
|
|
—
|
|
Other
|
619
|
|
|
1,403
|
|
Valuation allowances
|
(1,643
|
)
|
|
(6,730
|
)
|
Total deferred tax assets
|
$
|
135,589
|
|
|
$
|
149,303
|
|
Deferred tax liabilities:
|
|
|
|
Property, equipment and intangibles
|
$
|
(20,708
|
)
|
|
$
|
(16,059
|
)
|
Inventory
|
(9,480
|
)
|
|
(11,332
|
)
|
Store supplies
|
(6,054
|
)
|
|
(7,046
|
)
|
Prepaid expenses
|
(3,653
|
)
|
|
(2,438
|
)
|
Undistributed net income of non-U.S. subsidiaries
|
(4,390
|
)
|
|
—
|
|
Other
|
(1,011
|
)
|
|
(1,424
|
)
|
Total deferred tax liabilities
|
(45,296
|
)
|
|
(38,299
|
)
|
Net deferred income tax assets
|
$
|
90,293
|
|
|
$
|
111,004
|
|
Accumulated other comprehensive (loss) is shown net of deferred tax assets and deferred tax liabilities, resulting in a deferred tax liability of
$1.7 million
and a deferred tax liability of
$1.6 million
as of
January 30, 2016
and
January 31, 2015
, respectively. Accordingly, these deferred taxes are not reflected in the table above.
As of
January 30, 2016
, the Company had deferred tax assets related to foreign and state NOL of
$13.2 million
and
$0.2 million
, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryovers will begin to expire in 2017 and a portion of state NOL will begin to expire in 2021. Some foreign NOL have an indefinite carryforward period.
As of
January 30, 2016
, the Company had deferred tax assets related to state credit carryforwards of
$0.9 million
, net of valuation allowances that could be utilized to reduce future years’ tax liabilities. If not utilized, the credit carryforwards will begin to expire in 2017. The utilization of credit carryforwards may be limited in a given year.
The Company believes it is more likely than not that NOL and credit carryforwards would reduce future years’ tax liabilities in various states and certain foreign jurisdictions less any associated valuation allowance. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive (Loss) Income. No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. While the Company does not expect material adjustments to the total amount of valuation allowances within the next 12 months, changes in assumptions may occur based on the information then currently available. In such case, the Company will record an adjustment in the period in which a determination is made.
A reconciliation of the beginning and ending amounts of uncertain tax positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
Uncertain tax positions, beginning of the year
|
$
|
3,212
|
|
|
$
|
4,182
|
|
|
$
|
11,116
|
|
Gross addition for tax positions of the current year
|
13
|
|
|
152
|
|
|
449
|
|
Gross addition for tax positions of prior years
|
598
|
|
|
33
|
|
|
30
|
|
Reductions of tax positions of prior years for:
|
|
|
|
|
|
Lapses of applicable statutes of limitations
|
(986
|
)
|
|
(348
|
)
|
|
(2,880
|
)
|
Settlements during the period
|
(64
|
)
|
|
(4
|
)
|
|
(3,936
|
)
|
Changes in judgment/ excess reserve
|
(318
|
)
|
|
(803
|
)
|
|
(597
|
)
|
Uncertain tax positions, end of year
|
$
|
2,455
|
|
|
$
|
3,212
|
|
|
$
|
4,182
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amount of the above uncertain tax positions at
January 30, 2016
,
January 31, 2015
and
February 1, 2014
, which would impact the Company’s effective tax rate if recognized, was
$2.5 million
,
$3.2 million
and
$4.2 million
, respectively.
The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense. During Fiscal
2015
, the Company recognized a
$0.9 million
benefit related to net interest and penalties, compared to a
$0.2 million
benefit recognized during Fiscal
2014
. Interest and penalties of
$0.5 million
were accrued at the end of Fiscal
2015
, compared to
$1.4 million
accrued at the end of Fiscal
2014
.
The Internal Revenue Service (“IRS”) is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal
2015
as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal
2014
and prior years have been completed and settled. State and foreign returns are generally subject to examination for a period of
three
to
five years
after the filing of the respective return. The Company has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company's financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may decrease in the range of
$1.3 million
to
$1.8 million
due to settlements of audits and expiration of statutes of limitations.
The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.
