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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-51300

 

 

ZUMIEZ INC.

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1040022

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

4001 204th Street SW, Lynnwood, WA 98036

(Address of principal executive offices)  (Zip Code)

Registrant’s telephone number, including area code: (425) 551-1500

 

 

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 definition 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 Exchange Act).   Yes     No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

ZUMZ

Nasdaq Global Select

At November 28, 2020, there were 25,475,730 shares outstanding of common stock.

 

 


ZUMIEZ INC.

FORM 10-Q

TABLE OF CONTENTS

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at October 31, 2020 (unaudited) and February 1, 2020

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2020 and November 2, 2019

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 31, 2020 and November 2, 2019

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended October 31, 2020 and November 2, 2019

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2020 and November 2, 2019

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

 

 

Item 1A.

Risk Factors

32

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

 

 

Item 5.

Other Information

32

 

 

 

 

 

Item 6.

Exhibits

33

 

 

 

 

Signature

34

 

 

2


ZUMIEZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

October 31, 2020

 

 

February 1, 2020

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84,939

 

 

$

52,428

 

Marketable securities

 

 

231,234

 

 

 

198,768

 

Receivables

 

 

19,301

 

 

 

16,841

 

Inventories

 

 

160,961

 

 

 

135,095

 

Prepaid expenses and other current assets

 

 

9,240

 

 

 

9,456

 

Total current assets

 

 

505,675

 

 

 

412,588

 

Fixed assets, net

 

 

101,820

 

 

 

113,051

 

Operating lease right-of-use assets

 

 

273,796

 

 

 

301,784

 

Goodwill

 

 

59,540

 

 

 

57,099

 

Intangible assets, net

 

 

15,329

 

 

 

14,564

 

Deferred tax assets, net

 

 

8,192

 

 

 

6,303

 

Other long-term assets

 

 

9,802

 

 

 

8,869

 

Total long-term assets

 

 

468,479

 

 

 

501,670

 

Total assets

 

$

974,154

 

 

$

914,258

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Trade accounts payable

 

$

84,069

 

 

$

47,787

 

Accrued payroll and payroll taxes

 

 

25,603

 

 

 

23,653

 

Income taxes payable

 

 

8,402

 

 

 

4,686

 

Operating lease liabilities

 

 

72,526

 

 

 

61,800

 

Other liabilities

 

 

25,327

 

 

 

21,784

 

Total current liabilities

 

 

215,927

 

 

 

159,710

 

Long-term operating lease liabilities

 

 

255,160

 

 

 

284,717

 

Other long-term liabilities

 

 

3,881

 

 

 

3,745

 

Total long-term liabilities

 

 

259,041

 

 

 

288,462

 

Total liabilities

 

 

474,968

 

 

 

448,172

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Preferred stock, no par value, 20,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized; 25,472 shares issued and outstanding at October 31, 2020 and 25,828 shares issued and outstanding at February 1, 2020

 

 

167,119

 

 

 

161,458

 

Accumulated other comprehensive loss

 

 

(5,165

)

 

 

(12,591

)

Retained earnings

 

 

337,232

 

 

 

317,219

 

Total shareholders’ equity

 

 

499,186

 

 

 

466,086

 

Total liabilities and shareholders’ equity

 

$

974,154

 

 

$

914,258

 

 

See accompanying notes to condensed consolidated financial statements

 

3


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

 

November 2, 2019

 

 

October 31, 2020

 

 

 

November 2, 2019

 

Net sales

 

$

 

270,952

 

 

$

 

264,022

 

 

$

 

659,116

 

 

 

 

705,376

 

Cost of goods sold

 

 

 

165,146

 

 

 

 

169,446

 

 

 

 

438,724

 

 

 

 

467,140

 

Gross profit

 

 

 

105,806

 

 

 

 

94,576

 

 

 

 

220,392

 

 

 

 

238,236

 

Selling, general and administrative expenses

 

 

 

67,941

 

 

 

 

70,266

 

 

 

 

177,263

 

 

 

 

201,285

 

Operating profit

 

 

 

37,865

 

 

 

 

24,310

 

 

 

 

43,129

 

 

 

 

36,951

 

Interest income, net

 

 

 

769

 

 

 

 

1,002

 

 

 

 

2,637

 

 

 

 

2,652

 

Other income, net

 

 

 

86

 

 

 

 

275

 

 

 

 

584

 

 

 

 

987

 

Earnings before income taxes

 

 

 

38,720

 

 

 

 

25,587

 

 

 

 

46,350

 

 

 

 

40,590

 

Provision for income taxes

 

 

 

9,581

 

 

 

 

6,408

 

 

 

 

12,920

 

 

 

 

11,593

 

Net income

 

$

 

29,139

 

 

$

 

19,179

 

 

$

 

33,430

 

 

 

 

28,997

 

Basic earnings per share

 

$

 

1.17

 

 

$

 

0.76

 

 

$

 

1.34

 

 

 

 

1.15

 

Diluted earnings per share

 

$

 

1.16

 

 

$

 

0.75

 

 

$

 

1.32

 

 

 

 

1.14

 

Weighted average shares used in computation of earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

24,864

 

 

 

 

25,231

 

 

 

 

24,913

 

 

 

 

25,173

 

Diluted

 

 

 

25,219

 

 

 

 

25,560

 

 

 

 

25,271

 

 

 

 

25,480

 

 

See accompanying notes to condensed consolidated financial statements

 

4


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

 

October 31, 2020

 

 

November 2, 2019

 

Net income

 

$

29,139

 

 

$

19,179

 

 

 

$

33,430

 

 

$

28,997

 

Other comprehensive (loss) income, net of tax and reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(1,802

)

 

 

817

 

 

 

 

6,359

 

 

 

(2,881

)

Net change in unrealized (loss) gain on available-for-sale debt securities

 

 

(240

)

 

 

10

 

 

 

 

1,067

 

 

 

358

 

Other comprehensive (loss) income, net

 

 

(2,042

)

 

 

827

 

 

 

 

7,426

 

 

 

(2,523

)

Comprehensive income

 

$

27,097

 

 

$

20,006

 

 

 

$

40,856

 

 

$

26,474

 

 

See accompanying notes to condensed consolidated financial statements

 

5


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at August 1, 2020

 

 

25,450

 

 

$

165,056

 

 

$

(3,123

)

 

$

308,093

 

 

$

470,026

 

Net income

 

 

 

 

 

 

 

 

 

 

 

29,139

 

 

 

29,139

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(2,042

)

 

 

 

 

 

(2,042

)

Issuance and exercise of stock-based awards

 

 

22

 

 

 

414

 

 

 

 

 

 

 

 

 

414

 

Stock-based compensation expense

 

 

 

 

 

1,649

 

 

 

 

 

 

 

 

 

1,649

 

Balance at October 31, 2020

 

 

25,472

 

 

$

167,119

 

 

$

(5,165

)

 

$

337,232

 

 

$

499,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at August 3, 2019

 

 

25,770

 

 

$

156,625

 

 

$

(12,574

)

 

$

260,156

 

 

$

404,207

 

Net income

 

 

 

 

 

 

 

 

 

 

 

19,179

 

 

 

19,179

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

827

 

 

 

 

 

 

827

 

Issuance and exercise of stock-based awards

 

 

35

 

 

 

1,021

 

 

 

 

 

 

 

 

 

1,021

 

Stock-based compensation expense

 

 

 

 

 

1,605

 

 

 

 

 

 

 

 

 

1,605

 

Balance at November 2, 2019

 

 

25,805

 

 

$

159,251

 

 

$

(11,747

)

 

$

279,335

 

 

$

426,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at February 1, 2020

 

 

25,828

 

 

$

161,458

 

 

$

(12,591

)

 

$

317,219

 

 

$

466,086

 

Net income

 

 

 

 

 

 

 

 

 

 

 

33,430

 

 

 

33,430

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

7,426

 

 

 

 

 

 

7,426

 

Issuance and exercise of stock-based awards

 

 

338

 

 

 

866

 

 

 

 

 

 

 

 

 

866

 

Stock-based compensation expense

 

 

 

 

 

4,795

 

 

 

 

 

 

 

 

 

4,795

 

Repurchase of common stock

 

 

(694

)

 

 

 

 

 

 

 

 

(13,417

)

 

 

(13,417

)

Balance at October 31, 2020

 

 

25,472

 

 

$

167,119

 

 

$

(5,165

)

 

$

337,232

 

 

$

499,186

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at February 2, 2019

 

 

25,521

 

 

$

153,066

 

 

$

(9,224

)

 

$

256,614

 

 

$

400,456

 

Net income

 

 

 

 

 

 

 

 

 

 

 

28,997

 

 

 

28,997

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(2,523

)

 

 

 

 

 

(2,523

)

Issuance and exercise of stock-based awards

 

 

284

 

 

 

1,366

 

 

 

 

 

 

 

 

 

1,366

 

Stock-based compensation expense

 

 

 

 

 

4,819

 

 

 

 

 

 

 

 

 

4,819

 

Cumulative effect of accounting change under ASC 842

 

 

 

 

 

 

 

 

 

 

 

(6,276

)

 

 

(6,276

)

Balance at November 2, 2019

 

 

25,805

 

 

$

159,251

 

 

$

(11,747

)

 

$

279,335

 

 

$

426,839

 

 

See accompanying notes to condensed consolidated financial statements

 

6


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

33,430

 

 

$

28,997

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

17,909

 

 

 

18,776

 

Noncash lease expense

 

 

45,797

 

 

 

42,960

 

Deferred taxes

 

 

(2,155

)

 

 

29

 

Stock-based compensation expense

 

 

4,795

 

 

 

4,819

 

Impairment of long-lived assets

 

 

4,443

 

 

 

123

 

Other

 

 

(430

)

 

 

(562

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,030

)

 

 

3,190

 

Inventories

 

 

(24,856

)

 

 

(54,687

)

Prepaid expenses and other assets

 

 

532

 

 

 

(934

)

Trade accounts payable

 

 

36,196

 

 

 

38,186

 

Accrued payroll and payroll taxes

 

 

1,711

 

 

 

971

 

Income taxes payable

 

 

2,629

 

 

 

(2,586

)

Operating lease liabilities

 

 

(40,945

)

 

 

(45,512

)

Other liabilities

 

 

3,728

 

 

 

(4,316

)

Net cash provided by operating activities

 

 

81,754

 

 

 

29,454

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to fixed assets

 

 

(7,488

)

 

 

(13,871

)

Purchases of marketable securities and other investments

 

 

(135,515

)

 

 

(165,912

)

Sales and maturities of marketable securities and other investments

 

 

104,742

 

 

 

132,974

 

Net cash used in investing activities

 

 

(38,261

)

 

 

(46,809

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance and exercise of stock-based awards

 

 

959

 

 

 

1,604

 

Payments for tax withholdings on equity awards

 

 

(93

)

 

 

(238

)

Common stock repurchased

 

 

(13,417

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(12,551

)

 

 

1,366

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

1,899

 

 

 

(242

)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

32,841

 

 

 

(16,231

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

58,991

 

 

 

54,271

 

Cash, cash equivalents, and restricted cash, end of period

 

$

91,832

 

 

$

38,040

 

Supplemental disclosure on cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

11,933

 

 

$

14,024

 

Accrual for purchases of fixed assets

 

 

346

 

 

 

1,412

 

 

See accompanying notes to condensed consolidated financial statements

 

7


ZUMIEZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Nature of Business and Basis of Presentation

Nature of Business—Zumiez Inc., including its wholly owned subsidiaries, (the “Company,” “we,” “us,” “its” and “our”) is a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles. We operate under the names Zumiez, Blue Tomato and Fast Times. We operate ecommerce websites at zumiez.com, zumiez.ca, blue-tomato.com and fasttimes.com.au. At October 31, 2020, we operated 725 stores; 608 in the United States (“U.S.”), 52 in Canada, 53 in Europe, and 12 in Australia.

Beginning in mid-March, we experienced global store closures as a result of a novel strain of coronavirus (“COVID-19”) that extended for a significant portion of March and April. We began gradually re-opening physical stores at the end of the first fiscal quarter and into the second fiscal quarter, with 68.4% of stores re-opened at the end of the first quarter and 89.6% open and operating by the end of the second quarter. During the third fiscal quarter, on an aggregate basis our stores were open approximately 94.7% of the possible days across the business with limited closures.             

Fiscal Year—We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31.  Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years.  The three months ended October 31, 2020 and November 2, 2019 were 13-week periods. The nine months ended October 31, 2020 and November 2, 2019 were 39-week periods.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited condensed consolidated financial statements include the accounts of Zumiez Inc. and its wholly-owned subsidiaries.  All significant intercompany transactions and balances are eliminated in consolidation.

In our opinion, the unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated balance sheets, operating results and cash flows for the periods presented.

The financial data at February 1, 2020 is derived from audited consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended February 1, 2020, and should be read in conjunction with the audited consolidated financial statements and notes thereto.  Interim results are not necessarily indicative of results for the full fiscal year due to seasonality and other factors.

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period.  These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition.  Actual results could differ from these estimates and assumptions. 

COVID-19— In December 2019, COVID-19 was first identified, and in March 2020, the World Health Organization categorized COVID-19 as a pandemic. To help control the spread of the virus and protect the health and safety of our employees and customers, we began closing our retail stores across all markets that we operate between March 16, 2020 and March 19, 2020. We began gradually re-opening stores at the end of the first fiscal quarter and into the second fiscal quarter. During the third fiscal quarter, we were open and operating for approximately 94.7% of the possible days across our global stores. Changes in our operations due to COVID-19 resulted in material fluctuations to our results of operations during the nine months ended October 31, 2020 and are expected to create continued volatility in our results through the balance of the year and potentially into 2021.  

The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the outbreak may cause prolonged periods of store closures and modified operating schedules and may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending in our stores. This in turn may lead to increased asset recovery and valuation risks, such as impairment of our stores and other assets and an inability to realize deferred tax assets due to sustaining losses in certain jurisdictions. Uncertainties in the global economy could impact the financial viability of our suppliers, vendors and other business partners, which could interrupt our supply chain, limit our ability to sell to our consumer and require other changes to our operations. These and other factors could adversely impact our net revenues, operating income, earnings per share and other financial measures.

8


Restricted Cash— Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash in other long-term assets on our condensed consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows (in thousands):

 

 

 

October 31, 2020

 

 

February 1, 2020

 

Cash and cash equivalents

 

$

 

84,939

 

 

$

 

52,428

 

Restricted cash included in other long-term assets

 

 

 

6,893

 

 

 

 

6,563

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

 

91,832

 

 

$

 

58,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash included in other long-term assets represents amounts held as insurance collateral and collateral for bank guarantees on certain store operating leases.

Significant Accounting Policies—Our significant accounting policies are detailed in Note 2, “Summary of Significant Accounting Policies” within Part IV Item 15 of the Annual Report on Form 10-K for the year ended February 1, 2020.  There have been no changes in accounting policies other than specific accounting considerations herein that we have taken as a result of COVID-19.      

 

Zumiez evaluates its long-lived assets for indicators of impairment quarterly or when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Given the substantial reduction in our sales and reduced cash flow projections as a result of the store closures due to the COVID-19 pandemic, we determined that a triggering event occurred and that an impairment assessment was warranted for certain stores. This analysis resulted in the Company recording $2.3 million and $4.4 million of impairment charges related to long-lived assets and operating lease right-of-use assets in the three and nine months ended October 31, 2020, respectively.   

 

We assess goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter or more frequently if indicators of impairment arise. We perform this analysis at the reporting unit level by determining whether the fair value of a reporting unit is less than its carrying amount. Given the aforementioned circumstances surrounding COVID-19, we determined that a triggering event had, in fact, occurred. Based on our prior year fourth quarter impairment analysis, in which the fair values of all reporting units were in excess of their carrying amounts, we concluded that impairment was not needed. At this time, we do not believe that additional impairment of goodwill for the nine months ended October 31, 2020 is warranted; however, we are currently monitoring the ongoing negative effects of COVID-19 and if our results decline from our current estimates, we may incur future potential impairments.

 

Merchandise inventories are stated at the lower of cost or net realizable value. We record reserves for obsolete and slow-moving inventory and for estimated shrinkage between physical inventory counts. During the three and nine months ended October 31, 2020, we recorded immaterial inventory write-offs as a result of excess inventory due to the temporary closure of our retail stores.

During the nine months ended October 31, 2020, we received COVID-19 related lease concessions and deferrals for certain stores in United States, Europe and Australia, generally correlating with the limited time period our stores were closed during stay-at-home mandates. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we have elected to treat COVID-19-related rent concessions as variable lease expense and lease deferrals as there is no change in the contract assuming they are short-term in nature. COVID-19 related rent concessions that are expected to extend well beyond the fiscal year or change the other terms in the lease are treated as lease modifications and a full re-valuation of the right-of-use asset and liability is performed.  We are having ongoing conversations with landlords in various markets to seek commercially reasonable lease concessions given the current environment.  

Recent Accounting Standards— In April 2020, the FASB issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842, as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract).  The FASB also indicated it was acceptable to treat deferral of lease payments with no substantive changes to the contract as if there was no change to the contract. The Company has elected to treat COVID-19 related lease concessions as variable lease expense and COVID-19 related lease deferrals as there was no change to the contract assuming they are short-term in nature.  For leases where rent concessions are expected to extend well beyond the fiscal year or change the other terms of the lease these are treated as a lease modification. We have adopted this standard prospectively for the fiscal year beginning February 2, 2020.               

In December 2019, the FASB issued an update simplifying the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after

9


December 15, 2020. We early adopted this update for the fiscal year, and interim periods, beginning February 2, 2020. The impact on our condensed consolidated financial statements was not material.

In January 2017, the FASB issued a new standard simplifying the test for goodwill impairment.  The standard eliminates Step 2 from the goodwill impairment test. The standard requires entities perform the goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount and recognize the impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total goodwill allocated to that reporting unit. The new standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.  We do not expect this standard to have a material impact on our condensed consolidated financial statements.

     

 

2. Revenue

 

The following table disaggregates net sales by geographic region (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

United States

 

$

 

223,410

 

 

$

221,800

 

 

$

 

542,956

 

 

$

592,556

 

Canada

 <