Item 8.01 Other Events.
In addition, the Company is supplementing the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended August 3, 2019 and its subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, with the following risk factor:
The COVID-19 pandemic has disrupted and is expected to continue to disrupt our business, which in turn could have a material adverse effect on our business, operational results, financial position and cash flow for an extended period of time.
The coronavirus (“COVID-19”) pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the significant impact of the pandemic on the economy, our customers, supply chain partners, associates and stores, and consumer sentiment in general. In response to the escalating spread of COVID-19, and state and local shelter-in-place orders, on March 18, 2020, we temporarily closed all of our retail stores and corporate offices. The pandemic has materially adversely affected our near-term revenues, earnings, liquidity and cash flows.
Although we continue to operate our e-commerce business, the majority of our stores remain closed to customers in response to state and local shelter-in-place orders. As of May 27, 2020, approximately 450 of our 2,800 retail stores have re-opened to the public, most with restricted operations. Additionally, even in markets where shelter-in-place orders have been lifted, and where we have fully opened stores, we are experiencing significantly reduced customer traffic relative to the same period last year. As a result of the pandemic, in an effort to preserve capital, we have, among other measures, closed stores, furloughed associates, reduced base salaries, reduced advertising expenses and planned capital expenditures, extended vendor payment terms and withheld rent payments on closed stores. We have also reduced merchandise inventory orders, which could impact product availability and sales in future periods due to both the operational issues associated with the reduced orders as well as the result of extended payment terms. We may extend closures, or further restrict the operations of our stores, corporate offices and distribution facilities, if we deem this necessary or if recommended or mandated by authorities. The extent to which the COVID-19 pandemic impacts our business, financial position, cash flows and results of operations will depend on future developments, including, but not limited to, the duration, spread, severity and impact of the COVID-19 pandemic, the effects of the pandemic on our customers, associates and vendors, the
regulatory response and the impact of stimulus measures adopted by local, state and federal governments, and to what extent normal economic and operating conditions can resume.
As such, impacts of COVID-19 to our business are highly uncertain and we will continue to assess the financial impacts. COVID-19 also magnifies many of the other risks to our business, operations, liquidity and financial condition, including our ability to service our debt and lease obligations and our ability to continue to comply with the financial covenants contained in the credit agreement relating to our revolving credit facility (the “revolving credit agreement”). It may also affect the assessment under Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), or ASC 205-40, as to whether there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date on which the Company’s financial statements are issued.
Even after the COVID-19 pandemic has subsided, we could experience materially adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future due to a continued erosion in consumer sentiment or the effect of high unemployment on our customer base. Furthermore, the financial condition of our customers may be adversely impacted, which may result in a decrease in discretionary consumer spending and our store traffic and sales. These events may, in turn, have a material adverse impact on our business, financial position, cash flows and results of operations and we may not be able to comply with the financial covenants in our revolving credit agreement, which could negatively impact our ability to borrow additional funds, negatively impact our liquidity position and may increase our risk of insolvency.