ANF Abercrombie and Fitch Co

Overall net sales up 5%, with Hollister net sales up 10%, driving operating expense leverage and profit growth as strategic initiatives gain further traction

New Albany, Ohio, November 17, 2017:  Abercrombie & Fitch Co. (NYSE: ANF) today reported GAAP net income per diluted share of $0.15 for the third quarter ended October 28, 2017, compared to GAAP net income per diluted share of $0.12 for the third quarter last year. Excluding certain items, the company reported adjusted non-GAAP net income per diluted share of $0.30 for the quarter, compared to adjusted non-GAAP net income per diluted share of $0.02 last year.

⁽¹⁾ Excluded Items consist of legal charges of $11.1 million and store asset impairment charges of $3.5 million.
⁽²⁾ Excluded Items consist of indemnification recovery benefits of $6.0 million.
⁽³⁾ Excluded Items are net of tax effect.

The favorable impact from year-over-year changes in foreign currency exchange rates, net of hedging, was approximately $0.01 per diluted share for the quarter.

A description of the use of non-GAAP financial measures and a schedule reconciling GAAP financial measures to adjusted non-GAAP financial measures accompanies this release.

Fran Horowitz, Chief Executive Officer, said:

"We are pleased by the clear progress across all brands, delivering another quarter of sequential comparable sales improvement, and a return to positive comparable sales. This sales performance in combination with disciplined expense management drove profit growth, despite the promotional environment. Our customers remain at the center of all we do, and that singular focus continues to drive both our brands forward, with effective engagement across all channels driving positive overall traffic and conversion trends. Hollister delivered another quarter of sales growth across all channels and geographies, and Abercrombie is beginning to show signs of stabilization.

We continue to execute on our strategic plan, and we are positioned to compete in what we expect to be a challenging and promotional fourth quarter. We maintain our focus on driving operating expense leverage, while also making strategic investments in marketing and omnichannel to meet our customers' needs whenever, wherever and however they choose to engage with our brands."

Third Quarter Sales Results

Net sales for the third quarter were $859.1 million, up 5% over last year, with comparable sales for the third quarter up 4% and changes in foreign currency exchange rates benefiting net sales by 1%.

⁽¹⁾ Comparable sales are calculated on a constant currency basis.
⁽²⁾ Abercrombie includes the Abercrombie & Fitch and abercrombie kids brands.
By brand, net sales for the third quarter increased 10% to $508.1 million for Hollister and decreased 2% to $351.0 million for Abercrombie over last year.

By geography, net sales for the third quarter increased 4% to $554.7 million in the U.S. and increased 5% to $304.4 million in international markets over last year.

Direct-to-consumer sales grew to approximately 24% of total company net sales for the third quarter, compared to approximately 23% of total company net sales last year.

Additional Third Quarter Results Commentary

The gross profit rate for the third quarter was 61.3%, 80 basis points lower than last year on a constant currency basis, as lower average unit cost was more than offset by lower average unit retail.

Stores and distribution expense for the third quarter was $375.9 million, down from $386.6 million last year, as expense reductions were partially offset by volume-related expenses from higher sales and changes in foreign currency exchange rates.

Marketing, general and administrative expense for the third quarter was $124.5 million, up from $105.3 million last year. Excluding legal charges of $11.1 million this year and indemnification recovery benefits of $6.0 million last year, adjusted non-GAAP marketing, general and administrative expense increased $2.2 million, as expense reductions were more than offset by higher performance-based compensation and marketing expenses.

Asset impairment for the third quarter was $3.5 million and was excluded from adjusted results.

Net other operating income for the third quarter was $0.1 million, compared to $0.8 million last year.

Operating income for the third quarter was $22.7 million, compared to $19.6 million last year. Excluding certain items, adjusted non-GAAP operating income for the third quarter was $37.3 million, compared to $13.6 million last year.

The effective tax rate for the third quarter was 42%. Excluding certain items, the adjusted non-GAAP effective tax rate for the third quarter was 36%.

Net income attributable to Abercrombie & Fitch Co. for the third quarter was $10.1 million, compared to $7.9 million last year. Excluding certain items, adjusted non-GAAP net income attributable to Abercrombie & Fitch Co. for the third quarter was $20.5 million, compared to $1.4 million last year.

The company ended the third quarter with $459.3 million in cash and cash equivalents, and gross borrowings under the company's term loan agreement of $268.3 million, compared to $469.7 million in cash and cash equivalents and $293.3 million in borrowings last year.

The company ended the third quarter with $570.5 million in inventory, an increase of 11% over last year.

Other Developments

As previously announced, on November 14, 2017 the Board of Directors declared a quarterly cash dividend of $0.20 per share on the Class A Common Stock of Abercrombie & Fitch Co., payable on December 11, 2017 to stockholders of record at the close of business on December 1, 2017.

