Childrens Place, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains or may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company ’ s strategic initiatives and results of operations, including adjusted net income (loss) per diluted share. Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,” “plan,” “project,” “expect,” “anticipate,” “estimate,” and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company ’ s current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company ’ s filings with the Securities and Exchange Commission, including in Part I, Item 1A. Risk Factors of its annual report on Form 10-K for the fiscal year ended February 3, 2024. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unable to achieve operating results at levels sufficient to fund and/or finance the Company ’ s current level of operations and repayment of indebtedness, the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company ’ s business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions (including inflation), the risk that changes in the Company ’ s plans and strategies with respect to pricing, capital allocation, capital structure, investor communications and/or operations may have a negative effect on the Company ’ s business, the risk that the Company ’ s strategic initiatives to increase sales and margin, improve operational efficiencies, enhance operating controls, decentralize operational authority and reshape the Company ’ s culture are delayed or do not result in anticipated improvements, the risk of delays, interruptions, disruptions and higher costs in the Company ’ s global supply chain, including resulting from disease outbreaks, foreign sources of supply in less developed countries, more politically unstable countries, or countries where vendors fail to comply with industry standards or ethical business practices, including the use of forced, indentured or child labor, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigations brought under securities, consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, risks related to the existence of a controlling shareholder, and the uncertainty of weather patterns. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion should be read in conjunction with the Company ’ s unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company ’ s Annual Report on Form 10-K for the year ended February 3, 2024. Terms that are commonly used in our Management’s Discussion and Analysis of Financial Condition and Results of Operations are defined as follows: • First Quarter 2024 — The thirteen weeks ended May 4, 2024 • First Quarter 2023 — The thirteen weeks ended April 29, 2023 • Fiscal 2024 — The fifty-two weeks ending February 1, 2025 • Fiscal 2023 — The fifty-three weeks ended February 3, 2024 • SEC — U.S. Securities and Exchange Commission • U.S. GAAP — Generally Accepted Accounting Principles in the United States • FASB — Financial Accounting Standards Board • FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants • AUR — Average unit retail price • Comparable Retail Sales — Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce store, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes. A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is reopened for a full fiscal month. 23 • Gross Margin — Gross profit expressed as a percentage of net sales • SG&A — Selling, general, and administrative expenses OVERVIEW Our Business We are an omni-channel children’s specialty portfolio of brands with an industry-leading digital-first operating model. We design, contract to manufacture, and sell fashionable, high quality apparel, accessories and footwear predominantly at value prices, primarily under our proprietary brands: “The Children’s Place”, “Gymboree”, “Sugar & Jade”, and “PJ Place”. As of May 4, 2024, we had 518 stores across North America, our e-commerce business at www.childrensplace.com and www.gymboree.com , social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest, and 214 international points of distribution with our six franchise partners in 16 countries. Segment Reporting In accordance with FASB ASC 280— Segment Reporting , we report segment data based on geography: The Children’s Place U.S. and The Children’s Place International. Each segment includes an e-commerce business located at www.childrensplace.com and www.gymboree.com. Included in The Children’s Place U.S. segment are our U.S. and Puerto Rico-based stores and revenue from our U.S.-based wholesale business. Included in The Children’s Place International segment are our Canadian-based stores, revenue from our Canadian-based wholesale business, as well as revenue from international franchisees. We measure our segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. We periodically review these allocations and adjust them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and we have no customer that individually accounted for more than 10% of our net sales. Recent Developments Macroeconomic conditions, including inflationary pressures, higher interest rates, and other domestic and geo-political factors, continue to adversely affect our core customer, resulting in a decrease in discretionary apparel purchases during the First Quarter 2024. These macroeconomic conditions are expected to continue to have an adverse impact during the remainder of Fiscal 2024. On May 20, 2024 our Board of Directors (the “Board”) appointed Muhammad Umair, who is currently a Board member, as President and Interim Chief Executive Officer of the Company. Mr. Umair succeeded Jane Elfers, who departed as our President and Chief Executive Officer and as a member of the Board pursuant to a mutual agreement with the Company, effective as of May 20, 2024. Operating Highlights Net sales decreased $53.7 million, or 16.7%, to $267.9 million during the First Quarter 2024 from $321.6 million during the First Quarter 2023, primarily due to reductions in retail sales due to lower store count and traffic declines to stores, declines in e-commerce demand due to reductions in marketing results from liquidity challenges early in the quarter and decreases in wholesale revenue. During the First Quarter 2024, we closed five stores and did not open any new stores. Comparable retail sales decreased 11.7% for the First Quarter 2024. Gross profit decreased $3.8 million to $92.7 million or 34.6% of net sales during the First Quarter 2024 from $96.5 million or 30.0% of net sales during the First Quarter 2023. The 460 basis point increase was primarily due to reductions in product input costs, including cotton and supply chain costs, which negatively impacted margins in the prior year coupled with improvements in the leverage of e-commerce freight costs due to our new shipping threshold for free shipping. These improvements were partially offset by margin pressure due to aggressive promotions, as we sought to maximize revenue during the quarter and due to increases in freight cost resulting from split shipments. Operatin g loss decreased $2.1 million to $(28.0) million during the First Quarter 2024 compared to a loss of $(30.1) million during the First Quarter 2023. Operating margin deleveraged 110 basis points to (10.4)% of net sales. 24 Net loss increased $9.0 million to $(37.8) million, or $(2.99) per diluted share, during the First Quarter 2024 compared to $(28.8) million, or $(2.33) per diluted share, during the First Quarter 2023, due to the factors discussed above, in addition to higher interest expense due to higher average interest rates associated with our revolving credit facility due to the impact of refinancings and continued market-based rate increases. While we continue to face a challenging macroeconomic environment, including inflationary pressures, higher interest rates, and other domestic and geo-political concerns, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, alternative channels of distribution, and fleet optimization. Digital remains our top priority and we continue to expand our digital capabilities. We have expanded our partnerships with our outside providers to help us monitor and reallocate our marketing budgets in a more efficient and timely manner to drive acquisition, retention and reactivation. We continue to position marketing as a key growth lever in Fiscal 2024 and beyond. As our digital business continues to expand, we continue to strengthen our partnership with our third party logistics providers in an effort to provide our customers with a best-in-class digital experience. We have closed 681 stores since the announcement of our fleet optimization initiative in 2013, including five during the First Quarter 2024. With over 75% of our store fleet coming up for lease action in the next 24 months, we continue to maintain meaningful financial flexibility in our lease portfolio. The average unexpired lease term for our stores is approximately 1.7 years in the United States, Puerto Rico, and Canada. In November 2021, our Board authorized a $250.0 million share repurchase program (the “Share Repurchase Program”). Currently, given the terms of our credit agreement, dated as of May 9, 2019 (as amended from time to time, the “Credit Agreement”), by and among the Company and certain of its subsidiaries, and the lenders party thereto (collectively, the “Credit Agreement Lenders”), as amended by the seventh amendment to the Credit Agreement (the “Seventh Amendment”), we are not expecting to repurchase any shares in Fiscal 2024, except pursuant to our practice as a result of our insider trading policy. As of May 4, 2024, there was $156.9 million remaining availability under the Share Repurchase Program. We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S. dollars. The table below summarizes the average translation rates that most significantly impact our operating results: Thirteen Weeks Ended May 4, 2024 April 29, 2023 Average Translation Rates (1) Canadian dollar 0.7364 0.7387 Hong Kong dollar 0.1278 0.1274 ____________________________________________ (1) The average translation rates are the average of the monthly translation rates used during each period to translate the respective statements of operations. Each rate represents the U.S. dollar equivalent of the respective foreign currency. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES We describe our significant accounting policies in “Note 1. Basis of Preparation and Summary of Significant Accounting Policies” of the Consolidated Financial Statements included in our most recent Annual Report on Form 10-K for the fiscal year ended February 3, 2024. There have been no significant changes in our accounting policies from those described in our most recent Annual Report on Form 10-K. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses reported during the period. We continuously review the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Consequently, actual results could differ materially from our estimates. Our critical accounting estimates are described under the heading “Critical Accounting Estimates” in Item 7 of our most recent Annual Report on Form 10-K for the fiscal year ended February 3, 2024. Our critical accounting estimates include impairment of long-lived assets, impairment of indefinite-lived intangible assets, income taxes, stock-based compensation, and inventory valuation. There have been no material changes in these critical accounting estimates from those described in our most recent Annual Report on Form 10-K. 25 Recent Accounting Standards Updates Refer to “Note 1. Basis of Presentation” of the accompanying consolidated financial statements for discussion regarding the impact of recently issued accounting standards on our consolidated financial statements. RESULTS OF OPERATIONS We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales. The following table sets forth, for the periods indicated, selected data from our Statements of Operations expressed as a percentage of Net sales. We primarily evaluate the results of our operations as a percentage of Net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of Net sales (i.e., “basis points”). For example, SG&A decreased 560 basis points to 40.7% of Net sales during the First Quarter 2024 from 35.1% during the First Quarter 2023. Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business. Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “deleveraging”), we have less efficiently utilized the investments we have made in our business. Thirteen Weeks Ended May 4, 2024 April 29, 2023 Net sales 100.0 % 100.0 % Cost of sales (exclusive of depreciation and amortization) 65.4 70.0 Gross profit 34.6 30.0 Selling, general, and administrative expenses 40.7 35.1 Depreciation and amortization 4.3 3.7 Asset impairment charges — 0.5 Operating loss (10.4) (9.3) Interest expense, net (2.9) (1.9) Loss before provision (benefit) for income taxes (13.3) (11.2) Provision (benefit) for income taxes 0.8 (2.2) Net loss (14.1) % (9.0) % Number of Company stores, end of period 518 599 The following table sets forth net sales by segment, for the periods indicated: Thirteen Weeks Ended May 4, 2024 April 29, 2023 (in thousands) Net sales: The Children’s Place U.S. $ 246,188 $ 293,486 The Children’s Place International 21,690 28,154 Total net sales $ 267,878 $ 321,640 First Quarter 2024 Compared to First Quarter 2023 Net sales decreased $53.7 million or 16.7%, to $267.9 million during the First Quarter 2024 from $321.6 million during the First Quarter 2023, primarily due to reductions in retail sales due to lower store count, traffic declines to stores, declines in e-commerce demand due to reductions in marketing results from liquidity challenges early in the quarter and decreases in wholesale revenue. Comparable retail sales decreased 11.7% for the quarter. 26 The Children’s Place U.S. net sales decreased $47.3 million or 16.1%, to $246.2 million in the First Quarter 2024, compared to $293.5 million in the First Quarter 2023. This decrease was primarily due to reductions in retail sales due to lower store count, traffic declines to stores, declines in e-commerce demand due to reductions in marketing results from liquidity challenges early in the quarter and decreases in wholesale revenue. The Children’s Place International net sales decreased $6.5 million or 23.0%, to $21.7 million in the First Quarter 2024, compared to $28.2 million in the First Quarter 2023. This decrease was primarily due to reductions in retail sales due to lower store count and traffic declines to stores. Total e-commerce sales, which include postage and handling, were 53.4% of net retail sales and 49.2% of net sales during the First Quarter 2024, compared to 46.4% and 42.4%, respectively, during the First Quarter 2023. Gross profit decreased $3.8 million to $92.7 million in the First Quarter 2024, compared to $96.5 million in the First Quarter 2023. Gross margin increased 460 basis points to 34.6% of net sales in the First Quarter 2024. The 460 basis point increase was primarily due to reductions in product input costs, including cotton and supply chain costs, which negatively impacted margins in the prior year coupled with improvements in the leverage of e-commerce freight costs due to our new shipping threshold for free shipping. These improvements were partially offset by margin pressure due to aggressive promotions, as we sought to maximize revenue during the quarter and due to increases in freight cost resulting from split shipments. Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in shipping and material costs. These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period. Selling, general, and administrative expenses decreased $3.8 million to $109.1 million during the First Quarter 2024 from $112.9 million during the First Quarter 2023. SG &A deleveraged 560 basis points to 40.7% of net sales in the First Quarter 2024. The First Quarter 2024 results included incremental operating expenses of $20.4 million, including costs associated with the change of control of the Company of $13.7 million and financing related charges of $6.7 million, partially offset by the reversal of a legal settlement accrual of $2.3 million. Th e First Quarter 2023 results included incremental operating expenses of $3.8 million, including contract termination co sts of $2.4 million and fleet optimization costs of $1.1 million. Excluding the impact of these incremental charges, SG&A leveraged 80 basis points to 33.1% of net sales, primarily as a result of significant reductions in store payroll and home office payroll, and reductions in marketing costs. Depreciation and amortization was $11.6 million during the First Quarter 2024, compared to $11.8 million during the First Quarter 2023. The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 81 stores during the past twelve months, partially offset by accelerated depreciation related to the closure of our distribution center in Canada. Asset impairment charges were $1.8 million during the First Quarter 2023 , inclusive of ROU assets. These charges were relate d to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections. There were no asset impairment charges in the First Quarter 2024. Operating loss decreased $2.1 million to $(28.0) million during the First Quarter 2024, compared to $(30.1) million during the First Quarter 2023. Operating loss was impacted by several charges due to the recent change of control as a result of the investment in the Company by Mithaq Capital SPC, a Cayman segregated portfolio company (“Mithaq”), and several new financing initiatives. These charges, which include $10.8 million of non-cash equity compensation charges and $3.8 million in other fees associated with the change of control, and $6.7 million of financing related charges, have been classified as non-GAAP adjustments, leading to an adjusted operating loss of ($5.1) million in the First Quarter 2024, compared to an adjusted operating loss of ($24.5) million in the First Quarter 2023, and leveraged 570 basis points to (1.9)% of net sales. Net interest expense was $7.7 million during the First Quarter 2024, compared to $5.9 million during the First Quarter 2023. The increase in interest expense was driven by higher average interest rates associated with our revolving credit facility due to the impact of refinancings and continued market-based rate increases. Provision (benefit) for income taxes was a provision of $2.1 million during the First Quarter 2024, compared to a benefit of $(7.1) million during the First Quarter 2023. Our effective tax rate was a provision of (5.8)% and a benefit of 19.8% in the First Quarter 2024 and First Quarter 2023, respectively. The change in our effective tax rate and income tax provision (benefit) for the First Quarter 2024 compared to the First Quarter 2023 was primarily driven by the establishment of a valuation allowance against our net deferred tax assets. 27 Net loss, which reflected several unusual charges associated with the recent change of control due to the investment in the Company by Mithaq, and our new financing initiatives, increased $9.0 million to $(37.8) million, or $(2.99) per diluted share during the First Quarter 2024, compared to $(28.8) million, or $(2.33) per diluted share during the First Quarter 2023, due to the factors discussed above . LIQUIDITY AND CAPITAL RESOURCES Liquidity Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the payment of interest expense on our revolving credit facility and interest-equivalent expenses on our term loans, and the financing of capital projects. Our working capital deficit decreased $49.1 million to $63.6 million at May 4, 2024, compared to $112.7 million at April 29, 2023, primarily reflecting a decrease in borrowings on our $433.0 million asset-based revolving credit facility (the “ABL Credit Facility”) under our Credit Agreement and in our accounts payable balances, partially offset by a decrease in our inventory balance, driven by lower average unit costs and improved inventory management. At May 4, 2024, we had $226.1 million of outstanding borrowings under our $433.0 million ABL Credit Facility and no borrowings under our Shariah-compliant $40.0 million senior unsecured credit facility with Mithaq (the “Mithaq Credit Facility”). We had total liquidity of $60.7 million, including $47.7 million of availability under our ABL Credit Facility (after factoring