STEIN MART, INC. As used herein, the terms "we," "our," "us," "Stein Mart " and the "Company" refer toStein Mart, Inc. and its wholly-owned subsidiaries. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks, uncertainties or assumptions and may be affected by certain factors including, but not limited to, our ability to continue as a going concern, risks and uncertainties relating to the duration and severity of the coronavirus ("COVID-19") pandemic, actions that may be taken by governmental authorities to contain the COVID-19 pandemic or treat its impact, the negative impacts of the COVID-19 pandemic on the global economy and foreign sourcing, the impact of the COVID-19 pandemic on the Company's financial condition, liquidity and business operations, including the Company's ability to negotiate extended payment terms with suppliers and landlords, obtain suitable merchandise in a timely manner, secure additional financing or negotiate a strategic transaction, the specific factors discussed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , filed with theSecurities and Exchange Commission ("SEC") onJune 15, 2020 . Wherever used, the words "plan," "expect," "anticipate," "believe," "estimate," "intend," "may," "could," "predict" and similar expressions identify forward-looking statements. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on beliefs and assumptions of our management and on information currently available to such management concerning future developments and their potential effects uponStein Mart, Inc. and our subsidiaries. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise our forward-looking statements considering new information, future events or otherwise. Undue reliance should not be placed on such forward-looking statements, which are based on current expectations. Forward-looking statements are not guarantees of future performance. The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year endedFebruary 1, 2020 , filed with theSEC onJune 15, 2020 . Overview We are a national specialty off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. We currently operate 281 stores across 30 states. COVID-19 Pandemic and Ability to Continue as a Going Concern DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization related to the rapidly growing outbreak of COVID-19. The pandemic has significantly impacted the economic conditions in theU.S. , accelerating during the first half of March, as federal, state and local governments reacted to the public health crisis, creating significant uncertainties in theU.S. economy. InMarch 2020 , we announced the temporary closure of all stores for an unknown period of time and significant actions taken to mitigate the ongoing impact of the COVID-19 pandemic on our cash flows to protect our business and associates for the long term in response to the crisis. Such actions include targeted reductions in discretionary operating expenses such as advertising and payroll expenses, including furloughing a significant number of our employees and temporarily reducing the payroll of remaining employees, reducing capital expenditures, reducing merchandise receipts, and utilizing funds available under our Revolving Credit Facility and Promissory Note. Further, we have sought and are seeking extended payment terms with all vendors, including merchandise, expense and rent vendors. We started reopening stores onApril 23, 2020 as government jurisdictions have allowed, and as ofJune 15, 2020 , we have reopened all of our stores with limited operating hours. We are unable to predict if additional periods of store closures will be needed or mandated. 22 -------------------------------------------------------------------------------- T able of C ontents Continued impacts of the pandemic have had a material adverse impact on our revenues, earnings, liquidity and cash flows, and may require significant additional actions in response, including, but not limited to, further employee furloughs, reduced store hours, store closings, expense reductions or discounting of pricing of our products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within theU.S. , the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The ultimate impact of the pandemic on the Company's results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time. The significant risks and uncertainties related to the Company's liquidity described above raise substantial doubt about the Company's ability to continue as a going concern over the next twelve months. The Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business. The accompanying Consolidated Financial Statements do not include any adjustments to reflect the possible future effects of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities. Financial Overview for the 13 Weeks EndedMay 2, 2020 ?Net sales were$134.3 million for the 13 weeks endedMay 2, 2020 , compared to$314.2 million for the 13 weeks endedMay 4, 2019 . ?Comparable sales for the 13 weeks endedMay 2, 2020 decreased 57.6 percent compared to the 13 weeks endedMay 4, 2019 . ?Net loss for the 13 weeks endedMay 2, 2020 was$65.7 million , or$1.38 per basic and diluted share, compared to net income of$4.0 million , or$0.08 per basic and diluted share, during the 13 weeks endedMay 4, 2019 . ?We had$197.8 million ,$142.1 million and$153.8 million of direct borrowings from our credit facilities as ofMay 2, 2020 ,February 1, 2020 , andMay 4, 2019 , respectively. Stores The following table sets forth the stores activity for the 13 weeks endedMay 2, 2020 andMay 4, 2019 : 13 Weeks Ended 13 Weeks Ended May 2, 2020 May 4, 2019 Stores at beginning of period 283
287
Stores closed during the period (2) (4) Stores at the end of period 281 283 Inventories
Inventory levels were
23
--------------------------------------------------------------------------------
T able of C ontents
Results of Operations
The following table sets forth each line item of our Consolidated Statements of
Operations expressed as a percentage of net sales (1):
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019
Net sales 100.0 % 100.0 %
Other revenue 2.9 % 1.7 %
Total revenue 102.9 % 101.7 %
Cost of merchandise sold 107.5 % 72.2 %
Selling, general and administrative expenses 50.9 % 27.4 %
Operating (loss) income (55.4) % 2.1 %
Interest expense, net 1.5 % 0.8 %
(Loss) income before income taxes (57.0) % 1.3 %
Income tax (benefit) expense (8.1) % - %
Net (loss) income (48.9) % 1.3 %
_______________(1)Table may not foot due to rounding.
Loyalty Program We evolved our customer loyalty program inOctober 2019 by combining our Credit Card and Preferred Customer programs into a single loyalty program called SMart Rewards. The enhanced program allowsStein Mart credit cardholders to earn 2 points for every$1 spent atStein Mart , and Elite cardholders ($500 annual spend) earn 4 points for every$1 spent. All cardholders receive a$5 reward, calledStein Mart SMart Cash , for every 500 points earned. We have both co-branded MasterCard and Private Label Credit Cards (together, "Stein Mart Credit Cards") available for our customers based on credit approvals. AllStein Mart credit cardholders participate in our SMart Rewards loyalty program. While the primary purpose of offering our credit cards is to increase customer loyalty and drive sales, we also receive credit card revenue through our program agreement with our business partner, Synchrony Financial ("Synchrony"). Our credit cards are issued by Synchrony in accordance with our Amended and Restated Co-Brand and Private Label Credit Card Consumer Program Agreement (the "Agreement"). Synchrony bears all credit risk associated with the cards and provides us certain direct financial benefits based on sales on the cards and other factors. OnAugust 21, 2019 , we entered into an amendment to our Agreement with Synchrony whereby Synchrony waived its rights to require us to post cash reserves to cure our failure to satisfy one or more of the quarterly financial covenants specified in the Agreement for periods throughOctober 31, 2020 (the "Exemption Period"). As consideration for Synchrony's entry into this amendment, we agreed to reduce the amount of fees paid to us by Synchrony under the Agreement fromSeptember 1, 2019 through the end of the Exemption Period. Multi-tender Loyalty Rewards BeginningFebruary 20, 2020 , in certain regions, we now offer the multi-tender customer to participate in the Stein Mart Rewards Program, which also provides for an incentive to nonStein Mart card holders in the form of reward points for certificates. Certificates are issued in$5 increments, which is equivalent to 500 points. Points are valued at the stand-alone selling price of the certificates issued. We defer a portion of our revenue for multi-tender loyalty points earned by customers using tenders other than the co-branded and private label cards and recognize the revenue as the certificates earned are used to purchase merchandise by our customers. 24 -------------------------------------------------------------------------------- T able of C ontents Important Information Regarding Non-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). However, we believe that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating operating performance. Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, financial results prepared in accordance with GAAP. Items excluded from or included in non-GAAP financial measures may be significant and should be considered in assessing our financial condition and performance. The methods we used to calculate these non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, the non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Calculations of our comparable sales, including sales from licensed departments, are non-GAAP financial measures. We believe that providing calculations of changes in comparable sales, both including and excluding sales from licensed departments, assists in evaluating our ability to generate sales growth, whether through owned businesses or departments licensed to third parties. The following table sets forth these calculations. 13 Weeks Ended 13 Weeks Ended May 2, 2020 May 4, 2019
Decrease in comparable sales excluding sales from leased departments (1)
(57.2) % (2.5) %
Impact of comparable sales of leased departments (2) (0.4) % 0.8 %
Decrease in comparable sales including sales from leased
departments (57.6) % (1.7) %
_______________
(1)Represents the period-to-period percentage change in net sales from stores
open throughout the period presented and the same period in the prior year and
all online sales of steinmart.com, excluding commissions from departments
licensed to third parties.
(2)Represents the impact of including the full sales amounts for departments
licensed to third parties throughout the period presented and the same period in
the prior year on the calculation of comparable sales. We license our shoe and
vintage handbag departments to third parties and receive a commission from these
third parties based on a percentage of their sales. In our financial statements
prepared in conformity with GAAP, we include commissions (rather than sales of
the departments licensed to third parties) in our net sales. We do not include
the commission amounts from licensed department sales in our comparable sales
calculation.
13 Weeks Ended May 2, 2020 , Compared to the 13 Weeks Ended May 4, 2019 (tables
presented in thousands):
Net Sales
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019 Variance
Net sales $ 134,273 $ 314,157 $ (179,884)
Sales percent change:
Total net sales (57.3) %
Comparable store sales, including sales from
leased departments (57.6) %
Net sales include customer purchases from our stores as well as online orders.
Our online operation fulfills online orders from vendors and/or our warehouse.
Store sales include online orders that are fulfilled and shipped or picked up
from our stores. All online sales, regardless of fulfillment channel, are
referred to as omnichannel sales. The 57.3 percent decrease in net sales and
57.6 percent decrease in comparable sales is primarily driven by store closures
related to the COVID-19 pandemic during the 13 weeks ended May 2, 2020 , compared
to the 13 weeks ended May 4, 2019 . Comparable store sales reflect stores open
throughout the period and prior fiscal year and include omnichannel sales.
Omnichannel sales increased 17.2 percent, including online orders shipped from
our stores, for the 13 weeks ended May 2, 2020 compared to the 13 weeks ended
May 4, 2019 . We believe the temporary closure of our stores contributed to the
increase in online sales.
25
--------------------------------------------------------------------------------
T able of C ontents
Other Revenue
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019 Variance
Other revenue $ 3,909 $ 5,225 $ (1,316)
Percentage of net sales 2.9 % 1.7 % 1.2 %
The decrease in other revenue for the 13 weeks ended May 2, 2020 , is primarily
the result of lower usage from our credit card program, which decreased royalty
and bounty income, partially offset by higher breakage income and lower reward
program costs. This activity correlates with the sales activity that was
impacted by the COVID-19 pandemic, as discussed above.
Gross (Loss) Profit
Gross (loss) profit is determined as follows:
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019 Variance
Net sales $ 134,273 $ 314,157 $ (179,884)
Cost of merchandise sold 144,308 226,698 (82,390)
Gross (loss) profit $ (10,035) $ 87,459 $ (97,494)
Percentage of net sales (7.5) % 27.8 % (35.3) %
The gross (loss) profit rate for the 13 weeks ended May 2, 2020 was impacted by
increased markdowns and Omnichannel fulfillment costs and occupancy costs
representing a higher percentage of reduced overall sales due to the COVID-19
pandemic, as discussed above.
Selling, General and Administrative Expenses ("SG&A")
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019 Variance
Selling, general and administrative expenses $ 68,325 $ 86,136 $ (17,811)
Percentage of net sales 50.9 % 27.4 % 23.5 %
SG&A for the 13 weeks ended May 2, 2020 decreased $17.8 million compared to the
13 weeks ended May 4, 2019 . The decrease is primarily driven by store closures,
staff furloughs, temporary salary reductions and advertising cancellations in
response to the COVID-19 pandemic, which reduced store payroll by $13.1 million ,
store advertising by $8.2 million and corporate SG&A expenses by $3.5 million .
These reductions were partially offset by asset impairment charges of $10.3
million and higher Omnichannel SG&A expenses.
As discussed in Note 1. "Basis of Presentation" to the Consolidated Financial
Statements, the COVID-19 pandemic impacted us significantly, including causing
us to close all of our stores starting in March 2020 . We commenced reopening our
stores on April 23, 2020 , and by June 15, 2020 , all of our stores had reopened.
Based on an impairment analysis performed during the 13 weeks ended May 2, 2020 ,
we recorded asset impairment charges in selling, general and administrative
("SG&A") expenses of $5.2 million to reduce the carrying value of fixtures,
equipment and leasehold improvements held for use and certain other assets in
under-performing stores plus $5.1 million to reduce the carrying value of
certain operating lease assets to their respective estimated fair values.
26
--------------------------------------------------------------------------------
T able of C ontents
Interest Expense, Net
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019 Variance
Interest expense, net $ 2,077 $ 2,526 $ (449)
Percentage of net sales 1.5 % 0.8 % 0.7 %
Interest expense decreased by $0.4 million for the 13 weeks ended May 2, 2020
compared to the 13 weeks ended May 4, 2019 . The decrease in interest expense is
primarily due to lower average weighted interest rates compared to last year.
Income Taxes
13 Weeks Ended 13 Weeks Ended
May 2, 2020 May 4, 2019 Variance
Income tax (benefit) expense $ (10,811) $ 53 $ (10,864)
Effective tax rate 14.1 % 1.3 % 12.8 %
The income tax benefit for the 13 weeks ended May 2, 2020 includes $8.0 million
in federal income tax receivables and a $2.9 million net federal income tax
refund related to the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act").
Liquidity and Capital Resources
Capital requirements and working capital needs are funded through a combination
of internally generated funds, available cash, credit terms from vendors, our
$240.0 million senior secured revolving credit facility pursuant to a second
amended and restated credit agreement with Wells Fargo Bank and our
$35.0 million Term Loan (as discussed below).
Revolving Credit Facility
On February 3, 2015 , we entered into a $250.0 million senior secured revolving
credit facility pursuant to a second amended and restated credit agreement (the
"Credit Agreement") with Wells Fargo Bank ("Wells Fargo"), with an original
maturity of February 2020 (the "Revolving Credit Facility"). Borrowings under
the Revolving Credit Facility were initially used for a special dividend but are
subsequently being used for working capital, capital expenditures and other
general corporate purposes. During 2017, debt issuance costs of $0.4 million
were associated with the Revolving Credit Facility. Debt issuance costs
associated with the Credit Agreement were being amortized over its respective
term.
On February 19, 2018 , we entered into Amendment No. 1 (the "Credit Agreement
Amendment") to the Credit Agreement with Wells Fargo. The Credit Agreement
Amendment provided for, among other things, an Accommodation Period (as defined
in the Credit Agreement Amendment) during which we were not required to meet the
Fixed Charge Coverage Ratio (as defined in the Credit Agreement). This change
permitted us to borrow the full amount of the then applicable borrowing base
until we delivered our financial statements for the Measurement Period (as
defined in the Credit Agreement) ended February 28, 2018 . Pursuant to the Credit
Agreement Amendment, a Cash Dominion Event (as defined in the Credit Agreement
Amendment) occurred as of the effective date of the Credit Agreement Amendment
and at all times thereafter. Because of the Cash Dominion Event, all of our cash
receipts were swept daily to repay outstanding borrowings under the Credit
Agreement and the amount outstanding under the Credit Agreement was classified
as a short-term obligation. As noted below, the Third Credit Agreement Amendment
removed the Cash Dominion Event effective September 18, 2018 .
On March 14, 2018 , we entered into Amendment No. 2 (the "Second Credit Agreement
Amendment") to the Credit Agreement with Wells Fargo. The Second Credit
Agreement Amendment provided for, among other things, the following: (1) the
$25.0 million Tranche A-1 Revolving Loans (as defined in the Second Credit
Agreement Amendment) were repaid in full with the proceeds of the Term Loan (as
defined below); (2) the entry into the Intercreditor Agreement (as defined
below); and (3) certain other modifications and updates to coordinate the
Revolving Credit Facility with the Term Loan.
27
--------------------------------------------------------------------------------
T able of C ontents
On September 18, 2018 , we entered into Amendment No. 3 (the "Third Credit
Agreement Amendment") to the Credit Agreement with Wells Fargo. The Third Credit
Agreement Amendment provided for, among other things, the following: (1) the
increase of Aggregate Tranche A Revolving Loan Commitments (as defined in the
Second Credit Agreement Amendment) from $225.0 million to $240.0 million ; (2) an
extension of the maturity date of the Revolving Credit Facility to the earlier
of (a) the maturity date of the Term Loan Agreement (as defined below) or
(b) September 18, 2023 ; and (3) the elimination of Cash Dominion Event status
and a change in Cash Dominion to be triggered only in the event of (a) the
occurrence and continuance of any Event of Default or (b) Excess Availability of
less than (A) 10.0 percent of the loan cap at any time or (B) 12.5 percent of
the loan cap for three consecutive business days. During 2018, debt issuance
costs of less than $0.1 million were associated with the Third Credit Agreement
Amendment and are being amortized over its term. Debt issuance costs of $0.1
million remaining under the initial Credit Agreement are being amortized over
the new term of the Third Credit Agreement Amendment. The elimination of cash
dominion status changed the debt classification from a short-term to long-term
obligation at that time.
On February 26, 2019 , we entered into Amendment No. 4 (the "Fourth Credit
Agreement Amendment") to the Credit Agreement with Wells Fargo. The Fourth
Credit Agreement Amendment provided for, among other things, a modification to
the definition of "Capital Expenditures" and "Permitted Indebtedness" as defined
in the Fourth Credit Agreement Amendment.
During the first quarter of 2020, due to the financial and operating impacts of
the COVID-19 pandemic, certain Events of Default occurred that were subsequently
waived on June 11, 2020 , when we entered into Amendment No. 5 (the "Fifth Credit
Agreement Amendment") to the Credit Agreement with Wells Fargo. The Fifth Credit
Agreement Amendment provides for, among other things, the waiver of certain
Events of Default and the modification of certain provisions of the Credit
Agreement subject to the conditions set forth in the Fifth Credit Agreement
Amendment. The Events of Default, which include the presence of a "going
concern" explanatory paragraph in the report of our independent registered
public accounting firm on our financial statements as of and for the year ended
February 1, 2020 , are further defined under Specified Defaults in the Fifth
Credit Agreement Amendment. See Note 1, "Basis of Presentation" of the Notes to
Consolidated Financial Statements for further discussion of our going concern
evaluation. Due to the uncertainties concerning the Company's future liquidity
and on-going covenant compliance as a result of the impact of the COVID-19
pandemic on the Company's business, the amount outstanding under our Credit
Facilities is classified as a current obligation in the consolidated balance
sheet as of May 2, 2020 .
Pursuant to the Fifth Credit Agreement Amendment, a Cash Dominion Event, as
defined in the Fifth Credit Agreement Amendment, occurred as of the effective
date of such amendment through and including the first anniversary of the Fifth
Credit Agreement Amendment, and at all times thereafter unless certain
conditions are met, as further set forth in the Fifth Credit Agreement
Amendment. As a result of the Cash Dominion Event, all of our cash receipts are
swept daily to repay borrowings under the Credit Agreement. The Credit Agreement
matures in September 2023 ; however, as a result of the Cash Dominion Event, the
amount outstanding under the Credit Agreement is considered a short-term
obligation as of the amendment date until the conditions to remedy the Cash
Dominion Event have occurred, as defined, but not before the first anniversary
of the Fifth Credit Agreement Amendment. We manage our cash on a daily basis and
borrow against the Credit Agreement based on our daily cash disbursement needs.
As long as we remain within the terms of the Credit Agreement, the lenders are
obligated to allow us to draw up to our borrowing availability.
28
--------------------------------------------------------------------------------
T able of C ontents
The Fifth Credit Agreement Amendment revised the definition of Excess
Availability to exclude past-due payables that are greater than sixty (60) days
past due, and added a financial covenant requiring minimum Excess Availability
equal to the greater of (i) five percent (5%) of the Combined Loan Cap (as
defined in the Credit Agreement) and (ii) $10.0 million during the Accommodation
Period, which is defined as the date of the Fifth Credit Agreement Amendment
through and including October 3, 2020 (the "Accommodation Period"), and
thereafter requiring minimum Excess Availability equal to the greater of (i) ten
percent (10%) of the Combined Loan Cap (as defined in the Credit Agreement) and
(ii) $20.0 million . Additionally, the Fifth Credit Agreement Amendment added a
definition for Liquidity (as defined in the Fifth Credit Agreement Amendment),
which includes, in addition to Excess Availability (less required minimum Excess
Availability), amounts available in Blocked Accounts (as defined in the Credit
Agreement) and amounts available for borrowing under the Trust (as defined
below) and further provided for our provision of a Budget (as defined in the
Fifth Credit Agreement Amendment) to Wells Fargo. Additional Events of Default
under the Credit Agreement include (i) certain material deviations from the
Budget calculated on a rolling 4-week basis, (ii) certain material deviations
from the Budget on a rolling basis, which can be less than 4 weeks if we have
failed to maintain Liquidity of $12.5 million , and (iii) failure to maintain
Liquidity of $7.5 million .
As a result of the Fifth Credit Agreement Amendment, LIBOR loans bear interest
equal to the adjusted LIBOR plus the applicable margin (175 to 225 basis points)
depending on the quarterly average excess availability for the immediately
preceding fiscal quarter. Base Rate Loans bear interest equal to the highest of
(a) the Federal Funds Rate plus 0.50 percent, (b) the adjusted LIBOR plus 1.00
percent, or (c) the Wells Fargo "prime rate," plus the Applicable Margin (75 to
125 basis points). The Fifth Credit Agreement Amendment provides that during the
Accommodation Period, the applicable margin will be 225 and 125 for LIBOR loans
and Base Rate Loans, respectively.
As a prerequisite to obtaining the Fifth Credit Agreement Amendment, we are
required to pay $2.5 million , pursuant to a payment plan, for outstanding
accounts payable factored by Wells Fargo Trade Capital Services .
The Fifth Credit Agreement Amendment also added or amended certain definitions
and terms including the LIBO Replacement and Benchmark Transition Event,
Accelerated Borrowing Base Weekly Delivery Event, Early Termination Fee, and
certain financial covenants, all of which are defined in the Fifth Credit
Agreement Amendment.
The total amount available for borrowings under the Credit Agreement is the
lesser of $240.0 million or 100 percent of eligible credit card receivables and
the net recovery percentage of eligible inventories less reserves. On May 2,
2020 , in addition to outstanding borrowings under the Credit Agreement, we had
$7.9 million of outstanding letters of credit and our Excess Availability (as
defined in the Credit Agreement) was $22.4 million .
The Credit Agreement contains customary representations and warranties,
affirmative and negative covenants (including the requirement of a 1.0 to 1.0
consolidated Fixed Charge Coverage Ratio upon the occurrence and during the
continuance of any Covenant Compliance Event, as defined in the Credit
Agreement), and events of default for facilities of this type and is
cross-collateralized and cross-defaulted. Collateral for the Revolving Credit
Facility consists of substantially all of our personal property. Wells Fargo has
a first lien on all collateral other than equipment.
Subsequent to the expiration of the Accommodation Period as set forth in the
Fifth Credit Agreement Amendment, borrowings under the Credit Agreement are
either base rate loans or London Interbank Offered Rate ("LIBOR") loans. LIBOR
loans bear interest equal to the adjusted LIBOR plus the applicable margin (125
to 175 basis points) depending on the quarterly average excess availability.
Base Rate Loans bear interest equal to the highest of (a) the Federal Funds Rate
plus 0.50 percent, (b) the adjusted LIBOR plus 1.00 percent, or (c) the Wells
Fargo "prime rate," plus the Applicable Margin (25 to 75 basis points).
The weighted average interest rate for the amount outstanding under the Credit
Agreement was 2.41 percent as of May 2, 2020 .
29
--------------------------------------------------------------------------------
T able of C ontents
Term Loan
On March 14, 2018 , we entered into a Term Loan Credit Agreement with Gordon
Brothers Finance Company , as administrative agent (in such capacity, the "Term
Loan Agent"), and Gordon Brothers Finance Company, LLC , as lender (the "Term
Loan Agreement"). The Term Loan Agreement provided for a term loan in the amount
of $50.0 million (the "Term Loan"). Debt issuance costs associated with the Term
Loan were capitalized in the amount of $0.9 million and are being amortized over
the term of the Term Loan. The net proceeds of $49.1 million from the Term Loan
were used to permanently pay off the $25.0 million Tranche A-1 Revolving Loan
(as defined in the Credit Agreement) and to pay down the Revolving Credit
Facility. After utilizing proceeds from the Term Loan for repayment of amounts
outstanding under the existing Tranche A-1 Revolving Loans, the Term Loan
resulted in an increase in our Excess Availability of approximately $25.0
million under the Credit Agreement.
The Term Loan originally matured on the earlier of (1) the termination date
specified in our Credit Agreement, as such date may be extended with the consent
of the Term Loan Agent or in accordance with the Intercreditor Agreement
(defined below), and (2) March 14, 2020 .
On September 18, 2018 , we entered into Amendment No. 2 (the "Second Term Loan
Amendment") to the Term Loan with Gordon Brothers Finance Company . The Second
Term Loan Amendment provided for, among other things, the following: (1) the
reduction of the maximum amount of the Term Loan to $35.0 million ; (2) an
extension of the maturity date of the Term Loan Agreement to the earlier of
(a) the termination date specified in the Revolving Credit Facility (as defined
in the Third Credit Agreement Amendment), and (b) September 18, 2023 ; (3) the
reduction of the non-default interest rate applicable to the Term Loan under the
Term Loan Agreement to a fluctuating rate of interest equal to three-month LIBOR
(with a floor of 1.5%) plus 8.25% per annum; and (4) the elimination of Cash
Dominion Event status and a change in Cash Dominion to be triggered only in the
event of (a) the occurrence and continuance of any Event of Default or
(b) Excess Availability of less than (A) 10.0 percent of the Revolving Loan Cap
at any time or (B) 12.5 percent of the Revolving Loan Cap for three consecutive
Business Days. During 2018, debt issuance costs of approximately $0.3 million
were associated with the Term Loan and are being amortized over its term. The
elimination of cash dominion status changed the debt classification from a
short-term to long-term obligation at that time.
On February 26, 2019 , we entered into Amendment No. 3 (the "Third Term Loan
Amendment") to the Term Loan Agreement. The Third Term Loan Amendment provided
for, among other things, a modification to the definition of "Capital
Expenditures" and "Permitted Indebtedness" as defined in the Third Term Loan
Amendment.
On June 11, 2020 , we entered into the Fourth Amendment to the Term Loan Credit
Agreement and Waiver (the "Fourth Term Loan Amendment") with Gordon Brothers
Finance Company . The Fourth Term Loan Amendment provides for, among other
things, the waiver of certain Events of Default and the modification of certain
provisions of the Term Loan, subject to the conditions set forth in the Fourth
Term Loan Amendment. The Events of Default, which include the presence of a
"going concern" explanatory paragraph in the report of our independent
registered public accounting firm on our financial statements as of and for the
year ended February 1, 2020 , are further defined under Specified Defaults in the
Fourth Term Loan Amendment. See Note 1, "Basis of Presentation" of the Notes to
Consolidated Financial Statements for further discussion of our going concern
evaluation. Due to the uncertainties concerning the Company's future liquidity
and on-going covenant compliance as a result of the impact of the COVID-19
pandemic on the Company's business, the amount outstanding under our Term Loan
is classified as a current liability in the consolidated balance sheet as of
May 2, 2020 .
30
--------------------------------------------------------------------------------
T able of C ontents
The Fourth Term Loan Amendment revised the definition of Revolving Excess
Availability to exclude past-due payables that are greater than sixty (60) days
past due, and added a financial covenant requiring minimum Revolving Excess
Availability equal to the greater of (i) five percent (5%) of the Combined Loan
Cap (as defined in the Term Loan Agreement) and (ii) $10.0 million during the
Accommodation Period, which is defined as the date of the Fourth Term Loan
Amendment through and including October 3, 2020 (the "Term Loan Accommodation
Period"), and thereafter requiring minimum Revolving Excess Availability equal
to the greater of (i) ten percent (10%) of the Combined Loan Cap (as defined in
the Term Loan Agreement) and (ii) $20.0 million . Additionally, the Fourth Term
Loan Amendment added a definition for Liquidity (as defined in the Fourth Term
Loan Amendment), which includes, in addition to Revolving Excess Availability
(less required minimum Revolving Excess Availability), amounts available in
Blocked Accounts (as defined in the Term Loan Agreement) and amounts available
for borrowing under the Trust (as defined below) and further provided for our
provision of a Budget (as defined in the Fourth Term Loan Amendment) to Gordon
Brothers Finance Company . Additional Events of Default under the Credit
Agreement include (i) certain material deviations from the Budget calculated on
a rolling 4-week basis, (ii) certain material deviations from the Budget on a
rolling basis, which can be less than 4 weeks if we have failed to maintain
Liquidity of $12.5 million , and (iii) failure to maintain Liquidity of $7.5
million .
The Fourth Term Loan Amendment also added or amended certain definitions and
terms including Accelerated Borrowing Base Weekly Delivery Event, and certain
financial covenants, all of which are defined in the Fourth Term Loan Amendment.
Additionally, our obligation to pay the Term Loan Prepayment Fee (as defined in
the Term Loan) in the event the Term Loan is prepaid was extended to the third
anniversary of the Fourth Term Loan Amendment.
The Term Loan Agreement contains customary representations and warranties,
events of default, and affirmative and negative covenants, which include the
retention of the existing minimum 1.0 to 1.0 consolidated fixed charge coverage
ratio under the Credit Agreement during periods where Revolving Excess
Availability (as defined in the Term Loan Agreement) is less than the greater of
$20.0 million or 10.0 percent of Combined Loan Cap (as defined in the Term Loan
Agreement) for four consecutive business days or during the occurrence of an
Event of Default (as defined in the Term Loan Agreement).
The Term Loan is secured by a second lien security interest (subordinate only to
the liens securing the Credit Agreement) on all assets securing the Credit
Agreement (which consist of substantially all of our personal property), except
furniture, fixtures and equipment and intellectual property, upon which the Term
Loan lenders have a first lien security interest. If at any time prior to the
first anniversary date of the Term Loan, the Revolving Excess Availability is
less than $20.0 million , if requested by the Term Loan Agent, the Term Loan will
also be secured by a first lien on leasehold interests in real property with an
aggregate value of not less than $10.0 million , and the Credit Agreement will be
secured by a second lien on such leasehold interests.
The Term Loan is subject to certain mandatory prepayments if an Event of Default
(as defined in the Term Loan Agreement) exists. If no such Event of Default
exists, proceeds of the Term Loan priority collateral are to be applied to
amounts outstanding under the Credit Agreement.
The Term Loan Agent and Wells Fargo have entered into an Intercreditor Agreement
dated as of March 14, 2018 (the "Intercreditor Agreement"), acknowledged by us
under the Term Loan and the Credit Agreement. The Intercreditor Agreement was
also amended on September 18, 2018 to incorporate the amendment to the Revolving
Credit Facility and the Term Loan Agreement, and subsequently amended on June
11, 2020 to incorporate the Fifth Credit Agreement Amendment to the Revolving
Credit Facility and Fourth Term Loan Amendment to the Term Loan Agreement.
The weighted average interest rate for the amount outstanding under the Term
Loan was 9.83 percent as of May 2, 2020 .
31
--------------------------------------------------------------------------------
T able of C ontents
Promissory Notes
We believe we can borrow, on a short-term basis and subject to the formal
agreement of the lender, amounts up to 90 percent of the cash surrender value of
the life insurance policies related to our executive deferred compensation plans
to provide additional liquidity if needed. At May 2, 2020 , the cash surrender
value of our life insurance policies was approximately $11.1 million .
On March 23, 2020 , we borrowed $9.9 million on the cash surrender value of our
life insurance policies, which represented the full amount available to be
borrowed, at a rate of 3.56 percent per annum, which accrues daily on the
average loan balance for the number of days the loan is outstanding prior to the
date of repayment (the "Promissory Note"). The proceeds of the Promissory Note
were used to pay down borrowings under the existing credit agreement, which
provided additional availability under that agreement. The entire unpaid
principal and accrued interest balance is due and payable on or before September
30, 2020 .
On April 6, 2020 , we executed a promissory note to borrow $1.0 million for our
property insurance premiums through Bank Direct Capital Finance at a rate of
4.25 percent per annum. The entire unpaid principal and accrued interest balance
is due and payable on or before February 1, 2021 . Subsequent to quarter end, on
July 9, 2020 , we executed a promissory note to borrow $1.9 million for various
insurance premiums through Bank Direct Capital Finance at a rate of 4.25 percent
per annum. The entire unpaid principal and accrued interest balance is due and
payable on or before March 1, 2021 .
U.S. Small Business Administration Loan
Subsequent to quarter-end on June 23, 2020 , we entered into an agreement to
receive a U.S. Small Business Administration Loan ("SBA Loan") from Harvest
Small Business Finance, LLC related to the COVID-19 pandemic in the amount of
$10.0 million , which we received on June 30, 2020 . The SBA Loan has a fixed
interest rate of 1.00 percent per annum and a maturity date five years from the
date on which the Company applies for loan forgiveness under section 1106 of the
CARES Act. Pursuant to the terms of the SBA Loan, the Company may apply for
forgiveness of the amount due on the SBA Loan in an amount equal to the sum of
the following costs incurred by the Company during the period commencing on the
date of first disbursement of the Loan and ending upon the earlier of (i) 24
weeks after the date of the first disbursement of the Loan and (ii) December 31,
2020 : payroll costs, payment on a covered rent obligation, and any covered
utility payment. The amount of SBA Loan forgiveness shall be calculated in
accordance with the requirements of the Paycheck Protection Program, including
the provisions of Section 1106 of the CARES Act, although no more than 40
percent of the amount forgiven can be attributable to non-payroll costs.
