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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended August 1, 2020

Commission file number 001-36501

THE MICHAELS COMPANIES, INC.

A Delaware Corporation

IRS Employer Identification No. 37-1737959

8000 Bent Branch Drive

Irving, Texas 75063

(972) 409-1300

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

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, $0.06775 par value

MIK

Nasdaq Stock Exchange

The Michaels Companies, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

The Michaels Companies, Inc. has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

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

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

As of August 25, 2020, 147,437,563 shares of The Michaels Companies, Inc.’s common stock were outstanding.

Table of Contents

THE MICHAELS COMPANIES, INC.

TABLE OF CONTENTS

Part I—FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

3

Consolidated Statements of Comprehensive (Loss) Income for the 13 and 26 weeks ended August 1, 2020 and August 3, 2019 (unaudited)

3

Consolidated Balance Sheets as of August 1, 2020, February 1, 2020 and August 3, 2019 (unaudited)

4

Consolidated Statements of Cash Flows for the 26 weeks ended August 1, 2020 and August 3, 2019 (unaudited)

5

Consolidated Statements of Stockholders’ Deficit for the 13 and 26 weeks ended August 1, 2020 and August 3, 2019 (unaudited)

6

Notes to Consolidated Financial Statements (unaudited)

7

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

Part II—OTHER INFORMATION

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6.

Exhibits

30

Signatures

31

2

Table of Contents

Part IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

2020

2019

2020

2019

Net sales

$

1,148,170

$

1,033,689

$

1,948,058

$

2,127,408

Cost of sales and occupancy expense

 

805,658

 

666,703

 

1,383,724

 

1,342,783

Gross profit

 

342,512

366,986

 

564,334

 

784,625

Selling, general and administrative

 

289,053

 

290,074

 

570,394

 

610,670

Restructure charges

3,869

6,956

Store pre-opening costs

 

186

 

1,743

 

1,345

 

2,969

Operating income (loss)

 

53,273

 

71,300

 

(7,405)

 

164,030

Interest expense

 

36,740

 

40,134

 

74,863

 

77,493

Losses on early extinguishments of debt and refinancing costs

1,155

1,155

Other expense (income), net

 

1,365

 

(252)

 

(1,558)

 

2,853

Income (loss) before income taxes

 

15,168

 

30,263

 

(80,710)

 

82,529

Income taxes

 

22,925

 

5,716

 

(9,448)

 

20,291

Net (loss) income

$

(7,757)

$

24,547

$

(71,262)

$

62,238

Other comprehensive income (loss), net of tax:

 

 

 

 

Foreign currency and cash flow hedges

8,960

(4,762)

(5,376)

(9,588)

Comprehensive income (loss)

$

1,203

$

19,785

$

(76,638)

$

52,650

(Loss) earnings per common share:

Basic

$

(0.05)

$

0.16

$

(0.48)

$

0.39

Diluted

$

(0.05)

$

0.16

$

(0.48)

$

0.39

Weighted-average common shares outstanding:

Basic

147,296

157,272

147,080

157,511

Diluted

147,296

157,273

147,080

157,535

See accompanying notes to consolidated financial statements.

3

Table of Contents

THE MICHAELS COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)

August 1,

February 1,

August 3,

ASSETS

2020

2020

2019

Current Assets:

Cash and equivalents

$

651,118

$

409,964

$

130,981

Merchandise inventories

 

1,021,691

 

1,097,109

 

1,256,465

Prepaid expenses and other

 

60,721

 

62,287

 

69,672

Accounts receivable, net

31,043

30,442

23,941

Total current assets

 

1,764,573

 

1,599,802

 

1,481,059

Property and equipment, at cost

 

1,738,883

 

1,706,520

 

1,703,912

Less accumulated depreciation and amortization

(1,326,620)

(1,276,088)

(1,266,421)

Property and equipment, net

412,263

430,432

437,491

Operating lease assets

1,552,626

1,610,013

1,611,029

Goodwill

 

94,290

 

94,290

 

112,069

Other intangible assets, net

59,839

66,417

14,082

Deferred income taxes

 

22,435

 

18,201

 

28,142

Other assets

 

17,322

 

18,940

 

23,277

Total assets

$

3,923,348

$

3,838,095

$

3,707,149

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:

Accounts payable

$

627,619

$

476,298

$

533,473

Accrued liabilities and other

 

368,075

 

347,136

 

321,847

Current portion of operating lease liabilities

329,465

306,796

298,993

Current portion of long-term debt

 

24,900

 

24,900

 

24,900

Income taxes payable

 

29,141

 

41,236

 

11,974

Total current liabilities

 

1,379,200

 