As of
January 30, 2016
, a provision for U.S. income tax has not been recorded on approximately
$126.6 million
of unremitted net income generated through the third quarter of Fiscal
2015
of non-U.S. subsidiaries that the Company has determined to be indefinitely reinvested outside the U.S. The potential U.S. deferred income tax liability if the foreign net income were to be repatriated in the future, net of any foreign income or withholding taxes previously paid, is approximately
$25 million
. Unremitted net income of
$20.8 million
generated after October 31, 2015 is not considered to be invested indefinitely, and the Company has recorded
$4.4 million
of deferred U.S. income taxes on this net income.
11. BORROWINGS
Asset-Based Revolving Credit Facility
On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. ("A&F Management") as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement. The agreement, as amended, provides for a senior secured revolving credit facility of up to
$400 million
(the "ABL Facility"), subject to a borrowing base, with a letter of credit sub-limit of
$100 million
and an accordion feature allowing A&F to increase the revolving commitment by up to
$100 million
subject to specified conditions. The ABL Facility is available for working capital, capital expenditures and other general corporate purposes. The ABL Facility will mature on
August 7, 2019
.
Obligations under the ABL Facility are unconditionally guaranteed by A&F and certain of its subsidiaries. The ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property.
Amounts borrowed under the ABL Facility bear interest, at the Company's option, at either an adjusted LIBOR rate plus a margin of
1.25%
to
1.75%
per annum, or an alternate base rate plus a margin of
0.25%
to
0.75%
per annum. The initial applicable margins with respect to LIBOR loans and base rate loans, including swing line loans, under the ABL Facility are
1.50%
and
0.50%
per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical excess availability during the preceding quarter. The Company is also required to pay a fee of
0.25%
per annum on undrawn commitments under the ABL Facility. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility.
No borrowings were outstanding under the ABL Facility as of
January 30, 2016
.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Term Loan Facility
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan agreement on August 7, 2014, which, as amended, provides for a term loan facility of
$300 million
(the "Term Loan Facility" and, together with the ABL Facility, the "2014 Credit Facilities"). A portion of the proceeds of the Term Loan Facility was used to repay the outstanding balance of approximately
$127.5 million
under the Company's 2012 Term Loan Agreement, to repay outstanding borrowings of approximately
$60 million
under the Company's 2011 Credit Agreement and to pay fees and expenses associated with the transaction.
The Term Loan Facility was issued at a
1.0%
discount. In addition, the Company recorded deferred financing fees associated with the issuance of the 2014 Credit Facilities of
$5.8 million
in aggregate, of which
$3.2 million
was paid to lenders. The Company is amortizing the debt discount and deferred financing fees over the respective contractual terms of the 2014 Credit Facilities.
The Company's Term Loan debt is presented in the Consolidated Balance Sheets, net of the unamortized discount and fees paid to lenders. Net borrowings as of
January 30, 2016
and
January 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
|
January 31, 2015
|
|
Borrowings, gross at carrying amount
|
$
|
293,250
|
|
|
$
|
299,250
|
|
Unamortized discount
|
(1,929
|
)
|
|
(2,786
|
)
|
Unamortized fees paid to lenders
|
(5,086
|
)
|
|
(3,052
|
)
|
Borrowings, net
|
286,235
|
|
|
293,412
|
|
Less: short-term portion of borrowings, net of discount and fees
|
—
|
|
|
(2,102
|
)
|
Long-term portion of borrowings, net
|
$
|
286,235
|
|
|
$
|
291,310
|
|
The Term Loan Facility will mature on
August 7, 2021
and amortizes at a rate equal to
0.25%
of the original principal amount per quarter, beginning with the fourth quarter of Fiscal 2014. The Term Loan Facility is subject to (a) beginning in 2016, an annual mandatory prepayment in an amount equal to
0%
to
50%
of the Company's excess cash flows in the preceding fiscal year, depending on the Company's leverage ratio and (b) certain other mandatory prepayments upon receipt by the Company of proceeds of certain debt issuances, asset sales and casualty events, subject to certain exceptions specified therein, including reinvestment rights. The Company was not required to make any mandatory prepayments under the Term Loan Facility in Fiscal 2016.
A summary of future minimum payments under the Term Loan facility is as follows:
|
|
|
|
|
(in thousands)
|
|
Fiscal 2016
(1)
|
$
|
—
|
|
Fiscal 2017
|
$
|
3,000
|
|
Fiscal 2018
|
$
|
3,000
|
|
Fiscal 2019
|
$
|
3,000
|
|
Fiscal 2020
|
$
|
3,000
|
|
Thereafter
|
$
|
281,250
|
|
|
|
(1)
|
The Company prepaid its regularly scheduled Fiscal 2016 principal payments in January 2016.
|
All obligations under the Term Loan Facility are unconditionally guaranteed by A&F and certain of its subsidiaries. The Term Loan Facility is secured by a first-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. The Term Loan Facility is also secured by a second-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets, with certain exceptions.
At the Company's option, borrowings under the Term Loan Facility will bear interest at either (a) an adjusted LIBOR rate no lower than
1.00%
plus a margin of
3.75%
per annum or (b) an alternate base rate plus a margin of
2.75%
per annum. Customary agency fees are also payable in respect of the Term Loan Facility. The interest rate on borrowings under the Term Loan Facility was
4.75%
as of
January 30, 2016
.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Representations, Warranties and Covenants
The 2014 Credit Facilities contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of A&F and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to the greater of
10%
of the loan cap or
$30 million
must be maintained under the ABL Facility. The 2014 Credit Facilities do not otherwise contain financial maintenance covenants.
The Company was in compliance with the covenants under the 2014 Credit Facilities as of
January 30, 2016
.
12. OTHER LIABILITIES
Other liabilities consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
January 30, 2016
|
|
January 31, 2015
|
Accrued straight-line rent
|
$
|
90,445
|
|
|
$
|
99,108
|
|
Deferred compensation
|
48,058
|
|
|
56,244
|
|
Other
|
41,180
|
|
|
25,934
|
|
Other liabilities
|
$
|
179,683
|
|
|
$
|
181,286
|
|
Deferred compensation includes the Supplemental Executive Retirement Plan (the “SERP”), the Abercrombie & Fitch Co. Savings and Retirement Plan and the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan, all further discussed in Note 17, “
SAVINGS AND RETIREMENT PLANS
,” as well as deferred Board of Directors compensation and other accrued retirement benefits.
13. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of
$28.4 million
,
$23.0 million
and
$53.5 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively. The Company also recognized
$10.6 million
,
$8.6 million
and
$20.3 million
in tax benefits related to share-based compensation for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively.
The fair value of share-based compensation awards is recognized as compensation expense primarily on a straight-line basis over the awards’ requisite service period, net of estimated forfeitures, with the exception of performance share awards. Performance share award expense is primarily recognized in the performance period of the awards' requisite service period. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered an excess tax benefit and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged to additional paid-in capital, to the extent of the windfall pool of excess tax benefits, with any remainder recognized as tax expense. The Company’s windfall pool of excess tax benefits as of
January 30, 2016
, is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.
The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures was
$5.6 million
,
$2.6 million
and
$2.3 million
for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
, respectively.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of
January 30, 2016
, the Company had sufficient treasury stock available to settle stock options, stock appreciation rights, restricted stock units and performance share awards outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time.
In the event, at each reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan (the “2007 LTIP”) and the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan (the “2005 LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards is re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available
to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered.
Plans
As of
January 30, 2016
, the Company had
two
primary share-based compensation plans: the 2005 LTIP, under which the Company grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company and non-associate members of the Company's Board of Directors, and the 2007 LTIP, under which the Company grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company. The Company also has
four
other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the the Company's Board of Directors in prior years.
The 2007 LTIP, a stockholder-approved plan, permits the Company to annually grant awards covering up to
2.0 million
of underlying shares of the Company's Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits the Company to annually grant awards covering up to
250,000
of underlying shares of the Company's Common Stock for each award type to any associate of the Company (other than the Chief Executive Officer (the "CEO")) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. In addition, any non-associate director of the Company is eligible to receive awards under the 2005 LTIP. Under both plans, stock appreciation rights and restricted stock units vest primarily over
four years
for associates, while performance share awards are primarily earned and vest over the performance period. Under the 2005 LTIP, restricted stock units typically vest after approximately
one year
for non-associate directors of the Company. Under both plans, stock options have a
ten
-year term and stock appreciation rights have up to a
ten
-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control and certain additional conditions are met as defined in the plans.
Stock Options
The following table summarizes stock option activity for Fiscal
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life
|
Outstanding at January 31, 2015
|
328,100
|
|
|
$
|
64.64
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(57,100
|
)
|
|
72.16
|
|
|
|
|
|
Outstanding at January 30, 2016
|
271,000
|
|
|
$
|
63.05
|
|
|
$
|
354,740
|
|
|
1.8
|
Stock options exercisable at January 30, 2016
|
271,000
|
|
|
$
|
63.05
|
|
|
$
|
354,740
|
|
|
1.8
|
The Company did not grant any stock options during Fiscal
2015
, Fiscal
2014
and Fiscal
2013
. The total intrinsic value of stock options exercised was insignificant during Fiscal
2015
, Fiscal
2014
, and
Fiscal 2013
.
The grant date fair value of stock options that vested was insignificant during Fiscal
2015
, Fiscal
2014
, and
Fiscal 2013
.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of
January 30, 2016
, there was no unrecognized compensation cost related to currently outstanding stock options.
Stock Appreciation Rights
The following table summarizes stock appreciation rights activity for Fiscal
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life
|
Outstanding at January 31, 2015
|
8,953,675
|
|
|
$
|
40.28
|
|
|
|
|
|
Granted
|
715,858
|
|
|
21.71
|
|
|
|
|
|
Exercised
|
(1,550,000
|
)
|
|
22.23
|
|
|
|
|
|
Forfeited or expired
|
(2,818,418
|
)
|
|
36.58
|
|
|
|
|
|
Outstanding at January 30, 2016
|
5,301,115
|
|
|
$
|
45.02
|
|
|
$
|
2,827,754
|
|
|
3.6
|
Stock appreciation rights exercisable at January 30, 2016
|
4,288,337
|
|
|
$
|
48.75
|
|
|
$
|
11,657
|
|
|
2.3
|
Stock appreciation rights expected to become exercisable in the future as of January 30, 2016
|
897,471
|
|
|
$
|
29.73
|
|
|
$
|
2,352,008
|
|
|
8.6
|
The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company's Common Stock price for the most recent historical period equal to the expected term of the stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.
The weighted-average assumptions used in the Black-Scholes option-pricing model for stock appreciation rights granted during Fiscal
2015
, Fiscal
2014
and Fiscal
2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers
|
|
All Other Associates
|
|
2015
|
|
2014
|
|
2013
|
|
2015
|
|
2014
|
|
2013
|
Grant date market price
|
$
|
22.46
|
|
|
$
|
35.08
|
|
|
$
|
46.57
|
|
|
$
|
22.42
|
|
|
$
|
37.05
|
|
|
$
|
43.86
|
|
Exercise price
|
$
|
22.46
|
|
|
$
|
35.49
|
|
|
$
|
46.57
|
|
|
$
|
22.42
|
|
|
$
|
37.22
|
|
|
$
|
43.86
|
|
Fair value
|
$
|
9.11
|
|
|
$
|
12.85
|
|
|
$
|
20.34
|
|
|
$
|
8.00
|
|
|
$
|
12.92
|
|
|
$
|
16.17
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Price volatility
|
49
|
%
|
|
49
|
%
|
|
61
|
%
|
|
49
|
%
|
|
50
|
%
|
|
53
|
%
|
Expected term (years)
|
6.1
|
|
|
4.9
|
|
|
4.7
|
|
|
4.3
|
|
|
4.1
|
|
|
4.1
|
|
Risk-free interest rate
|
1.5
|
%
|
|
1.6
|
%
|
|
0.7
|
%
|
|
4.2
|
%
|
|
1.4
|
%
|
|
0.7
|
%
|
Dividend yield
|
1.7
|
%
|
|
2.0
|
%
|
|
1.8
|
%
|
|
1.7
|
%
|
|
1.9
|
%
|
|
1.8
|
%
|
Compensation expense for stock appreciation rights is recognized on a straight-line basis over the awards’ requisite service period, net of forfeitures. As of
January 30, 2016
, there was
$12.2 million
of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of
16 months
.
The total intrinsic value of stock appreciation rights exercised during Fiscal
2015
, Fiscal
2014
and Fiscal
2013
was
$4.3 million
,
$1.5 million
and
$8.5 million
, respectively. The grant date fair value of stock appreciation rights that vested during Fiscal
2015
, Fiscal
2014
and Fiscal
2013
was
$4.9 million
,
$7.4 million
and
$83.7 million
, respectively.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units
The following table summarizes activity for restricted stock units for Fiscal
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 January 31, 2015
|
1,566,272
|
|
|
$
|
37.84
|
|
|
205,420
|
|
|
$
|
32.06
|
|
|
36,374
|
|
|
$
|
40.13
|
|
Granted
|
1,117,321
|
|
|
20.68
|
|
|
113,331
|
|
|
20.10
|
|
|
113,337
|
|
|
19.04
|
|
Adjustments for performance achievement
|
—
|
|
|
—
|
|
|
(28,250
|
)
|
|
36.14
|
|
|
—
|
|
|
—
|
|
Vested
|
(637,837
|
)
|
|
37.01
|
|
|
(48,668
|
)
|
|
38.24
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(374,159
|
)
|
|
31.37
|
|
|
(56,333
|
)
|
|
29.05
|
|
|
(32,000
|
)
|
|
21.07
|
|
Unvested at January 30, 2016
|
1,671,597
|
|
|
$
|
28.13
|
|
|
185,500
|
|
|
$
|
23.42
|
|
|
117,711
|
|
|
$
|
25.00
|
|
Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying common stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company's total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For an award with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from
0%
to
200%
of target depending on the level of achievement of performance criteria. Unvested shares related to restricted stock units with performance vesting conditions are reflected at
100%
of their target vesting amount in the table above.
Service-based restricted stock units are expensed on a straight-line basis over the total requisite service period, net of forfeitures. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis, net of forfeitures. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures.
As of
January 30, 2016
, there was
$47.1 million
,
$3.1 million
, and
$1.6 million
of total unrecognized compensation cost, net of estimated forfeitures, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of
15 months
,
13 months
, and
12 months
for service-based, performance-based and market-based restricted stock units, respectively.
Additional information pertaining to restricted stock units for
Fiscal 2015
,
Fiscal 2014
and
Fiscal 2013
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
Service-based restricted stock units:
|
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
23,101
|
|
|
$
|
33,075
|
|
|
$
|
23,192
|
|
Total grant date fair value of awards vested
|
23,608
|
|
|
17,078
|
|
|
14,535
|
|
|
|
|
|
|
|
Performance-based restricted stock units:
|
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
2,278
|
|
|
$
|
4,709
|
|
|
$
|
10,814
|
|
Total grant date fair value of awards vested
|
1,861
|
|
|
515
|
|
|
515
|
|
|
|
|
|
|
|
Market-based restricted stock units:
|
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
2,158
|
|
|
$
|
3,756
|
|
|
$
|
—
|
|
Total grant date fair value of awards vested
|
—
|
|
|
—
|
|
|
—
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during
Fiscal 2015
and
Fiscal 2014
were as follows:
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
Fiscal 2014
|
Grant date market price
|
$
|
22.46
|
|
$
|
36.20
|
|
Fair value
|
$
|
19.04
|
|
$
|
40.42
|
|
Assumptions:
|
|
|
Price volatility
|
45
|
%
|
49
|
%
|
Expected term (years)
|
2.8
|
|
2.7
|
|
Risk-free interest rate
|
0.9
|
%
|
0.8
|
%
|
Dividend yield
|
3.5
|
%
|
2.2
|
%
|
Average volatility of peer companies
|
34.0
|
%
|
36.0
|
%
|
Average correlation coefficient of peer companies
|
0.3288
|
|
0.3704
|
|
14. 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.
In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative instrument is not highly effective.
For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative instrument gain or loss is recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative instrument related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a
two
-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated inter-company inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated inter-company receivables. Fluctuations in exchange rates will either increase or decrease the Company’s inter-company 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 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 accumulated other comprehensive loss ("AOCL"). Substantially all of the unrealized gains or losses related to designated cash flow hedges as of
January 30, 2016
will be recognized in cost of sales, exclusive of depreciation and amortization over the next twelve months.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company presents its derivative assets and derivative liabilities at their gross fair values on the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions.
As of
January 30, 2016
, 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 inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
|
|
|
|
|
(in thousands)
|
Notional Amount
(1)
|
Euro
|
$
|
94,700
|
|
British pound
|
$
|
22,029
|
|
Canadian dollar
|
$
|
8,617
|
|
|
|
(1)
|
Amounts are reported in U.S. Dollars equivalent as of
January 30, 2016
.
|
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 exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instrument and the hedged item.
As of
January 30, 2016
, the Company had outstanding the following foreign currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:
|
|
|
|
|
(in thousands)
|
Notional Amount
(1)
|
Euro
|
$
|
8,714
|
|
Switzerland franc
|
$
|
3,933
|
|
|
|
(1)
|
Amounts are reported in U.S. Dollars equivalent as of
January 30, 2016
.
|
The location and amounts of derivative fair values on the Consolidated Balance Sheets as of
January 30, 2016
and
January 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(in thousands)
|
Location
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Location
|
|
January 30, 2016
|
|
January 31, 2015
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other current assets
|
|
$
|
4,097
|
|
|
$
|
10,283
|
|
|
Accrued expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other current assets
|
|
$
|
69
|
|
|
$
|
10
|
|
|
Accrued expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
Other current assets
|
|
$
|
4,166
|
|
|
$
|
10,293
|
|
|
Accrued expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
Refer to Note 3, “
FAIR VALUE,
” for further discussion of the determination of the fair value of derivative instruments.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The location and amounts of derivative gains and losses for
Fiscal 2015
and
Fiscal 2014
on the Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
Fiscal 2014
|
(in thousands)
|
Location
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other operating income, net
|
|
$
|
751
|
|
|
$
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion and Amount Excluded from Effectiveness Testing
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative Contracts
(1)
|
|
Location of Gain (Loss) Reclassified from AOCL into Earnings
|
|
Amount of Gain (Loss) Reclassified from AOCL into Earnings
(2)
|
|
Location of Gain Recognized in Earnings on Derivative Contracts
|
|
Amount of Gain Recognized in Earnings on Derivative Contracts
(3)
|
(in thousands)
|
January 30,
2016
|
|
January 31,
2015
|
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
|
|
January 30,
2016
|
|
January 31,
2015
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
$
|
7,204
|
|
|
$
|
16,572
|
|
|
Cost of sales, exclusive of depreciation and amortization
|
|
$
|
15,596
|
|
|
$
|
440
|
|
|
Other operating income, net
|
|
$
|
242
|
|
|
$
|
215
|
|
|
|
(1)
|
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
|
|
|
(2)
|
The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
|
|
|
(3)
|
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.
|
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss for
Fiscal 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
(in thousands)
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Beginning balance at January 31, 2015
|
$
|
13,100
|
|
|
$
|
(96,680
|
)
|
|
$
|
(83,580
|
)
|
Other comprehensive income (loss) before reclassifications
|
7,204
|
|
|
(22,623
|
)
|
|
(15,419
|
)
|
Reclassified from accumulated other comprehensive (loss) income
(1)
|
(15,596
|
)
|
|
—
|
|
|
(15,596
|
)
|
Tax effect on other comprehensive income (loss)
|
(131
|
)
|
|
107
|
|
|
(24
|
)
|
Other comprehensive income (loss)
|
(8,523
|
)
|
|
(22,516
|
)
|
|
(31,039
|
)
|
Ending balance at January 30, 2016
|
$
|
4,577
|
|
|
$
|
(119,196
|
)
|
|
$
|
(114,619
|
)
|
|
|
(1)
|
For
Fiscal 2015
, a gain was reclassified from other comprehensive income (loss) to the cost of sales, exclusive of depreciation and amortization line item on the Consolidated Statement of Operations and Comprehensive Income (Loss). Additionally, a foreign currency translation loss related to the Company's dissolution of its Australian operations was reclassified to other operating income, net.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity in accumulated other comprehensive loss for
Fiscal 2014
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014
|
(in thousands)
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Beginning balance February 1, 2014
|
$
|
(2,166
|
)
|
|
$
|
(18,751
|
)
|
|
$
|
(20,917
|
)
|
Other comprehensive income (loss) before reclassifications
|
16,572
|
|
|
(76,891
|
)
|
|
(60,319
|
)
|
Reclassified from accumulated other comprehensive (loss) income
(1)
|
(440
|
)
|
|
—
|
|
|
(440
|
)
|
Tax effect on other comprehensive income (loss)
|
(866
|
)
|
|
(1,038
|
)
|
|
(1,904
|
)
|
Other comprehensive income (loss)
|
15,266
|
|
|
(77,929
|
)
|
|
(62,663
|
)
|
Ending balance at January 31, 2015
|
$
|
13,100
|
|
|
$
|
(96,680
|
)
|
|
$
|
(83,580
|
)
|
|
|
(1)
|
For
Fiscal 2014
, a gain was reclassified from other comprehensive income (loss) to the cost of sales, exclusive of depreciation and amortization line item on the Consolidated Statement of Operations and Comprehensive Income (Loss).
|
The activity in accumulated other comprehensive loss for
Fiscal 2013
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2013
|
(in thousands)
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Beginning balance February 2, 2013
|
$
|
(7,220
|
)
|
|
$
|
(6,068
|
)
|
|
$
|
(13,288
|
)
|
Other comprehensive income (loss) before reclassifications
|
6,435
|
|
|
(12,683
|
)
|
|
(6,248
|
)
|
Reclassified from accumulated other comprehensive (loss) income
(1)
|
(857
|
)
|
|
—
|
|
|
(857
|
)
|
Tax effect on other comprehensive income (loss)
|
(524
|
)
|
|
—
|
|
|
(524
|
)
|
Other comprehensive income (loss)
|
5,054
|
|
|
(12,683
|
)
|
|
(7,629
|
)
|
Ending balance at February 1, 2014
|
$
|
(2,166
|
)
|
|
$
|
(18,751
|
)
|
|
$
|
(20,917
|
)
|
|
|
(1)
|
For
Fiscal 2013
, a gain was reclassified from other comprehensive income (loss) to the cost of sales, exclusive of depreciation and amortization line item on the Consolidated Statement of Operations and Comprehensive Income (Loss).
