10-K 1 a201710-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to
    Commission file number 001-12107
ABERCROMBIE & FITCH CO.
(Exact name of registrant as specified in its charter)
Delaware
 
31-1469076
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
6301 Fitch Path, New Albany, Ohio
 
43054
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (614) 283-6500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A Common Stock, $0.01 Par Value
 
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     x  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No
Aggregate market value of the Registrant’s Class A Common Stock (the only outstanding common equity of the Registrant) held by non-affiliates of the Registrant (for this purpose, executive officers and directors of the Registrant are considered affiliates) as of July 28, 2017: $662,946,023.
Number of shares outstanding of the Registrant’s common stock as of March 28, 2018: 68,032,248 shares of Class A Common Stock.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders, to be held on June 14, 2018, are incorporated by reference into Part III of this Annual Report on Form 10-K.



ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
 
 
 
 
 
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
 



PART I
 
ITEM 1.
BUSINESS

GENERAL.

Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as the “Company” and “we”), is a global, multi-brand 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. For the fifty-three week period ended February 3, 2018, 63.2% of the Company’s net sales were attributable to the United States (“U.S.”).

The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year, as was the case for the year ended February 3, 2018. Fiscal years are designated in the consolidated financial statements and notes, as well as the remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows:
Fiscal year
 
Year ended
 
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

A&F makes available free of charge on its website, corporate.abercrombie.com, under “Investors, Financials, SEC Filings,” its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as A&F’s definitive proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains electronic filings by A&F and other issuers at www.sec.gov. In addition, the public may read and copy any materials A&F files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Company has included certain of its website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.

BRANDS.

Hollister.    The quintessential apparel brand of the global teen consumer, Hollister celebrates the liberating spirit of the endless summer inside everyone.  Inspired by California’s laidback attitude, Hollister’s clothes are designed to be lived in and made your own, for wherever life takes you. Hollister provides an engaging, welcoming and unique shopping experience around the globe. Hollister also carries intimates brand, Gilly Hicks, “the brand to start and end your day with.” Gilly Hicks product is designed to be effortless and comfortable to align with customers’ on-the-go, busy lifestyle.

Abercrombie & Fitch.    Abercrombie & Fitch is a specialty retailer of high-quality apparel and accessories for men and women. For 125 years, the iconic brand has outfitted innovators, explorers and entrepreneurs. Today, it reflects an updated attitude of the 21 to 24-year old customer, while remaining true to its heritage of creating expertly crafted products with an effortless, American style.

abercrombie kids.    abercrombie kids creates smart and creative apparel of enduring quality that celebrates the wide-eyed wonder of children from 5 to 14 years.  Its products are made for play — tough enough to stand up to everyday adventures.


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SEASONAL BUSINESS.

The retail industry has two principal selling seasons: the Spring season, which includes the first and second fiscal quarters (“Spring”); and the Fall season, which includes the third and fourth fiscal quarters (“Fall”). As is common in the retail industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Back-to-Fall in August for Hollister and Abercrombie, respectively, and the holiday sales periods in November and December.

COMPETITION.

The Company operates in a rapidly evolving and highly competitive retail business environment. Competitors include individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online businesses. Additionally, the Company competes for consumers’ discretionary spending with businesses in other product and experiential categories, such as technology, restaurants, travel and media content. The Company competes primarily on the basis of quality, fashion, brand experience and selection.

Operating in a highly competitive industry environment can cause the Company to engage in greater promotional activity, resulting in pressure on average unit retail and gross profit. Refer to “ITEM 1A. RISK FACTORS,” for further discussion of the potential impacts competition may have on the Company.

STRATEGIC INITIATIVES.

The Company is focused on putting the customer at the center of everything it does and engaging with them wherever, whenever and however they choose to shop, through its three strategic pillars:
inspiring customers;
innovating relentlessly; and
developing leaders.

Through the continued execution of the Company's brand playbooks, the Company is aligning product, brand voice and experience around the customer and is building and enhancing capabilities to react to a rapidly evolving retail landscape.

FINANCIAL INFORMATION ABOUT SEGMENTS.

The Company determines its segments on the same basis that it uses to allocate resources and assess performance. The Company’s two operating segments as of February 3, 2018 are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. Both of the Company’s operating segments sell a similar group of products — apparel, personal care products and accessories for men, women and kids. 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. Refer to “ITEM 6. SELECTED FINANCIAL DATA,” RESULTS OF OPERATIONS” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and Note 17, SEGMENT REPORTING, of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K for for further discussion and information of the Company’s operating segments and reportable segment as well as information about the geographic areas in which the Company operates.


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The following charts illustrate the Company’s net sales by brand and geography for Fiscal 2017:

item1netsalesbybrandandgeogr.jpg

(1) 
Includes Abercrombie & Fitch and abercrombie kids brands.

CHANNELS OF OPERATIONS.

Stores.    The Company continues to evaluate and manage its store fleet through its ongoing channel optimization program to address shifts in customer preferences. Actions taken to optimize store productivity include remodeling, relocating, downsizing and store closings. At the end of Fiscal 2017, the Company operated 868 stores. The following table details the number of retail stores operated by the Company as of February 3, 2018:
 
 
Hollister (1)
 
Abercrombie (2)
 
Total
United States
 
394
 
285
 
679
International
 
144
 
45
 
189
Total
 
538
 
330
 
868

(1) 
Excludes five international franchise stores as of February 3, 2018.
(2) 
Includes Abercrombie & Fitch and abercrombie kids brands. Excludes four international franchise stores as of February 3, 2018.

Omnichannel and direct-to-consumer operations. As customers increasingly shop across multiple channels, the Company has developed, and continues to expand, its omnichannel capabilities. These capabilities include purchase-online-pickup-in-store, reserve-in-store, order-in-store, ship-from-store, and online and in-store returns. The Company continues to invest in these and other omnichannel initiatives in order to create a more seamless shopping experience for its customers.

The Company operates 20 desktop and mobile websites for its brands globally, which are available in several languages and accept multiple currencies, that ship to more than 120 countries. Total net sales through direct-to-consumer operations, including shipping and handling revenue, were $973.9 million for Fiscal 2017, representing approximately 28% of total net sales. Mobile engagement continues to grow, with more than two-thirds of direct-to-consumer traffic was generated from mobile devices in Fiscal 2017. To improve the overall mobile experience, the Company continues to develop and expand its mobile capabilities, including streamlined mobile checkout and ease of navigation.

Wholesale, franchise and licensing operations. The Company continues to expand its international brand reach and create brand awareness through various wholesale, franchise and licensing arrangements. Total net sales from wholesale, franchise and licensing operations were $60.3 million for Fiscal 2017, representing approximately 2% of total net sales. As of February 3, 2018, the Company’s franchisees operated nine international franchise stores across the brands, located in Mexico, Qatar and Saudi Arabia.


5


CUSTOMER ENGAGEMENT.

The Company engages with its customers through in-store and online interactions, loyalty programs, social media platforms, mobile applications, online surveys and customer reviews, and continues to evolve in response to the feedback it receives through these channels. The Hollister and Abercrombie customer relationship management programs provide a platform with which the Company can develop direct relationships with its customers and harness insights. Both brands have a strong global following on key social media platforms, and the Company also partners with key influencers, such as celebrities, bloggers and stylists, to share its products and communicate its brands’ identities. The Company aims to be at the forefront of customer engagement and continues to explore new methods to connect with its customers.

Store experience.    The Company’s stores continue to play an essential role in creating brand awareness and have been imagined with the best customer experience in mind with a focus on inspiring customers and serving as physical gateways to the brands. The stores are tailored to reflect the personality of each brand, with unique furniture, fixtures, music and scent adding to a rich brand experience, that is focused on the customer. These stores also serve as local hubs for online engagement as the Company continues to implement its omnichannel capabilities to create a seamless shopping experience. In Fiscal 2017, the Abercrombie and abercrombie kids brands launched new store prototypes which are both open and inviting, and have accommodating features such as innovative fitting rooms and omni-channel capabilities. Through the enhanced store environment, the Company has seen improved store engagement and greater overall productivity on a smaller footprint.

Loyalty programs.    The Company offers the Club Cali® and A&F Club® loyalty programs for Hollister and Abercrombie customers, respectively. Under these programs, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds, which can be redeemed for merchandise discounts. The loyalty programs continue to provide timely customer insights, while driving a higher average level of customer spend. In addition, the Company uses its loyalty programs as a tool to stay close to the customer by engaging with some of its most valuable customers through special offers, members-only items and access to unique members-only experiences, including early looks at collections.

MERCHANDISE VENDORS.

Global sourcing strategy. The Company depends on its network of third-party vendors to supply compelling, on-trend and high-quality product assortments to its customers. The Company partners with vendors that respect local laws and share its dedication to employing leading practices in human rights, labor rights, environmental responsibility and workplace safety. Maintaining close relationships with vendors allows the Company to be responsive and adaptable to customer feedback. During Fiscal 2017, the Company sourced merchandise through approximately 150 vendors located throughout the world, primarily in Asia and Central America, and did not source more than 10% of its merchandise from any single factory or supplier. The Company’s global sourcing strategy includes relationships with vendors in 18 countries, including the U.S. The Company’s global sourcing of merchandise is generally negotiated and settled in U.S. Dollars.

Quality assurance. High quality standards are an integral part of the Company’s identity, and all product sources, including independent manufacturers and suppliers, must achieve and maintain these standards. The Company has established supplier product quality standards to ensure the high quality of fabrics and other materials used in the Company’s products. Both home office and field employees participate in monitoring suppliers’ compliance with the Company’s product quality standards. Before production begins, all factories, including subcontractors of the factories, undergo a quality assurance assessment to ensure they meet Company standards. All factories are contractually required to adhere to the Company’s Vendor Code of Conduct, go through social audits, which include on-site walk-throughs to appraise the physical working conditions and health and safety practices, and review payroll and age documentation. Social audits of the factories are performed at least every two years after the initial audit.

6


DISTRIBUTION OF MERCHANDISE INVENTORY.

The Company’s distribution network is built to deliver inventory to its stores and fulfill direct-to-consumer orders with speed and efficiency. Merchandise is shipped to the Company’s distribution centers (“DCs”), where it is received and inspected before being shipped to stores or direct-to-consumer customers. The Company primarily uses one contract carrier to ship merchandise and related materials to its North American stores and direct-to-consumer customers, and several contract carriers for its European and Asian stores and direct-to-consumer customers.

The Company relies on DCs to manage the receipt, storage, sorting, packing and distribution of its merchandise. The Company’s DCs by geography as of February 3, 2018 were as follows:

item1distributioncenters.jpg

Additional information pertaining to the Company’s DCs is as follows:
Location
 
Company-owned or third-party
 
Areas of service
New Albany, Ohio
 
Company-owned
 
Stores and direct-to-consumer operations in North America
New Albany, Ohio
 
Company-owned
 
Direct-to-consumer operations in North America
Reno, Nevada
 
Third-party
 
Stores and direct-to-consumer operations in North America
Bergen op Zoom, Netherlands
 
Third-party
 
Stores and direct-to-consumer operations in Europe
Shanghai, China
 
Third-party
 
Stores and direct-to-consumer operations in China
Hong Kong
 
Third-party
 
Stores and direct-to-consumer operations in Asia
Dubai, United Arab Emirates
 
Third-party
 
Stores in the Middle East

INFORMATION SYSTEMS.

The Company’s management information systems consist of a full range of retail, merchandising, human resource and financial systems. The systems include applications related to point-of-sale, direct-to-consumer, inventory management, supply chain, planning, sourcing, merchandising, payroll, scheduling and financial reporting. The Company continues to invest in technology to upgrade its core systems to create efficiencies, including the support of its direct-to-consumer operations, omnichannel capabilities, customer relationship management tools and loyalty programs.

TRADEMARKS.

The trademarks Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos are registered with the U.S. Patent and Trademark Office and registered, or the Company has applications for registration pending, with the registries of countries where stores are located or likely to be located in the future. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered, and the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to timely renew each of its registered trademarks that remain in use.

7


ASSOCIATE RELATIONS.

As of March 28, 2018, the Company employed approximately 38,000 associates, of whom approximately 31,000 were part-time associates, which equates to approximately 4,000 full-time equivalents. On average, the Company employed approximately 14,000 full-time equivalents during Fiscal 2017.

ENVIRONMENTAL MATTERS.

The Company has committed to advancing environmental initiatives in its internal practices, by increasing education and awareness throughout its partnership base, and through communities in which they make and sell products. Compliance with domestic and international regulations related to environmental matters has not had, nor is it expected to have, any material effect on the Company’s capital expenditures, earnings or competitive position based on information and circumstances known to the Company at this time.

OTHER INFORMATION.

Additional information about the Company’s business, including its results of operations for the last three fiscal years and gross square footage of stores, is set forth under “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below is certain information regarding the executive officers of A&F as of March 28, 2018:

Stacia Andersen, 47, has been Brand President of Abercrombie & Fitch and abercrombie kids since June 2016. Prior to joining A&F, Ms. Andersen served in various positions with Target Corporation (“Target”), a general merchandise retailer selling products through Target stores and digital channels, from 1993 until December 2015. Most recently, Ms. Andersen served as Senior Vice President Merchandising, Apparel, Accessories and Baby of Target, from May 2014 to December 2015, and as Senior Vice President Merchandising, Home and Seasonal of Target, from October 2009 to May 2014. Prior to serving as a Senior Vice President Merchandising at Target, Ms. Andersen served as President, Target Sourcing Services/Associated Merchandising Corporation, from February 2006 to October 2009, and before that, in various sourcing and merchandising positions.

Robert E. Bostrom, 65, has been Senior Vice President, General Counsel and Corporate Secretary of A&F since January 2014. Since August 2014, Mr. Bostrom has been a member of the Board of Directors of NeuLion, Inc. From December 2012 to December 2013, Mr. Bostrom was Co-Chairman of the Financial Regulatory and Compliance Practice of Greenberg Traurig LLP, an international law firm. From August 2011 to November 2012, Mr. Bostrom was Co-Head of the Global Financial Institutions and Funds Sector of Dentons US LLP (formerly, SNR Denton), an international law firm. From February 2006 to August 2011, Mr. Bostrom was Executive Vice President, General Counsel and Corporate Secretary of the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). Prior to his time with Freddie Mac, Mr. Bostrom was the Managing Partner of the New York office of Winston & Strawn LLP, a Member of that firm’s Executive Committee and Head of its Financial Institutions Practice.

Joanne C. Crevoiserat, 54, has been Executive Vice President and Chief Operating Officer of A&F since February 2017 and served as Executive Vice President and Chief Financial Officer of A&F from May 2014 to October 2017. In addition, Ms. Crevoiserat served as Interim Principal Executive Officer of A&F from June 2016 to February 2017 and was a member of the Office of the Chairman of A&F from October 2015 to February 2017. Prior to joining A&F, Ms. Crevoiserat served in a number of senior management roles at Kohl’s Inc., which operates family-oriented department stores and a website featuring apparel, footwear, accessories, soft home products and housewares. From June 2012 to April 2014, Ms. Crevoiserat was the Executive Vice President of Finance of Kohl’s and from November 2008 to June 2012, she served as the Executive Vice President of Merchandise Planning and Allocation of Kohl’s. Prior to her time with Kohl’s, Ms. Crevoiserat held senior finance positions with Wal-Mart Stores and May Department Stores, including Chief Financial Officer of the Filene’s, Foley’s and Famous-Barr brands.

Fran Horowitz, 54, has been Chief Executive Officer and a director of A&F since February 2017. In addition, Ms. Horowitz has been Principal Executive Officer of A&F since February 2017. Prior thereto, she had served as President & Chief Merchandising Officer for all brands of A&F since December 2015 and was a member of the Office of the Chairman of A&F from December 2014 to February 2017. Ms. Horowitz held the position of Brand President of Hollister from October 2014 to December 2015. Before joining Hollister, from October 2013 to October 2014, Ms. Horowitz served as the President of Ann Taylor Loft, a division of Ann Inc., the parent company of three specialty retail fashion brands in North America. Prior to her time with Ann Taylor Loft, from February 2005 to October 2012, she held various roles at Express, Inc., a specialty apparel and accessories retailer of women’s and men’s merchandise, including Executive Vice President of Women’s Merchandising and Design from May 2010 to November

8


2012. Before her time with Express, Inc., Ms. Horowitz spent 13 years at Bloomingdale’s in various women’s merchandising roles, including Vice President Divisional Merchandise Manager. Since March 2017, Ms. Horowitz has served on the Board of Directors of SeriousFun Children’s Network, Inc., a Connecticut non-profit corporation.

Scott Lipesky, 43, has been Senior Vice President and Chief Financial Officer of A&F, as well as Principal Financial Officer and Principal Accounting Officer of A&F, since October 2017. Prior to joining A&F, Mr. Lipesky served as Chief Financial Officer of American Signature, Inc., a privately-held home furnishings company, from October 2016 to October 2017. Prior to his time with American Signature, Inc., Mr. Lipesky served in various finance positions with A&F from November 2007 to October 2016, including as Chief Financial Officer, Hollister Brand, from September 2014 to October 2016, Vice President, Merchandise Finance from March 2013 to September 2014, Vice President, Financial Planning and Analysis from November 2012 to March 2013 and Senior Director, Financial Planning and Analysis from November 2010 to November 2012.

Kristin Scott, 50, has been Brand President of Hollister since August 2016. Before joining Hollister, Ms. Scott served in various positions with Victoria’s Secret, a specialty retailer of women’s intimate and other apparel which sells products at Victoria’s Secret stores and online, from December 2007 until April 2016. Most recently, Ms. Scott served as Executive Vice President, GMM Merchandising from March 2013 to April 2016, Senior Vice President, GMM Merchandising from March 2009 to March 2013 and Senior Vice President, GMM Merchandising - Stores from December 2007 to March 2009. Prior to her time with Victoria’s Secret, Ms. Scott served in merchandising positions at the Vice President level with Gap Outlet, Marshall Fields and Target.

The Board of Directors of A&F dissolved the Office of the Chairman, effective February 1, 2017 with the appointment of Fran Horowitz as Chief Executive Officer of A&F. The Office of the Chairman was formed in December 2014 to allow for effective management of the Company during a transition in leadership. The executive officers serve at the pleasure of the Board of Directors of A&F.

9


ITEM 1A.
RISK FACTORS
 
FORWARD-LOOKING STATEMENTS AND RISK FACTORS.

We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by us, our management or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which may be beyond our control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements.

Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. The following factors, categorized by the primary nature of the associated risk, could affect our financial performance and cause actual results to differ materially from those expressed or implied in any of the forward-looking statements.

Macroeconomic and industry risks include:
Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity;
Failure to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability;
Our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours;
Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations;
Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; and,
The impact of war, acts of terrorism or civil unrest could have a material adverse effect on our operating results and financial condition.

Strategic risks include:
The expansion of our direct-to-consumer sales channels and omnichannel initiatives are significant components of our growth strategy, and the failure to successfully develop our position across all channels could have an adverse impact on our results of operations;
Our international growth strategy and ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks; and,
Failure to successfully implement our strategic plans could have a negative impact on our growth and profitability.

Operational risks include:
Failure to protect our reputation could have a material adverse effect on our brands;
Our business could suffer if our information technology systems are disrupted or cease to operate effectively;
We may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss;
Our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain;
Changes in cost, availability and quality of raw materials, labor, transportation, and trade relations could cause manufacturing delays and increase our costs;
We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs;
We rely on the experience and skills of our senior executive officers and associates, the loss of whom could have a material adverse effect on our business; and,
Extreme weather conditions, including natural disasters, pandemic disease and other unexpected events, could negatively impact our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, which could result in an interruption to our business and adversely affect our operating results.


10


Legal, tax, regulatory and compliance risks include:
Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations;
Our litigation exposure could have a material adverse effect on our financial condition and results of operations;
Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets;
Changes in the regulatory or compliance landscape and compliance with changing regulations for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results; and,
Our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business.

The factors listed above are not our only risks. Additional risks may arise and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition. The following sets forth a description of the preceding risk factors that we believe may be relevant to an understanding of our business. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.

MACROECONOMIC AND INDUSTRY RISKS.

Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, could have a material adverse effect on our business, results of operations and liquidity.

Our business depends on consumer demand for our merchandise. Consumer purchases of discretionary items, including our merchandise, can be adversely impacted by recessionary periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect worldwide economic conditions including unemployment, consumer credit availability, consumer debt levels, reductions in net worth based on declines in the financial, residential real estate and mortgage markets, sales and personal income tax rates, fuel and energy prices, interest rates, consumer confidence in future economic and political conditions, consumer perceptions of personal well-being and security, the value of the U.S. Dollar versus foreign currencies and other macroeconomic factors. Additionally, changes in consumer preferences and discretionary spending habits may negatively impact the specialty apparel retail market. Global economic uncertainty and changing consumer preferences and discretionary spending habits could have a material adverse effect on our results of operations, liquidity and capital resources if reduced consumer demand for our merchandise should occur. It could also impact our ability to fund growth and/or result in our becoming reliant on external financing, the availability and cost of which may be uncertain.

The economic conditions and factors described above could adversely affect the profitability of our business, as well as adversely affect the pace of opening new stores, or their productivity once opened. Finally, the economic environment may exacerbate some of the risks noted below, including consumer demand, strain on available resources, our international growth strategy, availability of real estate, interruption of the flow of merchandise from key vendors and manufacturers, and foreign currency exchange rate fluctuations.

Failure to anticipate customer demand and changing fashion trends and to manage our inventory commensurately could adversely impact our sales levels and profitability.

Our success largely depends on our ability to anticipate and gauge the fashion preferences of our customers and provide merchandise that satisfies constantly shifting demands in a timely manner. Because we enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, pricing shifts, and the sub-optimal selection and timing of merchandise purchases. Moreover, there can be no assurance that we will continue to anticipate consumer demands and accurately plan inventory successfully in the future. Changing consumer preferences and fashion trends, whether we are able to anticipate, identify and respond to them or not, could adversely impact our sales. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to sell through excess inventory and therefore, lower than planned margins. A distressed economic and retail environment, in which many of our competitors continue to engage in aggressive promotional activities increases the importance of reacting appropriately to changing consumer preferences and fashion trends. Conversely, if we underestimate consumer demand for our merchandise, or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales. In addition, we could be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands. Any of these events could significantly harm our operating results and financial condition.


11


Our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours.

The sale of apparel and personal care products through stores and direct-to-consumer channels is a highly competitive business with numerous participants, including individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online businesses. Proliferation of the direct-to-consumer channel within the last few years has encouraged the entry of many new competitors and an increase in competition from established companies. We face a variety of competitive challenges, including:

anticipating and quickly responding to changing consumer demands or preferences better than our competitors, including being able to adapt to new, emerging technologies that alter customer experience expectations;
maintaining favorable brand recognition and effective marketing of our products to consumers in several diverse demographic markets;
sourcing merchandise efficiently;
developing innovative, high-quality merchandise in styles that appeal to our consumers and in ways that favorably distinguish us from our competitors; and,
countering the aggressive pricing and promotional activities of many of our competitors without diminishing the aspirational nature of our brands and brand equity.

In light of the competitive challenges we face, we may not be able to compete successfully in the future. Further, increases in competition could reduce our sales and harm our operating results and business.

Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations.

The functional currency of our foreign subsidiaries is generally the local currency in which each entity operates, while our consolidated financial statements are presented in U.S. Dollars. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. Dollars at exchange rates in effect during, or at the end of the reporting period. In addition, our international subsidiaries transact in currencies other than their functional currency, including intercompany transactions, which results in foreign currency transaction gains or losses. Furthermore, we purchase substantially all of our inventory in U.S. Dollars. As a result, our sales and gross profit rate from international operations will be negatively impacted during periods of a strengthened U.S. dollar relative to the functional currencies of our foreign subsidiaries. Additionally, tourism spending may be affected by changes in foreign currency exchange rates, and as a result, sales in our flagship stores and other stores with higher tourism traffic have, at times, been adversely impacted, and may continue to be adversely impacted, by fluctuations in foreign currency exchange rates. Certain events, such as the June 2016 decision by the United Kingdom to leave the European Union and the November 2016 U.S. elections, have increased global economic and political uncertainty and caused volatility in foreign currency exchange rates. Our business and results of operations may be impacted by these developments. For Fiscal 2017, 63.2%, 23.2% and 13.5% of the Company’s net sales were attributable to the U.S., Europe and other geographic areas, respectively.

Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around.

In order to generate customer traffic, we locate many of our stores in prominent locations within successful shopping malls or street locations. Our stores benefit from the ability of the malls’ “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic in the vicinity of our stores. We cannot control the loss of an anchor or other significant tenant in a shopping mall in which we have a store; the development of new shopping malls in the U.S. or around the world, the availability or cost of appropriate locations, competition with other retailers for prominent locations or the success of individual shopping malls. All of these factors may impact our ability to meet our productivity targets for our domestic stores and our growth objectives for our international stores and could have a material adverse effect on our financial condition or results of operations. In addition, some malls that were in prominent locations when we opened our stores may cease to be viewed as prominent. If this trend continues or if the popularity of mall shopping continues to decline generally among our customers, our sales may decline, which would impact our gross profits and net income.

Part of our future growth is dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs.


12


The impact of war, acts of terrorism or civil unrest could have a material adverse effect on our operating results and financial condition.

The continued threat of terrorism and the associated heightened security measures and military actions in response to acts of terrorism have disrupted commerce. Further acts of terrorism, future conflicts or civil unrest may disrupt commerce and undermine consumer confidence and consumer spending by causing domestic and/or tourist traffic in malls and the Company’s flagship and other stores to decline, which could negatively impact our sales revenue. Furthermore, war or an act of terrorism, or the threat thereof, or any other unforeseen interruption of commerce, could negatively impact our business by interfering with our ability to obtain merchandise from foreign manufacturers. With a substantial portion of our merchandise being imported from foreign countries, failure to obtain merchandise from our foreign manufacturers or substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our operating results and financial condition.

STRATEGIC RISKS.

The expansion of our direct-to-consumer sales channels and omnichannel initiatives are significant components of our growth strategy, and the failure to successfully develop our position across all channels could have an adverse impact on our results of operations.

Consumers are increasingly shopping online and via mobile devices, and we have made significant investments in capital spending and labor to develop these channels globally, invested in digital media to attract new customers and developed localized fulfillment, shipping and customer service operations. As omnichannel retailing continues to grow and evolve, our customers increasingly interact with our brands through a variety of media including smart phones and tablets, and expect seamless integration across all touchpoints. Our success depends on our ability to introduce innovative means of engaging our customers and our ability to respond to shifting consumer traffic patterns and direct-to-consumer buying trends. There is no assurance that we will be able to continue to successfully maintain or expand our direct-to-consumer sales channels and omnichannel initiatives and failure to adequately respond to these risks and uncertainties or to successfully maintain and expand our direct-to-consumer business may have an adverse impact on our results of operations.

In addition, direct-to-consumer operations are subject to numerous risks, including reliance on third-party computer hardware/software and service providers, data breaches, violations of state, federal or international laws, including those relating to online privacy, credit card fraud, telecommunication failures and electronic break-ins and similar disruptions, and disruption of Internet service. Changes in foreign governmental regulations may also negatively impact our ability to deliver product to our customers. Failure to successfully respond to these risks may adversely affect sales in our direct-to-consumer business as well as damage our reputation and brands.

Our international growth strategy and ability to conduct business in international markets may be adversely affected by legal, regulatory, political and economic risks.

International expansion is a significant component of our growth strategy and may require significant capital investment, which could strain our resources and adversely impact current store performance, while adding complexity to our current operations. We are subject to domestic laws, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If any of our overseas operations, or our associates or agents, violate such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.

Additionally, we may face operational issues that could have a material adverse effect on our reputation, business and results of operations if we fail to address certain factors including, but not limited to, the following:

address the different operational characteristics present in each country in which we operate, including employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements;
hire, train and retain qualified personnel;
maintain good relations with individual associates and groups of associates;
avoid work stoppages or other labor-related issues in our European stores where associates are represented by workers’ councils and unions;
retain acceptance from foreign customers;
manage inventory effectively to meet the needs of existing stores on a timely basis; and
manage foreign currency exchange rate risks effectively.

13


Failure to successfully implement our strategic plans could have a negative impact on our growth and profitability.

Our ability to execute our long-term strategies successfully and in a timely fashion is subject to various risks and uncertainties as described under this “Risk Factors” section. Specifically, these risks can be categorized into macroeconomic risk, strategic risk, operational risk and legal, tax, regulatory and compliance risk. Achieving the goals of our long-term strategy is also dependent on us executing the strategy successfully. Finally, it may take longer than anticipated to generate the expected benefits from our long-term strategy, the initiatives we implement in connection with our long-term strategy may not resonate with our customers and there can be no guarantee that these initiatives will result in improved operating results. In addition, failure to successfully implement our long-term strategy could have a negative impact on our growth and profitability.

OPERATIONAL RISKS.

Failure to protect our reputation could have a material adverse effect on our brands.

Our ability to maintain our reputation is critical to our brands. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity, if our third-party vendors fail to comply with our vendor code of conduct, if any third parties with which we have a business relationship fail to represent our brands in a manner consistent with our brand image and customer experience standards or as a result of a cyber-attack. In addition, the increasing use of social media platforms allows for rapid communication and any negative publicity related to the aforementioned concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor, health and safety, accounting or environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Public perception about our products or our stores, whether justified or not, could impair our reputation, involve us in litigation, damage our brands and have a material adverse effect on our business. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations and financial condition, as well as require additional resources to rebuild our reputation.

Our business could suffer if our information technology systems are disrupted or cease to operate effectively.

We rely heavily on our information technology systems to operate our websites; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise on a timely basis; and maintain cost-efficient operations. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of our computer hardware and software systems and maintain cyber security. Despite efforts to prevent such an occurrence, our information technology systems may be vulnerable from time to time to damage or interruption from computer viruses, power outages, third-party intrusions, inadvertent or intentional breach by our employees and other technical malfunctions. If our systems are damaged, or fail to function properly, we may have to make monetary investments to repair or replace the systems, and we could endure delays in our operations.

While we regularly evaluate our information technology systems and requirements, we are aware of the inherent risks associated with replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance and understanding. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade our systems could cause information to be lost or delayed, including data related to customer orders. Such a loss or delay, especially if the disruption or slowdown occurred during our peak selling seasons, could have a material adverse effect on our results of operations.


14


We may be exposed to risks and costs associated with cyber-attacks, credit card fraud and identity theft that would cause us to incur unexpected expenses and reputation loss.

In the standard course of business, we process customer information, including payment information, through our stores and direct-to-consumer channels. Rapidly evolving technologies, payment capabilities offered and types of cyber-attacks may result in this information being compromised or breached. The retail industry in particular has been the target of many recent cyber-attacks, and as a result, there is heightened concern over the security of personal information transmitted over or accessible through the Internet, consumer identity theft and user privacy. We endeavor to protect consumer identity and payment information through the implementation of security technologies, processes and procedures, including training programs for employees to raise awareness about phishing, malware and other cyber risks and could experience increased costs associated with maintaining these protections as threats of cyber-attacks increase in sophistication and complexity. It is possible that an individual or group could defeat our security measures and access sensitive customer and associate information. Actual or anticipated cyber-attacks may cause us to incur increased costs, including costs to deploy additional personnel and protective technologies, train employees and engage third-party experts and consultants. Exposure of customer data through any means, including through third-party service providers and vendors, could materially harm the Company by, but not limited to, reputation loss, regulatory fines and penalties, legal liability and costs of litigation.

Our reliance on DCs makes us susceptible to disruptions or adverse conditions affecting our supply chain.

We rely on two Company-owned DCs and five third-party DCs to manage the receipt, storage, sorting, packing and distribution of our merchandise. The Company utilizes primarily one contract carrier to ship merchandise and related materials to its North American stores and direct-to-consumer customers, and several contract carriers for its European and Asian stores and direct-to-consumer customers. As a result, our operations are susceptible to local and regional factors, such as system failures, accidents, economic and weather conditions, natural disasters, demographic and population changes, as well as other unforeseen events and circumstances. If our distribution operations were disrupted, our ability to replace inventory in our stores and process direct-to-consumer and wholesale orders could be interrupted negatively impacting sales and could experience increased costs related to these disruptions. Refer to “ITEM 1. BUSINESS,” for a listing of the DCs we rely on.

Changes in cost, availability and quality of raw materials, labor, transportation, and trade relations could cause manufacturing delays and increase our costs.

Changes in the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise could have a material adverse effect on our cost of sales, or our ability to meet customer demand. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton, as well as the cost of compliance with sourcing laws. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. Such factors may be exacerbated by legislation and regulations associated with global climate change. In addition, the cost of labor at many of our third-party manufacturers has been increasing significantly, and as the middle class in developing countries continues to grow, it is unlikely such cost pressure will abate. The Company is also susceptible to fluctuations in the cost of transportation. We may not be able to pass all or a portion of higher raw materials prices or labor or transportation costs on to our customers, which could adversely affect our gross margin and results of our operations. Recently, there has been greater uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, such as the threat of additional tariffs on imported consumer goods from China. Major developments in trade policies, such as the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.


15


We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could result in lost sales and could increase our costs.

We do not own or operate any manufacturing facilities. As a result, the continued success of our operations is tied to our timely receipt of quality merchandise from third-party manufacturers. We source the majority of our merchandise outside of the U.S. through arrangements with approximately 150 vendors which includes foreign manufacturers located throughout the world, primarily in Asia and Central America. Political, social or economic instability in Asia and Central America, or in other regions in which our manufacturers are located, could cause disruptions in trade, including exports to the U.S. A manufacturer’s inability to ship orders in a timely manner or meet our quality standards could cause delays in responding to consumer demands and negatively affect consumer confidence or negatively impact our competitive position, any of which could have a material adverse effect on our financial condition and results of operations.

Other events that could disrupt the timely delivery of our merchandise include new trade law provisions or regulations, reliance on a limited number of shipping carriers, significant labor disputes and significant delays in the delivery of cargo due to port security considerations. Furthermore, we are susceptible to increases in fuel costs which may increase the cost of distribution. If we are not able to pass this cost on to our customers, our financial condition and results of operations could be adversely affected.

We rely on the experience and skills of our senior executive officers and associates, the loss of whom could have a material adverse effect on our business.

Our ability to succeed may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our senior executive officers and associates. Our senior executive officers closely supervise all aspects of our business including the design of our merchandise and the operation of our stores and have substantial experience and expertise in the retail business and have an integral role in the growth and success of our brands. If we were to lose the benefit of the involvement of multiple senior executives or other personnel, our business could be adversely affected. In addition, if unexpected turnover occurs at the associate level without adequate succession plans, the loss of the services of any of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business. Competition for such qualified talent is intense, and we cannot be sure we will be able to attract, retain and develop a sufficient number of qualified individuals in future periods.

Extreme weather conditions, including natural disasters, pandemic disease and other unexpected events, could negatively impact our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, which could result in an interruption to our business and adversely affect our operating results.

Our retail stores, corporate offices, distribution centers, infrastructure projects and direct-to-consumer operations, as well as the operations of our vendors and manufacturers, are vulnerable to damage from natural disasters, pandemic disease and other unexpected events. If any of these events result in damage to our facilities, systems or stores, or the facilities or systems of our vendors or manufacturers, we may experience interruptions in our business until the damage is repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage which exceed our applicable insurance coverage.

In addition, historically, our operations have been seasonal, with a significant amount of net sales and operating income occurring in the fourth fiscal quarter. Severe weather conditions and changes in weather patterns can influence customer trends, consumer traffic and shopping habits. Unseasonable weather may diminish demand for our seasonal merchandise. In addition, severe weather can also decrease customer traffic in our stores and reduce sales and profitability. As a result of this seasonality, net sales and net income during any fiscal quarter cannot be used as an accurate indicator of our annual results. Any factors negatively affecting us during the third and fourth fiscal quarters of any year, including inclement weather, could have a material adverse effect on our financial condition and results of operations for the entire year.


16


LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS.

Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations.

We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows. In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows. In addition, tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted into law. The Act makes broad and significantly complex changes to the U.S. corporate income tax system. Given the complexities associated with the Act, the estimated financial impacts for fiscal 2017 are provisional and subject to further analysis, interpretation and clarification of the Act. In addition, the U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that differs from our interpretations and could result in changes to our estimates. Changes to these estimates during Fiscal 2018 could have a material adverse effect on our business, results of operations and liquidity. Refer to Note 10, “INCOME TAXES,” for further discussion.

Our litigation exposure could have a material adverse effect on our financial condition and results of operations.

We, along with third parties we do business with, are involved, from time to time, in litigation arising in the ordinary course of business. Litigation matters may include, but are not limited to, contract disputes, employment-related actions, labor relations, commercial litigation, intellectual property rights and shareholder actions. Any litigation that we become a party to could be costly and time consuming and could divert our management and key personnel from our business operations. Our current litigation exposure could be impacted by litigation trends, discovery of damaging facts with respect to legal matters pending against us or determinations by judges, juries or other finders of fact that are not in accordance with management’s evaluation of existing claims. Should management’s evaluation prove incorrect, our exposure could greatly exceed expectations and have a material adverse effect on our financial condition, results of operations or cash flows.

Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets.

We believe our core trademarks, Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos, are essential to the effective implementation of our strategy. We have obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries of countries where stores are located or likely to be located in the future. In addition, we own registrations and have pending applications for other trademarks in the U.S. and have applied for or obtained registrations from the registries in many foreign countries in which our stores or our manufacturers are located. There can be no assurance that we will obtain registrations that have been applied for or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. Although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third-party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected.

Because we have not yet registered all of our trademarks in all categories, or in all foreign countries in which we source or offer our merchandise now, or may in the future, our international expansion and our merchandising of products using these marks could be limited. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom we are not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or

17


logos in these jurisdictions could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our merchandise in those non-U.S. jurisdictions.

Changes in the regulatory or compliance landscape and compliance with changing regulations for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results.

We are subject to numerous laws and regulations, including customs, truth-in-advertising, securities laws, consumer protection, general privacy, health information privacy, identity theft, online privacy, employee health and safety, international minimum wage laws, unsolicited commercial communication and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, intellectual property, promotion and sale of merchandise and the operation of retail stores, direct-to-consumer operations and distribution centers. Laws and regulations at the local, state, federal and various international levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. If these laws and regulations were to change, or were violated by our management, associates, suppliers, vendors or other parties with whom we do business, the costs of certain merchandise could increase, or we could experience delays in shipments of our merchandise, be subject to fines or penalties, temporary or permanent store closures, increased regulatory scrutiny or suffer reputational harm, which could reduce demand for our merchandise and adversely affect our business and results of operations. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation including the areas referenced above, could adversely affect our business and results of operations.

In addition, changing regulatory requirements for corporate governance and public disclosure, including SEC regulations and the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) are creating additional complexities for public companies. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”), was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas.

Stockholder activism, the current political environment, financial reform legislation and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations. In addition, the potential requirement to transition to, or converge with, international financial reporting standards in the future may create uncertainty and additional complexities. These changing regulatory requirements may lead to additional compliance costs, as well as the diversion of our management’s time and attention from strategic business activities and could have a significant effect on our reported results for the affected periods.

Our Asset-Based Revolving Credit Agreement and our Term Loan Agreement include restrictive covenants that limit our flexibility in operating our business.

Our Asset-Based Revolving Credit Agreement, as amended, expires on October 19, 2022 and our Term Loan Agreement, as amended, has a maturity date of August 7, 2021. Both our Asset-Based Revolving Credit Agreement and our Term Loan Agreement contain restrictive covenants that, subject to specified exemptions, restrict our ability to incur indebtedness, grant liens, make certain investments, pay dividends or distributions on our capital stock and engage in mergers. The inability to obtain credit on commercially reasonable terms in the future when these facilities expire could adversely impact our liquidity and results of operations. In addition, market conditions could potentially impact the size and terms of a replacement facility or facilities.


ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

18


ITEM 2.
PROPERTIES

The Company’s headquarters and support functions occupy 501 acres, consisting of the home office, distribution and shipping facilities centralized on a campus-like setting in New Albany, Ohio, all of which are owned by the Company. Additionally, the Company leases small facilities to house its human resources, finance, design and sourcing support centers in Hong Kong and New York City, New York, as well as offices in China, Denmark, France, Germany, South Korea, Spain, Switzerland and the United Kingdom. The Company’s home office, distribution and shipping facilities, design support centers and stores are currently suitable and adequate.

All of the retail stores operated by the Company, as of March 28, 2018, are located in leased facilities, primarily in shopping centers. The leases expire at various dates, between 2018 and 2031.

For store count and gross square footage by brand and geography as of February 3, 2018 and January 28, 2017, refer to “STORE ACTIVITY,” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” As of March 28, 2018, the Company’s 868 stores were located as follows:
United States:
Alabama
3

 
Louisiana
5

 
Ohio
22

Arizona
12

 
Maine
3

 
Oklahoma
4

Arkansas
3

 
Maryland
11

 
Oregon
6

California
105

 
Massachusetts
24

 
Pennsylvania
27

Colorado
5

 
Michigan
15

 
Rhode Island
2

Connecticut
15

 
Minnesota
9

 
South Carolina
8

Delaware
5

 
Mississippi
3

 
Tennessee
12

District Of Columbia
1

 
Missouri
4

 
Texas
65

Florida
67

 
Montana
1

 
Utah
5

Georgia
18

 
Nebraska
1

 
Virginia
20

Hawaii
7

 
Nevada
8

 
Washington
15

Idaho
2

 
New Hampshire
8

 
West Virginia
3

Illinois
26

 
New Jersey
35

 
Wisconsin
5

Indiana
10

 
New Mexico
3

 
Puerto Rico
2

Iowa
4

 
New York
42

 
 
 
Kansas
4

 
North Carolina
15

 
 
 
Kentucky
8

 
North Dakota
1

 
 
 
 
 
 
 
 
 
 
 
International:
Austria
6

 
Hong Kong
4

 
Republic of Korea
2

Belgium
3

 
Ireland
2

 
Singapore
1

Canada
18

 
Italy
11

 
Spain
12

China
28

 
Japan
11

 
Sweden
3

Denmark
1

 
Kuwait
2

 
United Kingdom
34

France
15

 
Netherlands
4

 
United Arab Emirates
6

Germany
25

 
Poland
1

 
 
 

Refer to “Distribution of Merchandise Inventory,” in “ITEM 1. BUSINESS,” for information regarding the DCs the Company relies on to manage the receipt, storage, sorting, packing and distribution of its merchandise.

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ITEM 3.
LEGAL PROCEEDINGS

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 of approximately $18 million for certain legal contingencies, which are classified within other current liabilities on the Consolidated Balance Sheet included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K. Actual liabilities may differ from the amounts recorded, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There are certain claims and legal proceedings pending against the Company for which accruals have not been established.


ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


20


PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

A&F’s Class A Common Stock (“Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.” The table below sets forth the high and low sales prices of A&F’s Common Stock on the New York Stock Exchange for Fiscal 2017 and Fiscal 2016:
 
 
Sales Price
 
 
High
 
Low
Fiscal 2017
 
 
 
 
4th quarter
 
$
23.53

 
$
11.62

3rd quarter
 
$
14.82

 
$
9.03

2nd quarter
 
$
14.50

 
$
8.81

1st quarter
 
$
13.75

 
$
10.50

Fiscal 2016
 
 
 
 
4th quarter
 
$
17.35

 
$
11.29

3rd quarter
 
$
23.29

 
$
14.71

2nd quarter
 
$
27.37

 
$
16.49

1st quarter
 
$
32.83

 
$
23.45


Dividends are declared at the discretion of A&F’s Board of Directors. A quarterly dividend, of $0.20 per share outstanding, was declared in each of February, May, August and November in Fiscal 2017 and Fiscal 2016. Dividends were paid in each of March, June, September and December in Fiscal 2017 and Fiscal 2016. A&F’s Board of Directors reviews the dividend on a quarterly basis and establishes the dividend rate based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors which the Board of Directors deem relevant.

As of March 28, 2018, there were approximately 3,000 stockholders of record. However, when including investors holding shares of Common Stock in broker accounts under street name, A&F estimates that there are approximately 28,200 stockholders.

The following table provides information regarding the purchase of shares of the Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the quarterly period ended February 3, 2018:
Period (fiscal month)
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares  Purchased as
Part of Publicly
Announced Plans or
Programs (2)
 
Maximum Number of
Shares that May Yet
be Purchased under
the Plans or
Programs (3)
October 29, 2017 through November 25, 2017
 
804

 
$
14.55

 

 
6,503,656

November 26, 2017 through December 30, 2017
 
17,752

 
$
17.02

 

 
6,503,656

December 31, 2017 through February 3, 2018
 
5,062

 
$
20.11

 

 
6,503,656

Total
 
23,618

 
$
17.59

 

 
6,503,656


(1) 
All of the 23,618 shares of A&F’s Common Stock purchased during the fourteen-week period ended February 3, 2018 represented shares that were withheld for tax payments due upon the vesting of restricted stock units.
(2) 
No shares were repurchased during the fourteen-week period ended February 3, 2018 pursuant to A&F’s publicly announced stock repurchase authorization. On August 14, 2012, A&F’s Board of Directors authorized the repurchase of up to 10.0 million shares of A&F’s Common Stock, which was announced on August 15, 2012.
(3) 
The number shown represents, as of the end of each period, the maximum number of shares of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased from time-to-time, depending on market conditions.

21


The following graph shows the changes, over the five-year period ended February 3, 2018 (the last day of A&F’s Fiscal 2017) in the value of $100 invested in (i) shares of A&F’s Common Stock; (ii) Standard & Poor’s 500 Stock Index (the “S&P 500 Index”); (iii) Standard & Poor’s Midcap 400 Stock Index (the “S&P Midcap 400 Index”); and (iv) Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail Index”), including reinvestment of dividends. The plotted points represent the closing price on the last trading day of the fiscal year indicated.


PERFORMANCE GRAPH (1) 

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Abercrombie & Fitch Co., the S&P 500 Index, the S&P Midcap 400 Index and the S&P Apparel Retail Index

item5performancegraph.jpg

*$100 invested on 2/2/13 in stock or 1/31/13 in index, including reinvestment of dividends. Indexes calculated on month-end basis.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.

In Fiscal 2013, A&F was removed as a component of the S&P 500 Index and became a component of the S&P Midcap 400 Index.
 
(1)  
This graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to SEC Regulation 14A or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that A&F specifically requests that the graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.

22


ITEM 6.
SELECTED FINANCIAL DATA

The following financial information is derived from our Consolidated Financial Statements. The information presented below should be read in conjunction with “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the Company’s Consolidated Financial Statements and notes thereto included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K. We have also included certain nonfinancial information to enhance the understanding of our business.

(in thousands, except per share and per square foot amounts, return on average stockholders' equity, comparable sales, ratios and store data)
Fiscal 2017 (1)
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
 
Fiscal 2013
Statements of operations data
 
 
 
 
 
 
 
 
 
Net sales
$
3,492,690

 
$
3,326,740

 
$
3,518,680

 
$
3,744,030

 
$
4,116,897

Gross profit (2)
$
2,083,842

 
$
2,028,568

 
$
2,157,543

 
$
2,313,570

 
$
2,575,435

Operating income
$
72,050

 
$
15,188

 
$
72,838

 
$
113,519

 
$
80,823

Net income attributable to A&F
$
7,094

 
$
3,956

 
$
35,576

 
$
51,821

 
$
54,628

Net income per basic share attributable to A&F
$
0.10

 
$
0.06

 
$
0.52

 
$
0.72

 
$
0.71

Net income per diluted share attributable to A&F
$
0.10

 
$
0.06

 
$
0.51

 
$
0.71

 
$
0.69

Basic weighted-average shares outstanding
68,391

 
67,878

 
68,880

 
71,785

 
77,157

Diluted weighted-average shares outstanding
69,403

 
68,284

 
69,417

 
72,937

 
78,666

Cash dividends declared per share
$
0.80

 
$
0.80

 
$
0.80

 
$
0.80

 
$
0.80

Balance sheet data
 
 
 
 
 
 
 
 
 
Working capital (3)
$
756,992

 
$
653,300

 
$
644,277

 
$
679,016

 
$
752,344

Current ratio (4)
2.49

 
2.34

 
2.20

 
2.40

 
2.32

Cash and equivalents
$
675,558

 
$
547,189

 
$
588,578

 
$
520,708

 
$
600,116

Total assets
$
2,325,692

 
$
2,295,757

 
$
2,433,039

 
$
2,505,167

 
$
2,850,997

Borrowings, net
$
249,686

 
$
262,992

 
$
286,235

 
$
293,412

 
$
135,000

Leasehold financing obligations
$
50,653

 
$
46,397

 
$
47,440

 
$
50,521

 
$
60,726

Total long-term liabilities
$
565,675

 
$
557,718

 
$
602,614

 
$
629,510

 
$
553,282

Total stockholders’ equity
$
1,252,471

 
$
1,252,039

 
$
1,295,722

 
$
1,389,701

 
$
1,729,493

Return on average stockholders’ equity (5)
1
%
 
0
 %
 
3
 %
 
3
 %
 
3
 %
Other financial and operating data
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
285,704

 
$
185,307

 
$
310,009

 
$
312,480

 
$
175,493

Net cash used for investing activities
$
(106,798
)
 
$
(136,746
)
 
$
(122,567
)
 
$
(175,074
)
 
$
(173,861
)
Net cash used for financing activities
$
(74,813
)
 
$
(84,509
)
 
$
(106,943
)
 
$
(181,453
)
 
$
(40,831
)
Depreciation and amortization
$
194,549

 
$
195,414

 
$
213,680

 
$
226,421

 
$
235,240

Capital expenditures
$
107,001

 
$
140,844

 
$
143,199

 
$
174,624

 
$
163,924

Free cash flow (6)
$
178,703

 
$
44,463

 
$
166,810

 
$
137,856

 
$
11,569

Change in comparable sales (7)
3
%
 
(5
)%
 
(3
)%
 
(8
)%
 
(11
)%
Net store sales per average gross square footage
$
359

 
$
343

 
$
360

 
$
381

 
$
417

Number of stores at end of period
868

 
898

 
932

 
969

 
1,006

Gross store square footage at end of period
6,710

 
7,007

 
7,292

 
7,517

 
7,736


(1) 
Fiscal 2017 was a fifty-three week year.
(2) 
Gross profit is derived from cost of sales, exclusive of depreciation and amortization.
(3) 
Working capital is computed by subtracting current liabilities from current assets.
(4) 
Current ratio is computed by dividing current assets by current liabilities.
(5) 
Return on average stockholders’ equity is computed by dividing net income attributable to A&F by the average stockholders’ equity balance.
(6) 
Free cash flow is computed by subtracting capital expenditures from net cash provided by operating activities, both of which are disclosed in the table above preceding the measure of free cash flow.
(7) 
Comparable sales is defined as the aggregate of: (1) year-over-year sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation, and (2) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation. Excludes revenue other than store and direct-to-consumer sales.

23


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

BUSINESS SUMMARY

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.

The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year, as was the case for Fiscal 2017. For purposes of this “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” Fiscal 2017 is compared to Fiscal 2016 and Fiscal 2016 is compared to Fiscal 2015.

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.

SUMMARY RESULTS OF OPERATIONS

The table below summarizes the Company’s results of operations and reconciles financial measures determined in accordance with accounting principles generally accepted in the U.S. (“GAAP”) to non-GAAP financial measures for Fiscal 2017 and Fiscal 2016, respectively. Additional discussion about why the Company believes that these non-GAAP financial measures are useful to investors is provided under “NON-GAAP FINANCIAL MEASURES.”
 
 
Fiscal 2017 (1)
 
Fiscal 2016
(in thousands, except change in net sales, change in comparable sales, gross profit rate and per share amounts)
 
GAAP
 
Excluded Items (2)
 
Non-GAAP
 
GAAP
 
Excluded Items (2)
 
Non-GAAP
Net sales
 
$
3,492,690

 
 
 
 
 
$
3,326,740

 
 
 
 
Change in net sales
 
5
%
 
 
 
 
 
(5
)%
 
 
 
 
Change in comparable sales (3)
 
 
 
 
 
3
%
 
 
 
 
 
(5
)%
Gross profit rate
 
59.7
%
 
 
 
 
 
61.0
 %
 
 
 
 
Operating income
 
$
72,050

 
$
(28,731
)
 
$
100,781

 
$
15,188

 
$
11,926

 
$
3,262

Net income (loss) attributable to A&F
 
$
7,094

 
$
(37,911
)
 
$
45,005

 
$
3,956

 
$
8,026

 
$
(4,070
)
Net income (loss) per diluted share attributable to A&F
 
$
0.10

 
$
(0.55
)
 
$
0.65

 
$
0.06

 
$
0.12

 
$
(0.06
)

(1) 
Fiscal 2017 was a fifty-three week year.
(2) 
Refer to “RESULTS OF OPERATIONS,” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” for details on excluded items.
(3) 
Comparable sales is defined as the aggregate of: (1) year-over-year sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation, and (2) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation. Excludes revenue other than store and direct-to-consumer sales.

As of February 3, 2018, the Company had $675.6 million in cash and equivalents, and $253.3 million in gross borrowings outstanding under its term loan facility. Net cash provided by operating activities was $285.7 million for Fiscal 2017. The Company used cash of $107.0 million for capital expenditures, $54.4 million to pay dividends and $15.0 million to pay down debt during Fiscal 2017.

As of January 28, 2017, the Company had $547.2 million in cash and equivalents, and $268.3 million in gross borrowings outstanding under its term loan facility. Net cash provided by operating activities was $185.3 million for Fiscal 2016. The Company used cash of $140.8 million for capital expenditures, $54.1 million to pay dividends and $25.0 million to pay down debt during Fiscal 2016.

24


CURRENT TRENDS AND OUTLOOK

By staying close to our customer, executing to our brand playbooks and maintaining our disciplined approach to expense management we delivered sequential, quarterly comparable sales improvement throughout the year. This culminated in positive comparable sales for the fourth quarter across brands, channels and geographies and operating income growth for the year. Overall, Fiscal 2017 was a year of significant progress. We achieved several important milestones, including Hollister growing to $2 billion in sales, Abercrombie returning to positive comparable sales in the fourth quarter and record digital sales across all brands. We continue to improve the customer experience with ongoing investments in loyalty programs, store and direct-to-consumer experience and omnichannel capabilities.

With a strong balance sheet, proven cost management discipline and a clear plan for building on the foundations we laid to date, we will continue to focus our attention and our investments on engaging our customers with compelling assortments and new experiences, in clearly defined brand voices, positioning our business for sustainable long-term growth.

Additional information pertaining to our results for Fiscal 2015, Fiscal 2016 and Fiscal 2017 follows:

item7mdagraphs.jpg

item7mdagraphslegend.jpg


(1) 
Refer to “RESULTS OF OPERATIONS,” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” for details on excluded items.
(2) 
Includes Abercrombie & Fitch and abercrombie kids brands.

25


For Fiscal 2018, we expect:

Comparable sales to be up low-single digits.
Net sales to be up low-single digits, with benefits from changes in foreign currency exchange rates largely offset by the adverse impact from the loss of the additional week in Fiscal 2017.
Changes in foreign currency exchange rates to benefit net sales and operating income.
A gross profit rate up slightly from the Fiscal 2017 rate of 59.7%, with some continuing pressure in the first quarter.
Operating expenses, excluding other operating income, to be up approximately 1% from Fiscal 2017 adjusted non-GAAP operating expense of $2 billion, resulting in expense leverage, while still supporting investments in strategic initiatives.
Other operating income to not be significant, including as a result of gift card breakage now being recognized within net sales subsequent to the adoption of the new revenue recognition accounting standard.
A weighted average diluted share count of approximately 71 million shares, excluding the effect of potential share buybacks.

We estimate the core tax rate to be in the mid-to high-20s based on the Act. However, for Fiscal 2018, we expect to incur discrete non-cash income tax charges of approximately $10 million related to share-based compensation accounting standards that went into effect in Fiscal 2017. As a result, we expect the full year effective tax rate to be in the mid-to high-30s. For the first quarter of Fiscal 2018, we expect the effective tax rate to be in the low double-digits to low teens, including approximately $8 million of the discrete noncash income tax charges related to share-based compensation.

With regard to capital allocation, we are targeting capital expenditures to be approximately $130 million for Fiscal 2018, including approximately $85 million for store updates and new stores and approximately $45 million for direct-to-consumer and omnichannel capabilities, information technology and other projects.

We plan to open 21 full-price stores in Fiscal 2018, including 13 Hollister and eight Abercrombie stores. In addition, we expect to convert ten Abercrombie stores to the new, smaller square-foot prototype formats, and remodel approximately 40 Hollister stores, six of which are expected to be right-sized to smaller footprints. We also anticipate closing up to 60 stores in the U.S. during Fiscal 2018 through natural lease expirations.

STORE ACTIVITY

During Fiscal 2017, the Company opened nine stores, including six Abercrombie and three Hollister stores. In addition, the Company converted four Abercrombie stores to the new, smaller square-foot prototype formats, and remodeled 35 Hollister stores, 12 of which were right-sized to smaller footprints. The Company also closed 39 stores in Fiscal 2017, primarily in the U.S.

Store count and gross square footage by brand and geography for Fiscal 2017 and Fiscal 2016 were as follows:
 
Hollister (1)
Abercrombie (2)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
January 30, 2016
414

 
139

 
340

 
39

 
754

 
178

New
3

 
6

 
5

 
6

 
8

 
12

Closed
(19
)
 

 
(34
)
 
(1
)
 
(53
)
 
(1
)
January 28, 2017
398

 
145

 
311

 
44

 
709

 
189

New
3

 

 
4

 
2

 
7

 
2

Closed
(7
)
 
(1
)
 
(30
)
 
(1
)
 
(37
)
 
(2
)
February 3, 2018
394

 
144

 
285

 
45

 
679

 
189

Gross square footage (in thousands):
 
 
 
 
 
 
 
 
 
 
 
January 28, 2017
2,737

 
1,218

 
2,411

 
641

 
5,148

 
1,859

February 3, 2018
2,681

 
1,200

 
2,210

 
619

 
4,891

 
1,819


(1) 
Excludes five international franchise stores as of February 3, 2018, three international franchise stores as of January 28, 2017 and two international franchise stores as of January 30, 2016.
(2) 
Abercrombie includes the Company’s Abercrombie & Fitch and abercrombie kids brands. Excludes four international franchise stores as of February 3, 2018, and one international franchise store as of both January 28, 2017 and January 30, 2016.

26


NON-GAAP FINANCIAL MEASURES

This Annual Report on Form 10-K includes discussion of certain financial measures under “RESULTS OF OPERATIONS” on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is useful to investors as it provides a measure of the Company’s operating performance excluding the effect of certain items which the Company believes do not reflect its future operating outlook, and therefore supplements investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used supplemental to, and not as an alternative to, the Company’s GAAP financial results and may not be calculated in the same manner as similar measures presented by other companies.

The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period's exchange rates to the prior year's results and is net of the year-over-year impact from hedging.

In addition, the Company provides comparable sales, defined as the aggregate of (1) year-over-year sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuation, and (2) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuation. Comparable sales excludes revenue other than store and direct-to-consumer sales. Management uses comparable sales to understand the drivers of net sales year-over-year changes as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales.

The Company also discloses free cash flow in this Annual Report on Form 10-K, calculated as cash flows generated from operations less cash flows used for capital expenditures. The Company uses free cash flow as a measure to assess the Company’s liquidity and determine cash remaining for general corporate and strategic purposes as well as the amount of cash available to return to stockholders pursuant to the Company's capital allocation strategy. The most directly comparable GAAP financial measure is net cash provided by operating activities.

The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding certain of the following items, as applicable:
Financial measures (1)
 
Excluded items
Cost of sales, exclusive of depreciation and amortization
 
Inventory write-down, net
Gross profit
 
Inventory write-down, net
Stores and distribution expense
 
Store fixture disposal; charges related to the Company's profit improvement initiative; and lease termination and store closure costs
Marketing, general and administrative expense
 
Indemnification recovery; legal charges; and charges related to the Company's profit improvement initiative
Other operating income, net
 
Claims settlement benefits; and lease termination and store closure costs
Operating income
 
Inventory write-down, net; store fixture disposal; charges related to the Company's profit improvement initiative; lease termination and store closure costs; asset impairment; indemnification recovery; legal charges; claims settlement benefits; and restructuring benefits
Net income (loss) and net income (loss) per share attributable to A&F (2)
 
Inventory write-down, net; store fixture disposal; charges related to the Company's profit improvement initiative; lease termination and store closure costs; asset impairment; indemnification recovery; legal charges; claims settlement benefits; restructuring benefits; discrete net tax charges related to the Act; and the tax effect of excluded items

(1) 
Certain of these financial measures are also expressed as a percentage of net sales.
(2) 
The Company also presents income tax expense (benefit) and the effective tax rate on both a GAAP and on an adjusted non-GAAP basis excluding the items listed under “Operating income,” as applicable, in the table above and discrete net tax charges related to the Act. The Company computed the tax effect of excluded items as the difference between the tax provision calculation on a GAAP basis and an adjusted non-GAAP basis.

27


KEY BUSINESS INDICATORS

The following measurements are among the key business indicators reviewed by various members of management to gauge the Company’s results:

Comparable sales;
Comparative results of operations with the prior year’s results converted at the current year’s foreign currency exchange rate to remove the impact of foreign currency exchange rate fluctuation;
Gross profit and gross profit rate;
Cost of sales, exclusive of depreciation and amortization, as a percentage of net sales;
Stores and distribution expense as a percentage of net sales;
Marketing, general and administrative expense as a percentage of net sales;
Operating income and operating income as a percentage of net sales;
Net income and net income attributable to A&F;
Inventory per gross square foot and inventory to sales ratio;
Cash flow and liquidity determined by the Company’s current ratio, working capital and free cash flow;
Store metrics such as net sales per gross square foot, average number of transactions per store and store contribution (defined as store sales less direct costs of operating the store);
Transactional metrics such as traffic and conversion, performance across key product categories, average unit retail, average unit cost, average units per transaction and average transaction values;
Return on invested capital and return on equity; and
Customer-centric metrics such as customer satisfaction, brand health scores and certain metrics related to the loyalty programs.

While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.


28


RESULTS OF OPERATIONS

FISCAL 2017 COMPARED TO FISCAL 2016 AND FISCAL 2016 COMPARED TO FISCAL 2015

Net Sales
 
Fiscal 2017
 
Fiscal 2016
 
 
 
 
 
Fiscal 2015
 
 
 
 
(in thousands)
 
 
 
 
% Change
 
Change in Comparable Sales (1)
 
 
 
% Change
 
Change in Comparable Sales (1)
Hollister
$
2,038,598

 
$
1,839,716

 
11%
 
8%
 
$
1,877,688

 
(2)%
 
0%
Abercrombie (2)
1,454,092

 
1,487,024

 
(2)%
 
(2)%
 
1,640,992

 
(9)%
 
(11)%
Total net sales
$
3,492,690

 
$
3,326,740

 
5%
 
3%
 
$
3,518,680

 
(5)%
 
(5)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
$
2,208,618

 
$
2,123,808

 
4%
 
4%
 
$
2,282,040

 
(7)%
 
(5)%
International
1,284,072

 
1,202,932

 
7%
 
1%
 
1,236,640

 
(3)%
 
(6)%
Total net sales
$
3,492,690

 
$
3,326,740

 
5%
 
3%
 
$
3,518,680

 
(5)%
 
(5)%

(1) 
Comparable sales is defined as the aggregate of: (1) year-over-year sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation, and (2) year-over-year direct-to-consumer sales with the prior year’s net sales converted at the current year’s exchange rate to remove the impact of currency fluctuation. Excludes revenue other than store and direct-to-consumer sales.
(2) 
Includes Abercrombie & Fitch and abercrombie kids brands.

For Fiscal 2017, net sales increased 5% compared to Fiscal 2016, primarily attributable to a 3% increase in comparable sales, with a 8% increase in comparable sales for Hollister, partially offset by a 2% decrease in comparable sales for Abercrombie. In addition, the additional week in Fiscal 2017 benefited net sales by approximately $41 million, or 1%, and changes in foreign currency exchange rates benefited net sales by approximately $20 million, or 1%.

For Fiscal 2016, net sales decreased 5% compared to Fiscal 2015, primarily attributable to a 5% decrease in comparable sales, with flat comparable sales for Hollister offset by a 11% percent decrease in comparable sales for Abercrombie.

Cost of Sales, Exclusive of Depreciation and Amortization
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Cost of sales, exclusive of depreciation and amortization
$
1,408,848

 
40.3%
 
$
1,298,172

 
39.0%
 
$
1,361,137

 
38.7%
Deduct: inventory write-down, net (1)

 
0.0%
 

 
0.0%
 
(20,647
)
 
(0.6)%
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization
$
1,408,848

 
40.3%
 
$
1,298,172

 
39.0%
 
$
1,340,490

 
38.1%
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
2,083,842

 
59.7%
 
$
2,028,568

 
61.0%
 
$
2,157,543

 
61.3%
Deduct: inventory write-down, net (1)

 
0.0%
 

 
0.0%
 
20,647

 
0.6%
Adjusted non-GAAP gross profit
$
2,083,842

 
59.7%
 
$
2,028,568

 
61.0%
 
$
2,178,190

 
61.9%

(1)
Inventory write-down charges related to a Fiscal 2015 decision to accelerate the disposition of certain aged merchandise, net of recoveries.

For Fiscal 2017, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 130 basis points as compared to Fiscal 2016, primarily due to lower average unit retail, including the adverse effects from changes in foreign currency exchange rates of approximately 10 basis points.

For Fiscal 2016, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 30 basis points as compared to Fiscal 2015, which included a $20.6 million net inventory write-down. Excluding the Fiscal 2015 $20.6 million net inventory write-down, Fiscal 2016 adjusted non-GAAP cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 90 basis points as compared to Fiscal 2015, primarily due to the adverse effects from changes in foreign currency exchange rates of approximately 60 basis points and lower average unit retail.


29


Stores and Distribution Expense
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Stores and distribution expense
$
1,542,425

 
44.2%
 
$
1,578,460

 
47.4%
 
$
1,604,214

 
45.6%
Deduct:
 
 
 
 
 
 
 
 
 
 
 
Store fixture disposal

 
0.0%
 

 
0.0%
 
(4,200
)
 
(0.1)%
Lease termination and store closure costs

 
0.0%
 

 
0.0%
 
(1,756
)
 
0.0%
Charges related to the Company’s profit improvement initiative

 
0.0%
 

 
0.0%
 
(709
)
 
0.0%
Adjusted non-GAAP stores and distribution expense
$
1,542,425

 
44.2%
 
$
1,578,460

 
47.4%
 
$
1,597,549

 
45.4%

For Fiscal 2017, stores and distribution expense as a percentage of net sales decreased by approximately 320 basis points as compared to Fiscal 2016, which included lease termination charges of $15.6 million related to the A&F flagship store in Hong Kong, primarily due to the leveraging effect from higher net sales and expense reduction efforts.

For Fiscal 2016, stores and distribution expense as a percentage of net sales increased by approximately 180 basis points as compared to Fiscal 2015, primarily due to the deleveraging effect from lower net sales, higher direct-to-consumer expense and lease termination charges of $15.6 million related to the A&F flagship store in Hong Kong, partially offset by the realization of savings on lower sales and expense reduction efforts. Excluding items presented above, Fiscal 2016 adjusted non-GAAP stores and distribution expense as a percent of net sales increased by approximately 200 basis points as compared to Fiscal 2015.

For Fiscal 2017, shipping and handling costs associated with direct-to-consumer operations, including costs incurred physically move product to the customer and costs to store, move and prepare product for shipment, were $150.7 million as compared to $125.4 million for Fiscal 2016 and $115.0 million for Fiscal 2015.


30


Marketing, General and Administrative Expense
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Marketing, general and administrative expense
$
471,914

 
13.5%
 
$
453,202

 
13.6%
 
$
470,321

 
13.4%
Deduct:
 
 
 
 
 
 
 
 
 
 
 
Legal charges (1)
(15,070
)
 
(0.4)%
 

 
0.0%
 
(15,753
)
 
(0.4)%
Indemnification recovery (2)

 
0.0%
 
6,000

 
0.2%
 

 
0.0%
Charges related to the Company’s profit improvement initiative

 
0.0%
 

 
0.0%
 
(1,770
)
 
(0.1)%
Adjusted non-GAAP marketing, general and administrative expense
$
456,844

 
13.1%
 
$
459,202

 
13.8%
 
$
452,798

 
12.9%

(1)
Fiscal 2017 includes legal charges of $11.1 million in connection with the settlement of two class action lawsuits, subject to court approval, related to alleged wage and hour practices and accrued charges of $4.0 million related to other alleged wage and hour legal matters. Fiscal 2015 includes accrued expense for certain then proposed legal settlements.
(2)
Includes benefits related to an indemnification recovery of certain legal settlements which were recognized in Fiscal 2015.

For Fiscal 2017, marketing, general and administrative expense as a percentage of net sales decreased by approximately 10 basis points as compared to Fiscal 2016, primarily due to expense reduction efforts and the leveraging effect from higher net sales, partially offset by the net effect of the excluded items presented above and increases in performance-based compensation and marketing expenses. Excluding items presented above, Fiscal 2017 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales decreased by approximately 70 basis points as compared to Fiscal 2016.

For Fiscal 2016, marketing, general and administrative expense as a percentage of net sales increased by approximately 20 basis points as compared to Fiscal 2015, primarily due to the deleveraging effect from lower net sales and higher marketing expenses, partially offset by the net year-over-year impact of the excluded items presented above, lower compensation expense and expense reduction efforts. Excluding items presented above, Fiscal 2016 adjusted non-GAAP marketing, general and administrative expense as a percentage of net sales increased by approximately 90 basis points as compared to Fiscal 2015.


31


Restructuring Benefit

There were no restructuring benefits in Fiscal 2017 or Fiscal 2016. For Fiscal 2015, benefits associated with the restructuring of the Gilly Hicks brand were $1.6 million, which were excluded from adjusted non-GAAP results.

Asset Impairment

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.

Other Operating Income, Net
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Other operating income, net
$
16,938

 
0.5%
 
$
26,212

 
0.8%
 
$
6,441

 
0.2%
Deduct:
 
 
 
 
 
 
 
 
 
 
 
Claims settlement benefits (1)

 
0.0%
 
(12,282
)
 
(0.4)%
 

 
0.0%
Lease termination and store closure costs (2)

 
0.0%
 

 
0.0%
 
2,211

 
0.1%
Adjusted non-GAAP other operating income, net
$
16,938

 
0.5%
 
$
13,930

 
0.4%
 
$
8,652

 
0.2%

(1)
Includes benefits related to a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill.
(2)
Includes charges related to a release of cumulative translation adjustment as the Company substantially completed the liquidation of its Australian operations.

For Fiscal 2017, other operating income, net, as a percentage of net sales decreased by approximately 30 basis points as compared to Fiscal 2016. Excluding items presented above, Fiscal 2017 adjusted non-GAAP other operating income, net, as a percentage of net sales increased by approximately 10 basis points as compared to Fiscal 2016, as higher foreign currency exchange rate related gains more than offset lower gift card breakage.

For Fiscal 2016, other operating income, net, as a percentage of net sales increased by approximately 60 basis points as compared to Fiscal 2015. Excluding items presented above, Fiscal 2016 adjusted non-GAAP other operating income, net, as a percentage of net sales increased by approximately 20 basis points as compared to Fiscal 2015, primarily due to higher gift card breakage from the initial recognition of international gift card breakage of $4.8 million and higher foreign currency exchange rate related gains in Fiscal 2016, partially offset by insurance recoveries of $2.2 million in Fiscal 2015 .


32


Operating Income
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Operating income
$
72,050

 
2.1%
 
$
15,188

 
0.5%
 
$
72,838

 
2.1%
Deduct:
 
 
 
 
 
 
 
 
 
 
 
Legal charges (1)
15,070

 
0.4%
 

 
0.0%
 
15,753

 
0.4%
Asset impairment
13,661

 
0.4%
 
6,356

 
0.2%
 
18,209

 
0.5%
Indemnification recovery (2)

 
0.0%
 
(6,000
)
 
(0.2)%
 

 
0.0%
Claims settlement benefits (3)

 
0.0%
 
(12,282
)
 
(0.4)%
 

 
0.0%
Inventory write-down, net (4)

 
0.0%
 

 
0.0%
 
20,647

 
0.6%
Store fixture disposal

 
0.0%
 

 
0.0%
 
4,200

 
0.1%
Lease termination and store closure costs (5)

 
0.0%
 

 
0.0%
 
3,967

 
0.1%
Charges related to the Company’s profit improvement initiative

 
0.0%
 

 
0.0%
 
2,479

 
0.1%
Restructuring benefit

 
0.0%
 

 
0.0%
 
(1,598
)
 
0.0%
Adjusted non-GAAP operating income
$
100,781

 
2.9%
 
$
3,262

 
0.1%
 
$
136,495

 
3.9%

(1)
Fiscal 2017 includes legal charges of $11.1 million in connection with the settlement of two class action lawsuits, subject to court approval, related to alleged wage and hour practices and accrued charges of $4.0 million related to other alleged wage and hour legal matters. Fiscal 2015 includes accrued expense for certain then proposed legal settlements.
(2)
Includes benefits related to an indemnification recovery of certain legal settlements which were recognized in Fiscal 2015.
(3)
Includes benefits related to a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill.
(4)
Includes inventory write-down charges related to a decision to accelerate the disposition of certain aged merchandise, net of recoveries.
(5)
Includes charges related to a release of cumulative translation adjustment as the Company substantially completed the liquidation of its Australian operations.

For Fiscal 2017, operating income as a percentage of net sales increased by approximately 160 basis points as compared to Fiscal 2016, primarily driven by the leveraging effect from higher net sales and expense reduction efforts, partially offset by a reduction in the gross profit rate, increases in performance-based compensation and marketing expenses and the net year-over-year impact of the excluded items in the above table. Excluding items presented above, Fiscal 2017 adjusted non-GAAP operating income as a percentage of net sales increased approximately 280 basis points as compared to Fiscal 2016.

For Fiscal 2016, operating income as a percentage of net sales decreased by approximately 160 basis points as compared to Fiscal 2015, primarily driven by the deleveraging effect due to lower net sales, a reduction in the gross profit rate and higher marketing and direct-to-consumer expense, partially offset by the net year-over-year impact of the excluded items presented above and expense reduction efforts. Excluding items presented above, Fiscal 2016 adjusted non-GAAP operating income as a percentage of net sales decreased approximately 380 basis points as compared Fiscal 2015.

Interest Expense, Net
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Interest expense
$
22,973

 
0.7%
 
$
23,078

 
0.7%
 
$
22,601

 
0.6%
Interest income
(6,084
)
 
(0.2)%
 
(4,412
)
 
(0.1)%
 
(4,353
)
 
(0.1)%
Interest expense, net
$
16,889

 
0.5%
 
$
18,666

 
0.6%
 
$
18,248

 
0.5%

For Fiscal 2017, interest expense, net was $16.9 million as compared to $18.7 million and $18.2 million for Fiscal 2016 and Fiscal 2015, respectively. In each year, interest expense, net primarily consisted of interest expense on borrowings outstanding under the Company’s term loan facility, partially offset by realized gains from the trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”) and interest income earned on the Company’s investments and cash holdings.

For Fiscal 2017, interest expense, net decreased as compared to Fiscal 2016, primarily due to higher interest income earned on the Company's investments and cash holdings and a decrease in interest expense, primarily due to a reduction in the average principal balance of debt outstanding.


33


Income Tax Expense (Benefit)
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands, except ratios)
 
 
Effective Tax Rate
 
 
 
Effective Tax Rate
 
 
 
Effective Tax Rate
Income tax expense (benefit)
$
44,636

 
80.9%
 
$
(11,196
)
 
321.9%
 
$
16,031

 
29.4%
Deduct:
 
 
 
 
 
 
 
 
 
 
 
Tax effect (1)
10,756

 
 
 
(3,900
)
 
 
 
21,186

 
 
Tax Cuts and Jobs Act of 2017 charges (2)
(19,936
)
 

 

 
 
 

 
 
Adjusted non-GAAP tax income tax expense (benefit)
$
35,456

 
42.3%
 
$
(15,096
)
 
98.0%
 
$
37,217

 
31.5%

(1) 
Refer to Operating Incomefor details of excluded items. The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and an adjusted non-GAAP basis.
(2) 
Discrete net tax charges related to the Act, primarily associated with the one-time deemed repatriation tax on accumulated foreign earnings.

For Fiscal 2017, the effective tax rate was 80.9% as compared to 321.9% for Fiscal 2016, which was impacted by jurisdictional mix on low levels of absolute income. In Fiscal 2017, the effective tax rate was impacted by discrete net income tax charges of $19.9 million related to the Act, primarily associated with the one-time deemed repatriation tax on accumulated foreign earnings, and discrete non-cash income tax charges of $10.6 million related to new share-based compensation accounting standards that went into effect in Fiscal 2017. Excluding the tax effect of items presented above under Operating Income,” and charges related to the Act of $19.9 million, the adjusted non-GAAP effective tax rate was 42.3% for Fiscal 2017 compared to 98.0% for Fiscal 2016.

For Fiscal 2016, the effective tax rate was 321.9% as compared to 29.4% for Fiscal 2015. Excluding the tax effect of items presented above under Operating Income,” the adjusted non-GAAP effective tax rate was 98.0% for Fiscal 2016 compared to 31.5% for Fiscal 2015. The effective tax rate and the adjusted non-GAAP effective tax rate for Fiscal 2016 reflect a benefit of $4.5 million related to the realization of foreign currency losses and a discrete benefit of $2.4 million related to a tax regulatory change, as well as the impact of jurisdictional mix on low absolute levels of income. In Fiscal 2015, the effective tax rate and the adjusted non-GAAP effective tax rate reflect discrete benefits of $7.4 million and $5.4 million, respectively, related to a release of a valuation allowance and other discrete tax items.

As of February 3, 2018, the Company had approximately $61.4 million in net deferred tax assets, which included approximately $13.3 million and $13.8 million of net deferred tax assets in Japan and the United Kingdom, respectively. As of January 28, 2017, the Company had approximately $90.4 million in net deferred tax assets, which included approximately $13.5 million and $11.3 million of net deferred tax assets in Japan and Switzerland, respectively. The realization of the net deferred tax assets will depend upon the future generation of sufficient taxable profits in these jurisdictions. While the Company believes it is more likely than not that the net deferred tax assets will be realized, it is not certain. Should circumstances change, the net deferred tax assets may become subject to a valuation allowance in the future. Additional valuation allowances would result in additional tax expense.

Refer to Note 10, “INCOME TAXES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, for further discussion.

Net Income and Net Income per Diluted Share Attributable to A&F
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
 
 
 
% of Net Sales
Net income attributable to A&F
$
7,094

 
0.2%
 
$
3,956

 
0.1%
 
$
35,576

 
1.0%
Adjusted non-GAAP net income (loss) attributable to A&F (1)
$
45,005

 
1.3%
 
$
(4,070
)
 
(0.1)%
 
$
78,047

 
2.2%
 
 
 
 
 
 
 
 
 
 
 
 
Net income per diluted share attributable to A&F
$
0.10

 
 
 
$
0.06

 
 
 
$
0.51

 
 
Adjusted non-GAAP net income (loss) per diluted share attributable to A&F (1)
$
0.65

 
 
 
$
(0.06
)
 
 
 
$
1.12

 
 

(1) 
Excludes items presented above under “Operating Income,” and “Income Tax Expense (Benefit).


34


LIQUIDITY AND CAPITAL RESOURCES

HISTORICAL SOURCES AND USES OF CASH

Seasonality of Cash Flows

The Company’s business has two principal selling seasons: the Spring season, which includes the first and second fiscal quarters (“Spring”), and the Fall season, which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Back-to-Fall sales periods for Hollister and Abercrombie, respectively, and the holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the fiscal year and to reinvest in the business to support future growth. The Company also has an asset-based revolving credit facility available as a source of additional funding.

Credit Facilities

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”).

As of February 3, 2018, the borrowing base on the Amended ABL Facility was $261.2 million.

The Company uses, in the ordinary course of business, stand-by letters of credit under the existing Amended ABL Facility. As of March 28, 2018 and February 3, 2018, the Company had not drawn on the Amended ABL Facility, but had approximately $1.1 million and $1.9 million of outstanding stand-by letters of credit under the Amended ABL Facility, respectively. The Company has no other off-balance sheet arrangements.

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 provides for a term loan facility of $300 million (the “Term Loan Facility” and, together with the Amended ABL Facility, the “Credit Facilities”).

The Credit Facilities are further described in Note 11, BORROWINGS,” of the Notes to the Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K.

Operating Activities

For Fiscal 2017, net cash provided by operating activities was $285.7 million as compared to $185.3 million for Fiscal 2016. The year-over-year increase in net cash provided by operating activities for Fiscal 2017 as compared to Fiscal 2016 was primarily driven by higher cash receipts from increased net sales, refunds received from prior year tax returns and a year-over-year decrease in incentive compensation payments, partially offset by increased payments to vendors, including the impact of incremental payments made due to the additional week in Fiscal 2017, and a year-over-year decrease in long-term lease deposits returned.

For Fiscal 2016, net cash provided by operating activities was $185.3 million as compared to $310.0 million for Fiscal 2015. The year-over-year decrease in net cash provided by operating activities for Fiscal 2016 as compared to Fiscal 2015 was primarily driven by lower net income, adjusted for non-cash items, the extension of vendor payment terms in the second quarter of Fiscal 2015 and incentive compensation payments in the first quarter of Fiscal 2016, partially offset by the return of long-term lease deposits of $26.6 million and a $25.1 million decrease in cash paid for income taxes.

Investing Activities

For Fiscal 2017, Fiscal 2016 and Fiscal 2015, cash outflows for investing activities were used primarily for store updates and new store construction, direct-to-consumer and omnichannel capabilities and information technology investments. Fiscal 2015 cash investing activities also included proceeds from the sale of a Company-owned aircraft.


35


Financing Activities

For Fiscal 2017, cash outflows for financing activities consisted primarily of the payment of dividends of $54.4 million and the repayment of borrowings of $15.0 million. For Fiscal 2016, cash outflows for financing activities consisted primarily of the payment of dividends of $54.1 million and the repayment of borrowings of $25.0 million. For Fiscal 2015, cash outflows for financing activities consisted primarily of the payment of dividends of $55.1 million, the repurchase of approximately 2.5 million shares of A&F’s Common Stock in the open market with a market value of approximately $50.0 million and the repayment of borrowings of $6.0 million.

FUTURE CASH REQUIREMENTS AND SOURCES OF CASH

The Company’s capital allocation strategy remains to prioritize investments in the business to build on the foundation for sustainable long-term growth. These investments include the continued development of highly differentiated brand offerings and staying at the forefront of customer engagement. In addition, the Company prioritizes returning cash to stockholders through dividends and share repurchases as appropriate. Capital allocation priorities and investments are reviewed by the Company’s Board of Directors considering both liquidity and valuation factors.

To execute on these priorities, the Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operations throughout the fiscal year and to reinvest in the business to support future growth. The Company also has availability under the Amended ABL Facility as a source of additional funding. Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, leases, taxes and other operating activities, as well as to fund capital expenditures, marketing initiatives, quarterly dividends to stockholders subject to approval by A&F’s Board of Directors and debt service, including voluntary repayments, or required repayments, if any, based on annual excess cash flows, as defined in the term loan agreement.

The Company may repurchase shares of its Common Stock and, if it were to do so, would anticipate funding such repurchases by utilizing free cash flow generated from operations or proceeds from the Amended ABL Facility. As of February 3, 2018, A&F had approximately 6.5 million remaining shares available for repurchase as part of the A&F Board of Directors’ previous authorization.

Income Taxes

On December 22, 2017, the Act was signed into law. The Act made changes to U.S. corporate income tax law and transitions U.S. international taxation to a modified territorial tax system, which resulted in the Company incurring a provisional, mandatory one-time repatriation tax charge of $21.7 million on accumulated previously deferred foreign earnings as of December 31, 2017. 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.

As of February 3, 2018, certain foreign subsidiaries have lent approximately $267.4 million to certain U.S. subsidiaries resulting in $527.2 million of the Company’s $675.6 million of cash and cash equivalents being held by U.S. subsidiaries. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or pay dividends to A&F stockholders. As a result of the adoption of a modified territorial system under the Act, future earnings from foreign subsidiaries are generally not subject to additional federal tax upon repatriation. Additionally, if funds were to be legally repatriated to the U.S. it could have implications at the state and foreign levels. Because of the complexities associated with the Act, 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. Refer to Note 10, “INCOME TAXES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” for further discussion.
Capital Expenditures

Capital expenditures for Fiscal 2017, Fiscal 2016 and Fiscal 2015 were as follows:
(in thousands)
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
Store refreshes, remodels and new store construction
 
$
62,725

 
$
73,053

 
$
71,675

Direct-to-consumer and omnichannel investments, information technology and other projects
 
44,276

 
67,791

 
71,524

Total capital expenditures
 
$
107,001

 
$
140,844

 
$
143,199


The Company expects capital expenditures to be approximately $130 million for Fiscal 2018, prioritized towards store updates and new stores, as well as direct-to-consumer and omnichannel investments, information technology and other projects.

36


CONTRACTUAL OBLIGATIONS

As of February 3, 2018, the Company's contractual obligations were as follows:
 
 
 
 
Payments due by period
(in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating lease obligations (1)
 
$
1,523,787

 
$
358,955

 
$
521,826

 
$
315,189

 
$
327,817

Purchase obligations
 
267,855

 
232,909

 
33,015

 
1,922

 
9

Long-term debt obligations
 
253,250

 

 

 
253,250

 

Other obligations (2)
 
128,819

 
17,277

 
40,377

 
28,398

 
42,767

Capital lease obligations
 
6,330

 
2,464

 
3,430

 
436

 

Totals
 
$
2,180,041

 
$
611,605

 
$
598,648

 
$
599,195

 
$
370,593


(1) 
Includes leasehold financing obligations of $50.7 million. Refer to Note 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for additional information.
(2) 
Includes asset retirement obligations, the Supplemental Executive Retirement Plan, tax payments associated with the provisional, mandatory one-time deemed repatriation tax on accumulated foreign earnings, net payable over eight years pursuant to the Act, and estimated interest payments on the Term Loan Facility based on the interest rate as of February 3, 2018 assuming normally scheduled principal payments. Refer to Note 16, “SAVINGS AND RETIREMENT PLANS,” and Note 10, “INCOME TAXES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, for further discussion.

Operating lease obligations consist primarily of non-cancelable future minimum lease commitments related to store operating leases. Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Leased facilities,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, for further discussion. Excluded from the obligations above are amounts related to the portions of lease terms that are currently cancelable at the Company’s discretion. While included in the obligations above, 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. Operating lease obligations do not include common area maintenance (“CAM”), insurance, marketing or tax payments for which the Company is also obligated. Total expense related to CAM, insurance, marketing and taxes was $153.2 million in Fiscal 2017.

Long-term debt obligations consist of principal payments under the Term Loan Facility. Refer to Note 11, BORROWINGS,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for additional information.

Purchase obligations primarily represents noncancelable purchase orders for merchandise to be delivered during Fiscal 2018 and commitments for fabric expected to be used during upcoming seasons. In addition, purchase obligations include agreements to purchase goods or services, including information technology contracts and third-party distribution center service contracts.

Due to uncertainty as to the amounts and timing of future payments, the contractual obligations table above does not include tax (including accrued interest and penalties) of $1.3 million related to uncertain tax positions at February 3, 2018. Deferred taxes are also not included in the preceding table. For further discussion, refer to Note 10, “INCOME TAXES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K.

The Company is a defendant in certain class action lawsuits and has signed a $25.0 million claims-made settlement agreement, subject to final court approval, related to certain legal matters. Due to the uncertainty regarding regarding the actual claims rate experience, court approvals and the terms of any approval by the court, this is not included in the contractual obligations table. Refer to Note 18, “CONTINGENCIES,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for further discussion.

A&F has historically paid quarterly dividends on its Common Stock. There are no amounts included in the above table related to dividends due to the fact that future dividends are subject to determination and approval by A&F’s Board of Directors.


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RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recent accounting pronouncements,” of the Notes to the Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K for recent accounting pronouncements, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company's Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.

The Company believes the following policies are the most critical to the portrayal of the Company’s financial condition and results of operations.
Policy
 
Effect if Actual Results Differ from Assumptions
Revenue Recognition
 
 
The Company reserves for sales returns through estimates based on historical returns experience, recent sales activity and various other assumptions that management believes to be reasonable.
 
The Company has not made any material changes in the accounting methodology used to determine the sales return reserve over the past three fiscal years.

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. The Company determines the probability of gift card redemption based on historical redemption patterns.
 

The Company does not expect material changes to the underlying assumptions used to measure the sales return reserve or estimate gift card breakage and deferred revenue associated with loyalty programs as of February 3, 2018. However, actual results could vary from estimates and could result in material gains or losses.

The Company maintains loyalty programs in which customers primarily have the opportunity to earn points toward future merchandise discount rewards based on qualifying purchases. The Company will defer sales revenue equal to the relative selling price of the points issued to customers, taking into account expected future redemptions based on historical redemption patterns. Revenue associated with the issued points from the loyalty programs is recognized at the earlier of redemption or expiration, as net sales.

 
 
Inventory Valuation
 
 
The Company reviews inventories on a quarterly basis. The Company reduces the inventory valuation when the carrying cost of specific inventory items on hand exceeds the amount expected to be realized from the ultimate sale or disposal of the goods, through a lower of cost and net realizable value (“LCNRV”) adjustment.

The LCNRV adjustment reduces inventory to its net realizable value 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.

 
The Company does not expect material changes to the underlying assumptions used to measure the LCNRV or shrink reserve as of February 3, 2018. However, actual results could vary from estimates and could significantly impact the ending inventory valuation at cost, as well as gross margin.

An increase or decrease in the LCNRV adjustment of 10% would have affected pre-tax income by approximately $1.3 million for Fiscal 2017.

Additionally, as part of inventory valuation, an inventory shrink estimate is made each quarter that reduces the value of inventory for lost or stolen items, based on sales volumes, average unit costs, historical losses and actual shrink results from previous physical inventories.

 
An increase or decrease in the inventory shrink estimate of 10% would have affected pre-tax income by approximately $0.9 million for Fiscal 2017.

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Policy
 
Effect if Actual Results Differ from Assumptions
Long-lived Assets
 
 
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.
 
Impairment loss calculations involve uncertainty due to the nature of the assumptions that management is required to make, including estimating projected cash flows and selecting the discount rate that best reflects the risk inherent in future cash flows. If actual results are not consistent with the estimates and assumptions used, there may be a material impact on the Company’s financial condition or results of operation.

As of February 3, 2018, stores that were tested for impairment and not impaired had a net book value of $46.2 million and had undiscounted cash flows which were in the range of 100% to 150% of their respective net asset values.

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. The key assumptions used in estimating the fair value of impaired assets may include projected store cash flows or market data.

 
For stores assessed by management as having indicators of impairment, a 10% decrease in the sales assumption used to project future cash flows for the fair value estimates as of February 3, 2018 would have increased the Fiscal 2017 impairment charge by $10.2 million.

Income Taxes
 
 
The provision for income taxes is determined using the asset and liability approach. Tax laws often require items to be included in tax filings at different times than the items are being reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

 
On December 22, 2017, the Act was signed into law and the Company recorded in the fourth quarter provisional charges in the fourth quarter of Fiscal 2017 of $21. 7 million related to the mandatory, one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits and $3.8 million as a result of a revaluation of the Company’s deferred tax asset and liabilities. 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.

Legal Contingencies
 
 
The Company is a defendant in lawsuits and other adversarial proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where it is probable that a loss has been incurred and such loss is reasonably estimable. For probable losses, the Company accrues to the low end of an estimated range of loss, unless another amount within the range is determined to be more likely. Significant judgment may be applied in assessing the probability of loss and in estimating the amount of such loss.
 
Actual liabilities may differ from the amounts recorded, and there can be no assurance that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investment Securities

The Company maintains its cash equivalents in financial instruments, primarily money market funds, with original maturities of three months or less.

Refer to Note 6, “RABBI TRUST ASSETS,” for a discussion of the Company’s Rabbi Trust assets.

Interest Rate Risks

The Company has approximately $253.3 million in gross borrowings outstanding under its term loan facility (the “Term Loan Facility”) and no borrowings outstanding under its senior secured revolving credit facility (the “Amended ABL Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Credit Facilities carry interest rates that are tied to LIBOR, or an alternate base rate, plus a margin. The interest rate on the Term Loan Facility has a 100 basis point LIBOR floor, and assuming no changes in the Company’s financial structure as it stands, an increase in market interest rates of 100 basis points would increase annual interest expense by approximately $2.6 million. This hypothetical analysis for Fiscal 2017 may differ from the actual change in interest expense due to potential changes in interest rates or gross borrowings outstanding under the Company’s Credit Facilities.

Foreign Currency Exchange Rate Risk

A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency exchange rate fluctuation increases as international operations relative to domestic operations increase.

A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the sale of inventory between subsidiaries and foreign currency denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exposures are partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period.

The fair value of outstanding foreign currency exchange forward contracts included in other current assets was insignificant as of February 3, 2018 and was $6.0 million as of January 28, 2017. The fair value of outstanding foreign currency exchange forward contracts included in other liabilities was $9.1 million as of February 3, 2018 and insignificant as of January 28, 2017. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. The results would decrease derivative contract fair values by approximately $16.6 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair value would be more than offset by the net change in fair values of the underlying hedged items.

Refer to “ITEM 1A. RISK FACTORS,” for further discussion.

40


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Thousands, except per share amounts)
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
Net sales
$
3,492,690

 
$
3,326,740

 
$
3,518,680

Cost of sales, exclusive of depreciation and amortization
1,408,848

 
1,298,172

 
1,361,137

Gross profit
2,083,842

 
2,028,568

 
2,157,543

Stores and distribution expense