OLD COPPER COMPANY General
J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary isJ. C. Penney Corporation, Inc. (JCP). JCP was incorporated inDelaware in 1924, andJ. C. Penney Company, Inc. was incorporated inDelaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as "we," "us," "our," "ourselves" or the "Company," unless otherwise indicated. The holding company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP's outstanding debt securities. The guarantee of certain of JCP's outstanding debt securities by the holding company is full and unconditional. This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as ofFebruary 1, 2020 , and for the year then ended, related Notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Company's Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 (2019 Form 10-K). Unless otherwise indicated, all references to earnings/(loss) per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.
Business Update
DuringMarch 2020 , theWorld Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19), which continues to spread throughoutthe United States . In response to the COVID-19 pandemic, federal state and local governments in theU.S. reacted to the public health crisis by, among other things, issuing stay at home orders, implementing travel restrictions and mandating the closure of non-essential businesses. As a result, the Company closed all of its stores beginningMarch 19, 2020 , and furloughed approximately 80,000 associates. Although a majority of these restrictions have been lifted in various states, regions and municipalities throughout theU.S. , the COVID-19 pandemic continues to have a material impact on the Company's business operations, financial position, liquidity, capital resources and results of operations. The scope and duration of the COVID-19 pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time. In lateApril 2020 , the Company began reopening stores and by the end of the second quarter of 2020, most stores had been reopened with limited operating hours and updated staffing levels. Additionally, as of the end of the third quarter of 2020, the Company has completed closing sales events and closed 153 stores and is in the process of closing 3 additional stores, all approved by theBankruptcy Court onSeptember 1, 2020 . The remaining stores closed inNovember 2020 . As ofOctober 31, 2020 , less than 1,000 associates remain on furlough. OnMay 15, 2020 (the Petition Date), as described in Note 2 to the unaudited Interim Consolidated Financial Statements, the Company and certain of its subsidiaries (the Debtors) commenced voluntary cases under Chapter 11 of the Bankruptcy Code.The Bankruptcy Court has granted a motion seeking joint administration of the Chapter 11 Cases. The Debtors continue to operate their businesses as "debtors-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provision of the Bankruptcy Code and the orders of theBankruptcy Court . Following the Petition Date, theBankruptcy Court entered certain interim and final orders facilitating the Debtors' operational transition into Chapter 11. These orders authorized the Debtors to, among other things, access cash collateral, pay employee wages and benefits, honor customer programs and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date. OnSeptember 10, 2020 , the Company entered into a non-binding letter-of-intent ("LOI") related to the sale of substantially all of the assets of the Debtors comprising the operating company, pursuant to section 363 of the Bankruptcy Code, with certain lenders, Simon Property Group andBrookfield Property Group that is generally consistent with the framework of the restructuring process contemplated in the restructuring support agreement among the Debtors and certain lenders. OnOctober 28, 2020 , the Company, together with certain of its subsidiaries, entered into an Asset Purchase Agreement (the "Asset 23 -------------------------------------------------------------------------------- Table of Contents Purchase Agreement") withCopper Retail JV LLC , an entity formed by and under the control of Simon Property Group andBrookfield Property Group , andCopper Bidco LLC , an entity that is controlled by the lenders under the Superpriority Senior Secured Debtor-In-Possession Credit and Guaranty Agreement and the other holders of the Debtors' first lien debt (see Note 2 to the unaudited interim Consolidated Financial Statements). As discussed in Note 16, Subsequent Events, onNovember 24, 2020 , theBankruptcy Court orally approved the Company's plan of reorganization, which effectively will sell/distribute substantially all operating assets through the Asset Purchase Agreement. The sale of the operating assets, which was conducted under the provisions of Section 363 of the Bankruptcy Code and approved by theBankruptcy Court , was finalized onDecember 7, 2020 , and the transfer of the remaining 160 store properties and 6 supply chain properties under the plan of reorganization is expected to be finalized in early 2021. All retail operations of the Company will end effective with the sale of its operating assets. Following the distribution of the remaining 166 properties under the plan of reorganization, the Company will wind down through the settlement of remaining obligations. 24
