Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-31390
06-1195422
(Commission File Number)
(I.R.S. Employer Identification No.)

CHRISTOPHER & BANKS CORPORATION
(a Delaware corporation)
2400 Xenium Lane North
Plymouth, Minnesota 55441
763-551-5000
(Registrant, State of Incorporation or Organization, Address of Principal Executive Officers and Telephone Number)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
CBKC
 
OTCQX
 
 Indicate by check mark 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 check mark 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    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer
Non Accelerated Filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES þ  NO

The registrant had 38,595,316 shares of common stock outstanding as of September 11, 2020, excluding shares of treasury stock.



CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands)
 
 
August 1, 2020
 
February 1, 2020
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,771

 
$
3,198

Accounts receivable
 
2,603

 
2,975

Merchandise inventories
 
36,006

 
41,698

Prepaid expenses and other current assets
 
4,104

 
4,072

Income taxes receivable
 
379

 
291

Total current assets
 
45,863

 
52,234

Non-current assets:
 
 
 
 
Property, equipment and improvements, net
 
21,849

 
24,952

Operating lease assets
 
98,237

 
110,509

Deferred income taxes
 
613

 
613

Other assets
 
1,120

 
1,098

Total non-current assets
 
121,819

 
137,172

Total assets
 
$
167,682

 
$
189,406

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
27,901

 
$
23,715

Short-term borrowings
 
4,575

 

Current portion of long-term debt
 
417

 

Current portion of long-term lease liabilities
 
24,535

 
26,185

Accrued salaries, wages and related expenses
 
4,749

 
4,723

Accrued liabilities and other current liabilities
 
21,763

 
24,053

Total current liabilities
 
83,940

 
78,676

Non-current liabilities:
 
 
 
 
Long-term lease liabilities
 
89,827

 
99,793

Long-term debt
 
14,583

 

Other non-current liabilities
 
2,254

 
1,829

Total non-current liabilities
 
106,664

 
101,622

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock — $0.01 par value, 1,000 shares authorized, none outstanding
 

 

Common stock — $0.01 par value, 74,000 shares authorized, 48,900 and 48,680 shares issued, and 38,597 and 38,377 shares outstanding at August 1, 2020 and February 1, 2020, respectively
 
454

 
452

Additional paid-in capital
 
129,713

 
129,413

Accumulated deficit
 
(40,214
)
 
(7,882
)
Common stock held in treasury, 10,303 and 10,303 shares at cost at August 1, 2020 and February 1, 2020, respectively
 
(112,875
)
 
(112,875
)
Total stockholders’ equity
 
(22,922
)
 
9,108

Total liabilities and stockholders’ equity
 
$
167,682

 
$
189,406

See Notes to Condensed Consolidated Financial Statements

2


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(amounts in thousands, except per share data)
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
 
August 1,
 
August 3,
 
August 1,
 
August 3,
 
 
2020
 
2019
 
2020
 
2019
Net sales
 
$
58,481

 
$
83,443

 
$
98,606

 
$
166,663

Merchandise, buying and occupancy costs
 
52,101

 
58,969

 
88,502

 
116,575

Gross profit
 
6,380

 
24,474

 
10,104

 
50,088

Other operating expenses:
 
 

 
 
 
 
 
 
Selling, general and administrative
 
19,361

 
27,754

 
37,884

 
56,942

Depreciation and amortization
 
1,870

 
2,199

 
3,776

 
4,581

Impairment of store assets
 

 
311

 
264

 
311

Total other operating expenses
 
21,231

 
30,264

 
41,924

 
61,834

Operating loss
 
(14,851
)
 
(5,790
)
 
(31,820
)
 
(11,746
)
Interest expense, net
 
(280
)
 
(111
)
 
(553
)
 
(267
)
Loss before income taxes
 
(15,131
)
 
(5,901
)
 
(32,373
)
 
(12,013
)
Income (benefit) tax provision
 
(37
)
 
40

 
(41
)
 
80

Net loss and comprehensive loss
 
$
(15,094
)
 
$
(5,941
)
 
$
(32,332
)
 
$
(12,093
)
 
 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
 
Net loss
 
$
(0.40
)
 
$
(0.16
)
 
$
(0.86
)
 
$
(0.32
)
Basic shares outstanding
 
37,693

 
37,440

 
37,627

 
37,686

 
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
 
Net loss
 
$
(0.40
)
 
$
(0.16
)
 
$
(0.86
)
 
$
(0.32
)
Diluted shares outstanding
 
37,693

 
37,440

 
37,627

 
37,686

 

See Notes to Condensed Consolidated Financial Statements


3


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(amounts in thousands)
Thirteen Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Total
May 2, 2020
10,303

 
$
(112,875
)
 
38,372

 
$
452

 
$
129,573

 
$
(25,120
)
 
$
(7,970
)
Net loss

 

 

 

 

 
(15,094
)
 
(15,094
)
Issuance of restricted stock, net of forfeitures

 

 
225

 
2

 
(7
)
 

 
(5
)
Stock-based compensation expense

 

 

 

 
147

 

 
147

August 1, 2020
10,303

 
$
(112,875
)
 
38,597

 
$
454

 
$
129,713

 
$
(40,214
)
 
$
(22,922
)
Twenty-six Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Total
February 1, 2020
10,303

 
$
(112,875
)
 
38,377

 
$
452

 
$
129,413

 
$
(7,882
)
 
$
9,108

Net loss

 

 

 

 

 
(32,332
)
 
(32,332
)
Issuance of restricted stock, net of forfeitures

 

 
220

 
2

 
(9
)
 

 
(7
)
Stock-based compensation expense

 

 

 

 
309

 

 
309

August 1, 2020
10,303

 
$
(112,875
)
 
38,597

 
$
454

 
$
129,713

 
$
(40,214
)
 
$
(22,922
)
Thirteen Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
(Accumulated Deficit) Retained
Earnings
 
Total
May 4, 2019
10,161

 
$
(112,873
)
 
38,193

 
$
463

 
$
128,964

 
$
1,307

 
$
17,861

Net loss

 

 

 

 

 
(5,941
)
 
(5,941
)
Issuance of restricted stock, net of forfeitures

 

 
285

 
2

 
(6
)
 

 
(4
)
Stock-based compensation expense

 

 

 

 
160

 

 
160

Acquisition of common stock held in treasury, at cost
142

 
(2
)
 
(142
)
 
(14
)
 

 

 
(16
)
August 3, 2019
10,303

 
$
(112,875
)
 
38,336

 
$
451

 
$
129,118

 
$
(4,634
)
 
$
12,060

Twenty-six Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
(Accumulated Deficit) Retained
Earnings
 
Total
February 2, 2019
9,979

 
$
(112,809
)
 
38,386

 
$
481

 
$
128,714

 
$
4,137

 
$
20,523

Net loss

 

 

 

 

 
(12,093
)
 
(12,093
)
Issuance of restricted stock, net of forfeitures

 

 
274

 
2

 
(9
)
 

 
(7
)
Stock-based compensation expense

 

 

 

 
413

 

 
413

Acquisition of common stock held in treasury, at cost
324

 
(66
)
 
(324
)
 
(32
)
 

 

 
(98
)
Cumulative effect of accounting change

 

 

 

 

 
3,322

 
3,322

August 3, 2019
10,303

 
$
(112,875
)
 
38,336

 
$
451

 
$
129,118

 
$
(4,634
)
 
$
12,060


See Notes to Condensed Consolidated Financial Statements

4


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
 
 
Twenty-six Weeks Ended
 
 
August 1, 2020
 
August 3, 2019
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(32,332
)
 
$
(12,093
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
3,776

 
4,581

Impairment of store assets
 
264

 
311

Amortization of financing costs
 
96

 
30

Lease expense
 
12,061

 
12,867

Stock-based compensation expense
 
309

 
413

Changes in operating assets and liabilities:
 
 

 
 
Accounts receivable
 
372

 
(704
)
Merchandise inventories
 
5,692

 
(7,680
)
Prepaid expenses and other assets
 
255

 
(505
)
Income taxes receivable
 
(89
)
 
(26
)
Accounts payable
 
4,255

 
9,286

Accrued liabilities
 
(2,395
)
 
(2,964
)
Lease liabilities
 
(11,616
)
 
(13,634
)
Other liabilities
 
423

 
(230
)
Net cash used in operating activities
 
(18,929
)
 
(10,348
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, equipment and improvements
 
(661
)
 
(996
)
Net cash used in investing activities
 
(661
)
 
(996
)
Cash flows from financing activities:
 
 
 
 
Shares redeemed for payroll taxes
 
(7
)
 
(5
)
Proceeds from bank credit facility
 
18,155

 
12,650

Payments of bank credit facility
 
(13,580
)
 
(9,200
)
Payments for debt issuance costs
 
(405
)
 

Proceeds from long-term borrowings
 
15,000

 

Acquisition of common stock held in treasury, at cost

 

 
(98
)
Net cash provided by financing activities
 
19,163

 
3,347

Net decrease in cash and cash equivalents
 
(427
)
 
(7,997
)
Cash and cash equivalents at beginning of period
 
3,198

 
10,239

Cash and cash equivalents at end of period
 
$
2,771

 
$
2,242

Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
553

 
$
267

Income taxes paid
 
$
59

 
$
198

Accrued purchases of property, equipment and improvements
 
$
221

 
$
98

 
See Notes to Condensed Consolidated Financial Statements


5


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — Basis of Presentation
 
The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC"). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements, except the Condensed Consolidated Balance Sheet as of February 1, 2020 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020.
 
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of August 1, 2020, August 3, 2019 and for all periods presented.

COVID-19

On March 11, 2020, the World Health Organization declared the novel coronavirus (known as COVID-19) outbreak to be a global pandemic. As a result, the Company began the temporary closing of its stores, and effective March 19, 2020, it made the decision to temporarily close all of its stores and corporate office to combat the rapid spread of COVID-19. All stores remained closed until April 27, 2020, when a small number of stores in select markets were reopened to serve solely as fulfillment centers for the Company’s eCommerce sales. As of September 11, 2020, most corporate office associates continued to work remotely.

These developments have caused significant disruptions to the Company’s business and have had a significant adverse impact on its financial condition, results of operations and cash flows, the extent of which will be primarily based on the duration of the store closures, as well as the timing and extent of any recovery in traffic and consumer spending at the Company’s stores. As of August 1, 2020, 447 of the Company’s 452 stores, as well as its distribution center, have been reopened to customers, with the remaining stores closed to the public due to local government or landlord restrictions while remaining operational for purposes of fulfilling eCommerce orders. However, the Company is unable to determine whether, when or how the conditions surrounding the COVID-19 pandemic will change, including the impact that social distancing protocols will have on the Company’s operations, the degree to which the Company’s customers will patronize its stores and any impact from potential subsequent additional outbreaks or government mandated closures.

In response to the COVID-19 pandemic and the temporary closing of stores, the Company temporarily furloughed all store and most distribution center and corporate associates, but continued to provide benefits to furloughed associates. As the Company reopened stores, it recalled most furloughed associates, with approximately 85% returning to the workforce as of September 1, 2020.

The Company suspended rent payments to landlords while stores were closed and is currently negotiating with landlords in an effort to secure more favorable lease terms, where possible, both for periods when stores were temporarily closed as well as for future periods, as a result of the COVID-19 pandemic and its effects on the commercial real estate market. As previously announced, corporate employees and management received temporary base salary reductions beginning with 20% and up to 50% for the CEO. The Board of Directors also agreed to a substantial reduction in retainer fees aligned with management. As of July 12, 2020, the Company restored base salaries and director retainer fees to levels effective immediately prior to March 22, 2020.

Additionally, in early June 2020, the Company applied for and received $10.0 million in loan proceeds under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The Company has been able to apply the loan proceeds toward the payment of qualified payroll expenses in accordance with the conditions of the PPP and believes that the loan principal will be substantially forgiven under the CARES Act.


6


Also, the Company worked closely with its merchandise vendor partners to reduce orders and extend payment terms, canceling as much of its spring/summer inventory orders as possible while holding over some core product.

The Company has experienced, and will continue to experience, adverse impacts on its financial condition and results of operations as a result of the COVID-19 pandemic, including, but not limited to, significant declines in net sales as a result of its store closings, as partially offset by reduced merchandise, buying and occupancy costs and other operating expenses; increases in operating losses and net losses; and adjustments to asset carrying values or long-lived asset impairment charges. Actual results may differ materially from the Company’s current estimates as the scope of the COVID-19 pandemic evolves, depending largely, though not exclusively, on the duration and extent of the disruption to its business.
 
Recently issued accounting pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for public entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years. The Company has not yet adopted this ASU as of the balance sheet date. The Company is currently evaluating the ASU and will document its impact in a subsequent period.

In March 2020, the FASB issued ASU No. 2020-04, Fair Value Measurement - Reference Rate Reform (Topic 848). The guidance addresses accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The optional amendments are effective for all entities as of March 12, 2020, through December 31, 2022. The Company intends to elect to apply certain of the optional expedients when evaluating the impact of reference rate reform on its debt instruments that reference LIBOR.

Recently adopted accounting pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation did not have a significant impact on the condensed consolidated financial statements.

We reviewed all other significant newly-issued accounting pronouncements and concluded they are either not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.

NOTE 2 — Revenue
 
Merchandise sales
We sell merchandise through our brick and mortar and eCommerce sales channels. Revenues are recognized when control of the promised merchandise is transferred to our customers. Within our brick and mortar sales channel, control is transferred at the point of sale. Within our eCommerce sales channel, control is transferred upon delivery of the merchandise to our customers. Shipping revenues associated with the eCommerce channel are recognized upon the completion of the delivery. The revenue recorded reflects the consideration that we expect to receive in exchange for our merchandise. The Company has elected, as an accounting policy, to exclude from the transaction price all taxes assessed by governmental authorities imposed on merchandise sales.

7


Right of return
As part of our merchandise sales, we offer customers a right of return on merchandise that lapses, after a specified period of time, based on the original purchase date. The Company estimates the amount of sales that may be returned by our customers and records this estimate as a reduction of revenue in the period in which the related revenues are recognized. We utilize historical and industry data to estimate the total return liability. Conversely, the reduction in revenue results in a corresponding reduction in merchandise, buying and occupancy costs which results in a contract asset for the anticipated merchandise returned. The total reduction in revenue from estimated returns was $1.1 million for the period ended August 1, 2020, and $1.0 million for the period ended February 1, 2020. These amounts are included within accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Friendship Rewards Program
The Company established the Friendship Rewards Program (“Friendship Rewards”) as a loyalty program where customers earn points towards future discount certificates based on their purchase activity. We have identified the additional benefits received from Friendship Rewards as a separate performance obligation within a sales contract in the form of the discount certificates earned by customers. Accordingly, we assess any incremental discounts issued to our customers through Friendship Rewards and allocate a portion of the transaction price associated with merchandise sales from Friendship Rewards members to the future discounts earned. The transaction price allocated to future discounts is recorded as deferred revenue until the discounts are used or forfeited. In addition, the Company estimates breakage on the points earned within Friendship Rewards that will not be used by customers for future discounts. The Company estimates breakage based on the historical redemption rate and considers industry trends. Breakage is recorded as a reduction to the deferred revenue associated with Friendship Rewards. As of August 1, 2020, and February 1, 2020, the Company recorded $3.9 million and $4.3 million, respectively, in deferred revenue associated with Friendship Rewards, which is included in accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Gift card revenue
The Company sells gift cards to customers which can be redeemed for merchandise within our brick and mortar and eCommerce sales channels. Gift cards are recorded as deferred revenue when issued and are subsequently recorded as revenue upon redemption. The Company estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as revenue in proportion to the rate of gift card redemptions by vintage. As of August 1, 2020, and February 1, 2020, the Company had $3.0 million and $4.3 million, respectively, of deferred revenue associated with the issuance of gift cards. The deferred gift card revenue is included in accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Private label credit card
The Company offers a private label credit card ("PLCC") which bears the Christopher and Banks brand name offered under an agreement with Comenity Bank. Pursuant to this agreement, there are several obligations on behalf of Comenity Bank that impact the recording of revenue.
In connection with extending the term of the agreement, the Company received a signing bonus. We have determined that the benefits associated with signing the agreement are recognized over time throughout its term. This is the most accurate depiction of the transfer of services as the customer receives and consumes the benefits by obtaining and having the ability to use financing through Comenity Bank for purchases within our brick and mortar and eCommerce sales channels throughout the agreement's term. The deferred signing bonus is included in other liabilities and is being recognized in net sales ratably over the term of the contract.
The other revenue based on customer usage of the card is recognized in net sales in the periods in which the related customer transaction occurs. As of August 1, 2020, the Company had $1.2 million recorded as deferred revenue associated with the signing bonus, of which $0.3 million was included in accrued liabilities and other current liabilities and the remaining $0.9 million was included in other non-current liabilities in the Condensed Consolidated Balance Sheets. As of February 1, 2020, the Company had $1.3 million recorded as deferred revenue associated with the signing bonus, of which $0.3 million was included in accrued liabilities and other current liabilities and the remaining $1.1 million was included in other non-current liabilities of the Condensed Consolidated Balance Sheets. The Company recorded $0.1 million into revenue for the thirteen and twenty-six-week periods ended August 1, 2020 and August 3, 2019, respectively, associated with the signing bonus.
The Company records revenue associated with royalties received for purchases made using the PLCC. Royalty revenue is recognized based on the total amount to which we have a right to invoice in accordance with the practical expedient included in ASC 606. Accordingly, royalty revenue is recognized in the period in which the related purchases are recognized.

8


The Company receives a performance bonus based on the total amount of new PLCC accounts that are opened during the year. We have determined that this is a form of variable consideration. Variable consideration is recorded if, in the Company’s judgment, it is probable that a significant future reversal of revenue under the contract will not occur.
Disaggregation of revenue
The following table provides information about disaggregated revenue by sales channel. All revenue illustrated below is included within our one reportable segment.
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
(in thousands)
 
August 1, 2020
 
August 3, 2019
 
August 1, 2020
 
August 3, 2019
Brick and mortar stores
 
$
29,876

 
$
65,595

 
$
53,295

 
$
130,647

eCommerce sales
 
27,673

 
16,698

 
44,452

 
35,598

Other
 
932

 
1,150

 
859

 
418

Net sales
 
$
58,481

 
$
83,443

 
$
98,606

 
$
166,663



Amounts included within other revenue relate to revenues earned from our private label credit card, net of any revenue adjustments and accruals.

Contract balances

The following table provides information about contract liabilities from contracts with customers (in thousands):
 
 
Contract Liabilities
 
 
August 1, 2020
 
February 1, 2020
 
 
Current
 
Non-Current
 
Current
 
Non-Current
Right of return
 
$
1,104

 
$

 
$
979

 
$

Friendship Rewards
 
3,878

 

 
4,280

 

Gift card revenue
 
2,986

 

 
4,282

 

Private label credit card
 
274

 
936

 
274

 
1,073

Total
 
$
8,242

 
$
936

 
$
9,815

 
$
1,073



The Company recognized revenue of $1.3 million and $1.4 million in the thirteen-week periods ended August 1, 2020 and August 3, 2019, respectively, related to contract liabilities recorded at the beginning of the period. The Company recognized revenue of $2.2 million and $3.1 million in the twenty-six week periods ended August 1, 2020 and August 3, 2019, respectively, related to contract liabilities recorded at the beginning of the period. Such revenues were comprised of the redemption and forfeiture of Friendship Rewards discount certificates, redemption of gift cards, and amortization of the PLCC signing bonus. As of August 1, 2020, and February 1, 2020, the Company did not have any material contract assets.
For the thirteen and twenty-six-week periods ended August 1, 2020 and August 3, 2019, the Company did not recognize any revenue resulting from changes in the estimated variable consideration to be received associated with performance obligations satisfied or partially satisfied in prior periods.
Transaction price allocated to remaining performance obligations
The following table includes the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied as of August 1, 2020:
 
 
Remainder of
 
 
 
 
(in thousands)
 
Fiscal 2020
 
Fiscal 2021
 
Thereafter
Private label credit card
 
$
137

 
$
274

 
$
799

Total
 
$
137

 
$
274

 
$
799



Contract Costs
The Company has not incurred any costs to obtain or fulfill a contract.

9



NOTE 3 — Property, Equipment and Improvements, Net
 
Property, equipment and improvements, net consisted of the following (in thousands):
Description
 
August 1, 2020
 
February 1, 2020
Store leasehold improvements
 
$
50,023

 
$
49,894

Store furniture and fixtures
 
69,963

 
69,735

Corporate office and distribution center furniture, fixtures and equipment
 
6,463

 
6,463

Computer and point of sale hardware and software
 
32,959

 
32,952

Construction in progress
 
356

 
275

Total property, equipment and improvements, gross
 
159,764

 
159,319

Less accumulated depreciation and amortization
 
(137,915
)
 
(134,367
)
Total property, equipment and improvements, net
 
$
21,849

 
$
24,952


 
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future cash flows (undiscounted and without interest charges). If the sum of the estimated future cash flows is less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which is typically based on estimated discounted future cash flows or market value, as appropriate. We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis is depreciated over the remaining useful life of that asset.

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For long-lived assets deployed at store locations, we review for impairment at the individual store level.

Our impairment loss calculations involve uncertainty because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including estimating useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

Due to continued operating losses and sales declines resulting from the temporary closure of all stores as of March 19, 2020 due to the COVID-19 pandemic, the Company performed an impairment analysis for the quarter ended August 1, 2020. In performing the analysis, the Company estimated the impact of the temporary store closures on future sales, gross margins and store operating expenses, taking into account estimated store reopening dates and projected sales and other activity ramping up to more normal levels. Leasehold improvements, store furniture and fixtures, and right-of-use operating lease assets at certain under-performing stores, and stores identified for closure were analyzed for impairment. The Company recorded zero and $0.3 million in store asset impairment, respectively, for the thirteen and twenty-six week periods ended August 1, 2020. The Company recorded $0.3 million in store asset impairment during the thirteen and twenty-six week periods ended August 3, 2019.


10


NOTE 4 — Accrued Liabilities and Other Current Liabilities
 
Accrued liabilities and other current liabilities consisted of the following (in thousands):
 
 
August 1, 2020
 
February 1, 2020
Gift card revenue
 
$
2,986

 
$
4,282

Accrued Friendship Rewards liability
 
3,878

 
4,280

Accrued income, sales and other taxes payable
 
1,294

 
1,056

Accrued occupancy-related expenses
 
202

 
468

Right of return
 
1,104

 
979

eCommerce obligations
 
5,001

 
5,932

Other accrued liabilities
 
7,298

 
7,056

Total accrued liabilities and other current liabilities
 
$
21,763

 
$
24,053



NOTE 5 — Credit and Term Loan Facilities and PPP Loan
 
The Company is party to an amended and restated credit agreement (“the Credit Facility”) with Wells Fargo Bank, National Association ("Wells Fargo"), as lender. On February 27, 2020, the Company entered into (i) a third amendment (the “Third Amendment”) to the Credit Facility with Wells Fargo and (ii) a credit agreement (the “Term Loan Facility”) with ALCC, LLC as lender.

The Third Amendment, among other changes, (i) removed the $5.0 million revolving “first-in, last-out” tranche credit facility, which was paid in full using proceeds from the Term Loan Facility and (ii) permitted the Company to incur indebtedness under the Term Loan Facility. The Term Loan Facility provides for a delayed draw term loan facility in the aggregate principal amount of up to $10.0 million with a maturity date of August 3, 2023, and supplements the existing $50.0 million revolving Credit Facility. On February 27, 2020, the Company drew $5.0 million on the Term Loan Facility.

The Credit Agreement and the Term Loan Facility were subsequently amended on August 5, 2020, to create specific covenant basket for the PPP Loan, thus freeing up the Company's $10.0 million unsecured debt basket.

Loans under the Term Loan Facility bear interest at a rate of 10% per annum and will amortize on a straight-line basis based on a 5-year amortization period in monthly installments beginning on the first business day of the thirteenth month after the date of the initial borrowing. Borrowings under the Credit Facility will generally accrue interest at a rate ranging from 1.50% to 1.75% over the LIBOR or 0.50% to 0.75% over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such terms are defined in the Credit Facility. The Company has the ability to select between the LIBOR or prime based rate at the time of the cash advance. The Credit Facility has an unused commitment fee of 0.25%.

The Company expensed approximately $0.1 million of deferred financing costs during the thirteen and twenty-six week periods ended August 1, 2020 in connection with the Credit Facility. The deferred financing costs have been combined with the balance of the deferred financing costs remaining from the prior amendment on August 3, 2018. Deferred financing costs are included in other assets on the Condensed Consolidated Balance Sheet and are being amortized as interest expense over the related term of the Second Amendment.

The Credit Facility contains customary events of default and various affirmative and negative covenants. The financial covenant contained in both the Credit Facility and the Term Loan Facility requires the Company to maintain Availability, as such term is defined in the respective Facilities, at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. In addition, the Term Loan Facility requires the Company to maintain specified levels of consolidated EBITDA when the outstanding principal balance exceeds $5.0 million. The Company was in compliance with all financial covenants and other financial provisions of the Credit Facility and Term Loan Facility as of August 1, 2020.

The Company's obligations under the Credit Facility and Term Loan Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company's subsidiaries.
 

11


There were $4.6 million and zero in outstanding borrowings under the Credit Facility as of August 1, 2020 and February 1, 2020, respectively. The capped borrowing base at August 1, 2020 was approximately $26.2 million. As of August 1, 2020, the Company had open on-demand letters of credit of approximately $12.7 million. Accordingly, after reducing the capped borrowing base, current borrowings of $4.6 million, open letters of credit and the required minimum availability of the greater of $3.0 million, or $3.0 million (10.0% of the revolving loan cap), the net availability of revolving credit loans under the Credit Facility was approximately $5.9 million at August 1, 2020.

On June 2, 2020, the Company was granted a loan (the “PPP Loan”) from Cache Valley Bank in the aggregate amount of $10.0 million, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP Loan, which required a note dated June 1, 2020 issued by the Company, matures on June 1, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on December 1, 2020. The Company may prepay the note at any time prior to maturity with no prepayment penalties. The Company may only use funds from the PPP Loan for purposes specified in the CARES Act and related PPP rules, which include payroll costs, costs used to continue group health care benefits, rent, and utilities; other uses will constitute a default under the PPP Loan.

The Company used the entire PPP Loan amount for qualifying expenses during fiscal June, July and August of 2020. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act during the 24-week period commencing on the date of disbursement of the Loan.

NOTE 6 — Income Taxes

On March 27, 2020, the CARES Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income and accelerating alternative minimum tax credit refunds. The tax law changes in the CARES Act did not have a material impact on the Company’s income tax provision.

For the thirteen weeks ended August 1, 2020, the Company recorded income tax benefit of $(37) thousand, or an effective tax rate of 0.2%, versus income tax expense of $40 thousand, or an effective tax rate of (0.7)% for the same period of Fiscal 2019. For the twenty-six weeks ended August 1, 2020, the Company recorded income tax benefit of $(41) thousand, or an effective tax rate of 0.1%, versus income tax expense of $80 thousand, or an effective tax rate of (0.7)% for the same period of Fiscal 2019. The income tax provisions for the Fiscal 2020 and 2019 periods are primarily driven by state taxes.

As of August 1, 2020, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed to remain related to certain state tax benefits. As of February 1, 2020, the Company has gross federal and state net operating loss (“NOL”) carryforwards of approximately $162.2 million and $83.2 million, respectively. A portion of the federal net operating loss carryforwards will begin to expire in 2032 while the other portion can be carried forward indefinitely. The state net operating loss carryforwards have carryforward periods of 5 to 20 years and begin to expire in the current year. The Company also has federal tax credits of $1.1 million which will begin to expire in 2030 and gross charitable contribution carryforwards of $0.7 million that will begin to expire in 2020.

Sections 382 and 383 of the Internal Revenue Code limit the annual utilization of certain tax attributes, including net operating loss carryforwards, incurred prior to a change in ownership. If the Company were to experience an ownership change, as defined by Sections 382 and 383, its ability to utilize its tax attributes could be substantially limited. Depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant number of its accumulated NOLs.

The Company's liability for unrecognized tax benefits associated with uncertain tax provisions is recorded within the Condensed Consolidated Balance Sheets in Other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. We do not expect any significant changes to the amount of unrecognized tax benefits in the next twelve months.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax years before Fiscal 2011. The Company does not have any ongoing income tax audits that are anticipated to have a material impact on the financial statements.


12


NOTE 7 — Earnings Per Share (“EPS)
 
The following table sets forth the calculation of basic and diluted EPS shown in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss:
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
 
August 1,
 
August 3,
 
August 1,
 
August 3,
 
 
2020
 
2019
 
2020
 
2019
Numerator (in thousands):
 
 
 
 
 
 
 
 
Net loss attributable to Christopher & Banks Corporation
 
$
(15,094
)
 
$
(5,941
)
 
$
(32,332
)
 
$
(12,093
)
Denominator (in thousands):
 
 

 
 

 
 
 
 
Weighted average common shares outstanding - basic
 
37,693

 
37,440

 
37,627

 
37,686

Dilutive shares
 

 

 

 

Weighted average common and common equivalent shares outstanding - diluted
 
37,693

 
37,440

 
37,627

 
37,686

Net loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.40
)
 
$
(0.16
)
 
$
(0.86
)
 
$
(0.32
)
Diluted
 
$
(0.40
)
 
$
(0.16
)
 
$
(0.86
)
 
$
(0.32
)

 
Total stock options exercisable for approximately 4.7 million and 4.8 million shares were excluded from the shares used in the computation of diluted earnings per share for the thirteen week periods ended August 1, 2020 and August 3, 2019, respectively, as they were anti-dilutive.

Total stock options exercisable for approximately 4.5 million and 4.7 million shares were excluded from the shares used in the computation of diluted earnings per share for the twenty-six week periods ended August 1, 2020 and August 3, 2019, respectively, as they were anti-dilutive.

NOTE 8 — Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable
Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.

Assets that are Measured at Fair Value on a Non-recurring Basis:
 
The following table summarizes certain information for non-financial assets for the twenty-six weeks ended August 1, 2020 and the fiscal year ended February 1, 2020, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. 
 
 
Twenty-six Weeks Ended
 
Fiscal Year Ended
Long-Lived Assets Held and Used (in thousands):
 
August 1, 2020
 
February 1, 2020
Carrying value
 
$
476

 
$
510

Fair value measured using Level 3 inputs
 
212

 
199

Impairment charge
 
$
264

 
$
311


 
Approximately $0.2 million of the Fiscal 2020 impairment charge reduced the carrying value of operating lease assets. The remainder of the Fiscal 2020 impairment charge reduced the carrying value of fixed assets.


13


All of the fair value measurements included in the table above were based on significant unobservable inputs (Level 3). The Company determines fair value for measuring assets on a non-recurring basis using either a discounted cash flow or market value approach as discussed in Note 3, Property, Plant and Equipment. In determining future cash flows, the Company uses its best estimate of future operating results, which requires the use of significant estimates and assumptions, including estimated sales, merchandise margin and expense levels, and the selection of an appropriate discount rate; therefore, differences in the estimates or assumptions could produce significantly different results. General economic uncertainty impacting the retail industry and continuation of recent trends in company performance makes it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.

Fixed asset fair values were derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group is expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the case of assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.

n
NOTE 9 — Lease Commitments

The Company leases its store locations and vehicles under operating leases. The store lease terms, including rental period, renewal options, escalation clauses and rent as a percentage of sales, vary among the leases. Most store leases require the Company to pay real estate taxes and common area maintenance charges. In addition, we have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets.

For the Company's current lease obligations, no explicit interest rates were stated in the lease agreements and no implicit rates could be determined based on the terms of the agreements. Therefore, in all cases, the Company has applied a formula-based incremental borrowing rate appropriate to the type of lease and lease term.
 
Maturities of our lease liabilities as of August 1, 2020 were as follows:
(in thousands)
 
Lease Liabilities(1)
Remainder of 2020
 
$
16,456

2021
 
28,024

2022
 
23,863

2023
 
22,398

2024
 
19,018

Thereafter
 
28,282

Total lease payments
 
138,041

Less: Imputed interest
 
(23,679
)
Present value of lease liabilities
 
114,362

Less: Current lease liabilities
 
(24,535
)
Long-term lease liabilities
 
$
89,827


(1) 
Includes retail stores and the corporate headquarters facility, including the distribution center.

14



Maturities of our lease liabilities as of February 1, 2020 were as follows:
(in thousands)
 
Lease Liabilities(1)
2020
 
$
32,904

2021
 
27,326

2022
 
23,028

2023
 
21,929

2024
 
18,558

Thereafter
 
26,760

Total lease payments
 
150,505

Less: Imputed interest
 
(24,527
)
Present value of lease liabilities
 
125,978

Less: Current lease liabilities
 
(26,185
)
Long-term lease liabilities
 
$
99,793


(1) 
Includes retail stores and the corporate headquarters facility, including the distribution center.

The weighted average remaining lease terms and discount rates for all leases as of August 1, 2020 were as follows:
Remaining lease term and discount rate:
 
August 1, 2020
Weighted average remaining lease term (years)
 
5.5

Weighted average discount rate
 
5.7
%


Operating lease expense for the thirteen weeks ended August 1, 2020 totaled approximately $8.8 million, with $0.5 million of that amount representing operating lease variable rent that was recorded in cost of sales. In addition, all but $12 thousand of the $8.3 million of non-variable operating lease rent is included in cost of sales. $12 thousand dollars of operating lease expense is included in selling, general and administrative expenses. For the thirteen weeks ended August 1, 2020, cash lease payments were $7.5 million, and right-of-use assets obtained in exchange for lease liabilities were zero.

Operating lease expense for the twenty-six weeks ended August 1, 2020 totaled approximately $17.7 million, with $0.7 million of that amount representing operating lease variable rent that was recorded in cost of sales. In addition, all but $19 thousand of the $17.0 million of non-variable operating lease rent is included in cost of sales. $19 thousand dollars of operating lease expense is included in selling, general and administrative expenses. For the twenty-six weeks ended August 1, 2020, cash lease payments were $16.0 million, and right-of-use assets obtained in exchange for lease liabilities were $1.1 million.

NOTE 10 — Legal Proceedings
 
We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue a potential loss contingency.


15


On August 14, 2019, Mark Gottlieb, a Company stockholder, filed a purported class action lawsuit against Jonathan Duskin; Seth Johnson; Keri Jones; Kent Kleeberger; William Sharpe, III; Joel Waller and Laura Weil (the "Named Directors"), B. Riley FBR, Inc. and B. Riley Financial Inc., in the Court of Chancery in the State of Delaware (the "Court of Chancery"), on behalf of himself and all stockholders who held shares as of December 20, 2018. The lawsuit alleges that the Named Directors breached their duty of loyalty in connection with the Company's rejection in December of 2018, of an unsolicited bid to acquire the Company and seeks unspecified damages for shareholders' lost opportunity. The lawsuit further alleges that the B. Riley firms aided and abetted the asserted breach of the duty of loyalty by the Named Directors. The Company believes the Complaint is without merit. The Named Directors, and the Company on their behalf, together with the B. Riley firms, intend to defend the lawsuit vigorously. On September 18, 2019, the Director Defendants filed a motion to dismiss the Plaintiff's complaint for failure to state a claim upon which relief can be granted. The motion was briefed by Plaintiff and the Defendants and oral argument on the motion were held before the Court of Chancery in February 2020. On May 27, 2020, the court announced a partial decision on the pending motions but asked for further briefing on the potentially dispositive issue of whether the claim is a derivative or direct, i.e. whether it belongs to the Company and cannot be brought by the Plaintiff or whether he may bring it directly. The parties have submitted further briefing on that issue and are awaiting the Court's decision.

The ultimate resolution of legal matters can be inherently uncertain and, for some matters, we may be unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. We do not, however, currently believe that the resolution of any pending matter will have a material adverse effect on our financial position, results of operations or liquidity.

NOTE 11 — Subsequent Events

On August 5, 2020, Christopher & Banks Company, a subsidiary of the Company, entered into a secured vendor program agreement with ALCC, LLC (the “Program Agreement”), in order to improve cash flow and to better align the Company's payment for inventory when it is sold. Under the Program Agreement, ALCC may purchase up to $10 million of inventory from Christopher & Banks Company’s vendors on behalf of Christopher & Banks Company (the “Inventory”). Christopher & Banks Company must pay ALCC for the Inventory either when Christopher & Banks Company sells the Inventory or 180 days after ALCC purchases the Inventory. Christopher & Banks Company must pay ALCC a 1.0% origination fee on amounts funded under the Program Agreement. Christopher & Banks Company is required to pay interest on any unsold Inventory at rates determined in the Program Agreement. The Program Agreement will remain in effect until August 3, 2023 unless terminated earlier in accordance with its terms.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and our unaudited Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude.

The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed in "Risk Factors" and in "Forward-Looking Statements" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

Executive Overview
 
We are a specialty retailer of privately branded women's apparel and accessories. We offer our customer an assortment of unique, classic and versatile clothing that fits her everyday needs at a good value.
 
We operate an integrated, omni-channel platform that provides our customer the ability to shop when and where she wants, including online or at our retail and outlet stores. This approach allows our customers to browse, purchase, return, or exchange our merchandise through the channel that is optimal for her.
 

16


As of August 1, 2020, we operated 452 stores in 44 states, including 316 Missy, Petite, Women ("MPW") stores, 77 outlet stores, 31 Christopher & Banks ("CB") stores, and 28 C.J. Banks ("CJ") stores. These store numbers include temporarily closed stores. Our CB brand offers unique fashions and accessories featuring exclusively designed assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our MPW concept and outlet stores offer an assortment of both CB and CJ apparel servicing the Missy, Petite and Women-sized customer in one location.

COVID-19

On March 11, 2020, the World Health Organization declared the novel coronavirus (known as COVID-19) outbreak to be a global pandemic. As a result, and effective March 19, 2020, the Company made the decision to temporarily close all of its stores and corporate office to combat the rapid spread of COVID-19. All stores remained closed until April 27, 2020, when a small number of stores in select markets were reopened to serve solely as fulfillment centers for the Company’s eCommerce sales. As of September 11, 2020, most corporate office associates continue to work remotely.

These developments have caused, and will continue to cause, significant disruptions to the Company’s business and have had a significant adverse impact on its financial condition, results of operations and cash flows, the extent of which will be primarily based on the duration of the store closures, as well as the timing and extent of any recovery in traffic and consumer spending at the Company’s stores. As of August 1, 2020, 447 of the Company’s 452 stores, as well as its distribution center, have been reopened to customers, with the remaining stores closed to the public due to local government or landlord restrictions while remaining operational for purposes of fulfilling eCommerce orders. However, the Company is unable to determine whether, when or how the conditions surrounding the COVID-19 pandemic will change, including the impact that social distancing protocols will have on the Company’s operations, the degree to which the Company’s customers will patronize its stores and any impact from potential subsequent additional outbreaks or government mandated closures.

In response to the COVID-19 pandemic and the temporary closing of stores, the Company temporarily furloughed all store and most distribution center and corporate associates, but continued to provide benefits to furloughed associates. As the Company reopened stores, it recalled most furloughed associates, with approximately 85% returning to the workforce as of September 1, 2020.

The Company suspended rent payments to landlords while stores were closed and is currently negotiating with landlords in an effort to secure more favorable lease terms, where possible, both for periods when stores were temporarily closed as well as for future periods, as a result of the COVID-19 pandemic and its effects on the commercial real estate market. As previously announced, corporate employees and management received temporary base salary reductions beginning with 20% and up to 50% for the CEO. The Board of Directors also agreed to a substantial reduction in retainer fees aligned with management. As of July 12, 2020, the Company restored base salaries and director retainer fees to levels effective immediately prior to March 22, 2020.

Additionally, in early June 2020, the Company applied for and received $10.0 million in loan proceeds under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020. The Company has been able to apply the loan proceeds toward the payment of qualified payroll expenses in accordance with the conditions of the PPP and believes that the loan principal will be substantially forgiven under the CARES Act.

Also, the Company worked closely with its merchandise vendor partners to reduce orders and extend payment terms, canceling as much of its spring/summer inventory orders as possible while holding over some core product.

The Company has experienced, and will continue to experience, adverse impacts on its financial condition and results of operations as a result of the COVID-19 pandemic, including, but not limited to, significant declines in net sales as a result of our store closings, as partially offset by reduced merchandise, buying and occupancy costs and other operating expenses; increases in operating losses and net losses; and adjustments to asset carrying values or long-lived asset impairment charges. Actual results may differ materially from the Company’s current estimates as the scope of the COVID-19 pandemic evolves, depending largely, though not exclusively, on the duration and extent of the disruption to its business.

As various states across the country begin to authorize the re-opening of businesses, we continue to keep health and safety as a top priority as we take steps to re-open our stores. We have implemented social distancing and safety practices that include:
Hand sanitizer being available for all customers and associates;
Social distancing of at least 6 feet;
Extended cleaning efforts to wipe down surfaces after each use;

17


Wearing of masks by all associates and customers;
Limiting the number of customers in store based on store size;
Requiring associates that do not feel well to stay home; and
Requesting customers that do not feel way to stay home, but to shop online.

Ongoing Initiatives for Fiscal 2020

Since the beginning of the COVID-19 pandemic, protecting the health and safety of our customers, associates, and the communities that we serve has been our top priority. Accordingly, we moved quickly to close our stores, distribution center, and corporate offices in March. We continue to keep health and safety as a top priority as we re-open our stores.

As discussed above, we began limited reopening stores on April 27, 2020 for fulfillment of eCommerce orders. Since that time, we have opened these stores to the public and have continued to reopen other stores in accordance with applicable government guidelines. As of August 1, 2020, 447 of our stores have been reopened. While our stores were closed, our primary short-term financial objective was to effectively manage and enhance our liquidity. As our stores return to normal operations, and we receive more clarity on the extent of the impact of the COVID-19 pandemic, we will continue to focus on a number of ongoing initiatives aimed at improving our business.

Strategic Priorities
 
Our overall business strategy is to build sustainable, long-term revenue growth and consistent profitability through the following strategic initiatives:

Enhance the customer shopping experience;
Improve marketing and promotional effectiveness;
Leverage omni-channel capabilities;
Build loyalty and grow our customer file;
Optimize our real estate portfolio; and
Right-size our cost structure.

Enhance the Customer Shopping Experience

We are committed to enhancing our customer's shopping experience by providing a well curated product assortment that is presented in a way that is easier for her to shop. We are focused on improving the flow and depth of our inventory buys which are intended to help her build an outfit and drive units per transaction. Additionally, we have recently launched a new Style and Selling model to support our store associates in providing even better service and importantly drive sales. We believe these changes have increased conversion rates and units per transaction.

Improve Marketing and Promotional Effectiveness

Our goals include executing disciplined markdown management, leveraging improved analytics to inform what types and depth of promotions and targeted offers are used, increasing our return on marketing investments.

Leverage Omni-Channel Capabilities

Our integrated, omni-channel strategy is designed to provide customers with a seamless retail experience, allowing her to shop whenever, however and wherever she chooses. In January of 2018, we launched “Buy online, ship to store,” and in November of 2018, we launched “Buy online, ship from store.” We launched “Buy online, pick up in store” during the first quarter of Fiscal 2019 and in August of 2020 we launched an item level “Buy online, pick up in store” initiative. All of our stores are now fulfilling eCommerce orders. These flexible fulfillment options not only meet a customer need, they allow us to better leverage our inventory across our entire chain and to better manage our fulfillment costs.

Build Loyalty and Grow our Customer File

We have a very loyal customer base that is highly engaged. Our uniquely designed product, our value positioning and our customer service are key differentiators for us and contribute to the loyalty of our customers with approximately 90% of our active customers participating in our loyalty rewards program.


18


We continue to focus on maximizing the benefits of our customer relationship management (“CRM”) database, Friendship Rewards, and private-label credit card program to strengthen engagement with our customers. Our Friendship Rewards, in conjunction with our CRM system, allows us to personalize communications and customize our offers. We continue to leverage our direct and digital marketing channels to encourage additional customer visits and increased spending per visit.

To grow our active customer file, we intend to reallocate our marketing spend in an effort to drive acquisition of new customers, reactivate lapsed customers, and also capitalize on market disruptions. In addition, we intend to refresh our Friendship Rewards and to continue to leverage that program. Finally, we plan to capitalize on our unique positioning in the market to drive engagement with customers on a grass roots level.

Optimize our Real Estate Portfolio

Between 2011 and 2015 we consolidated our store formats and reduced our store count by 33% in an effort to improve store productivity. Additionally, approximately 34% of our store leases have a potential lease action arising during the last three quarters of Fiscal 2020. These lease actions should provide us with flexibility to close underperforming stores and the opportunity to renegotiate occupancy costs where applicable. To this end, we engaged a leading national third-party real estate consulting firm during Fiscal 2019 to assist us in lease restructuring and to accelerate and increase occupancy cost savings. As a result of these lease restructuring efforts, we realized approximately $2.0 million in occupancy cost savings in Fiscal 2019 and we expect an additional $4.6 million in savings in Fiscal 2020. In addition, it is the Company's intent to negotiate more favorable lease terms, where possible, both for periods during which stores were temporarily closed as well as for future periods, as a result of the COVID-19 pandemic and its effects on the commercial real estate market.

Right-size our Cost Structure

We intend to take a holistic approach in driving cost reductions. To help us in accomplishing this we have hired a third-party, non-merchandise procurement specialist to assist us in analyzing relationships and negotiating cost reductions. In addition, we intend to continue to aggressively negotiate rent reductions, optimize our marketing spend, review and reduce our corporate overhead and reduce our shipping and fulfillment expense.

Performance Measures

Management evaluates our financial results based on the following key measures of performance:

Comparable sales

Comparable sales is a measure that highlights the sales performance of our store channel and eCommerce channel by measuring the changes in sales over the comparable, prior-year period of equivalent length. Comparable sales were not available for the second quarter and first half of Fiscal 2020 due to temporary store closures related to the COVID-19 pandemic.

Our comparable sales calculation includes merchandise sales for:
Stores operating for at least 13 full months;
Stores relocated within the same center; and
eCommerce sales.

Our comparable sales calculation excludes:
Stores converted to the MPW format for 13 full months post conversion.

We believe our eCommerce operations are interdependent with our brick-and-mortar store sales and, as such, we believe that reporting combined store and eCommerce comparable sales is a more appropriate presentation. Our customers are able to browse merchandise in one channel and consummate a transaction in a different channel. At the same time, our customers have the option to return merchandise to a store or our third-party distribution center, regardless of the original channel used for purchase.

Comparable sales measures can vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies.


19


Other performance metrics
To supplement our comparable sales performance measure, we also monitor changes in net sales, net sales per store, net sales per gross square foot, gross profit, gross margin rate, operating income, cash, inventory and liquidity.
 
Second Quarter Fiscal 2020 Results of Operations
 
The following table presents selected consolidated financial data for the second quarter of Fiscal 2020 as compared to the second quarter of Fiscal 2019:
 
 
Thirteen Weeks Ended
 
Net Change
 
Percent of Net Sales
(dollars in thousands)
 
August 1, 2020
 
August 3, 2019
 
Amount
 
Percent
 
August 1, 2020
 
August 3, 2019
Net sales
 
$
58,481

 
$
83,443

 
$
(24,962
)
 
(29.9
)%
 
100.0
 %
 
100.0
 %
Merchandise, buying and occupancy costs
 
52,101

 
58,969

 
(6,868
)
 
(11.6
)%
 
89.1
 %
 
70.7
 %
Gross profit
 
6,380

 
24,474

 
(18,094
)
 
(73.9
)%
 
10.9
 %
 
29.3
 %
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
19,361

 
27,754

 
(8,393
)
 
(30.2
)%
 
33.1
 %
 
33.3
 %
Depreciation and amortization
 
1,870

 
2,199

 
(329
)
 
(15.0
)%
 
3.2
 %
 
2.6
 %
Impairment of store assets
 

 
311

 
(311
)
 
(100.0
)%
 
 %
 
0.4
 %
Total other operating expenses
 
21,231

 
30,264

 
(9,033
)
 
(29.8
)%
 
36.3
 %
 
36.3
 %
Operating loss
 
(14,851
)
 
(5,790
)
 
(9,061
)
 
156.5
 %
 
(25.4
)%
 
(6.9
)%
Interest expense, net
 
(280
)
 
(111
)
 
(169
)
 
152.3
 %
 
(0.5
)%
 
(0.1
)%
Loss before income taxes
 
(15,131
)
 
(5,901
)
 
(9,230
)
 
156.4
 %
 
(25.9
)%
 
(7.1
)%
Income tax (benefit) provision
 
(37
)
 
40

 
(77
)
 
(192.5
)%
 
(0.1
)%
 
 %
Net loss
 
$
(15,094
)
 
$
(5,941
)
 
$
(9,153
)
 
154.1
 %
 
(25.8
)%
 
(7.1
)%

 
 
Thirteen Weeks Ended
Rate trends as a percentage of net sales
 
August 1, 2020
 
August 3, 2019
Gross margin
 
10.9
 %
 
29.3
 %
Selling, general, and administrative
 
33.1
 %
 
33.3
 %
Depreciation and amortization
 
3.2
 %
 
2.6
 %
Operating loss
 
(25.4
)%
 
(6.9
)%

Second Quarter Fiscal 2020 Summary
Second quarter financial results were heavily driven by the impact of the COVID-19 pandemic. Net sales decreased 29.9% compared to the same period last year.
Year-over-year stores for May, June, and July 2020 were not comparable due to temporary store closures related to the COVID-19 pandemic. For Q2 we had 36% less store operating days due to temporary closures.
eCommerce sales increased 70.9% following a 1.3% decrease in the same period last year reflecting, in part, customers choosing to shop online versus in-store during the pandemic.
Gross margin rates decreased 1,842 basis points from the second quarter of last year, reflecting lower merchandise margin, higher shipping costs from increased eCommerce and split shipments related to ship from store orders, and fixed occupancy costs for stores versus lower revenues. The lower merchandise margin for the quarter was driven by deeper promotions to drive through spring season goods due to temporary store closures, incremental markdowns and higher markdown reserves.
SG&A expense declined $8.4 million, or 30.2%, from last year's second quarter with $6.4 million of the decrease relating to store and corporate compensation, primarily from furloughs and temporary base salary reductions. The remainder of the SG&A decrease was from lower marketing, medical benefits, professional services and store operations costs, partially offset by a credit in the second quarter of Fiscal 2019 from the sale of a claim regarding credit card interchange fees.
Net loss totaled $15.1 million, or a $(0.40) loss per share, compared to a net loss for the prior year's second quarter of $5.9 million, or a $(0.16) loss per share.
As of August 1, 2020, we held $2.8 million of cash and cash equivalents, compared to $0.2 million as of May 2, 2020.

20


As of August 1, 2020, bank borrowings under our Credit Facility totaled $4.6 million, with $5.9 million of availability under the Company's Credit Facility. As of August 1, 2020, we had $5.0 million outstanding under our Term Loan Facility. As of May 2, 2020, bank borrowings totaled $16.8 million, with $4.1 million of availability under the Company's Credit Facility. As of May 2, 2020, we had $5.0 million outstanding under our Term Loan Facility.

Net Sales
 
The overall 29.9% decrease in net sales for the second quarter was largely driven by the temporary store closings of retail stores, all of which were closed to customers during May and at least some of June. The components of the 29.9% net sales decrease in the second quarter Fiscal 2020 as compared to the second quarter of Fiscal 2019 were as follows:
 
 
Thirteen Weeks Ended
Sales driver change components
 
August 1, 2020
Number of transactions
 
(16.2
)%
Average unit retail
 
(14.0
)%
Units per transaction
 
(2.3
)%
Other sales
 
2.6
 %
Total sales driver change
 
(29.9
)%
 

Net sales decreased primarily due to a 16.2% decrease in the number of transactions, a 2.3% decline in units per transaction and a 14.0% decrease in average unit retail that was driven by deeper promotions necessitated to drive through spring goods due to temporary store closures.

Store count, openings, closings, and square footage for our stores, excluding the impacts of temporary store closures, were as follows:
 
 
Store Count
 
Square Footage (1)
 
 
May 3,
 
 
 
 
 
MPW
 
August 1,
 
Avg. Store
 
August 1,
 
May 3,
Stores by Format
 
2020
 
Open
 
Close
 
Conversions
 
2020
 
Count
 
2020
 
2020
MPW
 
312

 
4

 

 

 
316

 
313

 
1,244

 
1,239

Outlet
 
77

 

 

 

 
77

 
77

 
310

 
310

Christopher and Banks
 
31

 

 

 

 
31

 
31

 
103

 
103

C.J. Banks
 
28

 

 

 

 
28

 
28

 
100

 
100

Total Stores
 
448

 
4