Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. Forward-looking statements include all statements that are not historical facts, including statements reflecting our current views with respect to, among other things, our operations and financial performance. These forward-looking statements are included throughout this Quarterly Report, including this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in the section entitled "Risk Factors," and relate to matters such as macroeconomic conditions, our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "future," "will," "seek," "foreseeable," the negative version of these words or similar terms and phrases to identify forward-looking statements in this Quarterly Report.
The forward-looking statements contained in this Quarterly Report are based on management’s current expectations and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include but are not limited to those described under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (the "Annual Report"), as filed with the Securities and Exchange Commission (the "SEC") on March 16, 2023, as such risk factors have been updated from time to time in our periodic filings with the SEC, and are accessible on the SEC's website at www.sec.gov.
Any forward-looking statement made by us in this Quarterly Report speaks only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.
The following is a summary of the principal factors that make an investment in our securities speculative or risky (all of which are more fully described in the section entitled "Risk Factors" in the Annual Report):
Risks Related to Our Business and Industry
• overall decline in the health of the economy and consumer discretionary spending;
• our ability to predict or effectively react to changes in consumer tastes and preferences, to acquire and sell brand name merchandise at competitive prices and/or to manage our inventory balances;
• the continued impact of the COVID-19 pandemic on our business and the communities we serve;
• risks associated with our reliance on internationally manufactured merchandise;
• our ability to safeguard sensitive or confidential data relating to us and our customers, team members and vendors;
• intense competition in the sporting goods and outdoor recreation retail industries;
• our ability to operate, update or implement our information technology systems;
• risks associated with disruptions in our supply chain and losses of merchandise purchasing incentives;
• harm to our reputation;
• any failure of our third-party vendors of outsourced business services and solutions;
• our ability to successfully continue our store growth plans or manage our growth effectively, or any failure of our new stores to generate sales and/or achieve profitability;
• risks associated with our e-commerce business;
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• risks related to our private label brand merchandise;
• any disruption in the operation of our distribution centers;
• quarterly and seasonal fluctuations in our operating results;
• the occurrence of severe weather events, catastrophic health events, natural or man-made disasters, social and political conditions or civil unrest;
• our dependence on our ability to meet our labor needs;
• our ability to retain key personnel;
• the geographic concentration of our stores;
• fluctuations in merchandise (including raw materials) costs and availability;
• payment-related risks;
• the effectiveness of our marketing and advertising programs;
• our ability to successfully pursue strategic acquisitions and integrate acquired businesses.
Legal and Regulatory Risks
• our ability to comply with laws and regulations affecting our business, including those relating to the sale, manufacture and import of consumer products;
• risks related to climate change and other sustainability-related matters;
• claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient;
• risks related to product safety;
• our ability to protect our intellectual property and avoid the infringement of third-party intellectual property rights.
Risks Related to Our Indebtedness
• our level of indebtedness and related debt service payments and our ability to generate sufficient cash flow to satisfy all of our obligations under our indebtedness;
• our ability to incur substantially more debt;
• our variable rate indebtedness subjects us to interest rate risk;
• restrictions on our current and future operations imposed by the terms of our indebtedness;
• our ability to borrow under the ABL Facility (as defined below);
• our level of indebtedness may hinder our ability to negotiate favorable terms with our vendors;
Risks Related to the Ownership of Our Common Stock
• our stock price is volatile or may decline;
• our ability or decision to pay dividends on our common stock or conduct stock repurchases;
• lack of or negative coverage by securities analysts;
• anti-takeover provisions in our organizational documents could delay or prevent a change of control;
• our board of directors is authorized to issue and designate shares of preferred stock without stockholder approval;
• our exclusive forum provision; and
• you may be diluted by any future issuances of shares by us.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.
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The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited financial statements and related notes included elsewhere in this Quarterly Report for the thirteen weeks ended April 29, 2023 and our audited financial statements for the fiscal year ended January 28, 2023 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Annual Report.
All references to "Academy," "Academy Sports + Outdoors," "ASO, Inc.," "we," "us," "our" or the "Company" in this Quarterly Report refer to Academy Sports and Outdoors, Inc., a Delaware corporation and the current parent holding company of our operations, and its consolidated subsidiaries. We conduct our operations through our subsidiaries, including our indirect subsidiary, Academy, Ltd., an operating company which is doing business as "Academy Sports + Outdoors." All of the Company's sales and business operations occur at Academy, Ltd., and Academy, Ltd., is also the borrower and/or issuer of the Company's long-term debt and lessee of facilities.
We operate on a retail fiscal calendar pursuant to which our fiscal year consists of 52 or 53 weeks, ending on the Saturday closest to January 31 (which such Saturday may occur on a date following January 31) each year. References to any year, quarter, or month mean our fiscal year, fiscal quarter, and fiscal month, respectively, unless the context requires otherwise. References to the "current quarter," "2023 first quarter," or similar reference refers to the thirteen week period ended April 29, 2023, and any reference to the "prior year quarter," "2022 first quarter" or similar reference refers to the thirteen week period ended April 30, 2022. Unless otherwise specified, all comparisons regarding the current period of 2023 are made to the corresponding period of 2022.
Overview
We are a leading full-line sporting goods and outdoor recreation retailer in the United States. Our mission is to provide “Fun for All”, and we fulfill this mission with a localized merchandising strategy and value proposition that deeply connect with a broad range of consumers. Our product assortment focuses on key categories of outdoors, apparel, sports and recreation and footwear (representing 28%, 25%, 25% and 22% of our 2023 first quarter net sales, respectively) through both leading national brands and a portfolio of private label brands, which go well beyond traditional sporting goods and apparel offerings.
We sell a range of sporting and outdoor recreation products, including sporting equipment, apparel, footwear, camping gear, patio furniture, outdoor cooking equipment, and hunting and fishing gear, among many others. Our strong merchandise assortment is anchored by our broad offering of year-round items, such as fitness equipment and apparel, work and casual wear, folding chairs, wagons and tents, training and running shoes, and coolers. We also carry a deep selection of seasonal items, such as sports equipment and apparel, seasonal wear and accessories, hunting and fishing equipment and apparel, patio furniture, trampolines, play sets, bicycles, and severe weather supplies. We provide locally relevant offerings, such as crawfish boilers in Louisiana, licensed apparel for area sports fans, baits and lures for area fishing spots, and beach towels in coastal markets.
As of April 29, 2023, we operated 269 stores that range in size from approximately 40,000 to 130,000 gross square feet, with an average size of approximately 70,000 gross square feet, throughout 18 contiguous states located primarily in the southern United States. Our stores are supported by approximately 22,000 team members, three distribution centers, and our e-commerce platform, which includes our website at www.academy.com and our mobile app. Additionally, we are deepening our customer relationships, further integrating our e-commerce platform with our stores and driving operating efficiencies by developing our omnichannel capabilities, such as our mobile app, optimizing the website experience and upgrading our fulfillment capabilities.
The following table summarizes store activity for the periods indicated:
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
Beginning stores 268 259
Q1 new stores 1 1
Closed — —
Ending stores 269 260
Relocated stores — —
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How We Assess the Performance of Our Business and Recent Trends
Our management considers a number of financial and operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate projections. These metrics include operational measures and non-GAAP metrics supplemental to our GAAP results.
Comparable Sales. We define comparable sales as the percentage of period-over-period net sales increase or decrease, in the aggregate, for stores open after thirteen full fiscal months, as well as for all e-commerce sales. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this Quarterly Report regarding our comparable sales may not be comparable to similar data made available by other retailers. Stores which have been significantly remodeled or relocated are removed from this calculation until the new store has been in operation for substantially all of the periods being compared. Stores which have been closed for an extended period of time due to circumstances beyond our control are also removed from the calculation. Any sales made through our website or mobile app are allocated to e-commerce sales for the purpose of measuring comparable sales, regardless of how those sales are fulfilled, whether shipped to home or picked up in-store or curbside through our buy-online-pickup-in-store program ("BOPIS"). For example, all BOPIS transactions, which are originated by our website, are allocated to e-commerce sales for the purpose of comparable sales, despite the fact that our customers pick-up these purchases from a specific store.
Increases or decreases in e-commerce between periods being compared directly impact the comparable sales results. Various factors affect comparable sales, including consumer preferences, buying trends and overall economic trends; our ability to identify and respond effectively to customer preferences and local and regional trends; our ability to provide an assortment of high quality/value oriented product offerings that generate new and repeat visits to our stores and our website; the customer experience and unique services we provide in our stores; our ability to execute our omnichannel strategy, including the growth of our e-commerce business; changes in product mix and pricing, including promotional activities; the number of items purchased per visit and average order value; a shift in the timing of a holiday between comparable periods; and the number of stores that have been in operation for more than 13 months.
We experienced a decrease in comparable sales in the prior year, which continued with a decline of 7.3% for the 2023 first quarter. See the discussion on Net Sales below for some contributing factors to these changes.
