Unless the context otherwise requires, "G-III," "us," "we" and "our" refer to
G-III Apparel Group, Ltd. and its subsidiaries. References to fiscal years refer
to the year ended or ending on January 31 of that year. For example, our
fiscal year ending January 31, 2021 is referred to as "fiscal 2021."
Vilebrequin, KLH, KLNA and Fabco report results on a calendar year basis rather
than on the January 31 fiscal year basis used by G-III. Accordingly, the results
of Vilebrequin, KLH, KLNA and Fabco are, and will be, included in our financial
statements for the quarter ended or ending closest to G-III's fiscal quarter
end. For example, with respect to our results for the six-month period ended
July 31, 2020, the results of Vilebrequin, KLH, KLNA and Fabco are included for
the six-month period ended June 30, 2020. We account for our investment in each
of KLH, KLNA and Fabco using the equity method of accounting. The Company's
retail operations segment uses a 52/53-week fiscal year. The Company's three and
six-month periods ended July 31, 2020 and 2019 were each 13-week and 26-week
periods, respectively, for the retail operations segment. For fiscal 2021 and
2020, the three and six month periods for the retail operations segment ended on
August 1, 2020 and August 3, 2019 respectively.
Various statements contained in this Form 10-Q, in future filings by us with the
SEC, in our press releases and in oral statements made from time to time by us
or on our behalf constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on current expectations and are indicated by words or phrases such as
"anticipate," "estimate," "expect," "will," "project," "we believe," "is or
remains optimistic," "currently envisions," "forecasts," "goal" and similar
words or phrases and involve known and unknown risks, uncertainties and other
factors that may cause actual results, performance or achievements to be
materially different from the future results, performance or achievements
expressed in or implied by such forward-looking statements. Forward-looking
statements also include representations of our expectations or beliefs
concerning future events that involve risks and uncertainties, including, but
not limited to, the following:
the outbreak of COVID-19 and its numerous adverse effects, including the
closing of stores and shopping malls, the reduction of consumer purchases of
? the types of products we sell, the impact on our supply chain, restrictions on
travel and group gatherings and the general material adverse effect on the
economy in the U.S. and around the world, all of which negatively impact our
business, sales and results of operations;
? our dependence on licensed products;
? our dependence on the strategies and reputation of our licensors;
? costs and uncertainties with respect to expansion of our product offerings;
? the performance of our products at retail and customer acceptance of new
products;
? retail customer concentration;
? risks of doing business abroad;
? risks related to the recent adoption of a national security law in Hong Kong;
? price, availability and quality of materials used in our products;
? the need to protect our trademarks and other intellectual property;
? risks relating to our retail operations segment;
our ability to achieve operating enhancements and cost reductions from the
? restructuring of our retail operations, as well as the impact on our business
and financial statements resulting from any related costs and charges which may
be dilutive to our earnings;
? the impact on our business and financial statements related to the early
closure of stores or the termination of long-term leases;
? dependence on existing management;
? our ability to make strategic acquisitions and possible disruptions from
acquisitions;
? risks related to our indebtedness;
? need for additional financing;
? seasonal nature of our business;
? our reliance on foreign manufacturers;
? the need to successfully upgrade, maintain and secure our information systems;
? increased exposure to consumer privacy, cybersecurity and fraud concerns,
including as a result of the remote working environment;
? the impact of the current economic and credit environment on us, our customers,
suppliers and vendors;
? the effects of competition in the markets in which we operate, including from
online retailers;
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the redefinition of the retail store landscape in light of widespread retail
? store closings, the bankruptcy of a number of prominent retailers and the
impact of online apparel purchases and innovations by online retailers;
? consolidation of our retail customers;
? the impact on our business of the imposition of tariffs by the United States
government and the escalation of trade tensions between countries;
? additional legislation and/or regulation in the United States or around the
world;
? our ability to import products in a timely and cost effective manner;
? our ability to continue to maintain our reputation;
? fluctuations in the price of our common stock;
? potential effect on the price of our common stock if actual results are worse
than financial forecasts; and
? the effect of regulations applicable to us as a U.S. public company.
Any forward-looking statements are based largely on our expectations and
judgments and are subject to a number of risks and uncertainties, many of which
are unforeseeable and beyond our control. A detailed discussion of significant
risk factors that have the potential to cause our actual results to differ
materially from our expectations is described in Part II-Other Information below
in this Quarterly Report under the heading "Item 1A. Risk Factors." We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law.
Recent Developments
Secured Notes
On August 7, 2020, we completed a private debt offering of $400 million
aggregate principal amount of our 7.875% Senior Secured Notes due 2025 (the
"Notes). The terms of the Notes are governed by an indenture, dated as of August
7, 2020 (the "Indenture"), among us, the guarantors party thereto and U.S. Bank,
National Association, as trustee and collateral agent (the "Collateral Agent").
The net proceeds of the Notes have been used (i) to repay our existing term loan
facility due 2022, (ii) to pay related fees and expenses and (iii) for general
corporate purposes.
The Notes bear interest at a rate of 7.875% per year payable semi-annually in
arrears on February 15 and August 15 of each year, commencing on February 15,
2021.
The Notes are unconditionally guaranteed on a senior-priority secured basis by
our current and future wholly-owned domestic subsidiaries that guarantee any of
our credit facilities, including our ABL facility (the "ABL Facility") pursuant
to the ABL Credit Agreement, or certain future capital markets indebtedness of
ours or the guarantors.
The Notes and the related guarantees are secured by (i) first priority liens on
our Cash Flow Priority Collateral (as defined in the Indenture), and (ii) a
second-priority lien on our ABL Priority Collateral (as defined in the
Indenture), in each case subject to permitted liens described in the Indenture.
In connection with the issuance of the Notes and execution of the Indenture, we
and the Guarantors entered into a pledge and security agreement (the "Pledge and
Security Agreement"), among us, the Guarantors and the Collateral Agent.
The Notes are subject to the terms of the intercreditor agreement which governs
the relative rights of the secured parties in respect of the ABL Facility and
the Notes (the "Intercreditor Agreement"). The Intercreditor Agreement restricts
the actions permitted to be taken by the Collateral Agent with respect to the
Collateral on behalf of the holders of the Notes. The Notes are also subject to
the terms of the seller note subordination agreement which governs the relative
rights of the secured parties in respect of the Seller Note (as defined
therein), the ABL Facility and the Notes.
