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. 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, and liquidity management, as well as reductions to our expense and capital expenditure plans. Following the earlier 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 re-opened all 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 approximately 1,000 associate positions, including over 200 vacant positions that will not be filled. Although all of our stores were open at the end of the third quarter of fiscal 2020, we experienced during the quarter, and have continued to experience, significantly reduced customer traffic and net sales. Our retail customers in the Brand Portfolio Segment are having similar experiences. 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 primarily during the first half of fiscal 2020 and continuing reduced customer traffic, resulted in a sharp decline in our net sales and cash flows. 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 19% at the end of the third quarter of fiscal 2020 compared to the same period last year. We have been more aggressive with our promotional activity to clear through seasonal inventory and 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 athleisure, which includes athletic, and casual products and away from dress and seasonal categories. We have modified receipts to match these expectations and continue to 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 three quarters of fiscal 2020, well above digital sales for the same period last year across all segments. Our digital fulfillment options, such as Buy Online Pick Up in Store and Curbside Pickup, and our ability to use our stores for fulfillment served us well while our stores were closed and continue to see strength even as stores have fully reopened. 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. We were voted the #1 omni-channel retailer for the third year in a row and remain one of the largest designers, producers and retailers of footwear and accessories in the market. Our increased penetration in the athletic market coupled with our historical success in dress and seasonal and a fully integrated supply chain supported by our acquisition ofCamuto Group , position us well to be the premier footwear retailer for all of the family's needs over the long-term. The COVID-19 pandemic remains challenging, and with the resurgence of the COVID-19 outbreak and related restrictions imposed by state and local government authorities designed to slow the virus's spread, we may be required to close stores in certain locations that we only recently re-opened. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences during our peak fall season, including reductions in consumer spending, which may necessitate further shifts in our business model. 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. 20 --------------------------------------------------------------------------------
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 include 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 exchange rate used in the comparable period in the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer www.vincecamuto.com e-commerce site. While all stores were open as of the end of the third quarter of fiscal 2020, comparable sales also include stores temporarily closed during fiscal 2020 as a result of the COVID-19 outbreak as management continues to believe this metric is meaningful to monitor our performance. Comparable sales no longer include the Other segment beginning with the third quarter of fiscal 2020 due to the liquidation of Stein Mart. 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$652.9 million for the three months endedOctober 31, 2020 from$933.8 million for the three months endedNovember 2, 2019 . The 30.1% decrease in net sales was primarily driven by the ongoing and prolonged COVID-19 outbreak that contributed to the 30.4% decrease in comparable sales, as 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 our retailer customers also experiencing significantly reduced customer traffic and lower demand for dress products. During the three months endedOctober 31, 2020 , gross profit as a percentage of net sales was 25.4% as compared to 29.3% for the same period last year. The decrease in gross profit was primarily driven by the impact of the COVID-19 outbreak on our operations, which, in addition to the reduced sales volume, resulted in increased shipping costs associated with higher digital penetration and the deleveraging of distribution and fulfillment, store occupancy and royalty expenses on lower sales volume. Net loss for the three months endedOctober 31, 2020 was$40.6 million , or a loss of$0.56 per diluted share, which included net after-tax charges of$21.6 million , or$0.30 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. Net income for the three months endedNovember 2, 2019 was$43.5 million , or$0.60 earnings per diluted share, which included net after-tax charges of$5.1 million , or$0.07 per diluted share, primarily related to impairment charges and integration and restructuring expenses associated with the businesses acquired in fiscal 2018. 21 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months Ended
Three months ended
October 31, 2020 November 2, 2019 Change
(dollars in thousands, except per
share amounts) Amount % of Net Sales Amount % of Net Sales Amount %
Net sales(1) $ 652,870 100.0 % $ 933,826 100.0 % $ (280,956) (30.1) %
Cost of sales (487,214) (74.6) (660,518) (70.7) 173,304 (26.2) %
Gross profit(1) 165,656 25.4 273,308 29.3 (107,652) (39.4) %
Operating expenses(1) (196,067) (30.1) (215,038) (23.1) 18,971 (8.8) %
Income from equity investment 1,902 0.3 2,662 0.3 (760) (28.5) %
Impairment charges (30,081) (4.6) (4,824) (0.5) (25,257) 523.6 %
Operating profit (loss) (58,590) (9.0) 56,108 6.0 (114,698) NM
Interest expense, net (9,009) (1.3) (2,174) (0.2) (6,835) 314.4 %
Non-operating income, net 24 0.0 15 0.0 9 60.0 %
Income (loss) before income taxes (67,575) (10.3) 53,949 5.8 (121,524) NM
Income tax benefit (provision) 26,932 4.1 (10,489) (1.1) 37,421 NM Net income (loss)$ (40,643) (6.2) %$ 43,460 4.7 %$ (84,103) NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ (0.56) $ 0.60$ (1.16)
NM
Diluted earnings (loss) per share $ (0.56) $ 0.60$ (1.16)
NM
Weighted average shares used in per share calculations: Basic shares 72,344 72,123 221 0.3 % Diluted shares 72,344 72,947 (603) (0.8) % 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) October 31, 2020 Consolidated net sales for the same period last year $ 933,826 Decrease in comparable sales
(242,387)
Net increase from non-comparable sales and other changes
10,860
Loss of net sales from closed stores
(2,785)
Decrease in wholesale net sales from Brand Portfolio segment
(43,615)
Decrease in commission income from Brand Portfolio segment (3,029)
Consolidated net sales $ 652,870
22--------------------------------------------------------------------------------
The following summarizes net sales by segment:
Three months ended Change
(dollars in thousands) October 31, 2020 November 2, 2019 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 501,901 $ 716,775 $ (214,874) (30.0) % (31.9)%
Canada Retail 61,598 76,299 (14,701) (19.3) % (18.7)%
Brand Portfolio 83,905 137,496 (53,591) (39.0) % 13.4%
Other 27,020 28,848 (1,828) (6.3) % NA
Total segment net sales 674,424 959,418 (284,994) (29.7) % (30.4)%
Elimination of
intersegment net sales (21,554) (25,592) 4,038 (15.8) %
Consolidated net sales $ 652,870 $ 933,826 $ (280,956) (30.1) %
NA - Not applicable
The decreases in comparable sales for the U.S. Retail and Canada Retail segments
and in total consolidated net sales were driven primarily by significantly
reduced customer traffic as a result of COVID-19. Net sales during the quarter
were also impacted by an incident at a third-party vendor that provides
fulfillment and e-commerce services to the Company. The vendor experienced a
ransomware attack that resulted in a shutdown of some of its U.S. operations,
which temporarily impacted fulfillment services to us and led us to temporarily
reduce product availability on our U.S. e-commerce sites. Brand Portfolio
segment net sales were also negatively impacted by COVID-19 as retailer
customers also continued to experience significantly reduced customer traffic
and lower demand for dress product. Notwithstanding the temporary third-party
vendor incident previously discussed, the overall decrease in net sales 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.
Gross Profit- The following summarizes gross profit by segment:
Three months ended
October 31, 2020 November 2, 2019 Change
% of Segment % of Segment
(dollars in thousands) Amount Net Sales Amount Net Sales Amount % Basis Points
Segment gross profit:
U.S. Retail $ 117,679 23.4 % $ 201,409 28.1 % $ (83,730) (41.6) % (470)
Canada Retail 18,905 30.7 % 27,485 36.0 % $ (8,580) (31.2) % (530)
Brand Portfolio 22,128 26.4 % 40,849 29.7 % $ (18,721) (45.8) % (330)
Other 6,272 23.2 % 6,291 21.8 % $ (19) (0.3) % 140
164,984 276,034
Elimination of
intersegment gross loss
(profit) 672 (2,726)
Gross profit $ 165,656 25.4 % $ 273,308 29.3 % $ (107,652) (39.4) % (390)
The decrease in gross profit was primarily driven by significantly reduced customer traffic, increased shipping costs associated with higher digital penetration, and the deleveraging of distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume.
23
--------------------------------------------------------------------------------Elimination of intersegment gross profit (loss) consisted of the following:
Three months ended
(in thousands) October 31, 2020 November 2, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (21,554) $ (25,592)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 17,155 17,363
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
5,071 5,503 Gross loss (profit) $ 672 $ (2,726) Operating Expenses- For the three months endedOctober 31, 2020 , operating expenses decreased by$19.0 million over the same period last year, primarily driven by the reduction of our workforce initiated at the end of the second quarter of fiscal 2020 and reductions in store labor. Operating expenses during the three months endedOctober 31, 2020 were offset by government subsidies in the form of qualified payroll tax credits of$1.4 million . Impairment Charges- During the three months endedOctober 31, 2020 , we updated our impairment analysis at the store-level and, as a result, we recorded store impairment charges of$30.1 million , primarily related to certainU.S. Retail stores located in urban areas that are experiencing significantly lower traffic than the rest of the store fleet as a result of the continuing COVID-19 outbreak. Interest Expense, net- For the three months endedOctober 31, 2020 , interest expense increased over the same period last year due to additional debt under our new ABL Revolver and Term Loan, which have higher interest rates. Income Taxes- Our effective tax rate changed from 19.4% for the three months endedNovember 2, 2019 to 39.9% for the three months endedOctober 31, 2020 . The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where theU.S. federal statutory tax rate was 35% pursuant to the CARES Act. 24 -------------------------------------------------------------------------------- Comparison of the Nine Months EndedOctober 31, 2020 with the Nine Months EndedNovember 2, 2019 Nine months ended October 31, 2020 November 2, 2019 Change (dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount % Net sales(1)$ 1,625,367 100.0 %$ 2,663,067 100.0 %$ (1,037,700) (39.0) % Cost of sales (1,449,129) (89.2) (1,869,253) (70.2) 420,124 (22.5) % Gross profit(1) 176,238 10.8 793,814 29.8 (617,576) (77.8) % Operating expenses(1) (551,712) (33.9) (654,988) (24.6) 103,276 (15.8) % Income from equity investment 6,325 0.4 7,354 0.3 (1,029) (14.0) % Impairment charges (149,363) (9.2) (4,824) (0.2) (144,539) 2,996.2 % Operating profit (loss) (518,512) (31.9) 141,356 5.3 (659,868) NM Interest expense, net (14,955) (0.9) (5,947) (0.3) (9,008) 151.5 % Non-operating income (expenses), net 680 0.0 (128) (0.0) 808
NM
Income (loss) before income taxes (532,787) (32.8) 135,281 5.0 (668,068)
NM
Income tax benefit (provision) 178,072 11.0 (33,220) (1.2) 211,292 NM Net income (loss)$ (354,715) (21.8) %$ 102,061 3.8 %$ (456,776) NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ (4.92) $ 1.38$ (6.30)
NM
Diluted earnings (loss) per share $ (4.92) $ 1.36$ (6.28)
NM
Weighted average shares used in per share calculations: Basic shares 72,134 74,219 (2,085) (2.8) % Diluted shares 72,134 75,149 (3,015) (4.0) % 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: Nine months ended (in thousands) October 31, 2020 Consolidated net sales for the same period last year$ 2,663,067 Decrease in comparable sales
(894,684)
Net increase from non-comparable sales and other changes
13,048
Loss of net sales from closed stores
(10,893)
Decrease in wholesale net sales from Brand Portfolio segment
(141,079)
Decrease in commission income from Brand Portfolio segment (4,092) Consolidated net sales$ 1,625,367 25
--------------------------------------------------------------------------------
The following summarizes net sales by segment:
Nine months ended Change
(dollars in thousands) October 31, 2020 November 2, 2019 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 1,272,951 $ 2,086,535 $ (813,584) (39.0) % (39.6)%
Canada Retail 140,509 191,421 (50,912) (26.6) % (25.5)%
Brand Portfolio 196,476 344,989 (148,513) (43.0) % 61.4%
Other 62,909 93,935 (31,026) (33.0) % (50.4)%
Total segment net sales 1,672,845 2,716,880 (1,044,035) (38.4) % (38.4)%
Elimination of
intersegment net sales (47,478) (53,813) 6,335 (11.8) %
Consolidated net sales $ 1,625,367 $ 2,663,067 $ (1,037,700) (39.0) %
The decreases in comparable sales for all segments, except Brand Portfolio, and
in total consolidated net sales, were primarily 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 our retailer customers temporarily closed stores and canceled
orders.
Gross Profit- The following summarizes gross profit by segment:
Nine months ended
October 31, 2020 November 2, 2019 Change
% of Segment % of Segment
(dollars in thousands) Amount Net Sales Amount Net Sales Amount % Basis Points
Segment gross profit:
U.S. Retail $ 124,806 9.8 % $ 619,356 29.7 % $ (494,550) (79.8) % (1,990)
Canada Retail 22,244 15.8 % 65,171 34.0 % $ (42,927) (65.9) % (1,820)
Brand Portfolio 24,592 12.5 % 93,308 27.0 % $ (68,716) (73.6) % (1,450)
Other 962 1.5 % 21,643 23.0 % $ (20,681) (95.6) % (2,150)
172,604 799,478
Elimination of
intersegment gross loss
(profit) 3,634 (5,664)
Gross profit $ 176,238 10.8 % $ 793,814 29.8 % $ (617,576) (77.8) % (1,900)
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 shipping costs associated with
higher digital penetration, and the deleveraging of distribution and
fulfillment, store occupancy, and royalty 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. As of October 31, 2020 , we had
approximately $18.0 million of additional inventory reserves over the same
period last year.
26
--------------------------------------------------------------------------------Elimination of intersegment gross profit (loss) consisted of the following:
Nine months ended
(in thousands) October 31, 2020 November 2, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (47,478) $ (53,813)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 34,116 39,281
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
16,996 8,868 Gross loss (profit) $ 3,634 $ (5,664) Operating Expenses- For the nine months endedOctober 31, 2020 , operating expenses decreased by$103.3 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 and the reduction of our workforce and reductions in store labor initiated at the end of the second quarter of fiscal 2020. Operating expenses during the nine months endedOctober 31, 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$9.3 million . Impairment Charges- As a result of the material reduction in net sales and cash flows, 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 nine months endedOctober 31, 2020 , we recorded impairment charges of$122.9 million . Also, during the nine months endedOctober 31, 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 nine months endedOctober 31, 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.
Interest Expense, net- For the nine months ended
Income Taxes- Our effective tax rate changed from 24.6% for the nine months endedNovember 2, 2019 to 33.4% for the nine months endedOctober 31, 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 peak spring and fall selling seasons 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. In addition, the recent resurgence of COVID-19 may
further adversely impact our results of operations.
27
--------------------------------------------------------------------------------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 nine months endedOctober 31, 2020 , net cash used in operations was$106.3 million compared to net cash provided by operations of$118.1 million for the nine months endedNovember 2, 2019 . The change was driven by the net loss incurred during fiscal 2020 as a result of the COVID-19 outbreak, which was partially offset by measures we implemented to manage our working capital to preserve liquidity, including renegotiating vendor and landlord terms, reducing inventory orders, and significantly cutting costs.
Investing Cash Flows
For the nine months endedOctober 31, 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 capital expenditures of$26.9 million , which were reduced in order to preserve liquidity. During the nine months endedNovember 2, 2019 , our net cash used in investing activities was$10.3 million , which was due to capital expenditures of$59.6 million exceeding the net liquidation of our available-for-sale securities and the proceeds from a working capital settlement related to ourCamuto Group acquisition. Financing Cash Flows For the nine months endedOctober 31, 2020 , our net cash provided by financing activities was$127.2 million compared to net cash used in financing activities of$120.6 million for the nine months endedNovember 2, 2019 . During the nine months endedOctober 31, 2020 , we had net proceeds from borrowings from our ABL Revolver and Term Loan offset by the settlement of borrowings under the Credit Facility and the payment of debt issuance costs associated with the changes we made to our debt structure. We also significantly reduced the amount of dividends paid as we reduced the dividends paid during the first quarter of fiscal 2020 and did not pay any dividends during the second and third quarters of fiscal 2020. During the nine months endedNovember 2, 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 Credit Facility.
Debt
ABL Revolver- OnAugust 7, 2020 , we replaced our Credit Facility with the ABL Revolver, which 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. borrowings, and a$2.0 million sub-limit for swing loan advances for Canadian borrowings. 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 Term Loan. 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. As ofOctober 31, 2020 , the ABL Revolver had a borrowing base of$400.0 million , with$100.0 million outstanding and$5.0 million in letters of credit issued, resulting in$295.0 million available for borrowings. Borrowings and letters of credit issued 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 London Interbank Offered Rate ("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, with an interest rate of 3.25% as ofOctober 31, 2020 . Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs. 28 -------------------------------------------------------------------------------- Term Loan- OnAugust 7, 2020 , we also entered into a$250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due inAugust 2025 . The Term Loan has limited prepayment requirements under certain conditions. The 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, that constitute first priority collateral for the ABL Revolver. Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (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%, with an interest rate of 9.75% as ofOctober 31, 2020 . 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 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than$150.0 million . In addition, the ABL Revolver and the 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. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the 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$26.9 million during the nine months endedOctober 31, 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.
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. The following table presents a summary of our
minimum contractual commitments and obligations as of
Payments due by Period
Less Than 1 - 3 3 - 5 More Than
(in thousands) Total 1 Year Years Years 5 Years
Operating lease liabilities $ 1,056,867 $ 259,702 $ 389,097 $ 224,418 $ 183,650
Debt, including estimated
interest payments (1) 447,030 89,662 65,768 291,600 -
Minimum license commitments(2) 253,095 34,556 69,304 62,674 86,561
Purchase obligations(3) 8,064 6,989 1,075 - -
Total $ 1,765,056 $ 390,909 $ 525,244 $ 578,692 $ 270,211
(1) Interest payments on our ABL Revolver and Term Loan were estimated using
their respective interest rate as of October 31, 2020 and assuming interest
payments on $100.0 million outstanding on our ABL Revolver through the maturity
date of August 2025 .
(2) Minimum license commitments include guaranteed minimum royalties, including
amounts due to ABG-Camuto, and fixed licensing and other fees due to other
parties.
(3) Purchase obligations include commitments where we would not be able to
cancel such obligations without payment or penalty, including items to be
purchased for projects that were under construction or for which a lease has
been signed.
29
--------------------------------------------------------------------------------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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