J.JILL, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements". We operate on a 52- or 53-week fiscal year that ends on the Saturday that is closest toJanuary 31 . Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period. The fiscal years endingJanuary 30, 2021 ("Fiscal Year 2020") and fiscal year endedFebruary 1, 2020 ("Fiscal Year 2019") are both comprised of 52 weeks. OverviewJ.Jill is a premier omnichannel retailer and nationally recognized women's apparel brand committed to delighting customers with great wear-now product. The brand represents an easy, thoughtful and inspired style that reflects the confidence of remarkable women who live life with joy, passion and purpose.J.Jill offers a guiding customer experience through about 280 stores nationwide and a robust ecommerce platform.J.Jill is headquartered outsideBoston . Our first and second quarter financial results of Fiscal Year 2020 were significantly impacted by the COVID-19 pandemic as our stores were temporarily closed beginning inmid-March 2020 with most of our stores being reopened bymid-June 2020 , but with enhanced health and safety protocols. In response to the pandemic, we acted during the period to leverage our Direct channel, while focusing on cost management and improving our liquidity. We drew down$33.0 million on our ABL in the first quarter of Fiscal Year 2020 and ended our current quarter with a cash balance of approximately$32.0 million . After approaching our vendor community, we implemented extended payment terms for nearly all goods and services, and we withheld store rent payments beginning in April of 2020. These extensions and withholdings provided time for us to work on more longer-term solutions to help us through the pandemic. These solutions included cost reductions, including pay reductions for employees in our headquarters, furlough of store and some headquarter and distribution center staff, reductions in Marketing, reductions in Board of Directors fees, and reductions in other general expenses. Additionally, we have eliminated approximately half of our catalogs, which we are considering implementing as a permanent change. We have also been limiting investments in our ecommerce business to necessary website and supporting functions, and we have significantly reduced planned capital expenditures. The COVID-19 global pandemic and resulting temporary store closures have had a material adverse effect on our operations, cash flows and liquidity. We have made significant progress reducing cash expenditures and maximizing cash receipts from our direct to consumer business channel such that our current base forecast projects sufficient liquidity over the coming 12 months; however, considerable risk remains related to the performance of stores, the resilience of the customer in an uncertain economic climate, and the possibility of a resurgence of COVID-19 related market impacts in the coming 12 months. If one or more of these risks materialize, we believe that our current sources of liquidity and capital may not be sufficient to finance our continued operations for at least the next 12 months. Under the terms of the asset based revolving credit agreement ("ABL Facility") and term loan credit agreement ("Term Loan"), substantial doubt about the Company's ability to continue as a going concern is considered an event of default which allows the lenders to call the debt in advance of maturity. We have also filed an income tax refund for$6.9 million , of which we have received$1.2 million , with theIRS and multiple state jurisdictions related to the provision under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") enacted inMarch 2020 that provides numerous tax provisions and other stimulus measures, including temporary suspension of certain payment requirements for the employer-paid portion of social security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company has elected to defer the employer-paid portion of social security taxes beginning with pay dates on and afterApril 1, 2020 . We continue to evaluate the provisions of the CARES Act and the ways in which it could assist our business and improve our liquidity.
Factors Affecting Our Operating Results
Various factors are expected to continue to affect our results of operations going forward, including the following:
Overall Economic Trends. Consumer purchases of clothing and other merchandise generally decline during recessionary periods and other periods when disposable income is adversely affected, and consequently our results of operations may be affected by general economic conditions. For example, reduced consumer confidence and lower availability and higher cost of consumer credit may reduce demand for our merchandise and may limit our ability to increase or sustain prices. The growth rate of the market could be affected by macroeconomic conditions inthe United States . 16
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Consumer Preferences and Fashion Trends. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to anticipate fashion trends. During periods in which we have successfully anticipated fashion trends, we have generally had more favorable results.
