What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-04 compared with 2020-06-19 · 208 added, 111 removed, 92 unchanged (78% of the section changed)

2 unchanged sentences

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

To help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S.

and Canada, effective March 18, 2020.

Our e-commerce businesses have continued to be available to customers, with our fulfillment center and stores utilized for the fulfillment of online orders to be shipped to customers or available for curbside pickup.

The impact of the COVID-19 outbreak, including the temporary closure of all of our stores, has had a material adverse effect on our business, liquidity, financial condition, and results of operations.

During the three months ended May 2, 2020, we made, and may continue to make, adjustments to our operational plans, inventory controls, liquidity management by delaying lease and vendor payments, and reductions to our expense and capital expenditure plans.

We have already taken a number of actions including implementing temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave.

We are taking a phased approach as we reopen stores and we expect to have nearly all North American stores open by the end of June 2020.

Reopened stores initially are generating significantly lower sales than they did in prior periods, with trends improving as more of the economy reopens and as consumer behavior adapts to the changing landscape.

Additionally, we have instituted new health and safety protocols for our customers and employees using industry best practices.

In connection with reopening stores, we expect to spend approximately $8.0 million in pre-open cleaning services, signs used to encourage customers in social distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items to help control the spread of the virus and protect the health and safety of our customers and employees.

Prior to the COVID-19 outbreak, we were on track to achieve growth in fiscal 2020, with positive comparable sales year-to-date through March 5, 2020.

The impact of the COVID-19 outbreak on store traffic, beginning on March 6, 2020, and the subsequent closure of all our North American stores, materially altered this trajectory.

We implemented inventory control actions that resulted in inventory units on hand flat at the end of the first quarter of fiscal 2020 compared to the same period last year.

We have been more aggressive with our promotional activity to drive sales, and this markdown activity has materially impacted margins.

Over the past several years, we have made significant investments in our digital infrastructure and, as a result, we were able to generate robust digital sales during the first quarter of fiscal 2020, well above digital sales for the same period last year across all segments.

Our unique digital experiences and our ability to use our stores for fulfillment have served us well while our stores have been closed to the public.

On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S.

In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions.

However, as this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, liquidity management, and reductions to our expense and capital expenditure plans.

With the easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses, during the second quarter and into the third quarter of fiscal 2020, we have re-opened the majority of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions.

In July 2020, we implemented an internal reorganization and reduction of our workforce, resulting in the elimination of over 1,000 associate positions, including approximately 220 vacant positions that will not be filled.

Given the continuation of overall depressed consumer sentiment, customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all.

We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures resulted in a sharp decline in our net sales and cash flows during the first half of fiscal 2020.

Although the majority of our stores are now open, we are experiencing, and may continue to experience, significantly reduced customer traffic and net sales.

Our retailer customers in the Brand Portfolio Segment are having similar experiences.

Our flexible business model has afforded us the opportunity to quickly adapt to the volatile macro environment and business conditions.

We implemented inventory control actions that enabled us to decrease total inventory by 37% at the end of the second quarter of fiscal 2020 compared to the same period last year.

We have been more aggressive with our promotional activity to drive sales, and this markdown activity, along with additional inventory reserves, has materially impacted margins.

With our customers staying home, there has been a clear shift in consumer behavior and preferences to increased demand for athleisure and casual products and away from dress and seasonal categories.

We have modified receipts to match these expectations and see opportunity ahead of us given our under-penetration in this business.

Over the past several years, we have made significant investments in our digital infrastructure and, as a result, we were able to generate strong digital sales during the first half of fiscal 2020, well above digital sales for the same period last year across all segments.

Our unique digital experiences, such as Buy Online Pick Up in Store and Curbside Pickup, and our ability to use our stores for fulfillment have served us well while our stores have been closed to the public.

Digital innovation has also helped us pilot a self-checkout option through our mobile app for customers shopping in stores.

We anticipate that adapting to operating as a digital-focused retailer during this time will have a lasting influence on how we operate moving forward.

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We remain one of the largest designers, producers and retailers of footwear and accessories in the market and have the advantage of a fully integrated supply chain supported by our acquisition of Camuto Group.

The COVID-19 pandemic remains a rapidly evolving situation.

The continuation of the outbreak or a new surge in cases may cause new or prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors, including a potential reduction in consumer spending.

As such, the ultimate impacts of the COVID-19 outbreak to our businesses are highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

The COVID-19 pandemic remains challenging.

The continuation of the outbreak or a new surge in cases may cause new and prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors and preferences, which may necessitate further shifts in our business model, and potential reductions in consumer spending.

As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Comparable Sales Performance Metric

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Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed.

Comparable sales include e-commerce sales.

Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period in the prior year.

Comparable sales includes e-commerce sales.

Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency

exchange rate used in the comparable period in the prior year.

Comparable sales for the Brand Portfolio segment includes the direct-to-consumer www.vincecamuto.com e-commerce site.

Comparable sales also includes stores temporarily closed as a result of the COVID-19 outbreak as management continues to believe this metric is meaningful to monitor the performance through the temporary closure period and to measure progress as stores re-open.

Comparable sales will exclude the sales of Stein Mart beginning in the third quarter of fiscal 2020.

The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

Financial Summary

Net sales decreased to $482.8 million for the three months ended May 2, 2020 from $873.3 million for the three months ended May 4, 2019 .

The 44.7% decrease in net sales was primarily driven by the COVID-19 outbreak with a 42.3% decrease in comparable sales due to the temporary closure of all stores effective March 18, 2020, during our peak selling season, the lower Brand Portfolio segment sales due to orders canceled by our retailer customers, shelter-in-place orders impacting many of our customers, and changes in consumer spending as a result of the economic uncertainty.

During the three months ended May 2, 2020 , gross loss as a percentage of net sales was 5.5% as compared to a gross profit of 29.7% for the same period last year.

The change from a gross profit to a loss was primarily driven by the impacts of the COVID-19 outbreak on our operations and the closure of stores, which we addressed with aggressive promotional activity, significant inventory markdowns resulting in an increase in inventory reserves of $84.0 million over the same period last year, increased shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

Net loss for the three months ended May 2, 2020 was $215.9 million , or a loss of $3.00 per diluted share, which included net after-tax charges of $84.1 million , or $1.17 per diluted share, primarily related to impairment charges, integration and restructuring expenses and incremental costs related to the COVID-19 outbreak, offset by governmental credits we claimed.

Net income for the three months ended May 4, 2019 was $31.2 million , or $0.40 earnings per diluted share, which included net after-tax charges of $2.4 million , or $0.03 per diluted share, primarily related to integration and restructuring expenses.

Net sales decreased to $489.7 million for the three months ended August 1, 2020 from $856.0 million for the three months ended August 3, 2019.

The 42.8% decrease in net sales was primarily driven by the COVID-19 outbreak with a 42.7% decrease in comparable sales due to the temporary closure of all stores beginning in March 2020 through much of the second quarter of fiscal 2020 and, since re-opening, we are experiencing significantly reduced customer traffic and net sales relative to the same period last year.

In addition, we had lower Brand Portfolio segment sales due to orders canceled by our retailer customers.

During the three months ended August 1, 2020, gross profit as a percentage of net sales was 7.6% as compared to 30.5% for the same period last year.

The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations.

For the three months ended August 1, 2020, we addressed the temporary closure of stores and, subsequently, the significantly reduced customer traffic upon store re-openings, with aggressive promotional activity.

The impact of COVID-19 and the actions we took resulted in higher inventory reserves, increased shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

Net loss for the three months ended August 1, 2020 was $98.2 million, or a loss of $1.36 per diluted share, which included net after-tax charges of $6.2 million, or $0.08 per diluted share, primarily related to impairment charges, integration and restructuring expenses and incremental costs related to the COVID-19 outbreak, offset by governmental credits we claimed and a gain from a settlement with a vendor.

Net income for the three months ended August 3, 2019 was $27.4 million, or $0.37 earnings per diluted share, which included net after-tax charges of $8.3 million, or $0.11 per diluted share, primarily related to integration and restructuring expenses.

Results of Operations

Comparison of the Three Months Ended August 1, 2020 with the Three Months Ended August 3, 2019

Three months ended

(dollars in thousands, except per share amounts)

% of Net Sales

August 1, 2020 August 3, 2019 Change

(dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount %

Net sales (1)

$ 489,714 100.0 % $ 855,952 100.0 % $ (366,238) (42.8) %

Cost of sales (452,672) (92.4) (594,779) (69.5) 142,107 (23.9) %

Gross profit (loss) (1)

Gross profit (1)

37,042 7.6 261,173 30.5 (224,131) (85.8) %

Operating expenses (1)

(168,424) (34.4) (222,370) (26.0) 53,946 (24.3) %

Income from equity investment 2,153 0.4 2,464 0.3 (311) (12.6) %

Impairment charges

Operating profit (loss)

Impairment charges (6,735) (1.4) — — (6,735) NM

Operating profit (loss) (135,964) (27.8) 41,267 4.8 (177,231) NM

Interest expense, net (3,788) (0.8) (1,972) (0.2) (1,816) 92.1 %

Non-operating expenses, net

Income (loss) before income taxes

Income tax benefit (provision)

Net income (loss)

Non-operating income, net 743 0.2 199 0.0 544 273.4 %

Income (loss) before income taxes (139,009) (28.4) 39,494 4.6 (178,503) NM

Income tax benefit (provision) 40,795 8.3 (12,087) (1.4) 52,882 NM

Net income (loss) $ (98,214) (20.1) % $ 27,407 3.2 % $ (125,621) NM

Basic and diluted earnings (loss) per share:

Basic earnings (loss) per share

Diluted earnings (loss) per share

Basic earnings (loss) per share $ (1.36) $ 0.37 $ (1.73) NM

Diluted earnings (loss) per share $ (1.36) $ 0.37 $ (1.73) NM

Weighted average shares used in per share calculations:

Basic shares 72,142 73,529 (1,387) (1.9) %

Diluted shares 72,142 74,316 (2,174) (2.9) %

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Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:

(in thousands)

Three months ended May 2, 2020

(in thousands) Three months ended August 1, 2020

Consolidated net sales for the same period last year $ 855,952

Decrease in comparable sales (323,468)

Net decrease from non-comparable sales and other changes

Net increase from non-comparable sales and other changes 36,365

Loss of net sales from closed stores (3,614)

Decrease in wholesale net sales from Brand Portfolio segment (73,014)

Increase in commission income from Brand Portfolio segment

Decrease in commission income from Brand Portfolio segment (2,507)

Consolidated net sales $ 489,714

The following summarizes net sales by segment:

Three months ended Change

(dollars in thousands) August 1, 2020 August 3, 2019 Amount % Comparable Sales %

Segment net sales:

Retail $ 393,977 $ 677,920 $ (283,943) (41.9) % (44.9)%

Canada Retail 49,582 63,306 (13,724) (21.7) % (27.9)%

Brand Portfolio 30,458 102,947 (72,489) (70.4) % 120.5%

Other 22,266 29,480 (7,214) (24.5) % (36.2)%

Total segment net sales 496,283 873,653 (377,370) (43.2) % (42.7)%

Elimination of intersegment net sales (6,569) (17,701) 11,132 (62.9) %

Consolidated net sales $ 489,714 $ 855,952 $ (366,238) (42.8) %

The decreases in comparable sales for all segments, except Brand Portfolio, and in total consolidated net sales, were driven by the temporary closure of stores during our peak selling season and significantly reduced customer traffic since re-opening.

This was partially offset by strong performance in our e-commerce channels, including www.vincecamuto.com, which is included in comparable sales for the Brand Portfolio segment, as a certain amount of customer demand shifted online.

Brand Portfolio segment net sales was also negatively impacted by the COVID-19 outbreak as retailer customers temporarily closed stores and canceled orders.

Gross Profit (Loss)- The following summarizes gross profit (loss) by segment:

Three months ended

August 1, 2020 August 3, 2019 Change

(dollars in thousands)

Comparable Sales %

Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points

Segment gross profit (loss):

Retail $ 40,097 10.2 % $ 208,056 30.7 % $ (167,959) (80.7) % (2,050)

Canada Retail 5,650 11.4 % 21,939 34.7 % $ (16,289) (74.2) % (2,330)

Brand Portfolio (11,440) (37.6) % 26,786 26.0 % $ (38,226) NM NM

Other 118 0.5 % 6,041 20.5 % $ (5,923) (98.0) % (2,000)

34,425 262,822

Elimination of intersegment gross loss (profit) 2,617 (1,649)

Gross profit $ 37,042 7.6 % $ 261,173 30.5 % $ (224,131) (85.8) % (2,290)

The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations and the temporary closure of stores and significantly reduced customer traffic since re-opening, which we addressed with aggressive promotional activity.

The impact of COVID-19 and the actions we took also resulted in higher inventory reserves, increased shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market.

Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value.

For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores.

Elimination of intersegment gross profit (loss) consisted of the following:

Three months ended

(in thousands) August 1, 2020 August 3, 2019

Elimination of intersegment activity:

Net sales recognized by Brand Portfolio segment $ (6,569) $ (17,701)

Cost of sales:

Cost of sales recognized by Brand Portfolio segment 4,827 14,311

Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 4,359 1,741

Gross loss (profit) $ 2,617 $ (1,649)

Operating Expenses - For the three months ended August 1, 2020, operating expenses decreased by $53.9 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our associates and reducing pay for nearly all associates not placed on temporary leave for most of the second quarter of fiscal 2020.

Operating expenses during the three months ended August 1, 2020 were offset by a gain from a settlement with a vendor of $9.0 million and government subsidies in the form of qualified payroll tax credits of $3.5 million.

Impairment Charges- During the three months ended August 1, 2020, we evaluated certain long-lived assets based on our intent to use such assets going forward and, as a result, we recorded impairment charges of $6.7 million.

Comparison of the Six Months Ended August 1, 2020 with the Six Months Ended August 3, 2019

Six months ended

August 1, 2020 August 3, 2019 Change

(dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount %

Net sales (1)

$ 972,497 100.0 % $ 1,729,241 100.0 % $ (756,744) (43.8) %

Cost of sales (961,915) (98.9) (1,208,735) (69.9) 246,820 (20.4) %

Gross profit (1)

10,582 1.1 520,506 30.1 (509,924) (98.0) %

Operating expenses (1)

(355,645) (36.6) (439,950) (25.4) 84,305 (19.2) %

Income from equity investment 4,423 0.5 4,692 0.3 (269) (5.7) %

Impairment charges (119,282) (12.3) — — (119,282) NM

Operating profit (loss) (459,922) (47.3) 85,248 5.0 (545,170) NM

Interest expense, net (5,946) (0.6) (3,773) (0.2) (2,173) 57.6 %

Non-operating income (expenses), net 656 0.1 (143) (0.0) 799 NM

Income (loss) before income taxes (465,212) (47.8) 81,332 4.8 (546,544) NM

Income tax benefit (provision) 151,140 15.5 (22,731) (1.3) 173,871 NM

Net income (loss) $ (314,072) (32.3) % $ 58,601 3.5 % $ (372,673) NM

Basic and diluted earnings (loss) per share:

Basic earnings (loss) per share $ (4.36) $ 0.78 $ (5.14) NM

Diluted earnings (loss) per share $ (4.36) $ 0.77 $ (5.13) NM

Weighted average shares used in per share calculations:

Basic shares 72,028 75,267 (3,239) (4.3) %

Diluted shares 72,028 76,281 (4,253) (5.6) %

NM - Not meaningful

(1) We changed our presentation of net sales and gross profit (loss) for all periods presented to include commission income.

Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses.

Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:

(in thousands) Six months ended August 1, 2020

Consolidated net sales for the same period last year $ 1,729,241

Decrease in comparable sales (652,260)

Net increase from non-comparable sales and other changes 2,056

Loss of net sales from closed stores (8,013)

Decrease in wholesale net sales from Brand Portfolio segment (97,464)

Decrease in commission income from Brand Portfolio segment (1,063)

Consolidated net sales $ 972,497

The following summarizes net sales by segment:

Six months ended Change

(dollars in thousands) August 1, 2020 August 3, 2019 Amount % Comparable Sales %

Segment net sales:

Retail $ 771,050 $ 1,369,760 $ (598,710) (43.7) % (43.7)%

Canada Retail 78,911 115,122 (36,211) (31.5) % (29.9)%

Brand Portfolio 112,571 207,493 (94,922) (45.7) % 106.5%

Other 35,889 65,087 (29,198) (44.9) % (50.4)%

Total segment net sales 998,421 1,757,462 (759,041) (43.2) % (42.5)%

1 unchanged sentence

Consolidated net sales $ 972,497 $ 1,729,241 $ (756,744) (43.8) %

The decreases in comparable sales for all segments, except Brand Portfolio, and in total consolidated net sales, were driven by the temporary closure of stores during our peak selling season in response to the COVID-19 outbreak and significantly reduced customer traffic since re-opening.

1 unchanged sentence

Gross Profit (Loss)- The following summarizes gross profit (loss) by segment:

Three months ended

Six months ended

August 1, 2020 August 3, 2019 Change

(dollars in thousands)

% of Segment Net Sales

Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points

Segment gross profit (loss):

Retail $ 7,127 0.9 % $ 417,947 30.5 % $ (410,820) (98.3) % (2,960)

Canada Retail 3,339 4.2 % 37,686 32.7 % $ (34,347) (91.1) % (2,850)

Brand Portfolio 2,464 2.2 % 52,459 25.3 % $ (49,995) (95.3) % (2,310)

Elimination of intersegment gross profit

Gross profit (loss)

The change from a gross profit to a loss was primarily driven by the impacts of the COVID-19 outbreak on our operations and the closure of stores, which we responded to with aggressive promotional activity, significant inventory markdowns, higher shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

Other (5,310) (14.8) % 15,352 23.6 % $ (20,662) NM NM

7,620 523,444

Elimination of intersegment gross loss (profit) 2,962 (2,938)

Gross profit $ 10,582 1.1 % $ 520,506 30.1 % $ (509,924) (98.0) % (2,900)

The impact of COVID-19 and the actions we took also resulted in higher inventory reserves, increased

shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market.

Under the retail inventory method, the valuation of

inventories reflects reductions for merchandise that was marked down prior to the end of the first quarter of fiscal 2020 with charges to cost of sales.

As a result, earnings are negatively impacted as the merchandise is marked down prior to sale.

Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value.

For all inventories, we also monitored slow-moving and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores.

For the three months ended May 2, 2020 , we recorded $84.0 million of additional reserves over the same period last year.

For the six months ended August 1, 2020, we recorded $64.0 million of additional reserves over the same period last year.

Elimination of intersegment gross profit (loss) consisted of the following:

Three months ended

(in thousands)

Six months ended

(in thousands) August 1, 2020 August 3, 2019

Elimination of intersegment activity:

3 unchanged sentences

Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 11,925 3,365

Gross profit (loss)

Operating Expenses - For the three months ended May 2, 2020 , operating expenses decreased by $30.4 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 outbreak.

Operating expenses during the three months ended May 2, 2020 were offset by government subsidies in the form of qualified payroll tax credits of $4.5 million .

Gross loss (profit) $ 2,962 $ (2,938)

Operating Expenses - For the six months ended August 1, 2020, operating expenses decreased by $84.3 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 outbreak for most of the first half of fiscal 2020.

Operating expenses during the six months ended August 1, 2020 were offset by a gain from a settlement with a vendor of $9.0 million and government subsidies in the form of qualified payroll tax credits of $7.9 million.