Transactions and average ticket. We define transactions as the number of customer transactions for stores and e-commerce during a given period on a comparable sales basis. Transactions are influenced by customer traffic, the amount of customers that visited our stores or website, and sales conversion, the percent of those customers that made a purchase. We define average ticket as total comparable sales divided by the number of transactions during a given period, which tells us the average amount the customer is spending on a purchase.
Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow. Management uses Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. Management also uses Adjusted EBIT as a performance target to establish and award discretionary annual incentive compensation. See "Non-GAAP Measures" below.
Components of Our Results of Operations. Our profitability is primarily influenced by fluctuations in net sales, gross margin and our ability to leverage selling, general and administrative expenses.
Net Sales. Net sales are derived from in-store and e-commerce merchandise sales, net of sales tax and an allowance for merchandise returns.
Net sales fluctuations can be driven by new store openings, comparable sales increases or decreases including e-commerce sales, our ability to adjust inventory based on sales fluctuations, our management of vendor relations and meeting customer demand, allowances and logistics, seasonality, unseasonal or extreme weather, changes in consumer shopping preferences, consumer discretionary spending, and market and sales promotions.
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We must maintain sufficient inventory levels of merchandise that our customers desire to successfully operate our business. A shortage of popular merchandise could reduce our net sales. Conversely, we also must seek to avoid accumulating excess inventory to avoid markdowns and clearance which negatively impact sales and gross margin. We have deployed several new tools over recent years to improve inventory handling and vendor management, including third-party programs to analyze our inventory stock and execute a disciplined markdown strategy throughout the year at every location. This implementation, along with other factors, has allowed us to improve our inventory management in stores over the past few years. We have coupled these tools with the data we have been able to collect from our Academy Credit Card program, our customer database and targeted customer surveys, so that we can better estimate future inventory requirements. It is imperative that we continue to find innovative ways to strengthen our inventory management if we are to remain competitive and expand our margins on a go-forward basis.
Our broad assortment gives us an advantage over mass general merchants who typically do not carry the leading national brands sold at Academy. We have also continued to add private label brand products to our assortment of products, which we generally price lower than the national brand products of comparable quality that we also offer. A shift in our sales mix in which we sell more units of our private label brand products and fewer units of the national brand products would generally have a positive impact on our gross margin but an adverse impact on our total net sales. Furthermore, our softgoods merchandise divisions, which consist of apparel and footwear, have higher margins than our hardgoods merchandise divisions, which consist of outdoors and sports and recreation. A shift in sales mix toward softgoods would generally have a positive impact on gross margin and a shift in sales mix towards hardgoods would generally have a negative impact on gross margin. In recent years we have experienced higher sales related to the outdoors and sports and recreation merchandise divisions, as our customers turned to us for isolated recreation and outdoor and leisure activities during the pandemic. As our business begins to normalize, we are experiencing a shift in our sales mix from the outdoors and sports and recreation merchandise divisions to the footwear and apparel merchandise divisions, which would generally have a positive impact on our gross margin rate.
The expansion and enhancement of our omnichannel capabilities has resulted in increased sales in recent years, and we expect that it will continue to be a driver of growth in our net sales. We continue to invest in initiatives that will increase traffic to our e-commerce platform, which includes our website and mobile app, and drive increased online sales conversion. We have recently improved our omnichannel capabilities by implementing several innovative features to enhance the customer shopping experience, including outfitting, express check-out and enabling biometric security measures. Our improved e-commerce platform supports our stores with digital marketing and our BOPIS and ship-to-store programs. Additionally, our e-commerce platform allows us to reach customers outside of our current store footprint and introduces new customers to the Academy brand. It also allows for us to connect further with our customers for marketing and product education. We believe it is important that we continue to grow our omnichannel capabilities, which, together with recent enhancements made to our website and omnichannel capabilities, contributed to the increase in e-commerce sales during 2022. During the 2023 first quarter, stores facilitated approximately 95% of our total sales, including ship-from-store, BOPIS and in-store retail sales. We expect to continue to invest in expanding and enhancing our omnichannel capabilities, including our mobile app, optimizing the web site experience and upgrading our fulfillment capabilities, which will continue to require significant investments by us.
We expect that new stores will be a key driver of growth in our net sales in the future as we execute our new store opening growth plans of 13 to 15 new stores in 2023 and 120 to 140 new stores over the next five years. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. We are continually assessing the number of locations available that could accommodate our preferred size of stores in markets we would consider, and during the 2023 first quarter we opened one new store. We expect most of our stores to achieve profitability within the first twelve months of opening. We believe our real estate strategy has positioned us well for further expansion.
Gross Margin. Gross margin is our net sales less cost of goods sold. Our cost of goods sold includes the direct cost of merchandise and costs related to procurement, warehousing and distribution, which consist primarily of payroll and benefits, distribution center occupancy costs and freight and are generally variable in nature relative to our sales volume.
Our gross margin depends on a number of factors, such as net sales increases or decreases, our promotional activities, product mix including owned brand merchandise sales, and our ability to control cost of goods sold, such as inventory and logistics cost management. Our gross margin is also impacted by variables including commodity costs, freight costs, shrinkage and inventory processing costs and e-commerce shipping costs. We track and measure gross margin as a percentage of net sales in order to evaluate our performance against profitability targets.
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During 2021, there was increased competition across the industry for resources throughout a constrained supply chain, which resulted in disruptions to the flow of products from our vendors, labor shortages, reduced shipping container availability, and longer delays at the port. As a result, we experienced a period of decreased or delayed supply and high inflation which negatively impacted transportation and inventory costs. Over the past year, we have seen improvement to these constraints, resulting in decreased freight costs.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses include store and corporate administrative payroll and payroll benefits, store and corporate headquarters occupancy costs, advertising, credit card processing, information technology, pre-opening costs and other store and administrative expenses. These expenses are both variable and fixed in nature. SG&A expenses as a percentage of sales increased from 21.5% in the 2022 first quarter to 24.6% in the 2023 first quarter. We track and measure operating expenses as a percentage of net sales in order to evaluate our performance against profitability targets. Management of SG&A expenses depends on our ability to balance a control of operating costs, such as store, distribution center, and corporate headcount, information technology infrastructure and marketing and advertising expenses, with efficiently and effectively servicing our customers.
Pre-opening expenses represent non-capital expenditures associated with the opening of new stores and distribution centers prior to sales generation or start of operations, which consist primarily of occupancy costs, marketing, payroll and recruiting costs, and are expensed as incurred. As we execute our new store opening growth plans of 13 to 15 new stores in 2023 and 120 to 140 new stores over the next five years, we expect our pre-opening expenses to increase and result in a negative impact to SG&A as a percentage of sales. We opened one new store and incurred pre-opening expenses of $1.6 million during the 2023 first quarter. We opened one new store and incurred pre-opening expenses of $1.0 million during the 2022 first quarter.
Interest Expense. Interest expense includes regular interest payable related to our Term Loan, Notes and ABL Facility (see Note 4 to the accompanying financial statements) and the amortization of our deferred loan costs and original issuance discounts associated with the acquisition of the debt. In December of 2022, we utilized cash on hand to voluntarily prepay $100 million of outstanding borrowings on our Term Loan (see Note 4 to the accompanying financial statements), which has resulted in interest expense reductions in the thirteen weeks ended April 29, 2023. However, during 2022 and 2023 first quarter, the Federal Reserve increased the federal funds benchmark rate, which resulted in increased interest rates on our Term Loan and led to higher interest expense in the 2023 first quarter relative to the prior year quarter.
Income Tax Expense. ASO, Inc. is treated as a U.S. corporation for U.S. federal, state, and local income tax purposes and accordingly, a provision for income taxes has been recorded for the anticipated tax consequences of our reported results of operations for federal, state and local income taxes. Recent fluctuations in income tax expense have been primarily as a result of changes in income before income taxes.
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Results of Operations
Thirteen Weeks Ended April 29, 2023 Compared to Thirteen Weeks Ended April 30, 2022
The following table sets forth amounts and information derived from our unaudited statements of income for the periods indicated as follows (dollar amounts in thousands):
Thirteen Weeks Ended Change
April 29, 2023 April 30, 2022 Dollars Percent
Net sales $ 1,383,609 100.0 % $ 1,467,730 100.0 % $ (84,121) (5.7) %
Cost of goods sold 916,494 66.2 % 946,306 64.5 % (29,812) (3.2) %
Gross margin 467,115 33.8 % 521,424 35.5 % (54,309) (10.4) %
Selling, general and administrative expenses 340,919 24.6 % 315,931 21.5 % 24,988 7.9 %
Operating income 126,196 9.1 % 205,493 14.0 % (79,297) (38.6) %
Interest expense, net 11,230 0.8 % 10,920 0.7 % 310 2.8 %
Other (income), net (3,713) (0.3) % (697) (0.0) % (3,016) NM
Income before income taxes 118,679 8.6 % 195,270 13.3 % (76,591) (39.2) %
Income tax expense 24,709 1.8 % 45,464 3.1 % (20,755) (45.7) %
Net income $ 93,970 6.8 % $ 149,806 10.2 % $ (55,836) (37.3) %
*Percentages in table may not sum properly due to rounding.
**NM - Not meaningful
Net Sales . Net sales decreased $84.1 million, or 5.7%, for the 2023 first quarter compared to the 2022 first quarter as a result of decreased comparable sales of 7.3%, which were partially offset by increased sales generated from new locations. As of the end of the 2023 first quarter, we operated nine additional stores as compared to the end of the 2022 first quarter, and we had the full benefit of one store opened during the 2022 first quarter. Collectively, these stores accounted for a net $22.9 million increase in net sales for the 2023 first quarter.
The decrease of 7.3% in comparable sales was driven by lower sales across all merchandise divisions as a result of a decrease in transactions of 6.7% and a decline in average ticket of 0.6%. The outdoors merchandise division sales declines were led by the hunting and fishing categories. The sports and recreation merchandise division sales were primarily driven by decreased sales in fitness equipment, water sports, bikes and outdoor games, partially offset by sales increases in team sports, including baseball, golf and racquet sports. The footwear merchandise division sales decreased due to lower sales in athletic footwear, partially offset by increased sales in team sports footwear. The apparel merchandise division was relatively flat compared to the prior year.
E-commerce net sales represented 8.2% of merchandise sales in the 2023 first quarter compared to 9.5% in the 2022 first quarter.
Gross Margin. Gross margin decreased $54.3 million, or 10.4%, to $467.1 million for the 2023 first quarter from $521.4 million for the 2022 first quarter. As a percentage of net sales, gross margin decreased 1.7% from 35.5% in the 2022 first quarter to 33.8% in the 2023 first quarter. The decrease of 170 basis points in gross margin is primarily attributable to:
• 110 basis points of unfavorability in merchandise margin as a result of increased clearance and promotional activity compared to the 2022 first quarter; and
• 76 basis points of unfavorability as a result of increased inventory shrink.
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Selling, General and Administrative Expenses. SG&A expenses increased $25.0 million, or 7.9%, to $340.9 million for the 2023 first quarter from $315.9 million for the 2022 first quarter. As a percentage of net sales, SG&A expenses increased 3.1% to 24.6% in the 2023 first quarter compared to 21.5% in the 2022 first quarter. The increase of 310 basis points is primarily attributable to deleverage from increased costs on decreased sales. SG&A costs increased $25.0 million primarily as a result of:
• Employee compensation costs increased $12.0 million primarily due to increased equity compensation and an increased wages expense over the prior year, partially attributable to the addition of nine new stores since the end of the prior year first quarter;
• Advertising spend increase of $7.0 million; and
• Property and facility fees increase of $4.0 million primarily due to the addition of new stores.
Interest Expense. Interest expense increased $0.3 million, or 2.8%, for the 2023 first quarter when compared to the 2022 first quarter, resulting from an increase in interest rates in recent months on our Term Loan, which was partially offset by a lower outstanding balance on our long-term debt as a result of a voluntary prepayment of $100.0 million in December 2022.
Other (Income), net. Other income, net, increased $3.0 million in the 2023 first quarter when compared to the 2022 first quarter due to higher interest rates on money market investments in the current year.
Income Tax Expense. Income tax expense decreased $20.8 million to $24.7 million for the 2023 first quarter as compared to $45.5 million for the 2022 first quarter, resulting primarily from a decrease in pre-tax income.
Non-GAAP Measures
Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow, as shown below, have been presented in this Quarterly Report as supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America ("GAAP"). We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense and depreciation, amortization and impairment, further adjusted to exclude costs such as equity compensation expense, (gain) loss on early retirement of debt, net, payroll taxes associated with the 2021 Vesting Event and other adjustments. We define Adjusted EBIT as net income (loss) before interest expense, net, and income tax expense, further adjusted to exclude costs such as equity compensation expense, (gain) loss on early retirement of debt, net, payroll taxes associated with the 2021 Vesting Event and other adjustments. We describe these adjustments reconciling net income (loss) to Adjusted EBITDA and to Adjusted EBIT in the applicable table below. We define Adjusted Net Income as net income (loss), plus costs such as equity compensation expense, (gain) loss on early retirement of debt, net, payroll taxes associated with the 2021 Vesting Event and other adjustments, less the tax effect of these adjustments. We define basic Adjusted Earnings per Share as Adjusted Net Income divided by the basic weighted average common shares outstanding during the period and diluted Adjusted Earnings per Share as Adjusted Net Income divided by the diluted weighted average common shares outstanding during the period. We describe these adjustments by reconciling net income (loss) to Adjusted Net Income and Adjusted Earnings per Share in the applicable table below. We describe Adjusted Free Cash Flow as net cash provided by (used in) operating activities less net cash used in investing activities. We describe this adjustment by reconciling net cash provided by operating activities to Adjusted Free Cash Flow in the applicable table below.
We believe Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management believes Adjusted Free Cash Flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash. Management uses Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Management has also historically used Adjusted EBIT as a performance target to establish and award discretionary annual incentive compensation.
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Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow are not recognized terms under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or net cash provided by operating activities as a measure of liquidity, or any other performance measures derived in accordance with GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share should not be construed to imply that our future results will be unaffected by unusual or non-recurring items. In evaluating Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow should not be construed to imply that our future results will be unaffected by any such adjustments.
Our Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow measures have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share do not reflect costs or cash outlays for capital expenditures or contractual commitments;
• Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share do not reflect changes in, or cash requirements for, our working capital needs;
• Adjusted EBITDA and Adjusted EBIT do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, and Adjusted Free Cash Flow does not reflect the cash requirements necessary to service principal payments on our debt;
• Adjusted EBITDA and Adjusted EBIT do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;
• Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted Free Cash Flow do not reflect cash requirements for such replacements; and
• other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. Management compensates for these limitations by primarily relying on our GAAP results in addition to using Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow supplementally.
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Adjusted EBITDA and Adjusted EBIT
The following table provides reconciliations of net income to Adjusted EBITDA and to Adjusted EBIT for the periods presented (amounts in thousands):
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
Net income $ 93,970 $ 149,806
Interest expense, net 11,230 10,920
Income tax expense 24,709 45,464
Depreciation and amortization 26,261 25,578
Equity compensation (a) 11,382 3,499
Adjusted EBITDA (b) $ 167,552 $ 235,267
Less: Depreciation and amortization (26,261) (25,578)
Adjusted EBIT (b) $ 141,291 $ 209,689
(a) Represents non-cash charges related to equity-based compensation, which vary from period to period depending on certain factors such as timing and valuation of awards, achievement of performance targets and equity award forfeitures.
(b) Effective January 28, 2023, we no longer exclude pre-opening expenses from our computations of Adjusted EBITDA and Adjusted EBIT. Adjusted EBITDA and Adjusted EBIT for the thirteen weeks ended April 30, 2022 have been revised to the current period computation methodology. See the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Selling, General and Administrative Expenses for details of our pre-opening expenses for the periods presented.
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Adjusted Net Income and Adjusted Earnings per Share
The following table provides a reconciliation of net income to Adjusted Net Income and Adjusted Earnings per Share for the periods presented (amounts in thousands, except per share data):
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
Net income $ 93,970 $ 149,806
Equity compensation (a) 11,382 3,499
Tax effects of these adjustments (b) (2,370) (816)
Adjusted Net Income (c) $ 102,982 $ 152,489
Earnings per common share:
Basic $ 1.22 $ 1.73
Diluted $ 1.19 $ 1.69
Adjusted Earnings per Share:
Basic $ 1.34 $ 1.76
Diluted $ 1.30 $ 1.72
Weighted average common shares outstanding:
Basic
76,862 86,658
Diluted
79,288 88,614
(a) Represents non-cash charges related to equity-based compensation, which vary from period to period depending on certain factors such as timing and valuation of awards, achievement of performance targets and equity award forfeitures.
(b) For the thirteen weeks ended April 29, 2023 and April 30, 2022, this represents the estimated tax effect (by using the projected full year tax rates for the respective years) of the total adjustments made to arrive at Adjusted Net Income.
(c) Effective January 28, 2023, we no longer exclude pre-opening expenses from our computation of Adjusted Net Income. Adjusted Net Income for the thirteen weeks ended April 30, 2022 has been revised to the current period computation methodology. See the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Selling, General and Administrative Expenses for details of our pre-opening expenses for the periods presented.
Adjusted Free Cash Flow
The following table provides a reconciliation of net cash provided by operating activities to Adjusted Free Cash Flow for the periods presented (amounts in thousands):
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
Net cash provided by operating activities $ 52,135 $ 97,097
Net cash used in investing activities (40,547) (17,312)
Adjusted Free Cash Flow $ 11,588 $ 79,785
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Liquidity and Capital Resources
Sources and Uses of Liquidity
Our principal liquidity requirements are for working capital, capital expenditures and cash used to pay our debt obligations and related interest expense. We also use cash to pay dividends and occasionally use cash to repurchase common stock. We fund these liquidity requirements through cash and cash equivalents, cash generated from operating activities, issuances of debt (such as the Notes) and borrowings under our ABL Facility. On April 29, 2023, our cash and cash equivalents totaled $295.5 million. We believe our cash and cash equivalents, as well as our availability under the ABL Facility, will be sufficient to fund our cash requirements for at least the next 12 months.
Long-Term Debt
As of April 29, 2023, the Company's long-term debt and interest rates consist of (see Note 4 to the accompanying financial statements):
• Notes - 6.00% fixed rate senior secured notes with $400 million in principal outstanding and full principal maturing November 15, 2027;
• Term Loan - 8.60% variable rate term-loan with $194.0 million in principal outstanding maturing November 6, 2027 and quarterly principal payments of $750 thousand; and
• ABL Facility - $1.0 billion commitment on a variable rate secured asset-based revolving credit facility with no principal outstanding maturing November 6, 2025.
The following table summarizes our current debt obligations by fiscal year (amounts in thousands):
2023 2024 2025 2026 2027 Total
Term Loan and related interest (1)
$ 14,842 $ 17,061 $ 15,430 $ 15,145 $ 192,767 $ 255,245
Notes and related interest (2)
24,000 24,000 24,000 24,000 424,000 520,000
ABL Facility and related interest (3)
1,916 2,500 1,909 — — 6,325
(1) Interest payments do not include amortization of discount and debt issuance costs and are approximated based on projected interest rates and assume no unscheduled principal payments.
(2) Interest payments do not include amortization of debt issuance costs and assumes Notes are paid in full at maturity date.
(3) Assumes a minimum revolving credit commitment of $1.0 billion and assumes no balances drawn on our ABL Facility.
Liquidity information related to the ABL Facility is as follows for the periods shown (dollar amounts in thousands):
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
Average funds drawn $ — $ —
Number of days with outstanding balance — —
Maximum daily amount outstanding $ — $ —
Minimum available borrowing capacity $ 986,122 $ 954,516
Liquidity information related to the ABL Facility (amounts in thousands) as of:
April 29, 2023 January 28, 2023 April 30, 2022
Outstanding borrowings $ — $ — $ —
Issued letters of credit 13,878 13,878 17,828
Available borrowing capacity 986,122 947,764 982,172
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Leases
We lease store locations, distribution centers, office space and certain equipment under operating leases expiring between fiscal years 2023 and 2043. Operating lease obligations include future minimum lease payments under all of our non-cancelable operating leases at April 29, 2023. The following table summarizes our remaining operating lease obligations by fiscal year:
2023 2024 2025 2026 2027 After 2027 Total
Operating lease payments (1) (2)
$ 160,245 $ 209,067 $ 202,307 $ 194,375 $ 180,579 $ 940,233 $ 1,886,806
(1) Minimum lease payments have not been reduced by sublease rentals of $0.4 million due in the future under non-cancelable sub-leases.
(2) These balances include stores where we have an executed contract but have not taken possession of the location as of April 29, 2023.
In the thirteen weeks ended April 29, 2023, we opened one new location and we intend to open 13 to 15 new locations in 2023.
Share Repurchases
On June 2, 2022, the Board of Directors of the Company authorized a share repurchase program (the "2022 Share Repurchase Program") under which the Company may purchase up to $600 million of its outstanding shares during the three-year period ending June 2, 2025. The 2022 Share Repurchase Program does not obligate the Company to acquire any particular number of common shares, and the program may be suspended, extended, modified or discontinued at any time. As of April 29, 2023, we had approximately $249.4 million available for share repurchases pursuant to the 2022 Share Repurchase Program (see Note 2 to the accompanying financial statements).
The following table summarizes our share repurchases for the 2023 first quarter (dollar amounts in thousands, except per share amounts):
Total Number of Shares Purchased Average Price Paid per Share (1)
Total Amount Repurchased (1)
First Quarter (January 29, 2023 to April 29, 2023) (2)
750,010 $ 66.69 $ 50,015
Total Shares Repurchased 750,010 $ 66.69 $ 50,015
(1) Excludes the impact of excise taxes.
(2) See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for further detail on the 2023 first quarter share repurchases.
Dividends
The following table summarizes our quarterly dividend payments for the 2023 first quarter (amounts in thousands, except per share amounts):
Dividend per Share Total Dividends Paid Stockholder Date of Record
First Quarter (January 29, 2023 to April 29, 2023) $ 0.09 $ 6,929 March 23, 2023
Total Dividends Paid $ 6,929
On June 1, 2023, the Company's Board of Directors declared a quarterly cash dividend with respect to the fiscal quarter ended April 29, 2023, of $0.09 per share of the Company's common stock, payable on July 13, 2023, to stockholders of record as of the close of business on June 15, 2023.
