Item 7. Management’s Discussion and Analysis
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations:
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
is intended
to provide information to assist readers in better
understanding and evaluating our 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 2021
and fiscal
2020 and
year-to-
year comparisons between fiscal
2021 and fiscal
2020, as well,
as certain fiscal
2019 items.
Discussions
of
fiscal
2019
items
and
year-to-year
comparisons
between
fiscal
2020
and
fiscal
2019
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 January 30, 2021.
COVID-19 Update
The
COVID-19
pandemic
adversely
impacted
the
Company's
business,
financial
condition
and
operating
results
through
fiscal
2020
and
to
a
lesser
extent
through
2021.
In
2021,
the
Company
saw
significant
improvements
in
sales
compared
to
2020.
This
improvement
was
primarily
attributable
to
government
stimulus,
increased
customer
traffic,
states
lifting
capacity
limits
as
more
people
were
vaccinated,
consumers’
increasing
comfort
level
with
venturing
out
to
social
events
and
customers’
preparing to return
to work. However,
the Company’s
2021 sales remain
below pre-pandemic 2019
sales
for the
comparable period,
and there
is still
significant uncertainty
regarding the
lingering effects
of the
pandemic,
as
well
as
concerns
over
the
impact
of
new
or
potential
variants
of
the
virus
that
are
more
transmissible or
severe, stagnant
vaccination rates
and related
factors that
may continue
to fuel
periodic
surges of the virus or otherwise impede progress toward the return to pre-pandemic
activities and levels of
consumer
confidence
and
commercial
activity.
The
Company
faces
additional
uncertainty
from
the
continued effects of disruption in the global supply chain, inflation and its
impact on our cost of products,
transportation, wage
rates and
other operating
costs, as
well as,
the impact
on our
customers’ disposable
incomes,
and
the
availability
of
workers.
The
Company
expects
that
these
uncertainties
and
perhaps
others related to
the pandemic will continue
to impact the
Company in fiscal 2022.
The adverse financial
impacts associated with
these continued effects
of, and
uncertainties related to,
the COVID-19 pandemic
include,
but
are
not
limited
to,
(i)
lower
net
sales
in
markets
affected
by
actual
or
potential
adverse
changes in
conditions relating
to
the
pandemic, whether
due to
increases in
case
counts, state
and local
orders, 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.
While
the
Company
currently
anticipates
a
continuation
of
the
uncertainties
listed
above
and
the
potential
adverse
impacts
of
COVID-19
during
2022,
the
duration
and
severity
of
these
effects
will
depend
on
the
course
of
future
developments,
which
are
highly
uncertain.
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 or its
variants, its severity,
actions
taken to contain the
virus or treat its impact,
and how quickly and to
what extent pre-pandemic economic
and operating conditions can resume.
28
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 29,
2022
January 30,
2021
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
1.0
1.3
Total revenues ……………………………………………………….
101.0
101.3
Cost of goods sold …………………………………………………..
59.5
76.3
Selling, general and administrative………………………………….
35.1
36.4
Depreciation …………………………………………………………
1.6
2.6
Interest and other income ……………………………………………
0.3
1.2
Income (loss) before income taxes ……………………………
5.1
(12.8)
Net income (loss) ……………………………………………………
4.8
%
(8.4)
%
Fiscal 2021 Compared to Fiscal 2020
Retail sales increased by 34.2% to $761.4 million in fiscal 2021 compared to $567.5 million in fiscal 2020.
The increase in retail sales in fiscal 2021 was primarily
due to a 34% increase in same-store sales
and sales
from
new stores, partially offset by permanently closed stores in 2020.
Same-store sales
for the
fiscal year
2021 increased
primarily due
to increased
store operating
hours in
fiscal 2021
as opposed
to the
store closures
that persisted
from
March 19, 2020
into the second
quarter of 2020.
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
2021 and
fiscal 2020,
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),
increased by 33.8%
to $769.3 million
in fiscal 2021
compared to $575.1
million
in fiscal
2020. The
Company operated 1,311
stores at January
29, 2022
compared to
1,330 stores
operated at
January 30, 2021.
In fiscal 2021, the Company opened 6 new stores
and closed 25 stores.
Other
revenue
in
total
increased
to
$7.9
million
in
fiscal
2021
from
$7.6
million
in
fiscal
2020.
The
increase resulted
primarily due
to increases
in gift
card breakage
income, e-commerce shipping
revenues and
layaway charges, partially offset by a decrease in finance charges.
Credit revenue
of
$2.1 million
represented
0.3% of
total
revenue
in
fiscal
2021,
a
$0.6
million decrease
compared
to
fiscal
2020
credit
revenue
of
$2.7
million
or
0.5%
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 $1.4
million in
fiscal 2021
compared to
$1.5 million
in fiscal
2020.
See
Note 13
of Notes
to Consolidated Financial
Statements for
a schedule
of credit-related
expenses. Total
credit
segment income before
taxes decreased $0.6
million to $0.6
million in fiscal
2021 from $1.2
million in fiscal
2020.
Cost
of
goods sold
was $453.1
million, or
59.5%
of
retail
sales,
in
fiscal
2021
compared to
$433.2
million, or 76.3% of retail sales, in fiscal 2020. The decrease in cost of goods sold as a percentage of sales
resulted primarily
from the leveraging of occupancy, buying and distribution costs
due to more normalized
sales and
higher sales
of
regular priced
goods.
Cost
of
goods
sold
includes
merchandise
costs,
net
of
discounts
and
allowances,
buying
costs,
distribution
costs,
occupancy
costs,
freight
and
inventory
29
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) increased by 129.5% to
$308.3 million in
fiscal 2021 from
$134.3 million in
fiscal 2020. 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 $267.0 million in
fiscal 2021 compared to $206.7
million in fiscal 2020, an
increase of 29.2%. As
a
percent of
retail sales,
SG&A was
35.1% compared
to 36.4%
in the
prior year.
The dollar
increase in
SG&A
expense
was
primarily
attributable to higher employee benefit/bonus expense, store productivity initiatives
and
store operating expenses
as
store operating hours
have increased
substantially compared to
the
prior
year’s phased
store reopening following the
extended store closure
due to
COVID-19,
partially offset by
lower
impairment
charges.
Depreciation
expense
was
$12.4
million
in
fiscal
2021
compared
to
$14.7
million
in
fiscal
2020.
Depreciation
expense
decreased
from
fiscal
2020
due
to
fully
depreciated
older
stores
and
prior
period
impairments of
leasehold
improvements and
fixtures,
partially
offset
by
store
development
and
information
technology expenditures.
Interest and other income decreased to $2.1
million in fiscal 2021 compared to
$6.6 million in fiscal 2020.
The decrease is primarily due to
a gain on the sale
of land held for investment in
2020 and lower interest rates
on our short-term investments, partially
offset by an increase in short-term investments.
Income tax
expense
was $2.1
million, or
0.3%
of
retail sales
in
fiscal 2021
compared to
an
income tax
benefit of
$25.3 million,
or 4.5%
of retail
sales in
fiscal 2020.
The income
tax expense
was primarily
due to
higher
pre-tax
earnings,
partially
offset
by
the
ability
to
realize
foreign
tax
credits,
release
of
reserves
for
uncertain tax positions due
to the expiration
of the statute
of limitations, a
favorable adjustment to
the federal
net operating loss carryback and a partial release
of valuation allowances against state net
operating losses. The
effective tax rate
was 5.4% (Expense) in
fiscal 2021 compared to
34.8% (Benefit) in fiscal 2020.
See Note 12
to the Consolidated Financial Statements,
“Income Taxes,” for further details.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Company’s
accounting policies are
more fully described
in Note
1 to
the Consolidated Financial
Statements. As disclosed
in Note 1
of Notes to
the 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
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.
30
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
The Company determines whether an arrangement is a lease at inception. The Company has operating
leases
for
stores,
offices
and
equipment.
Its
leases
have remaining
lease
terms
of
one
year
to
10
years,
some of
which include
options to
extend the
lease term
for up
to five
years, and
some of
which include
options to
terminate the
lease within
one year.
The Company
considers these
options in
determining the
lease term
used to
establish its
right-of-use assets
and lease
liabilities. The
Company’s
lease agreements
do not contain any material residual value guarantees or material
restrictive covenants.
As
most
of
the
Company’s
leases
do
not
provide
an
implicit
rate,
the
Company
uses
its
estimated
incremental
borrowing
rate
based
on
the
information
available
at
commencement
date
of
the
lease
in
determining the present value of lease payments.
See Note 11 for further information.
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
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 future
projected cash flows, which include contribution margin 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
31
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
regulations 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,
will be adequate
to fund the
Company’s regular
operating requirements including
$71.3 million
of lease
obligations and
planned investments
of
$23.0 million
of capital
expenditures for
fiscal 2022 and for the foreseeable future.
Cash
provided
by
operating
activities
during
fiscal
2021
was
$59.8
million
as
compared
to
$30.7 million used
in fiscal
2020 and
$53.4 million
provided in
fiscal 2019.
Cash provided
by operating
activities
during
2021
was
primarily
attributable
to
net
income
adjusted
for
depreciation,
share-based
compensation, impairment and
changes in
working capital. The
increase of
$90.5 million for
fiscal 2021
compared to fiscal 2020 is
primarily
due to net operating
income versus
a net operating
loss and an
increase
in accounts
payable,
partially
offset by
higher
merchandise
inventories
and lower
store impairment
charges.
At January 29, 2022, the Company had
working capital of $111.5
million compared
to $108.6 million
and $163.5 million at January
30, 2021 and February 1,
2020, respectively.
The slight
increase
in working
capital compared
to the prior year is primarily
due to higher short-term
investments,
inventory
and cash and
cash equivalents,
partially
offset by
higher
accrued
liabilities
and accounts
payable.
At January 29,
2022, 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 2022.
The Company
is in
the process
of obtaining
a
new revolving credit
agreement and expects this
to be completed
by May of
2022.
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
29,
2022.
There
were
no
borrowings
outstanding under this credit
facility as of
the fiscal year ended
January 29, 2022
or the fiscal
year ended
January 30, 2021.
The
Company
had
no
outstanding
revocable
letters
of
credit
relating
to
purchase
commitments
at
32
January 29, 2022, January 30, 2021 and February 1, 2020.
Expenditures for property and equipment totaled $4.1 million, $14.0
million and $8.3 million in fiscal
2021,
2020
and
2019,
respectively.
The
expenditures
for
fiscal
2021
were
primarily
for
additional
investments
in six
new stores,
distribution
center
and information
technology.
Net cash
used by
investing activities
totaled $25.3
million for
fiscal 2021
compared to
$64.5 million
provided
for
fiscal
2020
and
$22.6
million
used
in
fiscal
2019.
In
fiscal
2021,
the
cash
used
was
primarily
attributable to the
increase in
net purchases of
short-term investments, partially offset by lower
expenditures
for property
and equipment.
Net cash used by financing activities totaled $31.8 million in fiscal 2021 compared to net cash used of
$27.2 million for fiscal 2020 and $41.6 million for fiscal 2019. The
increase
in cash
used was
primarily
due
to higher
dividend
payments
and 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 29,
2022. The
state, municipal
and corporate bonds
and asset-backed securities
have contractual
maturities which range from three
days to 4.9 years. The
U.S. Treasury Notes have
contractual maturities
which
range
from
4.5
months
to
1.1
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
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
29,
2022,
the
Company
had
$0.8
million
of
corporate
equities,
which
are
recorded within Other assets in the
Consolidated Balance Sheets.
At January 30, 2021, 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
compensation
obligation,
the
value
of
which
is
tracked
via
underlying
insurance
funds’
net
asset
values,
as
recorded
in
Other
noncurrent
liabilities
in
the
33
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.
Contractual Obligations
Contractual
obligations
for
future
payments
at
January
29,
2022
relate
primarily
to
operating
lease
commitments for
store leases.
Operating leases
represent minimum
required lease
payments under
non-
cancellable
lease
terms.
Most
store
leases
also
require
payment
of
related
operating
expenses
such
as
taxes, utilities, insurance and maintenance, which are not included in our estimated lease obligations.
See
Note
11,
Leases
in
Notes
to
the
Consolidated
Financial
Statements
for
the
maturities
of
our
operating
lease obligations.
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.