Impairment Charges- As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, we updated our impairment analysis at the store-level.

During the three months ended May 2, 2020 , we recorded impairment charges of $84.9 million for under-performing stores ( $65.2 million and $19.7 million for the U.S.

Retail and Canada Retail segments, respectively).

Also during the three months ended May 2, 2020 , we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life.

In addition, we evaluated other long-lived assets based on our intent to use such assets going forward.

During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million .

Also, during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life.

Also as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets.

Our analysis concluded that the fair values of the First Cost reporting unit within the Brand Portfolio segment and The Shoe Company tradename within the Canada Retail segment did not exceed their respective carrying values.

Accordingly, during the three months ended May 2, 2020 , we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment, and $1.1 million for The Shoe Company tradename included in the Canada Retail segment.

Income Taxes- Our effective tax rate changed from 25.4% for the three months ended May 4, 2019 to 33.8% for the three months ended May 2, 2020 .

Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value.

Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

Income Taxes- Our effective tax rate changed from 27.9% for the six months ended August 3, 2019 to 32.5% for the six months ended August 1, 2020.

The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S.

federal statutory tax rate was 35%.

federal statutory tax rate was 35% pursuant to the CARES Act.

Our business has historically been subject to seasonal merchandise trends driven by the change in weather conditions and our customers' interest in new seasonal styles.

New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter.

The COVID-19 outbreak has negatively impacted our spring peak selling season and the trends that we have experienced historically may change for the remainder of fiscal 2020.

The COVID-19 outbreak negatively impacted our spring peak selling season and we expect that the trends that we have experienced historically may change for the remainder of fiscal 2020.

With our customers staying home, there has been a clear shift in consumer behavior and preferences to increased demand for athleisure and casual products and away from dress and seasonal categories, which may result in changes in seasonal cadence.

Liquidity and Capital Resources

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We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility, including the impact of the outbreak of COVID-19.

We believe that cash generated from our operations and the business continuity plans put in place, together with our current levels of cash, as well as the use of our Credit Facility, are sufficient over the next 12 months to maintain our ongoing operations, support working capital requirements, and fund capital expenditures.

The cash generated from operations is based on our expectation of re-opening nearly all of our North American stores by the end of June 2020 with a gradual return of store traffic throughout the remainder of fiscal 2020.

During the three months ended May 2, 2020 , we took certain measures to preserve liquidity, including reducing inventory orders, significantly cutting costs, and delaying vendor and landlord payments, after providing notice, while we renegotiate to extend payment terms.

We have engaged a national lease firm to assist us in the negotiating of lease deferrals and concessions.

We have also extended nearly all payables to at least 90 days.

On March 17, 2020, the Board of Directors reduced the quarterly cash dividend by 60% from the previous quarter and declared a quarterly cash dividend payment of $0.10 per share for both Class A and Class B common shares.

The dividend was paid on April 10, 2020 to shareholders of record at the close of business on March 30, 2020.

As a result of our amended Credit Facility discussed below, we have suspended subsequent dividend payments and share repurchases.

During the three months ended May 2, 2020 , we took immediate actions to cancel orders and have reduced orders for the remainder of this fiscal year, while maintaining flexibility to increase orders as we monitor the business recovery.

In addition to the temporary leaves of absence without pay for a significant number of our employees, effective March 29, 2020, the base salaries for our executive officers were reduced by 20%, wages were reduced by 5% to 20% for nearly all of the remaining associates, depending on title , and annual cash retainers for all non-employee directors serving on the Board of Directors were reduced by 20% .

One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S.

federal statutory tax rate was 35%, as opposed to the current rate of 21%.

As a result, we expect to receive a refund in fiscal 2021 of approximately $140.0 million related to these net operating losses.

Our ability to recover deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income, although the risks of failing to realize these benefits vary across the jurisdictions.

We are actively pursuing further options to increase financial flexibility.

While there is no immediate need to raise capital, we intend to evaluate assessing the financing markets and may look to raise capital, when and if we deem it prudent, to further strengthen our balance sheet.

There can be no assurance that we will raise additional capital, or as to the timing or terms of any such additional capital.

If additional liquidity is needed, we may take additional actions including adjusting our marketing spend, implementing further employee furloughs, reducing the store labor requirements, and forgoing additional capital expenditures and other discretionary expenses.

We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, support working capital requirements, and fund capital expenditures over the next 12 months.

Operating Cash Flows

For the three months ended May 2, 2020 , net cash used in operations was $39.5 million compared to $3.0 million for the three months ended May 4, 2019 .

The increase in cash used in operations was driven by the net loss incurred for the quarter as a result of the COVID-19 outbreak, after adjusting for non-cash activity including depreciation and amortization, stock-based compensation, impairment charges, and the change in deferred income taxes, primarily due to the impact of the COVID-19 outbreak on our business.

This was partially offset by measures we implemented to manage our working capital to preserve liquidity, including reducing inventory orders, significantly cutting costs, and delaying vendor and landlord payments.

For the six months ended August 1, 2020, net cash used in operations was $79.6 million compared to net cash provided by operations of $34.2 million for the six months ended August 3, 2019.

The change was driven by the net loss incurred during fiscal 2020 as a result of the COVID-19 outbreak, after adjusting for non-cash activity including impairment charges and the change in deferred income taxes.

This was partially offset by measures we implemented to manage our working capital to preserve liquidity, including delaying vendor and landlord payments while we renegotiate terms, reducing inventory orders, and significantly cutting costs.

Investing Cash Flows

For the three months ended May 2, 2020 , our net cash provided by investing activities was $10.0 million , which was due to the liquidation of our available-for sale-securities and reductions of capital expenditures to $14.6 million in order to preserve liquidity.

During the three months ended May 4, 2019 , our net cash used in investing activities was $6.2 million , which was due to capital expenditures of $24.9 million , partially offset by the net liquidation of our available-for sale-securities.

For the six months ended August 1, 2020, our net cash provided by investing activities was $6.8 million, which was due to the liquidation of our available-for sale-securities, the proceeds from a settlement from a vendor, and reductions of capital expenditures to $22.1 million in order to preserve liquidity.

During the six months ended August 3, 2019, our net cash provided by investing activities was $4.5 million, which was due to proceeds from the sale of available-for-sale securities exceeding capital expenditures of $40.3 million.

Financing Cash Flows

For the three months ended May 2, 2020 , our net cash provided by financing activities was $193.9 million compared to net cash used in financing activities of $19.9 million for the three months ended May 4, 2019 .

During three months ended May 2, 2020 , we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S.

For the six months ended August 1, 2020, our net cash provided by financing activities was $193.2 million compared to net cash used in financing activities of $87.2 million for the six months ended August 3, 2019.

During the six months ended August 1, 2020, we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S.

and global markets resulting from COVID-19.

We also significantly reduced the amount of dividends paid.

During the three months ended May 4, 2019 , net cash used in financing activities was primarily related to the payment of dividends as the repurchase of Class A common shares was financed from borrowings from the Credit Facility.

Our Credit Facility, with a maturity date of August 25, 2022 , provides a revolving line of credit with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million , and the issuance of up to $75 million in foreign currency revolving loans and letters of credit.

The Credit Facility may be used to provide funds for working capital, capital expenditures, and other expenditures.

As previously disclosed, we reduced the dividends paid during the first quarter of fiscal 2020 and did not pay any dividends during the second quarter of fiscal 2020.

During the six months ended August 3, 2019, net cash used in financing activities was primarily related to the payment of dividends and the repurchase of Class A common shares partially financed using our revolving line of credit.

Credit Facility- During the six months ended August 1, 2020, our Credit Facility provided a revolving line of credit with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit.

On April 30, 2020, the Credit Facility was amended, which resulted in various changes, including:

Providing for a lien on all of the Company's assets;

Reducing the borrowing availability from $400 million to $375.0 million on October 31, 2020, $350.0 million on January 30, 2021, $325.0 million on May 1, 2021, and $300.0 million on July 31, 2021;

Redefining the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;

Changing the maximum leverage ratio covenant to 3.50:1 as of May 2, 2020, 4.00:1 as of August 1, 2020, 3.75:1 as of October 31, 2020, and 3.50:1 as of January 30, 2021 and as of the end of each fiscal quarter thereafter;

Changing the minimum fixed charge coverage ratio to 1.25:1 as of May 2, 2020 and 1.05:1 as of August 1, 2020 and as of the end of each fiscal quarter thereafter;

Restricting the Company from paying dividends, making share repurchases, and making certain acquisitions.

A violation of any of the financial or other covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility.

As of May 2, 2020 , we were in compliance with all financial covenants.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.5% as of May 2, 2020 .

Any loans issued in Canadian dollars bear interest at the alternate base rate plus a margin based on our leverage ratio.

Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.5% as of May 2, 2020 .

Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio.

As of May 2, 2020 , the Credit Facility provided a revolving line of credit up to $400 million and we had $393.0 million outstanding under the Credit Facility and $5.0 million in letters of credit issued, resulting in $2.0 million available for borrowings.

• Provided for a lien on all of the Company's assets;

• Redefined the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;

• Changed the maximum leverage ratio covenant to 4.00:1 as of August 1, 2020;

• Changed the minimum fixed charge coverage ratio to 1.05:1 as of August 1, 2020;

• Restricted the Company from paying dividends and making share repurchases.

Loans issued under the revolving line of credit bore interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.8% as of August 1, 2020.

Interest on letters of credit issued under the Credit Facility was variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.8% as of August 1, 2020.

Commitment fees were based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio.

As of August 1, 2020, the Credit Facility provided a revolving line of credit up to

$400 million and we had $393.0 million outstanding under the Credit Facility and $5.0 million in letters of credit issued, resulting in $2.0 million available for borrowings.

Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization and write-off of debt issuance costs.

Termination of Credit Facility- On August 7, 2020, we replaced our Credit Facility with a five-year $400.0 million, ABL Revolver and completed a five-year, $250.0 million Secured Term Loan.

Upon the closing of the transactions, we made an initial borrowing in the amount of $150.0 million under the ABL Revolver.

These proceeds, along with the proceeds from the Secured Term Loan, were used to repay in full the outstanding borrowings under the Credit Facility and we terminated the Credit Facility.

ABL Revolver- Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Secured Term Loan.

The ABL Revolver provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S.

borrowing, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings.

The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves.

At the closing of the ABL Revolver, the amount available for borrowing was limited to a borrowing base of $274.3 million with an initial borrowing of $150.0 million and issued letters of credit of $5.0 million resulting in $119.3 million available for additional borrowings.

Borrowings under the ABL Revolver accrue interest, at our option, at a rate equal to:

(A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month LIBOR plus 1.0%;

or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability.

Secured Term Loan- Our Secured Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025.

The Secured Term Loan has limited prepayment requirements under certain conditions.

The Secured Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory.

Borrowings under the Secured Term Loan accrue interest, at our option, at a rate equal to:

(A) a base rate per annum equal to the greater of (i) 2.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%;

or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10% of the maximum credit amount.

The Secured Term Loan includes a springing covenant imposing a minimum EBITDA covenant which arises when liquidity is less than $150.0 million.

In addition, the ABL Revolver and the Secured Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes.

There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions.

Both the ABL Revolver and the Secured Term Loan contain customary events of default with cross-default provisions.

Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

Capital Expenditure Plans

We expect to spend approximately $25.0 million to $35.0 million for capital expenditures in fiscal 2020 , of which we invested $14.6 million during the three months ended May 2, 2020 .

We expect to spend approximately $30.0 million to $35.0 million for capital expenditures in fiscal 2020, of which we invested $22.1 million during the six months ended August 1, 2020.

Our capital expenditures for the remainder of the year will depend primarily on the number of store projects, as well as infrastructure and information technology projects that we undertake and the timing of these expenditures.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis