BURLINGTON STORES, INC. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 (Fiscal 2019 10-K). In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled "Safe Harbor Statement." Executive Summary Introduction We are a nationally recognized off-price retailer of high-quality, branded apparel at everyday low prices. We opened our first store inBurlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 739 stores as ofAugust 1, 2020 in 45 states andPuerto Rico . We have diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise at up to 60% off other retailers' prices, including: women's ready-to-wear apparel, menswear, youth apparel, baby, beauty, footwear, accessories, home, toys, gifts and coats. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers. COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus (known as "COVID-19") outbreak to be a global pandemic. As a result, we began the temporary closing of some of our stores, and effectiveMarch 22, 2020 , we made the decision to temporarily close all of our stores, distribution centers (other than sporadic processing of received inventory) and corporate offices to combat the rapid spread of COVID-19. These developments have caused significant disruptions to our business and have had a significant adverse impact on our financial condition, results of operations and cash flows, the continuing extent of which will be primarily based on a variety of factors, including the timing and extent of any recovery in traffic and consumer spending at our stores, as well as any future required store closures because of COVID-19 resurgences. We began reopening stores onMay 11, 2020 , with the majority of stores, as well as all distribution centers, re-opened bymid-June 2020 , and substantially all stores re-opened by the end of the second quarter. However, we are currently unable to determine whether, when or how the conditions surrounding the COVID-19 pandemic will change, including the impact that social distancing protocols will have on our operations, the degree to which our customers will patronize our stores and any impact from potential subsequent additional outbreaks, including additional temporary store closures. In response to the COVID-19 pandemic and the temporary closing of our stores, we provided two weeks of financial support to associates impacted by these store closures and by the shutdown of distribution centers. We temporarily furloughed most store and distribution center associates, as well as some corporate associates, but continued to provide benefits to furloughed associates, including paying 100% of their current medical benefit premiums. As ofAugust 1, 2020 , we have recalled all furloughed associates at our re-opened stores, as well as our corporate and distribution facilities. In order to maintain maximum financial flexibility during these uncertain times, we completed several debt transactions during the first quarter of Fiscal 2020. DuringMarch 2020 , we borrowed$400 million on our existing$600 million senior secured asset-based revolving credit facility (the ABL Line of Credit),$150 million of which was repaid during the second quarter. InApril 2020 , we issued$805 million of 2.25% Convertible Senior Notes due 2025 (the Convertible Notes), and through our indirect subsidiary,Burlington Coat Factory Warehouse Corporation (BCFWC), issued$300 million of 6.25% Senior Secured Notes due 2025 (the Secured Notes). Refer to Note 4, "Long Term Debt," for further discussion regarding these debt transactions.
Additionally, we took the following steps to further enhance our financial flexibility:
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• Carefully managed operating expenses, working capital and capital
expenditures, including ceasing substantially all buying activities. We
have subsequently resumed our buying activity, while continuing our
conservative approach toward operating expenses and capital
expenditures.
• Negotiated rent deferral agreements with landlords.
• Suspended our share repurchase program.
• Our CEO voluntarily agreed to not take a salary, our board of directors
voluntarily forfeited their cash compensation, our executive leadership
team voluntarily agreed to decrease their salary by 50% and smaller
salary reductions have been temporarily put in place for all employees
through a certain level. This compensation has been reinstated now that
substantially all of our stores have reopened.
• The annual incentive bonus payments related to Fiscal 2019 performance
were delayed to the second quarter of Fiscal 2020, and merit pay
increases for Fiscal 2020 were delayed to the third quarter of Fiscal
2020.
Due to the aging of inventory related to the temporary store closures discussed
above, as well as the impact of seasonality on our merchandise, we recognized
inventory markdown reserves of $271.9 million during the three month period
ended May 2, 2020 . These reserves covered markdowns taken during the second
quarter of Fiscal 2020. These charges were included in "Cost of sales" on our
Condensed Consolidated Statement of (Loss) Income.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the
CARES Act) was signed into law, which provides emergency economic assistance for
American workers, families and businesses affected by the COVID-19 pandemic. The
economic relief package includes government loan enhancement programs and
various tax provisions to help improve liquidity for American businesses. Based
on our evaluation of the CARES Act, we believe we qualify for certain employer
refundable payroll credits, deferral of applicable payroll taxes, net operating
loss (NOL) carrybacks and immediate expensing for eligible qualified improvement
property. We recorded a tax benefit of $24.8 million and $87.3 million in our
effective income tax rate for the three and six months ended August 1, 2020 ,
respectively, for the increased benefit from NOL carrybacks to earlier years
when the tax rate was higher than the current year. The Company estimates that
it will obtain a tax refund of $221.2 million from the carryback of federal
NOLs, which is included in the line item "Other assets" on the Company's
Condensed Consolidated Balance Sheet. Refer to Note 8, "Income Taxes" for
further discussion.
We continue to keep health and safety as a top priority as we operate our stores. We have implemented social distancing and safety practices, including:
• Signage to remind customers and associates to practice social distancing
and remain at least six feet apart.
• One way entrances and exits at the front of the store and in the
department aisles.
• Wider check-out lanes, with social distancing markers on the floor.
• Increased space at each register, as well as a physical barrier, between
customers and associates.
• Closing all fitting rooms.
• Routinely cleaning and disinfecting all areas of the store, including
frequently cleaning high-touch areas.
• Providing sanitization materials throughout the store.
• Making shopping cart wipes available.
• All associates were screened before returning from furlough andcontinued to be screened daily in stores and distribution centers where
required by state and local mandates. Associates are also required to
wear face coverings while in stores and our distribution centers and are
provided face masks and gloves by the Company.
We could experience other potential adverse impacts as a result of the COVID-19
pandemic, including, but not limited to, charges from adjustments to the
carrying amount of goodwill and other intangible assets or long-lived asset
impairment charges. In addition, the negative impacts of the COVID-19 pandemic
may result in further changes in the amount of valuation allowance required.
Actual results may differ materially from the Company's current estimates as the
scope of the COVID-19 pandemic evolves, depending largely, though not
exclusively, on the duration and extent of the disruption to our business.
Fiscal Year
Fiscal 2020 is defined as the 52-week year ending
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Store Openings, Closings, and Relocations
During the six month period endedAugust 1, 2020 , we opened 25 new stores, inclusive of 10 relocations, and permanently closed three stores, exclusive of the aforementioned relocations, bringing our store count as ofAugust 1, 2020 to 739 stores, which includes temporarily closed stores.
Ongoing Initiatives for Fiscal 2020
Since the beginning of the COVID-19 pandemic, protecting the health and safety of our customers, associates, and the communities that we serve has been our top priority. Accordingly, we moved quickly to close our stores, distribution centers, and corporate offices in March. We continue to keep health and safety as a top priority as we operate our stores. As discussed above, we began reopening stores onMay 11, 2020 in accordance with applicable government guidelines, with the majority of our stores re-opened bymid-June 2020 , and substantially all stores re-opened by the end of the second quarter. While our stores were closed, our primary short-term financial objective was to effectively manage and enhance our liquidity. As our stores return to normal operations, and we receive more clarity on the extent of the impact of the COVID-19 pandemic, we will continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparable store sales trends, increasing total sales growth and reducing expenses. These initiatives include, but are not limited to:
• Driving Comparable Store Sales Growth.
We intend to continue to increase comparable store sales through the following initiatives:
• More Effectively Chasing the Sales Trend. We are conservatively
planning comparable stores sales growth, holding and controlling
liquidity and closely analyzing the sales trend by business, ready to
chase that trend. We believe that these actions should not only enable
us to more effectively chase the trend, but they will alsoallow us to
take more advantage of great opportunistic buys.
• Making a Greater Investment in Merchandising Capabilities. We intend
to invest in incremental headcount, especially in growing or
under-developed businesses, training and coaching, improved tools and
reporting, and other forms of merchant support. We believe that these
investments should improve our ability to develop vendor
relationships, source great merchandise buys, more accurately assess
value, and better forecast and chase the sales trend.
• Operating with Leaner Store Inventories. We are planning to carry less
inventory in stores going forward, which we believe should result in
the customer finding a higher mix of fresh receipts and great
merchandise values within the racks. We believe that thisshould drive
faster turns and lower markdowns, while simultaneously improving our
customers' shopping experience.
• Enhancing Existing Categories and Introducing New Categories. We have
opportunities to expand the depth and breadth of certainexisting
categories, such as ladies' apparel, children's products, bath and
cosmetic merchandise, housewares, décor for the home andbeauty as we
continue to de-weather our business, and maintain the flexibility to
introduce new categories as we expand our merchandisingcapabilities.
• Expanding and Enhancing Our Retail Store Base.
We intend to expand and enhance our retail store base through the following initiatives:
• Adhering to a Market Focused and Financially Disciplined Real Estate
Strategy. We have grown our store base consistently since our founding
in 1972, developing more than 99% of our stores organically. We
believe there is significant opportunity to expand our retail store
base in the United States . We have identified numerous market
opportunities that we believe will allow us to operate at least 1,000
stores over the long-term.
• Maintaining Focus on Unit Economics and Returns. We have adopted a
market focused approach to new store openings with a specific focus on
maximizing sales while achieving attractive unit economics and
returns. By focusing on opening stores with attractive unit economics,
we are able to achieve attractive returns on capital andcontinue to
grow our margins. We believe that as we continue to reduce our
comparable store inventory, we will be able to reduce the square
footage of our stores while continuing to maintain our broad
assortment.
• Enhancing the Store Experience Through Store Remodels and Relocations.
We continue to invest in store remodels on a store-by-store basis
where appropriate, taking into consideration the age, sales and
profitability of a store, as well as the potential impact to the
customer shopping experience. In our remodeled stores, we have
typically incorporated new flooring, painting, lighting and graphics,
relocated our fitting rooms to maximize productive selling space,
enhanced certain departments such as home and accessories and made
various other improvements as appropriate by location.
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• Enhancing Operating Margins.
We intend to increase our operating margins through the following initiatives:
• Improving Operational Flexibility. Our store and supply chain teams
must continue to respond to the challenge of becoming more responsive
to the sales chase, enhancing their ability at flexing up and down
based on trends. Their ability to appropriately flex based on the
ongoing trends allows us to maximize leverage on sales,regardless of
the trend.
• Optimizing Markdowns. We believe that our markdown system allows us to
maximize sales and gross margin dollars based on forward-looking sales
forecasts, sell-through targets and exit dates. Additionally, as we
plan to carry less inventory in our stores, we expect to drive faster
turns, which in turn will reduce the amount of markdowns taken.
• Enhancing Purchasing Power . We believe that increasing our store
footprint and expanding our west coast buying office provides us with
the opportunity to capture incremental buying opportunities and
realize economies of scale in our merchandising andnon-merchandising
purchasing activities.
• Challenging Expenses to Drive Operating Leverage. We believe that we
will be able to leverage our growing sales over the fixed costs of our
business. In addition, by more conservatively planning our comparable
store sales growth, we are forcing even tighter expensecontrol. We
believe that this should put us in a strong position to drive
operating leverage on any sales ahead of the plan. Additionally, we
plan to continue challenging the processes and operating norms
throughout the organization with the belief that this will lead to
incremental efficiency improvements and savings.
Uncertainties and Challenges
As we strive to increase profitability through achieving positive comparable store sales and leveraging productivity initiatives focused on improving the in-store experience, more efficient movement of products from the vendors to the selling floors, and modifying our marketing plans to increase our core customer base and increase our share of our current customers' spending, there are uncertainties and challenges that we face as an off-price retailer of apparel and accessories for men, women and children and home furnishings that could have a material impact on our revenues or income. COVID-19. The extent of the impact of the COVID-19 pandemic on our business will depend largely on future developments, including the duration and spread of the outbreak within theU.S. , the related impact on consumer confidence and spending and when, or if, we will be able to resume normal operations, all of which are highly uncertain and cannot be predicted. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results, liquidity and cash flows. General Economic Conditions. Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing global economic conditions, inflation, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy costs, commodities pricing, income tax rates and policies, consumer confidence and consumer perception of economic conditions. In addition, consumer purchasing patterns may be influenced by consumers' disposable income, credit availability and debt levels. A broader, protracted slowdown in theU.S. economy, an extended period of high unemployment rates, an uncertain global economic outlook or a credit crisis could adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis. Consumer confidence is also affected by the domestic and international political situation. Our financial condition and operations could be impacted by changes in government regulations in areas including, but not limited to, taxes and healthcare. Ongoing international trade and tariff negotiations could have a direct impact on our income and an indirect impact on consumer prices. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting theU.S. , or public health issues such as pandemics or epidemics, including the outbreak of the COVID-19 pandemic, could lead to a decrease in spending by consumers. In addition, natural disasters, public health issues, industrial accidents and acts of war in various parts of the world could have the effect of disrupting supplies and raising prices globally which, in turn, may have adverse effects on the world andU.S. economies and lead to a downturn in consumer confidence and spending. We closely monitor our net sales, gross margin and expenses. We have performed scenario planning such that if our net sales decline for an extended period of time, we have identified variable costs that could be reduced to partially mitigate the impact of these declines. If we were to experience adverse economic trends and/or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods. 26 -------------------------------------------------------------------------------- Seasonality of Sales and Weather Conditions. Our sales, like most other retailers, are subject to seasonal influences, with the majority of our sales and net income historically derived during the second half of the year, which includes the back-to-school and holiday seasons. Weather continues to be a contributing factor to the sale of our clothing. Generally, our sales are higher if the weather is cold during the Fall and warm during the early Spring. Sales of cold weather clothing are increased by early cold weather during the Fall, while sales of warm weather clothing are improved by early warm weather conditions in the Spring. Although we have diversified our product offerings, we believe traffic to our stores is still driven, in part, by weather patterns. Competition and Margin Pressure. We believe that in order to remain competitive with retailers, including off-price retailers and discount stores, we must continue to offer brand-name merchandise at a discount to prices offered by other retailers as well as an assortment of merchandise that is appealing to our customers. TheU.S. retail apparel and home furnishings markets are highly fragmented and competitive. We compete for business with department stores, off-price retailers, internet retailers, specialty stores, discount stores, wholesale clubs, and outlet stores as well as with certain traditional, full-price retail chains that have developed off-price concepts. At various times throughout the year, traditional full-price department store chains and specialty shops offer brand-name merchandise at substantial markdowns, which can result in prices approximating those offered by us at ourBurlington stores. Additionally, it is likely that the retail environment may continue to be highly promotional in the near term, as retailers try to rebuild traffic to their stores and clear aged merchandise. We anticipate that competition will increase in the future. Therefore, we will continue to look for ways to differentiate our stores from those of our competitors. TheU.S. retail industry continues to face increased pressure on margins as overall challenging retail conditions have led consumers to be more value conscious. Our "open to buy" paradigm, in which we purchase both pre-season and in-season merchandise, allows us the flexibility to purchase less pre-season with the balance purchased in-season and opportunistically. It also provides us with the flexibility to shift purchases between suppliers and categories. This enables us to obtain better terms with our suppliers, which we expect to help offset any rising costs of goods.
Key Performance Measures
We consider numerous factors in assessing our performance. As the COVID-19 pandemic began to unfold, our focus shifted toward maintaining and enhancing our liquidity position, so that we would be able to operate with reduced revenues for an extended period and take advantage of opportunistic buys as our stores re-opened. As our operations return to normal, management will continue to evaluate our other key performance measures, including, net (loss) income, Adjusted Net (Loss) Income, Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin, inventory and store payroll. Liquidity. Liquidity measures our ability to generate cash. Management measures liquidity through cash flow, which is the measure of cash generated from or used in operating, financing, and investing activities. We took several steps during the six months endedAugust 1, 2020 to effectively manage our liquidity during the COVID-19 pandemic, including careful management of operating expenses, working capital and capital expenditures, as well as suspending our share repurchase program. Additionally, we borrowed$400 million on our existing ABL Line of Credit, issued$805 million of our Convertible Notes, and through BCFWC, issued$300 million of our Secured Notes. We repaid$150 million on the ABL Line of Credit during the second quarter of Fiscal 2020. AtAugust 1, 2020 , we had$120.4 million available under the ABL Line of Credit. Cash and cash equivalents, including restricted cash and cash equivalents, increased$674.1 million during the six months endedAugust 1, 2020 , compared with a decrease of$15.1 million during the six months endedAugust 3, 2019 . Refer to the section below entitled "Liquidity and Capital Resources" for further explanation. Net (loss) income. We recorded a net loss of$46.8 million during the three month period endedAugust 1, 2020 compared with net income of$84.6 million during the three month period endedAugust 3, 2019 . We recorded a net loss of$380.5 million during the six month period endedAugust 1, 2020 compared with net income of$162.3 million during the six month period endedAugust 3, 2019 . These decreases were primarily driven by the temporary closure of all our stores due to the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation.
Adjusted Net (Loss) Income, Adjusted EBITDA and Adjusted EBIT: Adjusted Net (Loss) Income, Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance.
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We define Adjusted Net (Loss) Income as net (loss) income, exclusive of the
following items, if applicable: (i) net favorable lease cost; (ii) costs related
to debt issuances and amendments; (iii) loss on extinguishment of debt;
(iv) impairment charges; (v) amounts related to certain litigation matters; (vi)
non-cash interest expense on the Convertible Notes; (vii) costs related to
closing the e-commerce store; and (viii) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains, all of which are tax effected
to arrive at Adjusted Net (Loss) Income.
We define Adjusted EBITDA as net (loss) income, exclusive of the following
items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense; (v) depreciation and
amortization; (vi) impairment charges; (vii) costs related to debt issuances and
amendments; (viii) amounts related to certain litigation matters; (ix) costs
related to closing the e-commerce store; and (x) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains.
We define Adjusted EBIT as net (loss) income, exclusive of the following items,
if applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense; (v) impairment charges; (vi)
net favorable lease costs; (vii) costs related to debt issuances and amendments;
(viii) amounts related to certain litigation matters; (ix) costs related to
closing the e-commerce store; and (x) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains.
We present Adjusted Net (Loss) Income, Adjusted EBITDA and Adjusted EBIT,
because we believe they are useful supplemental measures in evaluating the
performance of our business and provide greater transparency into our results of
operations. In particular, we believe that excluding certain items that may vary
substantially in frequency and magnitude from what we consider to be our core
operating results are useful supplemental measures that assist in evaluating our
ability to generate earnings and leverage sales, and to more readily compare
core operating results between past and future periods.
Adjusted Net (Loss) Income has limitations as an analytical tool, and should not
be considered either in isolation or as a substitute for net (loss) income or
other data prepared in accordance with GAAP. Among other limitations, Adjusted
Net (Loss) Income does not reflect the following items, net of their tax effect:
• favorable lease costs;
• costs related to debt issuances and amendments;
• losses on extinguishment of debt;
• amounts charged for certain litigation matters;
• non-cash interest expense related to original issue discount on the
Convertible Notes;
• impairment charges on long-lived assets;
• costs related to closing the e-commerce store; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and six months endedAugust 1, 2020 , Adjusted Net (Loss) Income decreased$128.6 million to a loss of$37.2 million and decreased$529.2 million to a loss of$352.2 million , respectively, compared to the same periods in the prior year. These decreases were primarily driven by the temporary closure of all our stores due to the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 28 -------------------------------------------------------------------------------- The following table shows our reconciliation of net (loss) income to Adjusted Net (Loss) Income for the three and six months endedAugust 1, 2020 compared with the three and six months endedAugust 3, 2019 : (unaudited) (in thousands) Three Months Ended Six Months Ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 Reconciliation of net (loss) income to Adjusted Net (Loss) Income: Net (loss) income$ (46,781 ) $ 84,567 $ (380,509 ) $ 162,332 Net favorable lease costs (a) 6,183 9,205 12,626 19,907 Non-cash interest expense on convertible notes (b) 7,387 - 8,753 - Costs related to debt issuances and amendments (c) - 7 4,352 (375 ) Loss on extinguishment of debt (d) - - 202 - Impairment charges 1,077 - 3,001 - Litigation accruals (e) 10,388 - 20,788 - E-commerce closure (f) 970 - 970 - Tax effect (g) (16,421 ) (2,333 ) (22,427 ) (4,931 ) Adjusted Net (Loss) Income (37,197 ) 91,446 (352,244 ) 176,933
(a) Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of purchase
accounting related to the
These expenses are recorded in the line item "Selling, general and
administrative expenses" in our Condensed Consolidated Statements of (Loss)
Income.
(b) Represents non-cash accretion of original issue discount on the Convertible
Notes.
(c) Represents certain costs incurred as a result of the issuance of the
Secured Notes and the Convertible Notes, as well as the execution of
refinancing opportunities.
(d) Amounts relate to the refinancing of the Term Loan Facility.
(e) Represents amounts charged for certain litigation matters.
(f) Represents costs related to the closure of our e-commerce store.
(g) Tax effect is calculated based on the effective tax rates (before discrete
items) for the respective periods, adjusted for the tax effect for the
impact of items (a) through (f). The effective tax rate includes the
benefit of loss carrybacks to prior years with higher statutory tax rates.
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net (loss) income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect: • interest expense on our debt; • losses on the extinguishment of debt; • costs related to debt issuances and amendments;
• cash requirements for replacement of assets. Although depreciation and
amortization are non-cash charges, the assets being depreciated and
amortized will likely have to be replaced in the future;
• amounts charged for certain litigation matters;
• impairment charges on long-lived assets;
• costs related to closing the e-commerce store;
• income tax expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and six months endedAugust 1, 2020 , Adjusted EBITDA decreased$179.1 million to a loss of$8.8 million and decreased$794.6 million to a loss of$456.4 million , respectively, compared to the same period in the prior year. These decreases were primarily driven by the temporary closure of all our stores due to the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 29 -------------------------------------------------------------------------------- The following table shows our reconciliation of net (loss) income to Adjusted EBITDA for the three and six months endedAugust 1, 2020 compared with the three and six months endedAugust 3, 2019 : (unaudited) (in thousands) Three Months Ended Six Months Ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 Reconciliation of net (loss) income to Adjusted EBITDA: Net (loss) income$ (46,781 ) $ 84,567 $ (380,509 ) $ 162,332 Interest expense 28,359 13,435 43,052 26,805 Interest income (301 ) (189 ) (1,016 ) (393 ) Loss on extinguishment of debt (a) - - 202 - Costs related to debt issuances and amendments (b) - 7 4,352 (375 ) Litigation accruals (c) 10,388 - 20,788 - E-commerce closure (d) 970 - 970 - Depreciation and amortization (e) 60,537 61,355 121,222 122,535 Impairment charges 1,077 - 3,001 - Income tax (benefit) expense (63,055 ) 11,151 (268,415 ) 27,346 Adjusted EBITDA (8,806 ) 170,326 (456,353 ) 338,250 (a) Amounts relate to the refinancing of the Term Loan Facility. (b) Represents certain costs incurred as a result of the issuance of the Secured Notes and the Convertible Notes, as well as the execution of refinancing opportunities. (c) Represents amounts charged for certain litigation matters. (d) Represents costs related to the closure of our e-commerce store.
(e) Includes
the line item "Selling, general and administrative expenses" in our
Condensed Consolidated Statements of (Loss) Income for the three and six
months ended August 1, 2020 , and $9.1 million and $19.6 million for the
three and six months ended
lease cost represents the non-cash expense associated with favorable and
unfavorable leases that were recorded as a result of the Merger
Transaction.
Adjusted EBIT has limitations as an analytical tool, and should not be
considered either in isolation or as a substitute for net (loss) income or other
data prepared in accordance with GAAP. Among other limitations, Adjusted EBIT
does not reflect:
• interest expense on our debt;
• losses on the extinguishment of debt;
• costs related to debt issuances and amendments;
• favorable lease cost;
• amounts charged for certain litigation matters;
• impairment charges on long-lived assets;
• costs related to closing the e-commerce store;
• income tax expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and six months endedAugust 1, 2020 , Adjusted EBIT decreased$181.3 million to a loss of$63.2 million and decreased$800.6 million to a loss of$564.9 million , respectively, compared to the same period in the prior year. These decreases were primarily driven by the temporary closure of all our stores due to the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 30 -------------------------------------------------------------------------------- The following table shows our reconciliation of net (loss) income to Adjusted EBIT for the three and six months endedAugust 1, 2020 compared with the three and six months endedAugust 3, 2019 : (unaudited) (in thousands) Three Months Ended Six Months Ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 Reconciliation of net (loss) income to Adjusted EBIT: Net (loss) income$ (46,781 ) $ 84,567 $ (380,509 ) $ 162,332 Interest expense 28,359 13,435 43,052 26,805 Interest income (301 ) (189 ) (1,016 ) (393 ) Loss on extinguishment of debt (a) - - 202 - Costs related to debt issuances and amendments (b) - 7 4,352 (375 ) Net favorable lease costs (c) 6,183 9,205 12,626 19,907 Impairment charges 1,077 - 3,001 - Litigation accruals (d) 10,388 - 20,788 - E-commerce closure (e) 970 - 970 - Income tax (benefit) expense (63,055 ) 11,151 (268,415 ) 27,346 Adjusted EBIT (63,160 ) 118,176 (564,949 ) 235,622 (a) Amounts relate to the refinancing of the Term Loan Facility. (b) Represents certain costs incurred as a result of the issuance of the Secured Notes and the Convertible Notes, as well as the execution of refinancing opportunities.
(c) Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of the
Merger Transaction. These expenses are recorded in the line item "Selling,
general and administrative expenses" in our Condensed Consolidated
Statements of (Loss) Income.
(d) Represents amounts charged for certain litigation matters.
(e) Represents costs related to the closure of our e-commerce store.
Comparable Store Sales. Comparable store sales measure performance of a store
during the current reporting period against the performance of the same store in
the corresponding period of the previous year. The method of calculating
comparable store sales varies across the retail industry. As a result, our
definition of comparable store sales may differ from other retailers.
We define comparable store sales as merchandise sales of those stores,
commencing on the first day of the fiscal month one year after the end of their
grand opening activities, which normally conclude within the first two months of
operations. If a store is closed for seven or more days during a month, our
policy is to remove that store from our calculation of comparable stores sales
for any such month, as well as during the month(s) of their grand re-opening
activities. Comparable store sales increased 4% and 2% for the three and six
month periods ended August 3, 2019 , respectively.
Comparable store sales as defined above are not meaningful for the three and six
months ended August 1, 2020 , due to the extended store closures resulting from
the COVID-19 pandemic. In order to provide a performance indicator for our
stores as they reopen, we are temporarily reporting a new sales measure: sales
in re-opened stores. Sales in re-opened stores includes all stores that were
opened prior to the end of the second quarter of Fiscal 2019, and reports the
sales increase or decrease of these stores for the days the stores were open in
the current period against sales for the same days in the prior year. Sales in
re-opened stores decreased 14% during the second quarter of Fiscal 2020. These
sales were stronger in the first half of the quarter driven by strong clearance
sales, but weakened in late June and July due to low inventory levels and
delayed store replenishment.
Various factors affect comparable store sales, including, but not limited to,
weather conditions, current economic conditions, the timing of our releases of
new merchandise and promotional events, the general retail sales environment,
consumer preferences and buying trends, changes in sales mix among distribution
channels, competition, and the success of marketing programs.
Gross Margin. Gross margin is the difference between net sales and the cost of
sales. Our cost of sales and gross margin may not be comparable to those of
other entities, since some entities may include all of the costs related to
their buying and distribution functions, certain store-related costs and other
costs, in cost of sales. We include certain of these costs in the line items
"Selling, general and administrative expenses" and "Depreciation and
amortization" in our Condensed Consolidated Statements of (Loss) Income. We
include in our "Cost of sales" line item all costs of merchandise (net of
purchase discounts and certain vendor allowances), inbound freight, distribution
center outbound freight and certain merchandise acquisition costs, primarily
commissions and import fees. Gross margin as a percentage of net sales improved
to 45.8% during the three month period ended August 1, 2020 , compared with 41.4%
during the three month period ended August 3, 2019 . We recorded a reserve in the
first quarter of Fiscal 2020 to
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account for the impact of clearance markdowns anticipated upon store re-openings
in the second quarter. These markdowns reserved for in the first quarter led to
low levels of clearance inventory in the second half of the second quarter and
resulted in lower markdowns and increased margin for the quarter. Product
sourcing costs, which are included in selling, general and administrative
expenses, were $72.1 million during the three month period ended August 1, 2020 ,
compared with $82.2 million during the three month period ended August 3, 2019 .
Gross margin as a percentage of net sales decreased to 26.4% during the six
month period ended August 1, 2020 , compared with 41.2% during the six month
period ended August 3, 2019 , driven primarily by aged inventory markdowns in the
first quarter due to our extended store closures. Product sourcing costs were
$146.6 million during the six month period ended August 1, 2020 , compared with
$160.7 million during the six month period ended August 3, 2019 .
Inventory. Inventory at August 1, 2020 decreased to $607.6 million compared with
$823.8 million at August 3, 2019 . The decrease was driven by faster than
expected clearance sell through during the first half of the quarter, delays in
inventory replenishment, and conservative inventory plans due to uncertain
consumer demand during the pandemic. We are planning in-store inventories to
remain well below last year's levels on a comparable store basis. Pack and hold
inventory was 26% of total inventory as of August 1, 2020 , compared with 29% as
of August 3, 2019 . We intend to continue to build up our pack and hold
merchandise. Inventory at February 1, 2020 was $777.2 million .
In order to better serve our customers and maximize sales, we continue to refine
our merchandising mix and inventory levels within our stores. By appropriately
managing our inventories, we believe we will be better able to deliver a
continual flow of fresh merchandise to our customers. Once operations begin to
normalize, we intend to move toward more productive inventories by increasing
the amount of current inventory as a percent of total inventory.
Store Payroll. The method of calculating store payroll varies across the retail
industry. As a result, our store payroll may differ from other retailers. We
define store payroll as regular and overtime payroll for all store personnel as
well as regional and territory personnel, exclusive of payroll charges related
to corporate and warehouse employees.
As a result of the COVID-19 outbreak, we temporarily furloughed most store
associates in March 2020 , while providing two weeks of financial support to
impacted associates. We also continued to provide benefits to furloughed
associates, including paying 100% of their current medical benefit premiums. As
a result of these actions, store payroll costs decreased to $110.5 million and
$215.6 million during the three and six month periods ended August 1, 2020 ,
compared with $148.8 million and $289.9 million during the three and six month
periods ended August 3, 2019 , respectively.
Results of Operations
The following table sets forth certain items in the Condensed Consolidated Statements of (Loss) Income as a percentage of net sales for the three and six months endedAugust 1, 2020 and the three and six months endedAugust 3, 2019 . Percentage of Net Sales Three Months Ended Six Months Ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Other revenue 0.2 0.3 0.3 0.3 Total revenue 100.2 100.3 100.3 100.3 Cost of sales 54.2 58.6 73.6 58.8 Selling, general and administrative expenses 48.7 32.1 54.0 31.9 Costs related to debt issuances and amendments - 0.0 0.2 (0.0 ) Depreciation and amortization 5.4 3.1 6.0 3.1 Impairment charges - long-lived assets 0.1 - 0.2 - Other income - net (0.1 ) (0.1 ) (0.2 ) (0.1 ) Loss on extinguishment of debt - - 0.0 - Interest expense 2.8 0.8 2.4 0.8 Total costs and expenses 111.1 94.5 136.2 94.5 (Loss) income before income tax (benefit) expense (10.9 ) 5.8 (35.9 ) 5.8 Income tax (benefit) expense (6.2 ) 0.7 (14.8 ) 0.8 Net (loss) income (4.7 )% 5.1 % (21.1 )% 5.0 %
Three Month Period Ended
Net sales
Net sales decreased approximately
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their reopening to the end of the second quarter, decreased 14%. These sales
were stronger in the first half of the quarter driven by strong clearance sales,
but weakened in late June and July due to low inventory levels and delayed store
replenishment.
Cost of sales
Cost of sales as a percentage of net sales decreased to 54.2% during the second
quarter of Fiscal 2020, compared to 58.6% during the second quarter of Fiscal
2019. We recorded a reserve in the first quarter of Fiscal 2020 to account for
the impact of clearance markdowns anticipated upon store re-openings in the
second quarter. These markdowns reserved for in the first quarter led to low
levels of clearance inventory in the second half of the second quarter and
resulted in lower markdowns and increased margin for the quarter. On a dollar
basis, cost of sales decreased $422.9 million , or 43.6%, primarily driven by our
overall decrease in sales. Product sourcing costs, which are included in
selling, general and administrative expenses, were $72.1 million during the
second quarter of Fiscal 2020, compared with $82.2 million during the second
quarter of Fiscal 2019.
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the three month period endedAugust 1, 2020 compared with the three month period endedAugust 3, 2019 . (in millions) Three Months Ended Percentage Percentage August 1, of August 3, of 2020 Net Sales 2019 Net Sales $ Variance % Change
Store related costs$ 334.6 33.1 %$ 355.3 21.5 %$ (20.7 ) (5.8 )% Product sourcing costs 72.1 7.1 82.2 5.0 (10.1 ) (12.3 ) Corporate costs 59.5 5.9 55.4 3.3 4.1 7.4 Marketing and strategy costs 3.5 0.3 9.9 0.6 (6.4 ) (64.6 ) Favorable lease cost 6.1 0.6 9.1 0.5 (3.0 ) (33.0 ) Other selling, general and administrative expenses 15.8 1.7 19.9 1.2 (4.1 ) (20.6 ) Selling, general and administrative expenses$ 491.6 48.7 %$ 531.8 32.1 %$ (40.2 ) -7.6 % The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by the temporary closure of all our stores. We took significant steps to reduce selling, general and administrative expenses during this period. Among other things, we worked with landlords to modify payment terms for certain leases, furloughed most store and distribution center associates, as well as some corporate associates, temporarily eliminated the salary of the CEO and cash compensation for our Board of Directors, and temporarily reduced the salaries for our executive leadership team by 50%, with smaller salary reductions for all employees through a certain level. As a result of these actions, our selling, general and administrative expenses decreased from last year on a dollar basis. These decreases were partially offset by COVID-19 related expenses and store re-opening costs of approximately$37 million , as well as litigation accruals. Refer to Note 12, "Commitments and Contingencies" for further discussion regarding our litigation accruals.
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed
assets amounted to
Interest expense
Interest expense increased$14.9 million during the second quarter of Fiscal 2020 to$28.4 million , compared to the same period in the prior year. The increase was primarily driven by the$400 million draw on our ABL Line of Credit inMarch 2020 , as well as the issuance of our$805 million Convertible Notes and our$300 million Secured Notes. This increase was partially offset by the refinancing of our Term Loan Facility inFebruary 2020 , which reduced the applicable interest rate margins on our Term Loan Facility from 2.00% to 1.75%, as well as a decrease in average LIBOR. 33 -------------------------------------------------------------------------------- The average interest rates and average balances related to our variable rate debt for the second quarter of Fiscal 2020 compared with the second quarter of Fiscal 2019, are summarized in the table below: Three Months EndedAugust 1 ,August 3, 2020 2019 Average interest rate - ABL Line of Credit 2.1%
3.7%
Average interest rate - Term Loan Facility 2.0%
4.4%
Average balance - ABL Line of Credit (in millions)
146.0
Average balance - Term Loan Facility (in millions) (a)
961.4
(a) Excludes original issue discount.
Income tax (benefit) expense
Income tax benefit was$63.1 million during the second quarter of Fiscal 2020 compared with income tax expense of$11.2 million during the second quarter of Fiscal 2019. The effective tax rate for the second quarter of Fiscal 2020 was 57.4% compared with 11.6% during the second quarter of Fiscal 2019. The income tax benefit in the current year is a result of the pre-tax loss and the carry-back of net operating losses arising in 2020 to the five prior tax years, as permitted under the CARES Act. The increase in the income tax rate is a function of current year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate. At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the second quarter of Fiscal 2020 resulted in an annual effective income tax rate of approximately 36% (before discrete items) as our best estimate. This is an increase compared to the annual effective tax rate for the second quarter of Fiscal 2019 of approximately 25% (before discrete items), due to current year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate.
Net (loss) income
We recorded a net loss of$46.8 million for the second quarter of Fiscal 2020 compared with net income of$84.6 million for the second quarter of Fiscal 2019. This decrease was primarily driven by the temporary closure of all our stores due to the COVID-19 pandemic.
Six Month Period Ended
Net sales Net sales decreased approximately$1,477.0 million , or 45.0%, to$1,807.9 million during the six month period endedAugust 1, 2020 , driven primarily by the temporary closure of all our stores due to the COVID-19 pandemic. Sales in reopened stores, from the date of their reopening to the end of the second quarter, decreased 14%. These sales were stronger in the first half of the quarter driven by strong clearance sales, but weakened in late June and July due to low inventory levels and delayed store replenishment.
Cost of sales
Cost of sales as a percentage of net sales increased to 73.6% during the six month period endedAugust 1, 2020 , compared to 58.8% during the six month period endedAugust 3, 2019 , driven primarily by markdowns on aged inventory in the first quarter due to the extended store closures. On a dollar basis, cost of sales decreased$602.0 million , or 31.2%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in selling, general and administrative expenses, were$146.6 million during the six month period endedAugust 1, 2020 , compared with$160.7 million during the six month period endedAugust 3, 2019 . 34
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Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the six month period endedAugust 1, 2020 compared with the six month period endedAugust 3, 2019 . (in millions) Six Months Ended Percentage Percentage August 1, of August 3, of 2020 Net Sales 2019 Net Sales $ Variance % Change Store related costs$ 642.1 35.5 %$ 696.4 21.2 %$ (54.3 ) (7.8 )% Product sourcing costs 146.6 8.1 160.7 4.9 (14.1 ) (8.8 ) Corporate costs 136.3 7.5 106.0 3.2 30.3 28.6 Marketing and strategy costs 11.0 0.6 28.7 0.9 (17.7 ) (61.7 ) Favorable lease cost 12.5 0.7 19.6 0.6 (7.1 ) (36.2 ) Other selling, general and administrative expenses 28.2 1.6 37.8 1.1 (9.6 ) (25.4 ) Selling, general and administrative expenses$ 976.7 54.0 %$ 1,049.2 31.9 %$ (72.5 ) (6.9 )% The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by the temporary closure of all our stores. We took significant steps to reduce selling, general and administrative expenses during this period. Among other things, we worked with landlords to modify payment terms for certain leases, furloughed most store and distribution center associates, as well as some corporate associates, temporarily eliminated the salary of the CEO and cash compensation for our Board of Directors, and temporarily reduced the salaries for our executive leadership team by 50%, with smaller salary reductions for all employees through a certain level. As a result of these actions, our selling, general and administrative expenses decreased from last year on a dollar basis. These decreases were partially offset by COVID-19 related expenses and store re-opening costs of approximately$37 million , as well as litigation accruals. Refer to Note 12, "Commitments and Contingencies" for further discussion regarding our litigation accruals.
Costs related to debt issuances and amendments
During the first quarter of Fiscal 2020, we incurred legal fees related to the issuance of our Secured Notes of$3.2 million , as well as legal and placement fees of$1.1 million related to the refinancing our Term Loan Facility. During the first quarter of Fiscal 2019, we reversed$0.4 million of previously estimated debt amendment costs associated with the 2018 refinancing of our Term Loan Facility.
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed assets amounted to$108.7 million during the six month period endedAugust 1, 2020 compared with$102.9 million during the six month period endedAugust 3, 2019 . The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores.
Interest expense
Interest expense increased$16.2 million during the six month period endedAugust 1, 2020 to$43.1 million , compared to the same period in the prior year. The increase was primarily driven by the$400 million draw on our ABL Line of Credit inMarch 2020 , as well as the issuance of our$805 million Convertible Notes and our$300 million Secured Notes. This increase was partially offset by the refinancing of our Term Loan Facility inFebruary 2020 , which reduced the applicable interest rate margins on our Term Loan Facility from 2.00% to 1.75%, as well as a decrease in average LIBOR. 35 -------------------------------------------------------------------------------- The average interest rates and average balances related to our variable rate debt for the six month period endedAugust 1, 2020 compared with prior year, are summarized in the table below: Six Months EndedAugust 1 ,August 3, 2020 2019 Average interest rate - ABL Line of Credit 2.1%
3.7%
Average interest rate - Term Loan Facility 2.5%
4.5%
Average balance - ABL Line of Credit (in millions)
(a) Excludes original issue discount
Income tax (benefit) expense
Income tax benefit was$268.4 million during the six month period endedAugust 1, 2020 compared with income tax expense of$27.3 million during the six month period endedAugust 3, 2019 . The effective tax rate for the six month period endedAugust 1, 2020 was 41.4% compared with 14.4% during the six month period endedAugust 3, 2019 . The income tax benefit in the current year is a result of the pre-tax loss and the carry-back of net operating losses arising in 2020 to the five prior tax years, as permitted under the CARES Act. The increase in the income tax rate is a function of current year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate.
Net (loss) income
We recorded a net loss of
Liquidity and Capital Resources
Our ability to satisfy interest payment and future principal payment obligations on our outstanding debt will depend largely on our future performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service interest payment and future principal payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed on terms similar to our current financing agreements, or at all. As a result of the temporary store closures and the uncertainty regarding the duration of the COVID-19 impact on store traffic, the Company took a more conservative approach to managing its cash flow during the first half of Fiscal 2020. These measures included carefully managing operating expenses, working capital and capital expenditures during the period, as well as suspending the Company's share repurchase program. We completed several debt transactions in order to facilitate increased financial flexibility during this period. DuringMarch 2020 , we borrowed$400 million on our existing ABL Line of Credit. We repaid$150 million on the ABL Line of Credit during the second quarter of Fiscal 2020. OnApril 16, 2020 , we issued$805 million of our Convertible Notes, and through BCFWC, issued$300 million of Secured Notes. The proceeds of the Convertible Notes and Secured Notes are being used for general corporate purposes. We believe that cash generated from operations upon re-opening of our stores, along with our existing cash and our ABL Line of Credit, will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future. However, there can be no assurance that we would be able to offset declines in our comparable store sales with savings initiatives in the event that the economy declines, or we are again required to cease or significantly limit our operations as a result of the COVID-19 pandemic.
Cash Flow for the Six Month Period Ended
We generated
Net cash used in operating activities amounted to$473.0 million during the six month period endedAugust 1, 2020 , compared with proceeds of$229.4 million during the six month period endedAugust 3, 2019 . The decrease in our operating cash flows was primarily driven by the temporary closure of all stores due to the COVID-19 pandemic. 36
-------------------------------------------------------------------------------- Net cash used in investing activities was$134.1 million during the six month period endedAugust 1, 2020 compared with a use of$164.0 million during the six month period endedAugust 3, 2019 . This change was primarily the result of a decrease in capital expenditures. Some of our new store, store remodel and other store expenditure projects were moved to future periods as a result of the COVID-19 pandemic. Net cash provided by financing activities was$1,281.2 million during the six month period endedAugust 1, 2020 compared with a use of$80.5 million during the six month period endedAugust 3, 2019 . This change was primarily driven by our cash flow management efforts as a result of the COVID-19 pandemic, which included drawing$400 million on our ABL Line of Credit, issuing$805 million of our Convertible Notes, and through BCFWC, issuing$300 million of Secured Notes, and suspending our share repurchase program. We repaid$150 million on the ABL Line of Credit during the second quarter of Fiscal 2020. Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had working capital atAugust 1, 2020 of$660.0 million compared with a working capital deficit of$151.7 million atAugust 3, 2019 . The increase in working capital was primarily due to our increased cash balance, as a result of issuing the Convertible Notes and the Secured Notes and the$250 million net draw on our ABL Line of Credit, as well as a decrease in accounts payable, due to decreased inventory receipts. These increases were partially offset by a decrease in merchandise inventories, an increase in other current liabilities (primarily due to deferral of rent payments and accrued interest on the Convertible Notes and Secured Notes), and a decrease in accounts receivable (primarily due to decreased credit card receivables). We had a working capital deficit atFebruary 1, 2020 of$51.1 million . Capital Expenditures For the six month period endedAugust 1, 2020 , cash spend for capital expenditures, net of$12.8 million of landlord allowances, amounted to$120.9 million . As a result of our temporary store closures and the uncertainty regarding the impact of the COVID-19 pandemic on store traffic, some of our capital expenditure projects have been moved to future periods. We now estimate that we will spend approximately$260 million , net of approximately$40 million of landlord allowances, in capital expenditures during Fiscal 2020, including approximately$105 million , net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately$70 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives.
Share Repurchase Program
OnAugust 14, 2019 , our Board of Directors authorized the repurchase of up to$400 million of common stock, which is authorized to be executed throughAugust 2021 . This repurchase program is funded using our available cash and borrowings on our ABL Line of Credit. During the six month period endedAugust 1, 2020 , we repurchased 243,573 shares of our common stock for$50.2 million under the share repurchase program. As part of the Company's cash management efforts during the COVID-19 pandemic, we suspended our share repurchase program inMarch 2020 . As ofAugust 1, 2020 , we had$348.4 million remaining under our share repurchase authorization. We are authorized to repurchase, from time to time, shares of our outstanding common stock on the open market or in privately negotiated transactions under our repurchase program. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program.
Dividends
We currently do, and intend to continue to, retain all available funds and any
future earnings to fund all of the Company's capital expenditures, business
initiatives, and to support any potential opportunistic capital structure
initiatives. Therefore, at this time, we do not anticipate paying cash dividends
in the near term. Our ability to pay dividends on our common stock will be
limited by restrictions on the ability of our subsidiaries to pay dividends or
make distributions under the terms of current and any future agreements
governing our indebtedness. Any future determination to pay dividends will be at
the discretion of our Board of Directors, subject to compliance with covenants
in our current and future agreements governing our indebtedness, and will depend
upon our results of operations, financial condition, capital requirements and
other factors that our Board of Directors deems relevant.
In addition, since we are a holding company, substantially all of the assets
shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries.
Accordingly, our earnings, cash flow and ability to pay dividends are largely
dependent upon the earnings and cash flows of our subsidiaries and the
distribution or other payment of such earnings to us in the form of dividends.
37
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Operational Growth
During the six month period endedAugust 1, 2020 , we opened 25 new stores, inclusive of 10 relocations, and closed three stores, exclusive of the aforementioned relocations, bringing our store count as ofAugust 1, 2020 to 739 stores. Some of our store opening and relocation projects have been moved to future periods as a result of the COVID-19 pandemic. We continue to pursue our growth plans and invest in capital projects that meet our financial requirements. During Fiscal 2020, we plan to open 36 net new stores, which includes approximately 62 gross new stores, along with approximately 26 store relocations and closings. We continue to explore expansion opportunities both within our current market areas and in other regions. We believe that our ability to find satisfactory locations for our stores is essential for the continued growth of our business. The opening of stores generally is contingent upon a number of factors including, but not limited to, the availability of desirable locations with suitable structures and the negotiation of acceptable lease terms. There can be no assurance, however, that we will be able to find suitable locations for new stores or that we will be able to open the number of new stores presently planned, even if such locations are found and acceptable lease terms are obtained. Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores. Debt and Hedging
As of
Term Loan Facility
OnFebruary 26, 2020 , we completed a repricing of our Term Loan Facility, which among other things, reduced the interest rate margins applicable to our Term Loan Facility from 1.00% to 0.75%, in the case of prime rate loans, and from 2.00% to 1.75%, in the case of LIBOR loans, with the LIBOR floor remaining at 0.00%.
At
ABL Line of Credit
OnMarch 17, 2020 , we borrowed$400 million under the ABL Line of Credit as a precautionary measure in order to increase our cash position and facilitate financial flexibility in light of the uncertainty resulting from COVID-19. We repaid$150 million of this amount during the second quarter of Fiscal 2020. AtAugust 1, 2020 , we had$120.4 million available under the ABL Line of Credit. The maximum borrowings under the ABL Line of Credit during the six month period endedAugust 1, 2020 amounted to$400.0 million . Average borrowings during the six month period endedAugust 1, 2020 amounted to$289.3 million at an average interest rate of 2.1%.
Convertible Notes
OnApril 16, 2020 , we issued$805 million of Convertible Notes. An aggregate of up to 3,656,149 shares of common stock may be issued upon conversion of the Convertible Notes, which number is subject to adjustment up to an aggregate of 4,844,410 shares following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption, and which is also subject to certain anti-dilution adjustments.
The Convertible Notes are general unsecured obligations of the Company. The
Convertible Notes bear interest at a rate of 2.25% per year, payable
semi-annually in cash, in arrears on
Prior to the close of business on the business day immediately precedingJanuary 15, 2025 , the Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Convertible Notes have an initial conversion rate of 4.5418 shares per$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately$220.18 per share of our common stock), subject to adjustment if certain events occur. The initial conversion price represents a conversion premium of approximately 32.50% over$166.17 per share, the last reported sale price of our common stock onApril 13, 2020 (the pricing date of the offering) on theNew York Stock Exchange . Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. We will not be able to redeem the Convertible Notes prior toApril 15, 2023 . On or afterApril 15, 2023 , we will be able to redeem for cash all or any portion of the 38 -------------------------------------------------------------------------------- Convertible Notes, at our option, if the last reported sale price of our common stock is equal to or greater than 130% of the conversion price for a specified period of time, at a redemption price equal to 100% of the principal aggregate amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Holders of the Convertible Notes may require us to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if we issue a notice of redemption, it will, under certain circumstances, increase the conversion rate for holderswho elect to convert their Convertible Notes in connection with such corporate event or during the relevant redemption period for such Convertible Notes. The Convertible Notes contain a cash conversion feature, and as a result, we have separated it into liability and equity components. We valued the liability component based on our borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Notes and the fair value of the liability component.
Secured Notes
OnApril 16, 2020 , our indirect subsidiary, BCFWC, issued$300 million of Senior Secured Notes. The Secured Notes are senior, secured obligations of BCFWC, and interest is payable semiannually in cash at a rate of 6.25% per annum onApril 15 andOctober 15 of each year, beginning onOctober 15, 2020 . The Secured Notes are guaranteed on a senior secured basis byBurlington Coat Factory Holdings, LLC ,Burlington Coat Factory Investments Holdings, Inc. and BCFWC's subsidiaries that guarantee the loans under the Term Loan Facility and ABL Line of Credit. The Secured Notes will mature onApril 15, 2025 unless earlier redeemed or repurchased.
Hedging
OnDecember 17, 2018 , the Company entered into an interest rate swap contract, which was designated as a cash flow hedge. This interest rate swap, which hedges$450 million of our Term Loan Facility, became effectiveMay 31, 2019 and maturesDecember 29, 2023 .
Certain Information Concerning Contractual Obligations
The Company had$955.6 million of purchase commitments related to goods that were not received as ofAugust 1, 2020 . Except as disclosed above with respect to the issuance of the Convertible Notes and Secured Notes, there were no other significant changes regarding our obligations to make future payments under current contracts from those included in our Fiscal 2019 10-K.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management's judgments and estimates. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and 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. As ofAugust 1, 2020 , the end of our second quarter, the impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and judgments carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the consolidated financial statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Our critical accounting policies and estimates are consistent with those disclosed in Note 1, "Summary of Significant Accounting Policies," to the audited Consolidated Financial Statements, included in Part II, Item 8 of the Fiscal 2019 10-K.
39
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Safe Harbor Statement
This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Our forward-looking statements are subject to risks and uncertainties. Such statements may include, but are not limited to, future impacts of the COVID-19 pandemic, proposed store openings and closings, proposed capital expenditures, projected financing requirements, proposed developmental projects, projected sales and earnings, our ability to maintain selling margins, and the effect of the adoption of recent accounting pronouncements on our consolidated financial position, results of operations and cash flows. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include: general economic conditions; pandemics, including the duration of the COVID-19 pandemic and actions taken to slow its spread and the related impact on consumer confidence and spending; our ability to successfully implement one or more of our strategic initiatives and growth plans; the availability of desirable store locations on suitable terms; changing consumer preferences and demand; industry trends, including changes in buying, inventory and other business practices; competitive factors, including pricing and promotional activities of major competitors and an increase in competition within the markets in which we compete; the availability, selection and purchasing of attractive merchandise on favorable terms; import risks, including tax and trade policies, tariffs and government regulations; weather patterns, including, among other things, changes in year-over-year temperatures; our future profitability; our ability to control costs and expenses; unforeseen cyber-related problems or attacks; any unforeseen material loss or casualty; the effect of inflation; regulatory and tax changes; our relationships with employees; the impact of current and future laws and the interpretation of such laws; terrorist attacks, particularly attacks on or within markets in which we operate; natural and man-made disasters, including fire, snow and ice storms, flood, hail, hurricanes and earthquakes; our substantial level of indebtedness and related debt-service obligations; restrictions imposed by covenants in our debt agreements; availability of adequate financing; our dependence on vendors for our merchandise; domestic events affecting the delivery of merchandise to our stores; existence of adverse litigation; and other risks discussed from time to time in our filings with theSecurities and Exchange Commission (SEC). Many of these factors, including the ultimate impact of the COVID-19 pandemic, are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact in our Condensed Consolidated Financial Statements.
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