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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 31, 2020

or

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

For the transition period from          to       

 

Commission File Number: 0-18183

 G-III APPAREL GROUP, LTD.

(Exact name of registrant as specified in its charter) 

 

Delaware

    

41-1590959

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

512 Seventh Avenue, New York, New York

 

10018

(Address of principal executive offices)

 

(Zip Code)

(212) 403-0500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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, $0.01 par value per share

GIII

The Nasdaq Stock Market

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

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

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

As of September 4, 2020, there were 48,358,688 shares of issuer’s common stock, par value $0.01 per share, outstanding.

Table of Contents

TABLE OF CONTENTS

    

Page No.

Part I

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets – July 31, 2020, July 31, 2019 and January 31, 2020

3

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - For the Three and Six Months Ended July 31, 2020 and 2019 (Unaudited)

4

Condensed Consolidated Statements of Stockholders’ Equity – July 31, 2020 and July 31, 2019 (Unaudited)

5

Condensed Consolidated Statements of Cash Flows - For the Six Months Ended July 31, 2020 and 2019 (Unaudited)

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

Part II

OTHER INFORMATION

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 6.

Exhibits

61

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.          Financial Statements.

­­G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

July 31,

July 31,

January 31,

2020

2019

2020

    

(Unaudited)

    

(Unaudited)

    

(In thousands, except per share amounts)

ASSETS

Current assets

Cash and cash equivalents

$

252,798

$

39,568

$

197,372

Accounts receivable, net of allowance for doubtful accounts of $11.2 million, $0.9 million and $0.7 million, respectively

276,502

464,663

530,137

Inventories

574,767

842,136

551,918

Prepaid income taxes

13,949

12,500

8,566

Prepaid expenses and other current assets

55,709

93,353

80,695

Total current assets

1,173,725

1,452,220

1,368,688

Investments in unconsolidated affiliates

59,132

63,773

61,987

Property and equipment, net

66,627

85,548

76,023

Operating lease assets

168,071

309,421

270,032

Other assets, net

31,900

35,681

32,629

Other intangibles, net

36,423

40,444

38,363

Deferred income tax assets, net

34,548

25,253

18,135

Trademarks

438,721

439,409

438,658

Goodwill

260,667

260,687

260,622

Total assets

$

2,269,814

$

2,712,436

$

2,565,137

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Current portion of notes payable

$

3,717

$

683

$

673

Accounts payable

192,192

346,642

204,786

Accrued expenses

60,257

89,137

101,838

Customer refund liabilities

115,370

179,078

233,418

Current operating lease liabilities

91,700

74,297

63,166

Income tax payable

9,075

6,966

8,468

Other current liabilities

109

425

1,611

Total current liabilities

472,420

697,228

613,960

Notes payable, net of discount and unamortized issuance costs

405,003

553,118

396,794

Deferred income tax liabilities, net

7,960

15,019

7,952

Noncurrent operating lease liabilities

140,283

272,632

249,040

Other noncurrent liabilities

6,399

6,619

6,719

Total liabilities

1,032,065

1,544,616

1,274,465

Stockholders' Equity

Preferred stock; 1,000 shares authorized; no shares issued

Common stock - $0.01 par value; 120,000 shares authorized; 49,396, 49,394 and, 49,396 shares issued, respectively

264

264

264

Additional paid-in capital

444,384

456,195

452,142

Accumulated other comprehensive loss

(18,260)

(16,848)

(18,008)

Retained earnings

838,867

772,463

893,138

Common stock held in treasury, at cost - 1,037, 1,649 and 1,386 shares, respectively

(27,506)

(44,254)

(36,864)

Total stockholders' equity

1,237,749

1,167,820

1,290,672

Total liabilities and stockholders' equity

$

2,269,814

$

2,712,436

$

2,565,137

The accompanying notes are an integral part of these statements.

3

Table of Contents

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Three Months Ended July 31,

Six Months Ended July 31,

    

2020

    

2019

    

2020

    

2019

(Unaudited)

(In thousands, except per share amounts)

Net sales

$

297,212

$

643,892

$

702,343

$

1,277,444

Cost of goods sold

162,519

412,123

443,249

809,611

Gross profit

134,693

231,769

259,094

467,833

Selling, general and administrative expenses

122,102

196,448

276,722

398,307

Depreciation and amortization

9,691

9,789

19,558

19,262

Asset impairments, net of gain on lease modifications

14,302

(1,393)

17,489

(2,222)

Operating profit (loss)

(11,402)

26,925

(54,675)

52,486

Other income (loss)

1,943

(751)

(113)

(1,399)

Interest and financing charges, net

(9,177)

(10,785)

(19,556)

(21,105)

Income (loss) before income taxes

(18,636)

15,389

(74,344)

29,982

Income tax expense (benefit)

(3,660)

4,270

(20,073)

6,820

Net income (loss)

$

(14,976)

$

11,119

$

(54,271)

$

23,162

NET INCOME (LOSS) PER COMMON SHARE:

Basic:

Net income (loss) per common share

$

(0.31)

$

0.23

$

(1.13)

$

0.48

Weighted average number of shares outstanding

48,214

48,450

48,121

48,619

Diluted:

Net income (loss) per common share

$

(0.31)

$

0.23

$

(1.13)

$

0.47

Weighted average number of shares outstanding

48,214

49,116

48,121

49,436

Net income (loss)

$

(14,976)

$

11,119

$

(54,271)

$

23,162

Other comprehensive income:

Foreign currency translation adjustments

3,774

1,573

(252)

(1,654)

Other comprehensive income (loss)

3,774

1,573

(252)

(1,654)

Comprehensive income (loss)

$

(11,202)

$

12,692

$

(54,523)

$

21,508

The accompanying notes are an integral part of these statements.

4

Table of Contents

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Accumulated

Common

Additional

Other

Stock

Common

Paid-In

Comprehensive

Retained

Held In

    

Stock

    

Capital

    

Loss

    

Earnings

    

Treasury

    

Total

(Unaudited)

(In thousands)

Balance as of April 30, 2020

$

264

$

449,840

$

(22,034)

$

853,843

$

(35,679)

$

1,246,234

Equity awards exercised/vested, net

(7,993)

8,173

180

Share-based compensation expense

2,548

2,548

Taxes paid for net share settlements

(11)

(11)

Other comprehensive income, net

3,774

3,774

Net loss

(14,976)

(14,976)

Balance as of July 31, 2020

$

264

$

444,384

$

(18,260)

$

838,867

$

(27,506)

$

1,237,749

Balance as of April 30, 2019

$

264

$

456,835

$

(18,421)

$

761,344

$

(13,196)

$

1,186,826

Equity awards exercised/vested, net

(4,082)

4,158

76

Share-based compensation expense

5,122

5,122

Taxes paid for net share settlements

(1,680)

(1,680)

Other comprehensive income, net

1,573

1,573

Repurchases of common stock

(35,216)

(35,216)

Net income

11,119

11,119

Balance as of July 31, 2019

$

264

$

456,195

$

(16,848)

$

772,463

$

(44,254)

$

1,167,820

Balance as of January 31, 2020

$

264

$

452,142

$

(18,008)

$

893,138

$

(36,864)

$

1,290,672

Equity awards exercised/vested, net

(9,178)

9,358

180

Share-based compensation expense

1,737

1,737

Taxes paid for net share settlements

(317)

(317)

Other comprehensive loss, net

(252)

(252)

Net loss

(54,271)

(54,271)

Balance as of July 31, 2020

$

264

$

444,384

$

(18,260)

$

838,867

$

(27,506)

$

1,237,749

Balance as of January 31, 2019

$

264

$

464,112

$

(15,194)

$

758,881

$

(19,054)

$

1,189,009

Equity awards exercised/vested, net

(9,900)

10,016

116

Share-based compensation expense

9,349

9,349

Taxes paid for net share settlements

(7,366)

(7,366)

Other comprehensive loss, net

(1,654)

(1,654)

Repurchases of common stock

(35,216)

(35,216)

Cumulative effect of adoption of ASC 842

(9,580)

(9,580)

Net income

23,162

23,162

Balance as of July 31, 2019

$

264

$

456,195

$

(16,848)

$

772,463

$

(44,254)

$

1,167,820

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended July 31,

    

2020

    

2019

(Unaudited)

(In thousands)

Cash flows from operating activities

Net income (loss)

$

(54,271)

$

23,162

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

Depreciation and amortization

19,558

19,262

Loss on disposal of fixed assets

169

1,230

Non-cash operating lease costs

44,732

36,729

Gain on lease modifications

(2,524)

(2,222)

Asset impairments

20,013

Dividend received from unconsolidated affiliate

2,695

1,960

Equity (gain) loss in unconsolidated affiliates

175

(867)

Share-based compensation

1,737

9,349

Deferred financing charges and debt discount amortization

5,425

4,577

Deferred income taxes

(16,414)

Changes in operating assets and liabilities:

Accounts receivable, net

253,634

37,470

Inventories

(22,849)

(265,753)

Income taxes, net

(4,979)

(5,987)

Prepaid expenses and other current assets

25,128

3,321

Other assets, net

(678)

(1,164)

Customer refund liabilities

(118,047)

(64,512)

Operating lease liabilities

(37,785)

(38,300)

Accounts payable, accrued expenses and other liabilities

(55,914)

108,838

Net cash provided by (used in) operating activities

59,805

(132,907)

Cash flows from investing activities

Operating lease assets initial direct costs

(3,968)

(1,940)

Capital expenditures

(9,101)

(17,531)

Net cash used in investing activities

(13,069)

(19,471)

Cash flows from financing activities

Repayment of borrowings - revolving facility

(676,019)

(942,973)

Proceeds from borrowings - revolving facility

676,019

1,102,973

Repayment of borrowings - unsecured term loan

(170)

Proceeds from borrowings - unsecured term loan

7,071

3,407

Proceeds from exercise of equity awards

180

116

Purchase of treasury shares

(35,216)

Taxes paid for net share settlements

(317)

(7,366)

Net cash provided by financing activities

6,934

120,771

Foreign currency translation adjustments

1,756

1,037

Net increase (decrease) in cash and cash equivalents

55,426

(30,570)

Cash and cash equivalents at beginning of period

197,372

70,138

Cash and cash equivalents at end of period

$

252,798

$

39,568

Supplemental disclosures of cash flow information

Cash payments:

Interest, net

$

12,937

$

15,735

Income tax payments, net

$

1,385

$

12,791

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

As used in these financial statements, the term “Company” or “G-III” refers to G-III Apparel Group, Ltd. and its subsidiaries. The Company designs, sources and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. The Company also operates retail stores and licenses its proprietary brands for several product categories.

The Company consolidates the accounts of its wholly-owned and majority-owned subsidiaries. KL North America B.V. (“KLNA”) and Fabco Holding B.V. (“Fabco”) are Dutch joint venture limited liability companies that are 49% owned by the Company. Karl Lagerfeld Holding B.V. (“KLH”) is a Dutch limited liability company that is 19% owned by the Company. These investments are accounted for using the equity method of accounting. All material intercompany balances and transactions have been eliminated.

Vilebrequin International SA (“Vilebrequin”), a Swiss corporation that is wholly-owned by the Company, KLH, KLNA and Fabco report results on a calendar year basis rather than on the January 31 fiscal year basis used by the Company. Accordingly, the results of Vilebrequin, KLH, KLNA and Fabco are, and will be, included in the financial statements for the quarter ended or ending closest to the Company’s fiscal quarter end. For example, with respect to the Company’s results for the six-month period ended July 31, 2020, the results of Vilebrequin, KLH, KLNA and Fabco are included for the six-month period ended June 30, 2020. The Company’s retail operations segment reports on a 52/53-week fiscal year. The Company’s three and six-month periods ended July 31, 2020 and 2019 were each 13-week and 26-week periods, respectively, for the retail operations segment. For fiscal 2021 and 2020, the three and six-month periods for the retail operations segment ended on August 1, 2020 and August 3, 2019, respectively.

The results for the three and six months ended July 31, 2020 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company’s business and the significant effects of the COVID-19 pandemic on the Company’s business. The accompanying financial statements included herein are unaudited. All adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period presented have been reflected.

The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 filed with the Securities and Exchange Commission (the “SEC”).

Assets and liabilities of the Company’s foreign operations, where the functional currency is not the U.S. dollar (reporting currency), are translated from foreign currency into U.S. dollars at period-end rates, while income and expenses are translated at the weighted-average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within stockholders’ equity.

Accounting Policies

On April 10, 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Q&A to respond to frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 outbreak. Consequently, for lease concessions related to the effects of the COVID-19 outbreak, an entity will not have to analyze each lease to determine whether the enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance to those leases. Entities may make the elections for any lessor-provided concessions related to the effects of the outbreak (e.g., deferrals of lease payments, lease payment forgiveness, cash payments made to the lessee or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has elected to not apply the lease modification guidance for contracts with COVID-19 related rent concessions. As of July 31, 2020, the Company has $8.0 million of deferred lease payments recorded within accounts payable on its condensed consolidated balance sheets.

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Liquidity and Impact of COVID-19

The Company relies on its cash flows generated from operations and the borrowing capacity under its credit facilities to meet the cash requirements of its business. The primary cash requirements of its business are the seasonal buildup in inventory, compensation paid to employees, payments to suppliers in the normal course of business, capital expenditures, maturities of debt and related interest payments and income tax payments. The rapid expansion of the COVID-19 pandemic resulted in a sharp decline in net sales and earnings in the first and second quarters of fiscal 2021. The Company is focused on preserving its liquidity and managing its cash flow during these unprecedented conditions. The Company has taken preemptive actions to enhance its ability to meet its short-term liquidity needs, including, but not limited to, reducing payroll costs through employee furloughs, job eliminations, salary reductions, reductions in discretionary spending, deferring certain lease payments and deferral of capital projects. In addition, the Company is closely monitoring its inventory needs and is working with its suppliers to curtail, or cancel, production of product that the Company believes will not be able to be sold in season. The Company has also been working with its suppliers and licensors to negotiate extended payment terms in order to preserve capital.

As of July 31, 2020, the Company had cash and cash equivalents of $252.8 million. The Company believes it has adequate cash flows to meet the cash requirements of its business. As of July 31, 2020, the Company was in compliance with all covenants under its term loan and revolving credit facility. On August 7, 2020, the Company refinanced its term loan and revolving credit facility. See Note 16 – Subsequent Events.

Note 2 – Retail Restructuring

On June 5, 2020, the Company announced the restructuring of its retail operations segment including the closing of all Wilsons Leather and G.H. Bass stores. Additionally, the Company will close its Calvin Klein Performance stores. In connection with the restructuring of the retail operations segment, the Company expects to incur an aggregate charge of approximately $100 million related to store operating costs, landlord termination fees, severance costs, store liquidation and closing costs, write-offs related to right-of-use assets and legal and professional fees. The Company expects the net cash outflow from the retail restructuring to be approximately $65 million.

As a result of the restructuring of the Company’s retail operations, the Company recorded a charge of $1.2 million during the three months ended July 31, 2020. The charge consisted primarily of severance payments, benefit continuation costs and store closing costs. Restructuring charges are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive income (loss). The following is a reconciliation of the accrual for the quarter ended July 31, 2020:

    

Severance and Benefit Costs

    

Store Closing Costs

    

Total

(In thousands)

Balance at April 30, 2020

$

$

$

Amounts charged to expense

480

792

1,272

Cash payments

(26)

(26)

Balance at July 31, 2020

$

454

$

792

$

1,246

The Company has accounted for the remaining rent and termination payments under Accounting Standards Codification (“ASC”) 842 – Leases. As of July 31, 2020, the total operating lease liability related to Wilsons Leather, G.H Bass, and Calvin Klein Performance stores is $54.5 million and will be paid by the end of fiscal 2021.

Note 3 – Allowance for Doubtful Accounts

On February 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which had no material impact on the Company’s financial statements. The Company’s financial instruments consist of trade receivables arising from revenue transactions in the ordinary course of business. The Company considers its trade receivables to consist of two portfolio segments: wholesale and retail trade receivables. Wholesale trade receivables result from credit the Company has extended to its wholesale customers based on pre-defined criteria and are generally due within 30 to 60 days. Retail trade receivables primarily relate to amounts due from third-party credit card processors for the settlement of debit and credit card transactions and are typically collected within 3 to 5 days.

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The Company’s accounts receivable and allowance for doubtful accounts as of July 31, 2020 were:

July 31, 2020

    

Wholesale

    

Retail

    

Total

(In thousands)

Accounts receivable, gross

$

284,031

$

3,679

$

287,710

Allowance for doubtful accounts

(11,178)

(30)

(11,208)

Accounts receivable, net

$

272,853

$

3,649

$

276,502

The allowance for doubtful accounts for wholesale trade receivables is estimated based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligation (such as in the case of bankruptcy filings (including potential bankruptcy filings), extensive delay in payment or substantial downgrading by credit rating agencies), a specific reserve for bad debts is recorded against amounts due from that customer to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the end of the reporting period for financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions. The Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.

The allowance for doubtful accounts for retail trade receivables is estimated as the credit card chargeback rate applied to the previous 90 days of credit card sales. In addition, the Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.

During the three and six months ended July 31, 2020, the Company recorded a $0.8 million and $10.5 million increase in its allowance for doubtful accounts primarily due to allowances recorded against the outstanding receivables of certain department store customers that have publicly announced bankruptcy filings or possible bankruptcy filings. The Company had the following activity in its allowance for credit losses for the six months ended July 31, 2020:

July 31, 2020

    

Wholesale

    

Retail

    

Total

(In thousands)

Balance as of January 31, 2020

$

(628)

$

(82)

$

(710)

Provision for credit losses

(10,557)

52

(10,505)

Accounts written off as uncollectible

7

7

Balance as of July 31, 2020

$

(11,178)

$

(30)

$

(11,208)

Note 4 – Inventories

Wholesale inventories, which comprise a significant portion of the Company’s inventory, are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or net realizable value. Substantially all of the Company’s inventories consist of finished goods.

The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $15.1 million, $24.8 million and $31.0 million as of July 31, 2020, July 31, 2019 and January 31, 2020 respectively. The inventory return asset is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheets.

Inventory held on consignment by the Company’s customers totaled $6.3 million, $3.9 million and $9.1 million at July 31, 2020, July 31, 2019 and January 31, 2020, respectively. Consignment inventory is stored at the facilities of the Company’s customers. The Company reflects this inventory on its condensed consolidated balance sheets.

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Note 5 – Fair Value of Financial Instruments

Generally Accepted Accounting Principles establish a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.

The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:

Carrying Value

Fair Value

    

July 31,

July 31,

January 31,

    

July 31,

July 31,

January 31,

Financial Instrument

Level

2020

2019

2020

2020

2019

2020

(In thousands)

Term loan

2

$

300,000

$

300,000

$

300,000

$

300,000

$

300,000

$

300,000

Revolving credit facility

2

160,000

160,000

Note issued to LVMH

3

104,884

99,266

102,009

102,304

96,437

95,126

Unsecured loans

2

6,401

3,243

2,860

6,401

3,243

2,860

Overdraft facilities

2

3,530

3,530

The Company’s debt instruments are recorded at their carrying values in its condensed consolidated balance sheets, which may differ from their respective fair values. The carrying amount of the Company’s variable rate debt approximates the fair value, as interest rates change with the market rates. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) also approximates fair value due to the short-term nature of these accounts. On August 7, 2020, the Company refinanced its term loan and revolving credit facility. See Note 16 – Subsequent Events.

The 2% note in the principal amount of $125 million issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) in connection with the acquisition of Donna Karan International (“DKI”) was recorded on the balance sheet at a discount of $40.0 million in accordance with ASC 820 – Fair Value Measurements. For purposes of this fair value disclosure, the Company based its fair value estimate for the note issued to LVMH on the initial fair value as determined at the date of the acquisition of DKI and records the amortization using the effective interest method over the term of the note.

The fair value of the note issued to LVMH was considered a Level 3 valuation in the fair value hierarchy.

Non-Financial Assets and Liabilities

The Company’s non-financial assets that are measured at fair value on a nonrecurring basis include long-lived assets, which consist primarily of property and equipment and operating lease assets. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable. For impaired assets, an impairment loss is recognized equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These fair value measurements are considered level 3 measurements in the fair value hierarchy. During the second quarter of fiscal 2021, the Company recorded a $20 million impairment charge primarily related to operating lease assets, leasehold improvements and furniture and fixtures at certain Wilsons Leather, G.H. Bass, DKNY and Vilebrequin stores as a result of the performance at these stores. During the first quarter of fiscal 2020, the Company recorded an impairment of $9.6 million, net of tax, in connection with the adoption of ASC 842 – Leases (“ASC 842”) that was recognized through retained earnings.

