Roots Corp

TSX:ROOT

Earnings Call Transcript 2020-Q4

[Operator]

Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Roots Fiscal 2019 Fourth Quarter and Year-end Conference Call. [Operator Instructions] On the call today, we have Meghan Roach, Interim Chief Executive Officer; Mona Kennedy, Chief Financial Officer; and Kristen Davies, Head of Investor Relations for Roots. Before the call begins, the company would like to remind listeners that the call, including the Q&A portion, may include forward-looking statements about current and future plans, expectations and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments. This information is based on management's reasonable assumption and beliefs in light of information currently available to Roots and listeners are cautioned not to place undue reliance on such information. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected.The company refers listeners to its fiscal 2019 fourth quarter and year-end management's discussion and analysis and/or its annual information form dated April 2, 2019, for a summary of the significant assumptions, underlying forward-looking statements and certain risks and factors that could affect the company's future performance and ability to deliver on these statements. Roots undertakes no obligation to update or revise any forward-looking statements made on this call. The fiscal 2019 fourth quarter and year-end earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as on the Roots Investor Relations website at www.investors.roots.com. Finally, please also note that all figures discussed on this conference call are in Canadian dollars, unless otherwise stated. Thank you. Ms. Davies, you may begin your conference.

[Kristen Davies, Head of Investor Relations]

Thank you, operator. Good morning, everyone. And thank you for joining us. Meghan Roach, our Interim Chief Executive Officer, will briefly discuss our fiscal 2019 fourth quarter results, our go-forward plans for the U.S. market as well as the impacts of COVID-19 on the Roots business. Then she will turn the call over to Mona Kennedy, our Chief Financial Officer, who will discuss certain areas of our financials in greater detail. Meghan will then share some concluding remarks, after which, we will open up the call for questions. I will now turn it over to Meghan.

[Meghan Roach, CEO, President & Director]

Thank you, Kristen, and good morning, everyone. Fiscal 2019 results came in lower than expected. And with the unprecedented business environment created by COVID-19, Roots experienced a challenging start to fiscal 2020. Similar to our peers, we have been faced with many difficult decisions in the past month. I know it has been tough on our team, so I wanted to take a moment to recognize how hard they are all working and thank them for everything they have done during this unusual time. I'm proud to be part of a team with such commitment to the brand and each other. I want to also welcome Mona to Roots into her first quarterly call and her role as CFO. This is an eventful time to join the company, and she is a welcome addition to the leadership team. Now turning to our results for the quarter. As a result of operational challenges, the business performed below our expectations in the fourth quarter. Total sales were $127.5 million, down from $130.8 million in Q4 2018. The year-over-year decline was a result of the $1.6 million decrease in DTC sales, including a comparable sales decline of 1.8% and a $1.7 million decrease in Partners and Other sales. We saw lower year-over-year store traffic, which is partially offset by growth in e-commerce sales with our new U.S. stores delivering another quarter of significant underperformance. The expected decline in P&O sales reflected the ongoing negative impact of macroeconomic and geopolitical headwinds in the 3 Asian markets we operate within, as we've discussed with you on previous calls. We saw improved execution at the DC during our peak holiday period, which is a big achievement from the team. However, we continue to face inefficiencies, including delays in the flow of product to stores that negatively affected sales, pressured gross margins and drove increased costs. For the quarter, our DTC gross margin, excluding noncash items, was 56.5%, down as expected from 61.8% in Q4 2018. Of the 530 basis points year-over-year decline, approximately 40% was related to cost associated with the distribution center, including the shift in certain e-commerce fulfillment cost and 40% was due to a decline in product margins, largely as we extended our holiday promotional sale period to take advantage of quality traffic to move through seasonal inventory. The remaining 20% was related to the negative impact of foreign exchange. In terms of SG&A, we recorded a $2.2 million decline year-over-year when excluding the impact of IFRS 16 and noncash charges. We benefited from temporary vacancies in certain senior leadership roles, the shift with certain e-commerce costs from SG&A to gross margin and store wage optimization. These savings were partially offset by the incremental costs to acquire a larger overall square footage in our retail store base and a larger distribution center as well as onetime distribution center transition cost and onetime severance cost. Adjusted EBITDA for Q4 2019 was $26.1 million, down from $34.8 million in Q4 of 2018. This reflects all the factors I just discussed as well as adjusted EBITDA losses generated by the U.S. stores opened within the last 3 years, which totaled $6 million for the full fiscal year 2019. With the losses generated by these U.S. stores and given the increasingly challenging discretionary retail environment as a result of COVID-19, we decided to permanently close our stores in Boston, Washington and Chicago as well as our pop-up location in Woodbury Common in New York. In order to close these stores quickly and cost effectively, we have filed Chapter 7 liquidation proceedings for Roots USA Corporation, a wholly owned subsidiary of Roots Corporation. This step should not be perceived as we're exiting the U.S. market. We continue to believe in the opportunity and remain committed to our customers in the U.S. In the near term, we will focus on serving the U.S. through our e-commerce channel, while also continuing to operate our 2 longstanding stores in Michigan and Utah, as both locations play important roles in our heritage and have well-established customer bases. Exiting Q4, circumstances changed quickly given the rapid spread of COVID-19. We have assembled a cross-functional task force that is managing COVID-19 related impacts across all areas of the business. The task force is primarily focused on the health and safety of the Roots team and customers, our current operations, business continuity and managing liquidity. In doing our part to help protect against COVID-19, we closed our retail store location and our leather factory in mid-March, and we made a very difficult decision to temporarily lay off store and leather factory employees at that time. However, with the implementation of various government relief programs, we are reviewing potential opportunities to reembrace retail and leather factory employees into the business. As a company with an extensive selection sweats as a core product offering, a category in demand during these unusual times, we are working diligently under our operational constraints to get our customers the products they want in a timely fashion. As permitted by current government regulations, we continue to operate our global e-commerce business and distribution center, with strict cleaning protocols and social distancing measures in place. We are also operating our wholesale, B2B and licensing business in our work-from-home model. In addition, to help preserve the supply of medical-grade face masks for health care workers, we recently launched a special initiative at our Canadian leather factory. We have repurposed the facility in accordance with appropriate health and safety guidelines to produce nonmedical, washable and reusable face masks designed to make here in Canada. We are also donating medical-grade masks to local medical facilities. In Hong Kong and in China, our partner had managed through government required store closures and reduced hours. At this point, all of the stores in this region are open. However, many are still operating on a reduced hours and traffic and has not fully recovered. All of our partner-operated stores in Taiwan have remained open, thus far, but we are seeing traffic trends remain below pre-pandemic levels. We have taken significant measures to further reduce expenses and capital expenditures in response to the business impacts of COVID-19, which Mona will discuss in greater detail momentarily. As we move forward, we continue to focus on health and safety as well as taking all possible actions necessary to best position the company for the post-pandemic future. We will also continue to do our part to support the broader risk community in the best way we know how through comfort. For more than 4 decades, comfort has been at the heart of what we do and everything we make, and it goes beyond our world famous sweats for us. It's an overall feeling we hope to bring to people at the times they need it most. In an effort to show our appreciation for our frontline health care workers, we have donated approximately $500,000 of Roots clothing to be used as scrubs to the Toronto area medical facilities. We also partnered with the Fairmont Royal York to give Comfort Kits to those frontline workers who cannot go home between shifts. These amazing people are sacrificing so much and working tirelessly. We are so pleased to be able to show them our gratitude. On that note, I will pass the line to Mona.

[Mona Kennedy, Chief Financial Officer]

Thanks, Meghan, and good morning, everyone. I'm looking forward to working more closely with all of you. As Meghan noted, we have acted quickly to reduce expenses and capital expenditures in response to COVID-19. Our focus heading into fiscal 2020 was generating cash flow, but we had already taken significant steps. However, at this point, we have executed substantial further reductions. Our Board of Directors is foregoing compensation for 3 months, with senior leadership has temporarily reduced salaries of 25% and all other head office salaries have been reduced as well. We have reduced forward inventory purchases wherever we can, minimized discretionary expenditures and stopped capital investments. We continue to work closely with our partners, suppliers as well as service and logistics providers to identify further areas of cost reduction. Additionally, we're in dialogue with our landlords to find solutions that are mutually satisfactory given the current environment and the expected extended impacts. Managing our liquidity has been an important focus as well. At the end of Q4 2019, we had $14 million drawn on our $75 million revolver, and we recently amended our credit agreement with covenants that better reflect the typical seasonality of our business. This is unchartered territory, where we are identifying opportunities wherever we can and are pulling on the various triggers available to us when appropriate. That said, the situation continues to evolve quickly. To the extent things continue to worsen, there may be a material impact on our business, operations and financial position this year. However, the magnitude of this impact depends on the extent, duration or severity of the pandemic and isn't something we can quantify at this point. Now before passing the line to Meghan, I wanted to quickly touch on 2 noncash items that you would see reflected in our net income results for the quarter. We recorded a $19.2 million fixed asset impairment charge, $12.7 million of which was related to the U.S. stores we have now permanently closed. We also recorded a $44.8 million goodwill impairment related to our direct-to-consumer segment. The impairment was driven by more conservative forward-looking growth assumptions reflective of the recent trends on our business and the shortfall against our past projections. With that, I will pass the call to Meghan.

[Meghan Roach, CEO, President & Director]

Thank you, Mona. COVID-19 has created a tough operating environment at the moment. However, with a history of more than 4 decades long, we have to overcome many challenges to get where it is today. Long term, we are confident there continues to be multiple value creation levers for the company. As a Canadian staple for 46 years, we have a highly engaged and loyal customer base, strong omnichannel capabilities and a solid core product offering. In the meantime, we will continue to do our best to navigate these uncertain times, having implemented an action plan to best position the company in the current environment that is driving its recovery. We will also continue to do our part to help mitigate the spread of the virus and provide support in any way we can. Operator, that concludes our prepared remarks. Please open the line to questions.

[Operator]

[Operator Instructions] Your first question is from Patricia Baker with Scotiabank.

[Patricia A. Baker, Analyst]

I'm just wondering whether or not you can quantify the cost reductions that you've taken so far, give us some sort of a sense of how -- just how much you've been able to do.

[Meghan Roach, CEO, President & Director]

Mona, why don't you take that one?

[Mona Kennedy, Chief Financial Officer]

Sure. Patricia, as you know, we kind of went into 2020 with a focus on cash flow and reducing expenses. So we had a head start on this, and we've taken significant steps since then to reduce expenses. As I mentioned on the call, we've taken a lot of initiatives and acted quickly. So just want to hit on a few of the things that we have done. We're closely monitoring our supply chain and staying in close contact with our vendors and logistics partners. We've reduced our Board and head office compensation. We're leveraging the recently announced wage subsidy against our compensation around the head office in our leather factory. We've reduced our forward inventory purchases, and we've also minimized our capital expenditures and are only doing the renovations that are absolutely necessary. So I think we don't -- we won't speak to the specific numbers at this point in time. But as you can see, we are monitoring things closely and have taken a lot of initiatives and steps.

[Patricia A. Baker, Analyst]

Okay. And good luck with that. Just the -- are you willing to share with us what you think the CapEx number is going to be for 2020 at this point? Or is that still kind of in a state of flux?

[Mona Kennedy, Chief Financial Officer]

I wouldn't say it's in the state of flux. It's not information that we share, but we had significantly reduced our capital expenditures going into this year as we had completed a lot of major initiatives in the past 3 years. But I can say that we have significantly reduced it and are only working on the things that are absolutely necessary to run our current operations and the immediate future of the business.

[Operator]

Your next question is from Stephen MacLeod with BMO Capital Markets.

[Stephen MacLeod, Analyst]

I just wanted to follow up on a couple of things that was out of the press release and also -- and Meghan, some of your prepared remarks. You talked a little bit about some value creation levers that you think you can -- the company can pull over the next little while. I was wondering if you could give a little bit more color on what kind of -- what that sort of entails, if there's anything specific.

[Meghan Roach, CEO, President & Director]

Yes, absolutely. I think we've spoken with a detail at this point in terms of our future strategic plans. But I think as Mona alluded to, the first one, of course, obviously, is managing cost savings and liquidity. And so we've put in place a number of different levers there to make sure that we're best positioned for coming out of this recovery in a strong position from a cash and liquidity perspective. I think in addition to that, the benefit that Roots has is that it's a brand that's been around for 46 years. And so from that perspective, we have a loyal and engaged customer base. And we're also lucky, I think, to be positioned in a sector right now where we offer comfortable and high-quality products. And I think with people working from home, and with Roots being synonymous to both 2 characteristics and our product categories being really well suited for people who are looking for comfort today, I think we are also really well positioned to take advantage of it going forward, and that should benefit us. I think the other thing to mention is that we have strong omnichannel capabilities. And so I think you will have noted the fact that we've indicated we've come in above our targets for our e-commerce business as a percentage of total sales. And so we're happy with that, and we're also happy with the long-term potential for our e-commerce business and our omnichannel offering. And so that's another area that we can leverage, especially when our retail stores are closed. And I think longer term, we do have a strong operation and business in Asia and in multiple other areas of the business, which will generate revenue. So we continue to be positive about the future outlook for the business, but I won't be going into specific details of the strategy at this point in time.

[Stephen MacLeod, Analyst]

Okay. That makes sense. And you mentioned e-commerce, just -- if I understood correctly, you're running ahead of where you thought you would be at this point in time, probably accelerated a little bit by the stores being closed. Are you able to give any color on where you sit in terms of e-commerce as a percentage of sales?

[Meghan Roach, CEO, President & Director]

Yes. I can give you a sense for Q4. So when we initially came out with our targets, we had said we would be between 17% and 19%. At the end of Q4, we were in excess of 20% of sales from the e-commerce perspective as a percentage of sales. I'm not going to give you an indication now. I mean, obviously, with our stores closed, e-commerce is much of our business, right, so that will be a misleading percentage of sales. But at the end of Q4, we are tracking well. And obviously, as we see our stores being closed now, e-commerce is obviously the biggest proportion of our sales today.

[Stephen MacLeod, Analyst]

Right. Okay. Now that's very helpful. And then maybe just finally, just in terms of the distribution center. Some of the inefficiencies continue to leak into Q4 and I think probably illuminated by the fact that it's seasonally strong period. Can you talk a little bit about where you sit in terms of the DC inefficiencies having come out of that sort of high-volume period?

[Meghan Roach, CEO, President & Director]

Yes, absolutely. So when we -- on our last conference call, I think we highlighted the fact that we had gone through the DC in quite a long detail and also highlighted a number of implementation plans around things that we would implement in Q4 and the incremental future periods. So we were able to accomplish a lot of those things last year. Obviously, a few of those moved to Q1. As you know, Q1 and Q2 are seasonally low period. So I think, right now, we're happy with the execution at the DC. We have a few lingering things that we're focusing on from an overall efficiency perspective. But now we've turned our attention to driving incremental efficiencies and less fixing problems. And so today, with the DC being up and running with all the appropriate health and safety protocols in place, we're happy with the way it's performing, and we continue to expect future efficiencies in there.

[Operator]

Your next question is from Sabahat Khan with RBC.

[Sabahat Khan, Analyst]

Just I guess on the kind of the balance sheet and liquidity commentary that you provided earlier. Can you kind of share your thoughts for the rest of the year? And I think when you guys filed your new credit agreement this morning as well, kind of what are your assumptions or your outlook for the business? Or if you look -- if we look at what's included in this current agreement, seems like, I think, you guys have kind of the covenant ratios peaking later on in the year. Can you kind of give us some thoughts on kind of your outlook that sort of reflected in this kind of covenant progression through the course of the year and how comfortable you are sort of with your cash and liquidity position given some of the uncertainty?

[Meghan Roach, CEO, President & Director]

So I'll just add a few comments there and then let Mona take that one. So I think in terms of our outlook and our strategy for the year, I think, as we mentioned before, we're not going to be giving 2020 guidance just in light of where we are from a COVID-19 perspective. I know many people are in the same position of us, so it's very difficult to forecast out exactly how the year ends in light of the fact that we're in the midst of COVID-19. So we won't be giving you specifics there on the strategy that goes out. I can let Mona speak to you specifically about our liquidity and our covenant levels. And so, Mona, do you want to take that?

[Mona Kennedy, Chief Financial Officer]

Sure. I mean, we're feeling pretty comfortable with our liquidity. As I mentioned on the call, we had drawn $14 million of the $75 million revolver at the end of the year. We have significantly reduced our expenses. We have significantly reduced our capital expenditures. And we're running a lot of different scenarios and models to ensure that we manage that liquidity vigilantly. And we're tracking and monitoring all the right things. And everybody across the business is focused on cost and expenditures and cash, so everybody is managing it very actively. We also have very strong and supportive relationships with our lenders and are feeling pretty good at this point.

[Sabahat Khan, Analyst]

Great. And then, I guess, your comment earlier around e-commerce is pretty much most of your business right now. Can you give us some indication of sort of what you're seeing in terms of at least purchasing? Like is it in line with kind of trends you're expecting? Or are you assuming pretty much through this close down period, it's not going to be a material quarter for you guys as we look out for the rest of the year? And is that sort of reflected in your covenants as well that this is probably going to be a very low sales and EBITDA quarter? Or is there enough of an upside coming through the e-commerce channel that you do have some comfort in terms of some positive or even just some marginal contribution during this...

[Meghan Roach, CEO, President & Director]

I think there's a few questions there. So I think in terms of our e-commerce business, I mean, we've been happy with the way it's been performing. It has been exceeding our plan. But the reality is we have over 115 stores closed. And so as a result of that, while the e-commerce business is exceeding our expectations, it's not offsetting our retail store performance. So if you think about our business today and you think about the products we offered, as I mentioned previously, the fact that we offer sweats as a core product category and people today are seeking comfort, that's going well for us. But again, e-commerce is a portion of our business, so we do still have a significant retail store base. I can't comment specifically -- or I'm not going to comment specifically in terms of modeling that out into a future covenant period. Like as Mona alluded to that in the -- on her last comment around the fact that we're doing everything we can from a cost savings perspective and liquidity management perspective to manage the covenants and the overall liquidity of the business in the right way, and that we have strong partnerships with our banks, and we're comfortable with our current position. And so I won't go into more detail specifically about the future periods.

[Sabahat Khan, Analyst]

And then just last one for me. The comp store -- or this comparable sales metric that you provided, if you think about the future business without the U.S. stores, should we assume this number you provided excludes the U.S. stores? Or should we be rethinking this number over the course of 2020 and beyond? And just trying to think what is reflected in this number essentially.

[Meghan Roach, CEO, President & Director]

It would include the U.S. stores that are comp. So any store that would have been opened last year would have been included in the number.

[Operator]

And your final question comes from Matthew Lee with Canaccord.

[Matthew James Lee, Associate Analyst of Telecom and Media]

Just back on the e-commerce, maybe you can kind of outline your marketing and promotional strategy that you're using to take advantage more of customer shopping online.

[Meghan Roach, CEO, President & Director]

Yes. So I think that what we're finding today is that customers, again, are focusing on things that provide them with comfort, and that comfort can be 2 different ways. If you -- comfort in terms of helping to deal with the volatile and uncertain times that we're facing today and comfort in terms of the actual product quality. So from our marketing perspective, I think we're focusing on, first of all, the initiatives that we're doing to support frontline workers and, overall, the broader community at this point in time. So many of you may have seen the Roots Cares initiatives that we've done, where we've done a variety of different things, including donating over $500,000 worth of products for scrubs. We did a Give 10 Get 10, where customers could get a 10% discount and then give the 10% back to a charitable donation. We've also been producing masks and donating portions of those. And so we talked a lot about those specific initiatives that are supporting the community because we think it's important for people to understand what we're doing as a brand that has been focused on the community for many, many years. In addition to that, we'll focus on our products that provide the most comfort, so you will see that we're spending a lot of time focusing on our sweats and our sweatpants. Our sweatpants being an area that a lot of people are focusing on, I think, now, in light of the fact that many people are doing conference calls. And we're also focused on other categories that provide that similar type of comfort, so sweat dresses, hoodies and a number of different product categories within our collection. We also have recently done a collection called the Journey Collection, which is a slightly more technical item and it's not meant to be a fully technical offering, but it has slight technical capabilities, And we've also seen some good success with those different product categories.

[Matthew James Lee, Associate Analyst of Telecom and Media]

Right. Okay. That's really helpful. And then just can you maybe estimate the cost and timing of the shutdown of your U.S. stores? And was e-commerce a pretty large part of the U.S. revenue stream?

[Meghan Roach, CEO, President & Director]

Yes. So I can comment on that generally. So the Chapter 7 that we had mentioned will be occurring within the next day, so the timing of that will be imminently. And then in addition to -- and specifically as it relates to the cost, and that's not something I'll quantify on this call. E-commerce is a portion of the business. I'm not going to give you again specifics, but e-commerce is a relevant part of our business and will continue to be an offering -- something we operate on a go-forward basis, but it is relatively in line with what we're seeing in the Canadian marketplace.

[Operator]

Your next question is from Brian Morrison with TD Securities.

[Brian Morrison, Research Analyst]

If I can just go back to the available liquidity and the capacity. I understand there's $61 million available capacity. Can you just talk about the current restrictions on that? Or is it just cost related to certain ratios if you exceed them? And then if you can, is there any guidance with respect to the current cash burn while the pandemic goes on? And then can you confirm that, as a percentage of sales CapEx, the maintenance CapEx is still 1% to 2%? Is that correct?

[Meghan Roach, CEO, President & Director]

Mona, why don't you take that one?

[Mona Kennedy, Chief Financial Officer]

Sure. So your first question was around the liquidity and our revolver. So $14 million out of $75 million was used at the end of the year, and we've got the ability to draw down appropriately as we needed. Your next question was around cash burn. And as we mentioned earlier, we've taken every initiative that we can, and we continue to monitor the various triggers to cut cost and reduce our cash burn, including not paying rents to our landlords for April or May. So from a cash flow perspective, we've reduced what we can and continue to monitor it and manage it through our liquidity. From a maintenance CapEx perspective, that is not a number that we disclose. But as I mentioned, we have reduced it at a bare minimum at this point in time, and it's significantly lower than last year.

[Brian Morrison, Research Analyst]

Should I assume that you qualify for rent recoverability?

[Mona Kennedy, Chief Financial Officer]

I think that rent recoverability programs that have been communicated by the governments right now are for the small and medium companies. So we -- I don't believe -- and there hasn't been a lot of clarity around that, so I'm not certain whether or not we qualify for those programs. But we continue to monitor incremental programs that might be coming in the future weeks.

[Brian Morrison, Research Analyst]

Okay. And then, Meghan, just in terms of the multiple levers that you discussed earlier. I know you're not going to give the detail, but there's a whole laundry list when we went through the IPO. And I know that you talked about e-commerce and Asia growth, but if I'm looking at the long-term profitability and cash flow of the company, what are those key drivers that you'll be focusing on when things return back to normal?

[Meghan Roach, CEO, President & Director]

Yes. So I think the one thing you mentioned there is profitability and cash flow. So I think what's really quite important for us is really focusing on making sure that we're doing the best we can to spend things in an ROI-based manner. And so I think it's been great to have Mona on board as the CFO. She's very focused on that as I am. And so we're making decisions today that are very focused on what is that return on investment for us. So that's the first and foremost thing that we're doing. I think in addition to that, we are taking a very hard look at our product category to make sure that we're investing in the areas that have the most long-term potential for us and to making sure, again, that we're spending money in the right way to drive overall sales growth, but also margin expansion because, I think, that's quite important to us. And we're taking a big look as we go through COVID-19 in terms of positioning ourselves best for the future, which we think will obviously involve probably a more heavy e-commerce space in the near term, and so investing in the right ways in our omnichannel capabilities. I think we're lucky from a brand perspective that we have already strong omnichannel capabilities. We have the capacity to do things like curbside pick up, pick up in store, all of those things today. And so we don't have to make significant investments to allow us to do that. So that's another area that we see good potential growth. And I think in addition to that, we still have a lot that we can do to just to gain leverage for the brand amongst our consumers. We have a very loyal and engaged customer base. We've had that for the last 46 years. And I think we can continue to speak to many different ways and drive them into product categories that potentially they haven't been looking at in the past, which I think will allow us to gain future success. So I think there's quite a few areas across product, channel, cost savings, cash flow and overall just margin expansion that should be beneficial to us. But again, in light of the fact that we're in the middle of COVID-19, we're not coming out to you with a specific overall strategy for the next 3 years at this point in time because the environment is very rapidly changing.

[Brian Morrison, Research Analyst]

Okay. Last question, just high level with respect to supply chain. Can you just maybe update us whether there's any impact -- or negative impact currently ongoing right now? Or are things moving forward as planned?

[Meghan Roach, CEO, President & Director]

Yes. No, as we currently stand, we're seeing no significant disruptions in our supply chain. And so that's been beneficial to us as we currently stand.

[Operator]

Your final question comes from Matt Bank with CIBC.

[Matt Bank, Associate]

This has been asked a few times. I'm going to try it from a bit of a different angle. So seasonally, your year-end is strong for cash generation, but the first half burned significant cash -- or the first half of the year that we're now in typically burned significant cash, even excluding COVID. So in your modeling, do you have sufficient room on your revolver through the first half of the year if stores remain close?

[Meghan Roach, CEO, President & Director]

Maybe I'll mention -- just touch on that one because I think, we -- you're right, we have mentioned, and I think I answered this a couple of different ways. So as Mona mentioned, we revised our covenants at the end of the year to be reflective of our seasonality of the business. So obviously, those covenants take into consideration the overall seasonality and take into consideration the fact that we have seasonal peaks and troughs in terms of our working capital and cash flow and overall earnings. So I think that's the first thing some people to take away. I think the second thing is in terms of liquidity, as Mona mentioned, we're comfortable with our current liquidity. We are modeling in a number of different scenarios. In light of the fact that the problems which are just coming out was their opening days, it's too early for us to definitively say how long our stores would be closed. But we are modeling on a variety of different scenarios. And currently, we are comfortable with our liquidity under many booking areas. Mona, would you like to add anything to that?

[Mona Kennedy, Chief Financial Officer]

No, no. I think we've covered that one.

[Matt Bank, Associate]

Okay. Great. And then I just wanted to ask on the distribution center. Are you -- I mean, excluding the impact of COVID, had you got to full efficiency by the end of the quarter?

[Meghan Roach, CEO, President & Director]

So COVID-19 doesn't specifically impact our distribution center from an efficiency perspective. I would say the way it impacts the distribution centers is obviously with the addition of social distancing guidelines and limitations on, obviously, gatherings and also incremental health and safety protocols in place. It impacts overall our speed at which we can send things out. I mean it doesn't impact efficiencies from, I would say, other areas where we've seen deficiencies in the past. So I think it's not a question specifically that I'm going to answer in saying that we would have achieved x efficiency by this point in time. I think we mentioned on previous calls that we weren't going to give percentages in terms of what overall efficiency we've achieved. But I can say is we're happy with the levels of efficiency we currently have at the DC. We're continuing to focus on driving increased efficiency as we go forward. And I think from our perspective, you're never going to hit 100%. You're always going to find areas that can move faster, be better in terms of customer in a different way. And so we are in the phase now that we're focused on continuing to drive those things as opposed to in a phase where we're fixing issues or fixing problems.

[Operator]

And I would now like to turn the call back over to the presenters for closing remarks.

[Meghan Roach, CEO, President & Director]

Thank you, operator. That concludes today's call. Thank you again for joining us. We look forward to updating you on our progress when we report our Q1 fiscal 2020 results. Have a great day, and stay safe.

[Operator]

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, you may now disconnect.