NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”),
is a global, multi-brand specialty retailer, which primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids
under the Hollister, Abercrombie & Fitch and abercrombie kids brands
.
The brands share a commitment to offering products of enduring quality and exceptional comfort that allows customers around the world to express their own individuality and style.
The Company has operations in North America, Europe, Asia and the Middle East.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.
The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI in the Consolidated Balance Sheets.
Fiscal year
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:
|
|
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|
|
|
Fiscal year
|
|
Year ended
|
|
Number of weeks
|
Fiscal 2015
|
|
January 30, 2016
|
|
52
|
Fiscal 2016
|
|
January 28, 2017
|
|
52
|
Fiscal 2017
|
|
February 3, 2018
|
|
53
|
Fiscal 2018
|
|
February 2, 2019
|
|
52
|
Use of estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ.
Cash and equivalents
Cash and equivalents on the Consolidated Balance Sheets include amounts on deposit with financial institutions, U.S. treasury bills and other investments, primarily held in money market accounts, with original maturities of less than
three months
.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivables
Receivables on the Consolidated Balance Sheets primarily include credit card receivables, construction allowances, value added tax (“VAT”) receivables, trade receivables, income tax receivables and other tax credits or refunds.
As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold. Trade receivables are amounts billed by the Company to wholesale, franchise and licensing partners in the ordinary course of business. Income tax receivables represent refunds of certain tax payments along with net operating loss and credit carryback claims for which the Company expects to receive refunds within the next 12 months.
Inventories
Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The lower of cost and net realizable value adjustment is based on the Company’s consideration of multiple factors and assumptions including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly. Refer to Note 4, “
INVENTORIES
.”
Other current assets
Other current assets on the Consolidated Balance Sheets include prepaid rent, current store supplies, derivative contracts and other prepaids.
Property and equipment, net
Depreciation of property and equipment is computed for financial reporting purposes on a straight-line basis using the following service lives:
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Category of property and equipment
|
|
Service lives
|
Information technology
|
|
3 - 7 years
|
Furniture, fixtures and equipment
|
|
3 - 15 years
|
Leasehold improvements
|
|
3 - 15 years
|
Other property and equipment
|
|
3 - 20 years
|
Buildings
|
|
30 years
|
Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income on the Consolidated Statements of Operations and Comprehensive Income (Loss). Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized.
Long-lived assets, primarily leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumptions used in the Company’s undiscounted future cash flow models include sales, gross profit and, to a lesser extent, operating expenses.
An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. Fair value of the Company’s store-related assets is determined at the individual store level, often using a discounted cash flow model that utilizes Level 3 inputs. The key assumptions used in estimating the fair value of impaired assets may include projected store cash flows or market data. In instances where the discounted cash flow analysis indicates a negative value at the store level, the market exit price based on historical experience, and other comparable market data where applicable, is used to determine the fair value by asset type.
The Company capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding
seven
years.
Restricted cash
Cash that is legally restricted from use is recorded in other assets on the Consolidated Balance Sheets. Restricted cash includes various cash deposits with international banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements.
Income taxes
Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company’s income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited to: changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, the settlement of tax audits and changes in tax legislation and/or regulations.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties.
A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue may require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Foreign currency translation and transactions
The functional currencies of the Company’s foreign subsidiaries are generally the respective local currencies in the countries in which they operate. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies are translated into U.S. Dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in other operating income, net; whereas, translation adjustments and gains and losses associated with measuring inter-company loans of a long-term investment nature are reported as an element of Other comprehensive income (loss).
Derivative instruments
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative instrument is not highly effective.
For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative instrument gain or loss is recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative instrument related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a
two
-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of
twelve months
. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”) on the Consolidated Balance Sheets. Substantially all of the unrealized gains or losses related to designated cash flow hedges as of
February 3, 2018
will be recognized in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months.
The Company presents its derivative assets and derivative liabilities at their gross fair values on the Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.
Stockholders’ equity
As of
February 3, 2018
and
January 28, 2017
, there were
150.0 million
shares of A&F’s Class A Common Stock (the “Common Stock”),
$0.01
par value, authorized, of which
68.2 million
shares and
67.8 million
shares were outstanding as of
February 3, 2018
and
January 28, 2017
, respectively, and
106.4 million
shares of Class B Common Stock,
$0.01
par value, authorized, of which
none
were outstanding as of
February 3, 2018
and
January 28, 2017
.
Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to
one
vote per share while holders of Class B Common Stock are entitled to
three
votes per share on all matters submitted to a vote of stockholders.
Revenue recognition
The Company recognizes sales at the time the customer takes possession of the merchandise. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as net sales and the related direct shipping and handling costs are classified as stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Sales are recorded net of an allowance for estimated returns, associate discounts, and promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience. The sales return reserve is classified within accrued expenses on the Consolidated Balance Sheets.
The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. Gift cards sold to customers do not expire or lose value over periods of inactivity. The gift card liability remains until the Company recognizes income from gift cards. Income from gift cards is recognized at the earlier of redemption by the customer, as net sales, or when the Company determines that the likelihood of redemption is remote, referred to as gift card breakage, as other operating income on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company determines the probability of the gift card being redeemed to be remote based on historical redemption patterns and is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates. The gift card liability is classified within accrued expenses on the Consolidated Balance Sheets.
The Company maintains loyalty programs for both Hollister and Abercrombie in which customers primarily have the opportunity to earn points toward future merchandise discount rewards based on qualifying purchases. Upon reaching certain point thresholds, customers are issued a reward, which they may redeem for future merchandise discounts both in-store or online. Generally, rewards expire after 90 days from the date of issuance. The Company will defer sales revenue equal to the relative selling price of the points earned in the qualifying transaction, taking into account expected future redemptions. This deferred revenue liability is classified within accrued expenses on the Consolidated Balance Sheets and is recognized at the earlier of redemption or expiration. All redemptions of rewards are treated as a reduction in the future transaction price within net sales on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company’s revenue under wholesale arrangements is generally recognized at the time ownership passes to the partner. Under franchise and license arrangements, revenue generally consists of royalties earned upon sale of merchandise by franchise and license partners to retail customers.
The Company does not include tax amounts collected from customers in net sales.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cost of sales, exclusive of depreciation and amortization
Cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Income (Loss), primarily consists of cost incurred to ready inventory for sale, including product costs, freight, and import cost, as well as provisions for reserves for shrink and lower of cost and net realizable value. Gains and losses associated with the effective portion of designated foreign currency exchange forward contracts related to the hedging of inventory purchases are also recognized in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss) when the inventory being hedged is sold.
Costs incurred to physically move product to stores is recorded in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company’s cost of sales, exclusive of depreciation and amortization, and consequently gross profit, may not be comparable to that of other retailers, as inclusion of certain costs vary across the industry. Some retailers include all costs related to buying, design and distribution operations in cost of sales, while others may include either all or a portion of these costs in selling, general and administrative expenses.
Stores and distribution expense
Stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) includes: store payroll; store management, rent, utilities and other landlord expenses; depreciation and amortization, except for those amounts included in marketing, general and administrative expense; repairs and maintenance and other store support functions; direct-to-consumer expense; and distribution center (“DC”) expense.
Shipping and handling costs, including costs incurred to store, move and prepare product for shipment, and costs incurred to physically move product to customers, associated with direct-to-consumer operations, were
$150.7 million
,
$125.4 million
and
$115.0 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively. Handling costs, including costs incurred to store, move and prepare product for shipment to stores, were
$38.6 million
,
$41.5 million
and
$44.5 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively. These amounts are recorded in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Pre-opening expenses related to new store openings are expensed as incurred and are reflected as a component of stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Marketing, general and administrative expense
Marketing, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) includes: home office compensation, except for those departments included in stores and distribution expense; photography and social media; store marketing; information technology; outside services, such as legal and consulting; depreciation and amortization related to home office assets and trademark assets, respectively; relocation; recruiting; and travel expenses.
Costs to design and develop the Company’s merchandise are expensed as incurred and are reflected as a component of marketing, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Other operating income, net
Other operating income, net on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of gains and losses resulting from foreign currency denominated transactions and gift card breakage. Foreign currency denominated transactions resulted in a
gain
of
$7.0 million
for Fiscal
2017
, a
gain
of
$0.4 million
for Fiscal
2016
and a
loss
of
$1.5 million
for Fiscal
2015
. Gift card breakage was
$6.4 million
,
$10.3 million
and
$4.7 million
for Fiscal
2017
, Fiscal
2016
and
Fiscal 2015
, respectively. For Fiscal 2016, other operating income, net included a
$12.3 million
gain, in connection with a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill. For Fiscal 2015, other operating income, net included income of
$2.2 million
related to insurance recoveries.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising costs
Advertising costs primarily consists of paid media advertising, direct digital advertising, including e-mail distribution, digital content and in-store photography and signage, and are reported on the Consolidated Statements of Operations and Comprehensive Income (Loss). Advertising costs related specifically to direct-to-consumer operations are expensed as incurred as a component of stores and distribution expense. The production of in-store photography and signage are expensed when the marketing campaign commences and all other advertising costs are expensed as incurred as components of marketing, general and administrative expense. The Company recognized
$116.5 million
,
$110.1 million
and
$80.7 million
in advertising expense in
Fiscal 2017
,
Fiscal 2016
and
Fiscal 2015
, respectively.
