CHICO'S FAS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in this Form 10-Q
and in our Annual Report on Form 10-K for the fiscal year ended February 1,
2020 , filed with the SEC on March 16, 2020 ("2019 Annual Report on Form 10-K").
Executive Overview
Chico's FAS is aFlorida -based fashion company founded in 1983 onSanibel Island , Fla. The Company reinvented the fashion retail experience by creating fashion communities anchored by our Most Amazing Personal Service, which put the customer at the center of everything we do. As one of the leading fashion retailers inNorth America ,Chico's FAS is a company of three unique brands - Chico's®, White House Black Market® and Soma® - each thriving in their own white space, founded by women, led by women, providing solutions that millions of women say give them confidence and joy. Our distinct lifestyle brands serve the needs of fashion-savvy women 35 years and older. We earn revenue and generate cash through the sale of merchandise in our domestic and international retail stores, our various Company-operated e-commerce websites, our call center (which takes orders for all of our brands), through unaffiliated franchise partners and through third-party channels. We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various retail channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return or exchange our merchandise through whatever sales channel and at whatever time is most convenient. As a result, we track total sales and comparable sales on a combined basis. Select Financial Results The following table depicts select financial results for the thirteen weeks endedMay 2, 2020 andMay 4, 2019 : Thirteen Weeks Ended May 2, 2020 May 4, 2019 (in millions, except per share amounts) Net sales $ 280 $ 518 Significant charges: Inventory write-offs 43 - Long-lived store asset impairment 18 - Right of use asset impairment 2 - Goodwill impairment 80 - Indefinite-lived asset impairment 33 - (Loss) income from operations (254 ) 5 Net (loss) income (178 ) 2
Net (loss) income per common and common equivalent share - diluted
(1.55 ) 0.02
Loss per diluted share for the thirteen weeks ended May 2, 2020 (the "first
quarter") was $1.55 compared to earnings per diluted share of $0.02 for the
thirteen weeks ended May 4, 2019 ("last year's first quarter"). The first
quarter net loss includes impairment charges and inventory write-offs primarily
relating to the impact of COVID-19 of approximately $135 million , after-tax.
Last year's first quarter net income includes the unfavorable impact of
accelerated depreciation charges of approximately $4 million , after-tax, related
to our retail fleet optimization plan.
Overview of First Quarter Results
Results for the first quarter were negatively impacted due to the COVID-19
pandemic which led to the temporary closure of all stores across North America
and international franchise locations in Mexico during the second half of the
first quarter. The Company recognized significant impairment charges and
inventory write-offs as a result of the COVID-19 pandemic during the first
quarter. The Company also continued to incur payroll expenses and occupancy
costs while stores were closed. Results during the first quarter store closure
period were partially offset by strong digital commerce performance and the
Company's actions to align its cost structure with current sales expectations.
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The Company's first quarter cash flow was also negatively impacted by the COVID-19 closure period, which resulted from the Company paying for certain merchandise and expense payables as planned for the first quarter, despite lost sales during the store closure period. Further, the Company's cash burn during the first quarter reflects the payment of the previously approved first quarter fiscal 2020 dividend and the payout under the fiscal 2019 management incentive plan. The Company remains confident that it currently has sufficient liquidity to repay its obligations as they become due for the foreseeable future as stores reopen and the Company continues to execute on its cost savings initiatives, among other liquidity measures as discussed below. However, the extent to which the COVID-19 pandemic impacts our business operations, financial results, and liquidity will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the pandemic; our response to and ability to mitigate the impact of the pandemic; the negative impact it has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short- and longer-term impact on the levels of consumer confidence; the ability of our suppliers, vendors and customers to successfully address the impacts of the pandemic; actions governments, businesses and individuals take in response to the pandemic; and how quickly economies recover after the COVID-19 pandemic subsides. COVID-19 Business Actions Summary • Temporarily closed all retail stores inNorth America onMarch 17, 2020 to safeguard our customers, employees and the communities we serve; • Temporarily furloughed the majority of employees, while providing
continued health benefits for eligible employees during the furlough;
• Temporarily reduced a majority of non-furloughed associates' salary or
hours, including executive officers and the Board of Directors' (the
"Board") annual cash retainers;
• Adopted social distancing policies and enhanced safety procedures for
distribution center associates;
• Suspended rent payments commencing April 2020 and are in activediscussions with landlords to find a mutually beneficial and agreeable
path forward;
• Engaged a third-party to assist in restructuring the lease portfolio
and to seek rent relief in the form of rent reductions, rent
abatements and other concessions;
• Quickly aligned merchandise receipts with conservative forecast of market
demand;
• Partnered with suppliers and vendors to reduce operating costs and extend
payment terms;
• Significantly reduced selling, general and administrative ("SG&A")
expenses to better align operating costs with expected sales;
• Suspended quarterly dividend beginning in the second quarter; and
• Reduced capital expenditures primarily related to non-essential
maintenance and business essential expenditures.
• In addition to
of the first quarter, the Company has substantial additional borrowing
capacity under the asset-based lending facility ("ABL") and by leveraging
unencumbered real estate.
• Borrowings under the ABL have no required principal repayments until
August 2023 .
• The Company will realize meaningful added liquidity from provisions of the
Coronavirus Aid, Relief, and Economic Security Act, including benefits
from recent tax filings.
Stores Reopening and Operational Protocols OnApril 27, 2020 , the Company announced a phased store reopening plan acrossNorth America commencing onMay 4, 2020 in accordance with local, state and federal health and safety guidelines and regulations. Currently, the Company has 63% of stores open to the public under enhanced safety precautions and reduced hours, and will have 80% of its fleet open byJune 12, 2020 . As part of its reopening plan, the Company also is offering customers Buy On-Line, Pick-up In-Store (BOPIS) with contactless curbside pickup and shop-by-appointment. Second quarter sales are planned to be better than the first quarter, even as we work with limited store hours and social distancing guidelines. We will continue to open our remaining stores as states allow. The Company has implemented in-store measures to ensure the safety of employees and customers, including rigorous cleaning routines, providing hand sanitizer stations in every store, creating new flexible distance between clothing racks, and adjusting fitting rooms to accommodate social distancing practices. These stores will initially operate on reduced hours and the Company is managing capacity in accordance with local, state and federal health and safety guidelines and regulations. 25
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Digital Sales The Company's digital sales remain strong as we continue to leverage our digital platform, enhanced by our proprietary digital styling software, Style ConnectSM, that enables us to communicate directly with the majority of our customers to drive the digital business. Digital sales in the first quarter exceeded the same period last year, and we posted a double-digit increase in April. Fiscal 2020 Outlook The Company previously withdrew its guidance issued in its fourth quarter earnings release datedFebruary 27, 2020 and is not providing updated guidance at this time. The impact of the COVID-19 pandemic creates uncertainty in predicting near-term performance. As previously discussed, we have aggressively taken actions designed to balance our cash flows with the current environment. We expect these actions when combined with our strong financial position and competitively advantaged brands will enable us to successfully manage through the COVID-19 pandemic, allowing us to deliver sales through a variety of channels, including our stores, through social distancing sales practices such as curbside pickup, appointments and Style Connect, in addition to growing digital sales. Our Business Strategy Our overall business strategy is focused on building a collection of distinct high-performing retail brands serving the fashion needs of women 35 and older. The primary function of the Company is the production and procurement of beautiful merchandise that delivers the brand promise and brand positioning of each of our brands and resonates with customers. To that end, we are further strengthening our merchandise and design capabilities and enhancing our sourcing and supply chain to deliver product in a timely manner to our customers while also concentrating on improvements to the quality and aesthetic of our merchandise. Over the long term, we may build our brand portfolio by organic development or acquisition of other specialty retail concepts if research indicates that the opportunity complements our current brands and is appropriate and in the best interest of the shareholders. We pursue improving the performance of our brands by building our omnichannel capabilities, managing our store base, growing our online presence, executing marketing plans, effectively leveraging expenses, considering additional sales channels and markets, and optimizing the merchandise offerings of each of our brands. We continue to invest heavily in our omnichannel capabilities so our customers can fully experience our brands in the manner they choose. We view our stores and Company-operated e-commerce websites as a single, integrated sales function rather than as separate, independently operated sales channels. As a result, we maintain a shared inventory platform for our primary operations, allowing us to fulfill orders for all channels from our distribution center ("DC") inWinder, Georgia . Our domestic customers can return merchandise to a store or to our DC, regardless of the original purchase location. Using our enhanced "Locate" tool, we ship in-store orders from other locations directly to the customer, expediting delivery times while reducing our shipping costs. In addition, our shared inventory system, Endless Aisle, enables customers to make purchases online and ship from store. In fiscal 2019, we completed the implementation of our Buy On-Line, Pick-up In-Store (BOPIS) capability across all our brands, further enhancing our omnichannel capabilities, and in fiscal 2020, we completed the implementation of Style ConnectSM, our proprietary digital styling software that enables us to communicate directly with the majority of our customers to drive the frontline business to digital fulfillment. We seek to acquire new customers and retain existing customers by leveraging existing customer-specific data and through targeted marketing, including digital marketing, social media, television, catalogs and mailers. We seek to optimize the potential of our brands with improved product offerings, potential new merchandise opportunities, and brand extensions that enhance the current offerings, as well as through our continued emphasis on our trademark "Most Amazing Personal Service" standard. We also will continue to consider potential alternative sales channels for our brands, including international franchise, wholesale, licensing and other opportunities. In fiscal 2019, we took actions across our brands to focus on three distinct areas that we believe will positively impact results. These are: • Driving stronger sales through improved product and marketing;
• Optimizing the customer journey by simplifying, digitizing and extending
our unique and personalized service; and
• Transforming our sourcing and supply chain operations to increase product
speed to market and improve quality.
OnApril 29, 2020 , the Company announced a leadership transition, effectiveJune 24, 2020 , designed to strengthen and provide ongoing stability and continuity of the business, and to further support the Company's future, including the following: 26
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•
Executive Officer ("CEO") and President of the Company and join the Board;
•
Executive Chair of the Board; and
• Director
Key Performance Indicators
In assessing the performance of our business, we consider a variety of key
performance and financial measures to evaluate our business, develop financial
forecasts and make strategic decisions. These key measures include comparable
sales, gross margin as a percent of sales, diluted earnings per share and return
on net assets ("RONA"). In light of the COVID-19 pandemic, we have shifted our
focus to effectively manage our liquidity position, including aligning our
operating cost structure with expected sales. We will continue to evaluate our
other key performance measures in addition to our liquidity position. The
following describes these measures.
Liquidity
Liquidity is measured through cash flow, which is the measure of cash provided
by or used in operating, investing and financing activities. We believe that as
a result of the Company's extensive measures to mitigate the impact of the
COVID-19 pandemic discussed above, we were able to, and continue to, effectively
manage our liquidity position.
Comparable Sales
Comparable sales is an omnichannel measure of the amount of sales generated from
products the Company sells directly to the consumer relative to the amount of
sales generated in the comparable prior-year period. Comparable sales is defined
as sales from stores open for the preceding twelve months, including stores that
have been expanded, remodeled or relocated within the same general market and
includes online and catalog sales, and beginning in the third quarter of fiscal
2019, includes international sales. The comparable sales calculation excludes
the negative impact of stores closed four or more days. The Company has
historically viewed comparable sales as a key performance indicator to measure
the performance of our business, however, due to the temporary closure of all
its stores across North America as a result of the COVID-19 pandemic during the
second half of the first quarter, we believe this is not a meaningful measure
for the fiscal 2020 first quarter ended May 2, 2020 .
Gross Margin as a Percentage of Net Sales
Gross margin as a percentage of net sales is computed as gross margin divided by
net sales. We believe gross margin as a percentage of net sales is a primary
metric to measure the performance of our business as it is used to determine the
value of incremental sales, and to guide pricing and promotion decisions.
Diluted Earnings per Share
Earnings per share is determined using the two-class method when it is more
dilutive than the treasury stock method. Basic earnings per share is computed by
dividing net income available to common shareholders by the weighted-average
number of common shares outstanding during the period, including participating
securities. Diluted earnings per share reflects the dilutive effect of potential
common shares from non-participating securities such as stock options,
performance stock units and restricted stock units. Whereas basic earnings per
share serves as an indicator of the Company's profitability, we believe diluted
earnings per share is a key performance measure because it gauges the Company's
quality of earnings per share assuming all potential common shares from
non-participating securities are exercised.
Return on Net Assets
RONA is defined as (a) net income divided by (b) the "five-point average" (based
on balances at the beginning of the first quarter plus the final balances for
each quarter of the fiscal year) of net working capital less cash and marketable
securities plus fixed assets. We believe RONA is a primary metric as it helps to
determine how well the Company is utilizing its assets. As such, a higher RONA
could indicate that the Company is using its assets and working capital
efficiently and effectively.
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Results of Operations Thirteen Weeks EndedMay 2, 2020 Compared to the Thirteen Weeks EndedMay 4, 2019 The following results include the impact of the COVID-19 pandemic. Please note the Company is not providing comparable sales figures for the full first quarter as we believe this is not a meaningful measure for the first quarter due to the significant impact of store closures as a result of the COVID-19 pandemic. Furthermore, we recognized significant impairment charges and inventory write-offs and continued to pay for certain merchandise and expense payables as planned for the first quarter despite lost sales during the store closure period. As a result, comparisons to last year's first quarter are not a meaningful way to discuss our operating results this quarter. Net (Loss) Income and (Loss) Earnings per Diluted Share For the first quarter, the Company reported a net loss of$178 million , or$1.55 loss per diluted share, compared to net income of$2 million , or$0.02 earnings per diluted share in last year's first quarter. The first quarter results were significantly impacted by the COVID-19 pandemic and included the following pre-tax charges: Summary of Significant Charges Thirteen Weeks Ended May 2, 2020 % of Amount (1) Sales (1) (dollars in millions) Gross margin: Inventory write-offs$ 43 15.4 % Long-lived store asset impairment 18
6.6
Right of use asset impairment 2
0.9
Total significant charges impacting gross margin 64
22.8
Goodwill and intangible impairment:Goodwill impairment 80
28.7
Indefinite-lived asset impairment 33
11.7
Total goodwill and intangible impairment charges 113 40.4 Total$ 177 63.2 % (1) May not foot due to rounding Net Sales The following table depicts net sales by Chico's, WHBM and Soma in dollars and as a percentage of total net sales for the thirteen weeks endedMay 2, 2020 andMay 4, 2019 : Thirteen Weeks Ended May 2, 2020 May 4, 2019 (dollars in millions) Chico's$ 131 46.9 %$ 277 53.4 % WHBM 84 29.9 161 31.1 Soma 65 23.2 80 15.5
Total
(1) Includes TellTale net sales, which is not a significant component of Soma revenue.
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For the first quarter, net sales were$280 million compared to$518 million in last year's first quarter. This decrease of 45.9% reflects the impact of our closed stores during the second half of the first quarter and 78 net store closures since last year's first quarter, partially offset by strong digital commerce performance. During the initial four weeks of fiscal 2020, the Company's comparable sales increased 2.7% compared to the same period last year, building on the positive sales momentum reported in the fourth quarter of fiscal 2019. Cost of Goods Sold/Gross Margin The following table depicts cost of goods sold ("COGS") and gross margin in dollars and gross margin as a percentage of total net sales for the thirteen weeks endedMay 2, 2020 andMay 4, 2019 : Thirteen Weeks Ended May 2, 2020 May 4, 2019 (dollars in millions) Cost of goods sold$ 291 $ 327 Gross margin (11 ) 191 Gross margin percentage (4.0 )% 36.9 % For the first quarter, gross margin was$(11) million , or (4.0)% of net sales, compared to$191 million , or 36.9% of net sales, in last year's first quarter. The decrease in gross margin primarily reflects the impact of significant charges of$64 million , or 22.8%, related to inventory write-offs and store impairments as reflected in the table above, as well as deleverage of occupancy costs as a percent of sales as April rent was expensed in the first quarter for accounting purposes, although the April rent payment was suspended. Selling, General and Administrative Expenses The following table depicts SG&A, which includes direct operating expenses, marketing expenses and National Store Support Center expenses, in dollars and as a percentage of total net sales for the thirteen weeks endedMay 2, 2020 andMay 4, 2019 : Thirteen Weeks Ended May 2, 2020 May 4, 2019 (dollars in millions)
Selling, general and administrative expenses
46.4 % 35.9 %
For the first quarter, SG&A was $130 million , or 46.4% of net sales, compared to
$185 million , or 35.9% of net sales, for last year's first quarter. The decrease
in SG&A expenses primarily reflects the Company's actions to align its cost
structure with current and future sales expectations, including temporarily
placing the majority of its employees on furlough and reducing the salary or
hours of most remaining employees, all executive officers and the Board's cash
retainers by 50%, effective April 5, 2020 , as well as the benefit of other cost
saving initiatives and reduced marketing and other variable costs.
Income Taxes
For the first quarter, the $77 million income tax benefit resulted in an
effective tax rate of 30.0% compared to 62.7% for last year's first quarter. The
provision for the first quarter was primarily impacted by the benefits provided
by the enactment of the CARES Act, which was slightly reduced by the unfavorable
impact of the Company's book goodwill impairment and share-based compensation
expense. The 62.7% effective tax rate for last year's first quarter included the
recognition of $2.0 million related to employee share-based compensation
expense, the impact of which was enhanced relative to the statutory rate due to
the Company's low pretax loss. These items account for the variance between the
effective tax rate for the first quarter and last year's first quarter and the
U.S. federal statutory and state blended income tax rate of approximately 25%.
Cash, Marketable Securities and Debt
At the end of the first quarter, cash and marketable securities totaled $118
million while debt totaled $149 million .
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Inventories
At the end of the first quarter, inventories, net of inventory reserves, totaled$273 million compared to$242 million at the end of last year's first quarter. Adoption of New Accounting Pronouncements As discussed in Note 1 to our unaudited condensed consolidated financial statements included in this Form 10-Q, we adopted Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement and ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13") as ofFebruary 2, 2020 . OnFebruary 2, 2020 , we recorded a cumulative effect adjustment of approximately$1 million as a decrease to opening retained earnings upon adoption of ASU 2016-13. Adoption of ASU 2018-13 did not have a material impact on our unaudited condensed consolidated financial statements. Recently Issued Accounting Pronouncements See Note 2 to our unaudited condensed consolidated financial statements included in this Form 10-Q for a description of certain newly issued accounting pronouncements which may impact our financial statements in future reporting periods. Liquidity and Capital Resources As part of the actions we have taken, and are continuing to take, relating to the COVID-19 pandemic, the Company temporarily furloughed the majority of its employees, reduced a majority of non-furloughed associates' salary or hours, including the Company's executive officers' and the Board's annual cash retainers, canceled merchandise receipts to better align inventory with expected market demand and suspended its quarterly dividend beginning in the second quarter of fiscal 2020. The Company also significantly reduced SG&A expenses to better align operating costs with expected sales and reduced planned capital expenditures to be primarily maintenance and business essential expenses. The Company suspended rent payments commencing in April and is in active discussions with landlords to find a mutually beneficial and agreeable path forward, and is partnering with suppliers and vendors to materially reduce operating costs and extend payment terms. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and our responses thereto (including such actions we have taken or may take in the future as disclosed elsewhere in this Form 10-Q), we believe that cash flows from operating activities, our cash and marketable securities on hand, capacity within our credit facility and other liquidity options will be sufficient to repay our obligations for the foreseeable future. The following table summarizes cash flows for the year-to-date periodMay 2, 2020 compared to last year's year-to-date periodMay 4, 2019 : Thirteen Weeks Ended May 2, 2020 May 4, 2019 (dollars in millions) (1) Net cash (used in) provided by operating activities$ (99 ) $
6
Net cash provided by (used in) investing activities 30 (8 ) Net cash provided by (used in) financing activities 95 (16 ) Net increase (decrease) in cash and cash equivalents$ 26 $
(19 )
(1) May not foot due to rounding Operating Activities Net cash used in operating activities for the year-to-date period of fiscal 2020 was$99 million compared to net cash provided by operating activities of$6 million in last year's year-to-date period. The change in net cash used in operating activities primarily reflects inventory build as a result of store closures in the second half of the first quarter and the effect of the CARES Act on income taxes, partially offset by the suspension of rent payments commencingApril 2020 . 30
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Investing Activities Net cash provided by investing activities for the year-to-date period of fiscal 2020 was$30 million compared to net cash used in investing activities of$8 million in last year's year-to-date period, primarily reflecting a$37 million increase in the net proceeds from the sale of marketable securities. Financing Activities Net cash provided by financing activities for the year-to-date period of fiscal 2020 was$95 million compared to net cash used in financing activities of$16 million in last year's year-to-date period, primarily reflecting$107 million in proceeds from borrowings. Credit Facility OnAugust 2, 2018 , the Company and certain of its domestic subsidiaries entered into a credit agreement (the "Agreement") as borrowers and guarantors, withWells Fargo Bank, National Association , as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Agreement are guaranteed by the subsidiary guarantors and secured by a lien on certain assets of the Company and the subsidiary borrowers and guarantors, including inventory, accounts receivable, cash deposits, and certain insurance proceeds. The Agreement provides for a five-year asset-based senior secured revolving loan and letter of credit facility of up to$200 million , maturingAugust 2, 2023 . In addition, during the term of the Agreement, the Company may request an increase to the commitments under the Agreement by up to an additional$100 million , subject to customary conditions, including obtaining the agreements from the lenders to provide such commitment increase. The interest rate applicable to the loans under the Agreement will be equal to, at the Company's option, either a base rate, determined by reference to the federal funds rate, plus an interest rate margin, or a LIBOR, plus an interest rate margin, in each case, depending on availability under the Agreement. The Company expects borrowings to be at a LIBOR, plus an interest rate margin. In addition, the Company will pay a commitment fee per annum on the unused portion of the commitments under the Agreement. OnMarch 18, 2020 , the Company borrowed an additional$106.5 million under the Agreement, resulting in$51 million available for additional borrowings under the Agreement, in addition to the potential additional$100 million amount noted above. This borrowing under the Agreement was a proactive measure in order to increase the Company's cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of the Agreement, the proceeds from the Agreement borrowings may be used for working capital, capital expenditures or general corporate purposes. OnMarch 18, 2020 , in response to store closures due to the COVID-19 pandemic, the Company drew$106.5 million on its facility. If we borrow in excess of 90% of our current total borrowing capacity under the facility, we are subject to a cash dominion and an additional covenant, and, as such, we do not intend to exceed 90% of our borrowing capacity under the facility. As ofMay 2, 2020 ,$149 million in net borrowings were outstanding under the Agreement and is reflected as long-term debt in the unaudited condensed balance sheet included in this Form 10-Q.The Company is currently evaluating the impact that the pending discontinuation of, or transition away from, LIBOR will have on the Agreement. We have been in discussions withWells Fargo Bank, National Association regarding this and do not expect the move to have a significant impact on our unaudited condensed consolidated financial statements. Store and Franchise Activity During the fiscal 2020 year-to-date period, we had 9 permanent store closures, consisting of 2 Chico's stores and 7 WHBM stores. There were no store openings in the first quarter, and we anticipate permanently closing approximately 50 to 60 stores over the remainder of fiscal 2020. However, with the disruption we have seen from the pandemic, we intend to continuously evaluate the appropriate store base in light of economic conditions and our business strategy and may adjust the openings and closures as conditions require or as opportunities arise. Additionally, since the end of last year's first quarter, we have closed 84 stores. As ofMay 2, 2020 , the Company's franchise operations consisted of 70 international retail locations inMexico and 2 domestic airport locations. During the second half of the first quarter of fiscal 2020, all retail stores and franchise operations were temporarily closed as a result of the COVID-19 pandemic. 31
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Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, 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. Actual results may differ from these estimates under different assumptions or conditions. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and believes the assumptions and estimates, as set forth in our 2019 Annual Report on Form 10-K, are significant to reporting our results of operations and financial position. There have been no material changes to our critical accounting policies as disclosed in our 2019 Annual Report on Form 10-K. Forward-Looking Statements This Form 10-Q may contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to certain events that could have an effect on our future financial performance, including but without limitation, statements regarding our plans, objectives, and the future success of our store concepts and business initiatives. These statements may address items such as future sales and sales initiatives, business strategies and strategic initiatives, customer traffic, gross margin expectations, SG&A expectations, including statements about the COVID-19 pandemic and actions we have taken in response thereto, expected savings, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, proposed business ventures, new channels of sales or distribution, expected impact of ongoing litigation, future stock repurchase plans, future plans to pay dividends, future comparable sales, future product sourcing plans, future inventory levels, including the ability to leverage inventory management and targeted promotions, planned marketing expenditures, planned capital expenditures and future cash needs. These statements relate to expectations concerning matters that are not historical fact and may include the words or phrases such as "will," "could," "should," "expects," "believes," "anticipates," "plans," "intends," "estimates," "approximately," "our planning assumptions," "future outlook" and similar expressions. Except for historical information, matters discussed in this Form 10-Q are forward-looking statements. These forward-looking statements are based largely on information currently available to our management and on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those expressed or implied by such forward-looking statements. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance and there are a number of known and unknown risks, uncertainties, contingencies and other factors (many of which are outside our control) that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, there is no assurance that our expectations will, in fact, occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, "Risk Factors" in our 2019 Annual Report on Form 10-K and the following: The financial strength of retailing in particular and the economy in general; the extent of financial difficulties or economic uncertainty that may be experienced by customers; the effects of the COVID-19 pandemic, including uncertainties about its depth and duration (including any resurgence), as well as the impacts to economic conditions and consumer behavior (during and after the COVID-19 pandemic) and the effectiveness of store reopenings, cost reduction initiatives and other actions taken in response to the COVID-19 pandemic, and the financial impact of certain provisions of the CARES Act, changes in the general or specialty or apparel industries; significant shifts in consumer behavior; our ability to secure and maintain customer acceptance of styles and in-store and online concepts; the ability to leverage inventory management and targeted promotions; the ability to effectively manage our inventory and allocation processes; the extent and nature of competition in the markets in which we operate; the ability to remain competitive with customer shipping terms and costs pertaining to product deliveries and returns; the extent of the market demand and overall level of spending for women's private branded clothing and related accessories; the effectiveness of our brand strategies, awareness and marketing programs; the ability to coordinate product development with buying and planning; the quality and timeliness of merchandise received from suppliers; changes in the costs of manufacturing, raw materials, transportation, distribution, labor and advertising; the availability of quality store sites; our ability to manage our store fleet and the risk that our investments in merchandise or marketing initiatives may not deliver the results we anticipate; our ability to successfully navigate the increasing use of on-line retailers for fashion purchases and the pressure that puts on traffic and transactions in our physical stores; the ability to operate our own retail websites in a manner that produces profitable sales; the ability to successfully identify and implement additional 32
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sales and distribution channels; the ability to successfully execute our business strategies and particular strategic initiatives (including, but not limited to, the Company's organizational restructure, retail fleet optimization plan and three operating priorities which are driving stronger sales through improved product and marketing; optimizing the customer journey by simplifying, digitizing and extending the Company's unique and personalized service; and transforming sourcing and supply chain operations to increase product speed to market and improve quality), sales initiatives and multi-channel strategies, customer traffic; and to achieve the expected results from them; the continuing performance, implementation and integration of management information systems; the impact of any systems failures, cyber security or other data or security breaches, including any security breaches that result in theft, transfer, or unauthorized disclosure of customer, employee, or company information or our compliance with domestic and foreign information security and privacy laws and regulations in the event of such an incident; the ability to hire, train, motivate and retain qualified sales associates, managerial employees and other employees; the successful recruitment of leadership and the successful transition of new members to our senior management team; uncertainties regarding future unsolicited offers to buy the Company and our ability to respond effectively to them as well as to actions of activist shareholders and others; changes in the political environment that create consumer uncertainty; significant changes to product import and distribution costs (such as unexpected consolidation in the freight carrier industry); the ability to utilize our distribution center and other support facilities in an efficient and effective manner; the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images; the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results, including the impact of the coronavirus outbreak on manufacturing operations inChina and our supply chain, customer traffic and our operations in general; the impact of unanticipated changes in legal, regulatory or tax laws; the risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including significant economic (including the impact of changes in tariffs, taxes or other import regulations, particularly with respect toChina ), labor, political or other shifts; and changes in governmental policies in or towards foreign countries; currency exchange rates and other similar factors. All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 33
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