ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
|
|
May 2, 2020
|
|
|
February 1, 2020
|
|
|
May 4, 2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,324
|
|
|
$
|
17,839
|
|
|
$
|
17,462
|
|
Accounts receivable
|
|
|
14,481
|
|
|
|
3,743
|
|
|
|
7,581
|
|
Inventories
|
|
|
34,768
|
|
|
|
31,636
|
|
|
|
32,201
|
|
Prepaid expenses and other current assets
|
|
|
3,729
|
|
|
|
12,325
|
|
|
|
11,137
|
|
Total current assets
|
|
|
67,302
|
|
|
|
65,543
|
|
|
|
68,381
|
|
Operating lease right-of-use assets, net
|
|
|
196,226
|
|
|
|
208,503
|
|
|
|
230,881
|
|
Property and equipment, net
|
|
|
47,302
|
|
|
|
51,469
|
|
|
|
66,881
|
|
Other assets, net
|
|
|
12,381
|
|
|
|
3,093
|
|
|
|
4,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
323,211
|
|
|
$
|
328,608
|
|
|
$
|
370,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
20,639
|
|
|
$
|
10,823
|
|
|
$
|
20,428
|
|
Accrued liabilities
|
|
|
8,741
|
|
|
|
12,410
|
|
|
|
13,290
|
|
Current portion of long-term debt
|
|
|
14,041
|
|
|
|
8,936
|
|
|
|
-
|
|
Current portion of operating lease liabilities
|
|
|
53,734
|
|
|
|
48,691
|
|
|
|
50,097
|
|
Total current liabilities
|
|
|
97,155
|
|
|
|
80,860
|
|
|
|
83,815
|
|
Operating lease liabilities
|
|
|
194,502
|
|
|
|
200,938
|
|
|
|
215,335
|
|
Long-term debt, net
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
Other liabilities
|
|
|
159
|
|
|
|
284
|
|
|
|
49
|
|
Total liabilities
|
|
|
291,816
|
|
|
|
282,082
|
|
|
|
309,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - $0.01 par value, 80.0 million shares authorized; 4.0 million, 4.0 million and 3.9 million shares issued at May 2, 2020, February 1, 2020, and May 4, 2019, respectively*
|
|
|
40
|
|
|
|
40
|
|
|
|
39
|
|
Additional paid-in capital*
|
|
|
113,312
|
|
|
|
113,101
|
|
|
|
112,850
|
|
Retained earnings
|
|
|
78,064
|
|
|
|
93,406
|
|
|
|
108,277
|
|
Treasury stock, at cost – 0.9 million shares at each of May 2, 2020, February 1, 2020 and May 4, 2019
|
|
|
(160,021
|
)
|
|
|
(160,021
|
)
|
|
|
(160,021
|
)
|
Total stockholders’ equity
|
|
|
31,395
|
|
|
|
46,526
|
|
|
|
61,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
323,211
|
|
|
$
|
328,608
|
|
|
$
|
370,344
|
|
|
*
|
Reflects the 12-to-1 reverse stock split that became
effective on July 1, 2019. Refer to Note 1 - Summary of Significant Accounting Policies for further information.
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Operations
(In thousands, except per share data)
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
Net sales
|
|
$
|
43,753
|
|
|
$
|
87,125
|
|
Cost of goods sold and occupancy costs
|
|
|
46,624
|
|
|
|
56,798
|
|
Gross (loss) profit
|
|
|
(2,871
|
)
|
|
|
30,327
|
|
Selling, general and administrative expenses
|
|
|
24,951
|
|
|
|
39,994
|
|
Asset impairment charges
|
|
|
7,472
|
|
|
|
-
|
|
Loss from operations
|
|
|
(35,294
|
)
|
|
|
(9,667
|
)
|
Interest expense
|
|
|
429
|
|
|
|
173
|
|
Other income
|
|
|
(59
|
)
|
|
|
(113
|
)
|
Loss before income tax (benefit) expense
|
|
|
(35,664
|
)
|
|
|
(9,727
|
)
|
Income tax (benefit) expense
|
|
|
(20,322
|
)
|
|
|
422
|
|
Net loss
|
|
$
|
(15,342
|
)
|
|
$
|
(10,149
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share*
|
|
$
|
(5.25
|
)
|
|
$
|
(3.50
|
)
|
Weighted average basic and diluted shares outstanding*
|
|
|
2,920
|
|
|
|
2,901
|
|
|
*
|
Reflects the 12-to-1 reverse stock split that became
effective on July 1, 2019. Refer to Note 1 - Summary of Significant Accounting Policies for further information.
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statement of Changes
in Stockholders’ Equity
(In thousands)
|
|
Common Stock*
|
|
|
Additional
|
|
|
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Paid-in
Capital*
|
|
|
Retained
Earnings
|
|
|
Stock, at
cost
|
|
|
Stockholders'
Equity
|
|
Balance, February 1, 2020
|
|
|
3,036
|
|
|
|
40
|
|
|
|
113,101
|
|
|
|
93,406
|
|
|
|
(160,021
|
)
|
|
|
46,526
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,342
|
)
|
|
|
-
|
|
|
|
(15,342
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
211
|
|
|
|
|
|
|
|
-
|
|
|
|
211
|
|
Shares withheld related to net settlement of equity awards
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Balance, May 2, 2020
|
|
|
3,034
|
|
|
|
40
|
|
|
|
113,312
|
|
|
|
78,064
|
|
|
|
(160,021
|
)
|
|
|
31,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 2, 2019
|
|
|
2,972
|
|
|
$
|
39
|
|
|
$
|
113,121
|
|
|
$
|
120,251
|
|
|
$
|
(160,021
|
)
|
|
$
|
73,390
|
|
Cumulative effect adjustment on adoption of new accounting standard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,825
|
)
|
|
|
-
|
|
|
|
(1,825
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,149
|
)
|
|
|
-
|
|
|
|
(10,149
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(271
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(271
|
)
|
Restricted stocks forfeited
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, May 4, 2019
|
|
|
2,958
|
|
|
|
39
|
|
|
|
112,850
|
|
|
|
108,277
|
|
|
|
(160,021
|
)
|
|
|
61,145
|
|
|
*
|
Reflects the 12-to-1 reverse stock split that became
effective on July 1, 2019. Refer to Note 1 - Summary of Significant Accounting Policies for further information.
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
Cash Flows Used in Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,342
|
)
|
|
$
|
(10,149
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,767
|
|
|
|
5,785
|
|
Operating lease right-of-use asset amortization
|
|
|
11,105
|
|
|
|
11,594
|
|
Stock-based compensation expense
|
|
|
86
|
|
|
|
(222
|
)
|
Loss on sale of assets
|
|
|
-
|
|
|
|
102
|
|
Asset impairment charges
|
|
|
7,472
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,737
|
)
|
|
|
8,728
|
|
Inventories
|
|
|
(3,132
|
)
|
|
|
(1,723
|
)
|
Prepaid expenses and other assets
|
|
|
(1,037
|
)
|
|
|
(818
|
)
|
Accounts payable
|
|
|
9,490
|
|
|
|
(2,423
|
)
|
Accrued liabilities
|
|
|
(3,670
|
)
|
|
|
1,957
|
|
Operating lease liabilities
|
|
|
(7,036
|
)
|
|
|
(12,856
|
)
|
Net cash used in operating activities
|
|
|
(8,034
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows Used in Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(481
|
)
|
|
|
(2,616
|
)
|
Net cash used in investing activities
|
|
|
(481
|
)
|
|
|
(2,616
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows Used in Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under the revolving credit facility
|
|
|
5,000
|
|
|
|
5,000
|
|
Repayment of borrowings under the revolving credit facility
|
|
|
-
|
|
|
|
(5,000
|
)
|
Net cash provided by financing activities
|
|
|
5,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,515
|
)
|
|
|
(2,641
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
17,839
|
|
|
|
20,103
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,324
|
|
|
$
|
17,462
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid (received) for income taxes
|
|
$
|
-
|
|
|
$
|
(8,669
|
)
|
Interest paid
|
|
$
|
279
|
|
|
$
|
111
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
1.
|
Summary of Significant Accounting Policies
|
Nature of Business
Francesca’s Holdings Corporation is a holding company
incorporated in 2007 under the laws of the State of Delaware whose business operations are conducted through its subsidiaries. Unless
the context otherwise requires, the “Company,” refers to Francesca’s Holdings Corporation and its consolidated
subsidiaries. The Company operates a nationwide-chain of boutiques providing its customers with a unique, fun and personalized
shopping experience. The merchandise assortment the Company offers is a diverse and balanced mix of apparel, jewelry, accessories
and gifts at attractive values. The Company aims to offer a differentiated shopping experience and quality, on-trend merchandise
at a compelling value, across a wide variety of geographic markets and shopping venues. At May 2, 2020, the Company operated 703 boutiques,
which are located in 47 states throughout the United States and the District of Columbia, and also served its customers though
www.francescas.com, its ecommerce website.
On July 1, 2019, the Company effected a 12-to-1 stock split
(the “Reverse Stock Split”), reducing the number of shares of common stock outstanding on that date from 35.4 million
(which excludes 1.4 million of restricted stock awards granted to members of the Company’s Board of Directors prior to the
Reverse Stock Split but issued after the Reverse Stock Split) to 3.1 million shares. Additionally, the number of shares of common
stock subject to outstanding stock options, restricted stock awards and restricted stock units, the exercise price of outstanding
stock options, and the number of shares reserved for future issuance pursuant to the Company’s equity compensation plans
were adjusted proportionately in connection with the Reverse Stock Split. The number of authorized shares of common stock under
the Company’s Amended and Restated Certificate of Incorporation and the par value per share of the Company’s common
stock were unchanged. All historical share and per share amounts presented herein have been adjusted retrospectively to reflect
these changes.
Going Concern
As previously disclosed, the COVID-19 pandemic resulted in the
temporary closure of all of the Company’s 703 boutiques beginning on March 25, 2020. On April 30, 2020, the Company started
to reopen its boutiques in locations where local shutdown orders have been lifted. As of July 17, 2020, a total of 674 boutiques
have reopened although the majority of them are operating at reduced capacity and hours in accordance with local regulations. This
reflects the re-closure of 22 boutiques in California as of the same date. In conjunction with such boutique reopenings, a significant
number of furloughed corporate and boutique employees have been recalled and the base salary reductions in place for the Company’s
senior leadership team were lifted. The Company plans to continue to reopen boutiques and recall furloughed employees as local
mandates are lifted. All boutiques will strictly adhere to then current Centers for Disease Control and Prevention (“CDC”)
recommendations and local regulations to protect the health and safety of its sales associates and customers and all reopened boutiques
have adopted a mandatory mask requirement for associates and customers, irrespective of CDC and local authority guidelines. Additionally,
as of July 17, 2020, there continues to be an overall disruption in the Company’s supply chain and operations as its vendors
return to normal operations and the Company’s ecommerce and distribution facility are operating at reduced capacity due to
social distancing measures that have been put in place. As a result, the Company’s revenues, results of operations and cash
flows continue to be materially adversely impacted which raises substantial doubt about the Company’s ability to continue
as a going concern.
Management continues to take aggressive and prudent actions
to drive sales and monetize existing inventory, reduce expenses and manage cash flows, including making limited payments of accounts
payables, deferred rent payments for the Company’s leased locations for the months April, May and June 2020 and limiting
new inventory purchases to preserve cash on hand. The Company made payments on its past due payables making its merchandise and
non-merchandise vendor accounts payable substantially current as of July 17, 2020 and resumed payment of its lease obligations
for all its locations for July 2020. Additionally, subsequent to May 2, 2020, the Company repaid $2.0 million of its outstanding
borrowings under the Amended ABL Credit Agreement (defined in Note 7, Credit Facilities) bringing the combined outstanding borrowings
to $12.1 million, net of $0.9 million debt issuance costs, and $0.5 million in combined borrowing base availability under its Credit
Facilities as of July 17, 2020. The Company also expects to receive an income tax refund of $10.7 million related to certain provisions
under the Corona Aid, Relief and Economic Security Act (“CARES Act”). This refund is required to be used to repay any
then outstanding borrowings under the Company’s Amended ABL Credit Agreement in accordance with the certain letter agreement
entered into between the Company and the Amended ABL Credit Agreement lenders on May 1, 2020. See Note 6, Income Taxes, Note 7,
Credit Facilities, and Note 10, Subsequent Events, for additional information.
The Company could experience other potential impacts as a result
of the COVID-19 pandemic, including, but not limited to, charges from potential adjustments to the carrying amount of its inventory
and long-lived asset impairment charges. Actual results may differ materially from the Company’s current estimates as the
scope of the COVID-19 pandemic evolves, depending largely, though not exclusively, on the duration of the disruption to its business.
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
The Company’s unaudited consolidated financial statement
as of May 2, 2020 were prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business.
Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (“SEC”).
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the
opinion of management, these unaudited financial statements include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company’s financial position, results of operations, changes in equity,
and cash flows at the dates and for the periods presented. The financial information as of February 1, 2020 was derived from the
Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 1, 2020
included in the Company’s Annual Report on Form 10-K filed with the SEC on May 1, 2020.
These unaudited interim consolidated financial statements should
be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal
year ended February 1, 2020 included in the Company’s Annual Report on Form 10-K.
Due to seasonal variations in the Company’s business,
interim results are not necessarily indicative of results that may be expected for any other interim period or for a full year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements
include the accounts of the Company and all its subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company maintains its accounts on a 52- or 53-week year
ending on the Saturday closest to January 31st. Fiscal years 2020 and 2019 each include 52 weeks of operations. The fiscal
quarters ended May 2, 2020 and May 4, 2019 refer to the thirteen week periods ended as of those dates.
Management Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, net of estimated
sales returns, and expenses during the reporting periods. Actual results could differ materially from those estimates.
Reclassification
The non-cash amortization of operating lease right-of-use (“ROU”)
assets of $11.6 million in the thirteen weeks ended May 4, 2019 has been presented separately in the statement of cash flows to
conform to the current period presentation. This reclassification does not materially impact the consolidated financial statements
for the prior period presented.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill
and Other-Internal-Use-Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software. The Company adopted the provisions of this guidance on February 2, 2020 and such adoption did
not have a material impact on its consolidated financial statements.
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes.” The
ASU intends to enhance and simplify aspects of the income tax accounting guidance in ASC 740, “Income Taxes” as part
of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning
after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact this guidance may have on
its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 changes the methodology
for measuring credit losses on financial instruments and timing of when such losses are recorded. Since the original issuance of
ASU 2016-13, the FASB has issued several amendments and updates to this guidance. This new guidance is effective for public companies,
except for smaller reporting companies, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. For smaller reporting companies, such as the Company, this new guidance will be effective for fiscal year beginning after
December 15, 2022, and interim periods within those fiscal year. Early adoption is permitted. The guidance is to be adopted using
the modified retrospective approach. The Company does not expect the adoption of this guidance to have a material impact on its
consolidated financial statements.
The Company disaggregates net sales into the following major
merchandise departments.
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
(in thousands)
|
|
Apparel
|
|
$
|
22,084
|
|
|
$
|
41,824
|
|
Jewelry
|
|
|
10,690
|
|
|
|
23,878
|
|
Accessories
|
|
|
6,651
|
|
|
|
13,640
|
|
Gifts
|
|
|
3,731
|
|
|
|
7,843
|
|
Others (1)
|
|
|
597
|
|
|
|
(60
|
)
|
|
|
$
|
43,753
|
|
|
$
|
87,125
|
|
|
(1)
|
Includes gift card breakage income, shipping revenue and change in return reserve.
|
Contract liability
The Company recognizes a contract liability related to its gift
cards. The Company accounts for the sale of gift cards as a liability at the time a gift card is sold. The liability is relieved
and revenue is recognized upon redemption of the gift card. The Company’s gift cards do not have an expiration date. Income
from gift card breakage is estimated based on historical redemption patterns and recognized over the historical redemption period.
Liability for unredeemed gift cards totaled $3.6 million, $4.1 million and $4.7 million as of May 2, 2020, February 1, 2020 and
May 4, 2019, respectively. Unredeemed gift cards at the end of the prior fiscal year recognized in revenues during the thirteen
weeks ended May 2, 2020 and May 4, 2019 totaled $0.9 million and $1.8 million, respectively.
Loss per common share amounts are calculated using the weighted-average
number of common shares outstanding for the period. Diluted loss per common share amounts are calculated using the weighted-average
number of common shares outstanding for the period and include the dilutive impact of restricted stock and stock option grants
using the treasury stock method. The following table summarizes the potential dilution that could occur if stock options to acquire
common stock were exercised or if the restricted stock grants were fully vested and reconciles the weighted-average common shares
outstanding used in the computation of basic and diluted loss per share.
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,342
|
)
|
|
$
|
(10,149
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding – basic(1)
|
|
|
2,920
|
|
|
|
2,901
|
|
Restricted stocks and stock options(1)
|
|
|
-
|
|
|
|
-
|
|
Weighted-average common shares outstanding - diluted(1)
|
|
|
2,920
|
|
|
|
2,901
|
|
|
|
|
|
|
|
|
|
|
Loss per common share(1)
|
|
$
|
(5.25
|
)
|
|
$
|
(3.50
|
)
|
|
(1)
|
Reflects the 12-to-1 reverse stock split that became effective on July 1, 2019. Refer to Note 1, Summary of Significant Accounting
Policies, for further information.
|
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
Potentially issuable shares under the Company’s stock-based
compensation plans which amounted to 0.3 million and 0.1 million shares in the thirteen weeks ended May 2, 2020 and May 4, 2019,
respectively, were excluded in the computation of diluted loss per shares due to the Company being in a net loss position in each
period presented. The Company also excluded contingently issuable performance-based awards totaling 0.1 million in each of the
thirteen weeks ended May 2, 2020 and May 4, 2019 from the computation of diluted earnings per share because the pre-established
goals had not been satisfied as of the end of each period.
4.
|
Fair Value Measurements
|
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The
carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to the short term
nature of these financial assets and liabilities. The carrying amount of the Company’s debt approximates its fair value due
to the short-term nature of its debt.
The COVID-19 pandemic has also resulted in lower than expected
sales and profitability for each of the Company’s boutiques as a result of the temporary boutique closures which indicates
that its long-lived assets may be impaired. In determining whether an impairment has occurred, the Company considered both qualitative
and quantitative factors.
The quantitative analysis involves estimating the undiscounted
future cash flows of the boutique long-lived assets and comparing such cash flows against the carrying value of the boutique’s
assets. If the carrying value of the boutique’s assets is greater than the sum of the undiscounted future cash flows, an
impairment charge is recognized for the difference between the carrying value of the boutique’s assets and its fair value.
The fair value of the asset group is generally determined using discounted future cash flows or a market participant’s ability
to generate economic benefits using the asset in its highest and best use, whichever is appropriate. The discounted future cash
flows are determined based on such boutique’s historical experience, current sales trends, market conditions and other relevant
factors deemed material, and discounted using a rate commensurate with the risk. The inputs used in the determination of discounted
future cash flows are considered as Level 3 inputs in the fair value hierarchy, which require a significant degree of judgment
and are based on the Company’s own assumptions.
Based on the results of such assessment, the Company recorded
non-cash asset impairment charges of $7.5 million in the thirteen weeks ended May 2, 2020. Of the total amount, $6.8 million was
related to the write-down of operating lease ROU assets for 107 underperforming boutiques and $0.7 million was related to the write-down
of property and equipment for 41 underperforming boutiques. The Company did not record non-cash asset impairment charges in the
thirteen weeks ended May 4, 2019.
The provision for income tax (benefit) expense is based on the
Company’s current estimate of the annual effective tax rate. The effective income tax rates for the thirteen weeks ended
May 2, 2020 and May 4, 2019 were 57.0% and 4.3%, respectively. The change in the effective income tax rate in the thirteen weeks
ended May 2, 2020 versus the comparable prior year period was primarily due to the $9.6 million of federal and state net operating
loss that the Company may carry back to prior years under the CARES Act and is included in other assets in the accompanying unaudited
consolidated balance sheet. In addition, the Company filed an income tax refund for $10.7 million with the IRS in April 2020 related
to net operating loss for fiscal year 2018 that may be carried back to prior years also under the CARES Act and is included in
accounts receivable in the accompanying unaudited consolidated balance sheet. This refund is required to be used to repay any then
outstanding borrowings under the Amended ABL Credit Agreement in accordance with that certain letter agreement entered into between
the Company and the Amended ABL Credit Agreement lenders on May 1, 2020. See Note 7, Credit Facilities, for additional information.
The Company continues to provide a full valuation allowance on its net deferred tax assets as of May 2, 2020. The effective income
tax expense rate for the thirteen weeks ended May 4, 2019 included the impact of non-cash charge of $2.1 million associated with
the valuation allowance provided on the Company’s net deferred tax assets.
As of May 2, 2020 and May 4, 2019, the Company had $21.2 million
and $1.5 million, respectively, of income tax receivable.
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
The Company’s credit facilities and outstanding borrowings
consisted of the following:
|
|
May 2, 2020
|
|
|
February 1, 2020
|
|
|
May 4, 2019
|
|
|
|
(in thousands)
|
|
Asset based revolving credit facility
|
|
$
|
5,000
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
-
|
|
Unamortized debt issuance costs
|
|
|
(959
|
)
|
|
|
(1,064
|
)
|
|
|
-
|
|
Total long-term debt, net
|
|
|
14,041
|
|
|
|
8,936
|
|
|
|
-
|
|
Less: Current portion of long-term debt
|
|
|
(14,041
|
)
|
|
|
(8,936
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
Asset Based Revolving Credit Facility
On May 25, 2018, Francesca’s Holdings Corporation (the
“Holdings”), as guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of
its subsidiaries as guarantors (together with Holdings, and the Borrowers, the “Loan Parties”), entered into an asset
based revolving credit agreement (the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent
and the lenders party thereto. The ABL Credit Agreement provided for Aggregate Revolving Commitments (as defined in the ABL Credit
Agreement) of $50.0 million (including up to $10.0 million for letters of credit) and was scheduled to mature on May 25, 2023.
On August 13, 2019, concurrent with entering into the Term Loan
Credit Agreement (described below), the Borrowers entered into the first amendment to ABL Credit Agreement (the “First Amendment
to ABL Credit Agreement”), which amends the Company’s existing ABL Credit Agreement (the ABL Credit Agreement, as amended
by the First Amendment to ABL Credit Agreement, the “Amended ABL Credit Agreement”). The Amended ABL Credit Agreement
provided for Aggregate Revolving Commitments (as defined in the Amended ABL Credit Agreement) of $40.0 million and matures on the
earlier of (a) May 23, 2023 and (b) the date that is 90 days prior to any scheduled maturity of the Term Loan. Although the maturity
of borrowings under the Amended ABL Credit Agreement is currently beyond 12 months from the balance sheet, the Company classified
the outstanding amount as current liability in the consolidated balance sheet as of May 2, 2020 due to uncertainties concerning
the Company’s future liquidity and on-going covenant compliance under the Amended ABL Credit Agreement as a result of the
impact of the COVID-19 pandemic on the Company’s business.
The inclusion of a going concern qualification in the report
of the Company’s independent registered public accountant on its audited financial statements for the fiscal year ended February
1, 2020 and the Company’s non-payment of rent at its leased locations for the months of April, May and June 2020 resulted
in a violation of certain covenants under its Amended ABL Credit Agreement and Term Loan Credit Agreement. On May 1, 2020, the
Company entered into a letter agreement (the “First JPM Letter Agreement”) in connection with its Amended ABL Credit
Agreement and a letter agreement (the “First Tiger Letter Agreement”) in connection with its Term Loan Credit Agreement,
in each case, to obtain a waiver from its lenders of any default or event of default arising from its failure to (i) deliver annual
audited consolidated financial statements for the fiscal year ended February 1, 2020 without a “going concern” or a
like qualification or exception and (ii) pay rent on leased locations for the months of April, May, and June, 2020. The First JPM
Letter Agreement and the First Tiger Letter Agreement contain certain conditions and covenants, including that, in the case of
the First JPM Letter Agreement, the Company is required to use the entire $10.7 million income tax refund requested under the CARES
Act to repay any then outstanding borrowings under the Amended ABL Credit Agreement and providing that no loans will be made under
the ABL Credit Agreement unless the Company’s aggregate amount of cash and cash equivalents is less than $3.0 million. If
the Company is unable to meet its financial covenants or if there is an event of default under either the Amended ABL Credit Agreement
or Term Loan Credit Agreement, the Company’s lenders could instruct the administrative agent under such credit facilities
to exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness due and
payable immediately and terminating all remaining commitments and obligations under the credit facilities. Although the lenders
under the Company’s credit facilities may waive the defaults or forebear the exercise of remedies, they are not obligated
to do so. Failure to obtain such a waiver would have a material adverse effect on the Company’s liquidity, financial condition
and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in order to implement a restructuring plan.
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
As of May 2, 2020, the Company had $3.1 million of combined
borrowing base availability under the Amended ABL Credit Agreement and the Term Loan Credit Agreement, subject to compliance with
the covenants under the ABL Credit Agreement and First JPM Letter Agreement, including that no loans will be made under the ABL
Credit Agreement unless the Company’s aggregate amount of cash and cash equivalents is less than $3.0 million. For the thirteen
weeks ended May 2, 2020 and May 4, 2019, the average effective interest rate for borrowings under the Amended ABL Credit Agreement
were 2.75% and 4.36%, respectively.
See Note 10, Subsequent Events, for information regarding the
Company’s entry in to the Second JPM Letter Agreement (as defined in Note 10, Subsequent Events).
Term Loan Credit Agreement
On August 13, 2019, the Loan Parties, entered into the Term
Loan Credit Agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders
party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022.
Although the maturity of the Term Loan Credit Agreement is beyond 12 months from the balance sheet, the Company classified the
outstanding amount as current liability in the consolidated balance sheet as of May 2, 2020 due to 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.
On May 1, 2020, the Company entered into the First JPM Letter
Agreement, in connection with its Amended ABL Credit Agreement, and the First Tiger Letter Agreement. See “Asset Based Revolving
Credit Facility” above for additional information.
As of May 2, 2020, the Company had $3.1 million of combined
borrowing base availability under the Amended ABL Credit Agreement and the Term Loan Credit Agreement, subject to compliance with
the covenants under the Term Loan Credit Agreement, ABL Credit Agreement, First Tiger Letter Agreement and First JPM Letter Agreement,
including that no loans will be made under the ABL Credit Agreement unless the Company’s aggregate amount of cash and cash
equivalents is less than $3.0 million. For the thirteen weeks ended May 2, 2020, the average effective interest rate for borrowings
under the Term Loan Credit Agreement was 10.0%.
