CHRISTOPHER & BANKS CORPORATION
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.
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As ofAugust 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 OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus (known as COVID-19) outbreak to be a global pandemic. As a result, and effectiveMarch 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 untilApril 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 ofSeptember 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 ofAugust 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 ofSeptember 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 ofJuly 12, 2020 , the Company restored base salaries and director retainer fees to levels effective immediately prior toMarch 22, 2020 . Additionally, in earlyJune 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 onMarch 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;
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• 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 onApril 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 ofAugust 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.
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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.
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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
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
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
with
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
net loss for the prior year's second quarter of
loss per share.
• As of
compared to $0.2 million as of May 2, 2020 .
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• As of
million, with
Facility. As of
Term Loan Facility. As of
with
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 componentsAugust 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 - - 452 449 1,757 1,752
(1) Square footage presented in thousands
Average store count in the second quarter of Fiscal 2020 was 449 stores compared
to an average store count of 456 stores in the second quarter of Fiscal 2019, a
decrease of 1.4%. Average square footage in the second quarter of Fiscal 2020
decreased 0.8% compared to the second quarter of Fiscal 2019.
Gross Profit
Gross margin rate 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. Rent expense for closed stores continued to be recognized despite the Company not paying April, May and June rent.
Selling, General, and Administrative ("SG&A") Expenses
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 2019 from the sale of a claim regarding credit card interchange fees. 21
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Depreciation and Amortization
Depreciation and amortization expense decreased by
Operating Loss
Our$9.1 million increase in operating loss in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019 was due to the$18.1 million decrease in gross profit, as partially offset by the$8.4 million decrease in SG&A expenses and the$0.3 million decrease in depreciation and amortization expense. Interest Expense, Net The increase in net interest expense was due to a higher level of average borrowings from our Credit Facility during the second quarter of Fiscal 2020 as well as interest on the$5.0 million drawn on the Term Loan Facility beginningFebruary 27, 2020 . Income Tax Benefit Income tax benefit recorded for the second quarter of Fiscal 2020 was$(37) thousand compared to income tax expense of$40 thousand for the same period of Fiscal 2019. Our effective tax rate was 0.2% for the second quarter of Fiscal 2020 compared to (0.7)% in the same period last year.
Net Loss
Our$9.2 million increase in net loss during the second quarter of Fiscal 2020 was due to the$18.1 million decrease in gross profit, offset by the$8.4 million decrease in SG&A expenses, the$0.3 million decrease in depreciation and the$0.2 million increase in interest expense.
First Half Fiscal 2020 Result of Operations
The following table presents selected consolidated financial data for the first half of Fiscal 2020 compared to the first half of Fiscal 2019:
Twenty-six 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 $ 98,606 $ 166,663 $ (68,057 ) (40.8 )% 100.0 % 100.0 %
Merchandise, buying and
occupancy costs 88,502 116,575 (28,073 ) (24.1 )% 89.8 % 69.9 %
Gross profit 10,104 50,088 (39,984 ) (79.8 )% 10.2 % 30.1 %
Other operating expenses:
Selling, general and
administrative 37,884 56,942 (19,058 ) (33.5 )% 38.4 % 34.2 %
Depreciation and amortization 3,776 4,581 (805 ) (17.6 )% 3.8 % 2.7 %
Impairment of store assets 264 311 (47 ) (15.1 )% 0.3 % 0.2 %
Total other operating expenses 41,924 61,834 (19,910 ) (32.2 )% 42.5 % 37.1 %
Operating loss (31,820 ) (11,746 ) (20,074 ) 170.9 % (32.3 )% (7.0 )%
Interest expense, net (553 ) (267 ) (286 ) 107.1 % (0.6 )% (0.2 )%
Loss before income taxes (32,373 ) (12,013 ) (20,360 ) 169.5 % (32.8 )% (7.2 )%
Income tax (benefit) provision (41 ) 80 (121 ) (151.3 )% - % - %
Net loss $ (32,332 ) $ (12,093 ) $ (20,239 ) 167.4 % (32.8 )% (7.3 )%
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Twenty-six Weeks Ended
Rate trends as a percentage of net sales
10.2 % 30.1 %
Selling, general, and administrative 38.4 % 34.2 %
Depreciation and amortization 3.8 % 2.7 %
Operating loss (32.3 )% (7.0 )%
First Half Fiscal 2020 Summary • Net sales decreased 40.8% compared to the same period last year primarily due
to the impact of temporary store closings due to the COVID-19 pandemic.
• Comparable sales decreased 40.4% following a 3.9% decrease in the same period
last year, but are not comparable due to temporary store closures due to the
COVID-19 pandemic.
• eCommerce sales increased 27.6% reflecting, in part, customers choosing to
shop online versus in-store during the pandemic. eCommerce sales increased
4.8% in the same period last year.
• Gross margin rates decreased 1,981 basis points compared to the same period
last year primarily due to fixed occupancy costs for stores versus lower
revenues as well as lower merchandise margin due to markdowns and eCommerce
costs (primarily freight).
• SG&A expense was
due primarily to lower expenses for store and corporate compensation,
marketing, store operation costs, medical benefits and professional services,
partially offset by a credit in the second quarter of 2019 from the sale of a
claim regarding credit card interchange fees.
• Net loss totaled
net loss for the prior year's first half of
per share.
• As of
compared to
• As of
availability under the Company's Credit Facility. As of
had
2020, we had no outstanding borrowings and
under the Company's Credit Facility. As of February 1, 2020 , we had no
outstanding borrowings under out Term Loan Facility.
The overall 40.8% decrease in net sales for the first half of Fiscal 2020 was
largely driven by the temporary closing of retail stores, all of which were
closed to customers during the latter half of fiscal March, all of fiscal April
and May, and at least some of June. The components of the 40.8% net sales
decrease in the first half of Fiscal 2020 as compared to the first half of
Fiscal 2019 were as follows:
Twenty-six Weeks Ended
Sales driver change components August 1, 2020
Number of transactions (32.6 )%
Average unit retail (9.9 )%
Units per transaction (2.8 )%
Other sales 4.5 %
Total sales driver change (40.8 )%
Net sales decreased primarily due to a 32.6% decrease in the number of transactions, a 2.8% decline in units per transaction and a 9.9% decrease in average unit retail.
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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)
February 2, MPW August 1, Avg. Store August 1, February 2,
Stores by Format 2020 Open Close Conversions 2020 Count 2020 2020
MPW 309 7 - - 316 312 1,240 1,239
Outlet 77 - - - 77 77 310 310
Christopher and Banks 32 - (1 ) - 31 31 103 103
C.J. Banks 29 - (1 ) - 28 28 100 100
Total Stores 447 7 (2 ) - 452 448 1,753 1,752
(1) Square footage presented in thousands
Average store count in the first half of Fiscal 2020 was 448 stores compared to an average store count of 456 stores in the first half of Fiscal 2019, a decrease of 1.7%. Average square footage in the first half of Fiscal 2020 decreased 1.0% compared to the first half of Fiscal 2019.
Gross Profit
Gross margin rate decreased 1,981 basis points from the first half of last year, reflecting the impact of fixed occupancy costs for stores versus lower revenues as well as lower merchandise margin due to markdowns and eCommerce costs (primarily freight).
Selling, General, and Administrative ("SG&A") Expenses
SG&A expense was$19.1 million , or 33.5%, less than last year's first half due primarily to lower expenses for store and corporate compensation, marketing, store operation costs, medical benefits and professional services, partially offset by a credit in the second quarter of Fiscal 2019 from the sale of a claim regarding credit card interchange fees.
Depreciation and Amortization
Depreciation and amortization expense decreased by$0.8 million primarily due to lower Fiscal 2020 depreciation for capitalized software costs. Depreciation expense was also less for store leasehold improvements, primarily driven by a decline in average number of stores, as well as lower depreciation expense for computer hardware, furniture and fixtures and warehouse equipment.
Operating Loss
Our$20.1 million increase in operating loss in the first half of Fiscal 2020 compared to the first half of Fiscal 2019 was due to the$40.0 million decrease in gross profit, as partially offset by the$19.1 million decrease in SG&A expenses and the$0.8 million decrease in depreciation and amortization expense.
Interest Expense, Net
The increase in net interest expense was due to a higher level of average
borrowings from our Credit Facility during the first half of Fiscal 2020 as well
as interest on the
Income Tax (Benefit) Provision
Income tax benefit recorded for the first half of Fiscal 2020 was$41 thousand compared to income tax expense of$80 thousand for the same period of Fiscal 2019. Our effective tax rate was 0.1% for the first half of Fiscal 2020 compared to (0.7)% in the same period last year.
Net Loss
Our
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Liquidity and Capital Resources
Summary
There is significant uncertainty surrounding the potential impact of the COVID-19 pandemic on the Company's cash flow and liquidity. The Company is taking steps to increase available liquidity and cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures, and utilizing funds available under the PPP Loan, the Credit Facility, the Term Loan Facility and the Program Agreement described below. In addition, the Company has seen favorable initial customer response to its new merchandise assortments and, with substantial merchandise arriving over the next several months, the Company believes it is positioned for improved financial performance in the second half of Fiscal 2020. We believe that our sources of liquidity will be sufficient to sustain operations and to finance anticipated capital investments and strategic initiatives over the next twelve months. However, in the event our liquidity is not sufficient to meet our operating needs, we may be required to further limit our spending and to pursue additional sources of financing. There can be no assurance that we will continue to generate cash flows at or above current levels, that we will be able to comply with debt covenants and maintain our ability to borrow under our existing facilities, or that we may obtain additional financing, if necessary, on commercially reasonable terms, or at all.
Capital Resources
Funds generated by operating activities, available cash and cash equivalents, our Credit Facility and our Term Loan Facility are our most significant sources of liquidity. In addition, onJune 2, 2020 we received$10.0 million of proceeds in the form of a PPP Loan. The Company has been able to apply the loan proceeds toward the payment of payroll, rent, utilities and other qualified expenses in accordance with the conditions of the PPP and believes that the loan principal will be substantially forgiven under the CARES Act.
Our cash and cash equivalents balance as of
As ofAugust 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 ofAugust 1, 2020 , we had$5.0 million of principal outstanding under our Term Loan Facility. The Credit Facility with Wells Fargo was amended onFebruary 27, 2020 . This amendment, among other changes, removed the$5.0 million revolving "first-in, last-out" ("FILO") tranche credit facility and permitted the Company to incur indebtedness under the Term Loan Facility. The Credit Agreement and the Term Loan Facility were subsequently amended onAugust 5, 2020 , to create a specific covenant basket for the PPP Loan, thus freeing up the Company's$10.0 million unsecured debt basket. The current expiration date isAugust 3, 2023 . The Credit Facility's capped borrowing base atAugust 1, 2020 was approximately$26.2 million . As ofAugust 1, 2020 , the Company had open on-demand letters of credit of approximately$12.7 million . Accordingly, after reducing the capped borrowing base for 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 atAugust 1, 2020 . The Term Loan Facility was entered into onFebruary 27, 2020 and provides for a delayed draw term loan facility in the aggregate principal amount of up to$10.0 million with a maturity date ofAugust 3, 2023 .$5.0 million was drawn on the Term Loan Facility at closing, which was used to repay$5.0 million of outstanding FILO loans on the Credit Facility. 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 .
See Note 5 - Credit and Term Loan Facilities and PPP Loan of the unaudited Condensed Consolidated Financial Statements for additional details regarding our Credit Facility, Term Loan Facility and PPP Loan.
OnJune 2, 2020 , we were granted a loan (the "PPP Loan") fromCache Valley Bank in the aggregate amount of$10,000,000 , pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title I of the CARES Act, which was enactedMarch 27, 2020 . The PPP Loan, which required of a note datedJune 1, 2020 issued by the Company, matures onJune 1, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing onDecember 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 25
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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.
As ofSeptember 11, 2020 , the Company has used the entire PPP Loan amount for qualifying expenses. 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. The Company is in the process of determining how much of the PPP loan is eligible for forgiveness, but it currently believes that substantially all of the original loan amount will be forgiven. OnAugust 5, 2020 ,Christopher & Banks Company , a subsidiary of the Company, entered into a secured vendor program withALCC, LLC (the "Program Agreement"), in order to improve cash flow and better align the Company's payment for inventory with when it is sold. Under the Program Agreement, ALCC may purchase up to$10 million of inventory fromChristopher & Banks Company's vendors on behalf ofChristopher & Banks Company (the "Inventory").Christopher & Banks Company must pay ALCC for the Inventory either whenChristopher & Banks Company sells the Inventory or 180 days after ALCC purchases the Inventory.Christopher & Banks Company must pay ALCC an origination fee of 1.00% on each purchase order, as described in 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 untilAugust 3, 2023 unless terminated earlier in accordance with its terms.
Cash Flows
The following table summarizes our cash flows from operating, investing, and
financing activities for the first half of Fiscal 2020 compared to the first
half of Fiscal 2019:
Twenty-six Weeks Ended
(in thousands) August 1, 2020 August 3, 2019
Net cash used in operating activities
(661 ) (996 )
Net cash provided by financing activities 19,163 3,347
Net decrease in cash and cash equivalents $ (427 )
Operating Activities The$8.6 million change in cash used in operating activities in the first half of Fiscal 2020 compared to the first half of Fiscal 2019 was primarily due to the larger net loss and non-cash items. The negative effect of these items was partially offset by changes in working capital (primarily inventories) and lease-related items. Typically, working capital fluctuations are a reflection of seasonal patterns and a change in the timing of accounts payable and payroll accruals. However, for the first two quarters of Fiscal 2020, working capital fluctuations were significantly impacted by (a) the fact that prior year inventory balances were higher than normal due to prior year second quarter acceleration of shipments of certain goods in order to reduce tariffs, (b) the shift in timing of current year second quarter in-transit shipments by about three weeks from July toAugust 2020 and (c) temporary store closings and the pandemic. Cash flows from operations improved from($24.0) million during the 2020 first quarter to$5.1 million during the 2020 second quarter, primarily due to changes in working capital.
Investing Activities
Cash used in investing activities for the first half of Fiscal 2020 was$0.7 million as compared to a use of cash of$1.0 million during the first half of last year. The$0.3 million change is primarily attributable to lower expenditures for eCommerce initiatives, store leaseholds and other improvements.
Financing Activities
The increase in cash provided by financing activities between Fiscal 2020 and 2019 was due to$10.0 million of borrowings under the PPP Loan,$5.0 million of borrowings under the Company's Term Loan Facility, and higher net borrowings on the Company's Credit Facility. 26
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Sourcing
There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the thirteen and twenty-six-week periods endedAugust 1, 2020 compared to the Fiscal 2019 year endedFebruary 1, 2020 .
Quarterly Results and Seasonality
Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, and shifts in the timing of certain holidays and shifts in the timing of promotional events.
Inflation
We do not believe that inflation had a material effect on our results of operations for the second quarter and first half of Fiscal 2020.
Forward-Looking Statements
We may make forward-looking statements reflecting our current views with respect to future events and financial performance. These forward-looking statements, which may be included in reports filed under the Exchange Act, in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A - Risk Factors of our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , as updated in Item 1A of this Quarterly Report on Form 10-Q, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases "will likely result," "are expected to," "estimate," "project," "believe," "expect," "should," "anticipate," "forecast," "intend" and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). In particular, we desire to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q. Such forward-looking statements are subject to various risks and uncertainties, including, but not limited to, risks and uncertainties relating to: • Disruptions to our business from the COVID-19 pandemic;
• Deteriorating economic conditions in the
• Changes in
apparel or accessories and a potential trade war;
• Performance of our stores;
• Our ability to increase sales and achieve and sustain an acceptable level
of gross margin;
• Sufficiency and availability of our sources of liquidity;
• Impairment of our long-lived assets; and
• Privacy laws governing our use of customer information.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, we wish to advise readers that the factors listed in Item 1A of our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , as updated in Item 1A of this Quarterly Report on Form 10-Q, as well as other factors, could affect our performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed in the quarterly report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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