DESIGNER BRANDS INC. Executive Overview
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. OnMarch 18, 2020 , to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in theU.S. andCanada . In addition, we took several actions in lateMarch 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. However, as this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, liquidity management, and reductions to our expense and capital expenditure plans. With the easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses, during the second quarter and into the third quarter of fiscal 2020, we have re-opened the majority of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. InJuly 2020 , we implemented an internal reorganization and reduction of our workforce, resulting in the elimination of over 1,000 associate positions, including approximately 220 vacant positions that will not be filled. Given the continuation of overall depressed consumer sentiment, customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all. We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures resulted in a sharp decline in our net sales and cash flows during the first half of fiscal 2020. Although the majority of our stores are now open, we are experiencing, and may continue to experience, significantly reduced customer traffic and net sales. Our retailer customers in the Brand Portfolio Segment are having similar experiences. Our flexible business model has afforded us the opportunity to quickly adapt to the volatile macro environment and business conditions. We implemented inventory control actions that enabled us to decrease total inventory by 37% at the end of the second quarter of fiscal 2020 compared to the same period last year. We have been more aggressive with our promotional activity to drive sales, and this markdown activity, along with additional inventory reserves, has materially impacted margins. With our customers staying home, there has been a clear shift in consumer behavior and preferences to increased demand for athleisure and casual products and away from dress and seasonal categories. We have modified receipts to match these expectations and see opportunity ahead of us given our under-penetration in this business. Over the past several years, we have made significant investments in our digital infrastructure and, as a result, we were able to generate strong digital sales during the first half of fiscal 2020, well above digital sales for the same period last year across all segments. Our unique digital experiences, such as Buy Online Pick Up in Store and Curbside Pickup, and our ability to use our stores for fulfillment have served us well while our stores have been closed to the public. Digital innovation has also helped us pilot a self-checkout option through our mobile app for customers shopping in stores. We anticipate that adapting to operating as a digital-focused retailer during this time will have a lasting influence on how we operate moving forward. Continuing to function as a digital-focused retailer, coupled with our strategic pillars of delivering differentiated products, offering differentiated experiences in-store and online, and focusing on new growth opportunities to increase market share, will guide our decisions as we adjust for the future. We remain one of the largest designers, producers and retailers of footwear and accessories in the market and have the advantage of a fully integrated supply chain supported by our acquisition ofCamuto Group . The COVID-19 pandemic remains challenging. The continuation of the outbreak or a new surge in cases may cause new and prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors and preferences, which may necessitate further shifts in our business model, and potential reductions in consumer spending. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.
Comparable Sales Performance Metric
We consider comparable sales to be an important indicator of the performance of
our retail and direct-to-consumer businesses, and investors may find it useful
as such. Comparable sales is a primary metric commonly used throughout the
retail industry. We include stores in our comparable sales metric for those
stores in operation for at least 14 months at the beginning of the fiscal year.
Stores are added to the comparable base at the beginning of the year and are
dropped for comparative purposes in the quarter they are closed. Comparable
sales includes e-commerce sales. Comparable sales for the Canada Retail segment
exclude the impact of foreign currency translation and are calculated by
translating current period results at the foreign currency
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exchange rate used in the comparable period in the prior year. Comparable sales
for the Brand Portfolio segment includes the direct-to-consumer
www.vincecamuto.com e-commerce site. Comparable sales also includes stores
temporarily closed as a result of the COVID-19 outbreak as management continues
to believe this metric is meaningful to monitor the performance through the
temporary closure period and to measure progress as stores re-open. Comparable
sales will exclude the sales of Stein Mart beginning in the third quarter of
fiscal 2020. The calculation of comparable sales varies across the retail
industry and, as a result, the calculations of other retail companies may not be
consistent with our calculation.
Financial Summary
Net sales decreased to$489.7 million for the three months endedAugust 1, 2020 from$856.0 million for the three months endedAugust 3, 2019 . The 42.8% decrease in net sales was primarily driven by the COVID-19 outbreak with a 42.7% decrease in comparable sales due to the temporary closure of all stores beginning inMarch 2020 through much of the second quarter of fiscal 2020 and, since re-opening, we are experiencing significantly reduced customer traffic and net sales relative to the same period last year. In addition, we had lower Brand Portfolio segment sales due to orders canceled by our retailer customers. During the three months endedAugust 1, 2020 , gross profit as a percentage of net sales was 7.6% as compared to 30.5% for the same period last year. The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations. For the three months endedAugust 1, 2020 , we addressed the temporary closure of stores and, subsequently, the significantly reduced customer traffic upon store re-openings, with aggressive promotional activity. The impact of COVID-19 and the actions we took resulted in higher inventory reserves, increased shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume. Net loss for the three months endedAugust 1, 2020 was$98.2 million , or a loss of$1.36 per diluted share, which included net after-tax charges of$6.2 million , or$0.08 per diluted share, primarily related to impairment charges, integration and restructuring expenses and incremental costs related to the COVID-19 outbreak, offset by governmental credits we claimed and a gain from a settlement with a vendor. Net income for the three months endedAugust 3, 2019 was$27.4 million , or$0.37 earnings per diluted share, which included net after-tax charges of$8.3 million , or$0.11 per diluted share, primarily related to integration and restructuring expenses. 21 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months EndedAugust 1, 2020 with the Three Months EndedAugust 3, 2019 Three months ended August 1, 2020 August 3, 2019 Change (dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount % Net sales(1)$ 489,714 100.0 %$ 855,952 100.0 %$ (366,238) (42.8) % Cost of sales (452,672) (92.4) (594,779) (69.5) 142,107 (23.9) % Gross profit(1) 37,042 7.6 261,173 30.5 (224,131) (85.8) % Operating expenses(1) (168,424) (34.4) (222,370) (26.0) 53,946 (24.3) % Income from equity investment 2,153 0.4 2,464 0.3 (311) (12.6) % Impairment charges (6,735) (1.4) - - (6,735) NM Operating profit (loss) (135,964) (27.8) 41,267 4.8 (177,231) NM Interest expense, net (3,788) (0.8) (1,972) (0.2) (1,816) 92.1 % Non-operating income, net 743 0.2 199 0.0 544 273.4 % Income (loss) before income taxes (139,009) (28.4) 39,494 4.6 (178,503) NM Income tax benefit (provision) 40,795 8.3 (12,087) (1.4) 52,882 NM Net income (loss)$ (98,214) (20.1) %$ 27,407 3.2 %$ (125,621) NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share$ (1.36) $ 0.37 $ (1.73) NM Diluted earnings (loss) per share$ (1.36) $ 0.37 $ (1.73) NM Weighted average shares used in per share calculations: Basic shares 72,142 73,529 (1,387) (1.9) % Diluted shares 72,142 74,316 (2,174) (2.9) % NM - Not meaningful (1) We changed our presentation of net sales and gross profit (loss) for all periods presented to include commission income. Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses.Net Sales - The following summarizes the changes in consolidated net sales from the same period last year: Three months ended (in thousands) August 1, 2020 Consolidated net sales for the same period last year $ 855,952 Decrease in comparable sales
(323,468)
Net increase from non-comparable sales and other changes
36,365
Loss of net sales from closed stores
(3,614)
Decrease in wholesale net sales from Brand Portfolio segment
(73,014)
Decrease in commission income from Brand Portfolio segment (2,507)
Consolidated net sales $ 489,714
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The following summarizes net sales by segment:
Three months ended Change
(dollars in thousands) August 1, 2020 August 3, 2019 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 393,977 $ 677,920 $ (283,943) (41.9) % (44.9)%
Canada Retail 49,582 63,306 (13,724) (21.7) % (27.9)%
Brand Portfolio 30,458 102,947 (72,489) (70.4) % 120.5%
Other 22,266 29,480 (7,214) (24.5) % (36.2)%
Total segment net sales 496,283 873,653 (377,370) (43.2) % (42.7)%
Elimination of
intersegment net sales (6,569) (17,701) 11,132 (62.9) %
Consolidated net sales $ 489,714 $ 855,952 $ (366,238) (42.8) %
The decreases in comparable sales for all segments, except Brand Portfolio, and
in total consolidated net sales, were driven by the temporary closure of stores
during our peak selling season and significantly reduced customer traffic since
re-opening. This was partially offset by strong performance in our e-commerce
channels, including www.vincecamuto.com, which is included in comparable sales
for the Brand Portfolio segment, as a certain amount of customer demand shifted
online. Brand Portfolio segment net sales was also negatively impacted by the
COVID-19 outbreak as retailer customers temporarily closed stores and canceled
orders.
Gross Profit (Loss)- The following summarizes gross profit (loss) by segment:
Three months ended
August 1, 2020 August 3, 2019 Change
% of Segment % of Segment
(dollars in thousands) Amount Net Sales Amount Net Sales Amount % Basis Points
Segment gross profit
(loss):
U.S. Retail $ 40,097 10.2 % $ 208,056 30.7 % $ (167,959) (80.7) % (2,050)
Canada Retail 5,650 11.4 % 21,939 34.7 % $ (16,289) (74.2) % (2,330)
Brand Portfolio (11,440) (37.6) % 26,786 26.0 % $ (38,226) NM NM
Other 118 0.5 % 6,041 20.5 % $ (5,923) (98.0) % (2,000)
34,425 262,822
Elimination of intersegment
gross loss (profit) 2,617 (1,649)
Gross profit $ 37,042 7.6 % $ 261,173 30.5 % $ (224,131) (85.8) % (2,290)
The decrease in gross profit was primarily driven by the impacts of the COVID-19
outbreak on our operations and the temporary closure of stores and significantly
reduced customer traffic since re-opening, which we addressed with aggressive
promotional activity. The impact of COVID-19 and the actions we took also
resulted in higher inventory reserves, increased shipping costs in the current
quarter associated with higher digital penetration, and the deleverage of
distribution and fulfillment and store occupancy expenses on lower sales volume.
The U.S. Retail segment inventory is accounted for using the retail inventory
method and is stated at the lower of cost or market. Inventories for the Canada
Retail and Brand Portfolio segments are accounted for using the weighted average
cost method and are stated at the lower of cost or net realizable value. For all
inventories, we also monitored excess and obsolete inventories in light of the
temporary closure of stores during our peak spring selling season and reduced
traffic experienced since re-opening stores.
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--------------------------------------------------------------------------------Elimination of intersegment gross profit (loss) consisted of the following:
Three months ended
(in thousands) August 1, 2020 August 3, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (6,569) $ (17,701)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 4,827 14,311
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
4,359 1,741 Gross loss (profit) $ 2,617$ (1,649) Operating Expenses- For the three months endedAugust 1, 2020 , operating expenses decreased by$53.9 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our associates and reducing pay for nearly all associates not placed on temporary leave for most of the second quarter of fiscal 2020. Operating expenses during the three months endedAugust 1, 2020 were offset by a gain from a settlement with a vendor of$9.0 million and government subsidies in the form of qualified payroll tax credits of$3.5 million . Impairment Charges- During the three months endedAugust 1, 2020 , we evaluated certain long-lived assets based on our intent to use such assets going forward and, as a result, we recorded impairment charges of$6.7 million . Comparison of the Six Months EndedAugust 1, 2020 with the Six Months EndedAugust 3, 2019 Six months ended August 1, 2020 August 3, 2019 Change (dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount % Net sales(1)$ 972,497 100.0 %$ 1,729,241 100.0 %$ (756,744) (43.8) % Cost of sales (961,915) (98.9) (1,208,735) (69.9) 246,820 (20.4) % Gross profit(1) 10,582 1.1 520,506 30.1 (509,924) (98.0) % Operating expenses(1) (355,645) (36.6) (439,950) (25.4) 84,305 (19.2) % Income from equity investment 4,423 0.5 4,692 0.3 (269) (5.7) % Impairment charges (119,282) (12.3) - - (119,282) NM Operating profit (loss) (459,922) (47.3) 85,248 5.0 (545,170) NM Interest expense, net (5,946) (0.6) (3,773) (0.2) (2,173) 57.6 % Non-operating income (expenses), net 656 0.1 (143) (0.0) 799 NM Income (loss) before income taxes (465,212) (47.8) 81,332 4.8 (546,544) NM Income tax benefit (provision) 151,140 15.5 (22,731) (1.3) 173,871 NM Net income (loss)$ (314,072) (32.3) %$ 58,601 3.5 %$ (372,673) NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share$ (4.36) $ 0.78 $ (5.14) NM Diluted earnings (loss) per share$ (4.36) $ 0.77 $ (5.13) NM Weighted average shares used in per share calculations: Basic shares 72,028 75,267 (3,239) (4.3) % Diluted shares 72,028 76,281 (4,253) (5.6) % NM - Not meaningful (1) We changed our presentation of net sales and gross profit (loss) for all periods presented to include commission income. Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses. 24 --------------------------------------------------------------------------------Net Sales - The following summarizes the changes in consolidated net sales from the same period last year: Six months ended (in thousands) August 1, 2020 Consolidated net sales for the same period last year$ 1,729,241 Decrease in comparable sales
(652,260)
Net increase from non-comparable sales and other changes
2,056
Loss of net sales from closed stores
(8,013)
Decrease in wholesale net sales from Brand Portfolio segment
(97,464)
Decrease in commission income from Brand Portfolio segment (1,063) Consolidated net sales$ 972,497
The following summarizes net sales by segment:
Six months ended Change
(dollars in thousands) August 1, 2020 August 3, 2019 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 771,050 $ 1,369,760 $ (598,710) (43.7) % (43.7)%
Canada Retail 78,911 115,122 (36,211) (31.5) % (29.9)%
Brand Portfolio 112,571 207,493 (94,922) (45.7) % 106.5%
Other 35,889 65,087 (29,198) (44.9) % (50.4)%
Total segment net sales 998,421 1,757,462 (759,041) (43.2) % (42.5)%
Elimination of
intersegment net sales (25,924) (28,221) 2,297 (8.1) %
Consolidated net sales $ 972,497 $ 1,729,241 $ (756,744) (43.8) %
The decreases in comparable sales for all segments, except Brand Portfolio, and
in total consolidated net sales, were driven by the temporary closure of stores
during our peak selling season in response to the COVID-19 outbreak and
significantly reduced customer traffic since re-opening. This was partially
offset by strong performance in our e-commerce channels, including
www.vincecamuto.com, which is included in comparable sales for the Brand
Portfolio segment, as a certain amount of customer demand shifted online. Brand
Portfolio segment net sales was also negatively impacted by the COVID-19
outbreak as retailer customers temporarily closed stores and canceled orders.