Competition. The retail industry is highly competitive and retailers compete based on a variety of factors, including design, quality, price and customer service. Levels of competition and the ability of our competitors to more accurately predict fashion trends and otherwise attract customers through competitive pricing or other factors may impact our results of operations. Our Strategic Initiatives. The ongoing implementation of strategic initiatives will continue to have an impact on our results of operations. These initiatives include our ecommerce site, which was re-platformed in Fiscal Year 2017, and our initiative to upgrade and enhance our information systems. Although initiatives of this nature are designed to create growth in our business and continuing improvement in our operating results, the timing of expenditures related to these initiatives, as well as our ability to successfully achieve the expected benefits of these initiatives, may affect our results of operations in future periods. Pricing and Changes in Our Merchandise Mix. Our product offering changes from period to period, as do the prices at which goods are sold and the margins we are able to earn from the sales of those goods. The levels at which we are able to price our merchandise are influenced by a variety of factors, including the quality of our products, cost of production, prices at which our competitors are selling similar products and the willingness of our customers to pay for products. Potential Changes in Tax Laws and/or Regulations. Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could adversely affect our business, financial condition and operating results. Additionally, any potential changes with respect to tax and trade policies, tariffs and government regulations affecting trade between theU.S. and other countries could adversely affect our business, as we source the majority of our merchandise from manufacturers located outside of theU.S.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating metrics, including GAAP and non-GAAP measures, including the following:
Net sales consist primarily of revenues, net of merchandise returns and discounts, generated from the sale of apparel and accessory merchandise through our Retail channel and Direct channel. Net sales also include shipping and handling fees collected from customers and royalty revenues and marketing reimbursements related to our private label credit card agreement. Revenue from our Retail channel is recognized at the time of sale and revenue from our Direct channel is recognized upon shipment of merchandise to the customer.
Net sales are impacted by the size of our active customer base, product assortment and availability, marketing and promotional activities and the spending habits of our customers. Net sales are also impacted by the migration of single-channel customers to omnichannel customers who, on average, spend nearly three times more than single-channel customers.
Number of stores reflects all stores open at the end of a reporting period. In connection with opening new stores, we incur pre-opening costs. Pre-opening costs include expenses incurred prior to opening a new store and primarily consist of payroll, travel, training, marketing, initial opening supplies and costs of transporting initial inventory and fixtures to store locations, as well as occupancy costs incurred from the time of possession of a store site to the opening of that store. These pre-opening costs are included in selling, general and administrative expenses and are generally incurred and expensed within 30 days of opening a new store.
Gross profit is equal to our net sales less costs of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin.
Costs of goods sold includes the direct costs of sold merchandise, inventory shrinkage, and adjustments and reserves for excess, aged and obsolete inventory. We review our inventory levels on an ongoing basis to identify slow-moving merchandise and use product markdowns to liquidate these products. Changes in the assortment of our products may also impact our gross profit. The timing and level of markdowns are driven by customer acceptance of our merchandise. As a result, the reporting of our gross profit and gross margin may not be comparable to other companies. The primary drivers of the costs of goods sold are raw materials, which fluctuate based on certain factors beyond our control, including labor conditions, transportation or freight costs, energy prices, currency fluctuations and commodity prices. We place orders with merchandise suppliers inUnited States dollars and, as a result, are not exposed to significant foreign currency exchange risk. Selling, general and administrative expenses include all operating costs not included in costs of goods sold. These expenses include all payroll and related expenses, occupancy costs, information systems costs and other operating expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. These expenses also include marketing 17
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expense, including catalog production and mailing costs, warehousing, distribution and shipping costs, customer service operations, consulting and software services, professional services and other administrative costs.
Our historical revenue growth has been accompanied by increased selling, general and administrative expenses. The most significant increases were in occupancy costs associated with retail store expansion, and in marketing and payroll investments. Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA represents net income plus net interest expense, provision (benefit) for income taxes, depreciation and amortization, the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, certain Acquisition-related expenses, sponsor fees, equity-based compensation expense, goodwill and indefinite-lived intangible assets impairment, write-off of property and equipment and other non-recurring expenses, primarily consisting of outside legal and professional fees associated with certain non-recurring transactions and events. We present Adjusted EBITDA on a consolidated basis because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, securities analysts and other interested parties as a measure of our comparative operating performance from period to period. We also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance of our business and for evaluating on a quarterly and annual basis actual results against such expectations. Further, we recognize Adjusted EBITDA as a commonly used measure in determining business value and as such, use it internally to report results. Adjusted EBITDA margin represents, for any period, Adjusted EBITDA as a percentage of net sales. While we believe that Adjusted EBITDA is useful in evaluating our business, Adjusted EBITDA is a non-GAAP financial measure that has limitations as an analytical tool. Adjusted EBITDA should not be considered an alternative to, or substitute for, net income (loss), which is calculated in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces the usefulness of Adjusted EBITDA as a tool for comparison. We recommend that you review the reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, and the calculation of the resultant Adjusted EBITDA margin below and not rely solely on Adjusted EBITDA or any single financial measure to evaluate our business.
