What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-28 compared with 2020-12-09 · 127 added, 216 removed, 86 unchanged (80% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Executive Overview and Trends in our Business

The volatile macro environment and business conditions have required us to be nimble and quickly adapt our business model.

The business returned to profitability in the first quarter of fiscal 2021 for the first time since the onset of COVID-19.

The following are examples of trends in our business and changes we have made in response to the impacts of COVID-19 and the current macroeconomic environment:

• Inventory Management- COVID-19 negatively impacted North America and global economics, resulting in a drop in demand for our products, specifically in the seasonal and dress categories.

Although the seasonal and dress categories remain depressed from pre-COVID-19 levels, we are beginning to see strengthened results and we are responding to the increased demand with increased production within our Camuto Group business.

We implemented inventory management actions that enabled us to reduce the number of markdowns in the first quarter of fiscal 2021, which has allowed us to invest more in direct marketing.

• Changing Consumer Preferences- 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 historic under-penetration in the athleisure space.

Our business model remains flexible and we were able to increase production of brands produced by Camuto Group to match emerging demand in seasonal and dress categories during the first quarter of fiscal 2021.

• Strength in Digital- With store traffic continuing to trend lower than pre-COVID-19 levels, our digital fulfillment options, such as Buy Online Pick Up in Store, Buy Online Ship to Store, and Curbside Pickup, coupled with our ability to use our stores for fulfillment, have continued to serve us well as our customers look for convenient ways to shop.

We were able to generate strong digital demand during the first quarter of fiscal 2021, well above the digital demand for the same period last year.

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

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

Impact of COVID-19 on our Results of Operations

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

2 unchanged sentences

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 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 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.

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.

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.

Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions.

Following the re-opening of stores, we experienced and have continued to experience significantly reduced customer traffic and net sales from historic periods prior to COVID-19, which included subsequent store closures and reduced hours in certain areas, primarily in Canada, where government-imposed restrictions were mandated.

Our retail customers in the Brand Portfolio segment have had and are having similar experiences.

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 and reduced customer traffic resulted in a sharp decline in our net sales and cash flows.

The COVID-19 pandemic remains challenging and unpredictable.

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, 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 will depend on future developments, including the widespread availability, use and effectiveness of vaccines,

which are highly uncertain and cannot be predicted.

As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.

Financial Summary and Other Key Metrics

Net sales increased to $703.2 million for the three months ended May 1, 2021 from $482.8 million for the three months ended May 2, 2020.

The 45.6% increase in net sales was primarily driven by a 52.2% increase in comparable sales during the three months ended May 1, 2021, compared with depressed sales during the three months ended May 2, 2020 due to the temporary closure of all stores beginning in March 2020 and continuing through the rest of the first quarter of fiscal 2020.

During the three months ended May 2, 2020, we also maintained higher sales returns reserves while stores were unavailable to accept returns.

During the three months ended May 1, 2021, we had lower Brand Portfolio segment sales due to reduced orders as our retailer customers have shifted towards athletic and casual offerings.

During the three months ended May 1, 2021, gross profit as a percentage of net sales was 30.7% as compared to negative 5.5% for the same period last year.

The change to a gross profit from a loss was primarily driven by increased sales during the quarter as compared to the first quarter of 2020.

In the first quarter of fiscal 2020, in response to the impacts of the COVID-19 outbreak on our operations, we addressed the temporary closure of stores with aggressive promotional activity and significant inventory markdowns.

These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020.

During the first quarter of fiscal 2021, tight inventory management resulted in being less promotional.

Accordingly, gross profit as a percentage of net sales for the first quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 29.7% for the first quarter of fiscal 2019.

Net income for the three months ended May 1, 2021 was $17.0 million, or $0.22 earnings per diluted share, which included net after-tax benefits of $7.6 million, or $0.10 per diluted share, primarily related to the the change in the valuation allowance on deferred tax assets.

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 $85.6 million, or $1.19 per diluted share, primarily related to impairment charges and integration and restructuring expenses.

