What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-12-07 compared with 2021-08-31 · 116 added, 127 removed, 168 unchanged (59% of the section changed)

1 unchanged sentence

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.

Operating profit in the third quarter of fiscal 2021 surpassed pre-COVID-19 levels with an 86% growth when compared to the third quarter of fiscal 2019.

This growth came despite the lingering effects of the COVID-19 pandemic.

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:

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.

Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in 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 we believe continue to be the lifeblood of our business and our largest competitive differentiator.

• Brand- Controlling our own brand destiny is critical for our growth.

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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.

Fulfillment of digital customer orders currently takes five to seven business days and we are working to improve that to two to three 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.

Despite some of the challenges we face, including the ongoing COVID-19 pandemic and the potential for more severe or contagious variants and supply chain disruptions, we have experienced strong performance in our key assortments, including athleisure, kids, and men's, all powered by the top 50 brands in footwear, and our women's fashion business has also improved significantly.

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 we continue to closely monitor the COVID-19 pandemic, our top priority remains protecting the health and safety of our customers and associates.

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.

While trends have improved during fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends will continue.

For instance, we have continued to experience reduced customer traffic and consolidated net sales remain lower when compared to pre-COVID-19 periods.

It also remains unclear whether customer behavior may continue to be slow to return to pre-COVID-19 patterns, if at all.

We have also experienced supply chain challenges and significantly increased shipping costs, as well as labor shortages and higher labor costs.

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 such, the ultimate impacts of the COVID-19 pandemic on our businesses will depend on future developments, including the availability of labor, 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.

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.

Financial Summary and Other Key Metrics for the Third Quarter of Fiscal 2021

Net sales increased to $853.5 million for the three months ended October 30, 2021 from $652.9 million for the three months ended October 31, 2020.

The 30.7% increase in net sales was primarily driven by a 40.8% increase in comparable sales during the three months ended October 30, 2021 , partially offset by store closures, including those serviced in the Other segment.

The increase in comparable sales during the three months ended October 30, 2021 was due to the fact that during the three months ended October 31, 2020, the prolonged COVID-19 outbreak resulted in significantly reduced customer traffic and net sales.

In addition, the Brand Portfolio segment's net sales were higher in the third quarter of fiscal 2021 as compared to the same period last year due to increased orders as our retailer customers recover, but net sales were still below pre-COVID-19 levels.

During the three months ended October 30, 2021, gross profit as a percentage of net sales was 36.7% compared to 25.4% for the same period last year.

The improvement in gross profit was primarily driven by increased sales compared to the third quarter of fiscal 2020.

In the third quarter of fiscal 2020, the impact of the COVID-19 outbreak resulted in increased shipping costs associated with higher digital penetration and deleveraging distribution and fulfillment and store occupancy expenses on lower sales volume.

During the third quarter of fiscal 2021, tight inventory positions resulted in fewer promotions.

Accordingly, gross profit as a percentage of net sales for the third quarter of fiscal 2021 was higher than the pre-COVID-19 rate, which was 29.3% for the third quarter of fiscal 2019.

Net income for the three months ended October 30, 2021 was $80.2 million, or $1.04 earnings per diluted share, which included net after-tax benefits of $13.6 million, or $0.18 per diluted share, primarily related to the change in the valuation allowance on deferred tax assets.

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 $22.1 million, or $0.30 per diluted share, primarily related to impairment charges.

Comparable Sales Performance Metric

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Three months ended

July 31, 2021 August 1, 2020

Comparable sales:

October 30, 2021 October 31, 2020

Change in comparable sales:

Retail segment 43.9 % (31.9) %

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Brand Portfolio segment - direct-to-consumer channel 50.4 % 13.4 %

Other NA (36.2) %

Total comparable sales 40.8 % (30.4) %

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.

We consider the change in comparable sales from the same previous year period, 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 in our comparable sales metric 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 stores temporarily closed as a result of the COVID-19 pandemic as management continues to believe that this metric is meaningful to monitor our performance.

Comparable sales include e-commerce sales.

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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

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

Beginning with the third quarter of fiscal 2020, comparable sales do not 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.

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

As of October 30, 2021 and October 31, 2020, we had the following number of stores:

October 30, 2021 October 31, 2020

Retail segment - DSW stores 515 524

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Results of Operations

Comparison of the Three Months Ended July 31, 2021 with the Three Months Ended August 1, 2020

Comparison of the Three Months Ended October 30, 2021 with the Three Months Ended October 31, 2020

Three months ended

July 31, 2021 August 1, 2020 Change

October 30, 2021 October 31, 2020 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 2,600 0.3 1,902 0.3 698 36.7 %

Impairment charges (1,174) (0.1) (6,735) (1.4) 5,561 (82.6)%

Impairment charges — — (30,081) (4.6) 30,081 NM

Operating profit (loss) 104,308 12.2 (58,590) (9.0) 162,898 NM

Interest expense, net (7,706) (0.9) (9,009) (1.3) 1,303 (14.5) %

Non-operating income (expenses), net (244) (0.0) 743 0.2 (987) NM

Non-operating income, net 172 0.0 24 0.0 148 616.7 %

Income (loss) before income taxes 96,774 11.3 (67,575) (10.3) 164,349 NM

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Three months ended Change

(dollars in thousands) July 31, 2021 August 1, 2020 Amount % Comparable Sales %

(dollars in thousands) October 30, 2021 October 31, 2020 Amount % Comparable Sales %

Segment net sales:

8 unchanged sentences

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.

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

The improvement in sales, including increases in comparable sales and total consolidated net sales, during the three months ended October 30, 2021 over the same period last year was due to the fact that during the three months ended October 31, 2020, the prolonged COVID-19 outbreak resulted in significantly reduced customer traffic.

Additionally during the three months ended October 31, 2020, there was an incident at a third-party vendor that 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.

The improvements to net sales were partially offset by store closures, including those serviced in the Other segment.

In addition, the Brand Portfolio segment net sales were higher in the third quarter of fiscal 2021 as compared to the same period last year due to increased orders as our retailer customers recover, but net sales were still below pre-COVID-19 levels.

Gross Profit- The following summarizes gross profit by segment:

Three months ended

July 31, 2021 August 1, 2020

October 30, 2021 October 31, 2020

(dollars in thousands)

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

Segment gross profit (loss):

Segment gross profit:

Retail $ 258,059 36.4 % $ 117,679 23.4 % $ 140,380

3 unchanged sentences

318,976 164,984

Elimination of intersegment gross profit 487 2,617

Net recognition (elimination) of intersegment gross profit (5,359) 672

Gross profit $ 313,617 36.7 % $ 165,656 25.4 % $ 147,961

The improvement in gross profit was primarily driven by increased sales during the quarter as compared to the three months ended August 1, 2020.

During the second quarter of fiscal 2021, tight inventory positions resulted in being less

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:

The improvement in gross profit was primarily driven by increased sales compared to the third quarter of fiscal 2020.

In the third quarter of fiscal 2020, the impact of the COVID-19 outbreak resulted in increased shipping costs associated with higher digital penetration and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

During the third quarter of fiscal 2021, tight inventory positions resulted in fewer promotions.

Accordingly, gross profit as a percentage of net sales for the third quarter of fiscal 2021 was higher than the pre-COVID-19 rate, which was 29.3% for the third quarter of fiscal 2019.

Elimination of intersegment activity consisted of the following:

Three months ended

(in thousands) July 31, 2021 August 1, 2020

(in thousands) October 30, 2021 October 31, 2020

Elimination of intersegment activity:

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Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 6,543 5,071

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.

Net recognition (elimination) of intersegment gross profit $ (5,359) $ 672

Operating Expenses - For the three months ended October 30, 2021, operating expenses increased by $15.8 million over the same period last year, primarily driven by an increase in store payroll costs in line with the increase in net sales and higher incentive compensation expense.

Operating expenses a s a percentage of sales improved to 24.8% compared to 30.1% in the same period last year but were still elevated compared to the pre-COVID-19 rate for the third quarter of fiscal 2019, which was 23.1% as a percentage of sale s, primarily due to higher direct marketing and incentive compensation expense.

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 experienced significantly lower traffic than the rest of the store fleet as a result of the continuing COVID-19 outbreak.

Income Taxes- Our effective tax rate changed from 39.9% for the three months ended October 31, 2020 to 17.1% f or the three months ended October 30, 2021.

The rate for the three months ended October 30, 2021 is the result of maintaining a full valuation allowance on deferred tax assets.

Th e rate for the three months ended October 31, 2020 is the result of the carry back of losses to a tax year where the U.S.

federal statutory tax rate was 35%.

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

Comparison of the Nine Months Ended October 30, 2021 with the Nine Months Ended October 31, 2020

Nine months ended

October 30, 2021 October 31, 2020 Change

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

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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 %

Nine months ended Change

(dollars in thousands) October 30, 2021 October 31, 2020 Amount % Comparable Sales %

Segment net sales:

8 unchanged sentences

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.

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

Six months ended

July 31, 2021 August 1, 2020

The increases in comparable sales for all segments and in total consolidated net sales was a result of the temporary closure of stores in fiscal 2020 during our peak spring selling season in response to the COVID-19 pandemic and significantly reduced customer traffic since re-opening.

During a portion of fiscal 2021, the Canada Retail segment was impacted by further temporary closures and restrictions in certain key markets.

In addition, net sales were impacted by store closures, including those serviced in the Other segment.

Gross Profit- The following summarizes gross profit by segment:

Nine months ended

October 30, 2021 October 31, 2020

(dollars in thousands)

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

Segment gross profit (loss):

Segment gross profit:

Retail $ 708,065 34.5 % $ 124,806 9.8 % $ 583,259

3 unchanged sentences

819,044 172,604

Elimination of intersegment gross profit 724 2,962

Net recognition (elimination) of intersegment gross profit (4,635) 3,634

Gross profit $ 814,409 34.3 % $ 176,238 10.8 % $ 638,171

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.

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

The improvement in gross profit was primarily driven by increased sales during the nine months ended October 30, 2021 compared to the same period last year.

In response to the impacts of the COVID-19 pandemic on our operations in fiscal 2020, 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 deleveraging distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020.

During fiscal 2021, tight inventory positions resulted in fewer promotions.

Accordingly, gross profit as a percentage of net sales for the nine months ended October 30, 2021 was higher than the pre-COVID-19 rate, which was 29.8% 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 nine months ended October 30, 2021 compared to the same period last year, but gross profit as a percentage of net sales 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 activity consisted of the following:

Nine months ended

(in thousands) October 30, 2021 October 31, 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 16,031 16,996

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 .

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.

Net recognition (elimination) of intersegment gross profit $ (4,635) $ 3,634

Operating Expenses - For the nine months ended October 30, 2021, operating expenses increased by $85.4 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 pandemic for most of the first half of fiscal 2020.

Operating expenses as a percentage of sales improved to 26.9% compared to 33.9% in the same period last year but were still elevated compared to the pre-COVID-19 rate, which was 24.6% as a percentage of sales for the same period in fiscal 2019, primarily due to higher direct marketing expense and incentive compensation on lower sales.

Impairment Charges- During the nine months ended October 30, 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 nine months ended October 31, 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.

During the nine months ended October 31, 2020, we recorded impairment charges of $122.9 million for under-performing stores.

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.

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 the COVID-19 pandemic 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.

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.

Income Taxes- Our effective tax rate changed from 33.4% for the nine months ended October 31, 2020 to 11.8% for the nine months ended October 30, 2021.

The rate for the nine months ended October 30, 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 nine months ended October 31, 2020 is the result of the carry back of losses to a tax year where the U.S.

federal statutory tax rate was 35%.

1 unchanged sentence

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.

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

Liquidity and Capital Resources

1 unchanged sentence

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.

For the nine months ended October 30, 2021, net cash provided by operations was $164.3 million compared to net cash used in operations of $106.3 million for the nine months ended October 31, 2020.

The change was driven by the net income recognized in the nine months ended October 30, 2021 versus a net loss incurred during that same period last year as a result of the impacts of the COVID-19 pandemic, after adjusting for non-cash activity including impairment charges and the changes in deferred income taxes.

This was partially offset by higher spend on working capital as our business recovers from the impacts of the COVID-19 pandemic and the measures we implemented last fiscal 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.

For the nine months ended October 30, 2021, our net cash used in investing activities was $22.1 million, which was due to capital expenditures relating to infrastructure and IT projects and store improvements.

During 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 and the proceeds from a settlement from a vendor partially offset by capital expenditures of $26.9 million.

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.

For the nine months ended October 30, 2021, our net cash used in financing activities was $117.9 million compared to net cash provided by financing activities of $127.2 million for the nine months ended October 31, 2020.

During th e nine months ended October 30, 2021, we made net payments of $100.0 million on the ABL Revolver and payments of $9.4 million on the Term Loan.

During the nine months ended October 31, 2020 , we had net proceeds from borrowings from our ABL Revolver and Term Loan of $346.9 million offset by the settlement of borrowings under the Credit Facility of $190.0 million and the payment of debt issuance costs of $21.1 million associated with the changes we made to our debt structure.

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.

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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.

As of October 30, 2021, the ABL Revolver had a borrowing base of $400.0 million, with no outstanding borrowings and $5.3 million in letters of credit issued, resulting in $394.7 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.

(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 (as defined) plus 1.0%;

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 9.8% (effective interest rate of 11.8% w hen including the amortization of debt issuance costs) as of July 31, 2021.

or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rat e of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of October 30, 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.

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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.

As of October 30, 2021, we are limited in our ability to pay dividends, repurchase stock, and make certain restricted payments above a maximum of $10.0 million over the term of the Term Loan.

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.

As of October 30, 2021, we were in compliance with all financial covenants.

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.

We expect to spend approximatel y $35.0 million to $45.0 million for c apital expenditures in fiscal 2021, of which we invested $22.1 million during the nine months ended October 30, 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.

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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