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MarketScreener Homepage  >  Equities  >  Nyse  >  Designer Brands Inc.    DBI

DESIGNER BRANDS INC.

(DBI)
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DESIGNER BRANDS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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09/04/2020 | 05:26pm EDT

Executive Overview


In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. On March 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 the U.S. and Canada. In addition, we
took several actions in late March 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. In July 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 of Camuto 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
                                       20
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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 ended August 1, 2020
from $856.0 million for the three months ended August 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 in March 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 ended August 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 ended August 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 ended August 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 ended August 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
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Results of Operations


Comparison of the Three Months Ended August 1, 2020 with the Three Months Ended
August 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



                                       22
--------------------------------------------------------------------------------

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.

                                       23
--------------------------------------------------------------------------------

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 ended August 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 ended August 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 ended August 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 Ended August 1, 2020 with the Six Months Ended
August 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
--------------------------------------------------------------------------------

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 ended August 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 ended August 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 ended August 1, 2020, we recorded impairment charges of $92.8
million. Also, during the six months ended August 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 ended August 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 ended
August 3, 2019 to 32.5% for the six months ended August 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 the U.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 ended August 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 ended August 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 ended August 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 ended August 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 ended August 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 ended August 3, 2019. During the six months
ended August 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 the U.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 ended August 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 ended August 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. On April 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 of August 1, 2020;
•Changed the minimum fixed charge coverage ratio to 1.05:1 as of August 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 of
August 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 of August 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 of August 1, 2020, the Credit Facility provided a revolving
line of credit up to
                                       27
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$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- On August 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 in August 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 for U.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 in August 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 ended August 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
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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 February 1, 2020 in our 2019 Form 10-K. There have been no material changes in contractual obligations outside the ordinary course of business since February 1, 2020, except for the increased amount borrowed under the Credit Facility.

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.

© Edgar Online, source Glimpses


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