1,196,366

 

1,191,187

Long-term debt

 

2,633,643

 

2,644,460

 

2,655,391

Long-term operating lease liabilities

1,317,378

1,357,821

1,377,039

Other liabilities

 

103,010

 

85,912

 

71,102

Total liabilities

 

5,433,231

 

5,284,559

 

5,294,719

Commitments and contingencies

Stockholders’ Deficit:

Common stock, $0.06775 par value, 350,000 shares authorized; 147,437 shares issued and outstanding at August 1, 2020; 146,803 shares issued and outstanding at February 1, 2020; and 155,199 shares issued and outstanding at August 3, 2019

 

9,897

9,852

 

10,419

Additional paid-in-capital

 

18,046

4,872

 

Accumulated deficit

 

(1,509,619)

(1,438,357)

 

(1,573,843)

Accumulated other comprehensive loss

 

(28,207)

(22,831)

 

(24,146)

Total stockholders’ deficit

 

(1,509,883)

 

(1,446,464)

 

(1,587,570)

Total liabilities and stockholders’ deficit

$

3,923,348

$

3,838,095

$

3,707,149

See accompanying notes to consolidated financial statements.

4

Table of Contents

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

26 Weeks Ended

August 1,

August 3,

    

2020

2019

Cash flows from operating activities:

Net (loss) income

$

(71,262)

$

62,238

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

Non-cash operating lease expense

161,542

162,861

Depreciation and amortization

 

64,090

 

62,730

Share-based compensation

 

13,188

 

12,006

Debt issuance costs amortization

 

1,882

 

2,539

Loss on write-off of investment

5,036

Accretion of long-term debt, net

 

131

 

(262)

Restructure charges

6,956

Impairment of intangible assets

3,500

Deferred income taxes

(2,979)

39

Gain on sale of building

(101)

Losses on early extinguishments of debt and refinancing costs

1,155

Changes in assets and liabilities:

Merchandise inventories

 

76,027

 

(148,311)

Prepaid expenses and other

 

1,566

 

(10,782)

Accounts receivable

8,384

37,674

Other assets

1,232

(9,391)

Operating lease liabilities

(121,203)

(140,287)

Accounts payable

 

150,391

 

44,537

Accrued interest

 

7,367

 

(1,045)

Accrued liabilities and other

 

12,406

 

(54,843)

Income taxes

 

(19,953)

 

(34,327)

Other liabilities

 

13,541

 

(631)

Net cash provided by (used in) operating activities

 

299,749

 

(2,108)

Cash flows from investing activities:

Additions to property and equipment

 

(46,449)

 

(57,533)

Proceeds from sale of building

875

Net cash used in investing activities

 

(45,574)

 

(57,533)

Cash flows from financing activities:

Common stock repurchased

(571)

(27,289)

Payments on term loan credit facility

 

(12,450)

 

(12,450)

Payment of 2020 senior subordinated notes

(510,000)

Issuance of 2027 senior notes

500,000

Borrowings on asset-based revolving credit facility

 

600,000

 

Payments on asset-based revolving credit facility

 

(600,000)

 

Payment of debt refinancing costs

 

 

(6,032)

Proceeds from stock options exercised

506

Net cash used in financing activities

(13,021)

(55,265)

 

 

Net change in cash and equivalents

 

241,154

 

(114,906)

Cash and equivalents at beginning of period

409,964

245,887

Cash and equivalents at end of period

$

651,118

$

130,981

Supplemental cash flow information:

Cash paid for interest

$

66,196

$

76,991

Cash paid for taxes

$

13,612

$

54,676

See accompanying notes to consolidated financial statements.

5

Table of Contents

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

(Unaudited)

13 Weeks Ended

Accumulated

Number of

Additional

Other

Common

Common

Paid-in

Accumulated

Comprehensive

Shares

  

Stock

  

Capital

  

Deficit

  

Loss

  

Total

Balance at May 2, 2020

  

147,343

$

9,890

$

13,716

$

(1,501,862)

$

(37,167)

$

(1,515,423)

Net loss

(7,757)

 

(7,757)

Foreign currency and cash flow hedges

8,960

 

8,960

Share-based compensation

4,507

 

4,507

Exercise of stock options and other awards

151

10

(10)

Repurchase of stock and retirements

(57)

(3)

(167)

 

(170)

Balance at August 1, 2020

147,437

$

9,897

$

18,046

$

(1,509,619)

$

(28,207)

$

(1,509,883)

Balance at May 4, 2019

  

158,126

$

10,620

$

11,900

$

(1,590,494)

$

(19,384)

$

(1,587,358)

Net income

24,547

 

