What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-12-09 compared with 2020-09-04 · 128 added, 126 removed, 174 unchanged (59% of the section changed)

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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.

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, and liquidity management, as well as reductions to our expense and capital expenditure plans.

Following the earlier 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 re-opened all 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 approximately 1,000 associate positions, including over 200 vacant positions that will not be filled.

Although all of our stores were open at the end of the third quarter of fiscal 2020, we experienced during the quarter, and have continued to experience, significantly reduced customer traffic and net sales.

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

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.

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 primarily during the first half of fiscal 2020 and continuing reduced customer traffic, resulted in a sharp decline in our net sales and cash flows.

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 implemented inventory control actions that enabled us to decrease total inventory by 19% at the end of the third quarter of fiscal 2020 compared to the same period last year.

We have been more aggressive with our promotional activity to clear through seasonal inventory and 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 athleisure, which includes athletic, and casual products and away from dress and seasonal categories.

We have modified receipts to match these expectations and continue to 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 three quarters of fiscal 2020, well above digital sales for the same period last year across all segments.

Our digital fulfillment options, such as Buy Online Pick Up in Store and Curbside Pickup, and our ability to use our stores for fulfillment served us well while our stores were closed and continue to see strength even as stores have fully reopened.

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.

Continuing to function as a digital-focused retailer, coupled with our strategic pillars of delivering differentiated products, offering differentiated experiences in-store and online, and focusing on new growth opportunities to increase market share, will guide our decisions as we adjust for the future.

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 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.

We were voted the #1 omni-channel retailer for the third year in a row and remain one of the largest designers, producers and retailers of footwear and accessories in the market.

Our increased penetration in the athletic market coupled with our historical success in dress and seasonal and a fully integrated supply chain supported by our acquisition of Camuto Group, position us well to be the premier footwear retailer for all of the family's needs over the long-term.

The COVID-19 pandemic remains challenging, and with the resurgence of the COVID-19 outbreak and related restrictions imposed by state and local government authorities designed to slow the virus's spread, we may be required to close stores in certain locations that we only recently re-opened.

The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences during our peak fall season, including reductions in consumer spending, which may necessitate further shifts in our business model.

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.

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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 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.

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

While all stores were open as of the end of the third quarter of fiscal 2020, comparable sales also include stores temporarily closed during fiscal 2020 as a result of the COVID-19 outbreak as management continues to believe this metric is meaningful to monitor our performance.

Comparable sales no longer include the Other segment beginning with the third quarter of fiscal 2020 due to the liquidation of Stein Mart.

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 $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.

Net sales decreased to $652.9 million for the three months ended October 31, 2020 from $933.8 million for the three months ended November 2, 2019.

The 30.1% decrease in net sales was primarily driven by the ongoing and prolonged COVID-19 outbreak that contributed to the 30.4% decrease in comparable sales, as 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 our retailer customers also experiencing significantly reduced customer traffic and lower demand for dress products.

During the three months ended October 31, 2020, gross profit as a percentage of net sales was 25.4% as compared to 29.3% for the same period last year.

The decrease in gross profit was primarily driven by the impact of the COVID-19 outbreak on our operations, which, in addition to the reduced sales volume, resulted in increased shipping costs associated with higher digital penetration and the deleveraging of distribution and fulfillment, store occupancy and royalty expenses on lower sales volume.

Net loss for the three months ended October 31, 2020 was $40.6 million, or a loss of $0.56 per diluted share, which included net after-tax charges of $21.6 million, or $0.30 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 November 2, 2019 was $43.5 million, or $0.60 earnings per diluted share, which included net after-tax charges of $5.1 million, or $0.07 per diluted share, primarily related to impairment charges and integration and restructuring expenses associated with the businesses acquired in fiscal 2018.

Results of Operations

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

Comparison of the Three Months Ended October 31, 2020 with the Three Months Ended November 2, 2019

Three months ended

August 1, 2020 August 3, 2019 Change

October 31, 2020 November 2, 2019 Change

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

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Income from equity investment 1,902 0.3 2,662 0.3 (760) (28.5) %

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

Impairment charges (30,081) (4.6) (4,824) (0.5) (25,257) 523.6 %

Operating profit (loss) (58,590) (9.0) 56,108 6.0 (114,698) NM

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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 August 1, 2020

(in thousands) Three months ended October 31, 2020

Consolidated net sales for the same period last year $ 933,826

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Three months ended Change

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

(dollars in thousands) October 31, 2020 November 2, 2019 Amount % Comparable Sales %

Segment net sales:

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Brand Portfolio 83,905 137,496 (53,591) (39.0) % 13.4%

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

Other 27,020 28,848 (1,828) (6.3) % NA

Total segment net sales 674,424 959,418 (284,994) (29.7) % (30.4)%

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Consolidated net sales $ 652,870 $ 933,826 $ (280,956) (30.1) %

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:

NA - Not applicable

The decreases in comparable sales for the U.S.

Retail and Canada Retail segments and in total consolidated net sales were driven primarily by significantly reduced customer traffic as a result of COVID-19.

Net sales during the quarter were also impacted by an incident at a third-party vendor that provides fulfillment and e-commerce services to the Company.

The vendor experienced a ransomware attack that resulted in a shutdown of some of its U.S.

operations, which temporarily impacted fulfillment services to us and led us to temporarily reduce product availability on our U.S.

e-commerce sites.

Brand Portfolio segment net sales were also negatively impacted by COVID-19 as retailer customers also continued to experience significantly reduced customer traffic and lower demand for dress product.

Notwithstanding the temporary third-party vendor incident previously discussed, the overall decrease in net sales 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.

Gross Profit- The following summarizes gross profit by segment:

Three months ended

August 1, 2020 August 3, 2019 Change

October 31, 2020 November 2, 2019 Change

(dollars in thousands)

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

Segment gross profit (loss):

Segment gross profit:

Retail $ 117,679 23.4 % $ 201,409 28.1 % $ (83,730) (41.6) % (470)

Canada Retail 18,905 30.7 % 27,485 36.0 % $ (8,580) (31.2) % (530)

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

Brand Portfolio 22,128 26.4 % 40,849 29.7 % $ (18,721) (45.8) % (330)

Other 6,272 23.2 % 6,291 21.8 % $ (19) (0.3) % 140

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Gross profit $ 165,656 25.4 % $ 273,308 29.3 % $ (107,652) (39.4) % (390)

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.

The decrease in gross profit was primarily driven by significantly reduced customer traffic, increased shipping costs associated with higher digital penetration, and the deleveraging of distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume.

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

Three months ended

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

(in thousands) October 31, 2020 November 2, 2019

Elimination of intersegment activity:

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Gross loss (profit) $ 672 $ (2,726)

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

Operating Expenses - For the three months ended October 31, 2020, operating expenses decreased by $19.0 million over the same period last year, primarily driven by the reduction of our workforce initiated at the end of the second quarter of fiscal 2020 and reductions in store labor.

Operating expenses during the three months ended October 31, 2020 were offset by government subsidies in the form of qualified payroll tax credits of $1.4 million.

Impairment Charges- During the three months ended October 31, 2020, we updated our impairment analysis at the store-level and, as a result, we recorded store impairment charges of $30.1 million, primarily related to certain U.S.

Retail stores located in urban areas that are experiencing significantly lower traffic than the rest of the store fleet as a result of the continuing COVID-19 outbreak.

Interest Expense, net - For the three months ended October 31, 2020, interest expense increased over the same period last year due to additional debt under our new ABL Revolver and Term Loan, which have higher interest rates.

Income Taxes- Our effective tax rate changed from 19.4% for the three months ended November 2, 2019 to 39.9% for the three months ended October 31, 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% pursuant to the CARES Act.

Comparison of the Nine Months Ended October 31, 2020 with the Nine Months Ended November 2, 2019

Nine months ended

October 31, 2020 November 2, 2019 Change

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

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Income from equity investment 6,325 0.4 7,354 0.3 (1,029) (14.0) %

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

Impairment charges (149,363) (9.2) (4,824) (0.2) (144,539) 2,996.2 %

Operating profit (loss) (518,512) (31.9) 141,356 5.3 (659,868) NM

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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

(in thousands) Nine months ended October 31, 2020

Consolidated net sales for the same period last year $ 2,663,067

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The following summarizes net sales by segment:

Six months ended Change

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

Nine months ended Change

(dollars in thousands) October 31, 2020 November 2, 2019 Amount % Comparable Sales %

Segment net sales:

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Consolidated net sales $ 1,625,367 $ 2,663,067 $ (1,037,700) (39.0) %

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.

The decreases in comparable sales for all segments, except Brand Portfolio, and in total consolidated net sales, were primarily 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.

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:

Six months ended

August 1, 2020 August 3, 2019 Change

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

Gross Profit- The following summarizes gross profit by segment:

Nine months ended

October 31, 2020 November 2, 2019 Change

(dollars in thousands)

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

Segment gross profit (loss):

Segment gross profit:

Retail $ 124,806 9.8 % $ 619,356 29.7 % $ (494,550) (79.8) % (1,990)

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Brand Portfolio 24,592 12.5 % 93,308 27.0 % $ (68,716) (73.6) % (1,450)

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

Other 962 1.5 % 21,643 23.0 % $ (20,681) (95.6) % (2,150)

172,604 799,478

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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.

The impact of COVID-19 and the actions we took also resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleveraging of distribution and fulfillment, store occupancy, and royalty 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.

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

A s of October 31, 2020, we had approximately $18.0 million of additional inventory reserves over the same period last year.

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

Six months ended

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

Nine months ended

(in thousands) October 31, 2020 November 2, 2019

Elimination of intersegment activity:

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Gross loss (profit) $ 3,634 $ (5,664)

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.

