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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-21 · 123 added, 115 removed, 161 unchanged (60% of the section changed)

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EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS

Despite the continuing challenges of the volatile market conditions and supply chain disruptions, our strong results for 2021 demonstrated our ability to be nimble and quickly adapt our business model.

Our operating profit in 2021 surpassed pre-COVID-19 levels with a 61% growth when compared to 2019 and we continued to make progress by:

• Growing our market share in historically underpenetrated categories, including athletic, men’s and kids’;

• Maintaining our leading position in the seasonal and dress categories;

• Leaning further into our in-house design and sourcing capabilities as we move towards our goal of becoming a builder of brands.

As we look ahead to our strategic growth, we have organized our efforts around three pillars - Customer, Brand, and Speed:

• Customer- More than ever, our customers have a great desire for products and experiences, and we are adding resources to our digital, information technology ("IT") and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience.

Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in ways that we have never deployed before.

We are also developing new ideas for how we can provide more value to our VIP rewards members, who we believe continue to be the lifeblood of our business and our largest competitive differentiator.

• Brand- Controlling our own brand destiny is critical for our growth.

As we continue to design some of the best brands in the industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we are combining that with our strong direct-to-consumer distribution through our physical footprint in North America and digital infrastructure.

We are also partnering with some of the top national brands in the industry to offer one of the largest and broadest assortments.

We remain focused on investing in our top 50 brands and will continue to prioritize growing our own brands.

• Speed- Moving quickly is of the utmost importance to consumers.

We are developing processes to deliver products more quickly.

Fulfillment of digital customer orders currently takes five to seven business days and we are working to improve that to two to three calendar days while simultaneously finding efficiencies to contain costs.

We are optimizing our current infrastructure and expanding our delivery partnerships.

We are also working to improve collaboration through technology and processes across our organization and to gain additional efficiencies in our overall development cycle.

IMPACT OF THE COVID-19 PANDEMIC ON OUR RESULTS OF OPERATIONS

As we continue to closely monitor the ongoing COVID-19 pandemic, our top priority remains protecting the health and safety of our customers and associates.

As this continues to be an unprecedented period of uncertainty, we have made adjustments and may continue to adjust our operational plans, inventory controls, and liquidity management, as well as make changes to our expense and capital expenditure plans.

While trends improved during 2021 as compared to 2020, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends will continue.

For instance, we have continued to experience reduced customer in-store traffic and net sales when compared to pre-COVID-19 periods, and it is unclear when customer behavior will return to pre-COVID-19 patterns, if at all.

The ongoing and prolonged nature of the COVID-19 pandemic may lead to further adjustments to our operations.

As such, the ultimate impacts of the COVID-19 pandemic on our businesses will depend on future developments, including the availability of labor, global supply chain disruptions, new variants of COVID-19 and the severity thereof, and the global availability and use of vaccines or palliatives, all of which are highly uncertain and cannot be predicted.

As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.

For 2022, net sales increased 3.7% and comparable sales increased 4.4% over last year.

During 2022, net sales from our Owned Brands increased 32.1% over last year, with Owned Brands representing 24.4% of consolidated net sales as compared to 19.2% for last year.

The increase in net sales from our Owned Brands demonstrates progress toward our long-term goal of doubling net sales from our Owned Brands by 2026 (using 2021 net sales as a baseline).

Gross profit as a percentage of sales for 2022 was lower when compared to last year's record-setting results.

This decrease is primarily attributable to a more promotional retail environment in 2022, as the industry experienced a shift from tighter inventory positions to excess inventory, resulting in us also being more promotional.

In addition, we strategically increased our clearance assortment in order for us to attract customers who are more value-oriented, and this allowed us to manage our inventory more effectively and proactively.

However, gross profit as a percentage of sales for 2022 was higher than the pre-COVID-19 rate in 2019;

this increase was primarily driven by the increased Owned Brands penetration.

At the beginning of 2023, we completed the acquisition of the Keds business from Wolverine World Wide, Inc.

This expands our Owned Brands' reach into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels, supplementing the additions of Le Tigre and Topo during 2022.

This acquisition also marks our first Owned Brand wholesale business within the kids' footwear segment and supports our Owned Brand strategy.

EFFECTS OF INFLATION AND GLOBAL ECONOMIC CONDITIONS

A downturn in global economic conditions, most notably inflationary pressures, rising interest rates, changes in employment levels, significant foreign currency volatility, and the growing concerns of a potential recession, may adversely impact discretionary consumer income levels and spending.

Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence.

Moreover, we are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business.

In 2022, the U.S.

experienced significantly heightened inflationary pressures, which we expect to continue into 2023.

We are subject to inflationary pressures, including increases in the costs of merchandise, transportation, and compensation, which we offset in the first half of 2022 with pricing increases and being less promotional.

However, competitive pricing pressure has been exacerbated by a more promotional retail environment as the industry experienced a shift from tighter inventory positions to excess inventory and as macroeconomic conditions impact discretionary consumer spending.

During the second half of 2022, our net sales and gross profit declined as we became more promotional under this competitive landscape.

These factors could require us to enact mitigating operating efficiency measures that could have a material adverse effect on business, operations, and results of operations.

IMPACT OF COVID-19

The COVID-19 pandemic has had an adverse effect on our results of operations and may continue to impact the global economy, including disrupted supply chain operations globally, temporary factory closures, vessel, container and other transportation shortages, and port congestion.

Such disruptions have at times reduced our availability of inventory while at other times have caused excess inventory as the timing of inventory receipts has been disrupted.

Disruptions may continue especially in geographic locations where government responses may result in mandated quarantines and closures of facilities and operations we depend on.

The COVID-19 pandemic has and is likely to continue to result in social, economic, and labor instability in the markets in which we and our third-party vendors operate.

The long-term economic impact and near-term financial impacts of COVID-19, including, but not limited to, possible impairment, restructuring, or other charges, as well as the overall business on our business and results of operations, cannot be reliably estimated at this time due to the uncertainty of future developments.

FINANCIAL SUMMARY AND OTHER KEY METRICS

• Net sales increased to $3.3 billion for 2022 from $3.2 billion for 2021 .

• G ross profit as a percentage of net sales was 33.4% for 2021, as compared to 13.9% for 2020 and higher than the pre-COVID-19 rate, which was 28.6% for 2019.

• Net income for 2021 was $154.5 million, or $2.00 per diluted share, which included net after-tax benefits of $23.2 million , or $0.30 per diluted share, primarily related to the change in valuation allowance on deferred tax assets, restructuring charges, and target acquisition costs.

Net loss f or 2020 was $488.7 million , or a loss of $6.77 per diluted share, which included net after-tax charges of $207.1 million , or $2.87 per diluted share, primarily related to impairment and restructuring charges, a settlement gain with a vendor, and the valuation allowance established against deferred tax assets.

• G ross profit as a percentage of net sales was 32.6% for 2022, a decrease from 33.4% in 2021, but an increase from the 2019 pre-COVID-19 rate of 28.6%.

• Net income attributable to Designer Brands Inc.

for 2022 was $162.7 million, or $2.26 per diluted share, which included net after-tax benefits of $29.0 million, or $0.41 per diluted share, primarily related to the change in valuation allowance on deferred tax assets, partially offset by the loss on extinguishment of debt and write-off of debt issuance costs, restructuring and termination costs, CEO transition costs, impairment charges, and acquisition costs.

Net income for 2021 was $154.5 million, or $2.00 per diluted share, which included net after-tax benefits of $23.2 million, or $0.30 per diluted share, primarily related to the change in valuation allowance on deferred tax assets, partially offset by restructuring charges and target acquisition costs.

Comparable Sales Performance Metric- The following table presents the percent change in comparable sales for each segment and in total:

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Brand Portfolio segment - direct-to-consumer channel 34.5 % 30.9 %

Other NA (50.4) %

Total 4.4 % 51.6 %

NA - Not applicable

We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses.

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Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site www.vincecamuto.com.

Beginning with the third quarter of 2020, comparable sales do not include the Other segment due to no longer having activity in the Other segment.

The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

Number of Stores- As of the end of 2021 and 2020, we had the following number of stores:

Number of Stores- At the end of the last two fiscal years, we had the following number of stores:

January 28, 2023 January 29, 2022

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Operating expenses (896,382) (27.1) (870,682) (27.2) (25,700) 3.0 %

Income from equity investment 8,986 0.3 9,329 0.5 (343) (3.7) %

Income from equity investments 8,864 0.3 8,986 0.3 (122) (1.4) %

Impairment charges (4,317) (0.1) (1,720) (0.1) (2,597) 151.0 %

Operating profit (loss) 205,221 6.4 (586,314) (26.2) 791,535 NM

Operating profit 187,390 5.7 205,221 6.4 (17,831) (8.7) %

Interest expense, net (14,874) (0.5) (32,129) (1.0) 17,255 (53.7) %

Non-operating income (expenses), net (67) (0.0) 1,361 0.1 (1,428) NM

Income (loss) before income taxes 173,025 5.4 (608,647) (27.2) 781,672 NM

Loss on extinguishment of debt and write-off of debt issuance costs (12,862) (0.4) — — (12,862) NM

Non-operating expenses, net (130) — (67) — (63) 94.0 %

Income before income taxes 159,524 4.8 173,025 5.4 (13,501) (7.8) %

Income tax benefit (provision) 3,142 0.1 (18,544) (0.6) 21,686 NM

Net income (loss) $ 154,481 4.8 % $ (488,719) (21.9) % $ 643,200 NM

Basic and diluted earnings (loss) per share:

Basic earnings (loss) per share $ 2.12 $ (6.77) $ 8.89 NM

Diluted earnings (loss) per share $ 2.00 $ (6.77) $ 8.77 NM

Net income 162,666 4.9 154,481 4.8 8,185 5.3 %

Net loss attributable to redeemable noncontrolling interest 10 — — — 10 NM

Net income attributable to Designer Brands Inc.

$ 162,676 4.9 % $ 154,481 4.8 % $ 8,195 5.3 %

Earnings per share attributable to Designer Brands Inc.:

Basic earnings per share $ 2.41 $ 2.12 $ 0.29 13.7 %

Diluted earnings per share $ 2.26 $ 2.00 $ 0.26 13.0 %

Weighted average shares used in per share calculations:

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Brand Portfolio 327,715 9.7 % 286,024 8.7 % 41,691 14.6 % 34.5%

Other — — % 62,909 2.7 % (62,909) NM NA

Total segment net sales 3,402,469 100.0 % 3,290,539 100.0 % 111,930 3.4 % 4.4%

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Consolidated net sales $ 3,315,428 $ 3,196,583 $ 118,845 3.7 %

NA - Not applicable

NM - Not meaningful

The improvement in sales, including increases in comparable sales and total consolidated net sales, during 2021 over 2020 was a result of the temporary closure of stores in 2020 during our peak spring selling season in response to the COVID-19 pandemic and significantly reduced customer in-store traffic since re-opening.

During 2021, sales significantly recovered from 2020 levels, although we have continued to experience reduced customer in-store traffic and consolidated net sales remain lower when compared to pre-COVID-19 periods.

During a portion of 2021, the Canada Retail segment was impacted by further temporary closures and restrictions in certain key markets.

In addition, net sales were impacted by permanent store closures, including those serviced in the Other segment.

The Brand Portfolio segment net sales were higher in 2021 than 2020 due to increased orders as our retailer customers also recover, but net sales were still below pre-COVID-19 levels.

The increase in net sales during 2022 over last year was primarily due to the increase in comparable sales across all segments, primarily related to the prolonged COVID-19 pandemic in 2021 that resulted in significantly reduced store traffic in the U.S.

Retail and Canada Retail segments, with the Canada Retail segment also impacted by mandated closures and restrictions in certain key markets.

In addition, wholesale sales in the Brand Portfolio segment were higher during 2022, as compared to last year, due to increased orders as our retailer customers had similar results as our retail segments.

These increases were partially offset by the impact of a shift towards being more promotional in the U.S.

Retail and Brand Portfolio segments during the second half of 2022, net store closures since the end of 2021, and the unfavorable impact from foreign currency translation of the Canada Retail segment net sales.

The following table summarizes gross profit by segment:

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Brand Portfolio 72,006 22.0 % 66,774 23.3 % 5,232 7.8 % (130)

Other — — % 962 1.5 % (962) NM NM

Total segment gross profit 1,075,710 31.6 % 1,077,057 32.7 % (1,347) (0.1) % (110)

Elimination of intersegment gross loss (profit) (8,420) 2,449 (10,869)

Net recognition (elimination) of intersegment gross profit 3,515 (8,420) 11,935

Consolidated gross profit $ 1,079,225 32.6 % $ 1,068,637 33.4 % $ 10,588 1.0 % (80)

NM - Not meaningful

The improvement in gross profit was primarily driven by increased sales during 2021 as compared to 2020.

We addressed the temporary closure of stores in 2020, and the subsequent reduction in customer in-store traffic upon store re-openings, with aggressive promotional activity.

These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and deleveraged distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume during 2020.

During 2021, tight inventory positions resulted in fewer promotions.

Accordingly, gross profit as a percentage of net sales for 2021 was higher by 480 basis points than the pre-COVID-19 rate, which was 28.6% for 2019.

The Brand Portfolio segment's gross profit as a percentage of net sales significantly improved during 2021 compared to 2020 but remained below pre-COVID-19 levels when compared to 2019 due to the deleverage impacts of lower net sales.

Elimination of intersegment gross loss (profit) consisted of the following:

(dollars in thousands) 2021 2020

Elimination of intersegment activity:

The increase in consolidated gross profit was primarily driven by increased sales during 2022 over last year, partially offset by higher freight and distribution costs and a shift towards being more promotional in the U.S.

Retail and Brand Portfolio segments during the second half of 2022.

For the Canada Retail segment, the shift toward being more promotional happened later in 2022 resulting in less of an impact to the full fiscal year.

Higher distribution costs within the U.S.

Retail segment were primarily driven by moving our digital fulfillment activities from our Ohio location to our New Jersey location, which resulted in recognizing approximately $16.0 million of additional distribution costs, including accelerated depreciation and termination costs.

The net recognition (elimination) of intersegment gross profit consisted of the following:

(in thousands) 2022 2021

Recognition (elimination) of intersegment activity:

Net sales recognized by Brand Portfolio segment $ (87,041) $ (93,956)

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OPERATING EXPENSES

Operating expenses increased by $117.4 million during 2021 as compared to 2020, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 pandemic for most of the first half of 2020.

During the second half of 2020, we re-opened our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions, but made reductions to our workforce.

During 2021, we had an increase in store payroll costs in line with the increase in net sales and higher incentive compensation expense.

Operating expenses as a percentage of sales improved to 27.2% in 2021 compared to 33.7% in 2020, but was still higher than the pre-COVID-19 rate, which was 25.1% as a percentage of sales in 2019, primarily due to higher direct marketing expense and incentive compensation on lower sales.

Operating expenses increased by $25.7 million during 2022 as compared to last year, primarily driven by an increase in store payroll and costs as a result of severance activity, the dissolution of a joint venture, and the CEO transition.

Operating expenses as a percentage of net sales slightly improved to 27.1% in 2022 compared to 27.2% in 2021, due to the improvement in net sales over last year as we leveraged our fixed costs.

IMPAIRMENT CHARGES

During 2021, we recorded impairment charges of $1.7 million for abandoned equipment we are replacing and for the sublease of an abandoned leased space.

As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores during 2020, we performed an impairment analysis at the store level.

In addition, we evaluated other long-lived assets based on our intent to use such assets going forward.

During 2020, we recorded impairment charges of $127.1 million for under-performing stores.

Also during 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible asset resulting in a full impairment due to the lack of projected cash flows over the remaining useful life.

Further, as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 pandemic on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets.

Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value.

Accordingly, during 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

The effective tax rate changed to 10.7% for 2021 from 19.7% for 2020.

The rate for 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.

The rate for 2020 is the result of recording an additional valuation allowance of $87.6 million partially offset by the ability to carry back current year losses to a tax year where the U.S.

federal statutory tax rate was 35%.

During 2022, we recorded impairment charges of $4.3 million, primarily in the Brand Portfolio segment resulting from subleases of abandoned leased spaces.

During 2021, we recorded impairment charges of $1.7 million, including $1.2 million in the U.S.

Retail segment for abandoned equipment we replaced and $0.5 million in the Brand Portfolio segment for the sublease of an abandoned leased space.

INTEREST EXPENSE, NET

For 2022, interest expense, net, decreased by $17.3 million over last year, primarily due to the termination of the senior secured term loan ("Term Loan") in the first quarter of 2022, which had a higher interest rate than the ABL Revolver.

The decrease was partially offset by a higher average debt balance during 2022 over 2021.

LOSS ON EXTINGUISHMENT OF DEBT AND WRITE-OFF OF DEBT ISSUANCE COSTS

In connection with the settlement of our Term Loan on February 8, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

As a result of the replacement of the ABL Revolver during 2022, we also wrote off $0.2 million of debt issuance costs.

The effective tax rate was negative 2.0% for 2022, as compared to a positive 10.7% for 2021.

The rate for 2022 was the result of releasing $55.7 million of the valuation allowance partially offset by the permanent tax adjustments, primarily non-deductible compensation.

The rate for 2021 was the result of maintaining a full valuation allowance on deferred tax assets, while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.

LIQUIDITY AND CAPITAL RESOURCES

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Our working capital and inventory levels fluctuate seasonally.

During 2022, we repurchased 10.7 million Class A common shares at an aggregate cost of $147.5 million.

As of January 28, 2023, $187.4 million of Class A common shares remained available for repurchase under the share repurchase program.

During 2021 , we did not repurchase any Class A common shares.

In the fourth quarter of 2022, we received $120.3 million of our income tax receivable from the Internal Revenue Service as a result of the Coronavirus Aid, Relief, and Economic Security Act.

We expect to receive the remaining income tax receivable of $44.0 million within the next 12 months.

On December 13, 2022, we acquired a 79.4% ownership interest in Topo for $19.1 million in cash.

We have an exclusive call option to purchase the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of two years following the close of the transaction.

The noncontrolling interest holders also have a put option with respect to the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of three years following the close of the transaction.

The redemption price is defined in the operating agreement and is based primarily on a fixed multiple of Topo's trailing 12 months of adjusted earnings before interest, taxes, depreciation, amortization, and other agreed upon adjustments.

On February 4, 2023, we completed the acquisition of the Keds business from Wolverine World Wide, Inc.

for $123.3 million, funded with available cash and borrowings on the ABL Revolver.

The following table summarizes our material undiscounted cash requirements for 2023 and future fiscal years thereafter, and provides reference for each item to the relevant note of the Consolidated Financial Statements of this Form 10-K:

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Note 14 $ 31,159 $ 195,496 $ 226,655

On February 8, 2022, we settled in full the $231.3 million principal amount outstanding under our senior secured term loan ("Term Loan").

In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, comprised of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs, which will be recorded in the first quarter of 2022.

The settlement of the Term Loan was made using proceeds from borrowings under the ABL Revolver.

We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including the impacts of the COVID-19 pandemic.

We believe that cash generated from our operations, together with our current levels of cash and availability under our ABL Revolver, are sufficient to maintain our ongoing operations and fund capital expenditures over the next 12 months and beyond.

We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy, and withstand unanticipated business volatility, including the impacts of the global economic conditions on our results of operations.

We believe that cash generated from our operations, together with our current levels of cash, as well as the availability of our ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund acquisitions and capital expenditures, and repurchase common shares under our share repurchase program over the next 12 months and beyond.

The following table presents the key categories of our consolidated statements of cash flows:

(in thousands) 2022 2021 Change

Net cash provided by (used in) operating activities $ 171,429 $ (153,793) $ 325,222

Net cash provided by (used in) investing activities (35,028) 2,631 (37,659)

Net cash provided by (used in) financing activities (121,490) 122,954 (244,444)

Net cash provided by operating activities $ 201,426 $ 171,429 $ 29,997

Net cash used in investing activities (88,117) (35,028) (53,089)

Net cash used in financing activities (128,479) (121,490) (6,989)

Effect of exchange rate changes on cash balances (523) (33) (490)

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OPERATING CASH FLOWS

The change in net cash provided by (used in) operations was driven by the net income recognized during 2021 versus a net loss incurred during 2020 as a result of the impacts of the COVID-19 pandemic, after adjusting for non-cash activity including impairment charges and the change in deferred taxes.

This was partially offset by higher spend on working capital as our business recovered from the impacts of the COVID-19 pandemic and the measures we implemented in 2020 to manage our working capital to preserve liquidity, including delaying vendor and landlord payments while we renegotiated terms, reducing inventory orders, and significantly cutting costs.

The increase in net cash provided by operations was largely driven by the receipt of $120.3 million of our income tax receivable from the Internal Revenue Service during 2022.

This was partially offset by higher spend on working capital due to earlier receipts with normal vendor payment terms this year compared to last year when we experienced shipping delays and extended vendor payment terms as a result of the impacts of the COVID-19 pandemic.

In addition, net income recognized during 2022 was lower than last year after adjusting for non-cash activity, including changes in deferred income taxes, depreciation and amortization, stock-based compensation expense, and the loss from extinguishment of debt and write-off of debt issuance costs.

INVESTING CASH FLOWS

For 2021, the net cash used in investing activities was primarily due to capital expenditures relating to infrastructure and IT projects, new stores, and store improvements.

For 2020, the net cash provided by investing activities was due to the liquidation of our available-for-sale securities and the proceeds from a settlement with a vendor, partially offset by capital expenditures.

For 2022, net cash used in investing activities was primarily due to capital expenditures of $55.0 million relating to infrastructure and IT projects, new stores, store improvements, the acquisition of Topo for $19.1 million, and our investment in Le Tigre for $8.2 million.

For 2021, the net cash used in investing activities was primarily due to capital expenditures of $33.0 million relating to infrastructure and IT projects, new stores, and store improvements.

FINANCING CASH FLOWS

During 2021, the net cash used in financing activities was due to net payments of $100.0 million on the ABL Revolver and payments of $12.5 million on the Term Loan.

During 2020, the net cash provided by financing activities was due to net proceeds from borrowings from our ABL Revolver and Term Loan of $343.7 million offset by the settlement of borrowings under our senior unsecured revolving credit agreement (the "Credit Facility") of $190.0 million and the payment of debt issuance costs of $21.4 million associated with the changes we made to our debt structure.

ABL Revolver- On August 7, 2020, we replaced the Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million.

Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inv entory.

The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves.

As of January 29, 2022, the ABL Revolver had a borrowing base of $400.0 million, with no outstanding borrowings and $4.9 million in letters of credit issued, resulting in $395.1 million available for borrowings.

Term Loan- On August 7, 2020 , we also entered into a $250.0 million Term Loan.

The Term Loan was collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables, and inventory, that constitute first priority collateral for the ABL Revolver.

Termination of Term Loan- As discussed above, on February 8, 2022, we voluntarily terminated our Term Loan and settled in full the $231.3 million principal amount then outstanding.

The settlement of the Term Loan was made using proceeds from borrowings under the ABL Revolver.

As of January 29, 2022, the total borrowings under the Term Loan were classified as long-term debt since we had the ability and intent to refinance the Term Loan using borrowings from our ABL Revolver, which we classify as long-term debt.

Following the termination of the Term Loan, we had $235.0 million of outstanding borrowings, resulting in $160.1 million remaining available for borrowings, under the ABL Revolver.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount.

In addition, the ABL Revolver contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes.

There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions.

As of January 29, 2022, we were in compliance with all financial covenants.

During 2022, the net cash used in financing activities was due to the payment of $238.2 million for the settlement of the Term Loan, the repurchase of 10.7 million Class A common shares at an aggregate cost of $147.5 million, and the payment of dividends of $13.5 million, partially offset by the net receipts of $281.0 million from our revolving lines of credit.

During 2021, the net cash used in financing activities was due to net payments of $100.0 million from our revolving lines of credit and payments of $12.5 million on the Term Loan.

ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing-loan advances for U.S.

borrowings, and a $5.5 million sub-limit for swing-loan advances for Canadian borrowings.

Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables and inventory.

The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement.

The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves.

As of January 28, 2023, the ABL Revolver had a borrowing base of $529.9 million, with $281.0 million in outstanding borrowings and $5.0 million in letters of credit issued, resulting in $243.9 million available for borrowings.

Debt Covenants- As of January 28, 2023, the ABL Revolver required us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million or 10.0% of the maximum borrowing amount.

The ABL Revolver also contains customary covenants restricting certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes.

There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability.

As of January 28, 2023, we were in compliance with all financial covenants contained in the ABL Revolver.

ABL Revolver Amendment- On February 28, 2023, the ABL Revolver was amended to increase the available capacity under the revolving line of credit from $550.0 million to $600.0 million and to add a first-in last-out term loan (the "FILO Term Loan") of up to $30.0 million, which was drawn in full on the date of the amendment, subject to a borrowing base.

The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied.

Once repaid, no portion of the FILO Term Loan may be reborrowed.

The maturity date of the ABL Revolver did not change and is applicable to the FILO Term Loan.

The ABL Revolver was also amended to change the period during which we are required to maintain a fixed charge coverage ratio of not less than 1:1 when availability is less than the greater of $47.3 million or 10% of the maximum borrowing amount .

Termination of Term Loan - On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Term Loan.

In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

Refer to Note 12, Debt , of the Consolidated Financial Statements of this Form 10-K for further information about our debt arrangements.

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There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

CRITICAL ACCOUNTING ESTIMATES

As discussed in Note 1, Description of Business and Significant Accounting Policies , of the Consolidated Financial Statements included in this Form 10-K, the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S.

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The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and, in some cases, actuarial and valuation techniques.

We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

We constantly reevaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate.

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Inventories- The U.S.

Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market.

Retail segment inventory is accounted for using the retail inventory method, which is stated at the lower of cost or market.

Under the retail inventory method, the valuation of inventories at cost and the resulting gross profits are determined by applying a calculated cost-to-retail ratio to the retail value of inventories.

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If the reduction to inventories for markdowns, shrink, and aged inventories were to increase by 10%, cost of sales would increase by approximately $4.1 million.

Policy Judgments and Estimates Effect if Actual Results

Differ from Assumptions

Asset Impairment of Long-Lived Assets- We periodically evaluate the carrying amount of our long-lived assets, primarily property and equipment and operating lease assets, when events and circumstances warrant such a review to ascertain if any assets have been impaired.

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To the extent that these future projections or our strategies change, the conclusion regarding impairment may differ from our current estimates.

Policy Judgments and Estimates Effect if Actual Results

Differ from Assumptions

Impairment of Goodwill and Other Indefinite Lived Intangible Assets- We evaluate goodwill and other indefinite lived intangible assets for impairment annually during our fourth quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant and sustained decline in our stock price, that would indicate that impairment may exist.

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Where deemed appropriate, we may also utilize a market approach for estimating fair value.

Impairment charges are calculated as the amount by which the carrying amount exceeds its fair value, but not to exceed the carrying value for goodwill.

Impairment charges are calculated as the amount by which the carrying amount exceeds its fair value, but not to exceed the carrying value.

When assessing goodwill and other indefinite lived intangible assets for impairment, our decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the estimated fair value over carrying value at the last assessment date and the amount of time since the last quantitative fair value assessments.

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As of January 28, 2023, we had $93.7 million of goodwill within the U.S.

Retail segment, which is also the reporting unit, and $15.5 million in indefinite-lived trademarks and tradenames within the Canada Retail segment.

We performed a qualitative impairment assessment for goodwill.

In addition, we determined the fair values of the indefinite-lived intangibles were in excess of their carrying values and a 10% decrease in fair values would not result in a material impairment charge.

Retail segment, which is also the reporting unit, and $14.9 million in indefinite-lived tradenames within the Canada Retail segment.

In addition, we have an immaterial amount of goodwill as a result of the Topo acquisition in the fourth quarter of 2022 that is based on certain preliminary valuations and analysis.

We performed a qualitative impairment assessment for the goodwill in the U.S.

Retail segment and determined it is not more likely than not that there is an impairment.

In addition, we determined that the fair values of the indefinite-lived intangibles were in excess of their carrying values and a 10% decrease in fair values would not result in a material impairment charge.

As we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

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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-K

Item 7. Management’s Discussion and Analysis