BURLINGTON STORES, INC. For purposes of the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," unless the context requires otherwise, references to "the Company," "we," "our," or "us" refer toBurlington Stores, Inc. and its consolidated subsidiaries. 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 "Item 6, Selected Financial Data" and our Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Annual Report. 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 set forth under the caption above entitled "Cautionary Statement Regarding Forward-Looking Statements." Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Item 1A, Risk Factors and elsewhere in this Annual Report.
General
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 761 stores as ofJanuary 30, 2021 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. Executive Summary 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 processing of received inventory) and corporate offices to combat the rapid spread of COVID-19. We began re-opening 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. We are currently unable to determine how long the conditions resulting from the COVID-19 pandemic will continue, including the imposition of social distancing protocols and other restrictions on our store operations, and whether potential subsequent additional outbreaks will lead to a reduction in customer traffic and additional temporary store closures. 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 production and administration of effective medical treatments and vaccines, the timing and extent of any recovery in traffic and consumer spending at our stores, supply chain delays due to closed factories or distribution centers, reduced workforces or labor shortages, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas, and any future required store closures because of COVID-19 resurgences. 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 in accordance with our benefit plans. In addition, we paid 100% of their medical benefit premiums during the period they were furloughed. During the second quarter, we recalled all furloughed associates at our re-opened stores, as well as our corporate and distribution facilities. In order to maintain financial flexibility during these uncertain times, we completed several debt transactions in the first quarter of Fiscal 2020. InMarch 2020 , we borrowed$400 million on our existing$600 million senior secured asset-based revolving credit facility (the ABL Line of Credit), of which$150 million was repaid during the second quarter, and the remaining$250 million was repaid during the fourth quarter. InApril 2020 , we issued$805 million of 2.25% Convertible Senior Notes due 2025 (the Convertible 29 -------------------------------------------------------------------------------- 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 7, "Long Term Debt," for further discussion regarding these debt transactions.
Additionally, we took the following steps to further enhance our financial flexibility:
• Carefully managed operating expenses, working capital and capital
expenditures, including ceasing substantially all buying activities
while stores were closed. We subsequently resumed our buying activities,
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 directorsvoluntarily forfeited their cash compensation, our executive leadership
team voluntarily agreed to decrease their salary by 50% and smaller
salary reductions were temporarily put in place for all employees
through a certain level. This compensation was reinstated once
substantially all of our stores re-opened.
• 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 first quarter of Fiscal
2020. These reserves covered markdowns taken during the second quarter of Fiscal
2020. These charges were included in "Cost of sales" on our 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 $86.8 million in our effective income tax
rate for the year ended January 30, 2021 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 one-time tax refund of $219.7
million from the carryback of federal NOLs, which is included in the line item
"Prepaid and other current assets" on the Company's Consolidated Balance Sheet.
Refer to Note 15, "Income Taxes" for further discussion.
We continue to keep health and safety as a top priority as we operate our stores and distribution centers. 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
• Wider check-out lanes, with social distancing markers on the floor
• A physical barrier between customers and associates at each register
• 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
• Requiring associates to wear face coverings while in stores and our
distribution centers
• Screening all associates daily in stores and distribution centers where
required by state and local mandates
Store Openings, Closings and Relocations
During Fiscal 2020, we opened 62 new stores, inclusive of 17 relocations, and closed 11 stores, exclusive of the aforementioned relocations, bringing our store count as ofJanuary 30, 2021 to 761 stores. We continue to pursue our growth plans and invest in capital projects that meet our financial requirements. During the fiscal year endingJanuary 29, 2022 (Fiscal 2021), we plan to open approximately 75 net new stores, which includes approximately 100 gross new stores, along with approximately 25 store relocations and closings. 30 --------------------------------------------------------------------------------
Ongoing Initiatives for Fiscal 2021
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 inMarch 2020 . We continue to keep health and safety as a top priority as we operate our stores and distribution centers. As discussed above, we began re-opening 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 duration and 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 planning a more
conservative comparable stores sales growth, holding andcontrolling
liquidity, closely analyzing the sales trend by business, and being
ready to chase that trend. We believe that these actions should not
only enable us to more effectively chase the trend, but they will also
allow 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 Inventories. We are planning to carry less
inventory going forward, which we believe should result in the
customer finding a higher mix of fresh receipts and greatmerchandise
values. We believe that this should 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 2,000 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 believe that we are able to achieve attractive returns on capital
and continue to grow our margins. We believe that as wecontinue to
reduce our comparable store inventory, we will be able toreduce 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 select store remodels on a store-by-store
basis where appropriate, taking into consideration the age, sales,
size and profitability of a store, as well as the potential impact to
the customer shopping experience. During Fiscal 2020, weremodeled 14
of our stores and relocated 17 stores. In our remodeled stores, we
have typically incorporated new flooring, painting, lighting and
graphics, relocated our fitting rooms and optimized the sales floor to
maximize productivity as well as enhance certain departments,
including home and accessories 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 east and west coast buying offices
provides us with the opportunity to capture incremental buying
opportunities and realize economies of scale in ourmerchandising and
non-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
There are uncertainties and challenges that we face as an off-price retailer 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. , as well as the availability of, and prevalence of access to, effective medical treatments and vaccines; related economic uncertainties and government stimulus measures; 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. 32 -------------------------------------------------------------------------------- Seasonality of Sales and Weather Conditions. Our business, like that of most retailers, is subject to seasonal influences. In the second half of the year, which includes the back-to-school and holiday seasons, we generally realize a higher level of sales and net income. 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 . 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 continues 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 year endedJanuary 30, 2021 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, and the remaining$250 million during the fourth quarter of Fiscal 2020. AtJanuary 30, 2021 , we had$476.8 million available under the ABL Line of Credit. Cash and cash equivalents, including restricted cash and cash equivalents, increased$977.2 million during Fiscal 2020, compared with an increase of$275.5 million during Fiscal 2019. Refer to the section below entitled "Liquidity and Capital Resources" for further explanation. Net (loss) income. We recorded a net loss of$216.5 million during Fiscal 2020 compared with net income of$465.1 million during Fiscal 2019. This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by 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.
We define Adjusted Net (Loss) Income as net (loss) income, exclusive of the
following items, if applicable: (i) net favorable lease costs; (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 on the Convertible Notes; (vii) costs related to closing the
e-
33
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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 (benefit) 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 (benefit) 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 investors and management in evaluating our ability to generate earnings and leverage sales, and to more readily compare these metrics 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 Fiscal 2020, Adjusted Net (Loss) Income decreased$664.3 million to a loss of$169.5 million . This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 34 --------------------------------------------------------------------------------
The following table shows our reconciliation of net (loss) income to Adjusted Net (Loss) Income for Fiscal 2020, Fiscal 2019 and Fiscal 2018:
(unaudited)
(in thousands)
Fiscal Year Ended
January 30, February 1, February 2,
2021 2020 2019
Reconciliation of net (loss) income to Adjusted
Net (Loss) Income:
Net (loss) income $ (216,499 ) $ 465,116 $ 414,745
Net favorable lease costs (a) 24,078 35,761 26,081Non-cash interest expense on convertible notes (b) 23,988
- -
Costs related to debt issuances and amendments (c) 3,633 (375 ) 2,496
Loss on extinguishment of debt (d) 202 - 1,823
Impairment charges 6,012 4,315 6,844
Litigation matters (e) 22,788 - -
E-commerce closure(f) 1,549 - -
Tax effect (g) (35,273 ) (10,083 ) (9,449 )
Adjusted Net (Loss) Income $ (169,522 ) $ 494,734 $ 442,540 (a) Net favorable lease costs represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of purchase
accounting related to the
result of adoption of Accounting Standards Update (ASU) 2016-02, "Leases"
(ASU 2016-02), these expenses are recorded in the line item "Selling, general
and administrative expenses" in our Consolidated Statements of (Loss) Income
for Fiscal 2020 and Fiscal 2019. These expenses are recorded in the line item
"Depreciation and amortization" in our Consolidated Statement of Income for
Fiscal 2018.
(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 and the reversal of previously estimated costs related to the
repricing of our senior secured term loan facility (the Term Loan Facility)
in Fiscal 2018.
(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, for the tax 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 (benefit) expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During Fiscal 2020, Adjusted EBITDA decreased$942.3 million to a loss of$62.7 million . This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 35
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The following table shows our reconciliation of net (loss) income to Adjusted EBITDA for Fiscal 2020, Fiscal 2019 and Fiscal 2018:
(unaudited)
(in thousands)
Fiscal Year Ended
January 30 ,
2021 2020 2019
Reconciliation of net (loss) income to Adjusted EBITDA:
Net (loss) income $ (216,499 ) $ 465,116 $ 414,745
Interest expense 97,767 50,826 55,990
Interest income (1,253 ) (1,720 ) (406 )
Loss on extinguishment of debt (a) 202 - 1,823
Costs related to debt issuances and amendments (b) 3,633 (375 ) 2,496
Litigation matters (c) 22,788 - -
E-commerce closure (d) 1,549 - -
Depreciation and amortization (e) 244,273 246,109 217,884
Impairment charges 6,012 4,315 6,844
Income tax (benefit) expense (221,124 ) 115,409 92,839
Adjusted EBITDA $ (62,652 ) $ 879,680 $ 792,215 (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 and the reversal of previously estimated costs related to the
repricing of our Term Loan Facility in Fiscal 2018.
(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
Consolidated Statements of (Loss) Income for Fiscal 2020 and Fiscal 2019,
respectively. 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. As a result of adoption of ASU 2016-02,
these expenses are recorded in the line item "Selling, general and
administrative expenses" in our Consolidated Statements of (Loss) Income for
Fiscal 2020 and Fiscal 2019. These expenses are recorded in the line item
"Depreciation and amortization" in our Consolidated Statement of Income for
Fiscal 2018.
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 (benefit) expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During Fiscal 2020, Adjusted EBIT decreased$952.2 million to a loss of$282.8 million . This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 36
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The following table shows our reconciliation of net (loss) income to Adjusted EBIT for Fiscal 2020, Fiscal 2019 and Fiscal 2018:
(unaudited)
(in thousands)
Fiscal Year Ended
January 30, February 1, February 2,
2021 2020 2019
Reconciliation of net (loss) income to Adjusted EBIT:
Net (loss) income $ (216,499 ) $ 465,116 $ 414,745
Interest expense 97,767 50,826 55,990
Interest income (1,253 ) (1,720 ) (406 )
Loss on extinguishment of debt (a) 202 - 1,823
Costs related to debt issuances and amendments (b) 3,633 (375 ) 2,496
Net favorable lease costs (c) 24,078 35,761 26,081
Impairment charges 6,012 4,315 6,844
Litigation matters (d) 22,788 - -
E-commerce closure (e) 1,549 - -
Income tax (benefit) expense (221,124 ) 115,409 92,839
Adjusted EBIT $ (282,847 ) $ 669,332 $ 600,412 (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 and the reversal of previously estimated costs related to the
repricing of our Term Loan Facility in Fiscal 2018.
(c) Net favorable lease costs represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of the Merger
Transaction. As a result of adoption of Accounting Standards Update (ASU)
2016-02, "Leases" (ASU 2016-02), these expenses are recorded in the line item
"Selling, general and administrative expenses" in our Consolidated Statements
of (Loss) Income for Fiscal 2020 and Fiscal 2019. These expenses are recorded
in the line item "Depreciation and amortization" in our Consolidated
Statement of Income for Fiscal 2018.
(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 were flat during the fourth quarter of Fiscal 2020, compared to increases of 4% and 1% during the fourth quarter of Fiscal 2019 and Fiscal 2018, respectively. Comparable store sales were not meaningful for the full year period endedJanuary 30, 2021 due to the extended store closures resulting from the COVID-19 pandemic. Comparable store sales increased 3% in both full year periods for Fiscal 2019 and Fiscal 2018. Various factors affect comparable store sales, including 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 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 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 decreased to 38.2% during Fiscal 2020, compared with 41.8% during Fiscal 2019, driven primarily by aged inventory markdowns in the first quarter due to our extended store closures. 37 -------------------------------------------------------------------------------- Inventory. Inventory atJanuary 30, 2021 decreased to$740.8 million from$777.2 million atFebruary 1, 2020 . This decrease was primarily due to a 16% decrease in comparable store inventory, driven by our strategy of operating with leaner in-store inventory. This decrease was partially offset by our 34 net new stores since the end of Fiscal 2019, as well as reserve inventory, which was 38% of total inventory as of the end of Fiscal 2020, compared with 33% as of the end of Fiscal 2019. Reserve inventory includes all inventory that is being stored for release either later in the season, or in a subsequent season. We intend to continue to build up our reserve merchandise in order to more effectively chase sales trends. 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.
Inventory turnover and comparable store inventory turnover are performance metrics that indicate how efficiently inventory is bought and sold. They each measure the length of time that we own our inventory.
Inventory turnover is calculated by dividing cost of goods sold by the average cost value of our inventory for the period being measured. Our inventory turnover rate improved approximately 15% during the fourth quarter of Fiscal 2020, compared with the fourth quarter of Fiscal 2019. Due to the extended store closures during the year, inventory turnover for the full year is not meaningful. Comparable store inventory turnover is calculated by dividing comparable store sales by the average comparable store retail value of inventory for the period being measured. The comparable store retail value of inventories is estimated based on the original sales price of items on hand reduced by retail reductions, which include sales, markdowns taken, an estimated shortage adjustment and employee discounts, for our comparable stores. Our comparable store inventory turnover rate improved approximately 27% during the fourth quarter of Fiscal 2020 compared with the fourth quarter of Fiscal 2019. Due to the extended store closures during the year, comparable store inventory turnover for the full year is not meaningful. The difference between inventory turnover and comparable store inventory turnover is primarily the result of the latter not including distribution center and warehouse inventory or inventory at new and non-comparable stores. Inventory held at our warehouses and distribution centers includes merchandise being readied for shipment to our stores and reserve inventory acquired opportunistically for future store release. The magnitude of reserve, at any one point in time, is dependent on the buying opportunities identified in the marketplace. We present inventory turnover because it demonstrates how effective we are at managing our inventory. We present comparable store inventory turnover as we believe this is a useful supplemental metric in evaluating the effectiveness of our merchandising efforts, as a faster comparable store inventory turnover generally leads to reduced markdowns and more fresh merchandise in our stores. 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 pandemic, we temporarily furloughed most store associates inMarch 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 while they were furloughed. As a result of these actions, store payroll costs decreased to$572.0 million during Fiscal 2020, compared with$623.1 million during Fiscal 2019. 38
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Results of Operations
The following table sets forth certain items in the Consolidated Statements of (Loss) Income as a percentage of net sales for the periods indicated.
Percentage of Net Sales
Fiscal Year Ended
January 30, February 1, February 2,
2021 2020 2019
Net sales 100.0 % 100.0 % 100.0 %
Other revenue 0.2 0.4 0.4
Total revenue 100.2 100.4 100.4
Cost of sales 61.8 58.2 58.2
Selling, general and administrative expenses 40.5 30.7 30.4
Costs related to debt issuances and amendments 0.1 (0.0 ) 0.0
Depreciation and amortization 3.8 2.9 3.3
Impairment charges - long-lived assets 0.1 0.1 0.1
Other income - net (0.1 ) (0.2 ) (0.2 )
Loss on extinguishment of debt 0.0 - 0.0
Interest expense 1.7 0.7 0.8
Total costs and expenses 107.9 92.4 92.6
(Loss) income before income tax (benefit) expense (7.7 ) 8.0 7.8
Income tax (benefit) expense (3.8 ) 1.6 1.4
Net (loss) income (3.9 )% 6.4 % 6.4 %
Performance for Fiscal Year Ended
Net sales
Net sales decreased
Other revenue
Other revenue decreased$12.7 million to$12.4 million , driven primarily by a decrease in layaway fees, as well as a reduction in shipping income due to the closure of the e-commerce store. Our layaway program was suspended as of the end of Fiscal 2020. Cost of sales Cost of sales as a percentage of net sales increased to 61.8% during Fiscal 2020, 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$673.7 million , or 15.9%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in the line item "Selling, general and administrative expenses" in our Consolidated Statements of (Loss) Income, were$433.8 million during Fiscal 2020, compared to$339.1 million during Fiscal 2019. 39
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Selling, general and administrative expenses
The following table details selling, general and administrative expenses for Fiscal 2020 compared with Fiscal 2019. Certain prior year amounts have been reclassified to conform to the current period presentation.
(in millions)
Fiscal Year Ended
Percentage Percentage
January of February of
30, 2021 Net Sales 1, 2020 Net Sales $ Variance % Change
Store related costs $ 1,494.4 26.0 % $ 1,497.9 20.6 % $ (3.5 ) (0.2 )%
Product sourcing costs 433.8 7.5 339.1 4.7 94.7 27.9
Corporate costs 265.4 4.6 214.4 3.0 51.0 23.8
Marketing and strategy
costs 53.8 0.9 86.1 1.2 (32.3 ) (37.5 )
Other selling, general
and administrative
expenses 79.5 1.5 90.7 1.2 (11.2 ) (12.3 )
Selling, general and
administrative expenses $ 2,326.9 40.5 % $ 2,228.2 30.7 % $ 98.7 4.4 %
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 and
the overall decrease in sales. 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. On a dollar basis, these actions were more
than offset by an increase in products sourcing costs, as well as COVID-19
related expenses and store re-opening costs.
Costs related to debt issuances and amendments
During Fiscal 2020, we incurred legal fees related to the issuance of our
Secured Notes of
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed
assets amounted to
Impairment charges-long-lived assets
Impairment charges related to long-lived assets were$6.0 million and$4.3 million during Fiscal 2020 and Fiscal 2019, respectively, related to store-level assets and lease assets at 14 stores and 3 stores (including the online store), respectively. The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses, market rent rates and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.
Other income, net
Other income, net (consisting of gains and losses on disposition of assets, gains and losses on insurance proceeds and other miscellaneous items) decreased$8.2 million to$8.4 million during Fiscal 2020. The decrease in other income was primarily driven by one-time insurance gains recognized during Fiscal 2019. 40 --------------------------------------------------------------------------------
Interest expense
Interest expense increased$46.9 million to$97.8 million . The increase was primarily driven by the issuance of our$805 million Convertible Notes and our$300 million Secured Notes, as well as the higher average balance on our ABL Line of Credit. This increase was partially offset by the refinancing of our Term Loan Facility inFebruary 2020 , which reduced the applicable interest rate margins on our Term Loan Facility from 2.00% to 1.75%, as well as a decrease in average LIBOR. Our average interest rates and average balances related to our variable rate debt for Fiscal 2020 compared with Fiscal 2019 are summarized in the table below: Fiscal Year EndedJanuary 30 ,February 1, 2021 2020 Average interest rate - ABL Line of Credit 1.9%
3.7%
Average interest rate - Term Loan Facility 2.2%
4.2%
Average balance - ABL Line of Credit (in millions)$ 256.6 $
81.5
Average balance - Term Loan Facility (in millions) (a)$ 961.4 $ 961.4 (a) Excludes original issue discount
Income tax (benefit) expense
Income tax (benefit) expense was a benefit of$221.1 million for Fiscal 2020 compared with expense of$115.4 million for Fiscal 2019. The effective tax rate was 50.5% related to pretax loss of$437.6 million for Fiscal 2020, and 19.9% related to pretax income of$580.5 million for 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 Fiscal 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. Additionally, excess tax benefit from stock compensation drove an increase in the tax rate related to pre-tax loss in Fiscal 2020, compared to a decrease in the tax rate related to pre-tax income in Fiscal 2019. Net (loss) income We recorded a net loss of$216.5 million during Fiscal 2020 compared with net income of$465.1 million for Fiscal 2019. This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic.
Performance for Fiscal Year Ended
For a discussion related to Fiscal 2019 performance compared to Fiscal 2018 performance, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 (Fiscal 2019 10-K).
Liquidity and Capital Resources
Our ability to satisfy interest and 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 and 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 uncertainty regarding the duration of the COVID-19 pandemic and the related impact on store traffic, the Company has taken a more conservative approach to managing its cash flow during 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, and the remaining$250 million during the fourth quarter of Fiscal 2020. OnApril 16, 2020 , we issued 41 --------------------------------------------------------------------------------$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, 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 Flows
Cash Flows for Fiscal 2020 Compared with Fiscal 2019
We generated
Net cash provided by operating activities amounted to$219.2 million and$891.7 million during Fiscal 2020 and Fiscal 2019, respectively. The decrease in our operating cash flows was primarily driven by the temporary closure of all stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Net cash used in investing activities was$274.1 million and$324.6 million during Fiscal 2020 and Fiscal 2019, respectively. 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$1,032.2 million during Fiscal 2020 compared to a use of$291.6 million during Fiscal 2019. This change was primarily driven by our cash flow management efforts as a result of the COVID-19 pandemic, which included issuing$805 million of our Convertible Notes, and through BCFWC, issuing$300 million of Secured Notes, and suspending our share repurchase program. 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 atJanuary 30, 2021 of$820.0 million compared with a working capital deficit of$51.1 million atFebruary 1, 2020 . 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, as well as an increase in prepaid income taxes. These increases were partially offset by an increase in other current liabilities (primarily due to deferral of rent payments and accrued interest), as well as an increase in accounts payable.
For a discussion of our cash flows for Fiscal 2019 compared to Fiscal 2018, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Fiscal 2019 10-K.
Capital Expenditures
For Fiscal 2020, cash spend for capital expenditures, net of$40.7 million of landlord allowances, amounted to$232.4 million . These capital expenditures include approximately$97 million , net of the previously mentioned landlord allowances and insurance recoveries, for store expenditures (new stores, remodels and other store expenditures). In addition, we made capital expenditures of approximately$79 million to support our supply chain initiatives, with the remaining capital to support information technology and other business initiatives. We incurred cash spend on capital expenditures of$268.9 million , net of approximately$56.3 million of landlord allowances and$5.1 million of insurance recoveries related to property and equipment, during Fiscal 2019. We estimate that we will spend approximately$470 million , net of approximately$15 million of landlord allowances, in capital expenditures during Fiscal 2021, including approximately$205 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$140 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. 42
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During Fiscal 2020, we repurchased 243,573 shares of common stock for
We are authorized to repurchase shares of our outstanding common stock from time to time 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
During the past two fiscal years, we have not declared, and do not anticipate declaring in the near term, dividends on shares of our common stock. 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. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, including those under agreements governing our existing indebtedness, or, any potential future indebtedness we may incur, restrictions imposed by applicable law, capital requirements and other factors our Board of Directors deems relevant. In addition, since we are a holding company, substantially all of the assets shown on our 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.
Debt and Hedging
As ofJanuary 30, 2021 , our obligations include$958.4 million , inclusive of original issue discount, under our Term Loan Facility,$648.3 million , inclusive of original issue discount, of Convertible Notes and$300.0 million of Secured Notes. There were no outstanding borrowings on our ABL Line of Credit as ofJanuary 30, 2021 . Our debt obligations also include$47.7 million of finance lease obligations as ofJanuary 30, 2021 . Refer to Note 7 to our Consolidated Financial Statements, "Long Term Debt," for an overview of the terms and conditions of these instruments.
Term Loan Facility
At
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 continuing to be 0.00%. ABL Line of Credit AtJanuary 30, 2021 , we had$476.8 million available under the ABL Line of Credit. The maximum borrowings under the ABL Line of Credit during Fiscal 2020 amounted to$400.0 million . Average borrowings during Fiscal 2020 amounted to$256.6 million at an average interest rate of 1.9%.
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
43
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Prior to the close of business on the business day immediately preceding January
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 on April 13, 2020 (the pricing date of the offering) on the New
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 to April 15, 2023 . On or after April 15, 2023 , we will be able to
redeem for cash all or any portion of the 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 holders who 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 . 44 --------------------------------------------------------------------------------
Certain Information Concerning Contractual Obligations
The following table sets forth certain information regarding our obligations to
make future payments under current contracts as of
Payments Due By Period
Less Than
Total 1 Year 2-3 Years 4-5 Years Thereafter
(in thousands)
Debt obligations(1) $ 2,066,415 $ - $
-
-
Finance lease obligations(3) 68,012 6,841 15,102 12,715 33,354
Operating lease obligations(4) 3,373,326 444,392 883,039 754,084 1,291,811
Purchase obligations(5) 1,105,552 1,105,552 - - -
Other(6) 5,480 5,480 - - -
Total $ 6,916,269 $ 1,636,881 $ 1,048,718 $ 2,905,505 $ 1,325,165 (1) Represents future principal payments on outstanding borrowings as of January
30, 2021.
(2) Represents interest payments on (i) the outstanding balance of the Term Loan
Facility, with an average interest rate of 2.2% during Fiscal 2020; (ii) the
average borrowings outstanding on our ABL Line of Credit during Fiscal 2020,
with an average interest rate of 1.9% during Fiscal 2020; (iii) the
outstanding balance of the Secured Notes, with an interest rate of 6.25%; and
(iv) the outstanding balance of the Convertible Notes, with an interest rate
of 2.25%.
(3) Finance lease obligations include future interest payments.
(4) Represents minimum rent payments for operating leases under the current
terms.
(5) Represents commitments to purchase goods that have not been received as of
used in our business of up to
(6) Represents severance payments in the normal course of business that are
included in the line item "Selling, general and administrative expenses" in
our Consolidated Statements of (Loss) Income.
Our agreements with three former employees to pay their respective beneficiaries$1.0 million upon their deaths for a total of$3.0 million is not reflected in the table above because the timing of the payments is unpredictable. The table above excludes ASC Topic No. 740 "Income Taxes" (Topic No. 740) liabilities which represent uncertain tax positions related to temporary differences. The total Topic No. 740 liability was$16.9 million , inclusive of$10.6 million of interest and penalties included in our total Topic No. 740 liability neither of which is presented in the table above as we are not certain if and when these payments would be required. The table above excludes our irrevocable letters of credit guaranteeing payment and performance under certain leases, insurance contracts, debt agreements, merchandising agreements and utility agreements in the amount of$54.9 million as ofJanuary 30, 2021 .
As of
Critical Accounting Policies and Estimates
Our 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 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 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 of the end of Fiscal
2020, 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
45
--------------------------------------------------------------------------------reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
While there are a number of accounting policies, methods and estimates affecting our Consolidated Financial Statements as addressed in Note 1 to our Consolidated Financial Statements, "Summary of Significant Accounting Policies," areas that are particularly critical and significant include: Revenue Recognition. While revenue recognition for the Company does not involve significant judgment, it represents an important accounting policy. We record revenue at the time control of goods are transferred to the customer, which we determine to be at point of sale and delivery of merchandise, net of allowances for estimated future returns, which is estimated based on historical return rates. We present sales, net of sales taxes, in our Consolidated Statements of (Loss) Income. We account for layaway sales in compliance with ASC Topic No. 606 "Revenue from Contracts with Customers." Layaway sales are recognized upon delivery of merchandise to the customer. The amount of cash received upon initiation of the layaway is recorded as a deposit liability within the line item "Other current liabilities" in our Consolidated Balance Sheets. Stored value cards (gift cards and store credits issued for merchandise returns) are recorded as a liability at the time of issuance, and the related sale is recorded upon redemption. We estimate and recognize stored value card breakage income in proportion to actual stored value card redemptions. We determine an estimated stored value card breakage rate by continuously evaluating historical redemption data. Breakage income is recognized on a monthly basis in proportion to the historical redemption patterns for those stored value cards for which the likelihood of redemption is remote. Inventory. Our inventory is valued at the lower of cost or market using the retail inventory method. Under the retail inventory method, the valuation of inventory and the resulting gross margin are determined by applying a calculated cost to retail ratio to the retail value of inventory. The retail inventory method is an averaging method that results in valuing inventory at the lower of cost or market provided markdowns are taken timely to reduce the retail value of inventory. Inherent in the retail inventory method calculation are certain significant management judgments and estimates including merchandise markon, markups, markdowns and shortage, which significantly impact the ending inventory valuation as well as the resulting gross margin. Management believes that our retail inventory method provides an inventory valuation which approximates cost using a first-in, first-out assumption and results in carrying value at the lower of cost or market. We reserve for aged inventory based on historical trends and specific identification. Our aged inventory reserve contains uncertainties as the calculations require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. A 1% change in the dollar amount of retail markdowns would have resulted in an increase in markdown dollars, at cost, of approximately$4.5 million for Fiscal 2020. Estimates are used to record inventory shortage at retail stores between physical inventories. Actual physical inventories are conducted at least annually to calculate actual shortage. While we make estimates on the basis of the best information available to us at the time the estimates are made, over accruals or under accruals of shortage may be identified as a result of the physical inventory counts, requiring adjustments. Insurance Reserves. We have risk participation agreements with insurance carriers with respect to workers' compensation, general liability insurance and health insurance. Pursuant to these arrangements, we are responsible for paying individual claims up to designated dollar limits. The amounts included in our costs related to these claims are estimated and can vary based on changes in assumptions or claims experience included in the associated insurance programs. For example, changes in legal trends and interpretations, as well as changes in the nature and method of how claims are settled, can impact ultimate costs. An increase in workers' compensation claims by employees, health insurance claims by employees or general liability claims may result in a corresponding increase in our costs related to these claims. Insurance reserves amounted to$80.9 million and$79.0 million atJanuary 30, 2021 andFebruary 1, 2020 , respectively.
Recent Accounting Pronouncements
Refer to Note 2 to our Consolidated Financial Statements, "Recent Accounting Pronouncements," for a discussion of recent accounting pronouncements and their impact in our Consolidated Financial Statements.
Fluctuations in Operating Results
We expect that our revenues and operating results may fluctuate from fiscal quarter to fiscal quarter or over the longer term. Certain of the general factors that may cause such fluctuations are discussed in Item 1A, Risk Factors and elsewhere in this Annual Report.
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--------------------------------------------------------------------------------Seasonality
Our business, like that of most retailers, is subject to seasonal influences. In the second half of the year, which includes the back-to-school and holiday seasons, we generally realize a higher level of sales and net income. Weather is also 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.
Inflation
We do not believe that our operating results have been materially affected by inflation during Fiscal 2020, Fiscal 2019 or Fiscal 2018. Historically, as the costs of merchandising and related operating expenses have increased, we have been able to mitigate the effect of such impact on our operations. TheU.S. retail industry continues to face increased pressure on margins as commodity prices increase and the 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 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 the expected rising costs of goods.
Market Risk
We are exposed to market risks relating to fluctuations in interest rates. Our borrowings contain floating rate obligations and are subject to interest rate fluctuations. The objective of our financial risk management is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows. We manage interest rate risk through the use of our interest rate cap contracts. As more fully described in Note 8 to our Consolidated Financial Statements, "Derivative Instruments and Hedging Activities," we enter into interest rate derivative contracts to manage interest rate risks associated with our long term debt obligations. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in the line item "Accumulated other comprehensive loss" on the Company's Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. We continue to have exposure to interest rate risks to the extent they are not hedged.
Off-Balance Sheet Arrangements
Other than operating leases consummated in the normal course of business (prior to our adoption of ASU 2016-02) and letters of credit, as more fully described above under the caption "Certain Information Concerning Contractual Obligations," we are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result of adopting ASU 2016-02, our operating leases are included in our Consolidated Balance Sheet for Fiscal 2020 and Fiscal 2019.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates, as borrowings under our ABL Line of Credit and Term Loan Facility bear interest at floating rates based on LIBOR or the base rate, in each case plus an applicable borrowing margin. The interest rate of our Term Loan Facility is also dependent on the prime rate, and the federal funds rate as further discussed in Note 7 to our Consolidated Financial Statements, "Long Term Debt." We manage our interest rate risk through the use of interest rate derivative contracts. For our floating-rate debt, interest rate changes generally impact our earnings and cash flows, assuming other factors are held constant. OnDecember 17, 2018 , we entered into an interest rate swap contract, which was designated as a cash flow hedge. This interest rate swap became effective onMay 31, 2019 . It has a notional principal amount of$450.0 million , a swap rate of 2.72%, and matures onDecember 29, 2023 . 47 -------------------------------------------------------------------------------- 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 continuing to be 0.00%.
We have unlimited interest rate risk related to borrowings on our variable rate debt in excess of the notional principal amount of our interest rate swap contract.
AtJanuary 30, 2021 , we had$961.4 million of floating-rate debt, exclusive of original issue discount. Based on$961.4 million outstanding as floating-rate debt, a one percentage point interest rate increase as ofJanuary 30, 2021 (after considering our interest rate swap contract and assuming current borrowing level remains constant), would cause an increase to cash interest expense of$5.2 million per year, resulting in$5.2 million less in our pre-tax earnings. This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods. These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions. Our ability to satisfy our interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is in part 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 our interest 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. 48
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