Comparable Sales Performance Metric

We consider comparable sales to be an important indicator of the performance of our retail and direct-to-consumer businesses, and investors may find it useful as such.

Comparable sales is a primary metric commonly used throughout the retail industry.

The following table presents the increase (decrease) in comparable sales for each segment and in total:

Three months ended

May 1, 2021 May 2, 2020

Comparable sales:

Retail segment 56.3 % (42.4) %

Canada Retail segment 10.0 % (32.4) %

Brand Portfolio segment - direct-to-consumer channel 6.8 % 92.8 %

Other NA (62.0) %

Total comparable sales 52.2 % (42.3) %

NA - Not applicable

We consider comparable sales, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses.

We include stores in our comparable sales metric for those stores in operation for at least 14 months at the beginning of the fiscal year.

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.

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

Comparable sales include stores temporarily closed as a result of the COVID-19 outbreak as management continues to believe that this metric is meaningful to monitor our performance.

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.

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

Beginning with the third quarter of fiscal 2020, comparable sales no longer include the Other segment due to no longer having activity in the Other segment.

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 $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.

Number of Stores

At the end of the first quarter of fiscal 2021 and 2020, we had the following number of stores:

May 1, 2021 May 2, 2020

Retail segment - DSW stores 516 521

Canada Retail segment:

The Shoe Company / Shoe Warehouse stores 118 118

DSW stores 27 27

Total number of stores 661 666

Results of Operations

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

Comparison of the Three Months Ended May 1, 2021 with the Three Months Ended May 2, 2020

Three months ended

October 31, 2020 November 2, 2019 Change

May 1, 2021 May 2, 2020 Change

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

Net sales $ 703,155 100.0 % $ 482,783 100.0 % $ 220,372 45.6 %

$ 652,870 100.0 % $ 933,826 100.0 % $ (280,956) (30.1) %

Cost of sales (487,044) (69.3) (509,243) (105.5) 22,199 (4.4) %

Gross profit (1)

165,656 25.4 273,308 29.3 (107,652) (39.4) %

Gross profit (loss) 216,111 30.7 (26,460) (5.5) 242,571 NM

Operating expenses (200,814) (28.5) (187,221) (38.8) (13,593) 7.3 %

(196,067) (30.1) (215,038) (23.1) 18,971 (8.8) %

Income from equity investment 1,708 0.2 2,270 0.5 (562) (24.8) %

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

Impairment charges — — (112,547) (23.3) 112,547 NM

Operating profit (loss) 17,005 2.4 (323,958) (67.1) 340,963 NM

Interest expense, net (8,814) (1.2) (2,158) (0.5) (6,656) 308.4 %

Non-operating income, net 24 0.0 15 0.0 9 60.0 %

Non-operating income (expenses), net 806 0.1 (87) (0.0) 893 NM

Income (loss) before income taxes 8,997 1.3 (326,203) (67.6) 335,200 NM

Income tax benefit (provision) 26,932 4.1 (10,489) (1.1) 37,421 NM

Income tax benefit 8,029 1.1 110,345 22.9 (102,316) (92.7) %

Net income (loss) $ 17,026 2.4 % $ (215,858) (44.7) % $ 232,884 NM

6 unchanged sentences

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) Three months ended October 31, 2020

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

Decrease in comparable sales (242,387)

Net increase from non-comparable sales and other changes 10,860

Loss of net sales from closed stores (2,785)

Decrease in wholesale net sales from Brand Portfolio segment (43,615)

Decrease in commission income from Brand Portfolio segment (3,029)

Consolidated net sales $ 652,870

The following summarizes net sales by segment:

Net Sales- The following summarizes net sales by segment:

Three months ended Change

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

(dollars in thousands) May 1, 2021 May 2, 2020 Amount % Comparable Sales %

Segment net sales:

7 unchanged sentences

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:

The increases in comparable sales for all segments and in total consolidated net sales was due to the temporary closure of all stores beginning in March 2020 and continuing through the rest of the first quarter of fiscal 2020.

