Retailer Abercrombie & Fitch to Close 40 Stores

NEW ALBANY, OH — Retailer Abercrombie & Fitch Co. (NYSE: ANF) announced results for the fourth quarter and fiscal year ended February 2, 2019. The 13-week fourth quarter and 52-week year ended February 2, 2019, are compared to the 14-week fourth quarter and 53-week year ended February 3, 2018.

Fran Horowitz, Chief Executive Officer, said, “We ended 2018 on a strong note, recording our sixth consecutive quarter and second consecutive full year of positive comparable sales while exceeding $1 billion in annual digital sales. I am proud of our team and all we have accomplished this year. Most importantly, while delivering on the top-line, we drove gross profit rate improvement and operating expense leverage resulting in 100 basis points of adjusted EBIT margin expansion and a 77% improvement in adjusted net income for the full year.

We continue to keep the customer at the center of everything we do and are excited about the future of our brands. Our transformation initiatives are gaining traction and keeping us on track to deliver our previously disclosed fiscal 2020 targets.”

Fourth Quarter and Full Year Results

For the fourth quarter ended February 2, 2019:

  • Net sales of $1.2 billion decreased 3% from last year, reflecting a combined adverse impact of approximately 6% from the calendar shift, the loss of fiscal 2017’s 53rd week and changes in foreign currency exchange rates.
  • Comparable sales increased 3% on top of 9% last year.
  • Gross profit rate was 59.1%, up 70 basis points from last year and up approximately 20 basis points on a constant currency basis, net of hedging.
  • Stores and distribution expense was $434.5 million, down from $437.3 million last year, primarily due to the adverse impact of the additional week on last year’s expense, changes in foreign currency exchange rates and a reduction of store occupancy expense. This was partially offset by volume-related expenses from higher digital net sales and higher digital marketing spend as well as increased compensation costs due to severance.
  • Marketing, general and administrative expense was $118.9 million, down from $128.1 million last year. Excluding certain items last year, adjusted non-GAAP marketing, general and administrative expense decreased $5.2 million, primarily due to the adverse impact of the additional week on last year’s expense and a reduction in depreciation expense on IT assets. This was partially offset by continued investments in marketing.
  • Asset impairment was $1.2 million, compared to $4.0 million last year. Asset impairment last year was excluded from adjusted non-GAAP results.
  • Operating income of $129.7 million compared to $140.3 million last year. Excluding certain items, adjusted non-GAAP operating income was $148.4 million last year.
  • The effective tax rate was 23%, reflecting discrete net tax benefits of $6.0 million related to the Tax Cuts and Jobs Act of 2017. Excluding discrete net tax benefits of $6.0 million related to the Tax Cuts and Jobs Act of 2017 and the after-tax effect of certain items from prior quarters, the adjusted non-GAAP effective tax rate was 27%.
  • Net income per diluted share was adversely impacted by year-over-year changes in foreign currency exchange rates, net of hedging, of approximately $0.04.

For the full year ended February 2, 2019:

  • Net sales of $3.6 billion increased 3% from last year, despite the adverse impact from the loss of fiscal 2017’s 53rd week.
  • Comparable sales increased 3% on top of 3% last year.
  • Gross profit rate was 60.2%, up 50 basis points from last year and up approximately 20 basis points on a constant currency basis, net of hedging.
  • Stores and distribution expense was $1.5 billion, approximately flat to last year, primarily due to a reduction of store occupancy expense and the adverse impact of the additional week on last year’s expense. This was partially offset by volume-related expense from higher digital net sales and higher digital marketing spend as well as changes in foreign currency exchange rates.
  • Marketing, general and administrative expense was $484.9 million, up from $471.9 million last year. Excluding certain items, adjusted non-GAAP marketing, general and administrative expense increased $25.4 million, primarily due to investments in marketing and the company’s transformation initiatives as well as increased compensation costs. This was partially offset by a reduction in depreciation expense on IT assets and the adverse impact of the additional week on last year’s expense.
  • Asset impairment was $11.6 million, compared to $14.4 million last year. Excluding certain asset impairment charges, adjusted non-GAAP asset impairment increased $2.2 million from last year.
  • Operating income was $127.4 million compared to $72.1 million last year. Excluding certain items, adjusted non-GAAP operating income was $138.6 million compared to $100.8 million last year.
  • The effective tax rate was 32%, reflecting certain discrete tax items including non-cash charges of $9.6 million related to share-based compensation and net benefits of $3.5 million related to the Tax Cuts and Jobs Act of 2017. Excluding net benefits of $3.5 million related to the Tax Cuts and Jobs Act of 2017 and the after-tax effect of certain items, the adjusted non-GAAP effective tax rate was 34%.
  • Net income per diluted share benefited from year-over-year changes in foreign currency exchange rates, net of hedging, of approximately $0.06.

For the fourth quarter and full year, net sales decreased 3% and increased 3%, respectively, reflecting impacts from the calendar shift and loss of fiscal 2017’s 53rd week, as well as changes in foreign currency exchange rates.

Fourth Quarter Full Year
(in millions) 2018 2017 %
Change (1)
Comparable
Sales (2)
2018 2017 %
Change (1)
Comparable
Sales (2)
Net sales by brand
Hollister $ 712.9 $ 709.2 1 % 6 % $ 2,152.5 $ 2,038.6 6 % 5 %
Abercrombie (3) 442.7 484.0 (9 )% (2 )% 1,437.6 1,454.1 (1 )% 1 %
Total company $ 1,155.6 $ 1,193.2 (3 )% 3 % $ 3,590.1 $ 3,492.7 3 % 3 %
Net sales by region
United States $ 778.5 $ 774.6 1 % 5 % $ 2,321.7 $ 2,208.6 5 % 6 %
International 377.1 418.6 (10 )% (2 )% 1,268.4 1,284.1 (1 )% (2 )%
Total company $ 1,155.6 $ 1,193.2 (3 )% 3 % $ 3,590.1 $ 3,492.7 3 % 3 %

(1) For the fourth quarter, the calendar shift and loss of fiscal 2017’s 53rd week adversely impacted total net sales by approximately 5% and changes in foreign currency exchange rates adversely impacted total net sales by approximately 1%. For the full year, the loss of fiscal 2017’s 53rd week adversely impacted total net sales by approximately 1%.

(2) Comparable sales are calculated on a constant currency basis. Due to the calendar shift resulting from the 53rd week in fiscal 2017, comparable sales for the 13 and 52 weeks ended February 2, 2019 are compared to the 13 and 52 weeks ended February 3, 2018. Refer to “REPORTING AND USE OF GAAP AND NON-GAAP MEASURES,” for further discussion.

(3) Abercrombie includes the Abercrombie & Fitch and abercrombie kids brands.

Cash, Borrowings and Inventories

As of February 2, 2019 the company had:

  • Cash and equivalents of $723.1 million compared to $675.6 million last year.
  • Gross borrowings under the company’s term loan agreement of $253.3 million compared to $253.3 million last year.
  • Inventories of $437.9 million, an increase of 3% over last year.
Depreciation and Amortization and Store Activity

Depreciation and amortization expense for the full year was $178.0 million as compared to $194.5 million last year.

During the year, the company delivered 67 new store experiences through new store prototypes, remodeled stores and right-sizes. The company also closed 29 stores in the U.S.

Other Developments

As previously announced, on February 22, 2019, the Board of Directors declared a quarterly cash dividend of $0.20 per share on the Class A Common Stock of Abercrombie & Fitch Co., payable on March 18, 2019 to stockholders of record at the close of business on March 8, 2019.

During fiscal 2018, the company repurchased approximately 2.9 million shares of its Class A Common Stock and returned $122.4 million to stockholders through share repurchases and dividends.

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 making broad and significantly complex changes to the U.S. corporate income tax system. In the fourth quarter of fiscal 2017, the company recognized provisional discrete net tax charges of $19.9 million related to the enactment of the Act, primarily associated with the one-time deemed repatriation tax on accumulated foreign earnings. Given the complexities associated with the Act, the estimated financial impacts for fiscal 2017 were provisional and subject to further analysis, interpretation and clarification of the Act, which resulted in changes to these estimates during fiscal 2018.

In fiscal 2018, the company finalized the provisional tax estimate related to the Act and recognized measurement period net benefits in an aggregate amount of $3.5 million.

Fiscal 2019 Full Year Outlook

For fiscal 2019, the company expects:

  • Net sales to be up in the range of 2% to 4%, driven by positive comparable sales and net new store contribution, partially offset by an adverse impact of changes in foreign currency exchange rates of approximately $15 million primarily in the first quarter of fiscal 2019
  • Comparable sales to be up low-single digits
  • Gross profit rate to be up slightly from the fiscal 2018 rate of 60.2%
  • Operating expense, excluding other operating income, to be up approximately 2% from fiscal 2018 adjusted non-GAAP operating expense of $2.03 billion
  • The effective tax rate to be in the mid-to-upper 20s
  • A weighted average diluted share count of approximately 69 million shares, excluding the effect of future share buybacks
  • Capital investments of approximately $200 million
  • To deliver approximately 85 new store experiences through new store prototypes, remodeled stores and right-sizes
  • Up to 40 store closures, primarily in the U.S.