AT HOME GROUP INC. This discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes ofAt Home Group Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year endedJanuary 25, 2020 as filed with theSecurities and Exchange Commission ("SEC") onMay 19, 2020 (the "Annual Report"). You should review the disclosures under the heading "Item 1A. Risk Factors" in the Annual Report, as well as the disclosure under the heading "Item 1A. Risk Factors" and any cautionary language in this report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All expressions of the "Company", "us", "we", "our", and all similar expressions are references toAt Home Group Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the last Saturday in January. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to a fiscal year mean the year in which that fiscal year ends. References herein to "fiscal year 2021" relate to the 53 weeks endingJanuary 30, 2021 and references herein to "fiscal year 2020" relate to the 52 weeks endingJanuary 25, 2020 . References herein to "first fiscal quarter 2021" relate to the thirteen weeks endedApril 25, 2020 . References herein to "second fiscal quarter 2021" and "second fiscal quarter 2020" relate to the thirteen weeks endedJuly 25, 2020 andJuly 27, 2019 , respectively. References herein to "the six months endedJuly 25, 2020 " and "the six months endedJuly 27, 2019 " relate to the twenty-six weeks endedJuly 25, 2020 andJuly 27, 2019 , respectively. Overview At Home is the leading home décor superstore based on the number of our locations, and we believe our large format stores dedicate more space per store to home décor than any other player in the industry. We are focused on providing the broadest assortment of products for any room, in any style, for any budget. We utilize our space advantage to out-assort our competition, offering over 50,000 SKUs throughout our stores. Our differentiated merchandising strategy allows us to identify on-trend products and then value engineer those products to provide desirable aesthetics at attractive price points for our customers. Over 70% of our products are unbranded, private label or specifically designed for us. We believe that our broad and comprehensive offering, coupled with our compelling value proposition, create a leading destination for home décor and the opportunity to continue taking market share in a highly fragmented and growing industry. As ofJuly 25, 2020 , our store base was comprised of 219 large format stores across 40 states, averaging approximately 105,000 square feet per store. Over the past five completed fiscal years we have opened 142 new stores and we believe there is significant whitespace opportunity to increase our store count in both existing and new markets. Recent Developments
The global COVID-19 pandemic has resulted in significant disruptions to the global economy, and substantially impacted our business, results of operations and financial condition.
Following government mandates in certain locations as well as advice from theCenters for Disease Control and Prevention for persons inthe United States to take extraordinary health precautions, onMarch 20, 2020 we announced that we would temporarily close all of our stores nationwide for one week, after which we began to reopen stores in regions that were not required to remain closed by state or local mandates. All of our stores were fully open to foot traffic as ofJune 19, 2020 . The COVID-19 pandemic and resulting store closures caused a decline in revenue and cash flow from operations while our stores were closed, adversely affected store traffic and caused some disruption to our 19
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supply chains and staffing levels that adversely affected our results of
operations and financial condition during the six months ended
To mitigate the decline in cash flows, onMarch 12, 2020 , as a precautionary measure to provide more financial flexibility and maintain liquidity in response to the COVID-19 pandemic, we elected to borrow an additional$55 million on our ABL Facility, which was repaid in full during the second fiscal quarter 2021. OnJune 12, 2020 , to continue to help provide additional financial flexibility, we entered into the Eighth Amendment to our ABL Agreement to provide for a new tranche of term loans in a principal amount of$35.0 million on a "first-in, last out" basis (the "FILO Loans"), subject to a borrowing base. The net proceeds of the FILO Loans were used to repay a portion of the outstanding revolving credit loans. Our customers may also be negatively affected by layoffs, work reductions or financial hardship as a result of the global outbreak of COVID-19, which could negatively impact demand for our products as customers delay or reduce discretionary purchases. Even though our stores are fully reopened as of the date of this report, health concerns could continue and could cause employees or customers to avoid gathering in public places, which could have an adverse effect on store traffic or the ability to adequately staff our stores. There can be no assurance that we will not be required by landlords or authorities at the local, state or federal level to reinstate store closures, or as to how long any such closure would continue. In general, during any such closure, we would still be obligated to make payments to landlords and for routine operating costs, such as utilities and insurance. Additionally, any significant reduction in customer visits to, and spending at, our stores caused directly or indirectly by COVID-19 could result in a loss of revenue and profits and could result in other material adverse effects. The negative impact of the outbreak of COVID-19 could result in an adverse impact to manufacturing activity and supply chains, including as a result of work stoppages, factory and other business closings, slowdowns or delays, or if we fail to make timely payments to our suppliers. In addition, there may be restrictions and limitations placed on workers and factories, including shelter-in-place and stay-at-home orders and other limitations on the ability to travel and return to work, which could result in shortages or delays in production or shipment of products. During the first fiscal quarter 2021, because we continued to experience a decline in operating performance, substantially driven by the global outbreak of COVID-19 and a sustained decline in our market capitalization, coupled with a decision to further reduce our near-term growth model, we conducted an interim impairment testing of goodwill. Based on the test results, we concluded that goodwill was fully impaired and we recognized a non-cash impairment charge of$319.7 million during the twenty-six weeks endedJuly 25, 2020 . At the onset of the COVID-19 pandemic, we also implemented a number of other measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing a significant number of employees; (ii) temporary tiered salary reductions for corporate employees, including executive officers; (iii) deferring annual merit increases and bonuses; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; (v) extending payment terms with our vendors; (vi) negotiating rent deferrals or rent abatements for a portion of our leases; and (vii) working to maximize our participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic. During the second fiscal quarter 2021, we were able to bring back our furloughed employees and restore salaries to pre-COVID-19 levels for the home office employees who took pay cuts. In addition, we were able to institute merit increases and lift the hiring freeze put in place due to COVID-19.
The extent of the impact of COVID-19 on our business, results of operations and financial results will depend largely on future developments, including the duration and continued spread of the outbreak withinthe United States and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. The ultimate extent to which the outbreak of COVID-19 may impact our business is uncertain and the full effect it may have on our financial performance cannot be quantified at this time. Accordingly, our historical financial information may not be indicative of our future performance, financial condition and results of operations. OnAugust 20, 2020 ,At Home Holding III Inc. ("At Home III" or the "Issuer"), closed an offering (the "Notes Offering") of$275 million aggregate principal amount of 8.750% Senior Secured Notes due 2025 (the "Notes"). The 20
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Notes Offering was conducted pursuant to Rule 144A and Regulation S promulgated under the Securities Act, and the Notes have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold inthe United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Notes are governed by an indenture datedAugust 20, 2020 (the "Indenture"), by and among At Home III, the guarantors from time to time party thereto, andWells Fargo Bank, National Association , as trustee (the "Trustee) and as collateral agent (the "Collateral Agent"). Net proceeds of the issuance of the Notes were used, together with cash on our balance sheet, to repay all amounts outstanding under the Term Loan. The Notes bear interest at a fixed rate of 8.750% per annum, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, commencing onMarch 1, 2021 , and will mature onSeptember 1, 2025 . The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by (i)At Home Holding II Inc. ("At Home II"), aDelaware corporation and direct parent of At Home III and (ii) certain of the Issuer's existing and future wholly owned domestic restricted subsidiaries (collectively, the "Guarantors"), all of which also guarantee the ABL Facility. The Notes and the related guarantees are secured (i) on a first-priority basis by substantially all of the assets of the Issuer and the Guarantors other than the ABL Priority Collateral (as defined below) (such assets, the "Term Priority Collateral") and (ii) on a second-priority basis by substantially all of the cash, cash equivalents, deposit accounts, accounts receivables, other receivables, tax refunds and inventory, and certain related assets of the Issuer and the Guarantors that secure the ABL Facility on a first priority basis (such assets, the "ABL Priority Collateral"), in each case subject to certain exceptions. OnAugust 28, 2020 ,At Home III andAt Home Stores LLC (collectively, the "ABL Borrowers") and the guarantors under the ABL Facility entered into an amendment to the ABL Agreement (the "Ninth Amendment") withBank of America, N.A ., which amended the ABL Agreement to, among other things, extend the maturity of revolving credit loans provided thereunder toAugust 28, 2025 . See "Item 5 - Other Information" of this report for a description of this amendment.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
Overall economic trends. The overall economic environment and related changes in
consumer behavior have a significant impact on our business. In general,
positive conditions in the broader economy promote customer spending in our
stores, while economic weakness results in a reduction of customer spending.
Macroeconomic factors that can affect customer spending patterns, and thereby
our results of operations, include employment rates, business conditions,
changes in the housing market, the availability of credit, interest rates, tax
rates and fuel and energy costs, and localized or global events such as the
outbreak of epidemic or pandemic disease. Due to the COVID-19 pandemic, the
economic environment has undergone dramatic shifts. The second fiscal quarter
2021 saw a number of macroeconomic and consumer oriented trends that contributed
to our positive performance, such as pent up demand, both in general and for
home décor products in particular, in response to the COVID-19 pandemic;
however, we expect that certain of these trends may moderate during the balance
of fiscal year 2021.
Consumer preferences and demand. Our ability to maintain our appeal to existing
customers and attract new customers depends on our ability to originate, develop
and offer a compelling product assortment responsive to customer preferences and
design trends. If we misjudge the market for our products, we may be faced with
excess inventories for some products and may be required to become more
promotional in our selling activities, which would impact our net sales and
gross profit. During 2021, we have begun undertaking efforts to rationalize
SKUs, in order to ensure our continuing competitiveness without sacrificing our
wide and deep product assortment.
New store openings. We expect new stores will be a key driver of the growth in
our sales and operating profit in the future. Our results of operations have
been and will continue to be materially affected by the timing and number of new
store openings. As we continue to open new stores, competition among our stores
within the same or adjacent geographic regions may impact the performance of our
comparable store base. The performance of new stores may vary
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depending on various factors such as the store opening date, the time of year of a particular opening, the amount of store opening costs, the amount of store occupancy costs and the location of the new store, including whether it is located in a new or existing market. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. In addition, in response to the interest and excitement generated when we open a new store, the new stores generally experience higher net sales during the initial period of one to three months after which the new store's net sales will begin to normalize as it reaches maturity within six months of opening, as further discussed below. Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our inventory management and distribution systems, financial and management controls and information systems. We will also be required to hire, train and retain store management and store personnel, which, together with increased marketing costs, can affect our operating margins. A new store typically reaches maturity, meaning the store's annualized targeted sales volume has been reached within six months of opening. New stores are included in the comparable store base during the sixteenth full fiscal month following the store's opening, which we believe represents the most appropriate comparison. We also periodically explore opportunities to relocate a limited number of existing stores to improve location, lease terms, store layout or customer experience. Relocated stores typically achieve a level of operating profitability comparable to our company-wide average for existing stores more quickly than new stores. During the first quarter of fiscal year 2021, we suspended all new store openings and remodeling projects in response to the COVID-19 pandemic with the exception of seven stores that were at or near completion. We intend to resume opening new stores in fiscal year 2022. Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. In the past seven fiscal years, we have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that our strong management team, brand identity, upgraded distribution centers and enhanced information systems, including our warehouse and order management, e-commerce, POS, merchandise planning and inventory allocation systems, have enabled us to replicate our profitable store format and differentiated shopping experience. We have made investments relating to our second distribution center inPennsylvania , which opened in the beginning of fiscal year 2020 and have incurred net operating costs in connection therewith during fiscal year 2020 that have impacted our operating margins. We have made significant investments in our omnichannel capabilities during the twenty-six weeks endedJuly 25, 2020 that have allowed us to provide our customers with additional options for purchasing our products. We expect to make additions and upgrades to these infrastructure investments in the future to continue to support our successful operating model over a significantly expanded store base. Pricing strategy. We are committed to providing our products at everyday low prices. We value engineer products in collaboration with our suppliers to recreate the "look" that we believe our customer wants while eliminating the costly construction elements that our customer does not value. We believe our customer views shopping At Home as an in-person experience through which our customer can see and feel the quality of our products and physically assemble a desired aesthetic. This design approach allows us to deliver an attractive value to our customer, as our products are typically less expensive than other branded products with a similar look. We employ a simple everyday low pricing strategy that consistently delivers savings to our customer without the need for extensive promotions, as evidenced by over 80% of our net sales occurring at full price. Our ability to source and distribute products effectively. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales. Tariffs could also impact our or our vendors' ability to source product efficiently or create other supply chain disruptions. The tariffs enacted in fiscal year 2019 did not have a material impact on our gross margin due to a combination of supplier 22
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negotiations, direct sourcing and strategic price increases. However, the additional tariffs enacted in fiscal year 2020 led us to institute strategic price increases, which had a direct negative impact on comparable store sales. In addition, supply chain disruption for reasons such as the outbreak or persistence of epidemic or pandemic disease, including the global COVID-19 pandemic, have led to inventory constraints in certain product categories, which we expect could have a negative impact on our results of operations during the remainder of fiscal year 2021. Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, store openings and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year.
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, including with respect to freight costs, which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. We have faced and continue to face inflationary pressure on freight costs, which are being heightened by tariff-related shipment surges, port congestion and supply chain disruptions relating to the global outbreak of COVID-19. In response to increasing commodity prices, freight costs or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing
our pricing when necessary.
Other trends. In response to the COVID-19 pandemic, we began renegotiating certain store lease agreements in the first and second fiscal quarters 2021 to obtain rent relief in an effort to partially offset the negative financial impacts. We expect that over the remainder of fiscal year 2021, the reversal of such rent relief could have a negative impact on our cash position. In addition, due to the higher interest rate on our Notes compared to our Term Loan, annual interest expense may rise moderately compared to prior fiscal years to the extent that we increase the amount of borrowings under the revolving portion of our ABL Facility.
