* Reflects the 12-to-1 reverse stock split that became effective on July 1, 2019. Refer to Note 1 – Summary of Significant Accounting Policies for further information.

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

Francesca’s Holdings Corporation

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

Francesca’s Holdings Corporation

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

Francesca’s Holdings Corporation

Francesca’s Holdings Corporation

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Potentially issuable shares under the Company’s stock-based compensation plans which amounted to 0.1 million shares in each of the thirteen and twenty-six weeks ended August 3, 2019 and less than 0.10.3 million and 0.1 million shares in the thirteen and twenty-six weeks ended AugustMay 2, 2020 and May 4, 2018,2019, respectively, were excluded in the computation of diluted loss per shares due to their anti-dilutive effect.the Company being in a net loss position in each period presented. The Company also excluded contingently issuable performance-based awards totaling 0.1 million in each of the thirteen and twenty-six weeks ended August 3,May 2, 2020 and May 4, 2019 and August 4, 2018 from the computation of diluted earnings per share because the pre-established goals had not been satisfied as of the end of each period.

Fair value is defined as 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. The carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to the short-termshort term nature of these financial assets and liabilities. The carrying amount of the Company’s debt approximates its fair value due to the proximityshort-term nature of the debt issue date and the balance sheet date and the variable component of interest onits debt.

The COVID-19 pandemic has also resulted in lower than expected sales and profitability for each of the Company’s boutiques as a result of the temporary boutique closures which indicates that its long-lived assets may be impaired. In determining whether an impairment has occurred, the Company considered both qualitative and quantitative factors.

The quantitative analysis involves estimating the undiscounted future cash flows of the boutique long-lived assets and comparing such cash flows against the carrying value of the boutique’s assets. If the carrying value of the boutique’s assets is greater than the sum of the undiscounted future cash flows, an impairment charge is recognized for the difference between the carrying value of the boutique’s assets and its fair value. The fair value of the asset group is generally determined using discounted future cash flows or a market participant’s ability to generate economic benefits using the asset in its highest and best use, whichever is appropriate. The discounted future cash flows are determined based on such boutique’s historical experience, current sales trends, market conditions and other relevant factors deemed material, and discounted using a rate commensurate with the risk. The inputs used in the determination of discounted future cash flows are considered as Level 3 inputs in the fair value hierarchy, which require a significant degree of judgment and are based on the Company’s own assumptions.

Based on the results of such assessment, the Company recorded non-cash asset impairment charges of $7.5 million in the thirteen weeks ended May 2, 2020. Of the total amount, $6.8 million was related to the write-down of operating lease ROU assets for 107 underperforming boutiques and $0.7 million was related to the write-down of property and equipment for 41 underperforming boutiques. The Company did not record non-cash asset impairment charges in the thirteen weeks ended May 4, 2019.

The provision for income tax (benefit) expense (benefit) is based on the Company’s current estimate of the annual effective tax rate. The effective income tax expense (benefit) rates for the thirteen weeks ended August 3,May 2, 2020 and May 4, 2019 were 57.0% and August 4, 2018 were (22.0)% and 44.6%, respectively, and for the twenty-six weeks ended August 3, 2019 and August 4, 2018 were 1.2% and (6.4)%4.3%, respectively. The decreasechange in the Company’s effective income tax (benefit) expense rate duringin the thirteen weeks ended August 3, 2019May 2, 2020 versus the comparable prior year period was primarily due to a revisionthe $9.6 million of federal and state net operating loss that the Company may carry back to prior years under the CARES Act and is included in other assets in the Company’s estimate of its annualized taxableaccompanying unaudited consolidated balance sheet. In addition, the Company filed an income tax refund for $10.7 million with the IRS in April 2020 related to net operating loss for fiscal year 2019.2018 that may be carried back to prior years also under the CARES Act and is included in accounts receivable in the accompanying unaudited consolidated balance sheet. This refund is required to be used to repay any then outstanding borrowings under the Amended ABL Credit Agreement in accordance with that certain letter agreement entered into between the Company and the Amended ABL Credit Agreement lenders on May 1, 2020. See Note 7, Credit Facilities, for additional information. The Company continues to provide a full valuation allowance on its net deferred tax assets as of May 2, 2020. The effective income tax expense rate for the thirteen weeks ended May 4, 2019 included the impact of non-cash charge of $2.1 million associated with the valuation allowance provided on the Company’s net deferred tax assets.

As of August 3,May 2, 2020 and May 4, 2019, and August 4, 2018, the Company had $1.9$21.2 million and $11.7$1.5 million, respectively, of income tax receivable, respectively. As previously disclosed, the Company received an income tax refund of $8.5 million from the IRS on April 22, 2019.receivable.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

The Company’s credit facilities and outstanding borrowings consisted of the following:

Asset Based Revolving Credit Facility

On May 25, 2018, Francesca’s Holdings Corporation (the “Holdings”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of its subsidiaries as guarantors (together with Holdings, and the Borrowers, the “Loan Parties”), entered into an asset based revolving credit agreement (“ABL(the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto. The ABL Credit Agreement providesprovided for revolving commitmentsAggregate Revolving Commitments (as defined in the ABL Credit Agreement) of $50.0 million (including up to $10.0 million for letters of credit) and matureswas scheduled to mature on May 25, 2023. Availability

On August 13, 2019, concurrent with entering into the Term Loan Credit Agreement (described below), the Borrowers entered into the first amendment to ABL Credit Agreement (the “First Amendment to ABL Credit Agreement”), which amends the Company’s existing ABL Credit Agreement (the ABL Credit Agreement, as amended by the First Amendment to ABL Credit Agreement, the “Amended ABL Credit Agreement”). The Amended ABL Credit Agreement provided for Aggregate Revolving Commitments (as defined in the Amended ABL Credit Agreement) of $40.0 million and matures on the earlier of (a) May 23, 2023 and (b) the date that is 90 days prior to any scheduled maturity of the Term Loan. Although the maturity of borrowings under the Amended ABL Credit Agreement is currently beyond 12 months from the balance sheet, the Company classified the outstanding amount as current liability in the consolidated balance sheet as of May 2, 2020 due to uncertainties concerning the Company’s future liquidity and on-going covenant compliance under the Amended ABL Credit Agreement as a result of the impact of the COVID-19 pandemic on the Company’s business.

The inclusion of a going concern qualification in the report of the Company’s independent registered public accountant on its audited financial statements for the fiscal year ended February 1, 2020 and the Company’s non-payment of rent at its leased locations for the months of April, May and June 2020 resulted in a violation of certain covenants under its Amended ABL Credit Agreement and Term Loan Credit Agreement. On May 1, 2020, the Company entered into a letter agreement (the “First JPM Letter Agreement”) in connection with its Amended ABL Credit Agreement and a letter agreement (the “First Tiger Letter Agreement”) in connection with its Term Loan Credit Agreement, in each case, to obtain a waiver from its lenders of any default or event of default arising from its failure to (i) deliver annual audited consolidated financial statements for the fiscal year ended February 1, 2020 without a “going concern” or a like qualification or exception and (ii) pay rent on leased locations for the months of April, May, and June, 2020. The First JPM Letter Agreement and the First Tiger Letter Agreement contain certain conditions and covenants, including that, in the case of the First JPM Letter Agreement, the Company is required to use the entire $10.7 million income tax refund requested under the CARES Act to repay any then outstanding borrowings under the Amended ABL Credit Agreement and providing that no loans will be made under the ABL Credit Agreement unless the Company’s aggregate amount of cash and cash equivalents is subjectless than $3.0 million. If the Company is unable to a customary borrowing base comprised of: (a) a specified percentagemeet its financial covenants or if there is an event of default under either the Borrower’s credit card accounts (as defined in the ABL Credit Agreement); and (b) a specified percentage of the Borrower’s eligible inventory (as defined in the ABL Credit Agreement), and reduced by (c) certain customary reserves and adjustments (as defined in the ABL Credit Agreement). TheAmended ABL Credit Agreement also contains an optionor Term Loan Credit Agreement, the Company’s lenders could instruct the administrative agent under such credit facilities to increase, permittingexercise available remedies including, declaring the Borrowers, subject to certain requirements, to arrange with lenders for additional revolvingprincipal of and accrued interest on all outstanding indebtedness due and payable immediately and terminating all remaining commitments for up to an aggregate of $25.0 million. At August 3, 2019, the Company had $10.0 million of borrowings outstanding and $10.0 million of borrowing base availabilityobligations under the ABL Credit Agreement. Ofcredit facilities. Although the total borrowing base availability aslenders under the Company’s credit facilities may waive the defaults or forebear the exercise of August 3, 2019, $4.0 million is availableremedies, they are not obligated to be drawn without considerationdo so. Failure to obtain such a waiver would have a material adverse effect on the Company’s liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the Fixed Charge Coverage Ratio requirement (as defined below). Additionally, there were no letters of credit outstanding as of August 3, 2019.United States Bankruptcy Code in order to implement a restructuring plan.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

All obligationsAs of each Loan PartyMay 2, 2020, the Company had $3.1 million of combined borrowing base availability under the Amended ABL Credit Agreement are unconditionally guaranteed byand the Company and each ofTerm Loan Credit Agreement, subject to compliance with the Company’s existing and future direct and indirect wholly owned domestic subsidiaries, including the Borrowers. All obligationscovenants under the ABL Credit Agreement and the guarantees of those obligations (as well as banking services obligations and any interest rate hedging or other swap agreements), are secured by substantially all of the assets of the Company and each of the Company’s existing and future direct and indirect wholly owned domestic subsidiaries. Additionally,First JPM Letter Agreement, including that no loans will be made under the ABL Credit Agreement contains customary eventsunless the Company’s aggregate amount of defaultcash and requirescash equivalents is less than $3.0 million. For the Loan Parties to comply with certain financial covenants, including a restriction prohibitingthirteen weeks ended May 2, 2020 and May 4, 2019, the Loan Parties from declaring or making dividend payments, subject to certain exceptions. In addition, Holdings may declare or make dividend payments, subject toaverage effective interest rate for borrowings under the satisfaction of the Payment Conditions (as defined in the ABL Credit Agreement). TheAmended ABL Credit Agreement also requires that the auditor’s report on the Company’s audited financial statements for the previous fiscal year does not contain a “going concern” or like qualification or exceptionwere 2.75% and also requires the Loan Parties to maintain a minimum ratio of (i) EBITDAR (as defined in the ABL Credit Agreement) minus unfinanced capital expenditures (as defined in the ABL Credit Agreement)4.36%, to (ii) fixed charges of 1.00 to 1.00 during periods when availability (as defined in the ABL Credit Agreement) is less than $6.0 million (or has recently been less than $6.0 million as further specified in the ABL Credit Agreement) (such ratio, the “Fixed Charge Coverage Ratio”). As of August 3, 2019, our borrowing availability was more than $6.0 million, resulting in the elimination of the Fixed Charge Coverage Ratio requirement.respectively.

See Note 11,10, Subsequent Events, for additional information onregarding the Company’s entry in to the Second JPM Letter Agreement (as defined in Note 10, Subsequent Events).

Term Loan Credit Agreement

On August 13, 2019, the Loan Parties, entered into the Term Loan Credit Agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022. Although the maturity of the Term Loan Credit Agreement is beyond 12 months from the balance sheet, the Company classified the outstanding amount as current liability in the consolidated balance sheet as of May 2, 2020 due to uncertainties concerning the Company’s future liquidity and on-going covenant compliance as a result of the impact of the COVID-19 pandemic on the Company’s business.

