ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K. All references herein to "2023" and "2022" refer to the 53-week period ended February 3, 2024 and the 52-week period ended January 28, 2023, respectively.
Our management's discussion and analysis of financial condition and results of operations is presented in the following sections:
Page
Chapter 11 Cases
Overview
Financial Details for 2023
How We Assess the Performance of Our Business
Results of Operations
Liquidity and Capital Resources
Critical Accounting Estimates
CHAPTER 11 CASES
On April 22, 2024, the Company and certain of its direct and indirect subsidiaries (then known as Express Topco LLC; Express Holding, LLC; Express Finance Corp.; Express LLC; Express Fashion Investments, LLC; Express Fashion Logistics, LLC; Express Fashion Operations, LLC.; Express GC, LCC; Express BNBS Fashion, LLC; UW, LLC; and Express Fashion Digital Services Costa Rica, S.R.L. collectively, the “Debtors”) filed voluntary petitions to commence proceedings under chapter 11 (the “Chapter 11 Cases”) of title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption “ In re: Express, Inc., et al .” (Case No. 24-10831).
Through the Chapter 11 process, the Debtors sought to implement a going-concern sale transaction. On April 21, 2024, the Company received a non-binding letter of intent from a consortium led by WHP Global and affiliates of the Company’s two most significant landlords, Simon Property Group, L.P. and Brookfield properties (the “Phoenix JV”) for the potential acquisition of a substantial portion of the Company’s assets and the assumption of leases on a minimum of 280 stores for aggregate cash consideration in the amount of $10.0 million plus 100% of the net orderly liquidation value of acquired merchandise, in addition to the assumption of the applicable liabilities. On May 22, 2024, the Debtors entered into an asset purchase agreement (the “Purchase Agreement”) with the Phoenix JV. The Purchase Agreement provided for a total purchase price of approximately $172.0 million, consisting of approximately $134.0 million in cash consideration and $38.0 million of assumed liabilities. On June 14, 2024, the Bankruptcy Court entered an order approving the Purchase Agreement and the sale contemplated thereby (the “Sale Transaction”). The Sale Transaction was successfully consummated on June 21, 2024. Pursuant to the Sale Transaction, 403 leases for Express stores, 50 leases for Bonobos stores and the lease for the Company’s corporate headquarters in Columbus, Ohio, were assigned to and assumed by the Phoenix JV.
Additionally through the Chapter 11 process, the Debtors provided notice of and completed rejection of 118 unexpired leases in accordance with the procedures approved by the Bankruptcy Court.
On July 10, 2024, the ability for persons or entities (other than governmental units) to file proofs of claim in the Chapter 11 Cases expired.
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On August 7, 2024, the Bankruptcy Court entered an order extending the Debtor’s exclusivity period to file a Chapter 11 Plan to November 19, 2024 and their solicitation of acceptances thereof to January 20, 2025.
On December 17, 2024, the Bankruptcy Court confirmed the Plan. Pursuant to the Plan, proceeds from the Sale Transaction and the Debtors’ remaining assets will be distributed to eligible claim holders, in order of priority, after which each of the Debtors’ estates will be wound down. The Company anticipates that the Plan will go effective on or about December 31, 2024. As of the date of this Form 10-K, the Company and the other Debtors no longer have any operations, other than those relating to the wind-down process provided in the Plan.
Debtor-in-Possession Financing
In order to administer the Chapter 11 Cases, operate the Debtors’ business in the ordinary course and facilitate the marketing and consummation of the Sale Transaction, the Company obtained $214.0 million of post-petition debtor-in-possession financing (the “DIP Facilities”), consisting of (a) a new money single draw term loan in the amount of $25.0 million (the “Second Lien New Money DIP Term Loans”) and (b) a roll-up of (i) certain secured prepetition obligations under the Asset-Based Term Loan Agreement, dated as of September 5, 2023 (the “FILO Term Loan Agreement”) in the amount of $63.0 million (the “Second Lien DIP Term Roll-Up Loans”), and (ii) certain secured prepetition obligations under the asset-based loan credit agreement, dated as of May 20, 2015 (as amended, the “ABL Credit Agreement”) in the amount of $126.0 million (the “First Lien DIP ABL Roll-Up Loans”).
Each of the DIP Facilities were provided to the Company subject to the terms and conditions set forth in the respective DIP Credit Agreements that were executed by the Debtor and the applicable lenders on April 24, 2024, which include conditions precedent, representations and warranties, various affirmative and negative covenants, and events of default customary for financings of such type.
The relief granted by the Bankruptcy Court in its order on June 6, 2024 approving the final DIP Facilities (the “Final DIP Order”) also included granting certain adequate protections to the Debtors’ prepetition secured lenders and agents, which are intended to protect their interests in collateral securing their prepetition claims against the Debtors from any diminution in value.
Refer to Note 8 in our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion.
Litigation
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the applicable debtor, including actions to collect indebtedness, including interest payments, incurred prior to the Petition Date or to exercise control over the applicable debtor’s property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the applicable debtor or its property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the applicable debtor’s bankruptcy estate, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
The Chapter 11 Cases and the Sale Transaction are subsequent events that occurred after the periods for which the financial information herein is presented. Thus, the description of the Company’s business and financial information included in this management’s discussion and analysis of financial condition and results of operations reflects the Company’s business as previously operated as of February 3, 2024, prior to the filing of the Chapter 11 Cases on April 22, 2024 and prior to giving effect to the completion of the Sale Transaction on June 21, 2024.
OVERVIEW
Express previously operated as a multi-brand fashion retailer with an omnichannel platform, including both physical and online stores. Its two brand-based operating segments were Express, which included UpWest, and Bonobos.
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As of February 3, 2024, we operated 589 stores in the United States and Puerto Rico, the express.com online store, the Express mobile app, the bonobos.com online store and the upwest.com online store.
Brand
Description
Express
Grounded in a belief that style, quality and value should all be found in one place, Express is a brand with a purpose - We Create Confidence. We Inspire Self-Expression . - powered by a styling community.
UpWest
UpWest is an apparel, accessories and home goods brand with a purpose to provide comfort for people and planet.
Bonobos
Bonobos is a menswear brand known for exceptional fit and an innovative retail model.
Bonobos Acquisition
On May 23, 2023, we completed the acquisition of the operating assets of Bonobos.
Refer to Note 5 to our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion regarding the acquisition.
WHP Strategic Partnership
On January 25, 2023, we closed the strategic partnership transaction with WHP, a leading global brand management firm. Pursuant to the transaction, WHP acquired 5.4 million newly issued shares of our Common Stock, at a purchase price of $4.60 per share, or $25.0 million in the aggregate, representing approximately 7.4% of our outstanding shares of Common Stock, on a pro forma basis, as of the closing of the transaction. The Company and WHP also formed a Joint Venture valued at approximately $400.0 million, with WHP committing $235.0 million to the Joint Venture for 60% ownership of the Joint Venture and the Company contributing certain intellectual property in exchange for 40% ownership of the Joint Venture. Refer to Note 4 to our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion regarding the WHP strategic partnership.
1-for-20 Reverse Stock Split
On August 14, 2023, our Board approved the implementation of a 1-for-20 reverse stock split of our Common Stock, and a corresponding proportional reduction in the number of authorized shares of Common Stock. The reverse stock split was effected after market close on August 30, 2023 (the “Effective Date”), and shares of Common Stock began trading on a split-adjusted basis as of market open on August 31, 2023.
All shares of Common Stock, stock option awards and per share amounts contained in the Consolidated Financial Statements have been retroactively adjusted to reflect the 1-for-20 reverse stock split. Refer to Note 9 to our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion regarding the reverse stock split.
Management's Assessment of Going Concern
Management has concluded that the Debtors’ need to implement a chapter 11 restructuring plan and the costs, risks and uncertainties surrounding the Chapter 11 Cases raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the issuance of the financial statements.
Expense Reduction Initiatives
During 2023, we conducted a comprehensive review of our business model to identify actions expected to further meaningfully reduce pre-tax costs and enable a more efficient and effective organization and have engaged external advisors to assist in this effort.
During 2023, management was focused on improving its results of operations, operating cash flows and liquidity through expense reduction initiatives and developed contingency plans.
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FINANCIAL DETAILS FOR 2023
• Consolidated net sales decreased 0.5% to $1.85 billion, including $152.2 million of Bonobos net sales, from $1.86 billion in 2022
• The 53rd week added approximately $21.8 million to net sales for 2023
• Consolidated comparable sales decreased 9% compared to 2022
• Comparable retail sales (includes both retail stores and eCommerce sales) decreased 7% compared to 2022
• Comparable outlet sales decreased 14% compared to 2022
• Consolidated gross margin was 21.6% of net sales compared to 28.4% of net sales in 2022, a decrease of approximately 680 basis points
• Consolidated operating loss was $162.0 million compared to $67.5 million in 2022
• Consolidated net loss was $208.5 million, or a loss of $55.89 per diluted share, compared to net income of $293.8 million, or $85.1 per diluted share, in 2022, which reflected the gain on the transaction with WHP
HOW WE ASSESSED THE PERFORMANCE OF OUR BUSINESS
In assessing the performance of our business, we considered a variety of performance and financial measures. These key measures included net sales, comparable sales, eCommerce demand, transactions, cost of goods sold, buying and occupancy costs, gross profit/gross margin, and selling, general, and administrative expenses. The following table describes and discusses these measures.
Net Sales
Description
Revenue from the sale of merchandise, less returns and discounts, as well as shipping and handling revenue related to eCommerce, revenue from the rental of our LED sign in Times Square, gift card breakage and revenue earned from our private label credit card agreement.
Discussion
Our business is seasonal, and we historically realized a higher portion of our net sales in the third and fourth quarters, due primarily to the impact of the holiday season. Generally, approximately 45% of our annual net sales occurred in the Spring season (first and second quarters) and 55% occurred in the Fall season (third and fourth quarters).
Comparable Sales
Description
Comparable sales is a measure of the amount of sales generated in a period relative to the amount of sales generated in the comparable prior year period. Comparable sales for 2023 was calculated using the 53-week period ended February 3, 2024 as compared to the 53-week period ended February 4, 2023.
Comparable retail sales includes:
• Sales from retail stores that were open 12 months or more as of the end of the reporting period
• eCommerce shipped sales
Comparable outlet sales includes:
• Sales from outlet stores that were open 12 months or more as of the end of the reporting period, including conversions
Comparable sales excludes:
• Sales from stores where the square footage has changed by more than 20% due to remodel or relocation activity
• Sales from stores in a phased remodel where a portion of the store is under construction and therefore not productive selling space
• Sales from stores where the store cannot open due to weather damage or other catastrophes, including pandemics
Discussion
Our business and our comparable sales were subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving, and Christmas, and regional fluctuations for events such as sales tax holidays. We believe comparable sales provides a useful measure for investors by removing the impact of new stores and closed stores. Management considers comparable sales a useful measure in evaluating continuing store performance.
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eCommerce Demand
Description
eCommerce demand is defined as gross orders for Express and/or third party merchandise that originate through our eCommerce platform, including the website, app, and buy online pick-up in store.
Discussion
We believe eCommerce demand is a useful operational metric for investors and management as it provides visibility for orders placed but not yet shipped.
Transactions
Description
Transactions are defined as the number of customer point of sale interactions with customers.
Discussion
We believe this metric is useful as it provides a better indicator of the acceptance of our product.
Cost of Goods Sold, Buying and Occupancy Costs
Description
Includes the following:
• Direct cost of purchased merchandise
• Inventory shrink and other adjustments
• Inbound and outbound freight
• Royalties paid to the Joint Venture
• Merchandising, design, planning and allocation, and manufacturing/production costs
• Occupancy costs related to store operations (such as rent and common area maintenance, utilities, and depreciation on assets)
• Logistics costs associated with our eCommerce business
• Impairments on long-lived assets and right of use lease assets
Discussion
Our cost of goods sold typically increased in higher volume quarters because the direct cost of purchased merchandise is tied to sales.
The primary drivers of the costs of individual goods are raw materials, labor in the countries where our merchandise is sourced, and logistics costs associated with transporting our merchandise.
Buying and occupancy costs related to stores are largely fixed and do not necessarily increase as volume increases.
Changes in the mix of products sold by type of product or by channel may also impact our overall cost of goods sold, buying and occupancy costs.
Extended periods of declined business and sales could result in additional impairment of our assets.
Gross Profit/Gross Margin
Description
Gross profit is net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of net sales.
Discussion
Gross profit/gross margin is impacted by the price at which we were able to sell our merchandise and the cost of our product.
Inventory levels were previously reviewed on an on-going basis in order to identify slow-moving merchandise and generally use markdowns to clear such merchandise. The timing and level of markdowns were driven primarily by seasonality and customer acceptance of our merchandise and have a direct effect on our gross margin.
Any marked down merchandise that is not sold is marked-out-of-stock. We use third-party vendors to dispose of this marked-out-of-stock merchandise.
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Selling, General, and Administrative Expenses
Description
Includes operating costs not included in cost of goods sold, buying and occupancy costs such as:
• Payroll and other expenses related to operations at our corporate offices
• Store expenses other than occupancy costs
• Marketing expenses, including production, mailing, print, and digital advertising costs, among other things
Discussion
With the exception of store payroll, certain marketing expenses, and incentive compensation, selling, general, and administrative expenses generally did not vary proportionally with net sales. As a result, selling, general, and administrative expenses as a percentage of net sales were generally higher in lower volume quarters and lower in higher volume quarters.
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RESULTS OF OPERATIONS
Fiscal 2023 compared to Fiscal 2022
The financial results of Bonobos were included in our results beginning from the closing date of the acquisition on May 23, 2023.
Store Activity
The following table shows store activity for the stated periods:
Retail
Outlet
UpWest
Bonobos 1
Total
Retail
Outlet
UpWest
Total
Beginning stores
New stores
Closed stores
Ending stores
Gross square footage at end of period (in thousands)
1. Bonobos stores were acquired on May 23, 2023
Net Sales
The following table shows net sales and comparable sales for the stated periods:
Express
Bonobos
Net sales (in thousands)
Dollar change compared to prior year
Percentage change compared to prior year
Consolidated comparable retail sales percentage change
Consolidated comparable outlet sales percentage change
Total consolidated comparable sales percentage change
Net sales for 2023 decreased 0.5%, or $9.8 million, to $1,854.4 million compared to 2022, partially offset by $152.2 million of sales from the addition of Bonobos. The 53rd week contributed approximately $21.8 million to net sales. The decrease in Express sales was primarily attributable to challenging comparable sales in both our women's and men's business. This was driven by traffic softness in both retail and outlet stores along with reduced consumer spending, increased price sensitivity in discretionary categories and aggressive promotional activity across the industry that began in 2022 and persisted throughout fiscal year 2023. We continue to face challenges with the Express brand including declines in our customer file and store traffic, driven by missteps in our merchandise strategy where we were out of balance across categories, price points and wearing occasions. The misalignment between our assortment architectures and customer demand significantly impacted our sales.
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Gross Profit
The following table shows cost of goods sold, buying and occupancy costs, gross profit in dollars, and gross margin percentage for the stated periods:
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs
Gross profit
Gross margin percentage
Dollar change compared to prior year
The 680 basis point decrease in gross margin percentage, or gross profit as a percentage of net sales, for 2023 compared to 2022 was comprised of a decrease in merchandise margin of 620 basis points and an increase in buying and occupancy costs as a percentage of net sales of 60 basis points.
• The decrease in merchandise margin was primarily driven by the challenging macroeconomic and highly promotional retail environment, increased shipping and handling flex on higher eCommerce sales, as well as 350 basis points of royalty expense related to the Joint Venture.
• Buying and occupancy deleveraged due to the decline in comparable sales. In addition, buying and occupancy was also impacted by $2.7 million of severance charges related to our restructuring and $3.4 million due to an impairment charge of certain long-lived store related assets and right of use assets. Refer to N ote 1 for further discussion regarding the restructuring costs and Note 2 for further discussion regarding the impairment charges for 2023 in our Consolidated Financial Statements included elsewhere in this Form 10-K.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Selling, general, and administrative expenses
Selling, general, and administrative expenses, as a percentage of net sales
Dollar change compared to prior year
SG&A for 2023 decreased 0.4%, or $2.6 million, to $594.1 million compared to 2022. The decrease was primarily driven by our expense savings initiatives, including reductions in marketing spend, store labor costs, and a reduction in force in our corporate office that was implemented during the third quarter of 2023, as well as lower long-term incentive compensation. This was partially offset by the consolidation of Bonobos, as well as acquisition-related and integration costs incurred in connection with the acquisition and severance charges related to our restructuring.
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Royalty Income
The following table shows royalty income in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Royalty income
Royalty income, as a percentage of net sales
Dollar change compared to prior year
Royalty income for 2023 increased by $22.4 million compared to 2022. The increase was due to our share of equity income associated with our equity investment with WHP. Refer to Note 4 in our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion of our equity investment.
Other Operating Income, Net
The following table shows other operating income in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Other operating income, net
Other operating income, as a percentage of net sales
Dollar change compared to prior year
Other operating income for 2023 increased by $8.8 million compared to 2022. The increase reflects $8.3 million in settlement proceeds received in January 2024 related to the settlement of claims in the payment card interchange fee antitrust litigation.
Interest Expense, Net
The following table shows interest expense in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Interest expense, net
Interest expense, as a percentage of net sales
Dollar change compared to prior year
Interest expense for 2023 decreased 31.1%, or $9.0 million, to $20.1 million compared to 2022. The decrease was the result of higher aggregate amounts borrowed and higher variable interest rates on our outstanding indebtedness offset by $5.1 million of Term Loan refinancing costs, $4.5 million of early debt termination fees related to the subsequent termination of the Term Loan and $1.8 million of accelerated Term Loan discount amortization during 2022. Refer to Note 8 in our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion regarding our borrowings during 2023.
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Gain on Transaction with WHP
The following table shows gain on transaction with WHP in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Gain on transaction with WHP
Gain on transaction with WHP, as a percentage of net sales
Dollar change compared to prior year
The $409.5 million decrease in 2023 compared to 2022 was due to $235.0 million from the sale of the majority of our interest in our intellectual property to the Joint Venture, $156.7 million on the equity method investment and $17.8 million from the premium paid on the common shares by WHP in 2022. Refer to Note 2 , Note 4 and Note 9 in our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion.
Other Expense (Income), Net
The following table shows other expense (income), net in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Other expense (income), net
Other expense (income), as a percentage of net sales
Dollar change compared to prior year
The $28.6 million decrease in other income in 2023 compared to 2022 was primarily due to the impairment of our equity method investment in 2023. Refer to Note 4 in our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion.
Income Tax (Benefit) Expense
The following table shows income tax (benefit) expense in dollars and as a percentage of net sales for the stated periods:
(in thousands, except percentages)
Income tax (benefit) expense
Income tax (benefit) expense, as a percentage of net sales
Dollar change compared to prior year
The effective tax rate was 0.3% and 6.5% for 2023 and 2022, respectively. The effective tax rate for 2023 reflects the impact of the recording of an additional valuation allowance against our current year losses, our return-to-provision adjustment, and an adjustment to a refund claim made under the CARES Act. The effective tax rate for 2022 was driven by the tax expense related to the gain on the transaction with WHP Global.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Historically, the primary source of our liquidity was cash flows from operations. Due to the seasonality of our business, we historically realized a significant portion of the cash flows from operating activities during the second half of the fiscal year. The primary cash needs of our business historically were for merchandise inventories, payroll, rent for our retail and outlet locations, marketing, capital expenditures associated with opening new locations,
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updating existing locations, as well as the development of our information technology. Our traditional strategy was to seek out and evaluate opportunities for effectively managing and deploying capital in ways that improved working capital and supported and enhanced our business initiatives and strategies.
Historically, our liquidity position benefited from the fact that we generally collected cash from sales to customers the same day or, in the case of credit or debit card transactions, within three to five days of the related sale, and we had up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors. Commitments under our lease agreements and debt agreements also required future cash outlays. For information on payments required under lease agreements see Note 6 of our Consolidated Financial Statements included elsewhere in this Form 10-K and for payment information related to our long-term debt see Note 8 of our Consolidated Financial Statements included elsewhere in this Form 10-K.
During 2023, the following significant transactions impacted our liquidity:
• On May 23, 2023, we completed the acquisition of Bonobos for $28.3 million in cash consideration
• Realized $80 million of cost reductions for fiscal year 2023 versus fiscal year 2022
• We borrowed a net additional $22.3 million under the Revolving Credit Facility (as defined in Note 8 of our Consolidated Financial Statements included elsewhere in this Form 10-K) to fund normal working capital needs
• On September 5, 2023, we entered into a definitive loan agreement for a $65.0 million first-in-last-out asset-based term loan in further support of expanding liquidity access. We borrowed a net additional $63.1 million during 2023
• On April 15, 2024, we received approximately $49.0 million from the CARES Act
Based upon the sales and results of operations seen during 2023, and expense reduction and other measures planned and taken to date, we were in compliance with the financial covenants under the Revolving Credit Facility and FILO Term Loan (as defined in Note 8 of our Consolidated Financial Statements included elsewhere in this Form 10-K) as of February 3, 2024. As of February 3, 2024, we had a negative working capital balance, meaning our current liabilities exceeded our current assets (including cash balances). As of February 3, 2024, our current liabilities included current operating lease liabilities, for which the corresponding operating right of use assets are recorded as non-current on our Consolidated Balance Sheets.
Chapter 11 Cases
As previously disclosed, to address our financial challenges, we and certain of our subsidiaries voluntarily filed petitions to commence proceedings under Chapter 11 of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, our principal source of liquidity was proceeds from the DIP Facilities approved by the Bankruptcy Court, as the filing of Chapter 11 constituted an event of default that accelerated our obligations under the ABL Credit Agreement and the FILO Term Loan Agreement.
Refer to Note 8 and Note 14 of our Consolidated Financial Statements included elsewhere in this Form 10-K for more information.
The accompanying Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, management has concluded that the Debtors’ need to implement a Chapter 11 restructuring plan and the costs, risks and uncertainties surrounding the outcome of the Chapter 11 Cases raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the issuance of the financial statements. The Company's accompanying Consolidated Financial Statements do not include any adjustments that might result from the wind-down of the Debtors’ estates under the Plan, including the disposition of the proceeds of the Sale Transaction and the disposition of the Debtors’ remaining assets to eligible claim holders.
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Analysis of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities for the period indicated:
(in thousands)
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents | beginning of period
Cash and cash equivalents | end of period
Operating Activities
Our business historically relied on cash flows from operations as our primary source of liquidity, with the majority of those cash flows being generated in the fourth quarter of the year.
Net cash used in operating activities was $56.8 million in 2023 compared to $157.1 million in 2022, an increase of $100.2 million. This increase was primarily driven by changes in working capital.
Investing Activities
Investing activities consisted primarily of investments in capital expenditures related to investments in new and remodeled store construction and fixtures and investments in information technology. Investing activities also include our strategic investments.
Net cash used in investing activities was $54.5 million in 2023 compared to net cash provided by investing activities of $196.0 million in 2022, a decrease of $250.5 million. For 2023, net cash used in investing activities was primarily due to the acquisition of Bonobos for $28.3 million and capital expenditures of $26.1 million relating to new and remodeled store construction and fixtures and investments in information technology. For 2022, the net cash provided by investing activities was primarily due to proceeds of $243.4 million from the WHP transaction offset by capital expenditures of $47.4 million relating to new and remodeled store construction and fixtures and investments in information technology. The decrease in capital expenditures in 2023 was primarily driven by intentional reductions in our capital expenditures in response to our business results and redeployment of capital to fund the Bonobos transaction and to support our cost reduction initiatives. Refer to Note 5 for further discussion regarding the acquisition and Note 4 in our Consolidated Financial Statements included elsewhere in this Form 10-K for further details regarding the WHP transaction.
Financing Activities
Financing activities consisted primarily of borrowings and repayments related to our debt arrangements and other equity related transactions.
Net cash provided by financing activities was $81.9 million in 2023 compared to net cash used in financing activities of $14.5 million in 2022, an increase of $96.4 million. This increase was primarily driven by borrowings under our debt arrangements.
Debt Arrangements
The Company's filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations under the ABL Credit Agreement and the FILO Term Loan Agreement. Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the applicable debtor, including actions to collect indebtedness, including interest payments, incurred prior to the Petition Date or to exercise control over the applicable debtor’s property. Our pre-petition debt and post-petition debt are described in greater detail below.
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Pre-Petition Debt (Historical)
Revolving Credit Facility
During 2023, we borrowed a net additional $22.3 million under the Revolving Credit Facility to fund normal working capital needs as well as capital expenditures for stores, our eCommerce platform and other information technology investments. As of February 3, 2024, the Company had approximately $144.4 million in borrowings outstanding under the Revolving Credit Facility and approximately $31.1 million was available for additional borrowing under the Revolving Credit Facility subject to certain borrowing base limitations and after giving effect to outstanding letters of credit in the aggregate amount of $20.1 million, primarily related to a third party logistics contract. Refer to Note 8 of our Consolidated Financial Statements included elsewhere in this Form 10-K for additional information on the Revolving Credit Facility.
FILO Term Loan
During 2023, we borrowed a net additional $63.1 million under the FILO Term Loan. As of February 3, 2024, the net aggregate outstanding principal amount of the FILO Term Loan was $60.3 million, of which $4.7 million was classified as short-term debt and $55.6 million was classified as long-term debt on the Consolidated Balance Sheet, net of unamortized costs. Refer to Note 8 of our Consolidated Financial Statements included elsewhere in this Form 10-K for additional information on the Term Loan.
Investment Agreement
On December 8, 2022, we entered into an investment agreement relating to the issuance and sale of shares of our common stock, par value $0.01, in a private placement to WHP (the "Investment Agreement"). On January 25, 2023, we completed the transactions contemplated by the Investment Agreement and the Membership Interest Purchase Agreement. Pursuant to the Investment Agreement, we issued and sold 5.4 million shares of common stock to WHP for a purchase price of $4.60 per share, or an aggregate purchase price of $25.0 million. The excess paid over fair value of $17.8 million was recorded in gain on transaction with WHP on the Consolidated Statements of Income and Comprehensive Income. We used the proceeds to repay our outstanding term loan, fund the Joint Venture’s first year guaranteed minimum royalty of $60.0 million pursuant to the License Agreement and pay costs, fees and expenses incurred in connection with the Investment Agreement and other associated transactions. For additional information, refer to Note 4 and Note 9 of our Consolidated Financial Statements included elsewhere in this Form 10-K.
Post-Petition Debt (Chapter 11 Cases)
Debtor-in-Possession Financing
In order to administer the Chapter 11 Cases, operate the Debtors’ business in the ordinary course and facilitate the marketing and consummation of the Sale Transaction (as defined below), the Company obtained $214.0 million of post-petition debtor-in-possession financing, consisting of (a) a new money single draw term loan in the amount of $25.0 million (the “Second Lien New Money DIP Term Loans”) and (b) a roll-up of (i) certain secured prepetition obligations under the Asset-Based Term Loan Agreement, dated as of September 5, 2023 (the “FILO Term Loan Agreement”) in the amount of $63.0 million (the “Second Lien DIP Term Roll-Up Loans”), and (ii) certain secured prepetition obligations under the asset-based loan credit agreement, dated as of May 20, 2015 (as amended, the “ABL Credit Agreement”) in the amount of $126.0 million (the “First Lien DIP ABL Roll-Up Loans”).
Each of the DIP Facilities are provided to the Company subject to the terms and conditions set forth in the respective DIP Credit Agreements that were executed by the Debtor and the applicable lenders on April 24, 2024, which include conditions precedent, representations and warranties, various affirmative and negative covenants, and events of default customary for financings of such type. The proceeds of all or a portion of the proposed DIP Facilities may be used by the Debtors for, among other things, refinancing the pre-petition debt of the Company, post-petition working capital for the Debtors, payment of costs to administer the Chapter 11 Cases, payment of expenses and fees of the transactions contemplated by the Chapter 11 Cases, payment of court-approved adequate protection obligations under the DIP Credit Agreements, and payment of other costs, in each case subject to the terms of the respective DIP Credit Agreement and the Final DIP Order or any other order of the Bankruptcy Court. The DIP ABL Facility was used to repay in full the obligations under the Second Amended and Restated
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Asset-Based Loan Credit Agreement, dated as of May 20, 2015 (as amended, the “ABL Credit Agreement”), including interest and fees through the date of repayment, on a dollar-for-dollar cashless basis.
The First Lien DIP ABL Loans are senior obligations of the Company and certain Debtors, and are secured by a first priority lien on the collateral under the ABL Credit Agreement, as well as on any unencumbered assets of the Debtors. The Second Lien New Money Term Loans and the Second Lien DIP Term Roll-up Loans (collectively, the DIP Term Loan Facility”) are senior obligations of the Company and certain Debtors, secured by a second priority lien on the collateral under the ABL Credit Agreement as well as on any unencumbered assets of the Debtors.
The relief granted by the Bankruptcy Court in its order on June 6, 2024, approving the final DIP Facilities (the “Final DIP Order”) also included granting certain adequate protections to the Debtors’ prepetition secured lenders and agents, which are intended to protect their interests in collateral securing their prepetition claims against the Debtors from any diminution in value. Refer to Note 8 of our Consolidated Financial Statements included elsewhere in this Form 10-K for additional information on the DIP Facilities.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position and are, therefore, discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our Consolidated Financial Statements. More information on all of our significant accounting policies can be found in Note 2 to our Consolidated Financial Statements included elsewhere in this Form 10-K.
Store Asset Impairment
Description of Policy
Store related Property and Equipment, including the right of use assets, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of these assets might not be recoverable. These include, but are not limited to, material adverse changes in projected revenues, present cash flow losses combined with a history of cash flow losses and a forecast that demonstrates significant continuing losses, significant negative economic conditions, a significant decrease in the market value of an asset and store closure or relocation decisions. We review for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable.
Stores that display an indicator of impairment are subjected to an impairment assessment. Our impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows.
• The key assumption used in our undiscounted future store cash flow models is the sales growth rate.
An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. Fair value of our store-related assets is determined at the individual store level based on the highest and best use of the asset group.
• The key assumptions used in our fair value analysis may include discounted estimates of future store cash flows from operating the store and/or comparable market rents.
Judgments and Uncertainties
Our analysis for impairment requires judgment surrounding identification of appropriate triggering events and assumptions used in our fair value model.
Effect if Actual Results Differ from Assumptions
We have no reason to believe that there will be a material change in the future estimates or assumptions we use in this evaluation. However, if we become aware of additional triggering events there is potential that additional stores could be required to be tested for impairment and could be impaired. These events could include further deterioration in store operating results, increased store labor costs, our inability to implement our cost savings initiatives or lower mall traffic. In addition, if market rent fair values deteriorate, our fair value test could determine additional right of use asset impairment. A 1% reduction in our store related assets would be approximately $5.3 million at February 3, 2024.
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Inventories - Lower of Cost or Net Realizable Value
Description of Policy
Inventories are principally valued at the lower of cost or net realizable value on a weighted-average cost basis. We record a lower of cost or net realizable value adjustment for our inventories if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory.
Judgments and Uncertainties
Our accounting methodology for determining the lower of cost or net realizable value adjustment contains uncertainties because it requires management to make assumptions and estimates that are based on factors such as merchandise seasonality, historical trends, and estimated inventory levels, including sell-through of remaining units.
Effect if Actual Results Differ from Assumptions
We have no reason to believe that there will be a material change in the future estimates or assumptions we use to measure the lower of cost or net realizable value adjustment. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 100 basis point increase or decrease in the lower of cost or net realizable value adjustment would not have had a material impact on the inventory balance or pre-tax income as of and for the year ended February 3, 2024.
Valuation Allowance on Deferred Tax Assets
Description of Policy
Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities. Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur.
Judgments and Uncertainties
Our deferred tax asset and liability balances contain uncertainty because changes in tax laws, rates, or future taxable income may differ from estimates and judgments made by management. Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including past operating results and expectations of future operating income. The ultimate realization of deferred tax assets is often dependent upon future profitability, which is inherently uncertain. While we have a full valuation allowance on our net deferred tax asset assets, future changes in assumptions could have an effect on our estimates.
Effect if Actual Results Differ from Assumptions
We have no reason to believe that there will be a material change in the future estimates or assumptions we use to calculate our deferred taxes. However, if future tax rates are changed, or if actual results are not consistent with our estimates, we may need to adjust the carrying value of our deferred tax balances. An increase or decrease in the valuation allowance would result in a respective increase or decrease in our effective tax rate in the period the increase or decrease occurs.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements and their estimated effect on the Company’s consolidated financial statements are described in Note 1 of our Consolidated Financial Statements included elsewhere in this Form 10-K.
