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Table of Contents

y

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 26, 2020

or

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: 001-36161

THE CONTAINER STORE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

26-0565401

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

500 Freeport Parkway, Coppell, TX

75019

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (972) 538-6000

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TCS

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  No

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  No

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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.  

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

The registrant had 50,555,098 shares of its common stock outstanding as of October 16, 2020.

Table of Contents

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Unaudited Consolidated Balance Sheets as of September 26, 2020, March 28, 2020, and September 28, 2019

3

Unaudited Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks ended September 26, 2020 and September 28, 2019

5

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Thirteen and Twenty-Six Weeks ended September 26, 2020 and September 28, 2019

6

Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks ended September 26, 2020 and September 28, 2019

7

Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen and Twenty-Six Weeks ended September 26, 2020 and September 28, 2019

8

Notes to the Unaudited Consolidated Financial Statements

9

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Default Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

41

2

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

The Container Store Group, Inc.

Consolidated balance sheets

September 26,

March 28,

September 28,

(In thousands)

    

2020

    

2020

    

2019

Assets

(unaudited)

(unaudited)

Current assets:

Cash

$

61,847

$

67,755

$

9,029

Accounts receivable, net

 

29,053

 

24,721

 

26,030

Inventory

 

117,715

 

124,207

 

133,200

Prepaid expenses

 

10,391

 

8,852

 

11,736

Income taxes receivable

93

4,724

2,603

Other current assets

 

12,926

 

11,907

 

10,518

Total current assets

 

232,025

 

242,166

 

193,116

Noncurrent assets:

Property and equipment, net

 

136,573

 

147,540

 

155,107

Noncurrent operating lease assets

304,390

347,170

362,609

Goodwill

 

202,815

 

202,815

 

202,815

Trade names

 

226,562

 

222,769

 

223,184

Deferred financing costs, net

 

135

 

170

 

206

Noncurrent deferred tax assets, net

 

2,444

 

2,311

 

1,803

Other assets

 

3,110

 

1,873

 

1,732

Total noncurrent assets

 

876,029

 

924,648

 

947,456

Total assets

$

1,108,054

$

1,166,814

$

1,140,572

See accompanying notes.

3

Table of Contents

The Container Store Group, Inc.

Consolidated balance sheets (continued)

    

September 26,

    

March 28,

    

September 28,

(In thousands, except share and per share amounts)

    

2020

    

2020

    

2019

Liabilities and shareholders’ equity

(unaudited)

(unaudited)

Current liabilities:

Accounts payable

$

85,680

$

53,647

$

74,376

Accrued liabilities

 

76,734

 

66,046

 

65,522

Revolving lines of credit

 

1,107

 

9,050

 

10,813

Current portion of long-term debt

 

6,970

 

6,952

 

6,936

Current operating lease liabilities

54,724

62,476

61,663

Income taxes payable

 

2,797

 

 

254

Total current liabilities

 

228,012

 

198,171

 

219,564

Noncurrent liabilities:

Long-term debt

 

236,955

 

317,485

 

268,007

Noncurrent operating lease liabilities

292,142

317,284

333,603

Noncurrent deferred tax liabilities, net

 

48,556

 

50,178

 

49,516

Other long-term liabilities

 

13,094

 

11,988

 

10,534

Total noncurrent liabilities

 

590,747

 

696,935

 

661,660

Total liabilities

 

818,759

 

895,106

 

881,224

Commitments and contingencies (Note 6)

Shareholders’ equity:

Common stock, $0.01 par value, 250,000,000 shares authorized; 48,570,280 shares issued at September 26, 2020; 48,316,559 shares issued at March 28, 2020; 48,306,412 shares issued at September 28, 2019

 

486

 

483

 

483

Additional paid-in capital

 

869,167

 

866,667

 

865,347

Accumulated other comprehensive loss

 

(24,741)

 

(36,295)

 

(32,395)

Retained deficit

 

(555,617)

 

(559,147)

 

(574,087)

Total shareholders’ equity

 

289,295

 

271,708

 

259,348

Total liabilities and shareholders’ equity

$

1,108,054

$

1,166,814

$

1,140,572

See accompanying notes.

4

Table of Contents

The Container Store Group, Inc.

Consolidated statements of operations

Thirteen Weeks Ended

Twenty-Six Weeks Ended

September 26,

September 28,

September 26,

September 28,

(In thousands, except share and per share amounts) (unaudited)

    

2020

    

2019

    

2020

    

2019

Net sales

$

248,241

$

236,432

$

399,927

$

445,952

Cost of sales (excluding depreciation and amortization)

 

102,183

 

99,628

 

175,630

 

189,341

Gross profit

 

146,058

 

136,804

 

224,297

 

256,611

Selling, general, and administrative expenses (excluding depreciation and amortization)

 

101,193

 

113,978

 

187,458

 

222,309

Stock-based compensation

 

1,977

 

965

 

2,809

 

1,776

Pre-opening costs

 

7

 

2,331

 

16

 

3,506

Depreciation and amortization

 

8,823

 

8,742

 

17,772

 

18,448

Other expenses

 

294

 

403

 

1,102

 

376

Gain on disposal of assets

 

 

 

(6)

 

(4)

Income from operations

 

33,764

 

10,385

 

15,146

 

10,200

Interest expense, net

 

4,491

 

5,402

 

9,441

 

11,111

Income (loss) before taxes

29,273

 

4,983

5,705

 

(911)

Provision (benefit) for income taxes

 

9,073

 

1,337

 

2,175

 

(458)

Net income (loss)

$

20,200

$

3,646

$

3,530

$

(453)

Net income (loss) per common share — basic

$

0.42

$

0.08

$

0.07

$

(0.01)

Net income (loss) per common share — diluted

$

0.41

$

0.08

$

0.07

$

(0.01)

Weighted-average common shares — basic

48,513,826

48,291,643

48,451,508

48,261,395

Weighted-average common shares — diluted

 

48,782,505

 

48,417,474

 

48,630,246

 

48,261,395

See accompanying notes.

5

Table of Contents

The Container Store Group, Inc.

Consolidated statements of comprehensive income (loss)

Thirteen Weeks Ended

Twenty-Six Weeks Ended

September 26,

September 28,

September 26,

September 28,

(In thousands) (unaudited)

    

2020

    

2019

    

2020

    

2019

Net income (loss)

$

20,200

$

3,646

$

3,530

$

(453)

Unrealized gain (loss) on financial instruments, net of tax provision (benefit) of $747, ($981), $2,140, and ($1,000)

 

1,920

 

(2,801)

 

5,881

 

(2,929)

Pension liability adjustment

 

(137)

 

125

 

(356)

 

123

Foreign currency translation adjustment

 

2,446

 

(3,790)

 

6,029

 

(3,457)

Comprehensive income (loss)

$

24,429

$

(2,820)

$

15,084

$

(6,716)

See accompanying notes.

6

Table of Contents

The Container Store Group, Inc.

Consolidated statements of cash flows

Twenty-Six Weeks Ended

September 26,

September 28,

(In thousands) (unaudited)

    

2020

    

2019

Operating activities

Net income (loss)

$

3,530

$

(453)

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

Depreciation and amortization

17,772

 

18,448

Stock-based compensation

2,809

 

1,776

Gain on disposal of assets

(6)

 

(4)

Deferred tax benefit

(4,726)

 

(1,810)

Non-cash interest

931

 

931

Other

80

 

199

Changes in operating assets and liabilities:

Accounts receivable

(2,529)

 

(1,858)

Inventory

8,748

 

(25,988)

Prepaid expenses and other assets

(2,266)

 

310

Accounts payable and accrued liabilities

46,227

 

17,424

Net change in lease assets and liabilities

9,672

122

Income taxes

7,493

 

(4,254)

Other noncurrent liabilities

3,448

 

912

Net cash provided by operating activities

91,183

5,755

Investing activities

Additions to property and equipment

(6,864)

 

(21,534)

Proceeds from sale of property and equipment

6

 

4

Net cash used in investing activities

(6,858)

 

(21,530)

Financing activities

Borrowings on revolving lines of credit

22,242

 

35,428

Payments on revolving lines of credit

(30,849)

 

(29,676)

Borrowings on long-term debt

 

29,000

Payments on long-term debt

(81,482)

(16,775)

Payment of taxes with shares withheld upon restricted stock vesting

(406)

(356)

Net cash (used in) provided by financing activities

(90,495)

 

17,621

Effect of exchange rate changes on cash

262

 

(181)

Net (decrease) increase in cash

(5,908)

 

1,665

Cash at beginning of fiscal period

67,755

 

7,364

Cash at end of fiscal period

$

61,847

$

9,029

Supplemental information for non-cash investing and financing activities:

Purchases of property and equipment (included in accounts payable)

$

548

$

1,177

See accompanying notes.

7

Table of Contents

The Container Store Group, Inc.

Consolidated statements of shareholders’ equity

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Par

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

value

    

Shares

    

Amount

    

capital

    

(loss) income

    

deficit

    

equity

Balance at March 28, 2020

$

0.01

 

48,316,559

$

483

 

$

866,667

$

(36,295)

$

(559,147)

 

$

271,708

Net loss

 

 

 

 

 

 

(16,670)

 

 

(16,670)

Stock-based compensation

 

 

 

 

832

 

 

 

 

832

Vesting of restricted stock awards

174,758

2

(2)

0

Taxes related to net share settlement of restricted stock awards

(165)

(165)

Foreign currency translation adjustment

 

 

 

 

 

3,583

 

 

 

3,583

Unrealized gain on financial instruments, net of $1,393 tax provision

 

 

 

 

 

3,961

 

 

 

3,961

Pension liability adjustment

 

 

 

 

 

(219)

 

 

 

(219)

Balance at June 27, 2020

$

0.01

 

48,491,317

485

 

 

867,332

 

(28,970)

 

(575,817)

 

 

263,030

Net income

20,200

20,200

Stock-based compensation

1,836

1,836

Vesting of restricted stock awards

78,963

1

(1)

(0)

Taxes related to net share settlement of restricted stock awards

Foreign currency translation adjustment

2,446

2,446

Unrealized gain on financial instruments, net of $747 tax provision

1,920

1,920

Pension liability adjustment

(137)

(137)

Balance at September 26, 2020

$

0.01

48,570,280

486

869,167

(24,741)

(555,617)

289,295

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Par

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

value

    

Shares

    

Amount

    

capital

    

(loss) income

    

deficit

    

equity

Balance at March 30, 2019

$

0.01

 

48,142,319

$

481

 

$

863,978

$

(26,132)

$

(573,634)

 

$

264,693

Net loss

 

 

 

 

 

 

(4,099)

 

 

(4,099)

Stock-based compensation

 

 

 

 

811

 

 

 

 

811

Vesting of restricted stock awards

140,878

2

(56)

(54)

Taxes related to net share settlement of restricted stock awards

(347)

(347)

Foreign currency translation adjustment

 

 

 

 

 

333

 

 

 

333

Unrealized gain on financial instruments, net of $(18) tax benefit

 

 

 

 

 

(128)

 

 

 

(128)

Pension liability adjustment

 

 

 

 

 

(2)

 

 

 

(2)

Balance at June 29, 2019

$

0.01

 

48,283,197

483

 

 

864,386

 

(25,929)

 

(577,733)

 

 

261,207

Net income

 

 

 

 

 

 

3,646

 

 

3,646

Stock-based compensation

 

 

 

 

965

 

 

 

 

965

Vesting of restricted stock awards

23,215

4

4

Taxes related to net share settlement of restricted stock awards

(8)

(8)

Foreign currency translation adjustment

(3,790)

(3,790)

Unrealized gain on financial instruments, net of $(981) tax benefit

(2,801)

(2,801)

Pension liability adjustment

125

125

Balance at September 28, 2019

$

0.01

48,306,412

$

483

$

865,347

$

(32,395)

$

(574,087)

$

259,348

See accompanying notes.

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The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

(In thousands, except share amounts and unless otherwise stated)

September 26, 2020

1. Description of business and basis of presentation

These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the fiscal year ended March 28, 2020, filed with the Securities and Exchange Commission (“SEC”) on June 17, 2020 (the “2019 Annual Report on Form 10-K”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.

All references herein to “fiscal 2020” refer to the 53-week fiscal year ending April 3, 2021, “fiscal 2019” refer to the 52-week fiscal year ended March 28, 2020, and “fiscal 2018” refer to the 52-week fiscal year ended March 30, 2019.

Description of business

The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and organization solutions through an assortment of innovative products and unparalleled customer service. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the “Company”), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”). On November 6, 2013, the Company completed its initial public offering (the “IPO”). As the majority shareholder, LGP retains a controlling interest in the Company. As of September 26, 2020, The Container Store, Inc. (“TCS”) operates 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers (including business customers), through its website and call center. The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. elfa® branded products are sold exclusively in the United States in The Container Store retail stores, website and call center, and Elfa sells to various retailers on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.

Business Update Related to Coronavirus

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s first quarter of fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. During the second quarter of fiscal 2020, all 93 stores were open and operating at close to normalized schedules, with limited capacity. As a result, online sales somewhat moderated during the second quarter of fiscal 2020 as customers shifted to purchasing in-store, compared to the significant increase in online sales experienced while our stores were temporarily closed in the first quarter of fiscal 2020. We will continue to review local, state, and federal mandates as we may need to temporarily close some or all of the stores again, as COVID-19 and other uncertainties continue to unfold. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company’s financial health. As previously announced, the Company furloughed approximately 2,800 employees, primarily in its stores, as well as a portion of corporate employees, and reduced the base salaries of its executive officers, due to COVID-19. As of the date of this filing, we have no furloughed employees and approximately 4,000 active employees and have returned temporarily reduced base salaries to pre-COVID-19 levels. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores, including intensive and frequent cleaning procedures and limitations on the number of customers shopping in each store at any given time. Furthermore, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and the Company is implementing applicable benefits of the CARES Act. As such, we have deferred approximately $3,100 of

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employer payroll taxes as of September 26, 2020 and are evaluating potential employee retention credits. We will continue to monitor guidance from the Centers for Disease Control and Prevention, local, state and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

Seasonality

The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the twenty-six weeks ended September 26, 2020 are not necessarily indicative of the operating results for the full year. The Company has historically realized a higher portion of net sales, operating income, and cash flows from operations in the fourth fiscal quarter, attributable primarily to the timing and impact of Our Annual elfa® Sale, which traditionally starts in late December and runs into February.

Recent accounting pronouncements

In July 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

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, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement are not affected by the new guidance. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard in the first quarter of fiscal 2020 did not result in a material impact to the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The Company is planning to adopt this standard in the first quarter of fiscal 2021. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

In March 2020, the FASB issued, ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for the effects of reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in ASU 2020-04 are elective and are effective upon

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issuance for all entities. The adoption of this standard did not result in a material impact to the Company’s financial statements.

