Designer Brands Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Overview and Trends in our Business Operating profit in the second quarter of fiscal 2021 surpassed pre-COVID-19 levels with growth of 49% compared to the second quarter of 2019. This growth came despite the lingering effects of COVID-19, including global supply chain challenges. The volatile macro environment and supply chain disruptions have required us to be nimble and quickly adapt our business model. As we look ahead to our strategic growth, we have organized our efforts around three pillars: Customer, Brand and Speed: • Customer- More than ever, our customers have a great desire for products and experiences, and we are adding resources to our digital, IT and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience. Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in targeted and personalized ways that we have never deployed before. We are also developing new ideas for how we can provide more value to our VIP rewards members who continue to be the lifeblood of our business and our largest competitive differentiator. • Brand- Controlling our own brand destiny is critical for our growth. As we continue to design some of the best brands in the industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we are combining that with our strong direct-to-consumer distribution through our physical footprint in North America and digital infrastructure. We are also partnering with some of the top brands in the industry to offer one of the largest and most broad assortments. We remain focused on investing in some of the top 50 brands in footwear and will continue to prioritize growing our own brands. • Speed- Moving quickly is of the utmost importance to consumers. We are developing processes to deliver products more quickly. Fulfillment of digital customer orders takes 5 to 7 business days and we are working to improve that to 2 to 3 calendar days while simultaneously finding efficiencies to contain costs. We are optimizing our current infrastructure and expanding our delivery partnerships. We are also working to improve collaboration through technology and processes across our organization and to gain additional efficiencies in our overall development cycle. We have a proven track record of staying ahead of trends to ensure our success, despite some of the challenges we face, including COVID-19 variants and supply chain disruptions. Impact of COVID-19 In response to the sudden and significant impacts resulting from the COVID-19 pandemic, we took several actions during the first quarter of fiscal 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. 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 changes to our expense and capital expenditure plans. Although operating results have improved throughout the first half of fiscal 2021, we continue to experience adverse impacts due to COVID-19, including temporary store closures, reduced hours and other requirements in certain areas where government-imposed restrictions were mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences. The impacts from the COVID-19 pandemic remain challenging and unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19, and the global availability and use 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. 17 Financial Summary and Other Key Metrics for the Second Quarter of Fiscal 2021 Net sales increased to $817.3 million for the three months ended July 31, 2021 from $489.7 million for the three months ended August 1, 2020. The 66.9% increase in net sales was primarily driven by an 84.9% increase in comparable sales during the three months ended July 31, 2021, due to the fact that during the three months ended August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since reopening. The higher net sales due to the increase in total comparable sales were partially offset by store closures, including those serviced in the Other segment. 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 net sales. However, sales returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 as customer behavior has remained consistent. In addition, the Brand Portfolio segment net sales were higher in the quarter as compared to the second quarter of fiscal 2020 due to increased orders as our retailer customers recover, but still below pre-COVID-19 levels. During the three months ended July 31, 2021, gross profit as a percentage of net sales was 34.8% as compared to 7.6% for the same period last year. The improvement in gross profit was primarily driven by increased sales as compared to the second quarter of fiscal 2020. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings, with aggressive promotional activity. 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 second quarter of fiscal 2021, tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019. Net income for the three months ended July 31, 2021 was $42.9 million, or $0.55 earnings per diluted share, which included net after-tax charges of $0.6 million, or $0.01 per diluted share, primarily related to target acquisition costs, restructuring charges, impairment charges, and the change in the valuation allowance on deferred tax assets. 