Burlington Stores, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 ended February 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 in Burlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 736 stores as of May 2, 2020, which includes temporarily closed stores, in 45 states and Puerto 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 On March 11, 2020, the World 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 effective March 22, 2020, we made the decision to temporarily close all of our stores, distribution centers (other than sporadic processing of received inventory) and corporate offices to combat the rapid spread of COVID-19. All stores, distribution centers and corporate offices remained temporarily closed as of May 2, 2020. 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 extent of which will be primarily based on the duration of our store closures as well as the timing and extent of any recovery in traffic and consumer spending at our stores. As of May 29, 2020, approximately 400 of our stores, as well as our distribution centers, have been reopened, and we expect the majority of our stores to reopen by mid-June 2020. However, w e 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. 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 continue to provide benefits to furloughed associates, including paying 100% of their current medical benefit premiums. As we reopen our stores, we have begun to recall furloughed associates. In order to maintain maximum financial flexibility during these uncertain times, we initiated several debt transactions. During March 2020, we borrowed $400 million on our existing $600 million senior secured asset-based revolving credit facility (the ABL Line of Credit). On April 16, 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. 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 activity. 22 • 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 have been temporarily put in place for all employees through a certain level. It is anticipated that this compensation will be reinstated when a significant number of our stores reopen. • The annual incentive bonus payments related to Fiscal 2019 performance, as well as merit pay increases for Fiscal 2020, have been delayed to later in the fiscal year after we have more clarity regarding the impact of COVID-19. Although we have ceased most of our merchandise purchasing activity during this period, a significant amount of inventory remained at stores and in distribution centers prior to the temporary closures discussed above. Due to the aging of this inventory, as well as the impact of seasonality on our merchandise, we recognized inventory markdowns of $271.9 million during the three month period ended May 2, 2020. These charges are included in “Cost of sales” on our Condensed Consolidated Statement of (Loss) Income. 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 preliminary evaluation of the CARES Act, we currently believe we qualify for certain employer refundable payroll credits, deferral of applicable payroll taxes, net operating loss carryback and immediate expensing for eligible qualified improvement property. We recorded a tax benefit of $62.5 million in our effective income tax rate for the three month period ended May 2, 2020, for the increased benefit from net operating loss carryback to earlier years when the tax rate was higher than current year. We intend to continue to review and consider any available potential benefits under the CARES Act for which we qualify, including those described above. As various states across the country begin to authorize the re-opening of businesses, we continue to keep health and safety as a top priority as we take steps to re-open our stores. We are implementing 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 and in the department aisles. • Wider check-out lanes, with social distancing markers on the floor. • Increased space at each register between customers and associates. • 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. • Associates are being screened before returning to work, wearing face coverings while in stores, and are provided with gloves. 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 January 30, 2021. Fiscal 2019 is defined as the 52-week year ending February 1, 2020. Store Openings, Closings, and Relocations During the three month period ended May 2, 2020, we opened 22 new stores, inclusive of 10 relocations, and permanently closed three stores, exclusive of the aforementioned relocations, bringing our store count as of May 2, 2020 to 736 stores, which includes temporarily closed stores. 23 Ong o ing 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. Now, as various states across the country begin to authorize the re-opening of businesses, we continue to keep health and safety as a top priority as we take steps to re-open our stores. As discussed above, we began reopening stores on May 11, 2020 in accordance with applicable government guidelines and, as of May 29, 2020, approximately 400 of our stores have been reopened. We plan on opening most of our remaining stores by mid-June 2020. 