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Note 6 – Leases

The Company leases retail stores, warehouses, distribution centers, office space and certain equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Most leases are for a term of one to ten years.  Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years.  Several of the Company’s retail store leases include an option to terminate the lease based on failure to achieve a specified sales volume. The exercise of lease renewal options is generally at the Company’s sole discretion. The exercise of lease termination options is generally by mutual agreement between the Company and the lessor.

Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

The Company’s lease assets and liabilities as of July 31, 2020, July 31, 2019 and January 31, 2020 consist of the following:

Leases

Classification

July 31, 2020

July 31, 2019

January 31, 2020

(In thousands)

Assets

Operating

Operating lease assets

$

168,071

$

309,421

$

270,032

Total lease assets

$

168,071

$

309,421

$

270,032

Liabilities

Current operating

Current operating lease liabilities

$

91,700

$

74,297

$

63,166

Noncurrent operating

Noncurrent operating lease liabilities

140,283

272,632

249,040

Total lease liabilities

$

231,983

$

346,929

$

312,206

The Company’s operating lease assets and operating lease liabilities significantly declined during the second quarter of fiscal 2021 due to the restructuring of the retail operations segment. As a result of this restructuring, the Company expects to close all of its Wilsons Leather, G.H. Bass and Calvin Klein Performance stores by the end of fiscal 2021. In addition, primarily due to the restructuring, in the second quarter of fiscal 2021 the Company recorded a $19.4 million impairment charge related to the operating lease assets at certain Wilsons Leather, G.H. Bass, DKNY and Vilebrequin stores as a result of the performance at these stores.

The Company recorded lease costs of $36.0 million and $58.4 million during the three and six months ended July 31, 2020, respectively. The Company recorded lease costs of $24.9 million and $49.9 million during the three and six months ended July 31, 2019, respectively. Lease costs are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive income (loss). The Company recorded negative variable lease costs and short-term lease costs of ($4.3) million and ($0.9) million for the three and six months ended July 31, 2020, respectively. The negative variable lease costs were primarily due to rent forgiveness received by the Company’s retail operations segment that was recorded as negative variable lease costs in accordance with the Staff Q&A issued by the FASB on April 10, 2020. The Company recorded variable leases costs and short-term lease costs of $2.7 million and $5.0 million for the three and six months ended July 31, 2019, respectively. Short-term lease costs are immaterial.

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As of July 31, 2020, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2025 and thereafter are as follows:

Year Ending January 31,

Amount

(In thousands)

2021

$

79,178

2022

50,509

2023

43,058

2024

31,339

2025

24,239

After 2025

46,971

Total lease payments

$

275,294

Less: Interest

43,311

Present value of lease liabilities

$

231,983

As of July 31, 2020, there are no material leases that are legally binding but have not yet commenced.

As of July 31, 2020, the weighted average remaining lease term related to operating leases is 4.1 years. The weighted average discount rate related to operating leases is 8.1%.

Cash paid for amounts included in the measurement of operating lease liabilities is $51.0 million and $51.9 million during the six months ended July 31, 2020 and July 31, 2019, respectively. Right-of-use assets obtained in exchange for lease obligations were $10.8 million and $15.6 million as of July 31, 2020 and July 31, 2019, respectively.

Note 7 – Goodwill and Intangible Assets

As of July 31, 2020, there is $260.7 million of goodwill and $438.7 million of indefinite-lived trademarks recorded on the Company’s condensed consolidated balance sheet. The Company reviews and tests its goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Due to the impact of the COVID-19 pandemic on the Company’s operations, the Company performed a quantitative test of its goodwill as of April 30, 2020 using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. The Company also performed quantitative tests of each of its indefinite-lived intangible assets using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability. There were no impairments identified as of April 30, 2020 as a result of these tests.

While no impairment was identified as of April 30, 2020, $370.0 million of the Company’s indefinite-lived trademarks could be deemed to have a risk of future impairment as there is limited excess fair value over the carrying value of these assets at July 31, 2020.

During the second q