2.  Detail of certain balance sheet accounts

September 26,

March 28,

September 28,

    

2020

    

2020

    

2019

Accounts receivable, net:

Trade receivables, net

$

16,080

$

20,217

$

16,203

Credit card receivables

 

11,483

 

3,326

 

7,930

Other receivables

 

1,490

 

1,178

 

1,897

$

29,053

$

24,721

$

26,030

Inventory:

Finished goods

$

112,864

$

118,981

$

128,095

Raw materials

 

4,271

 

4,523

 

4,532

Work in progress

 

580

 

703

 

573

$

117,715

$

124,207

$

133,200

Accrued liabilities:

Accrued payroll, benefits and bonuses

$

20,538

$

19,112

$

18,150

Unearned revenue

16,360

12,976

13,874

Accrued transaction and property tax

15,441

12,509

12,800

Gift cards and store credits outstanding

9,067

9,208

8,945

Accrued lease liabilities

1,045

49

80

Accrued interest

3,750

1,483

1,602

Accrued sales returns

3,321

1,650

2,397

Other accrued liabilities

7,212

9,059

7,674

$

76,734

$

66,046

$

65,522

Contract balances as a result of transactions with customers primarily consist of trade receivables included in Accounts receivable, net, Unearned revenue included in Accrued liabilities, and Gift cards and store credits outstanding included in Accrued liabilities in the Company's Consolidated Balance Sheets provided above. Unearned revenue was $12,976 as of March 28, 2020, and $11,924 was subsequently recognized into revenue for the twenty-six weeks ended September 26, 2020. Gift cards and store credits outstanding was $9,208 as of March 28, 2020, and $1,866 was subsequently recognized into revenue for the twenty-six weeks ended September 26, 2020. See Note 10 for disaggregated revenue disclosures.

3. Leases

We conduct all of our U.S. operations from leased facilities that include corporate headquarters, warehouse facilities, and 93 store locations. The corporate headquarters, warehouse facilities, and stores are under operating leases that generally expire over the next 1 to 20 years. We also lease computer hardware under operating leases that generally expire over the next few years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company also has finance leases at our Elfa segment that are immaterial.

Lease expense on operating leases is recorded on a straight-line basis over the term of the lease, commencing on the date the Company takes possession of the leased property and is recorded in selling, general and administrative expenses (“SG&A”).

We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable lease payments include lease payments that are based on a percentage of sales.

 

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Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to present value the future lease payments and the exercise of renewal options.

Many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.

During the first and second quarters of fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments and the modification of certain lease terms for a substantial portion of our leased properties. Under ASC 842, changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications. In April 2020, the FASB issued guidance related to the relief for lease concessions offered as a result of the effects of the COVID-19 pandemic and does not require these concessions to be accounted for in accordance with the lease modification guidance in ASC 842. Under existing lease guidance, the Company would determine, on a lease by lease basis, if a lease concession was the result of a new arrangement with the tenant or if it was under the enforceable rights and obligations within the lease agreement. Under the relief guidance, a company can account for the concessions (i) as if no changes to the existing lease contract were made or (ii) as a variable lease adjustment. The Company did not apply the lease modification relief, and the remeasurement impact is included in the Company’s condensed consolidated financial statements as of and for the twenty-six weeks ended September 26, 2020.

Discount Rate

Our leases do not provide information about the rate implicit in the lease. Therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.

The components of lease costs for the thirteen and twenty-six weeks ended September 26, 2020 and September 28, 2019 were as follows:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

September 26, 2020

September 28, 2019

September 26, 2020

September 28, 2019

Operating lease costs

$

22,683

$

22,639

$

45,194

$

45,000

Variable lease costs

 

280

 

160

 

311

 

632

Total lease costs

$

22,963

$

22,799

$

45,505

$

45,632

We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen and twenty-six weeks ended September 26, 2020 and September 28, 2019.

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Supplemental cash flow information related to our leases for the twenty-six weeks ended September 26, 2020 and September 28, 2019 were as follows:

Twenty-Six Weeks Ended

September 26, 2020

September 28, 2019

Cash paid for amounts included in the measurement of operating lease liabilities

$

35,207

$

44,493

Additions to right-of-use assets

$

32,817

$

39,134

Weighted average remaining operating lease term and incremental borrowing rate as of September 26, 2020 and September 28, 2019 were as follows:

Twenty-Six Weeks Ended

September 26, 2020

September 28, 2019

Weighted average remaining lease term (years)

7.0

7.2

Weighted average incremental borrowing rate

14.0

%

8.7

%

As of September 26, 2020, future minimum lease payments under our operating lease liabilities were as follows:

    

Operating leases (1)

Within 1 year (remaining)

$

51,186

2 years

 

91,753

3 years

 

78,028

4 years

 

71,263

5 years

 

63,930

Thereafter

 

197,362

Total lease payments

$

553,522

Less amount representing interest

(206,656)

Total lease liability

$

346,866

Less current lease liability

(54,724)

Total noncurrent lease liability

$

292,142

(1)Operating lease payments exclude approximately $11,500 of legally binding minimum lease payments for leases signed but not yet commenced.

4. Net income (loss) per common share

Basic net income (loss) per common share is computed as net income (loss) divided by the weighted-average number of common shares for the period. Net income (loss) per common share – diluted is computed as net income (loss) divided by the weighted-average number of common shares for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive. Potentially dilutive securities are excluded from the computation of net income (loss) per common share – diluted if their effect is anti-dilutive.

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The following is a reconciliation of net income (loss) and the number of shares used in the basic and diluted net income (loss) per common share calculations:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

September 26,

September 28,

September 26,

September 28,

2020

    

2019

    

2020

    

2019

    

Numerator:

Net income (loss)

$

20,200

$

3,646

$

3,530

$

(453)

Denominator:

Weighted-average common shares — basic

 

48,513,826

 

48,291,643

 

48,451,508

 

48,261,395

Options and other dilutive securities

268,679

125,831

178,738

Weighted-average common shares — diluted

48,782,505

48,417,474

48,630,246

48,261,395

Net income (loss) per common share — basic

$

0.42

$

0.08

$

0.07

$

(0.01)

Net income (loss) per common share — diluted

0.41

0.08

0.07

(0.01)

Antidilutive securities not included:

Stock options outstanding

 

2,285,867

 

2,388,222

 

2,515,767

 

2,420,176

Nonvested restricted stock awards

232,724

202,376

312,851

275,489

5.  Income taxes

The provision for income taxes in the thirteen weeks ended September 26, 2020 was $9,073 as compared to $1,337 in the thirteen weeks ended September 28, 2019. The effective tax rate for the thirteen weeks ended September 26, 2020 was 31.0%, as compared to 26.8% in the thirteen weeks ended September 28, 2019. During the thirteen weeks ended September 26, 2020, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to stock-based compensation, U.S. state income taxes, and the impact of the global intangible low-taxed income (“GILTI”) provision from the Tax Cuts and Jobs Act (the “Tax Act”). During the thirteen weeks ended September 28, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to U.S. state income taxes, as well as the impact of the GILTI provision and the officer compensation limitation provision from the Tax Act.

The provision for income taxes in the twenty-six weeks ended September 26, 2020 was $2,175 as compared to a benefit of $458 in the twenty-six weeks ended September 28, 2019. The effective tax rate for the twenty-six weeks ended September 26, 2020 was 38.1%, as compared to 50.3% in the twenty-six weeks ended September 28, 2019. During the twenty-six weeks ended September 26, 2020, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to stock-based compensation, U.S. state income taxes, and the impact of the GILTI provision. During the twenty-six weeks ended September 28, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to the impact of U.S. state income taxes, as well as the GILTI provision and the officer compensation limitation provision from the Tax Act.  

6.  Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $3,804 as of September 26, 2020.

The Company is subject to ordinary litigation and routine reviews by regulatory bodies that are incidental to its business, none of which is expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows on an individual basis or in the aggregate.

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7.  Accumulated other comprehensive loss

Accumulated other comprehensive loss (“AOCL”) consists of changes in our foreign currency forward contracts, pension liability adjustment, and foreign currency translation. The components of AOCL, net of tax, are shown below for the twenty-six weeks ended September 26, 2020: