NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 the “Company”, or “we”) is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for Men, Women and Kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company has operations in North America, Europe and Asia, among other regions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows.
The Company has interests in an Emirati business venture and in a Kuwaiti 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”) on the Condensed Consolidated Statements of Operations and Comprehensive Loss and MAF’s portion of equity presented as NCI on the Condensed Consolidated Balance Sheets.
Fiscal year
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year, as was the case for the year ended February 3, 2018. Fiscal years are designated in the consolidated financial statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows:
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
Year ended
|
|
Number of weeks
|
|
Fiscal 2017
|
|
February 3, 2018
|
|
53
|
|
Fiscal 2018
|
|
February 2, 2019
|
|
52
|
|
Fiscal 2019
|
|
February 1, 2020
|
|
52
|
|
Fiscal 2020
|
|
January 30, 2021
|
|
52
|
Interim financial statements
The Condensed Consolidated Financial Statements as of August 3, 2019, and for the thirteen and twenty-six week periods ended August 3, 2019 and August 4, 2018, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, the 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 2018 filed with the SEC on April 1, 2019. The February 2, 2019 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, 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 2019.
Certain prior year amounts have been reclassified for consistency with the current year presentation of flagship store exit charges on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Recent accounting pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain recent accounting pronouncements the Company has adopted.
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|
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Accounting Standards Update (ASU)
|
|
Description
|
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Effect on the financial statements or other significant matters
|
|
Leases
(ASU 2016-02)
Date of adoption: February 3, 2019
|
|
This update supersedes the leasing standard in Accounting Standards Codification (“ASC”) 840, Leases. The new standard 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.
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|
The Company adopted this standard using a modified retrospective transition method and elected to not restate comparative periods.
In conjunction with the adoption of this standard, the Company elected:
- the package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification for leases existing before the date of adoption; and
- to combine lease and nonlease components for leases existing before the date of adoption, as well as for any new leases.
However, the Company did not elect the practical expedient to use hindsight when determining the lease term or assessing impairment.
Adoption of this standard resulted in the Company’s total assets and total liabilities on the Condensed Consolidated Balance Sheet each increasing by approximately $1.2 billion, primarily due to the recognition of operating lease right-of-use assets and liabilities. The Company also recognized a cumulative adjustment decreasing the opening balance of retained earnings by $0.1 billion on the date of adoption.
The adoption of this standard did not have a significant impact on the timing or classification of the Company’s Consolidated Statement of Cash Flows, the Company’s liquidity or the Company’s debt covenant compliance under current agreements.
Additional information regarding the impact from adoption of the new lease accounting standard and updated accounting policies related to leases are provided further in this Note 2.
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Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12)
Date of adoption: February 3, 2019
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|
This update amends ASC 815, Derivatives and Hedging. The new standard simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements.
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The Company adopted this standard using a modified retrospective transition approach, while the amended presentation and disclosure standard requires a prospective approach. Upon adoption of this standard, the Company elected to include time value in its assessment of effectiveness for derivative instruments designated as cash flow hedges. Updated accounting policies related to derivatives have been updated and are provided further in this Note 2.
The adoption of this standard did not have a significant impact on the Company’s Condensed Consolidated Financial Statements for the thirteen and twenty-six weeks ended August 3, 2019, and is not expected to have a significant impact on the Company’s consolidated financial statements for Fiscal 2019.
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Intangibles — Goodwill and Other —Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
(ASU 2018-15)
Date of adoption: February 3, 2019
|
|
This update amends ASC 350, Intangibles — Goodwill and Other —Internal-Use Software. The new standard allows companies to defer certain direct costs related to software as a service (“SaaS”) implementation costs and amortize them to operating expense over the term of the related SaaS arrangement. The criteria for determining whether costs associated with SaaS can be capitalized is now the same criteria applied to internal software development costs in order to assess eligibility for deferral.
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The Company early adopted this standard on a prospective basis and comparative periods have not been restated.
The Company expects to capitalize up to $10 million of SaaS implementation costs in Fiscal 2019, of which $2.2 million has been capitalized in the twenty-six weeks ended August 3, 2019.
Amortization expense related to capitalized SaaS implementation costs was immaterial for each of the thirteen and twenty-six weeks ended August 3, 2019.
|
The following table provides the impact from adoption of the new lease accounting standard on the Company’s Condensed Consolidated Balance Sheet:
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|
|
(in thousands)
|
February 2, 2019
(as reported under previous lease
accounting standard)
|
|
Impact from adoption
of new lease
accounting standard
|
|
Upon adoption on February 3, 2019
(under new lease accounting standard) (1)
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
723,135
|
|
|
$
|
—
|
|
|
$
|
723,135
|
|
|
Receivables
|
73,112
|
|
|
—
|
|
|
73,112
|
|
|
Inventories
|
437,879
|
|
|
—
|
|
|
437,879
|
|
|
Other current assets (2)
|
101,824
|
|
|
(31,310
|
)
|
|
70,514
|
|
|
Total current assets
|
1,335,950
|
|
|
(31,310
|
)
|
|
1,304,640
|
|
|
Property and equipment, net (3)
|
694,855
|
|
|
(46,624
|
)
|
|
648,231
|
|
|
Operating lease right-of-use assets (2)
|
—
|
|
|
1,234,515
|
|
|
1,234,515
|
|
|
Other assets (2) (5)
|
354,788
|
|
|
15,553
|
|
|
370,341
|
|
|
Total assets
|
$
|
2,385,593
|
|
|
$
|
1,172,134
|
|
|
$
|
3,557,727
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
$
|
226,878
|
|
|
$
|
—
|
|
|
$
|
226,878
|
|
|
Accrued expenses (2)
|
293,579
|
|
|
(13,508
|
)
|
|
280,071
|
|
|
Short-term portion of operating lease liabilities (4)
|
—
|
|
|
280,108
|
|
|
280,108
|
|
|
Short-term portion of deferred lease credits (2)
|
19,558
|
|
|
(19,558
|
)
|
|
—
|
|
|
Income taxes payable
|
18,902
|
|
|
—
|
|
|
18,902
|
|
|
Total current liabilities
|
558,917
|
|
|
247,042
|
|
|
805,959
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Long-term portion of operating lease liabilities (4)
|
—
|
|
|
1,193,946
|
|
|
1,193,946
|
|
|
Long-term portion of borrowings, net
|
250,439
|
|
|
—
|
|
|
250,439
|
|
|
Long-term portion of deferred lease credits (2)
|
76,134
|
|
|
(76,134
|
)
|
|
—
|
|
|
Leasehold financing obligations (3)
|
46,337
|
|
|
(46,337
|
)
|
|
—
|
|
|
Other liabilities (2) (5)
|
235,145
|
|
|
(71,218
|
)
|
|
163,927
|
|
|
Total long-term liabilities
|
608,055
|
|
|
1,000,257
|
|
|
1,608,312
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
Class A Common Stock
|
1,033
|
|
|
—
|
|
|
1,033
|
|
|
Paid-in capital
|
405,379
|
|
|
—
|
|
|
405,379
|
|
|
Retained earnings (6)
|
2,418,544
|
|
|
(75,165
|
)
|
|
2,343,379
|
|
|
Accumulated other comprehensive loss, net of tax
|
(102,452
|
)
|
|
—
|
|
|
(102,452
|
)
|
|
Treasury stock, at average cost
|
(1,513,604
|
)
|
|
—
|
|
|
(1,513,604
|
)
|
|
Total Abercrombie & Fitch Co. stockholders’ equity
|
1,208,900
|
|
|
(75,165
|
)
|
|
1,133,735
|
|
|
Noncontrolling interests
|
9,721
|
|
|
—
|
|
|
9,721
|
|
|
Total stockholders’ equity
|
1,218,621
|
|
|
(75,165
|
)
|
|
1,143,456
|
|
|
Total liabilities and stockholders’ equity
|
$
|
2,385,593
|
|
|
$
|
1,172,134
|
|
|
$
|
3,557,727
|
|
|
|
|
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(1)
|
Amounts under “Upon adoption on February 3, 2019 (under new lease accounting standard),” are calculated as February 2, 2019 reported balances adjusted for the impact of adoption on the first day of Fiscal 2019, February 3, 2019.
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|
|
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(2)
|
Upon adoption, the Company recognized assets for the rights to use its operating leases on the Condensed Consolidated Balance Sheet. In conjunction with this recognition, the Company reclassified amounts to operating lease right-of-use assets including: short-term prepaid rent from other current assets; key money, long-term prepaid rent and leasehold acquisition costs from other assets; short-term and long-term portions of deferred lease credits; accrued rent and accrued straight-line rent from accrued expenses and other liabilities, respectively.
|
|
|
|
|
(3)
|
Upon adoption, the Company derecognized construction project assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting. In certain instances, these construction project assets had shielded other assets included within their respective asset groups from impairment, as the fair value of the construction project assets had exceeded the carrying values of their respective asset groups. In such instances, the Company recognized impairment of certain leasehold improvements and store assets upon adoption.
|
|
|
|
|
(4)
|
Upon adoption, the Company recognized operating lease liabilities on the Condensed Consolidated Balance Sheet.
|
|
|
|
|
(5)
|
Upon adoption, the Company established net deferred tax assets for operating lease right-of-use assets and operating lease liabilities.
|
|
|
|
|
(6)
|
Upon adoption, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings, primarily related to right-of-use asset impairment charges for certain of the Company’s stores where it was previously determined that the carrying value of assets was not recoverable, partially offset by benefits to retained earnings to establish net deferred tax assets and a net gain resulting from the derecognition of certain leased building assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting.
|
The Company’s significant accounting policies as of August 3, 2019 have not changed materially from those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2018, with the exception of those discussed below which have been updated to reflect new accounting standards adopted in Fiscal 2019.
Leases
The Company determines if an arrangement is a lease at inception. On the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the transactional currency of the lease and the lease term. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.
The Company has elected to combine lease and nonlease components for all leases existing before the adoption of the new lease accounting standard, as well as for any new leases.
The measurement of lease right-of-use assets and liabilities includes amounts related to:
|
|
|
|
•
|
Lease payments made prior to the lease commencement date;
|
|
|
|
|
•
|
Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded;
|
|
|
|
|
•
|
Fixed payments related to lease components, such as rent escalation payments scheduled at the lease commencement date;
|
|
|
|
|
•
|
Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and
|
|
|
|
|
•
|
Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease.
|
The measurement of lease right-of-use assets and liabilities excludes amounts related to:
|
|
|
|
•
|
Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Condensed Consolidated Balance Sheets;
|
|
|
|
|
•
|
Variable payments related to lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss);
|
|
|
|
|
•
|
Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); and
|
|
|
|
|
•
|
Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
|
Certain of the Company’s leases include options to extend the lease or to terminate the lease. The Company assesses these leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s lease right-of-use assets and liabilities. Generally, the Company’s options to extend its leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until a new agreement has been executed.
Amortization and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the lease, amortization and interest expense is recorded in either stores and distribution expense or marketing, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company’s lease right-of-use assets are assessed for indicators of impairment at least quarterly, in accordance with the long-lived asset impairment policy disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of A&F’s Annual Report on Form 10-K for Fiscal 2018.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party or third party.
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. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued.
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 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. 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 exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. 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 conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”) into earnings on the Condensed Consolidated Balance Sheets.
The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Condensed Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions.
Condensed Consolidated Statements of Cash Flows reconciliation
The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Location
|
|
August 3, 2019
|
|
February 2, 2019
|
|
August 4, 2018
|
|
February 3, 2018
|
|
Cash and equivalents
|
Cash and equivalents
|
|
$
|
499,757
|
|
|
$
|
723,135
|
|
|
$
|
581,166
|
|
|
$
|
675,558
|
|
|
Long-term restricted cash and equivalents
|
Other assets
|
|
18,877
|
|
|
22,694
|
|
|
22,022
|
|
|
22,397
|
|
|
Short-term restricted cash and equivalents
|
Other current assets
|
|
$
|
2,537
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and equivalents and restricted cash and equivalents
|
|
|
$
|
521,171
|
|
|
$
|
745,829
|
|
|
$
|
603,188
|
|
|
$
|
697,955
|
|
3. REVENUE RECOGNITION
Contract liabilities
The following table details certain contract liabilities representing unearned revenue as of August 3, 2019, February 2, 2019, August 4, 2018 and February 3, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 3, 2019
|
|
February 2, 2019
|
|
August 4, 2018
|
|
February 3, 2018
|
|
Unearned revenue liabilities related to the Company’s gift card program
|
$
|
20,056
|
|
|
$
|
26,062
|
|
|
$
|
17,478
|
|
|
$
|
28,939
|
|
|
Unearned revenue liabilities related to the Company’s loyalty programs
|
$
|
21,073
|
|
|
$
|
19,904
|
|
|
$
|
20,042
|
|
|
$
|
15,965
|
|
The Company recognized revenue associated with gift card redemptions and gift card breakage of approximately $12.8 million and $28.1 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, and approximately $12.0 million and $25.8 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.
The Company recognized revenue associated with reward redemptions and breakage related to the Company’s loyalty programs of approximately $8.0 million and $14.5 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, and approximately $8.2 million and $15.4 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.
Disaggregation of revenue
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Loss. For information regarding the disaggregation of revenue, refer to Note 13, “SEGMENT REPORTING.”
4. NET LOSS PER SHARE
Net loss per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”).
Additional information pertaining to net loss per share attributable to A&F is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Shares of Common Stock issued
|
103,300
|
|
|
103,300
|
|
|
103,300
|
|
|
103,300
|
|
|
Weighted-average treasury shares
|
(38,144
|
)
|
|
(35,292
|
)
|
|
(37,452
|
)
|
|
(35,046
|
)
|
|
Weighted-average — basic shares
|
65,156
|
|
|
68,008
|
|
|
65,848
|
|
|
68,254
|
|
|
Dilutive effect of share-based compensation awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average — diluted shares
|
65,156
|
|
|
68,008
|
|
|
65,848
|
|
|
68,254
|
|
|
Anti-dilutive shares (1)
|
3,318
|
|
|
3,466
|
|
|
3,065
|
|
|
4,033
|
|
|
|
|
|
(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.
|
5. 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 of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of August 3, 2019
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
$
|
211
|
|
|
$
|
25,288
|
|
|
$
|
—
|
|
|
$
|
25,499
|
|
|
Derivative instruments (2)
|
—
|
|
|
5,457
|
|
|
—
|
|
|
5,457
|
|
|
Rabbi Trust assets (3)
|
1
|
|
|
107,466
|
|
|
—
|
|
|
107,467
|
|
|
Restricted cash equivalents (4)
|
10,056
|
|
|
4,546
|
|
|
—
|
|
|
14,602
|
|
|
Total assets
|
$
|
10,268
|
|
|
$
|
142,757
|
|
|
$
|
—
|
|
|
$
|
153,025
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative instruments (2)
|
$
|
—
|
|
|
$
|
349
|
|
|
$
|
—
|
|
|
$
|
349
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
349
|
|
|
$
|
—
|
|
|
$
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of February 2, 2019
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
$
|
55,558
|
|
|
$
|
34,440
|
|
|
$
|
—
|
|
|
$
|
89,998
|
|
|
Derivative instruments (2)
|
—
|
|
|
2,162
|
|
|
—
|
|
|
2,162
|
|
|
Rabbi Trust assets (3)
|
5
|
|
|
105,877
|
|
|
—
|
|
|
105,882
|
|
|
Restricted cash equivalents (4)
|
10,910
|
|
|
4,588
|
|
|
—
|
|
|
15,498
|
|
|
Total assets
|
$
|
66,473
|
|
|
$
|
147,067
|
|
|
$
|
—
|
|
|
$
|
213,540
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative instruments (2)
|
$
|
—
|
|
|
$
|
332
|
|
|
$
|
—
|
|
|
$
|
332
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
332
|
|
|
$
|
—
|
|
|
$
|
332
|
|
|
|
|
|
(1)
|
Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits.
|
|
|
|
|
(2)
|
Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts.
|
|
|
|
|
(3)
|
Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies.
|
|
|
|
|
(4)
|
Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits.
|
The Company’s Level 2 assets and liabilities consist of:
|
|
|
|
•
|
Time deposits, which are valued at cost approximating fair value due to the short-term nature of these investments;
|
|
|
|
|
•
|
Trust-owned life insurance policies, which are valued using the cash surrender value of the life insurance policies; and
|
|
|
|
|
•
|
Derivative instruments, primarily foreign currency exchange forward contracts, which are valued 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. The carrying amount and fair value of gross borrowings under the Company’s term loan credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 3, 2019
|
|
February 2, 2019
|
|
Gross borrowings outstanding, carrying amount
|
$
|
253,250
|
|
|
$
|
253,250
|
|
|
Gross borrowings outstanding, fair value
|
$
|
254,516
|
|
|
$
|
252,933
|
|
No borrowings were outstanding under the Company’s senior secured revolving credit facility as of August 3, 2019 or February 2, 2019.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 3, 2019
|
|
February 2, 2019
|
|
Property and equipment, at cost
|
$
|
2,719,350
|
|
|
$
|
2,829,250
|
|
|
Less: Accumulated depreciation and amortization
|
(2,069,990
|
)
|
|
(2,134,395
|
)
|
|
Property and equipment, net
|
$
|
649,360
|
|
|
$
|
694,855
|
|
Details related to store asset impairment charges incurred during the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Store asset impairment
|
355
|
|
|
8,671
|
|
|
2,017
|
|
|
9,727
|
|
The Company had $34.7 million of construction project assets in property and equipment, net as of February 2, 2019, related to the construction of buildings in certain lease arrangements where, under the previous lease accounting standard, the Company was deemed to be the owner of the construction project. Upon adoption of the new lease accounting standard, described further in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” the Company derecognized these construction project assets.
7. LEASES
The Company has leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
The following table provides a summary of the Company’s operating lease costs for the thirteen and twenty-six weeks ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
Single lease cost (1)
|
$
|
121,270
|
|
|
$
|
213,544
|
|
|
Variable lease cost (2)
|
60,238
|
|
|
103,083
|
|
|
Operating lease right-of-use asset impairment (3)
|
3,589
|
|
|
3,589
|
|
|
Total operating lease cost
|
$
|
185,097
|
|
|
$
|
320,216
|
|
|
|
|
|
(1)
|
Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities. Includes $23.3 million of charges related to flagship store exit charges for each of the thirteen and twenty-six weeks ended August 3, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.”
|
|
|
|
|
(2)
|
Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs. Includes $20.2 million of charges related to flagship store exit charges for each of the thirteen and twenty-six weeks ended August 3, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.”
|
|
|
|
|
(3)
|
Includes $3.2 million of charges related to flagship store exit charges for each of the thirteen and twenty-six weeks ended August 3, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.”
|
The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rates used to calculate the Company’s operating lease liabilities as of August 3, 2019:
|
|
|
|
|
|
|
|
August 3, 2019
|
|
Weighted-average remaining lease term (years)
|
6.3
|
|
|
Weighted-average discount rate
|
5.5
|
%
|
The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of August 3, 2019:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Fiscal 2019 (excluding the twenty-six weeks ended August 3, 2019)
|
$
|
173,786
|
|
|
Fiscal 2020
|
342,672
|
|
|
Fiscal 2021
|
293,971
|
|
|
Fiscal 2022
|
245,215
|
|
|
Fiscal 2023
|
202,561
|
|
|
Fiscal 2024 and thereafter
|
531,374
|
|
|
Total undiscounted operating lease payments
|
$
|
1,789,579
|
|
|
Less: Imputed interest
|
(285,981
|
)
|
|
Present value of operating lease liabilities
|
$
|
1,503,598
|
|
As of August 3, 2019, the Company had minimum commitments related to additional operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $28.1 million.
As reported under the previous accounting standard, the following table provides a summary of operating lease commitments, including leasehold financing obligations, under noncancelable leases as of February 2, 2019:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Fiscal 2019
|
$
|
367,622
|
|
|
Fiscal 2020
|
$
|
304,270
|
|
|
Fiscal 2021
|
$
|
205,542
|
|
|
Fiscal 2022
|
$
|
159,617
|
|
|
Fiscal 2023
|
$
|
128,626
|
|
|
Fiscal 2024 and thereafter
|
$
|
310,003
|
|
8. ASSET IMPAIRMENT
The following table provides additional details related to long-lived asset impairment charges for thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Operating lease right-of-use asset impairment (1)
|
$
|
3,589
|
|
|
$
|
—
|
|
|
$
|
3,589
|
|
|
$
|
—
|
|
|
Store asset impairment
|
355
|
|
|
8,671
|
|
|
2,017
|
|
|
9,727
|
|
|
Total asset impairment
|
$
|
3,944
|
|
|
$
|
8,671
|
|
|
$
|
5,606
|
|
|
$
|
9,727
|
|
|
|
|
|
(1)
|
Includes $3.2 million of operating lease right-of-use asset impairment related to flagship store exit charges for each of the thirteen and twenty-six weeks ended August 3, 2019. Refer to Note 14, “FLAGSHIP STORE EXIT CHARGES.”
|
9. INCOME TAXES
The quarterly tax provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. 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, interpretations and administrative practices, relative changes in 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 earnings.
The Company incurred discrete income tax charges of $0.1 million and benefits of $1.0 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, primarily related to the exercise of certain share-based compensation awards, and incurred discrete non-cash income tax benefits of $0.2 million and charges of $7.9 million for the thirteen and twenty-six ended August 4, 2018, respectively, primarily related to the expiration of certain share-based compensation awards.
10. SHARE-BASED COMPENSATION
Financial statement impact
The following table details share-based compensation expense for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Share-based compensation expense
|
$
|
36
|
|
|
$
|
6,156
|
|
|
$
|
2,668
|
|
|
$
|
10,939
|
|
The Company recognized tax expense associated with share-based compensation of $0.2 million and tax benefits of $0.4 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, and tax benefits of $1.3 million and $2.2 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.
Restricted stock units
The following table summarizes activity for restricted stock units for the twenty-six weeks ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 February 2, 2019
|
2,020,030
|
|
|
$
|
16.76
|
|
|
801,527
|
|
|
$
|
13.65
|
|
|
435,970
|
|
|
$
|
21.24
|
|
|
Granted
|
724,363
|
|
|
22.16
|
|
|
234,984
|
|
|
22.89
|
|
|
115,238
|
|
|
36.24
|
|
|
Adjustments for performance achievement
|
—
|
|
|
—
|
|
|
(90,616
|
)
|
|
24.06
|
|
|
(72,497
|
)
|
|
28.20
|
|
|
Vested
|
(701,802
|
)
|
|
17.92
|
|
|
—
|
|
|
—
|
|
|
(18,125
|
)
|
|
28.20
|
|
|
Forfeited
|
(261,851
|
)
|
|
16.22
|
|
|
(195,162
|
)
|
|
12.93
|
|
|
(38,802
|
)
|
|
29.90
|
|
|
Unvested at August 3, 2019
|
1,780,740
|
|
|
$
|
18.58
|
|
|
750,733
|
|
|
$
|
15.44
|
|
|
421,784
|
|
|
$
|
23.05
|
|
|
|
|
|
(1)
|
Includes 271,420 unvested restricted stock units as of August 3, 2019, subject to vesting requirements related to the achievement of certain performance metrics, such as operating income and net income, for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one or more installments of the award if the cumulative performance requirements are met in a subsequent year. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at 100% of their target vesting amount in the table above.
|
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 awards 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.
