ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1 – Basis of Presentation
Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing the convenience of shopping at any of our store locations or online. We offer customers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with an emphasis on national name brands. We differentiate our retail concept from our competitors by our distinctive, fun and promotional marketing efforts. We are an Indiana corporation that was initially formed in Delaware in 1993 and reincorporated in Indiana in 1996. References to “Shoe Carnival,” “we,” “us,” “our” and the “Company” in this Quarterly Report on Form 10-Q refer to Shoe Carnival, Inc. and its subsidiaries.
In our opinion, the accompanying Unaudited Condensed Consolidated Financial Statements and notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and contain all normal recurring adjustments necessary to fairly present our financial position and the results of our operations and our cash flows for the periods presented. Certain information and disclosures normally included in the notes to Condensed Consolidated Financial Statements have been condensed or omitted according to the rules and regulations of the SEC, although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.
Note 2 - Net (Loss)/Income Per Share
The following tables set forth the computation of basic and diluted net (loss)/income per share as shown on the face of the accompanying Condensed Consolidated Statements of Income:
|
|
Thirteen Weeks Ended
|
|
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Basic Net (Loss)/Income per Share:
|
|
Net
(Loss)/Income
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
|
Net
(Loss)/Income
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
Net (loss)/income
|
|
$
|
(16,190
|
)
|
|
|
|
|
|
|
|
|
|
$
|
13,873
|
|
|
|
|
|
|
|
|
|
Conversion of share-based compensation
arrangements
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
Net (loss)/income available for basic common shares
and basic net (loss)/income per share
|
|
$
|
(16,190
|
)
|
|
|
13,992
|
|
|
$
|
(1.16
|
)
|
|
$
|
13,829
|
|
|
|
14,612
|
|
|
$
|
0.95
|
|
Diluted Net (Loss)/Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(16,190
|
)
|
|
|
|
|
|
|
|
|
|
$
|
13,873
|
|
|
|
|
|
|
|
|
|
Conversion of share-based compensation
arrangements
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
580
|
|
|
|
|
|
Net (loss)/income available for diluted common
shares and diluted net (loss)/income per share
|
|
$
|
(16,190
|
)
|
|
|
13,992
|
|
|
$
|
(1.16
|
)
|
|
$
|
13,830
|
|
|
|
15,192
|
|
|
$
|
0.91
|
|
The computation of basic net (loss)/income per share of common stock is based on the weighted average number of common shares outstanding during the period. The computation of diluted net (loss)/income per share is based on the weighted average number of shares outstanding plus the dilutive incremental shares that would be outstanding assuming the vesting of restricted stock awards, restricted stock units and performance stock units, of which a small portion have a non-forfeitable right to dividends. The computation of diluted net (loss)/income per share excluded approximately 198,000 unvested share-settled equity awards for the first quarter of fiscal 2020 because the impact would be anti-dilutive. During the first quarter of fiscal 2019 all unvested share-settled equity awards were dilutive.
Note 3 – COVID-19 Impacts
Our operations are currently experiencing significant disruption associated with the outbreak of a novel strain of coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the COVID 19 outbreak a pandemic. The U.S. Government as well as the vast majority of states and local municipalities have taken unprecedented measures to control the spread of COVID-19 and to provide stimulus as a mitigating measure to deteriorating economic conditions and increasing unemployment.
7
The COVID-19 pandemic began significantly impacting our store operations, sales and costs beginning in the first quarter of fiscal 2020. Impacts included the temporary closure of our brick-and-mortar stores effective March 19, 2020, reduced foot traffic and sales, deteriorating economic conditions for our customer base and some disruption to our global supply chain. As a result, substantially all of our brick-and-mortar stores were closed for approximately 50% of the first quarter of fiscal 2020 and our net sales and gross profit significantly decreased year-over-year. Our website and mobile app continued to process e-commerce orders, which were generally fulfilled at our store locations. We began re-opening stores in accordance with applicable public health guidelines in late April, and as of June 4, 2020, approximately 97% of our stores have re-opened. The COVID-19 pandemic will likely continue to impact our financial condition and results of operations for the foreseeable future.
Note 4 - Fair Value Measurements
The accounting guidance related to fair value measurements defines fair value and provides a consistent framework for measuring fair value under the authoritative literature. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. This guidance only applies when other guidance requires or permits the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value measurements. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels:
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities;
|
|
•
|
Level 2 – Quoted prices in active or inactive markets for similar assets or liabilities that are either directly or indirectly observable; and
|
|
•
|
Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data. Fair values of our long-lived assets are estimated using an income-based approach and are classified within Level 3 of the valuation hierarchy.
|
Fair Value of Financial Instruments
The following table presents financial instruments that are measured at fair value on a recurring basis at May 2, 2020, February 1, 2020 and May 4, 2019.
|
|
Fair Value Measurements
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of May 2, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - money market mutual funds
|
|
$
|
3,128
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,128
|
|
As of February 1, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - money market mutual funds
|
|
$
|
48,080
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
48,080
|
|
As of May 4, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - money market mutual funds
|
|
$
|
28,779
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
28,779
|
|
The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature. We have no material liabilities measured at fair value on a recurring or non-recurring basis.
Long-Lived Asset Impairment Testing
We periodically evaluate our long-lived assets if events or circumstances indicate that the carrying value may not be recoverable. The carrying value of long-lived assets is considered impaired when the carrying value of the assets exceeds the expected future cash flows to be derived from their use. Assets are grouped, and the evaluation is performed, at the lowest level for which there are identifiable cash flows, which is generally at a store level. Store level asset groupings typically include property and equipment and operating lease right-of-use assets. If the estimated, undiscounted future cash flows for a store are determined to be less than the carrying value of the store’s assets, an impairment loss is recorded for the difference between estimated fair value and carrying value. Assets subject to impairment are adjusted to estimated fair value and, if applicable, an impairment loss is recorded in selling, general and administrative expenses. If the operating lease right-of-use asset is impaired, we would amortize the remaining right-of-use asset on a straight-line basis over the remaining lease term.
8
We estimate the fair value of our long-lived assets using store specific cash flow assumptions discounted by a rate commensurate with the risk involved with such assets while incorporating marketplace assumptions. Our estimates are derived from an income-based approach considering the cash flows expected over the remaining lease term for each location. These projections are primarily based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future performance. We estimate the fair value of operating right-of-use assets using the market value of rents applicable to the leased asset, discounted using the remaining lease term.
External factors, such as the local environment in which the store resides, including store traffic and competition, are evaluated in terms of their effect on sales trends. Changes in sales and operating income assumptions or unfavorable changes in external factors can significantly impact the estimated future cash flows. An increase or decrease in the projected cash flow can significantly decrease or increase the fair value of these assets, which may have an effect on the impairment recorded. If actual operating results or market conditions differ from those anticipated, the carrying value of certain of our assets may prove unrecoverable and we may incur additional impairment charges in the future.
During the thirteen weeks ended May 2, 2020 and May 4, 2019, we recorded impairment charges of $2.3 million and $40,000 associated with seven stores and one store, respectively. These charges were included in selling, general and administrative expenses. No impairments of operating right-of-use assets were recorded in either period.
Note 5 - Stock-Based Compensation
At our 2017 annual meeting of shareholders, our shareholders approved a new equity incentive plan, the Shoe Carnival, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which replaced our 2000 Stock Option and Incentive Plan, as amended (the “2000 Plan”). Under the 2017 Plan, we may issue stock units, restricted stock, stock appreciation rights, stock options and other stock-based awards to eligible participants. According to the terms of the 2017 Plan, no further awards may be made under the 2000 Plan. A maximum of 1,000,000 shares of our common stock are available for issuance and sale under the 2017 Plan. In addition, any shares of our common stock subject to an award granted under the 2017 Plan, or to an award granted under the 2000 Plan that was outstanding on the date our shareholders approved the 2017 Plan, that expires, is cancelled or forfeited, or is settled for cash will, to the extent of such cancellation, forfeiture, expiration or cash settlement, automatically become available for future awards under the 2017 Plan.
Stock-based compensation includes restricted stock units and performance stock units, restricted stock awards, and cash-settled stock appreciation rights (“SARs”). Additionally, we recognize stock-based compensation expense for the discount on shares sold to employees through our employee stock purchase plan. Stock-based compensation expense for the employee stock purchase plan was $11,000 before the income tax benefit of $3,000 and $11,000 before the income tax benefit of $1,000 for the thirteen weeks ended May 2, 2020 and May 4, 2019, respectively.
Share-Settled Equity Awards
The following table summarizes transactions for our restricted stock units and performance stock units pursuant to our stock-based compensation plans:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Restricted stock units and performance stock units at
February 1, 2020
|
|
|
263,135
|
|
|
$
|
29.44
|
|
Granted
|
|
|
158,439
|
|
|
|
14.88
|
|
Vested
|
|
|
(163,099
|
)
|
|
|
26.76
|
|
Forfeited
|
|
|
(1,717
|
)
|
|
|
31.94
|
|
Restricted stock units and performance stock units at
May 2, 2020
|
|
|
256,758
|
|
|
$
|
22.14
|
|
The total fair value at grant date of restricted stock units and performance stock units that vested during the thirteen-week periods ended May 2, 2020 and May 4, 2019 was $4.4 million and $2.0 million, respectively. The weighted-average grant date fair value of restricted stock units and performance stock units granted during the thirteen-week periods ended May 2, 2020 and May 4, 2019 was $14.88 and $31.36, respectively.
9
The following table summarizes transactions for our restricted stock awards pursuant to our stock-based compensation plans:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Restricted stock at February 1, 2020
|
|
|
67,435
|
|
|
$
|
24.23
|
|
Vested
|
|
|
(49,619
|
)
|
|
|
24.36
|
|
Forfeited or expired
|
|
|
(14,816
|
)
|
|
|
24.37
|
|
Restricted stock at May 2, 2020
|
|
|
3,000
|
|
|
$
|
21.46
|
|
There were no restricted stock awards granted during the thirteen-week periods ended May 2, 2020 or May 4, 2019. The total fair value at grant date of restricted stock awards that vested during the thirteen-week periods ended May 2, 2020 and May 4, 2019 was $1.2 million and $16.9 million, respectively.
The following table summarizes information regarding stock-based compensation expense recognized for all share-settled equity awards (restricted stock units, performance stock units and restricted stock awards):
(In thousands)
|
|
Thirteen
Weeks Ended May 2, 2020
|
|
|
Thirteen
Weeks Ended May 4, 2019
|
|
Stock-based compensation expense before the
recognized income tax effect
|
|
$
|
1,130
|
|
|
$
|
1,938
|
|
Income tax effect
|
|
$
|
342
|
|
|
$
|
247
|
|
Included in the thirteen-week period ended May 2, 2020 was a tax expense of $45,000 in connection with the vesting of equity-based compensation. The thirteen-week period ended May 4, 2019 included a tax benefit in connection with the vesting of equity-based compensation of approximately $1.9 million. As of May 2, 2020, there was approximately $3.8 million of unrecognized compensation expense remaining related to both our restricted stock units and performance stock units and performance-based and service-based restricted stock awards. The cost is expected to be recognized over a weighted average period of approximately 1.9 years. This incorporates our current assumptions with respect to the estimated requisite service period required to achieve the designated performance conditions for performance-based stock awards.
Cash-Settled Stock Appreciation Rights
Cash-settled stock appreciation rights (“SARs”) are granted to certain non-executive employees. Each SAR entitles the holder, upon exercise of their vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price, with a maximum amount of gain defined. The SARs granted during the first quarter of fiscal 2020 will vest and become fully exercisable on March 31, 2021 and any unexercised SARs will expire on March 31, 2023. SARs granted during the first quarter of fiscal 2019 vested and became fully exercisable on March 31, 2020 and any unexercised SARs will expire on March 31, 2022. The SARs issued have a defined maximum gain of $10.00 over the exercise price of $13.79 for awards granted in fiscal 2020 and over the exercise price of $34.95 for awards granted in fiscal 2019.
The following table summarizes the SARs activity:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Outstanding at February 1, 2020
|
|
|
43,200
|
|
|
$
|
34.95
|
|
|
|
|
|
Granted
|
|
|
43,000
|
|
|
|
13.79
|
|
|
|
|
|
Forfeited
|
|
|
(2,100
|
)
|
|
|
34.95
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
Outstanding at May 2, 2020
|
|
|
84,100
|
|
|
$
|
24.13
|
|
|
|
2.4
|
|
The fair value of these liability awards are remeasured, using a trinomial lattice model, at each reporting period until the date of settlement. Increases or decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. The weighted-average fair value of outstanding, non-vested SAR awards as of May 2, 2020 was $4.27.
