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 2022
and fiscal
2021 and
year-to-
year comparisons between fiscal
2022 and fiscal
2021, as well,
as certain fiscal
2020 items.
Discussions
of
fiscal
2020
items
and
year-to-year
comparisons
between
fiscal
2021
and
fiscal
2020
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 29, 2022.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
The current high
inflationary environment continues to
impact the Company
through higher operating
costs, including costs to ship our products to stores and customers, operating supplies, wages, and
fuel.
In
addition
to
the
price
increases,
costs
for
fuel,
food,
and
housing,
including
rent,
as
well
as
other
consumables across
the economy,
are increasingly
impacting our
customers’ disposable
income, as
well
as our customers’ willingness to purchase discretionary items such as
apparel, jewelry or shoes.
In
response
to
the
inflationary
pressures,
the
Federal
Reserve
began
raising
interest
rates
and
is
committed to continue
raising interest rates
until the inflationary
pressures subside.
These rising interest
rates
have
adversely
affected
the
availability
and
cost
of
credit
for
businesses
and
our
customers.
In
addition,
the
rising
interest
rates
are
increasing
the
costs
related
to
revolving
credit,
auto
loans
and
mortgages, which increasingly is
negatively impacting our customers’
discretionary income.
In addition,
rising interest rates may negatively impact our customers’ willingness
to purchase our products.
We
believe that
these price
increases and
rising interest
rates have
had an
impact during
fiscal 2022,
and will likely continue to have
a negative impact on consumer behavior
and, by extension, our results of
operations and financial condition during fiscal 2023.
Labor Challenges and Wage Inflation
The COVID-19
pandemic
and the
resulting factors
above have
also
created challenges
related to
the
availability of sufficient labor from time to time, and have caused a significant increase in the competition
for labor
among consumer-facing companies.
This competition
for labor
has driven
significant increases
in
wages
in
order
to
compete
for
sufficient
labor
availability
and/or
to
prevent
the
loss
of
existing
workforce in
our
stores,
distribution center
and
corporate office.
We
expect these
pressures to
continue
throughout fiscal 2023.
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 28, 2023
January 29, 2022
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
0.9
1.0
Total revenues ……………………………………………………….
100.9
101.0
Cost of goods sold …………………………………………………..
67.7
59.5
Selling, general and administrative………………………………….
32.3
35.1
Depreciation …………………………………………………………
1.5
1.6
Interest and other income ……………………………………………
0.8
0.3
Income before income taxes …………………………………………
0.2
5.1
Net income …………………………………………………………..
-
%
4.8
%
Fiscal 2022 Compared to Fiscal 2021
Retail sales
decreased by
1.2% to
$752.4 million
in fiscal
2022 compared
to $761.4
million in
fiscal
2021. The
decrease in
retail sales
in fiscal
2022 was
primarily due
to a
1% decrease
in same-store
sales
and sales
from closed
stores in
2021,
partially offset by
stores opened
in
2022. Same-store sales
for
the
fiscal
year 2022
decreased primarily
due to
lower
average unit
selling price
resulting from
late
arriving
merchandise due to supply chain disruptions in the first half of 2022. 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 2022 and fiscal
2021, e-commerce
sales were
less than
6% and
5% of
total sales
and same-store sales,
respectively.
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
1.3%
to
$759.3
million
in
fiscal
2022
compared
to
$769.3
million
in
fiscal
2021.
The
Company
operated
1,280
stores
at
January
28,
2023
compared
to
1,311
stores
operated
at
January
29,
2022.
In fiscal 2022, the Company opened 19 new stores and closed 50 stores.
Other
revenue,
a
component
of
total
revenues,
decreased
to
$6.9
million
in
fiscal
2022
from
$7.9
million in fiscal 2021.
The decrease resulted primarily due to
decreases in gift card breakage income and
e-commerce shipping revenues,
partially offset by an increase in finance and layaway charges.
Credit
revenue
of
$2.2
million
represented
0.3%
of
total
revenue
in
fiscal
2022,
a
$0.1
million
increase compared to fiscal 2021 credit
revenue of $2.1 million or 0.3% of
total revenue.
The increase in
credit revenue was
primarily due to
increases in finance
charges and late
fee income as
a result of
higher
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
$1.7
million
in
fiscal
2022
compared
to
$1.4
million
in
fiscal 2021.
See Note
13 of
Notes to
Consolidated Financial
Statements for
a schedule
of credit-related
expenses. Total
credit segment
income before
taxes was
$0.6 million
in
fiscal 2022
and $0.6
million in
fiscal 2021.
Cost
of
goods sold
was $509.7
million, or
67.7% of
retail
sales, in
fiscal
2022 compared
to
$453.1
million, or 59.5% of retail sales, in fiscal 2021. The increase in cost of goods sold as a
percentage of sales
resulted primarily
from
higher sales
of
marked down
goods
and
increases in
freight and
distribution
costs.
The Company
expects markdown
sales to
decrease in
2023 and
beyond, as
the markdown
sales increase
is
29
primarily
attributed
to
the
supply
chain
disruption
in
the
first
half
of
2022,
causing
goods
to
miss
their
optimum selling
times.
Cost of
goods sold
includes merchandise
costs, net
of discounts
and allowances,
buying costs,
distribution costs,
occupancy costs,
and 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 21.3% to $242.7
million in fiscal 2022
from $308.3
million in fiscal 2021. 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
$242.6 million in
fiscal 2022 compared
to $267.0 million
in fiscal 2021,
a decrease
of 9.1%.
