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 Annual Report on Form 10-K, as well as the information presented under "Selected Financial Data." 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 Annual Report on Form 10-K titled "Risk Factors" and "Cautionary 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 year endedJanuary 30, 2021 ("Fiscal Year 2020"), fiscal year endedFebruary 1, 2020 ("Fiscal Year 2019") and fiscal year endedFebruary 2, 2019 ("Fiscal Year 2018") are all comprised of 52 weeks.
Overview
Our Fiscal Year 2020 financial results were significantly impacted by the
COVID-19 pandemic ("COVID-19") as our stores were temporarily closed beginning
in mid-March 2020 with most of our stores being reopened by late 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. After approaching our vendor community,
we implemented extended payment terms for nearly all goods and services, and we
renegotiated leases to obtain rent abatements and deferrals. We implemented
other cost reductions, including marketing, where we reduced the frequency of
our catalogs and evaluated marketing investment levels and mix for the right
balance long-term. We have also limited investments in our ecommerce business to
necessary website and supporting functions.
The COVID-19 global pandemic and resulting temporary store closures and changes
in customer behavior toward in-store shopping 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 prolonged market impact
from COVID-19 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.
We entered into a Transaction Support Agreement ("TSA") with lenders of the
Company's previously existing term loans ("Consenting Lenders") and a majority
of our shareholders on the principal terms of a financial restructuring
("Transaction"). The Transaction was consented to by the requisite term loan
lenders and was consummated on an out-of-court basis on September 30, 2020 . The
Transaction resulted in a waiver of any past non-compliance with the terms of
the Company's credit facilities. It also provided the Company with additional
liquidity and extended the maturity of substantially all of the previously
existing debt by two years, through May 2024 .
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 consists 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.
35
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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. In connection with closing stores, we incur store-closing
costs. Store-closing costs primarily consist of lease termination penalties and
costs of transporting inventory and fixtures to other store locations. These
pre-opening costs and store-closing costs are included in selling, general and
administrative expenses and are generally incurred and expensed within 30 days
of opening a new store or closing a 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. Certain of our competitors and other retailers may report costs of goods sold differently than we do. 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 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. Additionally, our shipping costs may fluctuate due to surcharges from shipping vendors based on demand for shipping services. 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 (loss) income plus net interest expense, provision (benefit) for income taxes, depreciation and amortization, 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. 36 --------------------------------------------------------------------------------
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 Fiscal For the Fiscal For the Fiscal
Year Ended Year Ended Year Ended
(in thousands) January 30, 2021 February 1, 2020 February 2, 2019
Statements of Operations Data:
Net (loss) income $ (139,404 ) $ (128,567 ) $ 30,525
Fair value adjustment of derivative 1,005 - -
Fair value adjustment of warrants - 4,214 - -
related party
Interest expense, net 17,695 19,571 19,064
Interest expense, net - related party 534 - -
Income tax (benefit) provision (48,162 ) (3,022 ) 11,649
Depreciation and amortization 33,696 37,925 36,749
Equity-based compensation expense (a) 2,160 3,972 4,010
Write-off of property and equipment (b) 969 151 128
Impairment of goodwill and intangible 32,520 131,528 -
assets
Adjustment for exited retail stores (c) (1,444 ) - - Impairment of long-lived assets (d) 33,777 2,325 - Transaction costs (e) 21,914 - - Other non-recurring items (f) 2,820 1,597 1,346 Adjusted EBITDA $ (37,706 ) $ 65,480 $ 103,471 Net sales $ 426,730 $ 691,345 $ 706,262 Adjusted EBITDA margin -8.8 % 9.5 % 14.7 %
(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 grant.
(b) Represents the 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.
(e) Represents items management believes are not indicative of ongoingoperating performance. In Fiscal Year 2020, these expenses are primarily
composed of legal and advisory costs.
(f) Represents items management believes are not indicative of ongoingoperating performance. In Fiscal Year 2020, these expenses are primarily
composed of incremental one-time costs related to COVID-19, including
supplies and cleaning expenses, hazard pay and benefits, and retention
expenses. In Fiscal Year 2019, these expenses are primarily composed of a
gain from insurance proceeds, restructuring costs and expenses related to
a CEO transition, including the acceleration of equity-based compensation
expense. In Fiscal Year 2018, these expenses include costs related to a
CEO transition.
Items Affecting the Comparability of our Results of Operations
On
Impairment losses. Our Fiscal Year 2020 and Fiscal Year 2019 financial results included impairment charges of$66.3 million and$133.9 million , respectively for long-lived assets (operating lease right-of-use asset and leasehold improvements), goodwill and intangible assets. See Note 6,Goodwill and Other Intangible Assets, in Item I, Financial Statements, for additional information on these impairment losses. COVID-19 impact. Our Fiscal Year 2020 financial results were significantly impacted by COVID-19 as our stores were temporarily closed beginning in mid-March and reopened beginning in mid-May, with all stores reopened by end of June, 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. 37
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Results of Operations
Fiscal Year Ended
The following table summarizes our consolidated results of operations for the
periods indicated:
For the Fiscal Year Ended For the Fiscal Year Ended
January 30, 2021 February 1, 2020 Change Year-over-Year
% of Net % of Net
(in thousands) Dollars Sales Dollars Sales $ Change % Change
Net sales $ 426,730 100.0 % $ 691,345 100.0 % $ (264,615 ) (38.3 )%
Costs of goods sold 181,103 42.4 % 262,766 38.0 % (81,663 ) (31.1 )%
Gross profit 245,627 57.6 % 428,579 62.0 % (182,952 ) (42.7 )%
Selling, general and
administrative expenses 343,448 80.5 % 406,744 58.8 % (63,296 ) (15.6 )%
Impairment of long-lived
assets 33,777 7.9 % 2,325 0.3 % 31,452 1352.8 %
Impairment of goodwill 17,900 4.2 % 119,428 17.3 % (101,528 ) (85.0 )%
Impairment of intangible
assets 14,620 3.4 % 12,100 1.8 % 2,520 20.8 %
Operating loss (164,118 ) (38.5 )% (112,018 ) (16.2 )% (52,100 ) 46.5 %
Fair value adjustment of
derivative 1,005 0.2 % - - 1,005 -
Fair value adjustment of
warrants - related party 4,214 1.0 % - - 4,214
Interest expense, net 17,695 4.1 % 19,571 2.8 % (1,876 ) (9.6 )%
Interest expense, net -
related party 534 0.1 % - - 534
Loss before provision for
income taxes (187,566 ) (44.0 )% (131,589 ) (19.0 )% (55,977 ) 42.5 %
Income tax benefit (48,162 ) (11.3 )% (3,022 ) (0.4 )% (45,140 ) 1493.7 %
Net loss $ (139,404 ) (32.7 )% $ (128,567 ) (18.6 )% $ (10,837 ) 8.4 %
Net Sales
Net sales for Fiscal Year 2020 decreased $264.6 million or 38.3%, to $426.7
million from $691.3 million for Fiscal Year 2019. The decrease in total net
sales versus the prior year was primarily driven by the impact of COVID-19 on
consumer spending on fashion apparel. Net sales for Fiscal Year 2020 includes an
out-of-period adjustment associated with the Company's historical methodology
for determining its sales returns reserve which benefitted Net sales by
approximately 1%.
Our Direct channel was responsible for 65.5% of our net sales in Fiscal Year
2020 compared to 43.7% in Fiscal Year 2019. Our Retail channel was responsible
for 34.5% of our net sales in Fiscal Year 2020 and 56.3% in Fiscal Year 2019. We
operated 267 and 287 retail stores at the end of these same periods,
respectively.
Gross Profit and Cost of Goods Sold
Gross profit for Fiscal Year 2020 decreased$183.0 million , or 42.7%, to$245.6 million from$428.6 million for Fiscal Year 2019. The gross margin for the Fiscal Year 2020 was 57.6% compared to 62.0% for Fiscal Year 2019, largely driven by added promotions, markdowns, and liquidation actions to clear certain goods in Fiscal Year 2020. The out-of-period adjustment, discussed above, had minimal impact on the gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal Year 2020 decreased$63.3 million , or 15.6%, to$343.4 million from$406.7 million for Fiscal Year 2019. The decrease is driven by a$35.0 million decrease in compensation and benefits, a$29.2 million decrease in marketing costs, a$6.1 million decrease in occupancy costs, a$4.2 million decrease in depreciation and amortization, a$2.9 million decrease in credit card fees, a$1.8 million decrease in stock-based compensation, a$1.6 million decrease in shipping costs and a$1.1 million decrease in supplies expense, offset by a$17.2 million increase in professional services expenses, due primarily to costs associated with the financial restructuring, and a$1.7 million increase in non-occupancy insurance cost. 38
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Fair Value Adjustments
Fair value adjustments consist of the mark-to-market of warrants and derivative
liabilities related to the debt restructuring consummated on
Interest Expense, net
Interest expense, net consists of interest expense on the Term Loan, ABL Facility, Priming Loan and Subordinated Facility partially offset by interest earned on cash. Interest expense for Fiscal Year 2020 decreased by$1.9 million , or 9.6%, to$17.7 million from$19.6 million for Fiscal Year 2019. The decrease was driven by lower interest rates.
Provision for Income Taxes
The income tax benefit for Fiscal Year 2020 was$48.2 million compared to an income tax benefit of$3.0 million for Fiscal Year 2019. Our effective tax rates were 25.7% and 2.3%, respectively. The higher effective tax rate for Fiscal Year 2020 was primarily due to the realized benefit from the CARES Act as well as state and local income taxes. The CARES Act allows net operating losses generated in fiscal year 2020 to be carried back five years to years with higher tax rates than the current year. These benefits were partially offset by the impact on the effective tax rate from goodwill impairment, which has no associated tax benefit, and valuation allowance. The lower effective rate for Fiscal Year 2019 was primarily due to the impact from goodwill impairment, which has no associated tax benefit. For discussion related to the results of operations and changes in financial condition for Fiscal 2019 compared to Fiscal 2018 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2019 Form 10-K, which was filed with theUnited States Securities and Exchange Commission onJune 15, 2020 .
Liquidity and Capital Resources
General
The COVID-19 global pandemic, resulting store closures and impacts to customer spending behavior 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 prolonged market impacts from COVID-19 in the coming 12 months. If one or more of these risks materializes, 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. These risks raise substantial doubt about the Company's ability to continue as a going concern within one year after the date these financial statements have been issued. The material adverse effect caused by COVID-19 and 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 financial statements for the fiscal year endedFebruary 1, 2020 resulted in a failure by us to comply with the financial covenants contained in our ABL Facility and Term Loan agreements. As part of the Transactions that were consummated onSeptember 30, 2020 any non-compliance with the terms of our existing term loan facility (the "Existing Term Loan Facility") and ABL Facility was waived. Additionally, key financial covenants have been waived until the fourth quarter of Fiscal Year 2021, and the covenant requiring the delivery of an audit opinion without a "going concern" or similar qualification has been waived for Fiscal Year 2021 with respect to any such qualification relating solely to our ability to satisfy the minimum liquidity covenant in our debt facilities. Refer to Note 10, Debt, in the notes to the consolidated financial statements for further details regarding the debt facilities and the Transaction. As ofJanuary 30, 2021 , we had$4.4 million in cash and$23.8 million of total availability under our ABL Facility. Our primary sources of liquidity and capital resources are cash generated from operating activities and availability under our ABL Facility, which has a maturity ofMay 8, 2023 so long as certain conditions related to the maturity of the term loan are met. 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. 39 -------------------------------------------------------------------------------- We have filed a preliminary tax return for Fiscal Year 2020 and expect a refund in excess of$25 million . The tax refund amount benefited from the provisions under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") enacted inMarch 2020 most significantly from the provision that allows 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 Company has elected to defer the employer-paid portion of social security taxes beginning with pay dates on and afterApril 1, 2020 in accordance with the CARES Act, resulting in a deferral of$3.8 million as ofJanuary 30, 2021 . The Company expects to remit the social security taxes beforeOctober 15, 2021 . Under the Priming Credit Agreement, the Company has certain payment obligations during Fiscal Year 2021. The Company has the choice to repay$4.9 million in aggregate principal amount of the loans under the Priming Credit Agreement or issue additional shares of the Company's stock up to 798,807 shares or the maximum number of shares having a value of$4.75 million to the lenders. The Company expects to issue the shares to the lenders rather than repaying the$4.9 million since the minimum liquidity covenant will increase to$25.0 million from$15.0 million if the Company were to choose to repay the$4.9 million of principal. The Priming Credit Agreement provides for a principal paydown of at least$25.0 million byAugust 30, 2021 ; otherwise, there will be a Paid-in-Kind ("PIK") interest rate increase and a PIK fee based on the level of payment below the$25.0 million . We expect to make a principal payment of at least$25.0 million , avoiding PIK interest and fees, by using the funds from the expected tax refund. Cash Flow Analysis The following table shows our cash flows information for the periods presented: For the Fiscal For the Fiscal For the Fiscal Year Ended January Year Ended Year Ended (in thousands) 30, 2021 February 1, 2020 February 2, 2019 Net cash (used in) provided by operating activities $ (34,811 ) $ 32,653 $ 67,503 Net cash used in investing activities (3,805 ) (18,222 ) (24,710 ) Net cash provided by (used in) financing activities 21,496 (59,108 ) (2,567 )
Net cash used in operating activities during Fiscal Year 2020 was$34.8 million , a decline of$67.5 million as compared to Fiscal Year 2019 as cash-related income was a use of cash in the current year due to the impact of the COVID-19 pandemic, including the temporary closure of our retail stores as compared to a source of cash in the prior year. The use of cash caused by the current year loss was offset in part by working capital improvements due to extending payment terms with our vendors and management of our inventory balances, as well as negotiating rent deferrals with certain landlords and withholding rent payments for certain retail locations that were closed while we continue to negotiate amendments for those locations, totaling approximately$1.9 million .
Net cash used in investing activities during Fiscal Year 2020 was$3.8 million , a decrease of$14.4 million as compared to Fiscal Year 2019, representing efforts to reduce capital expenditures in order to preserve cash in response to COVID-19.
Net cash provided by financing activities during Fiscal Year 2020 was
Dividends
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 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 debt
agreements and under future indebtedness that we or they may incur.
40--------------------------------------------------------------------------------
Capitalization
At
Carrying Value
of Debt
January 30, 2021
Term Loan (principal of $5,007 ) $ 4,904
Priming Loan (principal of$229,773 )
223,296
Subordinated Facility (principal and paid-in kind interest of$15,666 ) 3,311 Less: Current portion (2,799 ) Net long-term debt$ 228,712 Additionally, the Company had short-term borrowings of$11.1 million under the Company's ABL Facility as ofJanuary 30, 2021 . The Company had outstanding letters of credit in the amount of$2.9 million and had a maximum additional borrowing capacity of$23.8 million as ofJanuary 30, 2021 . The Company was in compliance with all debt covenants as ofJanuary 30, 2021 . The maturity date of the Amended Existing Term Loan Agreement continues to beMay 8, 2022 . Loans under the Amended Existing Term Loan Agreement continue to accrue interest at LIBOR plus 5.00%, with a minimum LIBOR per annum of 1.00%, with the interest payable on a quarterly basis. The Company may alternatively elect to accrue interest at a Base Rate (as defined in the Amended Existing Term Loan Agreement) plus 4.00%. The maturity date of the Priming Credit Agreement isMay 8, 2024 , and the loans under the Priming Credit Agreement will bear interest at the Company's election at: (1) Base Rate (as defined in the Priming Credit Agreement) plus 4.00% or (2) LIBOR plus 5.00%, with a minimum LIBOR per annum of 1.00%, with the interest payable on a quarterly basis. The Priming Credit Agreement requires a principal paydown of at least$25.0 million byAugust 30, 2021 ; otherwise, there will be a Paid-in-Kind ("PIK") interest rate increase and a PIK fee. Refer to Note 10, Debt in the notes to the consolidated financial statements for further details on the Debt, including the potential PIK interest rate and PIK fee. OnMay 31, 2021 , the Company will have the choice (the "May 31, 2021 Option") to either (i) repay$4.9 million in aggregate principal amount of the loans under the Priming Credit Agreement, together with accrued and unpaid interest thereon or (ii) issue additional shares of Common Stock to the Priming Lenders in an amount equal to the greater of (I) 9.79% of the fully diluted shares of Common Stock as ofOctober 1, 2020 less 656,717 shares and (II) a number of shares of Common Stock with an aggregate value of$0.5 million at the time of such issuance; provided, that the Priming Lenders shall not receive on such date shares of Common Stock having a value greater than$4.75 million at the time of such issuance. The maturity date of the Subordinated Facility isNovember 8, 2024 . Loans under the Subordinated Facility will bear interest at the Borrower's election at (1) Base Rate (as defined in the Subordinated Facility) plus 11.00% or (2) LIBOR plus 12.00%, with a minimum LIBOR per annum of 1.00%. The ABL Facility allows us to elect, at our own option, the applicable interest rate for borrowings under the ABL Facility using a LIBOR or Base Rate variable interest rate plus an applicable margin. LIBOR loans under the ABL Facility accrue interest at a rate equal to LIBOR plus a spread ranging from 2.25% to 2.50%, subject to availability. Base Rate loans under the ABL Facility accrue interest at a rate equal to (i) the highest of (a) the prime rate, (b) the overnight Federal Funds Effective Rate plus 0.50%, (c) LIBOR with a one-month interest period plus 1.00% and (d) 2.00%, plus (ii) a spread ranging from 1.25% to 1.50%, subject to availability. Principal is payable upon maturity of the ABL Facility on its termination date. OnJune 12, 2019 this ABL Facility was amended to extend the termination date toMay 8, 2023 . The ABL Facility also requires the payment of monthly fees based on the average quarterly unused portion of the commitment, as well as a fee on the balance of the outstanding letters of credit. 41
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Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal
course of business. As of
Payments Due by Period
Less than 1 More than 5
(in thousands) Total year 1 - 3 years 3 - 5 years years
Long-Term Debt Obligations