On May 1, 2020, the Company entered into the First Amendment toJPM Letter Agreement, in connection with its Amended ABL Credit Agreement, (each as defined below) entered into on August 13, 2019.

On July 31, 2019,and the Board of Directors of the Company adopted a limited duration stockholder rights plan (the “Rights Plan”) with an expiration date of August 1, 2022 and an ownership trigger threshold of 15%, subject to certain exceptions.  In connection with the Rights Plan, the Board of Directors authorized and declared a dividend to the Company’s stockholders of record at the close of business on August 15, 2019 of one preferred share purchase right (a “Right”)First Tiger Letter Agreement. See “Asset Based Revolving Credit Facility” above for each outstanding share of the Company’s common stock.  additional information.

Upon certain triggering events, each Right will entitle the holder thereof to purchase fromAs of May 2, 2020, the Company one five-thousandth (subjecthad $3.1 million of combined borrowing base availability under the Amended ABL Credit Agreement and the Term Loan Credit Agreement, subject to adjustment) of one share of Series A Junior Participating Preferred Stock, $0.01 par value per share ofcompliance with the Company (the “Preferred Stock”) at an exercise price of $18.00 (the “Exercise Price”) per one five-thousandth of a share of Preferred Stock. In addition, if a person or group acquires beneficial ownership of 15% or more ofcovenants under the Term Loan Credit Agreement, ABL Credit Agreement, First Tiger Letter Agreement and First JPM Letter Agreement, including that no loans will be made under the ABL Credit Agreement unless the Company’s common stock without prior approvalaggregate amount of the Company’s Board of Directors, or in the case of a person or group that beneficially owned more than 15% of the Company’s common stock prior to the issuance of the press release announcing the adoption of the Rights Agreement on August 2, 2019, such person or group acquires beneficial ownership of any additional shares of the Company’s common stock without prior approval of the Company’s Board of Directors, each holder of a Right (other than the acquiring person or group whose Rights will become void) will have the right to purchase, upon payment of the Exercise Pricecash and in accordance with and subject to the adjustment under the terms of the Rights Plan, a number of shares of the Company’s common stock having a market value of twice the Exercise Price (as adjusted). The complete terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of August 1, 2019, between the Company and Computershare Trust Company, N.A., as rights agent.  

Stock-based compensation costcash equivalents is measured at the grant date fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period. The Company recognized stock-based compensation expense of less than $0.1 million in$3.0 million. For the thirteen weeks ended August 3, 2019 and a net reversal of previously accrued stock-based compensation of $0.2 millionMay 2, 2020, the average effective interest rate for borrowings under the Term Loan Credit Agreement was 10.0%.

See Note 10, Subsequent Events, for information regarding the Company’s entry in to the twenty-six weeks ended August 3, 2019. Stock-based compensation expense during the thirteen and twenty-six weeks ended August 4, 2018 was $0.3 million and $0.7 million, respectively.Second Tiger Letter Agreement (as defined in Note 10, Subsequent Events).

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Management Awards

For the twenty-six weeks ended August 3, 2019, the Company granted 0.3 million of restricted stock units (“RSU”), and, for the twenty-six weeks ended August 4, 2018, granted 0.1 million of restricted stock awards (“RSA”) to certain executives and key employees.  Of the total award in each period, 50% of the total units or shares awarded were in the form of performance-based (“PSU” or “PSA”) while the remaining 50% were in the form of time-based restricted shares. The number of PSUs or PSAs that may ultimately vest will be equal to 0% to 150% of the target units or shares awarded subject to the achievement of pre-established performance goals and the employee’s continued employment through the third anniversary of the grant date. The RSUs and RSAs vest in one installment on the third anniversary of the award date.

At the end of each reporting period, the Company assessed the probability of achieving the pre-established performance conditions related to the PSUs and PSAs and adjusted stock-based compensation expense based on the results of such assessment.

The Company leases boutiques, its distribution center and office space, and certain boutique and corporate office equipment under operating leases expiring in various years through the fiscal year ending 2029.2030. Certain of the leases provide that the Company may cancel the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location fall below an established level. Certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three to five years at the market rate at the time of renewal. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. See above under “Leases”

As discussed in Note 1, Summary of Significant Accounting Policies – Going Concern, the Company deferred its lease payments for additional information regardingApril, May and June 2020 on all of its leased locations in order to preserve its liquidity. The Company has been negotiating with its landlords to secure rent abatements and / or deferrals and, as of July 17, 2020, those discussions are substantially complete. These lease abatements and deferments will be accounted for as if no changes to the Company’s adoption of ASC 842, Leases on February 3, 2019 andlease contracts were made as allowed by the impact of such adoption.Staff Q&A issued by the FASB in April 2020.

The following table presents the components ofinformation regarding the Company’s operating lease costsleases for the periodperiods presented.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

As of August 3,May 2, 2020 and May 4, 2019, the weighted average remaining operating lease term was 6.0 years and the weighted average discount rate for operating leases was 6.0% and 5.6%., respectively. Cash paid for operating leases included in the measurement of lease liabilities, including interest, totaled $32.5$10.7 million and $16.1 million for the twenty-sixthirteen weeks ended August 3, 2019.May 2, 2020 and May 4, 2019, respectively.

As of August 3, 2019,May 2, 2020, the maturities of lease liabilities were as follows:

Operating lease liabilities include amounts due from landlords in tenant improvement allowances.

As of August 3, 2019,May 2, 2020, the minimum rental commitments for additional operating lease contracts that have not yet commenced was $4.8$5.4 million while its lease terms were within the range of 5 to 10 years.

On January 27, 2017, a purported collective action lawsuit entitled Meghan Magee, et al. v. Francesca’s Holdings Corp., et al. was filed in the United States District Court for the District of New Jersey, Camden Vicinage against the Company for alleged violations of federal and state wage and hour laws. After substitution of a named plaintiff, the lawsuit is now captioned, Danielle Prulello, et al. v. Francesca’s Holding Corp., et al. On November 6, 2018, the court conditionally certified the collective action. The Company believes that the allegations contained in the lawsuit are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any possible loss.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

The Company, from time to time, is subject to various claims and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business.  While the outcome of any such claim cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect on the Company’s business, results of operations or financial condition.

Term Loan Credit Agreement

COVID-19 Update

As previously disclosed, the COVID-19 pandemic resulted in the temporary closure of all of the Company’s 703 boutiques beginning on March 25, 2020. On August 13, 2019,April 30, 2020, the Loan Parties entered intoCompany started to reopen its boutiques in locations where local shutdown orders have been lifted. As of July 17, 2020, a Term Loan Credit Agreement (“Term Loan Credit Agreement”)total of 674 boutiques have reopened although the majority of them are operating at reduced capacity and hours in accordance with Tiger Finance, LLC,local regulations. This reflects the re-closure of 22 boutiques in California as administrative agentof the same date. In conjunction with such boutique reopenings, a significant number of furloughed corporate and boutique employees have been recalled and the lenders party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022.

The loan under the Term Loan Credit Agreement (the “Term Loan”) bears interest at a rate equal to LIBORbase salary reductions in place for the interest period relevantCompany’s senior leadership team were lifted. The Company plans to continue to reopen boutiques and recall furloughed employees as local mandates are lifted. All boutiques will strictly adhere to then current CDC recommendations and local regulations to protect the Term Loan, subjecthealth and safety of its sales associates and customers and all reopened boutiques have adopted a mandatory mask requirement for associates and customers, irrespective of CDC and local authority guidelines. Additionally, as of July 17, 2020, there continues to a 0.00% floor, plus 8.00%, provided that the interest rate on the Term Loan will not be less than 10.00%. The Term Loan Credit Agreement also requires the Borrowers to pay a closing fee equal to 2.5% of the amount of the Term Loan and an annual agency fee of $50,000. The Term Loan Credit Agreement is subject to a combined borrowing base together withoverall disruption in the Company’s existing asset based revolving credit facility. As of August 31, 2019, the combined borrowing base availability was $16.3 million.

The proceeds from the Term Loan were usedsupply chain and operations as its vendors return to pay the $10.0 million outstanding under the ABL Credit Agreement.

First Amendment to ABL Credit Agreement

On August 13, 2019, concurrent with entering into the Term Loan Credit Agreement, the Companynormal operations and the other Loan Parties, entered intoCompany’s ecommerce and distribution facility are operating at reduced capacity due to social distancing measures that have been put in place. As a First Amendmentresult, the Company’s revenues, results of operations and cash flows continue to ABL Credit Agreement (the “First Amendmentbe materially adversely impacted, which raises substantial doubt about its ability to ABL Credit Agreement”) with JPMorgan Chase, N.A.,continue as administrative agent, and the lenders party thereto, which amends the existing ABL Credit Agreement.

The First Amendment to ABL Credit Agreement, among other things, (i) reduces the Aggregate Revolving Commitment (as defined in the ABL Credit Agreement) from $50.0 million to $40.0 million; (ii) allows the Loan Parties to enter into the Term Loan Credit Agreement; (iii) changes the maturity date under the ABL Credit Agreement from May 23, 2023 to the earlier of (a) May 23, 2023 and (b) the date that is 90 days prior to any scheduled maturity of the Term Loan; (iv) removes the requirement to maintain a minimum Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) previously contained in the ABL Credit Agreement; and (v) limits the amount of capital expenditures that the Loan Parties may make through the fiscal year ending in 2021, provided that the Loan Parties may make unlimited amounts of capital expenditures if certain payment conditions are met. The reduced aggregate revolving commitment of $40.0 million exceeds the current borrowing base under the ABL Credit Agreement by a significant amount and such reduction therefore does not result in any reduction in available borrowings under the ABL Credit Agreement.going concern.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Management continues to take aggressive and prudent actions to drive sales and monetize existing inventory, reduce expenses and manage cash flows, including making limited payments of accounts payables, deferred rent payments for its leased locations for the months of April, May and June 2020, and limiting inventory payments to preserve cash on hand. The Company made payments on its past due payables making its merchandise and non-merchandise vendor accounts payable substantially current as of July 17, 2020 and resumed payment of its leased obligations for all its locations for July 2020. Additionally, subsequent to May 2, 2020, the Company repaid $2.0 million of its outstanding borrowings under the Amended ABL Credit Agreement bringing the combined outstanding borrowings to $12.1 million, net of $0.9 million debt issuance costs, and $0.5 million in combined borrowing base availability under its Credit Facilities as of July 17, 2020. The Company also expects to receive an income tax refund of $10.7 million related to certain provisions under the CARES Act. This refund is required to be used to repay any then outstanding borrowings under the Amended ABL Credit Agreement in accordance with the First JPM Letter Agreement entered into between the Company and the Amended ABL Credit Agreement lenders. See Note 1, Summary of Significant Accounting Policies – Going Concern, Note 6, Income Taxes, and Note 7, Credit Facilities, for additional information.

There is significant uncertainty around the disruptions related to the COVID-19 pandemic and its impact on the global economy. While the Company’s results of operations have been significantly impacted and it anticipates future results will continue to be adversely impacted, the full extent to which the COVID-19 pandemic impacts the Company’s future results will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including new information which may emerge concerning the severity of the COVID-19 pandemic in the United States, actions taken to contain it or treat its impact, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume.

Credit Facilities Letter Agreements

As a result of the delayed filing of this Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, on June 25, 2020, the Borrowers entered into a letter agreement (the “Second JPM Letter Agreement”) in connection with its Amended ABL Credit Agreement to amend the Amended ABL Credit Agreement to grant the Borrowers a 45 day extension to deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020 and waive any Default (as defined in the Amended ABL Credit Agreement) arising from the failure of the Borrowers to timely deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020. Additionally, the Second JPM Letter Agreement also amends the Amended ABL Credit Agreement to lower the minimum amount of Liquidity (as defined in the Amended ABL Credit Agreement) that triggers a Dominion Period (as defined in the Amended ABL Credit Agreement) from $15.0 million to $10.0 million and remove the requirement that unrestricted cash and cash equivalents not exceed 80% of total Liquidity, in each case, for a period of 60 days after the date of the Second JPM Letter Agreement.

Additionally, in connection with the delayed filing of this Form 10-Q, on June 25, 2020, the Borrowers entered into a letter agreement in connection with its Term Loan Credit Agreement (the “Second Tiger Letter Agreement”) with similar terms to the Second JPM Letter Agreement discussed above.

Lease Negotiations

As of July 17, 2020, the Company has substantially completed negotiations with all of its landlords to abate or defer lease payments for the months of April, May and June 2020. While deferred payments have a minimal impact on GAAP straight-line lease expense, they are expected to have a positive impact on the Company’s cash flow in fiscal year 2020.

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

FORWARD-LOOKING STATEMENTS

This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”, “anticipate”, “assume”, “believe”, “can have”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “likely”, “may”, “objective”, “plan”, “potential”, “positioned”, “predict”, “should”, “target”, “will”, “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. These risks and uncertainties include, but are not limited to, the following: our business is subject to risks arising from the risk thatCOVID-19 pandemic, including the Company may notrelated impact on our liquidity and our ability to begin making contractual rent payments as required under the terms of the agreements governing our boutique and distribution facility leases, changes in commercial and consumer spending and economic conditions generally, the duration of government-mandated and voluntary shutdowns and the speed with which our boutiques can safely be ablereopened and our ecommerce and distribution facilities can return to successfully execute its turnaround plan,normal capacity and the level of customer demand following reopening; our ability to continue as a going concern; our ability to satisfy covenant requirements under our Amended ABL Credit Agreement and Term Loan Credit Agreement and to make payments of principal and interest as they come due; the risk that we may not be able to successfully integrateexecute our Interim Chief Executive Officer and attract and integrate a new Chief Executive Officer;turnaround plan; the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences or changes in consumer environment, including changing expectations of service and experience in boutiques and online, and evolve our business model; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our ecommerce website; our ability to successfully open, close, refresh, and operate new boutiques each year; our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth; risks related to our ability to comply with the continued listing standards of the Nasdaq Global Select Market; and the impact of potential tariff increases or new tariffs. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February 2, 20191, 2020 and filed with the Securities and Exchange Commission (“SEC”) on May 3, 20191, 2020 (“Fiscal Year 20182019 10-K”) and any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings we file with the SEC, including under “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, as well as our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our Fiscal Year 20182019 10-K.

We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly after the date of this report whether as a result of new information, future developments or otherwise.

Overview

Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” “us” and “francesca’s^®“francesca’s®” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.

francesca’s^® is a specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience. The merchandise assortment we offer is a diverse and balanced mix of apparel, jewelry, accessories and gifts. We aim to offer a differentiated shopping experience and quality, on-trend merchandise at a compelling value, across a wide variety of geographic markets and shopping venues. As of August 3, 2019,May 2, 2020, francesca’s^® operated 718703 boutiques in 47 states throughout the United States and the District of Columbia and also served its customers through www.francescas.com, our ecommerce website. The information contained on our ecommerce website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our ecommerce website to be part of this Quarterly Report on Form 10-Q.

Recent Developments

As previously disclosed, the COVID-19 pandemic resulted in the temporary closure of all of our 703 boutiques beginning on March 25, 2020. On April 30, 2020, we started to reopen our boutiques in locations where local shutdown orders have been lifted. As of July 17, 2020, a total of 674 of our boutiques have reopened although the majority of them are operating at reduced capacity and hours in accordance with local regulations. This reflects the re-closure of 22 boutiques in California as of the same date. In conjunction with such boutique reopenings, a significant number of furloughed corporate and boutique employees have been recalled and the base salary reductions in place for our senior leadership team were lifted. We plan to continue to reopen boutiques and recall furloughed employees as local mandates are lifted. All boutiques will strictly adhere to then current CDC recommendations and local regulations to protect the health and safety of its sales associates and customers and all our boutiques have adopted a mandatory mask requirement for associates and customers, irrespective of CDC and local authority guidelines. As of July 17, 2020, there continues to be an overall disruption in our supply chain and operations as our vendors return to normal operations and our ecommerce and distribution facility are operating at reduced capacity due to social distancing measures that have been put in place. As a result, our revenues, results of operations and cash flows continue to be materially adversely impacted, which raises substantial doubt about our ability to continue as a going concern. We have, from time to time, received inquiries from potential investors proposing to provide additional capital to us. As part of our efforts to manage our liquidity and capital resources, we may engage in discussions with potential investors, including our existing investors, about obtaining additional capital, which may include, without limitation, a public offering or private placement of our common stock, subscription rights, warrants or other securities. We may decide not to seek additional capital, and there are no assurances that we will be successful in obtaining additional capital in the event we engage in discussions with potential investors.

We continue to take aggressive and prudent actions to drive sales and monetize existing inventory, reduce expenses and manage cash flows, including making limited payments of accounts payables, deferred rent payments for our leased locations for the months of April, May and June 2020 and limiting new inventory payments to preserve cash on hand. We made payments on our past due payables making our merchandise and non-merchandise vendor accounts payable substantially current as of July 17, 2020 and we resumed payments on our lease obligations for all of our locations for July 2020. Additionally, subsequent to May 2, 2020, we repaid $2.0 million of our outstanding borrowings under the Amended ABL Credit Agreement (as defined below) bringing the combined outstanding borrowings to $12.1 million, net of $0.9 million debt issuance costs, and $0.5 million in combined borrowing base availability under our Credit Facilities (as defined below) as of July 17, 2020. We also expect to receive an income tax refund of $10.7 million related to the provision under the Corona Aid, Relief and Economic Security Act (“CARES Act”). This refund is required to be used to repay any then outstanding borrowings under the Amended ABL Credit Agreement in accordance with the First JPM Letter Agreement (as defined below) entered into between the Company and the Amended ABL Credit Agreement lenders. See “Liquidity and Capital Resources - Credit Facilities” section below for additional information. As of July 17, 2020, our cash and cash equivalents totaled $18.7 million.

As of July 17, 2020, we substantially completed negotiations with all of our landlords to abate or defer lease payments for the months of April, May and June 2020. While deferred payments have a minimal impact on GAAP straight-line lease expense, they are expected to have a positive impact on our cash flow in fiscal year 2020.

The COVID-19 pandemic has also resulted in lower than expected sales and profitability for our boutiques as a result of the temporary boutique closures which indicates that our long-lived assets may be impaired. As a result of our asset impairment assessments, we recorded $7.5 million of non-cash asset impairment charges in the quarter ended May 2, 2020. Of the total amount, $6.8 million was related to the write-down of operating lease ROU assets for 107 underperforming boutiques and $0.7 million was related to the write-down of property and equipment for 41 underperforming boutiques.

While our results of operations have been significantly impacted and we anticipate our future results will continue to be adversely impacted, the full extent to which the COVID-19 pandemic impacts our future results will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including new information which may emerge concerning the severity of the COVID-19 pandemic in the United States, actions taken to contain it or treat its impact, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume.

On May 1, 2020, we entered into a letter agreement (the “First JPM Letter Agreement”) in connection with our Amended ABL Credit Agreement and a letter agreement (the “First Tiger Letter Agreement”) in connection with our Term Loan Credit Agreement (as defined below), in each case, to obtain a waiver from our lenders of any default or event of default arising from our failure to (i) deliver annual audited consolidated financial statements for the fiscal year ended February 1, 2020 without a “going concern” or a like qualification or exception and (ii) pay rent on leased locations for the months of April, May and June, 2020. The First JPM Letter Agreement and the First Tiger Letter Agreement contain certain conditions and covenants, including that, in the case of the First JPM Letter Agreement, we are required to use the entire $10.7 million income tax refund requested under the CARES Act to repay any then outstanding borrowings under the Amended ABL Credit Agreement and providing that no loans will be made under the ABL Credit Agreement unless our aggregate amount of cash and cash equivalents is less than $3.0 million.

In addition, as a result of the delayed filing of this Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, on June 25, 2020, the Borrowers (as defined below) entered into a letter agreement (the “Second JPM Letter Agreement”) in connection with its Amended ABL Credit Agreement to amend the Amended ABL Credit Agreement to grant the Borrowers a 45 day extension to deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020 and waive any Default (as defined in the Amended ABL Credit Agreement) arising from the failure of the Borrowers to timely deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020. Additionally, the Second JPM Letter Agreement also amends the Amended ABL Credit Agreement to lower the minimum amount of Liquidity (as defined in the Amended ABL Credit Agreement) that triggers a Dominion Period (as defined in the Amended ABL Credit Agreement) from $15.0 million to $10.0 million and remove the requirement that unrestricted cash and cash equivalents not exceed 80% of total Liquidity, in each case, for a period of 60 days after the date of the Second JPM Letter Agreement. Additionally, in connection with the delayed filing of this Form 10-Q, on June 25, 2020, the Borrowers entered into a letter agreement in connection with its Term Loan Credit Agreement (the “Second Tiger Letter Agreement”) with similar terms to the Second JPM Letter Agreement discussed in this paragraph.

If we are unable to meet our financial covenants or if we have an event of default under either agreement, our lenders could instruct the administrative agent under such credit facilities to exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness due and payable immediately and terminating all remaining commitments and obligations under the Amended ABL Credit Agreement and Term Loan Credit Agreement. Although the lenders under our credit facilities may waive the defaults or forebear the exercise of remedies, they are not obligated to do so. Failure to obtain such a waiver would have a material adverse effect on our liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan.

During the thirteen weeks ended August 3, 2019,May 2, 2020, our net sales decreased 6%50% to $106.0$43.8 million from $113.0$87.1 million, incomeloss from operations increased by $0.5$25.6 million from $0.8$9.7 million to $1.4$35.3 million, and net incomeloss increased $1.4$5.2 million from $0.5$10.1 million, or $0.16 earnings$3.50 loss per diluted share, to $1.8a net loss of $15.3 million, or $0.61 earnings$5.25 loss per diluted share, over the comparable prior year period.

During the twenty-six weeks ended August 3, 2019, our net sales decreased 10% to $193.1 million from $213.4 million, loss from operations increased by $4.6 million from $3.7 million to $8.3 million, and net loss increased $4.9 million from $3.4 million, or $1.18 loss per diluted share, to $8.3 million, or $2.87 loss per diluted share, over the comparable prior year period.

In February 2019, we executed a workforce reduction at both our corporate office and field management as part of our cost reduction initiative associated with our turnaround plan that commenced in January 2019. As a result, we expensed $0.9 million of severance benefits during the twenty-six weeks ended August 3, 2019. These severance benefits are included in selling, general and administrative expenses in the unaudited consolidated statements of operations.

On July 1, 2019, we effected a 12-to-1 stock split (the “Reverse Stock Split”), reducing the number of shares of common stock outstanding on that date from 35.4 million to 3.1 million shares. Additionally, the number of shares of our common stock subject to outstanding stock options, restricted stock awards and restricted stock units, the exercise price of all our outstanding stock options, and the number of shares reserved for future issuance pursuant to our equity compensation plans were adjusted proportionately in connection with the Reverse Stock Split. The number of authorized shares of common stock under the Company’s Amended and Restated Certificate of Incorporation and the par value per share of its common stock were unchanged. All historical share and per share amounts presented herein have been adjusted retrospectively to reflect these changes. The Reverse Stock Split was effected in order to increase the market price per share of our common stock to ensure the Company regained full compliance with The Nasdaq Stock Market LLC’s (“Nasdaq”) minimum bid price requirement and maintained its listing on Nasdaq. Nasdaq informed the Company on July 17, 2019 that it had regained full compliance with Nasdaq’s listing requirements.

On July 31, 2019, our Board of Directors adopted a limited durationstockholder rights plan (the “Rights Plan”) with an expiration date of August 1, 2022 and an ownership trigger threshold of 15%, subject to certain exceptions.  In connection with the Rights Plan, the Board of Directors authorized and declared a dividend to the Company’s stockholders of record at the close of business on August 15, 2019 of one preferred share purchase right (a “Right”) for each outstanding share of our common stock.  Upon certain triggering events, each Right will entitle the holder to purchase from us one five-thousandth (subject to adjustment) of one share of Series A Junior Participating Preferred Stock, $0.01 par value per share (the “Preferred Stock”) at an exercise price of $18.00 (the “Exercise Price”) per one five-thousandth of a share of Preferred Stock. In addition, if a person or group acquires beneficial ownership of 15% or more of our common stock without prior approval of our Board of Directors, or in the case of a person or group that beneficially owned more than 15% of our common stock prior to the issuance of the press release announcing the adoption of the Rights Agreement on August 2, 2019, such person or group acquires beneficial ownership of any additional shares of our common stock without prior approval of our Board of Directors, each holder of a Right (other than the acquiring person or group whose Rights will become void) will have the right to purchase, upon payment of the Exercise Price and in accordance with and subject to adjustment under the terms of the Rights Plan, a number of shares of our common stock having a market value of twice the Exercise Price (as adjusted). The complete terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of August 1, 2019, betweenFrancesca’s Holdings Corporationand Computershare Trust Company, N.A., as rights agent, which is included as Exhibit 4.1 to this Quarterly Report on Form 10-Q.  

On August 13, 2019, Francesca’s Holdings Corporation (the “Company”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of its subsidiaries as guarantors (together with the Company and the Borrowers, the “Loan Parties”), entered into a Term Loan Credit Agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022. Concurrent with entering into the Term Loan Credit Agreement, the Company and the other Loan Parties, entered into a First Amendment to ABL Credit Agreement (the “First Amendment to ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, which amends the Company’s existing asset based revolving credit agreement, dated as of May 25, 2018, by and among the Company, the other Loan Parties, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “ABL Credit Agreement” and, as amended by the First Amendment to ABL Credit Agreement, the “Amended ABL Credit Agreement”). See “Asset Based Revolving Credit Facility” and “Term Loan Credit Agreement” under “Liquidity and Capital Resources” below for additional information.

On August 13, 2019, we announced the completion of our previously announced strategic alternatives review process as we intend to focus on the execution of our turnaround plan.

Our boutique count decreased to 718 boutiques as of August 3, 2019 from 742 boutiques as of August 4, 2018. As previously disclosed, our current priority is executing our turnaround plan which is aimed at improving comparable sales and profitability. As such, we plan to close at least 10 existing boutiques during the remainder of the fiscal year as we continue to optimize our existing boutique fleet. We plan to resume new boutique openings and remodels in the future, as appropriate, when the desired results are achieved under our turnaround plan.

Results of Operations

The following represents operating data for the thirteen and twenty-six weeks ended August 3, 2019May 2, 2020 and AugustMay 4, 2018.2019.

Boutique Count

The following table summarizes the number of boutiques open at the beginning and end of the periods indicated.

Thirteen Weeks Ended August 3, 2019May 2, 2020 Compared to Thirteen Weeks Ended AugustMay 4, 20182019

Net Sales

Net sales decreased 6%50% to $106.0$43.8 million in the thirteen weeks ended August 3, 2019May 2, 2020 from $113.0$87.1 million in the thirteen weeks ended AugustMay 4, 2018.2019. This decrease was primarily due to a 5% decrease in comparable sales following a 13% decrease inmandated closures of all of our boutiques beginning on March 25, 2020 related to the same periodCOVID-19 pandemic and continuing through substantially all of the prior year. Thequarter. This decrease in comparable sales was the result of lower average unit retail prices associated with deeper markdowns. This was partially offset by higher boutique conversion rates and higher average units per transaction. Therestrong performance in ecommerce as all of our efforts subsequent to March 25, 2020 were 704 comparablefocused on driving ecommerce sales while our boutiques and 14 non-comparable boutiques open at August 3, 2019 compared to 663 and 79, respectively, at August 4, 2018.were temporarily closed.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs decreased 5%18% to $65.5$46.6 million in the thirteen weeks ended August 3, 2019May 2, 2020 from $68.9$56.8 million in the thirteen weeks ended AugustMay 4, 2018.2019. Cost of merchandise and shipping expenses decreased by $2.3$8.3 million primarily due to decreased sales volume duringgiven the quarter.temporary boutique closures related to the COVID-19 pandemic. Occupancy costs decreased by $1.1$1.9 million primarily due to lower depreciation associated with boutiques impaired in fiscal year 2018 and lower demolition costslease expenses associated with boutique remodels.closures since the comparable prior year period as well as prior period impairment charges resulting in decreased remaining book value of boutique long-lived assets. Occupancy costs include the full lease expense for all boutiques for the thirteen weeks ended May 2, 2020, regardless of any rent deferral.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 61.8%106.6% in the thirteen weeks ended August 3, 2019May 2, 2020 from 61.0%65.2% in the thirteen weeks ended AugustMay 4, 2018, an unfavorable variance of 80 basis points.2019. This change was due to lower merchandise margins and deleveraging ofdeleverage in occupancy costs as a result of lower sales. The decrease inAdditionally, merchandise margins wasmargin decreased due to deeperincreased promotions and markdowns but was partially offset by lower marked-out-of-stock charges.as well as higher inventory reserve due to the COVID-19 pandemic.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 10%38% to $39.1$25.0 million in the thirteen weeks ended August 3, 2019May 2, 2020 from $43.3$40.0 million in the thirteen weeks ended AugustMay 4, 2018.2019. This decrease was primarily due to a $2.5an $11.5 million decrease in boutique payroll and supplies associated with our cost reduction initiatives under our turnaround plan. Additionally, corporate payroll stock-based compensation and other payroll related expenses decreased $0.7 million primarily due to lower headcountcosts as a result of the workforce reductiontemporary furlough of substantially all of our employees, a $1.7 million decrease in February 2019, marketing expenses decreased by $0.4professional fees as the prior year included fees associated with the review of strategic and financial alternatives and the implementation of the turnaround plan, and a $0.9 million decrease in boutique and asset write-off charges related to remodels decreased by $0.3 million.corporate bonus expenses.

As a percentage of net sales, selling, general and administrative expense decreasedincreased to 36.9%57.0% in the thirteen weeks ended August 3, 2019May 2, 2020 as compared to 38.3%45.9% in the thirteen weeks ended AugustMay 4, 20182019 due to leveragingdeleveraging of expenses.expenses as a result of the lower sales.

Impairment Charges

We recorded non-cash asset impairment charges of $7.5 million in the thirteen weeks ended May 2, 2020. Of the total amount, $6.8 million were related to the write-down of operating lease ROU assets for 107 underperforming boutiques and $0.7 million were related to the write-down of property and equipment for 41 underperforming boutiques. We did not record non-cash asset impairment charges in the thirteen weeks ended May 4, 2019. See “Overview – Recent Development” section above for additional information.

Income Tax (Benefit) Expense

Income tax benefit was $(0.3)$20.3 million in the thirteen weeks ended August 3, 2019May 2, 2020 compared to an income tax expense of $0.4 million in the thirteen weeks ended August 4, 2018 while thecomparable prior year quarter. The effective income tax (benefit) expense rate was (22.0)% compared to 44.6% over the same period, respectively. The income tax benefit recognized in the thirteen weeks ended August 3, 2019May 2, 2020 was based on our revised estimate of the Company’s annualized taxable income for fiscal year 2019.

Twenty-Six Weeks August 3, 2019 Compared57.0% compared to Twenty-Six Weeks Ended August 4, 2018

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Net Sales

Net sales decreased 10% to $193.1 million4.3% in the twenty-sixthirteen weeks ended August 3, 2019 from $213.4 millionMay 4, 2019.  The income tax benefit in the twenty-six weeks ended August 4, 2018. This decreasecurrent year quarter was primarily due to a 9% decreasethe $9.6 million of federal and state net operating loss that we may carry back to prior years under the CARES Act. In addition, the Company filed an income tax refund for $10.7 million with the IRS in comparable sales following a 15% decrease in the same period of the prior year. The decrease in comparable sales was primarily due a decline in traffic as well as lower average unit retail prices as a result of deeper markdowns. There were 704 comparable boutiques and 14 non-comparable boutiques open at August 3, 2019 comparedApril 2020 related to 663 and 79, respectively, at August 4, 2018.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs decreased 7% to $122.3 million in the twenty-six weeks ended August 3, 2019 from $131.0 million in the twenty-six weeks ended August 4, 2018. Cost of merchandise and shipping expenses decreased by $7.2 million primarily due to decreased sales volume. Occupancy costs decreased by $1.5 million due to lower depreciation associated with boutiques impaired innet operating loss for fiscal year 2018 and lower demolition coststhat we may carry back to prior years also under the CARES Act. The provision for the thirteen weeks ended May 4, 2019 included a non-cash charge of $2.1 million associated with boutique remodels.

Asthe valuation allowance provided on our net deferred tax assets. We continue to provide a percentagefull valuation allowance on our net deferred tax asset as of net sales, cost of goods sold and occupancy costs increased to 63.3% in the twenty-six weeks ended August 3, 2019 from 61.4% in the twenty-six weeks ended August 4, 2018, an unfavorable variance of 200 basis points. This change was due to deleveraging of occupancy costs as a result of lower sales. Merchandise margins slightly decreased as the increase in markdowns were partially offset by lower marked-out-stock charges.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 8% to $79.1 million in the twenty-six weeks ended August 3, 2019 from $86.2 million in the twenty-six weeks ended August 4, 2018. This decrease was primarily due to a $5.7 million decrease in boutique payroll and supplies associated with our cost reduction initiatives under our turnaround plan. Additionally, stock-based compensation decreased $1.0 million primarily due to certain employee departures, marketing expenses decreased $0.7 million and freight expenses decreased $0.5 million as a result of lower sales volume. These decreases were partially offset by $2.2 million of consulting expenses associated with our review of strategic and financial alternatives and the implementation of our turnaround plan as well as higher audit and legal fees.

As a percentage of net sales, selling, general and administrative expense increased to 41.0% in the twenty-six weeks ended August 3, 2019 as compared to 40.4% in the twenty-six weeks ended August 4, 2018 due to deleveraging of expenses as a result of lower sales.

Income Tax Expense (Benefit)

Income tax expense was $0.1 million in the twenty-six weeks ended August 3, 2019 compared to an income tax benefit of $0.2 million in the twenty-six weeks ended August 4, 2018 while the effective income tax expense (benefit) rate was 1.2% compared to (6.4)% over the same period, respectively. The income tax expense in the current year-to-date period was related to state taxes while the prior year income tax benefit included a provision for net operating loss carryover partially offset by additional income tax expense related to the vesting of certain stock-based awards.May 2, 2020.

Sales by Merchandise Department