24,547

Foreign currency and cash flow hedges

(4,762)

 

(4,762)

Share-based compensation

5,154

 

5,154

Exercise of stock options and other awards

39

2

(2)

Repurchase of stock and retirements

(3,011)

(203)

(17,052)

(7,896)

 

(25,151)

Issuance of restricted stock awards

45

Balance at August 3, 2019

155,199

$

10,419

$

$

(1,573,843)

$

(24,146)

$

(1,587,570)

26 Weeks Ended

Accumulated

Number of

Additional

Other

Common

Common

Paid-in

Accumulated

Comprehensive

Shares

  

Stock

  

Capital

  

Deficit

  

Loss

  

Total

Balance at February 1, 2020

146,803

$

9,852

$

4,872

$

(1,438,357)

$

(22,831)

$

(1,446,464)

Net loss

(71,262)

 

(71,262)

Foreign currency and cash flow hedges

(5,376)

 

(5,376)

Share-based compensation

13,790

 

13,790

Exercise of stock options and other awards

916

62

(62)

Repurchase of stock and retirements

(310)

(17)

(554)

 

(571)

Issuance of restricted stock awards

28

Balance at August 1, 2020

147,437

$

9,897

$

18,046

$

(1,509,619)

$

(28,207)

$

(1,509,883)

Balance at February 2, 2019

157,774

$

10,594

$

5,954

$

(1,628,185)

$

(14,558)

$

(1,626,195)

Net income

62,238

 

62,238

Foreign currency and cash flow hedges

(9,588)

 

(9,588)

Share-based compensation

12,758

 

12,758

Exercise of stock options and other awards

594

40

466

506

Repurchase of stock and retirements

(3,240)

(215)

(19,178)

(7,896)

 

(27,289)

Issuance of restricted stock awards

71

Balance at August 3, 2019

155,199

$

10,419

$

$

(1,573,843)

$

(24,146)

$

(1,587,570)

See accompanying notes to consolidated financial statements.

6

Table of Contents

THE MICHAELS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

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

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

We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest to January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal 2020” relate to the 52 weeks ending January 30, 2021 and references to “fiscal 2019” relate to the 52 weeks ended February 1, 2020. In addition, all references to “the second quarter of fiscal 2020” relate to the 13 weeks ended August 1, 2020 and all references to “the second quarter of fiscal 2019” relate to the 13 weeks ended August 3, 2019. Finally, all references to “the six months ended August 1, 2020” relate to the 26 weeks ended August 1, 2020 and all references to “the six months ended August 3, 2019” relate to the 26 weeks ended August 3, 2019. The results of operations for the 13 and 26 weeks ended August 1, 2020 are not indicative of the results to be expected for the entire year due to the seasonal nature of our business and the financial impact of the COVID-19 pandemic.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. In response to the pandemic, many state and local jurisdictions ordered non-essential businesses closed and executed extensive stay-at-home orders. These orders resulted in the temporary closure of over 900 of our 1,275 stores which had a material adverse impact on our results of operations during the first quarter of fiscal 2020. During the second quarter of fiscal 2020, we reopened all of our stores and experienced a significant improvement in our business as net sales increased 11.1% compared to the same period in the prior year. Our liquidity position, which includes cash on hand and amounts available under our senior secured asset-based revolving credit facility (“Amended Revolving Credit Facility”), increased from $1.1 billion as of May 2, 2020 to $1.3 billion as of August 1, 2020. In addition, there were no amounts outstanding under our Amended Revolving Credit Facility as of the end of the second quarter of fiscal 2020. However, there remains significant uncertainty surrounding the future impact of the COVID-19 pandemic on our results of operations, and future waves of the pandemic could require us to close stores again if certain restrictions are reinstated by state and local authorities. We intend to continue to manage our liquidity position closely and invest in our omnichannel capabilities to meet the growing customer demand for a seamless omnichannel experience.

Share Repurchase Program

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

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August 1, 2020, we did not repurchase any shares under our share repurchase program. As of August 1, 2020, we had $293.5 million of availability remaining under our current share repurchase program.

Darice Liquidation and Restructure Charges

In May 2020, the Company adopted a plan to close the Darice wholesale operations (“Darice”). As a result of the closure, we recorded a charge totaling $52.5 million in the second quarter of fiscal 2020, consisting primarily of a $45.5 million charge in gross profit related to the liquidation of inventory and $7.0 million included in selling, general and administrative associated with the write-off of indefinite-lived intangible assets and employee-related expenses. We expect the closure process to be substantially completed by November 30, 2020 and the fiscal 2020 pre-tax cost to be approximately $58 million to $62 million. In the first six months of fiscal 2020 and fiscal 2019, Darice’s net sales totaled $26.4 million and $40.1 million, respectively. Excluding the charges, Darice did not have a material impact on the Company’s operating income in the periods presented.

