UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

Form 10-Q 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 1, 2020

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.01 Par Value	ANF	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    x  Yes    ¨  No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A Common Stock	Shares outstanding as of September 3, 2020
$0.01 Par Value	62,373,175

Table of Contents

PART I
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Index for Notes to Condensed Consolidated Financial Statements	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	44
PART II
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
	Signatures	48

2

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements (Unaudited)

Abercrombie & Fitch Co.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Thousands, except per share amounts)

(Unaudited)

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 1, 2020			August 3, 2019			August 1, 2020			August 3, 2019
Net sales	$	698,328		$	841,078		$	1,183,687		$	1,575,050
Cost of sales, exclusive of depreciation and amortization	274,720			342,445			495,934			632,327
Gross profit	423,608			498,633			687,753			942,723
Stores and distribution expense	310,370			376,347			632,494			732,959
Marketing, general and administrative expense	97,252			115,694			205,509			227,641
Flagship store exit (benefits) charges	(3,884		)	44,994			(4,427		)	46,738
Asset impairment, exclusive of flagship store exit charges	8,083			715			51,011			2,377
Other operating (income) loss, net	(2,356		)	367			(1,850		)	(250		)
Operating income (loss)	14,143			(39,484		)	(194,984		)	(66,742		)
Interest expense, net	7,098			1,370			10,469			1,986
Income (loss) before income taxes	7,045			(40,854		)	(205,453		)	(68,728		)
Income tax expense (benefit)	1,253			(11,330		)	32,786			(20,918		)
Net income (loss)	5,792			(29,524		)	(238,239		)	(47,810		)
Less: Net income attributable to noncontrolling interests	328			1,618			445			2,487
Net income (loss) attributable to A&F	$	5,464		$	(31,142	)	$	(238,684	)	$	(50,297	)
Net income (loss) per share attributable to A&F
Basic	$	0.09		$	(0.48	)	$	(3.82	)	$	(0.76	)
Diluted	$	0.09		$	(0.48	)	$	(3.82	)	$	(0.76	)
Weighted-average shares outstanding
Basic	62,527			65,156			62,543			65,848
Diluted	63,286			65,156			62,543			65,848
Other comprehensive income (loss)
Foreign currency translation, net of tax	$	8,734		$	(3,788	)	$	3,335		$	(6,574	)
Derivative financial instruments, net of tax	(2,407		)	3,133			6,458			3,080
Other comprehensive income (loss)	6,327			(655		)	9,793			(3,494		)
Comprehensive income (loss)	12,119			(30,179		)	(228,446		)	(51,304		)
Less: Comprehensive income attributable to noncontrolling interests	328			1,618			445			2,487
Comprehensive income (loss) attributable to A&F	$	11,791		$	(31,797	)	$	(228,891	)	$	(53,791	)

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

3

Abercrombie & Fitch Co.

Condensed Consolidated Balance Sheets

(Thousands, except par value amounts)

(Unaudited)

	August 1, 2020			February 1, 2020
Assets
Current assets:
Cash and equivalents	$	766,721		$	671,267
Receivables	88,323			80,251
Inventories	453,239			434,326
Other current assets	75,160			78,905
Total current assets	1,383,443			1,264,749
Property and equipment, net	635,703			665,290
Operating lease right-of-use assets	1,073,464			1,230,954
Other assets	216,204			388,672
Total assets	$	3,308,814		$	3,549,665
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	284,221		$	219,919
Accrued expenses	351,849			302,214
Short-term portion of operating lease liabilities	278,495			282,829
Income taxes payable	6,425			10,392
Total current liabilities	920,990			815,354
Long-term liabilities:
Long-term portion of operating lease liabilities	1,122,853			1,252,634
Long-term borrowings, net	343,250			231,963
Other liabilities	108,111			178,536
Total long-term liabilities	1,574,214			1,663,133
Stockholders’ equity
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued for all periods presented	1,033			1,033
Paid-in capital	392,272			404,983
Retained earnings	2,025,911			2,313,745
Accumulated other comprehensive loss, net of tax (“AOCL”)	(99,093		)	(108,886		)
Treasury stock, at average cost: 40,935 and 40,514 shares as of August 1, 2020 and February 1, 2020, respectively	(1,514,442		)	(1,552,065		)
Total Abercrombie & Fitch Co. stockholders’ equity	805,681			1,058,810
Noncontrolling interests	7,929			12,368
Total stockholders’ equity	813,610			1,071,178
Total liabilities and stockholders’ equity	$	3,308,814		$	3,549,665

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

4

Abercrombie & Fitch Co.

Condensed Consolidated Statements of Stockholders’ Equity

(Thousands, except per share amounts)

(Unaudited)

	Thirteen Weeks Ended August 1, 2020
	Common Stock				Paid-in capital			Non-controlling interests			Retained earnings			AOCL			Treasury stock					Total stockholders’ equity
	Shares outstanding		Par value														Shares		At average cost
Balance, May 2, 2020	62,284		$	1,033	$	389,904		$	7,827		$	2,022,366		$	(105,420	)	41,016		$	(1,517,644	)	$	798,066
Net income	—		—		—			328			5,464			—			—		—			5,792
Share-based compensation issuances and exercises	81		—		(1,376		)	—			(1,919		)	—			(81	)	3,202			(93		)
Share-based compensation expense	—		—		3,744			—			—			—			—		—			3,744
Derivative financial instruments, net of tax	—		—		—			—			—			(2,407		)	—		—			(2,407		)
Foreign currency translation adjustments, net of tax	—		—		—			—			—			8,734			—		—			8,734
Distributions to noncontrolling interests, net	—		—		—			(226		)	—			—			—		—			(226		)
Ending balance at August 1, 2020	62,365		$	1,033	$	392,272		$	7,929		$	2,025,911		$	(99,093	)	40,935		$	(1,514,442	)	$	813,610
	Thirteen Weeks Ended August 3, 2019
	Common Stock				Paid-in capital			Non-controlling interests			Retained earnings			AOCL			Treasury stock					Total stockholders’ equity
	Shares outstanding		Par value														Shares		At average cost
Balance, May 4, 2019	66,637		$	1,033	$	395,974		$	10,124		$	2,296,347		$	(105,291	)	36,663		$	(1,493,224	)	$	1,104,963
Net loss	—		—		—			1,618			(31,142		)	—			—		—			(29,524		)
Purchase of Common Stock	(3,545	)	—		—			—			—			—			3,545		(57,812		)	(57,812		)
Dividends ($0.20 per share)	—		—		—			—			(13,139		)	—			—		—			(13,139		)
Share-based compensation issuances and exercises	54		—		(1,316		)	—			(1,034		)	—			(54	)	2,200			(150		)
Share-based compensation expense	—		—		36			—			—			—			—		—			36
Derivative financial instruments, net of tax	—		—		—			—			—			3,133			—		—			3,133
Foreign currency translation adjustments, net of tax	—		—		—			—			—			(3,788		)	—		—			(3,788		)
Distributions to noncontrolling interests, net	—		—		—			(424		)	—			—			—		—			(424		)
Ending balance at August 3, 2019	63,146		$	1,033	$	394,694		$	11,318		$	2,251,032		$	(105,946	)	40,154		$	(1,548,836	)	$	1,003,295

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

5

Abercrombie & Fitch Co.

Condensed Consolidated Statements of Stockholders’ Equity

(Thousands, except per share amounts)

(Unaudited)

	Twenty-six Weeks Ended August 1, 2020
	Common Stock				Paid-in capital			Non-controlling interests			Retained earnings			AOCL			Treasury stock					Total stockholders’ equity
	Shares outstanding		Par value														Shares		At average cost
Balance, February 1, 2020	62,786		$	1,033	$	404,983		$	12,368		$	2,313,745		$	(108,886	)	40,514		$	(1,552,065	)	$	1,071,178
Net loss	—		—		—			445			(238,684		)	—			—		—			(238,239		)
Purchase of Common Stock	(1,397	)	—		—			—			—			—			1,397		(15,172		)	(15,172		)
Dividends ($0.20 per share)	—		—		—			—			(12,556		)	—			—		—			(12,556		)
Share-based compensation issuances and exercises	976		—		(21,617		)	—			(36,594		)	—			(976	)	52,795			(5,416		)
Share-based compensation expense	—		—		8,906			—			—			—			—		—			8,906
Derivative financial instruments, net of tax	—		—		—			—			—			6,458			—		—			6,458
Foreign currency translation adjustments, net of tax	—		—		—			—			—			3,335			—		—			3,335
Distributions to noncontrolling interests, net	—		—		—			(4,884		)	—			—			—		—			(4,884		)
Ending balance at August 1, 2020	62,365		$	1,033	$	392,272		$	7,929		$	2,025,911		$	(99,093	)	40,935		$	(1,514,442	)	$	813,610
	Twenty-six Weeks Ended August 3, 2019
	Common Stock				Paid-in capital			Non-controlling interests			Retained earnings			AOCL			Treasury stock					Total stockholders’ equity
	Shares outstanding		Par value														Shares		At average cost
Balance, February 2, 2019	66,227		$	1,033	$	405,379		$	9,721		$	2,418,544		$	(102,452	)	37,073		$	(1,513,604	)	$	1,218,621
Impact from adoption of the new lease accounting standard	—		—		—			—			(75,165		)	—			—		—			(75,165		)
Net loss	—		—		—			2,487			(50,297		)	—			—		—			(47,810		)
Purchase of Common Stock	(3,545	)	—		—			—			—			—			3,545		(57,812		)	(57,812		)
Dividends ($0.40 per share)	—		—		—			—			(26,385		)	—			—		—			(26,385		)
Share-based compensation issuances and exercises	464		—		(13,353		)	—			(15,665		)	—			(464	)	22,580			(6,438		)
Share-based compensation expense	—		—		2,668			—			—			—			—		—			2,668
Derivative financial instruments, net of tax	—		—		—			—			—			3,080			—		—			3,080
Foreign currency translation adjustments, net of tax	—		—		—			—			—			(6,574		)	—		—			(6,574		)
Distributions to noncontrolling interests, net	—		—		—			(890		)	—			—			—		—			(890		)
Ending balance at August 3, 2019	63,146		$	1,033	$	394,694		$	11,318		$	2,251,032		$	(105,946	)	40,154		$	(1,548,836	)	$	1,003,295

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

6

Abercrombie & Fitch Co.

Condensed Consolidated Statements of Cash Flows

(Thousands)

(Unaudited)

	Twenty-six Weeks Ended
	August 1, 2020			August 3, 2019
Operating activities
Net loss	$	(238,239	)	$	(47,810	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization	82,753			81,541
Asset impairment	51,011			5,606
Loss on disposal	7,617			3,720
Provision for (benefit from) deferred income taxes	23,037			(22,589		)
Share-based compensation	8,906			2,668
Changes in assets and liabilities:
Inventories	(18,378		)	(51,297		)
Accounts payable and accrued expenses	122,004			4,201
Operating lease right-of-use assets and liabilities	(20,266		)	39,351
Income taxes	(7,379		)	(5,011		)
Other assets	29,940			(46,638		)
Withdrawal of funds from Rabbi Trust assets	50,000			—
Other liabilities	5,227			203
Net cash provided by (used for) operating activities	96,233			(36,055		)
Investing activities
Purchases of property and equipment	(75,621		)	(94,224		)
Net cash used for investing activities	(75,621		)	(94,224		)
Financing activities
Proceeds from issuance of senior secured notes	350,000			—
Proceeds from borrowings under the senior secured asset-based revolving credit facility	210,000			—
Repayment of borrowings under the term loan facility	(233,250		)	—
Repayment of borrowings under the senior secured asset-based revolving credit facility	(210,000		)	—
Payment of debt issuance costs and fees	(6,558		)	—
Purchases of Common Stock	(15,172		)	(57,812		)
Dividends paid	(12,556		)	(26,385		)
Other financing activities	(11,135		)	(7,727		)
Net cash provided by (used for) financing activities	71,329			(91,924		)
Effect of foreign currency exchange rates on cash	1,785			(2,455		)
Net increase (decrease) in cash and equivalents, and restricted cash and equivalents	93,726			(224,658		)
Cash and equivalents, and restricted cash and equivalents, beginning of period	692,264			745,829
Cash and equivalents, and restricted cash and equivalents, end of period	$	785,990		$	521,171
Supplemental information related to non-cash activities
Purchases of property and equipment not yet paid at end of period	$	34,865		$	33,826
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	$	23,119		$	204,499
Supplemental information related to cash activities
Cash paid for interest	$	8,127		$	7,688
Cash paid for income taxes	$	8,460		$	16,434
Cash received from income tax refunds	$	1,426		$	8,565
Cash paid for amounts included in measurement of operating lease liabilities	$	122,128		$	200,457

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

7

Abercrombie & Fitch Co.

Index for Notes to Condensed Consolidated Financial Statements (Unaudited)

		Page No.
Note 1.	NATURE OF BUSINESS	9
Note 2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9
Note 3.	IMPACT OF COVID-19	10
Note 4.	REVENUE RECOGNITION	12
Note 5.	NET INCOME (LOSS) PER SHARE	12
Note 6.	FAIR VALUE	13
Note 7.	PROPERTY AND EQUIPMENT, NET	14
Note 8.	LEASES	14
Note 9.	ASSET IMPAIRMENT	14
Note 10.	RABBI TRUST ASSETS	15
Note 11.	INCOME TAXES	15
Note 12.	BORROWINGS	16
Note 13.	SHARE-BASED COMPENSATION	17
Note 14.	DERIVATIVE INSTRUMENTS	19
Note 15.	ACCUMULATED OTHER COMPREHENSIVE LOSS	21
Note 16.	SEGMENT REPORTING	22
Note 17.	FLAGSHIP STORE EXIT (BENEFITS) CHARGES	23

8

Abercrombie & Fitch Co.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. NATURE OF BUSINESS

Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global multi-brand omnichannel specialty retailer, whose products are sold primarily through its Company-owned store and digital channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company primarily has operations in North America, Europe and Asia, among other regions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows.

The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI on the Condensed Consolidated Balance Sheets.

Fiscal year

The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows:

Fiscal year	Year ended	Number of weeks
Fiscal 2019	February 1, 2020	52
Fiscal 2020	January 30, 2021	52

Interim financial statements

The Condensed Consolidated Financial Statements as of August 1, 2020, and for the thirteen and twenty-six week periods ended August 1, 2020 and August 3, 2019, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2019 filed with the SEC on March 31, 2020. The February 1, 2020 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2020.

Use of estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the COVID-19 pandemic and its impact on the length or frequency of store closures, and the extent to which

9

COVID-19 will impact worldwide macroeconomic conditions including interest rates, the speed of the anticipated recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods.

Recent accounting pronouncements

The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements.

Condensed Consolidated Statements of Cash Flows reconciliation

The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows:

(in thousands)	Location	August 1, 2020		February 1, 2020		August 3, 2019		February 2, 2019
Cash and equivalents	Cash and equivalents	$	766,721	$	671,267	$	499,757	$	723,135
Long-term restricted cash and equivalents	Other assets	19,269		18,696		18,877		22,694
Short-term restricted cash and equivalents	Other current assets	—		2,301		2,537		—
Cash and equivalents and restricted cash and equivalents		$	785,990	$	692,264	$	521,171	$	745,829

3. IMPACT OF COVID-19

Recent developments

The Company has seen, and may continue to see, material adverse impacts as a result of COVID-19. Current circumstances are dynamic and future impacts, including the duration and impact on overall customer demand, are uncertain.

In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19. In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and the Company has recommended associates who are able to perform their role remotely to do so. The Company is reacting to COVID-19 on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak. The Company has also implemented a range of precautionary health and safety measures with the well-being of the Company’s customers, associates and business partners in mind.

As a result of COVID-19, in January 2020, the Company temporarily closed the majority of its stores in the APAC region and in March 2020, the Company temporarily closed its stores across brands in North America and the EMEA region. The majority of APAC stores were reopened during March 2020, and the Company began to reopen stores in North America and the EMEA region on a rolling basis in late April 2020. As of August 1, 2020, approximately 90% of Company-operated stores had reopened for in-store service, although many with modified operating hours. The Company plans to follow the guidance of local governments to determine when it can reopen stores that have been closed due to COVID-19 and to evaluate whether further store closures will be necessary.

The Company’s digital operations across brands have continued to serve the Company’s customers during this unprecedented period of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational.

Impact of COVID-19

The Company has seen, and may continue to see material reductions in sales across brands and regions as a result of COVID-19. Total net sales decreased approximately 17% and 25% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively. The year-over-year decrease in total net sales was primarily driven by temporary widespread store closures and a decline in traffic as compared to the previous year as a result of COVID-19. The year-over-year decline in store sales was partially offset by digital sales growth of approximately 56% and 41% for the thirteen and twenty-six weeks ended August 1, 2020 as compared to the comparable periods ended August 3, 2019, respectively.

10

Primarily as a result of COVID-19 and the temporary closure of the Company’s stores, the Company recognized $14.8 million of charges to reduce the carrying value of inventory in cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the thirteen weeks ended May 2, 2020.

During the thirteen and twenty-six weeks ended August 1, 2020, reductions in revenue have not been offset by proportional decreases in expense, as the Company continued to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. During this period, the Company suspended rent payments for a significant number of stores that were closed, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides refundable employee retention tax credits for wages paid to employees who are unable to work during the COVID–19 outbreak and the deferral of the employer–paid portion of social security taxes. Similar relief programs have also been established throughout the EMEA and APAC regions. Based on the Company's evaluation of the CARES Act and legislation across regions, the Company qualifies for certain payroll tax credits, and such government subsidies have been treated as offsets to the related operating expenses when recognized. During the thirteen and twenty-six weeks ended August 1, 2020, the Company recognized qualified payroll tax credits reducing payroll expenses by approximately $3.1 million and $11.8 million, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with $3.6 million of expected relief classified in receivables on the Condensed Consolidated Balance Sheet as of August 1, 2020. The Company intends to continue to defer qualified payroll and other tax payments as permitted by the CARES Act and other regional legislation.

The Company also recognized asset impairment charges related to the Company’s right-of-use assets and property and equipment of $8.1 million and $51.0 million during the thirteen and twenty-six weeks ended August 1, 2020, respectively, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ASSET IMPAIRMENT,” for additional information.

In addition, the Company has also experienced other material impacts as a result of COVID-19, such as deferred tax valuation allowances and other tax charges during the twenty-six weeks ended August 1, 2020, adversely impacting results by $84.1 million. Refer to Note 11, “INCOME TAXES,” for additional information.

Balance sheet, cash flow and liquidity

During the twenty-six weeks ended August 1, 2020, the Company has taken various actions to preserve liquidity and manage cash flows in order to best position the business for key stakeholders, including (i) partnering with merchandise and non-merchandise vendors in regards to payment terms; (ii) reducing and recadencing inventory receipts to better align inventory with expected market demand; (iii) significantly reducing expenses to better align operating costs with sales; and (iv) temporarily suspending its share repurchase program in March 2020 and its dividend program in May 2020. In addition, despite the Company’s recent history of partnering with its vendors regarding payment terms, there can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.

As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) to improve its near-term cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash. In July 2020, the Company completed a private offering of $350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”) and used the net proceeds to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 12, “BORROWINGS,” and Note 10, “ RABBI TRUST ASSETS,” for additional information.

As of August 1, 2020, the Company had liquidity of $1.061 billion as compared to $913.8 million as of February 1, 2020, comprising cash and equivalents and actual incremental borrowing available to the Company under the ABL Facility.

11

4. REVENUE RECOGNITION

Disaggregation of revenue

All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 16, “SEGMENT REPORTING.”

Contract liabilities

The following table details certain contract liabilities representing unearned revenue as of August 1, 2020, February 1, 2020, August 3, 2019 and February 2, 2019:

(in thousands)	August 1, 2020		February 1, 2020		August 3, 2019		February 2, 2019
Gift card liability	$	22,461	$	28,844	$	20,056	$	26,062
Loyalty program liability	$	19,674	$	23,051	$	21,073	$	19,904

The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Revenue associated with gift card redemptions and gift card breakage	$	10,066	$	12,792	$	21,075	$	28,076
Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs	$	7,982	$	8,028	$	13,691	$	14,546

5. NET INCOME (LOSS) PER SHARE

Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net income (loss) per share attributable to A&F is as follows:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Shares of Common Stock issued	103,300		103,300		103,300		103,300
Weighted-average treasury shares	(40,773	)	(38,144	)	(40,757	)	(37,452	)
Weighted-average — basic shares	62,527		65,156		62,543		65,848
Dilutive effect of share-based compensation awards	759		—		—		—
Weighted-average — diluted shares	63,286		65,156		62,543		65,848
Anti-dilutive shares (1)	2,026		3,318		2,123		3,065

⁽¹⁾  Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion.

12

6. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:

• Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.

• Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.

• Level 3—inputs to the valuation methodology are unobservable.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, as of August 1, 2020 and February 1, 2020 were as follows:

	Assets at Fair Value as of August 1, 2020
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)	$	10,267	$	29,340	$	—	$	39,607
Rabbi Trust assets (2)	1		60,027		—		60,028
Restricted cash equivalents (3)	6,751		5,895		—		12,646
Total assets	$	17,019	$	95,262	$	—	$	112,281

	Assets and Liabilities at Fair Value as of February 1, 2020
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)	$	225	$	58,447	$	—	$	58,672
Derivative instruments (4)	—		1,969		—		1,969
Rabbi Trust assets (2)	1		109,048		—		109,049
Restricted cash equivalents (3)	9,765		4,601		—		14,366
Total assets	$	9,991	$	174,065	$	—	$	184,056
Liabilities:
Derivative instruments (4)	$	—	$	1,460	$	—	$	1,460
Total liabilities	$	—	$	1,460	$	—	$	1,460

⁽¹⁾  Level 1 assets consist of investments in money market funds. Level 2 assets consist of time deposits.

⁽²⁾  Level 1 assets consist of investments in money market funds. Level 2 assets consist of trust-owned life insurance policies.

⁽³⁾  Level 1 assets consist of investments in U.S. treasury bills and money market funds. Level 2 assets consist of time deposits.

⁽⁴⁾  Level 2 assets and liabilities consist primarily of foreign currency exchange forward contracts.

The Company’s Level 2 assets and liabilities consist of:

• Time deposits, which are valued at cost approximating fair value due to the short-term nature of these investments;

• Trust-owned life insurance policies which are valued using the cash surrender value of the life insurance policies; and

• Derivative instruments, primarily foreign currency exchange forward contracts, which are valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.

Fair value of long-term borrowings

The Company’s borrowings under the Term Loan Facility and the Senior Secured Notes are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows:

(in thousands)	August 1, 2020		February 1, 2020
Gross borrowings outstanding, carrying amount	$	350,000	$	233,250
Gross borrowings outstanding, fair value	$	350,875	$	233,979

13

7. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:

(in thousands)	August 1, 2020			February 1, 2020
Property and equipment, at cost	$	2,780,621		$	2,744,967
Less: Accumulated depreciation and amortization	(2,144,918		)	(2,079,677		)
Property and equipment, net	$	635,703		$	665,290

Refer to Note 9, “ASSET IMPAIRMENT,” for details related to property and equipment impairment charges incurred during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019.

8. LEASES

The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.

During the thirteen and twenty-six weeks ended August 1, 2020, the Company suspended rent payments for a significant number of stores that were closed as a result of COVID-19, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. To the extent that the Company is successful in negotiating further rent abatements, these benefits will be recognized as a component of variable lease cost. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

The following table provides a summary of the Company’s operating lease costs for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Single lease cost (1)	$	87,698	$	121,270	$	181,189	$	213,544
Variable lease cost (2)	19,433		60,238		47,335		103,083
Operating lease right-of-use asset impairment (3)	5,410		3,589		40,418		3,589
Total operating lease cost	$	112,541	$	185,097	$	268,942	$	320,216

⁽¹⁾  Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities.

⁽²⁾  Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as rent abatements agreed upon during the period.

⁽³⁾  Refer to Note 9, “ASSET IMPAIRMENT,” for details related to operating lease right-of-use asset impairment charges.

During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company paid $122.1 million and $200.5 million, respectively, for amounts included in measurement of operating lease liabilities, net of rent abatements agreed upon during the period which are classified as a component variable lease cost as noted in the above table. These payments are included within operating activities on the Condensed Consolidated Statements of Cash Flows.

During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company obtained operating lease right-of-use assets of $23.1 million and $204.5 million, respectively, in exchange for operating lease liabilities.

As of August 1, 2020, the Company had minimum commitments related to additional operating lease contracts the terms of which have not yet commenced, primarily for its Company-operated retail stores, of approximately $2.8 million.

9. ASSET IMPAIRMENT

Asset impairment charges for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Operating lease right-of-use asset impairment (1)	$	5,410	$	3,589	$	40,418	$	3,589
Property and equipment asset impairment	2,673		355		10,593		2,017
Total asset impairment	$	8,083	$	3,944	$	51,011	$	5,606

⁽¹⁾   Includes $3.2 million of operating lease right-of-use asset impairment related to flagship store exit charges for each of the thirteen and twenty-six weeks ended August 3, 2019. Refer to Note 17, “FLAGSHIP STORE EXIT (BENEFITS) CHARGES.”

14

Asset impairment charges for the thirteen weeks and twenty-six weeks ended August 1, 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the twenty-six weeks ended August 1, 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $135.5 million, including $124.6 million related to operating lease right-of-use assets.

Asset impairment charges for the thirteen weeks and twenty-six weeks ended August 3, 2019, primarily related to the Company’s SoHo, New York City Hollister flagship. The impairment charges for the twenty-six weeks ended August 3, 2019 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $8.2 million, including $7.0 million related to operating lease right-of-use assets.

10. RABBI TRUST ASSETS

As a precautionary measure and to preserve liquidity in light of the circumstances surrounding COVID-19, during the twenty-six weeks ended August 1, 2020, the Company withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash.

Investments of Rabbi Trust assets consisted of the following as of August 1, 2020 and February 1, 2020:

(in thousands)	August 1, 2020		February 1, 2020
Trust-owned life insurance policies (at cash surrender value)	$	60,027	$	109,048
Money market funds	1		1
Rabbi Trust assets	$	60,028	$	109,049

Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Realized gains related to Rabbi Trust assets	$	388	$	798	$	978	$	1,589

11. INCOME TAXES

The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.

Impact of valuation allowances and other tax charges during Fiscal 2020

The Company’s effective tax rate for the twenty-six weeks ended August 1, 2020 was impacted by $84.1 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax year-to-date loss. Further details regarding these adverse tax impacts are as follows:

• The Company anticipates pre-tax losses for the full fiscal year in certain jurisdictions, based on information currently available, primarily due to the significant adverse impacts of COVID-19. The Company did not recognize income tax benefits on $204.1 million of pre-tax losses during the twenty-six weeks ended August 1, 2020, resulting in an adverse tax impact of $47.6 million.

• The Company recognized charges of $36.5 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during the twenty-six weeks ended August 1, 2020, principally as a result of the significant adverse impacts of COVID–19. These charges related to valuation allowances recognized by the Company of $10.6 million and $6.0 million related to the U.S. and Germany, respectively, as well as valuation allowances and other tax charges in certain other jurisdictions against underlying tax asset balances that existed as of February 1, 2020. The Company also recognized valuation allowances of $78.9 million related to Switzerland with a U.S. branch equally offsetting amount, which in net, did not have an impact on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Changes in assumptions may occur based on new information that becomes available resulting in adjustments in the period in which a determination is made.

15

Global legislation in response to COVID-19

In March 2020, the CARES Act was enacted into U.S. law, intended to provide economic relief to those impacted by COVID-19 and enhance business’ liquidity. The Company continues to examine impacts that the provisions of the CARES Act may have on U.S. income taxes; however, the Company does not currently expect that these provisions will have a material impact on its income taxes.

The Company is still assessing the applicability of other recently passed global legislation, including the potential income tax measures offered in international jurisdictions where the Company’s operations have also been impacted by COVID-19.

Share-based compensation

Refer to Note 13, “SHARE-BASED COMPENSATION,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended August 3, 2019.

12. BORROWINGS

Details on the Company’s long-term borrowings, net, as of August 1, 2020 and February 1, 2020 are as follows:

(in thousands)	August 1, 2020			February 1, 2020
Long-term portion of borrowings, gross at carrying amount	$	350,000		$	233,250
Unamortized fees	(6,750		)	(355		)
Unamortized discount	—			(932		)
Long-term borrowings, net	$	343,250		$	231,963

Senior Secured Notes

On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of the Company, completed the private offering of the Senior Secured Notes, with a $350 million aggregate principal amount due in 2025 at an offering price of 100% of the principal amount thereof. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, as trustee, and as collateral agent.

The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments beginning in January 2021.

The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and accrued interest of $233.6 million and $110.8 million under the Term Loan Facility and the ABL Facility, respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes.

The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized over the contractual term of the Senior Secured Notes.

ABL Facility

The ABL Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors) and later amended on October 19, 2017, provides for a senior secured asset-based revolving credit facility of up to $400 million (the “ABL Facility”).

The ABL Facility will mature on October 19, 2022.

As a precautionary measure and to improve the Company’s cash position in light of the circumstances surrounding COVID-19, during the thirteen weeks ended May 2, 2020, the Company borrowed $210.0 million under the ABL Facility. During the thirteen weeks ended August 1, 2020, the Company used net proceeds from the offering of the Senior Secured Notes and cash on hand to repay all outstanding borrowings under the ABL Facility.

The Company did not have any borrowings outstanding under the ABL Facility as of August 1, 2020 or as of February 1, 2020.

As of August 1, 2020, the Company had availability under the ABL Facility of $327.5 million, net of $0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, actual incremental borrowing available to the Company under the ABL Facility was $294.6 million as of August 1, 2020.

16

The provisions under the credit agreement applicable to the ABL Facility have not changed from those described in Note 12, “BORROWINGS,” in the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2019.

Term Loan Facility

The Term Loan Facility, which was entered into on August 7, 2014 through A&F Management as the lead borrower (with A&F and certain other subsidiaries as borrowers or guarantors) and later amended on June 22, 2018, provided for a term loan facility of $300 million.

The Company had gross borrowings outstanding under the Term Loan Facility of $233.3 million as of February 1, 2020. During the thirteen weeks ended August 1, 2020, the Company used a portion of the proceeds from the issuance of the Senior Secured Notes to repay all outstanding borrowings under the Term Loan Facility and upon repayment the Term Loan Facility was terminated effective as of July 2, 2020.

The Term Loan Facility was previously scheduled to mature on August 7, 2021.

Representations, warranties and covenants

The aforementioned agreements contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries to: grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity.

The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness.

Certain of these agreements also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.

The Company was in compliance with all debt covenants under the aforementioned agreements as of August 1, 2020.

13. SHARE-BASED COMPENSATION

Financial statement impact

The following table details share-based compensation expense and the related income tax impacts for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:

	Thirteen Weeks Ended					Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019			August 1, 2020		August 3, 2019
Share-based compensation expense	$	3,744	$	36		$	8,906	$	2,668
Income tax (expense) benefit associated with share-based compensation expense recognized (1)	$	—	$	(195	)	$	—	$	355

⁽¹⁾  No income tax benefit was recognized related to share-based compensation expense during the thirteen and twenty-six weeks ended August 1, 2020 due to the U.S. being a loss jurisdiction.

The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019:

	Thirteen Weeks Ended			Twenty-six Weeks Ended
(in thousands)	August 1, 2020		August 3, 2019	August 1, 2020	August 3, 2019
Income tax discrete (charges) benefits realized for tax deductions related to the issuance of shares (1)	$	—