Item 7. Management’s Discussion and Analysis
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
The following information should
be read in
conjunction with the Consolidated
Financial Statements,
including the accompanying Notes appearing in Part
II, Item 8 of this
report on Form 10-K.
This section
of the Form
10-K
generally discusses fiscal 2020
and fiscal 2019
and year-to-year comparisons between
fiscal 2020
and fiscal
2019.
Discussions of
fiscal 2018
items and
year-to-year comparisons
between
fiscal 2019
and fiscal
2018 that
are not
included in
this Form
10-K
can be
found in
“Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations”
in Part
II, Item
7 of
the
Company’s Annual Report on Form 10-K
for the fiscal year ended February 1, 2020.
COVID-19 Update
The COVID
-19 pandemic
has adversely
impacted the
Company's business,
financial condition
and
operating results
through fiscal
2020, and
we expect
that it
will continue
to do
so in
fiscal 2021
and
possibly beyond. Adverse
financial impacts associated
with the outbreak
include, but are
not limited to,
(i) lower net
sales in markets
affected by the
actual or potential
outbreak, whether due to
state and local
orders to
close stores,
reductions in
store traffic
and customer
demand, labor
shortages, or
all of
these
factors, (ii) lower net sales caused
by the delay of inventory production and fulfillment,
(iii) and
incremental costs
associated with
efforts to
mitigate the
effects of
the outbreak,
including increased
freight and logistics costs and other expenses.
Responses to
the pandemic
by customers,
government and
the private
sector have
and will
likely
continue to
adversely impact
our business
operations.
In the
first quarter
of fiscal
2020, the
pandemic
resulted in state and local orders mandating store closures and other measures to mitigate
the spread of the
virus.
Though the Company’s stores
were reopened in the second quarter of fiscal 2020,
they continue to
operate at
reduced hours.
Periodic increases
in infection
rates in
communities where
our stores
are
located may prompt
further governmental
measures or
public health
guidance to
reduce public
activity
and gatherings
in order
to mitigate
the spread
of the
virus, and
may also
continue to
adversely affect
consumer confidence.
There continues to
be significant uncertainty
regarding the breadth,
severity and
duration of
business disruptions
related to
COVID-19, as
well as
its impact
on the
global and
U.S.
economy, consumer willingness to visit malls and shopping centers, and its impact
on appropriate
associate staffing levels for our stores.
The Company’s
pre-pandemic liquidity
position has
enabled it
to offset
the downturn
in operating
cash flows
since the
onset of
the pandemic
by liquidating
short-term investments
and drawing
and
repaying under
its revolving
credit facility.
The Company
has also
implemented various
cost-cutting
measures to
conserve cash,
such as
suspending dividend
payments, reducing
non-committed capital
expenditures (only half of planned new stores were opened during 2020)
and reducing corporate field and
store overhead.
The Company is grateful for
the efforts
of its
associates in helping to address the
considerable
challenges created by
the pandemic.
In recognition of
these efforts and
to aid with
retention, on March
24, 2021 the
Compensation Committee approved a
discretionary bonus of
$1.6 million ($1.3
million net
of taxes) to key associates as discussed in more detail in “Other Information”
in Part II, Item 9B.
The extent
to which
the COVID
-19 pandemic
ultimately impacts the
Company’s business,
financial
condition, results of operations, cash flows, and liquidity may differ from management’s current estimates
due to inherent uncertainties regarding the duration and further spread of the outbreak,
its severity, actions
taken to contain
the virus or
treat its impact,
and how quickly
and to what
extent normal economic
and
operating conditions can resume.
28
While the Company
currently anticipates a
continuation of the
adverse impacts of
COVID-19 during
2021 and possibly
beyond, the duration
and severity of
these effects will
depend on the
course of future
developments, which are
highly uncertain, including
the relative speed
and success of,
as well as
public
confidence in, mitigation measures
such as the current
effort to vaccinate substantial
portions of the U.S.
and global
population, emerging
information regarding
variants of
the virus
or new
viruses and
their
potential impact on
current mitigation efforts,
public attitudes toward
continued compliance with
containment and
mitigation measures, and
possible new information
and understanding that
could alter
the course and duration of current measures to combat the spread of the virus.
Results of Operations
The table below sets forth certain financial data of the Company expressed
as a percentage of retail sales for the
years indicated:
Fiscal Year Ended
January 30,
2021
February 1,
2020
February 2,
2019
Retail sales …………………………………………………………..
100.0
%
100.0
%
100.0
%
Other revenue…………………………………………………………
1.3
1.1
1.0
Total revenues ……………………………………………………….
101.3
101.1
101.0
Cost of goods sold …………………………………………………..
76.3
62.4
63.6
Selling, general and administrative………………………………….
36.4
32.3
32.0
Depreciation …………………………………………………………
2.6
1.9
2.0
Interest and other income ……………………………………………
1.2
0.7
0.6
Income (loss) before income taxes ……………………………
(12.8)
5.3
4.0
Net income (loss) ……………………………………………………
(8.4)
%
4.4
%
3.7
%
Fiscal 2020 Compared to Fiscal 2019
Retail sales decreased by 30.5% to $567.5 million
in fiscal 2020 compared to $816.2 million in fiscal 2019.
The decrease in
retail sales in
fiscal 2020 was
primarily due to
a 32% decrease
in same-store sales,
partially
offset by sales
from new store
openings. Same-store sales
includes stores that
have been open
more than 15
months.
Stores that have been relocated or expanded
are also included in the same-store sales calculation after
they have been
open more than
15 months.
In fiscal 2020
and fiscal 2019,
e-commerce sales were
less than
5% of
total sales
and same
-store sales.
The method
of calculating
same-store sales
varies across
the retail
industry. As
a result,
our same
-store sales
calculation may
not be
comparable to
similarly titled
measures
reported by other
companies.
Total revenues, comprised of retail sales and
other revenue (principally
finance
charges and late
fees on customer
accounts receivable, gift card
breakage,
shipping charges for
e-commerce
purchases
and layaway fees),
decreased by 30.3% to
$575.1 million in fiscal 2020
compared to $825.3 million
in fiscal 2019.
The Company operated 1,330
stores at January 30,
2021 compared to 1,281
stores operated at
February 1, 2020.
In fiscal 2020, the Company opened 76 new stores
and closed 27 stores.
Other revenue
in total
decreased to
$7.6 million
in fiscal
2020 from
$9.2 million
in fiscal
2019.
The
decrease resulted primarily due to
decreases in finance and
layaway charges, partially offset
by an increase in
e-commerce shipping revenues.
Credit revenue of
$2.7 million represented
0.5% of total
revenue in fiscal
2020,
a $0.9 million
decrease
compared to
fiscal 2019
credit revenue
of $3.6
million or
0.4% of
total revenue.
The decrease
in credit
revenue was
primarily due
to reductions
in finance
and late
charge income
as a
result of
lower accounts
receivable balances.
Credit revenue is comprised of interest earned on the Company’s private label credit card
portfolio and
related fee
income. Related
expenses include
principally payroll,
postage and
other
administrative expenses and totaled
$1.5 million in
fiscal 2020 compared
to $1.8 million
in fiscal 2019.
See
Note 14
of Notes to
Consolidated Financial Statements for
a schedule of
credit-related expenses. Total
credit
29
segment income before taxes
decreased $0.6 million to
$1.2 million in fiscal
2020 from $1.8 million
in fiscal
2019.
Cost of goods sold was $433.2 million, or 76.3% of retail sales, in fiscal 2020
compared to $508.9 million,
or 62.4%
of retail sales
,
in fiscal 2019.
The increase in
cost of
goods sold
as a
percentage of sales
resulted
primarily
from an increase
in markdown sales due
to liquidating spring and
summer
merchandise,
goods
marked out
of stock,
and deleveraging
occupancy,
distribution
and buying
costs
.
Cost of goods sold includes
merchandise costs, net
of discounts and
allowances, buying costs, distribution
costs, occupancy costs, freight
and inventory shrinkage. Net merchandise costs
and in-bound freight are capitalized as inventory
costs. Buying
and distribution costs include payroll, payroll-related costs and
operating expenses for the buying departments
and distribution
center. Occupancy
expenses include rent,
real estate
taxes, insurance,
common area
maintenance, utilities and maintenance
for stores and distribution
facilities.
Total gross
margin dollars (retail
sales less cost of
goods sold and excluding
depreciation) decreased by 56.3% to
$134.3 million in fiscal 2020
from $307.3
million in
fiscal 2019.
Gross margin
as presented
may not
be comparable
to that
of other
companies.
Selling,
general and
administrative expenses
(“SG&A”), which
primarily include
corporate and
store
payroll, related payroll
taxes and
benefits, insurance,
supplies, advertising, bank
and credit
card processing
fees were $206.7 million
in fiscal 2020 compared
to $263.8 million in
fiscal 2019, a decrease
of 21.7%.
As a
percent of retail sales,
SG&A was 36.4% compared
to 32.3% in the
prior year. The
dollar decrease in SG&A
expense was primarily
attributable
to lower
store expenses
due to stores
being closed,
phased store
re-opening
in the
second
quarter, reduced store
operating
hours,
lower corporate expenses
and the
elimination
of
incentive
compensation,
resulting
from the failure
to meet targets
under the Company’s
annual incentive
compensation
plan, partially
offset by
higher store
impairment
charges.
Depreciation expense was $14.7
million in fiscal 2020
compared to $15.5 million
in fiscal 2019.
Depreciation expense decreased
from fiscal 2019
due to
fully depreciated older
stores and
previous
impairments of leasehold
improvements and fixtures,
partially offset
by store
development and
information
technology expenditures.
Interest and other income increased to
$6.6 million in fiscal 2020
compared to $6.1 million in fiscal
2019.
The increase is primarily due to a gain
on the sale of land held
for investment, partially offset by a decrease in
short-term investments.
Income tax
benefit was
$25.3 million,
or 4.5%
of retail
sales in
fiscal 2020
compared to
income tax
expense of $7.3 million, or 0.9% of retail sales in
fiscal 2019. The income tax benefit was primarily due to the
federal net
operating loss
carryback provisions
of the
Coronavirus Aid,
Relief and
Economic Security Act
(“CARES Act”) and
release of reserve
s
for uncertain tax
positions due to
expiration of statute
of limitations,
partially offset by
valuation allowances against
state net operating
tax losses, less
income tax credits
and an
upward adjustment in the reserves
for uncertain tax positions specifi
c
to state income taxes
in the first quarter
of 2020.
The effective
tax rate
was 34.8%
(Benefit) in
fiscal 2020
compared to
16.9% (Expense)
in fiscal
2019. See Note 12 to the Consolidated Financial
Statements, “Income Taxes,” for further details.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Compa
ny’s accounting
policies are
more fully
described in
Note 1
to Consolidated
Financial
Statements. As disclosed in
Note 1 of
Notes to Consolidated Financial Statements,
the preparation of the
Company’s financial statements in conformity with generally accepted accounting principles in the
United States
(“GAAP”) requires
management to
make estimates
and assumptions
about future
events
that affect
the amounts reported
in the financial
statements and accompanying
notes. Future events
and
their effects
cannot be
determined with
absolute certainty.
Therefore, the
determination of
estimates
30
requires the
exercise of
judgment. Actual
results inevitably
will differ
from those
estimates, and
such
differences may be material to
the financial statements. The most significant accounting
estimates
inherent in
the preparation
of the
Company’s financial
statements include
the allowance
for customer
credit losses, inventory
shrinkage, the calculation
of potential asset
impairment, workers’ compensation,
general and auto insurance
liabilities, reserves relating to
self-insured health insurance, and
uncertain tax
positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
Allowance for Customer Credit Losses
The Company evaluates
the collectability of
customer accounts receivable
and records an
allowance
for customer credit
losses based on
the accounts receivable aging
and estimates of
actual write-offs. The
allowance is reviewed
for adequacy and
adjusted, as necessary,
on a quarterly
basis. The Company
also
provides for
estimated uncollectible
late fees
charged based
on historical
write-offs. The
Company’s
financial results can
be impacted by
changes in customer
loss write-off
experience and the
aging of the
accounts receivable portfolio.
Merchandise Inventories
The Company’s
inventory is valued
using the weighted
-average cost method
and is stated
at the net
realizable value. Physical inventories are
conducted throughout the year to calculate
actual shrinkage and
inventory on hand.
Estimates based on actual
shrinkage results are
used to estimate
inventory shrinkage,
which is accrued
for the period
between the last
physical inventory and the
financial reporting date.
The
Company regularly
reviews its
inventory levels
to identify
slow moving
merchandise and
uses
markdowns to clear slow moving inventory.
Lease Accounting
In 2016,
the Financial
Accounting Standards
Board (“FASB”)
issued Accounting
Standard
Codification (“ASC”) 842
-
Leases
, with
amendments issued in
2018. The guidance
requires lessees to
recognize most
leases on
the balance
sheet but
does not
change the
manner in
which expenses
are
recorded in
the income
statement. For
lessors, the
guidance modifies
the classification
criteria and
the
accounting for sales-type and direct financing leases.
As of February 3, 2019, the Company adopted ASC 842 utilizing the modified retrospective
approach.
The modified
retrospective approach
the Company
selected provides
a method
of transition
allowing
recognition of existing
leases as o
f
the beginning of
the period of
adoption (i.e., February
3, 2019), and
which does not require the adjustment of comparative periods. See Note
11 for further information.
The Company elected the transition
package of practical expedients that
is permitted by the
standard.
The package of practical expedients allows the
Company to not reassess previous accounting conclusions
regarding whether existing arrangements are or contain leases, the classification
of existing leases, and the
treatment of
initial direct
costs. The
Company did
not elect
the hindsight
transition practical
expedient
allowed for by the
new standard, which allows entities
to use hindsight when determining
lease term and
impairment of right-of-use assets.
Impairment of Long-Lived Assets
The Company invests
in leaseholds, right-
of use
assets and
equipment primarily in
connection with
the opening and remodeling of stores
and in computer software and hardware. The Company periodically
reviews its store locations
and estimates the recoverability
of its long-lived assets,
which primarily relate
to Fixtures
and equipment,
Leasehold improvements,
Right-of-use assets
net of
Lease liabilities
and
Information technology equipment
and software.
An impairment
charge is
recorded for
the amount
by
31
which the carrying
value exceeds the
estimated fair value
when the Company
determines that projected
cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This
determination is
based on
a number
of factors,
including the
store’s historical
operating results
and
projected cash flows, which
include future sales growth
rates, margin rates
and expense projections. The
Company assesses the fair
value of each
lease by considering market
rents and any
lease terms that
may
adjust market rents
under certain conditions,
such as the
loss of
an anchor tenant
or a leased
space in a
shopping center not
meeting certain criteria. Further,
in determining when to
close a store,
the Company
considers real
estate development
in the
area and
perceived local
market conditions,
which can
be
difficult to predict and may be subject to change.
Insurance Liabilities
The Company
is primarily
self-insured for
healthcare, workers’
compensation and
general liability
costs. These costs are significant primarily
due to the large number
of the Company’s retail
locations and
associates. The Company’s
self-insurance liabilities are based
on the total estimated
costs of claims filed
and estimates
of claims
incurred but
not reported,
less amounts
paid against
such claims,
and are
not
discounted. Management
reviews current
and historical
claims data
in developing
its estimates.
The
Company also uses information provided by outside actuaries
with respect to healthcare, workers’
compensation and general liability claims. If the
underlying facts and circumstances of the claims
change
or the
historical experience
upon which
insurance provisions
are recorded
is not
indicative of
future
trends, then the
Company may be required
to make adjustments
to the provision
for insurance costs
that
could be
material to the
Company’s reported
financial condition and
results of operations.
Historically,
actual results have not significantly deviated from estimates.
Uncertain Tax Positions
The Company records
liabilities for uncertain
tax positions primarily
related to state
income taxes as
of the balance sheet date.
These liabilities reflect the Company’s
best estimate of its ultimate
income tax
liability based
on the
tax codes,
regulations, and
pronouncements of
the jurisdictions
in which
we do
business.
Estimating our ultimate tax liability involves significant judgments regarding the application of
complex tax reg
ulations across many
jurisdictions.
Despite the Company’s
belief that the
estimates and
judgments are
reasonable, differences
between the
estimated and
actual tax
liabilities can
and do
exist
from time to time.
These differences may arise from settlements of
tax audits, expiration of the statute of
limitations, or the
evolution and application of
the various jurisdictional
tax codes and
regulations.
Any
differences will be
recorded in the
period in which
they become known and
could have a
material effect
on the results of operations in the period the adjustment is recorded.
Liquidity, Capital Resources and Market Risk
The Company believes
that its cash,
cash equivalents and
short-term investments, together
with cash
flows from operations and borrowings
available under its revolving credit
agreement, will be adequate to
fund the Company’s
regular operating requirements
and capital expenditures
for fiscal 2021
and for the
foreseeable future.
In order to preserve liquidity during
the COVID-19 pandemic and in
light of the uncertainties as
to its
duration and
economic impact,
the Company
suspended its
quarterly dividend,
significantly reduced
planned capital
expenditures and
decreased its
store hours,
reduced non
-payroll e
xpenses, as
well as,
furloughed associates and in
certain instances eliminated positions
primarily at the corporate
office.
The
Company’s pre
-pandemic liquidity position has
enabled it to offset
the downturn in operating
cash flows
since the onset of the pandemic by liquidating short-term investments and
drawing and repaying under its
revolving credit facility.
The Company will
continue to focus
on preserving liquidity
while minimizing
capital expenditures
in 2021.
Additionally, the
Company’s $35.0
million revolving
facility allows
the
Company flexibility in
managing its short-
term investments, as
was the case
in the first
quarter of 2020
32
when the credit markets seized during the early phases of the COVID-19
pandemic.
Cash used by
operating activities during
fiscal 2020 was
$30.7 million as
compared to $53.4
million
provided in fiscal 2019
and $60.2 provided in
fiscal 2018. Cash used
by operating activities during
2020
was primarily attributable
to a net
loss adjusted for
depreciation, share-based compensation, impairment
and changes in working
capital. The decrease o
f
$84.1 million for fiscal
2020 compared to fiscal
2019 is
primarily
due to a
net operating
loss versus
net operating
income,
an increase
in accounts
receivable
primarily
related
to income
taxes and
an increase
in prepaid
expenses,
partially
offset by
lower merchandise
inventories
and store
impairment
charges.
At January 30, 2021, the Company had working capital
of $108.6 million compared to $163.5 million
and $229.5
million at
February 1,
2020 and
February 2,
2019, respectively.
The decrease in
working
capital
is primarily due
to reduction in
short-term
investments
and lower inventories, partially
offset by
higher accounts
receivables
and lower
accrued
liabilities.
At January 30, 2021,
the Company had an
unsecured revolving credit agreement, which
provided for
borrowings of up to $35.0 million less the
balance of any revocable letters of credit
discussed below. The
revolving credit agreement is committed until
May 2023. The credit agreement contains
various financial
covenants and limitations, including the maintenance of specific financial ratios
with which the Company
was in compliance as of January 30, 2021. There were no borrowings outstanding
under this credit facility
as of the fiscal year ended January 30, 2021 or the fiscal year ended February
1, 2020.
The Company
had no
outstanding revocable
letters of
credit relating
to purchase
commitments at
January 30, 2021, February 1, 2020 and February 2, 2019.
Expenditures for property and equipment totaled $14.0 million, $8.3 million and $4.4
million in fiscal
2020, 2019 and 2018, respectively.
The expenditures for fiscal 2020 were
primarily for additional
investments
in 76 new stores,
distribution
center
and information
technology.
In fiscal 2021, the
Company
is planning to invest approximately $3.0 million in capital expenditures.
Net cash
provided by
investing activities
totaled $64.5
million for
fiscal 2020
compared to
$22.6
million used for fiscal
2019 and $71.1 million used
in fiscal 2018.
In fiscal 2020, the
cash provided was
primarily attributable
to the increase in net sales of short-term investments,
partially
offset by expenditures
for property
and equipment.
Net cash used by financing activities totaled $27.2 million in fiscal 2020 compared to net cash used of
$41.6 million for
fiscal 2019 and
$45.2 million for
fiscal 2018. The
decrease
was primarily
due to lower
dividend
payments,
partially
offset by
higher share
repurchase
amounts.
The Company does not use derivative financial instruments.
See Note
4, “Fair
Value
Measurements,” for
information regarding the
Company’s financial
assets
that are measured at fair value.
The Company’s
investment portfolio
was primarily invested
in corporate
bonds and tax-
exempt and
taxable governmental debt
securities held in
managed accounts with
underlying ratings of
A or better
at
January 30, 2021.
The state, municipal
and corporate bonds and
asset-backed securities have contractual
maturities which range
from two days
to 7.5 years.
The U.S. Treasury
Notes and Certificates
of Deposit
have contractual maturities
which range from
three months to
2.5 years. These securities are classified
as
available-for-sale
and are recorded as Short
-term investments,
Restricted
cash, Restricted
short-term
investments
and Other assets
on the accompanying
Consolidated
Balance
Sheets.
These assets
are carried
at
fair value with
unrealized
gains and
losses
reported
net of
taxes in
Accumulated
other comprehensive
income.
The asset-backed
securities
are bonds
comprised
of auto loans
and bank
credit cards
that carry
AAA
33
ratings.
The auto
loan asset-backed
securities
are backed
by static
pools of
auto loans
that were
originated
and
serviced
by captive auto
finance
units, banks or
finance
companies.
The bank credit
card asset-backed
securities
are backed
by revolving
pools of
credit
card receivables
generated
by account
holders
of cards
from
American
Express,
Citibank,
JPMorgan Chase,
Capital
One, and
Discover.
Additionally, at
January 30,
2021, the
Company had
$0.7 million
of corporate
equities, which
are
recorded within Other assets in the Consolidated Balance
Sheets.
At February 1, 2020, the Company had
$0.7 million
of corporate
equities, which are
recorded within
Other assets
in the
Consolidated Balance
Sheets.
Level 1
category
securities
are measured at
fair value using
quoted
active
market prices.
Level 2
investment
securities
include
corporate
and municipal
bonds for
which quoted
prices
may not
be available
on
active exchanges
for identical
instruments.
Their fair
value is
principally
based on
market values
determined
by management with assistance of a third-party pricing service.
Since quoted prices in active markets for
identical
assets
are not available,
these prices
are determined
by the pricing
service
using observable
market
information
such as quotes from less active markets
and/or quoted
prices
of securities
with similar
characteristics,
among other
factors.
Deferred compensation plan
assets consist
primarily of life
insurance policies.
These life
insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such
factors as
the fair
value of
the underlying
assets and
discounted cash
flow and
are therefore
classified within Level 3 of the valuation hierarchy.
The Level 3 liability associated with the life
insurance policies
represents a
deferred compensat
ion obligation,
the value
of which
is tracked
via
underlying insurance
funds’
net asset
values, as
recorded in
Other noncurrent
liabilities in
the
Consolidated Balance Sheets.
These funds are designed
to mirror the return
of existing mutual funds
and
money market funds that are observable and actively traded.
The following table shows the Company's obligations and commitments
as of January 30, 2021,
to make future payments under noncancellable contractual obligations
(in thousands):
Payments Due During One Year Fiscal Period Ending
Contractual Obligations
(1)
Total
2021
2022
2023
2024
2025
Thereafter
Operating leases
$
227,525
$
70,007
$
48,639
$
35,717
$
22,542
$
13,815
$
36,805
Total Contractual Obligations
$
227,525
$
70,007
$
48,639
$
35,717
$
22,542
$
13,815
$
36,805
____________
(1) In addition to the amounts shown in the table above, $5.9 million of unrecognized tax benefits have been recorded
as liabilities in accordance
with ASC 740 and we are uncertain if or when such amounts may
be settled.
See Note 12, Income Taxes, of the Consolidated Financial
Statements for additional information.
Recent Accounting Pronouncements
See Note 1, Summary of Significant
Accounting Policies, Recently Adopted Accounting Policies and
Recently Issued Accounting Pronouncements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk:
The Company
is subject
to market
rate risk
from exposure
to changes
in interest
rates based
on its
financing, investing and cash
management activities, but the
Company does not believe
such exposure is
material.
34
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.