Significant Accounting Policies
|3 Months Ended|
May 02, 2020
|Significant Accounting Policies|
|Significant Accounting Policies||
1. Significant Accounting Policies
Basis of Presentation — The condensed consolidated financial statements herein include the accounts of Tailored Brands, Inc. and its subsidiaries (the "Company") and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As applicable under such regulations, certain information and footnote disclosures have been condensed or omitted. We believe the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments which are necessary for a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation.
Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented are not necessarily indicative of the results that may be achieved for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended February 1, 2020.
Unless the context otherwise requires, "Company", "we", "us" and "our" refer to Tailored Brands, Inc. and its subsidiaries.
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual amounts could differ from those estimates.
As discussed in Note 4, during the third quarter of 2019, we completed the sale of our corporate apparel business. Amounts presented on the condensed consolidated balance sheet and condensed consolidated statements of (loss) earnings for all prior periods related to the corporate apparel business have been reclassified as discontinued operations. Unless noted otherwise, discussion in these notes to the condensed consolidated financial statements pertain to our continuing operations.
Impact of the COVID-19 Pandemic — The outbreak of the novel coronavirus (“COVID-19”) had a significant impact on our business, financial condition, results of operations and cash flows for the three months ended May 2, 2020. On March 17, 2020, we announced the temporary closure of our retail locations in the U.S. and Canada which continued through the end of our first quarter. In conjunction with our decision to extend the temporary closure of our stores, we also furloughed all of our U.S. store employees, most of our U.S. distribution network and the majority of our office employees, and we implemented the temporary layoff of all Canadian store employees and a significant portion of Canadian employees in our Canadian distribution network and offices.
During the three months ended May 2, 2020, we recorded a total of $194.3 million of non-cash impairment charges related to goodwill, intangible and long-lived assets. See Notes 3 and 16 for additional information.
Also, we took steps to increase our liquidity and preserve financial flexibility including borrowings of $310.0 million under our $550 million asset-based credit facility (the “ABL Facility”), significantly reducing inventory purchases, capital expenditures, advertising spend and store and other general and administrative costs, as well as furloughing a significant portion of our employees and implementing temporary salary reductions. Also, during the first quarter of fiscal 2020, we suspended rent payments under our operating leases for April and May and negotiated rent deferrals for some of our stores, with repayment of such deferred amounts, beginning at the end of 2020 into 2021. See Note 15 for additional information related to the accounting for these rent deferrals.
The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain, including, among others, the duration of the outbreak, additional periods of increases in the number of COVID-19 cases, new information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities, to contain the pandemic or reduce its impact. We currently expect the impact of COVID-19 on our business and results of operations, including our net sales, earnings and cash flows will be significantly negative for the remainder of fiscal 2020.
Going Concern — The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In accordance with the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim period, management evaluates whether there are conditions or events that, when considered in the aggregate, raise substantial doubt about a company’s ability to continue as a going concern within one year after the date the financial statements are issued. In making its assessment, management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and obligations due over the next twelve months.
We have considered the projected impact of COVID-19 on our cash flows and analyzed our future compliance with the financial covenants under our ABL Facility, including an additional discretionary reserve imposed against our borrowing base, as described in Note 19, and based on such projections and analysis, we will not remain in compliance with the fixed charge coverage ratio covenant under the ABL Facility beginning in the fourth quarter of fiscal 2020. If we violate this covenant and are unable to obtain an amendment or waiver from our lenders, we will be in default under the ABL Facility and our debt could be accelerated by the lenders under the ABL Facility. Because of cross-default provisions in the agreements and instruments governing our indebtedness, a default under the ABL Facility would result in a default under, and could result in the acceleration of, our other indebtedness unless we are able to obtain an amendment or waiver from our lenders. See Note 6 for additional information on our ABL Facility.
In addition, as described in Note 19, we elected not to make the approximate $6.1 million interest payment due and payable on July 1, 2020, with respect to our 7.00% Senior Notes due 2022 (the "Senior Notes"). We elected to enter into thegrace period with respect to this interest payment. During the grace period, we may elect to pay the interest and thereby remain in compliance with the provisions of our Senior Notes. If an event of default under the indenture governing the Senior Notes occurs as a result of such non-payment, it would result in a cross-event of default under both the Company’s term loan facility and the ABL Facility unless we are able to obtain an amendment or waiver from our lenders. As of the date of this filing, we have determined it is not probable that we will make the approximate $6.1 million interest payment; however, we may decide to make the interest payment prior to expiration of the grace period. See Note 6 for additional information on our Senior Notes.
Absent obtaining a waiver from our lenders or negotiating an agreement to avoid acceleration of our indebtedness, we will be in default on all of our indebtedness and we do not have sufficient liquidity to repay the amounts due under our indebtedness, consisting of our term loan, Senior Notes and ABL Facility. Furthermore, our current forecast for our financial condition and liquidity sources also raises doubt as to our ability to meet other obligations, including interest payments related to our indebtedness and operating lease obligations over the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern within one year after these condensed consolidated financial statements are issued. As of May 2, 2020, our outstanding indebtedness has been classified as current on our condensed consolidated balance sheets.
As a result of the conditions described above, we have engaged advisors to assist with management’s plans to evaluate several alternatives, including seeking a restructuring, amendment or refinancing of our debt through a private restructuring or reorganization under applicable bankruptcy laws. Management is also evaluating various alternatives to improve our liquidity, including but not limited to, lease concessions and deferrals, further reductions of operating and capital expenditures, and raising additional capital. However, there can be no assurances that we will be able to successfully restructure our indebtedness or improve our financial position and liquidity. Management’s plans are not yet finalized and are subject to numerous uncertainties including negotiations with our lenders and conditions in the credit and capital markets. As a result, we have concluded that management’s plans do not alleviate substantial doubt about our ability to continue as a going concern.
Accordingly, these condensed consolidated financial statements do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.
Recent Accounting Pronouncements Adopted — In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. We adopted ASU 2019-12 in the first quarter of fiscal 2020 on a prospective basis. The adoption of ASU 2019-12 did not have a material impact on our financial position, results of operations, or cash flows.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of ASU 2018-15 is permitted. We adopted ASU 2018-15 in the first quarter of fiscal 2020 and the adoption did not have a material impact on our financial position, results of operations or cash flows.
During the first quarter of fiscal 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on our financial position, results of operations or cash flows.
In March 2020, the SEC adopted amendments to reduce and simplify the financial disclosure requirements for guarantors and issuers of guaranteed registered securities, and affiliates of such issuers whose securities are collateralized. The amendments will be effective January 4, 2021, but voluntary compliance with the amendments in advance of January 4, 2021 is permitted. As a result of these amendments, starting with this Quarterly Report, we have elected to provide the simplified financial disclosure requirements, within "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.
Recent Accounting Pronouncements Not Yet Adopted — We have considered all new accounting pronouncements not yet adopted and have concluded there are no new pronouncements that may have a material impact on our financial position, results of operations, or cash flows, based on current information, except as disclosed below:
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which aims to address 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 GAAP 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 and through December 31, 2022. We intend to elect to apply certain of the optional expedients when evaluating the impact of reference rate reform on our debt and derivative instruments that reference LIBOR.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef