BURLINGTON STORES, INC. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 (Fiscal 2019 10-K). In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled "Safe Harbor Statement." Executive Summary Introduction We are a nationally recognized off-price retailer of high-quality, branded apparel at everyday low prices. We opened our first store inBurlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 769 stores as ofOctober 31, 2020 in 45 states andPuerto Rico . We have diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise at up to 60% off other retailers' prices, including: women's ready-to-wear apparel, menswear, youth apparel, baby, beauty, footwear, accessories, home, toys, gifts and coats. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers. COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus (known as COVID-19) outbreak to be a global pandemic. As a result, we began the temporary closing of some of our stores, and effectiveMarch 22, 2020 , we made the decision to temporarily close all of our stores, distribution centers (other than processing of received inventory) and corporate offices to combat the rapid spread of COVID-19. These developments have caused significant disruptions to our business and have had a significant adverse impact on our financial condition, results of operations and cash flows, the continuing extent of which will be primarily based on a variety of factors, including the timing and extent of any recovery in traffic and consumer spending at our stores, as well as any future required store closures because of COVID-19 resurgences. We began re-opening stores onMay 11, 2020 , with the majority of stores, as well as all distribution centers, re-opened bymid-June 2020 , and substantially all stores re-opened by the end of the second quarter. However, we are currently unable to determine whether, when or how the conditions surrounding the COVID-19 pandemic will change, including the impact that social distancing protocols will have on our operations, the degree to which our customers will patronize our stores and any impact from potential subsequent additional outbreaks, including additional temporary store closures. In response to the COVID-19 pandemic and the temporary closing of our stores, we provided two weeks of financial support to associates impacted by these store closures and by the shutdown of distribution centers. We temporarily furloughed most store and distribution center associates, as well as some corporate associates, but continued to provide benefits to furloughed associates in accordance with our benefit plans. In addition, we paid 100% of their medical benefit premiums during the period they were furloughed. During the second quarter, we recalled all furloughed associates at our re-opened stores, as well as our corporate and distribution facilities. In order to maintain maximum financial flexibility during these uncertain times, we completed several debt transactions in the first quarter of Fiscal 2020. InMarch 2020 , we borrowed$400 million on our existing$600 million senior secured asset-based revolving credit facility (the ABL Line of Credit),$150 million of which was repaid during the second quarter. InApril 2020 , we issued$805 million of 2.25% Convertible Senior Notes due 2025 (the Convertible Notes), and through our indirect subsidiary,Burlington Coat Factory Warehouse Corporation (BCFWC), issued$300 million of 6.25% Senior Secured Notes due 2025 (the Secured Notes). Refer to Note 4, "Long Term Debt," for further discussion regarding these debt transactions. 23
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Additionally, we took the following steps to further enhance our financial flexibility:
• Carefully managed operating expenses, working capital and capital
expenditures, including ceasing substantially all buying activities
while stores were closed. We subsequently resumed our buying activities,
while continuing our conservative approach toward operating expenses and
capital expenditures.
• Negotiated rent deferral agreements with landlords.
• Suspended our share repurchase program.
• Our CEO voluntarily agreed to not take a salary, our board of directors
voluntarily forfeited their cash compensation, our executive leadership
team voluntarily agreed to decrease their salary by 50% and smaller
salary reductions were temporarily put in place for all employees
through a certain level. This compensation was reinstated once
substantially all of our stores re-opened.
• The annual incentive bonus payments related to Fiscal 2019 performance
were delayed to the second quarter of Fiscal 2020, and merit pay
increases for Fiscal 2020 were delayed to the third quarter of Fiscal
2020.
Due to the aging of inventory related to the temporary store closures discussed
above, as well as the impact of seasonality on our merchandise, we recognized
inventory markdown reserves of $271.9 million during the three month period
ended May 2, 2020 . These reserves covered markdowns taken during the second
quarter of Fiscal 2020. These charges were included in "Cost of sales" on our
Condensed Consolidated Statement of Income (Loss).
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the
CARES Act) was signed into law, which provides emergency economic assistance for
American workers, families and businesses affected by the COVID-19 pandemic. The
economic relief package includes government loan enhancement programs and
various tax provisions to help improve liquidity for American businesses. Based
on our evaluation of the CARES Act, we believe we qualify for certain employer
refundable payroll credits, deferral of applicable payroll taxes, net operating
loss (NOL) carrybacks and immediate expensing for eligible qualified improvement
property. We recorded a tax expense of $7.2 million and a tax benefit of $80.1
million in our effective income tax rate for the three and nine months ended
October 31, 2020 , respectively, for the increased benefit from NOL carrybacks to
earlier years when the tax rate was higher than the current year. The Company
estimates that it will obtain a tax refund of $202.1 million from the carryback
of federal NOLs, which is included in the line item "Prepaid and other current
assets" on the Company's Condensed Consolidated Balance Sheet. Refer to Note 8,
"Income Taxes" for further discussion.
We continue to keep health and safety as a top priority as we operate our stores and distribution centers. We have implemented social distancing and safety practices, including:
• Signage to remind customers and associates to practice social distancing
and remain at least six feet apart.
• One way entrances and exits at the front of the store.
• Wider check-out lanes, with social distancing markers on the floor.
• Increased space at each register, as well as a physical barrier, between
customers and associates.
• Closing all fitting rooms.
• Routinely cleaning and disinfecting all areas of the store, including
frequently cleaning high-touch areas.
• Providing sanitization materials throughout the store.
• Making shopping cart wipes available.
• All associates were screened before returning from furlough and continue
to be screened daily in stores and distribution centers where required
by state and local mandates. Associates are also required to wear face
coverings while in stores and our distribution centers and are provided
face masks and gloves by the Company.
We could experience other potential adverse impacts as a result of the COVID-19
pandemic, including, but not limited to, charges from adjustments to the
carrying amount of goodwill and other intangible assets or long-lived asset
impairment charges. In addition, the negative impacts of the COVID-19 pandemic
may result in further changes in the amount of valuation allowance required.
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 and extent of the disruption to our business.
Fiscal Year
Fiscal 2020 is defined as the 52-week year ending
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Store Openings, Closings, and Relocations
During the nine month period endedOctober 31, 2020 , we opened 62 new stores, inclusive of 17 relocations, and permanently closed three stores, exclusive of the aforementioned relocations, bringing our store count as ofOctober 31, 2020 to 769 stores, which includes temporarily closed stores.
Ongoing Initiatives for Fiscal 2020
Since the beginning of the COVID-19 pandemic, protecting the health and safety of our customers, associates, and the communities that we serve has been our top priority. Accordingly, we moved quickly to close our stores, distribution centers, and corporate offices in March. We continue to keep health and safety as a top priority as we operate our stores and distribution centers. As discussed above, we began re-opening stores onMay 11, 2020 in accordance with applicable government guidelines, with the majority of our stores re-opened bymid-June 2020 , and substantially all stores re-opened by the end of the second quarter. While our stores were closed, our primary short-term financial objective was to effectively manage and enhance our liquidity. As our stores return to normal operations and we receive more clarity on the extent of the impact of the COVID-19 pandemic, we will continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparable store sales trends, increasing total sales growth and reducing expenses. These initiatives include, but are not limited to:
• Driving Comparable Store Sales Growth.
We intend to continue to increase comparable store sales through the following initiatives:
• More Effectively Chasing the Sales Trend. We are conservatively
planning comparable stores sales growth, holding and controlling
liquidity and closely analyzing the sales trend by business, ready to
chase that trend. We believe that these actions should not only enable
us to more effectively chase the trend, but they will alsoallow us to
take more advantage of great opportunistic buys.
• Making a Greater Investment in Merchandising Capabilities. We intend
to invest in incremental headcount, especially in growing or
under-developed businesses, training and coaching, improved tools and
reporting, and other forms of merchant support. We believe that these
investments should improve our ability to develop vendor
relationships, source great merchandise buys, more accurately assess
value, and better forecast and chase the sales trend.
• Operating with Leaner Store Inventories. We are planning to carry less
inventory in stores going forward, which we believe should result in
the customer finding a higher mix of fresh receipts and great
merchandise values within the racks. We believe that thisshould drive
faster turns and lower markdowns, while simultaneously improving our
customers' shopping experience.
• Enhancing Existing Categories and Introducing New Categories. We have
opportunities to expand the depth and breadth of certainexisting
categories, such as ladies' apparel, children's products, bath and
cosmetic merchandise, housewares, décor for the home andbeauty as we
continue to de-weather our business, and maintain the flexibility to
introduce new categories as we expand our merchandisingcapabilities.
• Expanding and Enhancing Our Retail Store Base.
We intend to expand and enhance our retail store base through the following initiatives:
• Adhering to a Market Focused and Financially Disciplined Real Estate
Strategy. We have grown our store base consistently since our founding
in 1972, developing more than 99% of our stores organically. We
believe there is significant opportunity to expand our retail store
base in the United States . We have identified numerous market
opportunities that we believe will allow us to operate at least 1,000
stores over the long-term.
• Maintaining Focus on Unit Economics and Returns. We have adopted a
market focused approach to new store openings with a specific focus on
maximizing sales while achieving attractive unit economics and
returns. By focusing on opening stores with attractive unit economics,
we are able to achieve attractive returns on capital andcontinue to
grow our margins. We believe that as we continue to reduce our
comparable store inventory, we will be able to reduce the square
footage of our stores while continuing to maintain our broad
assortment.
• Enhancing the Store Experience Through Store Remodels and Relocations.
We continue to invest in store remodels on a store-by-store basis
where appropriate, taking into consideration the age, sales and
profitability of a store, as well as the potential impact to the
customer shopping experience. In our remodeled stores, we have
typically incorporated new flooring, painting, lighting and graphics,
relocated our fitting rooms to maximize productive selling space,
enhanced certain departments such as home and accessories and made
various other improvements as appropriate by location.
25
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• Enhancing Operating Margins.
We intend to increase our operating margins through the following initiatives:
• Improving Operational Flexibility. Our store and supply chain teams
must continue to respond to the challenge of becoming more responsive
to the sales chase, enhancing their ability at flexing up and down
based on trends. Their ability to appropriately flex based on the
ongoing trends allows us to maximize leverage on sales,regardless of
the trend.
• Optimizing Markdowns. We believe that our markdown system allows us to
maximize sales and gross margin dollars based on forward-looking sales
forecasts, sell-through targets and exit dates. Additionally, as we
plan to carry less inventory in our stores, we expect to drive faster
turns, which in turn will reduce the amount of markdowns taken.
• Enhancing Purchasing Power . We believe that increasing our store
footprint and expanding our west coast buying office provides us with
the opportunity to capture incremental buying opportunities and
realize economies of scale in our merchandising andnon-merchandising
purchasing activities.
• Challenging Expenses to Drive Operating Leverage. We believe that we
will be able to leverage our growing sales over the fixed costs of our
business. In addition, by more conservatively planning our comparable
store sales growth, we are forcing even tighter expensecontrol. We
believe that this should put us in a strong position to drive
operating leverage on any sales ahead of the plan. Additionally, we
plan to continue challenging the processes and operating norms
throughout the organization with the belief that this will lead to
incremental efficiency improvements and savings.
Uncertainties and Challenges
As we strive to increase profitability through achieving positive comparable store sales and leveraging productivity initiatives focused on improving the in-store experience, more efficient movement of products from the vendors to the selling floors, and modifying our marketing plans to increase our core customer base and increase our share of our current customers' spending, there are uncertainties and challenges that we face as an off-price retailer of apparel and accessories for men, women and children and home furnishings that could have a material impact on our revenues or income. COVID-19. The extent of the impact of the COVID-19 pandemic on our business will depend largely on future developments, including the duration and spread of the outbreak within theU.S. , as well as the availability of, and prevalence of access to, effective medical treatments and vaccines; related economic uncertainties and government stimulus measures; the related impact on consumer confidence and spending; and when, or if, we will be able to resume normal operations, all of which are highly uncertain and cannot be predicted. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results, liquidity and cash flows. General Economic Conditions. Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing global economic conditions, inflation, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy costs, commodities pricing, income tax rates and policies, consumer confidence and consumer perception of economic conditions. In addition, consumer purchasing patterns may be influenced by consumers' disposable income, credit availability and debt levels. A broader, protracted slowdown in theU.S. economy, an extended period of high unemployment rates, an uncertain global economic outlook or a credit crisis could adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis. Consumer confidence is also affected by the domestic and international political situation. Our financial condition and operations could be impacted by changes in government regulations in areas including, but not limited to, taxes and healthcare. Ongoing international trade and tariff negotiations could have a direct impact on our income and an indirect impact on consumer prices. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting theU.S. , or public health issues such as pandemics or epidemics, including the outbreak of the COVID-19 pandemic, could lead to a decrease in spending by consumers. In addition, natural disasters, public health issues, industrial accidents and acts of war in various parts of the world could have the effect of disrupting supplies and raising prices globally which, in turn, may have adverse effects on the world andU.S. economies and lead to a downturn in consumer confidence and spending. We closely monitor our net sales, gross margin and expenses. We have performed scenario planning such that if our net sales decline for an extended period of time, we have identified variable costs that could be reduced to partially mitigate the impact of these declines. If we were to experience adverse economic trends and/or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods. 26 -------------------------------------------------------------------------------- Seasonality of Sales and Weather Conditions. Our sales, like most other retailers, are subject to seasonal influences, with the majority of our sales and net income historically derived during the second half of the year, which includes the back-to-school and holiday seasons. Weather continues to be a contributing factor to the sale of our clothing. Generally, our sales are higher if the weather is cold during the Fall and warm during the early Spring. Sales of cold weather clothing are increased by early cold weather during the Fall, while sales of warm weather clothing are improved by early warm weather conditions in the Spring. Although we have diversified our product offerings, we believe traffic to our stores is still driven, in part, by weather patterns. Competition and Margin Pressure. We believe that in order to remain competitive with retailers, including off-price retailers and discount stores, we must continue to offer brand-name merchandise at a discount to prices offered by other retailers as well as an assortment of merchandise that is appealing to our customers. TheU.S. retail apparel and home furnishings markets are highly fragmented and competitive. We compete for business with department stores, off-price retailers, internet retailers, specialty stores, discount stores, wholesale clubs, and outlet stores as well as with certain traditional, full-price retail chains that have developed off-price concepts. At various times throughout the year, traditional full-price department store chains and specialty shops offer brand-name merchandise at substantial markdowns, which can result in prices approximating those offered by us at ourBurlington stores. Additionally, it is likely that the retail environment may continue to be highly promotional in the near term, as retailers try to rebuild traffic to their stores and clear aged merchandise. We anticipate that competition will increase in the future. Therefore, we will continue to look for ways to differentiate our stores from those of our competitors. TheU.S. retail industry continues to face increased pressure on margins as overall challenging retail conditions have led consumers to be more value conscious. Our "open to buy" paradigm, in which we purchase both pre-season and in-season merchandise, allows us the flexibility to purchase less pre-season with the balance purchased in-season and opportunistically. It also provides us with the flexibility to shift purchases between suppliers and categories. This enables us to obtain better terms with our suppliers, which we expect to help offset any rising costs of goods.
Key Performance Measures
We consider numerous factors in assessing our performance. As the COVID-19 pandemic began to unfold, our focus shifted toward maintaining and enhancing our liquidity position, so that we would be able to operate with reduced revenues for an extended period and take advantage of opportunistic buys as our stores re-opened. As our operations return to normal, management will continue to evaluate our other key performance measures, including, net income (loss), Adjusted Net Income (Loss), Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin, inventory and store payroll. Liquidity. Liquidity measures our ability to generate cash. Management measures liquidity through cash flow, which is the measure of cash generated from or used in operating, financing, and investing activities. We took several steps during the nine months endedOctober 31, 2020 to effectively manage our liquidity during the COVID-19 pandemic, including careful management of operating expenses, working capital and capital expenditures, as well as suspending our share repurchase program. Additionally, we borrowed$400 million on our existing ABL Line of Credit, issued$805 million of our Convertible Notes, and through BCFWC, issued$300 million of our Secured Notes. We repaid$150 million on the ABL Line of Credit during the second quarter of Fiscal 2020. AtOctober 31, 2020 , we had$292.4 million available under the ABL Line of Credit. Cash and cash equivalents, including restricted cash and cash equivalents, increased$945.6 million during the nine months endedOctober 31, 2020 , compared with an increase of$12.9 million during the nine months endedNovember 2, 2019 . Refer to the section below entitled "Liquidity and Capital Resources" for further explanation. Net income (loss). We earned net income of$8.0 million during the three month period endedOctober 31, 2020 compared with net income of$96.5 million during the three month period endedNovember 2, 2019 . This decrease was primarily driven by the business disruption upon re-opening stores caused by the COVID-19 pandemic. We recorded a net loss of$372.5 million during the nine month period endedOctober 31, 2020 compared with net income of$258.8 million during the nine month period endedNovember 2, 2019 . This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation.
Adjusted Net Income (Loss), Adjusted EBITDA and Adjusted EBIT: Adjusted Net Income (Loss), Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance.
27
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We define Adjusted Net Income (Loss) as net income (loss), exclusive of the
following items, if applicable: (i) net favorable lease cost; (ii) costs related
to debt issuances and amendments; (iii) loss on extinguishment of debt;
(iv) impairment charges; (v) amounts related to certain litigation matters; (vi)
non-cash interest expense on the Convertible Notes; (vii) costs related to
closing the e-commerce store; and (viii) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains, all of which are tax effected
to arrive at Adjusted Net Income (Loss).
We define Adjusted EBITDA as net income (loss), exclusive of the following
items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense (benefit); (v) depreciation and
amortization; (vi) impairment charges; (vii) costs related to debt issuances and
amendments; (viii) amounts related to certain litigation matters; (ix) costs
related to closing the e-commerce store; and (x) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains.
We define Adjusted EBIT as net income (loss), exclusive of the following items,
if applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense (benefit); (v) impairment
charges; (vi) net favorable lease costs; (vii) costs related to debt issuances
and amendments; (viii) amounts related to certain litigation matters; (ix) costs
related to closing the e-commerce store; and (x) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains.
We present Adjusted Net Income (Loss), Adjusted EBITDA and Adjusted EBIT,
because we believe they are useful supplemental measures in evaluating the
performance of our business and provide greater transparency into our results of
operations. In particular, we believe that excluding certain items that may vary
substantially in frequency and magnitude from what we consider to be our core
operating results are useful supplemental measures that assist in evaluating our
ability to generate earnings and leverage sales, and to more readily compare
core operating results between past and future periods.
Adjusted Net Income (Loss) has limitations as an analytical tool, and should not
be considered either in isolation or as a substitute for net income (loss) or
other data prepared in accordance with GAAP. Among other limitations, Adjusted
Net Income (Loss) does not reflect the following items, net of their tax effect:
• favorable lease costs;
• costs related to debt issuances and amendments;
• losses on extinguishment of debt;
• amounts charged for certain litigation matters;
• non-cash interest expense related to original issue discount on the
Convertible Notes;
• impairment charges on long-lived assets;
• costs related to closing the e-commerce store; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and nine months endedOctober 31, 2020 , Adjusted Net Income (Loss) decreased$83.1 million to income of$19.5 million and decreased$612.3 million to a loss of$332.7 million , respectively, compared to the same periods in the prior year. These decreases were primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 28 -------------------------------------------------------------------------------- The following table shows our reconciliation of net income (loss) to Adjusted Net Income (Loss) for the three and nine months endedOctober 31, 2020 compared with the three and nine months endedNovember 2, 2019 : (unaudited) (in thousands) Three Months Ended Nine Months Ended October 31, November 2, October 31, November 2, 2020 2019 2020 2019 Reconciliation of net income (loss) to Adjusted Net Income (Loss): Net income (loss)$ 8,016 $ 96,459 $ (372,493 ) $ 258,791 Net favorable lease costs (a) 5,776 8,355 18,402 28,262 Non-cash interest expense on Convertible Notes (b) 7,542 - 16,295 - Costs related to debt issuances and amendments (c) (719 ) - 3,633 (375 ) Loss on extinguishment of debt (d) - - 202 - Impairment charges 2,575 - 5,575 - Litigation accruals (e) - - 20,788 - E-commerce closure (f) 556 - 1,526 - Tax effect (g) (4,209 ) (2,140 ) (26,634 ) (7,070 ) Adjusted Net Income (Loss)$ 19,537 $ 102,674 $ (332,706 ) $ 279,608
(a) Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of purchase
accounting related to the
These expenses are recorded in the line item "Selling, general and
administrative expenses" in our Condensed Consolidated Statements of Income
(Loss).
