Executive Overview
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. To help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in theU.S. andCanada , effectiveMarch 18, 2020 . Our e-commerce businesses have continued to be available to customers, with our fulfillment center and stores utilized for the fulfillment of online orders to be shipped to customers or available for curbside pickup. The impact of the COVID-19 outbreak, including the temporary closure of all of our stores, has had a material adverse effect on our business, liquidity, financial condition, and results of operations. During the three months endedMay 2, 2020 , we made, and may continue to make, adjustments to our operational plans, inventory controls, liquidity management by delaying lease and vendor payments, and reductions to our expense and capital expenditure plans. We have already taken a number of actions including implementing temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave. We are taking a phased approach as we reopen stores and we expect to have nearly all North American stores open by the end ofJune 2020 . Reopened stores initially are generating significantly lower sales than they did in prior periods, with trends improving as more of the economy reopens and as consumer behavior adapts to the changing landscape. Additionally, we have instituted new health and safety protocols for our customers and employees using industry best practices. In connection with reopening stores, we expect to spend approximately$8.0 million in pre-open cleaning services, signs used to encourage customers in social distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items to help control the spread of the virus and protect the health and safety of our customers and employees. Prior to the COVID-19 outbreak, we were on track to achieve growth in fiscal 2020, with positive comparable sales year-to-date throughMarch 5, 2020 . The impact of the COVID-19 outbreak on store traffic, beginning onMarch 6, 2020 , and the subsequent closure of all our North American stores, materially altered this trajectory. We implemented inventory control actions that resulted in inventory units on hand flat at the end of the first quarter of fiscal 2020 compared to the same period last year. We have been more aggressive with our promotional activity to drive sales, and this markdown activity has materially impacted margins. Over the past several years, we have made significant investments in our digital infrastructure and, as a result, we were able to generate robust digital sales during the first quarter of fiscal 2020, well above digital sales for the same period last year across all segments. Our unique digital experiences and our ability to use our stores for fulfillment have served us well while our stores have been closed to the public. We anticipate that adapting to operating as a digital-focused retailer during this time will have a lasting influence on how we operate moving forward. Continuing to function as a digital-focused retailer coupled with our strategic pillars of delivering differentiated products, offering differentiated experiences in-store and online, and focusing on new growth opportunities to increase market share, will guide our decisions as we adjust for the future. We remain one of the largest designers, producers and retailers of footwear and accessories in the market and have the advantage of a fully integrated supply chain supported by our acquisition ofCamuto Group . The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the outbreak or a new surge in cases may cause new or prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors, including a potential reduction in consumer spending. As such, the ultimate impacts of the COVID-19 outbreak to our businesses are highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.
Comparable Sales Performance Metric
We consider comparable sales to be an important indicator of the performance of our retail and direct-to-consumer businesses, and investors may find it useful as such. Comparable sales is a primary metric commonly used throughout the retail industry. We include stores in our comparable sales metric for those stores in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed. Comparable sales include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period in the prior year. Comparable sales for the Brand Portfolio segment includes the direct-to-consumer www.vincecamuto.com e-commerce site. Comparable sales also includes stores temporarily closed as a result of the COVID-19 outbreak as management continues to believe this metric is meaningful to monitor the performance through the temporary closure period and to measure progress as stores re-open. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation. 16 --------------------------------------------------------------------------------
Financial Summary
Net sales decreased to$482.8 million for the three months endedMay 2, 2020 from$873.3 million for the three months endedMay 4, 2019 . The 44.7% decrease in net sales was primarily driven by the COVID-19 outbreak with a 42.3% decrease in comparable sales due to the temporary closure of all stores effectiveMarch 18, 2020 , during our peak selling season, the lower Brand Portfolio segment sales due to orders canceled by our retailer customers, shelter-in-place orders impacting many of our customers, and changes in consumer spending as a result of the economic uncertainty. During the three months endedMay 2, 2020 , gross loss as a percentage of net sales was 5.5% as compared to a gross profit of 29.7% for the same period last year. The change from a gross profit to a loss was primarily driven by the impacts of the COVID-19 outbreak on our operations and the closure of stores, which we addressed with aggressive promotional activity, significant inventory markdowns resulting in an increase in inventory reserves of$84.0 million over the same period last year, increased shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume. Net loss for the three months endedMay 2, 2020 was$215.9 million , or a loss of$3.00 per diluted share, which included net after-tax charges of$84.1 million , or$1.17 per diluted share, primarily related to impairment charges, integration and restructuring expenses and incremental costs related to the COVID-19 outbreak, offset by governmental credits we claimed. Net income for the three months endedMay 4, 2019 was$31.2 million , or$0.40 earnings per diluted share, which included net after-tax charges of$2.4 million , or$0.03 per diluted share, primarily related to integration and restructuring expenses. Results of Operations Three months ended May 2, 2020 May 4, 2019 Change (dollars in thousands, except per share amounts) Amount % of Net Sales Amount
% of Net Sales Amount % Net sales(1)$ 482,783 100.0 %$ 873,289 100.0 %$ (390,506 ) (44.7 )% Cost of sales (509,243 ) (105.5 ) (613,956 ) (70.3 ) 104,713 (17.1 )% Gross profit (loss)(1) (26,460 ) (5.5 ) 259,333 29.7 (285,793 ) NM Operating expenses(1) (187,221 ) (38.8 ) (217,580 ) (24.9 ) 30,359 (14.0 )% Income from equity investment 2,270 0.5 2,228 0.2 42 1.9 % Impairment charges (112,547 ) (23.3 ) - - (112,547 ) NM Operating profit (loss) (323,958 ) (67.1 ) 43,981 5.0 (367,939 ) NM Interest expense, net (2,158 ) (0.5 ) (1,801 ) (0.2 ) (357 ) 19.8 % Non-operating expenses, net (87 ) (0.0 ) (342 ) (0.0 ) 255 (74.6)% Income (loss) before income taxes (326,203 ) (67.6 ) 41,838 4.8 (368,041 ) NM Income tax benefit (provision) 110,345 22.9 (10,644 ) (1.2 ) 120,989 NM Net income (loss)$ (215,858 ) (44.7 )%$ 31,194 3.6 %$ (247,052 ) NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share$ (3.00 ) $ 0.41 $ (3.41 ) NM Diluted earnings (loss) per share$ (3.00 ) $ 0.40 $ (3.40 ) NM Weighted average shares used in per share calculations: Basic shares 71,914 77,004 (5,090 ) (6.6 )% Diluted shares 71,914 78,263 (6,349 ) (8.1 )%
NM - Not meaningful (1) We changed our presentation of net sales and gross profit (loss) for all
periods presented to include commission income. Previously reported other
revenue, which primarily included operating sublease income, was reclassified to operating expenses. 17
--------------------------------------------------------------------------------Net Sales - The following summarizes the changes in consolidated net sales from the same period last year: Three months ended May (in thousands) 2, 2020 Consolidated net sales for the same period last year $
873,289
Decrease in comparable sales (328,789 ) Net decrease from non-comparable sales and other changes (34,310 ) Loss of net sales from closed stores (4,400 ) Decrease in wholesale net sales from Brand Portfolio segment (24,450 ) Increase in commission income from Brand Portfolio segment 1,443 Consolidated net sales $ 482,783
The following summarizes net sales by segment:
Three months ended
Change
(dollars in thousands) May 2, 2020 May 4, 2019 Amount % Comparable Sales % Segment net sales: U.S. Retail$ 377,073 $ 691,840 $ (314,767 ) (45.5 )% (42.4)% Canada Retail 29,329 51,816 (22,487 ) (43.4 )% (32.4)% Brand Portfolio 82,113 104,546 (22,433 ) (21.5 )% 92.8% Other 13,623 35,607 (21,984 ) (61.7 )% (62.0)% Total segment net sales 502,138 883,809 (381,671 ) (43.2 )% (42.3)% Elimination of intersegment net sales (19,355 ) (10,520 ) (8,835 ) 84.0 % Consolidated net sales$ 482,783 $ 873,289 $ (390,506 ) (44.7 )% The decreases in comparable sales for all segments, except Brand Portfolio, and in total consolidated net sales, were driven by the temporary closure of stores during our peak selling season in response to the COVID-19 outbreak. This was partially offset by strong performance in our e-commerce channels, including www.vincecamuto.com which is included in comparable sales for the Brand Portfolio segment, as a certain amount of customer demand shifted online. Brand Portfolio segment net sales was also negatively impacted by the COVID-19 outbreak as retailer customers temporarily closed stores and canceled orders. Gross Profit (Loss)- The following summarizes gross profit (loss) by segment: Three months ended May 2, 2020 May 4, 2019 % of Segment Net % of Segment (dollars in thousands) Amount Sales Amount Net Sales Change Segment gross profit (loss): U.S. Retail$ (32,970 ) (8.7 )%$ 209,891 30.3 %$ (242,861 ) Canada Retail (2,311 ) (7.9 )% 15,747 30.4 %$ (18,058 ) Brand Portfolio 13,904 16.9 % 25,673 24.6 %$ (11,769 ) Other (5,428 ) (39.8 )% 9,311 26.1 %$ (14,739 ) (26,805 ) 260,622 Elimination of intersegment gross profit 345 (1,289 ) Gross profit (loss)$ (26,460 ) (5.5 )%$ 259,333
29.7 %
The change from a gross profit to a loss was primarily driven by the impacts of the COVID-19 outbreak on our operations and the closure of stores, which we responded to with aggressive promotional activity, significant inventory markdowns, higher shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume. TheU.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of 18 -------------------------------------------------------------------------------- inventories reflects reductions for merchandise that was marked down prior to the end of the first quarter of fiscal 2020 with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored slow-moving and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores. For the three months endedMay 2, 2020 , we recorded$84.0 million of additional reserves over the same period last year.
Elimination of intersegment gross profit (loss) consisted of the following:
Three months
ended
(in thousands) May 2, 2020 May 4, 2019 Elimination of intersegment activity: Net sales recognized by Brand Portfolio segment$ (19,355 ) $ (10,520 ) Cost of sales: Cost of sales recognized by Brand Portfolio segment 12,134
7,607
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
7,566 1,624 Gross profit (loss) $ 345$ (1,289 ) Operating Expenses- For the three months endedMay 2, 2020 , operating expenses decreased by$30.4 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 outbreak. Operating expenses during the three months endedMay 2, 2020 were offset by government subsidies in the form of qualified payroll tax credits of$4.5 million . Impairment Charges- As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, we updated our impairment analysis at the store-level. During the three months endedMay 2, 2020 , we recorded impairment charges of$84.9 million for under-performing stores ($65.2 million and$19.7 million for theU.S. Retail and Canada Retail segments, respectively). Also during the three months endedMay 2, 2020 , we recorded an impairment charge of$6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life. Also as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair values of the First Cost reporting unit within the Brand Portfolio segment andThe Shoe Company tradename within the Canada Retail segment did not exceed their respective carrying values. Accordingly, during the three months endedMay 2, 2020 , we recorded an impairment charge of$20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment, and$1.1 million forThe Shoe Company tradename included in the Canada Retail segment. Income Taxes- Our effective tax rate changed from 25.4% for the three months endedMay 4, 2019 to 33.8% for the three months endedMay 2, 2020 . The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where theU.S. federal statutory tax rate was 35%. Seasonality Our business has historically been subject to seasonal merchandise trends driven by the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter. The COVID-19 outbreak has negatively impacted our spring peak selling season and the trends that we have experienced historically may change for the remainder of fiscal 2020. 19 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels fluctuate seasonally. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility, including the impact of the outbreak of COVID-19. We believe that cash generated from our operations and the business continuity plans put in place, together with our current levels of cash, as well as the use of our Credit Facility, are sufficient over the next 12 months to maintain our ongoing operations, support working capital requirements, and fund capital expenditures. The cash generated from operations is based on our expectation of re-opening nearly all of our North American stores by the end ofJune 2020 with a gradual return of store traffic throughout the remainder of fiscal 2020. During the three months endedMay 2, 2020 , we took certain measures to preserve liquidity, including reducing inventory orders, significantly cutting costs, and delaying vendor and landlord payments, after providing notice, while we renegotiate to extend payment terms. We have engaged a national lease firm to assist us in the negotiating of lease deferrals and concessions. We have also extended nearly all payables to at least 90 days. OnMarch 17, 2020 , the Board of Directors reduced the quarterly cash dividend by 60% from the previous quarter and declared a quarterly cash dividend payment of$0.10 per share for both Class A and Class B common shares. The dividend was paid onApril 10, 2020 to shareholders of record at the close of business onMarch 30, 2020 . As a result of our amended Credit Facility discussed below, we have suspended subsequent dividend payments and share repurchases. During the three months endedMay 2, 2020 , we took immediate actions to cancel orders and have reduced orders for the remainder of this fiscal year, while maintaining flexibility to increase orders as we monitor the business recovery. In addition to the temporary leaves of absence without pay for a significant number of our employees, effectiveMarch 29, 2020 , the base salaries for our executive officers were reduced by 20%, wages were reduced by 5% to 20% for nearly all of the remaining associates, depending on title, and annual cash retainers for all non-employee directors serving on the Board of Directors were reduced by 20%. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which theU.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. As a result, we expect to receive a refund in fiscal 2021 of approximately$140.0 million related to these net operating losses. Our ability to recover deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income, although the risks of failing to realize these benefits vary across the jurisdictions. We are actively pursuing further options to increase financial flexibility. While there is no immediate need to raise capital, we intend to evaluate assessing the financing markets and may look to raise capital, when and if we deem it prudent, to further strengthen our balance sheet. There can be no assurance that we will raise additional capital, or as to the timing or terms of any such additional capital. If additional liquidity is needed, we may take additional actions including adjusting our marketing spend, implementing further employee furloughs, reducing the store labor requirements, and forgoing additional capital expenditures and other discretionary expenses.
Operating Cash Flows
For the three months endedMay 2, 2020 , net cash used in operations was$39.5 million compared to$3.0 million for the three months endedMay 4, 2019 . The increase in cash used in operations was driven by the net loss incurred for the quarter as a result of the COVID-19 outbreak, after adjusting for non-cash activity including depreciation and amortization, stock-based compensation, impairment charges, and the change in deferred income taxes, primarily due to the impact of the COVID-19 outbreak on our business. This was partially offset by measures we implemented to manage our working capital to preserve liquidity, including reducing inventory orders, significantly cutting costs, and delaying vendor and landlord payments.
Investing Cash Flows
For the three months endedMay 2, 2020 , our net cash provided by investing activities was$10.0 million , which was due to the liquidation of our available-for sale-securities and reductions of capital expenditures to$14.6 million in order to preserve liquidity. During the three months endedMay 4, 2019 , our net cash used in investing activities was$6.2 million , which was due to capital expenditures of$24.9 million , partially offset by the net liquidation of our available-for sale-securities. 20 --------------------------------------------------------------------------------
Financing Cash Flows
For the three months endedMay 2, 2020 , our net cash provided by financing activities was$193.9 million compared to net cash used in financing activities of$19.9 million for the three months endedMay 4, 2019 . During three months endedMay 2, 2020 , we had net borrowings of$203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in theU.S. and global markets resulting from COVID-19. We also significantly reduced the amount of dividends paid. During the three months endedMay 4, 2019 , net cash used in financing activities was primarily related to the payment of dividends as the repurchase of Class A common shares was financed from borrowings from the Credit Facility.
Debt
Our Credit Facility, with a maturity date ofAugust 25, 2022 , provides a revolving line of credit with sub-limits for the issuance of up to$50 million in letters of credit, swing loan advances of up to$15 million , and the issuance of up to$75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, and other expenditures. OnApril 30, 2020 , the Credit Facility was amended, which resulted in various changes including: • Providing for a lien on all of the Company's assets;
• Reducing the borrowing availability from
October 31, 2020 ,$350.0 million onJanuary 30, 2021 ,$325.0 million onMay 1, 2021 , and$300.0 million onJuly 31, 2021 ; • Redefining the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;
• Changing the maximum leverage ratio covenant to 3.50:1 as of
4.00:1 as of
of
• Changing the minimum fixed charge coverage ratio to 1.25:1 as of
2020 and 1.05:1 as of
quarter thereafter; and
• Restricting the Company from paying dividends, making share repurchases,
and making certain acquisitions.
A violation of any of the financial or other covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As ofMay 2, 2020 , we were in compliance with all financial covenants. Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.5% as ofMay 2, 2020 . Any loans issued in Canadian dollars bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.5% as ofMay 2, 2020 . Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As ofMay 2, 2020 , the Credit Facility provided a revolving line of credit up to$400 million and we had$393.0 million outstanding under the Credit Facility and$5.0 million in letters of credit issued, resulting in$2.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization and write-off of debt issuance costs. Capital Expenditure Plans We expect to spend approximately$25.0 million to$35.0 million for capital expenditures in fiscal 2020, of which we invested$14.6 million during the three months endedMay 2, 2020 . Our capital expenditures for the remainder of the year will depend primarily on the number of store projects as well as infrastructure and information technology projects that we undertake and the timing of these expenditures.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
We have included a summary of our contractual obligations as of
21 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies disclosed in our 2019 Form 10-K.
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