Item 1. Business
Overview
RTW Retailwinds, Inc., formerly known as New York & Company, Inc., (together with its subsidiaries, the "Company") is a
specialty women's omni-channel retailer with a powerful multi-brand lifestyle platform providing curated fashion solutions that are versatile, on-trend, and stylish at a great value. The specialty
retailer, first incorporated in 1918, has grown to now operate 387 retail and outlet locations in 33 states while also growing a substantial eCommerce business. The Company's portfolio includes
branded merchandise from New York & Company, Fashion to Figure, and collaborations with Eva Mendes, Gabrielle Union and Kate Hudson. The Company's branded merchandise is sold exclusively at its
retail locations and online at www.nyandcompany.com, www.nyandcompanycloset.com,
www.fashiontofigure.com, and www.happyxnature.com.The target customers for the Company's merchandise are
women between the ages of 25 and 49.
The
Company offers exclusive merchandise with assortments across categories consisting of wear-to-work, casual apparel and accessories, including pants, dresses, jackets, knit tops,
blouses, sweaters, denim, t-shirts, activewear, handbags, jewelry and shoes. The Company's merchandise reflects current fashions and fulfills a broad spectrum of its customers' lifestyle and wardrobe
requirements, providing every woman with a fashion strategy from work to weekend. The Company offers an inclusive range of merchandise sizes: 00 to 20, XXS to XXL, petite, tall, and plus.
The
Company positions itself as a source of fashion, quality and value by providing its customers with an appealing merchandise assortment at attractive price points, generally below
those of department stores and other specialty retailers. In fiscal year 2019, the Company continued to invest in its omni-channel infrastructure to provide its customers with the ability to shop
where, when and how they would like. In March 2020, the Company discontinued its omni-channel infrastructure investment. The Company's eCommerce channel currently represents approximately 34% of its
business. The Company's stores are typically concentrated in medium to large population centers of the United States and are located in shopping malls, lifestyle centers, outlet centers, and off-mall
locations, including urban street locations.
The
Company is facing a period of uncertainty because of the existing and future impact of the coronavirus ("COVID-19"). In March 2020, the COVID-19 outbreak in the United States
initially led to reduced store traffic and the temporary reduction of operating hours for the Company's brick-and-mortar stores. As the impact of COVID-19 evolved, the Company took decisive action to
temporarily close all of the Company's brick-and-mortar stores to ensure the health and safety of its employees, customers, and communities. As of the date of this filing, in accordance with the
federal and state guidelines and the adoption of new health and safety recommendations resulting from the COVID-19 pandemic, the Company began re-opening its brick-and-mortar stores during the first
week of June 2020. The Company will re-open stores utilizing a staggered approach, with the goal of all of its brick-and-mortar stores re-opened by the last week of June 2020. The Company cannot
reasonably estimate the length or severity of COVID-19. The Company's revenues, results of operations, and cash flows have been materially adversely impacted, and are expected to be further materially
adversely impacted, which raises substantial doubt about the Company's ability to continue as a going concern. Please see the "Risk factors" section of this Annual Report on Form 10-K including
"Risk-FactorsThe recent coronavirus outbreak has been declared a pandemic by the World Health Organization and has spread to the United States and many other parts of the world and has
adversely affected the Company's business operations, store traffic, employee availability, financial condition, liquidity and cash flow and is expected to continue to negatively impact the business
which could require the Company to restructure its obligations in a manner that would significantly impact its shareholders..." The Company has already experienced substantial and recurring losses
from operations, and such losses
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have
caused a retained deficit of $164.6 million as of February 1, 2020. As such, the Company has been considering available options including restructuring its obligations or seek
protection under the bankruptcy laws in which case there will likely not be any value distributed to its shareholders and its shares could be cancelled for no consideration. The Company believes that
seeking protection under the bankruptcy laws is probable.
The
Company's fiscal year is a 52- or 53-week year that ends on the Saturday closest to January 31. The 52-week year ended February 1, 2020 and the 52-week year ended
February 2, 2019 are referred to herein as "fiscal year 2019" and "fiscal year 2018," respectively. The 52-week year ending January 30, 2021 is referred to herein as "fiscal year 2020."
The Company's Strategies
Transformation into a Digitally Dominant Retailer
Prior to the impact of COVID-19, the Company planned to accelerate its strategy to reposition itself as a digitally dominant retailer. With
that, it anticipated the closure of 150 stores over the next 18 months as a component of the Company's transformation to a digitally dominant portfolio of brands. If the Company seeks
protection under the bankruptcy laws as discussed above, it could close more than 150 stores, or it may close all of its stores. The reduction of non-productive selling square feet is an integral
component of the Company's goal to improve productivity and
profitability across its chain of stores and online. Since the beginning of fiscal year 2014, the Company has closed 179 stores.
Evolve as a Broader Lifestyle Brand
In November 2018, the Company changed its name to RTW Retailwinds, Inc. to establish a strong and distinct corporate identity reflecting
the Company's multi-brand portfolio strategy. Prior to the impact of COVID-19, the Company had plans to maximize the power of its omni-channel retail platform and leverage its core operating strengths
to become the premier incubator of celebrity and lifestyle brands, offering assortments across categories and channels.
The
Company's celebrity collaborations and sub-brand strategy deliver a differentiated experience for its customers, provide trending fashion and a versatile assortment that the Company
believes will continue to broaden its reach as a lifestyle brand. The Company believes that its successful celebrity collaborations have also elevated the performance of the Company's other sub-brands
and will continue to do so in the future. The Company currently has the following sub-brands: 7th Avenue Design Studio, Soho Jeans, Soho Street, the Eva Mendes Collection, and the Gabrielle
Union Collection.
Enhance Brand Awareness, Increase Customer Engagement, and Drive Traffic
The Company seeks to build and enhance the recognition, appeal and reach of its New York & Company® brand through its
merchandise assortment, celebrity collaborations, expansion of its private label credit card and loyalty program ("Runway Rewards"), best-in-class customer service, and consistent marketing in-store,
on its website and through mobile devices, including tablets. The Company plans to focus on new customer acquisition and retention of existing customers, and rebalance its marketing media mix and
leverage its celebrity collaborations and sub-brands to amplify the New York & Company brand.
The
Company believes that its celebrity collaborations with Eva Mendes, Gabrielle Union, and Kate Hudson elevate and differentiate the New York & Company brand. The Company
leverages its celebrity collaborations to create an emotional connection with its customers and increase overall brand awareness. The Company continually explores the addition of new celebrity
collaborations.
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Drive eCommerce Growth and Expand Omni-Channel Capabilities
The Company operates an omni-channel retail platform with the purpose of providing a seamless and consistent shopping experience across all
channels of its business, allowing its customers to shop in stores, on mobile or desktop. In fiscal year 2019, net sales from eCommerce represented approximately 34% of the Company's business. The
Company views the eCommerce channel (www.nyandcompany.com) as its largest store providing the broadest selection of merchandise, including exclusive
styles and extended sizes. The Company's eCommerce store and mobile app are integral to the success of its omni-channel retail strategy, driving increased sales and traffic across all channels.
Design and Merchandising
The Company's product development group, led by its merchant and design teams in collaboration with celebrity collaborators, is dedicated to
consistently delivering high-quality and on trend fashion apparel and accessories at competitive prices to its customers. The Company seeks to provide its customers with key fashion items of the
season and encourages through its store and digital footprint a versatile wardrobe that addresses customers' specific lifestyle needs. The Company offers a broad assortment of product inclusive of its
successful celebrity collaborations, and lifestyle based sub-brands, along with a broad assortment of coordinating apparel items and accessories. The Company's merchandising, marketing and promotional
efforts encourage multiple-unit and outfit purchases and focuses on customer loyalty.
While
the Company delivers select new items every two to four weeks to its stores in order to keep the merchandise current and to keep customers engaged, new product lines are introduced
into the Company's stores in five major deliveries each year (spring, summer, fall, holiday and pre-spring). Product line development begins with the introduction of design concepts, key franchise
styles and trend stories particular to each sub-brand in the selection for the product line. From a speed to market perspective, the Company has made several improvements to its product development
calendar, which have shortened the total supply chain timeline. These changes, along with the implementation of a formalized "Fast Track" product development process, enables the Company to more
effectively leverage runway and trend intelligence; and combined with improvements to the Company's logistics
network provides more rapid delivery of product from concept to in-store. The Company's designers focus on overall concepts and identify and interpret the fashion trends for the season, identifying
those particular apparel items and accessories that will appeal to its target customer, designing the product line and presenting it to the Company's merchants for review. The Company's merchants are
responsible for developing seasonal strategies in partnership with their planning and allocation partners to maximize performance. Merchandising also develops a detailed list of desired apparel pieces
and accessories to guide the designers. Merchandising is buying, testing, editing, placing product and pricing the line during the season on an ongoing basis. This integrated and internal development
and tested approach to design, merchandising and sourcing, enables the Company to carry a versatile merchandise assortment that addresses customer demand while attempting to minimize inventory risk
and maximize sales and profitability.
Sourcing
The Company's sourcing approach focuses on quality, speed and cost in order to provide timely delivery of quality goods. This is accomplished by
closely managing the product development cycle, from raw materials and garment production to store-ready packaging, logistics and customs clearance.
Sourcing Relationships. The Company purchases apparel and accessories products directly from manufacturers and in some instances from
importers. The
Company's relationships with its direct manufacturers are supported by independent buying agents, who help coordinate the Company's purchasing requirements with the factories. The Company's unit
volumes, long-established vendor
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relationships
and knowledge of fabric and production costs, combined with a flexible, diversified sourcing base, enable it to buy high-quality, low-cost goods. The Company is not subject to long-term
production contracts with any of its vendors, manufacturers or buying agents. The Company's broad sourcing network allows it to meet its factory workplace standards; objectives of quality, cost, speed
to market; and inventory efficiency by shifting merchandise purchases as required, and allows it to react quickly to changing market or regulatory conditions. The Company sources nearly all of its
merchandise from three countries, with China, Vietnam and Indonesia representing approximately 95% of all merchandise purchases made during fiscal year 2019. The Company utilized two major apparel
agents, which together represented approximately 63% of the Company's merchandise purchases during fiscal year 2019; however, no individual factory represented more than 8% of the Company's
merchandise purchases.
Quality Assurance and Compliance Monitoring. The RTW Retailwinds, Inc. Global Compliance Program (the "Compliance Program") is
administered by
the Company's in-house compliance team, in partnership with third-party providers, and provides monitoring of country of origin, point of fabrication compliance, compliance with the Company's Code of
Business Conduct for Suppliers, labor standards, and supply chain security. The Compliance Program includes supply chain labor standards and Customs-Trade Partnership Against Terrorism (C-TPAT)
security audits, announced or unannounced, conducted by the Company's in-house compliance team, as well as the Company's primary third party audit firm and two additional third party audit firms.
Subject to health and safety considerations, annual international and domestic visits are conducted by the Company's in-house compliance team for select vendors and their respective factories. The
Company's in-house compliance team visits factories to ensure that factory management and associates understand and comply with the Company's Code of Business Conduct for Suppliers, labor standards
and supply chain security standards. The Company's independent buying agents and importers also conduct in-line factory and final quality audits. In addition, all of the vendors that manufacture
merchandise for the Company enter into a master sourcing agreement with the Company that specifies their obligations with respect to quality, safety and ethical business practices.
Distribution and Logistics
The Company entered into a transition services agreement with L Brands in 2002 in connection with the acquisition of Lerner Holding (as amended,
the "transition services agreement"). L Brands provides the Company with certain warehousing and distribution services under the transition services agreement. All of the Company's merchandise is
received, processed, warehoused and distributed through L Brands' distribution center in Columbus, Ohio. Details about each receipt are supplied to the Company's store inventory planners, who
determine how the product should be distributed among the Company's stores based on current inventory levels, sales trends and specific product characteristics. Advance shipping notices are
electronically communicated to the stores.
Under
the transition services agreement, as amended, these services will terminate upon the earliest of the following: (i) 24 months from the date that L Brands notifies
the Company that L Brands wishes to terminate the services; (ii) 24 months from the date that the Company notifies L Brands that the Company wishes to terminate the services;
(iii) 60 days after the Company has given notice to L Brands that L Brands has failed to perform any material obligations under the agreement and such failure shall be continuing;
(iv) 30 days after L Brands has given notice to the Company that the Company has failed to perform any material obligations under the agreement and such failure shall be continuing;
(v) within 75 days of receipt of the annual proposed changes to the agreement schedules which outline the cost methodologies and estimated costs of the services for the coming year, if
such proposed changes would result in a significant increase in the amount of service costs that the Company would be obligated to pay; (vi) 15 months after a change of control of the
Company, at the option of L Brands; or (vii) upon reasonable notice under the prevailing circumstances by the Company
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to
L Brands after a disruption of services due to force majeure that cannot be remedied or restored within a reasonable period of time. The Company believes that these services are provided at a
competitive price and the Company anticipates continuing to use L Brands for these services.
The
Company relies on a third-party to operate its eCommerce stores, including fulfillment services. The third-party warehouse facility is located in Martinsville, Virginia. Merchandise
is received in this location from L Brands' distribution center. The operation of the Company's eCommerce stores is covered by a master services agreement that is in effect through April 30,
2021.
Real Estate
As of February 1, 2020, the Company operated 387 stores in 33 states, with an average of 5,004 selling square feet per store. The
Company's growth and productivity statistics are reported based on selling square footage because management believes the use of selling square footage yields a more accurate measure of store
productivity than gross square footage. All of the Company's stores are leased and are primarily located in medium to large population centers of the United States in shopping malls, lifestyle
centers, outlet centers, and off-mall locations, including urban street locations. As of February 1, 2020, approximately 70% of the Company's store leases could be terminated by the Company
within two years.
Historical Store Count
|
|
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|
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|
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|
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|
Fiscal Year
|
|
Total stores open
at beginning of
fiscal year
|
|
Number of stores
opened during
fiscal year
|
|
Number of stores
closed during
fiscal year
|
|
Number of stores
remodeled during
fiscal year
|
|
Total stores
open at end of
fiscal year
|
|
2019
|
|
|
410
|
|
|
8
|
|
|
(31
|
)
|
|
6
|
|
|
387
|
|
2018
|
|
|
432
|
|
|
15
|
|
|
(36
|
)
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|
1
|
|
|
411
|
|
Historical Selling Square Footage
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|
|
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|
|
|
|
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|
|
|
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|
|
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|
Fiscal Year
|
|
Total selling
square feet at
beginning
of fiscal year
|
|
Increase in
selling square
feet for stores
opened during
fiscal year
|
|
Reduction of
selling square
feet for stores
closed during
fiscal year
|
|
Net (reduction)
increase of
selling square
feet for stores
remodeled during
fiscal year
|
|
Total selling
square feet
at end of
fiscal year
|
|
2019
|
|
|
2,047,032
|
|
|
37,500
|
|
|
(142,017
|
)
|
|
(6,019
|
)
|
|
1,936,496
|
|
2018
|
|
|
2,171,329
|
|
|
53,174
|
|
|
(181,954
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)
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|
4,483
|
|
|
2,047,032
|
|
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Store Count by State as of February 1, 2020
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State
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|
# of
Stores
|
|
State
|
|
# of
Stores
|
|
State
|
|
# of
Stores
|
|
Alabama
|
|
|
6
|
|
Maryland
|
|
|
17
|
|
Ohio
|
|
|
15
|
|
Arizona
|
|
|
5
|
|
Massachusetts
|
|
|
7
|
|
Oklahoma
|
|
|
1
|
|
California
|
|
|
42
|
|
Michigan
|
|
|
8
|
|
Pennsylvania
|
|
|
25
|
|
Colorado
|
|
|
2
|
|
Minnesota
|
|
|
3
|
|
Rhode Island
|
|
|
2
|
|
Connecticut
|
|
|
6
|
|
Mississippi
|
|
|
1
|
|
South Carolina
|
|
|
10
|
|
Delaware
|
|
|
2
|
|
Missouri
|
|
|
4
|
|
Tennessee
|
|
|
8
|
|
Florida
|
|
|
27
|
|
Nevada
|
|
|
3
|
|
Texas
|
|
|
36
|
|
Georgia
|
|
|
17
|
|
New Hampshire
|
|
|
1
|
|
Virginia
|
|
|
18
|
|
Illinois
|
|
|
16
|
|
New Jersey
|
|
|
26
|
|
Wisconsin
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indiana
|
|
|
4
|
|
New Mexico
|
|
|
1
|
|
Grand Total
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
5
|
|
New York
|
|
|
43
|
|
|
|
|
|
|
Louisiana
|
|
|
5
|
|
North Carolina
|
|
|
19
|
|
|
|
|
|
|
Site Selection. The Company's real estate department is responsible for new store site selection. While selecting a specific location
for a new
store, the Company targets high-traffic real estate in locations with demographics reflecting concentrations of the Company's target customers and a complementary tenant mix.
Each
New York & Company store is typically 4,000 to 6,000 selling square feet. Each Outlet store is typically 3,000 to 5,000 selling square feet. Each Fashion to Figure store is
typically 2,000 to 3,000 selling square feet.
Store Display and Merchandising. The Company's stores are designed to effectively display its merchandise and create an upbeat
atmosphere. Expansive
front windows allow potential customers to see easily into the store and are used as a vehicle to highlight major merchandising and promotional events. The open floor design allows customers to
readily view the majority of the merchandise on display, while store fixtures allow for the efficient display of garments and accessories. Merchandise displays are modified on a weekly basis based on
sales trends and inventory receipts. The Company's in-store product presentation utilizes a variety of different fixtures to highlight the product line's breadth and versatility. Complete outfits are
displayed throughout the store using garments from a variety of product categories. The Company displays complete outfits to demonstrate how its customers can combine different pieces in order to
increase unit sales.
Pricing and Promotional Strategy. The Company's pricing and promotional strategy is designed to drive customer traffic, maximize
conversion and
promote brand loyalty. The Company evaluates the efficacy of its promotional strategy on an ongoing basis to eliminate underproductive and inefficient promotional tactics, introduce new promotional
logic, and identify category elasticities to align pricing and promotions with customer demand. The promotional pricing strategy is designed to encourage multiple-unit sales. Select key items are also
prominently displayed in store windows at competitive prices to drive traffic into the stores.
Inventory Management. The Company's inventory management systems, which support the Company's omni-channel retail strategy, are
designed to maximize
merchandise profitability and increase inventory turns. The Company constantly monitors inventory turns on the selling floor and uses pricing and promotions to maximize sales and profitability and to
achieve inventory turn goals. The Company is able to quickly distribute merchandise from its traditional retail stores to its Outlet stores to maximize sell-through and optimize its in-store
merchandise assortment. The Company's inventory loss prevention program is integrated with the store operations and finance departments of its
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business.
This program includes electronic article surveillance systems in a majority of stores, including sensor and ink tagging, as well as the use of data analytics, fraud prevention technology,
the monitoring of merchandise returns, merchandise voids, employee sales and deposits, and educating store personnel on loss prevention.
Field Sales Organization. The Company's New York & Company and Outlet store teams are integrated as one organization,
streamlining business
processes to increase efficiency and reduce costs. Currently, the Company's field sales organization is organized into 4 regions. The 4 regions are organized into 16 districts. Each region is managed
by a regional manager. The Company staffs approximately 16 district managers, with each typically responsible for the sales and operations of 24 stores on average. Each store is usually staffed with a
store manager and 2 additional support staff. Higher volume stores may have additional positions as required. All stores are staffed with hourly sales associates. The Company has approximately 1,000
full-time in-store managers. The goal of the Company's field sales organization is to provide a memorable customer experience by creating an environment that is inspirational, exciting and fun. To
accomplish this goal, the field sales organization is continuously engaged in various initiatives to improve talent assessment and acquisition processes, enhance brand education and communication
training and increase engagement with the customer in store to drive sales and profitability. The Company seeks to instill enthusiasm and dedication in its store management personnel by maintaining an
incentive-based bonus plan for its field managers. The program is
currently based on monthly sales performance and seasonal inventory loss targets. The Company believes that this program effectively creates incentives for its senior field leaders and aligns their
interests with the financial goals of the Company. The Company evaluates the selling and fitting room experience, visual merchandising standards, and the operational execution of running a productive
store. Stores are required to meet or exceed established store standards to ensure the quality of the customers' overall in-store experience.
The
Company typically employs between 3,000 and 4,000 full- and part-time store sales associates, depending on the Company's seasonal needs. The Company has store operating policies and
procedures and efficient point-of-sale ("POS") terminals and an in-store training program for new store employees. Detailed product descriptions are also provided to sales associates to enable them to
gain familiarity with product offerings. The Company offers its sales associates a discount on the Company's apparel and accessories.
Brand Building and Marketing
In November 2018, the Company changed its name to RTW Retailwinds, Inc. to establish a strong and distinct corporate identity reflecting
the Company's multi-brand portfolio strategy. The Company's brands include New York & Company, Fashion to Figure, and Happy x Nature. While the Company has invested in the growth
of its new brands, the Company believes that its New York & Company brand is among its most important assets. The Company's ability to continuously evolve its brand to appeal to the changing
needs and priorities of its target customer is a key source of its competitive advantage. The Company believes its exclusive merchandise and sub-brands, including 7th Avenue Design Studio, Soho
Jeans, Soho Street, Eva Mendes Collection, and Gabrielle Union Collection, combined with accessories, proprietary merchandise designs, value pricing, merchandise quality, in-store merchandise display
and store service differentiate its brand from its competitors and drives strong brand recognition and endorsement by its target customers. The Company is leveraging its existing collaborations with
celebrities Eva Mendes, Gabrielle Union and Kate Hudson to amplify the New York & Company brand. The Company believes its celebrity collaborations create an emotional connection with its
customers and increase overall brand awareness. The Company continually explores the addition of new celebrity collaborations.
The
Company has invested in the development of its brands through, among other things, direct mail, Fashion Books, in-store marketing, digital marketing, email and text messaging
programs, social
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mediaFacebook,
Instagram, Twitter, and Pinterest, public relations programs and select advertising. The Company also makes investments to enhance the overall customer experience through
remodeling/refreshing existing stores, broadening its assortment online and consistently upgrading the online experience, both in desktop and mobile applications, including tablets, and focusing on
customer service. For each of its brands, the Company consistently communicates brand image across all aspects of its business, including product design, store merchandising and shopping environments,
channels of distribution, and marketing and advertising.
The
Company believes that it is strategically important to acquire new customers and communicate directly with its current customer base on a regular basis. The Company uses its customer
database, which includes approximately four million customers who have made purchases within the last twelve months, to design marketing programs to attract its core customers.
Customer Credit
The Company has a credit card processing agreement with Comenity Bank, a bank subsidiary of Alliance Data Systems Corporation ("ADS"), which
provides the services of the Company's proprietary credit card program ("NY&C PLCC"). The Company allows payments on this credit card to be made at its stores as a service to its customers. ADS
owns the credit card accounts, with no recourse to the Company. All of the Company's proprietary credit cards carry the New York & Company brand. These cards provide purchasing power to
customers and an additional channel for the Company to communicate product offerings.
The
Company has a strong strategic focus on its private label credit card and its Runway Rewards loyalty program to increase the number of credit card holders and sales to such
customers. NY&C PLCC sales represented 45% of total Company sales in fiscal year 2019.
On
July 14, 2016, the Company entered into a Second Amended and Restated Private Label Credit Card Program Agreement, effectively dated May 1, 2016, with Comenity Bank,
which replaced the existing agreement with ADS and has a term through April 30, 2026 (the "ADS Agreement"). Pursuant to the terms of the ADS Agreement, ADS has the exclusive right to provide
private label credit cards to customers of the Company. In connection with the execution of the ADS Agreement, the Company received $40.0 million in signing bonuses. The signing bonuses were
payable in two installments, of which $17.5 million was received on July 28, 2016, and $22.5 million was received on January 10, 2017. In
addition, over the 10-year term of the ADS Agreement, the Company will receive an increased level of royalty payments based on a percentage of private label credit card sales. During fiscal year 2019
and fiscal year 2018, the Company recognized $22.1 million and $23.7 million of revenue from royalties and the amortization of signing bonuses in connection with the ADS Agreement,
respectively. Deferred revenue related to the ADS Agreement was $25.0 million at February 1, 2020, which will be amortized through April 30, 2026.
Information Technology
Information technology is a key component of the Company's business strategy and the Company is committed to utilizing technology to enhance its
competitive position. The Company's information systems integrate data from field sales, eCommerce sales, design, merchandising, planning and distribution, and financial reporting functions. The
Company's core business systems consist of both purchased and internally developed software, operating on Microsoft, Oracle, and IBM platforms. These systems are accessed over a company-wide network
through which associates have access to many key business applications.
Sales,
cash deposit and related credit card information are electronically collected from the stores' POS terminals and eCommerce websites on a daily basis. During this process, the
Company also obtains information concerning inventory receipts and transmits pricing, markdown and shipment notification data. In addition, where and as permitted by law, the Company collects customer
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transaction
data to grow and update its customer database. The merchandising staff and merchandise planning staff evaluate the sales and inventory information collected from the stores to make key
merchandise planning decisions, including orders and markdowns. These systems enhance the Company's ability to optimize sales while limiting markdowns, achieve planned inventory turns, reorder
successful styles, and effectively distribute new inventory to the stores.
One
of the Company's top priorities in fiscal year 2019 was optimizing its omni-channel retail strategy to provide a seamless and consistent customer shopping experience across store and
eCommerce channels. The Company believes that its omni-channel retail strategy has improved its customers' shopping experiences, which will continue to enhance brand image and increase customer
loyalty. Through fiscal year 2019, the Company continued to invest resources into omni-channel retail initiatives, with a particular focus on mobile, and leveraged the enhanced customer shopping
experience to drive additional traffic and increase sales across all channels. The Company also invested in
additional technology and services to enhance the customer experience on its digital channels: desktop and tablet, mobile web and mobile applications.
The
Company has implemented measures to prevent and detect security breaches and cyber incidents, and continues to invest in the fortification of its information systems, networks and
infrastructure. The Company is dedicated to safeguarding the storage and transmission of customers' personal information, shopping preferences and credit card information, in addition to employee
information and the Company's financial and strategic data.
Competition
The retail and apparel industries are highly competitive. The Company competes with traditional department stores, specialty store retailers,
discount apparel stores, international retailers opening large numbers of stores in the United States, and direct marketers for, among other things, customers, raw materials, market share, retail
space, finished goods, sourcing and personnel. The Company differentiates itself from its competitors on the basis of its exclusive merchandise and multi-brand portfolio, including its celebrity
collaborations and sub-brands, combined with accessories, proprietary merchandise designs, value pricing, merchandise quality, in-store merchandise display and store service. The Company believes that
its talented, in-house design, marketing, sourcing and production teams, in partnership with a global network of vendors and factories provide a competitive advantage.
Seasonality
The Company views the retail apparel market as having two principal selling seasons: spring (first and second quarter) and fall (third and
fourth quarter). New product lines are introduced into the Company's stores in five major deliveries each year (spring, summer, fall, holiday and pre-spring). The Company's business experiences
seasonal fluctuations in net sales and operating income, with a larger portion of its sales typically realized during the fourth quarter. Seasonal fluctuations also affect inventory levels. The
Company must carry a significant amount of inventory, especially before the holiday season selling period in the fourth quarter and prior to the Easter and Mother's Day holidays toward the latter part
of the first quarter and beginning of the second quarter. Due to COVID-19 overlapping the important holiday season selling period of Easter and Mother's Day, the Company was left with significant
unsold inventory during Spring 2020.
Intellectual Property
The Company's trademarks, including New York & Company®, NY&C®, Soho New York & Company
Jeans®, Lerner®, Fashion to Figure®, and FTF® brands, are registered with the United States Patent and Trademark Office and with registries of many
foreign countries. The Company also has long-term license agreements with its celebrity collaborators to use their name, likeness and other related materials to market specified brands.
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Employees and Labor Relations
As of February 1, 2020, the Company had a total of 4,971 employees of which 1,413 were full-time employees and 3,558 were part-time
employees, who are primarily store associates. The number of part-time employees fluctuates depending on the Company's seasonal needs. The collective bargaining agreement with the Local 1102 unit of
the Retail, Wholesale and Department Store Union (RWDSU) AFL-CIO is in effect through August 31, 2021. Approximately 7% of the Company's total employees are covered by collective bargaining
agreements and are primarily non-management store associates. The Company believes its relationship with its employees is good. As of the date of this filing, in accordance with the federal and state
guidelines and the adoption of new health and safety recommendations resulting from the COVID-19 pandemic, the Company began re-opening its brick-and-mortar stores during the first week of June 2020.
The Company will re-open stores utilizing a staggered approach, with the goal of all of its brick-and-mortar stores re-opened by the last week of June 2020. As a result of the temporary store closures
related to COVID-19, the Company's store associates have been temporarily furloughed. For further information, see Note 15,
"Subsequent Events," to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
In
order to remain competitive in the retail apparel industry, the Company must attract, develop, and retain skilled employees in design, merchandising, supply chain, marketing, and
other functions, as well as in its stores and distribution centers. The Company's success is also dependent, to a significant degree, on the continued contributions of key employees. For further
information, please refer to "Item 1A. Risk Factors," appearing elsewhere in this Annual Report on Form 10-K.
Government Regulation
The Company is subject to employment laws and regulations, including minimum wage requirements, intellectual property laws, consumer protection
laws and regulations (including those relating to advertising and promotions, privacy and product safety), truth-in-lending and other laws and regulations with respect to the operation of the
Company's stores and business generally, such as zoning and occupancy ordinances governing the importation and exportation of merchandise and the use of the Company's proprietary credit cards. Certain
jurisdictions are considering or have enacted privacy and/or cyber security laws and regulations that do or could impose additional obligations on the Company. In addition, the Company is subject to
Securities and Exchange Commission rules and regulations, state laws, Sarbanes-Oxley requirements, rules and regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection
Act, other U.S. public company regulations, and various other requirements mandated for the textiles and apparel industries such as the Consumer Product Safety Improvement Act of 2008, California's
Proposition 65 and similar state laws. The Company monitors changes in these laws and believes that it is in material compliance with applicable laws with respect to these practices.
The
majority of the Company's merchandise is manufactured by factories located outside of the United States. These products are imported and are subject to U.S. customs laws, which
impose tariffs for textiles and apparel. Any major changes in United States tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of
unilateral tariffs on imported goods, could have a material adverse effect on the Company's business, results of operations and liquidity. In addition, some of the Company's imported products are
eligible for certain duty-advantaged programs, including but not limited to the North American Free Trade Agreement, the Andean Trade Preference Act, the U.S. Caribbean Basin Trade Partnership Act and
the Caribbean Basin Initiative.
During
fiscal year 2018, the United States began to impose additional tariffs on certain Chinese-made imported products which had minor impact on the Company's products. On
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September 1,
2019, additional tariffs were imposed on the majority of products the Company imports from China, such as apparel, accessories, and footwear, with subsequent partial reductions on
February 14, 2020. The Company has been able to minimize the negative impact of these tariffs and new and/or incremental tariffs thus far, as the Company has been actively reducing its
penetration of Chinese-made imported products and has engaged vendor participation to negotiate cost-sharing agreements, and has managed and adjusted future buys and product pricing. The Company
sourced approximately 65% of its goods from China in fiscal year 2019, so any tariffs or other trade restrictions impacting the import of apparel and accessories from China could have a material
adverse impact on the Company. However, the Company has taken steps to attempt to mitigate the impacts of tariffs on imports from China, including renegotiation of product costs, shifting merchandise
mix, and sourcing merchandise from factories outside of China. There can be no assurance that these actions will mitigate the impact of existing tariffs and new and/or incremental tariffs and
consequentially, the Company may experience a material adverse impact from such tariffs to its results of operations, financial position and cash flows.
Smaller Reporting Company Status
The Company qualifies as a "smaller reporting company" as defined under Rule 12b-2 of the Exchange Act ("Rule 12b-2"). The Company
will continue to qualify as a smaller reporting company if: (i) its public float is less than $250 million; or (ii) its annual revenues are less than $100 million and its
public float is less than $700 million. Pursuant to Rule 12b-2, the Company determined it qualified as a smaller reporting company as of the last business day of its second fiscal
quarter. As a smaller reporting company, the Company may use the smaller reporting company scaled disclosure accommodations of Regulation S-K and S-X in its filings.
Available Information
The Company makes available free of charge on its website, www.nyandcompany.com, copies of its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as reasonably practicable after filing or furnishing such material electronically with the United States
Securities and Exchange Commission. Copies of the charters of each of the Company's Audit Committee, Compensation Committee, and Nomination & Governance Committee, as well as the Company's
Corporate Governance Guidelines, Code of Business Conduct for Associates, Code of
Conduct for Principal Executive Officers and Key Financial Associates, and Code of Business Conduct for Suppliers, are also available on the website.
Item 1A. Risk Factors
The recent coronavirus outbreak has been declared a pandemic by the World Health Organization and has spread
to the United States and many other parts of the world and has adversely affected the Company's business operations, store traffic, employee availability, financial condition, liquidity and cash flow
and is expected to continue to negatively impact the business which could require the Company to restructure its obligations or seek protection under the bankruptcy laws in which case there will
likely not be any value distributed to its shareholders and its shares could be cancelled for no consideration. The Company believes that seeking protection under the bankruptcy laws is probable.
The outbreak of the COVID-19 continues to grow in the United States and globally, and related government and private sector responsive actions
have adversely affected the Company's business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
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In
March 2020, the COVID-19 outbreak in the United States initially led to reduced store traffic and the temporary reduction of operating hours for the Company's brick-and-mortar stores.
As the impact of COVID-19 evolved, the Company took decisive action to temporarily close all of the Company's brick-and-mortar stores to ensure the health and safety of its employees, customers, and
communities. As of the date of this filing, in accordance with the federal and state guidelines and the adoption of new health and safety recommendations resulting from the COVID-19 pandemic, the
Company began re-opening its brick-and-mortar stores during the first week of June 2020. The Company will re-open stores utilizing a staggered approach, with the goal of all of its brick-and-mortar
stores re-opened by the last week of June 2020. The Company cannot reasonably estimate the length or severity of COVID-19. The Company's revenues, results of operations, and cash flows have been
materially adversely impacted, and are expected to be further materially adversely impacted, which raises substantial doubt about the Company's ability to continue as a going concern.
The
Company's response to COVID-19 may also impact its customer loyalty. If the Company's customer loyalty is negatively impacted or consumer discretionary spending habits change,
including in connection with rising levels of unemployment, the Company's market share may suffer as a result.
Because
the Company has temporarily closed all of its stores, the Company has taken steps to reduce operating costs and improve efficiency, including furloughing a substantial number of
the Company's personnel and terminating certain corporate personnel. These steps may have an impact on the Company's ability to attract and retain associates in the future. If the Company is unable to
attract and retain associates in the future, such as those associates who find other employment during the furlough period, the Company may experience operational challenges when it re-opens its
stores. These risks related to the Company's business, financial condition, and results of operations, are especially heightened given the uncertainty as to the extent and duration of COVID-19's
existing and future impact. The Company may also face demands or requests from its associates for additional compensation, healthcare benefits or other terms as a result of COVID-19 that could
increase costs, and the Company could experience labor disputes or disruptions as it continues to implement its COVID-19 mitigation plans.
All
of the Company's corporate office associates are working remotely. As a result, the Company faces certain operational risks, including heightened cybersecurity risks. In addition,
the Company cannot predict the impact that COVID-19 will have on its suppliers, vendors, and other business partners, and each of their financial conditions; however, any material effect on these
parties could adversely impact the Company. The Company may not be able to mitigate the impact COVID-19 has had and will have on its business and has been considering available options including
restructuring its obligations or seeking protection under the bankruptcy laws in which case there will likely not be any value distributed to its shareholders and its shares could be cancelled for no
consideration.
The Company's audited financial statements include a statement that there is a substantial doubt about the
Company's ability to continue as a going concern and a continuation of negative financial trends could result in the Company's inability to continue as a going concern.
The Company's audited financial statements as of and for the year ended February 1, 2020 were prepared on the assumption that the Company
would continue as a going concern. The Company's audited financial statements as of and for the year ended February 1, 2020 did not include any adjustments that might result from the outcome of
this uncertainty. As a result of the existing and future impact of COVID-19 on the Company's operations as described above, management has determined that there is a substantial doubt about the
Company's ability to continue as a going concern over the next twelve months and the Company's independent auditors have included a "going concern" explanatory paragraph in their report on the
Company's financial statements as of and for the year ended February 1, 2020.
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The
Company may not be able to mitigate the impact COVID-19 has had and will have on its business and has been considering available options including restructuring its obligations or
seeking protection under the bankruptcy laws in which case there will likely not be any value distributed to its shareholders and its shares could be cancelled for no consideration.