Principal payment obligations(1) $ 260,926 $ 13,945 $ 10,425 $ 236,556 $ -
Interest expense on long-term debt(2) 51,752 13,546 24,532 13,674 -
Operating Lease Obligations(3) 268,539 46,752 85,241 66,758 69,788
Purchase Obligations(4) 189,464 189,464 - - -
Total $ 770,681 $ 263,707 $ 120,198 $ 316,988 $ 69,788 (1) Amounts do not include the payment of PIK interest and PIK fees. The
Subordinated Facility requires a
maturity in Fiscal Year 2024. If the Company were to make the minimum
principal payments on the Priming Loan as presented in the table above,
the Company would be required to make a
and PIK interest at maturity in Fiscal Year 2024; however, the Company
expects to make a principal payment of at least
30, 2021 to avoid making any payments for PIK fees or PIK interest on the
Priming Loan. The Company anticipates using the proceeds from its
expected tax refund to fund the
outstanding borrowings under the ABL Facility are assumed to be repaid in
Fiscal Year 2021, which may or may not reflect the actual timing of
repayment.
(2) Assumes an interest rate of 6.00% per annum for the Term Loan and Priming
Loan Credit Agreement, and 13.2% for the Subordinated Facility, consistent
with the interest rates as of
(3) Assumes the base lease term and any additional options that are reasonably
certain to be exercised at lease commencement in our outstanding operating
lease arrangements as of
(4) Purchase obligations represent purchase commitments on inventory that are
short-term and are typically made six to nine months in advance of planned
receipt. It also includes commitments related to certain selling, general
and administrative expenses that are generally for periods of a year or
less.
Off Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
Critical Accounting Policies and Significant Estimates
Our discussion of results of operations and financial condition is based upon
the consolidated financial statements included elsewhere in this Annual Report
on Form 10-K, which have been prepared in accordance with GAAP. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and certain assumptions about future events that affect the
classification and amounts reported in our consolidated financial statements and
accompanying notes, including revenue and expenses, assets and liabilities, and
the disclosure of contingent assets and liabilities. These estimates and
assumptions are based on our historical results as well as management's
judgment. Although management believes the judgment applied in preparing
estimates is reasonable based on circumstances and information known at the
time, actual results could vary materially from estimates based on assumptions
used in the preparation of our consolidated financial statements.
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; accounting for business combinations; 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 below (see Note 2 to our audited consolidated financial statements
presented elsewhere in this Annual Report on Form 10-K for additional
information regarding our critical accounting policies).
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Revenue Recognition
Revenue is primarily derived from the sale of apparel and accessory merchandise
through our Retail channel and Direct channel, which includes website and
catalog phone orders. Revenue also includes shipping and handling fees collected
from customers. The criteria to recognize revenue is met when control of the
promised goods or services are transferred to customers at an amount that
reflects the consideration to which the entity expects to be entitled to in
exchange for those goods or services. 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.
The Company has a return policy where merchandise returns will be accepted
within 90 days of the original purchase date. At the time of sale, the Company
records an estimated sales reserve for merchandise returns based on historical
prior returns experience and expected future returns. The estimated sales
reserve is recorded as a return asset (and corresponding adjustment to cost of
goods sold) for the cost of inventory and a return liability for the amount to
settle the return with a customer (and a corresponding adjustment to revenue).
The return asset and return liability are recorded in Prepaid expenses and other
current assets, and Accrued expenses and other current liabilities,
respectively, in the consolidated balance sheets. The Company collects and
remits sales and use taxes in all states in which retail and direct sales occur
and taxes are applicable. These taxes are reported on a net basis and are
thereby excluded from revenue.
The Company sells gift cards without expiration dates to customers. The Company
does not charge administrative fees on unused gift cards. Proceeds from the sale
of gift cards are recorded as a contract liability until the customer redeems
the gift card or when the likelihood of redemption is remote. Based on
historical experience, the Company estimates the value of outstanding gift cards
that will ultimately not be redeemed ("gift card breakage") and will not be
escheated under statutory unclaimed property laws. This gift card breakage is
recognized as revenue over the time period established by the Company's
historical gift card redemption pattern.
The Company recognizes revenues from shipments to customers before the shipping
and handling activities occur and will accrue those related costs. Shipping and
handling costs are recorded in selling, general and administrative expenses.
Merchandise Inventory
Inventory consists of finished goods merchandise held for sale to our customers. Inventory is stated at the lower of cost or net realizable value. Cost is calculated using the weighted average method of accounting, and includes the cost to purchase merchandise from our manufacturers, duties, commissions and inbound freight. In the normal course of business, we record inventory reserves by applying estimates, based on past and projected sales performance, to the inventory on hand. The carrying value of inventory is reduced to estimated net realizable value when factors indicate that merchandise will not be sold on terms sufficient to recover its cost. We monitor inventory levels, sales trends and sales forecasts to estimate and record reserves for excess, slow-moving and obsolete inventory. We utilize internal channels, including sales catalogs, the internet, and price reductions in retail and outlet stores to liquidate excess inventory. In some cases, external channels such as inventory liquidators are utilized. The prices obtained through these off-price selling methods varies based on many factors. Accordingly, estimates of future sales prices requires management judgment based on historical experience, assessment of current conditions and assumptions about future transactions. We have not made significant changes to our assumptions during the periods presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and estimates have not varied significantly from historically recorded amounts.
Asset Impairment Assessments
We evaluate goodwill annually at year end to determine whether the carrying
value reflected on the balance sheet is recoverable, and more frequently if
events or circumstances indicate that the fair value of a reporting unit is less
than its carrying value. Our two reporting units applicable to goodwill
impairment assessments are defined as our Direct and Retail sales channels.
Examples of impairment indicators that would trigger an impairment assessment of
goodwill between annual evaluations include, among others, macro-economic
conditions, competitive environment, industry conditions, changes in our
profitability and cash flows, and changes in sales trends or customer demand.
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We may assess our goodwill for impairment initially using a qualitative approach
to determine whether conditions exist to indicate that it is more likely than
not that the fair value of a reporting unit is less than its carrying value. If
management concludes, based on assessment of relevant events, facts and
circumstances, that it is more likely than not that a reporting unit's fair
value is greater than its carrying value, no further impairment testing is
required.
If management's assessment of qualitative factors indicates that it is more
likely than not that the fair value of a reporting unit is less than its
carrying value, then a quantitative assessment is performed. We also have the
option to bypass the qualitative assessment described above and proceed directly
to the quantitative assessment. The quantitative assessment requires comparing
the fair value of a reporting unit to its carrying value, including goodwill. We
estimate the fair value of reporting units using the income approach. The income
approach uses a discounted cash flow analysis, which involves significant
estimates and assumptions, including preparation of revenue and profitability
growth forecasts, selection of the discount rate and the terminal year multiple.
If the fair value of a reporting unit exceeds its carrying amount, goodwill is
not considered to be impaired and no further testing is required. If the
carrying amount exceeds the reporting unit's fair value, a goodwill impairment
charge is recognized for the amount in excess, not to exceed the total amount of
goodwill allocated to that reporting unit.
During Fiscal Year 2020, we performed a quantitative assessment in the first,
third and fourth quarters which resulted in a $17.9 million impairment to our
goodwill. During Fiscal Year 2019, we performed a quantitative assessment in the
second and fourth quarters which resulted in a $119.4 million impairment to our
goodwill. Our tests for impairment of goodwill resulted in a determination that
the fair value of each reporting unit exceeded the carrying value of its net
assets during Fiscal Year 2018. This analysis contains uncertainties because it
requires us to make assumptions and to apply judgments to estimate industry
economic factors and the profitability of future business strategies. If actual
results are not consistent with our estimates and assumptions, we may be exposed
to future impairment losses that could be material.