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Results of Operations
Three Months Ended Nine Months Ended
October 31 ,
2020 2019 2020 2019
Total net sales $ 1,675 $ 2,384 $ 4,147 $ 7,332
Credit income and other 83 116 266 342
Total revenues 1,758 2,500 4,413 7,674
Total net sales increase/(decrease) from prior year (29.7) % (10.1) % (43.4) % (8.3) %
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and
amortization shown separately below) 1,178 1,541 2,909 4,756
Selling, general and administrative 579 854 1,621 2,580
Depreciation and amortization 167 131 462 415
Real estate and other, net - (1) (6) (3)
Restructuring and management transition 13 9 236 36
Total costs and expenses 1,937 2,534 5,222 7,784
Operating income/(loss) (179) (34) (809) (110)
Other components of net periodic pension cost/(income) (10) (13) 44 (39)
(Gain)/loss on extinguishment of debt - - - (1)
Net interest expense 96 73 238 220
Loss due to discontinuance of hedge accounting - - 77 -
Reorganization items, net 102 - 210 -
Income/(loss) before income taxes (367) (94) (1,378) (290)
Income tax expense/(benefit) 1 (1) (66) 5
Net income/(loss) $ (368) $ 75
$ (146)
$ (1.13)
$ (0.81) $ (0.30) $ (2.28) $ (0.94) Ratios as a percentage of total net sales: Cost of goods sold 70.3 % 64.6 % 70.1 % 64.9 % SG&A 34.6 % 35.8 % 39.1 % 35.2 % Operating income/(loss) (10.7) % (1.4) % (19.5) % (1.5) % (1)See "Non-GAAP Financial Measures" for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations. 25
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Table of Contents TotalNet Sales Three Months Ended Nine Months Ended October 31, November 2, October 31, November 2, ($ in millions) 2020 2019 2020 2019 Total net sales$ 1,675 $ 2,384 $ 4,147 $ 7,332 Sales percent increase/(decrease): Total net sales (29.7) % (10.1) % (43.4) % (8.3) % Total net sales for the third quarter of 2020 declined 29.7% compared to the third quarter of fiscal 2019. Total net sales for the nine months of 2020 declined 43.4% compared to the nine months of fiscal 2019. The decrease in net sales was primarily due to the impacts of the COVID-19 pandemic and the store closures during second quarter 2020. We are not presenting, or including a discussion on, comparable store sales for the three and nine months endedOctober 31, 2020 . We believe the conditions and continued impact resulting from the COVID-19 pandemic leading up to and following both the temporary closure and reopening of our stores do not accurately reflect the comparable store sales trends for the period or are indicative of future operating results. As previously noted, following the completion of the sale of the operating assets of the Company, retail operations will end onDecember 7, 2020 . Store Count The following table compares the number of stores for the three and nine months endedOctober 31, 2020 , andNovember 2, 2019 : Three Months Ended Nine Months Ended October 31, November 2, October 31, November 2, 2020 2019 2020 2019JCPenney department stores Beginning of period 839 846 846 864 New stores opened - - - - Permanently closed stores (146) - (153) (18) End of period (1) (2) 693 846 693 846 (1)Gross selling space, including selling space allocated to services and licensed departments, was 83 million square feet as ofOctober 31, 2020 , and 93 million square feet as ofNovember 2, 2019 . (2)All stores were temporarily closed beginningMarch 19,2020 , and most stores had reopened by the end of the second quarter of 2020 with limited operating hours and staffing levels. Credit Income and Other Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony Financial (Synchrony). Under our agreement, we receive cash payments from Synchrony based upon the performance of the credit card portfolios. We participate in the programs by providing marketing promotions designed to increase the use of each card, including enhanced marketing offers for cardholders. Additionally, we accept payments in our stores from cardholderswho prefer to pay in person when they are shopping in our locations. For the third quarters of 2020 and 2019, we recognized income of$83 million and$116 million , respectively, pursuant to our agreement with Synchrony. For the nine months of 2020 and 2019, we recognized income of$266 million and$342 million , respectively. The decline in credit income primarily resulted from lower net sales. Cost of Goods Sold Cost of goods sold, exclusive of depreciation and