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 $4.1 million, or $0.05 per diluted share, primarily related to impairment charges and integration and restructuring expenses, offset by a gain from a settlement with a vendor. Comparable Sales Performance Metric The following table presents the increase (decrease) in comparable sales for each segment and in total: Three months ended July 31, 2021 August 1, 2020 Comparable sales: U.S. Retail segment 94.3 % (44.9) % Canada Retail segment 14.6 % (27.9) % Brand Portfolio segment - direct-to-consumer channel 10.6 % 120.5 % Other NA (36.2) % Total comparable sales 84.9 % (42.7) % 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 in which they are closed. Comparable sales include stores temporarily closed as a result of COVID-19 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 of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site, 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 18 varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation. Number of Stores At the end of the second quarter of fiscal 2021 and 2020, we had the following number of stores: July 31, 2021 August 1, 2020 U.S. Retail segment - DSW stores 515 522 Canada Retail segment: The Shoe Company / Shoe Warehouse stores 116 117 DSW stores 27 27 143 144 Total number of stores 658 666 Results of Operations Comparison of the Three Months Ended July 31, 2021 with the Three Months Ended August 1, 2020 Three months ended July 31, 2021 August 1, 2020 Change (dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount % Net sales $ 817,335 100.0 % $ 489,714 100.0 % $ 327,621 66.9 % Cost of sales (532,654) (65.2) (452,672) (92.4) (79,982) 17.7 % Gross profit 284,681 34.8 37,042 7.6 247,639 668.5% Operating expenses (224,385) (27.5) (168,424) (34.4) (55,961) 33.2 % Income from equity investment 2,290 0.3 2,153 0.4 137 6.4 % Impairment charges (1,174) (0.1) (6,735) (1.4) 5,561 (82.6)% Operating profit (loss) 61,412 7.5 (135,964) (27.8) 197,376 NM Interest expense, net (8,072) (1.0) (3,788) (0.8) (4,284) 113.1 % Non-operating income (expenses), net (244) (0.0) 743 0.2 (987) NM Income (loss) before income taxes 53,096 6.5 (139,009) (28.4) 192,105 NM Income tax benefit (provision) (10,236) (1.3) 40,795 8.3 (51,031) NM Net income (loss) $ 42,860 5.2 % $ (98,214) (20.1) % $ 141,074 NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 0.59 $ (1.36) $ 1.95 NM Diluted earnings (loss) per share $ 0.55 $ (1.36) $ 1.91 NM Weighted average shares used in per share calculations: Basic shares 72,932 72,142 790 1.1 % Diluted shares 77,619 72,142 5,477 7.6 % NM - Not meaningful 19 Net Sales- The following summarizes net sales by segment: Three months ended Change (dollars in thousands) July 31, 2021 August 1, 2020 Amount % Comparable Sales % Segment net sales: U.S. Retail $ 723,093 $ 393,977 $ 329,116 83.5 % 94.3% Canada Retail 57,585 49,582 8,003 16.1 % 14.6% Brand Portfolio 50,529 30,458 20,071 65.9 % 10.6% Other — 22,266 (22,266) NM NA Total segment net sales 831,207 496,283 334,924 67.5 % 84.9% Elimination of intersegment net sales (13,872) (6,569) (7,303) 111.2 % Consolidated net sales $ 817,335 $ 489,714 $ 327,621 66.9 % NA - Not applicable NM - Not meaningful The improvement in sales, including increases in comparable sales and total consolidated net sales, during the three months ended July 31, 2021 over the same period last year was due to the fact that during the three months ended August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since re-opening. During a portion of the second quarter of fiscal 2021, the Canada Retail segment was impacted by ongoing temporary closures and restrictions in certain key markets. The higher net sales due to the increase in total comparable sales was partially offset by store closures, including those serviced in the Other segment. 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 net sales. However, sales returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 as customer behavior has remained consistent. In addition, the Brand Portfolio segment net sales were higher in the quarter as compared to the second quarter of fiscal 2020 due to increased orders as our retailer customers recover, but still below pre-COVID-19 levels. Gross Profit- The following summarizes gross profit (loss) by segment: Three months ended July 31, 2021 August 1, 2020 (dollars in thousands) Amount % of Segment Net Sales Amount % of Segment Net Sales Change Segment gross profit (loss): U.S. Retail $ 256,893 35.5 % $ 40,097 10.2 % $ 216,796 Canada Retail 18,768 32.6 % 5,650 11.4 % $ 13,118 Brand Portfolio 8,533 16.9 % (11,440) (37.6) % $ 19,973 Other — — % 118 0.5 % $ (118) 284,194 34,425 Elimination of intersegment gross profit 487 2,617 Gross profit $ 284,681 34.8 % $ 37,042 7.6 % $ 247,639 The improvement in gross profit was primarily driven by increased sales during the quarter as compared to the three months ended August 1, 2020. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings with aggressive promotional activity. 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 second quarter of fiscal 2021, tight inventory positions resulted in being less 20 promotional. Accordingly, gross profit as a percentage of net sales for the second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the quarter as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the second quarter of fiscal 2019 due to the deleverage impacts of lower net sales. Elimination of intersegment gross profit consisted of the following: Three months ended (in thousands) July 31, 2021 August 1, 2020 Elimination of intersegment activity: Net sales recognized by Brand Portfolio segment $ (13,872) $ (6,569) Cost of sales: Cost of sales recognized by Brand Portfolio segment 9,707 4,827 Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 4,652 4,359 Gross profit $ 487 $ 2,617 Operating Expenses - For the three months ended July 31, 2021, operating expenses increased by $56.0 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 for most of the second quarter of fiscal 2020. Operating expenses during the second quarter of fiscal 2020 were offset by a gain from a settlement with a vendor of $9.0 million. Operating expenses as a percentage of sales improved to 27.5% compared to 34.4% in the same period last year but were still elevated compared to the pre-COVID-19 rate for the second quarter of fiscal 2019, which was 26.0% as a percentage of sales, primarily due to higher direct marketing and incentive compensation expense and lower sales in the Brand Portfolio segment. Impairment Charges- During the three months ended July 31, 2021 and 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 $1.2 million and $6.7 million, respectively. Income Taxes- Our effective tax rate changed from 29.3% for the three months ended August 1, 2020 to 19.3% f or the three months ended July 31, 2021. The rate for the three months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets. The rate for the three months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%. 21 Comparison of the Six Months Ended July 31, 2021 with the Six Months Ended August 1, 2020 Six months ended July 31, 2021 August 1, 2020 Change (dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount % Net sales $ 1,520,490 100.0 % $ 972,497 100.0 % $ 547,993 56.3 % Cost of sales (1,019,698) (67.1) (961,915) (98.9) (57,783) 6.0 % Gross profit 500,792 32.9 10,582 1.1 490,210 4,632.5% Operating expenses (425,199) (28.0) (355,645) (36.6) (69,554) 19.6 % Income from equity investment 3,998 0.3 4,423 0.5 (425) (9.6) % Impairment charges (1,174) (0.1) (119,282) (12.3) 118,108 (99.0)% Operating profit (loss) 78,417 5.1 (459,922) (47.3) 538,339 NM Interest expense, net (16,886) (1.1) (5,946) (0.6) (10,940) 184.0 % Non-operating income, net 562 0.0 656 0.1 (94) (14.3)% Income (loss) before income taxes 62,093 4.0 (465,212) (47.8) 527,305 NM Income tax benefit (provision) (2,207) (0.1) 151,140 15.5 (153,347) NM Net income (loss) $ 59,886 3.9 % $ (314,072) (32.3) % $ 373,958 NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 0.82 $ (4.36) $ 5.18 NM Diluted earnings (loss) per share $ 0.78 $ (4.36) $ 5.14 NM Weighted average shares used in per share calculations: Basic shares 72,773 72,028 745 1.0 % Diluted shares 77,271 72,028 5,243 7.3 % NM - Not meaningful Net Sales- The following summarizes net sales by segment: Six months ended Change (dollars in thousands) July 31, 2021 August 1, 2020 Amount % Comparable Sales % Segment net sales: U.S. Retail $ 1,343,751 $ 771,050 $ 572,701 74.3 % 74.5% Canada Retail 98,189 78,911 19,278 24.4 % 12.6% Brand Portfolio 107,956 112,571 (4,615) (4.1) % 8.6% Other — 35,889 (35,889) NM NA Total segment net sales 1,549,896 998,421 551,475 55.2 % 68.1% Elimination of intersegment net sales (29,406) (25,924) (3,482) 13.4 % Consolidated net sales $ 1,520,490 $ 972,497 $ 547,993 56.3 % NA - Not applicable NM - Not meaningful The increases in comparable sales for all segments and in total consolidated net sales was a result of the temporary closure of all stores beginning in March 2020 through much of the second quarter of fiscal 2020 and, since re-opening, we experienced significantly reduced customer traffic and net sales. During a portion of the first half of fiscal 2021, the Canada Retail segment was impacted by ongoing temporary closures and restrictions in certain key markets. The higher net sales due to the increase in total comparable sales was partially offset by store closures, including those serviced in the Other segment. 22 Gross Profit- The following summarizes gross profit (loss) by segment: Six months ended July 31, 2021 August 1, 2020 (dollars in thousands) Amount % of Segment Net Sales Amount % of Segment Net Sales Change Segment gross profit (loss): U.S. Retail $ 450,006 33.5 % $ 7,127 0.9 % $ 442,879 Canada Retail 29,603 30.1 % 3,339 4.2 % $ 26,264 Brand Portfolio 20,459 19.0 % 2,464 2.2 % $ 17,995 Other — — % (5,310) (14.8) % $ 5,310 500,068 7,620 Elimination of intersegment gross profit 724 2,962 Gross profit $ 500,792 32.9 % $ 10,582 1.1 % $ 490,210 The improvement in gross profit was primarily driven by increased sales during the six months ended July 31, 2021 as compared to the same period last year. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings with aggressive promotional activity. 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 six months ended July 31, 2021 , tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the six months ended July 31, 2021 tracked higher than the pre-COVID-19 rate, which was 30.1% for the same period in fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the six months ended July 31, 2021 as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the same period in fiscal 2019 due to the deleverage impacts of lower net sales. Elimination of intersegment gross profit consisted of the following: Six months ended (in thousands) July 31, 2021 August 1, 2020 Elimination of intersegment activity: Net sales recognized by Brand Portfolio segment $ (29,406) $ (25,924) Cost of sales: Cost of sales recognized by Brand Portfolio segment 20,642 16,961 Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 9,488 11,925 Gross profit $ 724 $ 2,962 Operating Expenses - For the six months ended July 31, 2021, operating expenses increased by $69.6 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 COVID-19 for most of the first half of fiscal 2020. Operating expenses as a percentage of sales improved to 28.0% compared to 36.6% in the same period last year but were still elevated co mpared to the pre-COVID-19 rate, which was 25.4% as a percentage of sales for the same period in fiscal 2019, primarily due to higher direct marketing expense and incentive compensation and lower sales . 23 Impairment Charges- During the six months ended July 31, 2021, we recorded an impairment charge of $1.2 million for abandoned equipment we are replacing. As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores during the six months ended August 1, 2020, we performed an 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 for under-performing stores. 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. Further, 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 COVID-19 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 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 32.5% for the six months ended August 1, 2020 to 3.6% for the six months ended July 31, 2021. The rate for the six months ended July 31, 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 six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%. Seasonality 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. Since the COVID-19 outbreak, we have not experienced the typical seasonal trends given the changes in customer behavior. Liquidity and Capital Resources Overview 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 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 six months ended July 31, 2021, net cash provided by operations was $96.2 million compared to net cash used in operations of $79.6 million for the six months ended August 1, 2020. The change was driven by the net income recognized in the six months ended July 31, 2021 versus a net loss incurred during that same period last year as a result of COVID-19, 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 six months ended July 31, 2021, our net cash used in investing activities was $13.2 million, which was due to capital expenditures relating to infrastructure and IT projects and store improvements. During 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 and the proceeds from a settlement from a vendor partially offset by capital expenditures of $22.1 million. 24 Financing Cash Flows For the six months ended July 31, 2021, our net cash used in financing activities was $95.0 million compared to net cash provided by financing activities of $193.2 million for the six months ended August 1, 2020. During th e six months ended July 31, 2021, we had net payments of $83.2 million from the ABL Revolver and payments on the Term Loan of $6.3 million. 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 the uncertainty from COVID-19. Debt 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. 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 formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves . As of July 31, 2021, the ABL Revolver had a borrowing base of $386.1 million, with $16.8 million outstanding and $5.3 million in letters of credit issued, resulting in $364.0 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") (as defined) 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 3.0% as of July 31, 2021. 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%, with an interest rate of 9.8% (effective interest rate of 11.8% w hen including the amortization of debt issuance costs) as of July 31, 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 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. 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 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 July 31, 2021, we were in compliance with all financial covenants. 25 Capital Expenditure Plans We expect to spend approximately $35.0 million to $45.0 million for capital expenditures in fiscal 2021, of which we invested $13.2 million during the six months ended July 31, 2021. Our capital expenditures for the remainder of the year will depend primarily on the number of store projects, as well as infrastructure and IT projects that we undertake and the timing of these expenditures. Critical Accounting Policies and Estimates The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. 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 valuation 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. 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. There have been no material changes to the application of critical accounting policies disclosed in our 2020 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2020 Form 10-K.