Gross Profit (Loss)- The following summarizes gross profit (loss) by segment:
Six months ended
August 1, 2020 August 3, 2019 Change
% of Segment % of Segment
(dollars in thousands) Amount Net Sales Amount Net Sales Amount % Basis Points
Segment gross profit
(loss):
U.S. Retail $ 7,127 0.9 % $ 417,947 30.5 % $ (410,820) (98.3) % (2,960)
Canada Retail 3,339 4.2 % 37,686 32.7 % $ (34,347) (91.1) % (2,850)
Brand Portfolio 2,464 2.2 % 52,459 25.3 % $ (49,995) (95.3) % (2,310)
Other (5,310) (14.8) % 15,352 23.6 % $ (20,662) NM NM
7,620 523,444
Elimination of intersegment
gross loss (profit) 2,962 (2,938)
Gross profit $ 10,582 1.1 % $ 520,506 30.1 % $ (509,924) (98.0) % (2,900)
The decrease in gross profit was primarily driven by the impacts of the COVID-19
outbreak on our operations and the temporary closure of stores and significantly
reduced customer traffic since re-opening, which we addressed with aggressive
promotional activity. The impact of COVID-19 and the actions we took also
resulted in higher inventory reserves, increased
25
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shipping costs in the current quarter associated with higher digital
penetration, and the deleverage of distribution and fulfillment and store
occupancy expenses on lower sales volume. The U.S. Retail segment inventory is
accounted for using the retail inventory method and is stated at the lower of
cost or market. Inventories for the Canada Retail and Brand Portfolio segments
are accounted for using the weighted average cost method and are stated at the
lower of cost or net realizable value. For all inventories, we also monitored
excess and obsolete inventories in light of the temporary closure of stores
during our peak spring selling season and reduced traffic experienced since
re-opening stores. For the six months ended August 1, 2020 , we recorded $64.0
million of additional reserves over the same period last year.
Elimination of intersegment gross profit (loss) consisted of the following:
Six months ended
(in thousands) August 1, 2020 August 3, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (25,924) $ (28,221)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 16,961 21,918
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
11,925 3,365 Gross loss (profit) $ 2,962$ (2,938) Operating Expenses- For the six months endedAugust 1, 2020 , operating expenses decreased by$84.3 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 outbreak for most of the first half of fiscal 2020. Operating expenses during the six months endedAugust 1, 2020 were offset by a gain from a settlement with a vendor of$9.0 million and government subsidies in the form of qualified payroll tax credits of$7.9 million . Impairment Charges- As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, we updated our impairment analysis at the store-level. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the six months endedAugust 1, 2020 , we recorded impairment charges of$92.8 million . Also, during the six months endedAugust 1, 2020 , we recorded an impairment charge of$6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life. Also as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the six months endedAugust 1, 2020 , we recorded an impairment charge of$20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment. Income Taxes- Our effective tax rate changed from 27.9% for the six months endedAugust 3, 2019 to 32.5% for the six months endedAugust 1, 2020 . The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where theU.S. federal statutory tax rate was 35% pursuant to the CARES Act.
Seasonality
Our business has historically been subject to seasonal merchandise trends driven
by the change in weather conditions and our customers' interest in new seasonal
styles. New spring styles are primarily introduced in the first quarter and new
fall styles are primarily introduced in the third quarter. The COVID-19 outbreak
negatively impacted our spring peak selling season and we expect that the trends
that we have experienced historically may change for the remainder of fiscal
2020. With our customers staying home, there has been a clear shift in consumer
behavior and preferences to increased demand for athleisure and casual products
and away from dress and seasonal categories, which may result in changes in
seasonal cadence.
26
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels fluctuate seasonally. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility, including the impact of the outbreak of COVID-19. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, support working capital requirements, and fund capital expenditures over the next 12 months.
Operating Cash Flows
For the six months endedAugust 1, 2020 , net cash used in operations was$79.6 million compared to net cash provided by operations of$34.2 million for the six months endedAugust 3, 2019 . The change was driven by the net loss incurred during fiscal 2020 as a result of the COVID-19 outbreak, after adjusting for non-cash activity including impairment charges and the change in deferred income taxes. This was partially offset by measures we implemented to manage our working capital to preserve liquidity, including delaying vendor and landlord payments while we renegotiate terms, reducing inventory orders, and significantly cutting costs.
Investing Cash Flows
For the six months endedAugust 1, 2020 , our net cash provided by investing activities was$6.8 million , which was due to the liquidation of our available-for sale-securities, the proceeds from a settlement from a vendor, and reductions of capital expenditures to$22.1 million in order to preserve liquidity. During the six months endedAugust 3, 2019 , our net cash provided by investing activities was$4.5 million , which was due to proceeds from the sale of available-for-sale securities exceeding capital expenditures of$40.3 million .
Financing Cash Flows
For the six months endedAugust 1, 2020 , our net cash provided by financing activities was$193.2 million compared to net cash used in financing activities of$87.2 million for the six months endedAugust 3, 2019 . During the six months endedAugust 1, 2020 , we had net borrowings of$203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in theU.S. and global markets resulting from COVID-19. We also significantly reduced the amount of dividends paid. As previously disclosed, we reduced the dividends paid during the first quarter of fiscal 2020 and did not pay any dividends during the second quarter of fiscal 2020. During the six months endedAugust 3, 2019 , net cash used in financing activities was primarily related to the payment of dividends and the repurchase of Class A common shares partially financed using our revolving line of credit. Debt Credit Facility- During the six months endedAugust 1, 2020 , our Credit Facility provided a revolving line of credit with sub-limits for the issuance of up to$50 million in letters of credit, swing loan advances of up to$15 million , and the issuance of up to$75 million in foreign currency revolving loans and letters of credit. OnApril 30, 2020 , the Credit Facility was amended, which resulted in various changes, including: •Provided for a lien on all of the Company's assets; •Redefined the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19; •Changed the maximum leverage ratio covenant to 4.00:1 as ofAugust 1, 2020 ; •Changed the minimum fixed charge coverage ratio to 1.05:1 as ofAugust 1, 2020 ; and •Restricted the Company from paying dividends and making share repurchases. Loans issued under the revolving line of credit bore interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.8% as ofAugust 1, 2020 . Interest on letters of credit issued under the Credit Facility was variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.8% as ofAugust 1, 2020 . Commitment fees were based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As ofAugust 1, 2020 , the Credit Facility provided a revolving line of credit up to 27 --------------------------------------------------------------------------------$400 million and we had$393.0 million outstanding under the Credit Facility and$5.0 million in letters of credit issued, resulting in$2.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization and write-off of debt issuance costs. Termination of Credit Facility- OnAugust 7, 2020 , we replaced our Credit Facility with a five-year$400.0 million , ABL Revolver and completed a five-year,$250.0 million Secured Term Loan. Upon the closing of the transactions, we made an initial borrowing in the amount of$150.0 million under the ABL Revolver. These proceeds, along with the proceeds from the Secured Term Loan, were used to repay in full the outstanding borrowings under the Credit Facility and we terminated the Credit Facility. ABL Revolver- Our ABL Revolver matures inAugust 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Secured Term Loan. The ABL Revolver provides a revolving line of credit of up to$400.0 million , including a Canadian sub-limit of up to$20.0 million , a$50.0 million sub-limit for the issuance of letters of credit, a$40.0 million sub-limit for swing loan advances forU.S. borrowing, and a$2.0 million sub-limit for swing loan advances for Canadian borrowings. The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. At the closing of the ABL Revolver, the amount available for borrowing was limited to a borrowing base of$274.3 million with an initial borrowing of$150.0 million and issued letters of credit of$5.0 million resulting in$119.3 million available for additional borrowings. Borrowings under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month LIBOR plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability. Secured Term Loan- Our Secured Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due inAugust 2025 . The Secured Term Loan has limited prepayment requirements under certain conditions. The Secured Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory. Borrowings under the Secured Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 2.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%. Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of$30.0 million or 10% of the maximum credit amount. The Secured Term Loan includes a springing covenant imposing a minimum EBITDA covenant which arises when liquidity is less than$150.0 million . In addition, the ABL Revolver and the Secured Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. Both the ABL Revolver and the Secured Term Loan contain customary events of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral. Capital Expenditure Plans We expect to spend approximately$30.0 million to$35.0 million for capital expenditures in fiscal 2020, of which we invested$22.1 million during the six months endedAugust 1, 2020 . Our capital expenditures for the remainder of the year will depend primarily on the number of store projects, as well as infrastructure and information technology projects that we undertake and the timing of these expenditures. 28 --------------------------------------------------------------------------------
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
We have included a summary of our contractual obligations as of
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, 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. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies disclosed in our 2019 Form 10-K.
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