At any time prior to August 15, 2022, we may redeem some or all of the Notes at
a price equal to 100% of the principal amount of the Notes redeemed plus accrued
and unpaid interest, if any, to, but excluding, the applicable redemption date
plus a "make-whole" premium, as described in the Indenture. On or after August
15, 2022, we may redeem some or all of the Notes at any time and from time to
time at the redemption prices set forth in the Indenture, plus accrued and
unpaid interest, if any, to, but excluding, the applicable redemption date. In
addition, at any time prior to August 15, 2022, we may redeem up to 40% of the
aggregate principal amount of the Notes with the proceeds of certain equity
offerings at the redemption price set forth in the Indenture, plus accrued and
unpaid interest, if any, to, but excluding, the applicable
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redemption date. In addition, at any time prior to August 15, 2022, during any
twelve month period, we may redeem up to 10% of the aggregate principal amount
of the Notes at a redemption price equal to 103% of the principal amount of the
Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the
applicable redemption date.
If we experience a Change of Control (as defined in the Indenture), we are
required to offer to repurchase the Notes at 101% of the principal amount of
such Notes plus accrued and unpaid interest, if any, to, but excluding, the date
of repurchase.
The Indenture contains covenants that, among other things, limit our ability and
the ability of our restricted subsidiaries to incur or guarantee additional
indebtedness, pay dividends or make other restricted payments, make certain
investments, incur restrictions on the ability of our restricted subsidiaries
that are not guarantors to pay dividends or make certain other payments, create
or incur certain liens, sell assets and subsidiary stock, impair the security
interests, transfer all or substantially all of our assets or enter into merger
or consolidation transactions, and enter into transactions with affiliates. The
Indenture provides for customary events of default which include (subject in
certain cases to customary grace and cure periods), among others, nonpayment of
principal or interest, breach of other agreements in the Indenture, failure to
pay certain other indebtedness, failure of certain guarantees to be enforceable,
failure to perfect certain collateral securing the Notes failure to pay certain
final judgments, and certain events of bankruptcy or insolvency.
Second Amended and Restated ABL Credit Agreement
On August 7, our subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc.,
CK Outerwear, LLC, AM Retail Group, Inc. and The Donna Karan Company Store LLC
(collectively, the "Borrowers"), entered into the second amended and restated
credit agreement (the "ABL Credit Agreement") with the Lenders named therein and
with JPMorgan Chase Bank, N.A., as Administrative Agent. The ABL Credit
Agreement is a five year senior secured credit facility subject to a springing
maturity date if, subject to certain conditions, certain material indebtedness
is not refinanced or repaid prior to the date that is 91 days prior to the date
of any relevant payment thereunder. The ABL Credit Agreement provides for
borrowings in the aggregate principal amount of up to $650 million. We and our
subsidiaries, G-III Apparel Canada ULC, Gabrielle Studio, Inc., Donna Karan
International Inc. and Donna Karan Studio LLC (the "Guarantors"), are Loan
Guarantors under the ABL Credit Agreement.
The ABL Credit Agreement refinances, amends and restates the Amended Credit
Agreement, dated as of December 1, 2016 (as amended, supplemented or otherwise
modified from time to time prior to August 7, 2020, the "Prior Credit
Agreement"), by and among the Borrowers and the Loan Guarantors (each as defined
therein) party thereto, the lenders from time to time party thereto, and
JPMorgan Chase Bank, N.A., in its capacity as the administrative agent
thereunder. The Prior Credit Agreement provided for borrowings of up to $650
million and was due to expire in December 2021. The ABL Credit Agreement extends
the maturity date, subject to a springing maturity date if, subject to certain
conditions, certain material indebtedness is not refinanced or repaid prior to
the date that is 91 days prior to the date of any relevant payment thereunder.
Amounts available under the ABL Credit Agreement are subject to borrowing base
formulas and overadvances as specified in the ABL Credit Agreement. Borrowings
bear interest, at the Borrowers' option, at LIBOR plus a margin of 1.75% to
2.25% or an alternate base rate margin of 0.75% to 1.25% (defined as the
greatest of (i) the "prime rate" of JPMorgan Chase Bank, N.A. from time to time,
(ii) the federal funds rate plus 0.5% and (iii) the LIBOR rate for a borrowing
with an interest period of one month) plus 1.00%, with the applicable margin
determined based on Borrowers' availability under the ABL Credit Agreement. The
ABL Credit Agreement is secured by specified assets of the Borrowers and the
Guarantors.
Restructuring of Our Retail Operations Segment
On June 5, 2020, we announced a restructuring of our retail operations segment,
including the closing of all Wilsons Leather and G.H. Bass stores. Additionally,
we will close our Calvin Klein Performance stores. We have hired Hilco Global to
assist in the liquidation of these stores. We anticipate that the restructuring
will be completed by the end of fiscal 2021.
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After completion of the restructuring, our retail operations segment will
consist of DKNY and Karl Lagerfeld Paris stores, as well as the digital channels
for DKNY, Donna Karan, Karl Lagerfeld Paris, Andrew Marc, Wilsons Leather and
G.H. Bass. Part of our restructuring plan includes making significant changes to
our DKNY and Karl Lagerfeld store operations. In addition to the stores operated
as part of our retail operations segment, as of July 31, 2020, Vilebrequin
products were distributed through 104 company-operated stores and owned digital
channels in Europe and the United States, as well as through 63 franchised
locations.
In connection with the restructuring of our retail operations, we expect to
incur an aggregate charge of approximately $100 million related to store
operating costs, landlord termination fees, severance costs, store liquidation
and closing costs, write-offs related to right-of-use assets and legal and
professional fees. We recorded $1.2 million of this charge during the three
months ended July 31, 2020, consisting primarily of severance payments, benefit
continuation costs and store closing costs. We expect the net cash outflow of
the retail restructuring to be approximately $65 million. We believe that this
restructuring plan will enable us to greatly reduce our retail losses and to
ultimately have this segment become profitable.
Impact of COVID-19 Pandemic
Outbreaks of COVID-19 were detected beginning in December 2019 and, in March
2020, the World Health Organization declared COVID-19 a pandemic. The President
of the United States has declared a national emergency as a result of the
COVID-19 pandemic. Federal, state and local governments and private entities
mandated various restrictions, including travel restrictions, restrictions on
public gatherings, stay at home orders and advisories, and quarantining of
people who may have been exposed to the virus. The response to the COVID-19
pandemic has negatively affected the global economy, disrupted global supply
chains, and created significant disruption of the financial and retail markets,
including a disruption in consumer demand for apparel and accessories.
