What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-06-07 compared with 2022-12-08 · 70 added, 95 removed, 95 unchanged (63% of the section changed)

11 unchanged sentences

natural disasters such as hurricanes;

public health emergencies such as the ongoing COVID-19 pandemic and associated containment and remediation efforts;

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;

uncertainty and economic impact of pandemics, epidemics or other public health emergencies such as the ongoing COVID-19 pandemic;

transportation and distribution delays or interruptions;

4 unchanged sentences

the Company’s ability to gauge fashion trends and changing consumer preferences;

consumer confidence and changes in consumer spending patterns;

changes in consumer confidence and consumer spending patterns;

competition within the industry;

3 unchanged sentences

interruptions in suppliers’ businesses;

temporary changes in demand due to weather patterns;

the ongoing assessment and impact of the cyber disruption we identified on January 14, 2023, including legal, reputational, financial and contractual risks resulting from the disruption, and other risks related to cybersecurity, data privacy and intellectual property;

the results of pending or threatened litigation;

temporary changes in

demand due to weather patterns;

seasonality of the Company’s business;

delays associated with building, opening, remodeling and operating new stores;

the results of pending or threatened litigation;

delays associated with building, opening or expanding new or existing distribution centers;

6 unchanged sentences

Executive Overview

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

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

As of April 29, 2023, we operated 608 stores in urban, suburban and rural markets in 33 states.

Uncertainties and Challenges

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 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.

General Economic Conditions

We expect that our operations in the short-term will continue to be influenced by general economic conditions, including the recent inflationary pressures, which are particularly impactful to the communities we serve.

Given the macro-economic environment, we expect low-income families to remain under pressure through the majority of fiscal 2023.

In addition, we continue to monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions and costs to source our merchandise.

Supply Chain Disruptions

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.

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.

While the supply chain disruptions that began in the second half of fiscal 2021 have largely mitigated as of the date of this report, these disruptions resulted in decreased capacity and increased costs.

These pressures persisted through the majority of fiscal 2022.

In response, we took various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the vendor direct-to-store shipping program that we initiated in fiscal 2020.

Seasonality and Weather Patterns

2 unchanged sentences

In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates.

While we have greatly expanded our product offerings to become a one-stop-shop, traffic to our stores is still influenced by weather patterns to some extent.

While we have expanded our product offerings to become a one-stop-shop, traffic to our stores is still influenced by weather patterns to some extent.

Cyber Disruption

In January 2023, we experienced a disruption of our back office and distribution center IT systems, which was due to what is known as Hive ransomware.

In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident.

We do not retain sensitive customer data on our systems.

The impact of this disruption is not expected to be material to our full year fiscal 2023 financial results.

In the first quarter of fiscal 2023, cyber disruption related costs net of an expected insurance receivable totaled $1.6 million, comprised of incremental inventory processing costs, third-party consulting services and legal counsel.

In fiscal 2022, cyber disruption related costs incurred totaled $0.1 million, primarily comprised of third-party consulting services and legal counsel.

We do have cyber insurance, and we are working diligently with our insurance carriers on claims to recover costs incurred.

We anticipate that our financial costs related to the cyber disruption will ultimately be covered by insurance, subject to a retention.

We expect to incur ongoing costs related to the cyber disruption, including costs to enhance data security, and

plan to take further steps to prevent unauthorized access to, or manipulation of, our systems and data.

We are unable to estimate the ultimate direct and indirect financial impacts of this cyber disruption.

Basis of Presentation

3 unchanged sentences

Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs.

The following discussion contains references to fiscal years 2022 and 2021, which represent fiscal years ending or ended on January 28, 2023 and January 29, 2022, respectively.

Fiscal 2022 and fiscal 2021 both have 52-week accounting periods.

The following discussion contains references to fiscal years 2023 and 2022, which represent fiscal years ending or ended on February 3, 2024 and January 28, 2023, respectively.

Fiscal 2023 has a 53-week accounting period and fiscal 2022 had a 52-week accounting period.

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.

2 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 as a result of the seasonality of the business, the current economic uncertainty and the extent to which future business will be impacted by the COVID-19 pandemic.

Results of a period shorter than a full year may not be indicative of results expected for the entire year as a result of the seasonality of our business and the current economic uncertainty.

Key Operating Statistics

12 unchanged sentences

Finally, we monitor corporate expenses against budgeted amounts.

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 $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 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 $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 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 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.

Thirteen Weeks Ended April 29, 2023 and April 30, 2022

Net sales decreased $28.5 million, or 13.7%, to $179.7 million in the first quarter of 2023 from $208.2 million in the first quarter of 2022.

The decrease in sales was due to a 14.1% decrease in comparable store sales driven by continued inflationary pressures in the first quarter of 2023 that are particularly impactful to our core customers, combined with lower tax refunds this year compared to last year.

Cost of Sales (exclusive of depreciation).

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.

Cost of sales (exclusive of depreciation) decreased $13.3 million, or 10.5%, to $113.7 million in the first quarter of 2023 from $127.0 million in the first quarter of 2022.

Cost of sales as a percentage of sales increased to 63.3% in the first quarter of 2023 from 61.0% in the first quarter of 2022.

The change of 230 basis points was due to an increase of 150 basis points in freight costs (partially due to the cyber disruption) along with a decrease of 70 basis points in the core merchandise margin (initial mark-up, net of markdowns) driven by higher markdowns and an increase of 10 basis points in shrink expense.

Selling, General and Administrative Expenses.

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.

Selling, general and administrative expenses decreased $0.2 million, or 0.3%, to $70.8 million in the first quarter of 2023 from $71.0 million in the first quarter of 2022.

The decrease was due to a $2.6 million decrease in payroll expenses and a $0.9 million decrease in professional fees, partially offset by a $2.5 million increase in rent expense and an incremental $1.0 million of costs related to the cyber disruption.

As a percentage of sales, selling, general and administrative expenses increased to 39.4% in the first quarter of 2023 from 34.1% in the first quarter of 2022.

Depreciation.

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.

Depreciation expense decreased $0.7 million, or 14.0%, to $4.7 million in the first quarter of 2023 from $5.4 million in the first quarter of 2022.

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 $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.

Income Tax Benefit/Expense.

Income tax benefit was $1.9 million in the first quarter of 2023 compared to income tax expense of $9.4 million in the first quarter of 2022.

The difference is attributable to a pretax loss in the first quarter of this year compared to pretax income in the first quarter of last year that included the gain on sale-leaseback.

For the first quarter of 2023, we used the discrete effective tax rate method to determine income tax expense based upon interim period results.

Net Loss/Income.

Net loss was $6.6 million in the first quarter of 2023 compared to net income of $30.2 million in the first quarter of 2022 due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

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 $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.

Our capital allocation strategy is to maintain adequate liquidity 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 $88.7 million compared to $61.7 million at the end of the first quarter of 2022.

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

4 unchanged sentences

and (iv) a revolving credit facility with a $75 million credit commitment.

In addition, in April 2022, we completed a sale-leaseback transaction of our distribution center in Darlington, South Carolina, for pretax proceeds of $45.5 million.

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 $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.

Our quarter-end inventory balance was $114.3 million, compared with $129.7 million at the end of the first quarter of 2022.

The decrease was primarily due to a planned reduction in our packaway inventory, partially offset by a strategic increase in our average in-store inventory.

Capital Expenditures

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.

Capital expenditures in the first quarter of 2023 were $1.0 million, a decrease of $7.0 million from the first quarter of 2022 as we pared back our investments in new stores and remodels.

We anticipate capital expenditures in fiscal 2023 in the range of $15 to $20 million, primarily for opening five new stores and remodeling ten to twenty stores, combined with ongoing investments in our systems.

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.

We did not repurchase any shares of our common stock in the first quarter of 2023.

During the first quarter of 2022, we returned $5.3 million to shareholders through share repurchases.

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

2 unchanged sentences

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

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.

At the end of the first quarter of 2023, 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 $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).

Net cash used in operating activities was $13.1 million in the first quarter of 2023 compared to cash used of $18.9 million in the first quarter of 2022.

Sources of cash in the first quarter of 2023 resulted from a net loss adjusted for non-cash expenses totaling $10.5 million (compared to net income adjusted for non-cash items of $14.9 million in the first quarter of 2022 ) and an increase of $9.2 million in accounts payable (compared to a decrease of $11.3 million in the first quarter of 2022).

Significant uses of cash during the first quarter of 2023 included (1) a $20.0 million decrease in accrued expenses and other long-term liabilities (compared to a decrease of $11.1 million in the first quarter of 2022) due primarily to payments of operating lease liabilities;

and (2) an increase of $8.5 million in inventory (compared to an increase of $6.5 million in the first quarter of 2022).

Cash Flows From Investing Activities.

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 used by investing activities was $1.0 million in the first quarter of 2023 compared to cash provided of $38.2 million in the first quarter of 2022.

Cash used in the first quarter of 2023 consisted of purchases of property and equipment.

Cash provided in the first quarter of 2022 consisted of $45.5 million net proceeds from the sale-leaseback transaction, partially offset by $8.0 million of purchases of property and equipment.

Cash Flows From Financing Activities.

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 used in financing activities was $0.8 million in the first quarter of 2023 compared to $7.4 million in the first quarter of 2022.

Cash used in the first quarter of this year consisted of $0.8 million to settle withholding taxes on the vesting of restricted stock (compared to $2.1 million in the first quarter of last year).

Cash used in the first quarter of 2022 included $5.3 million for share repurchases.

Cash Requirements and Commitments

4 unchanged sentences

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

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

As of April 29, 2023, our contractual commitments for operating leases totaled $257.4 million (with $43.4 million due within 12 months).

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

2 unchanged sentences

Actual results could differ from those estimates.

There have been no material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

There have been no material changes to the Critical Accounting Policies outlined in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

Quantitative and Qualitative Disclosures About Market Risk.

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 .

There have been no material changes in our market risk during the thirteen weeks ended April 29, 2023 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

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