Dave & Buster's Entertainment, Inc. - Quarter Report: 2021 May (Form 10-Q)

Commission File

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐ 

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes

 

The Company operates on a 52 or fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period reported has 13 weeks. Fiscal 2021 and 2020, which end on January 30, 2022 and January 31, 2021, respectively, contain 52 weeks.

The Company’s financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information as prescribed by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Our quarterly financial data should be read in conjunction with the audited financial statements and notes thereto for the year ended January 31, 2021, included in our Annual Report on Form as filed with the SEC.

— On March 11, 2020, the World Health Organization declared the outbreak to be a global pandemic and on March 13, 2020, the United States declared a National Public Health Emergency. As a result, several state and local mandates were implemented that encouraged the practice of social distancing, placed restrictions from individuals gathering in groups and, in many areas, placed complete restrictions on movement outside of the home. Shortly after the national emergency declaration, state and local officials began placing restrictions on businesses, some of which allowed or curbside service only while others limited capacity in the dining room or midway. By March 20, 2020, all of our 137 operating stores were temporarily closed.

On April 30, 2020, our first store to the public, as state and local guidelines began to allow dining rooms and arcades to open at limited capacity and/or limited hours of operation. By the end of fiscal 2020, we had an additional 101 stores with limited operations. Many of these stores that were in limited capacity were required to temporarily close again in areas more severely impacted by the pandemic, particularly during the fourth quarter holiday season. The Company also opened five new stores in the second half of the fiscal year, all of which commenced construction prior to the outbreak of the pandemic. As of January 31, 2021, 107 of our 140 stores were open and operating in limited capacity.

During the first quarter of fiscal 2021, the Company 31 additional stores and one new store opened on February 8, 2021. One store that was open at the end of fiscal 2020 was temporarily in an area impacted by a localized resurgence, resulting in 138 of our 141 stores open and operating in some capacity as of the end of our first quarter.

As stores were during fiscal 2020, typically in limited capacity, the Company reduced labor and other operating costs. During fiscal 2020, the Company also negotiated with landlords and other vendors to negotiate relief from cash payments under existing lease and trade payable obligations, extending or reducing payment terms with several vendors. Regarding negotiations with landlords, a total of 126 initial rent relief agreements related to our operating locations and corporate headquarters were executed during fiscal 2020, which generally provided for rent deferrals on all or a portion of rent for up to six months.  to impact our business into the fourth quarter, the Company renewed negotiations with the majority of these landlords in order to provide additional rent relief, generally seeking to push out or extend the terms of deferral pay back periods and/or provide rent relief beyond the periods in the initial agreements. As of the end of the first quarter of fiscal 2021, the Company had executed 86 of these additional rent relief agreements.

The measures taken by the Company as well as the of the majority of our stores, although many remain at limited capacity, provide sufficient liquidity to meet estimated cash flow needs and covenant compliance obligations for at least the next twelve months from the issuance of the financial statements. We cannot predict whether, when or the manner in which the conditions surrounding will change including the timing of lifting remaining restrictions, customer with our brand, or possible of our currently open stores.

— We consider transaction settlements in process from credit card companies and all highly-liquid investments with original maturities of three months or less to be cash equivalents. Our cash management system provides for the daily funding of all major bank disbursement accounts as checks are presented for payment. Under this system, outstanding checks in excess of the cash balances at certain banks creates book overdrafts. Book overdrafts of $11,196 and $8,168 are presented in “Accounts payable” in the Consolidated Balance Sheets as of May 2, 2021 and January 31, 2021, respectively. Changes in the book overdraft position are presented within “Net cash provided by (used in) operating activities” within the Consolidated Statements of Cash Flows.

— Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value as follows: Level One inputs are quoted prices available for identical assets or liabilities in active markets; Level Two inputs are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; and Level Three inputs are unobservable and reflect management’s own assumptions.

During the first quarter of fiscal 2020, the Company recorded an impairment charge for its long-lived assets, including ROU assets, of $6,746, primarily driven by the expected impact of the pandemic on future cash flows of specific stores. During the first quarter of fiscal 2021, the Company did not identify  triggering events which would require a change in management’s estimate regarding the recoverability of store asset values, and no impairment related to our operating stores was recognized. The Company has determined no events and circumstances existed during the thirteen weeks ended May 2, 2021 that would indicate it is more likely than not that its goodwill or tradename are impaired. The ultimate severity and longevity of the pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

— February 28, 2019, the Company entered into three interest rate swap agreements to manage our exposure to interest rate movements on our variable rate credit facility. The agreements entitle the Company to receive at specified

intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreements. The notional amount of the swap agreements, which mature August 17, 2022, totals $350,000 and the fixed rate of interest for all agreements is 2.47%.

 

The Company initially designated its interest rate swap agreements as a cash flow hedge and accounted for the underlying activity in accordance with hedge accounting. Effective April 14, 2020, the Company amended its existing credit facility agreement to obtain relief from its financial covenants, and as a result, the variable interest rate terms were modified to create an interest rate floor of 1.00%. Accordingly, and as a result of the then current forward interest rate curve, the Company discontinued the hedging relationship as of April 14, 2020 date). Given the continued existence of the hedged interest payments, the Company is reclassifying its accumulated other comprehensive loss of $17,609 as of the date into “Interest expense, net” using a straight-line approach over the remaining life of the originally designated hedging relationship. The amount of losses in accumulated other comprehensive loss that was reclassified into interest expense was $1,887 and $314 for the thirteen weeks ended May 2, 2021 and May 3, 2020, respectively, and the Company expects to reclassify $7,547 within the next twelve months. Effective with the any gain or loss on the derivatives are recognized in earnings in the period in which the change occurs. For the thirteen weeks ended May 2, 2021 and May 3, 2020, a gain of $131 and a loss of $820 were recognized, respectively, which are included in “Other store operating expenses” in the Consolidated Statements of Comprehensive Income (Loss)

 

 

 

— Amusement revenues are primarily recognized upon utilization of game play credits on power cards purchased and used by customers to activate video and redemption games. Redemption games allow customers to earn tickets, which may be redeemed for prizes in our WIN! area. We have deferred a portion of amusement revenues for the estimated unfulfilled performance obligations based on an estimated rate of future use by customers of unused game play credits and the material right provided to customers to redeem tickets in the future for prizes. During the thirteen weeks ended May 2, 2021, we recognized revenue of approximately $11,900 related to the amount in deferred amusement revenue as of the end of fiscal 2020.

In jurisdictions where we do not have a legal obligation to remit unredeemed gift card balances to a legal authority, we recognize revenue on unredeemed gift cards in proportion to the pattern of redemption by the customers. During the thirteen weeks ended May 2, 2021, we recognized revenue of approximately $900 related to the amount in deferred gift card revenue of the end of fiscal 2020, of which approximately $120 was breakage revenue.

On April 14, 2020, pursuant to an open market sale agreement, the Company sold 6,149,936 shares of its common stock at a price of $12.20 per share, for proceeds of $75,000, prior to deducting offering expenses related to the offering. During May 2020, the Company entered into an underwriting agreement, pursuant to which it sold an additional 10,593,416 shares of its common stock (including shares under an over-allotment option) at a price of $10.44 per share, for proceeds of $110,600, prior to deducting offering costs.

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— In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), which removes certain exceptions related to the approach for intraperiod tax allocations, the calculation of income taxes in interim periods, and the recognition of deferred taxes for taxable goodwill. The Company adopted this standard as of the beginning of fiscal year 2021, and the adoption did not have a material impact on our consolidated financial statements.

— In March 2020, the FASB issued ASU , which provides temporary optional expedients and exceptions to the current guidance for contract modifications and hedging relationships through December 31, 2022, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. A contract modification resulting from reference rate reform may be accounted for as a continuation of the existing contract rather than the creation of a new contract. Additionally, changes in the critical terms of hedging relationships, caused by reference rate reform, should not result in the of the instrument, provided certain criteria are met. Although the Company has swap agreements based on LIBOR rates, the guidance is not expected to have an impact on our consolidated financial statements due to the of our hedging relationships in fiscal 2020.

Concurrent and subject to the issuance of the Notes, the Company entered into a second amendment to its existing credit facility, which included relief from testing compliance with certain financial covenants until the last day of the fiscal quarter ending on May 1, 2022. During the financial covenant suspension period the Company is required to maintain minimum liquidity (primarily availability under the credit facility) of $150,000. The second amendment extended the maturity date of the $500,000 revolving portion of the facility from August 17, 2022 to August 17, 2024, increased the interest rate spread to 4.00% during the financial covenant suspension period, and instituted a 1.00% utilization fee during that same time period. The utilization fee is due at maturity. After the financial covenant suspension period, the interest rate spread ranges from 1.25% to 3.00%. The second amendment terminated the term loan portion of the credit facility, which triggered payment of $1,900 of lender debt costs associated with the first amendment. The first amendment, effective April 14, 2020, provided initial relief from compliance with financial covenants after the pandemic and increased the interest rate spread on variable rate debt to 2.00% plus a LIBOR floor of 1.00%.

— The following table sets forth our recorded interest expense, net:

Operating lease cost, variable lease cost and short-term lease cost related primarily to our facilities is included in “Other store operating expenses” for our operating stores, costs” for our stores not yet operating, or “General and administrative expenses” for our corporate office and warehouse, in the Consolidated Statements of Comprehensive Income (Loss).

We are subject to certain legal proceedings and claims that arise in the ordinary course of our business, including claims alleging violations of federal and state law regarding workplace and employment matters, discrimination, and other customer-related incidents and similar matters. In the opinion of management, based upon consultation with legal counsel, the amount of ultimate liability, with respect to such legal proceedings and claims will not materially affect the consolidated results of our operations or our financial condition. Legal costs related to such claims are expensed as incurred.

The Company is a defendant in several lawsuits filed in courts in California alleging violations of California Business and Professions Code, industry wage orders, laws and rules and regulations pertaining primarily to the failure to pay proper regular and overtime wages, failure to pay for missed meals and rest periods, pay stub violations, failure to pay all wages due at the time of termination and other employment related claims (the “California Cases”). Some of the California Cases purport or may be determined to be class actions or Private Attorneys General Act representative actions and seek substantial damages and penalties. During fiscal 2020, the Company settled a portion of the cases at the approximate amount estimated and accrued. For the remaining cases, the Company’s assessments are based on assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Management’s assessment of these California Cases, as well as other lawsuits, could change because of future determinations or the discovery of facts that are not presently known. Accordingly, the ultimate costs of resolving these cases may be substantially higher or lower than estimated.

On March 11, 2020, the World Health Organization declared the outbreak to be a global pandemic and on March 13, 2020, the United States declared a National Public Health Emergency. As a result, several state and local mandates were implemented that encouraged the practice of social distancing, placed restrictions from individuals gathering in groups and, in many areas, placed complete restrictions on movement outside of the home. Shortly after the national emergency declaration, state and local officials began placing restrictions on businesses, some of which allowed or curbside service only while others limited capacity in the dining room or midway. By March 20, 2020, all of our 137 operating stores were temporarily closed.

On April 30, 2020, our first store to the public, as state and local guidelines began to allow dining rooms and arcades to open at limited capacity and/or limited hours of operation. By the end of fiscal 2020, we had progressively an additional 101 stores with limited operations. Many of these stores that were in limited capacity were required to temporarily close again in areas more severely impacted by the pandemic, particularly during the fourth quarter holiday season. The Company also opened five new stores in the second half of the fiscal year, all of which commenced construction prior to the outbreak of the pandemic. As of January 31, 2021, 107 of our 140 stores were open and operating in limited capacity.

The Company continues to be subject to risks and uncertainties as a result of the pandemic. These include state and local restrictions on our stores, some of which have limited capacity in the dining rooms and arcade areas while others have allowed or curbside service only. At the end of our first quarter of fiscal 2021, our two Canadian stores continued to remain closed to customers as a result of provincial restrictions. Additionally, one store in the United States was required to temporarily reclose as the result of a local increase in cases.

The process has been a gradual one with the safety of our team members and customers as our top priority. All of our stores are operating with some combination of streamlined menus, reduced games, new seating and game configurations, reduced operating hours, and reduced staff levels. As dining room and midway restrictions continue to ease and sales begin to improve, some labor inefficiencies and increased cleaning and supply costs are anticipated as stores adjust to improved sales volumes and enhanced health and safety protocols. On an ongoing basis, we will also continue to pursue long-term operating efficiencies and other cost savings initiatives.

We expect our operating results to continue to be severely impacted until such time that state and local restrictions are completely lifted, and our dining rooms and midways can at full capacity. We cannot predict how long the pandemic will last or when the state and local restrictions will be lifted or potentially In addition, we cannot predict with certainty how quickly our customers will return to our stores once such restrictions have been lifted or the impact this will have on consumer spending habits.

We are a leading owner and operator of high-volume venues in North America that combine dining and entertainment for both adults and families under the name “Dave & Buster’s”. Founded in 1982, the core of our concept is to offer our customers the opportunity to “Eat Drink Play and Watch” all in one location. Eat and Drink are offered through a full menu of entrées and appetizers and a full selection of and alcoholic beverages. Our Play and Watch offerings provide an extensive assortment of entertainment attractions centered around playing games and watching live sports and other televised events. Our brand appeals to a relatively balanced mix of male and female adults, as well as families and teenagers. We believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting.

Our stores, which average 40,000 square feet, range in size between 16,000 and 70,000 square feet. Prior to the pandemic, our stores were generally open seven days a week, with normal hours of operation typically from 11:30 a.m. to midnight on Sunday through Thursday and 11:30 a.m. to 2:00 a.m. on Friday and Saturday.

Comparable store sales are a comparison of sales to the same period of prior years for the comparable store base. We historically define the comparable store base to include those stores open for a full 18 months before the beginning of the fiscal year and excluding stores permanently closed during the period. Due to the limitations of store operations during the pandemic, the comparable store base for fiscal 2021 is defined as stores open for a full 18 months before the beginning of fiscal 2020 and excludes two stores that the Company elected not to reopen after they were closed in March 2020 as a result of local operating limitations. As of May 2, 2021, our comparable store base consisted of 114 stores, of which three stores were closed (two stores in Canada and one temporary closure in the United States).

Our ability to expand our business and reach new customers is influenced by the opening of additional stores in both new and existing markets. The success of our new stores is indicative of our brand appeal and the efficacy of our site selection and operating models. Between May 3, 2020 and May 2, 2021, we opened six new stores (five in fiscal 2020 and one in fiscal 2021).

In addition to the results provided in accordance with generally accepted accounting principles (“GAAP”), we provide measures which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP and include Adjusted EBITDA, Adjusted EBITDA Margin, Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin (defined below). These measures do not represent and should not be considered as an alternative to net income or cash flows from operations, as determined in accordance with GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Although we use these measures to assess the operating performance of our business, they have significant limitations as an analytical tool because they exclude certain material costs. For example, Adjusted EBITDA does not take into account a number of significant items, including our interest expense and depreciation and amortization expense. In addition, Adjusted EBITDA excludes and other costs which may be important in analyzing our GAAP results. Because Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. Our calculations of Adjusted EBITDA adjust for these amounts because they vary from period to period and do not directly relate to the ongoing operations of the currently underlying business of our stores and therefore complicate comparison of underlying business between periods. Nevertheless, because of the limitations described above, management does not view Adjusted EBITDA or Store Operating Income Before Depreciation and Amortization in isolation and also uses other measures, such as revenues, gross margin, operating income and net income, to measure operating performance.

. We define “Adjusted EBITDA” as net income (loss) plus interest expense, net, loss on debt refinancing, provision (benefit) for income taxes, depreciation and amortization expense, loss on asset disposal, impairment of long-lived assets, share-based compensation, costs, currency transaction (gains) losses and other costs. “Adjusted EBITDA Margin” is defined as Adjusted EBITDA divided by total revenues.

We define “Store Operating Income Before Depreciation and Amortization” as operating income (loss) plus depreciation and amortization expense, general and administrative expenses and costs. “Store Operating Income Before Depreciation and Amortization Margin” is defined as Store Operating Income Before Depreciation and Amortization divided by total revenues. Store Operating Income Before Depreciation and Amortization Margin allows us to evaluate operating performance of each store across stores of varying size and volume.

We believe that Store Operating Income Before Depreciation and Amortization is another useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store-level, and the costs of opening new stores, which are at the store-level, and thereby enables the comparability of the operating performance of our stores for the periods presented. We also believe that Store Operating Income Before Depreciation and Amortization is a useful measure in evaluating our operating performance within the entertainment and dining industry because it permits the evaluation of store-level productivity, efficiency and performance, and we use Store Operating Income Before Depreciation and Amortization as a means of evaluating store financial performance compared with our competitors. However, because this measure excludes significant items such as general and administrative expenses and costs, as well as our interest expense, net and depreciation and amortization expense, which are important in evaluating our consolidated financial performance from period to period, the value of this measure is limited as a measure of our consolidated financial performance.

We operate on a 52 or fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period has 13 weeks, except in a year when the fourth quarter has 14 weeks. All references to the first quarter of 2021 relate to the period ended May 2, 2021. All references to the first quarter of 2020 relate to the period ended May 3, 2020. Fiscal 2021 and fiscal 2020 consist of 52 weeks. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.

Our new stores historically open with sales volumes in excess of their expected long-term levels, which we refer to as a “honeymoon” effect. We traditionally expect our new store sales volumes in year two to be 10% to 20% lower than our year one targets, and to grow in line with the rest of our comparable store base thereafter. As a result of the substantial revenues associated with each new store, the number and timing of new store openings may result in significant fluctuations in quarterly results.

In the first year of operation new store operating margins (excluding expenses) typically benefit from honeymoon sales leverage on occupancy, management labor, and other fixed costs. This benefit is partially offset by normal inefficiencies in hourly labor and other costs associated with establishing a new store. In year two, operating margins may decline due to the loss of honeymoon sales leverage on fixed costs which is partially offset by improvements in store operating efficiency. Furthermore, rents in our new stores are typically higher than our comparable store base.

Our operating results fluctuate significantly due to seasonal factors. Typically, we have higher revenues associated with spring and holidays which will continue to be susceptible to the impact of severe or unseasonably mild weather on customer traffic and sales during that period. Our third quarter, which encompasses the fall season, has historically had lower revenues as compared to the other quarters.

We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increases or wage rate increases might be partially offset by selected menu price increases if competitively appropriate. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects of the pandemic on us or our suppliers, third-party service providers, and/or customers.

The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying unaudited consolidated statements of comprehensive income (loss).

In response to the outbreak, which was declared a global pandemic on March 11, 2020 and a National Public Health Emergency in the United States on March 13, 2020, the Company temporarily closed of all of our stores by March 20, 2020. On April 30, 2020, our first store to the public, as state and local guidelines began to allow dining rooms and arcades to open with capacity and other restrictions, with two additional stores offering limited food and beverage for dining by the end of our first quarter of fiscal 2020. By the end of fiscal 2020, 107 of our 140 stores were open and operating with a combination of limited menus, reduced dining room seating, reduced games in the midway, reduced operating hours and other restrictions referred to as “limited operations”. Of these 107 open stores, 84 were comparable stores. As of May 2, 2021, 138 of our 141 stores (including our one new store that opened on February 8, 2021), were operating in some capacity. Of these 138 open stores, 111 were comparable stores.

Total revenues increased $105,534, or 66.0%, to $265,340 in the first quarter of fiscal 2021 compared to total revenues of $159,806 in the first quarter of fiscal 2020. The increase in revenue is attributable primarily to more store operating weeks in the first quarter of fiscal 2021 compared to the prior year as a result of temporary store closures in the first quarter of fiscal 2020, as a result of the pandemic. For the thirteen weeks ended May 2, 2021, we derived 22.2% of our total revenue from food sales, 10.1% from beverage sales, 67.5% from amusement sales and 0.2% from other sources. For the thirteen weeks ended May 3, 2020, we derived 26.3% of our total revenue from food sales, 13.7% from beverage sales, 59.3% from amusement sales and 0.7% from other sources. The shift in mix from food and beverage sales to amusement sales of 820 basis points is due, in part, to significantly reduced special events, less discounting of amusements, reduced food and beverage menu offerings and greater capacity restrictions in our dining area due to the impacts of the pandemic.

Comparable store revenue increased $78,309 or 56.5%, in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020, due primarily to an 86.9% increase in comparable store operating weeks. During the first quarter of fiscal 2021, the number of comparable stores operating in some capacity increased by 32.1%, from 84 stores at the beginning of the current quarter to 111 stores at the end of the current quarter. Comparable store sales and comparable store weeks in the first quarter of fiscal 2021 were approximately 64.8% and 87.9%, respectively, of the levels achieved during the thirteen week period ended May 5, 2019. Our individual comparable stores generally experienced gradual increases in weekly sales performance as operating weeks increased. Individual store performance after was impacted by changes in local operating restrictions and consumer reactions to changes in local infection rates.

store revenue increased $32,725 in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020, for the same reasons noted above, including 194 more store operating weeks.

Total operating payroll and benefits increased by $6,542, or 15.0%, to $50,279 in the first quarter of fiscal 2021 compared to $43,737 in the first quarter of fiscal 2020. Nearly all of our store workforce, with the exception of a small team of essential personnel, were furloughed in 2020. Hourly team members returned only as stores and at reduced staffing levels. The total cost of operating payroll and benefits as a percentage of total revenues was 18.9% in the first quarter of fiscal 2021 compared to 27.4% in the first quarter of fiscal 2020. This decrease is primarily due to favorable leveraging on management labor in the first quarter of fiscal 2021 compared to the same period of fiscal 2020, and in part due to a leaner operating model while stores continued with limited operations and the geographic mix of our stores.

Other store operating expenses decreased by $11,227, or 11.7%, to $84,445 in the first quarter of fiscal 2021 compared to $95,672 in the first quarter of fiscal 2020. The decrease is primarily due to a $11,549 charge for impairment of long-lived assets and lease termination costs incurred during the first quarter of fiscal 2020. Slightly reduced spend on marketing was offset by increased spend of maintenance and other services as our stores continued to in some capacity throughout the current quarter. Other store operating expense as a percentage of total revenues decreased to 31.9% in the first quarter of fiscal 2021 compared to 59.8% in the first quarter of fiscal 2020. This decrease was due primarily to favorable sales leveraging on occupancy costs and utilities, lower marketing spend and the $11,549 impairment charge in the first quarter of fiscal 2020.

costs decreased by $2,164 to $1,659 in the first quarter of fiscal 2021 compared to $3,823 in the first quarter of fiscal 2020 due to a decrease in the number of planned new store openings, after construction was reduced as a result of impacts of the pandemic which began during the first quarter of fiscal 2020.

The effective tax rate for the thirteen weeks ended May 2, 2021, was 11.5%, compared to a benefit of 35.5% for the thirteen weeks ended May 3, 2020. The current quarter tax provision includes higher excess tax benefits associated with share-based compensation while the prior year was a tax benefit primarily due to the impact of the loss before income tax and the impact of the tax provisions within the CARES Act.

In response to the business disruption caused by the pandemic which began in the first quarter of fiscal 2020, the Company took the following actions to enable it to meet its obligations over the next twelve months:

Although uncertainty surrounds the timing of of our remaining stores and lifting of capacity restrictions and other requirements, as well as how quickly customers will return to our stores, due to continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses, the Company has taken measures to provide sufficient liquidity to meet estimated cash flow needs and covenant compliance obligations for at least the next twelve months from the issuance of the financial statements.

During fiscal 2019, we entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates on our variable rate credit facility. Our swap agreements with our derivative counterparties contain a provision where if the Company defaults on any of its indebtedness and repayment of the indebtedness has been accelerated, the Company could also be declared in default on its derivative obligations. Refer to Note 1 of the Consolidated Financial Statements for further discussion of our swap agreements, which were as hedges effective April 14, 2020, the date of the first amendment to our credit facility.

As a result of the impacts to our business arising from the COVID pandemic, dividend payments have been indefinitely suspended, and the previously established share repurchase program was allowed to expire at the end of fiscal 2020.

— Cash flow from operations typically provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, employee compensation, operations, and occupancy costs. Cash from operating activities is also subject to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, the timing of cash receipts and payments, and vendor payment terms.

— Cash flow from investing activities primarily reflects capital expenditures.

— During the first quarter of fiscal 2021, the Company had net repayments of $60,000 of its revolving credit facility. During the first quarter of fiscal year 2020, the Company drew down substantially all the available credit under our revolving credit facility, or approximately $100,000 and received net proceeds of approximately $72,000 from the issuance of shares of our common stock.

There have been no material changes outside the ordinary course of business to our contractual obligations since January 31, 2021, as reported on filed with the SEC on March 31, 2021.

The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the consolidated financial statements. Our current estimates are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis, and we adjust our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates we used in preparing the accompanying consolidated financial statements. A complete description of our critical accounting policies and estimates is included in our annual consolidated financial statements and the related notes in our Annual Report on Form filed with the SEC on March 31, 2021.

Our variable rate indebtedness under our $500,000 revolving credit facility is based on LIBOR, with a LIBOR floor of 1.00%. Our interest rate swap agreements, with a combined notional amount of $350,000, convert LIBOR to a fixed interest rate of approximately 2.47% through August 17, 2022. As of May 2, 2021, LIBOR is below 1.00%.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules and promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Rules 13a-15(f)

15d-15(f))

 

Information regarding legal proceedings is incorporated by reference from Note 5 to our Unaudited Consolidated Financial Statements set forth in Part I of this report.

 

10-K

 

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There were no repurchases of our common stock under our share repurchase plan during the thirteen weeks ended May 2, 2021.

 

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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