NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of Chico's FAS, Inc. and its wholly-owned subsidiaries (collectively, the "Company") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, such interim financial statements reflect all normal, recurring adjustments considered necessary to present fairly the condensed consolidated financial position, the results of operations and cash flows for the interim periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and notes thereto for the fiscal year ended February 2, 2019, included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019 filed with the Securities and Exchange Commission ("SEC") on March 19, 2019 ("2018 Annual Report on Form 10-K").
As used in this report, all references to "we," "us," "our" and "the Company," refer to Chico's FAS, Inc. and all of its wholly-owned subsidiaries.
Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. Operating results for the thirteen and twenty-six weeks ended August 3, 2019 are not necessarily indicative of the results that may be expected for the entire year.
Adoption of New Accounting Pronouncements
Effective February 3, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-02, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company also adopted the package of practical expedients issued in subsequent ASUs related to ASU 2016-02. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements, to Accounting Standard Codification ("ASC") 842, Leases ("ASC 842"), which included a provision to apply ASC 842 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to use the initial application date as the effective date of ASC 842. Consequently, the comparative periods are presented in accordance with ASC 840, Leases, and are not restated in accordance with ASC 842. As a result of the adoption of ASC 842, on February 3, 2019, we recorded operating lease right-of-use ("ROU") assets of $764.1 million and lease liabilities of $845.7 million. On February 3, 2019, the Company recorded a cumulative effect adjustment of $1.3 million as a decrease to opening retained earnings upon adoption of ASC 842. The adoption of ASC 842 had an immaterial impact on our unaudited condensed consolidated results of operations and statement of cash flows for the thirteen and twenty-six weeks ended August 3, 2019. Additional information and disclosures required by this new standard are contained in Note 4, Leases.
Leases
Beginning on February 3, 2019, the Company accounts for leases pursuant ASC 842 as established by ASU 2016-02. We determine if an arrangement is a lease at inception. Operating leases are included in ROU assets, current lease liabilities and long-term lease liabilities in our unaudited consolidated balance sheet. The Company does not have finance leases in the periods presented.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. The operating lease ROU asset represents the net present value of fixed payments required under the lease, discounted at the Company's incremental borrowing rate, offset by impairments and lease incentives such as tenant improvements and deferred rent balances.
Our leases do not provide an implicit rate. Accordingly, we use the Company's incremental borrowing rate at commencement date in determining the present value of lease payments over the lease term. Furthermore, we elected to apply a portfolio approach, using the same discount rate applied to a portfolio of leases for similar asset types with a similar lease term.
Our lease terms may include options to extend or terminate the lease. When it is reasonably certain that we will exercise an option to extend or terminate a lease, the Company will adjust its ROU asset and lease liability. For leases with no impairment of the ROU asset, lease expense is recognized on a straight-line basis over the lease term. For stores with impairment of the ROU asset, lease expense consists of straight-line amortization of the ROU asset and the implicit interest expense on the lease liability.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
We have lease agreements with lease and non-lease components. We have made a policy election to treat both lease and non-lease components as a single component and account for the full consideration as a single lease component. This policy election is applied to all asset classes for which the Company is a lessee.
We lease retail stores and a limited amount of office space under operating leases. The majority of our lease agreements provide for tenant improvement allowances, rent escalation clauses and/or contingent rent provisions. Tenant improvement allowances, fixed rent escalation clauses and impairments are included in the ROU asset computation.
Certain leases provide for contingent rents based on defined criteria, such as gross sales in excess of a specified level. We record a contingent rent liability in accrued liabilities on the consolidated balance sheets and the corresponding rent expense when the criteria has been achieved or is probable.
Additionally, we have a nominal number of leases that meet the standard's definition of a "short-term lease" (a lease that, at the commencement date, has a lease term of twelve months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). We have made a policy election to recognize these leases as incurred and have not recognized a ROU asset or corresponding lease liability for them. The Company's short-term leases are not material.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The amendments related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. We do not anticipate adoption to have a material impact on the Company's unaudited condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The update and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter, changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is to be applied using the modified-retrospective approach. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact the adoption will have on our unaudited consolidated financial statements.
3. REVENUE RECOGNITION
Disaggregated Revenue
The following table disaggregates our operating segment revenue by brand, which we believe provides a meaningful depiction of the nature of our revenue. Amounts shown include licensing and wholesale income, which is not a significant component of total revenue, and is aggregated within the respective brands in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
Chico's
|
$
|
268,924
|
|
|
52.9
|
%
|
|
$
|
286,808
|
|
|
52.7
|
%
|
|
$
|
545,626
|
|
|
53.2
|
%
|
|
$
|
587,744
|
|
|
53.1
|
%
|
WHBM
|
139,809
|
|
|
27.5
|
|
|
168,938
|
|
|
31.0
|
|
|
300,754
|
|
|
29.3
|
|
|
351,586
|
|
|
31.8
|
|
Soma (1)
|
99,623
|
|
|
19.6
|
|
|
88,974
|
|
|
16.3
|
|
|
179,704
|
|
|
17.5
|
|
|
167,205
|
|
|
15.1
|
|
Total Net Sales
|
$
|
508,356
|
|
|
100.0
|
%
|
|
$
|
544,720
|
|
|
100.0
|
%
|
|
$
|
1,026,084
|
|
|
100.0
|
%
|
|
$
|
1,106,535
|
|
|
100.0
|
%
|
(1) Includes TellTaleTM net sales, which is not a significant component of Soma revenue.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Accounting Policies
The Company recognizes revenue pursuant ASC 606 as established by ASU 2014-09 ("ASC 606"). Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and Company issued coupons, promotional discounts and employee discounts. Sales from our websites and catalogs are recognized at the time of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying unaudited condensed consolidated statements of (loss) income. Amounts paid by customers to cover shipping and handling costs are immaterial. Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from revenue. Licensing and wholesale income, which is not a significant component of total revenue, is recognized based upon delivery of products, except when the customer has a contractual right of return.
We sell gift cards in stores, on our e-commerce website and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized, net of third party sales commissions, for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.
Soma offers a points-based loyalty program in which customers earn points based on purchases. Attaining specified loyalty point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The liability is relieved and revenue is recognized for loyalty point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to remit the point value. We determine the loyalty point breakage rate based on historical and redemption patterns.
As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.
The Company's accounting policies and treatment over revenue recognition are consistent with the provisions of ASC 606 and represent a faithful depiction of the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Contract Liability
Contract liabilities on the unaudited condensed consolidated balance sheet were comprised of obligations associated with our gift card and customer loyalty programs. As of August 3, 2019 and February 2, 2019, contract liabilities primarily consisted of gift cards of $30.6 million and $42.6 million, respectively. For the thirteen and twenty-six weeks ended August 3, 2019, the Company recognized $7.6 million and $19.5 million, respectively, of revenue that was previously included in the gift card contract liability as of February 2, 2019. The contract liability for our loyalty program was not material as of August 3, 2019 or February 2, 2019.
Performance Obligation
For the thirteen and twenty-six weeks ended August 3, 2019, revenue recognized from performance obligations related to prior periods was not material. Revenue recognized in future periods related to performance obligations is not expected to be material.
4. LEASES
We lease retail stores, a limited amount of office space and certain equipment under operating leases expiring in various years through the fiscal year ending 2029. All of our leases have been classified as operating leases and are recognized and measured as such.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Certain operating leases provide for renewal options that at a pre-determined period and rental value. Furthermore, certain leases provide that we may cancel the lease if our retail sales at that location fall below an established level. Within the first few years of the initial lease term, a majority of our store operating leases contain cancellation clauses that allow the leases to be terminated at our discretion, if certain minimum sales levels are not met. In the normal course of business, operating leases are typically renewed or replaced by other leases.
Escalation of operating lease payments of certain leases depend on an existing index or rate, such as the consumer price index or the market interest rate. These are considered variable lease payments and are included in lease payments when the escalation is known.
Operating lease expense was as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
August 3, 2019
|
Operating lease cost (1)
|
$
|
62,341
|
|
|
$
|
127,243
|
|
(1) Includes approximately $5.0 million and $13.0 million in variable lease costs for the thirteen and twenty-six weeks ended August 3, 2019, respectively.
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
|
|
|
August 3, 2019
|
Right of Use Assets
|
$
|
697,332
|
|
|
|
Current lease liabilities
|
$
|
158,866
|
|
Long-term lease liabilities
|
611,308
|
|
Total operating lease liabilities
|
$
|
770,174
|
|
|
|
Weighted Average Remaining Lease Term (years)
|
5.0
|
|
|
|
Weighted Average Discount Rate (1)
|
5.7
|
%
|
(1) The incremental borrowing rate used by the Company is based on the rate at which the Company could borrow funds using its credit rating for a collateralized loan of similar term to the lease. The weighted average discount rate represents a weighted average of the incremental borrowing rate for each lease weighted based on the remaining fixed lease obligations.
Supplemental cash flow information related to operating leases was as follows:
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
August 3, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash outflows
|
$
|
114,186
|
|
Right of use assets obtained in exchange for lease obligations, non-cash
|
15,465
|
|
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Maturities of operating lease liabilities were as follows:
|
|
|
|
|
Fiscal Year Ending:
|
|
February 1, 2020
|
$
|
91,580
|
|
January 30, 2021
|
208,932
|
|
January 29, 2022
|
183,783
|
|
January 28, 2023
|
146,250
|
|
February 4, 2024
|
98,811
|
|
Thereafter
|
160,531
|
|
Total future minimum lease payments
|
$
|
889,887
|
|
Less imputed interest
|
(119,713
|
)
|
Total
|
$
|
770,174
|
|
5. RETAIL FLEET OPTIMIZATION PLAN
In the fourth quarter of fiscal 2018, the Company announced a retail fleet optimization plan to rebalance the mix between our physical store presence and our digital network with the closure of at least 250 stores in the United States in fiscal years 2019-2021. Under this plan, we expect to close approximately 100 Chico's, 90 WHBM and 60 Soma locations in fiscal years 2019-2021, with the majority of the closings occurring in fiscal years 2020 and 2021. This initiative is part of the Company's efforts to better capitalize on its omnichannel platform, reduce costs and improve profitability and return on invested capital. For the thirteen and twenty-six weeks ended August 3, 2019, the Company recorded $3.0 million and $7.9 million, respectively, in pre-tax accelerated depreciation of property and equipment within cost of goods sold associated with this retail fleet optimization plan. Accelerated depreciation on property and equipment reflects the impact of a change in the useful life of store assets for store closures added as a result of the Company's retail fleet optimization plan.
6. SHARE-BASED COMPENSATION
For the twenty-six weeks ended August 3, 2019 and August 4, 2018, share-based compensation expense was $3.5 million and $10.2 million, respectively. As of August 3, 2019, approximately 5.4 million shares remain available for future grants of equity awards under our Amended and Restated 2012 Omnibus Stock and Incentive Plan, which was amended and restated effective June 22, 2017.
Restricted Stock Awards
Restricted stock awards vest in equal annual installments over a three-year period from the date of grant.
Restricted stock award activity for the twenty-six weeks ended August 3, 2019 was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, beginning of period
|
2,715,466
|
|
|
$
|
10.92
|
|
Granted
|
2,759,505
|
|
|
4.50
|
|
Vested
|
(1,201,362
|
)
|
|
11.39
|
|
Forfeited
|
(1,231,952
|
)
|
|
6.96
|
|
Unvested, end of period
|
3,041,657
|
|
|
6.51
|
|
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Performance-based Restricted Stock Units
For the twenty-six weeks ended August 3, 2019, we granted performance-based restricted stock units ("PSUs"), contingent upon the achievement of Company-specific performance goals during the three fiscal years 2019 - 2021. Any units earned as a result of the achievement of this goal will vest 100% three years from the date of grant and will be settled in shares of our common stock.
Performance-based restricted stock unit activity for the twenty-six weeks ended August 3, 2019 was as follows:
|
|
|
|
|
|
|
|
|
Number of Units/
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, beginning of period
|
1,067,338
|
|
|
$
|
11.40
|
|
Granted
|
1,170,650
|
|
|
4.23
|
|
Vested
|
(244,628
|
)
|
|
13.19
|
|
Forfeited
|
(1,097,951
|
)
|
|
7.42
|
|
Unvested, end of period
|
895,409
|
|
|
6.42
|
|
Stock Option Awards
For the twenty-six weeks ended August 3, 2019 and August 4, 2018, we did not grant any stock options.
Stock option activity for the twenty-six weeks ended August 3, 2019 was as follows:
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
|
Outstanding, beginning of period
|
214,277
|
|
|
$
|
13.54
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited or expired
|
—
|
|
|
—
|
|
Outstanding and exercisable, end of period
|
214,277
|
|
|
13.54
|
|
7. INCOME TAXES
The provision for income taxes is based on a current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings.
For the thirteen weeks ended August 3, 2019 and August 4, 2018, the Company's effective tax rate was 0.0% and 25.4%, respectively. The 0.0% effective tax rate was primarily the result of an income tax benefit on the second quarter operating loss, offset by a true-up from the first quarter provision due to an increase in the forecasted annual effective tax rate.
For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company's effective tax rate was 109.1% and 27.0%, respectively. The effective tax rates of 109.1% and 27.0% was primarily the result of the additional tax expense related to employee share-based awards against lower pre-tax income.
8. EARNINGS PER SHARE
In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the "two-class" method. For the Company, participating securities are comprised entirely of unvested restricted stock awards and PSUs that have met their relevant performance criteria.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Earnings per share ("EPS") is determined using the two-class method when it is more dilutive than the treasury stock method. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options, PSUs and restricted stock units.
The following table sets forth the computation of net (loss) income per basic and diluted share shown on the face of the accompanying condensed consolidated statements of (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
Numerator
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(2,309
|
)
|
|
$
|
16,768
|
|
|
$
|
(284
|
)
|
|
$
|
45,772
|
|
Net income and dividends declared allocated to participating securities
|
—
|
|
|
(444
|
)
|
|
—
|
|
|
(1,169
|
)
|
Net (loss) income available to common shareholders
|
$
|
(2,309
|
)
|
|
$
|
16,324
|
|
|
$
|
(284
|
)
|
|
$
|
44,603
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
114,802
|
|
|
124,730
|
|
|
114,618
|
|
|
125,003
|
|
Dilutive effect of non-participating securities
|
—
|
|
|
44
|
|
|
—
|
|
|
51
|
|
Weighted average common and common equivalent shares outstanding – diluted
|
114,802
|
|
|
124,774
|
|
|
114,618
|
|
|
125,054
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.02
|
)
|
|
$
|
0.13
|
|
|
$
|
0.00
|
|
|
$
|
0.36
|
|
Diluted
|
$
|
(0.02
|
)
|
|
$
|
0.13
|
|
|
$
|
0.00
|
|
|
$
|
0.36
|
|
For the thirteen weeks ended August 3, 2019 and August 4, 2018, 0.8 million and 0.8 million potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
For the twenty-six weeks ended August 3, 2019 and August 4, 2018, 0.4 million and 0.8 million potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
9. FAIR VALUE MEASUREMENTS
Our financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable and payable, and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.
Marketable securities are classified as available-for-sale and as of August 3, 2019 generally consist of corporate bonds, commercial paper, U.S. government agencies and municipal securities, with $39.4 million of securities with maturity dates within one year or less and $24.0 million with maturity dates over one year and less than two years.
We consider all marketable securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the condensed consolidated balance sheets as they are available to support current operational liquidity needs. Marketable securities are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive (loss) income until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Entities are required to use a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
|
|
|
|
|
|
Level 1
|
—
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
|
Level 2
|
—
|
Unadjusted quoted prices in active markets for similar assets or liabilities; or Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or Inputs other than quoted prices that are observable for the asset or liability
|
|
|
|
|
|
Level 3
|
—
|
Unobservable inputs for the asset or liability
|
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our consolidated balance sheets.
From time to time, we measure certain assets at fair value on a non-recurring basis. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment using Company-specific assumptions which would fall within Level 3 of the fair value hierarchy.
We assess the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses market participant rents to calculate fair value of ROU assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level. On February 3, 2019, the Company recorded a transition day fair value impairment on our ROU asset of $1.3 million, after-tax, as a decrease to opening retained earnings upon adoption of ASC 842.
To assess the fair value of goodwill, we utilize both an income approach and a market approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant. Inputs used to calculate the fair value based on the market approach include identifying sales and EBITDA multiples based on guidelines for similar publicly traded companies and recent transactions.
To assess the fair value of trade names, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trade names primarily include future sales projections, discounted at a rate that approximates the cost of capital of a market participant and an estimated royalty rate.
The carrying value of goodwill for the Chico's and White House Black Market ("WHBM") reporting units and WHBM trade name as of August 3, 2019 and August 4, 2018 was $36.4 million, $60.4 million and $34.0 million, respectively. No impairment charges were recognized for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018. If profitability trends do not improve as projected during fiscal 2019 for our Chico's and WHBM reporting units, it is possible that an interim test, or our annual impairment test in the fourth quarter of fiscal 2019, may result in an impairment of these assets.
As of August 3, 2019 and February 2, 2018, our revolving loan and letter of credit facility approximates fair value as this instrument has a variable interest rate which approximates current market rates (Level 2 criteria).
To assess the fair value of long-term debt as of August 4, 2018, we utilized a discounted future cash flow model using current borrowing rates for similar types of debt of comparable maturities.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
During the quarter ended August 3, 2019, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of August 3, 2019, February 2, 2019 and August 4, 2018, we did not have any Level 3 financial assets measured on a recurring basis. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
In accordance with the provisions of the guidance, we categorized our financial assets and liabilities which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:
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Fair Value Measurements at Reporting Date Using
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Balance as of August 3, 2019
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Quoted Prices in Active Markets for Identical Assets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Financial Assets:
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Current Assets
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Cash equivalents:
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Money market accounts
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$
|
286
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$
|
286
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|
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$
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—
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|
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$
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—
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Marketable securities:
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|
|
|
|
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Corporate bonds
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60,476
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|
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—
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|
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60,476
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|
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—
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Commercial paper
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2,970
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|
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—
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2,970
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—
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Noncurrent Assets
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Deferred compensation plan
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7,112
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7,112
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—
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—
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Total
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$
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70,844
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$
|
7,398
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$
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63,446
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$
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—
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Financial Liabilities:
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Long-term debt
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$
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50,000
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$
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—
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$
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50,000
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|
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$
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—
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|
|
|
|
|
|
|
|
|
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Balance as of February 2, 2019
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Financial Assets:
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Current Assets
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Cash equivalents:
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Money market accounts
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$
|
711
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$
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711
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|
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$
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—
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|
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$
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—
|
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Marketable securities:
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|
|
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|
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Corporate bonds
|
60,281
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|
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—
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|
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60,281
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|
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—
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Commercial paper
|
1,706
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|
|
—
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|
|
1,706
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|
|
—
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Noncurrent Assets
|
|
|
|
|
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Deferred compensation plan
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6,644
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6,644
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|
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—
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|
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—
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Total
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$
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69,342
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|
|
$
|
7,355
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|
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$
|
61,987
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$
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—
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Financial Liabilities:
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Long-term debt
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$
|
57,500
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|
|
$
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—
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|
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$
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57,500
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|
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$
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—
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|
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|
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Balance as of August 4, 2018
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Financial Assets:
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Current Assets
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|
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Cash equivalents:
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|
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Money market accounts
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$
|
149
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|
|
$
|
149
|
|
|
$
|
—
|
|
|
$
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—
|
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Marketable securities:
|
|
|
|
|
|
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Municipal securities
|
3,423
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|
|
—
|
|
|
3,423
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|
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—
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U.S. government agencies
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6,773
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|
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—
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|
|
6,773
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|
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—
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Corporate bonds
|
46,542
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|
|
—
|
|
|
46,542
|
|
|
—
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Commercial paper
|
4,989
|
|
|
—
|
|
|
4,989
|
|
|
—
|
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Noncurrent Assets
|
|
|
|
|
|
|
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Deferred compensation plan
|
7,258
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|
|
7,258
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|
|
—
|
|
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—
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Total
|
$
|
69,134
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|
|
$
|
7,407
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|
|
$
|
61,727
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|
|
$
|
—
|
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Financial Liabilities:
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|
|
|
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Long-term debt
|
$
|
61,250
|
|
|
$
|
—
|
|
|
$
|
60,929
|
|
|
$
|
—
|
|
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
10. DEBT
On August 2, 2018, the Company and certain of its domestic subsidiaries entered into a credit agreement (the “Agreement”) as borrowers and guarantors, with Wells Fargo Bank, National Association, as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Agreement are guaranteed by the subsidiary guarantors and secured by a lien on certain assets of the Company and the subsidiary borrowers and guarantors, including inventory, accounts receivable, cash deposits, and certain insurance proceeds. The Agreement provides for a five-year asset-based senior secured revolving loan and letter of credit facility of up to $200 million, maturing August 2, 2023. In addition, during the term of the Agreement, the Company may increase the commitments under the Agreement by up to an additional $100 million, subject to customary conditions, including obtaining the agreements from the lenders to provide such commitment increase. The interest rate applicable to the loans under the Agreement will be equal to, at the Company's option, either a base rate, determined by reference to the federal funds rate, plus an interest rate margin, or a LIBO rate, plus an interest rate margin, in each case, depending on availability under the Agreement. The Company expects borrowings to be at a LIBO rate, plus an interest rate margin. In addition, the Company will pay a commitment fee per annum on the unused portion of the commitments under the Agreement.
The Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Agreement and the borrowing base (the "Loan Cap"), determined after giving effect to any such transaction or payment, on a pro forma basis.
As of August 3, 2019, our outstanding debt consisted of $50.0 million in borrowings under the Agreement, resulting in $150.0 million available for borrowings under the revolving loan and letter of credit facility. As of August 3, 2019, an unamortized debt discount of $0.5 million was outstanding related to the Agreement and is presented in other current assets in the accompanying unaudited consolidated balance sheet.
The credit agreement entered into on May 4, 2015 with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent and other lenders, which was unsecured and had provided for a term loan commitment in the amount of $100 million and a $100 million revolving credit facility, was terminated on August 2, 2018 in connection with the Company entering into the Agreement described above, and all outstanding amounts thereunder were repaid. We used the proceeds from the initial draw of the revolving loan of the Agreement to repay such obligations.
The following table provides additional detail on our outstanding long-term debt:
|
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|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
February 2, 2019
|
|
August 4, 2018
|
Credit Agreement
|
$
|
50,000
|
|
|
$
|
57,500
|
|
|
$
|
61,250
|
|
11. COMMITMENTS AND CONTINGENCIES
In July 2015, White House Black Market, Inc. ("WHBM") was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia ("District Court"). The complaint alleges that WHBM, in violation of federal law, willfully published more than the last five digits of a credit or debit card number on customers' point-of-sale receipts. The plaintiff seeks an award of statutory damages of $100 to $1,000 for each alleged willful violation of the law, as well as attorneys' fees, costs and punitive damages. WHBM denies the material allegations of the complaint and believes the case is without merit. On February 12, 2018, the District Court issued an order certifying the class.
On April 9, 2018, the District Court, sua sponte, issued an order granting WHBM's earlier 2016 request to appeal, to the Eleventh Circuit Court of Appeals ("Eleventh Circuit"), the District Court's ruling that the plaintiff has standing to maintain the lawsuit. On April 19, 2018, WHBM filed a petition for review in the Eleventh Circuit. In the meantime, the District Court stayed all further proceedings in the case pending the outcome of the appeal in the Eleventh Circuit.