The Company's ability to accelerate its transformation to a digitally dominant retailer is a complex strategy
that will require expertise and resources to execute. If the Company is unable to execute on the acceleration of its business transformation to a digitally dominant retailer, the Company may
experience a material adverse effect to it results of operations, financial condition, liquidity and cash flows.
Prior to the impact of COVID-19, the Company planned to accelerate its strategy to reposition itself as a digitally dominant retailer. With
that, it anticipated the closure of 150 stores over the next 18 months as a component of the Company's transformation to a digitally dominant portfolio of brands. If the Company seeks
protection under the bankruptcy laws as discussed above, it could close more than 150 stores, or it may close all of its stores. The reduction of non-productive selling square feet is an integral
component of the Company's goal to improve productivity and profitability across its chain of stores and online.
The
Company planned to make strategic investments to grow as a digitally dominant multi-brand portfolio company, but these investments are now on hold. These investments may include the
expansion of its celebrity collaborations and existing brands, launching new lifestyle brands, driving growth in the eCommerce channel, and rebalancing its marketing media mix to acquire new customers
and retain existing customers. As such, during the three months ended November 2, 2019, the Company launched its Customer First initiative with the objective to reinvent all aspects of its
marketing programs, from data analytics, creative storytelling, personalization and segmentation, and content creation with an intense focus on the customer. The Company remains focused on
transforming its marketing efforts to be customer-first, data-driven and creatively optimized, which, when combined the Company believes will elevate the customer experience, engage new customers and
retain existing customers.
In
addition, the Company planned to implement an organizational structure to support a digitally dominant business and growth as a multi-brand portfolio company. This included the Design
and Merchandising department re-alignment to improve clarity of offer, optimize organizational efficiencies and reduce development expense.
If
the Company is unable to execute on the acceleration of its business transformation to a digitally dominant retailer, or any of the components of that strategic agenda, the Company
may experience a material adverse effect to its results of operations, financial condition, liquidity and cash flows.
A continued reduction in the volume of mall traffic could significantly reduce the Company's sales and leave
it with unsold inventory, reducing the Company's profits or creating losses.
Many of the Company's stores are located in shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those
malls. The Company's sales volume and store traffic will be adversely affected by a continued decrease in the popularity of malls or other shopping centers in which the Company's stores are located,
the closing of anchor stores important to driving mall traffic and therefore the Company's business, a decline in popularity of other stores in the malls or shopping centers in which the Company's
stores are located, or a deterioration in the financial condition of shopping center operators or developers which could, for example, limit their ability to invest in improvements and finance tenant
improvements for the Company and other retailers. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from internet retailers, non-mall
retailers and other malls where the Company does not have stores, and the
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impact
of COVID-19 on consumer behavior. A continued reduction in mall traffic as a result of these or any other factors could materially adversely affect the Company's business.
If the Company is not able to respond to fashion trends in a timely manner, develop new merchandise or launch
new product lines successfully, it may be left with unsold inventory, experience decreased profits or incur losses or suffer reputational harm to the image of its brands.
The Company's success depends in part on management's ability to anticipate and respond to changing fashion tastes and consumer demands and to
translate market trends into appropriate, saleable product offerings. Customer tastes and fashion trends change rapidly. If the Company is unable to successfully identify or react to changing styles
or trends and misjudges the market for its products or any new product lines, its sales may be lower, gross margins may be lower and the Company may be faced with a significant amount of unsold
finished goods inventory. In response, the Company may be forced to increase its marketing promotions or price markdowns, which
could have a material adverse effect on its financial condition and results of operations. The Company's brand image may also suffer if customers believe that it is no longer able to offer the latest
fashions. Some of the Company's brands are affiliated with celebrities; if the Company experiences an unplanned interruption in the collaboration with these celebrities, including Eva Mendes,
Gabrielle Union, or Kate Hudson, for any reason, it may result in a decrease in net sales and profitability. The Company has long-term license agreements with its celebrity collaborators to use their
name, likeness and other related materials to market specified brands. The Company may not be able to renew expiring licenses on terms that are favorable to the Company or at all, which could have a
material adverse effect on the Company's results of operations, financial condition and cash flows.
The Company's inability to maintain the image of its brands, engage new and existing customers and gain
market share could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's success depends heavily on the value associated with its New York & Company brand, including its celebrity collaborations
and sub-brands. The New York & Company name is integral to the Company's existing business, as well as to the implementation of its strategy for growing and expanding its business. Maintaining,
promoting and growing the Company's brands will depend largely on the success of its design, merchandising and marketing efforts and its ability to provide a consistent, high-quality customer
experience. The Company's reputation could be jeopardized if it fails to maintain high standards for merchandise quality and integrity and any negative publicity about these types of concerns may
reduce demand for the Company's merchandise. While the Company's brands enjoy a loyal customer base, the success of the Company's growth strategy depends, in part, on the Company's ability to keep
existing customers engaged as well as attract new customers to shop its brands. The Company's brands could be adversely affected if the Company's public image or reputation were to be tarnished, which
could result in a material adverse effect on the Company's business. If the value associated with the Company's brands were to diminish, the Company's sales could decrease, causing decreased profits
or losses.
As
the use of social media becomes more prevalent, the Company's susceptibility to risks related to social media increases. The immediacy of social media precludes the Company from
having real-time control over postings made regarding the Company via social media, whether matters of fact or opinion. Information distributed via social media could result in negative publicity,
causing damage to the Company's reputation, and therefore have a material adverse effect on its business, financial condition and results of operations.
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The failure of the Company's celebrity collaborators to protect their reputation could have a material
adverse effect on the Company's business, reputation and brand image.
The Company's success is partially dependent on the reputations of its celebrity collaborators, such as Eva Mendes, Gabrielle Union and Kate
Hudson. The Company often relies on its celebrity collaborators to manage and maintain their brands, but these celebrity collaborators' reputation may be harmed due to factors outside the Company's
control, which could negatively impact the Company's brand image and have a material adverse effect on its business. Certain of the Company's products bear the names and likeness of celebrities, whose
brand or image may change without notice and who may not maintain the appropriate celebrity status or positive association among the consumer public to support projected sales levels. Damage to the
reputations of the Company's celebrity collaborators could have a material adverse effect on the Company's results of operations, financial condition and cash flows, as well as require additional
resources to rebuild the Company's reputation.
Fundamental shifts in the women's retail apparel industry could adversely affect the Company's business and
financial performance.
The growth and prominence of fast-fashion and value-fashion retailers and expansion of off-price retailers has fundamentally shifted customer
expectations of affordable pricing and continued promotional pressure. The rise of these retailers as well as the shift in shopping preferences away from brick-and-mortar stores to the direct channel,
where online-only businesses or those with robust direct channel capabilities can facilitate competitive entry and comparison shopping, have increased the difficulty of maintaining and gaining market
share. In addition, the Company's customers are increasingly using mobile devices to make purchases online and to help them in making purchasing decisions when in the Company's stores. The Company's
execution of its own omni-channel retail strategy to adapt to these changes, in relation to its competitors' actions as well as to its customers' adoption of new technology, presents a specific risk.
If for any reason the Company is unable to implement its omni-channel retail strategy, provide a convenient and consistent experience for its customers across all channels, or provide its customers
the products they want, when and where they want them at a compelling value proposition, then the Company's financial performance and brand image could be adversely affected. Further, unanticipated
changes in pricing and other practices of the Company's competitors, including promotional activity, such as free shipping and pricing pressures, could have a material adverse effect on the Company's
business.
Economic conditions may cause a decline in business and consumer spending which could adversely affect the
Company's business and financial performance.
The Company's business is impacted by general economic conditions, including the impact of COVID-19, and their effect on consumer confidence and
the level of consumer spending on the merchandise the Company offers. These economic factors include recessionary cycles, interest rates, currency exchange rates, economic growth, wage rates,
unemployment levels, energy prices, availability of consumer credit, and consumer confidence, among others. Economic conditions could negatively affect consumer purchases of the Company's merchandise
and adversely impact the Company's business, financial condition and results of operations. Economic conditions could also negatively impact the Company's merchandise vendors and their ability to
deliver products and sustain profits and sufficient liquidity. To counteract potential cash flow problems, the Company's merchandise vendors may require letters of credit or attempt to increase
prices, pass through increased costs or seek some other form of relief, which may adversely impact the Company's business, financial condition and results of operations. In addition, economic
conditions could negatively impact the Company's retail landlords and their ability to maintain their shopping centers in a first-class condition and otherwise perform their obligations, which could
negatively impact traffic in the Company's stores leading to a decrease in sales and profitability. However, during COVID-19, the Company has taken steps to reduce
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operating
costs and improve efficiency, including targeted reductions in capital expenditures, and engaging in conversations with landlords to defer April and May 2020 rent payments as well as
conversations with vendors to defer payments until the Company's brick-and-mortar stores reopen. As of the date of this filing, the Company has received default notices from various landlords and
vendors for non-payment.
The raw materials used to manufacture the Company's products and its distribution and labor costs are subject
to availability constraints and price volatility, which could result in increased costs.
The raw materials used to manufacture the Company's products are subject to availability constraints and price volatility caused by high demand
for petroleum-based synthetic fabrics, weather, supply conditions, government regulations, economic climate and other unpredictable factors. The Company sources nearly all of its merchandise from
three countries, with China, Vietnam and Indonesia representing approximately 95% of all merchandise purchases during fiscal year 2019. Any one of these countries could experience increased
inflationary pressure, which could lead to increased costs for the Company. In addition, the Company's transportation and labor costs are subject to price volatility caused by the price of oil, supply
of labor, governmental regulations, economic climate and
other unpredictable factors. Increases in demand for, or the price of, raw materials, distribution services and labor, could have a material adverse effect on the Company's business, financial
condition, results of operations, and cash flows. Furthermore, if the Company's vendors suffer prolonged manufacturing or transportation disruptions due to public health conditions or other unforeseen
events, such as the COVID-19 pandemic, the Company's ability to source product could be adversely impacted which would adversely affect the Company's results of operations. However, during COVID-19,
the Company has taken steps to reduce operating costs and improve efficiency, including targeted reductions in capital expenditures, and engaging in conversations with landlords to defer April and May
2020 rent payments as well as conversations with vendors to defer payments until the Company's brick-and-mortar stores reopen. As of the date of this filing, the Company has received default notices
from various landlords and vendors for non-payment.
Fluctuations in comparable store sales in any one of the Company's channels, including stores, Outlets and
eCommerce, or fluctuations in the Company's results of operations could cause the price of the Company's common stock to decline substantially.
A store is included in the comparable store sales calculation after it has completed 13 full fiscal months of operations from the store's
opening date or once it has been reopened after remodeling if the gross square footage did not change by more than 20%. Sales from the Company's eCommerce stores are included in comparable store
sales. In addition, recognized royalty revenue and the amortization of signing bonuses received in connection with the ADS Agreement are included in comparable store sales.
The
Company's results of operations have fluctuated in the past and can be expected to fluctuate in the future. The Company cannot ensure that it will be able to achieve consistency in
its future sales and cannot ensure a high level of comparable store sales in the future. If the Company experiences an extended shut down of its eCommerce stores, for any reason, the Company could
lose revenues and experience a material decrease in comparable store sales and profits.
The
Company's comparable store sales and results of operations are affected by a variety of factors, including but not limited to:
-
-
fashion trends;
-
-
mall traffic, including the impact of COVID-19;
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-
-
the Company's ability to effectively market to its customers and drive traffic both online and into its stores;
-
-
calendar shifts of holiday or seasonal periods;
-
-
the effectiveness of the Company's supply chain and inventory management;
-
-
changes in the Company's merchandise mix;
-
-
the timing of promotional events;
-
-
weather conditions;
-
-
changes in general economic conditions and consumer spending patterns;
-
-
the Company's ability to retain, recruit and train qualified personnel;
-
-
actions of competitors or mall anchor tenants; and
-
-
pandemics (including COVID-19).
If
the Company's future comparable store sales fail to meet expectations, then the market price of the Company's common stock could decline substantially.
The Company's net sales, operating income and inventory levels fluctuate on a seasonal basis and decreases in
sales or margins during the Company's peak seasons could have a disproportionate effect on its overall financial condition and results of operations.
The Company's business experiences seasonal fluctuations in net sales and operating income, with a larger portion of its sales typically
realized during its fourth quarter. Any decrease in sales or margins during the fourth quarter or peak holiday seasons could have a material adverse effect on the Company's financial condition and
results of operations.
Seasonal
fluctuations also affect the Company's inventory levels. The Company must carry a significant amount of inventory, especially before the holiday season selling period in the
fourth quarter and prior to the Easter and Mother's Day holidays toward the latter part of the first quarter and beginning of the second quarter. If the Company is not successful in selling its
inventory, it may have to write down the value of its inventory or sell it at significantly reduced prices or the Company may not be able to sell such inventory at all, which could have a material
adverse effect on the Company's financial condition and results of operations. Due to COVID-19 overlapping the important holiday season selling period of Easter and Mother's Day, the Company was left
with significant unsold inventory during Spring 2020.
Since the Company relies significantly on international sources of production, it is at risk from a variety
of factors that could leave it with inadequate or excess inventories, resulting in decreased profits or losses.
The Company purchases apparel and accessories in international markets, with a significant portion coming from China, Vietnam and Indonesia. Any
major changes in United States tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported goods, could have
a material adverse effect on the Company's business, results of operations and liquidity. The Company does not have any long-term merchandise supply contracts and many of its imports are subject to
existing or potential duties and tariffs. The Company competes with other companies for production facilities.
The
U.S. government is contemplating various actions regarding trade with China, including the possibility of levying additional tariffs on imports from China. U.S. trade policy could
trigger retaliatory actions by affected countries resulting in "trade wars," which could increase the Company's cost of goods and/or reduce customer demand if the Company has to increase its prices.
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The
Company also faces a variety of other risks generally associated with doing business in international markets and importing merchandise from abroad, such
as:
-
-
political or labor instability in countries where vendors are located;
-
-
political or military conflict involving the United States, which could cause a delay in the transportation of the Company's products and an
increase in transportation costs;
-
-
heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading
to delays in deliveries or impoundment of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales and damage to the
reputation of the Company's brand;
-
-
natural disasters, disease epidemics, pandemics (including COVID-19) and health related concerns, which could result in closed factories,
reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;
-
-
the migration and development of manufacturers, which can affect where the Company's products are or will be produced;
-
-
imposition of regulations relating to imports and the Company's ability to adjust in a timely manner to changes in trade regulations, which
among other things, could limit the Company's ability to source products from countries that have the labor and expertise needed to manufacture its products on a cost-effective basis;
-
-
imposition of duties, taxes and other charges on imports;
-
-
labor disputes, such as labor strikes or unrest or disruptions at the ports through which the Company imports its goods; and
-
-
currency volatility.
Any
of the foregoing factors, or a combination thereof, could have a material adverse effect on the Company's business.
The Company's manufacturers may be unable to manufacture and deliver products in a timely manner or meet its
quality standards, which could result in lost sales, cancellation charges or excessive markdowns.
The Company purchases apparel and accessories directly from third-party manufacturers and in some instances from importers. The Company utilized
two major apparel agents, which together represented approximately 63% of the Company's merchandise purchases made during fiscal year 2019; however, no individual factory represented more than 8% of
the Company's merchandise purchases. Similar to most other specialty retailers, the Company has short selling seasons for much of its inventory. Factors outside of the Company's control, such as
manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, product recalls, cancellation charges or excessive markdowns.
The Company may remodel/refresh and relocate a portion of its existing store base annually, and may open a
select number of new stores. The Company may not be able to successfully remodel/refresh and relocate existing stores, or open new stores, on a timely basis or at all. In addition, opening new stores
and relocating or remodeling/refreshing existing stores may strain its resources and cause the performance of its existing stores to suffer.
The Company may remodel/refresh and relocate a portion of its existing store base annually, and may open a select number of new stores. The
success of this strategy is dependent upon, among other things, the identification of suitable markets and sites for store locations, the negotiation of acceptable lease and renewal terms, including
the renegotiation of existing rent concessions, the hiring, training
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and
retention of competent sales personnel, and the effective management of inventory to meet the needs of new and existing stores in a timely basis. To the extent that the Company's new store
openings are in existing markets, the Company may experience reduced net sales volumes in existing stores in those markets. The Company expects to fund its new stores through cash flow from operations
and, if necessary, by borrowings under its revolving credit facility; however, if the Company experiences a decline in performance, the Company may slow or discontinue store openings. The Company may
not
be able to successfully execute any of these strategies on a timely basis. If the Company fails to successfully implement these strategies, its financial condition and results of operations would be
adversely affected.
In
addition, continued consolidation in the commercial retail real estate market could affect the Company's ability to successfully negotiate favorable lease and renewal terms for its
stores in the future. Should significant consolidation continue, a large portion of the Company's store base could be concentrated with one or a few entities that could then be in a position to
dictate unfavorable terms due to their significant negotiating leverage. If the Company is unable to negotiate favorable lease terms with these entities, this could affect its ability to profitably
operate its stores, which could adversely affect the Company's financial condition and results of operations.
Because of the Company's focus on keeping its inventory at the forefront of fashion trends, extreme and/or
unseasonable weather conditions could have a disproportionately large effect on the Company's business, financial condition and results of operations because it would be forced to mark down inventory.
Extreme weather conditions in the areas in which the Company's stores are located could have a material adverse effect on the Company's
business, financial condition and results of operations. For example, heavy snowfall or other extreme weather conditions over a prolonged period might make it difficult for the Company's customers to
travel to its stores. The Company's business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool
weather during the summer season could render a portion of the Company's inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions could adversely
affect the Company's business, financial condition and results of operations.
If third parties who manage some aspects of the Company's business do not adequately perform their functions,
the Company might experience disruptions in its business, leaving it with inadequate or excess inventories, among other adverse effects, resulting in decreased profits or losses.
L Brands handles the distribution of the Company's merchandise through its distribution facility in Columbus, Ohio pursuant to a transition
services agreement. The efficient operation of the Company's stores is dependent on its ability to distribute merchandise to locations throughout the United States in a timely manner. The Company
depends on L Brands to receive, sort, pack and distribute substantially all of the Company's merchandise. As part of the transition services agreement, L Brands contracts with third-party
transportation companies to deliver the Company's merchandise from international ports to their warehouses and to the Company's stores. Any failure by any of these third parties to respond adequately
to the Company's warehousing and distribution needs would disrupt the Company's operations and negatively impact its profitability.