10
The fair value was estimated using a trinomial lattice model with the following assumptions:
|
|
May 2, 2020
|
|
|
May 4, 2019
|
|
Risk free interest rate yield curve
|
|
0.10% - 0.36%
|
|
|
2.30% - 2.42%
|
|
Expected dividend yield
|
|
1.5%
|
|
|
0.9%
|
|
Expected volatility
|
|
62.95%
|
|
|
47.95%
|
|
Maximum life
|
|
1.91 - 2.91 Years
|
|
|
2.9 Years
|
|
Exercise multiple
|
|
|
1.29
|
|
|
|
1.29
|
|
Maximum payout
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Employee exit rate
|
|
2.2% - 9.0%
|
|
|
2.2% - 9.0%
|
|
The risk free interest rate was based on the U.S. Treasury yield curve in effect at the end of the reporting period. The expected dividend yield was based on our historical quarterly cash dividends, with the assumption that quarterly dividends would continue at that rate. Expected volatility was based on the historical volatility of our common stock. The exercise multiple and employee exit rate were calculated based on historical option data.
The following table summarizes information regarding stock-based compensation (benefit)/expense recognized for SARs:
(In thousands)
|
|
Thirteen
Weeks Ended May 2, 2020
|
|
|
Thirteen
Weeks Ended May 4, 2019
|
|
Stock-based compensation (benefit)/expense before the
recognized income tax effect
|
|
$
|
(87
|
)
|
|
$
|
8
|
|
Income tax effect
|
|
$
|
(26
|
)
|
|
$
|
1
|
|
As of May 2, 2020, approximately $219,000 in unrecognized compensation expense remained related to non-vested SARs. This expense is expected to be recognized over a period of approximately 0.9 years.
Note 6 – Revenue
Disaggregation of Revenue by Product Category
Revenue is disaggregated by product category below. Net sales and percentage of net sales for the thirteen weeks ended May 2, 2020 and May 4, 2019 were as follows:
(In thousands)
|
|
Thirteen Weeks
Ended May 2, 2020
|
|
|
Thirteen Weeks
Ended May 4, 2019
|
|
Non-Athletics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women’s
|
|
$
|
28,921
|
|
|
|
20
|
%
|
|
$
|
60,431
|
|
|
|
24
|
%
|
Men’s
|
|
|
18,715
|
|
|
|
13
|
|
|
|
35,863
|
|
|
|
14
|
|
Children’s
|
|
|
7,009
|
|
|
|
5
|
|
|
|
12,368
|
|
|
|
5
|
|
Total
|
|
|
54,645
|
|
|
|
38
|
|
|
|
108,662
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Athletics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women’s
|
|
|
32,912
|
|
|
|
22
|
|
|
|
49,687
|
|
|
|
20
|
|
Men’s
|
|
|
31,460
|
|
|
|
21
|
|
|
|
53,304
|
|
|
|
21
|
|
Children’s
|
|
|
20,664
|
|
|
|
14
|
|
|
|
30,818
|
|
|
|
12
|
|
Total
|
|
|
85,036
|
|
|
|
57
|
|
|
|
133,809
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accessories and Other
|
|
|
7,814
|
|
|
|
5
|
|
|
|
11,339
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
147,495
|
|
|
|
100
|
%
|
|
$
|
253,810
|
|
|
|
100
|
%
|
11
Accounting Policy and Performance Obligations
We operate as a multi-channel, family footwear retailer and provide the convenience of shopping at our brick-and-mortar stores or shopping online through our e-commerce and mobile platforms. As part of our multi-channel strategy, we offer Shoes 2U, a program that enables us to ship product to a customer’s home or selected store if the product is not in stock. We also offer “buy online, pick up in store” services for our customers. “Buy online, pick up in store” provides the convenience of local pickup for our customers.
For our brick-and-mortar stores, we satisfy our performance obligation and control is transferred at the point of sale when the customer takes possession of the products. This also includes the “buy online, pick up in store” scenario described above and includes sales made via our Shoes 2U program when customers choose to pick up their goods in-store. For sales made through our e-commerce site or mobile app in which the customer chooses home delivery, we transfer control and recognize revenue when the product is shipped from our stores or distribution center. This also includes sales made via our Shoes 2U program when the customer chooses home delivery.
We offer our customers sales incentives including coupons, discounts, and free merchandise. Sales are recorded net of such incentives and returns and allowances. If an incentive involves free merchandise, that merchandise is recorded as a zero sale and the cost is included in cost of sales. Gift card revenue is recognized at the time of redemption. When a customer makes a purchase as part of our rewards program, we allocate the transaction price between the goods purchased and the loyalty reward points and recognize the loyalty revenue based on estimated customer redemptions.
Transaction Price and Payment Terms
The transaction price is the amount of consideration we expect to receive from our customers and is reduced by any stated promotional discounts at the time of purchase. The transaction price may be variable due to terms that permit customers to exchange or return products for a refund within a limited period of time. The implicit contract with the customer reflected in the transaction receipt states the final terms of the sale, including the description, quantity, and price of each product purchased. The customer agrees to a stated price in the contract that does not vary over the term of the contract and may include revenue to offset shipping costs. Taxes imposed by governmental authorities such as sales taxes are excluded from net sales.
Our brick-and-mortar stores accept various forms of payment from customers at the point of sale. These include cash, checks, credit/debit cards and gift cards. Our e-commerce and mobile platforms accept credit/debit cards, PayPal, Apple Pay, gift cards and a third-party installment payment option as forms of payment. Payments made for products are generally collected when control passes to the customer, either at the point of sale or at the time the customer order is shipped. For Shoes 2U transactions, customers may order the product at the point of sale. For these transactions, customers pay in advance and unearned revenue is recorded as a contract liability. We recognize the related revenue when control has been transferred to the customer (i.e., when the product is picked up by the customer or shipped to the customer). Unearned revenue related to our Shoes 2U program was not material to our Condensed Consolidated Financial Statements at May 2, 2020, February 1, 2020 and May 4, 2019.
Returns and Refunds
Customers can exchange or return products for a refund within a limited period of time. We have established a returns allowance based upon historical experience in order to estimate these transactions. This allowance is recorded as a reduction in sales with a corresponding refund liability recorded in accrued and other liabilities. The estimated cost of merchandise inventory is recorded as a reduction to cost of sales and an increase in merchandise inventories. Approximately $718,000 of refund liabilities and $500,000 of right of return assets associated with estimated product returns were recorded in our Condensed Consolidated Balance Sheets at each of May 2, 2020 and February 1, 2020. Approximately $600,000 of refund liabilities and $410,000 of right of return assets associated with estimated product returns were recorded in our Condensed Consolidated Balance Sheet at May 4, 2019.
12
Contract Liabilities
We sell gift cards in our brick-and-mortar stores and through our e-commerce and mobile platforms. Gift card purchases are recorded as an increase to contract liabilities at the time of purchase and a decrease to contract liabilities when a customer redeems a gift card. Estimated breakage is determined based on historical breakage percentages and recognized as revenue based on expected gift card usage. We do not record breakage revenue when escheat liability to relevant jurisdictions exists. At May 2, 2020, February 1, 2020 and May 4, 2019, approximately $1.3 million, $1.5 million and $1.3 million of contract liabilities associated with unredeemed gift cards were recorded in our Condensed Consolidated Balance Sheets, respectively. We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions within two years. Breakage revenue associated with our gift cards of $19,000 and $33,000 was recognized in net sales during the thirteen-weeks ended May 2, 2020 and May 4, 2019, respectively.
Our Shoe Perks rewards program allows customers to accrue points and provides customers with the opportunity to earn rewards. Points under Shoe Perks are earned primarily by making purchases either in-store or through our online platform. Once a certain threshold of accumulated points is reached, the customer earns a reward certificate, which is redeemable at any of our stores or online.
When a Shoe Perks customer makes a purchase, we allocate the transaction price between the goods purchased and the loyalty reward points earned based on the relative standalone selling price. The portion allocated to the points program is recorded as a contract liability for rewards that are expected to be redeemed. We then recognize revenue based on an estimate of when customers redeem rewards, which incorporates an estimate of points expected to expire using historical rates. During the thirteen-weeks ended May 2, 2020 and May 4, 2019, approximately $957,000 and $406,000, respectively, of loyalty rewards were recognized in net sales. At May 2, 2020, February 1, 2020 and May 4, 2019, approximately $406,000, $679,000 and $293,000, of contract liabilities associated with loyalty rewards were recorded in our Condensed Consolidated Balance Sheets, respectively. We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions in less than one year.
Note 7 – Debt
On April 16, 2020, we entered into a third amendment (the “Third Amendment”) of our existing credit agreement (the “Credit Agreement”). Pursuant to the Third Amendment, we (1) exercised the full $50.0 million accordion feature, which increased the revolving commitment under the Credit Agreement from $50.0 million to $100.0 million, and increased the swing line sublimit from $10.0 million to $15.0 million; (2) granted a security interest in our inventory to the lenders; and (3) increased the maximum ratio of funded debt plus three times rent expense to EBITDA (as defined in the Credit Agreement) plus rent expense from 2.5 to 1.0 to 3.0 to 1.0. In addition, the Third Amendment, among other things, increased certain LIBOR margins applicable to borrowings under the Credit Agreement, increased the commitment fee charged on the unused portion of the lenders’ commitment and made customary updates to certain representations, covenants and other terms contained in the Credit Agreement. The Credit Agreement expires on March 27, 2022.
The Credit Agreement, as amended, contains covenants which stipulate: (1) Total Shareholders’ Equity (as defined in the Credit Agreement) will not fall below $250.0 million at the end of each fiscal quarter; (2) the ratio of funded debt plus three times rent to EBITDA (as defined in the Credit Agreement) plus rent will not exceed 3.0 to 1.0; (3) the aggregate amount of cash dividends for a fiscal year will not exceed $10.0 million; and (4) distributions in the form of redemptions of Equity Interests (as defined in the Credit Agreement) can be made solely with cash on hand so long as before and immediately after such distributions there are no revolving loans outstanding under the Credit Agreement. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion. We were in compliance with these covenants at May 2, 2020.
The credit facility bears interest, at our option, at (1) the agent bank’s prime rate as defined in the Credit Agreement plus 1.0%, with the prime rate defined as the greater of (a) the Federal Fund rate plus 0.50% or (b) the interest rate announced from time to time by the agent bank as its “prime rate” or (2) LIBOR plus 1.50% to 2.50%, depending on our achievement of certain performance criteria. A commitment fee is charged at 0.30% to 0.40% per annum, depending on our achievement of certain performance criteria, on the unused portion of the lenders’ commitment.
No borrowings were outstanding under the Credit Agreement as of May 2, 2020, February 1, 2020 or May 4, 2019. The maximum borrowings outstanding during the thirteen weeks ended May 2, 2020 was $8.7 million and no borrowings were outstanding during the thirteen weeks ended May 4, 2019. As of May 2, 2020, there were $1.2 million in letters of credit outstanding and $94.9 million available to us for borrowing under the Credit Agreement. Our ratio of funded debt plus three times rent to EBITDA plus rent is currently limiting our utilization of the Credit Agreement’s full capacity.
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Note 8 – Leases
We lease all of our retail stores and our single distribution center, which has a current lease term of 15 years, expiring in 2034. We also enter into leases of equipment, copiers and billboards. All of our leases are operating leases. Leases with terms of twelve months or less are immaterial and are expensed as incurred, and we did not have any leases with related parties as of May 2, 2020.
In response to the COVID-19 pandemic and related government restrictions impacting our operations, we began seeking relief from our landlords while our stores were temporarily closed to customers. On April 10, 2020, the Financial Accounting Standards Board staff issued a question-and-answer document providing guidance for lease concessions provided to lessees in response to the effects of COVID-19. Such guidance allows lessees to make an election to forgo the evaluation of the enforceable rights and obligations of the original lease contract and whether a lease concession provided by a lessor should be accounted for as a lease modification in the event the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Based on the nature of the agreements reached with many of our landlords, we have accounted for rent concessions as if they were part of the enforceable rights and obligations of the existing lease contracts and did not account for the concessions as lease modifications. When agreements with landlords to defer rent payments were reached, amounts that would have otherwise been due were reclassified as operating lease liabilities, all of which are reflected in the current portion of operating lease liabilities on our Condensed Consolidated Balance Sheet as of May 2, 2020. For negotiations with landlords that did not result in rent concessions, we have increased accounts payable for rents that are due. We have continued to recognize lease expense on a straight-line basis for our leases over the related lease terms.
Lease-related costs reported in our Condensed Consolidated Statements of Income were as follows for the thirteen weeks ended May 2, 2020 and May 4, 2019, respectively:
(In thousands)
|
|
Thirteen
Weeks Ended May 2, 2020
|
|
|
Thirteen
Weeks Ended May 4, 2019
|
|
Operating lease cost
|
|
$
|
13,226
|
|
|
$
|
13,898
|
|
Variable lease cost
|
|
|
187
|
|
|
|
234
|
|
CAM, property taxes and insurance
|
|
|
4,989
|
|
|
|
5,249
|
|
Total
|
|
$
|
18,402
|
|
|
$
|
19,381
|
|
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