Quarterly Report (10-q)

Date : 12/11/2019 @ 9:07PM
Source : Edgar (US Regulatory)
Stock : RTW Retailwinds Inc (RTW)
Quote : 0.3951  -0.0316 (-7.41%) @ 11:36PM
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Quarterly Report (10-q)


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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended November 2, 2019

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                             to                              .

COMMISSION FILE NUMBER: 1-32315

RTW RETAILWINDS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State of incorporation)
  33-1031445
(I.R.S. Employer Identification No.)

330 West 34th Street
9th Floor

 

 
New York, New York 10001
(Address of Principal Executive Offices,
including Zip Code)
  (212) 884-2000
(Registrant's Telephone Number,
Including Area Code)
Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   RTW   New York Stock Exchange

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o   Smaller reporting company ý

Emerging growth company o

        If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of December 6, 2019, the registrant had 65,228,262 shares of common stock outstanding.

   


Table of Contents


TABLE OF CONTENTS

 
   
  Page  
Special Note Regarding Forward-Looking Statements and Risk Factors     1  

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements

   
2
 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

   
17
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   
24
 

Item 4.

 

Controls and Procedures

   
24
 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

   
25
 

Item 1A.

 

Risk Factors

   
25
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   
25
 

Item 3.

 

Defaults Upon Senior Securities

   
25
 

Item 4.

 

Mine Safety Disclosures

   
25
 

Item 5.

 

Other Information

   
25
 

Item 6.

 

Exhibits

   
25
 

i


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

        This Quarterly Report on Form 10-Q includes forward-looking statements. Certain matters discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q are forward-looking statements intended to qualify for safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Some of these statements can be identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "could," "may," "plan," "project," "predict" and similar expressions and include references to assumptions that the Company believes are reasonable and relate to its future prospects, developments and business strategies. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These include, but are not limited to: (i) the Company's dependence on eCommerce and mall traffic for its sales, and the continued reduction in the volume of mall traffic; (ii) the Company's ability to anticipate and respond to fashion trends; (iii) the impact of general economic conditions and their effect on consumer confidence and spending patterns; (iv) changes in the cost of raw materials, distribution services or labor; (v) the potential for economic conditions to negatively impact the Company's merchandise vendors and their ability to deliver products; (vi) the Company's ability to open and operate stores successfully; (vii) seasonal fluctuations in the Company's business; (viii) competition in the Company's market, including promotional and pricing competition; (ix) the Company's ability to retain, recruit and train key personnel; (x) the Company's reliance on third parties to manage some aspects of its business; (xi) the Company's reliance on foreign sources of production; (xii) the Company's ability to protect its trademarks and other intellectual property rights; (xiii) the Company's ability to maintain, and its reliance on, its information technology infrastructure; (xiv) the effects of government regulation; (xv) the control of the Company by its largest stockholder and any potential change of ownership; (xvi) the impact of tariff increases or new tariffs; and (xvii) other risks and uncertainties as described in the Company's documents filed with the SEC, including its most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q.

        The Company undertakes no obligation to revise the forward-looking statements included in this Quarterly Report on Form 10-Q to reflect any future events or circumstances. The Company's actual results, performance or achievements could differ materially from the results expressed or implied by these forward-looking statements.

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PART I.
FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

RTW Retailwinds, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share amounts)
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 

Net sales

  $ 200,117   $ 210,758   $ 602,974   $ 645,957  

Cost of goods sold, buying and occupancy costs

    144,519     142,383     425,099     438,247  

Gross profit

    55,598     68,375     177,875     207,710  

Selling, general and administrative expenses

    67,664     66,802     199,964     199,605  

Operating (loss) income

    (12,066 )   1,573     (22,089 )   8,105  

Interest income, net of interest expense of $101, $72, $267, and $362, respectively

    (158 )   (258 )   (734 )   (453 )

Loss on extinguishment of debt

                239  

(Loss) income before income taxes

    (11,908 )   1,831     (21,355 )   8,319  

(Benefit) provision for income taxes

    (259 )   106     33     441  

Net (loss) income

  $ (11,649 ) $ 1,725   $ (21,388 ) $ 7,878  

Basic (loss) earnings per share

  $ (0.18 ) $ 0.03   $ (0.33 ) $ 0.12  

Diluted (loss) earnings per share

  $ (0.18 ) $ 0.03   $ (0.33 ) $ 0.12  

Weighted average shares outstanding:

                         

Basic shares of common stock

    64,420     63,940     64,317     63,738  

Diluted shares of common stock

    64,420     66,289     64,317     65,979  


RTW Retailwinds, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

(Amounts in thousands)
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 

Comprehensive (loss) income

  $ (11,597 ) $ 1,760   $ (21,231 ) $ 7,983  

   

See accompanying notes.

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RTW Retailwinds, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)
  November 2,
2019
  February 2,
2019*
  November 3,
2018
 
 
  (Unaudited)
   
  (Unaudited)
 

Assets

                   

Current assets:

                   

Cash and cash equivalents

  $ 65,565   $ 95,542   $ 83,662  

Accounts receivable

    11,762     9,879     14,134  

Inventories, net

    115,230     82,803     121,586  

Prepaid expenses

    11,162     16,921     16,894  

Other current assets

    2,399     1,818     2,363  

Total current assets

    206,118     206,963     238,639  

Property and equipment, net

    53,129     63,791     65,292  

Operating lease assets

    209,336          

Intangible assets

    16,672     16,813     16,891  

Other assets

    1,176     1,311     1,411  

Total assets

  $ 486,431   $ 288,878   $ 322,233  

Liabilities and stockholders' equity

                   

Current liabilities:

                   

Accounts payable

  $ 102,800   $ 77,050   $ 107,231  

Accrued expenses

    62,973     68,585     66,487  

Current operating lease liabilities

    39,233          

Income taxes payable

        375     16  

Total current liabilities

    205,006     146,010     173,734  

Non-current operating lease liabilities

    198,761          

Deferred rent

        25,090     25,623  

Other liabilities

    26,247     31,165     32,226  

Total liabilities

    430,014     202,265     231,583  

Stockholders' equity:

                   

Common stock, voting, par value $0.001; 300,000 shares authorized; 67,084, 66,649 and 66,663 shares issued and 65,253, 64,818 and 64,832 shares outstanding at November 2, 2019, February 2, 2019 and November 3, 2018, respectively

    67     67     67  

Additional paid-in capital

    186,544     185,020     184,916  

Retained deficit

    (124,327 )   (92,450 )   (88,802 )

Accumulated other comprehensive loss

    (782 )   (939 )   (446 )

Treasury stock at cost; 1,831 shares at November 2, 2019, February 2, 2019 and November 3, 2018

    (5,085 )   (5,085 )   (5,085 )

Total stockholders' equity

    56,417     86,613     90,650  

Total liabilities and stockholders' equity

  $ 486,431   $ 288,878   $ 322,233  

*
Derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

   

See accompanying notes.

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RTW Retailwinds, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)
  Nine months ended
November 2, 2019
  Nine months ended
November 3, 2018
 

Operating activities

             

Net (loss) income

  $ (21,388 ) $ 7,878  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

             

Depreciation and amortization

    14,778     15,833  

Non-cash lease expense

    33,861      

Loss from impairment charges

    782     486  

Amortization of intangible assets

    141     234  

Amortization of deferred financing costs

    27     49  

Write-off of unamortized deferred financing costs

        239  

Share-based compensation expense

    1,609     1,997  

Changes in operating assets and liabilities:

             

Accounts receivable

    (1,551 )   (1,981 )

Inventories, net

    (32,427 )   (37,088 )

Prepaid expenses

    596     (447 )

Accounts payable

    25,750     37,142  

Accrued expenses

    (5,887 )   (10,202 )

Income taxes payable

    (375 )   (12 )

Deferred rent

        (1,594 )

Operating lease liabilities

    (35,735 )    

Other assets and liabilities

    (4,128 )   (3,071 )

Net cash (used in) provided by operating activities

    (23,947 )   9,463  

Investing activities

             

Capital expenditures

    (4,755 )   (3,705 )

Insurance recoveries

    267     375  

Net cash used in investing activities

    (4,488 )   (3,330 )

Financing activities

             

Principal payment on capital lease obligations

    (1,318 )   (1,320 )

Payment of financing costs

    (139 )    

Shares withheld for payment of employee payroll taxes

    (85 )   (309 )

Repayment of long-term debt

        (11,750 )

Net cash used in financing activities

    (1,542 )   (13,379 )

Net decrease in cash and cash equivalents

    (29,977 )   (7,246 )

Cash and cash equivalents at beginning of period

    95,542     90,908  

Cash and cash equivalents at end of period

  $ 65,565   $ 83,662  

   

See accompanying notes.

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RTW Retailwinds, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

 
  Common Stock   Treasury Stock    
   
  Accumulated
Other
Comprehensive
Loss
   
 
 
  Additional
Paid-in
Capital
  Retained
Deficit
   
 
(Amounts in thousands)
  Shares   Amount   Shares   Amount   Total  

Balance at August 4, 2018

    64,440   $ 66     1,831   $ (5,085 ) $ 184,243   $ (90,527 ) $ (481 ) $ 88,216  

Issuance of common stock upon exercise of stock options and stock appreciation rights

    2     1                         1  

Restricted stock issued and vesting of units

    416                              

Restricted stock forfeits and shares withheld for employee payroll taxes

    (26 )               (138 )           (138 )

Share-based compensation expense

                    811             811  

Net income

                        1,725         1,725  

Minimum pension liability adjustment, net of tax

                            35     35  

Comprehensive income, net of tax

                        1,725     35     1,760  

Balance at November 3, 2018

    64,832   $ 67     1,831   $ (5,085 ) $ 184,916   $ (88,802 ) $ (446 ) $ 90,650  

 

 
  Common Stock   Treasury Stock    
   
  Accumulated
Other
Comprehensive
Loss
   
 
 
  Additional
Paid-in
Capital
  Retained
Deficit
   
 
(Amounts in thousands)
  Shares   Amount   Shares   Amount   Total  

Balance at August 3, 2019

    65,292   $ 67     1,831   $ (5,085 ) $ 186,313   $ (112,678 ) $ (834 ) $ 67,783  

Issuance of common stock upon exercise of stock appreciation rights

                                 

Restricted stock issued and vesting of units

    27                              

Restricted stock forfeits and shares withheld for employee payroll taxes

    (66 )               (26 )           (26 )

Share-based compensation expense

                    257             257  

Net loss

                        (11,649 )       (11,649 )

Minimum pension liability adjustment, net of tax

                            52     52  

Comprehensive loss, net of tax

                        (11,649 )   52     (11,597 )

Balance at November 2, 2019

    65,253   $ 67     1,831   $ (5,085 ) $ 186,544   $ (124,327 ) $ (782 ) $ 56,417  

   

See accompanying notes.

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RTW Retailwinds, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity (Continued)

(Unaudited)

 
  Common Stock   Treasury Stock    
   
  Accumulated
Other
Comprehensive
Loss
   
 
 
  Additional
Paid-in
Capital
  Retained
Deficit
   
 
(Amounts in thousands)
  Shares   Amount   Shares   Amount   Total  

Balance at February 3, 2018

    64,065   $ 66     1,831   $ (5,085 ) $ 183,228   $ (90,797 ) $ (551 ) $ 86,861  

Adoption of ASC Topic 606—Revenue Recognition

                        (5,883 )       (5,883 )

Issuance of common stock upon exercise of stock options and stock appreciation rights

    43     1                         1  

Restricted stock issued and vesting of units

    768                              

Restricted stock forfeits and shares withheld for employee payroll taxes

    (44 )               (309 )           (309 )

Share-based compensation expense

                    1,997             1,997  

Net income

                        7,878         7,878  

Minimum pension liability adjustment, net of tax

                            105     105  

Comprehensive income, net of tax

                        7,878     105     7,983  

Balance at November 3, 2018

    64,832   $ 67     1,831   $ (5,085 ) $ 184,916   $ (88,802 ) $ (446 ) $ 90,650  

 

 
  Common Stock   Treasury Stock    
   
  Accumulated
Other
Comprehensive
Loss
   
 
 
  Additional
Paid-in
Capital
  Retained
Deficit
   
 
(Amounts in thousands)
  Shares   Amount   Shares   Amount   Total  

Balance at February 2, 2019

    64,818   $ 67     1,831   $ (5,085 ) $ 185,020   $ (92,450 ) $ (939 ) $ 86,613  

Adoption of ASC Topic 842—Lease Accounting

                        (10,489 )       (10,489 )

Issuance of common stock upon exercise of stock appreciation rights

    14                              

Restricted stock issued and vesting of units

    505                              

Restricted stock forfeits and shares withheld for employee payroll taxes

    (84 )               (85 )           (85 )

Share-based compensation expense

                    1,609             1,609  

Net loss

                        (21,388 )       (21,388 )

Minimum pension liability adjustment, net of tax

                            157     157  

Comprehensive loss, net of tax

                        (21,388 )   157     (21,231 )

Balance at November 2, 2019

    65,253   $ 67     1,831   $ (5,085 ) $ 186,544   $ (124,327 ) $ (782 ) $ 56,417  

   

See accompanying notes.

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RTW Retailwinds, Inc.

Notes to Condensed Consolidated Financial Statements

November 2, 2019

(Unaudited)

1. Organization and Basis of Presentation

        RTW Retailwinds, Inc. (together with its subsidiaries, the "Company") is a specialty women's omni-channel retailer with a multi-brand lifestyle platform providing curated fashion solutions that are versatile, on-trend, and stylish at a great value. The specialty retailer, first incorporated in 1918, operates 414 retail and outlet locations in 35 states and a substantial and growing eCommerce business. The Company's portfolio includes branded merchandise from New York & Company, Fashion to Figure, Happy x Nature, and collaborations with Eva Mendes, Gabrielle Union and Kate Hudson. The Company's branded merchandise is sold at its retail locations and online at www.nyandcompany.com, www.fashiontofigure.com, www.happyxnature.com, and through its rental subscription businesses at www.nyandcompanycloset.com and www.fashiontofigurecloset.com. The target customers for the Company's merchandise are women between the ages of 25 and 49.

        The condensed consolidated financial statements as of November 2, 2019 and November 3, 2018 and for the 13 weeks ("three months") and 39 weeks ("nine months") ended November 2, 2019 and November 3, 2018 are unaudited and are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the 52-week fiscal year ended February 2, 2019 ("fiscal year 2018"), which were filed with the Company's Annual Report on Form 10-K with the SEC on April 17, 2019. The 52-week fiscal year ending February 1, 2020 is referred to herein as "fiscal year 2019." The Company's fiscal year is a 52- or 53-week year that ends on the Saturday closest to January 31.

        The Company identifies its operating segments according to how its business activities are managed and evaluated. Its operating segments have been aggregated and are reported as one reportable segment based on the similar nature of products sold, production process, distribution process, target customers and economic characteristics. All of the Company's revenues are generated in the United States.

        In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the financial condition, results of operations and cash flows for the interim periods. All significant intercompany balances and transactions have been eliminated in consolidation. Certain totals that appear in this Quarterly Report on Form 10-Q may not equal the sum of the components due to rounding.

        Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.

2. New Accounting Pronouncements

        In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. The core principle of ASU 2016-02 requires lessees to present the assets and liabilities that arise from leases on their balance sheets. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years and requires modified retrospective adoption with a cumulative effect adjustment to the opening retained earnings balance. The Company adopted ASU 2016-02 as of February 3, 2019 (the first day of fiscal year 2019). Please refer to Note 3, "Leases," for further information regarding the adoption of ASU 2016-02.

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        In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2018-02 as of February 3, 2019. The adoption of ASU 2018-02 did not have a material impact on the Company's financial position or results of operations.

        In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. A modified-retrospective adoption with a cumulative effect adjustment to retained earnings is required. The new standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the adoption of this new standard. However, the Company does not expect there to be a material impact to its financial position or results of operations upon adoption of ASU 2016-13.

        In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use-Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract" ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. A modified-retrospective adoption with a cumulative effect adjustment to retained earnings is required. This new guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the adoption of this new standard. However, the Company does not expect there to be a material impact to its financial position or results of operations upon adoption of ASU 2018-15.

3. Leases

        The Company leases retail business locations, office facilities, office equipment, and automotive equipment under various non-cancelable operating leases expiring in various years through 2031. Leases on retail business locations typically specify minimum rentals plus common area maintenance charges, real estate taxes, other landlord charges and possible additional rentals based upon a percentage of sales. Most of the retail business location leases previously had an original term of 10 years and some provide renewal options at rates specified in the leases. The Company's lease agreements do not contain any material residual value guarantees. As of November 2, 2019, approximately 70% of its store leases could be terminated by the Company within two years, providing the Company with operating flexibility. The Company leases office space for its corporate headquarters at 330 West 34th Street, New York, New York. The lease for the corporate headquarters expires in 2030.

        As previously disclosed in Note 2, the Company adopted ASU 2016-02 on February 3, 2019, using the transition option to recognize a cumulative adjustment to the opening retained earnings balance and without adjustment to prior periods. As permitted under the guidance, the Company has elected the package of transition practical expedients which allows the Company to carry forward its identification of contracts that are or contain leases, its historical lease classification, and indirect costs for existing leases. In addition, the Company has elected the practical expedient to separate its lease components from non-lease components. The Company has elected to not record short-term leases on its consolidated balance sheet. Short-term leases are leases with a term of twelve months or less

8


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("short-term leases"). Instead, the Company recognizes short-term leases on a straight-line basis over the related lease term and does not record a related right-of-use asset or lease liability. The Company has not elected to apply the hindsight practical expedient.

        Adoption of ASU 2016-02 resulted in the recording of operating lease assets and operating lease liabilities of approximately $238.1 million and $268.4 million, respectively, as of February 3, 2019. The difference between the additional lease assets and lease liabilities primarily represents adjustments for initial direct costs, tenant allowances, deferred rent, and the initial right-of-use asset impairment amounts associated with stores with fixed assets that were previously impaired. The adoption of this standard did not materially impact the Company's condensed consolidated statements of operations or condensed consolidated statements of cash flows.

        In accordance with the new lease standard, the disclosure of the impact of the cumulative effect adjustment to the opening balance of retained deficit on the Company's condensed consolidated balance sheet on February 3, 2019 was as follows:

 
  February 2, 2019
(As reported)
  Effect of
ASU 2016-02
Adoption
  February 3, 2019
(As amended)
 
 
  (Amounts in thousands)
 

Retained deficit

  $ (92,450 ) $ (10,489 ) $ (102,939 )

        The $10.5 million cumulative effect adjustment primarily represents impairment charges to the right-of-use asset associated with stores with fixed assets that were previously impaired.

        Although the adoption of ASU 2016-02 did not have a material impact on the operating results for the nine months ended November 2, 2019, the Company could however experience a material non-cash impact to operating income (loss) as the result of future impairments of the right-of-use asset depending on store performance, among other factors.

Lease Assets and Liabilities

        The following table discloses supplemental balance sheet information for the Company's leases:

 
  Classification   November 2, 2019  
 
   
  (amounts
in thousands)

 

Assets

           

Operating lease assets

  Operating lease assets   $ 209,336  

Finance lease assets

  Property and equipment, net     4,283  

Total lease assets

      $ 213,619  

Liabilities

           

Current

           

Operating

  Current operating lease liabilities   $ 39,233  

Finance

  Accrued expenses     1,292  

Non-current

           

Operating

  Non-current operating lease liabilities     198,761  

Finance

  Other liabilities     1,161  

Total lease liabilities

      $ 240,447  

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Lease Cost

        The components of lease expense were as follows:

 
  Classification   Three months
ended
November 2,
2019
  Nine months
ended
November 2,
2019
 
 
   
  (amounts in thousands)
 

Operating lease cost—stores(1)

  Occupancy costs   $ 19,013   $ 54,965  

Operating lease cost—office space and equipment

  SG&A     2,405     7,205  

Finance lease costs:

                 

Amortization of leased assets

  Occupancy costs/SG&A     357     1,069  

Interest on lease liabilities

  Interest expense     25     89  

Total lease cost

      $ 21,800   $ 63,328  

(1)
Includes $5.2 million of short-term lease costs and $1.0 million of variable lease costs for the three months ended November 2, 2019. Includes $13.7 million of short-term lease costs and $3.1 million of variable lease costs for the nine months ended November 2, 2019.

Maturity of Lease Liabilities

        The following table summarizes the maturity of lease liabilities as of November 2, 2019:

Fiscal Year
  Operating
leases
  Finance
leases
 
 
  (amounts
in thousands)

 

2019

  $ 10,823   $ 316  

2020

    55,157     1,365  

2021

    44,789     705  

2022

    38,142     160  

2023

    34,776      

Thereafter

    113,261      

Total lease obligations

  $ 296,948   $ 2,546  

Less: Interest

    58,954     93  

Present value of lease liabilities

  $ 237,994   $ 2,453  

        The table above does not include $4.3 million of short-term lease commitments.

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Lease Term and Discount Rate

        The following table discloses the weighted-average remaining lease term and weighted-average discount rate for the Company's leases, excluding short-term leases:

 
  November 2,
2019
 

Weighted-average remaining lease term (years)

       

Operating leases

    7.1  

Finance leases

    2.0  

Weighted-average discount rate

       

Operating leases

    6.2 %

Finance leases

    3.4 %

        The discount rate is the rate implicit in the lease unless that rate cannot be readily determined. Most of the Company's leases do not provide an implicit interest rate, therefore, the Company is required to use its incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company used incremental borrowing rates based on information available at the date of adoption of ASU 2016-02.

Other Information

        Supplemental cash flow information related to leases was as follows:

 
  Nine months
ended
November 2,
2019
 
 
  (amounts
in thousands)

 

Cash paid for amounts included in the measurement of lease liabilities

       

Operating cash flows from operating leases

  $ 47,397  

Operating cash flows from finance leases

  $ 74  

Financing cash flows from finance leases

  $ 1,318  

Lease assets obtained in exchange for new operating lease liabilities

  $ 4,950  

Lease assets obtained in exchange for new finance lease liabilities

  $  

4. Revenue Recognition

        The Company recognizes revenue from the sale of merchandise at the Company's stores at the time the customer takes possession of the related merchandise and the purchases are paid for. Revenue, including shipping fees billed to customers, from the sale of merchandise at the Company's eCommerce websites is recognized when the merchandise is shipped to the customer and the purchases are paid for. Sales taxes collected from customers are excluded from revenues.

        The Company issues gift cards and merchandise credits which do not contain provisions for expiration or inactivity fees. Revenue from gift cards and merchandise credits is recognized at redemption. The portion of the dollar value of gift cards and merchandise credits that ultimately is not used by customers to make purchases is known as breakage and will be recognized as revenue if the Company determines it is not required to escheat such amounts to government agencies under state escheatment laws.

        The Company offers its private label credit card holders a points-based customer loyalty program, in which customers earn points based on purchases (the "Runway Rewards" program). When customers reach predetermined point thresholds, earned points are converted to rewards that can be redeemed

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for discounts on future purchases of Company merchandise. Under the Runway Rewards program, points earned expire after 12 months if the point threshold for a reward is not attained. Issued rewards expire after approximately 60 days if they are not redeemed. As rewards are being earned, the Company defers a portion of the revenue equal to the estimated sales value of the reward that is expected to be redeemed using the standalone selling price method. Revenue is recognized as rewards are redeemed or expire.

        The Company recognizes revenue in connection with its private label credit card agreement with Comenity Bank, a bank subsidiary of Alliance Data Systems Corporation ("ADS") (the "ADS Agreement"). Pursuant to the terms of the ADS Agreement, ADS has the exclusive right to provide private label credit cards to the Company's customers. The Company's private label credit card is issued to the Company's customers for use exclusively at the Company's stores and eCommerce websites, and credit is extended to such customers by Comenity Bank on a non-recourse basis to the Company. After the execution of the ADS Agreement on July 14, 2016, the Company received a $40 million signing bonus, which was recorded as deferred revenue, and is being amortized on a straight-line basis over the 10-year term of the ADS Agreement. In addition, over the term of the ADS Agreement, the Company receives royalty payments based on a percentage of private label credit card sales, which the Company recognizes as revenue as it is earned.

        The opening and closing balances of the Company's contract liabilities are as follows:

 
  Gift Cards & Merchandise
Credits
  Loyalty Rewards  
 
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 
 
  (Amounts in thousands)
 

Beginning balance

  $ 12,206   $ 13,649   $ 6,389   $ 7,331  

Increase/(decrease)

    (1,976 )   (1,569 )   (1,289 )   427  

Ending balance

  $ 10,230   $ 12,080   $ 5,100   $ 7,758  

        Contract liabilities related to gift cards and merchandise credits and loyalty programs are reported in "Accrued expenses" on the condensed consolidated balance sheets.

        The amount of revenue recognized during the three months ended November 2, 2019 and November 3, 2018 that was included in the opening contract liability balance for gift cards and merchandise credits was $0.4 million and $1.1 million, respectively. The amount of revenue recognized during the nine months ended November 2, 2019 and November 3, 2018 that was included in the opening contract liability balance for gift cards and merchandise credits was $3.4 million and $5.1 million, respectively. During the three months ended November 2, 2019 and November 3, 2018, the net revenue impact from rewards issued, redeemed and expired under loyalty reward programs was $0.1 million of revenue deferred and $0.4 million of revenue deferred, respectively. During the nine months ended November 2, 2019 and November 3, 2018, the net revenue impact from rewards issued, redeemed and expired under loyalty reward programs was $1.3 million of revenue recognized and $0.4 million of revenue deferred, respectively.

        Deferred revenue related to the ADS Agreement was $26.0 million at November 2, 2019, of which $22.0 million is included in "Other liabilities" and $4.0 million is included in "Accrued expenses" on the condensed consolidated balance sheet. As of November 3, 2018, deferred revenue related to the ADS Agreement was $30.0 million, of which $26.0 million is included in "Other liabilities" and $4.0 million is included in "Accrued expenses" on the condensed consolidated balance sheet. During the three months ended November 2, 2019 and November 3, 2018, the Company recognized revenue of $5.6 million and $6.0 million, respectively, from royalties and the amortization of signing bonuses in

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connection with the ADS Agreement. During the nine months ended November 2, 2019 and November 3, 2018, the Company recognized revenue of $16.6 million and $17.6 million, respectively, from royalties and the amortization of signing bonuses in connection with the ADS Agreement.

5. Earnings Per Share

        Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, diluted earnings per share are calculated based on the weighted average number of outstanding shares of common stock plus the dilutive effect of share-based awards calculated under the treasury stock method. A reconciliation between basic and diluted earnings per share is as follows:

 
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 
 
  (Amounts in thousands, except per share amounts)
 

Net (loss) income

  $ (11,649 ) $ 1,725   $ (21,388 ) $ 7,878  

Basic (loss) earnings per share:

                         

Weighted average shares outstanding:

                         

Basic shares of common stock

    64,420     63,940     64,317     63,738  

Basic (loss) earnings per share

  $ (0.18 ) $ 0.03   $ (0.33 ) $ 0.12  

Diluted (loss) earnings per share:

                         

Weighted average shares outstanding:

                         

Basic shares of common stock

    64,420     63,940     64,317     63,738  

Plus impact of share-based awards

        2,349         2,241  

Diluted shares of common stock

    64,420     66,289     64,317     65,979  

Diluted (loss) earnings per share

  $ (0.18 ) $ 0.03   $ (0.33 ) $ 0.12  

        The calculation of diluted earnings per share for the three and nine months ended November 2, 2019 and November 3, 2018 excludes the share-based awards listed in the following table due to their anti-dilutive effect as determined under the treasury stock method:

 
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 
 
  (Amounts in thousands)
 

Stock options

                4  

Stock appreciation rights(1)

    2,102     846     2,173     339  

Restricted stock and units

    727     313     634     113  

Total anti-dilutive shares

    2,829     1,159     2,807     456  

(1)
Each stock appreciation right ("SAR") referred to above represents the right to receive a payment measured by the increase in the fair market value of one share of common stock from the date of grant of the SAR to the date of exercise of the SAR. Upon exercise, the SARs will be settled in the Company's common stock.

6. Pension Plan

        The Company sponsors a single employer defined benefit pension plan ("plan") covering substantially all union employees. Employees covered by collective bargaining agreements are primarily

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non-management store associates, representing approximately 6% of the Company's workforce at November 2, 2019. The collective bargaining agreement with the Local 1102 unit of the Retail, Wholesale and Department Store Union AFL-CIO is in effect through August 31, 2021.

        The plan provides retirement benefits for union employees who have attained the age of 21 and complete 1,000 or more hours of service in any calendar year following the date of employment. The plan provides benefits based on length of service. The Company's funding policy for the pension plan is to annually contribute the amount necessary to provide for benefits based on accrued service and to contribute at least the minimum required by ERISA rules. Net periodic benefit cost includes the following components:

 
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 
 
  (Amounts in thousands)
 

Service cost

  $ 97   $ 97   $ 290   $ 290  

Interest cost

    79     76     236     229  

Expected return on plan assets

    (130 )   (140 )   (388 )   (421 )

Amortization of unrecognized losses

    56     39     168     117  

Amortization of prior service credit

    (4 )   (4 )   (11 )   (12 )

Net periodic benefit cost

  $ 98   $ 68   $ 295   $ 203  

        In accordance with FASB ASC Topic 220, "Comprehensive Income," comprehensive (loss) income reported on the Company's condensed consolidated statements of comprehensive (loss) income includes net (loss) income and other comprehensive income. For the Company, other comprehensive income consists of the reclassification of unrecognized losses and prior service credits related to the Company's minimum pension liability. The total amount of unrecognized losses and prior service credits of the plan reclassified out of "Accumulated other comprehensive loss" on the condensed consolidated balance sheets and into "Selling, general, and administrative expenses" on the Company's condensed consolidated statements of operations for the three months ended November 2, 2019 and November 3, 2018 was approximately $52,000 and $35,000, respectively, and for the nine months ended November 2, 2019 and November 3, 2018 was approximately $157,000 and $105,000, respectively. As of February 2, 2019, the Company reported a minimum pension liability of $1.4 million due to the underfunded status of the plan. The minimum pension liability is reported in "Other liabilities" on the condensed consolidated balance sheets.

7. Income Taxes

        The Company files U.S. federal income tax returns and income tax returns in various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for tax years through 2014. With limited exception, the Company is no longer subject to state and local income tax examinations for tax years through 2014.

        At February 2, 2019, the Company reported a total liability for unrecognized tax benefits of $2.4 million, including interest and penalties. There have been no material changes during the nine months ended November 2, 2019. Of the total $2.4 million of unrecognized tax benefits at February 2, 2019, approximately $1.3 million, if recognized, would impact the Company's effective tax rate. The Company does not anticipate any significant increases or decreases to the balance of unrecognized tax benefits during the next 12 months.

        The Company continues to maintain a valuation allowance against its deferred tax assets until the Company believes it is more likely than not that these assets will be realized in the future. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the

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more likely than not standard under ASC Topic 740, "Income Taxes," the applicable valuation allowance would be reversed accordingly in the period that such determination is made. As of November 2, 2019, the Company's valuation allowance against its deferred tax assets was $61.7 million.

8. Long-Term Debt and Credit Facilities

        On October 24, 2019, RTW Retailwinds, Inc. and its wholly-owned direct and indirect subsidiaries, including Lerner New York, Inc., Lernco, Inc., Lerner New York Outlet, LLC, Lerner New York FTF, LLC, Lerner New York Holding, Inc., New York & Company Stores, Inc., Lerner New York GC, LLC and FTF GC, LLC entered into Amendment No. 1 to Fourth Amended and Restated Loan and Security Agreement and Joinder (the "Amendment") with Wells Fargo Bank, National Association, as administrative agent and lender, which amends that certain Fourth Amended and Restated Loan and Security Agreement, dated October 24, 2014 (the "Existing Agreement", as amended by the Amendment, the "Loan Agreement"). The Existing Agreement was scheduled to mature on October 24, 2019. All capitalized terms used herein without definition have the meanings ascribed to such terms in the Loan Agreement.

        The amendment to the Existing Agreement provides for, but is not limited to: (i) an extension of the term of the revolving credit facility to October 24, 2024; (ii) a reduction of interest rates related to the revolving credit facility (see below); (iii) a reduction of certain fees related to the revolving credit facility (see below); and (iv) a release of certain intangible assets as collateral.

        The maximum revolving credit facility commitment remains unchanged, providing the Company with up to $100 million of credit, consisting of a $75 million revolving credit facility (which includes a sub-facility for issuance of letters of credit up to $45 million), and a fully committed accordion option that allows the Company to increase the revolving credit facility up to $100 million in the aggregate or decrease it to a minimum of $60 million in the aggregate, subject to certain restrictions. Borrowing availability under the Company's revolving credit facility is determined by a monthly borrowing base calculation based on applying specified advance rates against inventory and certain other eligible assets. Under the Loan Agreement, the Company continues to be subject to a Minimum Excess Availability covenant equal to the greater of (i) 10% of the revolving credit facility commitment and (ii) $7.5 million. The Loan Agreement contains other covenants and conditions, including restrictions on the Company's ability to pay dividends on its common stock, incur additional indebtedness and to prepay, redeem, defease or purchase other debt. Subject to such restrictions, the Company may incur more debt for working capital, capital expenditures, stock repurchases, acquisitions and for other purposes.

        Under the terms of the Loan Agreement, the interest rates applicable to Revolving Loans have been reduced by 25 basis points. At the Company's option, Revolving Loans now bear interest at either (i) a floating rate equal to the LIBOR plus a margin of between 1.25% and 1.50% per year for LIBOR Rate Loans or (ii) a floating rate equal to the Base Rate plus a margin of between 0.25% and 0.50% per year for Base Rate Loans, with each such margin determined based upon the Company's Average Compliance Excess Availability. The fees the Company pays to the Lenders under the Loan Agreement have also been reduced and now the Company pays a monthly fee on outstanding commercial letters of credit at a rate of between 0.625% and 0.75% per year and on standby letters of credit at a rate of between 1.25% and 1.50% per year, with each such rate determined upon the Company's Average Compliance Excess Availability, plus a monthly fee on a proportion of the unused commitments under the Loan Agreement, which has been reduced to a rate of 0.20% per year.

        On April 5, 2018, the Company used cash on-hand to prepay in full the $11.5 million outstanding balance of a $15 million, 5-year term loan under the Existing Agreement. The Company can no longer borrow funds under the term loan.

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        The maximum borrowing availability under the Loan Agreement is determined by a monthly borrowing base calculation based on applying specified advance rates against inventory and certain other eligible assets. As of November 2, 2019, the Company had availability under the Loan Agreement of $64.6 million, net of letters of credit outstanding of $10.4 million, as compared to availability of $35.0 million, net of letters of credit outstanding of $11.9 million, as of February 2, 2019, and availability of $59.9 million, net of letters of credit outstanding of $13.0 million, as of November 3, 2018. The $10.4 million of letters of credit outstanding at November 2, 2019 represent $10.1 million of standby letters of credit primarily related to the Company's corporate headquarters and certain insurance contracts and $0.3 million of commercial letters of credit. Standby letters of credit related to the Company's corporate headquarters were reduced by $2.0 million in November 2019. As of November 2, 2019, the Company had no borrowings outstanding under the Loan Agreement.

        The lender has been granted a pledge of the common stock of Lerner New York Holding, Inc. and certain of its subsidiaries, and a first priority security interest in substantially all other tangible assets of RTW Retailwinds, Inc. and its subsidiaries, as collateral for the Company's obligations under the Loan Agreement. In addition, RTW Retailwinds, Inc. and certain of its subsidiaries have fully and unconditionally guaranteed the obligations under the Loan Agreement, and such guarantees are joint and several.

9. Fair Value Measurements

        The Company measures fair value in accordance with FASB ASC Topic 820, "Fair Value Measurements" ("ASC 820"). ASC 820 establishes a three-level fair value hierarchy that requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:

  Level 1:   Observable inputs such as quoted prices in active markets;

 

Level 2:

 

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3:

 

Unobservable inputs in which there is little or no market data and require the reporting entity to develop its own assumptions.

        The carrying values on the balance sheets for cash and cash equivalents, short-term trade receivables and accounts payable approximate their fair values due to the short-term maturities of such items.

        The Company classifies long-lived store assets and operating lease assets within Level 3 of the fair value hierarchy. The Company evaluates the impairment of long-lived assets in accordance with ASC Topic 360, "Property, Plant and Equipment." Long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. The evaluation is performed at the individual store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. In evaluating long-lived assets for recoverability, the Company estimates the future cash flows at the individual store level that are expected to result from the use of each store's assets based on historical experience, omni-channel strategy, knowledge and market data assumptions. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the long-lived assets, an impairment loss, equal to the excess of the carrying amount over the fair value of the assets, is recognized. During the three and nine months ended November 2, 2019, the Company recorded $0.4 million and $0.8 million of non-cash impairment charges related to underperforming store assets in "Selling, general and administrative expenses" on the Company's condensed consolidated statement of operations, respectively. During the nine months ended November 3, 2018, the Company recorded $0.5 million of non-cash impairment charges related to underperforming store assets in "Selling, general and administrative expenses" on the Company's condensed consolidated statement of operations. There were no asset impairment charges recorded during the three months ended November 3, 2018.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        RTW Retailwinds, Inc. (together with its subsidiaries, the "Company") is a specialty women's omni-channel retailer with a multi-brand lifestyle platform providing curated fashion solutions that are versatile, on-trend, and stylish at a great value. The specialty retailer, first incorporated in 1918, operates 414 retail and outlet locations in 35 states and a substantial and growing eCommerce business. The Company's portfolio includes branded merchandise from New York & Company, Fashion to Figure, Happy x Nature, and collaborations with Eva Mendes, Gabrielle Union and Kate Hudson. The Company's branded merchandise is sold at its retail locations and online at www.nyandcompany.com, www.fashiontofigure.com, www.happyxnature.com, and through its rental subscription businesses at www.nyandcompanycloset.com and www.fashiontofigurecloset.com. The target customers for the Company's merchandise are women between the ages of 25 and 49.

        For fiscal year 2019, the Company's key strategic initiatives are as follows: (i) leverage its celebrity collaborations to amplify the New York & Company brand, and evolve as a broader lifestyle brand through the growth of the Company's sub-brand strategy, including 7th Avenue Design Studio, Soho Jeans, Soho Street, Eva Mendes Collection, and Gabrielle Union Collection; (ii) enhance brand awareness and increase customer engagement, including new customer acquisition and retention of its loyal customer base to drive traffic online and into stores; (iii) drive growth in eCommerce sales and continue to elevate its omni-channel capabilities by providing an easy and seamless customer experience; (iv) optimize the Company's existing store base; (v) continue ongoing Project Excellence initiatives; and (vi) explore opportunities to invest in growth initiatives. Project Excellence is the Company's ongoing business re-engineering program which consists of a continuous analysis of business processes and organizational structure in an effort to improve sales productivity and operating efficiencies, as well as to reduce the Company's overall cost structure.

        In April 2019, the Company introduced Happy x Nature, Kate Hudson's first ready-to-wear collection supported by Ms. Hudson's active and engaged social network. The Company will continue to focus on increasing brand awareness and sales.

        In April 2019, the Company introduced Uncommon Sense, a lingerie lifestyle brand. Based on the Company's operating results during the nine months ended November 2, 2019 and the necessary decision to focus the Company's resources on improving the performance of the New York & Company brand, the Company is prioritizing its efforts around its new businesses that have shown early potential, namely Fashion to Figure and Happy x Nature. As such, the Company has decided to exit the Uncommon Sense brand. During the three months ended November 2, 2019, the Company recorded a $3.3 million charge to write-down Uncommon Sense inventory and $0.9 million of related severance and asset impairment charges.

        In the beginning of fiscal year 2019, the Company began rebalancing its marketing media mix and increasing its marketing investments to drive customer acquisition, grow its digital business and grow its new brands, Fashion to Figure and Happy x Nature. During the three months ended November 2, 2019, the Company launched its Customer First initiative with the objective to reinvent all aspects of its marketing programs, from data analytics, creative storytelling, personalization and segmentation, and content creation with an intense focus on the customer. The Company remains focused on transforming its marketing efforts to be customer-first, data-driven and creatively optimized, which, when combined the Company believes will elevate the customer experience, engage new customers and retain existing customers.

        The Company's net sales for the three months ended November 2, 2019 were $200.1 million, as compared to $210.8 million for the three months ended November 3, 2018. Comparable store sales

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decreased 4.0% for the three months ended November 2, 2019, as compared to an increase of 0.2% for the three months ended November 3, 2018. Net loss for the three months ended November 2, 2019 was $11.6 million, or a loss of $0.18 per diluted share, which includes losses from the Company's new brands, as well as $4.6 million of charges related to the Uncommon Sense brand and additional non-operating charges. This compares to net income of $1.7 million, or earnings of $0.03 per diluted share, for the three months ended November 3, 2018, which includes $0.8 million of non-operating charges. A decline in customer traffic in stores combined with challenges in the Soho Jeans sub-brand were leading causes for the operating loss during the three months ended November 2, 2019. Please refer to the "Results of Operations" below for a further discussion of the Company's operating results.

        Capital spending for the nine months ended November 2, 2019 was $4.8 million, as compared to $3.7 million for the nine months ended November 3, 2018. During the nine months ended November 2, 2019, the Company opened 6 New York & Company stores and 2 Fashion to Figure stores, closed 3 New York & Company stores and 1 Outlet store, converted 2 New York & Company stores into Outlet stores, and remodeled/refreshed 4 New York & Company stores and 1 Outlet store, ending the third quarter of fiscal year 2019 with 414 stores, including 120 Outlet stores (of which 57 are clearance stores) and 11 Fashion to Figure stores. As of November 2, 2019, the Company had 2.1 million selling square feet in operation. Included in the New York & Company store count at November 2, 2019 are 18 Eva Mendes side-by-side stores, 46 Eva Mendes shop-in-shop stores, and 1 free-standing Eva Mendes boutique.

Recent Macroeconomic Developments

        The Company has exposure to volatility of the macroeconomic environment due to political uncertainty and potential changes to international trade agreements, such as new tariffs imposed on certain Chinese-made products imported to the United States. During fiscal year 2018, the United States began to impose additional tariffs on certain Chinese-made imported products which had minor impact on the Company's products. However, on September 1, 2019, additional tariffs of 15% were imposed on the majority of products the Company imports from China, such as apparel, accessories, and footwear. The Company has been able to minimize the negative impact of these tariffs and new and/or incremental tariffs thus far, as the Company has been actively reducing its penetration of Chinese-made imported products and has engaged vendor participation to negotiate cost-sharing agreements, and will manage and adjust spring buys and product pricing. There can be no assurance that these actions will mitigate the impact of existing tariffs and new and/or incremental tariffs and consequentially, the Company may experience a material adverse impact from such tariffs to its results of operations, financial position and cash flows.

Seasonality

        The Company views the retail apparel market as having two principal selling seasons: spring (first and second quarter) and fall (third and fourth quarter). New product lines are introduced into the Company's stores in five major deliveries each year (spring, summer, fall, holiday and pre-spring). The Company's business experiences seasonal fluctuations in net sales and operating income, with a larger portion of its sales typically realized during its fourth quarter. Seasonal fluctuations also affect inventory levels. The Company must carry a significant amount of inventory, especially before the holiday season selling period in the fourth quarter and prior to the Easter and Mother's Day holidays toward the latter part of the first quarter and beginning of the second quarter.

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Table of Contents

Results of Operations

        The following tables summarize the Company's results of operations as a percentage of net sales and selected store operating data for the three and nine months ended November 2, 2019 and November 3, 2018:

As a % of net sales
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 

Net sales

    100.0 %   100.0 %   100.0 %   100.0 %

Cost of goods sold, buying and occupancy costs

    72.2 %   67.6 %   70.5 %   67.8 %

Gross profit

    27.8 %   32.4 %   29.5 %   32.2 %

Selling, general and administrative expenses

    33.8 %   31.7 %   33.2 %   30.9 %

Operating (loss) income

    (6.0 )%   0.7 %   (3.7 )%   1.3 %

Interest income, net

    (0.1 )%   (0.1 )%   (0.2 )%   (0.1 )%

Loss on extinguishment of debt

    %   %   %   %

(Loss) income before income taxes

    (5.9 )%   0.8 %   (3.5 )%   1.4 %

(Benefit) provision for income taxes

    (0.1 )%   %   %   0.2 %

Net (loss) income

    (5.8 )%   0.8 %   (3.5 )%   1.2 %

 

Selected operating data:
  Three months
ended
November 2,
2019
  Three months
ended
November 3,
2018
  Nine months
ended
November 2,
2019
  Nine months
ended
November 3,
2018
 
 
  (Dollars in thousands, except square foot data)
 

Comparable store sales (decrease) increase

    (4.0 )%   0.2 %   (4.7 )%   1.2 %

Net sales per average selling square foot(1)

  $ 98   $ 99   $ 294   $ 301  

Net sales per average store(2)

  $ 484   $ 495   $ 1,464   $ 1,502  

Average selling square footage per store(3)

    4,956     4,987     4,956     4,987  

(1)
Net sales per average selling square foot is defined as net sales divided by the average of beginning and monthly end of period selling square feet.

(2)
Net sales per average store is defined as net sales divided by the average of beginning and monthly end of period number of stores.

(3)
Average selling square footage per store is defined as end of period selling square feet divided by end of period number of stores.
 
  Three months
ended
November 2, 2019
  Three months
ended
November 3, 2018
  Nine months
ended
November 2, 2019
  Nine months
ended
November 3, 2018
 
Store count and selling square feet:
  Store
Count
  Selling
Square
Feet
  Store
Count
  Selling
Square
Feet
  Store
Count
  Selling
Square
Feet
  Store
Count
  Selling
Square
Feet
 

Stores open, beginning of period

    413     2,048,015     426     2,118,906     411     2,047,032     432     2,171,329  

New stores

    2     11,535     4     24,941     8     37,500     14     51,082  

Closed stores

    (1 )   (7,730 )   (2 )   (9,559 )   (4 )   (24,934 )   (18 )   (93,040 )

Net impact of remodeled stores on selling square feet

                (9 )   (1 )   (7,778 )       4,908  

Stores open, end of period

    414     2,051,820     428     2,134,279     414     2,051,820     428     2,134,279  

19


Table of Contents

Three Months Ended November 2, 2019 Compared to Three Months Ended November 3, 2018

        Net Sales.    Net sales for the three months ended November 2, 2019 were $200.1 million, as compared to $210.8 million for the three months ended November 3, 2018. The decrease in net sales reflects a net reduction in store count since November 3, 2018 and a 4.0% reduction in comparable store sales during the three months ended November 2, 2019, which was partially offset by increased sales from Fashion to Figure. Included in net sales for the three months ended November 2, 2019 and November 3, 2018 are royalties and other revenue totaling $5.6 million and $6.0 million, respectively, recognized as a result of the ADS Agreement. In the comparable store base, average dollar sales per transaction decreased by 1.1%, and the number of transactions per average store decreased 3.0%, as compared to the same period last year.

        Gross Profit.    Gross profit for the three months ended November 2, 2019 was $55.6 million, or 27.8% of net sales, as compared to $68.4 million, or 32.4% of net sales, for the three months ended November 3, 2018. The decrease in gross profit as a percentage of net sales for the three months ended November 2, 2019, as compared to the three months ended November 3, 2018, reflects a $3.3 million write-down of Uncommon Sense inventory, $0.4 million of related severance costs incurred in connection with exiting the brand, and $0.2 million of severance expense related to reorganization at the New York & Company brand. Also contributing to the decrease in gross profit was an increase in promotional activity, increased shipping costs primarily related to growth in the Company's eCommerce channel, and a decrease in the leveraging of buying and occupancy costs based on lower sales.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $67.7 million, or 33.8% of net sales, for the three months ended November 2, 2019, as compared to $66.8 million, or 31.7% of net sales, for the three months ended November 3, 2018. The increase in selling, general and administrative expenses as a percentage of net sales for the three months ended November 2, 2019, as compared to the three months ended November 3, 2018, is primarily due to $1.5 million of incremental spending in connection with the incubation of the Company's new brands, $0.6 million of expense associated with the exit of Uncommon Sense, and $0.4 million of severance expense incurred in connection with reorganization in the New York & Company brand, partially offset by the reversal of a legal accrual. Selling, general and administrative expenses for the three months ended November 3, 2018 included $0.8 million of non-operating charges related primarily to Project Excellence initiatives and a Registration Statement filed by the Company.

        During the three months ended November 2, 2019, marketing expense increased by 9.9%, as compared to November 3, 2018, as the Company continues to invest in marketing to drive customer acquisition, grow its digital business, and grow its new brands, Fashion to Figure and Happy x Nature.

        Operating (Loss) Income.    Operating loss for the three months ended November 2, 2019 was $12.1 million, inclusive of losses from the Company's new brands discussed above, as well as $4.2 million of charges associated with the exit of the Uncommon Sense brand and $0.6 million of severance expense related to reorganization in the New York & Company brand, partially offset by a $0.2 million reversal of a legal accrual. This compares to operating income for the three months ended November 3, 2018 of $1.6 million, inclusive of $0.8 million of non-operating charges discussed above.

        Interest Income, Net.    Net interest income was $0.2 million for the three months ended November 2, 2019, as compared to $0.3 million for the three months ended November 3, 2018.

        (Benefit) Provision for Income Taxes.    As previously disclosed, the Company continues to provide for adjustments to its deferred tax valuation allowance. The benefit for income taxes for the three months ended November 2, 2019 was $0.3 million, as compared to a provision of $0.1 million, for the three months ended November 3, 2018.

20


Table of Contents

        Net (Loss) Income.    For the reasons discussed above, net loss for the three months ended November 2, 2019 was $11.6 million, or a loss of $0.18 per diluted share, as compared to net income of $1.7 million, or earnings of $0.03 per diluted share, for the three months ended November 3, 2018.

Nine Months Ended November 2, 2019 Compared to Nine Months Ended November 3, 2018

        Net Sales.    Net sales for the nine months ended November 2, 2019 were $603.0 million, as compared to $646.0 million for the nine months ended November 3, 2018. The decrease in net sales reflects a net reduction in store count since November 3, 2018 and a 4.7% reduction in comparable store sales during the nine months ended November 2, 2019, which was partially offset by increased sales from Fashion to Figure. Included in net sales for the nine months ended November 2, 2019 and November 3, 2018 are royalties and other revenue totaling $16.6 million and $17.6 million, respectively, recognized as a result of the ADS Agreement. In the comparable store base, average dollar sales per transaction decreased by 0.3%, and the number of transactions per average store decreased 4.5%, as compared to the same period last year.

        Gross Profit.    Gross profit for the nine months ended November 2, 2019 was $177.9 million, or 29.5% of net sales, as compared to $207.7 million, or 32.2% of net sales, for the nine months ended November 3, 2018. The decrease in gross profit as a percentage of net sales for the nine months ended November 2, 2019, as compared to the nine months ended November 3, 2018, reflects a $3.3 million write-down of Uncommon Sense inventory, $0.4 million of related severance costs incurred in connection with exiting the brand, and $0.2 million of severance expense related to reorganization at the New York & Company brand. Also contributing to the decrease in gross profit was an increase in promotional activity, increased shipping costs primarily related to growth in the eCommerce channel, and a decrease in the leveraging of buying and occupancy costs based on lower sales. Gross profit for the nine months ended November 3, 2018 included $0.3 million of non-operating charges related to certain severance expense.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $200.0 million, or 33.2% of net sales, for the nine months ended November 2, 2019, as compared to $199.6 million, or 30.9% of net sales, for the nine months ended November 3, 2018. The increase in selling, general and administrative expenses as a percentage of net sales for the nine months ended November 2, 2019, as compared to the nine months ended November 3, 2018, is primarily due to $5.3 million of incremental spending in connection with the incubation of the Company's new brands and deleveraging as a result of the decrease in comparable store sales, which was partially offset by a decrease in variable compensation expense due to the Company's operating results. Selling, general and administrative expenses for the nine months ended November 3, 2018 included $1.8 million of non-operating charges related primarily to Project Excellence initiatives, a Registration Statement filed by the Company, certain severance expense, and legal expenses.

        During the nine months ended November 2, 2019, marketing expense increased by 15.9%, as compared to November 3, 2018, as the Company continues to invest in marketing to drive customer acquisition, grow its digital business, and grow its new brands, Fashion to Figure and Happy x Nature.

        Operating (Loss) Income.    Operating loss for the nine months ended November 2, 2019 was $22.1 million, inclusive of losses from the Company's new brands discussed above, as well as $4.2 million of charges associated with the exit of the Uncommon Sense brand and $0.6 million of severance related to reorganization in the New York & Company brand, partially offset by a $0.2 million reversal of a legal accrual. This compares to operating income of $8.1 million for the nine months ended November 3, 2018, inclusive of $2.0 million of non-operating charges discussed above.

        Interest Income, Net.    Net interest income was $0.7 million for the nine months ended November 2, 2019, as compared to $0.5 million for the nine months ended November 3, 2018.

21


Table of Contents

        Loss on Extinguishment of Debt.    In connection with the early repayment of the $11.5 million outstanding balance of a $15 million, 5-year term loan (the "Term Loan") on April 5, 2018, the Company wrote off $0.2 million of unamortized deferred financing fees. The Company can no longer borrow funds under the Term Loan.

        Provision for Income Taxes.    As previously disclosed, the Company continues to provide for adjustments to its deferred tax valuation allowance. The provision for income taxes for the nine months ended November 2, 2019 was $33,000, as compared to $0.4 million for the nine months ended November 3, 2018.

        Net (Loss) Income.    For the reasons discussed above, net loss for the nine months ended November 2, 2019 was $21.4 million, or a loss of $0.33 per diluted share, as compared to net income of $7.9 million, or earnings of $0.12 per diluted share, for the nine months ended November 3, 2018.

Liquidity and Capital Resources

        The Company's primary uses of cash are to fund working capital, operating expenses, and capital expenditures related primarily to the Company's information technology infrastructure, including the upgrade of corporate technology systems and the enhancement of its digital and omni-channel capabilities, construction of select new stores, and the remodeling/refreshing of existing stores. Historically, the Company has financed these requirements from internally generated cash flow. The Company intends to fund its ongoing capital and working capital requirements primarily through cash flows from operations and cash on-hand, supplemented by borrowings under the Loan Agreement (as hereinafter defined), if needed. As of the date of this Quarterly Report on Form 10-Q, the Company is in compliance with all debt covenants under the Loan Agreement. On October 24, 2019, the Company entered into Amendment No. 1 to Fourth Amended and Restated Loan and Security Agreement and Joinder (the "Amendment") with Wells Fargo Bank, National Association, as administrative agent and lender, which amends that certain Fourth Amended and Restated Loan and Security Agreement, dated October 24, 2014 (the "Existing Agreement", as amended by the Amendment, the "Loan Agreement"). For further information related to the Loan Agreement, please refer to Note 8, "Long-Term Debt and Credit Facilities," appearing elsewhere in this Quarterly Report on Form 10-Q.

        The Company plans to make strategic investments to grow as a multi-brand portfolio company and to enhance its information technology structure and eCommerce platform to support the growth. These strategic investments may include expanding its celebrity collaborations and existing brands, driving growth in the eCommerce channel, and rebalancing its marketing media mix to acquire new customers and retain existing customers. These investments may also include adding talent with enhanced skills and capabilities in digital marketing, celebrity management, data analytics, and customer experience.

        The following tables contain information regarding the Company's liquidity and capital resources:

 
  November 2,
2019
  February 2,
2019
  November 3,
2018
 
 
  (Amounts in thousands)
 

Cash and cash equivalents

  $ 65,565   $ 95,542   $ 83,662  

Working capital(1)

  $ 1,112   $ 60,953   $ 64,905  

(1)
Working capital at November 2, 2019 reflects the adoption of ASU 2016-02, as discussed in Note 3, "Leases," in the Notes to Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q. Excluding the $39.2 million

22


Table of Contents

    of current operating lease liabilities recorded in connection with the adoption of ASU 2016-02, working capital at November 2, 2019 would have been $40.3 million.

 
  Nine months
ended
November 2, 2019
  Nine months
ended
November 3, 2018
 
 
  (Amounts in thousands)
 

Net cash (used in) provided by operating activities

  $ (23,947 ) $ 9,463  

Net cash used in investing activities

  $ (4,488 ) $ (3,330 )

Net cash used in financing activities

  $ (1,542 ) $ (13,379 )

Net decrease in cash and cash equivalents

  $ (29,977 ) $ (7,246 )

Operating Activities

        The increase in net cash used in operating activities during the nine months ended November 2, 2019, as compared to the nine months ended November 3, 2018, is primarily the result of the Company's net loss during the nine months ended November 2, 2019.

Investing Activities

        Net cash used in investing activities was $4.5 million for the nine months ended November 2, 2019, as compared to $3.3 million for the nine months ended November 3, 2018. During the nine months ended November 2, 2019, the Company opened 6 New York & Company stores and 2 Fashion to Figure stores, closed 3 New York & Company stores and 1 Outlet store, converted 2 New York & Company stores into Outlet stores, and remodeled/refreshed 4 New York & Company stores and 1 Outlet store, ending the third quarter of fiscal year 2019 with 414 stores, including 120 Outlet stores (of which 57 are clearance stores) and 11 Fashion to Figure stores. As of November 2, 2019, the Company had 2.1 million selling square feet in operation. Included in the New York & Company store count at November 2, 2019 are 18 Eva Mendes side-by-side stores, 46 Eva Mendes shop-in-shop stores, and 1 free-standing Eva Mendes boutique.

        During the nine months ended November 3, 2018, the Company opened 3 New York & Company stores, 1 Outlet store, and 10 Fashion to Figure stores, converted 3 existing New York & Company stores to Outlet stores, closed 18 stores, and remodeled/refreshed 7 existing stores, ending the third quarter of fiscal year 2018 with 428 stores, including 119 Outlet stores, and 2.1 million selling square feet in operation. Included in the New York & Company store count at November 3, 2018 are 18 Eva Mendes side-by-side stores, 50 Eva Mendes shop-in-shop stores, and 1 free-standing Eva Mendes boutique.

        For fiscal year 2019, capital expenditures are expected to be between $11 million and $12 million. In total, fiscal year 2019 capital expenditures reflect continued investments in the Company's information technology, including its omni-channel infrastructure, eCommerce stores and mobile applications, and real estate spending to support opening a select number of new stores and remodeling/refreshing existing locations. The Company expects to end fiscal year 2019 having opened 7 New York & Company stores and 2 Fashion to Figure stores, converted 2 existing New York & Company stores to Outlet stores, remodeled/refreshed 4 New York & Company stores and 1 Outlet store, and closed 22 New York & Company stores, 4 Fashion to Figure stores, and 5 Outlet stores, ending the fiscal year with 388 stores and approximately 1.9 million selling square feet.

        As of November 2, 2019, approximately 70% of the Company's store leases could be terminated by the Company in two years or less, providing the Company with operating flexibility.

23


Table of Contents

Financing Activities

        Net cash used in financing activities for the nine months ended November 2, 2019 was $1.5 million, which consists primarily of principal payments on capital lease obligations. Net cash used in financing activities for the nine months ended November 3, 2018 was $13.4 million, which consists primarily of the $11.5 million early repayment of the Term Loan, a $0.3 million quarterly amortization payment of the Term Loan, $1.3 million of principal payments on capital lease obligations, and $0.3 million of employee payroll taxes for which shares were withheld.

Critical Accounting Policies

        Management has determined the Company's most critical accounting policies are those related to inventories, long-lived assets, including right-of-use assets, intangible assets, and income taxes. Management continues to monitor these accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies as discussed in the Company's Annual Report on Form 10-K filed with the SEC on April 17, 2019.

Adoption of New Accounting Standards

        Please refer to Note 2, "New Accounting Pronouncements" in the Notes to Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        There have been no material changes in the Company's quantitative and qualitative disclosures about market risk from what was reported in its Annual Report on Form 10-K filed with the SEC on April 17, 2019.

ITEM 4.    CONTROLS AND PROCEDURES

        (a) Evaluation of disclosure controls and procedures.    The Company carried out an evaluation, as of November 2, 2019, under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuring that all information required to be filed in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission's rules and forms (ii) and that the disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Principal Executive and Principal Financial Officers, as appropriate to allow timely decisions regarding required disclosure.

        (b) Changes in internal control over financial reporting.    There has been no change in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred during the Company's last fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

24


Table of Contents


PART II.
OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        There have been no material changes in the Company's legal proceedings from what was reported in its Annual Report on Form 10-K filed with the SEC on April 17, 2019.

ITEM 1A.    RISK FACTORS

        There have been no material changes in the Company's risk factors from what was reported in its Annual Report on Form 10-K filed with the SEC on April 17, 2019.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4.    MINE SAFETY DISCLOSURES

        None.

ITEM 5.    OTHER INFORMATION

        None.

ITEM 6.    EXHIBITS

        The following exhibits are filed with this report and made a part hereof.

10.1   Amendment No 1. to Fourth Amended and Restated Loan and Security Agreement and Joinder, made by and among Lerner New York, Inc., Lernco, Inc., Lerner New York Outlet, LLC and Lerner New York FTF, LLC, wholly-owned indirect subsidiaries of RTW Retailwinds, Inc., and Wells Fargo Bank, N.A., as Agent and Sole Lender, dated as of October 24, 2019.

31.1

 

Certification by the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated December 11, 2019.

31.2

 

Certification by the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated December 11, 2019.

32.1

 

Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated December 11, 2019.

101.INS

 

XBRL Instance Document.

101.SCH

 

XBRL Taxonomy Extension Schema Document.

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

XBRL Taxonomy Definition Linkbase Document.

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

25


Table of Contents


SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    RTW RETAILWINDS, INC.

 

 

/s/ SHEAMUS TOAL

    By:   Sheamus Toal
    Its:   Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)

 

 

Date:

 

December 11, 2019

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