Reconciliation of Net Income to Adjusted EBITDA and Calculation of Adjusted EBITDA Margin
The following table provides a reconciliation of net income to Adjusted EBITDA and the calculation of Adjusted EBITDA margin for the periods presented.
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
(in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Statements of Operations Data:
Net loss $ (19,034 ) $
(96,735 )
4,244 5,019 8,887 10,026
Income tax benefit (7,034 ) (3,069 ) (31,151 ) (1,631 )
Depreciation and amortization 8,277 9,396 17,313 18,848
Equity-based compensation
expense(a) 615 1,214 1,291 2,416
Write-off of property and
equipment (b) 244 8 256 14
Impairment of goodwill and
other intangible assets - 95,428 24,520 95,428
Adjustment for costs to exit
retail stores (c) (402 ) - (402 ) -
Impairment of long-lived
assets(d) (893 ) 2,064 26,587 2,064
Other non-recurring expenses
(e) 7,523 (740 ) 9,707 (740 )
Adjusted EBITDA $ (6,460 ) $ 12,585 $ (32,295 ) $ 34,056
Net sales $ 92,636 $
180,744
(7.0 )% 7.0 % (17.6 )% 9.5 %
(a) Represents expenses associated with equity incentive instruments granted to
our management and board of directors. Incentive instruments are accounted
for as equity-classified awards with the related compensation expense
recognized based on fair value at the date of the grants.
(b) Represents net gain or loss on the disposal of fixed assets.
(c) Represents non-cash gains associated with exiting store leases earlier than
anticipated.
(d) Represents impairment of long-lived assets related to the right-of-use asset
and leasehold improvements. For the thirteen weeks ended
Company recognized a benefit (or reversal of prior period impairment) caused
by the adjustment of the operating lease liability related to stores that
were permanently closed during the period.
(e) Represents items management believes are not indicative of ongoing operating
performance. For the twenty-six weeks ended
are primarily composed of legal and advisory costs and incremental one-time
costs related to the COVID-19 pandemic, including supplies and cleaning
expenses as well as hazard pay and benefits, as well as retention expenses.
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Items Affecting Comparability of Financial Results
Impairment losses. Our Fiscal Year 2020 year-to-date results include impairment charges of$51.1 million for long-lived assets (operating lease right of use asset and leasehold improvements), goodwill and intangible assets. We had$97.5 million of impairment charges in Q2 of Fiscal Year 2019 for goodwill, intangible assets and long-lived assets. See Note 5, Asset Impairments, in Item I, Financial Statements, for additional information on these impairment losses. COVID-19 impact. Our second quarter and year-to-date Fiscal Year 2020 financial results were significantly impacted by the COVID-19 pandemic as our stores were temporarily closed beginning in mid-March in efforts to stop the spread of the virus. Although the stores were temporarily closed and the Company lost revenues as a result, we continued to incur certain expenses, such as payroll and rent; therefore, ratios and other items may not be comparable to prior periods.
Results of Operations
Thirteen weeks ended
The following table summarizes our consolidated results of operations for the
periods indicated:
Change from the Thirteen Weeks Ended
For the Thirteen Weeks Ended August 3, 2019 to the Thirteen Weeks
August 1, 2020 August 3, 2019 Ended August 1, 2020
% of Net % of Net
(in thousands) Dollars Sales Dollars Sales $ Change % Change
Net sales $ 92,636 100.0 % $ 180,744 100.0 % $ (88,108 ) (48.7 )%
Costs of goods sold 37,616 40.6 % 75,403 41.7 % (37,787 ) (50.1 )%
Gross profit 55,020 59.4 % 105,341 58.3 % (50,321 ) (47.8 )%
Selling, general and
administrative expenses 77,737 83.9 % 102,634 56.8 % (24,897 ) (24.3 )%
Impairment of long-lived
assets (893 ) (1.0 )% 2,064 1.1 % (2,957 ) (143.2 )%
Impairment of goodwill - - 88,428 48.9 % (88,428 ) 100.0 %
Impairment of other
intangible assets - - 7,000 3.9 % (7,000 ) 100.0 %
Operating loss (21,824 ) (23.6 )% (94,785 ) (52.4 )% 72,961 (77.0 )%
Interest expense, net 4,244 4.6 % 5,019 2.8 % (775 ) (15.4 )%
Loss before provision for
income taxes (26,068 ) (28.1 )% (99,804 ) (55.2 )% 73,736 (73.9 )%
Income tax benefit (7,034 ) (7.6 )% (3,069 ) (1.7 )% (3,965 ) 129.2 %
Net loss $ (19,034 ) (20.5 )% $ (96,735 ) (53.5 )% $ 77,701 (80.3 )%
Net Sales
Net sales for the thirteen weeks ended August 1, 2020 decreased $88.1 million ,
or 48.7%, to $92.6 from $180.7 million for the thirteen weeks ended
August 3, 2019 . At the end of those same periods, we operated 281 and 286 retail
stores, respectively. The decrease in total net sales versus the prior year was
primarily driven by the temporary closure of our stores, particularly at the
beginning of the quarter ended August 1, 2020 , as a response to the COVID-19
pandemic. Essentially all of our stores were reopened midway through the second
quarter, following local mandates with reduced hours and enhanced health and
safety protocols.