The
Company's Compliance Program is administered by its in-house compliance team, in partnership with various third-party providers, and provides monitoring of country of origin and
point of fabrication compliance for U.S. Customs. Any failure of the Company, or its third-party providers, to fulfill their obligations under the Compliance Program, could disrupt the Company's
operations and negatively impact its profitability.
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Under
the transition services agreement, warehousing and distribution services will terminate upon the earliest of the following: (i) 24 months from the date that L Brands
notifies the Company that L Brands wishes to terminate the services; (ii) 24 months from the date that the Company notifies L Brands that the Company wishes to terminate the services;
(iii) 60 days after the Company has given notice to L Brands that L Brands has failed to perform any material obligations under the agreement and such failure shall be continuing;
(iv) 30 days after L Brands has given notice to the Company that the Company has failed to perform any material obligations under the agreement and such failure shall be continuing;
(v) within 75 days of receipt of the annual proposed changes to the agreement schedules which outline the cost methodologies and estimated costs of the services for the coming year, if
such proposed changes would result in a significant increase in the amount of service costs that the Company would be obligated to pay; (vi) 15 months after a change of control of the
Company, at the option of L Brands; or (vii) upon reasonable notice under the prevailing circumstances by the Company to L Brands after a disruption of services due to force majeure that cannot
be remedied or restored within a reasonable period of time. The Company believes that these services are provided at a competitive price and the Company anticipates continuing to use L Brands for
these services. The Company's failure to successfully replace the services could have a material adverse effect on the Company's business and prospects.
The
Company uses a third party for its eCommerce operations, including order management, order fulfillment, customer care, and channel management services. A failure by the third party
to adequately manage the Company's eCommerce operations may negatively impact the Company's profitability.
The
Company may rely on third parties for the implementation and/or management of certain aspects of its information technology infrastructure. Failure by any of these third parties to
implement and/or manage the Company's information technology infrastructure effectively could disrupt its operations and negatively impact its profitability.
The
Company relies on a third party to administer its proprietary credit card program. The inability of the administration company to effectively service the credit card program could
materially limit credit availability for the Company's customers, which would negatively impact the Company's revenues and, consequently, its profitability.
A
work stoppage resulting from, among other things, a dispute over a collective bargaining agreement covering employees of a third party relied on by the Company or employees of the
Company, may cause disruptions in the Company's business and negatively impact its profitability.
The Company's marketing efforts rely upon the use of customer information. Restrictions on the availability
or use of customer information could adversely affect the Company's marketing program, which could result in lost sales and a decrease in profits.
The Company uses its customer database to market to its customers. Any limitations imposed on the use of such consumer data, whether imposed by
federal or state governments or business partners, could have an adverse effect on the Company's future marketing activity. In addition, while the Company is compliant with Payment Card Industry Data
Security Standards (PCI DSS), to the extent the Company's or its business partners' security procedures and protection of customer information prove to be insufficient or inadequate, the Company may
become subject to litigation or other claims, which could expose it to liability and cause damage to its reputation or brand.
The Company relies on its manufacturers to use acceptable ethical business practices, and if they fail to do
so, the New York & Company brand name, and its other brands, could suffer reputational harm and the Company's sales could decline or its inventory supply could be interrupted.
The Company requires its manufacturers to operate in compliance with applicable laws, rules and regulations regarding working conditions,
employment practices, product quality and safety, and
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environmental
compliance. Additionally, the Company imposes upon its business partners operating guidelines that require additional obligations in order to promote ethical business practices. The
Company's in-house compliance team, staff of third party inspection services companies, and the staff of the Company's non-exclusive buying agents and importers periodically visit and monitor the
operations of the Company's manufacturers to determine compliance. However, the Company does not control its manufacturers or their labor and other business practices. If one of the Company's
manufacturers violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, the shipment of finished products to the
Company
could be interrupted, orders could be canceled, relationships could be terminated and the Company's reputation could be damaged. Any of these events could have a material adverse effect on the
Company's revenues and, consequently, its results of operations.
The Company is subject to numerous laws and regulations, including federal and state minimum wage laws that
could affect its operations. Changes in such laws and regulations could affect its profitability and impact the operation of its business through delayed shipments of its goods, increased costs, fines
or penalties.
The Company is subject to employment laws and regulations, including minimum wage requirements, intellectual property laws (including those
relating to advertising and promotions, privacy and product safety), truth-in-lending and other laws and regulations with respect to the operation of the Company's stores and business generally, such
as zoning and occupancy ordinances governing the importation and exportation of merchandise and the use of the Company's proprietary credit cards. In addition, the Company is subject to Securities and
Exchange Commission rules and regulations, state laws, Sarbanes-Oxley requirements, rules and regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, other U.S.
public company regulations, and various other requirements mandated for the textiles and apparel industries such as the Consumer Product Safety Improvement Act of 2008, California's Proposition 65 and
similar state laws. Although the Company monitors changes in these laws, if these laws change without the Company's knowledge, or are violated by the Company's employees, importers, buying agents,
manufacturers or distributors, the Company could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling laws or regulations, any of which
could have a material adverse effect on the Company's business, financial condition and results of operations.
On
April 4, 2016, the State of California passed legislation raising the hourly minimum wage to $15 by the end of year 2022. On the same day, the State of New York enacted similar
legislation increasing the hourly minimum wage to $15 in New York City by the end of year 2018, and in other parts of the state by the end of year 2021. Such legislation requires mandatory annual
increases to the hourly minimum wage in the interim. As a result, the Company increased the hourly minimum wage in California, New York City, and other parts of New York State, as well as in a number
of other states, as required. In addition, certain jurisdictions are considering or have enacted privacy and/or cyber security laws and regulations that do or could impose additional obligations on
the Company. For example, on January 1, 2020, the California Consumer Privacy Act of 2018 (the "CCPA") became effective. The CCPA requires certain companies to satisfy new requirements
regarding the handling of personal and sensitive data, including its use, protection and the ability of California residents whose data is stored to know specifically what data each company has
collected on them and, if they so choose, the right to demand that such companies delete their data, subject to certain exemptions defined in the statute. While the Company believes that it has
sufficient measures in place to comply with its obligations under the CCPA, failure to comply with its requirements could result in civil penalties. However, the CCPA additionally provides a private
right of action that allows consumers to seek, either individually or as a class, statutory or actual damages and injunctive and other relief, if their sensitive personal information is subject to
unauthorized access and exfiltration, theft or disclosure as a result of a business's failure to implement and maintain required reasonable security procedures.
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As
of the date of this filing, final regulations from the California Attorney General have not been released.
Compliance
with changes in these laws or regulations, including increasing minimum wage requirements and frequently changing requirements surrounding information security and privacy,
could result in increased costs to the Company and could impact operational efficiency, which could have a material adverse effect on the Company's financial condition and results of operations.
The Company may be unable to protect its trademarks, which could diminish the value of its brands.
The Company's trademarks are important to its success and competitive position. The Company's major trademarks are New York & Company,
NY&C, Soho New York & Company Jeans, Lerner, Fashion to Figure, and FTF, and are protected in the United States and in some cases internationally. The Company engages in the following steps to
protect and enforce its trademarks: file and prosecute trademark applications for registration in those countries where the marks are not yet registered; respond to office actions and examining
attorneys in those countries where the marks are not yet registered; maintain its trademark portfolio in the United States; file statements of use, renewal documents, assignments, policing of marks
and third party infringements; and handle the initiation and defense of opposition and/or cancellation proceedings. The Company is susceptible to others imitating the Company's products and infringing
on the Company's intellectual property rights. Imitation or counterfeiting of the Company's products or other infringement of the Company's intellectual property rights could diminish the value of its
brand or otherwise adversely affect its revenues. The actions the Company has taken to establish and protect its trademarks may not be adequate to prevent imitation of its products by others or to
prevent others from seeking to invalidate its trademarks or block sales of its products as a violation of the trademarks and intellectual property rights of others. In addition, others may assert
rights in, or ownership of, trademarks and other intellectual property rights of the Company or in marks that are similar to the Company's or marks that the Company licenses and/or markets and the
Company may not be able to successfully resolve these types of conflicts to its satisfaction. In some cases, there may be trademark owners who have prior rights to the Company's marks because the laws
of certain countries may not protect intellectual property rights to the same extent as do the laws of the United States. In other cases, there may be holders who have prior rights to similar marks.
Failure to protect the Company's trademarks could result in a material adverse effect on the Company's business.
The Company relies on its information technology infrastructure, which includes third party and internally
developed software, and purchased or leased hardware that support the Company's information technology, cybersecurity and various business processes. The Company's business, reputation and brand image
could suffer if its infrastructure fails to perform as intended.
The Company relies on purchased or leased hardware and software licensed from third parties or internally developed in order to manage its
business. The Company's ability to maintain and upgrade its information technology infrastructure is critical to the success of its business and the continued enhancement of its omni-channel retail
strategy. This hardware and software may not continue to be available on commercially reasonable terms or at all. Any disruptions to the Company's infrastructure or loss of the right to use any of
this hardware or software could affect the Company's operations, which could negatively affect the Company's business until corrected or until equivalent technology is either developed by the Company
or, if available, is identified, obtained and integrated. In addition, the software underlying the Company's operations can contain undetected errors. The Company may be forced to modify its
operations until such problems are corrected and, in some cases, may need to implement enhancements to correct errors that it does not detect. Problems with the software underlying the Company's
operations could result in loss of revenue, unexpected expenses and capital
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costs,
diversion of resources, loss of market share and damage to the Company's reputation which could adversely affect the Company's business, financial condition and results of operations.
Furthermore,
the Company's information systems initiatives and omni-channel retail strategy are complex and require managerial and financial expertise to implement successfully. If the
Company is unable to successfully implement new information system initiatives and execute its omni-channel retail strategy, or if the Company's customers are not provided with the intended benefits,
the Company's reputation and brand image could suffer resulting in a material adverse effect on the Company's financial condition and results of operations.
The
Company and third parties that manage portions of the Company's secure data are subject to cybersecurity risks and incidents. The Company's business involves the storage and
transmission of customers' personal information, shopping preferences and credit card information, in addition to employee information and the Company's financial and strategic data. The protection of
the Company's customer, employee and Company data is vitally important to the Company. To date, data security breaches have not had a material impact on the Company's financial condition, operating
results or business; however, the Company could suffer material financial or other losses in the future and it may not have the resources or technical sophistication to anticipate or prevent rapidly
evolving types of cyberattacks or intrusions. While the Company has implemented measures to prevent and detect
security breaches and cyber incidents, and continues to invest in the fortification of its information systems, networks and infrastructure, these systems may prove to be inadequate and result in the
disruption, failure, misappropriation or corruption of the Company's systems and infrastructure because the techniques used to obtain unauthorized access are constantly changing and becoming
increasingly more sophisticated and often are not recognized until launched against a target. The Company or its third-party service providers may not be able to anticipate these techniques or
implement sufficient preventative measures. In addition, data security breaches can also occur as a result of non-technical issues, including breaches by the Company or by the Company's third-party
service providers that result in the unauthorized release of personal or confidential information. Any failure of the Company's data protection and security measures and any failure of third parties
that assist the Company in managing its secure data could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss, or destruction of confidential and other
information. This could result in significant losses, including loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention,
reimbursement or other compensatory costs, or otherwise adversely affect the Company's business, financial condition or results of operations. Any of these events could result in litigation and legal
liability, harm to the Company's reputation, loss of confidence in the Company's ability to protect sensitive information, a distraction to the Company's business, and the need to divert resources to
remedy the issues, any of which could adversely affect the Company's business, financial condition and results of operations. Although the Company maintains cybersecurity insurance, there can be no
assurance that the Company's insurance coverage will cover the particular cyber incident at issue or that such coverage will be sufficient, or that insurance proceeds will be paid to the Company in a
timely manner.
Risks associated with the Company's eCommerce stores.
The Company operates online stores at www.nyandcompany.com, www.nyandcompanycloset.com,
www.fashiontofigure.com, www.fashiontofigurecloset.com, and www.happyxnature.com, which are integral to the
success of the
Company's omni-channel retail strategy and where it sells its largest assortment of its merchandise. The Company's eCommerce operations are subject to numerous risks, including unanticipated operating
problems, reliance on third-party computer hardware and software providers, system failures, cybersecurity incidents and the need to invest in additional computer systems. The eCommerce operations
also involve other risks that could have an impact on the Company's results of operations, including but not limited to diversion of sales from the Company's other stores, rapid
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technological
change, liability for online content, credit card fraud and risks related to the failure of the computer systems that operate the website and its related support systems. If the Company
is unable to successfully address and respond to these risks, revenues could be lost, costs could increase, and the Company's reputation may be damaged.
If the Company is unable to successfully develop and maintain a relevant and reliable omni-channel shopping
experience for its customers, the Company's reputation could be adversely affected, sales could be lost and its profits could decrease.
One of the Company's long-term growth initiatives is the expansion of the omni-channel shopping experience it provides customers through the
integration of its retail stores, eCommerce stores and mobile applications. Omni-channel retailing is rapidly evolving and the Company's success depends on its ability to anticipate and implement
innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their shopping needs. If the Company is unable to innovate and
successfully implement its omni-channel initiatives or does not meet customer expectations, revenues could be lost, costs could increase, and the Company's reputation may be damaged.
The Company relies upon independent third-party transportation providers for substantially all of its product
shipments and is subject to increased shipping costs as well as the potential inability of its third-party transportation providers to deliver on a timely basis.
The Company currently relies upon independent third-party transportation providers for substantially all of its product shipments, including
shipments to and from all of its stores and to its customers. The Company's utilization of these delivery services for shipments is subject to risks which may impact a shipping company's ability to
provide delivery services that adequately meet the Company's shipping needs, including risks related to employee strikes, labor and capacity constraints, and inclement weather. In addition, the
Company is subject to increased shipping costs when fuel prices increase, when it uses expedited means of transportation such as air freight, and due to other economic factors affecting supply and
demand within the transportation industry. If the Company changes the shipping companies it uses, it could face logistical difficulties that could adversely affect deliveries, and the Company would
incur costs and expend resources in connection with such change. Moreover, the Company may not be able to obtain terms as favorable as those received from its current independent third-party
transportation providers which, in turn, would increase its costs.
The Company is subject to customer payment-related risks that could increase its operating costs, expose it
to fraud or theft, subject it to potential liability and potentially disrupt its business.
The Company accepts payments using a variety of methods, including cash, checks, credit and debit cards, PayPal, Afterpay, its private label
credit cards, and gift cards. Acceptance of these payment options subjects the Company to rules, regulations, contractual obligations and compliance requirements, including payment network rules and
operating guidelines, data security
standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly.
Although no systems can completely prevent theft, security countermeasures have been deployed to reduce the potential for fraud and theft by criminals. Although the Company has taken steps to decrease
its risk of a data breach, the Company may still suffer a data breach, which could have a material adverse effect on the Company's brand image, financial condition and results of operations.
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The covenants in the Company's revolving credit facility impose restrictions that may limit its operating and
financial flexibility.
On March 20, 2020, as a precautionary measure and to preserve financial flexibility, given the uncertain environment resulting from
COVID-19 pandemic, the Company drew down $40 million under the Amendment No. 1 to Fourth Amended and Restated Loan and Security Agreement and Joinder (the "Loan Agreement," further
described under "Long-Term Debt and Credit Facilities" below) at an interest rate equal to the LIBOR plus a margin of 1.25%. As a result of the COVID-19 pandemic and steps the Company took in response
thereto, subsequent to February 1, 2020 and prior to June 3, 2020, the Company was in default under the Loan Agreement, although the Company did not receive any default notices from
Wells Fargo, National Association, administrative agent and lender. The Company has obtained a forbearance of certain specified potential defaults under Amendment No. 2 to the Loan Agreement
through June 30, 2020. For further information, see Note 15, "Subsequent Events," to the consolidated financial statement appearing elsewhere in this Annual Report on Form 10-K.
The
Company's credit facility contains a number of significant restrictions and covenants that limit its ability to:
-
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incur additional indebtedness;
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declare dividends, make distributions or redeem or repurchase capital stock, including the Company's common stock, or to make certain other
restricted payments or investments;
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sell assets, including capital stock of restricted subsidiaries;
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agree to payment restrictions affecting the Company's restricted subsidiaries;
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consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's assets;
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incur liens;
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alter the nature of the Company's business;
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enter into sale/leaseback transactions;
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conduct transactions with affiliates; and
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designate the Company's subsidiaries as unrestricted subsidiaries.
In
addition, the Company's credit facility includes additional restrictive covenants and prohibits it from prepaying its other indebtedness while indebtedness under its credit facility
is outstanding. The agreement governing the Company's credit facility also requires it to achieve specified financial and operating results and maintain compliance with specified financial ratios. The
Company's ability to comply with these ratios may be affected by events beyond the Company's control.
The
restrictions contained in the agreement governing the Company's credit facility could:
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limit the Company's ability to plan for or react to market conditions or meet capital needs or otherwise restrict its activities or business
plans; and
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adversely affect the Company's ability to finance its operations, strategic acquisitions, investments or other capital needs or to engage in
other business activities that would be in the Company's interest.
A
breach of any of these restrictive covenants or the Company's inability to comply with the required financial ratios could result in a default under the agreement governing its credit
facility. If a default occurs, the lender under the credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable.
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The
lender also has the right in these circumstances to terminate any commitments the lender has to provide further borrowings. If the Company is unable to repay outstanding borrowings
when due, the lender under the credit facility also has the right to proceed against the collateral, including the Company's available cash, granted to the lender to secure the indebtedness.
The Company may lose key personnel.
The Company believes that it has benefited from the leadership and experience of its key executives. The loss of the services of any of these
individuals could have a material adverse effect on the business and the prospects of the Company. Competition for key personnel in the retail industry is intense and the Company's future success will
depend upon its ability to retain, recruit and train qualified personnel.
Provisions in the Company's restated certificate of incorporation and Delaware law may delay or prevent the
Company's acquisition by a third party.
The Company's restated certificate of incorporation contains a "blank check" preferred stock provision. Blank check preferred stock enables the
Company's Board of Directors, without stockholders' approval, to designate and issue additional series of preferred stock with such dividend, liquidation, conversion, voting or other rights, including
the right to issue convertible securities with no limitation on conversion, as the Company's Board of Directors may determine, including rights to dividends and proceeds in a liquidation that are
senior to the common stock.
These
provisions may make it more difficult or expensive for a third party to acquire a majority of the Company's outstanding voting common stock. The Company is also subject to certain
provisions of Delaware law which could delay, deter or prevent the Company from entering into a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in the
Company's stockholders receiving a premium over the market price for their stock.