CHICO'S FAS, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto. References herein to "Notes" refer to the Notes to our consolidated financial statements. Each of the periods presented had fifty-two weeks. EXECUTIVE OVERVIEWChico's FAS is aFlorida -based fashion company founded in 1983 onSanibel Island ,Florida . The Company reinvented the fashion retail experience by creating fashion communities anchored by service, which put the customer at the center of everything we do. As one of the leading fashion retailers inNorth America ,Chico's FAS is a company of three unique brands operating under the Chico's,White House Black Market ("WHBM") and Soma brand names - each thriving in their own white space, founded by women, led by women, providing solutions that millions of women say give them confidence and joy. As ofJanuary 30, 2021 , we operated 1,302 stores across 46 states,Puerto Rico andthe United States ("U.S.") Virgin Islands , and sold merchandise through 68 international franchise locations inMexico and 2 domestic airport locations. We sometimes refer to our Chico's and WHBM brands collectively as our "Apparel Group " and refer to our Soma and TellTale brands collectively as "Soma." Our distinct lifestyle brands typically serve the needs of fashion-savvy women 35 years and older. We earn revenue and generate cash through the sale of merchandise in our domestic retail stores, our various Company-operated e-commerce websites, our call center (which takes orders for all of our brands), through unaffiliated franchise partners and through third-party channels. We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various retail channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return or exchange our merchandise through whatever sales channel and at whatever time is most convenient. As a result, we track total sales and comparable sales on a combined basis. Exit of Canada Frontline Operations OnJuly 30, 2020 , Chico'sFAS Canada, Co. , an immaterial subsidiary of the Company, filed for bankruptcy with theOntario, Canada office of the Superintendent in Bankruptcy. This action resulted in the permanent closure of four Chico's and six WHBM boutiques inOntario, Canada . The permanent closure of the Canadian boutiques, which constitute all of the Company's Canadian boutiques, was part of the Company's ongoing cost-savings measures taken to mitigate the impact of the novel strain of coronavirus ("COVID-19") pandemic (the "COVID-19 pandemic" or the "pandemic") and address the operational and financial challenges associated with operating inCanada . In connection with this effort, in the second quarter of fiscal 2020, we exited ourCanada frontline operations and recorded on a net basis a non-material charge, including the realization of a cumulative foreign currency translation adjustment.
28
--------------------------------------------------------------------------------
Table of Contents
Select Financial Results
The following table depicts select financial results for fiscal 2020, 2019 and
2018:
Fiscal 2020 Fiscal 2019 Fiscal 2018
(dollars in millions, except per share amounts)
Net sales $ 1,324 $ 2,038 $ 2,131
Significant non-cash charges (1):
Inventory write-offs (2) 55 - -
Long-lived store asset impairment
(2)(3) 21 - -
Right of use store asset impairment (2) 2 - -
Other long-lived asset impairment
(2)(4) 8 - -
Other right of use asset impairment (2) 2 - -
Goodwill impairment (2) 80 - -
Indefinite-lived asset impairment (2) 34 - -
Deferred tax asset valuation allowance 32 - -
(Loss) income from operations (457) (12) 44
Net (loss) income (360) (13) 36
Net (loss) income per common and common
equivalent share-diluted (3.11) (0.11) 0.28
(1) All significant charges relate to the impact of the pandemic. Less
significant charges that may have been incurred are not reflected in the table
above.
(2) Presented pre-tax.
(3) Primarily includes impairment on leasehold improvements at certain
underperforming stores.
(4) Includes impairment on capitalized implementation costs related to our cloud
computing arrangements and other technology-related assets.
Financial Results
Loss per diluted share for fiscal 2020 was $3.11 compared to loss per diluted
share of $0.11 in fiscal 2019. The fiscal 2020 net loss includes approximately
$200 million in significant after-tax non-cash charges. The fiscal 2019 net loss
includes the unfavorable impact of accelerated depreciation charges of
approximately $8 million , after-tax, related to our retail fleet optimization
plan and severance and other related net charges (collectively, "Severance
Charges") of approximately $2 million , after-tax, in connection with actions
taken to reposition our then organizational structure. The fiscal 2018 net
income includes the unfavorable impact of accelerated depreciation and
impairment charges of approximately $8 million , after-tax, related to our retail
fleet optimization plan, partially offset by the favorable tax benefit of
approximately $5 million related to the Tax Cuts and Jobs Act of 2017 (the "Tax
Act").
Current Trends
During fiscal 2020, the Company experienced varying degrees of business
disruptions as a result of the pandemic, which had a material adverse impact on
our business operations and operating results and operating cash flows during
fiscal 2020. In response to the pandemic, the Company took actions to reinforce
its financial position and liquidity. Specific actions include: significantly
reducing capital and expense structures, centralizing key functions to create a
nimbler organization to better align costs with expected sales; suspending the
quarterly dividend commencing April 2020 ; aligning inventory receipts with
expected demand; partnering with suppliers and vendors to reduce operating costs
and extend payment terms; and reviewing real estate and actively negotiating
with landlords to deliver rent relief in the form of reductions, abatements and
other concessions. The Company also amended and extended its credit facility to
strengthen its liquidity and enhance its financial stability. Furthermore, our
financial position and liquidity are being bolstered by robust digital
performance across all brands. As discussed in more detail in Item 1A "Risk
Factors" of this Annual Report on Form 10-K, the Company is subject to certain
risks and uncertainties. There can be no assurance that the actual future
results, performance, benefits, or achievements that we expect from our
strategies, systems, initiatives, or products, including our measures to
mitigate the operating and financial impact of the pandemic, will occur.
The Company remains confident that it currently has sufficient liquidity to
repay its obligations as they become due for the foreseeable future and the
Company continues to execute on its cost savings initiatives, among other
liquidity measures. However, the extent to which the pandemic impacts our
business operations, financial results, and liquidity will depend on numerous
evolving factors that we may not be able to accurately predict or assess,
including, but not limited to, the duration and scope of the pandemic; our
response to and ability to mitigate the impact of the pandemic; the negative
impact the pandemic has
29
--------------------------------------------------------------------------------
Table of Contents
on global and regional economies and economic activity, including the duration
and magnitude of its impact on unemployment rates and consumer discretionary
spending; its short- and longer-term impact on the levels of consumer
confidence; the ability of our suppliers, vendors and customers to successfully
address the impacts of the pandemic; actions governments, businesses and
individuals take in response to the pandemic; and how quickly economies recover
after the pandemic subsides.
Fiscal 2020 Business Highlights
The Company's fiscal 2020 highlights include:
•Rapid transformation into a digital-first company: Chico's FAS fast-tracked
numerous innovation and digital technology investments. These investments drove
higher consumer engagement and a year-over-year digital sales increase of 17.5%,
led by Soma's digital sales increase of 72%.
•Gained sales momentum at Soma: Soma generated comparable sales growth for the
last seven months in fiscal 2020, and according to market research firm NPD,
Group Inc. , for the 12 months ended January 2021 , Soma's growth exceeded that of
the U.S. apparel market and the market leader for non-sport bras and panties,
and was in the top five brands overall in the sleepwear market. We believe this
is compelling evidence Soma is well positioned and on track to accelerate recent
market share gains.
•Implementation of enhanced marketing efforts drove traffic as well as new
customers: Newly acquired customers were retained at a meaningfully higher rate
than in fiscal 2019. The average age of new customers dropped 10 years for
Chico's and eight years for Soma, and the average age of new WHBM customers
complemented the current target customer, reinforcing the runway for all three
brands.
•Improved apparel product and acceptance: The Company relaunched Zenergy in
Chico's with new fabrications, styling and marketing, and also increased its
gifting assortment and key item depth which showed positive results. At WHBM,
the brand pivoted to casualization and launched luxe weekend alongside new
runway leggings and a focus on denim that resonated well with customers.
•Enhanced liquidity and financial flexibility: The Company amended and extended
its credit facility to $300 million and ended the year with a solid cash
position of $109 million of cash and cash equivalents.
•Obtained meaningful rent reductions and strengthened the Company's real estate
position: Chico's FAS obtained landlord commitments of $65 million in rent
abatements and reductions and further rationalized its real estate position by
permanently closing an incremental 40 underperforming locations.
•Realized significant cost savings: The Company substantially streamlined the
organization and permanently reduced its cost structure to more efficiently
support the business, resulting in approximately $235 million of annual savings
in fiscal 2020, or 23% greater than its original plan, with the expectation that
certain of these cost savings initiatives will benefit future years and reflect
a cultural shift in how the business is managed.
Fiscal 2021 Outlook
Given the ongoing market disruption caused by the pandemic and related
uncertainty on timing and extent of the market recovery, the Company is not
providing specific fiscal 2021 first-quarter or full-year financial guidance at
this time.
The Company is, however, providing information on its planning expectations for
the coming year. At this time, the Company expects to benefit from the COVID-19
vaccine rollout, particularly given its customer base, and is planning for
consolidated sales trends to improve in the back half of the year. Consolidated
sales trends for the first half of the year are expected to be largely in line
with reported third and fourth quarter fiscal 2020 results. By brand, the
Company expects continued strong performance at Soma, with performance at
Chico's and WHBM consistent with market expectations and all brands benefiting
from the COVID-19 vaccine rollout. We expect our ongoing investment in the
digital channel to deliver continued sales growth.
Cost savings realized in fiscal 2020 are expected to be maintained in fiscal
2021. The Company is continuing to implement supply chain efficiencies and
intends to maintain stringent inventory controls, with fiscal 2021 first quarter
inventories planned down 30% to last year, which are expected to support
improving current margin levels.
To further optimize its store footprint and improve profitability, in fiscal
2021, the Company will continue to emphasize its growing digital channel and
anticipates rolling out "store-in-store" opportunities for the Soma brand in 50
Chico's boutiques.The Company anticipates closing 40 to 45 stores in fiscal
2021.
Key Performance Indicators
In assessing the performance of our business, we consider a variety of key
performance and financial measures to evaluate our business, develop financial
forecasts and make strategic decisions. These key measures include comparable
sales,
30
--------------------------------------------------------------------------------
Table of Contents
gross margin as a percent of sales, diluted earnings per share and return on net
assets ("RONA"). The following describes these measures.
Comparable Sales
Comparable sales is an omnichannel measure of the amount of sales generated from
products the Company sells directly to the consumer relative to the amount of
sales generated in the comparable prior-year period. Comparable sales is defined
as sales from stores open for the preceding twelve months, including stores that
have been expanded, remodeled or relocated within the same general market and
includes online and catalog sales, and beginning in the third quarter of fiscal
2019, includes international sales. The Company has historically viewed
comparable sales as a key performance indicator to measure the performance of
our business, however, due to varying degrees of business disruptions and
periods of store closures or stores operating at reduced hours as a result of
the pandemic during fiscal 2020, we do not believe this is a meaningful measure
for fiscal 2020.
Gross Margin as a Percentage of Net Sales
Gross margin as a percentage of net sales is computed as gross margin divided by
net sales. We believe gross margin as a percentage of net sales is a primary
metric to measure the performance of our business as it is used to determine the
value of incremental sales, and to guide pricing and promotion decisions.
Diluted Earnings per Share
Earnings per share is determined using the two-class method when it is more
dilutive than the treasury stock method. Basic earnings per share is computed by
dividing net income available to common shareholders by the weighted-average
number of common shares outstanding during the period, including participating
securities. Diluted earnings per share reflects the dilutive effect of potential
common shares from non-participating securities such as stock options,
performance stock units and restricted stock units. Whereas basic earnings per
share serves as an indicator of the Company's profitability, we believe diluted
earnings per share is a primary metric provided it gauges the Company's quality
of earnings per share assuming all potential common shares from
non-participating securities are exercised.
Return on Net Assets
RONA is defined as (a) net income divided by (b) the "five-point average" (based
on balances at the beginning of the first quarter plus the final balances for
each quarter of the fiscal year) of net working capital less cash and marketable
securities plus fixed assets. We believe RONA is a primary metric as it helps to
determine how well the Company is utilizing its assets. As such, a higher RONA
could indicate that the Company is using its assets and working capital
efficiently and effectively.
RESULTS OF OPERATIONS
Net (Loss) Income and Net (Loss) Income Per Diluted Share
For fiscal 2020, the Company reported a net loss of $360 million , or $3.11 loss
per diluted share, compared to a net loss for fiscal 2019 of $13 million , or
$0.11 loss per diluted share. Results for fiscal 2020 were significantly
impacted by the pandemic and included the following non-cash charges:
31
--------------------------------------------------------------------------------
Table of Contents
Summary of Significant Non-Cash Charges (1)
Fiscal 2020
Amount (2) % of Net Sales
(dollars in millions) (2)
Gross margin:
Inventory write-offs (3) $ 55 4.2 %
Long-lived store asset impairment (3)(4) 21 1.6
Right of use store asset impairment (3) 2 0.2
Total significant charges impacting gross margin 79 6.0
Selling, general and administrative expenses:
Other long-lived asset impairment (3)(5) 8 0.6
Other right of use asset impairment (3) 2 0.1
Total charges impacting selling, general and administrative expenses
10 0.7
Goodwill and intangible impairment charges:
Goodwill impairment (3) 80 6.1
Indefinite-lived asset impairment (3) 34 2.6
Total goodwill and intangible impairment charges 114 8.7
Income tax benefit:
Deferred tax asset valuation allowance 32 2.4
Total charges impacting income tax benefit 32 2.4
Total significant non-cash charges $ 235 17.8 %
(1) All significant charges relate to the impact of the pandemic. Less
significant charges that may have been incurred are not reflected in the table
above.
(2) May not foot due to rounding.
(3) Presented pre-tax.
(4) Primarily includes impairment on leasehold improvements at certain
underperforming stores.
(5) Includes impairment on capitalized implementation costs related to our cloud
computing arrangements and other technology-related assets.
Net loss for fiscal 2019 was $13 million , or $0.11 loss per diluted share,
compared to net income for fiscal 2018 of $36 million , or $0.28 loss per diluted
share. The fiscal 2019 net loss includes the unfavorable impact of accelerated
depreciation charges of approximately $8 million , after-tax, related to our
retail fleet optimization plan and Severance Charges of approximately $2
million , after-tax, related to our then revised organizational structure. Fiscal
2018 net income includes the unfavorable impact of impairment and accelerated
depreciation charges of approximately $8 million , after-tax, related to our
retail fleet optimization plan, partially offset by the favorable tax benefit of
approximately $5 million related to the Tax Act.
Net Sales
The following table depicts net sales by Chico's, WHBM and Soma in dollars and
as a percentage of total net sales for fiscal 2020, 2019 and 2018:
Fiscal 2020 % Fiscal 2019 % Fiscal 2018 %
(dollars in millions) (1)
Chico's $ 596 45.0 % $ 1,045 51.3 % $ 1,099 51.6 %
WHBM 376 28.4 627 30.8 695 32.6
Soma 352 26.6 365 17.9 338 15.8
Total net sales $ 1,324 100.0 % $ 2,038 100.0 % $ 2,131 100.0 %
(1) May not foot due to rounding.
For fiscal 2020, net sales were$1.3 billion compared to$2.0 billion in fiscal 2019. This 35.0% decrease primarily reflects disruptions related to the pandemic, including temporary store closures or stores operating at reduced hours during fiscal 2020, reduced in-store traffic, changing consumer patterns and the impact of 39 net store closures since fiscal 2019, partially offset by strong double-digit growth in digital sales. 32 --------------------------------------------------------------------------------
Table of Contents
For fiscal 2019, net sales were$2.0 billion compared to$2.1 billion in fiscal 2018. This decrease of 4.4% reflects a comparable sales decline of 3.4% as well as the impact of 77 net store closures since fiscal 2018. The comparable sales decline was driven by lower average dollar sale and a decrease in transaction count. The Company is not providing comparable sales figures for fiscal 2020 as it is not a meaningful measure due to the significant impact of store closures during the first half of fiscal 2020 as a result of the pandemic. Cost of Goods Sold/Gross Margin The following table depicts cost of goods sold and gross margin in dollars and gross margin as a percentage of total net sales for fiscal 2020, 2019 and 2018: Fiscal 2020 Fiscal 2019 Fiscal 2018 (dollars in millions) Cost of goods sold$ 1,140 $ 1,336 $ 1,368 Gross margin$ 184 $ 702 $ 763 Gross margin percentage 13.9 % 34.4 % 35.8 % [[Image Removed: chs-20210130_g2.jpg]] For fiscal 2020, gross margin was$184 million , or 13.9% of net sales, compared to$702 million , or 34.4% of net sales, in fiscal 2019. The decrease in gross margin rate primarily reflects lower maintained margin including pre-tax inventory write-offs of$55 million , or 4.2% of net sales, the impact of temporary store closures or stores operating at reduced hours which resulted in deleverage of fixed occupancy costs, and store impairment charges of$23 million , or 1.8% of net sales. For fiscal 2019, gross margin was$702 million , or 34.4%, compared to$763 million , or 35.8%, in fiscal 2018. This 140-basis point decrease primarily reflects charges related to our omnichannel programs, the clearance of merchandise and the impact of incremental tariffs on maintained margin incurred in the second half of fiscal 2019. Selling, General and Administrative Expenses The following table depicts selling, general and administrative ("SG&A") expenses, which includes store and direct operating expenses, marketing expenses and NSSC expenses, in dollars and as a percentage of total net sales for fiscal 2020, 2019 and 2018: Fiscal 2020 Fiscal 2019 Fiscal 2018 (dollars in millions)
Selling, general and administrative expenses
Percentage of total net sales 39.8 % 35.0
% 33.8 %
33
--------------------------------------------------------------------------------
Table of Contents
[[Image Removed: chs-20210130_g3.jpg]]
For fiscal 2020, SG&A was $527 million , or 39.8%, compared to $714 million , or
35.0%, in fiscal 2019. This $187 million decrease primarily reflects the
Company's ongoing expense reduction initiatives to align its cost structure with
sales, partially offset by the impact of pre-tax impairments charges of $10
million , or 0.7% of net sales, related to other asset impairments as reflected
in the Summary of Significant Non-Cash Charges table herein.
For fiscal 2019, SG&A was $714 million , or 35.0%, compared to $720 million , or
33.8%, in fiscal 2018. This $6 million decrease primarily reflects a reduction
in employee-related costs, partially offset by investments in marketing.
Retail Fleet Optimization Plan
In fiscal 2018, the Company announced a retail fleet optimization plan to
rebalance the mix between our physical store presence and our digital network.
Stores support the digital strategy and give us an enhanced presence. In fiscal
2019, the Company recorded pre-tax accelerated depreciation charges within cost
of goods sold of approximately $11 million associated with this retail fleet
optimization plan. The fiscal 2019 after-tax impact of these charges was
approximately $8 million . In fiscal 2018, the Company recorded pre-tax
accelerated depreciation and impairment charges within cost of goods sold of
approximately $1 million and $9 million , respectively. The fiscal 2018 after-tax
impact of these charges was approximately $8 million . Accelerated depreciation
of property and equipment for fiscal 2020 was immaterial.
To further support the digital strategy and improve store productivity, we
anticipate closing 40 to 45 stores in fiscal 2021.
Income Taxes
The effective tax rate for fiscal 2020, 2019 and 2018 was 21.7%, (6.7)% and
17.8%, respectively. The fiscal 2020 effective tax rate primarily reflects a
rate differential due to benefits provided under the Coronavirus Aid, Relief,
and Economic Security ("CARES") Act, partially offset by the unfavorable impact
of the Company's book goodwill impairment charge and the valuation allowance
against the Company's deferred tax assets in fiscal 2020. The fiscal 2019
effective tax rate primarily reflects an income tax benefit on an annual
operating loss, offset by an unfavorable fiscal 2018 provision-to-return
adjustment, a valuation allowance on certain deferred tax assets for charitable
contribution carryforwards and employee share-based compensation expense. The
fiscal 2018 effective tax rate reflects benefits from the Tax Act which includes
the lower federal statutory rate of 21% compared to a fiscal 2017 blended
federal tax rate of 33.8% due to the timing of the effective date of the Tax
Act. The fiscal 2018 effective tax rate also reflects approximately $5 million
of transitional tax reform benefits related to fiscal 2017, partially offset by
an approximate $1 million increase in tax expense related to the accounting for
employee share-based compensation expense. Excluding the aforementioned
favorable and unfavorable impacts to the effective tax rates, the fiscal 2020,
2019 and 2018 effective tax rate provisions would have been 21.7%, 26.4% and
25.8%.
Cash, Marketable Securities and Debt
At the end of fiscal 2020, cash and marketable securities totaled $109 million .
Debt at the end of fiscal 2020 totaled $149 million , remaining unchanged from
the end of the first quarter of fiscal 2020. Cash and marketable securities of
$109 million at the end of fiscal 2020 reflects $38 million in rent settlements
made to landlords during the fourth quarter of fiscal 2020.
Inventories
At the end of fiscal 2020, inventories totaled $204 million compared to $247
million at the end of fiscal 2019. This $43 million decrease, or 17.3%,
primarily reflects inventory assortments better aligned to consumer demand.
34
--------------------------------------------------------------------------------
Table of Contents
Income Tax Receivable
At the end of fiscal 2020, our consolidated balance sheet reflected a
$55 million income tax receivable related to the recovery of Federal income
taxes paid and other tax law changes as a result of the CARES Act.
Liquidity and Capital Resources
Overview
In response to the pandemic, the Company has taken actions to reinforce its
financial position and liquidity. Specific actions include: significantly
reducing capital and expense structures, centralizing key functions to create a
nimbler organization to better align costs with expected sales; suspending the
quarterly dividend commencing April 2020 ; aligning inventory receipts with
expected demand; partnering with suppliers and vendors to reduce operating costs
and extend payment terms; and reviewing real estate and actively negotiating
with landlords to deliver rent relief in the form of reductions, abatements and
other concessions. In October 2020 , the Company also amended and extended its
credit facility to strengthen its liquidity and enhance its financial stability.
The Company anticipates satisfying its material cash requirements from its cash
flows from operating activities, our cash and marketable securities on hand,
capacity within our credit facility and other liquidity options.
Our ongoing capital requirements will continue to be primarily for enhancing and
expanding our omnichannel capabilities, including investments in our stores;
information technology; and supply chain.
The following table summarizes cash flows for fiscal 2020, 2019 and 2018:
Fiscal 2020 Fiscal 2019 Fiscal 2018
(dollars in millions) (1)
Net cash (used in) provided by operating activities $ (98) $ 33 $ 158
Net cash provided by (used in) investing activities 34 (36) (56)
Net cash provided by (used in) financing activities 91 (58) (138)
Net increase (decrease) in cash and cash equivalents $ 27
(1) May not foot due to rounding.
Operating Activities Net cash used in operating activities in fiscal 2020 was$98 million compared to net cash provided by operating activities of$33 million for fiscal 2019. The change in net cash used in operating activities primarily reflects the fiscal 2020 net loss, partially offset by the suspension or reduction of rent payments commencing inApril 2020 and reduced operational spending as sales declined. Net cash provided by operating activities in fiscal 2019 was$33 million compared to$158 million for fiscal 2018. This$125 million decrease primarily reflects lower fiscal 2019 net income, a decline in share-based compensation and investments in cloud computing arrangement ("CCA") service contracts and Soma inventory to fund growth. Investing Activities Net cash provided by investing activities for fiscal 2020 was$34 million compared to net cash used in investing activities of$36 million for fiscal 2019, reflecting a$47 million increase in net proceeds from the sale of marketable securities and reduced capital spend. Net cash used in investing activities for fiscal 2019 was$36 million compared to$56 million for fiscal 2018, primarily reflecting a$20 million decrease in purchases of property and equipment as we continue to invest in CCA service contracts. 35 --------------------------------------------------------------------------------
Table of Contents
Financing Activities Net cash provided by financing activities for fiscal 2020 was$91 million compared to net cash used in financing activities of$58 million in fiscal 2019, primarily reflecting a$122 million increase in net proceeds from borrowings and the suspension of dividend payments commencing inApril 2020 . In fiscal 2020, we paid one cash dividend at$0.09 per share on our common stock, totaling$11 million , and received approximately$0.4 million in proceeds from issuing approximately 2 million shares related to employee stock ownership plans. Net cash used in financing activities for fiscal 2019 was$58 million compared to$138 million in fiscal 2018, primarily reflecting an$81 million decrease in share repurchases. In fiscal 2019, we paid four cash dividends at$0.0875 per share on our common stock, totaling$41 million , and received approximately$1 million in proceeds from issuing approximately 2 million shares related to employee stock ownership plans. Store and Franchise Activity During fiscal 2020, we had 39 net permanent store closures, consisting of 12 Chico's stores, 24 WHBM stores and 3 Soma stores. As ofJanuary 30, 2021 , the Company's franchise operations consisted of 68 international retail locations inMexico and 2 domestic airport locations. In fiscal 2018, the Company announced a retail fleet optimization plan to rebalance the mix between our physical store presence and our digital network. We have continued to refine that strategy, particularly in light of the pandemic. Stores continue to be an important part of our omnichannel strategy, and digital sales are higher in markets where we have a retail presence, but we intend to continue rationalizing our real estate portfolio, reflecting our emphasis on digital and our priority for higher profitability standards. We are currently driving store sales with less inventory and increased productivity. We have closed 40 underperforming locations since the beginning of fiscal 2020 and ended the fiscal year with 1,302 boutiques. We will continue to shrink our store base to align with these standards, primarily as leases come due, lease kickouts are available, or buyouts make economic sense. We have strong lease flexibility with nearly 60% of our leases coming up for renewal or kick-outs available over the next three years. The Company anticipates closing 40 to 45 stores in fiscal 2021. However, with the uncertainty of the pandemic, we intend to continuously evaluate the appropriate store base in light of economic conditions and our business strategy and may adjust the openings and closures as conditions require or as opportunities arise. Contractual Obligations The following table summarizes our material contractual obligations atJanuary 30, 2021 : One year or After 5 Total less 2-3 years 4-5 years years (in millions) (1) Operating leases$ 794 $ 228 $ 333 $ 164 $ 69 Purchase orders 263 263 - - - Capital expenditures 9 9 - - - Long-term debt obligations 149 - - 149 - Interest payments on long-term debt 25 5 10 9 - Total$ 1,240 $ 505 $ 343 $ 323 $ 69 (1) May not foot or cross-foot due to rounding. As ofJanuary 30, 2021 , our contractual obligations consisted of: 1) amounts outstanding under operating leases; 2) open purchase orders for inventory and other operating expenses, in the normal course of business; 3) contractual commitments for fiscal 2021 capital expenditures; 4) long-term debt obligations; and 5) interest payments on long-term debt. Until formal resolutions are reached between us and the relevant taxing authorities, we are unable to estimate a final determination related to our uncertain tax positions and therefore, we have excluded the uncertain tax positions, totaling approximately$1 million atJanuary 30, 2021 from the above table. 36 -------------------------------------------------------------------------------- Table of Contents Credit Facility OnOctober 30, 2020 , the Company and certain material domestic subsidiaries entered into Amendment No. 1 (the "Amendment") to its credit agreement (as amended, the "Agreement"), dated as ofAugust 2, 2018 , by and among the Company, certain material domestic subsidiaries as co-borrowers and guarantors,Wells Fargo Bank, National Association , as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Agreement are guaranteed by the guarantors and secured by a first priority lien on certain assets of the Company and certain material domestic subsidiaries, including inventory, accounts receivable, cash deposits, certain insurance proceeds, real estate, fixtures and certain intellectual property. The Agreement provides for a five-year asset-based senior secured revolving loan and letter of credit facility of up to$285 million , maturingOctober 30, 2025 . The Agreement also provides for a$15 million first-in last-out loan. The interest rate applicable to the Agreement is equal to, at the Company's option, either a base rate, determined by reference to the federal funds rate, or a LIBO rate with a floor of 75 basis points, plus in each case an interest rate margin. The Company expects borrowings to be at a LIBO rate, plus an interest rate margin. In addition, the Company will pay a commitment fee per annum on the unused portion of the commitments under the Agreement. The Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Agreement and the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis. As ofJanuary 30, 2021 , approximately$149 million in net borrowings were outstanding under the Agreement, and is reflected as long-term debt in the accompanying consolidated balance sheet in this Annual Report on Form 10-K. Availability under the Agreement is determined based upon a monthly borrowing base calculation which includes eligible credit card receivables, real estate and inventory, less outstanding borrowings, letters of credit and certain designated reserves. As ofJanuary 30, 2021 , the available additional borrowing capacity under the Agreement was approximately$60 million , inclusive of$29 million of excess availability. This availability is directly tied to inventory levels as of our fiscal year end, which traditionally represents the low point during the fiscal year. The Company is currently evaluating the impact that the pending discontinuation of, or transition away from, LIBO rate will have on the Agreement. We have been in discussions withWells Fargo Bank, National Association regarding this and do not expect the move to have a significant impact on our consolidated financial statements. Off-Balance Sheet Arrangements AtJanuary 30, 2021 andFebruary 1, 2020 , we did not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. Critical Accounting Estimates The discussion and analysis of our consolidated financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, and believes the following assumptions and estimates are significant to reporting our consolidated results of operations and financial position. Inventory Valuation and Shrinkage We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Further, inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We record excess and slow-moving inventories at net realizable value and may liquidate certain slow-moving inventory through third parties. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future. 37 -------------------------------------------------------------------------------- Table of Contents We estimate our expected shrinkage of inventories between our physical inventory counts by using average store shrinkage experience rates, which are updated on a regular basis. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future. Revenue Recognition Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and company issued coupons, promotional discounts and employee discounts. For sales from our websites and catalogs, revenue is recognized at the point of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying consolidated statements of (loss) income. Amounts paid by customers to cover shipping and handling costs are immaterial. We sell gift cards in stores, on our Company-operated e-commerce websites and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved, and revenue is recognized, for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions. Soma offers a points-based loyalty program in which customers earn points based on purchases. Attaining specified loyalty point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The liability is relieved and revenue is recognized for loyalty point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to remit the point value. We determined the loyalty point breakage rate based on historical and redemption patterns. As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels. Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from net sales. Evaluation of Long-Lived Assets,Goodwill and Indefinite-Lived Intangible Assets Long-lived assets, including definite-lived assets, are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If future undiscounted cash flows expected to be generated by the asset are less than its carrying amount, an asset is determined to be impaired, and a loss is recorded for the amount by which the carrying value of the asset exceeds its fair value. The Company uses market participant rents to calculate the fair value of right of use assets ("ROU") and discounted future cash flows of the asset or asset group using projected financial information and a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level. The estimate of future cash flows requires management to make certain assumptions and to apply judgment, including forecasting future sales and the useful lives of the assets. We exercise our best judgment based on the most current facts and circumstances surrounding our business when applying these impairment rules. We establish our assumptions and arrive at the estimates used in these calculations based upon our historical experience, knowledge of the retail industry and by incorporating third-party data, which we believe results in a reasonably accurate approximation of fair value. Nevertheless, changes in the assumptions used could have an impact on our assessment of recoverability. We review our goodwill for impairment at the reporting unit level on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will calculate the estimated fair value of the reporting unit. Fair value has historically been determined based on both an income approach and market approach. The income approach is based on estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant, while the market approach is based on sales and EBITDA multiples of similar companies and/or transactions, or other available indications of value. These approaches use significant estimates and assumptions, including projected future cash flows and the timing of those cash flows, discount rates reflecting risks inherent in future cash flows, perpetual growth 38 -------------------------------------------------------------------------------- Table of Contents rates and determination of appropriate market comparables. For fiscal 2020, we applied a 100% weighting to the income approach as we were able to provide detailed forecasts for the foreseeable future to perform a discounted cash flow analysis. We did not utilize a market approach in the fair value assessment of the reporting units for fiscal 2020 as the implied EBITDA multiples from the market approach did not yield reasonable fair values given the volatile market conditions at the time of the assessments. Estimating the fair value is judgmental in nature, which could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charges.Goodwill impairment charges are calculated as the amount by which a reporting unit's carrying amount exceeds its fair value up to the amount of reported goodwill. We review our other indefinite-lived intangible assets for impairment on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we calculate the fair value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept. Operating Leases Rent expense under store operating leases is recognized on a straight-line basis over the term of the leases. Landlord incentives, "rent-free" periods, rent escalation clauses and other fixed rental expenses are also amortized on a straight-line basis over the term of the leases, including the construction period. This is generally 60-90 days prior to the store opening date, when we generally begin improvements in preparation for our intended use. Variable rental expenses are recognized as incurred. Tenant improvement allowances, fixed rent escalation clauses and impairments are included within right of use assets. The Company deferred substantially all rent payments due in the months of April, May andJune 2020 and made reduced rent payments beginning inJuly 2020 where and when applicable. The Company has not recorded any provision for interest or penalties which may arise as a result of these deferrals, as management does not believe payment for any potential amounts to be probable. InApril 2020 , the FASB granted a practical expedient permitting an entity to choose to forgo the evaluation of the enforceable rights and obligations of the original lease contract, specifically in situations where rent concessions have been agreed to with landlords as a result of the pandemic. Instead, the entity may account for pandemic-related rent concessions, whatever their form (e.g. rent deferral, abatement or other) either: a) as if they were part of the enforceable rights and obligations of the parties under the existing lease contract; or b) as lease modifications. During fiscal 2020, we received concessions from certain landlords in the form of rent deferrals, rent abatements and other lease or rent modifications. In accordance with the practical expedient allowed by the FASB, the Company has elected to treat all rent concessions and related amendments, including pandemic-related concessions and lease amendments that extended the lease term, as lease modifications under ASC 842, Leases. In addition, the Company has continued recording lease expense during the deferral period in accordance with its existing policies. Income Taxes Income taxes are accounted for in accordance with authoritative guidance, which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and interpretations of existing tax law and published guidance as applicable to our operations. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain. Our effective tax rate considers management's judgment of expected tax liabilities within the various taxing jurisdictions in which we are subject to tax. We record amounts for uncertain tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Consequently, changes in our assumptions and judgments could affect amounts recognized related to income tax uncertainties and may affect our consolidated results of operations or financial position. We believe our assumptions for estimates continue to be reasonable, although actual results may have a positive or negative material impact on the balances of such tax positions. Historically, the variation of estimates to actual results is immaterial and material variation is not expected in the future.
39
--------------------------------------------------------------------------------
Table of Contents
Adoption of New Accounting Pronouncements
As discussed in Note 1 to our consolidated financial statements included in
this Annual Report on Form 10-K, we adopted Accounting Standards Update ("ASU")
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement and ASU 2016-13, Financial
Instruments - Credit Losses (Topic 326) ("ASU 2016-13") as of February 2, 2020 .
On February 2, 2020 , we recorded a cumulative effect adjustment of approximately
$0.8 as a decrease to opening retained earnings upon adoption of ASU 2016-13.
Adoption of ASU 2018-13 did not have a material impact on our consolidated
financial statements. We also elected to treat all rent concessions and related
amendments, including pandemic-related concessions and lease amendments that
extended the lease term, as lease modifications under Accounting Standards
Codification ("ASC") 842, Leases, in accordance with the practical expedient
issued by the FASB's Staff Question-and-Answer in April 2020 . Additionally, our
annual disclosures have been updated upon the Company's adoption of the U.S.
Securities and Exchange Commission (the "SEC") final rule under SEC Release No.
33-10825.
Recently Issued Accounting Pronouncements
See Note 1 to the accompanying consolidated financial statements under the
heading "Business Organization and Summary of Significant Accounting Policies"
for a description of certain newly issued accounting pronouncements which may
impact our financial statements in future reporting periods.
40
--------------------------------------------------------------------------------
Table of Contents Forward-Looking Statements This Annual Report on Form 10-K may contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect our current views with respect to certain events that could have an effect on our future financial performance, including but without limitation, statements regarding our plans, objectives, and the future success of our store concepts and business initiatives. These statements may address items such as future sales and sales initiatives, business strategies and strategic initiatives, including our digital strategy, environmental, social and governance program details, customer traffic, gross margin expectations, SG&A expectations, including statements about the pandemic and the expected impact of actions we have taken in response thereto, expected savings, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, proposed business ventures, new channels of sales or distribution, expected impact of ongoing litigation, future stock repurchase plans, future plans to pay dividends, future comparable sales, future product sourcing plans, future inventory levels, including the ability to leverage inventory management and targeted promotions, planned marketing expenditures, planned capital expenditures and future cash needs. These statements relate to expectations concerning matters that are not historical fact and may include the words or phrases such as "will," "could," "should," "expects," "believes," "anticipates," "plans," "intends," "estimates," "approximately," "our planning assumptions," "future outlook" and similar expressions. Except for historical information, matters discussed in this Annual Report on Form 10-K are forward-looking statements. These forward-looking statements are based largely on information currently available to our management and on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those expressed or implied by such forward-looking statements. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance and there are a number of known and unknown risks, uncertainties, contingencies and other factors (many of which are outside our control) that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, there is no assurance that our expectations will, in fact, occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, "Risk Factors" in this Annual Report on Form 10-K and the following: The financial strength of retailing in particular and the economy in general; the extent of financial difficulties or economic uncertainty that may be experienced by customers; the effects of the pandemic, including uncertainties about its depth and duration, new variants of COVID-19 that have emerged, and the speed and efficacy of vaccine and treatment developments, as well as the impacts to general economic conditions and the economic slowdown affecting consumer behavior and discretionary spending (during and after the pandemic) and any temporary store restrictions (including reduced hours or capacity) due to government mandates, and the effectiveness of store reopenings, cost reduction initiatives (including our ability to effectively restructure our lease portfolio to obtain further rent relief), and other actions taken in response to the pandemic, and the financial impact of certain provisions of the CARES Act; the ability of our third-party business partners, including our suppliers, logistics providers, vendors and landlords, to meet their obligations to us in light of financial stress, staffing shortages, liquidity challenges, bankruptcy filings by other industry participants and other disruptions due to the pandemic; the impact of the pandemic on our manufacturing operations inChina ; the exiting of store operations inCanada and other future permanent store closures; changes in the general or specialty or apparel industries; significant shifts in consumer behavior; our ability to secure and maintain customer acceptance of styles and in-store and online concepts; the ability to leverage inventory management and targeted promotions; the ability to effectively manage our inventory and allocation processes; the extent and nature of competition in the markets in which we operate; the ability to remain competitive with customer shipping terms and costs pertaining to product deliveries and returns; the extent of the market demand and overall level of spending for women's private branded clothing and related accessories; the effectiveness of our brand strategies, awareness and marketing programs; the ability to coordinate product development with buying and planning; the quality and timeliness of merchandise received from suppliers; changes in the costs of manufacturing, raw materials, transportation, distribution, labor and advertising; the availability of quality store sites; our ability to manage our store fleet and the risk that our investments in merchandise or marketing initiatives may not deliver the results we anticipate; our ability to successfully navigate the increasing use of online retailers for fashion purchases and the pressure that puts on traffic and transactions in our physical stores; the ability to operate our own retail websites in a manner that produces profitable sales; the ability to successfully identify and implement additional sales and distribution channels; the ability to successfully execute our business strategies and particular strategic initiatives (including, but not limited to, the Company's organizational restructure, retail fleet optimization plan and five fiscal 2021 operating priorities which are: continuing our ongoing digital transformation; further refining product through fit, quality, fabric and innovation; driving increased customer engagement through marketing; maintaining our operating and cost discipline; and further enhancing the productivity of our real estate portfolio), sales initiatives and multi-channel strategies, customer traffic, and to achieve the expected results from them; the continuing performance, implementation and integration of management information systems; the impact of any systems failures, cyber security or other data or security breaches, including any security breaches that result in theft, transfer, or unauthorized disclosure of customer, employee, or company information or our 41 -------------------------------------------------------------------------------- Table of Contents compliance with domestic and foreign information security and privacy laws and regulations in the event of such an incident; the ability to hire, train, motivate and retain qualified sales associates, managerial employees and other employees in an inclusive environment; the successful recruitment of leadership and the successful transition of new members to our senior management team; uncertainties regarding future unsolicited offers to buy the Company and our ability to respond effectively to them as well as to actions of activist shareholders and others; changes in the political environment that create consumer uncertainty; significant changes to product import and distribution costs (such as unexpected consolidation in the freight carrier industry); the ability to utilize our distribution center and other support facilities in an efficient and effective manner; the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images; the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results; the impact of unanticipated changes in legal, regulatory or tax laws; the risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including significant economic labor, political or other shifts (including the impact of changes in tariffs, taxes or other import regulations, particularly with respect toChina , or legislation prohibiting certain imports fromChina ); and changes in governmental policies in or towards foreign countries; currency exchange rates and other similar factors. All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 42 --------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
