Convertible Senior Notes

9 Months Ended

Oct. 29, 2022

Overview

In April 2020, the Company issued an aggregate $575.0 million of 3.25% Convertible Senior Notes due 2025, which included the full exercise of a $75.0 million over-allotment option, receiving proceeds of $557.6 million, net of $17.4 million of transaction fees and other third-party offering expenses. The Convertible Senior Notes are scheduled to mature on April 15, 2025 and accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15.

As of October 29, 2022, the conversion rate for the Convertible Senior Notes was 30.9636, which represents a conversion price of $32.30 per share. The difference between the initial conversion rate and the conversion rate as of October 29, 2022 is due to dividends that have been declared and paid on shares of the Company’s common stock following the issuance of the Convertible Senior Notes.

Upon conversion, the Company may settle the Convertible Senior Notes for cash, shares of the Company’s common stock, or a combination thereof, at the Company’s option. The Company currently intends to settle the principal amount of the Convertible Senior Notes in cash and any conversion premium in shares of its common stock.

Convertible Senior Notes Exchanges

During fiscal 2022, the Company entered into agreements with certain holders of the Convertible Senior Notes to exchange $420.6 million in aggregate principal amount of the Convertible Senior Notes for a combination of cash and shares of the Company’s common stock in five separate transactions. The payments included all accrued and unpaid interest on the amounts exchanged. Concurrently with each of the exchange transactions during fiscal 2022, the Company entered into agreements with certain counterparties to terminate a proportionate amount of the convertible bond hedge and warrant agreements that were entered into by the Company in April 2020 in connection with the issuance of the Convertible Senior Notes, (collectively, the “Notes Exchanges”).

In connection with the Notes Exchanges, the Company recognized pre-tax non-cash inducement charges of approximately $8.8 million and $21.1 million during the 13 and 39 weeks ended October 29, 2022, respectively, which were recorded within interest expense on the Consolidated Statement of Income, paid a total of $420.6 million to noteholders to redeem the principal amount of the Convertible Senior Notes with a carrying value of $413.1 million, and issued approximately 7.8 million shares of the Company's common stock. Following the Notes Exchanges, $154.4 million aggregate principal amount of the Convertible Senior Notes remain outstanding at October 29, 2022. Approximately 4.8 million shares underlie the Convertible Senior Notes, the convertible bond hedge and the warrants at October 29, 2022.

Financial Statement Impacts

As discussed in Note 1 – Description of Business and Basis of Presentation, following the adoption of ASU 2020-06, the Convertible Senior Notes are recorded entirely as a liability. A summary of the composition of the net carrying value of the Convertible Senior Notes is as follows:


(in millions)	October 29, 2022		January 29, 2022		October 30, 2021
Principal	$	154.4	$	575.0	$	575.0
Debt discount and issuance fees	(2.4)		(125.7)		(133.8)
Carrying amount	$	152.0	$	449.3	$	441.2
Equity component (*)	N/A		$	160.7	$	160.7

(*) Included in additional paid-in capital on the Consolidated Balance Sheets as of January 29, 2022 and October 30, 2021.

During the 13 and 39 weeks ended October 29, 2022, the Company recognized $11.4 million and $33.3 million of interest expense related to the Convertible Senior Notes, or $8.5 million and $24.7 million, net of tax, respectively. Interest expense related to the Convertible Senior Notes included the aforementioned inducement charges and $0.4 million and $1.9 million of non-cash amortization of issuance fees during the 13 and 39 weeks ended October 29, 2022, respectively. During the 13 and 39 weeks ended October 30, 2021, the Company recognized $12.4 million and $36.7 million of interest expense related to the Convertible Senior Notes, of which $7.7 million and $22.7 million, respectively, was attributed to non-cash amortization of the debt discount and issuance fees.

At October 29, 2022, the stock price conditions under which the Convertible Senior Notes could be convertible at the holders’ option were met. The Company has not received any material conversion requests through the filing date of this Form 10-Q. Because the closing price of the Company’s common stock of $116.23 at the end of the current quarter exceeded the conversion price of $32.30, the if-converted value exceeded the principal amount outstanding of the Convertible Senior Notes by approximately $401.4 million at October 29, 2022.