How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures include net sales, gross profit and gross margin, and selling, general and administrative expenses. In addition, we also review other important metrics such as Adjusted EBITDA, Store-level Adjusted EBITDA and
Adjusted Net Income.Net Sales
Net sales are derived from direct retail sales to customers in our stores, net of merchandise returns and discounts. Growth in net sales is impacted by opening new stores and increases and decreases in comparable store sales. New store openings The number of new store openings reflects the new stores opened during a particular reporting period, including any relocations of existing stores during such period. Before we open new stores, we incur pre-opening costs, as described below. The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results as described above in "-Trends and Other Factors Affecting Our Business". Comparable store sales
A store is included in the comparable store sales calculation on the first day
of the sixteenth full fiscal month following the store's opening, which is when
we believe comparability is achieved. When a store is being relocated or
remodeled, we exclude sales from that store in the calculation of comparable
store sales until the first day of the sixteenth full fiscal month after it
reopens. In addition, when applicable, we adjust for the effect of the 53rd
week. We have not excluded stores from the comparable store sales calculation
that were impacted by the COVID-19 pandemic. Sales resulting from our
omnichannel initiatives occur at the store level and are included in the
calculation of comparable store sales. There may be variations in the way in
which some of our competitors and other retailers
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calculate comparable or "same store" sales. As a result, data in this report regarding our comparable store sales may not be comparable to similar data made available by other retailers. Comparable store sales allow us to evaluate how our store base is performing by measuring the change in period-over-period net sales in stores that have been open for the applicable period. Various factors affect comparable store sales, including:
consumer preferences (including changing consumer preferences in response to
? unforeseen events such as the global COVID-19 pandemic), buying trends and
overall economic trends;
? our ability to identify and respond effectively to customer preferences and
trends;
? our ability to provide an assortment of high quality and trend-right product
offerings that generate new and repeat visits to our stores;
? the customer experience we provide in our stores;
? our ability to source and receive products accurately and timely;
? changes in product pricing, including promotional activities;
? the number of items purchased per store visit;
? weather;
? competition, including among our own stores within the same or adjacent
geographic region; and
? timing and length of holiday shopping periods.
As we continue to execute our growth strategy, we anticipate that a portion of our net sales will come from stores not included in our comparable store sales calculation. However, comparable store sales are only one measure we use to assess the success of our growth strategy.
Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of sales from our net sales. Gross margin measures gross profit as a percentage of net sales.
Cost of sales consists of various expenses related to the cost of selling our merchandise. Cost of sales consists of the following: (1) cost of merchandise, net of inventory shrinkage, damages and vendor allowances; (2) inbound freight and internal transportation costs such as distribution center-to-store freight costs; (3) costs of operating our distribution centers, including labor, occupancy costs, supplies, and depreciation; and (4) store occupancy costs including rent, insurance, taxes, common area maintenance, utilities, repairs and maintenance and depreciation. The components of our cost of sales expenses may not be comparable to other retailers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") consist of various
expenses related to supporting and facilitating the sale of merchandise in our
stores. These costs include payroll, benefits and other personnel expenses for
corporate and store employees, including stock-based compensation expense,
consulting, legal and other professional services expenses, marketing and
advertising expenses, occupancy costs for our corporate headquarters and various
other expenses.
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SG&A includes both fixed and variable components and, therefore, is not directly
correlated with net sales. In addition, the components of our SG&A expenses may
not be comparable to those of other retailers. We expect that our SG&A expenses
will increase in future periods due to our continuing store growth. In
particular, we have expanded our marketing and advertising spend as a percentage
of net sales in each of the fiscal years since our initial public offering and
expect that we will continue to make investments in marketing and advertising
spend in future fiscal years.
In addition, any increase in future stock option or other stock-based grants or
modifications will increase our stock-based compensation expense included in
SG&A.
Adjusted EBITDA
Adjusted EBITDA is a key metric used by management and our board of directors to
assess our financial performance. Adjusted EBITDA is also the basis for
performance evaluation under our current executive compensation programs. In
addition, Adjusted EBITDA is frequently used by analysts, investors and other
interested parties to evaluate companies in our industry. In addition to
covenant compliance and executive performance evaluations, we use Adjusted
EBITDA to supplement generally accepted accounting principles in the United
States of America ("GAAP") measures of performance to evaluate the effectiveness
of our business strategies, to make budgeting decisions and to compare our
performance against that of other peer companies using similar measures.
Adjusted EBITDA is defined as net income (loss) before net interest expense,
income tax provision and depreciation and amortization, adjusted for the impact
of certain other items as defined in our debt agreements, including certain
legal settlements and consulting and other professional fees, stock-based
compensation expense, impairment charges, loss (gain) on sale-leaseback,
non-cash rent and other adjustments. For a reconciliation of Adjusted EBITDA to
net income (loss), the most directly comparable GAAP measure, see "-Results
of
Operations".
Store-level Adjusted EBITDA
We use Store-level Adjusted EBITDA as a supplemental measure of our performance,
which represents our Adjusted EBITDA excluding the impact of costs associated
with new store openings and certain corporate overhead expenses that we do not
consider in our evaluation of the ongoing operating performance of our stores
from period to period. Our calculation of Store-level Adjusted EBITDA is a
supplemental measure of operating performance of our stores and may not be
comparable to similar measures reported by other companies. We believe that
Store-level Adjusted EBITDA is an important measure to evaluate the performance
and profitability of each of our stores, individually and in the aggregate,
especially given the level of investments we have made in our home office and
infrastructure over the past seven years to support future growth. We also
believe that Store-level Adjusted EBITDA is a useful measure in evaluating our
operating performance because it removes the impact of general and
administrative expenses, which are not incurred at the store level, and the
costs of opening new stores, which are non-recurring at the store level, and
thereby enables the comparability of the operating performance of our stores
during the period. We use Store-level Adjusted EBITDA information to benchmark
our performance versus competitors. Store-level Adjusted EBITDA should not be
used as a substitute for consolidated measures of profitability of performance
because it does not reflect corporate overhead expenses that are necessary to
allow us to effectively operate our stores and generate Store-level Adjusted
EBITDA. For a reconciliation of Store-level Adjusted EBITDA to net income
(loss), the most directly comparable GAAP measure, see "-Results of Operations".
Adjusted Net Income
Adjusted Net Income represents our net income (loss), adjusted for impairment
charges, loss (gain) on sale-leaseback, payroll tax expenses related to initial
public offering non-cash stock-based compensation expense and the income tax
impact associated with the special one-time initial public offering bonus stock
option exercises and other adjustments. We present Adjusted Net Income because
we believe it assists investors and analysts in comparing our performance across
reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance. For a reconciliation
of Adjusted Net Income to net income (loss), the most directly comparable GAAP
measure, see "-Results of Operations".
