What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-09-08 compared with 2021-06-09 · 73 added, 59 removed, 92 unchanged (59% of the section changed)

11 unchanged sentences

the potential negative impacts of COVID-19 on the global economy and foreign sourcing;

the impacts of COVID-19 on the Company's financial condition, business operation and liquidity, including the re-closure of any or all of the Company’s retail stores and distribution centers, growth risks, consumer spending patterns;

the impacts of COVID-19 on the Company’s financial condition, business operations and liquidity, including the re-closure of any or all of the Company’s retail stores and distribution centers;

growth risks, consumer spending patterns;

competition within the industry;

4 unchanged sentences

changes in freight rates;

the Company’s ability to attract and retain workers;

the Company’s ability to negotiate effectively the cost and purchase of merchandise;

17 unchanged sentences

Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers.

As of May 1, 2021, we operated 584 stores in urban, suburban and rural markets in 33 states.

As of July 31, 2021, we operated 589 stores in urban, suburban and rural markets in 33 states.

COVID-19 Pandemic

3 unchanged sentences

economy as the virus continues to spread or has a resurgence in certain jurisdictions.

Effective March 20, 2020, we temporarily closed all of our retail store locations and distribution centers as governments implemented measures in an effort to contain the virus, including lockdowns, physical distancing, travel restrictions, limitations on public gatherings, work from home and restrictions on nonessential businesses.

In response to the COVID-19 pandemic, effective March 20, 2020, we temporarily closed all of our retail store locations and distribution centers.

At the end of April 2020, we started to reopen stores in select states in accordance with government guidelines.

As of July 18, 2020, we safely reopened all of our stores.

The COVID-19 pandemic has resulted in a period of disruption, including the temporary closure of our stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of

We saw improvement in our financial results and positive trends during the latter half of fiscal 2020 and into the first quarter of 2021 as certain governments began to gradually ease restrictions and provide economic stimulus and vaccine distribution accelerated, leading to an increase in spending and increased customer demand.

We took numerous actions beginning in the first quarter of fiscal 2020 in light of the uncertainties resulting from the pandemic, including:

(i) the drawdown of $43.7 million in principal amount under the revolving credit facility on March 20, 2020, which we fully repaid on September 11, 2020;

(ii) an amendment to the revolving credit facility to extend the term to August 2021;

(iii) temporary furloughs of substantially all store and distribution center personnel and a significant portion of the corporate staff, with employee benefits for eligible employees continued through the temporary furloughs;

(iv) temporary tiered salary reductions for management level corporate employees and a reduction to the cash portion of non-employee director fees;

(v) extensions of payment terms with vendors and suppliers;

(vi) the suspension of share repurchases;

(vii) negotiations of rent concessions with landlords, some of which are ongoing;

and (viii) a substantial reduction in operating expenses, store occupancy costs, capital expenditures and other costs.

We expect continued uncertainty in our business and the global economy, although the extent and duration is unknown, by the COVID-19 pandemic and its effects on the economy in a variety of ways, potentially including volatility in employment trends and consumer confidence, the direction or extent of current or future restrictive actions that may be imposed by governments or public health authorities, timing and effectiveness of vaccines, the duration and extent of any economic stimulus programs, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs in an effort to maintain safe work and shopping environments.

The COVID-19 pandemic has resulted in periods of disruption for our business, including the temporary closure of our stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of products.

We saw improvement in our financial results and positive trends during the latter half of 2020 and into the first half of 2021 as certain governments began to ease restrictions and provide economic stimulus and vaccine distribution accelerated, leading to an increase in spending and increased customer demand.

We expect continued uncertainty in our business and the global economy due to the COVID-19 pandemic, including potential volatility in employment trends and consumer confidence, current or future restrictive actions that may be imposed by governments or public health authorities, the duration and extent of any economic stimulus programs, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs to maintain safe work and shopping environments.

Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, there may be consequences that we do not anticipate at this time or that develop in unexpected ways.

The impacts of the pandemic have had, and may continue to have, an adverse impact on the Company’s financial condition, results of operations and liquidity.

We will continue to monitor the effects of COVID-19 and take the necessary actions to serve our associates, customers, communities and shareholders.

For a further discussion of trends, uncertainties and other factors that could affect our future operating results related to the effects of the COVID-19 pandemic, see the section entitled "RISK FACTORS"

in ITEM 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

We will continue to monitor the effects of COVID-19 and take the necessary actions to safely serve our associates, customers, communities and shareholders.

For a further discussion of trends, uncertainties and other factors that could affect our future operating results related to the effects of the COVID-19 pandemic, see the section entitled "ITEM 1A.

RISK FACTORS"

in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

Accounting Periods

The following discussion contains references to fiscal years 2021 and 2020 , which represent fiscal years ending or ended on January 29, 2022 and January 30, 2021 , respectively.

Fiscal 2021 and fiscal 2020 both have 52-week accounting periods.

This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part 1, Item 1 of this report.

Fiscal 2021 and 2020 both have 52-week accounting periods.

This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part I, Item 1 of this report.

Results of Operations

3 unchanged sentences

Expenses and, to a greater extent, operating income, vary by quarter.

Results of a period shorter than a full year may not be indicative of results expected for the entire year, particularly in light of the current uncertainty surrounding the economic impact of the COVID-19 pandemic.

Furthermore, as a result of the closure of our stores for at least five weeks in fiscal 2020 related to the COVID-19 pandemic, comparisons of expense ratios and year-over-year trends are not a meaningful way to evaluate our operating results for the first quarter of 2021.

Results of a period shorter than a full year may not be indicative of results expected for the entire fiscal year, particularly in light of the current uncertainty surrounding the economic impact of the COVID-19 pandemic.

Furthermore, as a result of the closure of our stores for at least five weeks in 2020 related to the COVID-19 pandemic, comparisons of expense ratios and year-over-year trends are not a meaningful way to evaluate our operating results for the twenty-six weeks ended July 31, 2021.

Key Operating Statistics

10 unchanged sentences

In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales.

These results translate into store level contribution, which we use to evaluate overall performance of each individual store.

Finally, we monitor corporate expenses against budgeted amounts.

Thirteen Weeks Ended May 1, 2021 and May 2, 2020

Net sales increased $169.3 million, or 145.8%, to $285.4 million in the first quarter of 2021 from $116.1 million in the first quarter of 2020.

The increase in sales was due to a 142.0% increase in comparable store sales and the opening of 17 new stores since the end of the first quarter last year, partially offset by the impact of closing seven stores.

The increase in comparable store sales was due primarily to the temporary closure in the first quarter of last year of all 574 of our stores as a result of the COVID-19 pandemic.

Compared to the first quarter of 2019, comparable store sales in the first quarter of 2021 increased 35.0%, driven primarily by an increase in the average basket combined with a slight increase in the number of transactions.

Thirteen Weeks Ended July 31, 2021 and August 1, 2020

Net sales increased $21.1 million, or 9.8% , to $ 237.3 million in the second quarter of 2021 from $216.2 million in the second quarter of 2020 .

The increase in sales was due to an 8.7% increase in comparable store sales and the opening of 16 new stores since the second quarter of last year, partially offset by the impact of closing six stores.

The 8.7% increase in comparable store sales resulted in an increase of $18.4 million in sales, while store opening and closing activity resulted in a net increase of $2.7 million.

The increase in comparable store sales was reflected in an increase of 5% in customer transactions and an increase of 4% in the average basket size.

Comparable store sales changes by “CITI” or major merchandise category were as follows:

Beauty & Accessories +31%;

Home & Lifestyle +4%;

and Footwear -1%.

Cost of sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) increased $79.4 million, or 94.1%, to $163.8 million in the first quarter of 2021 from $84.4 million in the first quarter of 2020.

Cost of sales as a percentage of sales decreased to 57.4% in the first quarter of 2021 from 72.7% in the first quarter of 2020, due primarily to a decrease of 1,330 basis points in merchandise markdowns, as more markdowns were taken in the first quarter last year on transitional or seasonal merchandise due to our temporary store closures.

Compared to the first quarter of 2019, cost of sales decreased 510 basis points, due to an improvement of 490 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an improvement of 100 basis points in shrinkage, partially offset by an increase of 80 basis points in freight costs as a result of pressures in the trucking industry.

Cost of sales (exclusive of depreciation) increased $13.4 million, or 10.5% , to $140.5 million in the second quarter of 2021 from $127.1 million in the second quarter of 2020 .

Cost of sales as a percentage of sales increased slightly to 59.2% from 58.8% due to an increase of 250 basis points in freight costs, partially offset by an improvement of 130 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an improvement of 80 basis points in shrinkage.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $23.8 million, or 44.0%, to $77.9 million in the first quarter of 2021 from $54.1 million in the first quarter of 2020.

The increase was due primarily to expense reductions in the first quarter of 2020 due to the pandemic, consisting of lower payroll costs as a result of associate furloughs and decreases in other variable costs such as credit card processing fees and travel expenses.

As a percentage of sales, selling, general and administrative expenses decreased to 27.3% in the first quarter of 2021 from 46.6% in the first quarter of 2020 and 30.9% in the first quarter of 2019.

Selling, general and administrative expenses increased $17.8 million, or 30.8% , to $75.4 million in the second quarter of 2021 from $57.6 million in last year’s second quarter.

The increase was due primarily to significant favorable one-time expense reductions in the second quarter of last year related to COVID-19, including furloughs, store closures and reduced operating hours, abated rents, and other COVID-19 cost credits.

Also contributing to the increase was a $4.5 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 16 new stores since the second quarter of last year.

As a percentage of sales, selling, general and administrative expenses increased to 31.8% in the second quarter of 2021 from 26.7% in the second quarter of 2020 .

Depreciation.

Depreciation expense decreased $0.2 million, or 5.0%, to $4.7 million in the first quarter of 2021 from $4.9 million in the first quarter of 2020.

Depreciation expense increased $0.1 million, or 1.2% , to $5.0 million in the second quarter of 2021 from $4.9 million in the second quarter of 2020 .

Income Tax Expense.

Income tax expense was $3.8 million in the second quarter of 2021 compared to $6.2 million in the second quarter of 2020 due primarily to a decrease in pretax income.

Net income decreased $7.4 million to $12.5 million in the second quarter of 2021 compared to $ 19.9 million in the second quarter of 2020 due to the factors discussed above.

Twenty-Six Weeks Ended July 31, 2021 and August 1, 2020

Net sales increased $190.4 million, or 57.3% , to $522.7 million in the first half of 2021 from $332.3 million in the first half of 2020.

The increase in sales was due to a 55.5% increase in comparable store sales and the opening of 16 new stores since the end of the second quarter of last year, partially offset by the impact of closing six stores.

The year-to-date increase in comparable store sales was primarily due to the temporary closure of all 574 of our stores in the first half of last year as a result of the COVID-19 pandemic.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) increased $92.8 million, or 43.9% , to $304.3 million in the first half of 2021 from $211.5 million in the first half of 2020.

Cost of sales as a percentage of sales decreased to 58.2% in the first half of 2021 from 63.7% in the same period of 2020 due to an improvement of 580 basis points in the core merchandise margin (initial mark-up, net of markdowns) driven by lower markdowns, along with an improvement of 90 basis points in shrinkage, partially offset by an increase of 120 basis points in freight costs.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $41.6 million, or 37.2% , to $153.3 million in the first half of 2021 from $111.7 million in the first half of 2020.

The increase was due primarily to significant favorable one-time expense reductions in the first half of last year related to COVID-19, including furloughs, store closures and reduced operating hours, abated rents and other COVID-19 cost credits.

Also contributing to the increase was a $13.0 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 16 new stores since the second quarter of last year.

As a percentage of sales, selling, general and administrative expenses decreased to 29.3% in the first half of 2021 from 33.6% in the first half of 2020.

Depreciation.

Depreciation expense decreased $0.2 million, or 1.9% , to $9.7 million in the first half of 2021 from $9.9 million in the first half of 2020.

Asset Impairment.

There was no impairment expense recorded in the first quarter of 2021.

In the first quarter of 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

There were no asset impairment charges in the first half of 2021.

In the first half of 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

Income Tax Expense/Benefit.

Income tax expense was $8.1 million in the first quarter of 2021 compared to an income tax benefit of $6.6 million in the first quarter of 2020, as a result of pretax income this year versus the pretax loss in the first quarter of last year.

Income tax expense was $11.9 million in the first half of 2021 compared to an income tax benefit of $0.4 million in the first half of 2020 due primarily to pretax income this year compared to a pretax loss in the first half of last year.

Net Income/Loss.

Net income was $30.9 million in the first quarter of 2021 compared to a net loss of $20.9 million in the first quarter of 2020 due to the factors discussed above.

Net income was $43.4 million in the first half of 2021 compared to a loss of $1.0 million in the first half of 2020 due to the factors discussed above.

Liquidity and Capital Resources

Our principal sources of liquidity consist of:

(i) cash and cash equivalents (which equaled $131.3 million as of May 1, 2021);

(ii) short-term trade credit;

(iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory;

and (iv) a revolving credit facility with a $75.0 million credit commitment (with no borrowings as of May 1, 2021).

(i) cash and cash equivalents (which equaled $76.8 million as of July 31, 2021 );

(ii) short-term investment securities (which equaled $24.6 million as of July 31, 2021);

(iii) short-term trade credit;

(iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory;

and (v) a revolving credit facility with a $75 million credit commitment (with no borrowings as of July 31, 2021 ).

Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors.

Cash Flows From Operating Activities .

Net cash provided by operating activities was $61.7 million in the thirteen weeks ended May 1, 2021 compared to $12.8 million in the same period of 2020.

Sources of cash in the first quarter of 2021 included net income (adjusted for insurance proceeds and non-cash expenses) totaling $50.4 million (compared to a net loss in the first quarter of 2020).

Other significant sources of cash in the first quarter of 2021 included (1) a $24.5 million increase in accounts payable (compared to a $14.0 million increase in the first quarter of 2020) due to a high volume of merchandise receipts during the final two months of the third quarter of 2020, with nearly all of such purchases still in accounts payable at

the end of the quarter;

and (2) a $7.0 million increase in income tax payable (compared to a $1.1 million decrease in income tax receivable in the first quarter of 2020).

Significant uses of cash during the first quarter of 2021 included (1) an $11.2 million decrease in accrued compensation (compared to a $5.5 million decrease in the first quarter of 2020) due to payment in the first quarter of 2021 of incentive compensation accrued in fiscal 2020;

and (2) an $8.6 million decrease in accrued expenses and other long-term liabilities (compared with a $6.8 million decrease in the first quarter of 2020) due primarily to payments of operating lease liabilities.

Net cash provided by operating activities was $56.8 million in the first half of 2021 compared to $55.4 million in the first half of 2020.

Sources of cash in the first half of 2021 included net income adjusted for insurance proceeds and non-cash expenses such as depreciation, non-cash operating lease costs, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $82.2 million (compared to $33.4 million in the first half of 2020 ).

Other significant sources of cash in the first half of 2021 included a $14.3 million increase in accounts payable (compared to a $2.2 million decrease in the first half of 2020) due to a high volume of merchandise receipts during the final two months of the second quarter of 2021, with nearly all of such purchases still in accounts payable at the end of the quarter.

Significant uses of cash from operating activities in the first half of 2021 were (1) a $22.6 million decrease in accrued expenses and other long-term liabilities (compared to a $13.2 million decrease in the first half of 2020) due primarily to payments of operating lease liabilities;

(2) a $9.7 million increase in inventory (compared to a $43.7 million decrease in the first half of 2020) due to replenishing our merchandise in 2021 following robust sales in the fourth quarter of last year;

and (3) a $4.8 million decrease in accrued compensation (compared to a $0.1 million increase in the first half of 2020) due to payment in the first quarter of 2021 of incentive compensation accrued in the second half of last year.

Cash Flows From Investing Activities.

Cash used in investing activities was $5.7 million in the first quarter of 2021 compared to cash provided of $39.3 million in the first quarter of 2020.

Cash used in the first quarter of 2021 consisted primarily of purchases of property and equipment.

Cash provided in the first quarter of 2020 was primarily from the sales of investment securities due to the pandemic, partially offset by $4.0 million used for purchases of property and equipment.

Cash used in investing activities was $36.4 million in the first half of 2021 compared to cash provided of $37.4 million in the first half of 2020.

Cash used in the first half of 2021 consisted of $24.6 million for purchases of short-term investment securities and $12.0 million for purchases of property and equipment.

Cash provided in the first half of 2020 was primarily from the sales of investment securities due to the pandemic, partially offset by $5.8 million used for purchases of property and equipment.

Cash Flows From Financing Activities.

Cash used in financing activities was $47.9 million in the first quarter of 2021 compared to cash provided from financing activities of $36.1 million in the first quarter of 2020.

The principal use of cash in the first quarter of 2021 was share repurchases of $45.5 million.

Cash provided in the first quarter of 2020 was the result of a drawdown of $43.7 million on our revolving credit facility due to the pandemic, partially offset by $7.1 million of combined share repurchases and dividend payments.

Cash used in financing activities was $66.8 million in the first half of 2021 compared to cash provided of $34.0 million in the first half of 2020.

Cash used in the first half of 2021 consisted primarily of $64.4 million for repurchases of our common stock.

Cash provided in the first half of 2020 was the result of a net drawdown of $41.6 million on our credit facility due to the pandemic, partially offset by $7.1 million used for repurchases of our common stock and dividend payments.

Cash Requirements

1 unchanged sentence

Historically, we have met these cash requirements using cash flow from operations and short-term trade credit.

We have also used cash to repurchase stock under our stock repurchase program.

In the first quarter of 2021, pursuant to our stock repurchase program, we repurchased 287,496 shares of our common stock at an aggregate cost of $23.6 million.

We have also used cash to repurchase shares of our common stock.

In the first half of 2021, pursuant to our stock repurchase program, we repurchased 502,257 shares of our common stock at an aggregate cost of $42.5 million.

In addition, we repurchased in a block trade 250,000 shares of our common stock at an aggregate cost of $21.9 million.

9 unchanged sentences

Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the thirteen weeks ended May 1, 2021 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2021.

There have been no material changes in our market risk during the twenty-six weeks ended July 31, 2021 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2021 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis