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 1, 2020, included in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020 filed with the Securities and Exchange Commission ("SEC") on March 16, 2020 ("2019 Annual Report on Form 10-K").
As used in this report, all references to "we," "us," "our", "the Company" and "Chico's FAS," 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 1, 2020 are not necessarily indicative of the results that may be expected for the entire year.
Exit of Canada Frontline Operations
On July 30, 2020, Chico’s FAS Canada, Co., an immaterial subsidiary of the Company, filed for bankruptcy with the Ontario, Canada office of the Superintendent in Bankruptcy. This action resulted in the permanent closure of four Chico’s and six White House Black Market ("WHBM") boutiques in Ontario, Canada. The permanent closure of the Canadian boutiques, which constitute all of the Company’s Canadian boutiques, is part of the Company’s ongoing cost-savings measures taken to mitigate the impact of the novel strain of coronavirus ("COVID-19") pandemic and address the operational and financial challenges associated with operating in Canada. In connection with this effort, in the second quarter of fiscal 2020, we exited our Canada frontline operations and recorded on a net basis a non-material charge, including the realization of a cumulative foreign currency translation adjustment.
Reclassifications
Certain reclassifications have been made to the prior period's financial statements to enhance the comparability with the current year's financial statements. As a result, certain line items have been amended in the unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of cash flows to conform to the current period's presentation.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The COVID-19 pandemic (the "pandemic") has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact our results of operations. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our actual results could materially differ from those estimates in future periods.
COVID-19 Pandemic
During the thirteen and twenty-six weeks ended August 1, 2020, the Company experienced varying degrees of business disruptions and periods of store closures or reduced operating hours as a result of the pandemic which had a material adverse impact on our business operations and operating results, and operating cash flows. Throughout the first half of the fiscal year, the Company was able to navigate a rapidly changing retail landscape by leveraging its omni-channel capabilities and reopening of most of its stores in accordance with local, state and federal and safety guidelines and regulations. As of August 1, 2020, we were operating with approximately 96% of our store base opened to the public under reduced hours and enhanced safety protocols that limit capacity, follow strict social distancing practices and the use of proper protective equipment such as rigorous cleaning routines and hand sanitizer stations to ensure the safety of employees and customers. While the length and
severity and impact of the pandemic is uncertain, we expect that our business and results of operations, including our net sales, earnings and cash flows, will be materially adversely impacted through the remainder of fiscal 2020.
In response to the pandemic, the Company has taken actions to reinforce its financial position and liquidity. Specific actions include: significantly reducing its expense structure, centralizing key functions to create a nimbler organization to better align costs with expected sales; suspending its quarterly dividend commencing April 2020; aligning inventory receipts with expected demand; partnering with suppliers and vendors to reduce operating costs and extend payment terms; and reviewing real estate and actively negotiating with landlords to deliver rent relief in the form of reductions, abatements and other concessions. Furthermore, our financial position and liquidity are being meaningfully bolstered by strong digital performance across all brands and sales from reopened retail stores. As discussed in more detail in Item 1A "Risk Factors" of our Form 10-K and Quarterly Report on Form 10-Q for the quarter ended May 2, 2020, the Company is subject to certain risks and uncertainties. There can be no assurance that the actual future results, performance, benefits, or achievements that we expect from our strategies, systems, initiatives, or products, including our measures to mitigate the operating and financial impact of the pandemic, will occur. Although the pandemic has had a material adverse impact on our business operations and operating results and cash flows, we believe we have sufficient liquidity from operations and capacity within our credit facility and other liquidity options to repay our obligations for the foreseeable future.
Adoption of New Accounting Pronouncements
In April 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Question-and-Answer (“Q&A”) (hereinafter, the practical expedient) to clarify whether lease concessions related to the effects of the pandemic require the application of the lease modification guidance under the new lease standard, which the Company adopted on February 3, 2019. The Company has elected to apply the temporary practical expedient and not treat changes to certain leases due to the effects of the pandemic as modifications. See Note 8 for the effect the adoption of this practical expedient had on our unaudited condensed consolidated financial statements.
Effective February 2, 2020, the Company adopted Accounting Standards Update ("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. 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 were applied prospectively. All other amendments were applied retrospectively. Adoption of this pronouncement did not have a material effect on our unaudited condensed consolidated financial statements.
Effective February 2, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). 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 Company has developed processes for assessment and documentation, model development and validation. The implementation of ASU 2016-13 and related increase to the allowance for credit losses did not have a material impact on our unaudited condensed consolidated financial statements. The guidance is to be applied using the modified-retrospective approach. As a result of the adoption of ASU 2016-13, the Company recorded a cumulative effect adjustment of $0.8 million as a decrease to opening retained earnings on February 2, 2020.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on its consolidated financial statements.
3. GOODWILL AND INTANGIBLE IMPAIRMENT CHARGES
Fiscal 2020 Interim Impairment Assessment
Goodwill and other indefinite-lived intangible assets are assessed for impairment at least annually. We perform our annual impairment test during the fourth quarter, or more frequently when circumstances indicate carrying values may not be recoverable. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization. During the first quarter of fiscal 2020, the Company experienced a significant decline in its market capitalization and disruptions to its operations as a result of the pandemic. As a result, the Company reduced its level of forecasted earnings for fiscal 2020 and future periods across all of its brands. In light of the decline in the Company's stock price and market capitalization, the Company concluded that these factors, among other factors, represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2020.
The Company performed its valuation of its goodwill and indefinite-lived intangible assets using a quantitative approach as of April 4, 2020, which was the last day in the second month of the first fiscal quarter. The valuation of the Company's goodwill and indefinite-lived intangible assets was determined with the assistance of an independent valuation firm using the income approach (discounted cash flow ("DCF") method) and relief from royalty method, respectively. We applied a 100% weighting to the income approach as we were able to provide detailed forecasts for the foreseeable future to perform a DCF analysis. We did not utilize a market approach in the fair value assessment of the reporting units as the implied EBITDA multiples from the market approach did not yield reasonable fair values given the volatile market conditions at the time of the assessment. Furthermore, the Company’s publicly traded market capitalization was reconciled to the sum of the fair values of the reporting units estimated using the income approach described above. The fair value of our trademark was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trademark.
Changes in key assumptions and the resulting reduction in projected future cash flows included in the interim test resulted in a decrease in the fair values of our Chico's and White House Black Market ("WHBM") reporting units such that their fair values were less than their carrying values. As a result, the Company recognized the following pre-tax goodwill impairment charges during the twenty-six weeks ended August 1, 2020: a charge of $20.0 million at the Chico's reporting unit to write down the carrying value of the goodwill to $16.4 million and a charge of $60.4 million at the WHBM reporting unit, reducing the carrying value of goodwill to zero. In addition, the Company recognized pre-tax impairment charges to write down the carrying values of its other indefinite-lived intangible assets to their fair values as follows: $28.0 million of our WHBM trademark and $4.8 million of our Chico's franchise rights. The carrying values of the trademark and franchise rights was $6.0 million and $0.2 million, respectively, and are included in other intangible assets, net, in the accompanying unaudited condensed consolidated balance sheet as of August 1, 2020. These impairment charges are included in goodwill and intangible impairment in the accompanying unaudited condensed consolidated statements of loss.
The Company evaluated the need to perform an additional interim quantitative impairment test for its goodwill and indefinite-lived intangible assets during the thirteen weeks ended August 1, 2020. We considered macroeconomic, industry-specific and Company-specific factors in addition to the estimates and assumptions used in our most recently completed goodwill and indefinite-lived intangible assets analysis. Based on the qualitative analysis, among other factors, we determined that we currently do not have a triggering event that would require the additional testing of goodwill and indefinite-lived intangible assets subsequent to the testing performed as of April 4, 2020, and accordingly, we did not record any goodwill and indefinite-lived intangible asset impairment charges during the thirteen weeks ended August 1, 2020.
