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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 May 2, 2020

Commission file number 001-36501

THE MICHAELS COMPANIES, INC.

A Delaware Corporation

IRS Employer Identification No. 37-1737959

8000 Bent Branch Drive

Irving, Texas 75063

(972) 409-1300

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, $0.06775 par value

MIK

Nasdaq Stock Exchange

The Michaels Companies, Inc. (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.

The Michaels Companies, Inc. 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).

The Michaels Companies, Inc. is a large accelerated filer.

The Michaels Companies, Inc. is not (1) a shell company, (2) a small reporting company or (3) an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).

As of May 28, 2020, 147,339,890 shares of The Michaels Companies, Inc.’s common stock were outstanding.

Table of Contents

THE MICHAELS COMPANIES, INC.

TABLE OF CONTENTS

Part I—FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

3

Consolidated Statements of Comprehensive (Loss) Income for the 13 weeks ended May 2, 2020 and May 4, 2019 (unaudited)

3

Consolidated Balance Sheets as of May 2, 2020, February 1, 2020 and May 4, 2019 (unaudited)

4

Consolidated Statements of Cash Flows for the 13 weeks ended May 2, 2020 and May 4, 2019 (unaudited)

5

Consolidated Statements of Stockholders’ Deficit for the 13 weeks ended May 2, 2020 and May 4, 2019 (unaudited)

6

Notes to Consolidated Financial Statements (unaudited)

7

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

Part II—OTHER INFORMATION

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6.

Exhibits

30

Signatures

31

2

Table of Contents

Part IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share data)

(Unaudited)

13 Weeks Ended

May 2,

May 4,

2020

2019

Net sales

$

799,888

$

1,093,720

Cost of sales and occupancy expense

 

578,066

 

676,080

Gross profit

 

221,822

417,640

Selling, general and administrative

 

281,341

 

320,597

Restructure charges

3,087

Store pre-opening costs

 

1,159

 

1,226

Operating (loss) income

 

(60,678)

 

92,730

Interest expense

 

38,122

 

37,359

Other (income) expense, net

 

(2,922)

 

3,105

(Loss) income before income taxes

 

(95,878)

 

52,266

Income taxes

 

(32,373)

 

14,575

Net (loss) income

$

(63,505)

$

37,691

Other comprehensive (loss) income, net of tax:

 

 

Foreign currency and cash flow hedges

(14,336)

(4,826)

Comprehensive (loss) income

$

(77,841)

$

32,865

(Loss) earnings per common share:

Basic

$

(0.43)

$

0.24

Diluted

$

(0.43)

$

0.24

Weighted-average common shares outstanding:

Basic

146,865

157,749

Diluted

146,865

157,861

See accompanying notes to consolidated financial statements.

3

Table of Contents

THE MICHAELS COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)

May 2,

February 1,

May 4,

ASSETS

2020

2020

2019

Current Assets:

Cash and equivalents

$

926,830

$

409,964

$

246,727

Merchandise inventories

 

1,110,760

 

1,097,109

 

1,101,729

Prepaid expenses and other

 

51,438

 

62,287

 

65,304

Accounts receivable, net

23,337

30,442

36,223

Total current assets

 

2,112,365

 

1,599,802

 

1,449,983

Property and equipment, at cost

 

1,713,229

 

1,706,520

 

1,676,751

Less accumulated depreciation and amortization

(1,292,966)

(1,276,088)

(1,242,869)

Property and equipment, net

420,263

430,432

433,882

Operating lease assets

1,576,877

1,610,013

1,613,719

Goodwill

 

94,290

 

94,290

 

112,069

Other intangible assets, net

64,511

66,417

16,960

Deferred income taxes

 

22,816

 

18,201

 

25,577

Other assets

 

16,453

 

18,940

 

27,068

Total assets

$

4,307,575

$

3,838,095

$

3,679,258

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:

Accounts payable

$

443,911

$

476,298

$

406,947

Accrued liabilities and other

 

339,204

 

347,136

 

354,398

Current portion of operating lease liabilities

347,068

306,796

300,489

Current portion of long-term debt

 

624,900

 

24,900

 

24,900

Income taxes payable

 

9,378

 

41,236

 

55,339

Total current liabilities

 

1,764,461

 

1,196,366

 

1,142,073

Long-term debt

 

2,639,051

 

2,644,460

 

2,675,602

Long-term operating lease liabilities

1,327,997

1,357,821

1,380,175

Other liabilities

 

91,489

 

85,912

 

68,766

Total liabilities

 

5,822,998

 

5,284,559

 

5,266,616

Commitments and contingencies

Stockholders’ Deficit:

Common stock, $0.06775 par value, 350,000 shares authorized; 147,343 shares issued and outstanding at May 2, 2020; 146,803 shares issued and outstanding at February 1, 2020; and 158,126 shares issued and outstanding at May 4, 2019

 

9,890

9,852

 

10,620

Additional paid-in-capital

 

13,716

4,872

 

11,900

Accumulated deficit

 

(1,501,862)

(1,438,357)

 

(1,590,494)

Accumulated other comprehensive loss

 

(37,167)

(22,831)

 

(19,384)

Total stockholders’ deficit

 

(1,515,423)

 

(1,446,464)

 

(1,587,358)

Total liabilities and stockholders’ deficit

$

4,307,575

$

3,838,095

$

3,679,258

See accompanying notes to consolidated financial statements.

4

Table of Contents

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

13 Weeks Ended

May 2,

May 4,

    

2020

2019

Cash flows from operating activities:

Net (loss) income

$

(63,505)

$

37,691

Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:

Non-cash operating lease expense

81,171

81,371

Depreciation and amortization

 

32,843

 

31,489

Share-based compensation

 

8,535

 

7,251

Debt issuance costs amortization

 

940

 

1,237

Loss on write-off of investment

5,036

Accretion of long-term debt, net

 

66

 

(130)

Restructure charges

3,087

Deferred income taxes

(2,861)

140

Gain on sale of building

(101)

Changes in assets and liabilities:

Merchandise inventories

 

(12,857)

 

6,966

Prepaid expenses and other

 

10,850

 

(6,412)

Accounts receivable

6,593

23,705

Other assets

2,294

(12,964)

Operating lease liabilities

(36,862)

(56,843)

Accounts payable

 

(37,815)

 

(81,237)

Accrued interest

 

14,373

 

7,706

Accrued liabilities and other

 

(32,587)

 

(25,611)

Income taxes

 

(30,219)

 

12,318

Other liabilities

 

3,615

 

(1,002)

Net cash (used in) provided by operating activities

 

(55,527)

 

33,798

Cash flows from investing activities:

Additions to property and equipment

 

(21,856)

 

(25,101)

Proceeds from sale of building

875

Net cash used in investing activities

 

(20,981)

 

(25,101)

Cash flows from financing activities:

Common stock repurchased

(401)

(2,139)

Payments on term loan credit facility

 

(6,225)

 

(6,225)

Borrowings on asset-based revolving credit facility

 

600,000

 

Proceeds from stock options exercised

507

Net cash provided by (used in) financing activities

593,374

(7,857)

 

 

Net change in cash and equivalents

 

516,866

 

840

Cash and equivalents at beginning of period

409,964

245,887

Cash and equivalents at end of period

$

926,830

$

246,727

Supplemental cash flow information:

Cash paid for interest

$

22,900

$

29,164

Cash paid for taxes

$

1,106

$

2,320

See accompanying notes to consolidated financial statements.

5

Table of Contents

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

(Unaudited)

13 Weeks Ended

Accumulated

Number of

Additional

Other

Common

Common

Paid-in

Accumulated

Comprehensive

Shares

  

Stock

  

Capital

  

Deficit

  

Loss

  

Total

Balance at February 1, 2020

  

146,803

$

9,852

$

4,872

$

(1,438,357)

$

(22,831)

$

(1,446,464)

Net loss

(63,505)

 

(63,505)

Foreign currency and cash flow hedges

(14,336)

 

(14,336)

Share-based compensation

9,283

 

9,283

Exercise of stock options and other awards

765

52

(52)

Repurchase of stock and retirements

(253)

(14)

(387)

 

(401)

Issuance of restricted stock awards

28

Balance at May 2, 2020

147,343

$

9,890

$

13,716

$

(1,501,862)

$

(37,167)

$

(1,515,423)

Balance at February 2, 2019

  

157,774

$

10,594

$

5,954

$

(1,628,185)

$

(14,558)

$

(1,626,195)

Net income

37,691

 

37,691

Foreign currency and cash flow hedges

(4,826)

 

(4,826)

Share-based compensation

7,604

 

7,604

Exercise of stock options and other awards

555

38

469

507

Repurchase of stock and retirements

(229)

(12)

(2,127)

 

(2,139)

Issuance of restricted stock awards

26

Balance at May 4, 2019

158,126

$

10,620

$

11,900

$

(1,590,494)

$

(19,384)

$

(1,587,358)

See accompanying notes to consolidated financial statements.

6

Table of Contents

THE MICHAELS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are references to The Michaels Companies, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. Our consolidated financial statements include the accounts of The Michaels Companies, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest to January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal 2020” relate to the 52 weeks ending January 30, 2021 and references to “fiscal 2019” relate to the 52 weeks ended February 1, 2020. In addition, all references to “the first quarter of fiscal 2020” relate to the 13 weeks ended May 2, 2020 and all references to “the first quarter of fiscal 2019” relate to the 13 weeks ended May 4, 2019. The results of operations for the 13 weeks ended May 2, 2020 are not indicative of the results to be expected for the entire year due to the seasonal nature of our business and the financial impact of the COVID-19 pandemic.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. The COVID-19 pandemic has adversely impacted, and is expected to continue to adversely impact, our operations. During the first quarter of 2020, many state and local jurisdictions ordered all but certain essential businesses closed and executed extensive “shelter-in-place” or “stay-at-home” orders, many of which are currently still in place. These orders restricted our business operations and prompted us to temporarily close a significant portion of our stores during the quarter. The Company is taking measures to mitigate the impact of the COVID-19 pandemic including, but not limited to, borrowing $600.0 million under our senior secured asset-based revolving credit facility (“Amended Revolving Credit Facility”) to improve our cash position and preserve financial flexibility, deferring or eliminating discretionary capital and operating costs, improving working capital by renegotiating payment terms with our vendors and landlords and reducing labor costs as a result of the temporary store closures. We also launched additional omnichannel capabilities, including curbside pickup, same day delivery and in-app purchases, to enable us to operate more effectively in the current environment. We will continue to monitor the situation closely and, if necessary, we could implement further measures to mitigate the impact of COVID-19 on our operations.

As a result of restrictions related to the pandemic, over 900 stores were closed at various points during the first quarter and approximately 800 stores were closed as of May 2, 2020. However, a significant number of our closed stores continued to generate sales through our curbside pickup and ship from store programs. As of June 4, 2020, approximately 1,000 of our 1,273 stores were open and fully operational.

