NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Nature of Business
Abercrombie & Fitch Co. (“A&F”), through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer of branded apparel and accessories. The Company operates through store and direct-to-consumer operations, as well as through various wholesale, franchise and licensing arrangements. The Company has operations in North America, Europe, Asia and the Middle East.
Principles of Consolidation
The accompanying Condensed 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 assets, liabilities, results of operations and cash flows of these VIEs.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal
2017
” and “Fiscal
2016
” represent the fifty-three week fiscal year ending on
February 3, 2018
and the fifty-two week fiscal year ended on
January 28, 2017
, respectively.
Interim Financial Statements
The Condensed Consolidated Financial Statements as of
April 29, 2017
, and for the
thirteen
week periods ended
April 29, 2017
and
April 30, 2016
, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal
2016
filed with the SEC on
March 27, 2017
. The
January 28, 2017
consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal
2017
.
Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements that could affect the Company’s financial statements:
|
|
|
|
|
|
|
|
Accounting Standards Update (ASU)
|
|
Description
|
|
Date of
Adoption
|
|
Effect on the Financial Statements or Other Significant Matters
|
Standards adopted
|
ASU 2015-11,
Simplifying the Measurement of Inventory
|
|
This update amends ASC 330,
Inventory
. The new guidance applies to inventory measured using first-in, first-out (FIFO) or average cost. Under this amendment, inventory is to 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 guidance did not have any impact on the Company's consolidated financial statements.
|
ASU 2016-09,
Compensation—Stock Compensation
|
|
This update amends ASC 718,
Compensation
. Under the new guidance, tax benefits and certain tax deficiencies arising from the vesting of share-based payments are to be recognized as income tax benefits or expenses in the statement of operations; whereas, under the previous guidance, such benefits and deficiencies were recorded in additional paid-in-capital. The cash flow effects of the tax benefit are to be reported in cash flows from operating activities; whereas, they were previously reported in cash flows from financing activities. This guidance also allows for entities to make a policy election to estimate forfeitures or account for them when they occur.
|
|
January 29, 2017*
|
|
As required by the update, all excess tax benefits and tax deficiencies recognized on share-based compensation expense are reflected in the condensed consolidated statements of income as a component of the provision for income taxes on a prospective basis. This update resulted in additional non-cash income tax expense of $9.3 million in the first quarter of Fiscal 2017. In addition, excess tax benefits and tax deficiencies recognized on share-based compensation expense are now classified as an operating activity on the condensed consolidated statements of cash flows. The Company has applied this provision on a retrospective basis. For the first quarter of Fiscal 2016, net cash used by operating activities decreased by $0.6 million with a corresponding offset to net cash used for financing activities. The Company has elected to maintain its practice of estimating forfeitures when recognizing expense for share-based payment awards rather than accounting for forfeitures when they occur. Based on share-based compensation awards currently outstanding at current stock prices, the adoption of this guidance will result in non-cash income tax expense of approximately $11 million for Fiscal 2017 and $20 million for Fiscal 2018.
|
Standards not yet adopted
|
ASU 2014-09,
Revenue from Contracts with Customers
|
|
This update supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. The new 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 impact that this guidance will have on its consolidated financial statements.
|
ASU 2016-02,
Leases
|
|
This update supersedes the leasing requirements in ASC 840,
Leases
. The new guidance requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.
|
|
February 3, 2019*
|
|
The Company expects that this guidance will result in a significant increase in the Company’s long-term assets and long-term liabilities on the Company's consolidated balance sheets, and is currently evaluating additional impacts that it may have on its consolidated financial statements.
|
* Early adoption is permitted.
2. NET LOSS PER SHARE
Net loss per basic and diluted share is computed based on the weighted-average number of outstanding shares of common stock.
The following table presents weighted-average shares outstanding and anti-dilutive shares:
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
(in thousands)
|
April 29, 2017
|
|
April 30, 2016
|
Shares of common stock issued
|
103,300
|
|
|
103,300
|
|
Weighted-average treasury shares
|
(35,227
|
)
|
|
(35,675
|
)
|
Weighted-average — basic shares
|
68,073
|
|
|
67,625
|
|
Dilutive effect of share-based compensation awards
|
—
|
|
|
—
|
|
Weighted-average — diluted shares
|
68,073
|
|
|
67,625
|
|
Anti-dilutive shares
(1)
|
5,263
|
|
|
7,954
|
|
|
|
(1)
|
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net loss per diluted share because the impact would have been anti-dilutive.
|
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, which are measured at fair value on a recurring basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of April 29, 2017
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
—
|
|
|
$
|
100,417
|
|
|
$
|
—
|
|
|
$
|
100,417
|
|
Money market funds
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Derivative financial instruments
|
—
|
|
|
2,415
|
|
|
—
|
|
|
2,415
|
|
Total assets
|
$
|
21
|
|
|
$
|
102,832
|
|
|
$
|
—
|
|
|
$
|
102,853
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
1,243
|
|
|
$
|
—
|
|
|
$
|
1,243
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
1,243
|
|
|
$
|
—
|
|
|
$
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of January 28, 2017
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
—
|
|
|
$
|
99,654
|
|
|
$
|
—
|
|
|
$
|
99,654
|
|
Money market funds
|
94,026
|
|
|
—
|
|
|
—
|
|
|
94,026
|
|
Derivative financial instruments
|
—
|
|
|
6,042
|
|
|
—
|
|
|
6,042
|
|
Total assets
|
$
|
94,026
|
|
|
$
|
105,696
|
|
|
$
|
—
|
|
|
$
|
199,722
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
492
|
|
|
$
|
—
|
|
|
$
|
492
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
492
|
|
|
$
|
—
|
|
|
$
|
492
|
|
The Level 2 assets and liabilities consist of trust-owned life insurance policies and derivative financial instruments, primarily foreign currency exchange forward contracts. The fair value of foreign currency exchange forward contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
Fair value of borrowings:
The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. For disclosure purposes, the Company estimated the fair value of borrowings outstanding based on market rates for similar types of debt, which are considered to be Level 2 inputs.
The carrying amount and fair value of the Company’s term loan facility were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 29, 2017
|
|
January 28, 2017
|
Gross borrowings outstanding, carrying amount
|
$
|
268,250
|
|
|
$
|
268,250
|
|
Gross borrowings outstanding, fair value
|
$
|
258,861
|
|
|
$
|
260,551
|
|
No borrowings were outstanding under the Company’s senior secured revolving credit facility as of
April 29, 2017
or
January 28, 2017
.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 29, 2017
|
|
January 28, 2017
|
Property and equipment, at cost
|
$
|
2,766,557
|
|
|
$
|
2,772,139
|
|
Less: Accumulated depreciation and amortization
|
(1,960,500
|
)
|
|
(1,947,401
|
)
|
Property and equipment, net
|
$
|
806,057
|
|
|
$
|
824,738
|
|
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 assets 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, 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.
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 profit and, to a lesser extent, operating expenses.
An impairment loss would be recognized when these undiscounted future cash flows are less than the 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 include projected cash flows and discount rate.
The Company incurred asset impairment charges of
$0.7 million
for the
thirteen
weeks ended
April 29, 2017
. There were no asset impairment charges for the
thirteen
weeks ended
April 30, 2016
.
The Company had
$35.9 million
and
$35.6 million
of construction project assets in property and equipment, net at
April 29, 2017
and
January 28, 2017
, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.
5. INCOME TAXES
The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in law, regulations, and administrative practices, relative changes of expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax income (loss).
In the first quarter of Fiscal 2017, the provision for income taxes also differs from the tax computed at the U.S. federal statutory tax rate due to the tax effects of stock-based compensation. In the first quarter of Fiscal 2017, the Company adopted ASU 2016-09, “Compensation—Stock Compensation,” which resulted in a discrete non-cash income tax charge of
$9.3 million
recognized in income tax benefit on the Condensed Consolidated Statements of Operations and Comprehensive Loss. Refer to Note 1, “
BASIS OF PRESENTATION--Recent Accounting Pronouncements
” for further discussion regarding the adoption of this standard.
6. SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense of
$4.9 million
for the
thirteen
weeks ended
April 29, 2017
and
$6.6 million
for the
thirteen
weeks ended
April 30, 2016
. The tax benefit associated with share-based compensation expense was
$1.9 million
for the
thirteen
weeks ended
April 29, 2017
and
$2.5 million
for the
thirteen
weeks ended
April 30, 2016
.
Stock Options
The following table summarizes stock option activity for the
thirteen
weeks ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life
|
Outstanding at January 28, 2017
|
189,800
|
|
|
$
|
76.62
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(75,000
|
)
|
|
73.42
|
|
|
|
|
|
Outstanding at April 29, 2017
|
114,800
|
|
|
$
|
78.71
|
|
|
$
|
—
|
|
|
0.8
|
Stock options exercisable at April 29, 2017
|
114,800
|
|
|
$
|
78.71
|
|
|
$
|
—
|
|
|
0.8
|
Stock Appreciation Rights
The following table summarizes stock appreciation rights activity for the
thirteen
weeks ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life
|
Outstanding at January 28, 2017
|
4,079,050
|
|
|
$
|
47.49
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(888,197
|
)
|
|
44.34
|
|
|
|
|
|
Outstanding at April 29, 2017
|
3,190,853
|
|
|
$
|
48.50
|
|
|
$
|
—
|
|
|
3.0
|
Stock appreciation rights exercisable at April 29, 2017
|
2,841,662
|
|
|
$
|
51.22
|
|
|
$
|
—
|
|
|
2.5
|
Stock appreciation rights expected to become exercisable in the future as of April 29, 2017
|
267,161
|
|
|
$
|
26.63
|
|
|
$
|
—
|
|
|
7.7
|
As of
April 29, 2017
, there was
$2.1 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
11 months
.
The grant date fair value of stock appreciation rights that vested during the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
was
$1.9 million
and
$3.7 million
, respectively.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the
thirteen
weeks ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-based Restricted
Stock Units
|
|
Performance-based Restricted
Stock Units
|
|
Market-based Restricted
Stock Units
|
|
Number of
Underlying
Shares
(1)
|
|
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 28, 2017
|
1,915,461
|
|
|
$
|
25.47
|
|
|
203,923
|
|
|
$
|
22.53
|
|
|
184,892
|
|
|
$
|
26.89
|
|
Granted
|
1,408,972
|
|
|
9.61
|
|
|
524,030
|
|
|
9.11
|
|
|
236,872
|
|
|
11.79
|
|
Adjustments for performance achievement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
(466,291
|
)
|
|
28.86
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(122,813
|
)
|
|
22.37
|
|
|
(5,163
|
)
|
|
25.15
|
|
|
(5,165
|
)
|
|
29.55
|
|
Unvested at April 29, 2017
|
2,735,329
|
|
|
$
|
16.81
|
|
|
722,790
|
|
|
$
|
12.26
|
|
|
416,599
|
|
|
$
|
17.25
|
|
|
|
(1)
|
This includes
786,449
unvested restricted stock units as of April 29, 2017 that are subject to the requirement that the Company must achieve at least $1.00 of GAAP net income attributable to A&F for the fiscal year in order to vest.
|
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-based 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
April 29, 2017
, there was
$30.1 million
,
$4.9 million
and
$4.8 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
17 months
,
18 months
and
16 months
for service-based, performance-based and market-based restricted stock units, respectively.
The tax benefit associated with restricted stock vesting during the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
was
$2.1 million
and
$4.9 million
, respectively.
Additional information pertaining to restricted stock units for the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 29, 2017
|
|
April 30, 2016
|
Service-based restricted stock units:
|
|
|
|
Total grant date fair value of awards granted
|
$
|
13,540
|
|
|
$
|
21,445
|
|
Total grant date fair value of awards vested
|
13,457
|
|
|
12,892
|
|
|
|
|
|
Performance-based restricted stock units:
|
|
|
|
Total grant date fair value of awards granted
|
$
|
4,774
|
|
|
$
|
2,762
|
|
Total grant date fair value of awards vested
|
—
|
|
|
1,151
|
|
|
|
|
|
Market-based restricted stock units:
|
|
|
|
Total grant date fair value of awards granted
|
$
|
2,793
|
|
|
$
|
3,601
|
|
Total grant date fair value of awards vested
|
—
|
|
|
—
|
|
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
April 30, 2016
|
Grant date market price
|
$
|
11.43
|
|
|
$
|
31.67
|
|
Fair value
|
$
|
11.79
|
|
|
$
|
38.22
|
|
Assumptions:
|
|
|
|
Price volatility
|
47
|
%
|
|
44
|
%
|
Expected term (years)
|
2.9
|
|
|
2.8
|
|
Risk-free interest rate
|
1.5
|
%
|
|
1.1
|
%
|
Dividend yield
|
7.0
|
%
|
|
2.5
|
%
|
Average volatility of peer companies
|
35.2
|
%
|
|
34.4
|
%
|
Average correlation coefficient of peer companies
|
0.2664
|
|
|
0.3382
|
|
7. DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These 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
April 29, 2017
will be recognized in cost of sales, exclusive of depreciation and amortization, over the next
twelve months
.
The Company presents its derivative assets and derivative liabilities at their gross fair values on the Condensed Consolidated Balance Sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreement and other similar arrangements allow net settlements under certain conditions.
As of
April 29, 2017
, 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
|
$
|
81,038
|
|
British pound
|
$
|
30,243
|
|
Canadian dollar
|
$
|
15,119
|
|
Japanese yen
|
$
|
7,934
|
|
|
|
(1)
|
Amounts reported are the U.S. Dollar notional amounts outstanding as of
April 29, 2017
.
|
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 instruments and the hedged items.
As of
April 29, 2017
, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets/liabilities:
|
|
|
|
|
(in thousands)
|
Notional Amount
(1)
|
Euro
|
$
|
13,895
|
|
British pound
|
$
|
1,283
|
|
|
|
(1)
|
Amounts reported are the U.S. Dollar notional amounts outstanding as of
April 29, 2017
.
|
The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of
April 29, 2017
and
January 28, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Location
|
|
April 29,
2017
|
|
January 28,
2017
|
|
Location
|
|
April 29,
2017
|
|
January 28,
2017
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other current assets
|
|
$
|
2,415
|
|
|
$
|
5,920
|
|
|
Accrued expenses
|
|
$
|
1,226
|
|
|
$
|
486
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other current assets
|
|
$
|
—
|
|
|
$
|
122
|
|
|
Accrued expenses
|
|
$
|
17
|
|
|
$
|
6
|
|
Total
|
Other current assets
|
|
$
|
2,415
|
|
|
$
|
6,042
|
|
|
Accrued expenses
|
|
$
|
1,243
|
|
|
$
|
492
|
|
Refer to Note 3, “
FAIR VALUE,
” for further discussion of the determination of the fair value of derivative instruments.
The location and amounts of derivative gains and losses for the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
on the Condensed Consolidated Statements of Operations and Comprehensive Loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
April 29, 2017
|
|
April 30, 2016
|
(in thousands)
|
Location
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other operating income, net
|
|
$
|
28
|
|
|
$
|
(1,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion and Amount Excluded from Effectiveness Testing
|
|
Amount of Loss Recognized in OCI on Derivative Contracts
(1)
|
|
Location of Gain Reclassified from AOCL into Earnings
|
|
Amount of Gain 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)
|
|
Thirteen Weeks Ended
|
(in thousands)
|
April 29,
2017
|
|
April 30,
2016
|
|
|
|
April 29,
2017
|
|
April 30,
2016
|
|
|
|
April 29,
2017
|
|
April 30,
2016
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
$
|
(1,373
|
)
|
|
$
|
(9,382
|
)
|
|
Cost of sales, exclusive of depreciation and amortization
|
|
$
|
3,535
|
|
|
$
|
2,305
|
|
|
Other operating income, net
|
|
$
|
528
|
|
|
$
|
355
|
|
|
|
(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.
|
8. ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss for the
thirteen
weeks ended
April 29, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended April 29, 2017
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
Beginning balance at January 28, 2017
|
$
|
(126,127
|
)
|
|
$
|
4,825
|
|
|
$
|
(121,302
|
)
|
Other comprehensive income (loss) before reclassifications
|
5,607
|
|
|
(1,373
|
)
|
|
4,234
|
|
Reclassified from accumulated other comprehensive loss
(1)
|
—
|
|
|
(3,535
|
)
|
|
(3,535
|
)
|
Tax effect
|
—
|
|
|
308
|
|
|
308
|
|
Other comprehensive income (loss)
|
5,607
|
|
|
(4,600
|
)
|
|
1,007
|
|
Ending balance at April 29, 2017
|
$
|
(120,520
|
)
|
|
$
|
225
|
|
|
$
|
(120,295
|
)
|
|
|
(1)
|
For the
thirteen
weeks ended
April 29, 2017
, a gain was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statement of Operations and Comprehensive Loss.
|
The activity in accumulated other comprehensive loss for the
thirteen
weeks ended
April 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended April 30, 2016
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
Beginning balance at January 30, 2016
|
$
|
(119,196
|
)
|
|
$
|
4,577
|
|
|
$
|
(114,619
|
)
|
Other comprehensive income (loss) before reclassifications
|
25,660
|
|
|
(9,382
|
)
|
|
16,278
|
|
Reclassified from accumulated other comprehensive loss
(2)
|
—
|
|
|
(2,305
|
)
|
|
(2,305
|
)
|
Tax effect
|
(5,235
|
)
|
|
1,732
|
|
|
(3,503
|
)
|
Other comprehensive income (loss)
|
20,425
|
|
|
(9,955
|
)
|
|
10,470
|
|
Ending balance at April 30, 2016
|
$
|
(98,771
|
)
|
|
$
|
(5,378
|
)
|
|
$
|
(104,149
|
)
|
|
|
(2)
|
For the
thirteen
weeks ended
April 30, 2016
, a gain was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statement of Operations and Comprehensive Loss.
|
9. SEGMENT REPORTING
The Company has
two
operating segments: Hollister; and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes 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 the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
.
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
(in thousands)
|
April 29, 2017
|
|
April 30, 2016
|
Hollister
|
$
|
374,677
|
|
|
$
|
362,147
|
|
Abercrombie
|
286,422
|
|
|
323,336
|
|
Total
|
$
|
661,099
|
|
|
$
|
685,483
|
|
The following table provides the Company’s net sales by geographic area for the
thirteen
weeks ended
April 29, 2017
and
April 30, 2016
.
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
(in thousands)
|
April 29, 2017
|
|
April 30, 2016
|
United States
|
$
|
409,068
|
|
|
$
|
425,429
|
|
Europe
|
154,984
|
|
|
161,457
|
|
Other
|
97,047
|
|
|
98,597
|
|
Total
|
$
|
661,099
|
|
|
$
|
685,483
|
|
10. 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. 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. There are certain claims and legal proceedings pending against the Company for which accruals have not been established.