Our Retail channel contributed 28.4% of our net sales in the thirteen weeks
ended August 1, 2020 and 57.4% in the thirteen weeks ended August 3, 2019 . Our
Direct channel contributed 71.6% of our net sales in the thirteen weeks ended
August 1, 2020 and 42.6% in the thirteen weeks ended August 3, 2019 .
Gross Profit and Costs of Goods Sold
Gross profit for the thirteen weeks endedAugust 1, 2020 decreased$50.3 million , or 47.8%, to$55.0 million from$105.3 million for the thirteen weeks endedAugust 3, 2019 . The gross margin for the thirteen weeks endedAugust 1, 2020 was 59.4% compared to 58.3% for the thirteen weeks endedAugust 3, 2019 . The gross margin improvement was primarily due to a$2.4 million change in estimate during the thirteen weeks endedAugust 1, 2020 to reduce an accrual for potential future product liabilities. Additionally, higher promotions and markdown activity in the current year period were substantially offset by liquidation actions taken in the prior year period. 19
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the thirteen weeks endedAugust 1, 2020 decreased$24.9 million , or 24.3%, to$77.7 million from$102.6 million for the thirteen weeks endedAugust 3, 2019 . The decrease was primarily driven by expense reduction actions taken in the first quarter endedMay 2, 2020 , which included a reduction in headcount, pay reductions, lower store payroll related to the temporary closure of our stores and lower marketing costs.
As a percentage of net sales, selling, general and administrative expenses were
83.9% for the thirteen weeks ended
Interest Expense, Net
Interest expense, net, consists of interest expense on the Term Loan and ABL Facility, partially offset by interest earned on cash. Interest expense, net for the thirteen weeks endedAugust 1, 2020 decreased$0.8 million , or 15.4%, to$4.2 million from$5.0 million for the thirteen weeks endedAugust 3, 2019 .
Income Tax Benefit
The income tax benefit was$7.0 million for the thirteen weeks endedAugust 1, 2020 compared to$3.1 million for the thirteen weeks endedAugust 3, 2019 , while our effective tax rates for the same periods were 27.0% and 3.1%, respectively. The higher effective tax rate in the current period was driven by the anticipated benefit from the CARES Act, the impact on the effective tax rate and the impact of state income taxes, partially offset by the impact on the effective tax rate from §162(m) officer compensation limitation as well as the goodwill impairment charge, which has no associated tax benefit. The CARES Act provides for net operating losses in Fiscal Year 2020 to be carried back to earlier tax years with higher tax rates than the current year. The difference in the effective tax rates is also partially driven by the treatment of the impairment of goodwill and indefinite-lived intangible assets in the thirteen weeks endedAugust 3, 2019 .
Twenty-six weeks ended
The following table summarizes our consolidated results of operations for the
periods indicated:
For the Twenty-Six Weeks Ended Change from the Twenty-Six Weeks Ended
August 3, 2019 to the Twenty-Six Weeks
(in thousands) August 1, 2020 August 3, 2019 Ended August 1, 2020
% of Net % of Net
Dollars Sales Dollars Sales $ Change % Change
Net sales $ 183,605 100.0 % $ 357,196 100.0 % $ (173,591 ) (48.6 )%
Costs of goods sold 78,420 42.7 % 135,599 38.0 % (57,179 ) (42.2 )%
Gross profit 105,185 57.3 % 221,597 62.0 % (116,412 ) (52.5 )%
Selling, general and
administrative expenses 165,645 90.2 % 208,079 58.3 % (42,434 ) (20.4 )%
Impairment of long-lived
assets 26,587 14.5 % 2,064 0.6 % 24,523 1188.1 %
Impairment of goodwill 17,900 9.7 % 88,428 24.8 % (70,528 ) (79.8 )%
Impairment of other
intangible assets 6,620 3.6 % 7,000 2.0 % (380 ) (5.4 )%
Operating loss (111,567 ) (60.8 )% (83,974 ) (23.5 )% (27,593 ) 32.9 %
Interest expense, net 8,887 4.8 % 10,026 2.8 % (1,139 ) (11.4 )%
Loss before provision for
income taxes (120,454 ) (65.6 )% (94,000 ) (26.3 )% (26,454 ) 28.1 %
Income tax benefit (31,151 ) (17.0 )% (1,631 ) (0.5 )% (29,520 ) 1809.9 %
Net loss $ (89,303 ) (48.6 )% $ (92,369 ) (25.9 )% $ 3,066 (3.3 )%
Net Sales
Net sales for the twenty-six weeks ended August 1, 2020 decreased $173.6
million , or 48.6%, to $183.6 million from $357.2 million for the twenty-six
weeks ended August 3, 2019 . At the end of both of those same periods, we
operated 281 and 286 retail stores, respectively. The decrease in total net
sales versus the prior year was primarily driven by the temporary closure of our
stores, particularly for the second half of the first quarter and the first half
of the second quarter of Fiscal Year 2020, as a response to the COVID-19
pandemic. Essentially all of our stores were reopened midway through the second
quarter, following local mandates with reduced hours and enhanced health and
safety protocols.
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Our Retail channel contributed 33.4% of our net sales in the twenty-six weeks endedAugust 1, 2020 and 57.7% in the twenty-six weeks endedAugust 3, 2019 . Our Direct channel contributed 66.6% of our net sales in the twenty-six weeks endedAugust 1, 2020 and 42.3% in the twenty-six weeks endedAugust 3, 2019 .
Gross Profit and Costs of Goods Sold
Gross profit for the twenty-six weeks endedAugust 1, 2020 decreased$116.4 million , or 52.5%, to$105.2 million from$221.6 million for the twenty-six weeks endedAugust 3, 2019 . The gross margin for the twenty-six weeks endedAugust 1, 2020 was 57.3% compared to 62.0% for the twenty-six weeks endedAugust 3, 2019 , largely driven by added promotions, markdowns, and liquidation actions to clear certain goods, particularly after the temporary closure of our stores, and a$3.0 million accrual for potential future liability payments to vendors for order cancellations which were issued as part of the Company's COVID-19 response.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the twenty-six weeks endedAugust 1, 2020 decreased$42.4 million , or 20.4%, to$165.6 million from$208.1 million for the twenty-six weeks endedAugust 3, 2019 . The decrease was primarily driven by expense reduction actions taken in Fiscal Year 2020, which included a reduction in headcount, pay reductions, lower store payroll related to the temporary closure of our stores and the subsequent reopening of the stores at lower staffing rates and reduced hours, and lower marketing costs. As a percentage of net sales, selling, general and administrative expenses were 90.2% for the twenty-six weeks endedAugust 1, 2020 compared to 58.3% for the twenty-six weeks endedAugust 3, 2019 , primarily driven by revenue decreases since the temporary closure of the Company's stores as part of its COVID-19 response.
Interest Expense, Net
Interest expense, net, consists of interest expense on the Term Loan, partially offset by interest earned on cash. Interest expense for the twenty-six weeks endedAugust 1, 2020 decreased$1.1 million , or 11.4%, to$8.9 million from$10.0 million for the twenty-six weeks endedAugust 3, 2019 .
Income Tax Benefit
The income tax benefit was$31.2 million for the twenty-six weeks endedAugust 1, 2020 compared to$1.6 million for the twenty-six weeks endedAugust 3, 2019 . Our effective tax rates for the same periods were 25.9% and 1.7%, respectively. The higher effective tax rate in the current period was driven by the anticipated benefit from the CARES Act, the impact on the effective tax rate and the impact of state income taxes, partially offset by the impact on the effective tax rate from §162(m) officer compensation limitation as well as the goodwill impairment charge, which has no associated tax benefit. The CARES Act provides for net operating losses in Fiscal Year 2020 to be carried back to earlier tax years with higher tax rates than the current year. The difference in the effective tax rates is also partially driven by the treatment of the impairment of goodwill and indefinite-lived intangible assets in the twenty-six weeks endedAugust 3, 2019 .