In the fourth quarter of fiscal 2018, we closed all of our Pat Catan’s stores. As a result of the closures, we recorded a charge totaling $7.0 million in the first six months of fiscal 2019, primarily related to employee-related expenses and the impairment of an indefinite-lived intangible asset.

Accounting Pronouncements Recently Adopted

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

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

Recent Accounting Pronouncement Not Yet Adopted

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

2. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less

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transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

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

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

Level 3—Instruments with significant unobservable inputs.

Impairment losses related to property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted-average cost of capital and comparable store sales growth assumptions, and therefore, are classified as a Level 3 measurement in the fair value hierarchy. Impairment losses related to store-level operating lease assets are calculated using rent per square foot derived from observable market data, and therefore, are classified as a Level 2 measurement in the fair value hierarchy.

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

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

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

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

August 1,

February 1,

August 3,

2020

2020

2019

(in thousands)

Liabilities

Term loan credit facility

$

2,072,446

$

2,119,802

$

2,125,045

Senior notes

473,140

449,675

481,525

Short-term portion of cash flow hedges

15,440

13,007

9,679

Long-term portion of cash flow hedges

5,948

3,555

8,902

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

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

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3. REVENUE RECOGNITION

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

Customer Receivables

As of August 1, 2020, February 1, 2020 and August 3, 2019, receivables from customers, which consist primarily of trade receivables related to Darice, were approximately $4.4 million, $13.3 million and $15.4 million, respectively, and are included in accounts receivable, net in the consolidated balance sheets.

Gift Cards

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

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

2020

2019

2020

2019

Balance at beginning of period

$

59,658

$

55,708

$

64,130

$

61,071

Issuance of gift cards

11,405

13,140

18,310

24,465

Revenue recognized (1)

(11,619)

(13,668)

(22,218)

(29,415)

Gift card breakage

679

584

(99)

(357)

Balance at end of period

$

60,123

$

55,764

$

60,123

$

55,764

(1)Revenue recognized from the beginning liability during the second quarters of fiscal 2020 and fiscal 2019 totaled $6.4 million and $7.5 million, respectively. Revenue recognized from the beginning liability during the first six months of fiscal 2020 and fiscal 2019 totaled $12.4 million and $15.8 million, respectively.

4. LEASES

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

Our operating lease assets represent our right to use an underlying asset for the lease term and our operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The commencement date is the earlier of the date when we become legally obligated for the rent payments or the date when we take possession of the building for construction purposes. In addition, operating lease assets are net of lease incentives received. As our leases do not contain an implicit rate of return, we use our estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. For operating leases that commenced prior to the adoption date of the new lease accounting standard, we used the incremental borrowing rate as of the adoption date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. In fiscal 2020, we began negotiating certain rent concessions with our landlords, which consists primarily of rent abatements, to mitigate the economic effects of the COVID-19 pandemic. As of August 1, 2020, we received approximately $12 million in rent abatements that are included in our straight-line rent calculation.

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

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

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

2020

2019

2020

2019

Operating lease cost (1)

  

$

107,197

$

104,600

$

213,628

$

210,065

Variable lease cost (2)

 

38,127

 

36,077

 

77,571

 

72,517

Total lease cost

$

145,324

$

140,677

$

291,199

$

282,582

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

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

26 Weeks Ended

August 1,

August 3,

2020

2019

Operating cash outflows included in the measurement of lease liabilities

$

174,760

$

214,439

Operating lease assets obtained in exchange for new operating lease liabilities

$

115,060

$

133,137

Weighted-average remaining lease term

5.9 years

6.2 years

Weighted-average discount rate

6.7%

5.6%

Maturities of our lease liabilities are as follows as of August 1, 2020 (in thousands):

Fiscal Year

2020

$

214,922

2021

 

412,898

2022

 

357,340

2023

 

294,707

2024

 

231,024

Thereafter

 

501,488

Total lease payments

$

2,012,379

Less: Interest

(365,536)

Present value of lease liabilities

$

1,646,843

Lease payments exclude $57.4 million related to 17 leases that have been signed as of August 1, 2020 but have not yet commenced.

5. DEBT

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

August 1,

February 1,

August 3,

Interest Rate

2020

2020

2019

Term loan credit facility

Variable

$

2,170,100

$

2,182,550

$

2,195,000

Senior notes

8.00

%

 

500,000

 

500,000

 

500,000

Total debt

 

2,670,100

 

2,682,550

 

2,695,000

Less unamortized discount and debt costs

(11,557)

(13,190)

(14,709)

Total debt, net

2,658,543

2,669,360

2,680,291

Less current portion

 

(24,900)

 

(24,900)

 

(24,900)

Long-term debt

$

2,633,643

$

2,644,460

$

2,655,391

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Revolving Credit Facility

As of August 1, 2020 and August 3, 2019, the borrowing base under our Amended Revolving Credit Facility was $689.9 million and $789.3 million, respectively, of which Michaels Stores, Inc. (“MSI”) had unused borrowing capacity of $601.7 million and $686.1 million, respectively. As of August 1, 2020 and August 3, 2019, outstanding standby letters of credit, which reduce our borrowing base, totaled $88.2 million and $103.2 million, respectively. As a result of the COVID-19 pandemic, we borrowed $600.0 million under our Amended Revolving Credit Facility in the first quarter of fiscal 2020 to improve our cash position and preserve financial flexibility. In the second quarter of fiscal 2020, all amounts outstanding under the credit facility were repaid with available cash on hand.

Interest Rate Swaps

In April 2018, we executed two interest rate swaps with an aggregate notional value of $1 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The interest rate swaps have a maturity date of April 30, 2021 and were executed for risk management and are not held for trading purposes. The objective of the interest rate swaps is to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR. The swaps replaced the one-month LIBOR with a fixed interest rate of 2.7765% and payments are settled monthly. The swaps qualify as cash flow hedges and changes in the fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair value are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect earnings. Amounts reclassified from accumulated other comprehensive income to interest expense during the second quarters of fiscal 2020 and fiscal 2019 were $4.5 million and $0.9 million, respectively. Amounts reclassified from accumulated other comprehensive income to interest expense during the six months ended August 1, 2020 and August 3, 2019 were $8.0 million and $1.6 million, respectively.

Interest Rate Caps

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

6. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

2020

    

2019

    

2020

    

2019

Beginning of period

  

$

(37,167)

$

(19,384)

  

$

(22,831)

$

(14,558)

Foreign currency translation

 

7,540

 

2,259

 

(1,804)

 

(549)

Cash flow hedges

1,420

(7,021)

(3,572)

(9,039)

End of period

$

(28,207)

$

(24,146)

$

(28,207)

$

(24,146)

7. INCOME TAXES

Income tax expense increased $17.2 million for the second quarter of fiscal 2020 to $22.9 million compared to the same period in the prior year. The increase was due primarily to the cumulative impact of a change in estimated net operating losses and the related carryback provisions associated with the Coronavirus Aid, Relief, and Economic Security

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Act in the second quarter of fiscal 2020 and a tax benefit associated with a state income tax settlement in the second quarter of fiscal 2019. Income taxes decreased $29.7 million for the first six months of fiscal 2020 to a $9.4 million benefit compared to the first six months of fiscal 2019. The decrease was primarily due to operating losses incurred during the first half of fiscal 2020, partially offset by the tax benefit associated with a state income tax settlement in fiscal 2019.

8. EARNINGS (LOSS) PER SHARE

The Company’s unvested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by ASC 260, “Earnings Per Share”. In applying the two-class method, net income is allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Basic earnings (loss) per share is computed by dividing net income (loss) allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding plus the potential dilutive impact from stock options and restricted stock units. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. During the second quarter of fiscal 2020 and the first six months of fiscal 2020, we incurred a net loss and therefore all common stock equivalents were anti-dilutive and excluded from the diluted net loss per share calculation. As a result, the basic and dilutive losses per common share are the same for the second quarter of fiscal 2020 and first six months of fiscal 2020. There were 13.1 million and 11.3 million anti-dilutive shares during the second quarters of fiscal 2020 and fiscal 2019, respectively. There were 12.9 million and 11.6 million anti-dilutive shares during the six months ended August 1, 2020 and August 3, 2019, respectively.

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

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

2020

2019

2020

2019

Basic (loss) earnings per common share:

Net (loss) income

$

(7,757)

$

24,547

$

(71,262)

  

$

62,238

Less income related to unvested restricted shares

 

 

(29)

 

 

(68)

(Loss) income available to common shareholders - Basic

$

(7,757)

$

24,518

$

(71,262)

$

62,170

Weighted-average common shares outstanding - Basic

147,296

157,272

147,080

157,511

Basic (loss) earnings per common share

$

(0.05)

$

0.16

$

(0.48)

$

0.39

Diluted (loss) earnings per common share:

 

 

Net (loss) income

$

(7,757)

$

24,547

$

(71,262)

$

62,238

Less income related to unvested restricted shares

 

(29)

 

(68)