Indefinite-Lived Intangible Assets
Our trade name has been assigned an indefinite life as we currently anticipate that it will contribute cash flows to us indefinitely. Our trade name is reviewed at least annually to determine whether events and circumstances continue to support an indefinite, useful life.
We evaluate our trade name annually at year end for potential impairment, or whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Conditions that may indicate impairment include, but are not limited to, significant loss of market share to a competitor, the identification of other impaired assets within a reporting unit, loss of key personnel that negatively and materially has an adverse effect on our operations, the disposition of a significant portion of a reporting unit or a significant adverse change in business climate or regulations. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. We measure the fair value of our trade name using the relief-from-royalty method, which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. The most significant estimates and assumptions inherent in this approach are the preparation of revenue forecasts, selection of the royalty and discount rates, and selection of the terminal year multiple. We assessed the carrying value of the trade name as described above and determined that impairment losses of$12.0 million and$12.1 million were required during Fiscal Years 2020 and 2019, respectively. This analysis contains uncertainties because it requires us to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material. There were no impairment losses required in Fiscal Years 2018.
Long-Lived Assets
Long-lived assets include definite-lived intangible assets (our customer list)
subject to amortization, property and equipment and operating lease assets.
Long-lived assets obtained in a business combination are recorded at the
acquisition-date fair value, property and equipment purchased in the normal
course of business is recorded at cost and operating lease assets are recorded
at the present value of the lease payments.
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We assess the carrying value of long-lived assets for potential impairment
whenever indicators exist that the carrying value of an asset group might not be
recoverable. Indicators of impairment include, among others, a significant
decrease in the market price of an asset, a significant adverse change in the
extent or manner in which an asset is being used or in its physical condition,
and operating or cash flow performance that demonstrates continuing losses
associated with an asset group.
When indicators of potential impairment exist, we compare the sum of estimated
undiscounted future cash flows expected to result from the use and eventual
disposition of the asset group to the carrying value of the asset group. If the
carrying value of an asset group exceeds the sum of estimated undiscounted
future cash flows, we record an impairment loss in the amount required to reduce
carrying value of the asset group to fair value. We estimate the fair value of
an asset group based on the present value of estimated future cash flows,
calculated by discounting the cash flow projections used in the previous step.
We assessed the carrying value of our customer list as described above and
determined that an impairment loss of $2.6 million was required during Fiscal
Year 2020. The customer list impairment is recorded in impairment of intangible
assets in the consolidated statement of operations and comprehensive income.
During Fiscal Years 2020 and 2019, we assessed the carrying values of
right-of-use assets and property and equipment as described above. During Fiscal
Year 2020, the Company recorded impairment charges of $23.0 million and $10.8
million related to right-of-use assets and leasehold improvements, respectively,
associated with the assets of underperforming retail locations. During Fiscal
Year 2019, the Company recorded impairment charges of $2.0 million and $0.3
million related to right-of-use assets and leasehold improvements,
respectively. Right-of-use asset and leasehold improvement impairments are
recorded in impairment of long-lived assets in the consolidated statement of
operations and comprehensive income. During Fiscal Year 2018, the Company did
not record any impairment charges associated with long-lived assets.
Determining the fair value of long-lived assets requires management judgment and
relies upon the use of significant estimates and assumptions, including future
sales, our margins and cash flows, current and future market conditions,
discount rates applied, useful lives and other factors. We believe our
assumptions are reasonable based on available information. Changes in
assumptions and estimates used in the impairment analysis, or future results
that vary from assumptions used in the analysis, could affect the estimated fair
value of long-lived intangible assets and could result in impairment charges in
a future period.
Jumpstart Our Business Startups Act of 2012 (JOBS Act)
InApril 2012 , the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an "emerging growth company." As an "emerging growth company," we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company" we are not required to, among other things, (i) provide an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404B of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) comply with any requirement that may be adopted by thePublic Company Accounting Oversight Board (United States ) regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the consolidated financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer's compensation to median employee compensation. We may remain an "emerging growth company" until the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering onMarch 9, 2017 . However, if certain events occur prior to the end of such five-year period, including if we become a "large accelerated filer," our annual gross revenue equals or exceeds$1.07 billion or we issue more than$1.0 billion of non-convertible debt in any three-year period, we will cease to be an "emerging growth company" prior to the end of such five-year period.
Recent Accounting Pronouncements
See Note 3 to our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for information regarding recently issued
accounting pronouncements.
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