Academy Sports & Outdoors, Inc. 10-Q

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; 20 • 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. 21 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 and thirty-nine weeks ended October 28, 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 third quarter," or similar reference refers to the thirteen week period ended October 28, 2023, and any reference to the "prior year quarter," "2022 third quarter" or similar reference refers to the thirteen week period ended October 29, 2022. Any reference in this Quarterly Report to "current year-to-date," "year-to-date 2023" or similar reference represents the thirty-nine week period ended October 28, 2023, and any reference in this Quarterly Report to "prior year-to-date," "year-to-date 2022" or similar reference represents the thirty-nine week period ended October 29, 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, footwear and sports and recreation (representing 32%, 27%, 22% and 19% of our 2023 third 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 October 28, 2023, we operated 275 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. 22 The following table summarizes store activity for the periods indicated: Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 Beginning stores 268 259 Q1 new stores 1 1 Q2 new stores 1 1 Q3 new stores 5 4 Closed — — Ending stores 275 265 Relocated stores — — 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 7.6% for the year-to-date 2023. 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. 23 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. 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 has normalized, we have experienced a shift in our sales mix from the outdoors and sports and recreation merchandise divisions to the footwear and apparel merchandise divisions, which has generally had 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 a redesigned home page, additional BOPIS features, and enhanced shipment notifications. 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 third 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 14 total new stores in 2023 and 120 to 140 total new stores over the five fiscal year period ending with 2027. 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 third quarter we opened five new stores. 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. 24 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 private label 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 (discussed below) 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. During 2021, we began to see 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. We refer to loss or theft of inventory as "shrinkage" or "shrink". Over recent years, the United States retail industry, including Academy, has experienced a significant increase in inventory shrink, which has resulted in a negative impact to our gross margins. A prolonged period of significant increased shrink could have a material negative impact on our gross margin and results of operations. 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 prior year-to-date to 23.8% in the current year-to-date, primarily attributable to the addition of new stores. 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 14 total new stores in 2023 and 120 to 140 total new stores over the five fiscal year period ending with 2027, we expect our pre-opening expenses to increase and result in a negative impact to SG&A as a percentage of sales. The following table summarizes our pre-opening expense activity for the periods presented: Thirteen Weeks Ended Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Number of new stores opened 5 4 7 6 Pre-opening expenses (in millions) $ 4.0 $ 2.1 $ 7.9 $ 4.9 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 2022, we utilized cash on hand to voluntarily prepay $100 million of outstanding borrowings on our Term Loan; however, this decrease in the Term Loan was largely offset by increases made by the Federal Reserve to the federal funds benchmark rate during 2022 and 2023, resulting in a small decrease in interest expense in the year-to-date 2023 compared to the year-to-date 2022. 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. 