Document
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 2016
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 1-12107
 
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) 
 
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 (§232.405 of this chapter) 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
¨
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
 
Outstanding at September 1, 2016
$.01 Par Value
 
67,661,309 Shares


Table of Contents


ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Thousands, except per share amounts)
(Unaudited)



 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Net sales
$
783,160

 
$
817,756

 
$
1,468,643

 
$
1,527,178

Cost of sales, exclusive of depreciation and amortization
306,053

 
307,894

 
565,815

 
605,767

Gross profit
477,107

 
509,862

 
902,828

 
921,411

Stores and distribution expense
382,917

 
389,193

 
752,035

 
780,831

Marketing, general and administrative expense
111,719

 
119,846

 
226,166

 
227,379

Restructuring benefit
—

 
—

 
—

 
(1,598
)
Asset impairment
6,356

 
—

 
6,356

 
6,133

Other operating income, net
(13,080
)
 
(1,139
)
 
(16,013
)
 
(3,099
)
Operating (loss) income
(10,805
)
 
1,962

 
(65,716
)
 
(88,235
)
Interest expense, net
4,741

 
4,567

 
9,247

 
9,206

Loss before taxes
(15,546
)
 
(2,605
)
 
(74,963
)
 
(97,441
)
Income tax benefit
(3,515
)
 
(3,217
)
 
(24,302
)
 
(34,807
)
Net (loss) income
(12,031
)
 
612

 
(50,661
)
 
(62,634
)
Less: Net income attributable to noncontrolling interests
1,098

 
1,422

 
2,055

 
1,422

Net loss attributable to A&F
$
(13,129
)
 
$
(810
)
 
$
(52,716
)
 
$
(64,056
)
 
 
 
 
 
 
 
 
Net loss per share attributable to A&F
 
 
 
 
 
 
 
Basic
$
(0.19
)
 
$
(0.01
)
 
$
(0.78
)
 
$
(0.92
)
Diluted
$
(0.19
)
 
$
(0.01
)
 
$
(0.78
)
 
$
(0.92
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
67,944

 
69,713

 
67,785

 
69,612

Diluted
67,944

 
69,713

 
67,785

 
69,612

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation, net of tax
$
(7,361
)
 
$
(9,856
)
 
$
13,064

 
$
(9,871
)
Derivative financial instruments, net of tax
6,575

 
(2,916
)
 
(3,380
)
 
(8,336
)
Other comprehensive (loss) income
(786
)
 
(12,772
)
 
9,684

 
(18,207
)
Comprehensive loss
(12,817
)
 
(12,160
)
 
(40,977
)
 
(80,841
)
Less: Comprehensive income attributable to noncontrolling interests
1,098

 
1,422

 
2,055

 
1,422

Comprehensive loss attributable to A&F
$
(13,915
)
 
$
(13,582
)
 
$
(43,032
)
 
$
(82,263
)


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)

 


 
July 30, 2016
 
January 30, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
455,606

 
$
588,578

Receivables
79,012

 
56,868

Inventories, net
453,175

 
436,701

Other current assets
108,878

 
96,833

Total current assets
1,096,671

 
1,178,980

Property and equipment, net
850,114

 
894,178

Other assets
385,605

 
359,881

Total assets
$
2,332,390

 
$
2,433,039

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
180,834

 
$
184,175

Accrued expenses
279,918

 
321,237

Short-term portion of deferred lease credits
21,962

 
23,303

Income taxes payable
15,162

 
5,988

Short-term portion of borrowings, net
1,468

 
—

Total current liabilities
499,344

 
534,703

Long-term liabilities:
 
 
 
Long-term portion of deferred lease credits
79,877

 
89,256

Long-term portion of borrowings, net
285,528

 
286,235

Leasehold financing obligations
50,132

 
47,440

Other liabilities
185,285

 
179,683

Total long-term liabilities
600,822

 
602,614

Stockholders' equity
 
 
 
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of July 30, 2016 and January 30, 2016
1,033

 
1,033

Paid-in capital
394,925

 
407,029

Retained earnings
2,446,287

 
2,530,196

Accumulated other comprehensive loss, net of tax
(104,935
)
 
(114,619
)
Treasury stock, at average cost: 35,634 and 35,952 shares at July 30, 2016 and January 30, 2016, respectively
(1,511,366
)
 
(1,532,576
)
Total Abercrombie & Fitch Co. stockholders' equity
1,225,944

 
1,291,063

Noncontrolling interests
6,280

 
4,659

Total stockholders' equity
1,232,224

 
1,295,722

Total liabilities and stockholders' equity
$
2,332,390

 
$
2,433,039



The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
 


 
Twenty-six Weeks Ended
 
July 30, 2016
 
August 1, 2015
Operating activities
 
 
 
Net loss
$
(50,661
)
 
$
(62,634
)
Adjustments to reconcile net loss to net cash used for operating activities:
 
 
 
Depreciation and amortization
99,933

 
108,359

Asset impairment
6,356

 
6,133

Loss on disposal
1,336

 
4,447

Amortization of deferred lease credits
(12,577
)
 
(14,624
)
Benefit from deferred income taxes
(38,167
)
 
(34,745
)
Share-based compensation
11,000

 
14,083

Changes in assets and liabilities
 
 
 
Inventories
(26,517
)
 
(18,560
)
Accounts payable and accrued expenses
(35,922
)
 
47,433

Lessor construction allowances
2,530

 
2,105

Income taxes
6,800

 
(35,556
)
Return of long-term lease deposit
22,801

 
—

Other assets
(42,139
)
 
(16,529
)
Other liabilities
(2,632
)
 
(20,665
)
Net cash used for operating activities
(57,859
)
 
(20,753
)
Investing activities
 
 
 
Purchases of property and equipment
(58,009
)
 
(69,121
)
Proceeds from sale of property and equipment
4,098

 
11,109

Net cash used for investing activities
(53,911
)
 
(58,012
)
Financing activities
 
 
 
Repayments of borrowings
—

 
(1,500
)
Dividends paid
(26,992
)
 
(27,785
)
Other financing activities
(1,787
)
 
(1,053
)
Net cash used for financing activities
(28,779
)
 
(30,338
)
Effect of exchange rates on cash
7,577

 
(3,294
)
Net decrease in cash and equivalents
(132,972
)
 
(112,397
)
Cash and equivalents, beginning of period
588,578

 
520,708

Cash and equivalents, end of period
$
455,606

 
$
408,311

Significant non-cash investing activities
 
 
 
Change in accrual for construction in progress
$
(4,744
)
 
$
26,030

Supplemental information
 
 
 
Cash paid for interest
$
7,537

 
$
7,740

Cash paid for income taxes, net of refunds
$
19,041

 
$
41,419



The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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ABERCROMBIE & FITCH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Nature of Business

Abercrombie & Fitch Co. (“A&F”), through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer of branded apparel and accessories. The Company operates stores in North America, Europe, Asia and the Middle East and direct-to-consumer operations in North America, Europe and Asia that serve its customers throughout the world.

Principles of Consolidation

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

The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. ("MAF"), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the assets, liabilities, results of operations and cash flows of these VIEs.

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal 2016” and “Fiscal 2015” represent the fifty-two week fiscal years ending on January 28, 2017 and ended on January 30, 2016, respectively.

Interim Financial Statements

The Condensed Consolidated Financial Statements as of July 30, 2016, and for the thirteen and twenty-six week periods ended July 30, 2016 and August 1, 2015, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these 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 2015 filed with the SEC on March 28, 2016. The January 30, 2016 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 (“U.S. 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 and 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 2016.

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Recent Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements that could affect the Company's financial statements:
Accounting Standards Update (ASU)
 
Description
 
Date of
Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards not yet adopted
ASU 2015-11, Simplifying the Measurement of Inventory
 
This update amends ASC 330, Inventory. The new guidance applies to inventory measured using first-in, first-out (FIFO) or average cost. Under this amendment, inventory should be measured at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
 
January 29, 2017*
 
The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.
ASU 2016-09, Compensation—Stock Compensation
 
This update amends ASC 718, Compensation. Under the new guidance, simplified measures will be used for accounting for income taxes, identifying statutory tax withholding thresholds, and classifying tax effects and taxes paid related to stock compensation. This guidance also allows for entities to make a policy election to estimate forfeitures or account for them when they occur.
 
January 29, 2017*
 
The Company is currently evaluating the method of adoption and the impact that this standard will have on its consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers
 
This update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
 
February 4, 2018
 
The Company is currently evaluating the method of adoption and the impact that this standard will have on its consolidated financial statements.
ASU 2016-02, Leases
 
This update supersedes the leasing requirements in ASC 840, Leases. The new guidance requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.
 
February 3, 2019*
 
The Company is currently evaluating the method of adoption and the impact that this standard will have on its consolidated financial statements.

* Early adoption is permitted.

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2. NET LOSS PER SHARE

Net loss per basic and diluted share is computed based on the weighted-average number of outstanding shares of common stock.

The following table presents weighted-average shares outstanding and anti-dilutive shares:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
(in thousands)
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Shares of common stock issued
103,300

 
103,300

 
103,300

 
103,300

Weighted-average treasury shares
(35,356
)
 
(33,587
)
 
(35,515
)
 
(33,688
)
Weighted-average — basic shares
67,944

 
69,713

 
67,785

 
69,612

Dilutive effect of share-based compensation awards
—

 
—

 
—

 
—

Weighted-average — diluted shares
67,944

 
69,713

 
67,785

 
69,612

Anti-dilutive shares (1)
6,622

 
12,258

 
6,251

 
12,258


(1) 
Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net loss per diluted share because the impact would have been anti-dilutive.


3. FAIR VALUE

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

•
Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date.
•
Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
•
Level 3—inputs to the valuation methodology are unobservable.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution within it of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were as follows:
 
Assets and Liabilities at Fair Value as of July 30, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Trust-owned life insurance policies (at cash surrender value)
$
—

 
$
98,113

 
$
—

 
$
98,113

Money market funds
23

 
—

 
—

 
23

Derivative financial instruments
—

 
3,645

 
—

 
3,645

Total assets
$
23

 
$
101,758

 
$
—

 
$
101,781

 

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
$
—

 
$
2,867

 
$
—

 
$
2,867

 
Assets at Fair Value as of January 30, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
311,349

 
$
—

 
$
—

 
$
311,349

Derivative financial instruments
—

 
4,166

 
—

 
4,166

Total assets
$
311,349

 
$
4,166

 
$
—

 
$
315,515


The Level 2 assets and liabilities consist of derivative financial instruments, primarily forward foreign currency exchange contracts. The fair value of forward foreign currency exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.

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Fair value of borrowings:

The Company’s borrowings under the Company's credit facilities are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. For disclosure purposes, the Company estimated the fair value of borrowings outstanding based on market rates for similar types of debt, which are considered to be Level 2 inputs.

The carrying amount and fair value of the Company's term loan facility were as follows:
(in thousands)
July 30, 2016
 
January 30, 2016
Gross borrowings outstanding, carrying amount
$
293,250

 
$
293,250

Gross borrowings outstanding, fair value
$
290,318

 
$
284,453


No borrowings were outstanding under the Company's senior secured revolving credit facility as of July 30, 2016 or January 30, 2016.


4. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:
(in thousands)
July 30, 2016
 
January 30, 2016
Property and equipment, at cost
$
2,825,737

 
$
2,792,437

Less: Accumulated depreciation and amortization
(1,975,623
)
 
(1,898,259
)
Property and equipment, net
$
850,114

 
$
894,178


Long-lived assets, primarily comprised of 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 assets 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, other than temporary 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.

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 margin and, to a lesser extent, operating expenses.

An impairment loss would be recognized when these undiscounted future cash flows are less than carrying amount of the asset group. In the circumstance of impairment, the 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 cash flows and discount rate.

In the second quarter of Fiscal 2016, the Company incurred non-cash asset impairment charges of $6.4 million as it was determined that the carrying value of certain store assets would not be recoverable and exceeded fair value. These asset impairment charges are related to the Company's abercrombie kids flagship store in London.

In the year-to-date period of Fiscal 2015, the Company incurred non-cash asset impairment charges of $6.1 million related to a decision to remove certain store fixtures in connection with changes to the Abercrombie and Hollister store experiences, and a fair value adjustment related to the Company-owned aircraft which was sold in the second quarter of Fiscal 2015.

The Company had $38.1 million and $37.3 million of construction project assets in property and equipment, net at July 30, 2016 and January 30, 2016, respectively, related to the construction of buildings in certain lease arrangements where the Company is deemed to be the owner of the construction project.

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5. INCOME TAXES

The Company’s quarterly tax provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These 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 law, regulations, and administrative practices, relative changes of expenses or losses for which tax benefits are not recognized and the impact of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax income (loss).

6. SHARE-BASED COMPENSATION

The Company recognized share-based compensation expense of $4.4 million and $11.0 million for the thirteen and twenty-six weeks ended July 30, 2016, respectively, and $7.2 million and $14.1 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively. The Company also recognized tax benefits related to share-based compensation of $1.7 million and $4.1 million for the thirteen and twenty-six weeks ended July 30, 2016, respectively, and $2.5 million and $4.8 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively.

Stock Options

The following table summarizes stock option activity for the twenty-six weeks ended July 30, 2016:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 30, 2016
271,000

 
$
63.05

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(2,000
)
 
22.87

 
 
 
 
Forfeited or expired
(19,200
)
 
66.19

 
 
 
 
Outstanding at July 30, 2016
249,800

 
$
63.13

 
$
16,200

 
0.9
Stock options exercisable at July 30, 2016
249,800

 
$
63.13

 
$
16,200

 
0.9

Stock Appreciation Rights

The following table summarizes stock appreciation rights activity for the twenty-six weeks ended July 30, 2016:
 
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 30, 2016
5,301,115

 
$
45.02

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(9,533
)
 
22.46

 
 
 
 
Forfeited or expired
(136,347
)
 
30.68

 
 
 
 
Outstanding at July 30, 2016
5,155,235

 
$
45.51

 
$
55,187

 
2.6
Stock appreciation rights exercisable at July 30, 2016
4,548,819

 
$
47.96

 
$
594

 
1.9
Stock appreciation rights expected to become exercisable in the future as of July 30, 2016
522,109

 
$
27.40

 
$
38,048

 
8.4

As of July 30, 2016, there was $6.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 14 months.

The grant date fair value of stock appreciation rights that vested during the twenty-six weeks ended July 30, 2016 and August 1, 2015 was $4.0 million and $4.2 million, respectively.

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Restricted Stock Units

The following table summarizes activity for restricted stock units for the twenty-six weeks ended July 30, 2016:
 
Service-based Restricted
Stock Units
 
Performance-based Restricted
Stock Units
 
Market-based Restricted
Stock Units
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Number of 
Underlying
Shares
 
Weighted-
Average Grant
Date Fair Value
Unvested at January 30, 2016
1,671,597

 
$
28.13

 
185,500

 
$
23.42

 
117,711

 
$
25.00

Granted
1,028,888

 
26.07

 
112,398

 
27.20

 
112,406

 
34.12

Adjustments for performance achievement
—

 
—

 
—

 
—

 
—

 
—

Vested
(576,387
)
 
30.77

 
(32,625
)
 
36.12

 
—

 
—

Forfeited
(166,539
)
 
26.27

 
(78,677
)
 
24.22

 
(62,553
)
 
31.91

Unvested at July 30, 2016
1,957,559

 
$
26.44

 
186,596

 
$
23.14

 
167,564

 
$
28.54


Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying common stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company's total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For an award with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. Unvested shares related to restricted stock units with performance-based vesting conditions are reflected at 100% of their target vesting amount in the table above.

Service-based restricted stock units are expensed on a straight-line basis over the total requisite service period, net of forfeitures. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis, net of forfeitures. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures.

As of July 30, 2016, there was $48.8 million, $2.4 million and $3.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 17 months, 16 months and 15 months for service-based, performance-based and market-based restricted stock units, respectively.

Additional information pertaining to restricted stock units for the twenty-six weeks ended July 30, 2016 and August 1, 2015 follows:
(in thousands)
July 30, 2016
 
August 1, 2015
Service-based restricted stock units:
 
 
 
Total grant date fair value of awards granted
$
26,823

 
$
20,009

Total grant date fair value of awards vested
17,735

 
16,906

 
 
 
 
Performance-based restricted stock units:
 
 
 
Total grant date fair value of awards granted
$
3,057

 
$
2,278

Total grant date fair value of awards vested
1,178

 
1,861

 
 
 
 
Market-based restricted stock units:
 
 
 
Total grant date fair value of awards granted
$
3,835

 
$
2,158

Total grant date fair value of awards vested
—

 
—


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The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-six weeks ended July 30, 2016 and August 1, 2015 were as follows:
 
July 30, 2016
 
August 1, 2015
Grant date market price
$
29.56

 
$
22.46

Fair value
$
34.12

 
$
19.04

Assumptions:
 
 
 
Price volatility
44
%
 
45
%
Expected term (years)
2.8

 
2.8

Risk-free interest rate
1.1
%
 
0.9
%
Dividend yield
2.8
%
 
3.5
%
Average volatility of peer companies
34.5
%
 
34.0
%
Average correlation coefficient of peer companies
0.3389

 
0.3288



7. DERIVATIVE INSTRUMENTS

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss ("AOCL"). Substantially all of the unrealized gains or losses related to designated cash flow hedges as of July 30, 2016 will be recognized in cost of sales, exclusive of depreciation and amortization, over the next twelve months.

The Company presents its derivative assets and derivative liabilities at their gross fair values on the Condensed Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions.

As of July 30, 2016, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
(in thousands)
Notional Amount(1)
Euro
$
102,221

British pound
$
24,423

Canadian dollar
$
20,884

Japanese yen
$
11,225


(1) 
Amounts are reported in U.S. Dollars equivalent as of July 30, 2016.

The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.

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As of July 30, 2016, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets/liabilities:
(in thousands)
Notional Amount(1)
Euro
$
12,388

Swiss franc
$
4,044

British pound
$
984


(1) 
Amounts are reported in U.S. Dollars equivalent as of July 30, 2016.

The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of July 30, 2016 and January 30, 2016 were as follows:
 
Asset Derivatives
 
Liability Derivatives
(in thousands)
Location
 
July 30,
2016
 
January 30,
2016
 
Location
 
July 30,
2016
 
January 30,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
Other current assets
 
$
3,645

 
$
4,097

 
Accrued expenses
 
$
2,570

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
Other current assets
 
$
—

 
$
69

 
Accrued expenses
 
$
297

 
$
—

Total
Other current assets
 
$
3,645

 
$
4,166

 
Accrued expenses
 
$
2,867

 
$
—


Refer to Note 3, “FAIR VALUE,” for further discussion of the determination of the fair value of derivative financial instruments.


13
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The location and amounts of derivative gains and losses for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015 on the Condensed Consolidated Statements of Operations and Comprehensive Loss were as follows:
 
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
 
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
(in thousands)
Location
 
Gain/(Loss)
 
Gain/(Loss)
 
Gain/(Loss)
 
Gain/(Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
Other operating income, net
 
$
618

 
$
264

 
$
(1,159
)
 
$
424

 
 
Effective Portion
 
Ineffective Portion and Amount Excluded from Effectiveness Testing
 
Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (1)
 
Location of Gain (Loss) Reclassified from AOCL into Earnings
 
Amount of Gain (Loss) Reclassified from AOCL into Earnings (2)
 
Location of Gain Recognized in Earnings on Derivative Contracts
 
Amount of Gain  Recognized in Earnings on Derivative Contracts (3)
 
Thirteen Weeks Ended
(in thousands)
July 30,
2016
 
August 1,
2015
 
 
 
July 30,
2016
 
August 1,
2015
 
 
 
July 30,
2016
 
August 1,
2015
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
$
7,422

 
$
2,167

 
Cost of sales, exclusive of depreciation and amortization
 
$
(204
)
 
$
4,839

 
Other operating income, net
 
$
259

 
$
204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twenty-six Weeks Ended
(in thousands)
July 30, 2016
 
August 1, 2015
 
 
 
July 30, 2016
 
August 1, 2015
 
 
 
July 30, 2016
 
August 1, 2015
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
$
(1,960
)
 
$
2,386

 
Cost of sales, exclusive of depreciation and amortization
 
$
2,101

 
$
10,875

 
Other operating income, net
 
$
613

 
$
239


(1) 
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
(2) 
The amount represents the reclassification from AOCL into earnings when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
(3) 
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.
 

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8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended July 30, 2016 was as follows:
 
Thirteen Weeks Ended July 30, 2016
(in thousands)
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total
Beginning balance at April 30, 2016
$
(98,771
)
 
$
(5,378
)
 
$
(104,149
)
Other comprehensive income (loss) before reclassifications
(12,596
)
 
7,422

 
(5,174
)
Reclassified from accumulated other comprehensive loss (1)
—

 
204

 
204

Tax effect
5,235

 
(1,051
)
 
4,184

Other comprehensive income (loss)
(7,361
)
 
6,575

 
(786
)
Ending balance at July 30, 2016
$
(106,132
)
 
$
1,197

 
$
(104,935
)
 
Twenty-six Weeks Ended July 30, 2016
(in thousands)
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total
Beginning balance at January 30, 2016
$
(119,196
)
 
$
4,577

 
$
(114,619
)
Other comprehensive (loss) income before reclassifications
13,064

 
(1,960
)
 
11,104

Reclassified from accumulated other comprehensive loss (1)
—

 
(2,101
)
 
(2,101
)
Tax effect
—

 
681

 
681

Other comprehensive (loss) income
13,064

 
(3,380
)
 
9,684

Ending balance at July 30, 2016
$
(106,132
)
 
$
1,197

 
$
(104,935
)

(1)  
For the thirteen weeks ended July 30, 2016, a gain was reclassified from accumulated other comprehensive loss to the cost of sales, exclusive of depreciation and amortization line item on the Condensed Consolidated Statement of Operations and Comprehensive Loss. For the twenty-six weeks ended July 30, 2016, a loss was reclassified from accumulated other comprehensive loss to the cost of sales, exclusive of depreciation and amortization line item on the Condensed Consolidated Statement of Operations and Comprehensive Loss.

The activity in accumulated other comprehensive loss for the thirteen and twenty-six weeks ended August 1, 2015 was as follows:
 
Thirteen Weeks Ended August 1, 2015
(in thousands)
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Foreign Currency Translation Adjustment
 
Total
Beginning balance at May 2, 2015
$
7,680

 
$
(96,695
)
 
$
(89,015
)
Other comprehensive income (loss) before reclassifications
2,167

 
(9,856
)
 
(7,689
)
Reclassified from accumulated other comprehensive loss (2)
(4,839
)
 
—

 
(4,839
)
Tax effect
(244
)
 
—

 
(244
)
Other comprehensive loss
(2,916
)
 
(9,856
)
 
(12,772
)
Ending balance at August 1, 2015
$
4,764

 
$
(106,551
)
 
$
(101,787
)
 
Twenty-six Weeks Ended August 1, 2015
(in thousands)
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Foreign Currency Translation Adjustment
 
Total
Beginning balance at January 31, 2015
$
13,100

 
$
(96,680
)
 
$
(83,580
)
Other comprehensive income (loss) before reclassifications
2,386

 
(9,871
)
 
(7,485
)
Reclassified from accumulated other comprehensive loss (2)
(10,875
)
 
—

 
(10,875
)
Tax effect
153

 
—

 
153

Other comprehensive loss
(8,336
)
 
(9,871
)
 
(18,207
)
Ending balance at August 1, 2015
$
4,764

 
$
(106,551
)
 
$
(101,787
)

(2) 
For the thirteen and twenty-six weeks ended August 1, 2015, a loss was reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statement of Operations and Comprehensive Loss.


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9. SEGMENT REPORTING

The Company has two operating segments: Abercrombie, which includes the Company's Abercrombie & Fitch and abercrombie kids brands; and Hollister. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, and have been aggregated into one reportable segment.

The following table provides the Company's net sales by operating segment for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015.
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
(in thousands)
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Abercrombie
$
363,076

 
$
380,615

 
$
686,412

 
$
720,367

Hollister
420,084

 
437,141

 
782,231

 
806,811

Total
$
783,160

 
$
817,756

 
$
1,468,643

 
$
1,527,178


The following table provides the Company’s net sales by geographic area for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015.
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
(in thousands)
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
United States
$
478,755

 
$
514,526

 
$
904,184

 
$
963,415

Europe
193,070

 
200,150

 
354,527

 
366,234

Other
111,335

 
103,080

 
209,932

 
197,529

Total
$
783,160

 
$
817,756

 
$
1,468,643

 
$
1,527,178



10. CONTINGENCIES

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves 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 with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims. As of July 30, 2016, the Company had accrued charges of approximately $10 million for certain legal contingencies. In addition, there are certain claims and legal proceedings pending against the Company for which accruals have not been established. Actual liabilities may exceed the amounts reserved, 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.

Additionally, for the quarter ended July 30, 2016, the Company recognized a $12.3 million gain in other operating income, net in connection with a settlement of certain economic loss claims associated with the April 2010 Deepwater Horizon oil spill.

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Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

BUSINESS SUMMARY

The Company is a specialty retailer that operates stores in North America, Europe, Asia and the Middle East and direct-to-consumer operations in North America, Europe and Asia that serve its customers throughout the world. The Company sells casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands.

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2016” represent the fifty-two week fiscal year that will end on January 28, 2017, and to “Fiscal 2015” represent the fifty-two week fiscal year that ended January 30, 2016.

For the second quarter of Fiscal 2016, net sales decreased 4% to $783.2 million from $817.8 million for the second quarter of Fiscal 2015. The gross profit rate for the second quarter of Fiscal 2016 was 60.9% compared to 62.3% for the second quarter of Fiscal 2015. Operating loss was $10.8 million for the second quarter of Fiscal 2016 compared to operating income of $2.0 million for the second quarter of Fiscal 2015. Net loss and net loss per diluted share attributable to A&F were $13.1 million and $0.19, respectively, for the second quarter of Fiscal 2016, compared to net loss and net loss per diluted share attributable to A&F of $0.8 million and $0.01, respectively, for the second quarter of Fiscal 2015.
For the Fiscal 2016 year-to-date period, net sales decreased 4% to $1.469 billion from $1.527 billion for the comparable period of Fiscal 2015. The gross profit rate for the Fiscal 2016 year-to-date period was 61.5% compared to 60.3% for the comparable period of Fiscal 2015. Operating loss was $65.7 million for the Fiscal 2016 year-to-date period compared to $88.2 million for the comparable period of Fiscal 2015. Net loss and net loss per diluted share attributable to A&F were $52.7 million and $0.78, respectively, for the Fiscal 2016 year-to-date period, compared to net loss and net loss per diluted share attributable to A&F of $64.1 million and $0.92, respectively, for the comparable period of Fiscal 2015.
Excluding certain items, the adjusted non-GAAP gross profit rate was 60.9%, operating loss was $16.7 million and net loss and net loss per diluted share attributable to A&F were $16.8 million and $0.25, respectively, for the second quarter of 2016, compared to adjusted non-GAAP gross profit rate of 62.0%, operating income of $16.5 million, and net income and net income per diluted share attributable to A&F of $8.6 million and $0.12, respectively, for the second quarter of 2015. Excluding certain items, adjusted non-GAAP gross profit rate was 61.5%, operating loss was $71.6 million and net loss and net loss per diluted share attributable to A&F were $56.4 million and $0.83, respectively, for the year-to-date period of Fiscal 2016, compared to adjusted non-GAAP gross profit rate of 61.9%, operating loss of $35.9 million, and net loss and net loss per diluted share attributable to A&F of $28.6 million and $0.41, respectively, for the year-to-date period of Fiscal 2015.
As of July 30, 2016, the Company had $455.6 million in cash and equivalents, and $293.3 million in gross borrowings outstanding under its term loan facility. Net cash used by operating activities was $57.9 million for the twenty-six weeks ended July 30, 2016. The Company also used cash of $58.0 million for capital expenditures and $27.0 million to pay dividends during the twenty-six weeks ended July 30, 2016.


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Table of Contents


NON-GAAP FINANCIAL MEASURES

This Quarterly Report on Form 10-Q includes discussion of certain financial measures under "RESULTS OF OPERATIONS" on both a GAAP and a non-GAAP basis. The Company believes that the non-GAAP financial measures presented in this "ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" are useful to investors as they provide a measure of the Company’s operating performance as compared to historical periods, excluding the effect of certain items which the Company believes do not reflect its future operating outlook, and therefore supplements investors' understanding of comparability across periods. These non-GAAP financial measures should be used supplemental to, not as an alternative to, the Company's GAAP financial results, and may not be the same as similar measures presented by other companies.

Changes in comparable sales are calculated on a constant currency basis by converting prior year store and online sales at current year exchange rates. For the purpose of this calculation, a store must have been open as the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year.

In addition, the following financial measures are disclosed on a GAAP basis and, as applicable, on a non-GAAP basis excluding items relating to asset impairment, claims settlement benefits, inventory write-down, net, legal settlement charges, store fixture disposal, profit improvement initiative, lease termination and store closure costs and restructuring benefit: cost of sales, exclusive of depreciation and amortization; gross profit; stores and distribution expense; marketing, general and administrative expense; other operating income, net; operating (loss) income; income tax (benefit) expense; effective tax rate; net loss attributable to A&F; and, net loss per diluted share attributable to A&F. Certain of these GAAP and non-GAAP measures are also expressed as a percentage of net sales. The income tax effect of non-GAAP items is calculated as the difference in income tax (benefit) expense with and without the non-GAAP adjustments to income before income taxes based upon the tax laws and statutory income tax rates of the affected tax jurisdictions. 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.

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Table of Contents


The tables below reconcile GAAP financial measures to non-GAAP financial measures for the thirteen and twenty-six week periods ended July 30, 2016 and August 1, 2015.
 
 
July 30, 2016
(in thousands, except gross profit rate and per share amounts)
 
GAAP
 
Excluded Items(1)
 
Non-GAAP
Thirteen Weeks Ended
 
 
 
 
 
 
Gross profit rate
 
60.9
%
 
—
%
 
60.9
%
Operating loss
 
$
(10,805
)
 
$
(5,926
)
 
$
(16,731
)
Net loss attributable to A&F
 
$
(13,129
)
 
$
(3,679
)
 
$
(16,808
)
Net loss per diluted share attributable to A&F
 
$
(0.19
)
 
$
(0.06
)
 
$
(0.25
)
 
 
 
 
 
 
 
Twenty-six Weeks Ended
 
 
 
 
 
 
Gross profit rate
 
61.5
%
 
—
%
 
61.5
%
Operating loss
 
$
(65,716
)
 
$
(5,926
)
 
$
(71,642
)
Net loss attributable to A&F
 
$
(52,716
)
 
$
(3,679
)
 
$
(56,395
)
Net loss per diluted share attributable to A&F
 
$
(0.78
)
 
$
(0.05
)
 
$
(0.83
)
 
 
August 1, 2015
(in thousands, except gross profit rate and per share amounts)
 
GAAP
 
Excluded Items(1)
 
Non-GAAP
Thirteen Weeks Ended
 
 
 
 
 
 
Gross profit rate
 
62.3
%
 
(0.3
)%
 
62.0
%
Operating income
 
$
1,962

 
$
14,526

 
$
16,488

Net (loss) income attributable to A&F
 
$
(810
)
 
$
9,407

 
$
8,597

Net (loss) income per diluted share attributable to A&F
 
$
(0.01
)
 
$
0.13

 
$
0.12

 
 
 
 
 
 
 
Twenty-six Weeks Ended
 
 
 
 
 
 
Gross profit rate
 
60.3
%
 
1.6
 %
 
61.9
%
Operating loss
 
$
(88,235
)
 
$
52,380

 
$
(35,855
)
Net loss attributable to A&F
 
$
(64,056
)
 
$
35,479

 
$
(28,577
)
Net loss per diluted share attributable to A&F
 
$
(0.92
)
 
$
0.51

 
$
(0.41
)

(1)
Refer to "RESULTS OF OPERATIONS" for details on excluded items.

Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.

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Table of Contents


CURRENT TRENDS AND OUTLOOK

Traffic remained a significant headwind for the second quarter of Fiscal 2016 as flagship and tourist stores, which are concentrated in the Abercrombie brand, accounted for the vast majority of the comparable sales decline across brands and geographies. Comparable sales improvement from the first quarter in international markets, driven by a recovery in the Hollister European business, including in the U.K., was offset by a decline in the U.S. trend. In addition, we saw strong growth in our direct-to-consumer business, both domestically and internationally.

During the quarter, we began to roll out programs that reflect our new brand positions for both the Abercrombie and Hollister brands. Our goal for Abercrombie is to be the iconic American casual luxury brand for today's twenty-something consumer, and our goal for Hollister is to be the iconic brand of the global teenage consumer. While still in the early stages, a clearly defined brand image and voice is beginning to be communicated across all customer touch points.

As we look to the rest of the year, we expect the environment to remain challenging with flagship and tourist locations continuing to weigh on the business. We are confident, however, that we are focusing on the right priorities and we expect to see traction in our business over time as we introduce new product and invest in marketing to drive awareness and relevance for our brands.

For Fiscal 2016, we now expect:
•
Comparable sales to remain challenging through the second half of the year, with a disproportionate effect from flagship and tourist locations.
•
Adverse effects from foreign currency exchange rates on sales and operating income.
•
A gross margin rate flat to last year's adjusted non-GAAP rate of 61.9%, but down in the third quarter due to adverse effects from foreign currency.
•
Operating expense dollars to be down slightly to last year's adjusted non-GAAP operating expense, with investments in marketing, skewed towards the third quarter, offset by savings from expense reduction efforts
•
An effective tax rate in the mid-to-upper 30s.
•
Net income attributable to noncontrolling interests of approximately $5 million
•
A weighted average diluted share count of approximately 68 million shares, excluding the effect of potential share buybacks.

We expect capital expenditures to be at the low end of the range of $150 million to $175 million for the full year.

We plan to open approximately 15 new stores in Fiscal 2016, including approximately 10 in international markets, primarily China, and approximately five in the U.S. We also plan to open six new outlet stores, primarily in the U.S. In addition, we anticipate closing up to 60 stores in the U.S. during the fiscal year through natural lease expirations.

Excluded from our outlook are the effects of certain potential items, including, but not limited to, insurance recoveries and impairments.

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RESULTS OF OPERATIONS

STORE ACTIVITY

Store count and gross square footage by brand for the thirteen weeks ended July 30, 2016 and August 1, 2015, respectively, were as follows:
 
Abercrombie (1)(2)
 
Hollister (3)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
April 30, 2016
334

 
39

 
411

 
141

 
745

 
180

New
1

 
—

 
1

 
2

 
2

 
2

Closed
(2
)
 
—

 
(1
)
 
—

 
(3
)
 
—

July 30, 2016
333

 
39

 
411

 
143

 
744

 
182

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
July 30, 2016
2,554

 
619

 
2,830

 
1,206

 
5,384

 
1,825

 
 
 
 
 
 
 
 
 
 
 
 
 
Abercrombie (1)
 
Hollister
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
May 2, 2015
354

 
33

 
432

 
137

 
786

 
170

New
1

 
1

 
—

 
2

 
1

 
3

Closed
(1
)
 
—

 
(3
)
 
(2
)
 
(4
)
 
(2
)
August 1, 2015
354

 
34

 
429

 
137

 
783

 
171

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
August 1, 2015
2,728

 
571

 
2,955

 
1,182

 
5,683

 
1,753


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

(2)
Excludes one international franchise store as of July 30, 2016 and April 30, 2016.

(3)
Excludes two international franchise stores as of July 30, 2016 and April 30, 2016.

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Store count and gross square footage by brand for the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively, were as follows:
 
Abercrombie (1)(2)
 
Hollister (3)
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
January 30, 2016
340

 
39

 
414

 
139

 
754

 
178

New
2

 
—

 
1

 
4

 
3

 
4

Closed
(9
)
 
—

 
(4
)
 
—

 
(13
)
 
—

July 30, 2016
333

 
39

 
411

 
143

 
744

 
182

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
July 30, 2016
2,554

 
619

 
2,830

 
1,206

 
5,384

 
1,825

 
 
 
 
 
 
 
 
 
 
 
 
 
Abercrombie (1)
 
Hollister
 
Total
 
United States
 
International
 
United States
 
International
 
United States
 
International
January 31, 2015
361

 
32

 
433

 
135

 
794

 
167

New
4

 
2

 
—

 
4

 
4

 
6

Closed
(11
)
 
—

 
(4
)
 
(2
)
 
(15
)
 
(2
)
August 1, 2015
354

 
34

 
429

 
137

 
783

 
171

Gross square feet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
August 1, 2015
2,728

 
571

 
2,955

 
1,182

 
5,683

 
1,753


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

(2)
Excludes one international franchise store as of July 30, 2016 and January 30, 2016.

(3)
Excludes two international franchise stores as of July 30, 2016 and January 30, 2016.

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Table of Contents


Net Sales
 
Thirteen Weeks Ended
 
 
 
 
 
July 30, 2016
 
August 1, 2015
 
 
 
 
(in thousands)
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
$ Change
 
Net Sales
% Change
Abercrombie(2)
$
363,076

 
(7)%
 
$
380,615

 
(7)%
 
$
(17,539
)
 
(5)%
Hollister
420,084

 
(2)%
 
437,141

 
(1)%
 
(17,057
)
 
(4)%
Total net sales
$
783,160

 
(4)%
 
$
817,756

 
(4)%
 
$
(34,596
)
 
(4)%
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
478,755

 
(4)%
 
$
514,526

 
(4)%
 
$
(35,771
)
 
(7)%
International
304,405

 
(4)%
 
303,230

 
(4)%
 
1,175

 
—%
Total net sales
$
783,160

 
(4)%
 
$
817,756

 
(4)%
 
$
(34,596
)
 
(4)%
 
Twenty-six Weeks Ended
 
 
 
 
 
July 30, 2016
 
August 1, 2015
 
 
 
 
(in thousands)
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
 
Change in
Comparable
Sales(1)
 
Net Sales
$ Change
 
Net Sales
% Change
Abercrombie(2)
$
686,412

 
(7)%
 
$
720,367

 
(8)%
 
$
(33,955
)
 
(5)%
Hollister
782,231

 
(1)%
 
806,811

 
(4)%
 
(24,580
)
 
(3)%
Total net sales
$
1,468,643

 
(4)%
 
$
1,527,178

 
(6)%
 
$
(58,535
)
 
(4)%
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
904,184

 
(3)%
 
$
963,415

 
(6)%
 
$
(59,231
)
 
(6)%
International
564,459

 
(5)%
 
563,763

 
(6)%
 
696

 
—%
Total net sales
$
1,468,643

 
(4)%
 
$
1,527,178

 
(6)%
 
$
(58,535
)
 
(4)%

(1) 
Changes in comparable sales are calculated on a constant currency basis by converting prior year store and online sales at current year exchange rates. For the purpose of this calculation, a store must have been open as the same brand at least one year and its square footage must not have been expanded or reduced by more than 20% within the past year.

(2) 
Includes Abercrombie & Fitch and abercrombie kids brands.

For the second quarter and year-to-date period of Fiscal 2016, net sales decreased 4% compared to the second quarter and year-to-date period of Fiscal 2015, primarily attributable to a 4% decrease in comparable sales in each period, mainly driven by flagship and tourist stores across both brands and geographies.

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Table of Contents


Cost of Sales, Exclusive of Depreciation and Amortization
 
Thirteen Weeks Ended
 
July 30, 2016
 
August 1, 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
Cost of sales, exclusive of depreciation and amortization
$
306,053

 
39.1%
 
$
307,894

 
37.7%
Recovery on inventory write-down
—

 
—%
 
2,621

 
0.3%
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization
$
306,053

 
39.1%
 
$
310,515

 
38.0%
 
 
 
 
 
 
 
 
Gross profit
$
477,107

 
60.9%
 
$
509,862

 
62.3%
Recovery on inventory write-down
—

 
—%
 
(2,621
)
 
(0.3)%
Adjusted non-GAAP gross profit
$
477,107

 
60.9%
 
$
507,241

 
62.0%
 
Twenty-six Weeks Ended
 
July 30, 2016
 
August 1, 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
Cost of sales, exclusive of depreciation and amortization
$
565,815

 
38.5%
 
$
605,767

 
39.7%
Inventory write-down, net(1)
—

 
—%
 
(24,240
)
 
(1.6)%
Adjusted non-GAAP cost of sales, exclusive of depreciation and amortization
$
565,815

 
38.5%
 
$
581,527

 
38.1%
 
 
 
 
 
 
 
 
Gross profit
$
902,828

 
61.5%
 
$
921,411

 
60.3%
Inventory write-down, net(1)
—

 
—%
 
24,240

 
1.6%
Adjusted non-GAAP gross profit
$
902,828

 
61.5%
 
$
945,651

 
61.9%

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

For the second quarter of Fiscal 2016, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 140 basis points as compared to the second quarter of Fiscal 2015, primarily due to the adverse effects from changes in foreign currency exchange rates of approximately 90 basis points and the net impact of higher average unit costs partially offset by higher average unit retails. Excluding certain items, presented in the table above, second quarter Fiscal 2016 adjusted non-GAAP cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 110 basis points as compared to the second quarter of Fiscal 2015.

For the year-to-date period of Fiscal 2016, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 110 basis points as compared to the year-to-date period of Fiscal 2015, which included a $24.2 million, net inventory write-down. Excluding the $24.2 million, net inventory write-down, year-to-date Fiscal 2016 adjusted non-GAAP cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 40 basis points as compared to the year-to-date period of Fiscal 2015, primarily due to the adverse effects from changes in foreign currency exchange rates of approximately 80 basis points and the net impact of higher average unit cost partially offset by higher average unit retails.


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Table of Contents


Stores and Distribution Expense
 
Thirteen Weeks Ended
 
July 30, 2016
 
August 1, 2015
(in thousands)
 
 
% of Net Sales
 
 
 
% of Net Sales
Stores and distribution expense
$
382,917

 
48.9%
 
$
389,193

 
47.6%
Store fixture disposal
—

 
—%
 
(2,236
)
 
(0.3)%
Recovery on store closure costs
—

 
—%
 
842

 
0.1%
Adjusted non-GAAP stores and distribution expense
$
382,917

 
48.9%
 
$
387,799

 
47.4%
 
Twenty-six Weeks Ended
 
July 30, 2016
 
August 1, 2015
(in thousands)
 
 
% of Net Sales