As a
percent of
retail sales, SG&A
was 32.3%
compared to
35.1% in the
prior year.
The dollar
decrease in
SG&A expense was
primarily attributable to lower
employee benefit/bonus
expense and lower
insurance costs,
partially offset
by higher
store wages
resulting from
higher hourly
rates and increased
store
operating hours.
Depreciation
expense
was
$11.1
million
in
fiscal
2022
compared
to
$12.4
million
in
fiscal
2021.
Depreciation
expense
decreased
from
fiscal
2021
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
increased to
$5.9 million
in fiscal
2022 compared
to $2.1
million in
fiscal
2021.
The
increase
is
primarily
attributable
to
receiving
a
Business
Recovery
Grant
from
the
State
of
North
Carolina,
proceeds
from property
insurance
claims related
to
hurricanes in
fiscal
years
2021
and
2020 and an
increase in interest
income from short-term investments
due to rising
interest rates, partially
offset by lower short-term investments.
Income tax
expense was
$1.7 million,
or 0.2%
of retail
sales in
fiscal 2022
compared to
income tax
expense
of
$2.1
million,
or
0.3%
of
retail
sales
in
fiscal
2021.
The
income
tax
expense
decrease
was
primarily due
to lower
pre-tax income
and lower
federal, state
and local
tax benefits,
partially offset
by
Global Intangible Low-taxed Income (“GILTI”) and
non-deductible officer’s compensation. The effective
tax rate
was 98.4% (Expense)
in fiscal
2022 compared to
5.4% (Expense) in
fiscal 2021.
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,
uncertain
tax
positions, and valuation of deferred tax assets.
30
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
The Company determines whether an arrangement is a lease at inception. The Company has operating
leases for
stores,
offices,
warehouse space
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
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
31
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, and 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.
Deferred Tax Valuation
Allowance
The
Company
assesses
the
likelihood
that
deferred
tax
assets
will
be
realized
in
light
of
the
Company’s
current
financial
performance
and
projected
future
financial
performance.
Based
on
this
assessment, the
Company then
determines if
a valuation
allowance should
be recorded.
If the
Company
concludes
that
it
is
more
likely
than
not
that
the
Company
will
not
be
able
to
realize
its
tax
deferred
assets, a valuation allowance is recorded for the proportion of the deferred tax asset it determines may not
be realized.
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
$71.9 million
of lease
obligations and
planned investments
of
$22.1 million
of capital
expenditures,
for
fiscal 2023 and for the foreseeable future.
Cash
provided
by
operating
activities
during
fiscal
2022
was
$13.4
million
as
compared
to
$59.8 million provided
in fiscal
2021 and
$30.7 million
used in
fiscal 2020.
Cash provided
by operating
activities
during
2022
was
primarily
attributable
to
net
income
adjusted
for
depreciation,
share-based
compensation, impairment and
changes in working
capital. The decrease
of $46.4 million
for fiscal 2022
compared to
fiscal 2021
is primarily due
to lower net
operating income and
a decrease in
accounts payable
and accrued bonus and benefits, partially offset
by lower accounts receivable and merchandise
inventories.
At January
28, 2023,
the Company
had working
capital of
$74.7 million compared
to $111.5
million
and
$108.6
million
at
January
29,
2022
and
January
30,
2021,
respectively.
The
decrease in
working
capital
compared
to
the
prior
year
is
primarily
due
to
lower
short-term
investments
and
lower
inventory,
partially offset by lower accounts payable
and accrued bonus and benefits.
At January 28,
2023, 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 related
to
purchase
commitments,
and
was
committed
through
May
2027.
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 28, 2023. There were no borrowings
outstanding under this credit facility
32
as of the fiscal year ended January 28, 2023 or the fiscal year ended
January 29, 2022.
The
Company
had
no
outstanding
revocable
letters
of
credit
relating
to
purchase
commitments
at
January 28, 2023, January 29, 2022 and January 30, 2021.
Expenditures
for
property
and
equipment
totaled
$19.4
million,
$4.1
million
and
$14.0
million
in
fiscal 2022,
2021 and
2020, respectively.
The
expenditures for
fiscal 2022
were primarily
for additional
investments in 19 new stores, distribution
center and information technology.
Net
cash
provided
by
investing
activities
totaled
$16.0
million
for
fiscal
2022
compared
to
$25.3
million used in
fiscal 2021 and
$64.5 million provided
for fiscal
2020.
In fiscal 2022,
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 $29.3 million in fiscal 2022 compared to net cash used of
$31.8 million
for fiscal
2021 and
$27.2 million
for fiscal
2020.
The decrease in cash used was
primarily
due to lower share repurchase amounts,
partially offset by higher dividend payments.
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 28,
2023. The
state, municipal
and corporate
bonds and
asset-backed securities have
contractual
maturities which
range from
six
days to
3.9 years.
The U.S.
Treasury
Notes have
contractual maturities
which
range
from
three
days
to
1.6
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
28,
2023,
the
Company
had
$0.9
million
of
corporate
equities,
which
are
recorded within Other assets in the
Consolidated Balance Sheets.
At January 29, 2022, the Company had
$0.8
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
33
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.
Contractual Obligations
Contractual
obligations
for
future
payments
at
January
28,
2023
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.