Liquidity and Capital Resources
General
The COVID-19 global pandemic and resulting store closures have had a material adverse effect on our operations, cash flows and liquidity. We have made significant progress reducing cash expenditures and maximizing cash receipts from our direct to consumer business channel such that our current base forecast projects sufficient liquidity over the coming 12 months. However, considerable risk remains related to the performance of stores, the resilience of the customer in an uncertain economic climate, and the possibility of a resurgence of COVID-19 related market impacts in the coming 12 months. In addition, our lenders could instruct the administrative agent under such credit facilities to declare the principal of and accrued interest on all outstanding indebtedness immediately due and payable and terminate all remaining commitments and obligations under the credit facilities. If one or more of these risks materialize, we believe that our current sources of liquidity and capital will not be sufficient to finance our continued operations for at least the next 12 months. Our primary sources of liquidity and capital resources are cash generated from operating activities and availability under our ABL Facility, dated as ofMay 8, 2015 , by and amongJill Holdings LLC ,Jill Acquisition LLC , certain subsidiaries from time to time party thereto, the lenders party thereto andCIT Finance LLC as the administrative agent and collateral agent, as amended onMay 27, 2016 by Amendment No. 1 thereto. The ABL Facility was further amended onAugust 22, 2018 by Amendment No. 2 to reduce the 21
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frequency of borrowing base certificate submissions as long as certain conditions are met. The ABL Facility was further amended onJune 12, 2019 by Amendment No. 3 to extend the maturity of the ABL Facility to an initial maturity ofMay 8, 2023 so long as certain conditions related to the maturity of the term loan are met. OnMarch 16, 2020 , we borrowed an aggregate principal amount of$33.0 million under the ABL Facility. Our primary requirements for liquidity and capital are working capital and general corporate needs, including merchandise inventories, marketing, including catalog production and distribution, payroll, store occupancy costs and capital expenditures associated with opening new stores, remodeling existing stores and upgrading information systems and the costs of operating as a public company. As discussed above, our liquidity has been materially adversely impacted by the COVID-19 pandemic. We have filed an income tax refund for$6.9 million , of which we have received$1.2 million , with theIRS related to the provision under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") enacted inMarch 2020 that provides numerous tax provisions and other stimulus measures, including temporary suspension of certain payment requirements for the employer-paid portion of social security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company has elected to defer the employer-paid portion of social security taxes beginning with pay dates on and afterApril 1, 2020 . We continue to evaluate the provisions of the CARES Act and the ways in which it could assist our business and improve our liquidity. As a result of the COVID-19 pandemic, the Company's revenues, results of operations, and cash flows have been materially adversely impacted, and resulted in a failure by us to comply with the financial covenants contained in our ABL Facility and Term Loan agreements for the period endedAugust 1, 2020 . This has led to substantial doubt about the Company's ability to continue as a going concern. The inclusion of substantial doubt about the Company's ability to continue as a going concern in the report of our independent registered public accounting firm on our accompanying financial statements for the fiscal year endedFebruary 1, 2020 resulted in a violation of affirmative covenants under our ABL Facility and Term Loan agreements. As a result of the violation of affirmative covenants, lenders could exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness immediately due and payable and terminating all remaining commitments and obligations under the credit facilities. OnJune 15, 2020 , the Company entered into two forbearance agreements (the "Forbearance Agreements") with the lenders under its ABL Facility and Term Loan. The Forbearance Agreements are described in a Current Report on Form 8-K filed by the Company with theSEC onJune 16, 2020 , and available on theSEC's Edgar website as well as the Company's website, which includes the full text of the agreement as an exhibit. Under the Forbearance Agreements, the respective lenders agreed not to exercise any rights and remedies untilJuly 16, 2020 so long as, among other things, the Company otherwise remained in compliance with its credit facilities and complied with the terms of the Forbearance Agreements. Subsequently, the Forbearance Agreements were extended with the latest extension untilSeptember 26, 2020 . The extensions of the Forbearance Agreements are described in Current Reports on Forms 8-K filed by the Company with theSEC , and available on theSEC's Edgar website as well as the Company's website, which include the full text of the agreements as exhibits. OnSeptember 1, 2020 , the Company announced it entered into a Transaction Support Agreement ("TSA") with term loan lenders holding greater than 70% of the Company's term loans ("Consenting Lenders") and a majority of its shareholders on the principal terms of a financial restructuring ("Transaction") that would result in a waiver of any past non-compliance with the terms of the Company's credit facilities and provide the Company with additional liquidity. If the Transaction is consented to by the requisite term loan lenders, the Transaction will be consummated on an out-of-court basis. The out-of-court Transaction would extend the maturity of certain participating debt by two years, throughMay 2024 . The Company is working actively with the Consenting Lenders to obtain the necessary consents. In the event that the Transaction does not receive the required consents, the parties to theTSA have agreed to a prepackaged plan of reorganization under Chapter 11 of the United States Code (the "In-Court Transaction") the key terms of which have been negotiated, including additional financing during the Chapter 11 process. While the Company hopes to receive the required consents to execute the out-of-court Transaction, the Company anticipates that as part of the In-Court Transaction all vendor claims would be unimpaired and paid in full. The Company could experience other potential impacts as a result of the COVID-19 pandemic, including, but not limited to, additional charges from potential adjustments to the carrying amount of its inventory, goodwill, intangible assets, right-of-use assets and long-lived assets. Actual results may differ materially from the Company's current estimates as the scope of the COVID-19 pandemic evolves, depending largely, though not exclusively, on the duration of the disruption to its business. Our future operating performance and our ability to service or extend our indebtedness will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond our control. Capital expenditures were$2.7 million for the twenty-six weeks endedAugust 1, 2020 compared to$7.9 million for the twenty-six weeks endedAugust 3, 2019 . The decrease in capital expenditures in Fiscal Year 2020 was due primarily to our efforts to reduce cash expenditures and preserve cash on-hand in the wake of the COVID-19 pandemic. 22
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Cash Flow Analysis
The following table shows our cash flows information for the periods presented:
For the Twenty-Six Weeks Ended
(in thousands) August 1, 2020 August 3, 2019
Net cash (used in) provided by operating activities $ (17,340 ) $ 23,536
Net cash used in investing activities (2,675 ) (7,904 )
Net cash provided by (used in) financing activities 30,250 (52,712 )
Net cash (used in) provided by operating activities declined by$40.9 million dollars as compared to the prior year as cash-related income was a use of cash in the current year due to the impact of temporarily closing the stores in response to the COVID-19 pandemic as compared to a source of cash in the prior year. The use of cash caused by the current year loss was substantially offset by working capital improvements due to withholding April andMay 2020 rent payments at all of our retail locations, andJune 2020 rent payments at a portion of retail locations, totaling approximately$17.1 million and extending payment terms with merchandising vendors. Net cash used in operating activities during the twenty-six weeks endedAugust 1, 2020 was$17.3 million . Key elements of cash used in operating activities were (i) net loss of$89.3 million , (ii) adjustments to reconcile net income to net cash provided by operating activities of$55.5 million , primarily driven by impairment of goodwill and indefinite-lived intangible assets, depreciation and amortization, partially offset by deferred income taxes, and (iii) a source of cash from net operating assets and liabilities of$16.4 million , primarily driven by increases in accounts payable and accrued liabilities. Net cash provided by operating activities during the twenty-six weeks endedAugust 3, 2019 was$23.5 million . Key elements of cash provided by operating activities were (i) net loss of$92.4 million , and (ii) adjustments to reconcile net income to net cash provided by operating activities of$112.9 million , primarily driven by depreciation and amortization and equity based compensation and noncash amortization of deferred financing and debt discount costs, partially offset by deferred income taxes, and (iii) use of cash from net operating assets and liabilities of$3.0 million , primarily driven by higher inventory, accounts receivable and prepaid expense and other current assets levels, partially offset by higher accrued expense levels.
Net cash used in investing activities during the twenty-six weeks ended
Net cash used in investing activities during the twenty-six weeks ended
Net cash provided by financing activities during the twenty-six weeks ended
Net cash used in financing activities during the twenty-six weeks ended
Dividends
On
The payment of cash dividends in the future, if any, will be at the discretion
of our board of directors and will depend upon such factors as earnings levels,
capital requirements, restrictions imposed by applicable law, our overall
financial condition, restrictions in our debt agreements, including our Term
Loan and ABL Facility, and any other factors deemed relevant by our board of
directors. As a holding company, our ability to pay dividends depends on our
receipt of cash dividends from our operating subsidiaries, which may further
restrict our ability to pay dividends as a result of restrictions on their
ability to pay dividends to us under our Term Loan, our ABL Facility and under
future indebtedness that we or they may incur.
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Table of Contents Credit Facilities AtAugust 1, 2020 there was$31.8 million outstanding under the ABL Facility and atFebruary 1, 2020 there were no loan amounts outstanding under the ABL Facility. AtAugust 1, 2020 andFebruary 1, 2020 , the Company had outstanding letters of credit in the amount of$2.7 million and$1.7 million , respectively, and maximum additional borrowing capacity of$5.5 million and$38.3 million , respectively. Contractual Obligations The Company's contractual obligations consist primarily of debt obligations, interest payments, operating leases and purchase orders for merchandise inventory. These contractual obligations impact the Company's short-term and long-term liquidity and capital resource needs. During the twenty-six weeks endedAugust 1, 2020 , as a result of COVID-19 related temporary store closures, the Company was unable to maintain compliance with certain of its non-financial and financial covenants. In the absence of waivers from our lenders, our lenders could instruct the administrative agent under such credit facilities to exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness immediately due and payable and terminating all remaining commitments and obligations under the credit facilities. Although the lenders under our credit facilities may waive the defaults or forebear the exercise of remedies, they are not obligated to do so. Failure to obtain such a waiver would have a material adverse effect on the liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan. Our future operating performance and our ability to service or extend our indebtedness will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond our control.
Contingencies
We are subject to various legal proceedings that arise in the ordinary course of business. Although the outcome of such proceedings cannot be predicted with certainty, management does not believe that we are presently party to any legal proceedings the resolution of which management believes would have a material adverse effect on our business, financial condition, operating results or cash flows. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
Critical Accounting Policies and Significant Estimates
The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include those made in connection with revenue recognition, including accounting for gift card breakage and estimated merchandise returns; estimating the value of inventory; impairment assessments for goodwill and other indefinite-lived intangible assets, and long-lived assets; and estimating equity-based compensation expense. Management evaluates its policies and assumptions on an ongoing basis. Our significant accounting policies related to these accounts in the preparation of our consolidated financial statements are described under the heading "Management Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Significant Estimates" in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 . As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates previously described in our Annual Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 2 to our unaudited consolidated financial statements included in
this Quarterly Report on Form 10-Q, for recently adopted accounting standards,
including the dates of adoption and estimated effects on our results of
operations, financial position or cash flows.
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Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," "would" and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the Company's ability to consummate the Transaction, on the terms proposed or at all, including the Company's ability to obtain requisite support of the Transaction from various stakeholders and to finalize the terms and documentation relating to the Transaction; the Company's ability to comply with the terms of theTSA , including completing various stages of the restructuring within the dates specified therein; the effects of disruption from the proposed financial restructuring making it more difficult to maintain business, financing and operational relationships; the Company's ability to achieve the potential benefits of the proposed financial restructuring; the impact of the COVID-19 epidemic and political unrest on the Company and the economy as a whole; the Company's ability to adequately and effectively negotiate a long-term solution under its outstanding debt instruments; risks related to the Forbearance Agreements, including the duration of such agreements and the Company's ability to meet its ongoing obligations under such agreements; the Company's ability to take actions that are sufficient to eliminate the substantial doubt about its ability to continue as a going concern; the Company's ability to develop a plan to regain compliance with the continued listing criteria of the NYSE; the NYSE's acceptance of such plan; the Company's ability to execute such plan and to continue to comply with applicable listing standards within the available cure period; risks arising from the potential suspension of trading of the Company's common stock on the NYSE; regional, national or global political, economic, business, competitive, market and regulatory conditions, including risks regarding our ability to manage inventory or anticipate consumer demand; changes in consumer confidence and spending; our competitive environment; our failure to open new profitable stores or successfully enter new markets and other factors set forth under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 . All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Risk Factors set forth in our Annual Report on Form 10-K for the year endedFebruary 1, 2020 and other cautionary statements included therein and herein. These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. We qualify all of our forward-looking statements by these cautionary statements. 25
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