Share Repurchase Program

In September 2018, the Board of Directors authorized a new share repurchase program for the Company to purchase $500 million of the Company’s common stock on the open market or through accelerated share repurchase transactions. The share repurchase program does not have an expiration date, and the timing and number of repurchase

7

Table of Contents

transactions under the program will depend on market conditions, corporate considerations, debt agreements and regulatory requirements. Shares repurchased under the program are held as treasury shares until retired. During the three months ended May 2, 2020, we did not repurchase any shares under our share repurchase program. As of May 2, 2020, we had $293.5 million of availability remaining under our current share repurchase program.

Restructure Charges

In the fourth quarter of fiscal 2018, we closed all of our Pat Catan’s stores. As a result of the closures, we recorded a charge totaling $3.1 million in the first quarter of fiscal 2019, primarily related to employee-related expenses.

Accounting Pronouncements Recently Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”) which makes significant changes to the accounting for credit losses on financial assets and disclosures. The standard requires immediate recognition of management’s estimates of current expected credit losses. We adopted ASU 2016-13 in the first quarter of fiscal 2020 using a modified retrospective approach without restatement. The adoption did not result in a material impact to our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 in the first quarter of fiscal 2020. The adoption did not result in a material impact to our consolidated financial statements.

Recent Accounting Pronouncement Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued. The standard is effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We do not anticipate a material impact to the consolidated financial statements once implemented.

2. FAIR VALUE MEASUREMENTS

Fair value is 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. Accounting Standards Codification 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

Level 1—Quoted prices for identical instruments in active markets;

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

Level 3—Instruments with significant unobservable inputs.

Impairment losses related to property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted-average cost of capital and comparable store sales growth assumptions, and therefore, are classified as a Level 3 measurement in the fair

8

Table of Contents

value hierarchy. Impairment losses related to store-level operating lease assets are calculated using rent per square foot derived from observable market data, and therefore, are classified as a Level 2 measurement in the fair value hierarchy.

Impairment losses related to goodwill and other indefinite-lived intangible assets are calculated based on the estimated fair value of each reporting unit, which is determined using significant unobservable inputs including the present value of future cash flows expected to be generated by the reporting unit using a weighted-average cost of capital, terminal values and updated financial projections for the next five years and are classified as Level 3 measurements in the fair value hierarchy.

Due to the impact of COVID-19, we performed an interim impairment assessment of goodwill and other long-lived assets as of May 2, 2020, which included estimated future cash flow assumptions incorporating the impact of our temporary store closures. Due to the uncertainty around COVID-19, our projected future cash flows may differ materially from actual results.  There were no material impairment losses identified as a result of this assessment.

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their estimated fair values due to the short maturities of these instruments.

The table below provides the fair values of our senior secured term loan facility (“Amended and Restated Term Loan Credit Facility”), our 8% senior notes maturing in 2027 (“2027 Senior Notes”), our 5.875% senior subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes’’) and our cash flow hedges.

May 2,

February 1,

May 4,

2020

2020

2019

(in thousands)

Liabilities

Term loan credit facility

$

1,802,280

$

2,119,802

$

2,187,467

Senior notes

348,325

449,675

Senior subordinated notes

 

 

511,275

Short-term portion of cash flow hedges

18,924

13,007

3,686

Long-term portion of cash flow hedges

4,383

3,555

5,408

The fair values of our Amended and Restated Term Loan Credit Facility, our 2027 Senior Notes and our 2020 Senior Subordinated Notes were determined based on quoted market prices which are considered Level 1 inputs within the fair value hierarchy.

The fair value of our cash flow hedges were calculated using significant observable inputs including the present value of estimated future cash flows using the applicable interest rate curves and, therefore, were classified as Level 2 inputs within the fair value hierarchy. The short-term and long-term portions of our cash flow hedges are recorded in accrued liabilities and other liabilities, respectively, in our consolidated balance sheets.

3. REVENUE RECOGNITION

Our revenue is primarily associated with sales of merchandise to customers within our stores, customers utilizing our e-commerce platforms and through our Darice wholesale business (“Darice”). Revenue from sales of our merchandise is recognized when the customer takes possession of the merchandise. Payment for our retail sales is typically due at the time of the sale.

Customer Receivables

As of May 2, 2020, February 1, 2020 and May 4, 2019, receivables from customers, which consist primarily of trade receivables related to Darice, were approximately $12.2 million, $13.3 million and $22.4 million, respectively, and are included in accounts receivable, net in the consolidated balance sheets.

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Gift Cards

The gift card liability is included in accrued liabilities and other in the consolidated balance sheets. The following table includes activity related to gift cards (in thousands):

13 Weeks Ended

May 2,

May 4,

2020

2019

Balance at beginning of period

$

64,130

$

61,071

Issuance of gift cards

6,906

11,325

Revenue recognized (1)

(10,600)

(15,747)

Gift card breakage

(778)

(941)

Balance at end of period

$

59,658

$

55,708

(1)Revenue recognized from the beginning liability during the first quarters of fiscal 2020 and fiscal 2019 totaled $7.3 million and $10.7 million, respectively.

4. LEASES

We lease our retail store locations, distribution centers, office facilities and certain equipment under non-cancelable operating leases. Substantially all store leases have initial lease terms of approximately 10 years, the majority of which provide for one or more five-year renewal options. The exercise of lease renewal options is at the Company’s sole discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease.

Our operating lease assets represent our right to use an underlying asset for the lease term and our operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The commencement date is the earlier of the date when we become legally obligated for the rent payments or the date when we take possession of the building for construction purposes. In addition, operating lease assets are net of lease incentives received. As our leases do not contain an implicit rate of return, we use our estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. For operating leases that commenced prior to the adoption date of the new lease accounting standard, we used the incremental borrowing rate as of the adoption date. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. Our short-term non-real estate leases, which have a non-cancelable lease term of less than one year, are not included in the operating lease assets or liabilities. Short-term lease expense is recognized on a straight-line basis over the lease term.

The components of lease costs are as follows (in thousands):

13 Weeks Ended

May 2,

May 4,

2020

2019

Operating lease cost (1)

  

$

106,430

$

105,465

Variable lease cost (2)

 

39,445

 

36,440

Total lease cost

$

145,875

$

141,905

(1)Includes an immaterial amount related to short-term non-real estate leases.
(2)Includes taxes, insurance and common areas maintenance costs for our leased facilities which are paid based on actual cost incurred by the lessor. Also includes contingent rent which is immaterial in the periods presented.

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Additional information related to our operating leases is as follows (in thousands, except weighted-average data):

13 Weeks Ended

May 2,

May 4,

2020

2019

Operating cash outflows included in the measurement of lease liabilities

$

60,936

$

106,998

Operating lease assets obtained in exchange for new operating lease liabilities

$

56,806

$

52,709

Weighted-average remaining lease term

6.0 years

6.2 years

Weighted-average discount rate

6.3%

5.6%

Maturities of our lease liabilities are as follows as of May 2, 2020 (in thousands):

Fiscal Year

2020

$

335,426

2021

 

397,761

2022

 

337,630

2023

 

275,742

2024

 

214,431

Thereafter

 

463,794

Total lease payments

$

2,024,784

Less: Interest

(349,719)

Present value of lease liabilities

$

1,675,065

Lease payments exclude $57.4 million related to 17 leases that have been signed as of May 2, 2020 but have not yet commenced.

5. DEBT

Long-term debt consists of the following (in thousands):

May 2,

February 1,

May 4,

Interest Rate

2020

2020

2019

Term loan credit facility

Variable

$

2,176,325

$

2,182,550

$

2,201,225

Asset-based revolving credit facility

Variable

 

600,000

 

 

Senior notes

8.00

%

 

500,000

 

500,000

 

Senior subordinated notes

5.875

%

 

 

 

510,000

Total debt

 

3,276,325

 

2,682,550

 

2,711,225

Less unamortized discount/premium and debt costs

(12,374)

(13,190)

(10,723)

Total debt, net

3,263,951

2,669,360

2,700,502

Less current portion

 

(624,900)

 

(24,900)

 

(24,900)

Long-term debt

$

2,639,051

$

2,644,460

$

2,675,602

Revolving Credit Facility

As of May 2, 2020 and May 4, 2019, the borrowing base under our Amended Revolving Credit Facility was $826.9 million and $784.3 million, respectively, of which Michaels Stores, Inc. (“MSI”) had unused borrowing capacity of $137.7 million and $677.1 million, respectively. As of May 2, 2020 and May 4, 2019, outstanding standby letters of credit, which reduce our borrowing base, totaled $89.2 million and $107.2 million, respectively. As a result of the COVID-19 pandemic, we borrowed $600.0 million under our Amended Revolving Credit Facility to improve our cash position and preserve financial flexibility. In May 2020, we repaid $300.0 million of the outstanding borrowings using cash on hand.

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Interest Rate Swaps

In April 2018, we executed two interest rate swaps with an aggregate notional value of $1 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The interest rate swaps have a maturity date of April 30, 2021 and were executed for risk management and are not held for trading purposes. The objective of the interest rate swaps is to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR. The swaps replaced the one-month LIBOR with a fixed interest rate of 2.7765% and payments are settled monthly. The swaps qualify as cash flow hedges and changes in the fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair value are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect earnings. Amounts reclassified from accumulated other comprehensive income to interest expense during the first quarters of fiscal 2020 and fiscal 2019 were $3.5 million and $0.7 million, respectively.

Interest Rate Caps

In April 2020, we executed two interest rate cap agreements with an aggregate notional value of $2 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The interest rate caps have an effective date of September 30, 2020 and April 30, 2021, respectively. The interest rate caps have a maturity date of April 30, 2025 and were executed for risk management and are not held for trading purposes. The interest rate caps will effectively cap our LIBOR exposure on a portion of our Amended and Restated Term Loan Credit Facility at 1%. The interest rate caps qualify as cash flow hedges and changes in the fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair value are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect earnings. There were no amounts reclassified from accumulated other comprehensive income to interest expense during the three months ended May 2, 2020.

6. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table includes detail regarding changes in the composition of accumulated other comprehensive loss (in thousands):

13 Weeks Ended

May 2,

May 4,

2020

    

2019

Beginning of period

  

$

(22,831)

$

(14,558)

Foreign currency translation

 

(9,345)

 

(2,807)

Cash flow hedges

(4,991)

(2,019)

End of period

$

(37,167)

$

(19,384)

7. INCOME TAXES

The effective tax rate was 33.8% in the first quarter of fiscal 2020 compared to 27.9% in the first quarter of fiscal 2019. The effective tax rate for the first quarter of fiscal 2020 was higher than the same period in the prior year primarily due to the enactment of the Coronavirus Aid, Relief, and Economic Security Act in March 2020 that allows us to carry back net operating losses and claim refunds in tax years with higher rates.

8. EARNINGS (LOSS) PER SHARE

The Company’s unvested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by ASC 260, “Earnings Per Share”. In applying the two-class method, net income is allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Basic earnings (loss) per share is computed by dividing net income (loss) allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding plus the potential dilutive impact from stock options and restricted stock units. Common equivalent shares are excluded from the

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computation if their effect is anti-dilutive. During the first quarter of fiscal 2020, we incurred a net loss and therefore all common stock equivalents were anti-dilutive and excluded from the diluted net loss per share calculation. As a result, the basic and dilutive losses per common share are the same for the first quarter of fiscal 2020. There were 12.7 million and 11.1 million anti-dilutive shares during the first quarters of fiscal 2020 and fiscal 2019, respectively.

The following table sets forth the computation of basic and diluted (loss) earnings per common share (in thousands, except per share data):

13 Weeks Ended

May 2,

May 4,

2020

2019

Basic (loss) earnings per common share:

Net (loss) income

$

(63,505)

  

$

37,691

Less income related to unvested restricted shares

 

 

(39)

(Loss) income available to common shareholders - Basic

$

(63,505)

$

37,652

Weighted-average common shares outstanding - Basic

146,865

157,749

Basic (loss) earnings per common share

$

(0.43)

$

0.24

Diluted (loss) earnings per common share:

 

Net (loss) income

$

(63,505)

$

37,691

Less income related to unvested restricted shares

 

(39)

(Loss) income available to common shareholders - Diluted

$

(63,505)

$

37,652

Weighted-average common shares outstanding - Basic

146,865

157,749

Effect of dilutive stock options and restricted stock units

112

Weighted-average common shares outstanding - Diluted

146,865

157,861

Diluted (loss) earnings per common share

$

(0.43)

$

0.24

9. SEGMENTS AND GEOGRAPHIC INFORMATION

We consider Michaels-U.S., Michaels-Canada, and Darice to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting (“ASC 280”). We determined that Michaels-U.S. and Michaels-Canada have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine these operating segments into one reporting segment. Darice does not meet the materiality criteria in ASC 280 and, therefore, is not disclosed separately as a reportable segment. Our chief operating decision makers evaluate historical operating performance and forecast future periods’ operating performance based on operating income.

Our net sales by country are as follows (in thousands):

13 Weeks Ended

May 2,

May 4,

2020

2019

United States

$

724,939

$

994,101

Canada

 

74,949

 

99,619

Total

$

799,888

$

1,093,720

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10. RELATED PARTY TRANSACTIONS

Affiliates of, or funds advised by, The Blackstone Group, Inc. owned approximately 14% of our outstanding common stock as of May 2, 2020. Affiliates of The Blackstone Group, Inc. also held $4.9 million of our Amended and Restated Term Loan Credit Facility as of May 2, 2020.

The Blackstone Group, Inc. owns a majority equity position in ShopCore Properties, LP, Blackstone Real Estate DDR Retail Holdings III, LLC and Blackstone Real Estate RC Retail Holdings, LLC and has significant influence over Edens Limited Partnership, vendors we utilize to lease certain properties. Payments associated with these vendors during the first quarters of fiscal 2020 and fiscal 2019 were $2.0 million and $2.7 million, respectively. These expenses are included in cost of sales and occupancy expense in the consolidated statements of comprehensive income.

The Blackstone Group, Inc. has significant influence over JDA Software Group, Inc., a vendor we utilize for transportation and supply chain software. Payments associated with this vendor during the first quarters of fiscal 2020 and fiscal 2019 were $0.5 million and $0.7 million, respectively. These expenses are included in selling, general and administrative in the consolidated statements of comprehensive income.

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11. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Our debt covenants restrict MSI, and certain subsidiaries of MSI, from various activities including the incurrence of additional debt, payment of dividends and the repurchase of MSI’s capital stock (subject to certain exceptions), among other things. The following condensed consolidated financial information represents the financial information of MSI and its wholly-owned subsidiaries subject to these restrictions. The information is presented in accordance with the requirements of Rule 12-04 under the SEC’s Regulation S-X.

Michaels Stores, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

May 2,

February 1,

May 4,

ASSETS

    

2020

2020

2019

Current assets:

Cash and equivalents

$

926,037

$

409,173

$

245,944

Merchandise inventories

 

1,110,760

 

1,097,109

 

1,101,729

Prepaid expenses and other current assets

 

74,682

 

92,601

 

101,423

Total current assets

 

2,111,479

 

1,598,883

 

1,449,096

Property and equipment, net

 

420,263

 

430,432

 

433,882

Operating lease assets

1,576,877

1,610,013

1,613,719

Goodwill

 

94,290

 

94,290

 

112,069

Other intangible assets, net

64,511

66,417

16,960

Other assets

 

39,273

 

37,146

 

52,647

Total assets

$

4,306,693

$

3,837,181

$

3,678,373

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:

Accounts payable

$

443,911

$

476,298

$

406,947

Accrued liabilities and other

 

338,730

 

346,657

 

353,961

Current portion of operating lease liabilities

347,068

306,796

300,489

Current portion of long-term debt

 

624,900

 

24,900

 

24,900

Income taxes payable

 

9,378

 

41,236

 

55,339

Total current liabilities

 

1,763,987

 

1,195,887

 

1,141,636

Long-term debt

 

2,639,051

 

2,644,460

 

2,675,602

Long-term operating lease liabilities

1,327,997

1,357,821

1,380,175

Other liabilities

 

146,605

 

141,582

 

125,761

Total stockholders’ deficit

 

(1,570,947)

 

(1,502,569)

 

(1,644,801)

Total liabilities and stockholders’ deficit

$

4,306,693

$

3,837,181

$

3,678,373

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Michaels Stores, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

13 Weeks Ended

May 2,

May 4,

    

2020

    

2019

Net sales

$

799,888

$

1,093,720

Cost of sales and occupancy expense

 

578,066

676,080

Gross profit

 

221,822

 

417,640

Selling, general and administrative

 

281,105

320,387

Restructure charges

3,087

Store pre-opening costs

 

1,159

1,226

Operating (loss) income

 

(60,442)

 

92,940

Interest and other expense, net

 

35,201

40,469

(Loss) income before income taxes

 

(95,643)

 

52,471

Income taxes

 

(32,317)

14,624

Net (loss) income

$

(63,326)

$

37,847

Other comprehensive (loss) income, net of tax:

Foreign currency and cash flow hedges

 

(14,336)

 

(4,826)

Comprehensive (loss) income

$

(77,662)

$

33,021

Michaels Stores, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

13 Weeks Ended

May 2,

May 4,

2020

2019

Cash flows from operating activities:

Net cash (used in) provided by operating activities

$

(55,930)

$

32,162

Cash flows from investing activities:

Additions to property and equipment

 

(21,856)

 

(25,101)

Proceeds from sale of building

875

Net cash used in investing activities

(20,981)

(25,101)

Cash flows from financing activities:

Net repayments of debt

 

(6,225)

 

(6,225)

Net borrowings of debt

600,000

Net cash provided by (used in) financing activities

 

593,775

 

(6,225)

Net change in cash and equivalents

 

516,864

 

836

Cash and equivalents at beginning of period

 

409,173

 

245,108

Cash and equivalents at end of period

$

926,037

$

245,944

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12. SUBSEQUENT EVENT

Following the completion of a strategic review of our Darice business in the United States, on May 14, 2020, the Company adopted a plan to close the Darice wholesale operations (the “Plan”). The Company expects the closure process to be substantially completed by November 30, 2020. As a result, the Company expects the fiscal 2020 after-tax cost of implementing the Plan to be approximately $46 million to $52 million, consisting primarily of costs associated with the liquidation of inventory, employee-related expenses and costs associated with the write-off of intangible assets. In fiscal 2019, Darice’s net sales totaled approximately $80 million and they had no material impact on the Company’s operating income.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto included elsewhere in this quarterly report), the audited consolidated financial statements of the Company (and the related notes thereto) and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on March 17, 2020.

All of the “Company”, “us”, “we”, “our”, and similar expressions are references to The Michaels Companies, Inc. (“Michaels”) and our consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest to January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal 2020” relate to the 52 weeks ending January 30, 2021 and references to “fiscal 2019” relate to the 52 weeks ended February 1, 2020. In addition, all references to “the first quarter of fiscal 2020” relate to the 13 weeks ended May 2, 2020 and all references to “the first quarter of fiscal 2019” relate to the 13 weeks ended May 4, 2019. The results of operations for the 13 weeks ended May 2, 2020 are not indicative of the results to be expected for the entire year due to the seasonal nature of our business and the financial impact of the COVID-19 pandemic.

Overview

We are the largest arts and crafts specialty retailer in North America (based on store count) providing materials, project ideas and education for creative activities under the Michaels retail brand. We also operate a wholesale business under the Darice brand name and a market-leading, vertically-integrated custom framing business under the Artistree brand name. As of May 2, 2020, we operated 1,271 Michaels stores.

In March 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. The health and safety of our customers and employees remain our top priority as we continue to make decisions during this rapidly evolving situation. The COVID-19 pandemic has adversely impacted, and is expected to continue to adversely impact, our operations. During the first quarter of 2020, many state and local jurisdictions ordered all but certain essential businesses closed and executed extensive “shelter-in-place” or “stay-at-home” orders, many of which are currently still in place. These orders restricted our business operations and prompted us to temporarily close a significant portion of our stores during the quarter. The Company is taking measures to mitigate the impact of the COVID-19 pandemic including, but not limited to, borrowing $600.0 million under our senior secured asset-based revolving credit facility (“Amended Revolving Credit Facility”) to improve our cash position and preserve financial flexibility, deferring or eliminating discretionary capital and operating costs, improving working capital by renegotiating payment terms with our vendors and landlords and reducing labor costs as a result of temporary store closures. We also launched additional omnichannel capabilities, including curbside pickup, same day delivery and in-app purchases, to enable us to operate more effectively in the current environment. We will continue to monitor the situation closely and, if necessary, we could implement further measures to mitigate the impact of COVID-19 on our operations.  

As a result of restrictions related to the pandemic, over 900 stores were closed at various points during the first quarter and approximately 800 stores were closed as of May 2, 2020. However, a significant number of our closed stores continued to generate sales through our curbside pickup and ship from store programs. As of June 4, 2020, approximately 1,000 of our 1,273 stores were open and fully operational.

Net sales for the first quarter of fiscal 2020 decreased 26.9% compared to the same period in the prior year. The decrease in net sales was primarily due to a 27.6% decrease in comparable store sales as a result of the temporary store closures due to the COVID-19 pandemic. Gross profit as a percent of net sales decreased during the first quarter of fiscal 2020 primarily due to deleveraging occupancy and distribution related costs as a result of the temporary store closures, the impact of tariffs on inventory we purchase from China, an increase in inventory charges to sell through slow-moving merchandise and a change in sales mix. The decrease was partially offset by benefits from our ongoing pricing and sourcing

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initiatives. We incurred an operating loss of $60.7 million in the first quarter of fiscal 2020 compared to operating income of $92.7 million in the same period in the prior year.  The operating loss in the current year was primarily the result of lower net sales.

Certain products that we import from China have been impacted by tariffs. We have taken steps to mitigate a portion of the financial impact of these tariffs, including, among other things, selectively increasing prices on certain of our products, sourcing products from alternative countries and negotiating lower prices with our suppliers in China. If additional tariffs are implemented, we cannot provide any assurances that our mitigation efforts will be successful and, as a result, such tariffs could have a material impact on our business.

Comparable Store Sales

Comparable store sales represents the change in net sales for stores open the same number of months in the comparable period of the previous year, including stores that were relocated or expanded during either period, as well as e-commerce sales. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not considered comparable during the month it is closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of operation after its reopening.

The Company temporarily closed a significant number of stores during the first quarter of fiscal 2020 to comply with state and local regulations associated with the COVID-19 pandemic. All stores that have been temporarily closed due to the pandemic have continued to be included in the computation of comparable store sales.

Operating Information

The following tables set forth certain operating data:

13 Weeks Ended

May 2,

May 4,

2020

2019

Stores open at beginning of period

1,274

 

1,258

 

New stores

1

 

4

 

Relocated stores opened

6

 

7

 

Closed stores

(4)

 

(2)

 

Relocated stores closed

(6)

 

(7)

 

Stores open at end of period

1,271

 

1,260

 

Average inventory per store (in thousands)

$

832

$

822

Comparable store sales

(27.6)

%

(2.9)

%

Comparable store sales, at constant currency

(27.4)

%

(2.5)

%

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Results of Operations

The following table sets forth the percentage relationship to net sales of line items in our consolidated statements of comprehensive (loss) income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes.

13 Weeks Ended

May 2,

May 4,

2020

2019

Net sales

 

100.0

%

100.0

%

Cost of sales and occupancy expense

 

72.3

61.8

Gross profit

 

27.7

38.2

Selling, general and administrative

 

35.2

29.3

Restructure charges

0.3

Store pre-opening costs

 

0.1

0.1

Operating (loss) income

 

(7.6)

8.5

Interest expense

 

4.8

3.4

Other (income) expense, net

 

(0.4)

0.3

(Loss) income before income taxes

 

(12.0)

4.8

Income taxes

 

(4.0)

1.3

Net (loss) income

 

(7.9)

%

3.4

%

13 Weeks Ended May 2, 2020 Compared to the 13 Weeks Ended May 4, 2019

Net Sales. Net sales decreased $293.8 million in the first quarter of fiscal 2020, or 26.9%, to $799.9 million compared to the first quarter of fiscal 2019. The decrease in net sales was due to a $296.0 million decrease in comparable store sales and a $3.5 million decrease in wholesale revenue. The decrease was partially offset by $3.1 million of net sales related to 11 additional stores opened (net of closures) since May 4, 2019. E-commerce sales, which are included in comparable store sales, increased $118.8 million in the first quarter of fiscal 2020, or 295.6%, to $159.1 million compared to the same period in the prior year. Comparable store sales decreased 27.6%, or 27.4% at constant exchange rates, due to a decrease in customer transactions as a result of the temporary store closures due to the COVID-19 pandemic, partially offset by an increase in average ticket.

Gross Profit. Gross profit was 27.7% of net sales in the first quarter of fiscal 2020 compared to 38.2% in the first quarter of fiscal 2019. The decrease was primarily due to deleveraging occupancy and distribution related costs as a result of the temporary store closures due to the COVID-19 pandemic, the impact of tariffs on inventory we purchase from China, an increase in inventory charges to sell through slow-moving merchandise and a change in sales mix. Gross profit includes $1.8 million of incremental COVID-19 related costs, including hazard pay for our distribution center team members and certain supply costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) was 35.2% of net sales in the first quarter of fiscal 2020 compared to 29.3% in the first quarter of fiscal 2019. SG&A decreased $39.3 million to $281.3 million in the first quarter of fiscal 2020 primarily resulting from the temporary store closures due to the COVID-19 pandemic. The decrease included a $22.7 million decrease in payroll-related costs as a result of furloughed team members, $5.6 million of CEO severance costs incurred in the first quarter of the prior year and $5.0 million of wage subsidies resulting from COVID-19 relief legislation enacted in the U.S. and Canada. In addition, marketing costs decreased $8.7 million and credit card fees decreased $3.8 million due primarily to lower sales. The decrease was partially offset by $7.6 million of incremental COVID-19 related costs, including hazard pay for store team members and sanitation supplies, and $1.5 million associated with operating 11 additional stores (net of closures) since May 4, 2019.

Restructure Charges. In the fourth quarter of fiscal 2018, we closed all of our Pat Catan’s stores. As a result of the closures, we recorded a charge totaling $3.1 million in the first quarter of fiscal 2019, primarily related to employee-related expenses.

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Interest Expense. Interest expense increased $0.8 million to $38.1 million in the first quarter of fiscal 2020 compared to the same period in the prior year. The increase was primarily due to $2.8 million related to settlement payments associated with our interest rate swaps, $2.5 million related to a higher interest rate associated with our senior notes issued in July 2019 (“2027 Senior Notes”) and $1.4 million related to increased borrowing on our Amended Revolving Credit Facility. The increase was partially offset by a $6.3 million decrease as a result of a lower interest rate on our senior secured term loan credit facility (“Amended and Restated Term Loan Credit Facility”).

Income Taxes. The effective tax rate was 33.8% for the first quarter of fiscal 2020 compared to 27.9% for the first quarter of fiscal 2019. The effective tax rate for the first quarter of fiscal 2020 was higher than the same period in the prior year primarily due to the enactment of the Coronavirus Aid, Relief, and Economic Security Act in March 2020 that allows us to carry back net operating losses and claim refunds in tax years with higher rates.

Liquidity and Capital Resources

We require cash principally for day-to-day operations, to finance capital investments (including possible acquisitions), purchase inventory, service our outstanding debt and for seasonal working capital needs. We expect that our available cash, cash flow generated from operating activities and funds available under our Amended Revolving Credit Facility will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected by the occurrence of any of the events described under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and in this Quarterly Report on Form 10-Q or our failure to meet our debt covenants. As a result of the COVID-19 pandemic, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. As a precautionary measure, we borrowed $600.0 million under our Amended Revolving Credit Facility during the first quarter of fiscal 2020 to improve our cash position and preserve financial flexibility. In May 2020, we repaid $300.0 million of outstanding borrowings using cash on hand. In addition, we have taken other steps to increase available cash and reduce costs, including, but not limited to, deferring or eliminating discretionary capital and operating costs, improving working capital by renegotiating payment terms with our vendors and landlords, and reducing labor costs as a result of the temporary store closures. We also launched additional omnichannel capabilities, including curbside pickup, same day delivery and in-app purchases, to enable us to operate more effectively in the current environment. Our cash and cash equivalents totaled $926.8 million at May 2, 2020.

Our Amended Revolving Credit Facility provides senior secured financing of up to $850 million, subject to a borrowing base. As of May 2, 2020, the borrowing base was $826.9 million, of which we had $89.2 million of outstanding standby letters of credit and $137.7 million of unused borrowing capacity. As of May 2, 2020, we are in compliance with all debt covenants.

In May 2020, following the completion of a strategic review of our Darice business in the United States, the Company adopted a plan to close the Darice wholesale operations (the “Plan”). The Company expects the closure process to be substantially completed by November 30, 2020. As a result, the Company expects the fiscal 2020 after-tax cost of implementing the Plan to be approximately $46 million to $52 million, consisting primarily of costs associated with the liquidation of inventory, employee-related expenses and costs associated with the write-off of intangible assets. In fiscal 2019, Darice’s net sales totaled approximately $80 million and they had no material impact on the Company’s operating income.

We had total outstanding debt of $3,276.3 million at May 2, 2020, of which $2,776.3 million was subject to variable interest rates and $500.0 million was subject to fixed interest rates. In April 2018, we executed two interest rate swaps with an aggregate notional value of $1 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The swaps replaced the one-month LIBOR with a fixed interest rate of 2.7765%.

In April 2020, we executed two interest rate cap agreements with an aggregate notional value of $2 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The interest rate caps have an effective date of September 30, 2020 and April 30, 2021, respectively. The interest rate caps have a maturity date of April 30, 2025

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and were executed for risk management and are not held for trading purposes. The interest rate caps will effectively cap our LIBOR exposure on a portion of our Amended and Restated Term Loan Credit Facility at 1%.

In September 2018, the Board of Directors authorized a new share repurchase program for the Company to purchase $500 million of the Company’s common stock on the open market or through accelerated share repurchase transactions. The share repurchase program does not have an expiration date, and the timing and number of repurchase transactions under the program will depend on market conditions, corporate considerations, debt agreements and regulatory requirements. Shares repurchased under the program are held as treasury shares until retired. During the three months ended May 2, 2020, we did not repurchase any shares under our share repurchase program. As of May 2, 2020, we had $293.5 million of availability remaining under our current share repurchase program.

Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions, including those created by the COVID-19 pandemic, and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.

We intend to use excess operating cash flows to invest in growth opportunities (including possible acquisitions), repurchase outstanding shares and repay portions of our indebtedness, depending on prevailing market conditions, liquidity requirements, existing economic conditions, contractual restrictions and other factors. As such, we and our subsidiaries, affiliates and significant shareholders may, from time to time, seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. If we use our excess cash flows to repay our debt, it will reduce the amount of excess cash available for additional capital expenditures.

Cash Flow from Operating Activities

Cash flows used in operating activities were $55.5 million in the first quarter of fiscal 2020 compared to cash flows provided by operating activities of $33.8 million in the first quarter of fiscal 2019. The decrease in cash flows from operating activities was primarily due to operating losses incurred in the first quarter of fiscal 2020 as a result of the temporary store closures due to the COVID-19 pandemic, partially offset by steps we have taken to preserve liquidity, including renegotiating payment terms with our vendors and landlords.

Inventory at the end of the first quarter of fiscal 2020 increased $9.0 million, or 0.8%, to $1,110.8 million, compared to $1,101.7 million at the end of the first quarter of fiscal 2019. The increase in inventory was primarily due to lower sales as a result of the temporary store closures due to the COVID-19 pandemic, tariffs enacted on product that we purchase from China and additional inventory associated with the operation of 11 additional stores (net of closures) since May 4, 2019. Average inventory per store (inclusive of distribution centers, in-transit and inventory for the Company’s e-commerce site) increased 1.2% to $832,000 at May 2, 2020 from $822,000 at May 4, 2019.

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Cash Flow from Investing Activities

The following table includes capital expenditures paid during the periods presented (in thousands):

13 Weeks Ended

May 2,

May 4,