What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-08 compared with 2022-09-08 · 71 added, 61 removed, 119 unchanged (53% of the section changed)

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Executive Overview

We are a growing specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families.

We are a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families.

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 multicultural customers.

As of July 30, 2022, we operated 617 stores in urban, suburban and rural markets in 33 states.

As of October 29, 2022, we operated 615 stores in urban, suburban and rural markets in 33 states.

Uncertainties and Challenges

There is still significant uncertainty regarding the lingering effects of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows and liquidity.

There is still uncertainty regarding the lingering effects of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows and liquidity.

We cannot reasonably predict the extent to which our future business will be impacted by the COVID-19 pandemic.

Our operations have been impacted by the recent surge in prices for food, fuel, housing and energy due to inflationary pressures, which are particularly impactful to the communities we serve.

We expect inflationary pressures will persist in the near term.

In addition, we are closely monitoring the impacts of higher unemployment, wage inflation and costs to source our merchandise.

Our operations have been impacted by the recent surge in prices for food, fuel, housing and energy due to inflationary pressures, which may continue in the near term and are particularly impactful to the communities we serve.

We are closely monitoring the impacts of inflationary pressures, higher unemployment, wage inflation and costs to source our merchandise.

The future impact of inflation remains highly uncertain, and our business and results of operations could continue to be adversely impacted.

Supply Chain Disruptions

We have encountered increasing supply chain disruptions that began in the second half of fiscal 2021 and have continued through the date of this Report.

In particular, our vendors have faced production delays, and we have been impacted by industry-wide U.S.

Beginning in the second half of fiscal 2021, we encountered increasing supply chain disruptions, such as production delays for our vendors and industry-wide U.S.

port and ground transportation delays.

In response, we have taken various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the direct shipping program from our vendors to our stores that we initiated in fiscal 2020.

These supply chain disruptions have resulted in increased costs, and we expect supply chain pressures will persist in the near term.

These supply chain disruptions have resulted in increased costs.

We continue to actively monitor and manage the impact on product availability and expenses.

The future impact of the supply chain disruption remain highly uncertain, and our business and results of operations could continue to be adversely impacted.

Seasonality and Weather Patterns

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Finally, we monitor corporate expenses against budgeted amounts.

Thirteen Weeks Ended July 30, 2022 and July 31, 2021

Net sales decreased $52.3 million, or 22.0%, to $185.0 million in the second quarter of 2022 from $237.3 million in the second quarter of 2021.

The decrease in sales was due to a 24.9% decrease in comparable store sales, partially offset by a $6.5 million increase from net store opening and closing activity.

The decrease in comparable store sales was due to outsized sales in the first quarter of last year driven by government stimulus payments, combined with inflationary pressures in the first quarter of this year that are particularly impactful to our core customers.

Thirteen Weeks Ended October 29, 2022 and October 30, 2021

Net sales decreased $35.7 million, or 15.6%, to $192.3 million in the third quarter of 2022 from $228.0 million in the third quarter of 2021.

The decrease in sales was due to an 18.3% decrease in comparable store sales, partially offset by a $5.0 million increase from net store opening and closing activity.

The decrease in comparable store sales was due to outsized sales in the third quarter of last year driven by government stimulus payments, combined with inflationary pressures in the third quarter of this year that are particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) decreased $25.9 million, or 18.5%, to $114.6 million in the second quarter of 2022 from $140.5 million in the second quarter of 2021.

Cost of sales (exclusive of depreciation) decreased $20.4 million, or 14.9%, to $115.7 million in the third quarter of 2022 from $136.1 million in the third quarter of 2021.

Cost of sales as a percentage of sales increased to 60.2% from 59.7%.

The change of 270 basis points was due to a decrease of 190 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to unusually low markdowns in the second quarter of last year during outsized stimulus-driven demand, along with an increase of 60 basis points in shrinkage and 20 basis points in freight costs in the current quarter.

The change of 50 basis points was due to a decrease of 55 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to lower markdowns in the third quarter of last year during outsized stimulus-driven demand, along with an increase of 25 basis points in shrinkage, partially offset by a decrease of 30 basis points in freight costs in the current quarter.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses decreased $6.9 million, or 9.2%, to $68.5 million in the second quarter of 2022 from $75.4 million in the second quarter of 2021.

The decrease was driven by a $5.4 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the second quarter of last year) as well as an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest.

Also contributing to the lower expense were other one-time items totaling $2.4 million consisting of an insurance gain, an adjustment to accrued vacation expense and the capitalization of payroll related to a technology upgrade, along with a decrease in credit card processing fees, a decrease in professional fees related to discontinuing a third-party warehouse provider and savings from headcount reductions.

These decreases were partially offset by a $1.1 million increase in rent related to the sale-leaseback of our Darlington distribution center and the general impact on expenses of opening and operating more stores.

As a percentage of sales, Selling, general and administrative expenses increased to 37.0% in the second quarter of 2022 from 31.8% in the second quarter of 2021, primarily due to the deleveraging effect of lower sales.

Selling, general and administrative expenses decreased $5.7 million, or 7.6%, to $69.1 million in the third quarter of 2022 from $74.8 million in the third quarter of 2021.

The decrease was driven by:

(1) a $4.7 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the third quarter of last year) as well as an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest;

(2) a decrease of $1.5 million in payroll expenses related to reduced headcount;

(3) the capitalization of $0.5 million of payroll related to a technology upgrade;

(4) decreases in travel expenses and credit card processing fees;

and (5) decreases in various other expenses related to our initiative to reduce costs.

These decreases were partially offset by an increase of $1.6 million in rent expense related to the sale-leasebacks of our distribution centers.

As a percentage of sales, Selling, general and administrative expenses increased to 35.9% in the third quarter of 2022 from 32.8% in the third quarter of 2021, primarily due to the deleveraging effect of lower sales.

Depreciation.

Depreciation expense increased $0.3 million, or 5.6%, to $5.3 million in the second quarter of 2022 from $5.0 million in the second quarter of 2021.

Income Tax Benefit/ Expense.

Income tax benefit was $0.9 million in the second quarter of 2022 compared to expense of $3.8 million in the second quarter of 2021 due to the pretax loss in the second quarter this year versus pretax income in the second quarter of last year.

Net Loss/Income.

Net loss was $2.5 million in the second quarter of 2022 compared to net income of $12.5 million in the second quarter of 2021 due to the factors discussed above.

Twenty-Six Weeks Ended July 30, 2022 and July 31, 2021

Net sales decreased $129.5 million, or 24.8%, to $393.2 million in the first half of 2022 from $522.7 million in the same period of 2021.

Depreciation expense decreased $0.4 million, or 8.2%, to $5.1 million in the third quarter of 2022 from $5.5 million in the third quarter of 2021.

Gain on sale-leaseback.

In the third quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Roland, Oklahoma that resulted in a $29.2 million gain.

Income Tax Expense.

Income tax expense was $7.1 million in the third quarter of 2022 compared to $2.5 million in the third quarter of 2021 due primarily to higher pretax income in the current period, including the impact of the gain on the sale of our distribution center.

Net income was $24.6 million in the third quarter of 2022 compared to $9.0 million in the third quarter of 2021 due to the factors discussed above.

Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021

Net sales decreased $165.0 million, or 22.0%, to $585.6 million in the first thirty-nine weeks of 2022 from $750.6 million in the same period of 2021.

The decrease in sales was due to a 24.5% decrease in comparable store sales, partially offset by a $15.9 million increase from net store opening and closing activity.

The decrease in comparable store sales was due to outsized sales in the first half of last year driven by government stimulus payments, combined with inflationary pressures in the first half of this year that are particularly impactful to our core customers.

The decrease in comparable store sales was due to outsized sales in the first thirty-nine weeks of last year driven by government stimulus payments, combined with inflationary pressures in the first thirty-nine weeks of this year that are particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) decreased $62.7 million, or 20.6%, to $241.6 million in the first half of 2022 from $304.3 million in the same period of 2021.

Cost of sales as a percentage of sales increased to 61.4% in the first half of 2022 from 58.2% in the same period of 2021.

The change of 320 basis points was due to a decrease of 235 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to unusually low markdowns in the first half of last year during outsized stimulus-driven demand, along with an increase of 45 basis points in shrinkage and 40 basis points in freight costs in the current period.

Cost of sales (exclusive of depreciation) decreased $83.1 million, or 18.9%, to $357.3 million in the first thirty-nine weeks of 2022 from $440.4 million in the same period of 2021.

Cost of sales as a percentage of sales increased to 61.0% in the first thirty-nine weeks of 2022 from 58.7% in the same period of 2021.

The change of 230 basis points was due to a decrease of 180 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to lower markdowns in the first thirty-nine weeks of last year during outsized stimulus-driven demand, along with an increase of 35 basis points in shrinkage and 15 basis points in freight costs in the current period.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses decreased $13.8 million, or 9.0%, to $139.5 million in the first half of 2022 from $153.3 million in the same period of 2021.

The decrease was due primarily to an $11.1 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the first half last year) and an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest, as well as higher costs last year related to the recognition of incremental compensation costs related to the conversion of nonvested cash-settled units to nonvested shares.

Also contributing to the lower expense were $2.4 million of one-time items in the second quarter of 2022 as discussed above, along with a decrease in credit card processing fees and a decrease in payroll expense related to headcount reductions.

These decreases were partially offset by a $1.1 million increase in rent related to the sale-

leaseback of our Darlington distribution center and the general impact on expenses of opening and operating more stores.

As a percentage of sales, Selling, general and administrative expenses increased to 35.5% in the first half of 2022 from 29.3% in the first half of 2021, primarily due to the deleveraging effect of lower sales.

Selling, general and administrative expenses decreased $19.5 million, or 8.5%, to $208.6 million in the first thirty-nine weeks of 2022 from $228.1 million in the same period of 2021.

The decrease was due to:

(1) a $16.6 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the first thirty-nine weeks last year) and an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest, as well as higher costs last year related to the recognition of incremental compensation costs related to the conversion of nonvested cash-settled units to nonvested shares;

(2) $2.9 million of one-time items consisting of an insurance gain, adjustments to accrued vacation expense and the capitalization of payroll related to a

technology upgrade;

(3) a decrease of $1.6 million in payroll expenses related to reduced headcount;

and (4) decreases in credit card processing fees and professional fees.

These decreases were partially offset by a $2.8 million increase in rent related to the sale-leasebacks of our distribution centers, higher utility costs and the general impact on expenses of opening and operating more stores.

As a percentage of sales, Selling, general and administrative expenses increased to 35.6% in the first thirty-nine weeks of 2022 from 30.4% in the first thirty-nine weeks of 2021, primarily due to the deleveraging effect of lower sales.

Depreciation.

Depreciation expense increased $1.0 million, or 10.6%, to $10.7 million in the first half of 2022 from $9.7 million in the same period last year.

Depreciation expense increased $0.6 million, or 3.8%, to $15.8 million in the first thirty-nine weeks of 2022 from $15.2 million in the same period last year.

Gain on sale-leaseback.

In the first quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Darlington, South Carolina that resulted in a $34.9 million gain.

In the third quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Roland, Oklahoma that resulted in a $29.2 million gain.

Income Tax Expense.

Income tax expense was $8.5 million in the first half of 2022 compared to $11.9 million in the first half of 2021 due primarily to lower pretax income this year.

Net income was $27.7 million in the first half of 2022 compared to $43.4 million in the same period of 2021 due to the factors discussed above.

Income tax expense was $15.6 million in the first thirty-nine weeks of 2022 compared to $14.4 million in the first thirty-nine weeks of 2021 due to higher pretax income this year, combined with a slightly higher rate because the prior year had a favorable tax impact of restricted stock vestings.

Net income was $52.3 million in the first thirty-nine weeks of 2022 compared to $52.4 million in the same period of 2021 due to the factors discussed above.

Liquidity and Capital Resources

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Our capital allocation strategy is to prioritize investments in opportunities to profitably grow our business and maintain current operations, then to return excess cash to shareholders through our repurchase programs.

Our quarter-end cash and cash equivalents balance was $27.9 million compared to $76.8 million at the end of the second quarter last year.

Our quarter-end cash and cash equivalents balance was $77.8 million compared to cash and cash equivalents and short-term investments of $47.5 million at the end of the third quarter last year.

Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

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In September 2022, we completed a sale-leaseback transaction of our distribution center in Roland, Oklahoma, for pretax proceeds of $35.6 million.

Our quarter-end inventory balance was $142.1 million, compared with $113.2 million at the end of the second quarter last year.

The increase was primarily due to reduced inventory levels at the end of the second quarter last year driven by outsized sales, combined with opportunistic purchases of packaway inventory at the end of fiscal 2021 and during the first quarter of this year.

Our quarter-end inventory balance was $128.5 million, compared with $126.9 million at the end of the third quarter last year.

The increase was primarily due to reduced inventory levels at the end of the third quarter last year driven by outsized sales, combined with opportunistic purchases of packaway inventory at the end of fiscal 2021 and during the first quarter of this year.

Capital Expenditures

Capital expenditures in the first half of 2022 were $18.4 million, an increase of $6.4 million over the first half of 2021 as we invested in our strategic initiatives, including opening 10 new stores, remodeling 32 stores and continuing our investments in system upgrades and distribution center enhancements.

We anticipate capital expenditures in fiscal 2022 of approximately $22 million, with plans in the second half of the year to open up to five additional new stores, remodel approximately 10 more stores and continue the ongoing investments in our systems and distribution centers.

Capital expenditures in the first thirty-nine weeks of 2022 were $19.2 million, a decrease of $1.6 million over the first thirty-nine weeks of 2021 as we invested in our strategic initiatives, including opening 12 new stores, remodeling 35 stores and continuing our investments in system upgrades and distribution center enhancements.

We anticipate capital expenditures in fiscal 2022 of approximately $22 million.

Share Repurchases

During the first half of 2022 and 2021, we returned $10.0 million and $64.4 million, respectively, to shareholders through share repurchases.

During the first thirty-nine weeks of 2022 and 2021, we returned $10.0 million and $107.2 million, respectively, to shareholders through share repurchases.

See Part II of this Report and Note 7 to the Financial Statements for more information.

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Additional details of the credit facility are in Note 4 to the Financial Statements .

At the end of the second quarter of 2022, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.

At the end of the third quarter of 2022, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.

Cash Flows From Operating Activities .

Net cash used in operating activities was $38.2 million in the first half of 2022 compared to cash provided of $56.8 million in the same period of 2021.

Sources of cash this year included net income adjusted for insurance proceeds, non-cash expenses and gain on sale-leaseback totaling $32.7 million (compared to $82.2 million in the first half of 2021) and a decrease of $3.4 million in income tax receivable.

Significant uses of cash from operating activities in the first half of 2022 included (1) a $24.1 million decrease in accrued expenses and other long-term liabilities (compared to a $22.6 million decrease in the first half of 2021) due primarily to payments of operating lease liabilities;

(2) a $19.5 million increase in inventory (compared to a $9.7 million increase in the same period last year);

(3) a $16.3 million decrease in accounts payable (compared to a $14.3 million increase last year) due to significantly fewer inventory purchases in the last two months of the quarter, with substantially all of such purchases sitting in accounts payable at the end of the quarter;

and (4) a $12.9 million decrease in accrued compensation (compared to a $4.8 million decrease in the same period last year) due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year.

Net cash used in operating activities was $23.1 million in the first thirty-nine weeks of 2022 compared to cash provided of $54.9 million in the same period of 2021.

Sources of cash this year included net income adjusted for insurance proceeds, non-cash expenses and gain on sale-leasebacks totaling $48.5 million (compared to $110.8 million in the first thirty-nine weeks of 2021) and an increase of $6.9 million in income tax payable.

Significant uses of cash from operating activities in the first thirty-nine weeks of 2022 included (1) a $44.8 million decrease in accrued expenses and other long-term liabilities (compared to a $36.3 million decrease in the first thirty-nine weeks of 2021) due primarily to payments of operating lease liabilities;

(2) a $15.6 million decrease in accounts payable (compared to a $15.9 million increase last year) due to significantly fewer inventory purchases in the last two months of the current quarter;

(3) a $15.2 million decrease in accrued compensation (compared to a $6.5 million decrease in the same period last year) due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year;

and (4) a $5.9 million increase in inventory (compared to a $23.4 million increase in the same period last year).

Cash Flows From Investing Activities.

Cash provided by investing activities was $28.4 million in the first half of 2022 compared to cash used of $36.4 million in the same period last year.

Cash provided in the first half of 2022 consisted of $45.5 million net proceeds from the sale of a building in the sale-leaseback transaction, partially offset by $18.4 million for purchases of property and equipment.

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

Cash provided by investing activities was $63.3 million in the first thirty-nine weeks of 2022 compared to cash used of $56.1 million in the same period last year.

Cash provided in the first thirty-nine weeks of 2022 consisted of $81.1 million net proceeds from the sale of buildings in the sale-leaseback transactions, partially offset by $19.2 million for purchases of property and equipment.

Cash used for investing activities in the first thirty-nine weeks of 2021 consisted of $35.5 million purchases of investment securities and $20.8 million purchases of property and equipment.

Cash Flows From Financing Activities.

Cash used in financing activities was $12.1 million in the first half of 2022 compared to $66.8 million in the same period last year.

Cash used in the first half of 2022 consisted primarily of $10.0 million for repurchases of our common stock.

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

Cash used in financing activities was $12.2 million in the first thirty-nine weeks of 2022 compared to $109.9 million in the same period last year.

Cash used in the first thirty-nine weeks of 2022 consisted of $10.0 million for repurchases of our common stock and $2.2 million paid to settle withholding taxes on restricted stock that vested.

Cash used in the first thirty-nine weeks of 2021 consisted primarily of repurchases of our common stock.

Cash Requirements and Commitments

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

As of July 30, 2022, our contractual commitments for operating leases totaled $247.8 million (with $47.5 million due within 12 months).

As of October 29, 2022, our contractual commitments for operating leases totaled $270.7 million (with $48.3 million due within 12 months).

See Note 9 to the Financial Statements for more information regarding lease commitments.

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Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the twenty-six weeks ended July 30, 2022 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 .

There have been no material changes in our market risk during the thirty-nine weeks ended October 29, 2022 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 .

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