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
annual report
on Form 10-K.
This section of the annual report
on Form 10-K generally discusses fiscal 2023
and fiscal
2022
and
year-to-year
comparisons
between
fiscal
2023
and
fiscal
2022,
as
well
as
certain
fiscal
2021
items.
Discussions
of
fiscal
2021
items
and
year-to-year
comparisons
between
fiscal
2022
and
fiscal
2021 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 28, 2023.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
Our
customers’
disposable
income
was
negatively
impacted
by
high
interest
rates
and
continued
inflation related to
fuel, food, housing,
including rent, and
other consumable products
and a flattening
of
wage rates in 2023. The
persistence of high interest rates and
inflation negatively affected our customers’
willingness to purchase discretionary items such as apparel, jewelry
and shoes.
Though the Federal Reserve paused
raising rates in the
fall of 2023, it
has indicated it is
committed to
maintaining
interest
rates
at
or
near
these
elevated
levels
until
inflation
subsides
to
its
targeted
levels.
These high interest rates have adversely affected the availability and cost of credit for both businesses and
our
customers.
Increasing
costs
related
to
revolving
credit,
auto
loans
and
mortgages
continue
to
negatively
impact
our
customers’
discretionary
income.
Our
customers’
willingness
to
purchase
our
products may continue to be negatively impacted by these inflationary
pressures and high interest rates.
We
believe continued
inflation and
high interest
rates negatively
impacted fiscal
2023 and
will likely
continue to have a negative impact on
consumer behavior and, by extension, our results of
operations and
financial condition during fiscal 2024.
Merchandise Supply Chain
A
significant
amount
of
our
merchandise
is
manufactured
overseas,
principally
Southeast
Asia,
and
traverses through the Panama Canal or
the Suez Canal.
Due to a sustained regional
drought, the Panama
Canal
has
reduced
the
number
of
transits
by
approximately
37%
and
has
also
reduced
the
permissible
draft of vessels
transiting the Panama Canal,
which reduces the volume
and number of
containers carried
by container
ships and
increases our
costs.
The recent
hostilities affecting
the Red
Sea and
Suez Canal
are
causing
container
ships
to
travel
a
much
longer
distance
around
the
Cape
of
Good
Hope,
which
is
increasing both lead times for merchandise during our key selling times and our costs to ship
these goods.
Both of these situations have negatively impacted 2023 and will likely continue to have a negative impact
on our results of operations and financial condition during fiscal 2024.
30
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
February 3, 2024
January 28, 2023
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
1.1
0.9
Total revenues ……………………………………………………….
101.1
100.9
Cost of goods sold …………………………………………………..
66.3
67.7
Selling, general and administrative………………………………….
36.1
32.3
Depreciation …………………………………………………………
1.4
1.5
Interest and other income ……………………………………………
0.7
0.8
Income (loss) before income taxes …………………………………………
(2.0)
0.2
Net income (loss)…………………………………………………………..
(3.4)
%
-
%
Fiscal 2023 Compared to Fiscal 2022
Retail sales
decreased by
6.9% to
$700.3 million
in fiscal
2023 compared
to $752.4
million in
fiscal
2022. The decrease in
retail sales in fiscal
2023 was primarily due
to a 5.9% decrease
in same-store sales
and
sales from
closed stores
in
2022
and
stores
closed
in
the
first
half
of
2023,
partially offset
by
an
additional
week of sales
in 2023 and a
small increase in
sales from stores opened in 2023. Fiscal
2023 had
53 weeks
versus 52
weeks in
fiscal 2022.
Same-store sales
for the
fiscal year
2023 decreased
primarily
due
to
lower
transactions,
partially
offset
by
fewer
returns
and
slightly
higher
average
sales
per
transaction. 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
2023 and
fiscal
2022,
e-commerce sales
were less
than
5%
and
6%
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 6.7%
to $708.1
million in
fiscal 2023
compared
to
$759.3
million
in
fiscal
2022.
The
Company
operated
1,178
stores
at
February
3,
2024
compared to 1,280 stores operated at January 28, 2023.
In fiscal 2023, the Company opened nine new stores and closed 111 stores.
Other
revenue,
a
component
of
total
revenues,
increased
to
$7.7
million
in
fiscal
2023
from
$6.9
million
in
fiscal
2022.
The
increase
was
due
to
increases
in
gift
card
breakage
and
finance
charges
associated
with
the
Company’s
proprietary
credit
card,
partially
offset
by
decreases
in
e-commerce
shipping revenue.
Credit
revenue
of
$2.6
million
represented
0.4%
of
total
revenue
in
fiscal
2023,
a
$0.4
million
increase compared to fiscal 2022 credit
revenue of $2.2 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
2023
compared
to
$1.7
million
in
fiscal
2022.
See
Note 13
to
the
Consolidated Financial
Statements,
“Reportable Segment
Information”
for
a schedule
of
credit-related expenses.
Total
credit segment
income before
taxes
was $0.9
million in
fiscal 2023 and $0.6 million in fiscal 2022.
31
Cost
of
goods sold
was $464.3
million, or
66.3% of
retail
sales, in
fiscal
2023 compared
to
$509.7
million, or 67.7% of retail sales, in fiscal 2022. The decrease in cost of goods sold as a percentage of sales
resulted
primarily
from
lower
ocean
freight
costs
and
increased
sales
of
regular
priced
goods,
partially
offset
by deleveraging
of
occupancy and
buying costs.
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
2.8%
to
$236.0 million
in fiscal
2023 from
$242.7 million
in fiscal
2022. 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 $252.8 million in fiscal
2023 compared to $242.6 million in fiscal
2022, an increase
of 4.2%. As a percent of retail sales, SG&A was 36.1% compared to 32.3% in the prior year. The increase
in SG&A
expense in
fiscal 2023
was primarily
attributable to
higher payroll,
insurance and
closed store
expenses.
Depreciation
expense
was
$9.9
million
in
fiscal
2023
compared
to
$11.1
million
in
fiscal
2022.
Depreciation
expense
decreased
from
fiscal
2022
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
$5.1 million
in fiscal
2023 compared
to $5.9
million in
fiscal
2022.
The
decrease
is
primarily
attributable
to
receiving
a
Business
Recovery
Grant
from
the
State
of
North
Carolina
in
fiscal
2022,
partially
offset
by
higher
amounts
earned
on
investments
due
to
higher
interest rates.
Income tax expense was
$10.1 million, or 1.4%
of retail sales in
fiscal 2023 compared to
income tax
expense
of
$1.7
million,
or
0.2%
of
retail
sales
in
fiscal
2022.
The
income
tax
expense
increase
was
primarily due to a valuation allowance
recorded against U.S. federal and state
deferred tax assets due to
a
pre-tax loss,
partially offset
by foreign
rate differential.
The effective
tax rate
was (73.5%)
(Expense) in
fiscal
2023
compared
to
98.4%
(Expense)
in
fiscal
2022.
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
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 calculation of potential asset
impairment, income tax
valuation allowances, reserves relating
to self-insured health
insurance, workers’
32
compensation, general
and auto
insurance liabilities,
uncertain tax
positions, the
allowance for
customer
credit losses, and inventory shrinkage.
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
to the
Consolidated Financial Statements,
“Leases” 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.
33
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
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
$66.9
million
of
lease
obligations
and
planned
investments
of
$8.7
million
of
capital
expenditures,
for
fiscal 2024 and for the foreseeable future.
Cash
provided
by
operating
activities
during
fiscal
2023
was
$0.5
million
as
compared
to
$13.4 million in
fiscal 2022
and $59.8
in fiscal
2021. Cash
provided by
operating activities
during 2023
was primarily attributable to net income adjusted for depreciation, share-based compensation, impairment
and changes in
working capital. The
decrease of $12.9
million for fiscal
2023 compared to
fiscal 2022 is
primarily
due
to
lower
net
operating
income
partially
offset
by
a
decrease
in
merchandise
inventories
and
deferred taxes.
At
February 3,
2024,
the
Company had
working
capital
of
$55.1 million compared
to
$74.7 million
and
$111.5
million
at
January
28,
2023
and
January
29,
2022,
respectively.
The
decrease in
working
34
capital
compared
to
the
prior
year
is
primarily
due
to
lower
short-term
investments
and
lower
inventory,
partially offset by lower accounts payable
and current lease liability.
At February 3,
2024, 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
February 3,
2024. There
were no
borrowings outstanding,
nor
any outstanding
letters of
credit that
reduced borrowing
availability,
under this
credit facility
as of
the fiscal
year ended
February 3, 2024 or the fiscal year ended January 28, 2023.
The
Company
had
no
outstanding
revocable
letters
of
credit
relating
to
purchase
commitments
at
February 3, 2024 or at January 28, 2023.
Expenditures
for
property
and
equipment
totaled
$12.5
million,
$19.4
million
and
$4.1
million
in
fiscal 2023,
2022 and
2021, respectively.
The
expenditures for
fiscal 2023
were primarily
for additional
investments in nine new stores, our
distribution center and information technology.
Net
cash
provided
by
investing
activities
totaled
$19.8
million
for
fiscal
2023
compared
to
$16.0
million provided
in fiscal
2022 and
$25.3 million
used in
fiscal 2021.
In fiscal
2023, the
cash provided
was primarily
attributable to
the net
sales of
short-term investments,
partially offset
by expenditures
for
property and equipment.
Net cash used in financing activities totaled
$16.1 million in fiscal 2023 compared to
net cash used of
$29.3
million
for
fiscal
2022
and
$31.8
million
for
fiscal
2021.
The decrease in
cash used during
fiscal
2023 was primarily due to lower
share repurchase amounts.
The Company does not use derivative financial instruments.
See
Note
4
to
the
Consolidated
Financial
Statements,
“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
taxable
governmental debt securities held in managed accounts
with underlying ratings of A or
better at February
3, 2024. The state,
municipal and corporate bonds and
asset-backed securities have contractual maturities
which
range
from
seven
days
to
3.1
years.
The
U.S.
Treasury
Notes
have
contractual
maturities
which
range
from
four
days to
2.0
years. These
securities are
classified as
available-for-sale and
are recorded
as
Short-term investments, Restricted cash, 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
February
3,
2024
and
January
28,
2023,
the
Company
had
$1.1
and
$0.9
million,
respectively,
of
corporate
equities,
which
are
recorded
within
Other
assets
in
the
accompanying
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 the assistance of a third-party pricing service.
Since quoted prices in active markets for
35
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
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
February
3,
2024
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
to
the
Consolidated
Financial
Statements,
“Leases”
for
the
maturities
of
our
operating
lease
obligations.
Recent Accounting Pronouncements
See
Note 1
to
the
Consolidated Financial
Statements,
“Summary of
Significant Accounting
Policies,
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.
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