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Results of Operations
The following tables summarize key components of our results of operations for the periods indicated in dollars (in thousands), as a percentage of our net sales and other operational data:
Thirteen Weeks Ended Twenty-six Weeks Ended
July 25, 2020 July 27, 2019 July 25, 2020 July 27, 2019
(in thousands, except percentages and operational data)
Statement of Operations
Data:
Net sales $ 515,244 $ 342,321 $ 705,090 $ 648,585
Cost of sales 319,117 241,923 492,613 460,136
Gross profit 196,127 100,398 212,477 188,449
Operating expenses
Selling, general and
administrative expenses 68,606 76,716 135,072 153,645
Impairment charges - - 319,732 -
Depreciation and
amortization 2,159 1,869 4,372 3,630
Total operating expenses 70,765 78,585 459,176 157,275
(Loss) gain on
sale-leaseback (115) - (115) 16,528
Operating income (loss) 125,247 21,813 (246,814) 47,702
Interest expense, net 6,172 8,235 13,143 16,004
Income (loss) before
income taxes 119,075 13,578 (259,957) 31,698
Income tax provision 29,652 3,196 9,562 7,433
Net income (loss) $ 89,423 $ 10,382 $ (269,519) $ 24,265
Percentage of Net Sales :
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 61.9 % 70.7 % 69.9 % 70.9 %
Gross profit 38.1 % 29.3 % 30.1 % 29.1 %
Operating expenses
Selling, general and
administrative expenses 13.3 % 22.4 % 19.2 % 23.7 %
Impairment charges - % - % 45.3 % - %
Depreciation and
amortization 0.4 % 0.5 % 0.6 % 0.6 %
Total operating expenses 13.7 % 23.0 % 65.1 % 24.2 %
(Loss) gain on
sale-leaseback (0.0)% - % (0.0)% 2.5 %
Operating income (loss) 24.3 % 6.4 % (35.0)% 7.4 %
Interest expense, net 1.2 % 2.4 % 1.9 % 2.5 %
Income (loss) before
income taxes 23.1 % 4.0 % (36.9)% 4.9 %
Income tax provision 5.8 % 0.9 % 1.4 % 1.1 %
Net income (loss) 17.4 % 3.0 % (38.2)% 3.7 %
Operational Data:
Total stores at end of
period 219 204 219 204
New stores opened 1 13 7 24
Comparable store sales 42.3 % (0.4)% 0.3 % (0.6)%
Non-GAAP Measures(1):
Store-level Adjusted
EBITDA(2) $ 185,273 $ 78,772 $ 199,261 $ 143,479
Store-level Adjusted
EBITDA margin(2) 36.0 % 23.0% 28.3% 22.1%
Adjusted EBITDA(2) $ 159,653 $ 47,147 $ 145,043 $ 80,897
Adjusted EBITDA
margin(2) 31.0 % 13.8% 20.6% 12.5%
Adjusted Net Income(3) $ 90,556 $ 11,421 $ 51,346 $ 13,317 We present Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted
EBITDA, Store-level Adjusted EBITDA margin and Adjusted Net Income, which are
not recognized financial measures under GAAP, because we believe they assist
investors and analysts in comparing our operating performance across
reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance, such as interest, (1) depreciation, amortization, loss on extinguishment of debt, impairment
charges and taxes. You are encouraged to evaluate these adjustments and the
reasons we consider them appropriate for supplemental analysis. In evaluating
Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income, you
should be aware that in the future we may incur expenses that are the same as
or similar to some of the adjustments in our presentation of Adjusted EBITDA,
Store-level Adjusted EBITDA and Adjusted Net Income. In particular,
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Store-level Adjusted EBITDA does not reflect costs associated with new store
openings, which are incurred on a limited basis with respect to any particular
store when opened and are not indicative of ongoing core operating performance,
and corporate overhead expenses that are necessary to allow us to effectively
operate our stores and generate Store-level Adjusted EBITDA. Our presentation of
Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income should not
be construed as an inference that our future results will be unaffected by
unusual or non-recurring items. There can be no assurance that we will not
modify the presentation of Adjusted EBITDA, Store-level Adjusted EBITDA and
Adjusted Net Income in the future, and any such modification may be material. In
addition, Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted EBITDA,
Store-level Adjusted EBITDA margin and Adjusted Net Income may not be comparable
to similarly titled measures used by other companies in our industry or across
different industries. Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with performance evaluations for our executives; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and to compare our performance against that of other peer companies using similar measures. In addition, we utilize a further adjusted metric based on Adjusted EBITDA in certain calculations under our senior secured asset-based lending credit facility (the "ABL Facility") (defined therein as "Consolidated Cash EBITDA") and the Indenture (defined therein as "EBITDA"). Management believes Store-level Adjusted EBITDA is helpful in highlighting trends because it facilitates comparisons of store operating performance from period to period by excluding the impact of costs associated with new store openings and certain corporate overhead expenses, such as certain costs associated with management, finance, accounting, legal and other centralized corporate functions. Management believes that Adjusted Net Income assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items we do not believe are indicative of our core operating performance.
The following table reconciles our net income (loss) to EBITDA, Adjusted (2) EBITDA and Store-level Adjusted EBITDA for the periods presented (in
thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
July 25, 2020 July 27, 2019 July 25, 2020 July 27, 2019
Net income (loss), as
reported $ 89,423 $ 10,382 $ (269,519) $ 24,265
Interest expense, net 6,172 8,235 13,143 16,004
Income tax provision 29,652 3,196 9,562 7,433
Depreciation and
amortization(a) 17,908 17,301 36,057 33,831
EBITDA $ 143,155 $ 39,114 $ (210,757) $ 81,533
Impairment charges(b) - - 319,732 -
Loss (gain) on
sale-leaseback 115 - 115 (16,528)
Consulting and other
professional services(c) 355 719 630 2,300
Stock-based compensation
expense(d) 2,316 1,637 4,379 3,485
Non-cash rent(e) 12,833 4,257 30,065 8,633
Other(f) 879 1,420 879 1,474
Adjusted EBITDA $ 159,653 $ 47,147 $ 145,043 $ 80,897
Costs associated with new
store openings(g) 2,098 7,539 5,678 14,599
Corporate overhead
expenses(h) 23,522 24,086 48,540 47,983
Store-level Adjusted EBITDA $ 185,273 $ 78,772 $ 199,261 $ 143,479 Includes the portion of depreciation and amortization expenses that are (a) classified as cost of sales in our condensed consolidated statements of
operations.
(b) Represents a non-cash impairment charge of
impairment of goodwill.
Primarily consists of (i) consulting and other professional fees with respect (c) to projects to enhance our merchandising and human resource capabilities and
other company initiatives; and (ii) other transaction costs.
Non-cash stock-based compensation expense related to the ongoing equity (d) incentive program that we have in place to incentivize, retain and motivate
our employees, officers and non-employee directors.
Consists of the non-cash portion of rent, which reflects the extent to which
our GAAP straight-line rent expense recognized exceeds or is less than our (e) cash rent payments. The GAAP straight-line rent expense adjustment can vary
depending on the average age of our lease portfolio, which has been impacted
by our significant growth. For newer leases, our rent expense
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recognized typically exceeds our cash rent payments while for more mature
leases, rent expense recognized is typically less than our cash rent payments.
In fiscal year 2021, due to the COVID-19 pandemic, we have renegotiated leases
to include significant deferrals which has resulted in higher non-cash rent
expense.
(f) Other adjustments include amounts our management believes are not
representative of our ongoing operations, including:
for each of the thirteen and twenty-six weeks ended
? relating to the write-off of certain site selection costs that occurred as a
result of the COVID-19 pandemic.
for each of the thirteen and twenty-six weeks ended
? incurred of
department.
Reflects non-capital expenditures associated with opening new stores,including marketing and advertising, labor and cash occupancy expenses. Costs
related to new store openings represent cash costs, and you should be aware
that in the future we may incur expenses that are similar to these costs. We (g) anticipate that we will continue to incur cash costs as we open new stores in
the future. We opened one and 13 new stores during the thirteen weeks ended
during the twenty-six weeks ended July 25, 2020 and July 27, 2019 ,
respectively.
Reflects corporate overhead expenses, which are not directly related to the
profitability of our stores, to facilitate comparisons of store operating
performance as we do not consider these corporate overhead expenses when
evaluating the ongoing performance of our stores from period to period.
Corporate overhead expenses, which are a component of selling, general and
administrative expenses, are comprised of various home office general and
administrative expenses such as payroll expenses, occupancy costs, marketing (h) and advertising, and consulting and professional fees. See our discussion of
the changes in selling, general and administrative expenses presented in
"-Results of Operations". Store-level Adjusted EBITDA should not be used as a
substitute for consolidated measures of profitability or performance because
it does not reflect corporate overhead expenses that are necessary to allow
us to effectively operate our stores and generate Store-level Adjusted
EBITDA. We anticipate that we will continue to incur corporate overhead
expenses in future periods.
(3) The following table reconciles our net income (loss) to Adjusted Net Income
for the periods presented (in thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
July 25, 2020 July 27, 2019 July
25, 2020
Net income (loss), as reported$ 89,423 $ 10,382 $ (269,519) $ 24,265 Adjustments: Impairment charges(a) - - 319,732 - Loss (gain) on sale-leaseback 115 - 115 (16,528) Payroll tax expense related to special one-time IPO bonus stock option exercises(b) - 10 - 46 Merchandising department restructuring(c) - 870 - 870 Other(d) 1,375 474 1,375 1,373 Tax impact of adjustments to net income (loss)(e) (357) (308) (357) 3,304 Tax benefit related to special one-time IPO bonus stock option exercises(f) - (7)
- (13)
Adjusted Net Income $ 90,556 $ 11,421 $ 51,346 $ 13,317 (a) Represents a non-cash impairment charge of
impairment of goodwill.
Payroll tax expense related to stock option exercises associated with a (b) special one-time initial public offering bonus grant to certain members of
senior management (the "IPO grant"), which we do not consider in our
evaluation of our ongoing performance.
(c) Includes certain employee related costs incurred as part of restructuring our
merchandising department.
(d) Other adjustments include amounts our management believes are not
representative of our ongoing operations, including:
for each of the thirteen and twenty-six weeks ended
? relating to the write-off of certain site selection costs that occurred as a
result of the COVID-19 pandemic.
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Represents the income tax impact of the adjusted expenses using the annual
effective tax rate excluding discrete items. After giving effect to the (e) adjustments to net income (loss), the adjusted effective tax rate for the
thirteen and twenty-six weeks ended
respectively. The adjusted effective tax rate for the thirteen and twenty-six
weeks ended July 27, 2019 was 23.5% and 23.7%, respectively.
(f) Represents the income tax benefit related to stock option exercises
associated with the IPO grant.
Matters Affecting Comparability
As a result of the COVID-19 pandemic, our stores and distribution centers were closed or operated in a limited capacity during the first fiscal quarter and into the beginning of the second fiscal quarter 2021. In addition to lost revenues, we continued to incur expenses relating to our stores, distribution centers and home office. Once our stores reopened, we experienced a significant increase in foot traffic and sales that we believe was impacted by pent-up demand and stimulus spending. As a result, comparisons as a percentage of sales and year-over-year trends may not be meaningful for certain financial statement items this quarter.
Thirteen Weeks Ended
Net Sales Net sales increased$172.9 million , or 50.5%, to$515.2 million for the thirteen weeks endedJuly 25, 2020 from$342.3 million for the thirteen weeks endedJuly 27, 2019 . Comparable store sales increased$131.9 million , or 42.3%, during the thirteen weeks endedJuly 25, 2020 . The increase was primarily driven by increased demand as state and local restrictions related to the COVID-19 pandemic were lifted and we reopened our stores, as well as the continued roll-out of our omnichannel initiatives. The increase was partially offset by lost sales in the beginning of the quarter due to mandated store closures.
Cost of Sales
Cost of sales increased$77.2 million , or 31.9%, to$319.1 million for the thirteen weeks endedJuly 25, 2020 from$241.9 million for the thirteen weeks endedJuly 27, 2019 . This increase was primarily driven by the 50.5% increase in net sales during the thirteen weeks endedJuly 25, 2020 compared to the thirteen weeks endedJuly 27, 2019 , which resulted in a$75.3 million increase in merchandise costs. In addition, during the thirteen weeks endedJuly 25, 2020 , we recognized a$2.1 million increase in store occupancy costs, net of abatements received from lessors of$2.3 million during the COVID-19 pandemic and a$0.3 million increase in depreciation and amortization, in each case as a result of new store openings and sale-leaseback transactions sinceJuly 27, 2019 . The increase was partially offset by a decrease in distribution center costs of$2.8 million as a result of store closures during the COVID-19 pandemic. Gross Profit and Gross Margin
Gross profit was$196.1 million for the thirteen weeks endedJuly 25, 2020 , an increase of$95.7 million from$100.4 million for the thirteen weeks endedJuly 27, 2019 . The increase in gross profit was driven by the increase in sales during the thirteen weeks endedJuly 25, 2020 . Gross margin increased 880 basis points to 38.1% of net sales for the thirteen weeks endedJuly 25, 2020 from 29.3% of net sales for the thirteen weeks endedJuly 27, 2019 . The increase was primarily driven by leverage on occupancy costs, depreciation expense and distribution center costs as a result of the increase in comparable store sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$68.6 million for the thirteen weeks endedJuly 25, 2020 compared to$76.7 million for the thirteen weeks endedJuly 27, 2019 , a decrease of$8.1 million or 10.6%. As a percentage of sales, SG&A decreased 910 basis points for the thirteen weeks endedJuly 25, 2020 to 13.3% from 22.4% for the thirteen weeks endedJuly 27, 2019 , primarily due to the increase in sales and a decrease in SG&A as a result of our efforts to curtail spending amid the COVID-19 pandemic. 29 Table of Contents Selling, general and administrative expenses include expenses related to corporate overhead and store operations, which decreased by$2.2 million and$0.3 million , respectively, primarily driven by a reduction in pre-opening and other variable costs due to the COVID-19 pandemic. The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were$5.0 million for the thirteen weeks endedJuly 25, 2020 compared to$10.6 million for the thirteen weeks endedJuly 27, 2019 , a decrease of$5.6 million or 52.5%. The decrease was driven by our efforts to curtail our advertising spend amid the COVID-19 pandemic. Interest Expense, Net Interest expense, net decreased to$6.2 million for the thirteen weeks endedJuly 25, 2020 from$8.2 million for the thirteen weeks endedJuly 27, 2019 , a decrease of$2.0 million . The decrease in interest expense was primarily due to a significant paydown of our ABL Facility in addition to decreases in the average interest rates applicable to our variable rate debt during the period. The effective interest rate for the ABL Facility was approximately 2.30% and 4.40% during the thirteen weeks endedJuly 25, 2020 andJuly 27, 2019 , respectively. Income Tax Provision
Income tax expense was$29.7 million for the thirteen weeks endedJuly 25, 2020 compared to$3.2 million for the thirteen weeks endedJuly 27, 2019 . The effective tax rate for the thirteen weeks endedJuly 25, 2020 was 24.9 % compared to 23.5% for the thirteen weeks endedJuly 27, 2019 . The effective tax rate for each of the thirteen weeks endedJuly 25, 2020 andJuly 27, 2019 , differs from the federal statutory rate primarily due to the impact of state and local income taxes.
Twenty-six Weeks Ended
Net Sales Net sales increased$56.5 million , or 8.7%, to$705.1 million for the twenty-six weeks endedJuly 25, 2020 from$648.6 million for the twenty-six weeks endedJuly 27, 2019 . Comparable store sales increased$1.6 million , or 0.3%, during the twenty-six weeks endedJuly 25, 2020 . The increase was primarily driven by increased demand as state and local mandates related to the COVID-19 pandemic were lifted and we reopened our stores in addition to the continued roll-out of our BOPIS initiative. The increase was partially offset by lost sales during the first fiscal quarter 2021 and into the beginning of the second fiscal quarter 2021 due to mandated store closures. Cost of Sales Cost of sales increased$32.5 million , or 7.1%, to$492.6 million for the twenty-six weeks endedJuly 25, 2020 from$460.1 million for the twenty-six weeks endedJuly 27, 2019 . This increase was primarily driven by the 8.7% increase in net sales during the twenty-six weeks endedJuly 25, 2020 compared to the twenty-six weeks endedJuly 27, 2019 , which resulted in a$26.5 million increase in merchandise costs. The increase was also due to a$11.6 million increase in store occupancy costs, net of abatements received from lessors of$2.3 million during the COVID-19 pandemic and a$1.5 million increase in depreciation and amortization, in each case as a result of new store openings and sale-leaseback transactions sinceJuly 27, 2019 . The increase was partially offset by a decrease in distribution center costs of$4.6 million as a result of the COVID-19 pandemic. Gross Profit and Gross Margin Gross profit was$212.5 million for the twenty-six weeks endedJuly 25, 2020 , an increase of$24.1 million from$188.4 million for the twenty-six weeks endedJuly 27, 2019 . The increase in gross profit was driven by the increase in sales during the twenty-six weeks endedJuly 25, 2020 . Gross margin increased 100 basis points to 30.1% of net sales for the twenty-six weeks endedJuly 25, 2020 from 29.1% of net sales for the twenty-six weeks endedJuly 27 , 30
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2019. The increase was primarily driven by a decrease in distribution center
costs of
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$135.1 million for the twenty-six weeks endedJuly 25, 2020 compared to$153.6 million for the twenty-six weeks endedJuly 27, 2019 , a decrease of$18.5 million or 12.1%. As a percentage of sales, SG&A decreased 450 basis points for the twenty-six weeks endedJuly 25, 2020 to 19.2% from 23.7% for the twenty-six weeks endedJuly 27, 2019 , primarily due to our efforts to curtail spending amid the COVID-19 pandemic and due to the increase in sales. Selling, general and administrative expenses include expenses related to store operations and corporate overhead, which decreased by$6.4 million and$2.0 million , respectively, primarily driven by a reduction in pre-opening and other variable costs due to the COVID-19 pandemic. The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were$12.8 million for the twenty-six weeks endedJuly 25, 2020 compared to$23.0 million for the twenty-six weeks endedJuly 27, 2019 , a decrease of$10.2 million or 44.1%. The decrease was driven by our efforts to curtail our advertising spend amid the COVID-19 pandemic. Impairment Charges
During the first fiscal quarter 2021, because we continued to experience a decline in operating performance, substantially driven by the global outbreak of COVID-19 and a sustained decline in our market capitalization, coupled with a decision to further reduce our near-term growth model, we conducted an interim impairment testing of goodwill. Based on the test results, we concluded that goodwill was fully impaired and we recognized a non-cash impairment charge of$319.7 million during the twenty-six weeks endedJuly 25, 2020 . No impairment charges were incurred during the twenty-six weeks endedJuly 27, 2019 . Interest Expense, Net Interest expense, net decreased to$13.1 million for the twenty-six weeks endedJuly 25, 2020 from$16.0 million for the twenty-six weeks endedJuly 27, 2019 , a decrease of$2.9 million . The decrease in interest expense was primarily due to reduced average borrowings under our ABL Facility in addition to decreases in the average interest rates applicable to our variable rate debt during the period. The effective interest rate for the ABL Facility was approximately 2.80% and 4.30% during the twenty-six weeks endedJuly 25, 2020 andJuly 27, 2019 , respectively. Income Tax Provision
Income tax expense was$9.6 million for the twenty-six weeks endedJuly 25, 2020 compared to$7.4 million for the twenty-six weeks endedJuly 27, 2019 . The effective tax rate for the twenty-six weeks endedJuly 25, 2020 was (3.7)% compared to 23.4% for the twenty-six weeks endedJuly 27, 2019 . The effective tax rate for the twenty-six weeks endedJuly 25, 2020 differs from the federal statutory rate primarily due to the goodwill impairment charge that was non-deductible for income tax purposes, the income tax benefit of$5.2 million from a tax loss carryback under the Coronavirus Aid, Relief, and Economic Security Act ("CARES" Act) and to a lesser extent the impact of state and local income taxes. The effective tax rate for the twenty-six weeks endedJuly 27, 2019 differs from the federal statutory rate primarily due to the impact of state and local income taxes.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been our cash generated by
operating activities, proceeds from sale-leaseback transactions and borrowings
under our ABL Facility and Term Loan Facility (as described in "-Term Loan
Facility"). Historically, we have financed our operations primarily from cash
generated from operations and periodic borrowings under our ABL Facility. Our
primary cash needs are for day-to-day operations, to provide for
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infrastructure investments in our stores, to invest in future projects such as e-commerce, to finance new store openings, to pay interest and principal on our indebtedness and to fund working capital requirements for seasonal inventory builds and new store inventory purchases. In response to the global COVID-19 pandemic, inMarch 2020 we temporarily closed all of our stores nationwide for one week, after which we began to reopen stores in regions that were not required to remain closed by state or local mandates. All of our stores were fully open to foot traffic as ofJune 19, 2020 . There can be no assurance that we will not be required by landlords or authorities at the local, state or federal level to reinstate store closures, or as to how long any such closure would continue. The extent and duration of any such closure reinstatements is inherently uncertain and could significantly adversely affect our cash flows from operations. In the event that our obligations exceed our cash generated from operations and currently available sources of liquidity, such as borrowings under our ABL Facility, our ability to meet our obligations when due could be adversely affected. The availability of liquidity from the sources described herein are subject to a range of risks and uncertainties, including those discussed under "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedJanuary 25, 2020 as filed with theSecurities and Exchange Commission ("SEC") onMay 19, 2020 as well as under "Item 1A. Risk Factors" included in this Quarterly Report. As ofJuly 25, 2020 , we had$32.4 million of cash and cash equivalents, no borrowings outstanding under the ABL Facility revolving credit loans and$273.4 million in borrowing availability under our ABL Facility. At that date, there were$1.0 million in face amount of letters of credit that had been issued under the ABL Facility. The agreement governing the ABL Facility (the "ABL Agreement"), as amended, currently provides for aggregate revolving commitments of$425.0 million , with a sublimit for the issuance of letters of credit of$50.0 million and a sublimit for the issuance of swingline loans of$20.0 million . The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them. OnJune 12, 2020 , the ABL Facility was amended to provide for a new tranche of term loans in a principal amount of$35.0 million on a "first-in, last out" basis. See "- Asset-Based Lending Credit Facility." Our capital expenditures can vary depending on the timing of new store openings and infrastructure-related investments. Capital expenditures for the fiscal year endedJanuary 25, 2020 were approximately$123.5 million and consisted primarily of expenses relating to new store openings and$5.5 million invested in the second distribution center, net of proceeds from the sale of property and equipment, which includes sale-leaseback proceeds, of approximately$123.3 million . We plan to invest in the infrastructure necessary to support the further development of our business and continued growth. During fiscal year 2020, we opened 32 new stores, net of three relocated stores and one store closure. Net capital expenditures incurred to date have been substantially financed with cash from operating activities, sale-leaseback transactions and borrowings under our ABL Facility. In response to the COVID-19 pandemic, we took swift and decisive action to preserve liquidity, including temporarily suspending new store openings, collaborating with our vendors on payment terms and reducing non-essential expenses and inventory flows. While the ultimate duration and impact of this suspension of new store openings is unknown, it could have a material adverse effect on the execution of our growth strategy and our business, financial condition and results of operations. We believe that our current cash position, net cash provided by operating activities, borrowings under our ABL Facility and sale-leaseback transactions, taking into consideration our actions to preserve liquidity, will be adequate to finance our operations, planned capital expenditures, working capital requirements and debt service obligations over the next twelve months and for the foreseeable future thereafter. However, if cash flows from operations and borrowings under our ABL Facility are not sufficient or available to meet our operating requirements, including as a result of further restrictions on store operations in future periods, we could be required to obtain additional financing in the near future. We may not be able to obtain equity or additional debt financing in the future when we need it or, if available, the terms may not be satisfactory to us or could be dilutive to
our
shareholders.
Our indebtedness could adversely affect our ability to raise additional capital,
limit our ability to react to changes in the economy or our industry, expose us
to interest rate risk and prevent us from meeting our obligations. Management
reacts strategically to changes in economic conditions and monitors compliance
with debt covenants to seek to mitigate any potential material impacts to our
financial condition and flexibility.
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Sale-Leaseback Transactions
As part of our flexible real estate strategy, we utilize sale-leaseback
transactions to finance investments previously made for the purchase of
second-generation properties and the construction of new store locations. This
enhances our ability to access a range of locations and facilities efficiently.
We factor sale-leaseback transactions into our capital allocation decisions. In
order to support the execution of sale-leaseback transactions, we have
relationships with certain REITs and other lenders that have demonstrated
interest in our portfolio of assets.
In March 2019 , we sold five of our properties in Frederick, Maryland ; Live Oak,
Texas ; Mansfield, Texas ; Plano, Texas ; and Whitehall, Pennsylvania for a total
of $74.7 million . Contemporaneously with the closing of the sale, we entered
into a lease pursuant to which we leased back the properties for cumulative
initial annual rent of $5.0 million , subject to annual escalations.
In July 2020 , we sold three of our properties in Grand Chute, Wisconsin ;
Cincinnati, Ohio ; and Lutz, Florida for a total of $33.2 million .
Contemporaneously with the closing of the sales, we entered into leases pursuant
to which we leased back the properties for cumulative initial annual rent of
$2.9 million , subject to annual escalations.
Term Loan Facility
On June 5, 2015 , our indirect wholly owned subsidiary At Home Holding III Inc.
(the "Borrower") entered into a first lien credit agreement (the "First Lien
Agreement"), by and among the Borrower, At Home II , a direct wholly owned
subsidiary of ours, as guarantor, certain indirect subsidiaries of At Home II,
various lenders and Bank of America, N.A ., as administrative agent and
collateral agent. After giving effect to amendments to the First Lien Agreement,
the First Lien Agreement provided for a term loan facility in an aggregate
principal amount of $350.0 million (the "Term Loan"). The Term Loan had a
maturity of June 3, 2022 , and was repayable in equal quarterly installments of
approximately $0.9 million for an annual aggregate amount equal to 1.00% of the
principal amount. The Borrower had the option of paying interest on a 1-month,
2-month or quarterly basis on the Term Loan at an annual rate of LIBOR (subject
to a 1.00% floor) plus 4.00%, subject to a 0.50% reduction if the Borrower
achieved a specified secured net leverage ratio level, which was met during the
fiscal year ended January 28, 2017 and for which the Borrower continued to
qualify during the twenty-six weeks ended July 25, 2020 . The Term Loan was
prepayable, in whole or in part, without premium at our option. As of July 25,
2020 , approximately $334.2 million was outstanding under the Term Loan.
On August 20, 2020 , At Home III closed the Notes Offering. The net proceeds of
the issuance of the Notes were used, together with cash on our balance sheet, to
repay in full all indebtedness outstanding under the Term Loan.
Asset-Based Lending Credit Facility
InOctober 2011 , we entered into the ABL Facility, which originally provided for cash borrowings or issuances of letters of credit of up to$80.0 million based on defined percentages of eligible inventory and credit card receivable balances. We have subsequently amended the ABL Agreement from time to time to, among other things, increase the aggregate revolving commitments available thereunder. InJune 2019 , we entered into a letter agreement with certain of the lenders party to the ABL Agreement pursuant to which such lenders agreed to increase their respective commitments by$75.0 million in the aggregate, with effect fromJune 14, 2019 (the "ABL Commitment Increase"). After giving effect to prior amendments to the ABL Agreement and the ABL Commitment Increase, the amount of aggregate revolving commitments available under the ABL Agreement is$425.0 million , with a sublimit for the issuance of letters of credit of$50.0 million and a sublimit for the issuance of swingline loans of$20.0 million . The revolving credit loans under the ABL Facility will mature on the earlier ofJuly 27, 2022 and the date that is 91 days prior to the maturity date of the First Lien Agreement (as such date may be extended). The ABL Agreement has been further amended to extend the maturity date of the revolving credit loans under the ABL Facility to the earlier of (i)August 28, 2025 and (ii) the date of termination of the commitments under such revolving credit facility pursuant to the terms of the ABL Agreement. See "Item 5 - Other Information." 33 Table of Contents OnJune 12, 2020 (the "Amendment Effective Date"), the ABL Borrowers and the guarantors under the ABL Facility entered into an amendment (the "Eighth Amendment") to the ABL Facility with the lenders party thereto,Bank of America, N.A ., as administrative agent and collateral agent for all lenders (in such capacities, the "Administrative Agent"), andTCG Senior Funding L.L.C. , as agent for certain of the lenders (in such capacity, the "FILO Agent"). Pursuant to the Eighth Amendment, the ABL Facility was amended, among other things, to provide for a new tranche of term loans in a principal amount of$35.0 million on a "first-in, last out" basis (the "FILO Loans"), subject to a borrowing base, which FILO Loans were extended to the ABL Borrowers on the Amendment Effective Date by the lenders holding commitments for FILO Loans on the Amendment Effective Date (the "FILO Lenders"). Following the Amendment Effective Date, the aggregate revolving commitments available under the ABL Facility remained unchanged at$425.0 million . As ofJuly 25, 2020 , we had no borrowings outstanding in respect of the revolving credit loans under the ABL Facility, approximately$1.0 million in face amount of letters of credit had been issued and we had availability of approximately$273.4 million . As ofJuly 25, 2020 , we were in compliance with all covenants prescribed in the ABL Facility. Revolving credit loans outstanding under the ABL Facility bear interest at a rate per annum equal to, at our option: (x) the higher of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the agent bank's prime rate and (iii) LIBOR plus 1.00% (the "Base Rate"), plus in each case, an applicable margin of 0.75% to 1.25% based on our average daily availability or (y) the agent bank's LIBOR plus an applicable margin of 1.75% to 2.25% based on our average daily availability. This reflects an increase of the applicable margin included in the interest rate by 0.50% pursuant to the Eighth Amendment. Also in connection with the Eighth Amendment, the ABL Facility was amended to add a 1.00% interest rate floor applicable to all revolving credit loans irrespective of rate used. The effective interest rate was approximately 2.30% and 4.40% during the thirteen weeks endedJuly 25, 2020 andJuly 27, 2019 , respectively, and approximately 2.80% and 4.30% during the twenty-six weeks endedJuly 25, 2020 andJuly 27, 2019 , respectively. The ABL Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; make loans, advances or guarantees; pay dividends; engage in transactions with affiliates; and make investments. In addition, the ABL Facility contains certain cross-default provisions. Prior to the Amendment Effective Date, while there were no financial maintenance covenants in the ABL Facility, during the existence of an event of default or at times when we did not maintain availability of the greater of$15.0 million and 10% of the loan cap, the consolidated fixed charge coverage ratio on a rolling 12-month basis as of the end of any fiscal month was required to be 1.00 to 1.00 or higher. Pursuant to the Eighth Amendment, the covenants in the ABL Facility were amended to replace the consolidated fixed charge coverage ratio to include a new minimum availability covenant whereby the ABL Borrowers and their restricted subsidiaries must maintain at all times availability (i.e., an amount equal to (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base minus (ii) the total revolving credit loans outstanding) in excess of the greater of (x)$35.0 million and 10.0% of the combined loan cap (i.e., the sum of (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base and (ii) the total outstanding amount of FILO Loans). Also, in connection with the Eighth Amendment, a mandatory prepayment provision under the ABL Facility was added requiring the ABL Borrowers to prepay any outstanding revolving credit loans to the extent the total amount of cash and cash equivalents of At Home II, the ABL Borrowers and their restricted subsidiaries (subject to certain exclusions) exceeds$35.0 million . Pursuant to the Eighth Amendment, the ABL Agreement has been amended to, among other things, provide for the FILO Loans, subject to a borrowing base. The FILO Loans bear interest at the London Interbank Offered Rate ("LIBOR") offered for deposits for an interest period of 3 months (with a 1.00% LIBOR floor, the "FILO Rate") plus 9.00%, (with such interest rate switching to Base Rate plus 8.00% only if the FILO Rate cannot be determined) and amortizes at 10.00% per annum in equal quarterly installments of$875,000 commencing onSeptember 30, 2020 , with the remaining balance due at maturity. The FILO Loans will mature on the earlier of (i) the maturity date of the ABL Facility and (ii)July 27, 2022 (the "FILO Maturity Date"). The FILO Loans are prepayable at our option, in whole or in part, subject to a prepayment premium on the principal amount of the FILO Loans prepaid or required to be prepaid. 34 Table of Contents
8.750% Senior Secured Notes due 2025
OnAugust 20, 2020 , At Home III closed an offering of$275 million aggregate principal amount of the Notes. The Notes Offering was conducted pursuant to Rule 144A and Regulation S promulgated under the Securities Act, and the Notes have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold inthe United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Notes are governed by the Indenture. Net proceeds of the issuance of the Notes were used, together with cash on our balance sheet, to repay all amounts outstanding under the Term Loan. The Notes bear interest at a fixed rate of 8.750% per annum, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, commencing onMarch 1, 2021 , and will mature onSeptember 1, 2025 .
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantors, all of which also guarantee the ABL Facility.
The Notes are the senior secured obligations of the Issuer and the Guarantors. The Notes and the guarantees rank equal in right of payment with any of the existing and future senior indebtedness of the Issuer and the Guarantors and other obligations that are not, by their terms, expressly subordinated in right of payment to the Notes, including indebtedness under the ABL Facility. The Notes and the guarantees will rank senior in right of payment to any of the indebtedness of the Issuer and the Guarantors that is expressly subordinated to the Notes. The Notes and the guarantees will be effectively senior to any of the unsecured indebtedness of the Issuer and the Guarantors to the extent of the value of the Collateral (as defined below). With respect to the Collateral, the Notes and the guarantees will be (x) effectively junior to the obligations of the Issuer and the Guarantors under the ABL Facility to the extent of the value of the ABL Priority Collateral securing the Notes and (y) effectively senior to the obligations of the Issuer and the Guarantors under the ABL Facility to the extent of the value of the Term Priority Collateral securing the ABL Facility. The Notes and the guarantees will be effectively subordinated to any indebtedness and other liabilities secured by any assets not constituting Term Priority Collateral or ABL Priority Collateral, to the extent of the value of the assets subject to those liens. The Notes will be structurally subordinated to all indebtedness and other liabilities of the Issuer's existing and future subsidiaries that do not guarantee the Notes. The Issuer may redeem the Notes, in whole or in part, at any time prior toSeptember 1, 2022 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the redemption date plus a make-whole premium. In addition, at any time prior toSeptember 1, 2022 , but not more than once during each 12-month period commencing with the issue date of the Notes, the Issuer may redeem up to 10% of the aggregate original principal amount of the Notes at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. At any time prior toSeptember 1, 2022 , the Issuer may also redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings, at a redemption price equal to 108.750% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date. On or afterSeptember 1, 2022 , the Issuer may redeem all or part of the Notes at the following redemption prices, plus accrued and unpaid interest, if any, to, but not including, the redemption date, if redeemed during the 12-month period commencingSeptember 1 of the years set forth below: Period Redemption Price 2022 104.3750% 2023 102.1875%
2024 and thereafter 100.0000%
Collateral under the ABL Facility, Term Loan and the Notes
The ABL Facility is secured (a) on a first-priority basis by substantially all
of the cash, cash equivalents, deposit accounts, accounts receivables, other
receivables, inventory and certain related assets of the ABL Borrowers and the
guarantors party to the ABL Agreement (collectively, the "ABL Priority
Collateral") of the ABL Borrowers and the
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guarantors party to the ABL Facility and (b) on a second-priority basis by substantially all of the assets of the ABL Borrowers and the guarantors party to the ABL Agreement other than the ABL Priority Collateral (collectively, "Term Priority Collateral"), in each case subject to certain exceptions (collectively, "Term Priority Collateral"); provided, however that since our amendment of the ABL Facility inJuly 2017 , real property that may have secured the Term Loan, or may secure the Notes from time to time, does not form part of the collateral under the ABL Facility. The Term Loan was secured (a) on a first-priority basis by the Term Priority Collateral and (b) on a second-priority basis by the ABL Priority Collateral. In connection with the Notes Offering, we repaid in full all indebtedness outstanding under the Term Loan using the net proceeds of the Notes Offering along with cash on our balance sheet, and accordingly terminated the First Lien Agreement. The Notes are secured (a) on a first-priority basis by the Term Priority Collateral and (b) on a second-priority basis by the ABL Priority Collateral, in each case subject to certain exceptions.
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