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 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: • 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 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. 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 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. 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 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. 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 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 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. 17 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 The following table presents the increase (decrease) in comparable sales for each segment and in total: Three months ended October 30, 2021 October 31, 2020 Change in comparable sales: U.S. Retail segment 43.9 % (31.9) % Canada Retail segment 15.2 % (18.7) % Brand Portfolio segment - direct-to-consumer channel 50.4 % 13.4 % Total comparable sales 40.8 % (30.4) % 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 the COVID-19 pandemic 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 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 As of October 30, 2021 and October 31, 2020, we had the following number of stores: October 30, 2021 October 31, 2020 U.S. Retail segment - DSW stores 515 524 Canada Retail segment: The Shoe Company / Shoe Warehouse stores 117 118 DSW stores 27 27 144 145 Total number of stores 659 669 18 Results of Operations Comparison of the Three Months Ended October 30, 2021 with the Three Months Ended October 31, 2020 Three 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 % Net sales $ 853,467 100.0 % $ 652,870 100.0 % $ 200,597 30.7 % Cost of sales (539,850) (63.3) (487,214) (74.6) (52,636) 10.8 % Gross profit 313,617 36.7 165,656 25.4 147,961 89.3 % Operating expenses (211,909) (24.8) (196,067) (30.1) (15,842) 8.1 % Income from equity investment 2,600 0.3 1,902 0.3 698 36.7 % 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, 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 Income tax benefit (provision) (16,590) (1.9) 26,932 4.1 (43,522) NM Net income (loss) $ 80,184 9.4 % $ (40,643) (6.2) % $ 120,827 NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 1.10 $ (0.56) $ 1.66 NM Diluted earnings (loss) per share $ 1.04 $ (0.56) $ 1.60 NM Weighted average shares used in per share calculations: Basic shares 73,191 72,344 847 1.2 % Diluted shares 77,135 72,344 4,791 6.6 % NM - Not meaningful Net Sales- The following summarizes net sales by segment: Three months ended Change (dollars in thousands) October 30, 2021 October 31, 2020 Amount % Comparable Sales % Segment net sales: U.S. Retail $ 709,608 $ 501,901 $ 207,707 41.4 % 43.9% Canada Retail 74,792 61,598 13,194 21.4 % 15.2% Brand Portfolio 103,919 83,905 20,014 23.9 % 50.4% Other — 27,020 (27,020) NM NA Total segment net sales 888,319 674,424 213,895 31.7 % 40.8% Elimination of intersegment net sales (34,852) (21,554) (13,298) 61.7 % Consolidated net sales $ 853,467 $ 652,870 $ 200,597 30.7 % 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 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 19 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 October 30, 2021 October 31, 2020 (dollars in thousands) Amount % of Segment Net Sales Amount % of Segment Net Sales Change Segment gross profit: U.S. Retail $ 258,059 36.4 % $ 117,679 23.4 % $ 140,380 Canada Retail 28,588 38.2 % 18,905 30.7 % $ 9,683 Brand Portfolio 32,329 31.1 % 22,128 26.4 % $ 10,201 Other — — % 6,272 23.2 % $ (6,272) 318,976 164,984 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 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) October 30, 2021 October 31, 2020 Elimination of intersegment activity: Net sales recognized by Brand Portfolio segment $ (34,852) $ (21,554) Cost of sales: Cost of sales recognized by Brand Portfolio segment 22,950 17,155 Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 6,543 5,071 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%. 20 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 % Net sales $ 2,373,957 100.0 % $ 1,625,367 100.0 % $ 748,590 46.1 % Cost of sales (1,559,548) (65.7) (1,449,129) (89.2) (110,419) 7.6 % Gross profit 814,409 34.3 176,238 10.8 638,171 362.1 % Operating expenses (637,108) (26.9) (551,712) (33.9) (85,396) 15.5 % Income from equity investment 6,598 0.3 6,325 0.4 273 4.3 % Impairment charges (1,174) (0.0) (149,363) (9.2) 148,189 (99.2) % Operating profit (loss) 182,725 7.7 (518,512) (31.9) 701,237 NM Interest expense, net (24,592) (1.0) (14,955) (0.9) (9,637) 64.4 % Non-operating income, net 734 0.0 680 0.0 54 7.9 % Income (loss) before income taxes 158,867 6.7 (532,787) (32.8) 691,654 NM Income tax benefit (provision) (18,797) (0.8) 178,072 11.0 (196,869) NM Net income (loss) $ 140,070 5.9 % $ (354,715) (21.8) % $ 494,785 NM Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 1.92 $ (4.92) $ 6.84 NM Diluted earnings (loss) per share $ 1.81 $ (4.92) $ 6.73 NM Weighted average shares used in per share calculations: Basic shares 72,911 72,134 777 1.1 % Diluted shares 77,216 72,134 5,082 7.0 % NM - Not meaningful Net Sales- The following summarizes net sales by segment: Nine months ended Change (dollars in thousands) October 30, 2021 October 31, 2020 Amount % Comparable Sales % Segment net sales: U.S. Retail $ 2,053,359 $ 1,272,951 $ 780,408 61.3 % 62.6% Canada Retail 172,981 140,509 32,472 23.1 % 13.7% Brand Portfolio 211,875 196,476 15,399 7.8 % 22.8% Other — 62,909 (62,909) NM NA Total segment net sales 2,438,215 1,672,845 765,370 45.8 % 57.4% Elimination of intersegment net sales (64,258) (47,478) (16,780) 35.3 % Consolidated net sales $ 2,373,957 $ 1,625,367 $ 748,590 46.1 % 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 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. 21 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: U.S. Retail $ 708,065 34.5 % $ 124,806 9.8 % $ 583,259 Canada Retail 58,191 33.6 % 22,244 15.8 % $ 35,947 Brand Portfolio 52,788 24.9 % 24,592 12.5 % $ 28,196 Other — — % 962 1.5 % $ (962) 819,044 172,604 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 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: Net sales recognized by Brand Portfolio segment $ (64,258) $ (47,478) Cost of sales: Cost of sales recognized by Brand Portfolio segment 43,592 34,116 Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 16,031 16,996 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. 22 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 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 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%. 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 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 ongoing impacts of the COVID-19 pandemic. 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 and beyond. Operating Cash Flows 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 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. 23 Financing Cash Flows 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. 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 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 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 October 30, 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 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. 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. 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 October 30, 2021, we were in compliance with all financial covenants. 24 Capital Expenditure Plans 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. 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.