Service-based restricted stock units are expensed on a straight-line basis over the award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation expense for stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. Unrecognized compensation expense presented excludes the effect of potential forfeitures, and will be adjusted for actual forfeitures as they occur.
As of August 3, 2019, there was $27.6 million, $4.3 million and $5.4 million of total unrecognized compensation cost, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 16 months, 16 months and 14 months for service-based, performance-based and market-based restricted stock units, respectively.
The actual tax benefit realized for tax deductions related to the issuance of shares associated with restricted stock units vesting was $0.3 million and $4.4 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, and $1.5 million and $4.9 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.
The amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights was $0.2 million and $6.4 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, and $0.9 million and $5.9 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, and is classified within other financing activities on the Condensed Consolidated Statements of Cash Flows.
Additional information pertaining to restricted stock units for the twenty-six weeks ended August 3, 2019 and August 4, 2018 follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
Service-based restricted stock units:
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
16,052
|
|
|
$
|
16,161
|
|
|
Total grant date fair value of awards vested
|
12,576
|
|
|
14,608
|
|
|
|
|
|
|
|
Performance-based restricted stock units:
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
5,379
|
|
|
$
|
4,310
|
|
|
Total grant date fair value of awards vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Market-based restricted stock units:
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
4,176
|
|
|
$
|
4,784
|
|
|
Total grant date fair value of awards vested
|
511
|
|
|
137
|
|
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-six weeks ended August 3, 2019 and August 4, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Grant date market price
|
$
|
25.34
|
|
|
$
|
23.59
|
|
|
Fair value
|
$
|
36.24
|
|
|
$
|
33.69
|
|
|
Assumptions:
|
|
|
|
|
Price volatility
|
57
|
%
|
|
54
|
%
|
|
Expected term (years)
|
2.9
|
|
|
2.9
|
|
|
Risk-free interest rate
|
2.2
|
%
|
|
2.4
|
%
|
|
Dividend yield
|
3.2
|
%
|
|
3.4
|
%
|
|
Average volatility of peer companies
|
40.0
|
%
|
|
37.4
|
%
|
|
Average correlation coefficient of peer companies
|
0.2407
|
|
|
0.2709
|
|
Stock appreciation rights
The following table summarizes stock appreciation rights activity for the twenty-six weeks ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life (years)
|
|
Outstanding at February 2, 2019
|
1,041,867
|
|
|
$
|
37.81
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(43,463
|
)
|
|
22.41
|
|
|
|
|
|
|
Forfeited or expired
|
(52,725
|
)
|
|
33.96
|
|
|
|
|
|
|
Outstanding at August 3, 2019
|
945,679
|
|
|
$
|
38.75
|
|
|
$
|
—
|
|
|
2.4
|
|
Stock appreciation rights exercisable at August 3, 2019
|
940,054
|
|
|
$
|
38.86
|
|
|
$
|
—
|
|
|
2.4
|
|
Stock appreciation rights expected to become exercisable in the future as of August 3, 2019
|
5,526
|
|
|
$
|
19.90
|
|
|
$
|
—
|
|
|
6.1
|
As of August 3, 2019, total unrecognized compensation cost related to stock appreciation rights was insignificant and is expected to be recognized over a weighted-average period of 2 months.
The grant date fair value of stock appreciation rights that vested during the twenty-six weeks ended August 3, 2019 was $0.6 million. The grant date fair value of stock appreciation rights that were exercised during the twenty-six weeks ended August 4, 2018 was $1.2 million.
11. DERIVATIVE INSTRUMENTS
As of August 3, 2019, 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
|
$
|
86,139
|
|
|
British pound
|
$
|
42,892
|
|
|
Canadian dollar
|
$
|
15,742
|
|
|
Japanese yen
|
$
|
9,140
|
|
|
|
|
|
(1)
|
Amounts reported are the U.S. Dollar notional amounts outstanding as of August 3, 2019.
|
As of August 3, 2019, foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets and liabilities were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Notional Amount (1)
|
|
Chinese yuan
|
$
|
21,763
|
|
|
Euro
|
$
|
9,485
|
|
|
|
|
|
(1)
|
Amount reported is the U.S. Dollar notional amount outstanding as of August 3, 2019.
|
The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of August 3, 2019 and February 2, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Location
|
|
August 3, 2019
|
|
February 2, 2019
|
|
Location
|
|
August 3, 2019
|
|
February 2, 2019
|
|
Derivatives designated as cash flow hedging instruments
|
Other current assets
|
|
$
|
5,254
|
|
|
$
|
2,162
|
|
|
Accrued expenses
|
|
$
|
349
|
|
|
$
|
15
|
|
|
Derivatives not designated as hedging instruments
|
Other current assets
|
|
203
|
|
|
—
|
|
|
Accrued expenses
|
|
—
|
|
|
317
|
|
|
Total
|
|
|
$
|
5,457
|
|
|
$
|
2,162
|
|
|
|
|
$
|
349
|
|
|
$
|
332
|
|
Refer to Note 5, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative instruments.
Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Gain recognized in AOCL (1)
|
$
|
4,791
|
|
|
$
|
8,058
|
|
|
$
|
7,053
|
|
|
$
|
16,665
|
|
|
Gain (loss) reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2)
|
$
|
1,763
|
|
|
$
|
(150
|
)
|
|
$
|
4,303
|
|
|
$
|
(5,222
|
)
|
|
|
|
|
(1)
|
The amount represents the change in fair value of derivative contracts.
|
|
|
|
|
(2)
|
The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization.
|
Substantially all of the unrealized gains or losses related foreign currency exchange forward contracts designated as cash flow hedging instruments as of August 3, 2019 will be recognized in cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months.
Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Gain recognized in other operating income, net
|
|
$
|
906
|
|
|
$
|
1,894
|
|
|
$
|
1,181
|
|
|
$
|
4,595
|
|
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended August 3, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended August 3, 2019
|
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
|
Beginning balance at May 4, 2019
|
$
|
(107,673
|
)
|
|
$
|
2,382
|
|
|
$
|
(105,291
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(3,788
|
)
|
|
4,791
|
|
|
1,003
|
|
|
Reclassified from accumulated other comprehensive loss (1)
|
—
|
|
|
(1,763
|
)
|
|
(1,763
|
)
|
|
Tax effect
|
—
|
|
|
105
|
|
|
105
|
|
|
Other comprehensive (loss) income
|
(3,788
|
)
|
|
3,133
|
|
|
(655
|
)
|
|
Ending balance at August 3, 2019
|
$
|
(111,461
|
)
|
|
$
|
5,515
|
|
|
$
|
(105,946
|
)
|
|
|
|
|
|
|
|
|
|
Twenty-six Weeks Ended August 3, 2019
|
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
|
Beginning balance at February 2, 2019
|
$
|
(104,887
|
)
|
|
$
|
2,435
|
|
|
$
|
(102,452
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(6,574
|
)
|
|
7,053
|
|
|
479
|
|
|
Reclassified from accumulated other comprehensive loss (1)
|
—
|
|
|
(4,303
|
)
|
|
(4,303
|
)
|
|
Tax effect
|
—
|
|
|
330
|
|
|
330
|
|
|
Other comprehensive (loss) income
|
(6,574
|
)
|
|
3,080
|
|
|
(3,494
|
)
|
|
Ending balance at August 3, 2019
|
$
|
(111,461
|
)
|
|
$
|
5,515
|
|
|
$
|
(105,946
|
)
|
|
|
|
|
(1)
|
Amount represents gain 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 and twenty-six weeks ended August 4, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended August 4, 2018
|
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
|
Beginning balance at May 5, 2018
|
$
|
(93,286
|
)
|
|
$
|
2,153
|
|
|
$
|
(91,133
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(11,206
|
)
|
|
8,058
|
|
|
(3,148
|
)
|
|
Reclassified from accumulated other comprehensive loss (1)
|
—
|
|
|
150
|
|
|
150
|
|
|
Tax effect
|
—
|
|
|
(761
|
)
|
|
(761
|
)
|
|
Other comprehensive (loss) income
|
(11,206
|
)
|
|
7,447
|
|
|
(3,759
|
)
|
|
Ending balance at August 4, 2018
|
$
|
(104,492
|
)
|
|
$
|
9,600
|
|
|
$
|
(94,892
|
)
|
|
|
|
|
|
|
|
|
|
Twenty-six Weeks Ended August 4, 2018
|
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
|
Beginning balance at February 3, 2018
|
$
|
(84,947
|
)
|
|
$
|
(10,107
|
)
|
|
$
|
(95,054
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(19,545
|
)
|
|
16,665
|
|
|
(2,880
|
)
|
|
Reclassified from accumulated other comprehensive loss (1)
|
—
|
|
|
5,222
|
|
|
5,222
|
|
|
Tax effect
|
—
|
|
|
(2,180
|
)
|
|
(2,180
|
)
|
|
Other comprehensive (loss) income
|
(19,545
|
)
|
|
19,707
|
|
|
162
|
|
|
Ending balance at August 4, 2018
|
$
|
(104,492
|
)
|
|
$
|
9,600
|
|
|
$
|
(94,892
|
)
|
|
|
|
|
(1)
|
Amount represents loss 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.
|
13. SEGMENT REPORTING
The Company’s two operating segments are brand-based: Hollister and Abercrombie, the latter of 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, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area.
The following table provides the Company’s net sales by operating segment for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Hollister
|
$
|
504,758
|
|
|
$
|
500,836
|
|
|
$
|
933,203
|
|
|
$
|
924,464
|
|
|
Abercrombie
|
336,320
|
|
|
341,578
|
|
|
641,847
|
|
|
648,849
|
|
|
Total
|
$
|
841,078
|
|
|
$
|
842,414
|
|
|
$
|
1,575,050
|
|
|
$
|
1,573,313
|
|
The following table provides the Company’s net sales by geographic area for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
United States
|
$
|
543,472
|
|
|
$
|
531,446
|
|
|
$
|
1,013,130
|
|
|
$
|
980,572
|
|
|
Europe
|
182,815
|
|
|
192,354
|
|
|
341,060
|
|
|
362,014
|
|
|
Other
|
114,791
|
|
|
118,614
|
|
|
220,860
|
|
|
230,727
|
|
|
Total
|
$
|
841,078
|
|
|
$
|
842,414
|
|
|
$
|
1,575,050
|
|
|
$
|
1,573,313
|
|
14. FLAGSHIP STORE EXIT CHARGES
Global Store Network Optimization
Reflecting a continued focus on one of the Company’s key transformation initiatives ‘Global Store Network Optimization’, the Company continues to pivot away from its large format flagship stores and strives to open smaller, more productive omnichannel focused brand experiences.
As a result, the Company has closed certain of its flagship stores and may have additional closures as it executes against this strategy. For context, at the end of Fiscal 2018, the Company had 19 flagship stores, and at the end of the second quarter of Fiscal 2019, the Company had 17 flagship stores. Details related to previously announced flagship store closures are as follows:
|
|
|
|
|
|
|
|
|
Location
|
|
Brand
|
|
Actual or expected closure date
|
|
Pedder Street, Hong Kong
|
|
Abercrombie
|
|
Closed in the first quarter of Fiscal 2017
|
|
Copenhagen, Denmark
|
|
Abercrombie
|
|
Closed in the first quarter of Fiscal 2019
|
|
SoHo in New York City
|
|
Hollister
|
|
Closed in the second quarter of Fiscal 2019
|
|
Milan, Italy
|
|
Abercrombie
|
|
Expected to close by the end of Fiscal 2019
|
|
Fukuoka, Japan
|
|
Abercrombie
|
|
Expected to close in the second half of Fiscal 2020
|
The Company has recognized charges related to the aforementioned store closures in flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Loss. The following table provides additional details related to these charges incurred during the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
(in thousands)
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Single lease cost (1)
|
$
|
23,269
|
|
|
$
|
—
|
|
|
$
|
23,269
|
|
|
$
|
—
|
|
|
Variable lease cost (2)
|
20,218
|
|
|
—
|
|
|
20,218
|
|
|
—
|
|
|
Operating lease right-of-use asset impairment
|
3,229
|
|
|
—
|
|
|
3,229
|
|
|
—
|
|
|
Operating lease cost
|
46,716
|
|
|
—
|
|
|
46,716
|
|
|
—
|
|
|
Lease termination fees (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
3,688
|
|
|
Asset disposals and other store-closure costs (4)
|
(1,675
|
)
|
|
—
|
|
|
(1,687
|
)
|
|
—
|
|
|
Employee severance and other employee transition costs
|
(47
|
)
|
|
—
|
|
|
1,709
|
|
|
120
|
|
|
Total flagship store exit charges
|
$
|
44,994
|
|
|
$
|
—
|
|
|
$
|
46,738
|
|
|
$
|
3,808
|
|
|
|
|
|
(1)
|
Amounts represent accelerated amortization associated with the operating lease right-of-use assets and liabilities and the impact from remeasurement of operating lease liabilities.
|
|
|
|
|
(2)
|
Amounts represent the remeasurement of the lease liability to reflect variable lease costs that became fixed upon decision to close aforementioned flagship stores.
|
|
|
|
|
(3)
|
Under the new lease accounting standard, which the Company adopted on February 3, 2019, similar charges would be incorporated into the above table as a component of operating lease cost.
|
|
|
|
|
(4)
|
Amounts represent costs incurred in returning the store to its original condition, including updates to previous accruals for asset retirement obligations and costs to remove inventory and store assets.
|
The Company’s future lease payments associated with these stores are reflected within short-term and long-term operating lease liabilities on the Condensed Consolidated Balance Sheet and will be paid through the fiscal year ending January 30, 2029 (“Fiscal 2028”).These future lease payments are not expected to exceed $15 million in any fiscal year. Refer to Note 7, “LEASES,” for a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows.
As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur incremental charges or future cash expenditures not currently contemplated due to events that may occur as a result of, or that are associated with, additional flagship store closures. At this time, the Company is not able to quantify the amount of charges or future cash expenditures that may take place in future periods resulting from any potential flagship store closures given the unpredictable nature of lease exit negotiations and ultimate lease renewal decisions.