Outlook

For the fourth quarter of fiscal 2017, the company expects:

• Comparable sales to be up low-single digits, and net sales to be up mid- to high-single digits, including benefits from the 53rd week and changes in foreign currency exchange rates
   
• The 53rd week to benefit net sales by approximately $38 million and operating income by approximately $2 million
   
• Changes in foreign currency exchange rates to benefit net sales by approximately $20 million and operating income by approximately $5 million, net of hedging
   
• A gross profit rate down approximately 100 basis points to last year's rate of 59.3%, in line with the third quarter year-over-year decline
   
• Operating expense, including other operating income, to be down approximately 1% from $553.7 million last year, with expense reductions partially offset by  increases in volume-related expenses from higher sales and the adverse effect from changes in foreign currency exchange rates
   
• The effective tax rate to be in the mid 30s
   
• A weighted average diluted share count of approximately 70 million shares, excluding the effect of potential share buybacks

On a full year basis, the company expects the effective tax rate to reflect a core tax rate in the mid 30s, which is highly sensitive at lower levels of pre-tax earnings. Additionally, the company expects the full year effective tax rate to reflect discrete non-cash income tax charges of approximately $11 million related to a change in share-based compensation accounting standards.

The company now expects capital expenditures to be approximately $110 million for the full year, up from the company's prior expectation of $100 million.

In addition to the five stores opened year to date, including two outlet stores, the company expects to open four new full-price stores in the fourth quarter. The company anticipates closing up to 60 stores in the U.S. by year-end through natural lease expirations, including 14 stores closed to date.

Today at 8:30 AM, Eastern Standard Time, the company will conduct a conference call. Management will discuss the company's performance and its plans for the future and will accept questions from participants. To listen to the conference call, dial (877) 627-6590 and ask for the Abercrombie & Fitch Quarterly Call or go to www.abercrombie.com.  The international call-in number is (719) 325-4857. This call will be recorded and made available by dialing the replay number (888) 203-1112 or the international number (719) 457-0820 followed by the conference ID number 5771918 or through www.abercrombie.com.

An investor presentation of third quarter results will be available in the "Investors" section of the company's website at www.abercrombie.com at approximately 8:00 AM, Eastern Standard Time, today.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

A&F cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Press Release or made by management or spokespeople of A&F involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the company's control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements. The following factors, in addition to those disclosed in "ITEM 1A. RISK FACTORS" of A&F's Annual Report on Form 10-K for the fiscal year ended January 28, 2017 and in A&F's subsequently filed quarterly reports on Form 10-Q, in some cases have affected, and in the future could affect, the company's financial performance and could cause actual results for Fiscal 2017 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Press Release or otherwise made by management: changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity; our inability to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability; our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours; direct-to-consumer sales channels are a significant component of our growth strategy, and the failure to successfully develop our position in these channels could have an adverse impact on our results of operations; our ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks; our inability to successfully implement our strategic plans could have a negative impact on our growth and profitability; our failure to protect our reputation could have a material adverse effect on our brands; our business could suffer if our information technology systems are disrupted or cease to operate effectively; we may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss; fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations; changes in the cost, availability and quality of raw materials, labor, transportation and trade relations could cause manufacturing delays and increase our costs; we depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs; our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; we rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business; our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain; our litigation exposure could have a material adverse effect on our financial condition and results of operations; our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets; fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results; extreme weather conditions and the seasonal nature of our business may cause net sales to fluctuate and negatively impact our results of operations; our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters, pandemic disease and other unexpected events, any of which could result in an interruption to our business and adversely affect our operating results; the impact of war or acts of terrorism could have a material adverse effect on our operating results and financial condition; changes in the regulatory or compliance landscape could adversely affect our business and results of operations; our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business; and, compliance with changing regulations and standards for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results.

About Abercrombie & Fitch Co.

Abercrombie & Fitch Co. (NYSE: ANF) is a leading, global specialty retailer of apparel and accessories for Men, Women and Kids through three renowned brands. For 125 years, the iconic Abercrombie & Fitch brand has outfitted innovators, explorers and entrepreneurs. Today, the brand reflects the updated attitude of the 21 to 24-year old customer, while remaining true to its heritage of creating expertly crafted products with an effortless, American style. The Hollister brand epitomizes the liberating and carefree spirit of the endless California summer for the teen market. abercrombie kids creates smart, playful apparel for children ages 5-14, celebrating the wide-eyed wonder of childhood.

The brands share a commitment to offering products of enduring quality and exceptional comfort that allow consumers around the world to express their own individuality and style. The Company operates approximately 900 stores under these brands across North America, Europe, Asia and the Middle East, as well as the e-commerce sites www.abercrombie.com and www.hollisterco.com.

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