Operating Expenses - For the nine months ended October 31, 2020, operating expenses decreased by $103.3 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 and the reduction of our workforce and reductions in store labor initiated at the end of the second quarter of fiscal 2020.

O perating expenses during the nine months ended October 31, 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 $9.3 million.

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

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.

During the nine months ended October 31, 2020, we recorded impairment charges of $122.9 million.

Also, during the nine months ended October 31, 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 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.

Accordingly, during the nine months ended October 31, 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.

Interest Expense, net - For the nine months ended October 31, 2020, interest expense increased over the same period last year due to additional debt under our new ABL Revolver and Term Loan, which have higher interest rates.

Income Taxes- Our effective tax rate changed from 24.6% for the nine months ended November 2, 2019 to 33.4% for the nine months ended October 31, 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.

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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 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.

The COVID-19 outbreak negatively impacted our peak spring and fall selling seasons 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.

In addition, the recent resurgence of COVID-19 may further adversely impact our results of operations.

Liquidity and Capital Resources

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Operating Cash Flows

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.

For the nine months ended October 31, 2020, net cash used in operations was $106.3 million compared to net cash provided by operations of $118.1 million for the nine months ended November 2, 2019.

The change was driven by the net loss incurred during fiscal 2020 as a result of the COVID-19 outbreak, which was partially offset by measures we implemented to manage our working capital to preserve liquidity, including renegotiating vendor and landlord terms, reducing inventory orders, and significantly cutting costs.

Investing Cash Flows

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.

For the nine months ended October 31, 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 capital expenditures of $26.9 million, which were reduced in order to preserve liquidity.

During the nine months ended November 2, 2019, our net cash used in investing activities was $10.3 million, which was due to capital expenditures of $59.6 million exceeding the net liquidation of our available-for-sale securities and the proceeds from a working capital settlement related to our Camuto Group acquisition.

Financing Cash Flows

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.

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:

• 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.

For the nine months ended October 31, 2020, our net cash provided by financing activities was $127.2 million compared to net cash used in financing activities of $120.6 million for the nine months ended November 2, 2019.

During the nine months ended October 31, 2020, we had net proceeds from borrowings from our ABL Revolver and Term Loan offset by the settlement of borrowings under the Credit Facility and the payment of debt issuance costs associated with the changes we made to our debt structure.

We also significantly reduced the amount of dividends paid as we reduced the dividends paid during the first quarter of fiscal 2020 and did not pay any dividends during the second and third quarters of fiscal 2020.

During the nine months ended November 2, 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 Credit Facility.

ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which 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.

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

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 Term Loan.

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:

As of October 31, 2020, the ABL Revolver had a borrowing base of $400.0 million, with $100.0 million outstanding and $5.0 million in letters of credit issued, resulting in $295.0 million available for borrowings.

Borrowings and letters of credit issued 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 London Interbank Offered Rate ("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, with an interest rate of 3.25% as of October 31, 2020.

Commitment fees are based on the unused portion of the ABL Revolver.

Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.

Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan.

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

The Term Loan has limited prepayment requirements under certain conditions.

The 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, that constitute first priority collateral for the ABL Revolver.

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

(A) a base rate per annum equal to the greater of (i) 3.25%, (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%.

or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.75% as of October 31, 2020.

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 10.0% 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.

The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million.

In addition, the ABL Revolver and the 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.

We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply.

Both the ABL Revolver and the 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 $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.

We expect to spend approximately $30.0 million to $35.0 million for capital expenditures in fiscal 2020, of which we invested $26.9 million during the nine months ended October 31, 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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We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

We have included a summary of our contractual obligations as of February 1, 2020 in our 2019 Form 10-K.

There have been no material changes in contractual obligations outside the ordinary course of business since February 1, 2020, except for the increased amount borrowed under the Credit Facility.

The following table presents a summary of our minimum contractual commitments and obligations as of October 31, 2020:

Payments due by Period

(in thousands) Total Less Than

Years More Than

Operating lease liabilities $ 1,056,867 $ 259,702 $ 389,097 $ 224,418 $ 183,650

Debt, including estimated interest payments (1)

447,030 89,662 65,768 291,600 —

Minimum license commitments (2)

253,095 34,556 69,304 62,674 86,561

Purchase obligations (3)

8,064 6,989 1,075 — —

Total $ 1,765,056 $ 390,909 $ 525,244 $ 578,692 $ 270,211

(1) Interest payments on our ABL Revolver and Term Loan were estimated using their respective interest rate as of October 31, 2020 and assuming interest payments on $100.0 million outstanding on our ABL Revolver through the maturity date of August 2025.

(2) Minimum license commitments include guaranteed minimum royalties, including amounts due to ABG-Camuto, and fixed licensing and other fees due to other parties.

(3) Purchase obligations include commitments where we would not be able to cancel such obligations without payment or penalty, including items to be purchased for projects that were under construction or for which a lease has been signed.

Critical Accounting Policies and Estimates

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What changed 10-Q

Item 2. Management’s Discussion and Analysis