(b) Represents non-cash accretion of original issue discount on the Convertible
Notes.
(c) Represents certain costs incurred as a result of the issuance of the
Secured Notes and the Convertible Notes, as well as the execution of
refinancing opportunities.
(d) Amounts relate to the refinancing of the Term Loan Facility.
(e) Represents amounts charged for certain litigation matters.
(f) Represents costs related to the closure of our e-commerce store.
(g) Tax effect is calculated based on the effective tax rates (before discrete
items) for the respective periods, adjusted for the tax effect for the
impact of items (a) through (f). The effective tax rate includes the
benefit of loss carrybacks to prior years with higher statutory tax rates.
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income (loss) or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect: • interest expense on our debt; • losses on the extinguishment of debt; • costs related to debt issuances and amendments;
• cash requirements for replacement of assets. Although depreciation and
amortization are non-cash charges, the assets being depreciated and
amortized will likely have to be replaced in the future;
• amounts charged for certain litigation matters;
• impairment charges on long-lived assets;
• costs related to closing the e-commerce store;
• income tax expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and nine months endedOctober 31, 2020 , Adjusted EBITDA decreased$79.0 million to income of$113.5 million and decreased$873.6 million to a loss of$342.8 million , respectively, compared to the same period in the prior year. These decreases were primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 29 -------------------------------------------------------------------------------- The following table shows our reconciliation of net income (loss) to Adjusted EBITDA for the three and nine months endedOctober 31, 2020 compared with the three and nine months endedNovember 2, 2019 : (unaudited) (in thousands) Three Months Ended Nine Months Ended October 31, November 2, October 31, November 2, 2020 2019 2020 2019 Reconciliation of net income (loss) to Adjusted EBITDA: Net income (loss)$ 8,016 $ 96,459 $ (372,493 ) $ 258,791 Interest expense 27,456 12,149 70,508 38,954 Interest income (163 ) (103 ) (1,178 ) (496 ) Loss on extinguishment of debt (a) - - 202 - Costs related to debt issuances and amendments (b) (719 ) - 3,633 (375 ) Litigation accruals (c) - - 20,788 - E-commerce closure (d) 556 - 1,526 - Depreciation and amortization (e) 60,712 61,035 181,934 183,570 Impairment charges 2,575 - 5,575 - Income tax expense (benefit) 15,088 22,957 (253,327 ) 50,302 Adjusted EBITDA$ 113,521 $ 192,497 $ (342,832 ) $ 530,746 (a) Amounts relate to the refinancing of the Term Loan Facility. (b) Represents certain costs incurred as a result of the issuance of the Secured Notes and the Convertible Notes, as well as the execution of refinancing opportunities. (c) Represents amounts charged for certain litigation matters. (d) Represents costs related to the closure of our e-commerce store.
(e) Includes
the line item "Selling, general and administrative expenses" in our
Condensed Consolidated Statements of Income (Loss) for the three and nine
months ended
three and nine months ended
lease cost represents the non-cash expense associated with favorable and
unfavorable leases that were recorded as a result of the Merger
Transaction.
Adjusted EBIT has limitations as an analytical tool, and should not be
considered either in isolation or as a substitute for net income (loss) or other
data prepared in accordance with GAAP. Among other limitations, Adjusted EBIT
does not reflect:
• interest expense on our debt;
• losses on the extinguishment of debt;
• costs related to debt issuances and amendments;
• favorable lease cost;
• amounts charged for certain litigation matters;
• impairment charges on long-lived assets;
• costs related to closing the e-commerce store;
• income tax expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and nine months endedOctober 31, 2020 , Adjusted EBIT decreased$81.2 million to income of$58.6 million and decreased$881.8 million to a loss of$506.4 million , respectively, compared to the same period in the prior year. These decreases were primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Refer to the section below entitled "Results of Operations" for further explanation. 30
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The following table shows our reconciliation of net income (loss) to Adjusted
EBIT for the three and nine months ended
(unaudited)
(in thousands)
Three Months Ended Nine Months Ended
October 31, November 2, October 31, November 2,
2020 2019 2020 2019
Reconciliation of net income (loss) to
Adjusted EBIT:
Net income (loss) $ 8,016 $ 96,459 $ (372,493 ) $ 258,791
Interest expense 27,456 12,149 70,508 38,954
Interest income (163 ) (103 ) (1,178 ) (496 )
Loss on extinguishment of debt (a) - - 202 -
Costs related to debt issuances and
amendments (b) (719 ) - 3,633 (375 )
Net favorable lease costs (c) 5,776 8,355 18,402 28,262
Impairment charges 2,575 - 5,575 -
Litigation accruals (d) - - 20,788 -
E-commerce closure (e) 556 - 1,526 -
Income tax expense (benefit) 15,088 22,957 (253,327 ) 50,302
Adjusted EBIT $ 58,585 $ 139,817 $ (506,364 ) $ 375,438
(a) Amounts relate to the refinancing of the Term Loan Facility.
(b) Represents certain costs incurred as a result of the issuance of the
Secured Notes and the Convertible Notes, as well as the execution of
refinancing opportunities.
(c) Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of the
Merger Transaction. These expenses are recorded in the line item "Selling,
general and administrative expenses" in our Condensed Consolidated
Statements of Income (Loss).
(d) Represents amounts charged for certain litigation matters.
(e) Represents costs related to the closure of our e-commerce store.
Comparable Store Sales. Comparable store sales measure performance of a store
during the current reporting period against the performance of the same store in
the corresponding period of the previous year. The method of calculating
comparable store sales varies across the retail industry. As a result, our
definition of comparable store sales may differ from other retailers.
We define comparable store sales as merchandise sales of those stores,
commencing on the first day of the fiscal month one year after the end of their
grand opening activities, which normally conclude within the first two months of
operations. If a store is closed for seven or more days during a month, our
policy is to remove that store from our calculation of comparable stores sales
for any such month, as well as during the month(s) of their grand re-opening
activities. Comparable store sales decreased 11% for the three month period
ended October 31, 2020 , and increased 3% and 2% for the three and nine month
periods ended November 2, 2019 , respectively. Comparable store sales were not
meaningful for the nine months ended October 31, 2020 , due to the extended store
closures resulting from the COVID-19 pandemic.
Various factors affect comparable store sales, including, but not limited to,
weather conditions, current economic conditions, the timing of our releases of
new merchandise and promotional events, the general retail sales environment,
consumer preferences and buying trends, changes in sales mix among distribution
channels, competition, and the success of marketing programs.
Gross Margin. Gross margin is the difference between net sales and the cost of
sales. Our cost of sales and gross margin may not be comparable to those of
other entities, since some entities may include all of the costs related to
their buying and distribution functions, certain store-related costs and other
costs, in cost of sales. We include certain of these costs in the line items
"Selling, general and administrative expenses" and "Depreciation and
amortization" in our Condensed Consolidated Statements of Income (Loss). We
include in our "Cost of sales" line item all costs of merchandise (net of
purchase discounts and certain vendor allowances), inbound freight, distribution
center outbound freight and certain merchandise acquisition costs, primarily
commissions and import fees. Gross margin as a percentage of net sales improved
to 45.0% during the three month period ended October 31, 2020 , compared with
42.4% during the three month period ended November 2, 2019 , driven by a
combination of lower markdowns and higher markup, partially offset by higher
freight costs. Product sourcing costs, which are included in selling, general
and administrative expenses, increased approximately 360 basis points as a
percentage of net sales, driven by higher wages and hiring incentives in our
supply chain. Gross margin as a percentage of net sales decreased to 35.3%
during the nine month period ended October 31, 2020 , compared with 41.6% during
the nine month period ended November 2, 2019 , driven primarily by aged inventory
markdowns in the first quarter due to our extended store closures. Product
sourcing costs were $290.3 million during the nine month period ended October
31, 2020 , compared with $250.3 million during the nine month period ended
November 2, 2019 .
31
-------------------------------------------------------------------------------- Inventory. Inventory atOctober 31, 2020 decreased to$867.0 million compared with$1,004.4 million atNovember 2, 2019 . The decrease was due to a 20% decrease in comparable store inventory, driven by our initiative to decrease in-store inventory, as well as conservative inventory plans due to uncertain consumer demand during the pandemic. These decreases were partially offset by our 43 net new stores since the end of the third quarter of Fiscal 2019, as well as reserve inventory, which was 25% of total inventory as ofOctober 31, 2020 , compared with 19% as ofNovember 2, 2019 . Reserve inventory includes all inventory that is being stored for release either later in the season, or in a subsequent season. We intend to continue to build up our reserve merchandise. Inventory atFebruary 1, 2020 was$777.2 million . In order to better serve our customers and maximize sales, we continue to refine our merchandising mix and inventory levels within our stores. By appropriately managing our inventories, we believe we will be better able to deliver a continual flow of fresh merchandise to our customers. Store Payroll. The method of calculating store payroll varies across the retail industry. As a result, our store payroll may differ from other retailers. We define store payroll as regular and overtime payroll for all store personnel as well as regional and territory personnel, exclusive of payroll charges related to corporate and warehouse employees. Store payroll as a percentage of net sales was 9.8% during the three month period endedOctober 31, 2020 , compared with 9.0% during the three month period endedNovember 2, 2019 . This increase was driven by our overall decrease in sales.
As a result of the COVID-19 outbreak, we temporarily furloughed most store
associates in
Results of Operations
The following table sets forth certain items in the Condensed Consolidated Statements of Income (Loss) as a percentage of net sales for the three and nine months endedOctober 31, 2020 and the three and nine months endedNovember 2, 2019 . Percentage of Net Sales Three Months Ended Nine Months Ended October 31, November 2, October 31, November 2, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Other revenue 0.2 0.4 0.2 0.4 Total revenue 100.2 100.4 100.2 100.4 Cost of sales 55.0 57.6 64.7 58.4 Selling, general and administrative expenses 38.8 32.9 46.7 32.3 Costs related to debt issuances and amendments (0.0 ) - 0.1 (0.0 ) Depreciation and amortization 3.3 3.0 4.7 3.1 Impairment charges - long-lived assets 0.2 - 0.2 - Other income - net (0.1 ) (0.5 ) (0.1 ) (0.3 ) Loss on extinguishment of debt - - 0.0 - Interest expense 1.6 0.7 2.0 0.8 Total costs and expenses 98.8 93.7 118.3 94.3 Income (loss) before income tax expense (benefit) 1.4 6.7 (18.1 ) 6.1 Income tax expense (benefit) 0.9 1.3 (7.3 ) 1.0 Net income (loss) 0.5 % 5.4 % (10.8 )% 5.1 %
Three Month Period Ended
Net sales Net sales decreased approximately$110.2 million , or 6.2%, to$1,664.7 million during the third quarter of Fiscal 2020, primarily driven by the business disruption upon re-opening stores caused by the COVID-19 pandemic. Comparable store sales during the third quarter decreased 11%. This decrease was partially offset by additional sales from our 43 net new stores since the end of the third quarter of Fiscal 2019. Cost of sales Cost of sales as a percentage of net sales decreased to 55.0% during the third quarter of Fiscal 2020, compared to 57.6% during the third quarter of Fiscal 2019. This improvement was driven by a combination of lower markdowns and higher markup, partially 32
-------------------------------------------------------------------------------- offset by higher freight costs. On a dollar basis, cost of sales decreased$107.1 million , or 10.5%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 360 basis points as a percentage of net sales, driven by higher wages and hiring incentives in our supply chain.
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the three month period endedOctober 31, 2020 compared with the three month period endedNovember 2, 2019 . Prior year amounts have been reclassified to conform to the current period presentation. (in millions) Three Months Ended Percentage Percentage October 31, of November 2, of 2020 Net Sales 2019 Net Sales $ Variance % Change Store related costs$ 393.0 23.6 %$ 377.7 21.3 %$ 15.3 4.1 % Product sourcing costs 143.5 8.6 89.6 5.0 53.9 60.2 Corporate costs 62.0 3.7 57.0 3.2 5.0 8.8 Marketing and strategy costs 17.7 1.1 27.4 1.5 (9.7 ) (35.4 ) Favorable lease cost 5.7 0.3 8.3 0.5 (2.6 ) (31.3 ) Other selling, general and administrative expenses 23.4 1.5 23.6 1.4 (0.2 ) (0.8 ) Selling, general and administrative expenses$ 645.3 38.8 %$ 583.6 32.9 %$ 61.7 10.6 % The increase in selling, general and administrative expenses is primarily due to an increase in product sourcing costs due to higher wages and hiring incentives in our supply chain, as well as COVID-19 related expenses, which are included in store related costs in the table above. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by the increases in product sourcing costs noted above, as well as deleverage on occupancy costs and store payroll.
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed
assets amounted to
Impairment charges - long-lived assets
Impairment charges on long-lived assets were$2.6 million during the third quarter of Fiscal 2020, related to store-level assets and lease assets at 10 stores. There were no impairment charges on long-lived assets during the third quarter of Fiscal 2019. The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.
Other income - net
Other income decreased$8.0 million to$1.3 million during the third quarter of Fiscal 2020, driven by insurance gains recognized during the third quarter of Fiscal 2019, as well as a reduction in layaway fees while the program was temporarily suspended during Fiscal 2020.
Interest expense
Interest expense increased$15.3 million during the third quarter of Fiscal 2020 to$27.5 million , compared to the same period in the prior year. The increase was primarily driven by the issuance of our$805 million Convertible Notes and our$300 million Secured Notes, as well as an increased average balance on our ABL Line of Credit. This increase was partially offset by the refinancing of our Term Loan Facility inFebruary 2020 , which reduced the applicable interest rate margins on our Term Loan Facility from 2.00% to 1.75%, as well as a decrease in average LIBOR. 33
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The average interest rates and average balances related to our variable rate
debt for the third quarter of Fiscal 2020 compared with the third quarter of
Fiscal 2019, are summarized in the table below:
Three Months Ended
October 31 , November 2,
2020 2019
Average interest rate - ABL Line of Credit 1.6% 3.5%
Average interest rate - Term Loan Facility 1.9%
4.1%
Average balance - ABL Line of Credit (in millions)$ 250.0 $
32.6
Average balance - Term Loan Facility (in millions) (a)$ 961.4 $ 961.4 (a) Excludes original issue discount.
Income tax expense
Income tax expense was$15.1 million during the third quarter of Fiscal 2020 compared with income tax expense of$23.0 million during the third quarter of Fiscal 2019. The effective tax rate for the third quarter of Fiscal 2020 was 65.3% compared with 19.2% during the third quarter of Fiscal 2019. The decrease in income tax expense in the current year primarily relates to a decrease in pre-tax income, partially offset by an increased tax rate. The increased effective tax rate for the third quarter of Fiscal 2020 is primarily due to the reversal of income tax benefit recorded in the first two quarters related to the CARES Act. The CARES Act provides for net operating losses incurred in fiscal 2020 to be carried back to earlier tax years that have higher tax rates than the current year. The projected losses subject to carry back to earlier years decreased in the third quarter of fiscal 2020, resulting in a reduction of the year to date income tax benefit At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the third quarter of Fiscal 2020 resulted in an annual effective income tax rate of approximately 35% (before discrete items) as our best estimate. This is an increase compared to the annual effective tax rate for the third quarter of Fiscal 2019 of approximately 25% (before discrete items), due to current year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate.
Net income
We earned net income of$8.0 million for the third quarter of Fiscal 2020 compared with net income of$96.5 million for the third quarter of Fiscal 2019. This decrease was primarily driven by the business disruption upon re-opening stores caused by the COVID-19 pandemic.
Nine Month Period Ended
Net sales Net sales decreased approximately$1,587.3 million , or 31.4%, to$3,472.6 million during the nine month period endedOctober 31, 2020 , driven primarily by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic.
Cost of sales
Cost of sales as a percentage of net sales increased to 64.7% during the nine month period endedOctober 31, 2020 , compared to 58.4% during the nine month period endedNovember 2, 2019 , driven primarily by markdowns on aged inventory in the first quarter due to the extended store closures. On a dollar basis, cost of sales decreased$709.1 million , or 24.0%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in selling, general and administrative expenses, were$290.3 million during the nine month period endedOctober 31, 2020 , compared with$250.3 million during the nine month period endedNovember 2, 2019 . 34
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Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the nine month period endedOctober 31, 2020 compared with the nine month period endedNovember 2, 2019 . Prior year amounts have been reclassified to conform to the current period presentation. (in millions) Nine Months Ended Percentage Percentage October of November of 31, 2020 Net Sales 2, 2019 Net Sales $ Variance % Change Store related costs$ 1,034.9 29.8 %$ 1,074.1 21.2 %$ (39.2 ) (3.6 )% Product sourcing costs 290.3 8.4 250.3 4.9 40.0 16.0 Corporate costs 198.3 5.7 163.0 3.2 35.3 21.7 Marketing and strategy costs 28.7 0.8 56.1 1.1 (27.4 ) (48.8 ) Favorable lease cost 18.3 0.5 27.9 0.6 (9.6 ) (34.4 ) Other selling, general and administrative expenses 51.5 1.5 61.5 1.3 (10.0 ) (16.3 ) Selling, general and administrative expenses$ 1,622.0 46.7 %$ 1,632.9 32.3 %$ (10.9 ) (0.7 )% The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by the temporary closure of all our stores and the overall decrease in sales. We took significant steps to reduce selling, general and administrative expenses during this period. Among other things, we worked with landlords to modify payment terms for certain leases, furloughed most store and distribution center associates, as well as some corporate associates, temporarily eliminated the salary of the CEO and cash compensation for our Board of Directors, and temporarily reduced the salaries for our executive leadership team by 50%, with smaller salary reductions for all employees through a certain level. As a result of these actions, our selling, general and administrative expenses decreased from last year on a dollar basis. These decreases were partially offset by COVID-19 related expenses and store re-opening costs, as well as litigation accruals. Refer to Note 12, "Commitments and Contingencies" for further discussion regarding our litigation accruals.
Costs related to debt issuances and amendments
During Fiscal 2020, we incurred legal fees related to the issuance of our
Secured Notes of
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed assets amounted to$163.7 million during the nine month period endedOctober 31, 2020 compared with$155.6 million during the nine month period endedNovember 2, 2019 . The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores.
Impairment charges - long-lived assets
Impairment charges on long-lived assets were$5.6 million during the nine month period endedOctober 31, 2020 , related to store-level assets and lease assets at 14 stores. There were no impairment charges on long-lived assets during the nine month period endedNovember 2, 2019 . The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.
Other income - net
Other income decreased$8.8 million to$4.2 million during the third quarter of Fiscal 2020, driven by insurance gains recognized during the third quarter of Fiscal 2019, as well as a reduction in layaway fees while the program was temporarily suspended during Fiscal 2020. 35
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Interest expense
Interest expense increased$31.6 million during the nine month period endedOctober 31, 2020 to$70.5 million , compared to the same period in the prior year. The increase was primarily driven by the issuance of our$805 million Convertible Notes and our$300 million Secured Notes, as well as the higher average balance on our ABL Line of Credit. This increase was partially offset by the refinancing of our Term Loan Facility inFebruary 2020 , which reduced the applicable interest rate margins on our Term Loan Facility from 2.00% to 1.75%, as well as a decrease in average LIBOR. The average interest rates and average balances related to our variable rate debt for the nine month period endedOctober 31, 2020 compared with prior year, are summarized in the table below: Nine Months EndedOctober 31 ,November 2, 2020 2019 Average interest rate - ABL Line of Credit 2.0%
3.7%
Average interest rate - Term Loan Facility 2.3%
4.3%
Average balance - ABL Line of Credit (in millions)$ 276.2 $
108.7
Average balance - Term Loan Facility (in millions) (a)$ 961.4 $ 961.4 (a) Excludes original issue discount
Income tax expense (benefit)
Income tax benefit was$253.3 million during the nine month period endedOctober 31, 2020 compared with income tax expense of$50.3 million during the nine month period endedNovember 2, 2019 . The effective tax rate for the nine month period endedOctober 31, 2020 was 40.5% compared with 16.3% during the nine month period endedNovember 2, 2019 . The income tax benefit in the current year is a result of the pre-tax loss and the carry-back of net operating losses arising in 2020 to the five prior tax years, as permitted under the CARES Act. The increase in the income tax rate is a function of current year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate.
Net income (loss)
We recorded a net loss of$372.5 million during the nine month period endedOctober 31, 2020 compared with net income of$258.8 million for the nine month period endedNovember 2, 2019 . This decrease was primarily driven by the temporary closure of all our stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic.
Liquidity and Capital Resources
Our ability to satisfy interest payment and future principal payment obligations on our outstanding debt will depend largely on our future performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service interest payment and future principal payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed on terms similar to our current financing agreements, or at all. As a result of the uncertainty regarding the duration of the COVID-19 pandemic and the related impact on store traffic, the Company has taken a more conservative approach to managing its cash flow during Fiscal 2020. These measures included carefully managing operating expenses, working capital and capital expenditures during the period, as well as suspending the Company's share repurchase program. We completed several debt transactions in order to facilitate increased financial flexibility during this period. DuringMarch 2020 , we borrowed$400 million on our existing ABL Line of Credit. We repaid$150 million on the ABL Line of Credit during the second quarter of Fiscal 2020. OnApril 16, 2020 , we issued$805 million of our Convertible Notes, and through BCFWC, issued$300 million of Secured Notes. The proceeds of the Convertible Notes and Secured Notes are being used for general corporate purposes. We believe that cash generated from operations, along with our existing cash and our ABL Line of Credit, will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future. However, there can be no assurance that we would be able to offset declines in our comparable store sales with savings initiatives in the event that the economy declines, or we are again required to cease or significantly limit our operations as a result of the COVID-19 pandemic. 36
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Cash Flow for the Nine Month Period Ended
We generated
Net cash used in operating activities amounted to$116.9 million during the nine month period endedOctober 31, 2020 , compared with proceeds of$476.9 million during the nine month period endedNovember 2, 2019 . The decrease in our operating cash flows was primarily driven by the temporary closure of all stores and the subsequent business disruption upon re-opening caused by the COVID-19 pandemic. Net cash used in investing activities was$215.3 million during the nine month period endedOctober 31, 2020 compared with a use of$256.0 million during the nine month period endedNovember 2, 2019 . This change was primarily the result of a decrease in capital expenditures. Some of our new store, store remodel and other store expenditure projects were moved to future periods as a result of the COVID-19 pandemic. Net cash provided by financing activities was$1,277.9 million during the nine month period endedOctober 31, 2020 compared with a use of$207.9 million during the nine month period endedNovember 2, 2019 . This change was primarily driven by our cash flow management efforts as a result of the COVID-19 pandemic, which included drawing$400 million on our ABL Line of Credit, issuing$805 million of our Convertible Notes, and through BCFWC, issuing$300 million of Secured Notes, and suspending our share repurchase program. We repaid$150 million on the ABL Line of Credit during the second quarter of Fiscal 2020. Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had working capital atOctober 31, 2020 of$887.6 million compared with a working capital deficit of$199.1 million atNovember 2, 2019 . The increase in working capital was primarily due to our increased cash balance, as a result of issuing the Convertible Notes and the Secured Notes and the$250 million net draw on our ABL Line of Credit, as well as an increase in prepaid income taxes. These increases were partially offset by a decrease in merchandise inventories and an increase in other current liabilities (primarily due to deferral of rent payments). We had a working capital deficit atFebruary 1, 2020 of$51.1 million .
Capital Expenditures
For the nine month period endedOctober 31, 2020 , cash spend for capital expenditures, net of$26.0 million of landlord allowances, amounted to$188.4 million . As a result of our temporary store closures and the uncertainty regarding the impact of the COVID-19 pandemic on store traffic, some of our capital expenditure projects have been moved to future periods. We now estimate that we will spend approximately$245 million , net of approximately$45 million of landlord allowances, in capital expenditures during Fiscal 2020, including approximately$105 million , net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately$75 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives.
Share Repurchase Program
OnAugust 14, 2019 , our Board of Directors authorized the repurchase of up to$400 million of common stock, which is authorized to be executed throughAugust 2021 . This repurchase program is funded using our available cash and borrowings on our ABL Line of Credit. During the nine month period endedOctober 31, 2020 , we repurchased 243,573 shares of our common stock for$50.2 million under the share repurchase program. As part of the Company's cash management efforts during the COVID-19 pandemic, we suspended our share repurchase program inMarch 2020 . As ofOctober 31, 2020 , we had$348.4 million remaining under our share repurchase authorization. We are authorized to repurchase, from time to time, shares of our outstanding common stock on the open market or in privately negotiated transactions under our repurchase program. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program.
Dividends
We currently do, and intend to continue to, retain all available funds and any
future earnings to fund all of the Company's capital expenditures, business
initiatives, and to support any potential opportunistic capital structure
initiatives. Therefore, at this time, we do not anticipate paying cash dividends
in the near term. Our ability to pay dividends on our common stock will be
limited by restrictions on the ability of our subsidiaries to pay dividends or
make distributions under the terms of current and any future agreements
37
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governing our indebtedness. Any future determination to pay dividends will be at
the discretion of our Board of Directors, subject to compliance with covenants
in our current and future agreements governing our indebtedness, and will depend
upon our results of operations, financial condition, capital requirements and
other factors that our Board of Directors deems relevant.
In addition, since we are a holding company, substantially all of the assets
shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries.
Accordingly, our earnings, cash flow and ability to pay dividends are largely
dependent upon the earnings and cash flows of our subsidiaries and the
distribution or other payment of such earnings to us in the form of dividends.
Operational Growth
During the nine month period endedOctober 31, 2020 , we opened 62 new stores, inclusive of 17 relocations, and closed three stores, exclusive of the aforementioned relocations, bringing our store count as ofOctober 31, 2020 to 769 stores. Some of our store opening and relocation projects have been moved to future periods as a result of the COVID-19 pandemic. We continue to pursue our growth plans and invest in capital projects that meet our financial requirements. During Fiscal 2020, we plan to open 34 net new stores, which includes approximately 62 gross new stores, along with approximately 28 store relocations and closings. We continue to explore expansion opportunities both within our current market areas and in other regions. We believe that our ability to find satisfactory locations for our stores is essential for the continued growth of our business. The opening of stores generally is contingent upon a number of factors including, but not limited to, the availability of desirable locations with suitable structures and the negotiation of acceptable lease terms. There can be no assurance, however, that we will be able to find suitable locations for new stores or that we will be able to open the number of new stores presently planned, even if such locations are found and acceptable lease terms are obtained. Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores. Debt and Hedging
As of
Term Loan Facility
OnFebruary 26, 2020 , we completed a repricing of our Term Loan Facility, which among other things, reduced the interest rate margins applicable to our Term Loan Facility from 1.00% to 0.75%, in the case of prime rate loans, and from 2.00% to 1.75%, in the case of LIBOR loans, with the LIBOR floor remaining at 0.00%.
At
ABL Line of Credit OnMarch 17, 2020 , we borrowed$400 million under the ABL Line of Credit as a precautionary measure in order to increase our cash position and facilitate financial flexibility in light of the uncertainty resulting from COVID-19. We repaid$150 million of this amount during the second quarter of Fiscal 2020.
At
Convertible Notes
OnApril 16, 2020 , we issued$805 million of Convertible Notes. An aggregate of up to 3,656,149 shares of common stock may be issued upon conversion of the Convertible Notes, which number is subject to adjustment up to an aggregate of 4,844,410 shares following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption, and which is also subject to certain anti-dilution adjustments.
The Convertible Notes are general unsecured obligations of the Company. The
Convertible Notes bear interest at a rate of 2.25% per year, payable
semi-annually in cash, in arrears on
Prior to the close of business on the business day immediately precedingJanuary 15, 2025 , the Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the 38
-------------------------------------------------------------------------------- Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Convertible Notes have an initial conversion rate of 4.5418 shares per$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately$220.18 per share of our common stock), subject to adjustment if certain events occur. The initial conversion price represents a conversion premium of approximately 32.50% over$166.17 per share, the last reported sale price of our common stock onApril 13, 2020 (the pricing date of the offering) on theNew York Stock Exchange . Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. We will not be able to redeem the Convertible Notes prior toApril 15, 2023 . On or afterApril 15, 2023 , we will be able to redeem for cash all or any portion of the Convertible Notes, at our option, if the last reported sale price of our common stock is equal to or greater than 130% of the conversion price for a specified period of time, at a redemption price equal to 100% of the principal aggregate amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Holders of the Convertible Notes may require us to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if we issue a notice of redemption, it will, under certain circumstances, increase the conversion rate for holderswho elect to convert their Convertible Notes in connection with such corporate event or during the relevant redemption period for such Convertible Notes. The Convertible Notes contain a cash conversion feature, and as a result, we have separated it into liability and equity components. We valued the liability component based on our borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Notes and the fair value of the liability component.
Secured Notes
OnApril 16, 2020 , our indirect subsidiary, BCFWC, issued$300 million of Senior Secured Notes. The Secured Notes are senior, secured obligations of BCFWC, and interest is payable semiannually in cash at a rate of 6.25% per annum onApril 15 andOctober 15 of each year, beginning onOctober 15, 2020 . The Secured Notes are guaranteed on a senior secured basis byBurlington Coat Factory Holdings, LLC ,Burlington Coat Factory Investments Holdings, Inc. and BCFWC's subsidiaries that guarantee the loans under the Term Loan Facility and ABL Line of Credit. The Secured Notes will mature onApril 15, 2025 unless earlier redeemed or repurchased.
Hedging
OnDecember 17, 2018 , the Company entered into an interest rate swap contract, which was designated as a cash flow hedge. This interest rate swap, which hedges$450 million of our Term Loan Facility, became effectiveMay 31, 2019 and maturesDecember 29, 2023 .
Certain Information Concerning Contractual Obligations
The Company had$1,090.7 million of purchase commitments related to goods that were not received as ofOctober 31, 2020 . Except as disclosed above with respect to the issuance of the Convertible Notes and Secured Notes, there were no other significant changes regarding our obligations to make future payments under current contracts from those included in our Fiscal 2019 10-K. 39
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Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management's judgments and estimates. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As ofOctober 31, 2020 , the end of our third quarter, the impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and judgments carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the consolidated financial statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Our critical accounting policies and estimates are consistent with those disclosed in Note 1, "Summary of Significant Accounting Policies," to the audited Consolidated Financial Statements, included in Part II, Item 8 of the Fiscal 2019 10-K.
Safe Harbor Statement This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Our forward-looking statements are subject to risks and uncertainties. Such statements may include, but are not limited to, future impacts of the COVID-19 pandemic, proposed store openings and closings, proposed capital expenditures, projected financing requirements, proposed developmental projects, projected sales and earnings, our ability to maintain selling margins, and the effect of the adoption of recent accounting pronouncements on our consolidated financial position, results of operations and cash flows. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include: general economic conditions; pandemics, including the duration of the COVID-19 pandemic and actions taken to slow its spread and the related impact on consumer confidence and spending; our ability to successfully implement one or more of our strategic initiatives and growth plans; the availability of desirable store locations on suitable terms; changing consumer preferences and demand; industry trends, including changes in buying, inventory and other business practices; competitive factors, including pricing and promotional activities of major competitors and an increase in competition within the markets in which we compete; the availability, selection and purchasing of attractive merchandise on favorable terms; import risks, including tax and trade policies, tariffs and government regulations; weather patterns, including, among other things, changes in year-over-year temperatures; our future profitability; our ability to control costs and expenses; unforeseen cyber-related problems or attacks; any unforeseen material loss or casualty; the effect of inflation; regulatory and tax changes; our relationships with employees; the impact of current and future laws and the interpretation of such laws; terrorist attacks, particularly attacks on or within markets in which we operate; natural and man-made disasters, including fire, snow and ice storms, flood, hail, hurricanes and earthquakes; our substantial level of indebtedness and related debt-service obligations; restrictions imposed by covenants in our debt agreements; availability of adequate financing; our dependence on vendors for our merchandise; domestic events affecting the delivery of merchandise to our stores; existence of adverse litigation; and other risks discussed from time to time in our filings with theSecurities and Exchange Commission (SEC). Many of these factors, including the ultimate impact of the COVID-19 pandemic, are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements. 40
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Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact in our Condensed Consolidated Financial Statements.
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