25 Results of Operations Thirteen Weeks Ended October 28, 2023 Compared to Thirteen Weeks Ended October 29, 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 October 28, 2023 October 29, 2022 Dollars Percent Net sales $ 1,397,777 100.0 % $ 1,493,925 100.0 % $ (96,148) (6.4) % Cost of goods sold 915,136 65.5 % 971,454 65.0 % (56,318) (5.8) % Gross margin 482,641 34.5 % 522,471 35.0 % (39,830) (7.6) % Selling, general and administrative expenses 345,910 24.7 % 342,949 23.0 % 2,961 0.9 % Operating income 136,731 9.8 % 179,522 12.0 % (42,791) (23.8) % Interest expense, net 10,930 0.8 % 12,163 0.8 % (1,233) (10.1) % Other (income), net (4,146) (0.3) % (2,538) (0.2) % (1,608) 63.4 % Income before income taxes 129,947 9.3 % 169,897 11.4 % (39,950) (23.5) % Income tax expense 29,969 2.1 % 38,156 2.6 % (8,187) (21.5) % Net income $ 99,978 7.2 % $ 131,741 8.8 % $ (31,763) (24.1) % *Percentages in table may not sum properly due to rounding. Net Sales . Net sales decreased $96.1 million, or 6.4%, in the 2023 third quarter over the prior year third quarter as a result of decreased comparable sales of 8.0%, which were partially offset by additional net sales generated by new locations. As of the end of the 2023 third quarter, we operated 10 additional stores as compared to the end of the 2022 third quarter, and we had the full benefit of four stores opened during the 2022 third quarter. Collectively, these stores accounted for a $21.9 million increase in net sales for the 2023 third quarter, which does not include e-commerce sales fulfilled from these locations. The decrease of 8.0% in comparable sales was driven by lower sales across all merchandise divisions as a result of a decrease in transactions of 8.1%, while average ticket remained relatively flat. The outdoors merchandise division sales declines were primarily as a result of a decrease in the hunting category, driven by decreases in firearms and ammunition sales over the prior year third quarter, which were partially offset by increased sales in the camping category. The apparel merchandise division sales decreased due to lower sales in athletic and outdoor apparel. The footwear merchandise division sales decrease was led by lower sales in the athletic footwear, work footwear and casual footwear categories. The decline in the sports and recreation merchandise division sales was primarily driven by decreased sales in fitness equipment and bikes. E-commerce net sales represented 9.4% of merchandise sales for the 2023 third quarter compared to 9.5% for the prior year third quarter. Gross Margin. Gross margin decreased $39.8 million, or 7.6%, to $482.6 million in the 2023 third quarter from $522.5 million in the 2022 third quarter. As a percentage of net sales, gross margin decreased 0.5% from 35.0% in the 2022 third quarter to 34.5% in the 2023 third quarter. The decrease of 50 basis points in gross margin is primarily attributable to: • 49 basis points of unfavorability in merchandise margin as a result of increased planned promotional activity compared to the 2022 third quarter; • 26 basis points of unfavorability in inventory overhead expenditures as a result of higher absorption rates from slower inventory turnover; • 19 basis points of unfavorability as a result of decreased vendor allowances; • 12 basis points of unfavorability related to increased inventory shrinkage; partially offset by • 77 basis points of favorability in import and domestic freight due to lower freight costs per unit. 26 Selling, General and Administrative Expenses. SG&A expenses increased $3.0 million, or 0.9%, to $345.9 million in the 2023 third quarter as compared to $342.9 million in the 2022 third quarter. As a percentage of net sales, SG&A expenses increased 1.7% to 24.7% in the 2023 third quarter compared to 23.0% in the 2022 third quarter. The increase of 170 basis points in SG&A is partially attributable to deleverage from decreased sales. SG&A costs also increased $3.0 million primarily as a result of: • Property and facility fees increase of $8.3 million primarily due to investments in long-term growth initiatives, which includes the addition of new stores and increased technology expense; partially offset by • Professional fees decrease of $2.5 million; and • Employee compensation costs decrease of $1.1 million, primarily driven by lower incentive compensation expenses in the current year quarter. Interest Expense. Interest expense decreased $1.2 million, or 10.1%, in the 2023 third quarter when compared with the 2022 third quarter, resulting from higher capitalized interest due to increased construction of new stores and a lower outstanding balance on our long-term debt driven by a voluntary prepayment of $100.0 million made in December 2022. Other (Income), net. Other (income), net, increased $1.6 million in the 2023 third quarter when compared with the 2022 third quarter, primarily driven by higher interest rates on money market investments in the current year. Income Tax Expense. Income tax expense decreased $8.2 million to $30.0 million for the 2023 third quarter as compared to $38.2 million in the 2022 third quarter, resulting primarily from a decrease in pre-tax income. Thirty-Nine Weeks Ended October 28, 2023 Compared to Thirty-Nine Weeks Ended October 29, 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): Thirty-Nine Weeks Ended Change October 28, 2023 October 29, 2022 Dollars Percent Net sales $ 4,364,463 100.0 % $ 4,648,570 100.0 % $ (284,107) (6.1) % Cost of goods sold 2,851,261 65.3 % 3,008,612 64.7 % (157,351) (5.2) % Gross margin 1,513,202 34.7 % 1,639,958 35.3 % (126,756) (7.7) % Selling, general and administrative expenses 1,039,312 23.8 % 998,209 21.5 % 41,103 4.1 % Operating income 473,890 10.9 % 641,749 13.8 % (167,859) (26.2) % Interest expense, net 33,473 0.8 % 34,240 0.7 % (767) (2.2) % Other (income), net (11,482) (0.3) % (4,676) (0.1) % (6,806) 145.6 % Income before income taxes 451,899 10.4 % 612,185 13.2 % (160,286) (26.2) % Income tax expense 100,876 2.3 % 141,837 3.1 % (40,961) (28.9) % Net income $ 351,023 8.0 % $ 470,348 10.1 % $ (119,325) (25.4) % *Percentages in table may not sum properly due to rounding. Net Sales . Net sales decreased $284.1 million, or 6.1%, for the year-to-date 2023 compared to the year-to-date 2022 as a result of decreased comparable sales of 7.6%, which were partially offset by increased sales generated from new locations. As of the end of the 2023 third quarter, we operated 10 additional stores as compared to the end of the 2022 third quarter, and we had the full benefit of six stores opened during the year-to-date 2022. Collectively, these stores accounted for a $69.1 million increase in net sales for the year-to-date 2023, which does not include e-commerce sales fulfilled from these locations. 27 The decrease of 7.6% in comparable sales was driven by lower sales across all merchandise divisions as a result of a decrease in transactions of 7.8%, while the average ticket remained relatively flat. The outdoors merchandise division sales declines were primarily as a result of the hunting category driven by decreases in firearms and ammunition sales over the prior year-to-date. The footwear merchandise division sales decreased due to lower sales in the athletic footwear and work footwear categories, partially offset by increased sales in the casual and seasonal footwear categories. The apparel merchandise division sales decreased due to lower sales in athletic and outdoor apparel, partially offset by increased sales in licensed apparel. The sports and recreation merchandise division decrease was a result of decreased sales in fitness equipment and bikes. E-commerce net sales represented 9.0% of merchandise sales in the year-to-date 2023 compared to 9.7% in the year-to-date 2022. Gross Margin. Gross margin decreased $126.8 million, or 7.7%, to $1,513.2 million for the year-to-date 2023 from $1,640.0 million for the year-to-date 2022. As a percentage of net sales, gross margin decreased 0.6% from 35.3% in the year-to-date 2022 to 34.7% in the year-to-date 2023. The decrease of 60 basis points in gross margin is primarily attributable to: • 60 basis points of unfavorability in merchandise margin as a result of increased planned promotional activity compared to the prior year-to-date; • 42 basis points of unfavorability as a result of increased inventory shrink; • 37 basis points of unfavorability in inventory overhead expenditures as a result of higher absorption rates from slower inventory turnover; partially offset by • 85 basis points of favorability in import and domestic freight due to lower freight costs per unit. Selling, General and Administrative Expenses. SG&A expenses increased $41.1 million, or 4.1%, to $1,039.3 million for the year-to-date 2023 from $998.2 million for the year-to-date 2022. As a percentage of net sales, SG&A expenses increased 2.3% to 23.8% in the year-to-date 2023 compared to 21.5% in the year-to-date 2022. The increase of 230 basis points is partially attributable to deleverage from decreased sales. SG&A costs also increased $41.1 million primarily as a result of: • Employee compensation costs increased $19.1 million primarily due to increased equity compensation and an increased wages expense over the prior year, partially attributable to the addition of 10 new stores since the end of the prior year third quarter; • Property and facility fees increase of $18.6 million primarily due to investments in long-term growth initiatives, which includes the addition of new stores and increased technology expense; and • Advertising spend increase of $5.4 million. Interest Expense. Interest expense decreased $0.8 million, or 2.2%, for the year-to-date 2023 when compared to the year-to-date 2022, resulting from higher capitalized interest due to increased construction of new stores and a lower outstanding balance on our long-term debt driven by a voluntary prepayment of $100.0 million made in December 2022, partially offset by an increase in interest rates on our Term Loan. Other (Income), net. Other income, net, increased $6.8 million in the year-to-date 2023 when compared to the year-to-date 2022 due to higher interest rates on money market investments in the current year. Income Tax Expense. Income tax expense decreased $41.0 million to $100.9 million for the year-to-date 2023 as compared to $141.8 million for the year-to-date 2022, resulting primarily from a decrease in pre-tax income. 28 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 and other adjustments included in the table below. We define Adjusted EBIT as Adjusted EBITDA less depreciation and amortization. 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 other adjustments included in the table below, 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. 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; 29 • 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. 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Net income $ 99,978 $ 131,741 $ 351,023 $ 470,348 Interest expense, net 10,930 12,163 33,473 34,240 Income tax expense 29,969 38,156 100,876 141,837 Depreciation and amortization 27,373 27,000 79,394 78,852 Equity compensation (a) 6,245 5,829 26,128 15,486 Adjusted EBITDA (b) $ 174,495 $ 214,889 $ 590,894 $ 740,763 Less: Depreciation and amortization (27,373) (27,000) (79,394) (78,852) Adjusted EBIT (b) $ 147,122 $ 187,889 $ 511,500 $ 661,911 (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 and thirty-nine weeks ended October 29, 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. 30 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Net income $ 99,978 $ 131,741 $ 351,023 $ 470,348 Equity compensation (a) 6,245 5,829 26,128 15,486 Tax effects of these adjustments (b) (1,531) (1,325) (5,909) (3,590) Adjusted Net Income (c) $ 104,692 $ 136,245 $ 371,242 $ 482,244 Earnings per common share: Basic $ 1.34 $ 1.67 $ 4.63 $ 5.67 Diluted $ 1.31 $ 1.62 $ 4.51 $ 5.54 Adjusted Earnings per Share: Basic $ 1.41 $ 1.72 $ 4.90 $ 5.82 Diluted $ 1.38 $ 1.67 $ 4.77 $ 5.68 Weighted average common shares outstanding: Basic 74,461 79,085 75,809 82,901 Diluted 76,057 81,379 77,893 84,910 (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 and thirty-nine weeks ended October 28, 2023 and October 29, 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 and thirty-nine weeks ended October 29, 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Net cash provided by operating activities $ 57,476 $ 50,763 $ 301,042 $ 309,169 Net cash used in investing activities (42,345) (31,677) (150,191) (79,811) Adjusted Free Cash Flow $ 15,131 $ 19,086 $ 150,851 $ 229,358 31 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 October 28, 2023, our cash and cash equivalents totaled $274.8 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 October 28, 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 - 9.18% variable rate term-loan with $192.5 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) $ 5,179 $ 19,931 $ 18,081 $ 17,551 $ 194,807 $ 255,549 Notes and related interest (2) 12,000 24,000 24,000 24,000 424,000 508,000 ABL Facility and related interest (3) 654 2,500 1,909 — — 5,063 (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): Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 Average funds drawn $ — $ — Number of days with outstanding balance — — Maximum daily amount outstanding $ — $ — Minimum available borrowing capacity $ 985,447 $ 954,516 Liquidity information related to the ABL Facility (amounts in thousands) as of: October 28, 2023 January 28, 2023 October 29, 2022 Outstanding borrowings $ — $ — $ — Issued letters of credit 11,553 13,878 17,378 Available borrowing capacity 988,447 947,764 982,622 32 Leases We lease store locations, distribution centers, office space and certain equipment under operating leases expiring between fiscal years 2023 and 2044. Operating lease obligations include future minimum lease payments under all of our non-cancelable operating leases at October 28, 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) $ 54,569 $ 220,419 $ 216,754 $ 208,723 $ 194,941 $ 1,033,542 $ 1,928,948 (1) Minimum lease payments have not been reduced by sublease rentals of $0.1 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 October 28, 2023. In the thirty-nine weeks ended October 28, 2023, we opened seven new locations and we intend to open 14 total 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 October 28, 2023, we had $99.4 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 third 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) 750,010 $ 66.69 $ 50,015 Second Quarter (April 30, 2023 to July 29, 2023) 1,994,064 53.37 106,432 Third Quarter (July 30, 2023 to October 28, 2023) (2) 863,631 50.51 43,625 Total Shares Repurchased 3,607,705 $ 55.46 $ 200,072 (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 third quarter share repurchases. On November 29, 2023, the Board of Directors of the Company authorized a new share repurchase program (the "2023 Share Repurchase Program") under which the Company may purchase up to $600 million of its outstanding shares during the three-year period ending November 29, 2026. The total availability under the combined 2023 Share Repurchase Program and 2022 Share Repurchase Program is $699.4 million (see Note 11 to the accompanying financial statements). Dividends The following table summarizes our quarterly dividend payments for the year-to-date 2023 (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 Second Quarter (April 30, 2023 to July 29, 2023) 0.09 6,896 June 15, 2023 Third Quarter (July 30, 2023 to October 28, 2023) 0.09 6,718 September 13, 2023 Total Dividends Paid $ 20,543 33 On November 29, 2023, the Company's Board of Directors declared a quarterly cash dividend with respect to the fiscal quarter ended October 28, 2023, of $0.09 per share of the Company's common stock, payable on January 10, 2024, to stockholders of record as of the close of business on December 13, 2023. Capital Expenditures The following table summarizes our capital expenditures for the thirty-nine weeks ended October 28, 2023 and October 29, 2022 (amounts in thousands): Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 New stores $ 75,156 $ 30,108 Corporate, e-commerce and information technology programs 52,357 35,979 Updates for existing stores and distribution centers 24,450 13,367 Total capital expenditures $ 151,963 $ 79,454 We expect capital expenditures for fiscal year 2023 to be between $175 million and $225 million. The following table summarizes our forecasted allocation of capital expenditures for fiscal year 2023: 2023 New stores 50 % Corporate, e-commerce and information technology programs 35 % Updates for existing stores and distribution centers 15 % 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 Thirty-Nine Weeks Ended October 28, 2023 and October 29, 2022 Our unaudited statements of cash flows are summarized as follows (in thousands): Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 Net cash provided by operating activities $ 301,042 $ 309,169 Net cash used in investing activities (150,191) (79,811) Net cash used in financing activities (213,169) (397,189) Net decrease in cash and cash equivalents $ (62,318) $ (167,831) 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 year-to-date 2023 decreased $8.1 million, compared to year-to-date 2022. This decrease in cash was attributable to: • $119.3 million decrease in net income; and • $5.3 million net decrease in non-cash charges; partially offset by a • $116.5 million net increase in cash flows provided by operating assets and liabilities. 34 The increase in cash flows from operating assets and liabilities was primarily attributable to: • $115.0 million increase in cash flows from merchandise inventories, net related to a reduction in inventory replenishment in the year-to-date 2023 when compared to the prior year period; • $33.7 million increase in cash flows from accrued expenses and other current liabilities, primarily driven by a decrease in performance compensation payments made in the year-to-date 2023 relative to the prior year; and • $33.1 million increase in cash flows from accounts payable, due to decreased inventory receipts relative to the prior year third quarter; partially offset by • $60.0 million decrease in cash flows from prepaid expenses and other current assets, largely driven by increased construction reimbursement receivables in the year-to-date 2023 relative to the prior year. Investing Activities . Cash used in investing activities increased $70.4 million in the year-to-date 2023 compared to the year-to-date 2022. The increase in cash used in investing activities is primarily due to: • $72.5 million higher capital expenditures, primarily driven by increased investments in new stores in the year-to-date 2023. Financing Activities . Cash used in financing activities decreased $184.0 million in the year-to-date 2023, compared to the year-to-date 2022. The primary drivers of the decrease were: • $189.4 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). 35 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."