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Capital Expenditures
The following table summarizes our capital expenditures for the thirteen weeks ended April 29, 2023 and April 30, 2022 (amounts in thousands):
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
New stores $ 17,207 $ 4,888
Corporate, e-commerce and information technology programs 16,348 8,661
Updates for existing stores and distribution centers 6,909 3,731
Total capital expenditures $ 40,464 $ 17,280
We expect capital expenditures for fiscal year 2023 to be between $200 million and $250 million. The following table summarizes our forecasted allocation of capital expenditures for fiscal year 2023:
2023
New stores 55 %
Corporate, e-commerce and information technology programs 25 %
Updates for existing stores and distribution centers 20 %
We review forecasted capital expenditures throughout the year and will adjust or our capital expenditures based on business conditions at that time.
Cash Flows for the Thirteen Weeks Ended April 29, 2023 and April 30, 2022
Our unaudited statements of cash flows are summarized as follows (in thousands):
Thirteen Weeks Ended
April 29, 2023 April 30, 2022
Net cash provided by operating activities $ 52,135 $ 97,097
Net cash used in investing activities (40,547) (17,312)
Net cash used in financing activities (53,197) (93,388)
Net decrease in cash and cash equivalents $ (41,609) $ (13,603)
Operating Activities. Cash flows from operating activities are seasonal in our business. Typically, cash flows from operations are used to build inventory in advance of peak selling seasons, with the fourth quarter pre-holiday season inventory increase being the most significant.
Cash provided by operating activities in the 2023 first quarter decreased $45.0 million, compared to 2022 first quarter. This decrease in cash was attributable to:
• $55.8 million decrease in net income;
• $9.9 million net increase in cash flows provided by operating assets and liabilities; and
• $1.0 million net increase in non-cash charges.
The increase in cash flows from operating assets and liabilities was primarily attributable to:
• $49.1 million increase in cash flows from merchandise inventories, net related to a reduction in inventory replenishment in the 2023 first quarter when compared to the prior year period;
• $34.8 million increase in cash flows from a decrease in performance compensation payments made in the 2023 first quarter relative to the prior year quarter; partially offset by a
• $58.9 million decrease in cash flows from accounts payable primarily due to decreased inventory receipts relative to the prior year first quarter.
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Investing Activities . Cash used in investing activities increased $23.2 million in the 2023 first quarter compared to the 2022 first quarter. The increase in cash used in investing activities is primarily due to:
• $23.2 million higher capital expenditures driven by increased investments in new stores in the 2023 first quarter.
Financing Activities . Cash used in financing activities decreased $40.2 million in the 2023 first quarter, compared to the 2022 first quarter. The primary drivers of the decrease were:
• $38.5 million decrease in cash outflows caused by a reduction in repurchases and simultaneous retirement of common stock in the current year.
Critical Accounting Policies and Estimates
This management's discussion and analysis of our financial condition and results of operations is based upon our unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Our management bases its estimates on historical experience and other assumptions it believes to be reasonable under the circumstances. Actual results could differ significantly from those estimates.
Management evaluated the development and selection of our critical accounting policies and estimates used in the preparation of the Company's unaudited financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical. Our most significant estimates and assumptions that materially affect the financial statements involve difficult, subjective or complex judgments by management, including the valuation of merchandise inventories and performing goodwill, intangible and long-lived asset impairment analyses. Given the global economic climate, these estimates remain challenging, and actual results could differ materially from our estimates. More information on all of our significant accounting policies can be found in the "Critical Accounting Policies and Estimates" section of the Annual Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the Annual Report, other than the following:
Effective January 29, 2023, the Company changed the method of accounting for its inventories from the last-in-first-out (“LIFO”) method to the weighted average cost method. The Company believes that this inventory method change is preferable because we believe it improves comparability with industry peers and is a more accurate representation of merchandise inventories, net and cost of goods sold. Due to historical price deflation on the Company’s merchandise purchases, the Company was in a position where the LIFO merchandise inventories value exceeded the cost of its inventory for all periods presented in the consolidated financial statements. In considering the lower of cost or market principle, merchandise inventories valued at LIFO, including necessary valuation adjustments, approximated the cost of such inventories using the weighted average inventory method (see Note 2 to the accompanying financial statements).
Recent Accounting Pronouncements
The information set forth in Note 2 to our unaudited consolidated financial statements under Part I, Item 1 of this Quarterly Report is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in the Annual Report under "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk."
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