|
16. GILLY HICKS RESTRUCTURING
As previously announced, on November 1, 2013, A&F’s Board of Directors approved the closure of the Company’s
24
stand-alone Gilly Hicks stores. The Company substantially completed the store closures in the first quarter of Fiscal 2014.
Below is a summary of the aggregate pre-tax charges incurred through
January 30, 2016
related to the closure of the Gilly Hicks branded stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
|
Total
|
Lease terminations and store closure (benefits) costs
|
$
|
(1,598
|
)
|
|
$
|
5,998
|
|
|
$
|
42,667
|
|
|
$
|
47,067
|
|
Asset impairment
|
—
|
|
|
2,096
|
|
|
37,940
|
|
|
40,036
|
|
Other
|
—
|
|
|
337
|
|
|
893
|
|
|
1,230
|
|
Total (benefits) charges
|
$
|
(1,598
|
)
|
|
$
|
8,431
|
|
|
$
|
81,500
|
|
|
$
|
88,333
|
|
Costs associated with exit or disposal activities are recorded when the liability is incurred. During Fiscal 2015, the Company's liability related to the Gilly Hicks restructuring decreased from approximately
$6.0 million
to approximately
$2.1 million
, as of
January 30, 2016
, as a result of lease termination benefits and cash payments applied against the liability.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. SAVINGS AND RETIREMENT PLANS
The Company maintains the Abercrombie & Fitch Co. Savings & Retirement Plan, a qualified plan. All U.S. associates are eligible to participate in this plan if they are at least
21
years of age. In addition, the Company maintains the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement, composed of two sub-plans (Plan I and Plan II). Plan I contains contributions made through December 31, 2004, while Plan II contains contributions made on and after January 1, 2005. Participation in these plans is based on service and compensation. The Company’s contributions are based on a percentage of associates’ eligible annual compensation. The cost of the Company’s contributions to these plans was
$15.4 million
,
$13.8 million
and
$18.3 million
for
Fiscal 2015
,
Fiscal 2014
and
Fiscal 2013
, respectively.
18. SEGMENT REPORTING
During the first quarter of Fiscal
2015
, the Company substantially completed its transition to a branded organizational structure. In conjunction with the change, the Company determined its brand-based operating segments to be Abercrombie, which includes the Company's Abercrombie & Fitch and abercrombie kids brands, and Hollister. These operating segments have similar economic characteristics, class of consumers, products and production and distribution methods, and have been aggregated into
one
reportable segment.
The following table provides the Company's net sales by operating segment for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
Abercrombie
|
$
|
1,640,992
|
|
|
$
|
1,771,299
|
|
|
$
|
1,893,955
|
|
Hollister
|
1,877,688
|
|
|
1,947,869
|
|
|
2,127,816
|
|
Other
(1)
|
—
|
|
|
24,862
|
|
|
95,126
|
|
Total
|
$
|
3,518,680
|
|
|
$
|
3,744,030
|
|
|
$
|
4,116,897
|
|
|
|
(1)
|
Represents net sales from the Company's Gilly Hicks operations. See Note 16,
"GILLY HICKS RESTRUCTURING,"
for additional information on the Company's exit from Gilly Hicks branded stores.
|
The following table provides the Company’s net sales by geographic area for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
United States
|
$
|
2,282,040
|
|
|
$
|
2,408,427
|
|
|
$
|
2,659,089
|
|
Europe
|
832,923
|
|
|
959,981
|
|
|
1,116,781
|
|
Other
|
403,717
|
|
|
375,622
|
|
|
341,027
|
|
Total
|
$
|
3,518,680
|
|
|
$
|
3,744,030
|
|
|
$
|
4,116,897
|
|
The following table provides the Company’s long-lived assets by geographic area for Fiscal
2015
, Fiscal
2014
and Fiscal
2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
United States
|
$
|
548,983
|
|
|
$
|
556,967
|
|
|
$
|
580,610
|
|
Europe
|
263,977
|
|
|
332,435
|
|
|
446,345
|
|
Other
|
109,275
|
|
|
105,542
|
|
|
135,373
|
|
Total
|
$
|
922,235
|
|
|
$
|
994,944
|
|
|
$
|
1,162,328
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. CONTINGENCIES
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims. As of
January 30, 2016
, the Company had accrued charges of approximately
$19 million
for certain legal contingencies. In addition, there are certain claims and legal proceedings pending against the Company for which accruals have not been established. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial results for Fiscal
2015
and Fiscal
2014
are presented below. See “RESULTS OF OPERATIONS,” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” of this Annual Report on Form 10-K for information regarding items included below that could affect comparability between quarter results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Fiscal Quarter 2015
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
$
|
709,422
|
|
|
$
|
817,756
|
|
|
$
|
878,572
|
|
|
$
|
1,112,930
|
|
Gross profit
|
$
|
411,549
|
|
|
$
|
509,862
|
|
|
$
|
559,787
|
|
|
$
|
676,345
|
|
Net income (loss)
|
$
|
(63,246
|
)
|
|
$
|
612
|
|
|
$
|
42,285
|
|
|
$
|
58,908
|
|
Net income (loss) attributable to A&F
(2)(4)
|
$
|
(63,246
|
)
|
|
$
|
(810
|
)
|
|
$
|
41,891
|
|
|
$
|
57,741
|
|
Net income (loss) per diluted share attributable to A&F
(1)
|
$
|
(0.91
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.60
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Fiscal Quarter 2014
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
$
|
822,428
|
|
|
$
|
890,605
|
|
|
$
|
911,453
|
|
|
$
|
1,119,544
|
|
Gross profit
|
$
|
511,659
|
|
|
$
|
552,956
|
|
|
$
|
567,070
|
|
|
$
|
681,885
|
|
Net income (loss)
|
$
|
(23,671
|
)
|
|
$
|
12,877
|
|
|
$
|
18,227
|
|
|
$
|
44,388
|
|
Net income (loss) attributable to A&F
(3)(5)
|
$
|
(23,671
|
)
|
|
$
|
12,877
|
|
|
$
|
18,227
|
|
|
$
|
44,388
|
|
Net income (loss) per diluted share attributable to A&F
(1)
|
$
|
(0.32
|
)
|
|
$
|
0.17
|
|
|
$
|
0.25
|
|
|
$
|
0.63
|
|
|
|
(1)
|
Net income (loss) per diluted share for each of the quarters was computed using the weighted average number of shares outstanding during the quarter while the full year is computed using the average of the weighted average number of shares outstanding each quarter; therefore, the sum of the quarters may not equal the total for the year.
|
|
|
(2)
|
Net income (loss) attributable to A&F for Fiscal 2015 included certain items related to inventory write-down, asset impairment, legal settlement charges, store fixture disposal, the Company’s profit improvement initiative, lease termination and store closure costs and restructuring. These items adversely impacted in net income (loss) attributable to A&F by
$26.1 million
,
$9.4 million
and
$16.0 million
for the first, second and fourth quarters of Fiscal 2015, respectively, and increased net income attributable to A&F by
$9.0 million
for the third quarter of Fiscal 2015.
|
|
|
(3)
|
Net income (loss) attributable to A&F for Fiscal 2014 included certain items related to asset impairment, the Company’s profit improvement initiative, lease termination and store closure costs, restructuring and corporate governance matters. These items adversely impacted net income (loss) attributable to A&F by
$10.7 million
,
$1.2 million
,
$12.2 million
and
$36.4 million
for the first, second, third and fourth quarters of Fiscal 2015, respectively.
|
|
|
(4)
|
Net income (loss) attributable to A&F for Fiscal 2015 included the correction of certain errors relating to prior periods. The impact of the amounts recorded out-of-period resulted in a decrease in net income attributable to A&F of
$2.6 million
and
$1.9 million
for the second and fourth quarters of Fiscal 2015, respectively, and an increase in net income attributable to A&F of
$1.2 million
for the third quarter of Fiscal 2015. The Company does not believe these corrections were material to any current or prior interim or annual periods that were affected.
|
|
|
(5)
|
Net income (loss) attributable to A&F for Fiscal 2014 included the correction of certain errors relating to prior periods. The impact of the amounts recorded out-of-period adversely impacted net income (loss) attributable to A&F by
$0.9 million
,
$0.9 million
,
$0.8 million
and
$0.1 million
for the first, second, third and fourth quarters of Fiscal 2014, respectively. The Company does not believe these corrections were material to any current or prior interim or annual periods that were affected.
|