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 also allow 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 this should 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 certain existing categories, such as ladies’ apparel, children’s products, bath and cosmetic merchandise, housewares, décor for the home and beauty as we continue to de-weather our business, and maintain the flexibility to introduce new categories as we expand our merchandising capabilities. • 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 and continue 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. 24 • 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 and non-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 expense control. 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 the U.S., 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 more broad, protracted slowdown in the U.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 the U.S., or public health issues such as pandemics or epidemics, including the recent 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 and U.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. 25 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. The U.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 our Burlington stores. Additionally, it is likely that the retail environment may 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. The U.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 (loss) income, Adjusted Net (Loss) Income, 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 three months ended May 2, 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. Cash and cash equivalents, including restricted cash and cash equivalents, increased $1,085.4 million during the three months ended May 2, 2020, compared with a decrease of $7.2 million during the three months ended May 4, 2019. Refer to the section below entitled “Liquidity and Capital Resources” for further explanation. Net (loss) income . We recorded a net loss of $333.7 million during the three month period ended May 2, 2020 compared with net income of $77.8 million during the three month period ended May 4, 2019. This decrease was primarily driven by the temporary closure of all our stores in March and April 2020 due to the COVID-19 pandemic. Refer to the section below entitled “Results of Operations” for further explanation. Adjusted Net (Loss) Income, Adjusted EBITDA and Adjusted EBIT : Adjusted Net (Loss) Income, Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance. We define Adjusted Net (Loss) Income as net (loss) income, exclusive of the following items, if applicable: (i) net favorable lease cost; (ii) costs related to debt 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; and (vii) other unusual, non-recurring or extraordinary expenses, losses, charges or gains, all of which are tax effected to arrive at Adjusted Net (Loss) Income. 26 We define Adjusted EBITDA as net (loss) income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) income tax expense; (v) depreciation and amortization; (vi) impairment charges; (vii) costs related to debt amendments; (viii) amounts related to certain litigation matters ; and (ix ) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We define Adjusted EBIT as net (loss) income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) income tax expense; (v) impairment charges; (vi) net favorable lease costs; (vii) costs related to debt amendments; (viii) amounts related to certain litigation matters; and (ix) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We present Adjusted Net (Loss) Income, 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. Additionally, Adjusted Net Income per share (subject to further adjustment by the Compensation Committee of the board of directors) has historically been used for purposes of determining 50% of the awards made under our corporate annual incentive plan. Adjusted Net (Loss) Income has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net (loss) income or other data prepared in accordance with GAAP. Among other limitations, Adjusted Net (Loss) Income does not reflect the following items, net of their tax effect: • favorable lease costs; • costs related to debt 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; and • other unusual, non-recurring or extraordinary expenses, losses, charges or gains. During the three months ended May 2, 2020, Adjusted Net (Loss) Income, exclusive of management transition costs, decreased $397.9 million to a loss of $312.4 million. This decrease was primarily driven by the temporary closure of all our stores in March and April 2020 due to the COVID-19 pandemic. Refer to the section below entitled “Results of Operations” for further explanation. 27 The following table shows our reconciliation of net (loss) income to Adjusted Net (Loss) Income for the three months ended May 2, 2020 compared with the three months ended May 4, 2019 : (unaudited) (in thousands) Three Months Ended May 2, May 4, 2020 2019 Reconciliation of net (loss) income to Adjusted Net (Loss) Income: Net (loss) income $ (333,728 ) $ 77,765 Net favorable lease costs (a) 6,443 10,701 Non-cash interest expense on convertible notes (b) 1,366 — Costs related to debt amendments (c) 4,352 (382 ) Loss on extinguishment of debt (d) 202 — Impairment charges 1,924 — Litigation accruals (e) 10,400 — Tax effect (f) (6,006 ) (2,597 ) Adjusted Net (Loss) Income (315,047 ) 85,487 Management transition costs, net of tax effect (g) 2,599 — Adjusted Net (Loss) Income, exclusive of management transition costs $ (312,448 ) $ 85,487 (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 April 13, 2006 Bain Capital acquisition of Burlington Coat Factory Warehouse Corporation (the Merger Transaction). These expenses are recorded in the line item “Selling, general and administrative expenses” in our Condensed Consolidated Statements of (Loss) Income. (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) 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 (e). (g) Represents costs incurred as a result of hiring a new Chief Executive Officer, primarily related to sign-on and duplicative compensation costs. Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net (loss) income 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 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; • income tax expense; and • other unusual, non-recurring or extraordinary expenses, losses, charges or gains. During the three months ended May 2, 2020, Adjusted EBITDA, exclusive of management transition costs, decreased $612.9 million to a loss of $444.9 million. This decrease was primarily driven by the temporary closure of all our stores in March and April 2020 due to 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 (loss) income to Adjusted EBITDA for the three months ended May 2, 2020 compared with the three months ended May 4, 2019 : (unaudited) (in thousands) Three Months Ended May 2, May 4, 2020 2019 Reconciliation of net (loss) income to Adjusted EBITDA: Net (loss) income $ (333,728 ) $ 77,765 Interest expense 14,693 13,371 Interest income (716 ) (205 ) Loss on extinguishment of debt (a) 202 — Costs related to debt amendments (b) 4,352 (382 ) Litigation accruals (c) 10,400 — Depreciation and amortization (d) 60,685 61,180 Impairment charges 1,924 — Income tax (benefit) expense (205,359 ) 16,195 Adjusted EBITDA (447,547 ) 167,924 Management transition costs (e) 2,599 — Adjusted EBITDA, exclusive of management transition costs $ (444,948 ) $ 167,924 (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) Includes $6.4 million and $10.5 million of favorable lease cost included in the line item “Selling, general and administrative expenses” in our Condensed Consolidated Statements of (Loss) Income for the three months ended May 2, 2020 and the three months ended May 4, 2019, respectively. 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. (e) Represents costs incurred as a result of hiring a new Chief Executive Officer, primarily related to sign-on and duplicative compensation costs. Adjusted EBIT has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net (loss) income 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 amendments; • favorable lease cost; • amounts charged for certain litigation matters; • impairment charges on long-lived assets; • income tax expense; and • other unusual, non-recurring or extraordinary expenses, losses, charges or gains. During the three months ended May 2, 2020, Adjusted EBIT, exclusive of management transition costs, decreased $616.6 million to a loss of $499.2 million. This decrease was primarily driven by the temporary closure of all our stores in March and April 2020 due to 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 (loss) income to Adjusted EBIT for the three months ended May 2, 2020 compared with the three months ended May 4, 2019 : (unaudited) (in thousands) Three Months Ended May 2, May 4, 2020 2019 Reconciliation of net (loss) income to Adjusted EBIT: Net (loss) income $ (333,728 ) $ 77,765 Interest expense 14,693 13,371 Interest income (716 ) (205 ) Loss on extinguishment of debt (a) 202 — Costs related to debt amendments (b) 4,352 (382 ) Net favorable lease costs (c) 6,443 10,701 Impairment charges 1,924 — Litigation accruals (d) 10,400 — Income tax (benefit) expense (205,359 ) 16,195 Adjusted EBIT (501,789 ) 117,445 Management transition costs (e) 2,599 — Adjusted EBIT, exclusive of management transition costs $ (499,190 ) $ 117,445 (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 (Loss) Income. (d) Represents amounts charged for certain litigation matters. (e) Represents costs incurred as a result of hiring a new Chief Executive Officer, primarily related to sign-on and duplicative compensation costs. 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. This metric has also historically been used for purposes of determining 50% of the awards made under our corporate annual incentive plan. 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 increased 3% in February of Fiscal 2020. All stores were non-comparable during March and April of Fiscal 2020 due to the temporary closures associated with the COVID-19 pandemic. Comparable store sales were flat for the three months ended May 4, 2019 . 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 (Loss) Income. 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 decreased to 2.0% during the three month period ended May 2, 2020, compared with 41.0% during the three month period ended May 4, 2019, driven primarily by a $271.9 million charge against aged inventory due to our extended store closures. Product sourcing costs, which are included in selling, general and administrative 30 expenses, were $75.7 million during the three month period ended May 2, 2020 , compared with $78.6 million during the three month period ended May 4, 2019 . Inventory. Inventory at May 2, 2020 decreased to $625.9 million compared with $895.8 million at May 4, 2019. The decrease was attributable primarily to the $271.9 million inventory charge during the three month period ended May 2, 2020 due to aged inventory, as well as aggressive actions to reduce inventory receipts during this period of extended store closures. These charges are included in “Cost of sales” on our Condensed Consolidated Statement of (Loss) Income. Pack and hold inventory was 22% of total inventory as of May 2, 2020, compared with 28% as of May 4, 2019. We ceased most buying activity, including pack and hold, during the period that stores were closed. Once operations return to normal, we intend to continue to build up our pack and hold merchandise. Inventory at February 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. Once operations begin to normalize, we will continue to move toward more productive inventories by increasing the amount of current inventory as a percent of total inventory. 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. As a result of the COVID-19 outbreak, we temporarily furloughed most store associates in March 2020, while providing two weeks of financial support to impacted associates. We also continued to provide benefits to furloughed associates, including paying 100% of their current medical benefit premiums. As a result of these actions, store payroll costs decreased to $105.2 million during the three month period ended May 2, 2020, compared with $141.0 million during the three month period ended May 4, 2019. Results of Operations The following table sets forth certain items in the Condensed Consolidated Statements of (Loss) Income as a percentage of net sales for the three months ended May 2, 2020 and the three months ended May 4, 2019. Percentage of Net Sales Three Months Ended May 2, May 4, 2020 2019 Net sales 100.0 % 100.0 % Other revenue 0.4 0.3 Total revenue 100.4 100.3 Cost of sales 98.0 59.0 Selling, general and administrative expenses 60.8 31.8 Costs related to debt amendments 0.6 (0.0 ) Depreciation and amortization 6.8 3.1 Impairment charges - long-lived assets 0.2 — Other income - net (0.3 ) (0.1 ) Loss on extinguishment of debt 0.0 — Interest expense 1.8 0.8 Total costs and expenses 167.9 94.6 (Loss) income before income tax (benefit) expense (67.5 ) 5.7 Income tax (benefit) expense (25.7 ) 1.0 Net (loss) income (41.8 )% 4.7 % Three Month Period Ended May 2, 2020 Compared With the Three Month Period Ended May 4, 2019 Net sales Net sales decreased approximately $830.6 million, or 51.0%, to $798.0 million during the three month period ended May 2, 2020, driven primarily by the temporary closure of all our stores by March 22, 2020. Comparable store sales for February of Fiscal 2020 increased 3% prior to the store closures. All stores were non-comparable for March and April of Fiscal 2020. Cost of sales Cost of sales as a percentage of net sales increased to 98.0% during the three month period ended May 2, 2020, compared to 59.0% during the three month period ended May 4, 2019, driven primarily by a $271.9 million charge against aged inventory due to 31 the extended store closures . On a dollar basis, cost of sales de creased $ 179.1 million, or 18.6% , pr imarily driven by our overall de crease in sales . Product sourcing costs, which are included in selling, general and administrative expenses, wer e $75.7 million during the three month period ended May 2, 2020 , compared with $78.6 million during the three month period ended May 4, 2019 . Selling, general and administrative expenses The following table details selling, general and administrative expenses for the three month period ended May 2, 2020 compared with the three month period ended May 4, 2019. (in millions) Three Months Ended May 2, 2020 Percentage of Net Sales May 4, 2019 Percentage of Net Sales $ Variance % Change Store related costs $ 306.5 38.4 % $ 341.0 20.9 % $ (34.5 ) (10.1 )% Product sourcing costs 75.7 9.5 78.6 4.8 (2.9 ) (3.7 ) Corporate costs 76.7 9.6 50.6 3.1 26.1 51.6 Marketing and strategy costs 7.5 0.9 18.7 1.2 (11.2 ) (59.9 ) Favorable lease cost 6.4 0.8 10.5 0.7 (4.1 ) (39.0 ) Other selling, general and administrative expenses 12.3 1.6 18.0 1.1 (5.7 ) (31.7 ) Selling, general and administrative expenses $ 485.1 60.8 % $ 517.4 31.8 % $ (32.3 ) (6.2 )% The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by the temporary closure of all stores by March 22, 2020. 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 increases in stock compensation expense and litigation accruals, as well as COVID-19 related expenses. Costs related to debt amendments During the first quarter of Fiscal 2020, we incurred legal fees related to the issuance of our Secured Notes of $3.2 million, as well as legal and placement fees of $1.1 million related to the refinancing our Term Loan Facility. During the first quarter of Fiscal 2019, we reversed $0.4 million of previously estimated debt amendment costs associated with the 2018 refinancing of our Term Loan Facility. Depreciation and amortization Depreciation and amortization expense related to the depreciation of fixed assets amounted to $54.3 million during the three month period ended May 2, 2020 compared with $50.6 million during the three month period ended May 4, 2019. The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores. Interest expense Interest expense increased $1.3 million to $14.7 million. The increase was primarily driven by the $400 million draw on our ABL Line of Credit in March 2020, as well as the issuance of our $805 million Convertible Notes and our $300 million Secured Notes. This increase was partially offset by the refinancing of our Term Loan Facility in February 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. 32 The average interest rates and average balances related to our variable rate debt for the three month period ended May 2, 2020 compared with prior year, are summarized in the table below: Three Months Ended May 2, May 4, 2020 2019 Average interest rate – ABL Line of Credit 2.2% 3.8% Average interest rate – Term Loan Facility 3.0% 4.5% Average balance – ABL Line of Credit (in millions) $ 206.6 $ 147.4 Average balance – Term Loan Facility (in millions) (a) $ 961.4 $ 961.4 (a) Excludes original issue discount Income tax expense Income tax benefit was $205.4 million during the three month period ended May 2, 2020 compared with income tax expense of $16.2 million during the three month period ended May 4, 2019. The effective tax rate for the three month period ended May 2, 2020 was 38.1% compared with 17.2% during the three month period ended May 4, 2019. The income tax benefit in the current year is a result of the pre-tax loss, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27th, 2020. Among other things, the CARES Act allows for a 5 year Net Operating Loss carry-back. 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 (loss) income We recorded a net loss of $333.7 million during the three month period ended May 2, 2020 compared with net income of $77.8 million for the three month period ended May 4, 2019. This decrease was primarily driven by the temporary closure of all our stores in March and April 2020 due to 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 temporary store closures and the uncertainty regarding the duration of the COVID-19 impact on store traffic, the Company took a more conservative approach to managing its cash flow during the first quarter of 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 initiated several debt transactions in order to facilitate increased financial flexibility during this period. During March 2020, we borrowed $400 million on our existing ABL Line of Credit. On April 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 will be used for general corporate purposes. We believe that cash generated from operations upon re-opening of our stores, 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. Cash Flow for the Three Month Period Ended May 2, 2020 Compared With the Three Month Period Ended May 4, 2019 We generated $1,085.4 million of cash flow during the three month period ended May 2, 2020 compared with a use of $7.2 million during the three month period ended May 4, 2019. Net cash used in operating activities amounted to $271.7 million during the three month period ended May 2, 2020, compared with proceeds of $54.2 million during the three month period ended May 4, 2019. The decrease in our operating cash flows was primarily driven by the temporary closure of all stores due to the COVID-19 pandemic. 33 Net cash used in investing activities was $ 62.6 million during the three month period ended May 2, 2020 compared with a use of $ 83.9 million during the three month period ended May 4, 2019 . This change was primarily the result of a decrease in capital expenditures. Many 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 $1,419.7 million during the three month period ended May 2, 2020 compared with $22.4 million during the three month period ended May 4, 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 on our Secured Notes, and suspending our share repurchase program. 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 at May 2, 2020 of $867.9 million compared with a working capital deficit of $114.0 million at May 4, 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 $400 million draw on our ABL Line of Credit. These increases were partially offset by a decrease in merchandise inventories, as a result of markdowns taken on inventory purchased prior to the COVID-19 pandemic. We had a working capital deficit at February 1, 2020 of $51.1 million. Capital Expenditures For the three month period ended May 2, 2020, cash spend for capital expenditures, net of $5.8 million of landlord allowances, amounted to $56.7 million. As a result of our temporary store closures and the uncertainty regarding the impact of the COVID-19 pandemic on store traffic, many of our capital expenditure projects have been moved to future periods. We now estimate that we will spend approximately $260 million, net of approximately $40 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 $ 70 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives. Share Repurchase Program On August 14, 2019, our Board of Directors authorized the repurchase of up to $400 million of common stock, which is authorized to be executed through August 2021. This repurchase program is funded using our available cash and borrowings on our ABL Line of Credit. During the three month period ended May 2, 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 in March 2020. As of May 2, 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 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. 34 Operational Growth During the three month period ended May 2, 2020, we opened 22 new stores, inclusive of 10 relocations, and closed three stores, exclusive of the aforementioned relocations, bringing our store count as of May 2, 2020 to 736 stores. Many of our store opening and relocation projects have been moved to future periods as a result of the COVID-19 pandemic. We will continue to pursue our growth plans and invest in capital projects that meet our financial requirements once normal store operations resume, and we have more clarity on the extent of the impact of the COVID-19 pandemic. During Fiscal 2020, we plan to open 38 net new stores, which includes approximately 64 gross new stores, along with approximately 26 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 even if such locations are found and acceptable lease terms are obtained, we will be able to open the number of new stores presently planned. 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 May 2, 2020, our obligations, inclusive of original issue discount, include $957.8 million under our Term Loan Facility, $625.7 million of Convertible Notes, $300.0 million of Secured Notes and $400.0 million of outstanding borrowings on our ABL Line of Credit. Our debt obligations also include $49.5 million of finance lease obligations as of May 2, 2020. Term Loan Facility On February 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 May 2, 2020, our borrowing rate related to the Term Loan Facility was 2.6 %. ABL Line of Credit On March 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. At May 2, 2020, we had $150.9 million available under the ABL Line of Credit. The maximum borrowings under the ABL Line of Credit during the three month period ended May 2, 2020 amounted to $400.0 million. Average borrowings during the three month period ended May 2, 2020 amounted to $206.6 million at an average interest rate of 2.2%. Convertible Notes On April 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 will bear interest at a rate of 2.25% per year, payable semi-annually in cash, in arrears on April 15 and October 15 of each year, beginning on October 15, 2020. The Convertible Notes will mature on April 15, 2025, unless earlier converted, redeemed or repurchased. Prior to the close of business on the business day immediately preceding January 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 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 on April 13, 2020 (the pricing date of the offering) on the New 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 to April 15, 2023. On or after April 15, 2023, we will be able to redeem for cash all or any portion of the 35 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 holders who 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 On April 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 on each of April 15 and October 15, beginning on October 15, 2020. The Secured Notes are guaranteed on a senior secured basis by Burlington 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 on April 15, 2025 unless earlier redeemed or repurchased. Hedging On December 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 effective May 31, 2019 and matures December 29, 2023. Certain Information Concerning Contractual Obligations The Company had $455.2 million of purchase commitments related to goods that were not received as of May 2, 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. 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 of May 2, 2020, the end of our first 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. 36 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 the Securities 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. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes to our quantitative and qualitative disclosures about market risk from those included in our Fiscal 2019 10-K. 37