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 “Abercrombie & Fitch” or the “Company”), is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its Company-owned store and digital 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 primarily 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 Income (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. Fiscal years are designated in the Condensed 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 commences. All references herein to the Company’s fiscal years are as follows:
|
|
|
|
|
|
Fiscal year
|
|
Year ended
|
|
Number of weeks
|
Fiscal 2019
|
|
February 1, 2020
|
|
52
|
Fiscal 2020
|
|
January 30, 2021
|
|
52
|
Interim financial statements
The Condensed Consolidated Financial Statements as of August 1, 2020, and for the thirteen and twenty-six week periods ended August 1, 2020 and August 3, 2019, 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 2019 filed with the SEC on March 31, 2020. The February 1, 2020 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 (“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 2020.
Use of estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the COVID-19 pandemic and its impact on the length or frequency of store closures, and the extent to which
COVID-19 will impact worldwide macroeconomic conditions including interest rates, the speed of the anticipated recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods.
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 that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements.
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 1, 2020
|
|
|
February 1, 2020
|
|
|
August 3, 2019
|
|
|
February 2, 2019
|
|
Cash and equivalents
|
Cash and equivalents
|
|
$
|
766,721
|
|
|
$
|
671,267
|
|
|
$
|
499,757
|
|
|
$
|
723,135
|
|
Long-term restricted cash and equivalents
|
Other assets
|
|
19,269
|
|
|
18,696
|
|
|
18,877
|
|
|
22,694
|
|
Short-term restricted cash and equivalents
|
Other current assets
|
|
—
|
|
|
2,301
|
|
|
2,537
|
|
|
—
|
|
Cash and equivalents and restricted cash and equivalents
|
|
|
$
|
785,990
|
|
|
$
|
692,264
|
|
|
$
|
521,171
|
|
|
$
|
745,829
|
|
3. IMPACT OF COVID-19
Recent developments
The Company has seen, and may continue to see, material adverse impacts as a result of COVID-19. Current circumstances are dynamic and future impacts, including the duration and impact on overall customer demand, are uncertain.
In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19. In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and the Company has recommended associates who are able to perform their role remotely to do so. The Company is reacting to COVID-19 on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak. The Company has also implemented a range of precautionary health and safety measures with the well-being of the Company’s customers, associates and business partners in mind.
As a result of COVID-19, in January 2020, the Company temporarily closed the majority of its stores in the APAC region and in March 2020, the Company temporarily closed its stores across brands in North America and the EMEA region. The majority of APAC stores were reopened during March 2020, and the Company began to reopen stores in North America and the EMEA region on a rolling basis in late April 2020. As of August 1, 2020, approximately 90% of Company-operated stores had reopened for in-store service, although many with modified operating hours. The Company plans to follow the guidance of local governments to determine when it can reopen stores that have been closed due to COVID-19 and to evaluate whether further store closures will be necessary.
The Company’s digital operations across brands have continued to serve the Company’s customers during this unprecedented period of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational.
Impact of COVID-19
The Company has seen, and may continue to see material reductions in sales across brands and regions as a result of COVID-19. Total net sales decreased approximately 17% and 25% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively. The year-over-year decrease in total net sales was primarily driven by temporary widespread store closures and a decline in traffic as compared to the previous year as a result of COVID-19. The year-over-year decline in store sales was partially offset by digital sales growth of approximately 56% and 41% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively.
Primarily as a result of COVID-19 and the temporary closure of the Company’s stores, the Company recognized $14.8 million of charges to reduce the carrying value of inventory in cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the thirteen weeks ended May 2, 2020.
During the thirteen and twenty-six weeks ended August 1, 2020, reductions in revenue have not been offset by proportional decreases in expense, as the Company continued to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. During this period, the Company suspended rent payments for a significant number of stores that were closed, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides refundable employee retention tax credits for wages paid to employees who are unable to work during the COVID–19 outbreak and the deferral of the employer–paid portion of social security taxes. Similar relief programs have also been established throughout the EMEA and APAC regions. Based on the Company's evaluation of the CARES Act and legislation across regions, the Company qualifies for certain payroll tax credits, and such government subsidies have been treated as offsets to the related operating expenses when recognized. During the thirteen and twenty-six weeks ended August 1, 2020, the Company recognized qualified payroll tax credits reducing payroll expenses by approximately $3.1 million and $11.8 million, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with $3.6 million of expected relief classified in receivables on the Condensed Consolidated Balance Sheet as of August 1, 2020. The Company intends to continue to defer qualified payroll and other tax payments as permitted by the CARES Act and other regional legislation.
The Company also recognized asset impairment charges related to the Company’s right-of-use assets and property and equipment of $8.1 million and $51.0 million during the thirteen and twenty-six weeks ended August 1, 2020, respectively, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ASSET IMPAIRMENT,” for additional information.
In addition, the Company has also experienced other material impacts as a result of COVID-19, such as deferred tax valuation allowances and other tax charges during the twenty-six weeks ended August 1, 2020, adversely impacting results by $84.1 million. Refer to Note 11, “INCOME TAXES,” for additional information.
Balance sheet, cash flow and liquidity
During the twenty-six weeks ended August 1, 2020, the Company has taken various actions to preserve liquidity and manage cash flows in order to best position the business for key stakeholders, including (i) partnering with merchandise and non-merchandise vendors in regards to payment terms; (ii) reducing and recadencing inventory receipts to better align inventory with expected market demand; (iii) significantly reducing expenses to better align operating costs with sales; and (iv) temporarily suspending its share repurchase program in March 2020 and its dividend program in May 2020. In addition, despite the Company’s recent history of partnering with its vendors regarding payment terms, there can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.
As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) to improve its near-term cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash. In July 2020, the Company completed a private offering of $350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”) and used the net proceeds to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 12, “BORROWINGS,” and Note 10, “ RABBI TRUST ASSETS,” for additional information.
As of August 1, 2020, the Company had liquidity of $1.061 billion as compared to $913.8 million as of February 1, 2020, comprising cash and equivalents and actual incremental borrowing available to the Company under the ABL Facility.
4. REVENUE RECOGNITION
Disaggregation of revenue
All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 16, “SEGMENT REPORTING.”
Contract liabilities
The following table details certain contract liabilities representing unearned revenue as of August 1, 2020, February 1, 2020, August 3, 2019 and February 2, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 1, 2020
|
|
|
February 1, 2020
|
|
|
August 3, 2019
|
|
|
February 2, 2019
|
|
Gift card liability
|
$
|
22,461
|
|
|
$
|
28,844
|
|
|
$
|
20,056
|
|
|
$
|
26,062
|
|
Loyalty program liability
|
$
|
19,674
|
|
|
$
|
23,051
|
|
|
$
|
21,073
|
|
|
$
|
19,904
|
|
The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Revenue associated with gift card redemptions and gift card breakage
|
$
|
10,066
|
|
|
$
|
12,792
|
|
|
$
|
21,075
|
|
|
$
|
28,076
|
|
Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs
|
$
|
7,982
|
|
|
$
|
8,028
|
|
|
$
|
13,691
|
|
|
$
|
14,546
|
|
5. NET INCOME (LOSS) PER SHARE
Net income (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 income (loss) per share attributable to A&F is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Shares of Common Stock issued
|
103,300
|
|
|
103,300
|
|
|
103,300
|
|
|
103,300
|
|
Weighted-average treasury shares
|
(40,773
|
)
|
|
(38,144
|
)
|
|
(40,757
|
)
|
|
(37,452
|
)
|
Weighted-average — basic shares
|
62,527
|
|
|
65,156
|
|
|
62,543
|
|
|
65,848
|
|
Dilutive effect of share-based compensation awards
|
759
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average — diluted shares
|
63,286
|
|
|
65,156
|
|
|
62,543
|
|
|
65,848
|
|
Anti-dilutive shares (1)
|
2,026
|
|
|
3,318
|
|
|
2,123
|
|
|
3,065
|
|
|
|
(1)
|
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. 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 the maximum vesting amount less any dilutive portion.
|
6. 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, as of August 1, 2020 and February 1, 2020 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of August 1, 2020
|
(in thousands)
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
$
|
10,267
|
|
|
$
|
29,340
|
|
|
$
|
—
|
|
|
$
|
39,607
|
|
Rabbi Trust assets (2)
|
1
|
|
|
60,027
|
|
|
—
|
|
|
60,028
|
|
Restricted cash equivalents (3)
|
6,751
|
|
|
5,895
|
|
|
—
|
|
|
12,646
|
|
Total assets
|
$
|
17,019
|
|
|
$
|
95,262
|
|
|
$
|
—
|
|
|
$
|
112,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of February 1, 2020
|
(in thousands)
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
$
|
225
|
|
|
$
|
58,447
|
|
|
$
|
—
|
|
|
$
|
58,672
|
|
Derivative instruments (4)
|
—
|
|
|
1,969
|
|
|
—
|
|
|
1,969
|
|
Rabbi Trust assets (2)
|
1
|
|
|
109,048
|
|
|
—
|
|
|
109,049
|
|
Restricted cash equivalents (3)
|
9,765
|
|
|
4,601
|
|
|
—
|
|
|
14,366
|
|
Total assets
|
$
|
9,991
|
|
|
$
|
174,065
|
|
|
$
|
—
|
|
|
$
|
184,056
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative instruments (4)
|
$
|
—
|
|
|
$
|
1,460
|
|
|
$
|
—
|
|
|
$
|
1,460
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
1,460
|
|
|
$
|
—
|
|
|
$
|
1,460
|
|
|
|
(1)
|
Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits.
|
|
|
(2)
|
Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies.
|
|
|
(3)
|
Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits.
|
|
|
(4)
|
Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts.
|
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 long-term borrowings
The Company’s borrowings under the Term Loan Facility and the Senior Secured Notes are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 1, 2020
|
|
|
February 1, 2020
|
|
Gross borrowings outstanding, carrying amount
|
$
|
350,000
|
|
|
$
|
233,250
|
|
Gross borrowings outstanding, fair value
|
$
|
350,875
|
|
|
$
|
233,979
|
|
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 1, 2020
|
|
|
February 1, 2020
|
|
Property and equipment, at cost
|
$
|
2,780,621
|
|
|
$
|
2,744,967
|
|
Less: Accumulated depreciation and amortization
|
(2,144,918
|
)
|
|
(2,079,677
|
)
|
Property and equipment, net
|
$
|
635,703
|
|
|
$
|
665,290
|
|
Refer to Note 9, “ASSET IMPAIRMENT,” for details related to property and equipment impairment charges incurred during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019.
8. LEASES
The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
During the thirteen and twenty-six weeks ended August 1, 2020, the Company suspended rent payments for a significant number of stores that were closed as a result of COVID-19, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
The following table provides a summary of the Company’s operating lease costs for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Single lease cost (1)
|
$
|
87,698
|
|
|
$
|
121,270
|
|
|
$
|
181,189
|
|
|
$
|
213,544
|
|
Variable lease cost (2)
|
19,433
|
|
|
60,238
|
|
|
47,335
|
|
|
103,083
|
|
Operating lease right-of-use asset impairment (3)
|
5,410
|
|
|
3,589
|
|
|
40,418
|
|
|
3,589
|
|
Total operating lease cost
|
$
|
112,541
|
|
|
$
|
185,097
|
|
|
$
|
268,942
|
|
|
$
|
320,216
|
|
|
|
(1)
|
Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities.
|
|
|
(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, as well as rent abatements agreed upon during the period.
|
|
|
(3)
|
Refer to Note 9, “ASSET IMPAIRMENT,” for details related to operating lease right-of-use asset impairment charges.
|
During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company paid $122.1 million and $200.5 million, respectively, for amounts included in measurement of operating lease liabilities, net of rent abatements agreed upon during the period which are classified as a component variable lease cost as noted in the above table. These payments are included within operating activities on the Condensed Consolidated Statements of Cash Flows.
During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company obtained operating lease right-of-use assets of $23.1 million and $204.5 million, respectively, in exchange for operating lease liabilities.
As of August 1, 2020, the Company had minimum commitments related to additional operating lease contracts the terms of which have not yet commenced, primarily for its Company-operated retail stores, of approximately $2.8 million.
9. ASSET IMPAIRMENT
Asset impairment charges for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Operating lease right-of-use asset impairment (1)
|
$
|
5,410
|
|
|
$
|
3,589
|
|
|
$
|
40,418
|
|
|
$
|
3,589
|
|
Property and equipment asset impairment
|
2,673
|
|
|
355
|
|
|
10,593
|
|
|
2,017
|
|
Total asset impairment
|
$
|
8,083
|
|
|
$
|
3,944
|
|
|
$
|
51,011
|
|
|
$
|
5,606
|
|
|
|
(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 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.”
|
Asset impairment charges for the thirteen weeks and twenty-six weeks ended August 1, 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the twenty-six weeks ended August 1, 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $135.5 million, including $124.6 million related to operating lease right-of-use assets.
Asset impairment charges for the thirteen weeks and twenty-six weeks ended August 3, 2019, primarily related to the Company’s SoHo, New York City Hollister flagship. The impairment charges for the twenty-six weeks ended August 3, 2019 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $8.2 million, including $7.0 million related to operating lease right-of-use assets.
10. RABBI TRUST ASSETS
As a precautionary measure and to preserve liquidity in light of the circumstances surrounding COVID-19, during the twenty-six weeks ended August 1, 2020, the Company withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash.
Investments of Rabbi Trust assets consisted of the following as of August 1, 2020 and February 1, 2020:
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 1, 2020
|
|
|
February 1, 2020
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
60,027
|
|
|
$
|
109,048
|
|
Money market funds
|
1
|
|
|
1
|
|
Rabbi Trust assets
|
$
|
60,028
|
|
|
$
|
109,049
|
|
Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Realized gains related to Rabbi Trust assets
|
$
|
388
|
|
|
$
|
798
|
|
|
$
|
978
|
|
|
$
|
1,589
|
|
11. INCOME TAXES
The quarterly 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 provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors 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 laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
Impact of valuation allowances and other tax charges during Fiscal 2020
The Company’s effective tax rate for the twenty-six weeks ended August 1, 2020 was impacted by $84.1 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax year-to-date loss. Further details regarding these adverse tax impacts are as follows:
|
|
•
|
The Company anticipates pre-tax losses for the full fiscal year in certain jurisdictions, based on information currently available, primarily due to the significant adverse impacts of COVID-19. The Company did not recognize income tax benefits on $204.1 million of pre-tax losses during the twenty-six weeks ended August 1, 2020, resulting in an adverse tax impact of $47.6 million.
|
|
|
•
|
The Company recognized charges of $36.5 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during the twenty-six weeks ended August 1, 2020, principally as a result of the significant adverse impacts of COVID–19. These charges related to valuation allowances recognized by the Company of $10.6 million and $6.0 million related to the U.S. and Germany, respectively, as well as valuation allowances and other tax charges in certain other jurisdictions against underlying tax asset balances that existed as of February 1, 2020. The Company also recognized valuation allowances of $78.9 million related to Switzerland with a U.S. branch equally offsetting amount, which in net, did not have an impact on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Changes in assumptions may occur based on new information that becomes available resulting in adjustments in the period in which a determination is made.
|
Global legislation in response to COVID-19
In March 2020, the CARES Act was enacted into U.S. law, intended to provide economic relief to those impacted by COVID-19 and enhance business’ liquidity. The Company continues to examine impacts that the provisions of the CARES Act may have on U.S. income taxes; however, the Company does not currently expect that these provisions will have a material impact on its income taxes.
The Company is still assessing the applicability of other recently passed global legislation, including the potential income tax measures offered in international jurisdictions where the Company’s operations have also been impacted by COVID-19.
Share-based compensation
Refer to Note 13, “SHARE-BASED COMPENSATION,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended August 3, 2019.
12. BORROWINGS
Details on the Company’s long-term borrowings, net, as of August 1, 2020 and February 1, 2020 are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 1, 2020
|
|
|
February 1, 2020
|
|
Long-term portion of borrowings, gross at carrying amount
|
$
|
350,000
|
|
|
$
|
233,250
|
|
Unamortized fees
|
(6,750
|
)
|
|
(355
|
)
|
Unamortized discount
|
—
|
|
|
(932
|
)
|
Long-term borrowings, net
|
$
|
343,250
|
|
|
$
|
231,963
|
|
Senior Secured Notes
On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of the Company, completed the private offering of the Senior Secured Notes, with a $350 million aggregate principal amount due in 2025 at an offering price of 100% of the principal amount thereof. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, as trustee, and as collateral agent.
The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments beginning in January 2021.
The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and accrued interest of $233.6 million and $110.8 million under the Term Loan Facility and the ABL Facility, respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes.
The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized over the contractual term of the Senior Secured Notes.
ABL Facility
The ABL Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors) and later amended on October 19, 2017, provides for a senior secured asset-based revolving credit facility of up to $400 million (the “ABL Facility”).
The ABL Facility will mature on October 19, 2022.
As a precautionary measure and to improve the Company’s cash position in light of the circumstances surrounding COVID-19, during the thirteen weeks ended May 2, 2020, the Company borrowed $210.0 million under the ABL Facility. During the thirteen weeks ended August 1, 2020, the Company used net proceeds from the offering of the Senior Secured Notes and cash on hand to repay all outstanding borrowings under the ABL Facility.
The Company did not have any borrowings outstanding under the ABL Facility as of August 1, 2020 or as of February 1, 2020.
As of August 1, 2020, the Company had availability under the ABL Facility of $327.5 million, net of $0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, actual incremental borrowing available to the Company under the ABL Facility was $294.6 million as of August 1, 2020.
The provisions under the credit agreement applicable to the ABL Facility have not changed from those described in Note 12, “BORROWINGS,” in 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 2019.
Term Loan Facility
The Term Loan Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors) and later amended on June 22, 2018, provided for a term loan facility of $300 million.
The Company had gross borrowings outstanding under the Term Loan Facility of $233.3 million as of February 1, 2020. During the thirteen weeks ended August 1, 2020, the Company used a portion of the proceeds from the issuance of the Senior Secured Notes to repay all outstanding borrowings under the Term Loan Facility and upon repayment the Term Loan Facility was terminated effective as of July 2, 2020.
The Term Loan Facility was previously scheduled to mature on August 7, 2021.
Representations, warranties and covenants
The aforementioned agreements contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity.
The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness.
Certain of these agreements also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with all debt covenants under the aforementioned agreements as of August 1, 2020.
13. SHARE-BASED COMPENSATION
Financial statement impact
The following table details share-based compensation expense and the related income tax impacts for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Share-based compensation expense
|
$
|
3,744
|
|
|
$
|
36
|
|
|
$
|
8,906
|
|
|
$
|
2,668
|
|
Income tax (expense) benefit associated with share-based compensation expense recognized (1)
|
$
|
—
|
|
|
$
|
(195
|
)
|
|
$
|
—
|
|
|
$
|
355
|
|
|
|
(1)
|
No income tax benefit was recognized related to share-based compensation expense during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction.
|
The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Income tax discrete (charges) benefits realized for tax deductions related to the issuance of shares (1)
|
$
|
—
|
|
|
$
|
(70
|
)
|
|
$
|
—
|
|
|
$
|
1,169
|
|
Income tax discrete charges realized upon cancellation of stock appreciation rights (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
(165
|
)
|
Total income tax discrete (charges) benefits related to share-based compensation awards
|
$
|
—
|
|
|
$
|
(70
|
)
|
|
$
|
—
|
|
|
$
|
1,004
|
|
|
|
(1)
|
No income tax benefits or charges related to these items were recognized during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction.
|
The following table details 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 for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Employee tax withheld upon issuance of shares (1)
|
$
|
93
|
|
|
$
|
150
|
|
|
$
|
5,416
|
|
|
$
|
6,438
|
|
|
|
(1)
|
Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows.
|
Restricted stock units
The following table summarizes activity for restricted stock units for the twenty-six weeks ended August 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1, 2020
|
1,676,831
|
|
|
$
|
18.68
|
|
|
747,056
|
|
|
$
|
15.11
|
|
|
421,784
|
|
|
$
|
23.05
|
|
Granted
|
1,814,294
|
|
|
7.58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adjustments for performance achievement
|
—
|
|
|
—
|
|
|
38,381
|
|
|
11.37
|
|
|
134,122
|
|
|
11.79
|
|
Vested
|
(726,341
|
)
|
|
17.67
|
|
|
(481,304
|
)
|
|
9.63
|
|
|
(350,447
|
)
|
|
11.79
|
|
Forfeited
|
(41,100
|
)
|
|
15.73
|
|
|
(6,917
|
)
|
|
22.80
|
|
|
(3,485
|
)
|
|
35.61
|
|
Unvested at August 1, 2020 (2)
|
2,723,684
|
|
|
$
|
11.59
|
|
|
297,216
|
|
|
$
|
22.43
|
|
|
201,974
|
|
|
$
|
34.89
|
|
|
|
(1)
|
Includes 79,028 unvested restricted stock units as of August 1, 2020, 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.
|
|
|
(2)
|
Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Certain unvested shares related to restricted stock units with performance-based vesting conditions can be achieved at up to 200% of their target vesting amount.
|
The following table details unrecognized compensation cost and the remaining weighted-average period these costs are expected to be recognized for restricted stock units as of August 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Service-based Restricted
Stock Units
|
|
Performance-based Restricted
Stock Units
|
|
Market-based Restricted
Stock Units
|
Unrecognized compensation cost
|
$
|
26,520
|
|
|
$
|
—
|
|
|
$
|
2,567
|
|
Remaining weighted-average period cost is expected to be recognized (years)
|
1.3
|
|
|
0.0
|
|
|
0.8
|
|
Additional information pertaining to restricted stock units for the twenty-six weeks ended August 1, 2020 and August 3, 2019 follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Service-based restricted stock units:
|
|
|
|
Total grant date fair value of awards granted
|
$
|
13,752
|
|
|
$
|
16,052
|
|
Total grant date fair value of awards vested
|
$
|
12,834
|
|
|
$
|
12,576
|
|
|
|
|
|
Performance-based restricted stock units:
|
|
|
|
Total grant date fair value of awards granted
|
$
|
—
|
|
|
$
|
5,379
|
|
Total grant date fair value of awards vested
|
$
|
4,635
|
|
|
$
|
—
|
|
|
|
|
|
Market-based restricted stock units:
|
|
|
|
Total grant date fair value of awards granted
|
$
|
—
|
|
|
$
|
4,176
|
|
Total grant date fair value of awards vested
|
$
|
4,132
|
|
|
$
|
511
|
|
No market-based restricted stock units were granted during the twenty-six weeks ended August 1, 2020. 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 were as follows:
|
|
|
|
|
|
August 3, 2019
|
|
Grant date market price
|
$
|
25.34
|
|
Fair value
|
$
|
36.24
|
|
Assumptions:
|
|
Price volatility
|
57
|
%
|
Expected term (years)
|
2.9
|
|
Risk-free interest rate
|
2.2
|
%
|
Dividend yield
|
3.2
|
%
|
Average volatility of peer companies
|
40.0
|
%
|
Average correlation coefficient of peer companies
|
0.2407
|
|
Stock appreciation rights
The following table summarizes stock appreciation rights activity for the twenty-six weeks ended August 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted-Average
Remaining
Contractual Life (years)
|
Outstanding at February 1, 2020
|
796,725
|
|
|
$
|
40.06
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(382,225
|
)
|
|
47.87
|
|
|
|
|
|
Outstanding at August 1, 2020
|
414,500
|
|
|
$
|
32.86
|
|
|
$
|
—
|
|
|
3.7
|
Stock appreciation rights exercisable at August 1, 2020
|
414,500
|
|
|
$
|
32.86
|
|
|
$
|
—
|
|
|
3.7
|
Stock appreciation rights expected to become exercisable in the future as of August 1, 2020
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
0.0
|
No stock appreciation rights were exercised during the twenty-six weeks ended August 1, 2020. Additional information pertaining to stock appreciation rights for the twenty-six weeks ended August 3, 2019 follows:
|
|
|
|
|
(in thousands)
|
August 3, 2019
|
|
Total grant date fair value of awards exercised
|
$
|
586
|
|
14. DERIVATIVE INSTRUMENTS
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate 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 foreign currency 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 foreign currency exchange 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”) into earnings.
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 foreign currency exchange rates result in transaction gains or 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.
The Company did not have any outstanding foreign currency exchange forward contracts as of August 1, 2020, although the Company may enter into these contracts in future periods. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheet as of February 1, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Location
|
|
February 1, 2020
|
|
|
Location
|
|
February 1, 2020
|
|
Derivatives designated as cash flow hedging instruments
|
Other current assets
|
|
$
|
1,869
|
|
|
Accrued expenses
|
|
$
|
1,377
|
|
Derivatives not designated as hedging instruments
|
Other current assets
|
|
100
|
|
|
Accrued expenses
|
|
83
|
|
Total
|
|
|
$
|
1,969
|
|
|
|
|
$
|
1,460
|
|
The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
As a result of COVID–19, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments. At the time of dedesignation of these hedges, they were in a net gain position of approximately $12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation are deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occur and the hedged items affect earnings. During the twenty-six weeks ended August 1, 2020 and subsequent to the dedesignation of these hedges, these hedge contracts were settled.
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 1, 2020 and August 3, 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Gain recognized in AOCL (1)
|
$
|
—
|
|
|
$
|
4,791
|
|
|
$
|
12,235
|
|
|
$
|
7,053
|
|
Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2)
|
$
|
2,407
|
|
|
$
|
1,763
|
|
|
$
|
5,777
|
|
|
$
|
4,303
|
|
|
|
(1)
|
Amount represents the change in fair value of derivative contracts.
|
|
|
(2)
|
Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 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 gain will be recognized in costs 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 1, 2020 and August 3, 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Gain recognized in other operating (income) loss, net
|
$
|
—
|
|
|
$
|
906
|
|
|
$
|
742
|
|
|
$
|
1,181
|
|
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
For the thirteen and twenty-six weeks ended August 1, 2020, the activity in accumulated other comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended August 1, 2020
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
|
Total
|
|
Beginning balance at May 2, 2020
|
$
|
(115,366
|
)
|
|
$
|
9,946
|
|
|
$
|
(105,420
|
)
|
Other comprehensive income before reclassifications
|
8,734
|
|
|
—
|
|
|
8,734
|
|
Reclassified gain from accumulated other comprehensive loss (1)
|
—
|
|
|
(2,407
|
)
|
|
(2,407
|
)
|
Other comprehensive income (loss) after reclassifications (2)
|
8,734
|
|
|
(2,407
|
)
|
|
6,327
|
|
Ending balance at August 1, 2020
|
$
|
(106,632
|
)
|
|
$
|
7,539
|
|
|
$
|
(99,093
|
)
|
|
|
|
|
|
|
|
Twenty-six Weeks Ended August 1, 2020
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
|
Total
|
|
Beginning balance at February 1, 2020
|
$
|
(109,967
|
)
|
|
$
|
1,081
|
|
|
$
|
(108,886
|
)
|
Other comprehensive income before reclassifications
|
3,335
|
|
|
12,235
|
|
|
15,570
|
|
Reclassified gain from accumulated other comprehensive loss (1)
|
—
|
|
|
(5,777
|
)
|
|
(5,777
|
)
|
Other comprehensive income after reclassifications (2)
|
3,335
|
|
|
6,458
|
|
|
9,793
|
|
Ending balance at August 1, 2020
|
$
|
(106,632
|
)
|
|
$
|
7,539
|
|
|
$
|
(99,093
|
)
|
|
|
(1)
|
Amount represents gain reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
|
|
|
(2)
|
No tax effect was recognized during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction.
|
For the thirteen and twenty-six weeks ended August 3, 2019, the activity in accumulated other comprehensive loss 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 gain from accumulated other comprehensive loss (1)
|
—
|
|
|
(1,763
|
)
|
|
(1,763
|
)
|
Tax effect
|
—
|
|
|
105
|
|
|
105
|
|
Other comprehensive (loss) income after reclassifications
|
(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 gain from accumulated other comprehensive loss (1)
|
—
|
|
|
(4,303
|
)
|
|
(4,303
|
)
|
Tax effect
|
—
|
|
|
330
|
|
|
330
|
|
Other comprehensive (loss) income after reclassifications
|
(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 Statements of Operations and Comprehensive Income (Loss).
|
16. 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 Company’s net sales by operating segment for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Hollister
|
$
|
429,248
|
|
|
$
|
504,758
|
|
|
$
|
702,260
|
|
|
$
|
933,203
|
|
Abercrombie
|
269,080
|
|
|
336,320
|
|
|
481,427
|
|
|
641,847
|
|
Total
|
$
|
698,328
|
|
|
$
|
841,078
|
|
|
$
|
1,183,687
|
|
|
$
|
1,575,050
|
|
Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
U.S.
|
$
|
458,671
|
|
|
$
|
543,472
|
|
|
$
|
781,533
|
|
|
$
|
1,013,130
|
|
EMEA
|
171,297
|
|
|
200,642
|
|
|
283,951
|
|
|
374,586
|
|
APAC
|
41,814
|
|
|
67,350
|
|
|
74,150
|
|
|
132,926
|
|
Other
|
26,546
|
|
|
29,614
|
|
|
44,053
|
|
|
54,408
|
|
International
|
$
|
239,657
|
|
|
$
|
297,606
|
|
|
$
|
402,154
|
|
|
$
|
561,920
|
|
Total
|
$
|
698,328
|
|
|
$
|
841,078
|
|
|
$
|
1,183,687
|
|
|
$
|
1,575,050
|
|
17. FLAGSHIP STORE EXIT (BENEFITS) CHARGES
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.
The Company recognizes impacts related to the exit of its flagship stores in flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). Details of the (benefits) charges incurred during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 related to this initiative were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands)
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
Single lease cost (1)
|
$
|
(5,230
|
)
|
|
$
|
23,269
|
|
|
$
|
(5,230
|
)
|
|
$
|
23,269
|
|
Variable lease cost (2)
|
—
|
|
|
20,218
|
|
|
—
|
|
|
20,218
|
|
Operating lease right-of-use asset impairment
|
—
|
|
|
3,229
|
|
|
—
|
|
|
3,229
|
|
Operating lease cost
|
(5,230
|
)
|
|
46,716
|
|
|
(5,230
|
)
|
|
46,716
|
|
Asset disposals and other store-closure costs (3)
|
(3,205
|
)
|
|
(1,675
|
)
|
|
(3,205
|
)
|
|
(1,687
|
)
|
Employee severance and other employee transition costs
|
4,551
|
|
|
(47
|
)
|
|
4,008
|
|
|
1,709
|
|
Total flagship store exit (benefits) charges
|
$
|
(3,884
|
)
|
|
$
|
44,994
|
|
|
$
|
(4,427
|
)
|
|
$
|
46,738
|
|
|
|
(1)
|
Amounts represent accelerated amortization associated with the operating lease right-of-use assets 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 flagship stores.
|
|
|
(3)
|
Amounts represent costs incurred or benefits associated with returning the store to its original condition, including updated estimates to previously established accruals for asset retirement obligations and costs to remove inventory and store assets.
|
Future fixed lease payments associated with closed flagship stores are reflected within short-term and long-term operating lease liabilities on the Condensed Consolidated Balance Sheets. These payments are scheduled to be paid through the fiscal year ending January 30, 2029 (“Fiscal 2028”) and are not expected to exceed $15 million in aggregate in any fiscal year.
As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur future cash expenditures, incremental charges or realize benefits not currently contemplated due to events that may occur as a result of, or that are associated with, previously announced flagship store closures and flagship store closures that have not yet been finalized. At this time, the Company is not able to quantify the amount of future impacts, including any 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.