See Note 10, Subsequent Events, for information regarding the
Company’s entry in to the Second Tiger Letter Agreement (as defined in Note 10, Subsequent Events).
The Company leases boutiques, its distribution center and office
space, and certain boutique and corporate office equipment under operating leases expiring in various years through the fiscal
year ending 2030. Certain of the leases provide that the Company may cancel the lease, with penalties as defined in the lease,
if the Company’s boutique sales at that location fall below an established level. Certain leases provide for additional rent
payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three
to five years at the market rate at the time of renewal.
As discussed in Note 1, Summary of Significant Accounting Policies
– Going Concern, the Company deferred its lease payments for April, May and June 2020 on all of its leased locations in order
to preserve its liquidity. The Company has been negotiating with its landlords to secure rent abatements and / or deferrals and,
as of July 17, 2020, those discussions are substantially complete. These lease abatements and deferments will be accounted for
as if no changes to the lease contracts were made as allowed by the Staff Q&A issued by the FASB in April 2020.
The following table presents information regarding the Company’s
leases for the periods presented.
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
(in thousands)
|
|
|
|
|
Components of operating lease costs
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
14,749
|
|
|
$
|
15,149
|
|
Variable lease cost
|
|
|
267
|
|
|
|
224
|
|
|
|
$
|
15,016
|
|
|
$
|
15,373
|
|
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
As of May 2, 2020 and May 4, 2019, the weighted average remaining
operating lease term was 6.0 years and the weighted average discount rate for operating leases was 6.0% and 5.6%, respectively.
Cash paid for operating leases included in the measurement of lease liabilities, including interest, totaled $10.7 million and
$16.1 million for the thirteen weeks ended May 2, 2020 and May 4, 2019, respectively.
As of May 2, 2020, the maturities of lease liabilities were
as follows:
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
|
|
(in thousands)
|
|
Maturities of lease liabilities
|
|
|
|
|
Remainder of 2020
|
|
$
|
52,922
|
|
2021
|
|
|
56,401
|
|
2022
|
|
|
48,938
|
|
2023
|
|
|
42,207
|
|
2024
|
|
|
35,030
|
|
Thereafter
|
|
|
58,165
|
|
Total lease payments
|
|
|
293,663
|
|
Less: Interest
|
|
|
45,427
|
|
Present value of lease liabilities
|
|
$
|
248,236
|
|
Operating lease liabilities include amounts due from landlords
in tenant improvement allowances.
As of May 2, 2020, the minimum rental commitments for additional
operating lease contracts that have not yet commenced was $5.4 million while its lease terms were within the range of 5 to 10 years.
On January 27, 2017, a purported collective action lawsuit entitled
Meghan Magee, et al. v. Francesca’s Holdings Corp., et al. was filed in the United States District Court for the District
of New Jersey, Camden Vicinage against the Company for alleged violations of federal and state wage and hour laws. After substitution
of a named plaintiff, the lawsuit is now captioned, Danielle Prulello, et al. v. Francesca’s Holding Corp., et al. On November
6, 2018, the court conditionally certified the collective action. The Company believes that the allegations contained in the lawsuit
are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable estimate of the amount
of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any
possible loss.
The Company, from time to time, is subject to various claims
and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial
disputes and other matters that arise in the ordinary course of business. While the outcome of any such claim cannot
be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect
on the Company’s business, results of operations or financial condition.
COVID-19 Update
As previously disclosed, the COVID-19 pandemic resulted in the
temporary closure of all of the Company’s 703 boutiques beginning on March 25, 2020. On April 30, 2020, the Company started
to reopen its boutiques in locations where local shutdown orders have been lifted. As of July 17, 2020, a total of 674 boutiques
have reopened although the majority of them are operating at reduced capacity and hours in accordance with local regulations. This
reflects the re-closure of 22 boutiques in California as of the same date. In conjunction with such boutique reopenings, a significant
number of furloughed corporate and boutique employees have been recalled and the base salary reductions in place for the Company’s
senior leadership team were lifted. The Company plans to continue to reopen boutiques and recall furloughed employees as local
mandates are lifted. All boutiques will strictly adhere to then current CDC recommendations and local regulations to protect the
health and safety of its sales associates and customers and all reopened boutiques have adopted a mandatory mask requirement for
associates and customers, irrespective of CDC and local authority guidelines. Additionally, as of July 17, 2020, there continues
to be an overall disruption in the Company’s supply chain and operations as its vendors return to normal operations and the
Company’s ecommerce and distribution facility are operating at reduced capacity due to social distancing measures that have
been put in place. As a result, the Company’s revenues, results of operations and cash flows continue to be materially adversely
impacted, which raises substantial doubt about its ability to continue as a going concern.
Francesca’s Holdings Corporation
Notes to Unaudited
Consolidated Financial Statements
Management continues to take aggressive and prudent actions
to drive sales and monetize existing inventory, reduce expenses and manage cash flows, including making limited payments of accounts
payables, deferred rent payments for its leased locations for the months of April, May and June 2020, and limiting inventory payments
to preserve cash on hand. The Company made payments on its past due payables making its merchandise and non-merchandise vendor
accounts payable substantially current as of July 17, 2020 and resumed payment of its leased obligations for all its locations
for July 2020. Additionally, subsequent to May 2, 2020, the Company repaid $2.0 million of its outstanding borrowings under the
Amended ABL Credit Agreement bringing the combined outstanding borrowings to $12.1 million, net of $0.9 million debt issuance costs,
and $0.5 million in combined borrowing base availability under its Credit Facilities as of July 17, 2020. The Company also expects
to receive an income tax refund of $10.7 million related to certain provisions under the CARES Act. This refund is required to
be used to repay any then outstanding borrowings under the Amended ABL Credit Agreement in accordance with the First JPM Letter
Agreement entered into between the Company and the Amended ABL Credit Agreement lenders. See Note 1, Summary of Significant Accounting
Policies – Going Concern, Note 6, Income Taxes, and Note 7, Credit Facilities, for additional information.
There is significant uncertainty around the disruptions related
to the COVID-19 pandemic and its impact on the global economy. While the Company’s results of operations have been significantly
impacted and it anticipates future results will continue to be adversely impacted, the full extent to which the COVID-19 pandemic
impacts the Company’s future results will depend on future developments, which are highly uncertain and cannot be predicted
with certainty, including new information which may emerge concerning the severity of the COVID-19 pandemic in the United States,
actions taken to contain it or treat its impact, any possible resurgence of COVID-19 that may occur after the initial outbreak
subsides, and how quickly and to what extent normal economic and operating conditions can resume.
Credit Facilities Letter Agreements
As a result of the delayed filing of
this Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, on June 25, 2020, the Borrowers entered into
a letter agreement (the “Second JPM Letter Agreement”) in connection with its Amended ABL Credit Agreement to amend
the Amended ABL Credit Agreement to grant the Borrowers a 45 day extension to deliver quarterly consolidated financial statements
for the fiscal quarter ended May 2, 2020 and waive any Default (as defined in the Amended ABL Credit Agreement) arising from the
failure of the Borrowers to timely deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020.
Additionally, the Second JPM Letter Agreement also amends the Amended ABL Credit Agreement to lower the minimum amount of Liquidity
(as defined in the Amended ABL Credit Agreement) that triggers a Dominion Period (as defined in the Amended ABL Credit Agreement)
from $15.0 million to $10.0 million and remove the requirement that unrestricted cash and cash equivalents not exceed 80% of total
Liquidity, in each case, for a period of 60 days after the date of the Second JPM Letter Agreement.
Additionally, in connection with the delayed filing of this
Form 10-Q, on June 25, 2020, the Borrowers entered into a letter agreement in connection with its Term Loan Credit Agreement (the
“Second Tiger Letter Agreement”) with similar terms to the Second JPM Letter Agreement discussed above.
Lease Negotiations
As of July 17, 2020, the Company has substantially completed
negotiations with all of its landlords to abate or defer lease payments for the months of April, May and June 2020. While deferred
payments have a minimal impact on GAAP straight-line lease expense, they are expected to have a positive impact on the Company’s
cash flow in fiscal year 2020.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains statements that constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our
business, operations and financial performance and condition as well as our plans, objectives and expectations for our business
operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements
of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”,
“anticipate”, “assume”, “believe”, “can have”, “could”, “due”,
“estimate”, “expect”, “goal”, “intend”, “likely”, “may”,
“objective”, “plan”, “potential”, “positioned”, “predict”, “should”,
“target”, “will”, “would” and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements
we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and
financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or
impact of pending or threatened litigation are forward-looking statements.
These forward-looking statements are based on current expectations,
estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs
and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks,
uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to
risks and uncertainties that may cause our actual results to differ materially from our expectations. These risks and uncertainties
include, but are not limited to, the following: our business is subject to risks arising from the COVID-19 pandemic, including
the related impact on our liquidity and our ability to begin making contractual rent payments as required under the terms of the
agreements governing our boutique and distribution facility leases, changes in commercial and consumer spending and economic
conditions generally, the duration of government-mandated and voluntary shutdowns and the speed with which our boutiques can safely
be reopened and our ecommerce and distribution facilities can return to normal capacity and the level of customer demand following
reopening; our ability to continue as a going concern; our ability to satisfy covenant requirements under our Amended ABL Credit
Agreement and Term Loan Credit Agreement and to make payments of principal and interest as they come due; the risk that we may
not be able to successfully execute our turnaround plan; the risk that we cannot anticipate, identify and respond quickly to changing
fashion trends and customer preferences or changes in consumer environment, including changing expectations of service and experience
in boutiques and online, and evolve our business model; our ability to attract a sufficient number of customers to our boutiques
or sell sufficient quantities of our merchandise through our ecommerce website; our ability to successfully open, close, refresh,
and operate new boutiques each year; our ability to efficiently source and distribute additional merchandise quantities necessary
to support our growth; and the impact of potential tariff increases or new tariffs. For additional information regarding these
and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward looking
statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February
1, 2020 and filed with the Securities and Exchange Commission (“SEC”) on May 1, 2020 (“Fiscal Year 2019 10-K”)
and any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings we file with the SEC, as well as our
disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
elsewhere in this report and in our Fiscal Year 2019 10-K.
We derive many of our forward-looking statements from our own
operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable,
we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on
our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary
statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking
statements made in this report in the context of these risks and uncertainties.
Potential investors and other readers are urged to consider
these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking
statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake
no obligation to update or revise any forward-looking statements after the date of this report whether as a result of new information,
future developments or otherwise.
Overview
Unless the context otherwise requires, the “Company,”
“we,” “our,” “ours,” “us” and “francesca’s®” refer to Francesca’s
Holdings Corporation and its consolidated subsidiaries.
francesca’s® is
a specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping
experience. The merchandise assortment we offer is a diverse and balanced mix of apparel, jewelry, accessories and gifts. We aim
to offer a differentiated shopping experience and quality, on-trend merchandise at a compelling value, across a wide variety of
geographic markets and shopping venues. As of May 2, 2020, francesca’s®
operated 703 boutiques in 47 states throughout the United States and the District of Columbia and also served its customers through
www.francescas.com, our ecommerce website. The information contained on our ecommerce website is not incorporated by reference
into this Quarterly Report on Form 10-Q and you should not consider information contained on our ecommerce website to be part of
this Quarterly Report on Form 10-Q.
Recent Developments
As previously disclosed, the COVID-19 pandemic resulted in the
temporary closure of all of our 703 boutiques beginning on March 25, 2020. On April 30, 2020, we started to reopen our boutiques
in locations where local shutdown orders have been lifted. As of July 17, 2020, a total of 674 of our boutiques have reopened although
the majority of them are operating at reduced capacity and hours in accordance with local regulations. This reflects the re-closure
of 22 boutiques in California as of the same date. In conjunction with such boutique reopenings, a significant number of furloughed
corporate and boutique employees have been recalled and the base salary reductions in place for our senior leadership team were
lifted. We plan to continue to reopen boutiques and recall furloughed employees as local mandates are lifted. All boutiques will
strictly adhere to then current CDC recommendations and local regulations to protect the health and safety of its sales associates
and customers and all our boutiques have adopted a mandatory mask requirement for associates and customers, irrespective of CDC
and local authority guidelines. As of July 17, 2020, there continues to be an overall disruption in our supply chain and operations
as our vendors return to normal operations and our ecommerce and distribution facility are operating at reduced capacity due to
social distancing measures that have been put in place. As a result, our revenues, results of operations and cash flows continue
to be materially adversely impacted, which raises substantial doubt about our ability to continue as a going concern. We have,
from time to time, received inquiries from potential investors proposing to provide additional capital to us. As part of our efforts
to manage our liquidity and capital resources, we may engage in discussions with potential investors, including our existing investors,
about obtaining additional capital, which may include, without limitation, a public offering or private placement of our common
stock, subscription rights, warrants or other securities. We may decide not to seek additional capital, and there are no assurances
that we will be successful in obtaining additional capital in the event we engage in discussions with potential investors.
We continue to take aggressive and prudent actions to drive
sales and monetize existing inventory, reduce expenses and manage cash flows, including making limited payments of accounts payables,
deferred rent payments for our leased locations for the months of April, May and June 2020 and limiting new inventory payments
to preserve cash on hand. We made payments on our past due payables making our merchandise and non-merchandise vendor accounts
payable substantially current as of July 17, 2020 and we resumed payments on our lease obligations for all of our locations for
July 2020. Additionally, subsequent to May 2, 2020, we repaid $2.0 million of our outstanding borrowings under the Amended ABL
Credit Agreement (as defined below) bringing the combined outstanding borrowings to $12.1 million, net of $0.9 million debt issuance
costs, and $0.5 million in combined borrowing base availability under our Credit Facilities (as defined below) as of July 17, 2020.
We also expect to receive an income tax refund of $10.7 million related to the provision under the Corona Aid, Relief and Economic
Security Act (“CARES Act”). This refund is required to be used to repay any then outstanding borrowings under the Amended
ABL Credit Agreement in accordance with the First JPM Letter Agreement (as defined below) entered into between the Company and
the Amended ABL Credit Agreement lenders. See “Liquidity and Capital Resources - Credit Facilities” section
below for additional information. As of July 17, 2020, our cash and cash equivalents totaled $18.7 million.
As of July 17, 2020, we substantially completed negotiations
with all of our landlords to abate or defer lease payments for the months of April, May and June 2020. While deferred payments
have a minimal impact on GAAP straight-line lease expense, they are expected to have a positive impact on our cash flow in fiscal
year 2020.
The COVID-19 pandemic has also resulted in lower than expected
sales and profitability for our boutiques as a result of the temporary boutique closures which indicates that our long-lived assets
may be impaired. As a result of our asset impairment assessments, we recorded $7.5 million of non-cash asset impairment charges
in the quarter ended May 2, 2020. Of the total amount, $6.8 million was related to the write-down of operating lease ROU assets
for 107 underperforming boutiques and $0.7 million was related to the write-down of property and equipment for 41 underperforming
boutiques.
While our results of operations have been significantly impacted
and we anticipate our future results will continue to be adversely impacted, the full extent to which the COVID-19 pandemic impacts
our future results will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including
new information which may emerge concerning the severity of the COVID-19 pandemic in the United States, actions taken to contain
it or treat its impact, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly
and to what extent normal economic and operating conditions can resume.
On May 1, 2020, we entered into a letter agreement (the “First
JPM Letter Agreement”) in connection with our Amended ABL Credit Agreement and a letter agreement (the “First Tiger
Letter Agreement”) in connection with our Term Loan Credit Agreement (as defined below), in each case, to obtain a waiver
from our lenders of any default or event of default arising from our failure to (i) deliver annual audited consolidated financial
statements for the fiscal year ended February 1, 2020 without a “going concern” or a like qualification or exception
and (ii) pay rent on leased locations for the months of April, May and June, 2020. The First JPM Letter Agreement and the First
Tiger Letter Agreement contain certain conditions and covenants, including that, in the case of the First JPM Letter Agreement,
we are required to use the entire $10.7 million income tax refund requested under the CARES Act to repay any then outstanding borrowings
under the Amended ABL Credit Agreement and providing that no loans will be made under the ABL Credit Agreement unless our aggregate
amount of cash and cash equivalents is less than $3.0 million.
In addition, as a result of the delayed
filing of this Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, on June 25, 2020, the Borrowers (as
defined below) entered into a letter agreement (the “Second JPM Letter Agreement”) in connection with its Amended ABL
Credit Agreement to amend the Amended ABL Credit Agreement to grant the Borrowers a 45 day extension to deliver quarterly consolidated
financial statements for the fiscal quarter ended May 2, 2020 and waive any Default (as defined in the Amended ABL Credit Agreement)
arising from the failure of the Borrowers to timely deliver quarterly consolidated financial statements for the fiscal quarter
ended May 2, 2020. Additionally, the Second JPM Letter Agreement also amends the Amended ABL Credit Agreement to lower the minimum
amount of Liquidity (as defined in the Amended ABL Credit Agreement) that triggers a Dominion Period (as defined in the Amended
ABL Credit Agreement) from $15.0 million to $10.0 million and remove the requirement that unrestricted cash and cash equivalents
not exceed 80% of total Liquidity, in each case, for a period of 60 days after the date of the Second JPM Letter Agreement. Additionally,
in connection with the delayed filing of this Form 10-Q, on June 25, 2020, the Borrowers entered into a letter agreement in connection
with its Term Loan Credit Agreement (the “Second Tiger Letter Agreement”) with similar terms to the Second JPM Letter
Agreement discussed in this paragraph.
If we are unable to meet our financial covenants or if we have
an event of default under either agreement, our lenders could instruct the administrative agent under such credit facilities to
exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness due and
payable immediately and terminating all remaining commitments and obligations under the Amended ABL Credit Agreement and Term Loan
Credit Agreement. Although the lenders under our credit facilities may waive the defaults or forebear the exercise of remedies,
they are not obligated to do so. Failure to obtain such a waiver would have a material adverse effect on our liquidity, financial
condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in order to implement a restructuring plan.
During the thirteen weeks ended May 2, 2020, our net sales decreased
50% to $43.8 million from $87.1 million, loss from operations increased by $25.6 million from $9.7 million to $35.3 million, and
net loss increased $5.2 million from $10.1 million, or $3.50 loss per share, to a net loss of $15.3 million, or $5.25 loss per
share, over the comparable prior year period.
Results of Operations
The following represents operating data for the thirteen weeks
ended May 2, 2020 and May 4, 2019.
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
Net sales change for period
|
|
|
(50
|
)%
|
|
|
(13
|
)%
|
Comparable sales results for the period(1)(2)
|
|
|
(3
|
)%
|
|
|
(13
|
)%
|
Number of boutiques open at end of period
|
|
|
703
|
|
|
|
722
|
|
Net sales per average square foot for period(2)
|
|
$
|
42
|
|
|
$
|
83
|
|
Average square feet per boutique(3)
|
|
|
1,463
|
|
|
|
1,454
|
|
Total gross square feet at end of period
|
|
|
1,029,000
|
|
|
|
1,050,000
|
|
|
(1)
|
A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique’s opening.
If a boutique is closed for four or more days within a given fiscal week for any reason, we exclude sales from that boutique from
comparable sales for that full fiscal week. If a boutique is permanently closed, we exclude sales from that boutique from comparable
sales on the first day of the fiscal month that it did not register full month of sales. Comparable sales include our ecommerce
sales and exclude gift card breakage income.
|
|
(2)
|
Comparable sales for the thirteen weeks ended May 2, 2020 included boutique sales for the period February 2, 2020 through the
full week prior to the individual mandated boutique closure date as of March 25, 2020 and ecommerce sales for the full thirteen
weeks ended May 2, 2020.
|
|
(3)
|
Net sales per average square foot is calculated by dividing net sales for the period by the average square feet during the
period. For purposes of providing net sales per square foot measure, we use average square feet during the period as opposed to
total gross square feet at the end of the period. For individual quarterly periods, average square feet is calculated as (a) the
sum of total gross square feet at the beginning and end of the period divided by (b) two. For periods consisting of more than
one fiscal quarter, average square feet is calculated as (a) the sum of total gross square feet at the beginning of the period
and total gross square feet at the end of each fiscal quarter within the period, divided by (b) the number of fiscal quarters
within the period plus one (which, for a fiscal year, is five). There may be variations in the way in which some of our competitors
and other retailers calculate sales per square foot or similarly titled measures. As a result, average square feet and net sales
per average square foot for the period may not be comparable to similar data made available by other retailers.
|
|
(4)
|
Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of
boutiques open at the end of the period.
|
Boutique Count
The following table summarizes the number of boutiques open
at the beginning and end of the periods indicated.
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
Number of boutiques open at beginning of period
|
|
|
711
|
|
|
|
727
|
|
Boutiques added
|
|
|
-
|
|
|
|
3
|
|
Boutiques closed
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Number of boutiques open at the end of period
|
|
|
703
|
|
|
|
722
|
|
Thirteen Weeks Ended May 2, 2020 Compared to Thirteen
Weeks Ended May 4, 2019
|
|
Thirteen Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
Variance
|
|
|
|
In USD
|
|
|
As a %
of Net
Sales (1)
|
|
|
In USD
|
|
|
As a %
of Net
Sales (1)
|
|
|
In USD
|
|
|
%
|
|
|
Basis
Points
|
|
|
|
(in thousands, except percentages and basis points)
|
|
Net sales
|
|
$
|
43,753
|
|
|
|
100.0
|
%
|
|
$
|
87,125
|
|
|
|
100.0
|
%
|
|
$
|
(43,372
|
)
|
|
|
(50
|
)%
|
|
|
-
|
|
Cost of goods sold and occupancy costs
|
|
|
46,624
|
|
|
|
106.6
|
%
|
|
|
56,798
|
|
|
|
65.2
|
%
|
|
|
(10,174
|
)
|
|
|
(18
|
)%
|
|
|
4,140
|
|
Gross (loss) profit
|
|
|
(2,871
|
)
|
|
|
(6.6
|
)%
|
|
|
30,327
|
|
|
|
34.8
|
%
|
|
|
(33,198
|
)
|
|
|
(109
|
)%
|
|
|
(4,140
|
)
|
Selling, general and administrative expenses
|
|
|
24,951
|
|
|
|
57.0
|
%
|
|
|
39,994
|
|
|
|
45.9
|
%
|
|
|
(15,043
|
)
|
|
|
(38
|
)%
|
|
|
1,110
|
|
Asset impairment charges
|
|
|
7,472
|
|
|
|
17.1
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
7,472
|
|
|
|
100
|
%
|
|
|
1,710
|
|
Loss from operations
|
|
|
(35,294
|
)
|
|
|
(80.7
|
)%
|
|
|
(9,667
|
)
|
|
|
(11.1
|
)%
|
|
|
25,627
|
|
|
|
265
|
%
|
|
|
6,960
|
|
Interest expense
|
|
|
429
|
|
|
|
1.0
|
%
|
|
|
173
|
|
|
|
0.2
|
%
|
|
|
256
|
|
|
|
148
|
%
|
|
|
80
|
|
Other income
|
|
|
(59
|
)
|
|
|
(0.1
|
)%
|
|
|
(113
|
)
|
|
|
(0.1
|
)%
|
|
|
(54
|
)
|
|
|
(48
|
)%
|
|
|
-
|
|
Loss before income tax (benefit) expense
|
|
|
(35,664
|
)
|
|
|
(81.5
|
)%
|
|
|
(9,727
|
)
|
|
|
(11.2
|
)%
|
|
|
25,937
|
|
|
|
267
|
%
|
|
|
7,030
|
|
Income tax (benefit) expense
|
|
|
(20,322
|
)
|
|
|
(46.4
|
)%
|
|
|
422
|
|
|
|
0.5
|
%
|
|
|
(20,744
|
)
|
|
|
(4,916
|
)%
|
|
|
(4,690
|
)
|
Net loss
|
|
$
|
(15,342
|
)
|
|
|
(35.1
|
)%
|
|
$
|
(10,149
|
)
|
|
|
(11.6
|
)%
|
|
$
|
5,193
|
|
|
|
51
|
%
|
|
|
2,340
|
|
|
(1)
|
Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
|
Net Sales
Net sales decreased 50% to $43.8 million in the thirteen weeks
ended May 2, 2020 from $87.1 million in the thirteen weeks ended May 4, 2019. This decrease was primarily due to mandated
closures of all of our boutiques beginning on March 25, 2020 related to the COVID-19 pandemic and continuing through substantially
all of the quarter. This decrease was partially offset by strong performance in ecommerce as all of our efforts subsequent to March
25, 2020 were focused on driving ecommerce sales while our boutiques were temporarily closed.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs decreased 18% to $46.6
million in the thirteen weeks ended May 2, 2020 from $56.8 million in the thirteen weeks ended May 4, 2019. Cost of merchandise
and shipping expenses decreased by $8.3 million primarily due to decreased sales volume given the temporary boutique closures related
to the COVID-19 pandemic. Occupancy costs decreased by $1.9 million primarily due to lower depreciation and lease expenses associated
with boutique closures since the comparable prior year period as well as prior period impairment charges resulting in decreased
remaining book value of boutique long-lived assets. Occupancy costs include the full lease expense for all boutiques for the thirteen
weeks ended May 2, 2020, regardless of any rent deferral.
As a percentage of net sales, cost of goods sold and occupancy
costs increased to 106.6% in the thirteen weeks ended May 2, 2020 from 65.2% in the thirteen weeks ended May 4, 2019. This change
was due to deleverage in occupancy costs as a result of lower sales. Additionally, merchandise margin decreased due to increased
promotions and markdowns as well as higher inventory reserve due to the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 38% to
$25.0 million in the thirteen weeks ended May 2, 2020 from $40.0 million in the thirteen weeks ended May 4, 2019. This decrease
was primarily due to an $11.5 million decrease in boutique and corporate payroll costs as a result of the temporary furlough of
substantially all of our employees, a $1.7 million decrease in professional fees as the prior year included fees associated with
the review of strategic and financial alternatives and the implementation of the turnaround plan, and a $0.9 million decrease in
boutique and corporate bonus expenses.
As a percentage of net sales, selling, general and administrative
expense increased to 57.0% in the thirteen weeks ended May 2, 2020 as compared to 45.9% in the thirteen weeks ended May 4, 2019
due to deleveraging of expenses as a result of the lower sales.
Impairment Charges
We recorded non-cash asset impairment charges of $7.5 million
in the thirteen weeks ended May 2, 2020. Of the total amount, $6.8 million were related to the write-down of operating lease ROU
assets for 107 underperforming boutiques and $0.7 million were related to the write-down of property and equipment for 41 underperforming
boutiques. We did not record non-cash asset impairment charges in the thirteen weeks ended May 4, 2019. See “Overview –
Recent Development” section above for additional information.
Income Tax (Benefit) Expense
Income tax benefit was $20.3 million in the thirteen weeks ended
May 2, 2020 compared to an income tax expense of $0.4 million in the comparable prior year quarter. The effective income tax rate
in the thirteen weeks ended May 2, 2020 was 57.0% compared to 4.3% in the thirteen weeks ended May 4, 2019. The income tax
benefit in the current year quarter was primarily due to the $9.6 million of federal and state net operating loss that we may carry
back to prior years under the CARES Act. In addition, the Company filed an income tax refund for $10.7 million with the IRS in
April 2020 related to net operating loss for fiscal year 2018 that we may carry back to prior years also under the CARES Act. The
provision for the thirteen weeks ended May 4, 2019 included a non-cash charge of $2.1 million associated with the valuation allowance
provided on our net deferred tax assets. We continue to provide a full valuation allowance on our net deferred tax asset as of
May 2, 2020.
Sales by Merchandise Department
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
|
|
(in thousands, except percentages)
|
|
Apparel
|
|
|
$
|
22,084
|
|
|
|
50.5
|
%
|
|
$
|
41,824
|
|
|
|
48.0
|
%
|
Jewelry
|
|
|
|
10,690
|
|
|
|
24.4
|
%
|
|
|
23,878
|
|
|
|
27.4
|
%
|
Accessories
|
|
|
|
6,651
|
|
|
|
15.2
|
%
|
|
|
13,640
|
|
|
|
15.7
|
%
|
Gifts
|
|
|
|
3,731
|
|
|
|
8.5
|
%
|
|
|
7,843
|
|
|
|
9.0
|
%
|
Other (1)
|
|
|
|
597
|
|
|
|
1.4
|
%
|
|
|
(60
|
)
|
|
|
(0.1
|
)%
|
|
|
|
$
|
43,753
|
|
|
|
100.0
|
%
|
|
$
|
87,125
|
|
|
|
100.0
|
%
|
|
(1)
|
Includes gift card breakage income, shipping and change in return reserve.
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations
and borrowings under our Amended ABL Credit Agreement (see “Asset Based Revolving Credit Facility” below for more information).
Our primary cash needs are for funding normal working capital requirements, the operation of our existing boutiques and ecommerce
website, the implementation of our turnaround plan, and payments of interest and principal, if any, under our Amended ABL Credit
Agreement. We may use cash or our Amended ABL Credit Agreement to issue letters of credit to support merchandise receipts
or for other corporate purposes. The most significant components of our working capital are cash and cash equivalents, merchandise
inventories, accounts payable and other current liabilities. Our working capital position benefits from the fact that we generally
collect cash from sales to customers the day of or, in the case of credit or debit card transactions, within several days of the
related sales and we typically have up to 45 days to pay our inventory vendors and up to 60 days to pay other vendors.
As discussed in the “Overview – Recent Developments,”
our revenues, results of operations and cash flows have been materially adversely impacted
due to the COVID-19 pandemic, which raises substantial doubt about our ability to continue as a going concern for the next twelve
months. In response to such events, we continue to take aggressive and prudent actions to drive sales and monetize
existing inventory, reduce expenses and manage cash flows, including making limited payments of accounts payables, deferred rent
payments for our leased locations for the months of April, May and June 2020 and limiting new inventory payments to preserve cash
on hand. We made payments on our past due payables making our merchandise and non-merchandise vendor accounts substantially current
as of July 17, 2020 and we resumed payments on our lease obligations for all of our locations for July 2020. Additionally, subsequent
to May 2, 2020, we repaid $2.0 million of our outstanding borrowings under the Amended ABL Credit Agreement (as defined below)
bringing the combined outstanding borrowings to $12.1 million, net of $0.9 million debt issuance costs, and we have $0.5 million
in combined borrowing base availability under our Credit Facilities (as defined below) as of July 17, 2020. We also expect to receive
an income tax refund of $10.7 million related to certain provisions under the CARES Act. This refund is required to be used to
repay any then outstanding borrowings under our Amended ABL Credit Agreement and any other then outstanding borrowings under the
Amended ABL Credit Agreement in accordance with the First JPM Letter Agreement (as defined below) entered into between the Company
and the Amended ABL Credit Agreement lenders. As of July 17, 2020, our cash and cash equivalents totaled $18.7 million. See the
risk factor entitled, “Our liquidity has been adversely impacted by our negative operating results and the COVID-19 pandemic
and there is no assurance that we will have sufficient liquidity to continue operations” in Part II, Item IA of this
Quarterly Report on Form 10-Q for further discussion of our liquidity.
Cash Flow
A summary of our operating, investing and financing activities
are shown in the following table:
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
(in thousands)
|
|
Used in operating activities
|
|
$
|
(8,034
|
)
|
|
$
|
(25
|
)
|
Used in investing activities
|
|
|
(481
|
)
|
|
|
(2,616
|
)
|
Provided by financing activities
|
|
|
5,000
|
|
|
|
-
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(3,515
|
)
|
|
$
|
(2,641
|
)
|
Operating Activities
Operating activities consist of net loss adjusted for non-cash
items, including depreciation and amortization, stock compensation expense, and the effect of working capital changes. Net cash
used in operating activities decreased by $8.0 million in the thirteen weeks ended May 2, 2020 compared to the thirteen weeks ended
May 4, 2019. This decrease was primarily due to the increase in net loss as a result of the temporary closure of all of our boutiques
as a result of the COVID-19 pandemic that lasted for substantially all of the thirteen weeks ended May 2, 2020. Additionally, income
tax receivable increased to $21.2 million as of May 2, 2020 from $1.5 million as of May 4, 2019 due to income tax refunds we expect
to receive under the net operating loss carryback provision of the CARES Act. These changes were partially offset by timing of
payments of our accounts payable and lease obligations in order to preserve our liquidity.
Investing Activities
Investing activities consist primarily of capital expenditures
for new boutiques, improvements to existing boutiques, as well as investments in information technology and our distribution facility.
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
(in thousands)
|
|
Capital expenditures for:
|
|
|
|
|
|
|
|
|
New boutiques
|
|
$
|
228
|
|
|
$
|
395
|
|
Remodels
|
|
|
-
|
|
|
|
1,339
|
|
Existing boutiques
|
|
|
231
|
|
|
|
609
|
|
Technology
|
|
|
-
|
|
|
|
205
|
|
Corporate and distribution
|
|
|
22
|
|
|
|
68
|
|
|
|
$
|
481
|
|
|
$
|
2,616
|
|
Our total capital expenditures for the thirteen weeks ended
May 2, 2020 and May 4, 2019 were $0.5 million and $2.6 million, respectively. A majority of our spending in the thirteen weeks
ended May 2, 2020 was associated with new boutique openings already set to be opened prior to this fiscal year and relocation of
existing boutiques expected to occur during the balance of the year. For the thirteen weeks ended May 4, 2019, our capital expenditures
totaled $2.6 million, a majority of which were payments of prior year accrued constructions costs related to remodels.
All capital expenditures in fiscal year 2020 have been temporarily
suspended. We expect to resume this spending upon stabilization of our business and the general macro environment.
Financing Activities
Financing activities consist of borrowings and repayments under
our Amended ABL Credit Agreement.
Net cash used in financing activities in the thirteen weeks
ended May 2, 2020 consisted of $5.0 million in proceeds from borrowings under our Amended ABL Credit Agreement. Net cash used in
financing activities in the thirteen weeks ended May 4, 2019 consisted of $5.0 million proceeds from borrowings under our Amended
ABL Credit Agreement that was subsequently repaid during the quarter.
Credit Facilities
Asset Based Revolving Credit Facility
On May 25, 2018, Francesca’s Holdings Corporation ( “Holdings”),
as guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of its subsidiaries as guarantors
(together with Holdings, and the Borrowers, the “Loan Parties”), entered into an asset based lending credit agreement
(“ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto. The
ABL Credit Agreement provided for Aggregate Revolving Commitments (as defined in the ABL Credit Agreement) of $50.0 million (including
up to $10.0 million for letters of credit) and was scheduled to mature on May 25, 2023.
On August 13, 2019, concurrent with entering into the Term Loan
Credit Agreement (described below), the Loan Parties entered into the first amendment to ABL Credit Agreement (the “First
Amendment to ABL Credit Agreement” and together with the ABL Credit Agreement, the “Amended ABL Credit Agreement”).
The Amended ABL Credit Agreement provides for Aggregate Revolving Commitments (as defined in the Amended ABL Credit Agreement)
of $40.0 million and matures on the earlier of (a) May 23, 2023 and (b) the date that is 90 days prior to any scheduled maturity
of the Term Loan.
Availability under the Amended ABL Credit Agreement is subject
to a customary borrowing base, as reasonably determined by the applicable agent, comprised of: (a) a specified percentage of the
Borrower’s credit card accounts (as defined in the Amended ABL Credit Agreement); and (b) a specified percentage
of the Borrower’s eligible inventory (as defined in the Amended ABL Credit Agreement), and reduced by (c) certain customary
reserves and adjustments (as defined in the Amended ABL Credit Agreement). The combined borrowing base is the lesser
of (i) the sum of the (a) the Revolving Loan Cap (as defined in the Amended ABL Agreement), which is the lesser of (x) $34.0 million
and (y) the borrowing base under the Amended ABL Credit Agreement, plus, (b) any outstanding amount under the Term Loan Credit
Agreement and (ii) the Term Loan Credit Agreement borrowing base (described below). On May 1, 2020, we entered into the First JPM
Letter Agreement and on June 25, 2020, we entered into the Second JPM Letter Agreement. See “Overview – Recent Developments”
above for additional information.
All obligations of each Loan Party under the Amended ABL Credit
Agreement continue to be unconditionally guaranteed by the Company and each of the Company’s existing and future direct and
indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Amended ABL Credit Agreement, and
the guarantees of those obligations (as well as banking services obligations and any interest rate hedging or other swap agreements),
are secured by substantially all of the assets of the Company and each of the Company’s existing and future direct and indirect
wholly owned domestic subsidiaries. Additionally, the Amended ABL Credit Agreement contains customary events of default and requires
the Loan Parties to comply with certain financial covenants, including a restriction on the amount of capital expenditures that
the Loan Parties may make through 2021, subject to certain exceptions. In addition, the Company may declare or make dividend payments,
subject to the satisfaction of the Payment Conditions (as defined in the Amended ABL Credit Agreement). The Amended ABL Credit
Agreement also requires that the auditor’s report on our audited financial statements does not contain a “going concern”
or like qualification or exception. We obtained a waiver of such requirement for fiscal year 2019 in connection with the First
JPM Letter Agreement and First Tiger Letter Agreement. See “Overview – Recent Developments” section above for
additional information.
Borrowings under the Amended ABL Credit Agreement bear interest
at a rate equal to an applicable margin plus, at the option of the Borrowers, either (a) in the case of base rate borrowings, a
rate equal to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds rate plus 1/2 of 1.00%, and
(3) LIBOR for an interest period of one month plus 1.00% (subject to a 0.0% LIBOR floor), provided that that the interest rate
for base rate borrowings (including the addition of the applicable margin) shall be no less than 1.50% per annum, or (b) in the
case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing subject to a 0.00% floor.
The applicable margin for borrowings under the Amended ABL Credit Agreement ranges from -0.50% to 0.00% per annum with respect
to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings, in each case based upon the achievement
of specified levels of the Fixed Charge Coverage Ratio (as defined in the Amended ABL Credit Agreement). The Amended ABL Credit
Agreement also requires the Borrowers to pay a commitment fee for the unused portion of the revolving credit facility of 0.20%
per annum. For the thirteen weeks ended May 2, 2020 and May 4, 2019, the average effective interest rate for borrowings under the
Amended ABL Credit Agreement were 2.75% and 4.36%, respectively.
The Amended ABL Credit Agreement contains customary affirmative
and negative covenants, including limitations, subject to customary exceptions, on the ability of the Company and its subsidiaries
to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances; (iv) sell assets;
(v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers
or consolidations; (viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain transactions
with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries to grant liens
upon their assets; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness.
The inclusion of a going concern qualification in the report of our independent registered public accountant on our audited financial
statements for the fiscal year ended February 1, 2020, our non-payment of rent on our leased locations for the months of April,
May and June, 2020, and our failure to timely deliver quarterly consolidated financial statements
for the fiscal quarter ended May 2, 2020 resulted in a violation of certain covenants under our Amended ABL Credit Agreement.
However, we were able to obtain a waiver of such violations from the lenders under such agreement. See “Overview –
Recent Developments” section above for additional information on the First JPM Letter Agreement and Second JPM Letter Agreement.
The Amended ABL Credit Agreement also contains customary events
of default, including: (i) failure to pay principal, interest, fees or other amounts under the Amended ABL Credit Agreement when
due taking into account any applicable grace period; (ii) any representation or warranty proving to have been materially incorrect
when made or deemed made; (iii) a cross default with respect to other material indebtedness; (iv) bankruptcy and insolvency events;
(v) unsatisfied material final judgments; (vi) a “change of control”; (vii) certain defaults under the Employee Retirement
Income Security Act of 1974; (viii) the invalidity or impairment of any loan document or any security interest; and (ix) breach
of covenants in the Amended ABL Credit Agreement and other loan documents.
As of May 2, 2020, we had $5.0 million in borrowings outstanding
under the Amended ABL Credit Agreement and had $3.1 million of combined borrowing base availability under the Amended ABL Credit
Agreement and Term Loan Credit Agreement, subject to compliance with the covenants under the Amended ABL Credit Agreement, First
JPM Letter Agreement, and Second JPM Letter Agreement, including that no loans will be made under the Amended ABL Credit Agreement
unless the our aggregate amount of cash and cash equivalents is less than $3.0 million. As of July 17, 2020, we had $12.1 million,
net of $0.9 million debt issuance costs, in combined borrowings outstanding and $0.5 million in combined borrowing base availability
under the Amended ABL Agreement and Term Loan Credit Agreement. See “Overview – Recent Developments” section
above for additional information as our liquidity has been materially adversely impacted by the COVID-19 pandemic.
Term Loan Credit Agreement
On August 13, 2019, the Loan Parties, entered into the term
loan credit agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders
party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022.
On May 1, 2020, we entered into the First Tiger Letter Agreement. See “Overview – Recent Developments” section
above for additional information as our liquidity has been materially adversely impacted by the COVID-19 pandemic.
The Term Loan Credit Agreement is subject to a combined borrowing
base together with the Company’s existing asset based revolving credit facility under the Amended ABL Credit Agreement. This
borrowing base is comprised of: (a) a specified percentage of the Borrower’s credit card accounts (as defined in the
Term Loan Credit Agreement); and (b) a specified percentage of the Borrower’s eligible inventory (as defined in the
Term Loan Credit Agreement), and reduced by (c) certain customary reserves and adjustments (as defined in the Term Loan
Credit Agreement).
All obligations of each Loan Party under the Term Loan Credit
Agreement are unconditionally guaranteed by the Company and each of the Company’s existing and future direct and indirect
wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Term Loan Credit Agreement, and the guarantees
of those obligations, are secured on a junior lien basis by substantially all of the assets of the Company and each of the Company’s
existing and future direct and indirect wholly owned domestic subsidiaries.
Borrowings under the Term Loan Credit Agreement bears interest
at a rate equal to LIBOR for the interest period relevant to the Term Loan, subject to a 0.00% floor, plus 8.00%, provided that
the interest rate on the Term Loan will not be less than 10.00%. The Term Loan Credit Agreement also requires the Borrowers to
pay an annual agency fee of $50,000. For the thirteen weeks ended May 2, 2020, the average effective interest rate for borrowings
under the Term Loan was 10.0%.
The Term Loan Credit Agreement contains customary affirmative
and negative covenants, including limitations, subject to customary exceptions, on our and our subsidiaries ability to (i) incur
additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances; (iv) sell assets; (v) pay
dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations;
(viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain transactions with affiliates;
(x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries to grant lines upon their assets;
and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness. In addition, the
Term Loan Credit Agreement limits the amount of capital expenditures that the Loan Parties may make through the fiscal year ending
in 2021, provided that the Loan Parties may make unlimited amounts of capital expenditures if certain payment conditions are met.
On May 1, 2020, we entered into the First Tiger Letter Agreement
and on June 25, 2020, we entered into the Second Tiger Letter Agreement. See “Overview – Recent Developments”
above for additional information.
As of May 2, 2020, we had $10.0 million of outstanding borrowings
under the Term Loan Credit Agreement and had a combined borrowing base availability of $3.1 million under the Term Loan Credit
Agreement and Amended ABL Credit Agreement, subject to compliance with the covenants under the Term Loan Agreement, Amended ABL
Credit Agreement, First Tiger Letter Agreement, First JPM Letter Agreement, Second Tiger Letter Agreement, and Second JPM Letter
Agreement, including that no loans will be made under the Amended ABL Credit Agreement unless our aggregate amount of cash and
cash equivalents is less than $3.0 million. As of July 17, 2020, we had $12.1 million, net of $0.9 million debt issuance costs,
in combined borrowings outstanding under the Amended ABL Credit Agreement and we have $0.5 million in combined borrowing base availability
under the Term Loan Credit Agreement and Amended ABL Credit Agreement.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities
at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1
to the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended February 1, 2020.
Certain of the Company’s accounting policies and estimates
are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated
financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently
uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020. There were no significant
changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal
year ended February 1, 2020.
Recent Accounting
Pronouncements
For information regarding recent accounting pronouncements,
please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated
herein by reference.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.