amortization, for the three months endedOctober 31, 2020 , was$1,178 million , a decrease of$363 million compared to$1,541 million for the three months endedNovember 2, 2019 . Cost of goods sold as a percentage of total net sales was 70.3% for the three months endedOctober 31, 2020 , compared to 64.6% for the three months endedNovember 2, 2019 , an increase of 570 basis points. Cost of goods sold for the nine months endedOctober 31, 2020 , was$2,909 million , a decrease of$1,847 million compared to$4,756 million for the nine months endedNovember 2, 2019 . Cost of goods sold as a percentage of total net sales was 70.1% for the nine months endedOctober 31, 2020 , compared to 64.9% for the nine months endedNovember 2, 2019 , an increase of 520 basis points. The increases in cost of goods sold as a 26 -------------------------------------------------------------------------------- Table of Contents percentage of net sales were due to lower allowances from suppliers during each period and increased markdowns, primarily markdowns related to going out of business sales in our closing stores. SG&A Expenses For the three months endedOctober 31, 2020 , SG&A expenses were$579 million compared to$854 million in the corresponding period of 2019. SG&A expenses as a percentage of total net sales for the third quarter of 2020 decreased to 34.6% compared to 35.8% in the third quarter of 2019. For the nine months endedOctober 31, 2020 , SG&A expenses were$1,621 million compared to$2,580 million in the corresponding period of 2019. SG&A expenses as a percentage of total net sales for the nine months of 2020 increased to 39.1% compared to 35.2% in the nine months of 2019. The year-over-year decreases in SG&A dollars for the three months and nine months endedOctober 31, 2020 , resulted primarily from the actions taken by the Company to reduce expenses to mitigate the impact of sales losses due to the temporary store closures and continued impacts of the COVID-19 pandemic. Year-over-year savings for the three and nine month periods of 2020 include payroll, payroll related and incentive compensation savings of approximately$166 million and$460 million , respectively, primarily due to associate furloughs and reduced staffing levels in reopened stores. Additional year-over-year savings include approximately$74 million and$257 million from reduced advertising and store operating expenses, for the three and nine month periods of 2020, respectively. For the three and nine months periods of 2020, SG&A expenses included approximately$26 million and$36 million , respectively, of accelerated amortization of lease assets related to closing stores. Depreciation and Amortization Expense Depreciation and amortization expense was$167 million and$131 million for the three months endedOctober 31, 2020 andNovember 2, 2019 , respectively. Depreciation and amortization increased$36 million in 2020 from 2019 primarily due to accelerated depreciation of fixed assets and leasehold improvements of approximately$21 million associated with the 146 closing stores previously noted. Depreciation and amortization expense was$462 million and$415 million for the nine months endedOctober 31, 2020 andNovember 2, 2019 , respectively. Restructuring and Management Transition The composition of restructuring and management transition charges were as follows: Three Months Ended Nine Months Ended October 31, November 2, October 31, November 2, ($ in millions) 2020 2019 2020 2019 Home office and stores$ 13 $ 8$ 236 $ 31 Management transition - 1 - 5 Total$ 13 $ 9$ 236 $ 36 During the three and nine months endedOctober 31, 2020 , we recorded$13 million and$236 million , respectively, of costs related to our store and home office expenses. Costs during the nine months of 2020 include impairments of long-lived assets and operating lease assets of$126 million , an impairment of indefinite-lived intangible assets of$42 million , charges of$16 million for the write off of certain long-lived assets related to store and other facility closings, and severance costs of$34 million related to announced store closings and a reduction in workforce for home office, field management and international associates. The Company also incurred$24 million of expenses related to pre-petition debt restructuring advisory fees in the first half of 2020. See Notes 8 and 13 to the unaudited interim Consolidated Financial Statements. Costs during the nine months endedNovember 2, 2019 include store impairments related to announced store closures of$14 million and accelerated depreciation of$6 million , employee termination benefits of$4 million , store related closing costs of$4 million and advisory costs of$3 million . Operating Income/(Loss) For the third quarter of 2020, we reported an operating loss of$179 million compared to an operating loss of$34 million in the third quarter of 2019.
For the nine months of 2020, we reported an operating loss of
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Other Components of Net Periodic Pension Cost/(Income) Other components of net periodic pension cost/(income) was$(10) million and$(13) million for the three months endedOctober 31, 2020 , andNovember 2, 2019 , respectively and$44 million and$(39) million for the nine months endedOctober 31, 2020 , andNovember 2, 2019 , respectively. During the third quarter, Other components of net periodic pension cost/(income) includes a charge of$16 million related to settlement accounting resulting from lump sum payouts during the first nine months of 2020. During second quarter 2020, the Company recorded a$94 million charge to Other components of net periodic pension cost/(income) relate to the VERP. See note 12 to the unaudited interim Consolidated Financial Statements for additional information regarding the VERP. Net Interest Expense Net interest expense for the third quarter of 2020 was$96 million compared to$73 million in the third quarter of 2019. As further discussed in Note 9 to the unaudited interim Consolidated Financial Statements, the Company is currently accruing and paying interest on the DIP Credit Agreement, the 2017 Credit Facility, the 2016 Term Loan and the Senior Secured Notes. Interest on the remaining outstanding debt is not being accrued or paid. Unrecognized contractual interest expense totaled$31 million during third quarter 2020 and$26 million during second quarter 2020.. Net interest expense for the nine months of 2020 was$238 million compared to$220 million in the nine months of 2019. Reorganization Items, Net Any expenses, gains or losses that are realized or incurred as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are recorded under Reorganization items, net in our unaudited interim Consolidated Statement of Operations. For the three and nine months endedOctober 31, 2020 , Reorganization items, net were$102 million and$210 million , respectively and consisted of the following items: Three Months Ended Nine Months Ended (In millions) October 31, 2020 October 31, 2020 Advisor fees $ 73 $ 137 Debtor-in-possession financing fees - 50 Write-off of pre-petition unamortized debt issuance costs - 33 Employee retention 11 32 Gains on lease terminations, net of landlord damage claims 11 (55) Other 7 13 Total reorganization items, net $ 102 $ 210 Income Taxes The net tax expense of$1 million for the three months endedOctober 31, 2020 , related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets. The net tax benefit of$66 million for the nine months endedOctober 31, 2020 , consisted of federal, state and foreign tax benefits of$1 million ,$3 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, net tax benefit of$3 million resulting from state audit settlements and a$65 million benefit due to the release of valuation allowance, primarily due to the generation of post-tax reform NOLs that do not expire.. Non-GAAP Financial Measures We report our financial information in accordance with GAAP. However, we present certain financial measures identified as non-GAAP under the rules of theSecurities and Exchange Commission (SEC) to assess our results. We believe the presentation of these non-GAAP financial measures is useful in order to better understand our financial performance as well as to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented. The following non-GAAP financial measures are adjusted to exclude reorganization items, restructuring and management transition charges, other components of net periodic pension cost/(income), the loss due to discontinuance of hedge accounting, 28 -------------------------------------------------------------------------------- Table of Contents the net (gain)/loss on the sale of non-operating assets and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps. Unlike other operating expenses, reorganization items, restructuring and management transition charges, other components of net periodic pension cost/(income), the loss due to discontinuance of hedge accounting, the net (gain)/loss on the sale of non-operating assets and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps are not directly related to our ongoing core business operations, which consist of selling merchandise and services to consumers through our department stores and our website at jcp.com. Further, our non-GAAP adjustments are for non-operating associated activities such as store impairments included in restructuring and management transition charges. Additionally, other components of net periodic pension cost/(income) is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility. We believe it is useful for investors to understand the impact of reorganization items, restructuring and management transition charges, other components of net periodic pension cost/(income), the loss due to discontinuance of hedge accounting, the net (gain)/loss on the sale of non-operating assets and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted EBITDA; (2) adjusted net income/(loss); and (3) adjusted earnings/(loss) per share-diluted. Adjusted EBITDA. The following table reconciles net income/(loss), the most directly comparable GAAP measure, to adjusted EBITDA, which is a non-GAAP financial measure: Three Months Ended Nine Months Ended October 31, October 31, November 2, ($ in millions) 2020 November 2, 2019 2020 2019 Net income/(loss)$ (368) $ (93)$ (1,312) $ (295) Add: Net interest expense 96 73 238 220 Add: (Gain)/loss on extinguishment of debt - - - (1) Add: Loss due to discontinuance of hedge accounting - - 77 - Add: Income tax expense/(benefit) 1 (1) (66) 5 Add: Depreciation and amortization 167 131 462 415 Add: Restructuring and management transition charges 13 9 236 36 Add: Other components of net periodic pension cost/(income) (10) (13) 44 (39) Add: Reorganization items, net 102 - 210 -
Less: Net (gain)/loss on the sale of non-operational assets
- - - (1)
Adjusted EBITDA (non-GAAP) $ 1 $ 106 $ (111) $ 340 Adjusted Net Income/(Loss) and Adjusted Diluted EPS. The following table reconciles net income/(loss) and diluted EPS, the most directly comparable GAAP financial measures, to adjusted net income/(loss) and adjusted diluted EPS, which are non-GAAP financial measures:
Three Months Ended Nine Months Ended
October 31, November 2, October 31, November 2,
($ in millions, except per share data) 2020 2019 2020 2019
Net income/(loss) $ (368) $ (93) $ (1,312) $ (295)
Diluted EPS $ (1.13) $
(0.29)
13 9 236 36
Add: Other components of net periodic pension
cost/(income) (1) (10) (13) 44 (39)
Add: Loss due to discontinuance of hedge
accounting (2) - - 83 -
Add: (Gain)/loss on extinguishment of debt (1) - - - (1)
Add: Reorganization items, net 102 - 210 -
Less: Net (gain)/loss on sale of non-operating
assets (1) - - - (1)
Adjusted net income/(loss) (non-GAAP) $ (263) $
(97)
$ (0.81) $
(0.30)
(1) Adjustments reflect no tax effect due to the impact of the Company's tax valuation allowance. (2) Adjustment reflects$6 million reclassified to income tax expense from accumulated other comprehensive income. 29
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Liquidity and Capital Resources
During the Chapter 11 Cases, our primary sources of liquidity are cash generated from operations, available cash and cash equivalents and cash available under the DIP Credit Agreement. Our cash flows may be impacted by many factors including the economic environment, consumer confidence, competitive conditions in the retail industry, the success of our strategies and the continued uncertainties of the COVID-19 pandemic on the Company's operations. Following the commencement of the Chapter 11 Cases we no longer have access to a revolving credit facility. During second quarter 2020 the Company entered into the DIP Credit Agreement, which provided$450 million of new money,$225 million of which remains in escrow pending achievement of certain milestones. Refer to Note 9 to the unaudited interim Consolidated Financial Statements for a full description of the financing terms related to the funding under the DIP Credit Agreement. We ended the third quarter of 2020 with$1,186 million of cash, cash equivalents and restricted cash. Restricted cash of$515 million consists primarily of the$225 million of DIP Credit Agreement proceeds held in escrow noted above, cash collateral related to the 2017 Credit Facility, and amounts in escrow for professional fees due upon emergence as required under the DIP Credit Agreement. The cash collateral related to the 2017 Credit Facility fluctuates depending on the value of the asset collateral described in the agreement, primarily inventory, on the Company's balance sheet. Free Cash Flow (Non-GAAP) Free cash flow is a key financial measure of our ability to generate additional cash from operating our business and in evaluating our financial performance. We define free cash flow as cash flow from operating activities, less capital expenditures plus the proceeds from the sale of operating assets. Free cash flow is a relevant indicator of our ability to repay maturing debt, revise our dividend policy or fund other uses of capital that we believe will enhance stockholder value. Free cash flow is considered a non-GAAP financial measure under the rules of theSEC . Free cash flow is limited and does not represent remaining cash flow available for discretionary expenditures due to the fact that the measure does not deduct payments required for debt maturities, payments made for business acquisitions or required pension contributions, if any. Therefore, it is important to view free cash flow in addition to, rather than as a substitute for, our entire statement of cash flows and those measures prepared in accordance with GAAP. The following table sets forth a reconciliation of net cash provided by/(used in) operating activities, the most directly comparable GAAP financial measure, to free cash flow, a non-GAAP financial measure, as well as information regarding net cash provided by/(used in) investing activities and net cash provided by/(used in) financing activities: Nine Months Ended October 31, November 2, ($ in millions) 2020 2019 Net cash provided by/(used in) operating activities (GAAP)$ (798) $ (306) Add: Proceeds from sale of operating assets 12 14 Less: Capital expenditures (1) (59) (226) Free cash flow (non-GAAP)$ (845) $ (518) Net cash provided by/(used in) investing activities (2)$ (46) $ (211) Net cash provided by/(used in) financing activities
(1)As of the end of the third quarters of 2020 and 2019, we had accrued capital expenditures of$18 million ,$12 million of which was pre-petition, and$25 million , respectively. (2)Net cash provided by/(used in) investing activities includes capital expenditures and proceeds from sale of operating assets, which are also included in our computation of free cash flow. For the nine months endedOctober 31, 2020 , free cash flow was an outflow of$845 million compared to an outflow of$518 million for the same period of the prior year. The increase in the outflow resulted primarily from the effect of the COVID-19 pandemic and store closures on operating performance. 30 -------------------------------------------------------------------------------- Table of Contents Operating Activities While a significant portion of our sales, profit and operating cash flows have historically been realized in the fourth quarter, our quarterly results of operations may fluctuate significantly as a result of many factors, including seasonal fluctuations in customer demand, product offerings, inventory levels and promotional activity. Due to the COVID-19 pandemic, the results of operations and cash flows for the nine months endedOctober 31, 2020 , are not necessarily indicative of the results for future quarters or the entire year. Cash flow from operating activities for the nine months endedOctober 31, 2020 , declined$492 million to an outflow of$798 million compared to an outflow of$306 million for the same period in 2019 primarily due to the temporary closure of all stores beginningMarch 19, 2020 . In lateApril 2020 , the Company began reopening stores and by the end ofJuly 2020 , most stores had reopened with limited operating hours and staffing levels. Merchandise inventory decreased$1,027 million , or 35.0%, to$1,907 million as of the end of the third quarter of 2020 compared to$2,934 million as of the end of the third quarter of 2019 and decreased$259 million from year-end 2019, primarily as a result of 153 store closures during 2020. Merchandise payables decreased$853 million as of the end of the third quarter of 2020 compared to the corresponding prior year period and decreased$534 million from year end 2019. The decline in merchandise payables primarily resulted from the reclassification of pre-petition amounts to liabilities subject to compromise, deferred purchases and receipts of inventory, and a rise in advance or on delivery payments for merchandise during the third quarter of 2020. Following the temporary store closures inMarch 2020 , companies issuing credit cards accepted by the Company for consumer sales transactions withheld$63 million as ofOctober 31, 2020 . These reserves were established in accordance with the various credit card agreements and are recorded in prepaid expenses and other. Investing Activities Investing activities for the nine months endedOctober 31, 2020 resulted in cash outflows of$46 million compared to outflows of$211 million for the same nine month period of 2019, primarily due to the decrease of cash capital spending during the months subsequent to the temporary store closures in order to conserve liquidity. In addition, as of the end of the third quarters of 2020 and 2019, we had$18 million ,$12 million of which was pre-petition, and$25 million , respectively, of accrued capital expenditures. Cash capital expenditures related primarily to investments in our store environment and store facility improvements and investments in information technology in both our home office and stores. Investing activities for the nine months endedNovember 2, 2019 , related primarily to investments in our store environment and store facility improvements and investments in information technology in both our home office and stores. We received construction allowances from landlords of$4 million in the nine months of 2019 to fund a portion of the capital expenditures related to store leasehold improvements. Financing Activities For the nine months endedOctober 31, 2020 , cash flows from financing activities were an inflow of$1,644 million compared to an inflow of$341 million for the same prior year period. During the first nine months of 2020, the Company had net borrowings of$1,264 million under its 2017 Credit Facility, primarily drawn to enhance liquidity at the onset of the COVID-19 pandemic. Additionally, in connection with the Chapter 11 Cases and under the DIP Credit Agreement, the Company borrowed$450 million of new money, of which$225 million was funded to the Company onJune 8, 2020 and$225 million was funded to an escrow account onJuly 9, 2020 . The Company also incurred$50 million in DIP financing costs associated with the borrowing. Refer to Note 9 to the unaudited interim Consolidated Financial Statements for a full description of the financing terms related to the funding under the DIP Credit Agreement.
For the nine months ended
Cash Flow Outlook
We believe that our existing liquidity, including cash on hand, funds generated
from ongoing operations and availability of cash under the DIP Credit Agreement
will be adequate to fund anticipated cash requirements through the Chapter 11
Cases.
Credit Ratings
Credit rating agencies periodically review our capital structure and the quality
and stability of our earnings. Rating agencies consider, among other things,
changes in operating performance, comparable store sales, the economic
environment, conditions
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in the retail industry, financial leverage and changes in our business strategy
in their rating decisions. Downgrades to our long-term credit ratings could
result in reduced access to the credit and capital markets and higher interest
costs on future financings. Following the commencement of the Chapter 11 Cases
(see Note 2 to the unaudited Interim Consolidated Financial Statements), all
three credit rating agencies, Fitch Ratings, Moody's Investor Service, Inc. and
Standard & Poor's Ratings Services , lowered their issue-level ratings on the
Company to a 'Default' status rating. Additionally, and subsequent to
downgrading the Company's issue-level rating to 'Default' and pursuant to our
voluntary Chapter 11 filing, all three of the aforementioned credit rating
agencies withdrew their issued credit ratings and outlook and have discontinued
their rating coverage of the Company.
Contractual Obligations and Commitments
Aggregate information about our obligations and commitments to make future
payments under contractual or contingent arrangements was disclosed in the 2019
Form 10-K. These obligations and commitments have been impacted by the Chapter
11 Cases. See Note 2 and Note 9 to the unaudited interim Consolidated Financial
Statements.
Impact of Inflation, Deflation and Changing Prices
We have experienced inflation and deflation related to our purchase of certain
commodity products. We do not believe that changing prices for commodities have
had a material effect on our Net Sales or results of operations. Although we
cannot precisely determine the overall effect of inflation and deflation on
operations, we do not believe inflation and deflation have had a material effect
on our financial condition or results of operations. With a sizable portion of
our private and national branded apparel and footwear sourced from China , we are
exposed to potential increases in product costs which may result from increased
tariffs imposed by the U.S. government in connection with its trade disputes
with China . We expect a minimal impact on our product costs based on the current
tariffs that are in effect and have taken actions to diversify our sourcing
operations. However, we can expect a more meaningful increase to our product
costs if potential additional tariffs go into effect on all Chinese imports and
specifically apparel and footwear. The impact of COVID-19 on factory efficiency
and capacity also has the potential to impact product costing and delivery.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 4 to the
unaudited Interim Consolidated Financial Statements.
Seasonality
While a significant portion of our sales, profit and operating cash flows have
historically been realized in the fiscal fourth quarter, our quarterly results
of operations may fluctuate significantly as a result of many factors, including
seasonal fluctuations in customer demand, product offerings, inventory levels
and our promotional activity. Due to the COVID-19 pandemic and the sale of the
Company's operating assets on December 7, 2020 , the results of operations and
cash flows for the nine months ended October 31, 2020 , are not indicative of the
results for future quarters or the entire year.
Cautionary Statement Regarding Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which reflect our current view
of future events and financial performance. Forward-looking statements are based
only on our current assumptions and views of future events. They are subject to
known and unknown risks and uncertainties, many of which are outside of the
Company's control. Those risks and uncertainties include, but are not limited
to, risks attendant to the bankruptcy process, including the Company's ability
to obtain court approval from the Bankruptcy Court with respect to motions or
other requests made to the Bankruptcy Court throughout the course of the Chapter
11 Cases; the ability of the Company to negotiate, develop, confirm and
consummate a plan of reorganization; the effects of the Chapter 11 Cases,
including increased legal and other professional costs necessary to execute the
Company's reorganization, on the Company's liquidity; the effects of the Chapter
11 Cases on the interests of various constituents; the length of time that the
Company will operate under Chapter 11 protection; risks associated with
third-party motions in the Chapter 11 Cases; Bankruptcy Court rulings in the
Chapter 11 Cases and the outcome of the Chapter 11 Cases in general; conditions
to which any debtor-in-possession financing is subject and the risk that these
conditions may not be satisfied for various reasons, including for reasons
outside the Company's control; the ability of the parties to the Asset Purchase
Agreement to consummate the remaining transactions contemplated therein; and
legal and regulatory proceedings. We intend the forward-looking statements in
this Quarterly Report on Form 10-Q to speak only as of the date of this report
and do not undertake to update or revise these forward-looking statements as of
any future date.
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