Leased facilities
The Company leases property for its stores under operating leases. Lease agreements may contain construction allowances, rent escalation clauses and, in some instances, contingent rent provisions.
Annual store rent consists of a fixed minimum amount and, in some instances, contingent rent based on sales performance. For construction allowances, the Company records a deferred lease credit on the Consolidated Balance Sheets and amortizes the deferred lease credit as a reduction of rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) over the term of the lease. For scheduled rent escalation clauses during the lease term, the Company records minimum rental expense on a straight-line basis over the term of the lease on the Consolidated Statements of Operations and Comprehensive Income (Loss). The difference between rent expense and the amounts paid under the lease, less amounts attributable to the repayment of construction allowances recorded as deferred rent, is included in accrued expenses and other liabilities on the Consolidated Balance Sheets. The term over which the Company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on the date of initial possession, which is generally when the Company enters the space and begins construction.
For certain leases that provide for contingent rents, the Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheets, and the corresponding rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) on a ratable basis over the measurement period when it is determined that achieving the specified levels during the fiscal year is probable. In addition, most leases require payment of real estate taxes, insurance and certain common area maintenance costs in addition to future minimum lease payments.
A summary of rent expense follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Store rent expense:
|
|
|
|
|
|
Fixed minimum
(1)
|
$
|
373,457
|
|
|
$
|
408,575
|
|
|
$
|
404,836
|
|
Contingent
|
14,752
|
|
|
11,690
|
|
|
10,161
|
|
Deferred lease credits amortization
|
(22,149
|
)
|
|
(24,557
|
)
|
|
(28,619
|
)
|
Total store rent expense
|
366,060
|
|
|
395,708
|
|
|
386,378
|
|
Buildings, equipment and other
|
9,752
|
|
|
5,772
|
|
|
3,849
|
|
Total rent expense
|
$
|
375,812
|
|
|
$
|
401,480
|
|
|
$
|
390,227
|
|
|
|
(1)
|
Includes lease termination fees of
$2.0 million
,
$15.5 million
and
$3.3 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively. Fiscal 2015 includes a benefit of
$1.6 million
related to better than expected lease exit terms associated with the closure of the Gilly Hicks stand-alone stores.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At
February 3, 2018
, the Company was committed to noncancelable leases with remaining terms of less than one year to
13
years. Excluded from the obligations below are portions of lease terms that are currently cancelable at the Company’s discretion without condition. While included in the obligations below, in many instances the Company has options to terminate certain leases if stated sales volume levels are not met or the Company ceases operations in a given country, which may be subject to lease termination policies. A summary of operating lease commitments, including leasehold financing obligations, under noncancelable leases follows:
|
|
|
|
|
(in thousands)
|
|
Fiscal 2018
|
$
|
356,620
|
|
Fiscal 2019
|
$
|
286,485
|
|
Fiscal 2020
|
$
|
232,591
|
|
Fiscal 2021
|
$
|
178,218
|
|
Fiscal 2022
|
$
|
136,478
|
|
Thereafter
|
$
|
327,817
|
|
Leasehold financing obligations
In certain lease arrangements, the Company is involved in the construction of a building and is deemed to be the owner of the construction project. In those instances, the Company records an asset for the amount of the total project costs, including the portion funded by the landlord, and an amount related to the value attributed to the pre-existing leased building in property and equipment, net, and a corresponding financing obligation in leasehold financing obligations, on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company allocates a portion of its rent obligation to the assets which are owned for accounting purposes as a reduction of the financing obligation and interest expense. As of
February 3, 2018
and
January 28, 2017
, the Company had
$50.7 million
and
$46.4 million
, respectively, of long-term liabilities related to leasehold financing obligations. Total interest expense related to landlord financing obligations was
$5.5 million
,
$5.7 million
and
$5.3 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively.
Share-based compensation
The Company issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of
February 3, 2018
, the Company had sufficient treasury stock available to settle restricted stock units, stock appreciation rights and stock options outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time.
In the event, at each reporting date as of which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (as amended effective June 15, 2017, the “
2016 Directors LTIP
”) and the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended effective June 15, 2017, the “
2016 Associates LTIP
”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards would be re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered.
Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from
0%
to
200%
of target depending on the level of achievement of performance criteria.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company’s Common Stock price for the most recent historical period equal to the expected term of the stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.
Service-based restricted stock units are expensed on a straight-line basis over the total awards’ requisite service period, net of forfeitures. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis, net of forfeitures. Performance share award expense is primarily recognized in the performance period of the awards’ requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures. Compensation expense for stock options and stock appreciation rights is recognized on a straight-line basis over the awards’ requisite service period, net of forfeitures. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures.
For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the issuance of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction differs from the recorded deferred tax asset, the excess tax benefit or deficit associated with the tax deduction is recognized within income tax expense.
Net income per share attributable to A&F
Net income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Common Stock.
Additional information pertaining to net income per share attributable to A&F is as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Shares of Common Stock issued
|
103,300
|
|
|
103,300
|
|
|
103,300
|
|
Weighted-average treasury shares
|
(34,909
|
)
|
|
(35,422
|
)
|
|
(34,420
|
)
|
Weighted-average — basic shares
|
68,391
|
|
|
67,878
|
|
|
68,880
|
|
Dilutive effect of share-based compensation awards
|
1,012
|
|
|
406
|
|
|
537
|
|
Weighted-average — diluted shares
|
69,403
|
|
|
68,284
|
|
|
69,417
|
|
Anti-dilutive shares
(1)
|
5,379
|
|
|
6,107
|
|
|
8,967
|
|
|
|
(1)
|
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income per diluted share attributable to A&F because the impact would have been anti-dilutive.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent accounting pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s financial statements. The following table provides a brief description of recent accounting pronouncements the Company has adopted or that could affect the Company’s financial statements.
|
|
|
|
|
|
|
|
Accounting Standards Update (ASU)
|
|
Description
|
|
Date of
Adoption
|
|
Effect on the Financial Statements or Other Significant Matters
|
Standards adopted
|
ASU 2015-11,
Inventory—Simplifying the Measurement of Inventory
|
|
This update amends ASC 330,
Inventory
. The new guidance applies to inventory measured using first-in, first-out (FIFO) or average cost. Under this amendment, inventory is to be measured at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
|
|
January 29, 2017
|
|
The adoption of this guidance did not have any impact on the Company’s consolidated financial statements.
|
ASU 2016-09,
Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting
|
|
This update amends ASC 718,
Compensation
. Under the new guidance, tax benefits and certain tax deficiencies arising from the vesting of share-based payments are to be recognized as income tax benefits or expenses in the statement of operations; whereas, under the previous guidance, such benefits and deficiencies were recorded in additional paid in-capital. The cash flow effects of the tax benefit are to be reported in cash flows from operating activities; whereas, they were previously reported in cash flows from financing activities. This guidance also allows for entities to make a policy election to estimate forfeitures or account for them when they occur.
|
|
January 29, 2017
|
|
As required by the update, all excess tax benefits and tax deficiencies recognized on share-based compensation expense are reflected in the Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of the provision for income taxes on a prospective basis. This update resulted in non-cash income tax expense of $10.6 million in Fiscal 2017. In addition, excess tax benefits and tax deficiencies recognized on share-based compensation expense are now classified as an operating activity on the Consolidated Statements of Cash Flows. The Company has applied this provision on a retrospective basis. For Fiscal 2016 and Fiscal 2015, net cash provided by operating activities increased by $0.7 million and $0.1 million, respectively, with a corresponding offset to net cash used for financing activities. The Company has elected to account for forfeitures when they occur. Based on share-based compensation awards currently outstanding and the price of the Company’s Common Stock as of February 3, 2018, the adoption of this guidance would result in non-cash income tax expense of approximately $10 million for Fiscal 2018 and would have an immaterial impact in Fiscal 2019.
|
Standards not yet adopted
|
ASU 2014-09,
Revenue from Contracts with Customers
|
|
This update supersedes the revenue recognition guidance in ASC 605,
Revenue Recognition
. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
|
|
February 4, 2018
|
|
The Company has determined that it will adopt the guidance using a modified retrospective approach. This guidance will primarily impact the classification and timing of the recognition of the Company's gift card breakage. The cumulative impact will increase retained earnings by less than $10 million upon adoption and is not expected to result in material changes to revenue recognized in the Consolidated Statement of Operations and Comprehensive Income (Loss). In addition, gift card breakage will be recognized as a component of net sales in Fiscal 2018 compared to as a component of other operating income in previous years. The Company does not expect this guidance to have a material impact on store, direct-to-consumer, wholesale, franchise or license revenues.
|
ASU 2016-02,
Leases
|
|
This update supersedes the leasing guidance in ASC 840,
Leases
. The new guidance requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.
|
|
February 3, 2019*
|
|
The Company expects that this guidance will result in a material increase in the Company’s long-term assets and long-term liabilities on the Company’s Consolidated Balance Sheets, and is currently evaluating additional impacts that this guidance may have on its consolidated financial statements. The Company will not be early adopting this guidance.
|
ASU 2017-12,
Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities
|
|
This update amends ASC 815,
Derivatives and Hedging
. The new guidance simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements. Under the new standard, more hedging strategies will be eligible for hedge accounting, including hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets or liabilities and partial-term hedges of fixed-rate assets or liabilities. For cash flow and net investment hedges, the guidance requires a modified retrospective approach while the amended presentation and disclosure guidance requires a prospective approach.
|
|
February 3, 2019*
|
|
The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements. The Company will not be early adopting this guidance.
|
|
|
*
|
Early adoption is permitted.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
|
|
•
|
Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
|
|
|
•
|
Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
|
|
|
•
|
Level 3—inputs to the valuation methodology are unobservable.
|
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution within it of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of February 3, 2018
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
—
|
|
|
$
|
102,784
|
|
|
$
|
—
|
|
|
$
|
102,784
|
|
Money market funds
|
330,649
|
|
|
—
|
|
|
—
|
|
|
330,649
|
|
Derivative financial instruments
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
Total assets
|
$
|
330,649
|
|
|
$
|
102,821
|
|
|
$
|
—
|
|
|
$
|
433,470
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
9,147
|
|
|
$
|
—
|
|
|
$
|
9,147
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
9,147
|
|
|
$
|
—
|
|
|
$
|
9,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of January 28, 2017
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
—
|
|
|
$
|
99,655
|
|
|
$
|
—
|
|
|
$
|
99,655
|
|
Money market funds
|
94,026
|
|
|
—
|
|
|
—
|
|
|
94,026
|
|
Derivative financial instruments
|
—
|
|
|
6,041
|
|
|
—
|
|
|
6,041
|
|
Total assets
|
$
|
94,026
|
|
|
$
|
105,696
|
|
|
$
|
—
|
|
|
$
|
199,722
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
492
|
|
|
$
|
—
|
|
|
$
|
492
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
492
|
|
|
$
|
—
|
|
|
$
|
492
|
|
The Level 2 assets and liabilities consist of trust-owned life insurance policies and derivative financial instruments, primarily foreign currency exchange forward contracts. The fair value of foreign currency exchange forward contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair value of borrowings:
The Company’s borrowings under the Company’s credit facilities are carried at historical cost in the accompanying Consolidated Balance Sheets.
The carrying amount and fair value of the Company’s gross borrowings under the Term Loan Facility were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Gross borrowings outstanding, carrying amount
|
$
|
253,250
|
|
|
$
|
268,250
|
|
Gross borrowings outstanding, fair value
|
$
|
253,250
|
|
|
$
|
260,551
|
|
No borrowings were outstanding under the Company’s senior secured revolving credit facility as of
February 3, 2018
or
January 28, 2017
. Refer to Note 11,
“
BORROWINGS
,”
for further discussion of the Company’s credit facilities.
4. INVENTORIES
Inventories consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Inventories at original cost
|
$
|
446,559
|
|
|
$
|
425,807
|
|
Less: Lower of cost and net realizable value adjustment
|
(13,362
|
)
|
|
(18,402
|
)
|
Less: Shrink estimate
|
(8,804
|
)
|
|
(7,610
|
)
|
Inventories
|
$
|
424,393
|
|
|
$
|
399,795
|
|
Inventories included inventory in transit from vendors of
$80.2 million
and
$79.2 million
at
February 3, 2018
and
January 28, 2017
, respectively. Inventory in transit is merchandise owned by the Company that has not yet been received at a Company distribution center.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Land
|
$
|
36,875
|
|
|
$
|
36,875
|
|
Buildings
|
288,977
|
|
|
282,564
|
|
Furniture, fixtures and equipment
|
688,529
|
|
|
691,918
|
|
Information technology
|
523,429
|
|
|
480,352
|
|
Leasehold improvements
|
1,271,170
|
|
|
1,224,398
|
|
Construction in progress
|
10,773
|
|
|
54,080
|
|
Other
|
1,956
|
|
|
1,952
|
|
Total
|
2,821,709
|
|
|
2,772,139
|
|
Less: Accumulated depreciation
|
(2,083,527
|
)
|
|
(1,947,401
|
)
|
Property and equipment, net
|
$
|
738,182
|
|
|
$
|
824,738
|
|
For Fiscal 2017, the Company incurred store asset impairment charges of
$14.4 million
, primarily related to
certain of the Company's international Abercrombie & Fitch stores in Germany, Spain, Italy and Hong Kong
.
For Fiscal 2016, the Company incurred store asset impairment charges of
$7.9 million
, primarily related to the Company’s abercrombie kids flagship store in London.
For Fiscal 2015, the Company incurred store asset impairment charges of
$18.2 million
, primarily related to the Company’s Abercrombie & Fitch flagship store in Hong Kong and the removal of certain store fixtures in connection with changes to the Abercrombie and Hollister store experiences.
The Company had
$38.7 million
and
$35.6 million
of construction project assets in property and equipment, net at
February 3, 2018
and
January 28, 2017
, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. RABBI TRUST ASSETS
Investments of Rabbi Trust assets consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Rabbi Trust assets:
|
|
|
|
Trust-owned life insurance policies (at cash surrender value)
|
$
|
102,784
|
|
|
$
|
99,655
|
|
Money market funds
|
13
|
|
|
20
|
|
Total Rabbi Trust assets
|
$
|
102,797
|
|
|
$
|
99,675
|
|
The Rabbi Trust includes amounts, restricted in their use, to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value and are included in other assets on the Consolidated Balance Sheets. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of
$3.1 million
in each of Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, recorded in interest expense, net on the Consolidated Statements of Operations and Comprehensive Income (Loss).
7. OTHER ASSETS
Other assets consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Rabbi Trust
(1)
|
$
|
102,797
|
|
|
$
|
99,675
|
|
Deferred tax assets
|
64,039
|
|
|
91,141
|
|
Long-term deposits
|
42,178
|
|
|
40,451
|
|
Intellectual property
(2)
|
26,147
|
|
|
27,092
|
|
Restricted cash
(3)
|
22,397
|
|
|
20,443
|
|
Long-term supplies
(4)
|
21,185
|
|
|
22,050
|
|
Other
(5)
|
44,229
|
|
|
30,867
|
|
Other assets
|
$
|
322,972
|
|
|
$
|
331,719
|
|
|
|
(2)
|
Intellectual property primarily includes trademark assets associated with the Company’s international operations, consisting of finite-lived and indefinite-lived intangible assets of approximately $
12.5 million
and
$13.7 million
, respectively, as of
February 3, 2018
, and approximately
$13.4 million
and
$13.7 million
, respectively, as of
January 28, 2017
. The Company’s finite-lived intangible assets are amortized over a useful life of
10
to
20
years.
|
|
|
(3)
|
Restricted cash includes various cash deposits with international banks that are used as collateral for customary nondebt banking commitments and deposits into trust accounts to conform to standard insurance security requirements.
|
|
|
(4)
|
Long-term supplies include, but are not limited to, hangers, frames, sign holders, security tags, back-room supplies and construction materials.
|
|
|
(5)
|
Other includes prepaid leases and various other assets.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. ACCRUED EXPENSES
Accrued expenses consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Accrued payroll and related costs
(1)
|
$
|
65,045
|
|
|
$
|
37,235
|
|
Accrued taxes
|
37,123
|
|
|
34,077
|
|
Gift card liability
|
28,939
|
|
|
29,685
|
|
Accrued rent
|
25,731
|
|
|
29,410
|
|
Construction in progress
|
14,277
|
|
|
36,853
|
|
Other
(2)
|
137,486
|
|
|
105,784
|
|
Accrued expenses
|
$
|
308,601
|
|
|
$
|
273,044
|
|
|
|
(1)
|
Accrued payroll and related costs include salaries, incentive compensation, benefits, withholdings and other payroll related costs.
|
|
|
(2)
|
Other includes expenses incurred but not yet paid related to outside services associated with store and home office operations and deferred revenue related to loyalty programs.
|
9. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective terms of the related leases, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
|
January 28, 2017
|
Deferred lease credits
|
$
|
451,906
|
|
|
$
|
442,788
|
|
Amortized deferred lease credits
|
(356,507
|
)
|
|
(346,391
|
)
|
Total deferred lease credits, net
|
95,399
|
|
|
96,397
|
|
Less: short-term portion of deferred lease credits
|
(19,751
|
)
|
|
(20,076
|
)
|
Long-term portion of deferred lease credits
|
$
|
75,648
|
|
|
$
|
76,321
|
|
10. INCOME TAXES
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act makes broad and significantly complex changes to the U.S. corporate income tax system by, among other things; reducing the U.S. federal corporate income tax rate from 35% to 21%, transitioning U.S. international taxation to a modified territorial tax system and imposing a mandatory one-time deemed repatriation tax, payable over eight years, on accumulated undistributed foreign subsidiary earnings and profits as of December 31, 2017. Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts for Fiscal 2017 are provisional and assessed as of March 1, 2018. The ultimate outcome may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Act. Provisional amounts are expected to be finalized after the Company's 2017 U.S. corporate income tax return is filed in the fourth quarter of Fiscal 2018, but no later than one year from the enactment of the Act.
As a result of the Company's initial analysis of the impact of the Act, the Company incurred discrete net income tax charges of
$19.9 million
in Fiscal 2017, which consisted of:
|
|
•
|
$21.7 million
of provisional tax expense related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits of approximately
$363.5 million
;
|
|
|
•
|
$3.8 million
of provisional tax expense related to the remeasurement of the Company's ending deferred tax assets and liabilities at February 3, 2018, as a result of the U.S. federal corporate income tax rate reduction from 35% to 21%; and,
|
|
|
•
|
$5.6 million
of tax benefit for the decrease in its federal deferred tax liability on unremitted foreign earnings.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result of the provisional, mandatory one-time deemed repatriation tax, the Company has incurred federal tax on its foreign earnings as of December 31, 2017 of
$21.7 million
. After the utilization of existing tax credits, the Company expects U.S. federal cash tax payments of approximately
$10.6 million
on the mandatory one-time deemed repatriation, payable over eight years. Under a modified territorial system, future earnings are generally not subject to additional federal tax, however as discussed below, the U.S. has adopted several new tax concepts.
Additionally, if funds were to be legally repatriated to the U.S. it could have implications at the state and foreign levels.
Accordingly,
the Company has not fully concluded on its position with respect to reinvestment of foreign earnings and whether its existing international structure for the various jurisdictions is the optimal structure for the future, but expects to complete this assessment in Fiscal 2018.
The Act includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions require the Company to include foreign subsidiary earnings in excess of an allowable return on certain of the foreign subsidiary’s tangible assets in its U.S. income tax return. The Company has elected to account for GILTI tax in the period in which it is incurred and is evaluating whether it will be subject to incremental U.S. tax on GILTI income beginning in Fiscal 2018. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not currently expect it will be subject to this tax. Based on these expectations, the Company has not included any tax impacts of GILTI or BEAT in its consolidated financial statements as of February 3, 2018.
Components of Income Taxes
Income (loss) before taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Domestic
(1)
|
$
|
(12,326
|
)
|
|
$
|
(52,041
|
)
|
|
$
|
8,412
|
|
Foreign
|
67,487
|
|
|
48,563
|
|
|
46,178
|
|
Income (loss) before taxes
|
$
|
55,161
|
|
|
$
|
(3,478
|
)
|
|
$
|
54,590
|
|
|
|
(1)
|
Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return.
|
Income tax expense (benefit) consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(218
|
)
|
|
$
|
(18,888
|
)
|
|
$
|
(3,124
|
)
|
State
|
1,897
|
|
|
(74
|
)
|
|
(434
|
)
|
Foreign
|
5,472
|
|
|
15,633
|
|
|
12,120
|
|
Total current
|
$
|
7,151
|
|
|
$
|
(3,329
|
)
|
|
$
|
8,562
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
23,620
|
|
|
$
|
(5,787
|
)
|
|
$
|
9,224
|
|
State
|
1,457
|
|
|
(346
|
)
|
|
3,297
|
|
Foreign
|
12,408
|
|
|
(1,734
|
)
|
|
(5,052
|
)
|
Total deferred
|
37,485
|
|
|
(7,867
|
)
|
|
7,469
|
|
Income tax expense (benefit)
|
$
|
44,636
|
|
|
$
|
(11,196
|
)
|
|
$
|
16,031
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
(1)
|
|
Fiscal 2016
(2)
|
|
Fiscal 2015
|
U.S. federal corporate income tax rate
|
33.7
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income tax, net of U.S. federal income tax effect
|
3.5
|
|
|
5.0
|
|
|
4.6
|
|
Foreign taxation of non-U.S. operations
|
(25.8
|
)
|
|
248.9
|
|
|
(10.2
|
)
|
U.S. taxation of non-U.S. operations
(3)
|
17.3
|
|
|
(212.6
|
)
|
|
20.0
|
|
Net change in valuation allowances
|
1.0
|
|
|
(16.5
|
)
|
|
(8.7
|
)
|
Audit and other adjustments to prior years’ accruals
|
—
|
|
|
(0.1
|
)
|
|
(8.7
|
)
|
Statutory tax rate and law changes
|
(0.3
|
)
|
|
94.3
|
|
|
4.2
|
|
Permanent items
|
3.5
|
|
|
91.3
|
|
|
(2.6
|
)
|
Credit items
|
(4.2
|
)
|
|
11.7
|
|
|
(1.0
|
)
|
Tax Cuts and Jobs Act of 2017
|
36.1
|
|
|
—
|
|
|
—
|
|
Tax deficit recognized on share-based compensation expense
(4)
|
19.2
|
|
|
—
|
|
|
—
|
|
Credit for increasing research activities
|
(2.3
|
)
|
|
32.1
|
|
|
(1.3
|
)
|
Trust-owned life insurance policies (at cash surrender value)
|
(1.9
|
)
|
|
31.0
|
|
|
(2.0
|
)
|
Other items, net
|
1.1
|
|
|
1.8
|
|
|
0.1
|
|
Total
|
80.9
|
%
|
|
321.9
|
%
|
|
29.4
|
%
|
|
|
(1)
|
On December 22, 2017, the Act was signed into law, which reduced the U.S. federal corporate income tax rate from 35% to 21% resulting in a blended U.S. federal income tax rate of 33.7% based on the applicable tax rates before and after January 1, 2018, and the number of days in Fiscal 2017.
|
|
|
(2)
|
Given the low level of income in absolute dollars in Fiscal 2016, effective tax rate reconciling items that may have been considered de minimis in prior years in terms of absolute dollars and on a percentage basis were amplified on a percentage basis in Fiscal 2016 even as the absolute dollar value of the reconciling items were similar to prior years. Accordingly, year over year comparability may be difficult as a result of the amplifying effect of the lower levels of income.
|
|
|
(3)
|
U.S. branch operations in Canada and Puerto Rico are subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items.
|
|
|
(4)
|
In Fiscal 2017, the Company adopted new share-based compensation accounting standards and in accordance with this guidance, the Company recognized
$10.6 million
of discrete non-cash income tax charges in Fiscal 2017 in income tax expense (benefit) on the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 2, “
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Recent Accounting Pronouncements
,” for further discussion.
|
Historically, jurisdictional location of pre-tax income (loss) represented a significant component of the Company’s effective tax rate as income tax rates outside the U.S. were generally lower than the U.S. statutory income tax rate. Furthermore, the impact of changes in the jurisdictional location of pre-tax income (loss) on the Company’s effective tax rate were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. As a result of the Act, the U.S. effective tax rate will be generally lower, but the effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items in the table above excludes items related to the Company’s non-U.S. operations reported separately in the appropriate corresponding line items.
For Fiscal 2017, the impact of foreign taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s Swiss and Hong Kong subsidiaries, along with the Company’s NCI. For Fiscal 2017, the Company’s Swiss subsidiary earned pre-tax income of
$31.6 million
with a jurisdictional effective tax rate of
1.2%
. For Fiscal 2017, the Company’s Hong Kong subsidiary incurred pre-tax losses of
$7.4 million
with a jurisdictional effective tax rate of negative
3.1%
. With respect to the NCI, the subsidiaries incurred pre-tax income of
$3.4 million
with no jurisdictional tax effect.
For Fiscal 2016, the impact of foreign taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s Swiss and Hong Kong subsidiaries, along with the Company’s NCI. For Fiscal 2016, the Company’s Swiss subsidiary earned pre-tax income of
$18.7 million
with a jurisdictional effective tax rate of negative
11.0%
. For Fiscal 2016, the Company’s Hong Kong subsidiary incurred pre-tax losses of
$12.6 million
with a jurisdictional effective tax rate of negative
4.5%
. With respect to the NCI, the subsidiaries incurred pre-tax income of
$3.8 million
with no jurisdictional tax effect.
For Fiscal 2015, the impact of foreign taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s subsidiaries in Australia, Switzerland and Hong Kong. For Fiscal 2015, the Company’s Australian subsidiary incurred pre-tax losses of
$4.9 million
, with no jurisdictional tax effect, related to the closure of the Company’s Australian operations. For Fiscal 2015, the Company’s Swiss subsidiary earned pre-tax income of
$1.9 million
with a jurisdictional effective tax rate of negative
745%
. The Swiss jurisdictional effective tax rate included the impact of the Company’s omnichannel
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
restructuring as well as the release of a valuation allowance. For Fiscal 2015, the Company’s Hong Kong subsidiary incurred pre-tax losses of
$6.8 million
with a jurisdictional effective tax rate of
15.8%
, slightly below the statutory tax rate of
16.5%
.
Components of Deferred Income Tax Assets and Liabilities
The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Deferred income tax assets:
|
|
|
|
Deferred compensation
|
$
|
31,567
|
|
|
$
|
54,552
|
|
Accrued expenses and reserves
|
13,790
|
|
|
13,168
|
|
Rent
|
29,594
|
|
|
33,917
|
|
Net operating losses (NOL), tax credit and other carryforwards
|
5,256
|
|
|
26,812
|
|
Investments in subsidiaries
|
—
|
|
|
8,791
|
|
Other
|
1,100
|
|
|
3,030
|
|
Valuation allowances
|
(3,508
|
)
|
|
(2,429
|
)
|
Total deferred income tax assets
|
$
|
77,799
|
|
|
$
|
137,841
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Property, equipment and intangibles
|
$
|
(2,923
|
)
|
|
$
|
(20,177
|
)
|
Inventory
|
(5,206
|
)
|
|
(11,955
|
)
|
Store supplies
|
(3,261
|
)
|
|
(4,892
|
)
|
Prepaid expenses
|
(1,698
|
)
|
|
(3,262
|
)
|
Investments in subsidiaries
|
(2,937
|
)
|
|
—
|
|
Undistributed profits of non-U.S. subsidiaries
|
—
|
|
|
(5,609
|
)
|
Other
|
(1,532
|
)
|
|
(950
|
)
|
Total deferred income tax liabilities
|
(17,557
|
)
|
|
(46,845
|
)
|
Net deferred income tax assets
|
$
|
60,242
|
|
|
$
|
90,996
|
|
Accumulated other comprehensive loss is shown net of deferred tax assets and liabilities, resulting in a deferred tax liability of
$1.2 million
and
$0.6 million
as of
February 3, 2018
and
January 28, 2017
, respectively. Accordingly, these deferred taxes are not reflected in the table above.
As of
February 3, 2018
, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of
$3.0 million
and
$1.2 million
, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryovers will begin to expire in
2020
and a portion of state NOL will begin to expire in
2021
. Some foreign NOL have an indefinite carryforward period.
The Company believes it is more likely than not that NOLs and credit carryforwards will reduce future years’ tax liabilities in various states and certain foreign jurisdictions less any associated valuation allowance. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive Income (Loss). No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. While the Company does not expect material adjustments to the total amount of valuation allowances within the next 12 months, changes in assumptions may occur based on the information then currently available. In such case, the Company will record an adjustment in the period in which a determination is made.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other
The amount of uncertain tax positions as of
February 3, 2018
,
January 28, 2017
and
January 30, 2016
, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Uncertain tax positions, beginning of the year
|
$
|
1,239
|
|
|
$
|
2,455
|
|
|
$
|
3,212
|
|
Gross addition for tax positions of the current year
|
148
|
|
|
67
|
|
|
13
|
|
Gross (reduction) addition for tax positions of prior years
|
(1
|
)
|
|
19
|
|
|
598
|
|
Reductions of tax positions of prior years for:
|
|
|
|
|
|
Lapses of applicable statutes of limitations
|
(157
|
)
|
|
(1,211
|
)
|
|
(986
|
)
|
Settlements during the period
|
(116
|
)
|
|
(40
|
)
|
|
(64
|
)
|
Changes in judgment / excess reserve
|
—
|
|
|
(51
|
)
|
|
(318
|
)
|
Uncertain tax positions, end of year
|
$
|
1,113
|
|
|
$
|
1,239
|
|
|
$
|
2,455
|
|
The Internal Revenue Service (“IRS”) is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal
2017
as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal
2016
and prior years have been completed. The Company has a
$6.2 million
carryback refund claim related to Fiscal
2016
which is pending a routine Joint Committee on Taxation review. State and foreign returns are generally subject to examination for a period of
three
to
five years
after the filing of the respective return. The Company has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of these examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlements of audits and expiration of statutes of limitations.
The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.
During Fiscal
2017
, the Company recognized a
$0.1 million
benefit related to net interest and penalties, compared to a
$0.2 million
benefit recognized during Fiscal
2016
. Interest and penalties of
$0.2 million
were accrued at the end of Fiscal
2017
, compared to
$0.3 million
accrued at the end of Fiscal
2016
.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. BORROWINGS
Asset-Based Revolving Credit Facility
On August 7, 2014, A&F, through its subsidiary Abercrombie & Fitch Management Co. (“A&F Management”) as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors), entered into an asset-based revolving credit agreement.
As of October 19, 2017, the Company, through A&F Management, entered into a Second Amendment to Credit Agreement (the “ABL Second Amendment”), amending and extending the maturity date of the asset-based revolving credit agreement. As amended, the asset-based revolving credit agreement continues to provide for a senior secured revolving credit facility of up to
$400 million
(the “Amended ABL Facility.”) The Amended ABL Facility is subject to a borrowing base, consisting primarily of U.S. inventory, with a letter of credit sub-limit of
$50 million
and an accordion feature allowing A&F to increase the revolving commitment by up to
$100 million
subject to specified conditions. The Amended ABL Facility is available for working capital, capital expenditures and other general corporate purposes. The Amended ABL Facility will mature on
October 19, 2022
.
Obligations under the Amended ABL Facility are unconditionally guaranteed by A&F and certain of its subsidiaries. The Amended ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The Amended ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property.
At the Company’s option, borrowings under the Amended ABL Facility will bear interest at either (a) an adjusted LIBOR rate plus a margin of
1.25%
to
1.50%
per annum, or (b) an alternate base rate plus a margin of
0.25%
to
0.50%
per annum. The applicable margins with respect to LIBOR loans and base rate loans, including swing line loans, under the Amended ABL Facility are
1.25%
and
0.25%
per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical availability during the preceding quarter. The Company is also required to pay a fee of
0.25%
per annum on undrawn commitments under the Amended ABL Facility. Customary agency fees and letter of credit fees are also payable in respect of the Amended ABL Facility.
No borrowings were outstanding under the Amended ABL Facility as of
February 3, 2018
.
The Company had availability under the Amended ABL Facility of
$259.3 million
as of
February 3, 2018
.
Term Loan Facility
A&F, through its subsidiary A&F Management as the borrower (with A&F and certain other subsidiaries as guarantors), also entered into a term loan agreement on August 7, 2014, which, as amended, provides for a term loan facility of
$300 million
(the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”). A portion of the proceeds of the Term Loan Facility was used to repay the outstanding balance of approximately
$127.5 million
under the Company’s 2012 Term Loan Agreement, to repay outstanding borrowings of approximately
$60 million
under the Company’s 2011 Credit Agreement and to pay fees and expenses associated with the transaction.
The Term Loan Facility was issued at a
1.0%
discount. In addition, the Company recorded deferred financing fees associated with the issuance of the Credit Facilities in Fiscal 2014 of
$5.8 million
in aggregate, of which
$3.2 million
was paid to lenders. The Company also recorded deferred financing fees associated with the issuance of the ABL Second Amendment of
$0.9 million
.The debt discount and deferred financing fees are amortized over the respective contractual terms of the Credit Facilities.
The Company’s Term Loan debt is presented in the Consolidated Balance Sheets, net of the unamortized discount and fees. Net borrowings as of
February 3, 2018
and
January 28, 2017
were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
|
January 28, 2017
|
|
Borrowings, gross at carrying amount
|
$
|
253,250
|
|
|
$
|
268,250
|
|
Unamortized discount
|
(1,184
|
)
|
|
(1,764
|
)
|
Unamortized fees
|
(2,380
|
)
|
|
(3,494
|
)
|
Borrowings, net
|
249,686
|
|
|
262,992
|
|
Less: short-term portion of borrowings
|
—
|
|
|
—
|
|
Long-term portion of borrowings, net
|
$
|
249,686
|
|
|
$
|
262,992
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Term Loan Facility will mature on
August 7, 2021
and amortizes at a rate equal to
0.25%
of the original principal amount per quarter, beginning with the fourth quarter of Fiscal 2014. The Company made repayments of $15 million and $25 million in Fiscal 2017 and Fiscal 2016, respectively, in prepayment of its scheduled Fiscal 2017 through Fiscal 2021 amortization and a portion of the amount of principal due at maturity. The Term Loan Facility is subject to (a) beginning in 2016, an annual mandatory prepayment in an amount equal to
0%
to
50%
of the Company’s excess cash flows in the preceding fiscal year, depending on the Company’s leverage ratio and (b) certain other mandatory prepayments upon receipt by the Company of proceeds of certain debt issuances, asset sales and casualty events, subject to certain exceptions specified therein, including reinvestment rights, less any voluntary payments made. The final principal installment of
$253.3 million
on the Term Loan Facility will be due
August 7, 2021
.
All obligations under the Term Loan Facility are unconditionally guaranteed by A&F and certain of its subsidiaries. The Term Loan Facility is secured by a first-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. The Term Loan Facility is also secured by a second-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets, with certain exceptions.
At the Company’s option, borrowings under the Term Loan Facility will bear interest at either (a) an adjusted LIBOR rate no lower than
1.00%
plus a margin of
3.75%
per annum or (b) an alternate base rate plus a margin of
2.75%
per annum. Customary agency fees are also payable in respect of the Term Loan Facility. The interest rate on borrowings under the Term Loan Facility was
5.32%
as of
February 3, 2018
.
Representations, Warranties and Covenants
The Credit Facilities contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of A&F and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to the greater of
10%
of the loan cap or
$30 million
must be maintained under the Amended ABL Facility. The Credit Facilities do not otherwise contain financial maintenance covenants.
Both Credit Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Company was in compliance with the covenants under the Credit Facilities as of
February 3, 2018
.
12. OTHER LIABILITIES
Other liabilities consisted of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
Accrued straight-line rent
|
$
|
80,532
|
|
|
$
|
82,241
|
|
Deferred compensation
(1)
|
42,672
|
|
|
44,531
|
|
Other
(2)
|
66,484
|
|
|
45,236
|
|
Other liabilities
|
$
|
189,688
|
|
|
$
|
172,008
|
|
|
|
(1)
|
Deferred compensation includes the Supplemental Executive Retirement Plan, the Abercrombie & Fitch Co. Savings and Retirement Plan and the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan, all further discussed in Note 16, “
SAVINGS AND RETIREMENT PLANS
,” as well as deferred Board of Directors compensation and other accrued retirement benefits.
|
|
|
(2)
|
Other includes asset retirement obligations, the provisional, mandatory one-time deemed repatriation tax on accumulated foreign earnings, net and various other liabilities.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of
$22.1 million
,
$22.1 million
and
$28.4 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively. The Company recognized tax benefits associated with share-based compensation expense of
$8.0 million
,
$8.3 million
and
$10.6 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively.
The effect of adjustments for forfeitures was
$2.9 million
,
$3.4 million
and
$5.6 million
for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
, respectively.
Plans
As of
February 3, 2018
, the Company had
two
primary share-based compensation plans: (i) the
2016 Directors LTIP
, with 750,000
shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, stock appreciation rights, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors; and (ii) the
2016 Associates LTIP
, with 4,700,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company. The Company also has
six
other share-based compensation plans under which it granted restricted stock, restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company and restricted stock units, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors in prior years.
The
2016 Directors LTIP
, a stockholder-approved plan, permits the Company to annually grant awards to non-associate directors, subject to the following limits:
|
|
•
|
For non-associate directors:
awards with an aggregate fair market value on the date of the grant of no more than
$300,000
;
|
|
|
•
|
For the non-associate director occupying the role of Non-Executive Chairman of the Board (if any):
additional awards with an aggregate fair market value on the date of grant of no more than
$500,000
; and
|
|
|
•
|
For the non-associate director occupying the role of Executive Chairman of the Board (if any):
additional awards with an aggregate fair market value on the date of grant of no more than
$2,500,000
.
|
Under the
2016 Directors LTIP
, restricted stock units are subject to a minimum vesting period ending no sooner than the earlier of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of stockholders held after the grant date. Any stock appreciation rights or stock options granted under this plan have the same minimum vesting period requirements as restricted stock units and, in addition, must have a term that does not exceed a period of
ten
years from the grant date, subject to forfeiture under the terms of the
2016 Directors LTIP
.
The
2016 Associates LTIP
, a stockholder-approved plan, permits the Company to annually grant one or more types of awards covering up to an aggregate for all awards of
1.0 million
of underlying shares of the Company’s Common Stock to any associate of the Company. Under the
2016 Associates LTIP
, for restricted stock units that have performance-based vesting, performance must be measured over a period of at least one year and for restricted stock units that do not have performance-based vesting, vesting in full may not occur more quickly than in pro-rata installments over a period of
three
years from the date of the grant, with the first installment vesting no sooner than the first anniversary of the date of the grant. In addition, any stock options or stock appreciation rights granted under this plan must have a minimum vesting period of
one
year and a term that does not exceed a period of
ten
years from the grant date, subject to forfeiture under the terms of the
2016 Associates LTIP
.
Each of the
2016 Directors LTIP
, and the
2016 Associates LTIP
, provides for accelerated vesting of awards if there is a change of control and certain other conditions specified in each plan are met.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units
The following table summarizes activity for restricted stock units for Fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-based Restricted
Stock Units
|
|
Performance-based Restricted
Stock Units
|
|
Market-based Restricted
Stock Units
|
|
Number of
Underlying
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Number of
Underlying
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Number of
Underlying
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Unvested at January 28, 2017
|
1,915,461
|
|
|
$
|
25.47
|
|
|
203,923
|
|
|
$
|
22.53
|
|
|
184,892
|
|
|
$
|
26.89
|
|
Granted
|
1,698,803
|
|
|
9.96
|
|
|
524,030
|
|
|
9.11
|
|
|
236,872
|
|
|
11.79
|
|
Adjustments for performance achievement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
(746,118
|
)
|
|
25.62
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(347,986
|
)
|
|
22.20
|
|
|
(37,779
|
)
|
|
21.75
|
|
|
(37,784
|
)
|
|
26.14
|
|
Unvested at February 3, 2018
(1) (2)
|
2,520,160
|
|
|
$
|
15.35
|
|
|
690,174
|
|
|
$
|
11.82
|
|
|
383,980
|
|
|
$
|
16.50
|
|
|
|
(1)
|
Includes
704,703
unvested service-based restricted stock units subject to vesting requirements related to the achievement of certain performance metrics, such as operating income and net income, for the fiscal year immediately preceding the vesting date. Holders of these restricted stock units have the opportunity to earn back one of more installments of the award if cumulative performance requirements are met in a subsequent year.
|
|
|
(2)
|
Unvested shares related to restricted stock units with performance-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at
100%
of their target vesting amount in the table above.
|
As of
February 3, 2018
, there was
$24.6 million
,
$5.2 million
and
$3.2 million
of total unrecognized compensation cost, net of estimated forfeitures, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of
14 months
,
13 months
and
11 months
for service-based, performance-based and market-based restricted stock units, respectively.
The actual tax benefit realized for tax deductions related to the issuance of shares associated with restricted stock unit vesting was
$2.8 million
,
$7.0 million
and
$5.9 million
for Fiscal 2017, Fiscal 2016, and Fiscal 2015, respectively.
Additional information pertaining to restricted stock units for
Fiscal 2017
,
Fiscal 2016
and
Fiscal 2015
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Service-based restricted stock units:
|
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
16,920
|
|
|
$
|
29,047
|
|
|
$
|
23,101
|
|
Total grant date fair value of awards vested
|
$
|
19,116
|
|
|
$
|
20,314
|
|
|
$
|
23,608
|
|
|
|
|
|
|
|
Performance-based restricted stock units:
|
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
4,774
|
|
|
$
|
3,334
|
|
|
$
|
2,278
|
|
Total grant date fair value of awards vested
|
$
|
—
|
|
|
$
|
1,178
|
|
|
$
|
1,861
|
|
|
|
|
|
|
|
Market-based restricted stock units:
|
|
|
|
|
|
Total grant date fair value of awards granted
|
$
|
2,793
|
|
|
$
|
4,023
|
|
|
$
|
2,158
|
|
Total grant date fair value of awards vested
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during
Fiscal 2017
,
Fiscal 2016
and
Fiscal 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Grant date market price
|
$
|
11.43
|
|
|
$
|
28.06
|
|
|
$
|
22.46
|
|
Fair value
|
$
|
11.79
|
|
|
$
|
31.01
|
|
|
$
|
19.04
|
|
Assumptions:
|
|
|
|
|
|
Price volatility
|
47
|
%
|
|
45
|
%
|
|
45
|
%
|
Expected term (years)
|
2.9
|
|
|
2.7
|
|
|
2.8
|
|
Risk-free interest rate
|
1.5
|
%
|
|
1.0
|
%
|
|
0.9
|
%
|
Dividend yield
|
7.0
|
%
|
|
3.0
|
%
|
|
3.5
|
%
|
Average volatility of peer companies
|
35.2
|
%
|
|
34.5
|
%
|
|
34.0
|
%
|
Average correlation coefficient of peer companies
|
0.2664
|
|
|
0.3415
|
|
|
0.3288
|
|
Stock Appreciation Rights
The following table summarizes stock appreciation rights activity for Fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life
|
Outstanding at January 28, 2017
|
4,079,050
|
|
|
$
|
47.49
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(1,068,330
|
)
|
|
42.59
|
|
|
|
|
|
Outstanding at February 3, 2018
|
3,010,720
|
|
|
$
|
49.35
|
|
|
$
|
29,097
|
|
|
1.9
|
Stock appreciation rights exercisable at February 3, 2018
|
2,783,169
|
|
|
$
|
51.31
|
|
|
$
|
15,771
|
|
|
1.5
|
Stock appreciation rights expected to become exercisable in the future as of February 3, 2018
|
214,132
|
|
|
$
|
25.68
|
|
|
$
|
8,870
|
|
|
7.0
|
No stock appreciation rights were granted during Fiscal 2017 and Fiscal 2016. The weighted-average assumptions used in the Black-Scholes option-pricing model for stock appreciation rights granted during Fiscal
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
Executive Officers
|
|
All Other Associates
|
Grant date market price
|
$
|
22.46
|
|
|
$
|
22.42
|
|
Exercise price
|
$
|
22.46
|
|
|
$
|
22.42
|
|
Fair value
|
$
|
9.11
|
|
|
$
|
8.00
|
|
Assumptions:
|
|
|
|
Price volatility
|
49
|
%
|
|
49
|
%
|
Expected term (years)
|
6.1
|
|
|
4.3
|
|
Risk-free interest rate
|
1.5
|
%
|
|
4.2
|
%
|
Dividend yield
|
1.7
|
%
|
|
1.7
|
%
|
As of
February 3, 2018
, there was
$1.0 million
of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of
7 months
.
No stock appreciation rights were exercised in
Fiscal 2017
and the total intrinsic value of stock appreciation rights exercised was insignificant during Fiscal
2016
and
$4.3 million
during Fiscal
2015
. The grant date fair value of stock appreciation rights that vested during Fiscal
2017
, Fiscal
2016
and Fiscal
2015
was
$2.4 million
,
$4.3 million
and
$4.9 million
, respectively.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options
The following table summarizes stock option activity for Fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Weighted-Average
Remaining
Contractual Life
|
Outstanding at January 28, 2017
|
189,800
|
|
|
$
|
76.62
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(102,600
|
)
|
|
75.27
|
|
|
|
|
|
Outstanding at February 3, 2018
|
87,200
|
|
|
$
|
78.20
|
|
|
$
|
—
|
|
|
0.1
|
Stock options exercisable at February 3, 2018
|
87,200
|
|
|
$
|
78.20
|
|
|
$
|
—
|
|
|
0.1
|
No stock options were granted during during Fiscal
2017
, Fiscal
2016
and Fiscal
2015
. The total intrinsic value of stock options exercised was insignificant during Fiscal
2016
and
Fiscal 2015
and no stock options were exercised in Fiscal 2017. As of
February 3, 2018
, there was no unrecognized compensation cost related to currently outstanding stock options.
14. DERIVATIVE INSTRUMENTS
As of
February 3, 2018
, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
|
|
|
|
|
(in thousands)
|
Notional Amount
(1)
|
Euro
|
$
|
89,532
|
|
British pound
|
$
|
31,798
|
|
Canadian dollar
|
$
|
17,041
|
|
Japanese yen
|
$
|
7,940
|
|
|
|
(1)
|
Amounts reported are the U.S. Dollar notional amounts outstanding as of
February 3, 2018
.
|
As of
February 3, 2018
, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:
|
|
|
|
|
(in thousands)
|
Notional Amount
(1)
|
Euro
|
$
|
11,183
|
|
|
|
(1)
|
Amounts reported are the U.S. Dollar notional amounts outstanding as of
February 3, 2018
.
|
The location and amounts of derivative fair values on the Consolidated Balance Sheets as of
February 3, 2018
and
January 28, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(in thousands)
|
Location
|
|
February 3, 2018
|
|
January 28, 2017
|
|
Location
|
|
February 3, 2018
|
|
January 28, 2017
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
|
|
$
|
37
|
|
|
$
|
5,920
|
|
|
|
|
$
|
9,108
|
|
|
$
|
486
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
|
|
$
|
39
|
|
|
$
|
6
|
|
Total
|
Other current assets
|
|
$
|
37
|
|
|
$
|
6,042
|
|
|
Accrued expenses
|
|
$
|
9,147
|
|
|
$
|
492
|
|
Refer to Note 3,
“
FAIR VALUE
,”
for further discussion of the determination of the fair value of derivative instruments.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The location and amounts of derivative gains and losses for
Fiscal 2017
and
Fiscal 2016
on the Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
(in thousands)
|
Location
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
Other operating income, net
|
|
$
|
(3,557
|
)
|
|
$
|
627
|
|
|
$
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion and Amount Excluded from Effectiveness Testing
|
|
Amount of (Loss) Gain Recognized in OCI on Derivative Contracts
(1)
|
|
Location of (Loss) Gain Reclassified from AOCL into Earnings
|
|
Amount of (Loss) Gain Reclassified from AOCL into Earnings
(2)
|
|
Location of Gain Recognized in Earnings on Derivative Contracts
|
|
Amount of Gain Recognized in Earnings on Derivative Contracts
(3)
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
|
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
|
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
$
|
(21,810
|
)
|
|
$
|
7,078
|
|
|
$
|
7,204
|
|
|
Cost of sales, exclusive of depreciation and amortization
|
|
$
|
(4,303
|
)
|
|
$
|
6,195
|
|
|
$
|
15,596
|
|
|
Other operating income, net
|
|
$
|
2,949
|
|
|
$
|
1,873
|
|
|
$
|
242
|
|
|
|
(1)
|
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
|
|
|
(2)
|
The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
|
|
|
(3)
|
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
For
Fiscal 2017
, the activity in accumulated other comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
Beginning balance at January 28, 2017
|
$
|
(126,127
|
)
|
|
$
|
4,825
|
|
|
$
|
(121,302
|
)
|
Other comprehensive income (loss) before reclassifications
|
42,492
|
|
|
(21,810
|
)
|
|
20,682
|
|
Reclassified from accumulated other comprehensive loss
(1)
|
—
|
|
|
4,303
|
|
|
4,303
|
|
Tax effect
|
(1,312
|
)
|
|
2,575
|
|
|
1,263
|
|
Other comprehensive income
|
41,180
|
|
|
(14,932
|
)
|
|
26,248
|
|
Ending balance at February 3, 2018
|
$
|
(84,947
|
)
|
|
$
|
(10,107
|
)
|
|
$
|
(95,054
|
)
|
|
|
(1)
|
For
Fiscal 2017
, a loss was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Consolidated Statement of Operations and Comprehensive Income (Loss).
|
For
Fiscal 2016
, the activity in accumulated other comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
Beginning balance January 30, 2016
|
$
|
(119,196
|
)
|
|
$
|
4,577
|
|
|
$
|
(114,619
|
)
|
Other comprehensive (loss) income before reclassifications
|
(7,091
|
)
|
|
7,078
|
|
|
(13
|
)
|
Reclassified from accumulated other comprehensive loss
(1)
|
—
|
|
|
(6,195
|
)
|
|
(6,195
|
)
|
Tax effect
|
160
|
|
|
(635
|
)
|
|
(475
|
)
|
Other comprehensive loss
|
(6,931
|
)
|
|
248
|
|
|
(6,683
|
)
|
Ending balance at January 28, 2017
|
$
|
(126,127
|
)
|
|
$
|
4,825
|
|
|
$
|
(121,302
|
)
|
|
|
(1)
|
For
Fiscal 2016
, a gain was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Consolidated Statement of Operations and Comprehensive Income (Loss). Additionally, a foreign currency translation loss related to the Company's dissolution of its Australian operations was reclassified to other operating income, net.
|
For
Fiscal 2015
, the activity in accumulated other comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
(in thousands)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
Total
|
Beginning balance January 31, 2015
|
$
|
(96,680
|
)
|
|
$
|
13,100
|
|
|
$
|
(83,580
|
)
|
Other comprehensive (loss) income before reclassifications
|
(22,623
|
)
|
|
7,204
|
|
|
(15,419
|
)
|
Reclassified from accumulated other comprehensive loss
(1)
|
—
|
|
|
(15,596
|
)
|
|
(15,596
|
)
|
Tax effect
|
107
|
|
|
(131
|
)
|
|
(24
|
)
|
Other comprehensive loss
|
(22,516
|
)
|
|
(8,523
|
)
|
|
(31,039
|
)
|
Ending balance at January 30, 2016
|
$
|
(119,196
|
)
|
|
$
|
4,577
|
|
|
$
|
(114,619
|
)
|
|
|
(1)
|
For
Fiscal 2015
, a gain was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Consolidated Statement of Operations and Comprehensive Income (Loss).
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. SAVINGS AND RETIREMENT PLANS
The Company maintains the Abercrombie & Fitch Co. Savings & Retirement Plan, a qualified plan. All U.S. associates are eligible to participate in this plan if they are at least
21
years of age. In addition, the Company maintains the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement, composed of two sub-plans (Plan I and Plan II). Plan I contains contributions made through December 31, 2004, while Plan II contains contributions made on and after January 1, 2005. Participation in these plans is based on service and compensation. The Company’s contributions to these plans are based on a percentage of associates’ eligible annual compensation. The cost of the Company’s contributions to these plans was
$14.4 million
,
$11.1 million
and
$15.4 million
for
Fiscal 2017
,
Fiscal 2016
and
Fiscal 2015
, respectively.
In addition, the Company maintains the Supplemental Executive Retirement Plan which provides retirement income to its former Chief Executive Officer for life, based on averaged compensation before retirement, including base salary and cash incentive compensation. The Company has recorded
$9.7 million
and
$10.2 million
, as of
February 3, 2018
and
January 28, 2017
, respectively, in other liabilities on the Consolidated Balance Sheets related to future Supplemental Executive Retirement Plan distributions.
17. SEGMENT REPORTING
The Company's two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands.
These operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment.
The Company’s net sales by operating segment for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Hollister
|
$
|
2,038,598
|
|
|
$
|
1,839,716
|
|
|
$
|
1,877,688
|
|
Abercrombie
|
1,454,092
|
|
|
1,487,024
|
|
|
1,640,992
|
|
Total
|
$
|
3,492,690
|
|
|
$
|
3,326,740
|
|
|
$
|
3,518,680
|
|
The Company’s net sales by geographic area for Fiscal
2017
, Fiscal
2016
and Fiscal
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
United States
|
$
|
2,208,618
|
|
|
$
|
2,123,808
|
|
|
$
|
2,282,040
|
|
Europe
|
811,664
|
|
|
768,630
|
|
|
832,923
|
|
Other
|
472,408
|
|
|
434,302
|
|
|
403,717
|
|
Total
|
$
|
3,492,690
|
|
|
$
|
3,326,740
|
|
|
$
|
3,518,680
|
|
The Company’s long-lived assets by geographic area as of
February 3, 2018
,
January 28, 2017
and
January 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 3, 2018
|
|
January 28, 2017
|
|
January 30, 2016
|
United States
|
$
|
494,132
|
|
|
$
|
543,923
|
|
|
$
|
548,983
|
|
Europe
|
192,133
|
|
|
215,124
|
|
|
263,977
|
|
Other
|
78,064
|
|
|
92,783
|
|
|
109,275
|
|
Total
|
$
|
764,329
|
|
|
$
|
851,830
|
|
|
$
|
922,235
|
|
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. CONTINGENCIES
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. As of
February 3, 2018
, the Company had accrued charges for legal contingencies, including the certain legal matters detailed below, of approximately
$18 million
, which are classified within other current liabilities on the accompanying Consolidated Balance Sheet. The estimated liability represents what the Company believes to be reasonable estimates of the loss exposures related to its legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding regarding final settlement agreement negotiations, actual claims rate experience, court approvals and the terms of any approval by the courts, and there can be no assurance that 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 may be subject to estimated incremental losses of as much as approximately
$25 million
. There are certain claims and legal proceedings pending against the Company for which accruals have not been established.
Certain Legal Matters
The Company is a defendant in two separate class action lawsuits filed by former associates of the Company who are represented by the same counsel. The first lawsuit, filed in 2013, alleges failure to indemnify business expenses and a series of derivative claims for compelled patronization, inaccurate wage statements, waiting time penalties, minimum wage violations and unfair competition under California state law on behalf of all non-exempt hourly associates at Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks stores in California. Four subclasses of associates have since been certified, and was before a U.S. District Court of California. The second lawsuit, filed in 2015, alleges that associates were required to purchase uniforms without reimbursement in violation of federal law, and laws of the states of New York, Florida and Massachusetts, as well as derivative putative state law claims and seeks to pursue such claims on a class and collective basis. On December 12, 2017, a U.S. District Court of California granted the parties’ stipulation to transfer the first lawsuit pending and combine it with the second lawsuit then pending before a U.S. District Court of Ohio.
Both matters were mediated and the parties signed a
$25.0 million
claims-made settlement agreement which, subject to final approval by a U.S. District Court of Ohio, is intended to result in a full and final settlement of all claims in both lawsuits on a class-wide basis. On February 16, 2018, a U.S. District Court of Ohio granted preliminary approval of the proposed settlement and ordered that notice of the proposed settlement be given to the absent members of the settlement class. The ultimate settlement amount is dependent upon the actual claims made by members of the class and is also subject to final approval by the U.S. District Court of Ohio. A final approval hearing is set to occur in the second quarter of Fiscal 2018.
In addition to the matters discussed above, the Company is a defendant in other class action lawsuits filed by former associates of the Company. These lawsuits allege non-exempt hourly associates of the Company were not properly compensated, in violation of federal and California law, for call-in practices requiring associates to engage in certain pre-shift activities in order to determine whether they should report to work and the Company's alleged failure to pay Reporting Time and all wages earned at termination. In addition, these lawsuits include derivative claims alleging inaccurate wage statements and unfair competition under California state law on behalf of non-exempt hourly associates. These lawsuits are currently assigned to the same judge and remain stayed in a U.S. District Court of California.
There can be no absolute assurance that settlements will be finalized or approved or of the ultimate outcomes of the litigations.
Other
For Fiscal 2016, the Company recognized a
$12.3 million
gain in other operating income, net in connection with a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill.
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial results for Fiscal
2017
and Fiscal
2016
are presented below. See
“
RESULTS OF OPERATIONS
,”
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 regarding items included below that could affect comparability between quarterly results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Fiscal Quarter 2017
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
$
|
661,099
|
|
|
$
|
779,321
|
|
|
$
|
859,112
|
|
|
$
|
1,193,158
|
|
Gross profit
(1)
|
$
|
398,925
|
|
|
$
|
460,895
|
|
|
$
|
526,627
|
|
|
$
|
697,395
|
|
Net (loss) income
|
$
|
(61,009
|
)
|
|
$
|
(14,615
|
)
|
|
$
|
10,616
|
|
|
$
|
75,533
|
|
Net (loss) income attributable to A&F
(2)
|
$
|
(61,700
|
)
|
|
$
|
(15,491
|
)
|
|
$
|
10,075
|
|
|
$
|
74,210
|
|
Net (loss) income per basic share attributable to A&F
(3)
|
$
|
(0.91
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.15
|
|
|
$
|
1.08
|
|
Net (loss) income per diluted share attributable to A&F
(3)
|
$
|
(0.91
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.15
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Fiscal Quarter 2016
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
$
|
685,483
|
|
|
$
|
783,160
|
|
|
$
|
821,734
|
|
|
$
|
1,036,363
|
|
Gross profit
(1)
|
$
|
425,721
|
|
|
$
|
477,107
|
|
|
$
|
510,739
|
|
|
$
|
615,001
|
|
Net (loss) income
|
$
|
(38,630
|
)
|
|
$
|
(12,031
|
)
|
|
$
|
8,274
|
|
|
$
|
50,105
|
|
Net (loss) income attributable to A&F
(4)
|
$
|
(39,587
|
)
|
|
$
|
(13,129
|
)
|
|
$
|
7,881
|
|
|
$
|
48,791
|
|
Net (loss) income per basic share attributable to A&F
(3)
|
$
|
(0.59
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.12
|
|
|
$
|
0.72
|
|
Net (loss) income per diluted share attributable to A&F
(3)
|
$
|
(0.59
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.12
|
|
|
$
|
0.71
|
|
|
|
(1)
|
Gross profit is derived from cost of sales, exclusive of depreciation and amortization.
|
|
|
(2)
|
Net income (loss) attributable to A&F for Fiscal 2017 included certain items related to asset impairment, legal charges and discrete net tax charges related to the Act. These items adversely impacted net income (loss) attributable to A&F by
$4.5 million
,
$10.4 million
and
$23.0 million
for the second, third and fourth quarters of Fiscal 2017, respectively.
|
|
|
(3)
|
Net income (loss) per share for each of the quarters was computed using the weighted average number of shares outstanding during the quarter while the full year is computed using the average of the weighted average number of shares outstanding each quarter; therefore, the sum of the quarters may not equal the total for the year.
|
|
|
(4)
|
Net income (loss) attributable to A&F for Fiscal 2016 included certain items related to asset impairment, indemnification recoveries and claims settlement benefits. These items benefited net income (loss) attributable to A&F by
$3.7 million
and
$6.5 million
for the second and third quarters of Fiscal 2016, respectively, and adversely impacted net income (loss) attributable to A&F by
$2.1 million
for the fourth quarter of Fiscal 2016.
|