Impact of COVID-19 (Notes)

3 Months Ended

Oct. 31, 2020

Unusual or Infrequent Item, or Both [Line Items]

Unusual or Infrequent Items, or Both, Disclosure [Text Block]

Recent developments

The Company has seen, and may continue to see, material adverse impacts as a result of COVID-19. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID- 19 and the availability and acceptance of an effective vaccine or medical treatments.

In January 2020, the Company began to experience business disruptions in the Asia-Pacific (“APAC”) region as a result of COVID-19. In February 2020, the situation escalated as the scope of COVID-19 worsened beyond the APAC region, with the United States (the “U.S.”) and the Europe, Middle East and Africa (“EMEA”) region experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines and the Company has recommended associates who are able to perform their role remotely continue to do so. The Company is reacting to COVID-19 on a daily basis, including by conforming to local government guidance and monitoring developments in government legislation or other government actions in response to the COVID-19 outbreak. The Company has also implemented a range of precautionary health and safety measures with the well-being of the Company’s customers, associates and business partners in mind.

As a result of COVID-19, in January 2020, the Company temporarily closed the majority of its stores in the APAC region and in March 2020, the Company temporarily closed its stores across brands in North America and the EMEA region. The majority of APAC stores were reopened during March 2020, and the Company began to reopen stores in North America and the EMEA region on a rolling basis in late April 2020. As of October 31, 2020, approximately 97% of Company-operated stores had reopened for in-store service, although many with modified operating hours. The Company plans to follow the guidance of local governments to determine when it can reopen stores that have been closed due to COVID-19 and to evaluate whether further store closures will be necessary.

The Company’s digital operations across brands have continued to serve the Company’s customers during this unprecedented period of temporary store closures as the Company’s distribution centers implemented enhanced cleaning and social distancing measures in order to remain operational. In response to elevated digital demand during this period, the Company has increased its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pick-up at a majority of U.S. locations, and by utilizing ship-from-store capabilities. In addition, to prepare for the Fiscal 2020 holiday season, the Company has entered into a short-term lease for an additional distribution center and has partnered with incremental carriers.

Impact of COVID-19

The Company has seen, and may continue to see, material reductions in sales across brands and regions as a result of COVID-19. Total net sales decreased approximately 5% and 18% for the thirteen and thirty-nine weeks ended October 31, 2020

as compared to the comparable periods ended November 2, 2019, respectively. The year-over-year decrease in total net sales was primarily driven by temporary widespread store closures and a decline in traffic as compared to the previous year as a result of COVID-19. The year-over-year decline in store sales was partially offset by digital sales growth of approximately 43% and 42% for the thirteen and thirty-nine weeks ended October 31, 2020 as compared to the comparable periods ended November 2, 2019, respectively.

Primarily as a result of COVID-19 and the temporary closure of the Company’s stores, the Company recognized $14.8 million of charges to reduce the carrying value of inventory in cost of sales, exclusive of depreciation and amortization on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the thirteen weeks ended May 2, 2020.

During the thirty-nine weeks ended October 31, 2020, reductions in revenue have not been offset by proportional decreases in expense, as the Company continued to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. During this period, the Company suspended rent payments for a significant number of stores that were closed, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. The Company has elected to account for all qualifying lease concessions, those that are a direct consequence of COVID-19 and that result in revised lease consideration that is substantially the same or less than the original consideration, as if the enforceable rights and obligations associated with the concession existed in the original lease agreement. Rent abatements associated with such concessions are recognized in variable lease cost. Lease concessions granted as part of an agreement that substantially increases the total consideration as a result of the inclusion of additional terms, such as rent payments associated with a lease term extension, are treated as lease modifications. For stores where the Company suspended payments, the Company reclassified related amounts from operating lease liability to accrued expenses in the period during which rent was due, while continuing to recognize operating lease cost in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides refundable employee retention tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and the deferral of the employer–paid portion of social security taxes. Similar relief programs have also been established throughout the EMEA and APAC regions. Based on the Company's evaluation of the CARES Act and legislation across regions, the Company qualifies for certain payroll tax credits, and such government subsidies have been treated as offsets to the related operating expenses when recognized. During the thirteen and thirty-nine weeks ended October 31, 2020, the Company recognized qualified payroll tax credits reducing payroll expenses by approximately $2.8 million and $14.7 million, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), The Company intends to continue to defer qualified payroll and other tax payments as permitted by the CARES Act and other regional legislation.

The Company also recognized asset impairment charges related to the Company’s right-of-use assets and property and equipment of $6.3 million and $57.3 million during the thirteen and thirty-nine weeks ended October 31, 2020, respectively, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ASSET IMPAIRMENT,” for additional information.

In addition, the Company has also experienced other material impacts as a result of COVID-19, such as deferred tax valuation allowances and other tax charges during the thirty-nine weeks ended October 31, 2020, adversely impacting results by $77.4 million. Refer to Note 11, “INCOME TAXES,” for additional information.

Balance sheet, cash flow and liquidity

During the thirty-nine weeks ended October 31, 2020, the Company has taken various actions to preserve liquidity and manage cash flows in order to best position the business for key stakeholders, including (i) partnering with merchandise and non-merchandise vendors in regards to payment terms; (ii) tightly managing inventory receipts to align inventory with expected market demand; (iii) significantly reducing expenses to better align operating costs with sales; and (iv) temporarily suspending its share repurchase program in March 2020 and its dividend program in May 2020. In addition, despite the Company's recent history of partnering with its vendors regarding payment terms, certain payment term extensions were temporary and certain previously deferred payments have since been made. There can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods.

As a precautionary measure in response to COVID-19, in March 2020, the Company borrowed $210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) to improve its near-term cash position and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $50.0 million of additional cash. In July 2020, the Company completed a private offering of $350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”) and used the net proceeds to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 12, “BORROWINGS,” and Note 10, “ RABBI TRUST ASSETS,” for additional information.

As of October 31, 2020, the Company had liquidity of $1.158 billion as compared to $913.8 million as of February 1, 2020, comprised of cash and equivalents and actual incremental borrowing available to the Company under the ABL Facility.