in our excess availability threshold, as defined below), $40.0 million of availability under our Mithaq Credit Facility, and $13.0 million of cash on hand. At May 4, 2024, we had $12.2 million of outstanding letters of credit, with an additional $12.8 million available for issuing letters of credit under our ABL Credit Facility. We expect to be able to meet our working capital, capital expenditure, and debt service requirements for at least the next twelve months from the date that our consolidated financial statements for the First Quarter 2024 were issued, by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility and Mithaq Credit Facility. ABL Credit Facility and 2021 Term Loan We and certain of our subsidiaries maintain the $433.0 million ABL Credit Facility and, before it was fully repaid, maintained a $50.0 million term loan (the “2021 Term Loan”) under our Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”), Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., JPMorgan Chase Bank, N.A., and PNC Bank, National Association as the Credit Agreement Lenders and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lender and, before the 2021 Term Loan was fully repaid, Term Agent. The ABL Credit Facility will mature and, before it was fully repaid, the 2021 Term Loan would have matured, in November 2026. As of the effective date of the Seventh Amendment, the ABL Credit Facility includes a $25.0 million Canadian sublimit and a $25.0 million sublimit for standby and documentary letters of credit. Under the ABL Credit Facility, borrowings outstanding bear interest, at our option, at: (i) the prime rate per annum, plus a margin of 2.000%; or (ii) the Secured Overnight Financing Rate (“SOFR”) per annum, plus 0.100%, plus a margin of 3.000%. Prior to the effective date of the Seventh Amendment, we were charged a fee of 0.200% on the unused portion of the commitments. As of the effective date of the Seventh Amendment, based on the size of the unused portion of the commitments, we are charged a fee ranging from 0.250% to 0.375%. Letter of credit fees are at 1.125% for commercial letters of credit and 1.750% for standby letters of credit. The amount available for loans and letters of credit under the ABL Credit Facility is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves and an availability block. 28 From and after February 4, 2025 and on the first day of each fiscal quarter thereafter, based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility will bear interest, at our option, at: (i) the prime rate per annum, plus a margin of 1.750% or 2.000%; or (ii) the SOFR per annum, plus 0.100%, plus a margin of 2.750% or 3.000%. Letter of credit fees will range from 1.000% to 1.125% for commercial letters of credit and will range from 1.500% to 1.750% for standby letters of credit. Letter of credit fees will be determined based on the amount of our average daily excess availability under the facility. For the First Quarter 2024 and First Quarter 2023, we recognized $5.7 million and $4.7 million, respectively, in interest expense related to the ABL Credit Facility. Prior to the effective date of the Seventh Amendment, when the 2021 Term Loan was fully repaid, credit extended under the ABL Credit Facility was secured by a first priority security interest in substantially all of our U.S. and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock. As of the effective date of the Seventh Amendment, the ABL Credit Facility is secured on a first priority basis by all of the foregoing collateral. The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain customary events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods. We are not subject to any early termination fees. The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments. These covenants also limit our ability to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of our business. Pursuant to the Seventh Amendment, the requisite payment condition thresholds for some of these covenants have been heightened, resulting in certain actions such as the repurchase of shares and payment of cash dividends becoming more difficult to perform. Additionally, if we are unable to maintain a certain amount of excess availability for borrowings (the “excess availability threshold”), we may be subject to cash dominion. The ABL Credit Facility contains customary events of default, which include (subject in certain cases to customary grace and cure periods) nonpayment of principal or interest, breach of covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization, such as a change of control. In October 2023, we became aware of inadvertent calculation errors contained in the June, July and August 2023 borrowing base certificates provided to the Credit Agreement Lenders under our Credit Agreement, all of which have since been remedied. As the Credit Agreement Lenders determined that the calculation errors resulted in certain technical defaults under the Credit Agreement (including us not being in compliance with certain debt covenants), we and the Credit Agreement Lenders entered into a Waiver and Amendment Agreement (the “Waiver Agreement”) on October 24, 2023, pursuant to which the Credit Agreement Lenders waived all of the defaults and we agreed to certain temporary enhanced reporting requirements and temporary restrictions on certain payments. These enhanced reporting requirements and restrictions will cease once we achieve certain excess availability thresholds. At no time prior to or following entering into the Waiver Agreement were we prevented from borrowing under the Credit Agreement in the ordinary course in accordance with its terms. During the First Quarter 2024, Mithaq became the controlling shareholder of the Company and this change of control triggered an event of default under the Credit Agreement, thus subjecting us to cash dominion by the Credit Agreement Lenders. Subsequently, the Credit Agreement Lenders agreed to forbear from enforcing certain other rights and remedies during a limited forbearance period. On April 16, 2024, we and certain of our subsidiaries entered into the Seventh Amendment to the Credit Agreement with the Credit Agreement Lenders that, among other things, provided a permanent waiver of the change of control event of default. As of the effective date of the Seventh Amendment, the ABL Credit Facility was reduced from $445.0 million to $433.0 million, and until we achieve certain excess availability thresholds, the Seventh Amendment preserves the temporary enhanced reporting requirements under the Waiver Agreement and continues to impose cash dominion. 29 The table below presents the components of our ABL Credit Facility: May 4, 2024 February 3, 2024 April 29, 2023 (in millions) Total borrowing base availability (1) $ 286.0 $ 258.4 $ 408.9 Credit facility availability (2) 433.0 400.5 315.0 Maximum borrowing availability (3) 286.0 258.4 315.0 Outstanding borrowings 226.1 226.7 300.8 Letters of credit outstanding—standby 12.2 7.4 7.4 Utilization of credit facility at end of period 238.3 234.1 308.2 Availability (4) $ 47.7 $ 24.3 $ 6.8 Interest rate at end of period 9.9% 8.1% 6.5% Year-To-Date 2024 Fiscal 2023 Year-To-Date 2023 (in millions) Average end of day loan balance during the period $ 228.2 $ 315.5 $ 297.1 Highest end of day loan balance during the period $ 251.6 $ 379.4 $ 305.9 Average interest rate 9.6% 7.5% 5.9% ____________________________________________ (1) In the First Quarter 2024, given that the Company was under cash dominion, the total borrowing base availability was only net of the availability block under the Credit Agreement as of the effective date of the Seventh Amendment, and the excess availability threshold was not applicable. For the second quarter of Fiscal 2024, if applicable, the total borrowing base availability will need to be net of the excess availability threshold for 60 consecutive days after June 30, 2024 in order to exit cash dominion. In Fiscal 2023, the total borrowing base availability was net of the excess availability threshold under the Credit Agreement prior to the effective date of the Seventh Amendment. (2) In the First Quarter 2024, given that the Company was under cash dominion, the excess availability threshold under the Credit Agreement as of the effective date of the Seventh Amendment was not applicable to the determination of the credit facility availability. For the second quarter of Fiscal 2024, if applicable, the credit facility availability will need to be net of the excess availability threshold for 60 consecutive days after June 30, 2024 in order to exit cash dominion. In Fiscal 2023, the credit facility availability was net of the excess availability threshold under the Credit Agreement prior to the effective date of the Seventh Amendment. (3) The lower of the credit facility availability and the total borrowing base availability. (4) The sub-limit availability for letters of credit was $12.8 million at May 4, 2024, and $42.6 million at February 3, 2024 and April 29, 2023. The 2021 Term Loan bore interest, payable monthly, at (a) the SOFR per annum plus 2.750% for any portion that was a SOFR loan, or (b) the base rate per annum plus 2.000% for any portion that was a base rate loan. The 2021 Term Loan was pre-payable at any time without penalty, and did not require amortization. For the First Quarter 2024 and First Quarter 2023, we recognized $1.1 million and $0.9 million, respectively, in interest expense related to the 2021 Term Loan. As of the effective date of the Seventh Amendment, the 2021 Term Loan was fully repaid. As of May 4, 2024, unamortized deferred financing costs amounted to $2.9 million related to our ABL Credit Facility. Mithaq Term Loans We and certain of our subsidiaries maintain an interest-free, unsecured and subordinated promissory note with Mithaq for a $78.6 million term loan (the “Initial Mithaq Term Loan”), consisting of (a) a first tranche in an aggregate principal amount of $30.0 million (the “First Tranche”) and (b) a second tranche in an aggregate principal amount of $48.6 million (the “Second Tranche”). We received the First Tranche on February 29, 2024 and the Second Tranche on March 8, 2024. The Initial Mithaq Term Loan matures on February 15, 2027. The Initial Mithaq Term Loan is guaranteed by each of our subsidiaries that guarantee our ABL Credit Facility. 30 We and certain of our subsidiaries also maintain a Shariah-compliant unsecured and subordinated $90.0 million term loan with Mithaq (the “New Mithaq Term Loan”; and together with the Initial Mithaq Term Loan, collectively, the “Mithaq Term Loans”). The New Mithaq Term Loan matures on April 16, 2027, and requires monthly payments equivalent to interest charged at the SOFR plus 4.000% per annum, with such monthly payments to Mithaq deferred until April 30, 2025. The New Mithaq Term Loan is guaranteed by each of our subsidiaries that guarantee our ABL Credit Facility. For the First Quarter 2024, we recognized $0.4 million in deferred interest-equivalent expense related to the New Mithaq Term Loan. The Mithaq Term Loans are subject to an amended and restated subordination agreement (as amended from time to time, the “Subordination Agreement”), dated as of April 16, 2024, by and among us and certain of our subsidiaries, Wells Fargo and Mithaq, pursuant to which the Mithaq Term Loans are subordinated in payment priority to our obligations under the Credit Agreement. Subject to such subordination terms, the Mithaq Term Loans are prepayable at any time and from time to time without penalty and do not require any mandatory prepayments. The Mithaq Term Loans contain customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, including limits on our ability to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, dispositions or restricted payments, or to change the nature of our business. The Mithaq Term Loans, however, do not provide for any closing, prepayment or exit fees, or other fees typical for transactions of this nature, do not impose additional reserves on borrowings under the Credit Agreement, and do not contain certain other restrictive covenants. The Mithaq Term Loans contain certain customary events of default, which include (subject in certain cases to customary grace periods), nonpayment of principal, breach of other covenants of the Mithaq Term Loans, inaccuracy in representations or warranties, acceleration of certain other indebtedness (including under the Credit Agreement), certain events of bankruptcy, insolvency or reorganization, such as a change of control, and invalidity of any part of the Mithaq Term Loans. As of May 4, 2024 unamortized deferred financing costs amounted to $2.0 million related to the Mithaq Term Loans. Maturities of the Company’s principal debt payments as of May 4, 2024 are as follows: May 4, 2024 (in thousands) Remainder of 2024 $ — 2025 — 2026 — 2027 168,600 Thereafter — Total debt $ 168,600 Mithaq Commitment Letter On May 2, 2024, we entered into a commitment letter with Mithaq for a Shariah-compliant $40.0 million Mithaq Credit Facility. Under the Mithaq Credit Facility, we may request for advances at any time prior to July 1, 2025. If any debt is incurred under the Mithaq Credit Facility, it shall require monthly payments equivalent to interest charged at the SOFR plus 5.000% per annum. Such debt shall be unsecured and shall be guaranteed by each of our subsidiaries that guarantee our ABL Credit Facility. Similar to the Mithaq Term Loans, such debt shall also be subject to the Subordination Agreement, contain customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, and contain certain customary events of default. Additionally, such debt shall require no mandatory prepayments and shall mature no earlier than July 1, 2025. As of May 4, 2024, no debt had been incurred under the Mithaq Credit Facility. Cash Flows and Capital Expenditures Cash used in operating activities was $110.8 million during the First Quarter 2024, compared to cash provided by operating activities of $5.1 million during the First Quarter 2023. Cash used in operating activities during the First Quarter 2024 was primarily the result of a higher inventory balance, lower accounts payable balance and losses incurred during the period. Cash used in investing activities was $4.7 million during the First Quarter 2024, compared to $11.0 million during the First Quarter 2023, driven by lower capital expenditures. 31 Cash provided by financing activities was $114.9 million during the First Quarter 2024, compared to $7.8 million during the First Quarter 2023. The increase primarily resulted from proceeds from the Mithaq Term Loans, partially offset by the repayment of the 2021 Term Loan. Our ability to continue to meet our capital requirements in Fiscal 2024 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility and Mithaq Credit Facility. Cash flows generated from operations depends on our ability to achieve our financial plans. We believe that our cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility and Mithaq Credit Facility will be sufficient to fund our capital and other cash requirements for at least the next twelve months from the date that our consolidated financial statements for the First Quarter 2024 were issued. 32