The COVID-19 pandemic has had multiple impacts on our business, including, but
not limited to, the temporary closure of our customers' stores and closures of
our own stores in North America, a mandate to require our employees who work in
our headquarters to work remotely and temporary disruption of our global supply
chain. The COVID-19 pandemic has impacted our business operations and results of
operations for the first and second quarters of fiscal 2021 resulting in lower
sales, lower liquidity and an adverse impact on free cash flow. COVID-19 could
continue to have an adverse impact on our results of operations and liquidity,
the operations of our suppliers, vendors and customers, and on our employees as
a result of quarantines, facility closures, and travel and logistics
restrictions. Even as businesses slowly begin to reopen as governmental
restrictions are loosened with respect to stay at home orders and previously
closed businesses, the ultimate economic impact of the COVID-19 pandemic is
highly uncertain. We expect that our business operations and results of
operations, including our net sales, earnings and cash flows, will be materially
adversely impacted for at least the balance of fiscal 2021.
During this crisis we are focused on protecting the health and safety of our
employees, our customers, and our communities. We have taken precautionary
measures intended to help minimize the risk of COVID-19 to our employees,
including temporarily requiring employees to work remotely and temporarily
closing all of our retail stores. Requiring our employees to work remotely may
disrupt our operations or increase the risk of a cybersecurity incident. Only
recently, we have begun re-opening stores and our personnel have started working
again in our offices.
Most of our retail partners closed their stores in North America, including our
largest customer, Macy's, while some of our customers, such as Costco and Sam's
Club, remained open for business. Our retail partners that have closed stores
have asked to extend their payment terms with us. We continue to negotiate
resolutions with our retail partners that are equitable and fiscally responsible
for each of us. Certain of our retail partners have publicized actual or
potential bankruptcy filings or other liquidity issues that could impact our
anticipated income and cash flows, as well as require us to record additional
accounts receivable reserves. In addition, we could be required to record
increased excess and obsolete inventory reserves due to decreased sales or
noncash impairment charges related to our intangible assets or goodwill due to
reduced market values and cash flows. Further, a more promotional retail
environment may cause us to lower our prices or sell existing inventory at
larger discounts than in the past, negatively impacting our margins.
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There is significant uncertainty around the breadth and duration of store
closures and other business disruptions related to the COVID-19 pandemic, as
well as its impact on the U.S. and global economies and on consumer willingness
to visit stores once they re-open. Recently, consumer businesses have begun to
re-open in many areas of the United States under governmental social distancing
and other restrictions that are expected to limit the scope of operations
compared to pre-COVID-19 business operations for an unknown period of time.
These restrictions are expected to adversely impact sales even as retail stores
continue to reopen. The extent to which COVID-19 impacts our results will depend
on continued developments in the public and private responses to the pandemic.
The continued impact of COVID-19 remains highly uncertain and cannot be
predicted. New information may emerge concerning the severity of the outbreak
and the actions taken to contain COVID-19 or treat its impact may change or
become more restrictive if a second wave of infections occurs, or continues to
occur, as a result of the loosening of governmental restrictions.
In response to these challenges, we have taken measures to contain costs that
include, but are not limited to, employee furloughs, job eliminations, temporary
salary reductions, reduced advertising and other promotional spending and
deferral of capital projects. We are also reviewing our inventory needs and
working with suppliers to curtail, or cancel, production of product which we
believe will not be able to be sold in season. We have also been working with
our suppliers, landlords and licensors to renegotiate related agreements and
extend payment terms in order to preserve capital.
Due to the impact of the COVID-19 pandemic on our operations, we performed a
quantitative test of our goodwill as of April 30, 2020 using an income approach
through a discounted cash flow analysis methodology. The discounted cash flow
approach requires that certain assumptions and estimates be made regarding
industry economic factors and future profitability. We also performed
quantitative tests of each of our indefinite-lived intangible assets using a
relief from royalty method, another form of the income approach. The relief from
royalty method requires assumptions regarding industry economic factors and
future profitability. While no impairment was identified as of April 30, 2020 as
a result of these tests, $370.0 million of our indefinite-lived trademarks could
be deemed to have a risk of future impairment as there is limited excess fair
value over the carrying value of the assets at April 30, 2020. During the second
quarter of 2020, we conducted a review to assess whether indicators of
impairment existed. As a result of this review, we concluded that no indicators
existed that would make management believe it is more likely than not that the
fair value of its goodwill or indefinite-lived trademarks is less than its
carrying value. The continued impact of the COVID-19 pandemic could give rise to
global and regional macroeconomic factors that could impact our assumptions
relating to net sales growth rates, discount rates, tax rates or royalty rates
and may result in future impairment charges for indefinite-lived intangible
assets.
We believe that we have sufficient cash and available capacity under our
revolving credit facility to meet our liquidity needs. As of July 31, 2020, we
had cash of approximately $252.8 million.
License Renewal
In August 2020, we renewed our license agreements with Levi Strauss & Co. for
the Levi's and Dockers brands. These licenses have been renewed through November
30, 2024 and cover men's and women's outerwear under the Levi's brand and men's
outerwear under the Dockers brand.
Overview
G-III designs, sources and markets an extensive range of apparel, including
outerwear, dresses, sportswear, swimwear, women's suits and women's performance
wear, as well as women's handbags, footwear, small leather goods, cold weather
accessories and luggage. G-III has a substantial portfolio of more than 30
licensed and proprietary brands, anchored by five global power brands: DKNY,
Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld Paris. We are not
only licensees, but also brand owners, and we distribute our products through
multiple brick and mortar and online channels.
Our own proprietary brands include DKNY, Donna Karan, Vilebrequin, G.H. Bass,
Eliza J, Jessica Howard, Andrew Marc and Marc New York. We sell products under
an extensive portfolio of well-known licensed brands, including Calvin Klein,
Tommy Hilfiger, Karl Lagerfeld Paris, Kenneth Cole, Cole Haan, Guess?, Vince
Camuto, Levi's and Dockers. Through our team sports business, we have licenses
with the National Football League, National Basketball Association, Major League
Baseball, National Hockey League and over 150 U.S. colleges and universities. We
also source and sell products to major retailers under their private retail
labels.
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We believe that the international sales and profit opportunity is quite
significant for our DKNY and Donna Karan businesses. We are also expanding our
DKNY business globally through our distribution partners in key regions. The key
markets in which our DKNY merchandise is currently distributed include the
Middle East, Russia, Indonesia, the Philippines, South East Asia and South
Korea, as well as in China where we operate through a joint venture. Continued
growth, brand development and marketing in these key markets is critical to
driving global brand recognition.
We operate in fashion markets that are intensely competitive. Our ability to
continuously evaluate and respond to changing consumer demands and tastes,
across multiple market segments, distribution channels and geographic areas is
critical to our success. Although our portfolio of brands is aimed at
diversifying our risks in this regard, misjudging shifts in consumer preferences
could have a negative effect on our business. Our success in the future will
depend on our ability to design products that are accepted in the marketplace,
source the manufacture of our products on a competitive basis, and continue to
diversify our product portfolio and the markets we serve.
Segments
We report based on two segments: wholesale operations and retail operations.
Our wholesale operations segment includes sales of products to retailers under
owned, licensed and private label brands, as well as sales related to the
Vilebrequin business. Wholesale revenues also include royalty revenues from
license agreements related to our owned trademarks including DKNY, Donna Karan,
Vilebrequin, G.H. Bass and Andrew Marc.
Our retail operations segment historically consisted primarily of direct sales
to consumers through our company-operated stores. Prior to our restructuring of
this segment, it was composed primarily of Wilsons Leather, G.H. Bass and DKNY
stores, substantially all of which are operated as outlet stores, as well as a
smaller number of Karl Lagerfeld Paris and Calvin Klein Performance stores.
After completion of the restructuring, our retail operations segment will
initially consist of DKNY and Karl Lagerfeld Paris stores, as well as the
digital channels for DKNY, Donna Karan, Karl Lagerfeld Paris, Andrew Marc,
Wilsons Leather and G.H. Bass. Our ongoing plan for our retail business focuses
on the operations and growth of our DKNY and Karl Lagerfeld Paris stores, as
well as our digital business. Our plan is based on the assumed continued
strength of the DKNY and Karl Lagerfeld brands, improved store productivity,
changes in planning and allocation and improvements in gross margin and payroll
leverage.
Trends
Industry Trends
Significant trends that affect the apparel industry include retail chains
closing unprofitable stores, an increased focus by retail chains and others on
expanding digital sales and providing convenience-driven fulfillment options,
the continued consolidation of retail chains and the desire on the part of
retailers to consolidate vendors supplying them. In addition, consumer shopping
preferences have continued to shift from physical stores to online shopping and
retail traffic remains under pressure. All of these factors have led to a more
promotional retail environment that includes aggressive markdowns in an attempt
to offset declines caused by a reduction in physical store traffic. The effects
of the COVID-19 pandemic have accelerated these trends.
We sell our products over the web through retail partners such as macys.com and
nordstrom.com, each of which has a substantial online business. As digital sales
of apparel continue to increase, we are developing additional digital marketing
initiatives on our web sites and through social media. We are investing in
digital personnel, marketing, logistics, planning and distribution to help us
expand our online opportunities going forward. Our digital business consists of
our own web platforms at www.dkny.com, www.donnakaran.com,
www.wilsonsleather.com, www.ghbass.com, www.vilebrequin.com and
www.andrewmarc.com. We also sell Karl Lagerfeld Paris products on our website,
www.karllagerfeldparis.com. In addition, we sell to pure play online retail
partners such as Amazon and Fanatics.
A number of retailers are experiencing financial difficulties, which in some
cases have resulted in bankruptcies, liquidations and/or store closings, such as
the announced store closing plans for Macy's, the bankruptcy and announced
liquidation of Lord & Taylor, the announced bankruptcy filings of JC Penney,
Neiman Marcus and other retailers and the potential bankruptcy of other
retailers. The financial difficulties of a retail customer of ours could result
in reduced business with that customer. We may also assume higher credit risk
relating to receivables of a retail customer experiencing
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financial difficulty that could result in higher reserves for doubtful accounts
or increased write-offs of accounts receivable. We attempt to mitigate credit
risk from our customers by closely monitoring accounts receivable balances and
shipping levels, as well as the ongoing financial performance and credit
standing of customers.
Retailers are seeking to differentiate their offerings by devoting more
resources to the development of exclusive products, whether by focusing on their
own private label products or on products produced exclusively for a retailer by
a national brand manufacturer. Exclusive brands are only made available to a
specific retailer, and thus customers loyal to their brands can only find them
in the stores of that retailer.
We have attempted to respond to trends in our industry by continuing to focus on
selling products with recognized brand equity, by attention to design, quality
and value and by improving our sourcing capabilities. We have also responded
with the strategic acquisitions made by us and new license agreements entered
into by us that added to our portfolio of licensed and proprietary brands and
helped diversify our business by adding new product lines and expanding
distribution channels. We believe that our broad distribution capabilities help
us to respond to the various shifts by consumers between distribution channels
and that our operational capabilities will enable us to continue to be a vendor
of choice for our retail partners.
Tariffs
The apparel and accessories industry has been impacted by tariffs implemented by
the United States government on goods imported from China. Tariffs on handbags
and leather outerwear imported from China were effective beginning in September
2018, and were initially in the amount of 10% of the merchandise cost to us.
The level of tariffs on these product categories was increased to 25% beginning
May 10, 2019.
On August 1, 2019, the United States government announced new 10% tariffs that
cover the remaining estimated $300 billion of inbound trade from China,
including most of our apparel products. On August 23, 2019, the United States
government announced that the new tariffs to go into effect would increase from
10% to 15%. The new 15% tariffs went into effect on September 1, 2019, although
the additional tariffs on certain categories of products were delayed until
December 15, 2019. The announcement followed an earlier proposal by the United
States government that would have imposed 25% tariffs on the balance of inbound
trade from China, but that were suspended pending trade negotiations with China.
In January 2020, the U.S. and China signed their Phase One Deal that rolled back
certain tariffs and postponed certain tariffs that had been scheduled to go into
effect on December 15, 2020.
It is difficult to accurately estimate the impact on our business from these
tariff actions or similar actions or when additional tariffs may become
effective. For fiscal 2019, approximately 61% of the products that we sold were
manufactured in China. For fiscal 2020, approximately 50% of the products that
we sold were manufactured in China.
Notwithstanding the Phase One Deal, the United States government continues to
negotiate with China with respect to a trade deal, which could lead to the
removal or postponement of additional tariffs. If the U.S. and China are not
able to resolve their differences, additional tariffs may be put in place and
additional products may become subject to tariffs. Tariffs on additional
products imported by us from China would increase our costs, could require us to
increase prices to our customers and would cause us to seek price concessions
from our vendors. If we are unable to increase prices to offset an increase in
tariffs, this would result in our realizing lower gross margins on the products
sold by us and will negatively impact our operating results. We have engaged in
a number of efforts to mitigate the effect on our results of operations of
increases in tariffs on products imported by us from China, including
diversifying our sourcing network by arranging to move production out of China,
negotiating with our vendors in China to receive vendor support to lessen the
impact of increased tariffs on our cost of goods sold, and discussing with our
customers the implementation of price increases that we believe our products can
absorb because of the strength of our portfolio of brands.
Results of Operations
Three months ended July 31, 2020 compared to three months ended July 31, 2019
Net sales for the three months ended July 31, 2020 decreased to $297.2 million
from $643.9 million in the same period last year. Net sales of our segments are
reported before intercompany eliminations.
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Net sales of our wholesale operations segment decreased to $266.8 million for
the three months ended July 31, 2020 from $588.6 million in the comparable
period last year. We experienced a significant decrease in net sales across
substantially all of our brands due to the effects of restrictions on business
and personal activities imposed by governments in connection with the COVID-19
pandemic. Most of our retail partners began to reopen a majority of their stores
in North America beginning in June 2020, including our largest customer, Macy's.
However, a majority of these stores continue to operate under government
mandated social distancing restrictions as the COVID-19 pandemic continues to
spread across large portions of North America. The governmental restrictions
imposed in connection with the COVID-19 pandemic have resulted in significant
increases in unemployment, a reduction in business activity and a reduction in
consumer spending on apparel and accessories, all of which contributed to the
reduction of our net sales which occurred throughout the three month period.
Net sales of our retail operations segment were $34.5 million for the
three months ended July 31, 2020 compared to $83.7 million in the same period
last year. This decrease primarily reflected the closure of our retail stores in
March 2020. Our stores did not begin to reopen until June 2020. In addition,
there was reduced demand as a result of disruptions related to COVID-19. Same
store sales decreased across all store brands due to the COVID-19 related store
closures. In addition, the decrease in domestic and international tourism
resulting from COVID-19 travel restrictions also had a negative impact on net
sales of our retail operations segment. As we began the restructuring of our
retail operations segment during the current period, net sales were also
negatively impacted by significant promotional activity from liquidation sales.
Net sales of our retail operations segment were also negatively affected by the
decrease in the number of stores operated by us from 292 at July 31, 2019 to 247
at July 31, 2020. The number of retail stores operated by us and, as a result,
the net sales of our retail operations segment will be reduced significantly as
a result of the restructuring of our retail operations segment.
Gross profit was $134.7 million, or 45.3% of net sales, for the three months
ended July 31, 2020, compared to $231.8 million, or 36.0% of net sales, in the
same period last year. The gross profit percentage in our wholesale operations
segment was 46.3% in the three months ended July 31, 2020 compared to 32.8% in
the same period last year. The gross profit percentage for our wholesale segment
was positively impacted by the reversal of previously anticipated markdown
accruals that are no longer necessary due to the reduction in sales to our
retail customers. In addition, there was a reversal of a portion of previously
accrued royalty expense associated with royalty reductions provided by
licensors. The gross profit percentage in our retail operations segment was
32.5% for the three months ended July 31, 2020 compared to 46.5% for the same
period last year. The gross profit percentage for our retail segment was
negatively impacted by the reduction of our net sales caused by COVID-19 related
closures of our retail stores, increased promotional activity due to the
COVID-19 pandemic and the restructuring of our retail operations segment.
Selling, general and administrative expenses decreased to $122.1 million in the
three months ended July 31, 2020 from $196.4 million in the same period last
year. The decrease in expenses was primarily due to a decrease of $55.9 million
in personnel costs including salaries, bonus, share-based compensation and other
incentives and benefits as a result of employee furloughs and job eliminations,
as well as salary reductions implemented by us in response to the impact of the
COVID-19 pandemic on our operations. In addition, there were decreases of $9.6
million in advertising and $6.6 million in third-party warehouse expenses.
Selling, general and administrative expenses will be further reduced as a result
of the restructuring of our retail operations segment. This reduction is
expected to be offset, in part, as we bring back furloughed employees in our
wholesale operations segment as we respond to the re-opening of the U.S.
economy.
Depreciation and amortization was $9.7 million for the three months ended July
31, 2020 compared to $9.8 million in the same period last year.
Other income was $1.9 million in the three months ended July 31, 2020 compared
to an other loss of $0.8 million for the same period last year. This change is
primarily the result of recording $1.5 million of foreign currency income during
the three months ended July 31, 2020 compared to foreign currency losses of $0.4
million during the three months ended July 31, 2019. In addition, we recorded
$0.4 million in income from unconsolidated affiliates during the three months
ended July 31, 2020 compared to $0.4 million of losses from unconsolidated
affiliates in the same period last year.
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Interest and financing charges, net, for the three months ended July 31, 2020
were $9.2 million compared to $10.8 million for the same period last year.
Borrowings were lower in the three months ended July 31, 2020 compared to the
second quarter of fiscal 2020 due to reduced inventory purchases this year.
Further, interest rates were lower during the three months ended July 31, 2020
as compared to the same period last year.
Income tax benefit was $3.7 million for the three months ended July 31, 2020
compared to income tax expense of $4.3 million for the same period last year
primarily due to our net loss position resulting from the significant decrease
in net sales due to the effects of the COVID-19 pandemic. Our effective tax rate
decreased to 19.6% in the current year's quarter from 27.7% in last year's
comparable quarter primarily due to a U.S. federal net operating loss carryback
to a tax year with a 35% federal tax rate compared to the current federal tax
rate of 21% as well as a decrease in excess tax benefits in connection with the
vesting of equity awards.
Six months ended July 31, 2020 compared to six months ended July 31, 2019
Net sales for the six months ended July 31, 2020 decreased to $702.3 million
from $1.28 billion in the same period last year. Net sales of our segments are
reported before intercompany eliminations.
Net sales of our wholesale operations segment decreased to $645.7 million for
the six months ended July 31, 2020 from $1.16 billion in the comparable period
last year. We experienced a significant decrease in net sales across
substantially all of our brands primarily due to the effects of restrictions
that began in March 2020 on business and personal activities imposed by
governments in connection with the COVID-19 pandemic. As a result, most of our
retail partners closed their stores in North America beginning in mid-March,
2020, including our largest customer, Macy's. Most of our retail partners began
to reopen a majority of their stores in North America beginning in June 2020.
However, a majority of these stores continue to operate under governmental
mandated social distancing restrictions as the COVID-19 pandemic continues to
spread across large portions of North America. The governmental restrictions
imposed in connection with the COVID-19 pandemic have resulted in significant
increases in unemployment, a reduction in business activity and a reduction in
consumer spending on apparel and accessories, all of which contributed to the
reduction of our net sales which occurred during the majority of the six month
period.
Net sales of our retail operations segment were $68.4 million for the six months
ended July 31, 2020 compared to $165.6 million in the same period last year.
This decrease primarily reflected the closure of our retail stores in March
2020. Our stores did not begin to reopen until June 2020. In addition, there was
reduced demand as a result of disruptions related to COVID-19. Same store sales
decreased across all store brands due to the COVID-19 related store closures and
reduced store traffic. In addition, the decrease in domestic and international
tourism resulting from COVID-19 travel restrictions also had a negative impact
on net sales of our retail operations segment. As we began the restructuring of
our retail operations segment during the second quarter of the current year, net
sales were also negatively impacted by significant promotional activity from
liquidation sales. Net sales of our retail operations segment were also
negatively affected by the decrease in the number of stores operated by us from
292 at July 31, 2019 to 247 at July 31, 2020. The number of retail stores
operated by us and, as a result, the net sales of our retail operations segment
will be reduced significantly as a result of the restructuring of our retail
operations segment.
Gross profit was $259.1 million, or 36.9% of net sales, for the six months ended
July 31, 2020, compared to $467.8 million, or 36.6% of net sales, in the same
period last year. The gross profit percentage in our wholesale operations
segment was 36.5% in the six months ended July 31, 2020 compared to 33.8% in the
same period last year. The gross profit percentage for our wholesale segment was
positively impacted by the reversal of previously anticipated markdown accruals
that are no longer necessary due to the reduction in sales to our retail
customers. This positive impact was partially offset by the impact of the
COVID-19 pandemic resulting in the recognition of certain fixed costs, primarily
higher effective royalty rates, over a reduced sales base. The gross
profit percentage in our retail operations segment was 34.2% for the six months
ended July 31, 2020 compared to 45.8% for the same period last year. The gross
profit percentage for our retail segment was negatively impacted by the
reduction of our net sales caused by COVID-19 related closures of our retail
stores, increased promotional activity due to the COVID-19 pandemic and the
restructuring of our retail operations segment.
Selling, general and administrative expenses decreased to $276.7 million in the
six months ended July 31, 2020 from $398.3 million in the same period last year.
The decrease in expenses was primarily due to a decrease of $92.5 million in
personnel costs including salaries, bonus, share-based compensation and other
incentives and benefits as a result of employee furloughs and job eliminations,
as well as salary reductions implemented by us in response to the impact of the
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COVID-19 pandemic on our operations. In addition, there were decreases of $19.7
million in advertising, $3.0 million in rent and facility costs and $9.4 million
in third-party warehouse expenses. These decreases were offset, in part, by a
$10.4 million increase in bad debt expense primarily related to allowances
recorded against the outstanding receivables of certain department store
customers that have publicly announced bankruptcy filings or potential
bankruptcy filings. Selling, general and administrative expenses will be further
reduced as a result of the restructuring of our retail operations segment. This
reduction is expected to be offset, in part, as we bring back furloughed
employees in our wholesale operations segment as we respond to the re-opening of
the U.S. economy.
Depreciation and amortization was $19.6 million for the six months ended July
31, 2020 compared to $19.3 million in the same period last year. The increase in
expense is due to capital expenditures during the last twelve months.
Other loss was $0.1 million in the six months ended July 31, 2020 compared to
$1.4 million for the same period last year. This decrease is primarily the
result of recording $0.1 million of foreign currency income during the six
months ended July 31, 2020 compared to $1.0 million of foreign currency losses
during the six months ended July 31, 2019. In addition, we recorded $0.2 million
in losses from unconsolidated affiliates during the six months ended July 31,
2020 compared to $0.4 million of losses from unconsolidated affiliates in the
same period last year.
Interest and financing charges, net, for the six months ended July 31, 2020 were
$19.6 million compared to $21.1 million for the same period last year. Average
borrowings were higher in the six months ended July 31, 2020 than in the same
period last year due to our $500 million in borrowings under our revolving
credit facility during March 2020 as a precautionary measure to maintain our
financial liquidity during the COVID-19 pandemic. Interest rates were lower
during the six month ended July 31, 2020 as compared to the same period last
year.
Income tax benefit was $20.1 million for the six months ended July 31, 2020
compared to income tax expense of $6.8 million for the same period last year
primarily due to our net loss position resulting from the significant decrease
in net sales due to the effects of the COVID-19 pandemic. Our effective tax rate
increased to 27.0% in the current year's quarter from 22.7% in last year's
comparable quarter primarily due to a U.S. federal net operating loss carryback
to a tax year with a 35% federal tax rate compared to the current federal tax
rate of 21% as well as a decrease in excess tax benefits in connection with the
vesting of equity awards.
Historically, we calculated our provision for income taxes during interim
reporting periods by applying the estimated annual effective tax rate for the
full fiscal year to pre-tax income or loss, excluding discrete items, for the
reporting period. Due to the uncertainty related to the impact of the COVID-19
pandemic on our operations, we have used a discrete effective tax rate method to
calculate taxes for the three-month period ended July 31, 2020. We will continue
to evaluate income tax estimates under the historical method in subsequent
quarters and employ a discrete effective tax rate method if warranted.
Liquidity and Capital Resources
Cash Requirements and Trends and Uncertainties Affecting Liquidity
We rely on our cash flows generated from operations and the borrowing capacity
under our revolving credit facility to meet the cash requirements of our
business. The primary cash requirements of our business usually are the seasonal
buildup in inventories, compensation paid to employees, payments to vendors in
the normal course of business, capital expenditures, maturities of debt and
related interest payments and income tax payments. The rapid expansion of the
COVID-19 pandemic resulted in a sharp decline in net sales and earnings in the
six months of fiscal 2021, which has a corresponding impact on our liquidity. We
are focused on preserving our liquidity and managing our cash flow during these
unprecedented conditions. We have taken preemptive actions to enhance our
ability to meet our short-term liquidity needs including, but not limited to,
reducing payroll costs through employee furloughs, job eliminations, salary
reductions, reductions in discretionary expenses, deferring certain lease
payments and deferral of capital projects. In addition, we are closely
monitoring our inventory needs and we are working with our suppliers to curtail,
or cancel, production of product that we believe will not be able to be sold in
season. We have also been working with our suppliers, landlords and licensors to
renegotiate related agreements and extend payment terms in order to preserve
capital.
As of July 31, 2020, we had cash and cash equivalents of $252.8 million. As of
July 31, 2020, we were in compliance with all covenants under our term loan and
revolving credit facility.
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We cannot be sure that our assumptions used to estimate our liquidity
requirements will remain accurate due to the unprecedented nature of the
disruption to our operations and the unpredictability of the COVID-19 outbreak.
As a result, the impact of COVID-19 on our future earnings and cash flows could
continue to have a material impact on our results of operations and financial
condition depending on the duration and scope of the COVID-19 pandemic. We
believe we have sufficient cash and available borrowings for our foreseeable
liquidity needs.
On August 7, 2020, we refinanced our term loan and revolving credit facility.
See "Recent Developments."
Revolving Credit Facility
We are party to a five-year senior secured credit facility providing for
borrowings in the aggregate principal amount of up to $650 million (the
"revolving credit facility").
Amounts available under the revolving credit facility are subject to borrowing
base formulas and over advances as specified in the revolving credit facility.
Borrowings bear interest, at our option, at LIBOR plus a margin of 1.25% to
1.75% or an alternate base rate (defined as the greatest of (i) the "prime
rate" of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds
rate plus 0.5% and (iii) the LIBOR rate for a borrowing with an interest period
of one month) plus a margin of 0.25% to 0.75%, with the applicable margin
determined based on Borrowers' availability under the revolving credit facility
. As of July 31, 2020, interest under the revolving credit facility was being
paid at the weighted average rate of 2.06% per annum. The revolving credit
facility is secured by specified assets of us and certain of our subsidiaries.
In addition to paying interest on any outstanding borrowings under the revolving
credit facility, we are required to pay a commitment fee to the lenders under
the revolving credit facility with respect to the unutilized commitments. The
commitment fee shall accrue at a rate equal to 0.25% per annum on the average
daily amount of the available commitment.
The revolving credit facility contains covenants that, among other things,
restrict our ability, subject to specified exceptions, to incur additional debt;
incur liens; sell or dispose of certain assets; merge with other companies;
liquidate or dissolve G-III; acquire other companies; make loans, advances, or
guarantees; and make certain investments. In certain circumstances, the
revolving credit facility also requires us to maintain a fixed charge coverage
ratio, as defined in the agreement, which may not be less than 1.00 to 1.00 for
each period of twelve consecutive fiscal months. As of July 31, 2020, we were in
compliance with these covenants.
Term Loan
On December 1, 2016, we borrowed $350 million under a senior secured term loan
facility (the "Term Loan"). Additionally, on December 1, 2016, we prepaid $50
million in principal amount of the Term Loan, reducing the principal balance of
the Term Loan to $300 million. The Term Loan will mature in December 2022.
Interest on the outstanding principal amount of the Term Loan accrues at a rate
equal to the London Interbank Offered Rate ("LIBOR"), subject to a 1% floor,
plus an applicable margin of 5.25% or an alternate base rate (defined as the
greatest of (i) the "prime rate" as published by the Wall Street Journal from
time to time, (ii) the federal funds rate plus 0.5% and (iii) the LIBOR rate for
a borrowing with an interest period of one month) plus 4.25%, per annum, payable
in cash. As of July 31, 2020, interest under the Term Loan was being paid at the
average rate of 6.45% per annum.
The Term Loan is secured (i) on a first-priority basis by a lien on, among other
things, our real estate assets, equipment and fixtures, equity interests and
intellectual property and certain related rights owned by us and by certain of
our subsidiaries and (ii) by a second-priority security interest in our and
certain of our subsidiaries other assets, which will secure on a first-priority
basis our revolving credit facility.
The Term Loan is required to be prepaid with the proceeds of certain asset sales
if such proceeds are not applied as required by the agreement within specified
deadlines. The Term Loan is also required to be prepaid in an amount equal to
75% of our Excess Cash Flow (as defined in the agreement) with respect to each
fiscal year ending on or after January 31, 2018. The percentage of Excess Cash
Flow that must be so applied is reduced to 50% if our senior secured leverage
ratio is less than 3.00 to 1.00, to 25% if our senior secured leverage ratio is
less than 2.75 to 1.00 and to 0% if our senior secured leverage ratio is less
than 2.25 to 1.00.
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The Term Loan contains covenants that, among other things, restrict our ability,
subject to certain exceptions, to incur additional debt; incur liens; sell or
dispose of certain assets; merge with other companies; liquidate or dissolve
G-III; acquire other companies; make loans, advances, or guarantees; and make
certain investments. As described above, the Term Loan also includes a mandatory
prepayment provision with respect to Excess Cash Flow. A first lien leverage
covenant requires the Company to maintain a level of debt to EBITDA at a ratio
as defined in the term loan agreement. As of July 31, 2020, we were in
compliance with these covenants.
LVMH Note
We issued to LVMH, as a portion of the consideration for the acquisition of DKI,
a junior lien secured promissory note in favor of LVMH in the principal amount
of $125 million (the "LVMH Note") that bears interest at the rate of 2%
per year. $75 million of the principal amount of the LVMH Note is due and
payable on June 1, 2023 and $50 million of such principal amount is due and
payable on December 1, 2023.
Based on an independent valuation, it was determined that the LVMH Note should
be treated as having been issued at a discount of $40 million in accordance
with ASC 820 - Fair Value Measurements. This discount is being amortized as
interest expense using the effective interest method over the term of the LVMH
Note.
In connection with the issuance of the LVMH Note, LVMH entered into (i) a
subordination agreement providing that our obligations under the LVMH Note are
subordinate and junior to our obligations under the revolving credit facility
and Term Loan and (ii) a pledge and security agreement with us and our
subsidiary, G-III Leather, pursuant to which we and G-III Leather granted to
LVMH a security interest in specified collateral to secure our payment and
performance of our obligations under the LVMH Note that is subordinate and
junior to the security interest granted by us with respect to our obligations
under the revolving credit facility and Term Loan.
Unsecured Loans
On April 15, 2019, T.R.B. International SA ("TRB"), a subsidiary of Vilebrequin,
borrowed €3.0 million under an unsecured loan (the "2019 Unsecured Loan").
During the term of the 2019 Unsecured Loan, TRB is required to make quarterly
installment payments of €0.2 million. Interest on the outstanding principal
amount of the 2019 Unsecured Loan accrues at a fixed rate equal to 1.50% per
annum, payable quarterly. The 2019 Unsecured Loan originally matured on April
15, 2024. Due to the COVID-19 pandemic, the bank agreed to amend the 2019
Unsecured Loan to suspend the March and June 2020 quarterly installment payments
and add these payments to the balance due at the end of the loan term. The 2019
Unsecured Loan now matures on September 15, 2024.
On February 3, 2020, TRB borrowed €1.7 million under another unsecured loan (the
"February 2020 Unsecured Loan"). During the term of the February 2020 Unsecured
Loan, TRB is required to make quarterly installment payments of €0.1 million.
Interest on the outstanding principal amount of the February 2020 Unsecured Loan
accrues at a fixed rate equal to 1.50% per annum, payable quarterly. The
February 2020 Unsecured Loan originally matured on March 31, 2025. Due to the
COVID-19 pandemic, the bank agreed to amend the February 2020 Unsecured Loan to
suspend the June 2020 quarterly installment payment and add this payment to the
balance due at the end of the loan term. The February 2020 Unsecured Loan now
matures on June 30, 2025.
On June 12, 2020, a subsidiary of TRB borrowed €1.5 million under a French state
backed loan provided by UBS Bank (the "June 2020 Unsecured Loan") as part of a
COVID-19 relief program. The June 2020 Unsecured Loan provides for an initial
one year term with the option to extend the term by an additional one to five
years at the end of the initial term. The June 2020 Unsecured Loan requires no
interest or principal payments during the initial term of the agreement.
Overdraft Facilities
During the second quarter of fiscal 2021, TRB entered into several overdraft
facilities that allow for applicable bank accounts to be in a negative position
up to a certain maximum overdraft. TRB entered into an uncommitted overdraft
facility with HSBC Bank allowing for a maximum overdraft of €5 million. Interest
on drawn balances accrues at a fixed rate equal to the Euro Interbank Offered
Rate plus a margin of 1.75% per annum, payable quarterly. The facility may be
cancelled at any time by TRB or HSBC Bank. As part of a COVID-19 relief program,
TRB and its subsidiaries have also entered into several state backed overdraft
facilities with UBS Bank in Switzerland for an aggregate of CHF 4.7 million at
varying interest rates of 0% to 0.5%. As of July 31, 2020, TRB had an aggregate
€3.1 million drawn across these various facilities.
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Outstanding Borrowings
Our primary operating cash requirements usually are to fund our seasonal buildup
in inventories and accounts receivable, primarily during the second and third
fiscal quarters each year. Due to the seasonality of our business, we generally
reach our peak borrowings under our revolving credit facility during our third
fiscal quarter. The primary sources to meet our operating cash requirements have
been borrowings under this credit facility and cash generated from operations.
We had no borrowings outstanding under our revolving credit facility at July 31,
2020 and had $160 million of borrowings outstanding at July 31, 2019. We
borrowed $500 million in March 2020 as a precautionary measure in connection
with disruptions caused by the COVID-19 pandemic and repaid an aggregate of $500
million of those borrowings in May and June 2020. In addition, we had $300
million in borrowings outstanding under the Term Loan at both July 31, 2020 and
2019. Our contingent liability under open letters of credit was approximately
$10.4 million and $13.4 million at July 31, 2020 and 2019, respectively. In
addition to the amounts outstanding under these two loan agreements, at July 31,
2020 and 2019, we had $125.0 million of face value principal amount outstanding
under the LVMH Note. As of July 31, 2020, we also had €5.7 million ($6.4
million) outstanding under the 2019, February 2020 and June 2020 Unsecured Loans
and €3.1 million ($3.5 million) outstanding under the Overdraft Facilities.
We had cash and cash equivalents of $252.8 million on July 31, 2020 and $39.6
million on July 31, 2019.
Share Repurchase Program
Our Board of Directors has authorized a share repurchase program of 5,000,000
shares. The timing and actual number of shares repurchased, if any, will depend
on a number of factors, including market conditions and prevailing stock prices,
and are subject to compliance with certain covenants contained in our loan
agreement. Share repurchases may take place on the open market, in privately
negotiated transactions or by other means, and would be made in accordance with
applicable securities laws. No shares were repurchased during the three months
ended July 31, 2020. We have 2,949,362 authorized shares remaining under this
program. As of September 4, 2020, we had 48,358,688 shares of common stock
outstanding.
Cash from Operating Activities
We generated $59.8 million of cash from operating activities during six months
ended July 31, 2020, primarily due to decreases of $253.6 million in accounts
receivable, $25.1 million in prepaid expenses and other current assets and
non-cash charges relating primarily to operating lease costs of $44.7 million,
asset impairment charges of $20 million and depreciation and amortization of
$19.6 million. These items were offset, in part, by our net loss of $54.3
million, and decreases of $118 million in customer refund liabilities, $55.9
million in accounts payable, accrued expenses and other liabilities, and $37.8
million in operating lease liabilities. In addition, we had a non-cash charge of
$16.4 million in deferred income taxes.
Inventory normally increases for the build-up of inventory for the fall shipping
season. Due to the COVID-19 pandemic, inventory purchasing was at a lower volume
than in prior years. As a result, accounts payable decreased due to the lower
volume of inventory purchases resulting from the COVID-19 pandemic. Our accounts
receivable and customer refund liabilities decreased because we experience lower
sales levels in our first and second quarters than in our third and fourth
quarters. The COVID-19 pandemic exacerbated these trends in the second quarter.
Cash from Investing Activities
We used $13.1 million of cash in investing activities during six months ended
July 31, 2020 for capital expenditures and initial direct costs of operating
lease assets. Capital expenditures in the period primarily related to
infrastructure and information technology expenditures and additional fixturing
costs at department stores prior to the onset of the COVID-19 pandemic.
Operating lease assets initial direct costs in the period primarily related to
payments of key money and broker fees.
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Cash from Financing Activities
Net cash provided by financing activities was $6.9 million during six months
ended July 31, 2020 primarily as a result of the proceeds of $7.1 million in
borrowings under our unsecured loans and overdraft facilities during the first
and second quarters of fiscal 2021.
Critical Accounting Policies
Our discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that investors need to
be aware of these policies and how they impact our financial statements as a
whole, as well as our related discussion and analysis presented herein. While we
believe that these accounting policies are based on sound measurement criteria,
actual future events can, and often do, result in outcomes that can be
materially different from these estimates or forecasts.
The accounting policies and related estimates described in our Annual Report on
Form 10-K for the year ended January 31, 2020 are those that depend most heavily
on these judgments and estimates. As of July 31, 2020, there have been no
material changes to our critical accounting policies, other than the adoption
ASU 2016-13 as discussed in Note 3 to the condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q.
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