The following table details the changes in goodwill for each reportable segment, as applicable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chico's
Reporting Unit
|
|
WHBM
Reporting Unit
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at February 1, 2020
|
$
|
36,403
|
|
|
$
|
60,371
|
|
|
$
|
96,774
|
|
|
Impairment charges
|
(20,043
|
)
|
|
(60,371
|
)
|
|
(80,414
|
)
|
|
Balance at August 1, 2020
|
$
|
16,360
|
|
|
$
|
—
|
|
|
$
|
16,360
|
|
(1) There is no goodwill associated with the Intimates Group reporting unit and, therefore, no analysis has been performed.
The following table details the changes in other indefinite-lived intangible assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WHBM
Trademark
|
|
Chico's Franchise Rights
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at February 1, 2020
|
$
|
34,000
|
|
|
$
|
4,930
|
|
|
$
|
38,930
|
|
|
Impairment charges
|
(28,000
|
)
|
|
(4,766
|
)
|
|
(32,766
|
)
|
|
Balance at August 1, 2020
|
$
|
6,000
|
|
|
$
|
164
|
|
|
$
|
6,164
|
|
4. LONG-LIVED ASSET IMPAIRMENT CHARGES RELATED TO THE COVID-19 PANDEMIC
Long-lived assets, including definite-lived intangibles, are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company uses market participant rent assumptions to calculate the fair value of right of use ("ROU") assets and discounted future cash flows of the asset or asset group using projected financial information and 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.
During the thirteen and twenty-six weeks ended August 1, 2020, the Company experienced varying degrees of business disruptions and periods of store closures or reduced operating hours as a result of the pandemic. In light of the impact of the pandemic and lower-than-expected earnings for fiscal 2020 and future periods, the Company concluded that these factors, among other factors, represented impairment indicators which required the Company to test its long-lived assets for impairment during the thirteen and twenty-six weeks ended August 1, 2020.
During the twenty-six weeks ended August 1, 2020, we completed an evaluation of our long-lived assets which primarily consisted of leasehold improvements at certain underperforming stores for indicators of impairment as a result of the impact of the pandemic, and consequently, recorded pre-tax impairment charges of approximately $18.5 million. These charges are primarily included in cost of goods sold in the accompanying unaudited condensed consolidated statements of loss. Pre-tax impairment charges reduced the net carrying value of long-lived assets at retail stores to their estimated fair value, as determined using a discounted cash flow model. Pre-tax impairment charges for the thirteen weeks ended August 1, 2020 and thirteen and twenty-six weeks ended May 4, 2019 were immaterial.
During the thirteen and twenty-six ended August 1, 2020, we completed an evaluation of our operating lease assets for indicators of impairment as a result of the impact of the pandemic, and consequently, recorded pre-tax impairment charges of approximately $0.8 million and $3.2 million, respectively, which is included in cost of goods sold within the accompanying unaudited condensed consolidated statements of loss.
5. INVENTORY
We use the moving average cost method to determine the cost of merchandise inventories. We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Further, inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We record excess and slow-moving inventories at net realizable value.
Primarily as a result of changes in the market for certain Company products and the resulting slowdown in sell through rates due to the impact of the pandemic, carrying amounts for those inventories were reduced by $12.3 million and $55.4 million for the thirteen and twenty-six weeks ended August 1, 2020, respectively. These inventory write-offs are included in cost of goods sold in the accompanying unaudited condensed consolidated statements of loss. Inventory write-offs for the thirteen and twenty-six weeks ended August 3, 2019 were $1.3 million and $6.2 million, respectively.
6. 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 revenue, which is not a significant component of total revenue, and is aggregated within the respective brands in the table below.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
August 1, 2020
|
|
August 3, 2019
|
|
August 1, 2020
|
|
August 3, 2019
|
|
Chico's
|
$
|
139,584
|
|
|
45.6
|
%
|
|
$
|
268,924
|
|
|
52.9
|
%
|
|
$
|
271,021
|
|
|
46.3
|
%
|
|
$
|
545,626
|
|
|
53.2
|
%
|
|
WHBM
|
82,253
|
|
|
26.9
|
|
|
139,809
|
|
|
27.5
|
|
|
166,173
|
|
|
28.3
|
|
|
300,754
|
|
|
29.3
|
|
|
Soma
|
84,337
|
|
|
27.5
|
|
|
99,623
|
|
|
19.6
|
|
|
149,244
|
|
|
25.4
|
|
|
179,704
|
|
|
17.5
|
|
|
Total Net Sales
|
$
|
306,174
|
|
|
100.0
|
%
|
|
$
|
508,356
|
|
|
100.0
|
%
|
|
$
|
586,438
|
|
|
100.0
|
%
|
|
$
|
1,026,084
|
|
|
100.0
|
%
|
Accounting Policies
The Company recognizes revenue pursuant to Accounting Standard Codification ("ASC") 606, Revenue Recognition ("ASC 606"), as established by ASU 2014-09, Revenue from Contracts with Customers (Topic 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. 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 revenue, which is not a significant component of total revenue, is recognized based on the contractual royalty rate on franchisee revenue, or based upon delivery of products, except when the customer has a contractual right of return, respectively.
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 in the unaudited condensed consolidated balance sheets are comprised of obligations associated with our gift card and customer loyalty programs. As of August 1, 2020, February 1, 2020 and August 3, 2019, contract liabilities primarily consisted of gift cards of $33.8 million, $40.1 million and $30.6 million, respectively.
For the thirteen and twenty-six weeks ended August 1, 2020, the Company recognized $4.8 million and $12.8 million, respectively, of revenue that was previously included in the gift card contract liability as of February 1, 2020. 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 1, 2020, February 1, 2020 or August 3, 2019.
Performance Obligation
For the thirteen and twenty-six weeks ended August 1, 2020 and 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.
7. RETAIL FLEET OPTIMIZATION PLAN
In the fourth quarter of fiscal 2018, the Company announced a three-year retail fleet optimization plan to rebalance the mix between our physical store presence and our digital network. This initiative is part of the Company's efforts to better capitalize on its omnichannel platform, reduce costs, and improve our 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 in the accompanying unaudited condensed consolidated statements of loss 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. Accelerated depreciation of property and equipment associated with this retail fleet optimization plan for the thirteen and twenty-six weeks ended August 1, 2020 was immaterial.
8. 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 2030. All of our leases have been classified as operating leases and are recognized and measured as such.
Certain operating leases provide for renewal options that are 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.
The Company deferred substantially all rent payments due in the months of April, May and June 2020 and made reduced rent payments in July 2020. The Company has not recorded any provision for interest or penalties which may arise as a result of these deferrals, as management does not believe payment for any potential amounts to be probable. In April 2020, the FASB granted a practical expedient permitting an entity to choose to forgo the evaluation of the enforceable rights and obligations of the original lease contract, specifically in situations where rent concessions have been agreed to with landlords as a result of the pandemic. Instead, the entity may account for pandemic-related rent concessions, whatever their form (e.g. rent deferral, abatement or other) either: a) as if they were part of the enforceable rights and obligations of the parties under the existing lease contract; or b) as lease modifications. The Company has elected to account for the concessions agreed to by landlords that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee as though enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected to not remeasure the related lease liabilities and right-of-use assets. During the thirteen and twenty-six weeks ended August 1, 2020, we have received concessions from certain landlords in the form of rent deferrals and other lease or rent modifications. Where the lease concessions negotiated did not substantially increase the rights of the lessor or the obligations of the Company under the lease, we have elected to account for these rent concessions as though enforceable rights and obligations for those concessions existed in the original lease agreements and have recorded a non-interest bearing payable for the deferred rent payments. Executed leases amendments that extended the lease term were treated as modifications under ASC 842, Leases. The recognition of rent concessions that were not in the form of lease extensions did not have a material impact on our unaudited condensed consolidated statement of loss for the thirteen and twenty-six weeks ended August 1, 2020. In addition, the Company has continued recording lease expense during the deferral period in accordance with its existing policies.
Operating lease expense was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
August 1, 2020
|
|
August 3, 2019
|
|
August 1, 2020
|
|
August 3, 2019
|
|
Operating lease cost (1)
|
$
|
59,558
|
|
|
$
|
62,341
|
|
|
$
|
120,562
|
|
|
$
|
127,243
|
|
(1) For the thirteen and twenty-six weeks ended August 1, 2020, includes approximately $7.7 million and $16.1 million, respectively, in variable lease costs. For the thirteen and twenty-six weeks ended August 3, 2019, includes approximately $5.0 million and $13.0 million, respectively, in variable lease costs.
Supplemental balance sheet information related to operating leases was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2020
|
|
February 1, 2020
|
|
August 3, 2019
|
|
Right of use assets (1)
|
$
|
571,992
|
|
|
$
|
648,397
|
|
|
$
|
697,332
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
$
|
218,691
|
|
|
$
|
157,043
|
|
|
$
|
158,866
|
|
|
Long-term lease liabilities
|
482,380
|
|
|
555,922
|
|
|
611,308
|
|
|
Total operating lease liabilities
|
$
|
701,071
|
|
|
$
|
712,965
|
|
|
$
|
770,174
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term (years)
|
4.6
|
|
|
4.8
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate (2)
|
5.5
|
%
|
|
5.6
|
%
|
|
5.7
|
%
|
(1) During the thirteen and twenty-six weeks ended August 1, 2020, we completed an evaluation of our operating lease assets for indicators of impairment as a result of the impact of the pandemic, and consequently, recorded pre-tax impairment charges of approximately $0.8 million and $3.2 million, respectively, which is included in cost of goods sold, pre-tax, in the accompanying unaudited condensed consolidated statements of loss.
(2) 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 1, 2020
|
|
|
August 3, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash outflows
|
$
|
38,673
|
|
(1)
|
|
$
|
114,186
|
|
|
Right of use assets obtained in exchange for lease obligations, non-cash
|
12,775
|
|
|
|
15,465
|
|
(1) The Company deferred substantially all rent payments due in the months of April, May and June 2020, and made reduced rent payments in July 2020. We are in active discussions with landlords to find a mutually beneficial and agreeable path forward.
Maturities of operating lease liabilities as of August 1, 2020 were as follows:
|
|
|
|
|
|
|
|
Fiscal Year Ending:
|
|
|
January 30, 2021
|
$
|
156,617
|
|
|
January 29, 2022
|
190,630
|
|
|
January 28, 2023
|
153,349
|
|
|
February 4, 2024
|
106,104
|
|
|
February 1, 2025
|
77,695
|
|
|
Thereafter
|
108,998
|
|
|
Total future minimum lease payments
|
$
|
793,393
|
|
|
Less imputed interest
|
(92,322
|
)
|
|
Total
|
$
|
701,071
|
|
Accounting Policies
Beginning on February 3, 2019, the Company accounts for leases pursuant to ASC 842, Leases, as established by ASU 2016-02, Leases. 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 condensed consolidated balance sheets. 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.
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.
9. SHARE-BASED COMPENSATION
For the twenty-six weeks ended August 1, 2020 and August 3, 2019, share-based compensation expense was $3.8 million and $3.5 million, respectively. As of August 1, 2020, approximately 11.1 million shares remain available for future grants of equity awards under our 2020 Omnibus Stock and Incentive Plan, which became effective upon shareholder approval at the 2020 Annual Meeting of Shareholders on June 25, 2020.
Restricted Stock Awards
Restricted stock awards vest in equal annual installments over a three-year period from the date of grant, except for a restricted stock award granted to our Chief Executive Officer ("CEO") in fiscal 2019, which vests over a four-year period from the date of grant and is described further in the Company’s Current Report on Form 8-K/A filed with the SEC on August 20, 2019.
Restricted stock award activity for the twenty-six weeks ended August 1, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested, beginning of period
|
3,180,016
|
|
|
$
|
5.47
|
|
|
Granted
|
2,656,188
|
|
|
3.39
|
|
|
Vested
|
(928,438
|
)
|
|
7.36
|
|
|
Forfeited
|
(931,041
|
)
|
|
4.80
|
|
|
Unvested, end of period
|
3,976,725
|
|
|
3.79
|
|
Restricted Stock Units
Restricted stock units vest 100% one year from the date of grant with certain rights to defer settlement in shares of our common stock.
Restricted stock unit activity for the twenty-six weeks ended August 1, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested, beginning of period
|
71,740
|
|
|
$
|
5.81
|
|
|
Granted
|
108,750
|
|
|
1.25
|
|
|
Vested
|
(16,560
|
)
|
|
8.76
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
Unvested, end of period
|
163,930
|
|
|
2.49
|
|
Performance-based Restricted Stock Units
For the twenty-six weeks ended August 1, 2020, we granted performance-based restricted stock units ("PSUs"), contingent upon the achievement of Company-specific performance goals during the three fiscal years 2020 - 2022. Any units earned as a result of the achievement of the performance goal will vest 100% three years from the date of grant and will settle in shares of our common stock.
Performance-based restricted stock unit activity for the twenty-six weeks ended August 1, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units/
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested, beginning of period
|
2,042,138
|
|
|
$
|
2.48
|
|
|
Granted
|
1,167,187
|
|
|
3.45
|
|
|
Vested
|
(29,320
|
)
|
|
14.22
|
|
|
Forfeited
|
(763,359
|
)
|
|
3.61
|
|
|
Unvested, end of period
|
2,416,646
|
|
|
2.50
|
|
Stock Option Awards
For the twenty-six weeks ended August 1, 2020 and August 3, 2019, we did not grant any stock options.
Stock option activity for the twenty-six weeks ended August 1, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, beginning of period
|
168,335
|
|
|
$
|
13.42
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
(87,501
|
)
|
|
13.69
|
|
|
Outstanding and exercisable, end of period
|
80,834
|
|
|
13.13
|
|
10. 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 1, 2020 and August 3, 2019, the Company's effective tax rate was 25.7% and 0.0%, respectively. The effective tax rate of 25.7% for the thirteen weeks ended August 1, 2020 includes the annual benefit of the fiscal 2020 pre-tax loss due the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which is slightly offset by the impact of nondeductible book goodwill impairment charges. In addition, during the thirteen weeks ended August 1, 2020, the Company recognized a small valuation allowance against certain state tax credit carryforwards that are expected to expire unutilized in the future. The 0.0% effective tax rate for the thirteen weeks ended August 3, 2019 was primarily the result of an income tax benefit on the quarter's 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 1, 2020 and August 3, 2019, the Company's effective tax rate was 29.2% and 109.1%, respectively. The effective tax rate of 29.2% for the twenty-six weeks ended August 1, 2020 was primarily impacted by the benefits provided by the enactment of the CARES Act, which was reduced by the unfavorable impact of the Company’s book goodwill impairment, a valuation allowance on certain state tax credit carryforwards that are expected to expire unutilized and share-based compensation expense. The 109.1% effective tax rate for the twenty-six weeks ended August 3, 2019 was primarily the result of the additional tax expense related to employee share-based awards against lower pre-tax income.
As of August 1, 2020, our unaudited condensed consolidated balance sheet reflected an $83.0 million income tax receivable related to the recovery of Federal income taxes paid in prior years and other tax law changes as a result of the CARES Act.
11. LOSS 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 loss per common share pursuant to the "two-class" method. For the Company, participating securities are comprised entirely of unvested restricted stock awards granted prior to fiscal 2020 and PSUs that have met their relevant performance criteria.
Net loss per share is determined using the two-class method when it is more dilutive than the treasury stock method. Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted net loss per share reflects the dilutive effect of potential common shares from non-participating securities such as restricted stock awards granted after fiscal 2019, stock options, PSUs and restricted stock units.
The following table sets forth the computation of net loss per basic and diluted share shown on the face of the accompanying condensed consolidated statements of loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
August 1, 2020
|
|
August 3, 2019
|
|
August 1, 2020
|
|
August 3, 2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(46,845
|
)
|
|
$
|
(2,309
|
)
|
|
$
|
(225,135
|
)
|
|
$
|
(284
|
)
|
|
Net income and dividends declared allocated to participating securities
|
—
|
|
|
—
|
|
|
(193
|
)
|
|
—
|
|
|
Net loss available to common shareholders
|
$
|
(46,845
|
)
|
|
$
|
(2,309
|
)
|
|
$
|
(225,328
|
)
|
|
$
|
(284
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
115,912,031
|
|
|
114,802,252
|
|
|
115,743,004
|
|
|
114,618,153
|
|
|
Dilutive effect of non-participating securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average common and common equivalent shares outstanding – diluted
|
115,912,031
|
|
|
114,802,252
|
|
|
115,743,004
|
|
|
114,618,153
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.40
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
—
|
|
|
Diluted
|
$
|
(0.40
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
—
|
|
For the thirteen weeks ended August 1, 2020 and August 3, 2019, 2.6 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 1, 2020 and August 3, 2019, 2.6 million and 0.4 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.
12. 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, less reserves for credit losses as applicable, 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 1, 2020 generally consist of corporate bonds, commercial paper, U.S. government agencies and municipal securities, with $9.7 million of securities with maturity dates within one year or less and $11.0 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 gain (loss) until realized, and any credit risk related losses recognized in net income the period incurred. 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.
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
|
Assets Measured on a Recurring Basis
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 unaudited condensed consolidated balance sheets.
Assets Measured on a Nonrecurring Basis
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 and a market participant discount rate to calculate the fair value of ROU assets. The Company uses 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 within the asset group which are primarily leasehold improvements. 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.
To assess the fair value of goodwill, we have historically utilized 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 trademarks, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trademarks 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 following tables presents quantitative information about the Level 3 significant unobservable inputs for the WHBM trademark measured at fair value as of April 4, 2020 and long-lived assets and operating lease assets at retail stores as of August 1, 2020:
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
|
|
|
|
|
|
|
|
WHBM Trademark
|
$
|
6,000
|
|
|
Relief from royalty
|
|
Weighted-average cost of capital
|
|
11% to 13%
|
|
|
|
|
|
|
Long-term revenue growth rate
|
|
-2.5% to 0%
|
|
Long-lived assets and operating lease assets at retail stores (1)
|
$
|
89,819
|
|
|
Discounted cash flow
|
|
Weighted-average cost of capital
|
|
9.5 % to 11.5 %
|
|
|
|
|
|
|
Long-term revenue growth rate
|
|
-10% to 15%
|
(1) The fair value of long-lived assets and operating lease assets at retail stores of $89.8 million specifically relates to only those stores which had impairment charges during the twenty-six weeks ended August 1, 2020.
The fair value of goodwill for the Chico's and WHBM reporting units and WHBM trademark as of April 4, 2020 was $16.4 million, zero and $6.0 million, respectively. The carrying value of goodwill for the Chico's and WHBM reporting units and WHBM trademark as of February 1, 2020 and August 3, 2019 was $36.4 million, $60.4 million and $34.0 million, respectively.
The Company performed its valuation of its goodwill and indefinite-lived intangible assets using a quantitative approach as of April 4, 2020, which was the last day in the second month of the first fiscal quarter. For the twenty-six weeks ended August 1, 2020, we recognized $113.2 million in goodwill and indefinite-lived intangible impairment charges as further discussed in Note 3, and $18.5 million in impairment charges primarily consisting of leasehold improvements at certain underperforming stores, and $3.2 million in impairment charges for operating lease assets, as further discussed in Note 4. Impairment charges related to long-lived assets for the twenty-six weeks ended August 3, 2019 were immaterial.
As of August 1, 2020, February 1, 2020 and August 3, 2019, 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).
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. The most sensitive assumptions in our estimates include short and long-term revenue recoverability rates as a result of the pandemic, which could impact future impairment charges.
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 and nonrecurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at the End of the Reporting Date Using
|
|
Twenty-Six Weeks Ended August 1, 2020
|
|
|
Balance as of August 1, 2020
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total Impairment
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
34,581
|
|
|
$
|
34,581
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
20,742
|
|
|
—
|
|
|
20,742
|
|
|
—
|
|
|
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,818
|
|
|
7,818
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total recurring fair value measurements
|
$
|
63,141
|
|
|
$
|
42,399
|
|
|
$
|
20,742
|
|
|
$
|
—
|
|
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
16,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,360
|
|
|
$
|
(80,414
|
)
|
|
Trademark
|
6,000
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
|
(28,000
|
)
|
|
Long-lived assets (1)
|
6,867
|
|
|
—
|
|
|
5,990
|
|
|
877
|
|
|
(18,493
|
)
|
|
Operating lease assets (1)
|
88,942
|
|
|
—
|
|
|
—
|
|
|
88,942
|
|
|
(3,236
|
)
|
|
Total nonrecurring fair value measurements
|
$
|
118,169
|
|
|
$
|
—
|
|
|
$
|
5,990
|
|
|
$
|
112,179
|
|
|
$
|
(130,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 1, 2020
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
621
|
|
|
$
|
621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
62,645
|
|
|
—
|
|
|
62,645
|
|
|
—
|
|
|
|
|
Commercial paper
|
1,248
|
|
|
—
|
|
|
1,248
|
|
|
—
|
|
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,464
|
|
|
7,464
|
|
|
—
|
|
|
—
|
|
|
|
|
Total recurring fair value measurements
|
$
|
71,978
|
|
|
$
|
8,085
|
|
|
$
|
63,893
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 3, 2019
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
286
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
60,476
|
|
|
—
|
|
|
60,476
|
|
|
—
|
|
|
|
|
Commercial paper
|
2,970
|
|
|
—
|
|
|
2,970
|
|
|
—
|
|
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,112
|
|
|
7,112
|
|
|
—
|
|
|
—
|
|
|
|
|
Total recurring fair value measurements
|
$
|
70,844
|
|
|
$
|
7,398
|
|
|
$
|
63,446
|
|
|
$
|
—
|
|
|
|
(1) The fair value of long-lived assets and operating lease assets of $6.9 million and $88.9 million, respectively, specifically relates to only those assets which had impairment charges during the twenty-six weeks ended August 1, 2020.
13. 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. 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, determined after giving effect to any such transaction or payment, on a pro forma basis.
As of August 1, 2020, our outstanding debt consisted of $149.0 million in borrowings under the Agreement. As of August 1, 2020, deferred financing costs of $0.4 million was outstanding related to the Agreement and is presented in other current assets in the accompanying unaudited condensed consolidated balance sheets. On March 18, 2020, in response to store closures due to the pandemic, the Company drew $106.5 million on its facility. If we borrow in excess of 90% of our current total borrowing capacity under the facility, we are subject to a cash dominion and an additional covenant, and, as such, we do not intend to exceed 90% of our borrowing capacity under the facility.
14. COMMITMENTS AND CONTINGENCIES
In July 2015, 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.
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 and supplemented on April 22, 2019, that the display of the first six 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 District Court granted the motion to stay on November 15, 2018. A petition for rehearing on the October 2018 opinion was filed in the Muransky case on October 24, 2018. In October 2019, the Eleventh Circuit granted rehearing and, on February 25, 2020, heard oral argument in the en banc appeal. 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 holds that there is not 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 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. On October 22, 2019, the parties attended a mediation. Thereafter, the plaintiff voluntarily dismissed the case from federal court on March 5, 2020, and re-filed the complaint in San Diego County Superior Court. Subsequently, the case was settled by the parties on June 9, 2020 and a dismissal was filed with the San Diego County Superior Court on August 10, 2020. The resolution was not material to our annual consolidated financial statements.
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 1, 2020 are not estimable. However, while such matters could affect our consolidated operating results 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.
15. SUBSEQUENT EVENTS
The Company is in active discussions with landlords to abate, reduce or defer lease payments for the months of suspended or reduced rent payments, and future lease obligations.