Cash flows and availability
Cash flows from operations are driven by sales as well as the credit terms
available to us from our vendors and their factors. Our sales generate cash
almost immediately and are affected by customer traffic to our stores and the
desirability of our merchandise to those customers. Customer traffic is in turn
affected by our marketing and advertising, general economic and business
conditions, weather, and most recently, the COVID-19 pandemic. Changes in these
factors could have a material effect on our ability to generate sales and thus
cash inflows to operate our business, and prolonged or additional store closures
could have a material adverse impact on our liquidity and our ability to
continue as a going concern over the next twelve months.
32
--------------------------------------------------------------------------------
T able of C ontents
In March 2020 , we announced the temporary closure of all stores for an unknown
period of time and significant actions taken to mitigate the ongoing impact of
the COVID-19 pandemic on our cash flows to protect our business and associates
for the long term in response to the crisis. Such actions include targeted
reductions in discretionary operating expenses such as advertising and payroll
expenses, including furloughing a significant number of our employees and
temporarily reducing the payroll of remaining employees, suspensions and/or
deferrals of payments due to landlords and vendors, reducing capital
expenditures, reducing merchandise receipts and utilizing funds available under
our Revolving Credit Facility and Promissory Note. Further, we have sought and
are seeking extended payment terms with all vendors, including merchandise,
expense and rent vendors. All stores are now open but we are unable to predict
if additional periods of store closures will be needed or mandated. Further, we
are unable to predict when consumer spending patterns will normalize. Continued
impacts of the pandemic could materially adversely affect our near-term and
long-term revenues, earnings, liquidity and cash flows, ability to secure
suitable merchandise and may require significant actions in response, including
but not limited to, further employee furloughs, reduced store hours, store
closings, expense reductions or discounting of pricing of our products, all in
an effort to mitigate such impacts. The outcome of the impacts from the COVID-19
pandemic is subject to a high degree of uncertainty and is dependent upon
factors that are outside of the Company's control, including actions of federal
and local governments and consumer behavior. There is no assurance that
additional credit or liquidity will be available to us.
The significant risks and uncertainties related to the Company's liquidity
described above raise substantial doubt about the Company's ability to continue
as a going concern. The Consolidated Financial Statements have been prepared on
a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities and other commitments in the normal course of
business. The accompanying Consolidated Financial Statements do not include any
adjustments to reflect the possible future effects of this uncertainty on the
recoverability or classification of recorded assets amounts or the amounts or
classifications of liabilities.
Our working capital fluctuates with seasonal variations, which affect our
borrowings and availability. Our availability is generally highest just after
our strong seasonal spring and holiday selling seasons and is lowest just before
those seasons as we build inventory levels. Working capital is also used to
support capital investments for maintenance of our existing stores, system
improvements and new store openings. We have reduced our capital investments to
enhance our cash flows. These reduced levels of investment can be sustained for
the foreseeable future as prior to this our store base and systems have been
well maintained. Positive operating results and cash flows will help us preserve
satisfactory credit terms and allow us to operate within the borrowing
availability under our Credit Agreement and Term Loan Agreement.
As of May 2, 2020 , we had cash and cash equivalents of $2.2 million and $152.0
million in borrowings under our Credit Agreement, $35.0 million in borrowings
under the Term Loan and $10.8 million in borrowings from promissory notes, for a
total of $197.8 million in outstanding borrowings. As of February 1, 2020 , we
had cash and cash equivalents of $9.5 million and $107.1 million in borrowings
under our Credit Agreement and $35.0 million in borrowings under the Term Loan,
for a total of $141.4 million in outstanding borrowings, which is net of $0.7
million in unamortized debt issuance costs. As of May 4, 2019 , we had cash and
cash equivalents of $21.9 million and $118.8 million in borrowings under our
Credit Agreement and $35.0 million in borrowings under the Term Loan, for a
total of $153.0 million in outstanding borrowings, net of $0.8 million in
unamortized debt issuance costs. The total amount available for borrowings and
letters of credit under our Credit Agreement is the lesser of $240.0 million or
100 percent of eligible credit card receivables and the net recovery percentage
value of inventories less reserves. On May 2, 2020 , in addition to outstanding
borrowings under the Credit Agreement and Term Loan, we had $7.9 million of
outstanding letters of credit. Our Excess Availability (as defined in the Credit
Agreement) was $22.4 million on May 2, 2020 .
33--------------------------------------------------------------------------------
© Edgar Online, source