Also during the first quarter of fiscal 2020, we maintained higher sales returns reserves with stores not being available to accept returns, which resulted in significantly lower sales.

During the first quarter of fiscal 2021, the sales returns rates normalized to pre-COVID-19 rates.

The Canada Retail segment continues to be impacted by mandated closures and restrictions in certain key markets.

In addition, we had lower Brand Portfolio segment sales due to reduced orders as our retailer customers have shifted towards athletic and casual offerings.

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

Three months ended

October 31, 2020 November 2, 2019 Change

May 1, 2021 May 2, 2020

(dollars in thousands)

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

Segment gross profit:

Amount % of Segment Net Sales Amount % of Segment Net Sales Change

Segment gross profit (loss):

Retail $ 193,113 31.1 % $ (32,970) (8.7) % $ 226,083

3 unchanged sentences

215,874 (26,805)

Elimination of intersegment gross loss (profit) 672 (2,726)

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

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:

Elimination of intersegment gross profit 237 345

Gross profit (loss) $ 216,111 30.7 % $ (26,460) (5.5) % $ 242,571

The change to a gross profit from a loss was primarily driven by increased sales during the quarter as compared to the first quarter of 2020.

During the first quarter of fiscal 2021, tight inventory management resulted in being less promotional.

Accordingly, gross profit as a percentage of net sales for the first quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 29.7% for the first quarter of fiscal 2019.

The Canada Retail segment continues to be impacted by mandated closures and restrictions in certain key markets, which resulted in deleverage impacts to gross margin when compared to pre-COVID-19 gross margin rates.

In addition, the lower Brand Portfolio segment sales also results in deleverage of fixed royalty expenses included within cost of sales.

Elimination of intersegment gross profit consisted of the following:

Three months ended

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

(in thousands) May 1, 2021 May 2, 2020

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 4,836 7,566

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

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 %

Net sales (1)

$ 1,625,367 100.0 % $ 2,663,067 100.0 % $ (1,037,700) (39.0) %

Cost of sales (1,449,129) (89.2) (1,869,253) (70.2) 420,124 (22.5) %

Gross profit $ 237 $ 345

176,238 10.8 793,814 29.8 (617,576) (77.8) %

Operating expenses (1)

(551,712) (33.9) (654,988) (24.6) 103,276 (15.8) %

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

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

Interest expense, net (14,955) (0.9) (5,947) (0.3) (9,008) 151.5 %

Non-operating income (expenses), net 680 0.0 (128) (0.0) 808 NM

Income (loss) before income taxes (532,787) (32.8) 135,281 5.0 (668,068) NM

Income tax benefit (provision) 178,072 11.0 (33,220) (1.2) 211,292 NM

Net income (loss) $ (354,715) (21.8) % $ 102,061 3.8 % $ (456,776) NM

Basic and diluted earnings (loss) per share:

Basic earnings (loss) per share $ (4.92) $ 1.38 $ (6.30) NM

Diluted earnings (loss) per share $ (4.92) $ 1.36 $ (6.28) NM

Weighted average shares used in per share calculations:

Basic shares 72,134 74,219 (2,085) (2.8) %

Diluted shares 72,134 75,149 (3,015) (4.0) %

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) Nine months ended October 31, 2020

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

Decrease in comparable sales (894,684)

Net increase from non-comparable sales and other changes 13,048

Loss of net sales from closed stores (10,893)

Decrease in wholesale net sales from Brand Portfolio segment (141,079)

Decrease in commission income from Brand Portfolio segment (4,092)

Consolidated net sales $ 1,625,367

The following summarizes net sales by segment:

Nine months ended Change

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

Segment net sales:

Retail $ 1,272,951 $ 2,086,535 $ (813,584) (39.0) % (39.6)%

Canada Retail 140,509 191,421 (50,912) (26.6) % (25.5)%

Brand Portfolio 196,476 344,989 (148,513) (43.0) % 61.4%

Other 62,909 93,935 (31,026) (33.0) % (50.4)%

Total segment net sales 1,672,845 2,716,880 (1,044,035) (38.4) % (38.4)%

Elimination of intersegment net sales (47,478) (53,813) 6,335 (11.8) %

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 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.

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 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:

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

Canada Retail 22,244 15.8 % 65,171 34.0 % $ (42,927) (65.9) % (1,820)

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

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

172,604 799,478

Elimination of intersegment gross loss (profit) 3,634 (5,664)

Gross profit $ 176,238 10.8 % $ 793,814 29.8 % $ (617,576) (77.8) % (1,900)

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 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.

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.

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:

Nine months ended

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

Elimination of intersegment activity:

Net sales recognized by Brand Portfolio segment $ (47,478) $ (53,813)

Cost of sales:

Cost of sales recognized by Brand Portfolio segment 34,116 39,281

Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 16,996 8,868

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

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 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.

Operating Expenses - For the three months ended May 1, 2021, operating expenses increased by $13.6 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 as a percentage of sales improved to 28.5% compared to 38.8% in the same period last year, but were still elevated compared to the pre-COVID-19 rate for the first quarter of fiscal 2019, which was 24.9% as a percentage of sales.

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 beginning in the first quarter of fiscal 2020, we performed an 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.

In addition, 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.

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 performed an 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 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.

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.

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.

Income Taxes- Our effective tax rate changed from 33.8% for the three months ended May 2, 2020 to negative 89.2% for the three months ended May 1, 2021.

The negative rate for the three months ended May 1, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies.

The rate for the three months ended May 2, 2020 is the result of carry back of losses to a tax year where the U.S.

federal statutory tax rate was 35%.

Our business is generally subject to seasonal 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 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.

Since the COVID-19 outbreak, we have not experienced the typical seasonal trends given the changes in customer behavior.

Liquidity and Capital Resources

Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth.

Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing commitments, other working capital needs, capital expenditures, and debt service.

Our working capital and inventory levels fluctuate seasonally.

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, 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.

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

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, fund capital expenditures, and meet our debt service obligations over the next 12 months.

Operating Cash Flows

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.

For the three months ended May 1, 2021, net cash used in operations was $1.4 million compared to $39.5 million for the three months ended May 2, 2020.

The decrease in cash used in operations was dr iven by the net income recognized in the first quarter of fiscal 2021 versus a net loss incurred during that same period last year 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 higher spend on working capital as business recovers from COVID-19 and the measures we implemented last year 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 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.

For the three months ended May 1, 2021, our net cash used in investing activities was $5.6 million, which was due to capital expenditures.

During 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 partially offset by capital expenditures of $14.6 million.

Financing Cash Flows

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.

For the three months ended May 1, 2021, our net cash used in financing activities was $3.6 million compared to net cash provided by financing activities of $193.9 million for the three months ended May 2, 2020.

During the three months ended May 1, 2021, we had net borrowings of $4.8 million from the ABL Revolver with payments on the Term Loan of $3.1 million.

During the 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.

and global markets resulting from COVID-19.

ABL Revolver- On August 7, 2020, we replaced the 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.

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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.

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.

As of May 1, 2021, the ABL Revolver had a borrowing base of $400.0 million, with $104.8 million outstanding and $5.3 million in letters of credit issued, resulting in $289.9 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.

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(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%, with an interest rate of 9.75% as of October 31, 2020.

or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of May 1, 2021.

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 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.

The 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 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.

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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.

Both the ABL Revolver and the Term Loan contain customary covenants 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.

As of May 1, 2021, we were in compliance with all financial covenants.

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 $26.9 million during the nine months ended October 31, 2020.

We expect to spend approximately $35.0 million to $45.0 million for capital expenditures in fiscal 2021, of which we invested $5.6 million during the three months ended May 1, 2021.

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.

Off-Balance Sheet Liabilities and Other Contractual Obligations

We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

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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We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques.

We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation

of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate.

As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis