What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-06 compared with 2023-09-06 · 64 added, 59 removed, 125 unchanged (50% of the section changed)

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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 July 29, 2023, we operated 611 stores in urban, suburban and rural markets in 33 states.

As of October 28, 2023, we operated 606 stores in urban, suburban and rural markets in 33 states.

Uncertainties and Challenges

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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.

Given the macro-economic environment, we expect low-income families to remain under pressure through the remainder 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, costs to source our merchandise and supply chain disruptions.

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

In the first half of fiscal 2023, the January 2023 cyber disruption related costs, net of an expected insurance receivable, totaled $1.7 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 January 2023 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.

In the third quarter of fiscal 2023, we received insurance proceeds (reflected on our Statement of Cash Flows) related to the January 2023 cyber disruption.

This resulted in a gain of $1.2 million that is recorded in Selling, general and administrative expenses on our Statement of Operations .

In the first thirty-nine weeks of fiscal 2023, we recognized $1.7 million of costs related to the cyber disruption in Selling, general and administrative expenses on our Statement of Operations.

We expect to incur ongoing costs to enhance data security and take further steps to prevent unauthorized access to, or manipulation of, our systems and data.

Several putative class action lawsuits have been filed against the Company and several inquiries have been made to the Company with respect to the January 2023 cyber disruption.

At October 28, 2023, we had an accrual of $0.8 million for estimated losses in connection with these matters recorded in Accrued expenses on our Balance Sheet.

See Note 7 to the Financial Statements for more information.

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Finally, we monitor corporate expenses against budgeted amounts.

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

Net sales decreased $11.4 million, or 6.2%, to $173.6 million in the second quarter of 2023 from $185.0 million in the second quarter of 2022.

Thirteen Weeks Ended October 28, 2023 and October 29, 2022

Net sales decreased $12.8 million, or 6.7%, to $179.5 million in the third quarter of 2023 from $192.3 million in the third quarter of 2022.

The decrease in sales was due to a 6.2% decrease in comparable store sales and a decrease of $1.3 million from net store opening and closing activity.

The decrease in comparable store sales was the result of continued inflationary pressures in the second quarter of 2023 that are particularly impactful to our core customers.

The decrease in comparable store sales was the result of continued inflationary pressures in the third quarter of 2023 that are particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) decreased $7.4 million, or 6.4%, to $107.2 million in the second quarter of 2023 from $114.6 million in the second quarter of 2022.

Cost of sales as a percentage of sales decreased to 61.8% from 61.9%.

The change of 10 basis points was due to an increase of 50 basis points in the core merchandise margin (initial mark-up, net of markdowns) due primarily to lower markdowns, partially offset by an increase of 30 basis points in freight costs due to the deleveraging effect of lower sales and an increase of 10 basis points in shrinkage.

Cost of sales (exclusive of depreciation) decreased $4.8 million, or 4.1%, to $110.9 million in the third quarter of 2023 from $115.7 million in the third quarter of 2022.

Cost of sales as a percentage of sales increased to 61.8% from 60.2%.

The increase was driven primarily by higher freight costs due to rebuilding inventory in certain categories, as well as an increase in shrinkage costs.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $1.0 million, or 1.6%, to $69.5 million in the second quarter of 2023 from $68.5 million in the second quarter of 2022.

The increase was driven by (1) $2.4 million of one-time items that reduced expenses in the second quarter of last year (primarily consisting of an insurance gain and an adjustment to accrued vacation);

(2) higher rent expense this year related to the sale-leasebacks of our distribution centers;

and (3) higher incentive compensation this year due to the reversal last year of certain performance-based awards that were determined to be improbable of vesting.

These increases were partially offset by lower insurance expense due primarily to an actuarial adjustment for future losses, lower professional fees and lower payroll expenses.

As a percentage of sales, Selling, general and administrative expenses increased to 40.1% in the second quarter of 2023 from 37.0% in the second quarter of 2022, due to the factors discussed above and the deleveraging effect of lower sales.

Selling, general and administrative expenses increased $0.6 million, or 0.8%, to $69.7 million in the third quarter of 2023 from $69.1 million in the third quarter of 2022.

The increase was primarily due to:

(1) higher incentive compensation this year due to the reversal last year of certain performance-based awards that were deemed improbable of vesting;

and (2) higher occupancy expenses, including higher rent expense related to the sale-leasebacks of our distribution centers.

These increases were partially offset by a $1.2 million gain on insurance this year and lower insurance costs resulting from lower claims for medical and workers’ compensation.

As a percentage of sales, Selling, general and administrative expenses increased to 38.8% in the third quarter of 2023 from 35.9% in the third quarter of 2022, due to the deleveraging effect of lower sales.

Depreciation.

Depreciation expense decreased $0.6 million, or 10.7%, to $4.7 million in the second quarter of 2023 from $5.3 million in the second quarter of 2022.

Depreciation expense decreased $0.4 million, or 6.4%, to $4.7 million in the third quarter of 2023 from $5.1 million in the third quarter of 2022.