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
On July 12, 2018, the plaintiff and WHBM notified the Eleventh Circuit that the plaintiff and WHBM had reached a class settlement on all claims and therefore voluntarily dismissed WHBM's appeal to the Eleventh Circuit. On August 2, 2018, the District Court reopened the case for purposes of reviewing/approving the proposed settlement. On October 22, 2018, the plaintiff filed the settlement papers with the District Court, along with a motion to stay the District Court's consideration of the settlement pending the Eleventh Circuit's final disposition of Muransky v. Godiva Chocolatier, Inc., in which the Eleventh Circuit held, in an opinion issued October 3, 2018, that the display of the first five and last four digits of a credit or debit card number on a customer's receipt given at the point of sale establishes a "concrete injury" sufficient to confer Article III standing, enabling the customer to maintain a lawsuit. The motion to stay was granted on November 15, 2018. A petition for rehearing on the October 2018 opinion was filed in the Muransky case on October 24, 2018. The Eleventh Circuit issued a new opinion on April 22, 2019, sua sponte, superseding the October 2018 opinion, and reaffirming the establishment of Article III standing in the Muransky case. A petition for rehearing on that April 2019 opinion was filed on May 13, 2019 and is currently pending before the Eleventh Circuit. The Muransky opinion, if not altered on the petition for rehearing, would bind the District Court in the Altman case and likely establish that the plaintiff has standing to maintain her lawsuit against WHBM. In such event, the stay will be lifted and the proposed settlement will be reviewed by the District Court. If the Eleventh Circuit does not find standing in the Muransky case, the parties have agreed to submit the proposed settlement to the Superior Court for Cobb County, Georgia for approval. The proposed settlement would not have a material adverse effect on the Company's consolidated financial condition or results of operations.
However, no assurance can be given that the proposed settlement will be approved. If the proposed settlement is rejected and the case were to proceed as a class action and WHBM were to be unsuccessful in its defense on the merits, then the ultimate resolution of the case could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In May 2016, Chico's Retail Services, Inc. ("CRS") was named as a defendant in Corporate Cleaners, Inc. v. Chico's Retail Services, Inc., an action filed in the Seventeenth Judicial Circuit of Florida (“Seventeenth Judicial Circuit”). The plaintiff alleges that CRS breached a contract (and related amendments thereto) with the plaintiff by, among other reasons, failing to pay outstanding invoices and failing to allow the plaintiff the exclusive right to provide certain cleaning services. The plaintiff seeks an award of lost profits, lost revenue, as well as attorneys' fees and costs. CRS denies the material allegations brought by the plaintiff and filed a counterclaim seeking recovery of amounts associated with alleged misrepresentations by the plaintiff as to the quantity of inventory units cleaned by the plaintiff.
Mediation commenced in 2018, but was adjourned with the expectation that the parties would continue mediation after expert disclosures have been exchanged. CRS' expert was deposed in April 2019. A trial date was set for September 17, 2019; however, on August 15, 2019, the parties entered into a settlement agreement for an amount that was not material to our annual consolidated financial statements. The Seventeenth Judicial Circuit will dismiss the case upon the Company's payment of the settlement.
In May 2019, the Company was named as a defendant in Fisher v. Chico's FAS, Inc., a putative class action filed in the United States District Court for the Southern District of California. The complaint alleges that the Company advertised fictitious prices and corresponding phantom discounts on its made-for-outlet products in its Chico's outlets in violation of California's Unfair Competition Laws, California's False Advertising Laws and the California Consumer Legal Remedies Act. The plaintiff seeks disgorgement of the Company's profits and alleged unjust enrichment resulting from such advertising practices, injunctive relief, a corrective advertising campaign, as well as attorneys' fees and costs. The Company was served on May 10, 2019. The parties have scheduled a mediation date of October 22, 2019. Additionally, the parties have jointly asked the court to extend Company’s response deadline to November 22, 2019.
The Company is currently investigating the underlying allegations and will vigorously defend the case. At this time, it is not possible to predict whether this matter ultimately will be permitted to proceed as a class action, and no assurance can be given as to the ultimate outcome of this matter. However, if the matter were to proceed as a class action and the Company were to be unsuccessful in its defense on the merits, then the ultimate resolution of the case could have a material adverse effect on the Company's consolidated financial condition or results of operations.
Other than as noted above, we are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties, and outcomes may not be predictable. Consequently, the ultimate aggregate amounts of monetary liability or financial impact with respect to these matters as of August 3, 2019 are not estimable. However, while such matters could affect our consolidated operating results
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.