Abercrombie & Fitch Earnings 2021-01-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended January 30, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-12107
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (614 ) 283-6500
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). x Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| x | Accelerated filer | ¨ | |||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes x No
Aggregate market value of the Registrant’s Class A Common Stock (the only outstanding common equity of the Registrant) held by non-affiliates of the Registrant (for this purpose, executive officers and directors of the Registrant are considered affiliates) as of July 31, 2020: $587,999,740 .
Number of shares outstanding of the Registrant’s common stock as of March 24, 2021: 62,112,126 shares of Class A Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Table of Contents
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PART I
Item 1. Business
GENERAL
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” and “we”), is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Company’s two brand-based operating segments: Hollister, which includes the Company’s Hollister and Gilly Hicks brands, and Abercrombie, which includes the Company’s 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 operates primarily in North America, Europe and Asia.
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 Consolidated Financial Statements and Notes thereto, as well as the remainder of this Annual Report on Form 10-K, 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/ ending | Number of weeks | ||||||||||||
| Fiscal 2018 | February 2, 2019 | 52 | ||||||||||||
| Fiscal 2019 | February 1, 2020 | 52 | ||||||||||||
| Fiscal 2020 | January 30, 2021 | 52 | ||||||||||||
| Fiscal 2021 | January 29, 2022 | 52 | ||||||||||||
For additional information about the Company’s business, see “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” as well as “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K.
Impact of COVID-19
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 Europe, Middle East and Africa (“EMEA”) 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 continue 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 COVID-19.
The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of the coronavirus and the availability and acceptance of effective vaccines or medical treatments.
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 January 30, 2021 and March 24, 2021, approximately 88% and 91% of Company-operated stores were open for in-store service, respectively, with temporary store closures primarily in the EMEA region. The Company plans to follow the guidance of local governments to determine when it can reopen closed stores and to evaluate whether further store closures will be necessary.
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, including:
•Requiring associates to use face coverings, depending on geographic region;
•Encouraging or requiring customers to use face coverings, depending on geographic region;
•Conducting associate wellness checks in accordance with local government direction;
•Enhancing cleaning routines and installing plexiglass barriers in the majority of store locations;
•Implementing various measures to encourage social distancing, including managing occupancy limits;
•Encouraging contactless payment options, where available;
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•Opening fitting rooms where permissible, with additional cleaning procedures for clothing that has been tried on;
•Removing returned merchandise from the sales floor for a period of time where mandated by local government;
•Reducing store hours in select locations;
•Continuing to offer purchase-online-pickup-in-store;
•Increasing its omnichannel capabilities by introducing curbside pickup at a majority of U.S. locations;
•Following recommended cleaning and distancing measures in the Company's distribution centers; and
•Maximizing work-from-home and digital collaboration alternatives to minimize in-person meetings whenever possible.
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 14% for Fiscal 2020 as compared to Fiscal 2019, primarily driven by temporary store closures and a decline in traffic as compared to the previous year as a result of COVID-19. During Fiscal 2020, sales for stores that had reopened were approximately 75% of Fiscal 2019 levels. The Company has experienced other material impacts as a result of COVID-19, including, but not limited to, deferred tax valuation allowances, long-lived asset impairment, adjustments of the carrying amount of inventory and changes in the effectiveness of its hedging instruments.
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. In response to elevated digital demand during this period, the Company has increased its omnichannel capabilities by continuing to offer purchase-online-pickup-in-store, including curbside pick-up at a majority of U.S. locations, and by utilizing ship-from-store capabilities. In addition, to prepare for the Fiscal 2020 holiday season, the Company entered into a short-term lease for an additional distribution center and partnered with incremental carriers. Digital net sales increased approximately 39% for Fiscal 2020 as compared to Fiscal 2019, resulting in digital sales accounting for 54% of total revenues in Fiscal 2020 compared to 33% in Fiscal 2019. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current performance in the digital channel will continue.
The Company is also focused on managing inventories and the impacts COVID-19 has had, and continues to have, on its global supply chain, including potential disruptions of product deliveries. The Company sources the majority of its merchandise outside of the U.S. through arrangements with vendors primarily located in southeast Asia and, as of January 30, 2021, the vast majority of the factories the Company partners with were operating at full capacity. In order to complete production, these manufacturing factories are dependent on raw materials from fabric mills that are primarily located in the APAC region. The Company continues to collaborate with its third-party partners to mitigate significant delays in delivery of merchandise, especially in light of disruptions across the supply chain, including port congestion and shipping container shortages. During Fiscal 2020, the Company reduced certain orders that were not already in production, delayed and altered the cadence of deliveries and implemented various strategies to tightly manage inventories, including utilizing ship-from-store capabilities in select locations.
The Company’s progress executing against the following key transformation initiatives created the foundation to allow the Company to respond quickly to COVID-19 in Fiscal 2020:
•Optimizing the global store network;
•Enhancing digital and omnichannel capabilities;
•Increasing the speed and efficiency of the concept-to-customer product life cycle by further investing in capabilities to position the supply chain for greater speed, agility and efficiency, while leveraging data and analytics to offer the right product at the right time and the right price; and
•Improving customer engagement through loyalty programs and marketing optimization.
The Company entered Fiscal 2020 with a healthy liquidity position, however in light of COVID-19 the Company took immediate, aggressive and prudent actions, including re-evaluating all expenditures, to balance short-term and long-term liquidity needs, in order to best position the business for the Company’s key stakeholders during Fiscal 2020. Actions to preserve liquidity and manage cash flows during Fiscal 2020, included, but were not limited to the following:
•Partnered with merchandise and non-merchandise vendors in regards to payment terms;
•Managed inventory receipts tightly to align inventory with expected market demand;
•Reduced expenses to better align operating costs with sales;
•Assessed government policy and economic stimulus responses to COVID-19 for both business and individuals;
•Borrowed $210.0 million under the senior secured asset-based revolving credit facility in March 2020, which was then repaid in July 2020 along with the term loan facility;
•Withdrew $50.0 million from the overfunded Rabbi Trust assets, representing the majority of excess funds in March 2020;
•Announced the temporary suspension of the Company's share repurchase and dividend programs in March 2020 and May 2020, respectively; and
•Completed a private offering of $350.0 million aggregate principal amount of senior secured notes in July 2020.
Reflecting ongoing global uncertainty and the near-term challenges that COVID-19 presents, such as continued temporary store closures, uncertainty surrounding the global economy and customer discretionary spending habits, the Company plans to conservatively manage cash and liquidity in the first half of Fiscal 2021, while prioritizing investments in the business and continuing to fund operating activities. Regarding returns to shareholders, although the dividend program remains suspended, the Company recently announced that it plans to resume share repurchases beginning on or after March 4, 2021, dependent on
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various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.
As of January 30, 2021, the Company had liquidity of $1.3 billion as compared to $0.9 billion as of February 1, 2020, comprised of cash and equivalents and borrowing available to the Company under the senior secured asset-based revolving credit facility.
Despite the Company's recent history of partnering with its vendors regarding payment terms, certain payment term extensions were temporary and certain previously deferred payments have since been made. 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.
For further information about COVID-19, refer to “ITEM 1A. RISK FACTORS,” and “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," of this Annual Report on Form 10-K.
BRANDS AND SEGMENT INFORMATION
The Company’s brands are as follows:
| Brand | Description | |||||||
| Hollister | The quintessential apparel brand of the global teen consumer, Hollister Co. believes in liberating the spirit of an endless summer inside everyone. At Hollister, summer isn’t just a season, it’s a state of mind. Hollister creates carefree style designed to make all teens feel celebrated and comfortable in their own skin, so they can live in a summer mindset all year long, whatever the season. | |||||||
| Gilly Hicks | Hollister also carries an intimates brand, Gilly Hicks, which offers intimates, loungewear and sleepwear. Its products are designed to invite everyone to embrace who they are underneath it all. | |||||||
| Abercrombie & Fitch | Abercrombie & Fitch believes that every day should feel as exceptional as the start of the long weekend. Since 1892, the brand has been a specialty retailer of quality apparel, outerwear and fragrance - designed to inspire our global customers to feel confident, be comfortable and face their Fierce. | |||||||
| abercrombie kids | A global specialty retailer of quality, comfortable, made-to-play favorites, abercrombie kids sees the world through kids’ eyes, where play is life and every day is an opportunity to be anything and better everything. | |||||||
The Company determines its segments after taking into consideration a variety of factors, including its organizational structure and the basis that it uses to allocate resources and assess performance. The Company’s two operating segments as of January 30, 2021 are brand-based: Hollister, which includes the Company’s Hollister and Gilly Hicks brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Additional information concerning the Company’s segment and geographic information is contained in Note 18, “SEGMENT REPORTING” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K.
STRATEGY AND KEY BUSINESS PRIORITIES
The Company remains committed to, and confident in, its long-term vision of becoming a leading digital-first omnichannel global apparel retailer. The Company continues to evaluate opportunities to make progress against initiatives that support this vision, while balancing the near-term challenges and continued global uncertainty presented by COVID-19.
Navigating COVID-19
As discussed above under “Impact of COVID-19”, the Company’s progress executing against its key transformation initiatives prior to Fiscal 2020 created the foundation to allow the Company to respond quickly to COVID-19. The Company remains focused on navigating the challenges presented by COVID-19, primarily by:
•Prioritizing digital and omnichannel operations to serve the Company’s customers during temporary store closures and restrictions;
•Maintaining safety protocols across the Company’s corporate home offices, stores and distribution centers;
•Utilizing the Company’s agile supply-chain;
•Speaking directly to the Company’s customers through its social media channels about the current environment and issues that are impacting them the most; and
•Conservatively managing cash flows and liquidity in the near-term given continued global uncertainty, in order to best position the business for the Company’s key stakeholders, including its associates, customers and shareholders.
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Long-term strategy
As the COVID-19 situation allows, the Company continues to evaluate opportunities to make progress on initiatives that position the business for sustainable long-term growth and align with its strategic pillars. The Company remains committed to meeting its customers’ needs whenever, wherever and however they choose to shop and works to accomplish this, in a rapidly evolving retail landscape, through the following pillars:
•Inspiring customers;
•Innovating relentlessly; and
•Developing leaders.
The following priorities serve as a framework in the Company achieving its long-term vision of becoming a leading digital-first omnichannel global apparel retailer and achieving sustainable long-term operating margin expansion:
•Transform to a leading digital-first omnichannel global business model, by creating best-in-class customer experiences across channels;
•Continue to make progress against stated transformation initiatives, including: optimizing global store square footage while remaining opportunistic in global intimate, omni-enabled store expansion; enhancing digital and omnichannel capabilities; increasing the speed and efficiency of our concept-to-customer product life cycle; and improving customer engagement;
•Address market opportunities for the Company’s brands across Europe and Asia through the ongoing build-out of the Company’s London and Shanghai teams, which are focused on providing localized product and marketing. These teams, and the rollout of intimate omni-enabled new store experiences that cater to local customers in underpenetrated international markets, support the Company’s long-term vision of becoming a leading digital-first omnichannel global apparel retailer;
•Focus on Gilly Hicks growth by increasing domestic and international awareness through new store experiences, engaging product launches and thoughtful marketing, while being opportunistic regarding other growth opportunities, such as launching new brands and/or acquiring brands;
•Improve customer engagement by leveraging data analytics to retrieve timely customer insights that will accelerate responsiveness to customer demands and by introducing additional personalization measures;
•Attract, retain, and develop the Company’s human capital resources by building upon the strength of its unique culture and by executing against the key initiatives discussed below under “HUMAN CAPITAL MANAGEMENT”; and
•Integrate environment, social and governance practices and standards throughout the organization through collaboration with the Company’s associates, partners and communities.
OVERVIEW OF OPERATIONS
Omnichannel initiatives
As customer shopping preferences continue to shift and customers increasingly shop across multiple channels, the Company aims to create best-in-class customer experiences and grow total company profitability by delivering improvements through a continuous test-and-learn approach. While prior to Fiscal 2020, stores were the primary fulfillment point for orders, the Company experienced an acceleration in sales fulfilled through the digital channel in Fiscal 2020 as a result of COVID-19. Despite, this acceleration in channel shift, stores continue to be an important part of the customers’ omnichannel experience and the Company believes that the customers’ experience is improved by its offering of omnichannel capabilities, which include:
•Purchase-Online-Pickup-in-Store, allowing customers to purchase merchandise through one of the Company’s websites or mobile apps and pick-up the merchandise in store, which often times drives incremental in-store sales;
•Curbside pickup, allowing customers to engage with the Company’s brands while encouraging social distancing in light of the COVID-19 pandemic;
•Order-in-Store, allowing customers to shop the brands’ in-store and online offerings while in-store;
•Reserve-in-Store, allowing customers to reserve merchandise online and try it on in-store before purchase;
•Ship-from-Store, which allows the Company to ship in-store merchandise to customers and increases inventory productivity; and
•Cross-channel returns, allowing customers to return merchandise purchased through one channel to a different channel.
The Company also believes that its loyalty programs, Hollister’s Club Cali® and Abercrombie’s myAbercrombie®, are important parts of its omnichannel strategy as the Company aims to seamlessly interact and connect with customers across all touchpoints through members-only offers, items and experiences. Under these programs, customers accumulate points primarily based on purchase activity and earn rewards as points are converted at certain thresholds. These rewards can be redeemed for merchandise discounts either in-store or online. The loyalty programs continue to provide timely customer insights and the Company believes these programs contribute to higher average transaction value.
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Digital operations
In order to create a more seamless shopping experience for its customers, the Company continues to invest in its digital infrastructure. The Company has the capability to ship merchandise to customers in more than 110 countries and process transactions in 28 currencies and through 28 forms of payment globally. The Company operates desktop and mobile websites for its brands globally, which are available in various local languages, and four mobile apps. In addition, in its efforts to expand its international brand reach, the Company also partners with certain third-party e-commerce platforms. The Company continues to develop its mobile capabilities as mobile engagement continues to grow, with over 80% of the Company’s digital traffic generated from mobile devices in Fiscal 2020.
Store operations
The Company continues to thoughtfully open new stores and invest in smaller omni-enabled store experiences that align with local customer shopping preferences as stores are a critical part of the omnichannel brand experience. During Fiscal 2020, the Company opened 15 new store locations, remodeled four store locations and right-sized an additional six store locations. Hollister and Abercrombie both have stores in updated formats, which are designed to be open and inviting, and include accommodating features such as innovative fitting rooms and omnichannel capabilities. These stores are tailored to reflect the personality of each brand, with unique furniture, fixtures, music and scent adding to a rich brand experience. The Company’s stores continue to play an essential role in creating brand awareness serving as physical gateways to the brands. Stores also serve as local hubs for online engagement as the Company continues to grow its omnichannel capabilities to create seamless shopping experiences.
The Company continues to evaluate and manage its store fleet through its ongoing global store network optimization initiative and has taken actions to optimize store productivity by remodeling, right-sizing or relocating stores to smaller square footage locations, and closing stores. As part of this initiative, the Company closed eight flagship locations during Fiscal 2020, leaving the Company with seven operating flagships at the end of Fiscal 2020, down from 15 at the beginning of the year. In addition, the Company closed 129 non-flagship locations, resulting in 137 total store closures during Fiscal 2020. These actions reduced total Company store gross square footage by approximately 1.1 million gross square feet, or 17%, as compared to Fiscal 2019 year-end. The actions taken in Fiscal 2020, combined with ongoing digital sales growth, are expected to continue to transform the Company's operating model and reposition the Company for the future as the Company continues to focus on aligning store square footage with digital penetration.
All of the retail stores operated by the Company, as of January 30, 2021, are located in leased facilities, primarily in shopping centers. These leases generally have initial terms of between five and ten years. Certain leases also include early termination options, which can be exercised under specific conditions. The leases expire at various dates between Fiscal 2021 and Fiscal 2030.
As of January 30, 2021, the Company operated 735 retail stores as detailed in the table below:
Hollister (1) | Abercrombie (2) | Total (3) | ||||||||||||||||||
| Europe | 107 | 16 | 123 | |||||||||||||||||
| Asia | 27 | 19 | 46 | |||||||||||||||||
| Canada | 10 | 7 | 17 | |||||||||||||||||
| Middle East | 6 | 6 | 12 | |||||||||||||||||
| International | 150 | 48 | 198 | |||||||||||||||||
| United States | 347 | 190 | 537 | |||||||||||||||||
| Total | 497 | 238 | 735 | |||||||||||||||||
(1)Includes the Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes nine international franchise stores and 12 U.S. Company-operated temporary stores as of January 30, 2021.
(2)Includes Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 10 international franchise stores and two U.S. Company-operated temporary stores as of January 30, 2021.
(3)This store count excludes one international third-party operated multi-brand outlet store as of January 30, 2021.
For store count and gross square footage by brand and geographic region as of January 30, 2021 and February 1, 2020, refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”
Third-party operations
The Company continues to expand its international brand reach, create brand awareness and develop local expertise through various wholesale, franchise, licensing and consignment arrangements. As of January 30, 2021, the Company had eight wholesale partnerships, primarily internationally. As of January 30, 2021, the Company’s franchisees operated 19 international franchise stores across the brands located in Mexico, Qatar and Saudi Arabia and one multi-brand consignment outlet in China.
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SOURCING OF MERCHANDISE INVENTORY
The Company works with its network of third-party vendors to supply compelling, on-trend and high-quality product assortments to its customers. These vendors are expected to respect local laws and have committed to follow the standards set forth in the Company’s Vendor Code of Conduct, which details the Company’s dedication to human rights, labor rights, environmental responsibility and workplace safety.
The Company sourced merchandise through approximately 100 vendors located in 17 countries, including the U.S., during Fiscal 2020. The Company’s largest vendor accounted for approximately 13% of merchandise sourced in Fiscal 2020, based on the cost of sourced merchandise. The Company believes its product sourcing is appropriately distributed among vendors.
Refer to Note 6, “INVENTORIES,” for a summary of inventory sourced based on vendor location and dollar cost of merchandise receipts during Fiscal 2020.
DISTRIBUTION OF MERCHANDISE INVENTORY
The Company’s distribution network is built to deliver inventory to Company-operated and international franchise stores and fulfill digital and wholesale orders with speed and efficiency. Generally, merchandise is shipped directly from vendors to the Company’s distribution centers, where it is received and inspected before being shipped to the Company’s stores or its digital or wholesale customers.
The Company relies on its distribution centers to manage the receipt, storage, sorting, packing and distribution of its merchandise. Additional information pertaining to certain of the Company’s distribution centers as of January 30, 2021 follows:
| Location | Company-owned or third-party | |||||||
| New Albany, Ohio (Primarily serves store and digital operations) | Company-owned | |||||||
| New Albany, Ohio (Serves only digital operations) | Company-owned | |||||||
| Bergen op Zoom, Netherlands | Third-party | |||||||
| Shanghai, China | Third-party | |||||||
In addition, during Fiscal 2019, the Company entered into an agreement for a facility to be located in the Phoenix, Arizona area, with services expected to commence in Fiscal 2021, which is intended to replace the Company’s third-party distribution center in Reno, Nevada to increase capacity and improve fulfillment capabilities.
In Fiscal 2020, the Company entered into a short-term lease for an additional distribution center, which has since ended, and diversified its distribution network to mitigate risk from carrier capacity shortages in light of COVID-19, particularly during the Fiscal 2020 holiday season. The Company primarily used four contract carriers to ship merchandise and related materials to its North American customers, and several contract carriers for its international customers during Fiscal 2020.
COMPETITION
The Company operates in a rapidly evolving and highly competitive retail business environment. Competitors include: individual and chain specialty apparel retailers; local, regional, national and international department stores; discount stores; and online- exclusive businesses. Additionally, the Company competes for consumers’ discretionary spend with businesses in other product and experiential categories such as technology, restaurants, travel and media content.
The Company competes primarily on the basis of differentiating its brands from competition through: product, higher quality and increased newness; brand voice, amplifying and consolidating brand messaging; and experience, investing in immersive, participatory omnichannel shopping environments.
Operating in a highly competitive industry environment can cause the Company to engage in greater than expected promotional activity, which would result in pressure on average unit retail and gross profit. Refer to “ITEM 1A. RISK FACTORS - Our failure to operate in a highly competitive and constantly evolving industry could have a material adverse impact on our business” of this Annual Report on Form 10-K for further discussion of the potential impacts competition may have on the Company.
SEASONAL BUSINESS
Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seasons: the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company experiences its greatest sales activity during Fall, due to Back-to-School and Holiday sales
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periods. Refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K for further discussion.
TRADEMARKS
The trademarks Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos are registered with the U.S. Patent and Trademark Office and registered, or the Company has applications for registration pending, with the registries of countries in key markets within the Company’s sales and distribution channels. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered, and the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to timely renew each of its registered trademarks that remain in use.
INFORMATION SYSTEMS
The Company’s Company-owned and third-party-operated management information systems consist of a full range of retail, merchandising, human resource and financial systems. These systems include applications related to point-of-sale, digital operations, inventory management, supply chain, planning, sourcing, merchandising, payroll, scheduling and financial reporting. The Company continues to invest in technology to upgrade its core systems to create efficiencies and to support its digital operations, omnichannel capabilities, customer relationship management tools and loyalty programs.
WORKING CAPITAL
Refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K for a discussion of the Company’s cash requirements and sources of cash available for working capital needs and investment opportunities.
HUMAN CAPITAL MANAGEMENT
The Company strives to create a culture that not only drives strategic and key business priorities forward, but also encourages associates to create a positive impact in their communities. The Company believes that the strength of its unique culture is a competitive advantage, and intends to continue building upon that culture to improve performance across its business. This will become even more important as the Company expands globally and works towards achieving its long-term vision of becoming a leading digital-first omnichannel global apparel retailer.
Therefore, the Company believes that the attraction, retention, and management of qualified talent representing diverse backgrounds, experiences, and skill sets, and fostering a diverse, equitable and inclusive work environment is integral to its success in advancing the Company’s strategies and key business priorities and avoiding disruptions in the business. The Company relies on its associates across the organization, including those at its corporate offices, stores, and distribution centers, as well as their experience and expertise in the retail business. Examples of key initiatives that are focused to attract, retain, and manage the Company’s human capital resources include the following:
•Offering competitive compensation and benefits, including cash-based and equity-based incentive awards in order to align the interests of associates and shareholders.
•Improving associate engagement through open communication channels and focusing on development. The Company regularly holds all-company meetings to communicate with its associates and collects feedback through various surveys to better understand associate experience and drive improvements. The Company also strives to provide a wide variety of development opportunities throughout associates’ careers in order to be able to pivot resources to align with overall corporate strategies when necessary.
•Embracing diversity and inclusion in all forms, including gender, race, ethnicity, disability, nationality, religion, age, veteran, LGBTQIA+ status and other factors. The Company continuously reviews representation, pay and promotion among associates with diverse backgrounds, including those in senior leadership positions. The Company also encourages associates to enhance their understanding of diversity and inclusion through the Company’s various associate resource groups which allow associates from different business functions around the world to discuss relevant topics and help address regional-specific needs. Additionally, the Company invests in year-round competency building training for associates on topics of bias, allyship and advocacy.
•Encouraging community involvement by promoting various charitable, philanthropic, and social awareness programs, which fosters a collaborative and rewarding work environment.
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•Focusing on the health and safety of its associates by investing in various wellness programs throughout the year that are designed to enhance the physical, financial, and mental well-being of its associates globally. Refer to "Impact of COVID-19" included in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K for information on actions taken by the Company to support its associates during COVID-19.
The Company employed approximately 34,000 associates globally as of January 30, 2021, of whom approximately 26,900 were part-time associates. As of January 30, 2021, the Company employed approximately 25,000 associates in the U.S., and employed approximately 9,000 associates outside of the U.S. The Company employs temporary, seasonal associates at times, particularly during Fall, when it experiences its greatest sales activity due to Back-to-School and Holiday sales periods.
The number of associates represented by workers’ councils and unions is not significant and is generally limited to associates in the Company’s European stores.
Board oversight
A&F’s Board of Directors and its committees also play an integral role in the Company’s human capital management. For example, the Corporate Social Responsibility Committee of the Board of Directors provides oversight of the Company’s attention to issues of social responsibility, including diversity and inclusion, health and safety, human rights, environmental and philanthropy and the Company’s policies, practices and progress with respect to such issues. This includes overseeing, making recommendations and evaluating the success of the Company’s diversity and inclusion policies and programs, while monitoring current trends and opportunities in corporate diversity outreach. In addition, among other things, the Compensation and Organization Committee of the Board of Directors oversees the Company’s overall compensation structure, policies and programs, as well as reviews and approves metrics to be used for the determination of payouts under cash-based and equity-based incentive programs. Members of the Board of Directors also review succession plans for the Company’s executive officers and discuss with senior leadership the Company’s organizational structure and key reporting relationships, along with development of strategies and practices relating to recruitment, retention and development of the Company’s associates as needed.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The executive officers serve at the pleasure of the Board of Directors of A&F. Set forth below is certain information regarding the executive officers of the Company as of March 24, 2021:
| Fran Horowitz, Chief Executive Officer and Director | |||||
 | Age: 57 Executive Roles: •Chief Executive Officer, Principal Executive Officer and Director (since February 2017) •Former member of the Office of the Chairman of the Company, which was formed in December 2014 to allow for effective management of the Company during a transition in leadership until it was dissolved in February 2017 upon Ms. Horowitz’s appointment as Chief Executive Officer •Former President and Chief Merchandising Officer for all brands of the Company (December 2015 - February 2017) and former Brand President of Hollister (October 2014 - December 2015) •Former President of Ann Taylor Loft, a division of Ascena Retail Group, the parent company of specialty retail fashion brands in North America (October 2013 - October 2014) •Formerly held various roles at Express, Inc., a specialty apparel and accessories retailer of women’s and men’s merchandise (February 2005 - November 2012), including Executive Vice President of Women’s Merchandising and Design (May 2010 - November 2012) •Formerly held various merchandising roles at Bloomingdale’s and various positions at Bergdorf Goodman, Bonwit Teller and Saks Fifth Avenue Other Leadership Roles: •Member of the Board of Directors of SeriousFun Children’s Network, Inc., a non-profit corporation that provides specially-adapted camp experiences for children with serious illnesses and their families, free of charge (since March 2017) •Member of Columbus Partnership, a non-profit organization of chief executive officers from leading businesses and institutions in Columbus, Ohio, with the goal of improving economic development in the city that is home to the Company (since May 2018) •Member of the Board of Directors of Chief Executives for Corporate Purpose (CECP), a CEO-led coalition that helps companies transform their social strategy by providing customized resources (since October 2019) | ||||
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| Gregory J. Henchel, Senior Vice President, General Counsel and Corporate Secretary | |||||
 | Age: 53 Executive Roles: •Senior Vice President, General Counsel and Corporate Secretary of the Company (since October 2018) •Former Executive Vice President, Chief Legal Officer and Secretary of HSN, Inc., a $3+ billion multi-channel retailer (February 2010 - December 2017) •Former Senior Vice President and General Counsel of Tween Brands, Inc., a specialty retailer (October 2005 - February 2010) and served as that company’s Secretary (August 2008 - February 2010) •Formerly held various roles at Cardinal Health, Inc., a global medical device, pharmaceutical and healthcare technology company, including Assistant General Counsel of Cardinal Health (2001 - October 2005), and Senior Litigation Counsel (May 1998 - 2001) •Formerly held position as a litigation associate with the law firm of Jones Day (September 1993 - May 1998) | ||||
| Scott D. Lipesky, Senior Vice President and Chief Financial Officer | |||||
 | Age: 46 Executive Roles: •Senior Vice President and Chief Financial Officer of the Company, as well as Principal Financial Officer and Principal Accounting Officer of the Company (since October 2017) •Prior to rejoining the Company, formerly served as Chief Financial Officer of American Signature, Inc., a privately-held home furnishings company (October 2016 - October 2017) •Formerly held various leadership roles and finance positions with the Company (November 2007 - October 2016) including: Chief Financial Officer, Hollister Brand (September 2014 - October 2016); Vice President, Merchandise Finance (March 2013 - September 2014); Vice President, Financial Planning and Analysis (November 2012 - March 2013); and Senior Director, Financial Planning and Analysis (November 2010 - November 2012) •Former Corporate Finance Director with FTI Consulting Inc., a global financial services advisory firm •Former Director of Corporate Business Development with The Goodyear Tire & Rubber Company •Formerly held position as a Certified Public Accountant with PricewaterhouseCoopers LLP | ||||
| Holly May, Senior Vice President and Chief Human Resource Officer | |||||
 | Age: 39 Executive Roles: •Senior Vice President and Chief Human Resource Officer of the Company (since January 2021) •Former Senior Vice President, Global Total Rewards & Service Delivery for Starbucks, a global retail company (September 2018 - December 2020) •Former Vice President, Global Compensation, Mobility and Payroll at Visa, Inc., an electronic payments company (October 2016 - August 2018) •Formerly held senior positions across human resources at Voya Financial, a financial services company, (September 2012 - October 2016), including Senior Vice President, Human Resources (November 2014 - October 2016) Other Leadership Roles: •Member of Board of Trustees of Seattle Children’s Hospital and Research Foundation (since 2020) | ||||
| Kristin Scott, President, Global Brands | |||||
 | Age: 53 Executive Roles: •President, Global Brands of the Company (since November 2018) •Former Brand President of Hollister (August 2016 - November 2018) •Formerly held senior positions at Victoria’s Secret, a specialty retailer of women’s intimate and other apparel which sells products at Victoria’s Secret stores and online (December 2007 - April 2016), including: Executive Vice President, General Merchandise Manager (March 2013 - April 2016); Senior Vice President, General Merchandise Manager (March 2009 - March 2013); and Senior Vice President, General Merchandise Manager - Stores (December 2007 - March 2009) •Formerly held various planning and merchandising positions at Gap Inc., Target, and Marshall Fields. | ||||
GOVERNMENT REGULATIONS
As a global organization, the Company is subject to the laws and regulations of the U.S. and multiple foreign jurisdictions in which it operates. These laws and regulations include, but are not limited to: trade, transportation and logistic laws, including tariffs and import and export regulations; tax laws and regulations; product and consumer safety laws; anti-bribery and corruption laws; employment and labor laws; antitrust or competition laws; data privacy laws; and environmental regulations.
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Laws and regulations have had, and may continue to have, a material impact on the Company’s operations. In addition, certain governments’ responses to COVID-19, such as travel restrictions and local statutory quarantines, negatively impacted the Company’s earnings in Fiscal 2020 as is described further within “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K.
Refer to “ITEM 1A. RISK FACTORS,” of this Annual Report on Form 10-K for a discussion of the potential impacts regulatory matters may have on the Company in the future, including those related to environmental matters. Compliance with government laws and regulations has not had a material effect on the Company’s capital expenditures or competitive position.
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OTHER INFORMATION
A&F makes available free of charge on its website, corporate.abercrombie.com, under the “Investors, Financials, SEC Filings,” section, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). A&F also makes available free of charge in the same section of the Company’s website the definitive proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after the Company electronically files such proxy materials with the SEC. The SEC maintains a website that contains electronic filings by the Company and other issuers at www.sec.gov.
A&F has included certain of its website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.
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Item 1A. Risk Factors
FORWARD-LOOKING STATEMENTS AND RISK FACTORS.
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by us, our management or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which may be beyond our control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we assume no obligation to publicly update or revise any forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.
The current outbreak of COVID-19 has caused business disruption beginning in January 2020. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. Further, the Company has seen, and expects to continue to see a direct, material adverse impact to sales and operations as a result of COVID-19. COVID-19 poses various risks to the Company, certain of which are detailed throughout this “ITEM 1A. RISK FACTORS”. Any one of these risks, or a combination of risks, could result in further adverse impacts on the Company’s business, results of operations, financial condition and cash flows. In addition, the following factors, categorized by the primary nature of the associated risk, could affect our financial performance and cause actual results to differ materially from those expressed or implied in any of the forward-looking statements.
Macroeconomic and industry risks include:
•COVID‐19 has and may continue to materially adversely impact and cause disruption to our business;
•Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits could have a material adverse impact on our business;
•Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business;
•Our failure to operate effectively in a highly competitive and constantly evolving industry could have a material adverse impact on our business;
•Fluctuations in foreign currency exchange rates could have a material adverse impact on our business;
•Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around;
•The impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience could have a material adverse impact on our business; and
•The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business.
Strategic risks include:
•Failure to successfully develop an omnichannel shopping experience, a significant component of our growth strategy, or failure to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business;
•Our failure to optimize our global store network could have a material adverse impact on our business;
•Our failure to execute our international growth strategy successfully and inability to conduct business in international markets as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business; and
•Our failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business.
Operational risks include:
•Failure to protect our reputation could have a material adverse impact on our business;
•If our information technology systems are disrupted or cease to operate effectively, it could have a material adverse impact on our business;
•We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business;
•Our reliance on our distribution centers makes us susceptible to disruptions or adverse conditions affecting our supply chain;
•Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could have a material adverse impact on our business;
•We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could have a material adverse impact on our business;
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•We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business; and
•We identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future. If we fail to remediate our material weaknesses, or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
Legal, tax, regulatory and compliance risks include:
•Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations could have a material adverse impact on our business;
•Our litigation exposure, or any securities litigation and shareholder activism, could have a material adverse impact on our business;
•Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business;
•Changes in the regulatory or compliance landscape could have a material adverse impact on our business; and
•The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business.
The factors listed above are not our only risks. Additional risks may arise, and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition. The following sets forth a description of the preceding risk factors that we believe may be relevant to an understanding of our business. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.
MACROECONOMIC AND INDUSTRY RISKS.
COVID‐19 has and may continue to materially adversely impact and cause disruption to our business.
COVID-19 has had a material adverse effect on our business, including our financial performance and condition, operating results and cash flows, and may continue to materially adversely impact and cause disruption to our business in the future.
As a result of COVID-19, numerous state and local jurisdictions have imposed, and others in the future may impose, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in temporary store closures, modified store operating hours, a decrease in customer traffic, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. The impact of regulations imposed in the future in response to the pandemic, could, among other things, require that we close our stores or distribution centers or otherwise make it difficult or impossible to operate our business.
Other factors that would negatively impact our ability to successfully operate during the current COVID-19 pandemic include, but are not limited to:
•Our ability to reopen our stores in a timely manner if and when they reopen;
•Our ability to keep our stores open if there is a re-emergence or increase in infection rate;
•Our ability to attract customers to our reopened stores, given the risks, or perceived risks, of gathering in public places;
•Our ability to incentivize and retain associates and to reinstate any furloughed store associates;
•Our ability to obtain rent abatements or enter into rent deferral arrangements with our landlords;
•Our ability to react to changes in anticipated customer demand and manage inventories, which may result in excess inventories;
•Our ability to rely on our distribution centers to manage the receipt, storage, sorting, packing and distribution of our merchandise as the distribution centers are susceptible to local and regional factors, such as system failures, accidents, labor disputes, economic and weather conditions, natural disasters, demographic and population changes;
•Supply chain delays due to closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas, as well as carrier constraints due to an increase in digital sales;
•Fluctuations in the cost, availability and quality of raw materials, as well as costs of labor and transportation;
•A more promotional retail environment or our ability to move existing inventory, may cause us to lower our prices, sell existing inventory at larger discounts than in the past, or write down the value of inventory, and increase the costs and expenses of updating and replacing inventory, negatively impacting our margins;
•Delays in, or our ability to complete, planned store openings on the expected terms or timing, or at all;
•The deterioration or fluctuations in the economic conditions in the U.S. or international markets, which could have an impact on consumer confidence and discretionary consumer spending;
•Our ability to attract, retain and manage our associates during periods of extended work from home arrangements;
•Associates, whether our own or those of our third-party vendors, working offsite through work from home arrangements may rely on residential communication networks and internet providers and may be more susceptible to service
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interruptions and cyberattacks, and, this period of uncertainty could result in an increase in phishing and other scams, fraud, money laundering, theft and other criminal activity;
•Fluctuations in foreign currency exchange rates and changes in the effectiveness of our hedging instruments;
•Our ability to successfully execute against our international expansion plans;
•Our ability to preserve liquidity to be able to take advantage of market conditions during periods of temporary store closures; and
•Difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities.
Factors and uncertainties related to future impacts of COVID-19 on our business, include, but are not limited to:
•The severity and duration of the pandemic, including additional periods of increases or spikes in the number of COVID-19 cases, future mutations or variants of the virus in areas in which we operate;
•The availability and acceptance of effective vaccines or medical treatments;
•The nature and size of federal economic stimulus and other governmental efforts;
•The impact of the pandemic on overall customer demand and consumer behaviors as well as its impact on macroeconomic factors such as general economic uncertainty, unemployment rates, and recessionary pressures; and
•Any unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response.
It is uncertain as to when or if we will be able to resume all store operations and if we will see traffic return to pre-COVID-19 levels in the future. In addition, customers have increasingly relied on technology to shop and to interact with our brands during this unprecedented period and our inability to continue to connect with our customers in this manner going forward could affect our ability to compete and adversely affect our results of operations.
The factors described above may exacerbate other risks within this section of “ITEM 1A. RISK FACTORS”. Any future outbreak of any other highly infectious or contagious disease could also have a material adverse impact on our business.
Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits could have a material adverse impact on our business.
Our business depends on consumer demand for our merchandise. Consumer preferences and discretionary spending habits, including purchases of our merchandise, can be adversely impacted by recessionary periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect worldwide economic conditions including unemployment, consumer credit availability, consumer debt levels, reductions in net worth based on declines in the financial, residential real estate and mortgage markets, sales and personal income tax rates, fuel and energy prices, interest rates, consumer confidence in future economic and political conditions, consumer perceptions of personal well-being and security, the value of the U.S. Dollar versus foreign currencies and other macroeconomic factors.
Global uncertainty, such as the ultimate impact of the United Kingdom’s recent exit from the European Union, uncertainty with respect to trade policies and COVID-19, has in the past, and could in the future, cause changes in consumer confidence and in consumers’ discretionary spending habits globally, resulting in a material adverse effect on our results of operations, liquidity and capital resources.
The economic conditions and factors described above could adversely impact our results of operations, liquidity and capital resources, and may exacerbate other risks within this section of “ITEM 1A. RISK FACTORS”. Changes in economic conditions could also impact our ability to fund growth and/or result in our becoming reliant on external financing, the availability and cost of which may be uncertain.
Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business.
Our success largely depends on our ability to anticipate and gauge the fashion preferences of our customers and provide merchandise that satisfies constantly shifting demands in a timely manner. Because we may enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, pricing shifts, and the sub-optimal selection and timing of merchandise purchases.
Moreover, there can be no assurance that we will continue to anticipate consumer demands and accurately plan inventory successfully in the future. Changing consumer preferences and fashion trends, whether we are able to anticipate, identify and respond to them or not, could adversely impact our sales. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to sell through excess inventory and, therefore, lower than planned margins. Conversely, if we underestimate consumer demand for our merchandise, or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales.
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We could also be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands and improve customer engagement. Any of these events could significantly harm our operating results and financial condition.
In addition to our own execution, we also need to react to factors affecting inventory flow that are outside our control, such as natural disasters or other unforeseen events that may significantly impact anticipated customer demand as we have seen with COVID-19. If we are not able to adjust appropriately to such factors, our inventory management may be affected, which could adversely impact our performance and our reputation.
Our failure to operate effectively in a highly competitive and constantly evolving industry could have a material adverse impact on our business.
The sale of apparel, personal care products and accessories for men, women and kids is a highly competitive business with numerous participants, including individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online-exclusive businesses. Proliferation of the digital channel within the last few years has encouraged the entry of many new competitors and an increase in competition from established companies. These increases in competition could reduce our ability to retain and grow sales, resulting in an adverse impact to our operating results and business.
We also face a variety of challenges in the highly competitive and constantly evolving retail industry, including:
•anticipating and quickly responding to changing consumer shopping preferences better than our competitors;
•maintaining favorable brand recognition;
•marketing our products to consumers in several diverse demographic markets effectively, including through social media platforms which have become increasingly more important during the COVID-19 pandemic in order to stay connected to our customers;
•retaining customers, including our loyalty club members, as if we were to fail, it could result in increased marketing costs to acquire new customers;
•developing innovative, high-quality merchandise in styles that appeal to consumers and in ways that favorably distinguish us from our competitors;
•countering the aggressive pricing and promotional activities of many of our competitors without diminishing the aspirational nature of our brands and brand equity; and
•identifying and assessing disruptive innovation, by existing or new competitors, that could alter the competitive landscape by: improving the customer experience and heightening customer expectations; transforming supply chain and corporate operations through digital technologies and artificial intelligence; and enhancing management decision-making through use of data analytics to develop new, consumer insights.
In addition, in order to compete in this highly competitive and constantly evolving industry, at times, we may launch and/or acquire new brands to expand our portfolio. This could result in significant financial and operational investments that do not provide the anticipated benefits or desired rates of return and there can be no guarantee that pursuing these investments will result in improved operating results.
In light of the competitive challenges we face, we may not be able to compete successfully in the future.
Fluctuations in foreign currency exchange rates could have a material adverse impact on our business.
Due to our international operations, we are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. In addition, certain of our subsidiaries transact in currencies other than their functional currency, including intercompany transactions, which results in foreign currency transaction gains or losses. Furthermore, we purchase substantially all of our inventory in U.S. Dollars. As a result, our sales, gross profit and gross profit rate from international operations will be negatively impacted during periods of a strengthened U.S. dollar relative to the functional currencies of our foreign subsidiaries, as was the case in Fiscal 2019.
Fluctuations in foreign currency exchange rates could adversely impact consumer spending, delay or prevent successful penetration into new markets or adversely affect the profitability of our international operations. Certain events, such as the uncertainty as to the ultimate scope and duration of COVID-19, the ultimate impact of the United Kingdom’s recent exit from the European Union and uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, have increased global economic and political uncertainty in recent years and could result in volatility of foreign currency exchange rates as these events develop. For example, changes in sales assumptions in response to COVID-19 have resulted in changes in the effectiveness to certain of our hedging instruments, and we could see similar impacts in future periods.
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Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around.
Our stores are primarily located in shopping malls and other shopping centers, certain of which had been experiencing declines in customer traffic prior to COVID-19. Our sales at these stores, as well as sales at our flagship locations, are partially dependent upon the volume of traffic in those shopping centers and the surrounding area. Our stores may benefit from the ability of a shopping center’s other tenants and area attractions to generate consumer traffic in the vicinity of our stores and the continuing popularity of the shopping center. We cannot control the loss of a significant tenant in a shopping mall or area attraction, the development of new shopping malls in the U.S. or around the world, the availability or cost of appropriate locations or the success of individual shopping malls and there is competition with other retailers for prominent locations.
If the popularity of shopping malls declines among our customers, our sales may decline, and it may be appropriate to exit leases earlier than originally anticipated. In addition, COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as shopping malls, and caused us to enact widespread temporary store closures and our landlords to temporarily close certain of the malls in which our stores operate.
While the majority of stores have reopened since their initial closure in March 2020, we continue to see reclosures in certain geographic areas, primarily within Europe, and there is significant uncertainty surrounding the ultimate duration of these closures as well as temporary store closures that may take place in the future. In Fiscal 2020, we experienced store traffic below Fiscal 2019 levels and there remains uncertainty as to the long-term effects of COVID-19 on consumer willingness to visit shopping malls in the future, and whether store traffic will return to pre-COVID-19 levels. Furthermore, declines in traffic beyond our current expectations could result in additional impairment charges. While we have been successful in obtaining certain rent abatements and landlord concessions of rent payable during Fiscal 2020 as a result of COVID-19 store closures, we may be limited in our ability to obtain rent abatements or landlord concessions of rent otherwise payable going forward.
All of these factors may impact our ability to meet our productivity or our growth objectives for our stores and could have a material adverse impact on our financial condition or results of operations. Part of our future growth is dependent on our ability to operate stores in desirable locations, with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure when or whether such desirable locations will become available at reasonable costs.
The impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience could have a material adverse impact on our business.
In the past, the impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience and the associated heightened security measures in response to these events have disrupted commerce. Further events of this nature, domestic or abroad, including recent unrest in the U.S., Europe and in China’s Hong Kong SAR, may disrupt commerce and undermine consumer confidence and consumer spending by causing a decline in traffic, store closures and a decrease in digital demand adversely affecting our operating results.
Furthermore, the existence or threat of any other unforeseen interruption of commerce, could negatively impact our business by interfering with the availability of raw materials or our ability to obtain merchandise from foreign manufacturers. With a substantial portion of our merchandise being imported from foreign countries, failure to obtain merchandise from our foreign manufacturers or substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our operating results and financial condition.
The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business.
Our retail stores, corporate offices, distribution centers, infrastructure projects and digital operations, as well as the operations of our vendors and manufacturers, are vulnerable to disruption from natural disasters, infectious disease outbreaks and other unexpected events, such as COVID-19. These events could disrupt the operations of our corporate offices, global stores and supply chain and those of our third-party partners, including our vendors and manufacturers. In addition to impacts on global operations, these events could result in the potential loss of customers and revenues as a result of store closures, delay in merchandise deliveries, reduced consumer confidence or changes in consumers’ discretionary spending habits.
These events could reduce the availability and quality of the fabrics or other raw materials used to manufacture our merchandise, which could result in delays in responding to consumer demand resulting in the potential loss of customers and revenues or we may incur increased costs to meet demand and may not be able to pass all or a portion of higher costs on to our customers, which could adversely affect our gross margin and results of our operations.
We could also be adversely affected if government authorities impose mandatory store closures as we experienced in Fiscal 2020 as a result of COVID-19, or restrict the import or export of products, in response to an unexpected event such as an infectious disease outbreak. Even if such measures are not implemented or infectious disease does not spread significantly, the
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perceived risk of infection or health risk may adversely affect our business and operating results. The extent of impacts of COVID-19 or future infectious disease outbreaks may be exacerbated depending on the emergence of new variants or strains as well as the availability and acceptance of effective vaccines or medical treatments.
Our business has been materially, adversely impacted by COVID-19. Refer to risk factor “COVID‐19 has and may continue to materially adversely impact and cause disruption to our business,” included within this section for further discussion of the ongoing impacts and risks related to COVID-19.
In addition, historically, our operations have been seasonal, and extreme weather conditions, including natural disasters, unseasonable weather or changes in weather patterns, may diminish demand for our seasonal merchandise and could also influence consumer preferences and fashion trends, consumer traffic and shopping habits. In addition, we may incur costs that exceed our applicable insurance coverage for any necessary repairs to damages or business disruption.
STRATEGIC RISKS.
Failure to successfully develop an omnichannel shopping experience, a significant component of our growth strategy, or failure to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business.
As omnichannel retailing continues to grow and evolve, our customers increasingly interact with our brands through a variety of media including smart phones and tablets, and expect seamless integration across all touchpoints. As our success depends on our ability to respond to shifting consumer traffic patterns and ability to engage our customers, we have made significant investments and significant operational changes to develop our digital and omnichannel capabilities globally, including the development of localized fulfillment, shipping and customer service operations, investments in digital media to attract new customers and the rollout of omnichannel capabilities listed in “ITEM 1. BUSINESS.”
While we must keep up to date with emerging technology trends in the retail environment in order to develop a successful omnichannel shopping experience, it is possible these initiatives may not prove to be successful, may increase our costs, may not succeed in driving sales or attracting customers and could result in significant investments that do not provide the anticipated benefits or desired rates of return. For example, we could be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands and improve customer engagement across channels.
In addition, digital operations are subject to numerous risks, including reliance on third-party computer hardware/software and service providers, data breaches, violations of state, federal or international laws, including those relating to online privacy, credit card fraud, telecommunication failures and electronic break-ins and similar disruptions, and disruption of internet service. Changes in foreign governmental regulations may also negatively impact our ability to deliver product to our customers. Failure to successfully respond to these risks may adversely affect sales as well as damage the reputation of our brands.
Our failure to optimize our global store network could have a material adverse impact on our business.
With the evolution of digital and omnichannel capabilities, customer expectations have shifted and there has been greater pressure for a seamless omnichannel experience across all channels. In addition, the majority of the Company’s sales in Fiscal 2020 occurred within the digital channel as a result of COVID-19’s influence on consumer shopping behaviors which may have a lasting impact on consumer shopping behaviors in the future. As a result, global store network optimization is an important part of our business and failure to optimize our global store network could have an adverse impact on our results of operations.
Opportunities to open new stores experiences and modify existing leases requires partnership with our landlords. If our partnerships with our landlords were to deteriorate, this could adversely affect the pace of opening new store experiences and/or lead to an increase in store closures. In addition, if there is an increase in events such as landlord bankruptcies, or mall foreclosures, competition between retailers could increase for remaining suitable store locations. Pursuing the wrong opportunities and any delays, cost increases, disruptions or other uncertainties related to those opportunities could adversely affect our results of operations. If our investments in new stores or remodeling and right-sizing existing stores do not achieve appropriate returns, our financial condition and results of operations could be adversely affected.
Although we attempt to open new stores in prominent locations, it is possible that prominent locations when we opened our stores may cease to be viewed as prominent. For example, our flagship stores, large-format stores in tourist locations with higher than average construction and operating costs, were initially successful upon opening, but are now outdated and, in aggregate, have a disproportionate adverse impact on operating results. The cost involved to modernize many of these flagship stores is significant and oftentimes without promise of a return. As a result, we may elect to exit these leases and other of our store leases earlier than originally anticipated, or modify the leases, which could result in material incremental charges, as seen in the second quarter of Fiscal 2019 when we closed the SoHo, New York City Hollister flagship store.
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Our failure to execute our international growth strategy successfully and inability to conduct business in international markets as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business.
International expansion is a significant component of our growth strategy and may require significant investment, which could strain our resources and adversely impact current store performance, while adding complexity to our current operations.
Operational issues that could have a material adverse effect on our reputation, business and results of operations if we fail to address them include, but are not limited to, the following:
•address the different operational characteristics present in each country in which we operate, including employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements;
•support global growth by successfully implementing local customer and product-facing teams and certain corporate support functions at our regional headquarters located in Shanghai, China and London, United Kingdom;
•hire, train and retain qualified personnel;
•maintain good relations with individual associates and groups of associates;
•avoid work stoppages or other labor-related issues in our European stores where associates are represented by workers’ councils and unions;
•retain acceptance from foreign customers;
•manage inventory effectively to meet the needs of existing stores on a timely basis; and
•manage foreign currency exchange rate risks effectively.
We are subject to domestic laws, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If any of our overseas operations, or our associates or agents, violate such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
In addition, there continues to be global uncertainty, such as the uncertainty as to the ultimate scope and duration of COVID-19, the ultimate impact of the United Kingdom’s recent exit from the European Union and uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, and similar events of global unrest. These events have increased global economic and political uncertainty in recent years and could affect our international expansion plans.
Our failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business.
There is an increased focus from certain investors, customers, associates, business partners and other stakeholders concerning environmental, social and governance matters.
The expectations related to environmental, social and governance matters are rapidly evolving, and from time to time, we announce certain initiatives and goals, related to environmental, social or governmental matters, such as those announced in Fiscal 2019 through our participation in the United Nations Global Compact. We could fail, or be perceived to fail to act responsibly, in our environmental, social and governance efforts, or we could fail in accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the scope of such initiatives or goals. As a result, we could suffer negative publicity and our reputation could be adversely impacted, which in turn could have a negative impact on investor perception and our products' acceptance by consumers. This may also impact our ability to attract and retain talent to compete in the marketplace.
There is also greater uncertainty following the recent November 2020 U.S. elections regarding potential policies related to issues surrounding global environmental sustainability. Changes in the legal or regulatory environment affecting responsible sourcing, supply chain transparency, or environmental protection, among others, including regulations to limit carbon dioxide and other greenhouse gas emissions, to discourage the use of plastic or to limit or to impose additional costs on commercial water use may result in increased compliance costs for us and our business partners.
OPERATIONAL RISKS.
Failure to protect our reputation could have a material adverse impact on our business.
Our ability to maintain our reputation is critical and public perception about our products or operations, whether justified or not, could impair our reputation, involve us in litigation, damage our brands and have a material adverse impact on our business.
Events that could jeopardize our reputation, include, but are not limited to, the following:
•We fail to maintain high standards for merchandise quality and integrity;
•We fall victim to a cyber-attack, resulting in customer data being compromised;
•We fail to comply with ethical, social, product, labor, health and safety, accounting or environmental standards, or related political considerations;
•Our associates’ actions don’t align with our values and fail to comply with our Associate Code of Conduct;
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•Third parties with which we have a business relationship, including our brand representatives and influencer network, fail to represent our brands in a manner consistent with our brand image or act in a way that harms their reputation; and
•Third-party vendors fail to comply with our Vendor Code of Conduct or any third parties with which we have a business relationship with fail to represent our brands in a manner consistent with our brand image.
Our position or perceived lack of position on environmental, social, governance, public policy or other similar issues, including any actions we have taken in response to COVID-19, and any perceived lack of transparency about those matters could also harm our reputation with consumers or investors.
In addition, in recent years there has been increase in social media platforms and our use of social media platforms is an important element of our omnichannel marketing efforts, which became increasingly more important during the COVID-19 pandemic in order to stay connected to our customers. For example, we maintain various social media accounts for our brands, including Instagram, TikTok, Facebook, Twitter and Pinterest accounts. Actions taken by individuals that we partner with, such as brand representatives, influencers or our associates, that fail to represent our brands in a manner consistent with our brand image or act in a way that harms their reputation, whether through our social media platforms or their own, could harm our brand reputation and materially impact our business. Social media also allows for anyone to provide public feedback that could influence perceptions of our brands and reduce demand for our merchandise.
Damage to our reputation and loss of consumer confidence for these or any other reasons could lead to adverse consumer actions, including boycotts, negative impacts on investor perception and could impact our ability to attract and retain the talent necessary to compete in the marketplace, all of which could have a material adverse impact on our business, as well as require additional resources to rebuild our reputation.
If our information technology systems are disrupted or cease to operate effectively, it could have a material adverse impact on our business.
We rely heavily on our information technology systems in both our customer-facing and corporate operations to: operate our websites and mobile apps; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise, on a timely basis; maintain cost-efficient operations; create a customer relationship management database through our loyalty programs; and complete other customer-facing and business objectives. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of our computer hardware, telecommunication systems and software systems, and maintain data security. Despite efforts to prevent such an occurrence, our information technology systems may be vulnerable from time to time to damage or interruption from computer viruses, power system failures, third-party intrusions, inadvertent or intentional breach by our associates or third-party service providers, and other technical malfunctions. If our systems are damaged, fail to function properly, or are obsolete in comparison to those of our competition, we may have to make monetary investments to repair or replace the systems, and we could endure delays in our operations. The effectiveness of these investments can be less predictable than others and may fail to provide the expected benefits.
While we regularly evaluate our information technology systems and requirements, we are aware of the inherent risks associated with replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance and understanding. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade our systems could cause information to be lost or delayed, including data related to customer orders. Such a loss or delay, especially if the disruption or slowdown occurred during our peak selling seasons, could have a material adverse effect on our results of operations.
We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business.
In the standard course of business, we receive and maintain confidential information about customers, associates and other third parties. In addition, third parties also receive and maintain certain confidential information. The protection of this information is critical to our business and subjects us to numerous laws, rules and regulations domestically and in foreign jurisdictions. The retail industry in particular has been the target of many recent cyber-attacks and it is possible that an individual or group could defeat our security measures, or those of a third-party service provider, and access confidential information. Further, like other companies in the retail industry, during the ordinary course of business, we and our vendors have in the past experienced, and we expect to continue to experience, cyber-attacks of varying degrees and types, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that cyber attacks will not have a material impact in the future.
We could experience increased costs associated with protecting confidential information through the implementation of security technologies, processes and procedures, including training programs for associates to raise awareness about phishing, malware and other cyber risks, especially as we implement new technologies, such as new payment capabilities or updates to our mobile apps and websites. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems change frequently and increase in complexity and are often not recognized until such attacks are launched
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or have been in place for a period of time. We may not have the resources or technical sophistication to anticipate, prevent, or immediately identifying cyber-attacks.
Furthermore, the global regulatory environment is increasingly complex and demanding with frequent new and changing requirements surrounding cybersecurity, information security and privacy, including the China Cybersecurity Law, the California Consumer Privacy Act, and the European Union’s General Data Protection Regulation. We may incur significant costs related to compliance with these laws and failure to comply with these regulatory standards, and others, could have a material adverse impact on our business.
In addition, our business has been adversely impacted by COVID-19, and as a result, we have implemented a work-from-home policy that applies to a significant majority of our corporate associates, as have certain of our third-party vendors. Offsite working by associates, increased use of public Wi-Fi, and use of office equipment off premises may be necessary, and may make our business more vulnerable to cybersecurity breach attempts. In addition, this period of uncertainty could result in an increase in phishing and other scams, fraud, money laundering, theft and other criminal activity.
If we, or a third-party partner, were to fall victim to a successful cyber-attack, suffer intentional or unintentional data and security breaches by associates or third-parties, it could have a material adverse impact on our business, especially an event that compromises customer data or results in the unauthorized release of confidential business or customer information. In addition, if we are unable to avert a denial of service attack that renders our site inoperable, it could result in negative consequences, such as lost sales and customer dissatisfaction. Additional negative consequences that could result from these and similar events may include, but are not limited to:
•remediation costs, such as liability for stolen assets or information, potential legal settlements to affected parties, repairs of system damage, and incentives to customers or business partners in an effort to maintain relationships after an attack;
•increased cybersecurity protection costs, which may include the costs of making organizational changes, deploying additional personnel and protection technologies, training associates, and engaging third party experts and consultants;
•lost revenues resulting from the unauthorized use of proprietary information or the failure to retain or attract customers following an attack;
•litigation and legal risks, including costs of litigation and regulatory, fines, penalties or actions by domestic or international governmental authorities;
•increased insurance premiums;
•reputational damage that adversely affects customer or investor confidence; and
•damage to the Company’s competitiveness, stock price, and long-term shareholder value.
Although we maintain cybersecurity insurance, there can be no assurance that it will be sufficient for a specific cyber incident, or that insurance proceeds will be paid to us in a timely fashion.
Our reliance on our distribution centers makes us susceptible to disruptions or adverse conditions affecting our supply chain.
Our distribution center operations are susceptible to local and regional factors, such as system failures, accidents, labor disputes, economic and weather conditions, natural disasters, demographic and population changes, as well as other unforeseen events and circumstances, such as COVID-19. We rely on our distribution centers to manage the receipt, storage, sorting, packing and distribution of our merchandise. If our distribution centers are not adequate to support our operations, including as a result of capacity constraints in response to an increase in digital sales, we could experience adverse impacts such as shipping delays and customer dissatisfaction. In addition, if our distribution operations were disrupted, and we were unable to relocate operations or find other property adequate for conducting business, our ability to replace inventory in our stores and process digital and third-party orders could be interrupted, potentially resulting in adverse impacts to sales or increased costs. Refer to “ITEM 1. BUSINESS,” for a listing of certain distribution centers on which we utilize.
Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could have a material adverse impact on our business.
Changes in the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise and fluctuations in the cost of transportation could have a material adverse effect on our cost of sales, or our ability to meet customer demand. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton, as well as the cost of compliance with sourcing laws. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields, weather patterns and other unforeseen events.
In addition, we have experienced increasing wage pressures in recent years related to the cost of labor at our third-party manufacturers, at our distribution centers and at our stores. For example, recent government initiatives in the U.S. or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations. We may not be able to pass all or a portion of higher labor costs on to our customers, which could adversely affect our gross margin and results of operations.
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We primarily used four contract carriers to ship merchandise and related materials to our North American customers, and several contract carriers for our international customers. If the shipping operations of these third-parties were disrupted, and we are unable to respond in a quick and efficient manner, our ability to replace inventory in our stores and process digital and third-party orders could be interrupted, potentially resulting in adverse impacts to sales or increased costs.
In addition, there continues to be global uncertainty, such as to the ultimate scope and duration of COVID-19, the ultimate impact of the United Kingdom’s recent exit from the European Union and uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, and similar events of global, political unrest. These events have increased global uncertainty and have impacted and may in the future impact the cost, availability and quality of merchandise, as well as the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise. For example, factors that may negatively impact our ability to successfully operate during the current COVID-19 pandemic include, but are not limited to supply chain delays due to closed factories, continued shipping container shortages, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas.
In addition, compliance with the recent sanctions and customs trade orders issued by the U.S. government related to entities and individuals who are connected to the China’s Xinjiang Uyghur Autonomous Region, could affect the global supply chain and the price of cotton in the marketplace. We may face regulatory challenges in complying with applicable sanctions and trade regulations and reputational challenges with our consumers and other stakeholders if we are unable to sufficiently verify the origins for the material sourced.
We may not be able to pass all or a portion of higher raw materials prices or labor or transportation costs on to our customers, which could adversely affect our gross margin and results of operations. Such factors listed above may be exacerbated by legislation and regulations associated with global trade policies and climate change.
We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could have a material adverse impact on our business.
We do not own or operate any manufacturing facilities. As a result, the continued success of our operations is tied to our timely receipt of quality merchandise from third-party manufacturers. We source the majority of our merchandise outside of the U.S. through arrangements with approximately 100 vendors, primarily located in southeast Asia. Political, social or economic instability in the regions in which our manufacturers are located could cause disruptions in trade, including exports to the U.S. In addition, the inability of vendors to access liquidity, or the insolvency of vendors, could lead to their failure to deliver merchandise to us. A manufacturer’s inability to ship orders in a timely manner or meet our quality standards could cause delays in responding to consumer demand and negatively affect consumer confidence or negatively impact our competitive position, any of which could have a material adverse effect on our financial condition and results of operations.
All factories that we partner with are contractually required to adhere to the Company’s Vendor Code of Conduct, go through social audits which include on-site walk-throughs to appraise the physical working conditions and health and safety practices, and review payroll and age documentation. If our factories are unwilling or not able to meet the standards set forth within the Company’s Vendor Code of Conduct, it could limit the options available to us and could result in an increase of costs of manufacturing, which we may not able to pass on to our customers.
Other events that could disrupt the timely delivery of our merchandise include new trade law provisions or regulations, reliance on a limited number of shipping carriers and associated alliances, weather events, significant labor disputes, port congestion and other unexpected events, such as COVID-19. Furthermore, we are susceptible to increases in fuel costs which may increase the cost of distribution. If we are not able to pass this cost on to our customers, our financial condition and results of operations could be adversely affected.
We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business.
Our ability to succeed may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our executive officers. We believe that the attraction, retention, and management of qualified talent is integral to our success in advancing our strategies and key business priorities and avoiding disruptions in our business. We rely on our associates across the organization, including those at our corporate offices, stores, and distribution centers, as well as their experience and expertise in the retail business.
Our executive officers closely supervise all aspects of our operations, including the design of our merchandise, have substantial experience and expertise in the retail business and have an integral role in the growth and success of our brands. If we were to lose the benefit of the involvement of executives or other personnel, without adequate succession plans, our business could be adversely affected.
In addition, if we are unable to attract and retain talent at the associate level without adequate succession plans, our business could also adversely be impacted as competition for such qualified talent is intense, and we cannot be sure we will be able to attract, retain and develop a sufficient number of qualified individuals in future periods. For example, as automation, artificial
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intelligence and similar technological advancements continue to evolve, we may need to compete for talent that is familiar with these advancements in technologies in order to compete effectively with our industry peers. If we are not successful in these efforts, our business may be adversely affected.
COVID-19 has also caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as shopping malls. Our business could be adversely affected if we experienced a large capacity of store associates that are either unwilling or unable to staff our stores as a result of concerns over COVID-19, similar infectious disease in the future or other safety concerns.
If we are not successful in these efforts or fail to successfully execute against the key initiatives that are focused on attracting, retaining and managing our human capital resources listed in “ITEM 1. BUSINESS,” our business could be adversely impacted.
We identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future. If we fail to remediate our material weaknesses, or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
The effectiveness of any controls or procedures is subject to certain inherent limitations, and as a result, there can be no assurance that our controls and procedures will prevent or detect misstatements. Even an effective system of internal control over financial reporting will provide only reasonable, not absolute, assurance with respect to financial statement preparation. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
With the participation of the Chief Executive Officer of A&F and the Senior Vice President and Chief Financial Officer of A&F, management evaluated the effectiveness of A&F’s internal control over financial reporting as of January 30, 2021 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s assessment of A&F’s internal control over financial reporting, under the criteria described in the preceding sentence, management has identified a control deficiency during the fiscal year ended January 30, 2021, that constituted a material weakness as described within “ITEM 9A. CONTROLS & PROCEDURES.”
If we fail to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting, management could be required to expend significant resources and we could fail to meet our public reporting requirements on a timely basis, and be subject to fines, penalties, investigations or judgements, all of which could negatively affect investor confidence and adversely impact our stock price.
LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS.
Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations could have a material adverse impact on our business.
We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year, there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows.
In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows.
There is also heightened scrutiny on the potential taxation of digital businesses. For example, the Organization for Economic Co-Operation and Development (the “OECD”) has had a specific focus on the taxation implications of e-commerce business, generally referred by the OECD as the “digital economy,” proposed an approach which would, among other changes, create a new right to tax certain “digital economy” income not necessarily based on traditional nexus concepts nor on the “arm’s length principle.” At this point, there is a lack of consensus agreement among members with the latest OECD proposal. A failure to reach full consensus on an executable plan within the tight timeframe under which the OECD is operating could result in individual jurisdictions legislating digital tax provisions in an uncoordinated and unilateral manner, and further result in greater or even double taxation that companies may not have sufficient means to remedy. Efforts to alleviate any increased tax burden may increase the cost of structuring and compliance, adversely impacting our business.
In the past, tax law has been enacted, domestically and abroad, impacting our current or future tax structure and effective tax rate, such as the Tax Cuts and Jobs Act of 2017 and Swiss Tax Reform discussed further in Note 12, “INCOME TAXES.” Tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate,
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including tax law that may be enacted following the recent November 2020 U.S. elections or in response to the COVID-19 crisis, both of which have introduced greater uncertainty with respect to tax policies, laws and regulations. For example, certain jurisdictions may introduce new tax law or reconsider existing laws to assist with covering the costs of the COVID-19 crisis in efforts to restore public finances, which could have a material impact on our business.
Our litigation exposure, or any securities litigation and shareholder activism, could have a material adverse impact on our business.
We, along with third parties we do business with, are involved, from time to time, in litigation arising in the ordinary course of business. Litigation matters may include, but are not limited to, contract disputes, employment-related actions, labor relations, commercial litigation, intellectual property rights, product safety, environmental matters and shareholder actions.
Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in publicly traded companies recently. Due to the potential volatility of our stock price and for a variety of other reasons, we may become the target of securities litigation or shareholder activism.
Additionally, while we have continued to prioritize the health and safety of our associates and customers as we continue to operate during COVID-19, we face an increased risk of litigation related to our operating environments, including litigation risk related to potential workplace lawsuits and may incur significant increased operating costs associated with potential increases in insurance premiums, medical claims costs, and/or workers’ compensation claim costs, which could negatively affect our results of operations both during and after the pandemic. In addition, while the Company has been successful in obtaining certain rent abatements and landlord concessions of rent payable during Fiscal 2020 as a result of COVID-19 store closures, the Company continues to engage with our landlords to find a mutually beneficial and agreeable path forward for certain of our other leases.
Any litigation that we become a party to could be costly and time consuming and could divert our management and key personnel from our business operations. Our current litigation exposure could be impacted by various factors, including, but not limited to: litigation trends; discovery of additional facts with respect to legal matters pending against us; or determinations by judges, juries or other finders of fact that are not in accordance with management’s evaluation of existing claims. Should management’s evaluation prove incorrect, our exposure could greatly exceed expectations and have a material adverse effect on our financial condition, results of operations or cash flows.
Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business.
We believe our core trademarks, Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos, are essential to the effective implementation of our strategy. We have obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries of countries in key markets within the Company’s sales and distribution channels. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. There can be no assurance that we will obtain registrations that have been applied for or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. Although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected.
Because we have not yet registered all of our trademarks in all categories, or in all foreign countries in which we source or offer our merchandise now, or may in the future, our international expansion and our merchandising of products using these marks could be limited. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom we are not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our merchandise in those non-U.S. jurisdictions.
Additionally, if a third party claims to have licensing rights with respect to merchandise we have produced or purchased from a vendor, we may be obligated to remove this merchandise from our inventory offering and incur related costs, and could be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages.
Changes in the regulatory or compliance landscape could have a material adverse impact on our business.
We are subject to numerous laws and regulations, including customs, truth-in-advertising, securities laws, consumer protection, general privacy, health information privacy, identity theft, online privacy, general employment laws, employee health and safety, minimum wage laws, unsolicited commercial communication and zoning and occupancy laws and ordinances that regulate
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retailers generally and/or govern the importation, intellectual property, promotion and sale of merchandise and the operation of retail stores, digital operations and distribution centers. If these laws and regulations were to change, or were violated by our management, associates, suppliers, vendors or other parties with whom we do business, the costs of certain merchandise could increase, or we could experience delays in shipments of our merchandise, be subject to fines or penalties, temporary or permanent store closures, increased regulatory scrutiny or suffer reputational harm, which could reduce demand for our merchandise and adversely affect our business and results of operations. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation including the areas referenced above, could adversely affect our business and results of operations.
Laws and regulations at the local, state, federal and various international levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. In addition, the United Kingdom’s recent exit from the European Union could result in additional administrative burdens to adhere to changes in regulatory frameworks concerning critical areas, including, but not limited to, the movement of goods or the movement of people. Changes in the legal or regulatory environment affecting responsible sourcing, supply chain transparency, or environmental protection, among others, may result in increased compliance costs for us and our business partners.
There is continued uncertainty as to the ultimate scope and duration of COVID-19 and, as a result, government authorities have taken certain actions to mitigate the spread of COVID-19. These actions have impacted our operations and any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation, could have a material adverse impact on our business and results of operations, including, but not limited to, the following actions: imposing restrictions on public gatherings and human interactions; requiring mandatory store closures or seeking voluntary store closures; restricting hours of store operations; imposing curfews; or restricting the import or export of products.
In addition, we are subject to a variety of regulatory, reporting requirements, including, but not limited to, those related to corporate governance and public disclosure. Stockholder activism, the current political environment, financial reform legislation, government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations. New requirements or changes in current regulatory reporting requirements may introduce additional complexities, lead to additional compliance costs, divert management’s time and attention from strategic business activities, and could have a significant effect on our reported results for the affected periods. Failure to comply with such regulations could result in fines, penalties, or lawsuits and could have a material adverse impact on our business.
The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business.
Our senior secured asset-based revolving credit agreement, as amended (the “ABL Facility”), expires on October 19, 2022 and our senior secured notes, which have a fixed 8.75% interest rate, will mature on July 15, 2025 (the “Senior Secured Notes”). Both our ABL Facility and the indenture governing our Senior Secured Notes contain restrictive covenants that, subject to specified exemptions, restrict, among other things, the following: our ability to incur, assume or guarantee additional indebtedness; grant or incur liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends or make distributions on our capital stock; redeem or repurchase capital stock; change the nature of our business; and consolidate or merge with or into, or sell substantially all of our assets to another entity.
If an event of default occurs, any outstanding obligations under the Senior Secured Notes and the ABL Facility could be declared immediately due and payable or the lenders could foreclose on or exercise other remedies with respect to the assets securing the indebtedness under the Senior Secured Notes and the ABL Facility. In addition, there is no assurance that we would have the cash resources available to repay such accelerated obligations. In addition, the Senior Secured Notes and ABL Facility are secured by certain of our real property, inventory, intellectual property, general intangibles and receivables, among other things, and lenders may exercise remedies against the collateral in the event of our default.
We have, and expect to continue to have, a level of indebtedness. In addition, we may, from time to time, incur additional indebtedness. We may need to refinance all or a portion of our existing indebtedness before maturity, including the Senior Secured Notes, and any indebtedness under the ABL Facility. There can be no assurance that we would be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all. Changes in market conditions could potentially impact the size and terms of a replacement facility or facilities in the future. The inability to obtain credit on commercially reasonable terms in the future could adversely impact our liquidity and results of operations as well as limit our ability to take advantage of business opportunities that may arise.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s global headquarters is located on a campus-like setting in New Albany, Ohio, which is owned by the Company. The Company also leases property for its regional headquarters located in London, United Kingdom and Shanghai, China. In addition, the Company owns or leases facilities both domestically and internationally to support the Company’s operations, such as its distribution centers and various support centers.
The Company does not believe any individual regional headquarters, distribution center or support center lease is material as, if necessary or desirable to relocate an operation, other suitable property could be found. These properties are utilized by both of the Company’s operating segments, and are currently suitable and adequate for conducting the Company’s business.
As of January 30, 2021, the Company operated 735 retail stores across its brands. The Company does not believe that any individual store lease is material; however, certain geographic areas may have a higher concentration of store locations.
Item 3. Legal Proceedings
The Company is a defendant in lawsuits and other adversarial proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Consolidated Balance Sheets included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts.
In addition, the Company notes that in connection with the SEC’s recent modernization of the disclosures of legal proceedings required under Item 103 of Regulation S-K, the Company has elected to apply the threshold of $1 million in potential monetary sanctions (with such amount being the lesser of $1 million or 1% of the current assets of the Company on a consolidated basis) pursuant to Item 103(c)(3)(iii) of Regulation S-K in connection with determining the required disclosure with respect to environmental proceedings to which a governmental authority is a party.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
A&F’s Class A Common Stock (“Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.”
The following graph shows the changes, over the five-year period ended January 30, 2021 (the last day of A&F’s Fiscal 2020) in the value of $100 invested in (i) shares of A&F’s Common Stock; (ii) Standard & Poor’s 500 Stock Index (the “S&P 500”); and (iii) Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail”), including reinvestment of dividends. The plotted points represent the closing price on the last trading day of the fiscal year indicated.
PERFORMANCE GRAPH (1)
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Abercrombie & Fitch Co., the S&P 500 Index and the S&P Apparel Retail Index
| 1/30/16 | 1/28/17 | 2/3/18 | 2/2/19 | 2/1/20 | 1/30//21 | ||||||||||||||||||||||||||||||
| Abercrombie & Fitch Co. | $ | 100.00 | $ | 45.14 | $ | 86.61 | $ | 93.47 | $ | 74.87 | $ | 107.38 | |||||||||||||||||||||||
| S&P 500 | $ | 100.00 | $ | 120.04 | $ | 151.74 | $ | 148.23 | $ | 180.37 | $ | 211.48 | |||||||||||||||||||||||
| S&P Apparel Retail | $ | 100.00 | $ | 100.84 | $ | 109.74 | $ | 121.77 | $ | 139.98 | $ | 152.76 | |||||||||||||||||||||||
* $100 invested on 1/30/16 in stock or 1/31/16 in index, including reinvestment of dividends. Indexes calculated on month-end basis.
Copyright© 2021 Standard & Poor’s, a division of S&P Global. All rights reserved.
(1) This graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to SEC Regulation 14A or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that A&F specifically requests that the graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act.
As of March 24, 2021, there were approximately 2,700 stockholders of record. However, when including investors holding shares of Common Stock in broker accounts under street name, A&F estimates that there were approximately 23,600 stockholders.
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There were no sales of equity securities during Fiscal 2020 that were not registered under the Securities Act.
The following table provides information regarding the purchase of shares of the Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended January 30, 2021:
| Period (fiscal month) | Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs (2) | Maximum number of shares that may yet be purchased under the plans or programs (3) | ||||||||||||||||||||||
| November 1, 2020 through November 28, 2020 | 2,720 | $ | 19.08 | — | 3,218,058 | |||||||||||||||||||||
| November 29, 2020 through January 2, 2021 | 3,351 | $ | 20.42 | — | 3,218,058 | |||||||||||||||||||||
| January 3, 2021 through January 30, 2021 | 297 | $ | 17.91 | — | 3,218,058 | |||||||||||||||||||||
| Total | 6,368 | $ | 19.73 | — | 3,218,058 | |||||||||||||||||||||
(1)All 6,368 shares of A&F’s Common Stock purchased during the thirteen weeks ended January 30, 2021 were withheld for tax payments due upon the vesting of employee restricted stock units.
(2)There were no shares of A&F’s Common Stock repurchased during the thirteen weeks ended January 30, 2021 pursuant to A&F’s publicly announced stock repurchase authorization then in effect. On June 12, 2019, A&F’s Board of Directors authorized the repurchase of 5.0 million shares of A&F’s Common Stock, which was announced on June 12, 2019. As of January 30, 2021, the Company had the authority to repurchase approximately 3.2 million shares under the previously approved June 12, 2019 share repurchase authorization. As announced on March 2, 2021, at a meeting of A&F’s Board of Directors held on February 19, 2021, A&F’s Board of Directors authorized the repurchase of 10.0 million shares of the Company’s Common Stock. This authorization replaced the June 12, 2019 share repurchase authorization (which was terminated), bringing the total number of shares of Common Stock that the Company was authorized to repurchase as of February 19, 2021 to 10.0 million shares.
(3)The number shown represents, as of the end of each period, the maximum number of shares of Common Stock that may yet be purchased under A&F’s publicly announced June 12, 2019 stock repurchase authorization then in effect as described in footnote 2 above. In Fiscal 2020, the Company announced that it had temporarily suspended its share repurchase program in order to preserve liquidity and maintain financial flexibility in light of the circumstances surrounding COVID-19. The Company announced on March 2, 2021 that it plans to resume share repurchase activity beginning on or after March 4, 2021. The timing and amount of any future share repurchases will depend on various factors, including market and business conditions.
Dividends are declared at the discretion of A&F’s Board of Directors. A quarterly dividend, of $0.20 per share outstanding, was declared in February for Fiscal 2020 and in each of February, May, August and November in Fiscal 2019. Dividends were paid in March for Fiscal 2020, and in each of March, June, September and December in Fiscal 2019.
In order to preserve liquidity and maintain financial flexibility in light of COVID-19, in May 2020, the Company announced that it had temporarily suspended its dividend program. The Company’s dividend program remains suspended. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. A&F’s Board of Directors reviews and establishes a dividend amount, if any, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including the potential severity of impacts to the business resulting from COVID-19 and any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.
Item 6. Selected Financial Data
Information for Item 6, Selected Financial Data is no longer required as the Company has adopted certain provisions within the SEC amendments to Regulation S-K that eliminate Item 301.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s audited Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” to which all references to Notes in MD&A are made.
INTRODUCTION
MD&A is provided as a supplement to the accompanying Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows:
•Overview. This section provides a general description of the Company’s business and certain segment information, and an overview of key performance indicators reviewed by various members of management to gauge the Company’s results.
•Current Trends and Outlook. This section provides a discussion related to COVID-19’s impact on the Company’s business and discussion of the Company’s long-term plans for growth. In addition, this section also provides a summary of the Company’s performance over recent years, primarily Fiscal 2020 and Fiscal 2019.
•Results of Operations. This section provides an analysis of certain components of the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income for Fiscal 2020 as compared to Fiscal 2019.
•Liquidity and Capital Resources. This section provides a discussion of the Company’s financial condition, changes in financial condition and liquidity as of January 30, 2021, which includes (i) an analysis of changes in cash flows for Fiscal 2020 as compared to Fiscal 2019, (ii) an analysis of liquidity, including the availability under credit facilities, payments of dividends, and outstanding debt and covenant compliance, (iii) a summary of contractual and other obligations as of January 30, 2021 and (iv) a discussion related to actions taken during Fiscal 2020 to preserve liquidity in light of COVID-19.
•Recent Accounting Pronouncements. The recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s audited Consolidated Financial Statements, are included in Note 2 “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.”
•Critical Accounting Policies and Estimates. This section discusses accounting policies considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of the Company’s management in their application.
•Non-GAAP Financial Measures. MD&A provides a discussion of certain financial measures that have been determined to not be in accordance with accounting principles generally accepted in the U.S. (“GAAP”). This section includes certain reconciliations for non-GAAP financial measures and additional details on these financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors.
A discussion of the Company’s financial condition, changes in financial condition and results of operations for Fiscal 2019 as compared to Fiscal 2018, is incorporated by reference from “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” in PART II of A&F’s Annual Report on Form 10-K for Fiscal 2019, filed with the SEC on March 31, 2020.
Safe harbor statement under the Private Securities Litigation Reform Act of 1995
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by the Company, its management or its spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. A discussion of material risks that could affect the Company’s financial performance and cause actual results to differ materially from those expressed or implied in any of the forward-looking statements is included in “ITEM 1A. RISK FACTORS,” of this Annual Report on Form 10-K.
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OVERVIEW
Business summary
The Company is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Company’s two brand-based operating segments: Hollister, which includes the Company’s Hollister and Gilly Hicks brands, and Abercrombie, which includes the Company’s 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 operates primarily in North America, Europe and Asia.
The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows:
| Fiscal year | Year ended/ ending | Number of weeks | ||||||||||||
| Fiscal 2019 | February 1, 2020 | 52 | ||||||||||||
| Fiscal 2020 | January 30, 2021 | 52 | ||||||||||||
| Fiscal 2021 | January 29, 2022 | 52 | ||||||||||||
Due to the seasonal nature of the retail apparel industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year and the Company could experience significant fluctuations in certain asset and liability accounts. The Company experiences its greatest sales activity during Fall, due to Back-to-School and Holiday sales periods, respectively.
Key performance indicators
The following measurements are among the key performance indicators reviewed by various members of the Company’s management to gauge the Company’s results:
•Changes in net sales and comparable sales;
•Comparative results of operations on a constant currency basis with the prior year’s results converted at the current year’s foreign currency exchange rate to remove the impact of foreign currency exchange rate fluctuation;
•Gross profit and gross profit rate;
•Cost of sales, exclusive of depreciation and amortization, as a percentage of net sales;
•Stores and distribution expense as a percentage of net sales;
•Marketing, general and administrative expense as a percentage of net sales;
•Operating income and operating income as a percentage of net sales (“operating margin”);
•Net income and net income attributable to A&F;
•Cash flow and liquidity measures, such as the Company’s current ratio, working capital and free cash flow;
•Inventory metrics, such as inventory turnover;
•Return on invested capital and return on equity;
•Store metrics, such as net sales per gross square foot, and store 4-wall operating margins;
•Digital and omnichannel metrics, such as total shipping expense as a percentage of digital sales, and certain metrics related to our purchase-online-pickup-in-store and order-in-store programs;
•Transactional metrics, such as traffic and conversion, performance across key product categories, average unit retail, average unit cost, average units per transaction and average transaction values; and
•Customer-centric metrics such as customer satisfaction, customer retention and acquisition, and certain metrics related to the loyalty programs.
While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics within this MD&A.
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CURRENT TRENDS AND OUTLOOK
Impact of COVID-19
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 Europe, Middle East and Africa (“EMEA”) 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 continue 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 COVID-19.
The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of the coronavirus and the availability and acceptance of effective vaccines or medical treatments.
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 January 30, 2021 and March 24, 2021, approximately 88% and 91% of Company-operated stores were open for in-store service, respectively, with temporary store closures primarily in the EMEA region. The Company plans to follow the guidance of local governments to determine when it can reopen closed stores and to evaluate whether further store closures will be necessary.
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, including:
•Requiring associates to use face coverings, depending on geographic region;
•Encouraging or requiring customers to use face coverings, depending on geographic region;
•Conducting associate wellness checks in accordance with local government direction;
•Enhancing cleaning routines and installing plexiglass barriers in the majority of store locations;
•Implementing various measures to encourage social distancing, including managing occupancy limits;
•Encouraging contactless payment options, where available;
•Opening fitting rooms where permissible, with additional cleaning procedures for clothing that has been tried on;
•Removing returned merchandise from the sales floor for a period of time where mandated by local government;
•Reducing store hours in select locations;
•Continuing to offer purchase-online-pickup-in-store;
•Increasing its omnichannel capabilities by introducing curbside pick-up at a majority of U.S. locations;
•Following recommended cleaning and distancing measures in the Company's distribution centers; and
•Maximizing work-from-home and digital collaboration alternatives to minimize in-person meetings whenever possible.
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 14% for Fiscal 2020 as compared to Fiscal 2019, primarily driven by temporary store closures and a decline in traffic as compared to the previous year as a result of COVID-19. During Fiscal 2020, sales for stores that had reopened were approximately 75% of Fiscal 2019 levels. The Company has experienced other material impacts as a result of COVID-19, including, but not limited to, deferred tax valuation allowances, long-lived asset impairment, adjustments of the carrying amount of inventory and changes in the effectiveness of its hedging instruments.
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. In response to elevated digital demand during this period, the Company has increased its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority of U.S. locations, and by utilizing ship-from-store capabilities. In addition, to prepare for the Fiscal 2020 holiday season, the Company entered into a short-term lease for an additional distribution center and partnered with incremental carriers. Digital net sales increased approximately 39% for Fiscal 2020 as compared to Fiscal 2019, resulting in digital sales accounting for 54% of total revenues in Fiscal 2020 compared to 33% in Fiscal 2019. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current performance in the digital channel will continue.
The Company is also focused on managing inventories and the impacts COVID-19 has had, and continues to have, on its global supply chain, including potential disruptions of product deliveries. The Company sources the majority of its merchandise outside of the U.S. through arrangements with vendors primarily located in southeast Asia and, as of January 30, 2021, the vast majority of the factories the Company partners with were operating at full capacity. In order to complete production, these manufacturing factories are dependent on raw materials from fabric mills that are primarily located in the APAC region. The Company continues
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to collaborate with its third-party partners to mitigate significant delays in delivery of merchandise, especially in light of disruptions across the supply chain, including port congestion and shipping container shortages. During Fiscal 2020, the Company reduced certain orders that were not already in production, delayed and altered the cadence of deliveries and implemented various strategies to tightly manage inventories, including utilizing ship-from-store capabilities in select locations.
The Company’s progress executing against the following key transformation initiatives created the foundation to allow the Company to respond quickly to COVID-19 in Fiscal 2020:
•Optimizing the global store network;
•Enhancing digital and omnichannel capabilities;
•Increasing the speed and efficiency of the concept-to-customer product life cycle by further investing in capabilities to position the supply chain for greater speed, agility and efficiency, while leveraging data and analytics to offer the right product at the right time and the right price; and
•Improving customer engagement through loyalty programs and marketing optimization.
The Company entered Fiscal 2020 with a healthy liquidity position, however in light of COVID-19 the Company took immediate, aggressive and prudent actions, including re-evaluating all expenditures, to balance short-term and long-term liquidity needs, in order to best position the business for the Company’s stakeholders during Fiscal 2020. Actions to preserve liquidity and manage cash flows during Fiscal 2020, included, but were not limited to the following:
•Partnered with merchandise and non-merchandise vendors in regards to payment terms;
•Managed inventory receipts tightly to align inventory with expected market demand;
•Reduced expenses to better align operating costs with sales;
•Assessed government policy and economic stimulus responses to COVID-19 for both business and individuals;
•Borrowed $210.0 million under the ABL Facility in March 2020, which was then repaid in July 2020 along with the Term Loan Facility;
•Withdrew $50.0 million from the overfunded Rabbi Trust assets, representing the majority of excess funds in March 2020;
•Announced the temporary suspension of the Company's share repurchase and dividend programs in March 2020 and May 2020, respectively; and
•Completed a private offering of $350.0 million aggregate principal amount of Senior Secured Notes in July 2020.
Reflecting ongoing global uncertainty and the near-term challenges that COVID-19 presents, such as continued temporary store closures, uncertainty surrounding the global economy and customer discretionary spending habits, the Company plans to conservatively manage cash and liquidity in the first half of Fiscal 2021, while prioritizing investments in the business and continuing to fund operating activities. Regarding returns to shareholders, although the dividend program remains suspended, the Company recently announced that it plans to resume share repurchases beginning on or after March 4, 2021, dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business.
As of January 30, 2021, the Company had liquidity of $1.3 billion as compared to $0.9 billion as of February 1, 2020, comprised of cash and equivalents and borrowing available to the Company under the ABL Facility.
Despite the Company's recent history of partnering with its vendors regarding payment terms, certain payment term extensions were temporary and certain previously deferred payments have since been made. 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.
For further information about how COVID-19 could impact our operations, refer to “ITEM 1A. RISK FACTORS,” of this Annual Report on Form 10-K.
Global Store Network Optimization
Reflecting a continued focus on its key transformation initiative ‘Global Store Network Optimization,’ the Company delivered new store experiences across brands during Fiscal 2020 and Fiscal 2019. Details related to these new store experiences follow:
| Type of new store experience | Fiscal 2020 | Fiscal 2019 | ||||||||||||
| New stores | 15 | 40 | ||||||||||||
| Remodels | 4 | 24 | ||||||||||||
| Right-sizes | 6 | 26 | ||||||||||||
| Total | 25 | 90 | ||||||||||||
A component of optimizing the Company’s global store network is pivoting away from large format tourist-dependent flagship stores and opening smaller, omni-enabled stores that cater to local customers. As a result, the Company closed twelve flagship locations during Fiscal 2019 and Fiscal 2020. This leaves the Company with seven operating flagships at the end of Fiscal 2020, down from 15 at the beginning of the year. Future closures could be completed through natural lease expirations, while certain
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other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions.
In addition, the Company closed 129 non-flagship locations, resulting in 137 total store closures during Fiscal 2020. Store optimization efforts in Fiscal 2020 reduced total Company store gross square footage by approximately 1.1 million gross square feet, or 17%, as compared to Fiscal 2019 year-end. The actions taken in Fiscal 2020, combined with ongoing digital sales growth, are expected to continue to transform the Company's operating model and reposition the Company for the future as the Company continues to focus on aligning store square footage with digital penetration.
Store count and gross square footage by brand and geography as of February 1, 2020 and January 30, 2021 were as follows:
Hollister (1) | Abercrombie (2) | Total Company (3) | |||||||||||||||||||||||||||||||||||||||
| United States | International | United States | International | United States | International | Total | |||||||||||||||||||||||||||||||||||
| Number of stores: | |||||||||||||||||||||||||||||||||||||||||
February 1, 2020 (4) | 392 | 155 | 257 | 53 | 649 | 208 | 857 | ||||||||||||||||||||||||||||||||||
| New | 3 | 3 | 4 | 5 | 7 | 8 | 15 | ||||||||||||||||||||||||||||||||||
| Closed | (48) | (8) | (71) | (10) | (119) | (18) | (137) | ||||||||||||||||||||||||||||||||||
| January 30, 2021 | 347 | 150 | 190 | 48 | 537 | 198 | 735 | ||||||||||||||||||||||||||||||||||
Gross square footage (in thousands): | |||||||||||||||||||||||||||||||||||||||||
February 1, 2020 (4) | 2,605 | 1,263 | 1,829 | 617 | 4,434 | 1,880 | 6,314 | ||||||||||||||||||||||||||||||||||
| January 30, 2021 | 2,309 | 1,219 | 1,311 | 393 | 3,620 | 1,612 | 5,232 | ||||||||||||||||||||||||||||||||||
(1)Hollister includes the Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes nine international franchise stores as of each of January 30, 2021 and February 1, 2020. Excludes 12 Company-operated temporary stores as of January 30, 2021 and 15 as of February 1, 2020.
(2)Abercrombie includes the Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 10 international franchise stores as of January 30, 2021 and seven as of February 1, 2020. Excludes two Company-operated temporary stores as of January 30, 2021 and six as of February 1, 2020.
(3)This store count excludes one international third-party operated multi-brand outlet store as of January 30, 2021.
(4)Prior period numbers have been revised due to a change in the temporary store definition to only include store leases with original terms of 18 months or less.
United Kingdom’s withdrawal from the European Union (“Brexit”)
In June 2016, the United Kingdom passed a referendum to recommend withdrawing from the European Union. Upon withdrawal from the European Union in January 2020 (“Brexit"), the United Kingdom entered into a formal transition period that expired on December 31, 2020, during which the United Kingdom and the European Union negotiated a post-Brexit trade agreement. The ultimate impact of Brexit on the Company will depend on the effects of this agreement, which went into effect on January 1, 2021.
There is continued uncertainty related to the ultimate impact on consumer behavior, trade relations, economic conditions, foreign currency exchange rates and the free movement of goods, services, people and capital between the United Kingdom and the European Union during this time of transition. The United Kingdom’s withdrawal from the European Union could also adversely impact other areas of the business, including, but not limited to, an increase in duties and delays in the delivery of merchandise from the Company’s Netherlands distribution center to its customers in the United Kingdom if trade barriers materialize. The United Kingdom’s withdrawal from the European Union could also adversely impact the operations of the Company’s vendors and of our other third-party partners. In order to mitigate the risks associated with the United Kingdom’s withdrawal from the European Union, the Company: collaborated across the organization and tested systems; worked with external partners to develop contingency plans for potential adverse impacts; and took actions to reduce, to the extent possible, the potential impact of any incremental duty exposure. It is possible that preparations for the events listed above are not adequate to mitigate their impact, and that these events could adversely affect the business and results of operations.
Impact of global events and uncertainty
As a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions and, as a result, management is are mindful of macroeconomic risks and global challenges that could adversely impact certain areas of the business. As a result, in addition to the events listed within MD&A, management continues to monitor certain other global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for the events discussed within MD&A are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause actual results to differ materially from expectations, refer to “ITEM 1A. RISK FACTORS,” included in this Annual Report on Form 10-K.
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Focus areas for Fiscal 2021
Reflecting ongoing global uncertainty and the near-term challenges COVID-19 presents, in Fiscal 2021, the Company plans to continue to conservatively manage inventories, position its supply chain to optimize its capacity to fulfill digital orders and tightly manage expenses.
For Fiscal 2021, the Company plans to make progress recovering sales losses experienced in Fiscal 2020 as a result of COVID-19, while maintaining or improving on gross profit rate from Fiscal 2020 levels. While the Company expects to see certain savings in operating expenses in Fiscal 2021, reflecting Fiscal 2020 permanent store closures and rent negotiations, certain operating expenses related to stores that were temporarily closed in Fiscal 2020 due to COVID-19 are expected to return in Fiscal 2021. The Company plans to reposition expense savings towards customer-facing areas, specifically targeting the acceleration of marketing, digital and data investments.
The Company continues to evaluate opportunities to invest in and make progress on initiatives that position the business for sustainable long-term growth that align with the strategic pillars as described within “ITEM 1. BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES,” included in this Annual Report on Form 10-K.
Summary of results
A summary of results for Fiscal 2020 and Fiscal 2019 follows:
| GAAP | Non-GAAP (1) | ||||||||||||||||||||||
| (in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) | Fiscal 2020 | Fiscal 2019 | Fiscal 2020 | Fiscal 2019 | |||||||||||||||||||
| Net sales | $ | 3,125,384 | $ | 3,623,073 | |||||||||||||||||||
| Change in net sales from the prior fiscal year | (14) | % | 1 | % | |||||||||||||||||||
Gross profit rate (2) | 60.5 | % | 59.4 | % | |||||||||||||||||||
Operating (loss) income (3) | $ | (20,469) | $ | 70,068 | $ | 52,468 | $ | 82,820 | |||||||||||||||
| Operating (loss) income margin | (0.7) | % | 1.9 | % | 1.7 | % | 2.3 | % | |||||||||||||||
Net (loss) income attributable to A&F (3) (4) | $ | (114,021) | $ | 39,358 | $ | (45,383) | $ | 48,097 | |||||||||||||||
Net (loss) income per diluted share attributable to A&F (3) (4) | $ | (1.82) | $ | 0.60 | $ | (0.73) | $ | 0.73 | |||||||||||||||
(1) Refer to “RESULTS OF OPERATIONS” for details on excluded items. Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors is provided below under “NON-GAAP FINANCIAL MEASURES.”
(2) Gross profit is derived from cost of sales, exclusive of depreciation and amortization.
(3) Fiscal 2019 results included $47 million of flagship store exit charges, which adversely impacted net income per diluted share attributable to A&F by approximately $0.53 per share, net of estimated tax effect. Refer to Note 19, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.”
(4) Fiscal 2020 results included $101 million of adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges as a result of the COVID-19 pandemic, which adversely impacted net loss per diluted share by or $1.61 per share. Refer to Note 12, “INCOME TAXES.”
Certain components of the Company’s Consolidated Balance Sheets as of February 1, 2020 and January 30, 2021 and Consolidated Statements of Cash Flows for Fiscal 2020 and Fiscal 2019 were as follows:
| (in thousands) | |||||||||||
| Balance Sheets data | January 30, 2021 | February 1, 2020 | |||||||||
| Cash and equivalents | $ | 1,104,862 | $ | 671,267 | |||||||
| Gross borrowings outstanding, carrying amount | $ | 350,000 | $ | 233,250 | |||||||
| Inventories | $ | 404,053 | $ | 434,326 | |||||||
| Statement of Cash Flows data | Fiscal 2020 | Fiscal 2019 | |||||||||
| Net cash provided by operating activities | $ | 404,918 | $ | 300,685 | |||||||
| Net cash used for investing activities | $ | (51,910) | $ | (202,784) | |||||||
| Net cash provided by (used for) financing activities | $ | 69,717 | $ | (147,873) | |||||||
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RESULTS OF OPERATIONS
The estimated basis point (“BPS”) change disclosed throughout this Results of Operations has been rounded based on the change in the percentage of net sales.
Net sales
| (in thousands) | Fiscal 2020 | Fiscal 2019 | $ Change | % Change | |||||||||||||||||||
| Hollister | $ | 1,834,349 | $ | 2,158,514 | $ | (324,165) | (15)% | ||||||||||||||||
| Abercrombie | 1,291,035 | 1,464,559 | (173,524) | (12)% | |||||||||||||||||||
| Total Company | $ | 3,125,384 | $ | 3,623,073 | $ | (497,689) | (14)% | ||||||||||||||||
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 the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2020 and Fiscal 2019 were as follows:
| (in thousands) | Fiscal 2020 | Fiscal 2019 | $ Change | % Change | |||||||||||||||||||
| United States | $ | 2,127,403 | $ | 2,410,802 | $ | (283,399) | (12)% | ||||||||||||||||
| EMEA | 709,451 | 822,202 | $ | (112,751) | (14)% | ||||||||||||||||||
| APAC | 176,636 | 264,895 | $ | (88,259) | (33)% | ||||||||||||||||||
| Other | 111,894 | 125,174 | $ | (13,280) | (11)% | ||||||||||||||||||
| International | $ | 997,981 | $ | 1,212,271 | $ | (214,290) | (18)% | ||||||||||||||||
| Total Company | $ | 3,125,384 | $ | 3,623,073 | $ | (497,689) | (14)% | ||||||||||||||||
For Fiscal 2020, net sales decreased 14% as compared to Fiscal 2019, primarily due to a decrease in units sold driven by reduced store traffic, including as it related to temporary store closures as a result of COVID-19, partially offset by 39% digital sales growth. Average unit retail increased year-over-year, driven by lower promotions, with benefits from changes in foreign currency exchange rates of approximately $22 million.
Cost of sales, exclusive of depreciation and amortization
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 1,234,179 | 39.5% | $ | 1,472,155 | 40.6% | (110) | ||||||||||||||||||||||
For Fiscal 2020, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased approximately 110 basis points as compared to Fiscal 2019, reflecting benefits of approximately 30 basis points from changes in foreign currency exchange rates. The year-over-year decrease was primarily attributable to increased average unit retail driven by lower promotions. Average unit cost remained relatively flat, reflecting, among other items, adverse impacts of approximately 50 basis points related to charges to reduce the carrying value of inventory during the thirteen weeks ended May 2, 2020, primarily as a result of COVID-19 and the temporary closure of the Company’s stores and benefits of approximately 30 basis points from inventory shrink favorability.
Gross profit, exclusive of depreciation and amortization
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| % of Net Sales | % of Net Sales | BPS Change | |||||||||||||||||||||||||||
| Gross profit, exclusive of depreciation and amortization | $ | 1,891,205 | 60.5% | $ | 2,150,918 | 59.4% | 110 | ||||||||||||||||||||||
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Stores and distribution expense
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Stores and distribution expense | $ | 1,391,584 | 44.5% | $ | 1,551,243 | 42.8% | 170 | ||||||||||||||||||||||
For Fiscal 2020, stores and distribution expense decreased 10% as compared to Fiscal 2019, primarily driven by a $117 million reduction in store occupancy expense, reflecting the impact of COVID-19 on operations including temporary store closures and benefits from rent abatements recognized as variable lease cost and a $92 million reduction in payroll expense, which was inclusive of a benefit of $18 million related to government subsidies in certain jurisdictions where the Company qualifies. These reductions in expense were partially offset by a $67 million increase in shipping and handling expense related to the 39% year-over-year digital sales growth.
Marketing, general and administrative expense
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Marketing, general and administrative expense | $ | 463,843 | 14.8% | $ | 464,615 | 12.8% | 200 | ||||||||||||||||||||||
For Fiscal 2020, marketing, general and administrative expense was approximately flat as compared to Fiscal 2019, reflecting reductions in marketing and other controllable expenses, and an increase in payroll expense as a result of higher performance-based compensation.
Flagship store exit (benefits) charges
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Flagship store exit (benefits) charges | $ | (11,636) | (0.4)% | $ | 47,257 | 1.3% | (170) | ||||||||||||||||||||||
For Fiscal 2020, flagship store exit benefits primarily related to the closure of several international Abercrombie & Fitch flagship stores. Flagship store exit charges for Fiscal 2019 primarily related to the closure of the Company’s SoHo Hollister flagship in New York City. Refer to Note 19, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.”
Asset impairment, exclusive of flagship store exit charges
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Asset impairment, exclusive of flagship store exit charges | $ | 72,937 | 2.3% | $ | 19,135 | 0.5% | 180 | ||||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
Asset impairment charges (1) | (72,937) | (2.3)% | (12,752) | (0.4)% | (190) | ||||||||||||||||||||||||
Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges | $ | — | 0.0% | $ | 6,383 | 0.2% | (20) | ||||||||||||||||||||||
Other operating income, net
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Other operating income, net | $ | 5,054 | 0.2% | $ | 1,400 | 0.0% | 20 | ||||||||||||||||||||||
For Fiscal 2020, other operating income, net, increased as compared to Fiscal 2019, primarily due to foreign currency exchange related gains in Fiscal 2020.
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Operating (loss) income
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Operating (loss) income | $ | (20,469) | (0.7)% | $ | 70,068 | 1.9% | (260) | ||||||||||||||||||||||
| Excluded items: | |||||||||||||||||||||||||||||
Asset impairment charges (1) | 72,937 | 2.3% | 12,752 | 0.4% | 190 | ||||||||||||||||||||||||
| Adjusted non-GAAP operating income | $ | 52,468 | 1.7% | $ | 82,820 | 2.3% | (60) | ||||||||||||||||||||||
Interest expense, net
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||
| (in thousands) | % of Net Sales | % of Net Sales | BPS Change | ||||||||||||||||||||||||||
| Interest expense | $ | 31,726 | 1.0% | $ | |||||||||||||||||||||||||