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 Benefit.

Income tax benefit was $2.1 million in the second quarter of 2023 compared to benefit of $0.9 million in the second quarter of 2022 due primarily to a higher pretax loss in the current period.

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

Net loss was $5.0 million in the second quarter of 2023 compared to net loss of $2.5 million in the second quarter of 2022 due to the factors discussed above.

Twenty-Six Weeks Ended July 29, 2023 and July 30, 2022

Net sales decreased $40.0 million, or 10.2%, to $353.2 million in the first twenty-six weeks of 2023 from $393.2 million in the same period of 2022.

The decrease in sales was due to a 10.0% decrease in comparable store sales and a $1.6 million decrease from net store opening and closing activity.

The decrease in comparable store sales was the result of continued inflationary pressures in the first twenty-six weeks of 2023 that are particularly impactful to our core customers.

Income tax benefit was $1.3 million in the third quarter of 2023 compared to income tax expense of $7.1 million in the third quarter of 2022.

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

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

Net loss was $3.9 million in the third quarter of 2023 compared to net income of $24.6 million in the third quarter of 2022 due to the factors discussed above.

Thirty-Nine Weeks Ended October 28, 2023 and October 29, 2022

Net sales decreased $52.8 million, or 9.0%, to $532.8 million in the first thirty-nine weeks of 2023 from $585.6 million in the same period of 2022.

The decrease in sales was due to an 8.7% decrease in comparable store sales and a $3.2 million decrease from net store opening and closing activity.

The decrease in comparable store sales was the result of continued inflationary pressures in the first thirty-nine weeks of 2023 that are particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) decreased $20.7 million, or 8.6%, to $220.9 million in the first twenty-six weeks of 2023 from $241.6 million in the same period of 2022.

Cost of sales as a percentage of sales increased to 62.5% in the first twenty-six weeks of 2023 from 61.4% in the same period of 2022.

The change of 110 basis points was due to an increase of 90 basis points in freight costs, a decrease of 10 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an increase of 10 basis points in shrinkage due primarily to the deleveraging effect of lower sales.

Cost of sales (exclusive of depreciation) decreased $25.5 million, or 7.1%, to $331.8 million in the first thirty-nine weeks of 2023 from $357.3 million in the same period of 2022.

Cost of sales as a percentage of sales increased to 62.3% in the first thirty-nine weeks of 2023 from 61.0% in the same period of 2022.

The increase was driven primarily by higher freight costs due to rebuilding inventory in certain categories, as well as an increase in shrinkage costs.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $0.9 million, or 0.6%, to $140.4 million in the first twenty-six weeks of 2023 from $139.5 million in the same period of 2022.

The increase was due to (1) $2.4 million of one-time items that reduced expenses in the second quarter of last year (primarily consisting of an insurance gain and an adjustment to accrued vacation);

(2) an incremental $1.2 million of costs related to the cyber disruption;

and (3) higher rent expense this year related to the sale-leasebacks of our distribution centers.

These increases were partially offset by lower insurance expense due to lower claims and an actuarial adjustment for future losses, lower professional fees and lower payroll costs.

As a percentage of sales, Selling, general and administrative expenses increased to 39.7% in the first twenty-six weeks of 2023 from 35.5% in the first twenty-six weeks of 2022, due to the factors discussed above and the deleveraging effect of lower sales.

Selling, general and administrative expenses increased $1.4 million, or 0.7%, to $210.0 million in the first thirty-nine weeks of 2023 from $208.6 million in the same period of 2022.

The increase was primarily due to (1) higher rent expense this year related to the sale-leasebacks of our distribution centers;

(2) higher incentive compensation this year due to zero bonus incentive accrued last year and the reversal last year of certain performance-based awards that were deemed improbable of vesting;

and (3) an increase in other occupancy costs.

These increases were partially offset by lower insurance costs resulting from lower claims for medical and workers’ compensation, lower professional fees and lower payroll expenses.

As a percentage of sales, Selling, general and administrative expenses increased to 39.4% in the first thirty-nine weeks of 2023 from 35.6% in the first thirty-nine weeks of 2022, due to the deleveraging effect of lower sales.

Depreciation.

Depreciation expense decreased $1.3 million, or 12.4%, to $9.4 million in the first twenty-six weeks of 2023 from $10.7 million in the same period last year.

Depreciation expense decreased $1.7 million, or 10.5%, to $14.1 million in the first thirty-nine weeks of 2023 from $15.8 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 Benefit (Expense).

Income tax benefit was $4.0 million in the first twenty-six weeks of 2023 compared to income tax expense of $8.5 million in the first twenty-six weeks of 2022 due to pretax loss this year compared to pretax income last year that included the gain on sale leaseback.

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

Income tax benefit was $5.3 million in the first thirty-nine weeks of 2023 compared to income tax expense of $15.6 million in the first thirty-nine weeks of 2022.

The difference is attributable to a pretax loss this year compared to pretax income last year that included the gain on sale-leasebacks.

For the first thirty-nine weeks 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 $11.7 million in the first twenty-six weeks of 2023 compared to net income of $27.7 million in the same period of 2022 due to the factors discussed above.

Net loss was $15.5 million in the first thirty-nine weeks of 2023 compared to net income of $52.3 million in the same period of 2022 due to the factors discussed above.

Liquidity and Capital Resources

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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 $65.8 million compared to cash and cash equivalents of $27.9 million at the end of the second quarter last year.

Our quarter-end cash and cash equivalents balance was $59.7 million compared to cash and cash equivalents of $77.8 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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and (iv) a revolving credit facility with a $75 million credit commitment.

Our quarter-end inventory balance was $134.5 million, compared with $142.1 million at the end of the second quarter last year.

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.

Our quarter-end inventory balance was $129.7 million, compared with $128.5 million at the end of the third quarter last year.

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

Capital Expenditures

Capital expenditures in the first twenty-six weeks of 2023 were $6.9 million, a decrease of $11.5 million over the first twenty-six weeks 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.

Capital expenditures in the first thirty-nine weeks of 2023 were $11.6 million, a decrease of $7.6 million over the first thirty-nine weeks of 2022, as we pared back our investments in new stores and remodels.

We anticipate capital expenditures in fiscal 2023 in the range of $17 to $20 million, primarily for opening new stores and remodeling existing stores, combined with ongoing investments in our systems.

Share Repurchases

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

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

We did not repurchase any shares of our common stock in the first thirty-nine weeks of 2023.

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

See Part II of this Report and Note 8 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 2023, 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 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 $30.0 million in the first twenty-six weeks of 2023 compared to $38.2 million in the same period of 2022.

Sources of cash this year included net loss adjusted for non-cash expenses totaling $22.2 million (compared to net income adjusted for non-cash items of $32.7 million in the first twenty-six weeks of 2022) and an increase of $12.4 million in accounts payable (compared to a $16.3 million decrease in the same period last year).

Significant uses of cash from operating activities in the first twenty-six weeks of 2023 included (1) a $31.2 million decrease in accrued expenses and other long-term liabilities (compared to a $24.1 million decrease in the first twenty-six weeks of 2022) due primarily to payments of operating lease liabilities;

Net cash used in operating activities was $32.9 million in the first thirty-nine weeks of 2023 compared to $23.1 million in the same period of 2022.

Sources of cash this year included net loss adjusted for non-cash expenses totaling $36.0 million (compared to net income adjusted for non-cash items of $48.5 million in the first thirty-nine weeks of 2022).

Significant uses of cash from operating activities in the first thirty-nine weeks of 2023 included (1) a $45.5 million decrease in accrued expenses and other long-term liabilities (compared to a $44.6 million decrease in the first thirty-nine weeks of 2022) due primarily to payments of operating lease liabilities;

and (2) a $23.9 million increase in inventory (compared to a $5.9 million increase in the same period last year).

Cash Flows From Investing Activities.

Cash used in investing activities was $6.9 million in the first twenty-six weeks of 2023 compared to cash provided of $28.4 million in the same period last year.

Cash used in the first twenty-six weeks of 2023 consisted of purchases of property and equipment.

Cash provided by investing activities in the first twenty-six weeks of 2022 consisted of $45.5 million net proceeds from the sale-leaseback transaction, partially offset by $18.4 million for purchases of property and equipment.

Cash used in investing activities was $10.1 million in the first thirty-nine weeks of 2023 compared to cash provided of $63.3 million in the same period last year.

Cash used in the first thirty-nine weeks of 2023 consisted of purchases of property and equipment of $11.6 million and insurance proceeds of $1.5 million.

Cash provided by investing activities in the first thirty-nine weeks of 2022 consisted of $81.1 million net proceeds from the sale-leaseback transaction and insurance proceeds of $1.4 million, partially offset by $19.2 million for purchases of property and equipment.

Cash Flows From Financing Activities.

Cash used in financing activities was $0.8 million in the first twenty-six weeks of 2023 compared to $12.1 million in the same period last year.

Cash used in the first twenty-six weeks of 2023 consisted of payments to settle withholding taxes on restricted stock that vested.

Cash used in the first twenty-six weeks of 2022 consisted of $10.0 million of repurchases of our common stock and payments of $2.1 million to settle withholding taxes on restricted stock that vested .

Cash used in financing activities was $0.9 million in the first thirty-nine weeks of 2023 compared to $12.2 million in the same period last year.

Cash used in the first thirty-nine weeks of 2023 consisted of payments to settle withholding taxes on restricted stock that vested.

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

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 29, 2023, our contractual commitments for operating leases totaled $245.1 million (with $46.5 million due within 12 months).

As of October 28, 2023, our contractual commitments for operating leases totaled $243.4 million (with $46.5 million due within 12 months).

See Note 10 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 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 .

There have been no material changes in our market risk during the thirty-nine weeks ended October 28, 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