What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-18 compared with 2020-03-19 · 117 added, 86 removed, 235 unchanged (46% of the section changed)

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We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year.

References to "fiscal year 2021" or "fiscal 2021" refer to the period from January 31, 2021 to January 29, 2022, which consists of a 52-week fiscal year.

References to "fiscal year 2020" or "fiscal 2020" refer to the period from February 2, 2020 to January 30, 2021, which consists of a 52-week fiscal year.

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References to “fiscal year 2016” or “fiscal 2016” refer to the period from January 31, 2016 to January 28, 2017, which consists of a 52-week fiscal year.

References to “fiscal year 2015” or “fiscal 2015” refer to the period from February 1, 2015 to January 30, 2016, which consists of a 52-week fiscal year.

Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

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We offer a dynamic, edited assortment of exciting products, with most priced at $5 and below, including select brands and licensed merchandise across our category worlds.

As of February 1, 2020 , we operated 900 stores in 36 states.

As of January 30, 2021, we operated 1,020 stores in 38 states.

In August 2016, we commenced selling merchandise on the internet through our fivebelow.com e-commerce website.

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Our e-commerce expenses will have components classified as both cost of goods sold and selling, general and administrative expenses.

We believe that our business model has resulted in strong financial performance irrespective of the economic environment.

Our comparable sales increased by 0.6% in fiscal 2019 , 3.9% in fiscal 2018 , based on the restated calendar, and 6.5% in fiscal 2017 .

We believe that our business model has resulted in strong financial performance when considered in light of the economic environment.

Our comparable sales decreased by 5.5% in fiscal 2020, and increased by 0.6% in fiscal 2019 and 3.9% in fiscal 2018, based on the restated calendar.

Between fiscal 2018 and fiscal 2020, our net sales increased from $1,559.6 million to $1,962.1 million, representing a compounded annual growth rate of 12.2%.

Over the same period, our operating income increased from $157.4 million to $217.3 million , representing a compounded annual growth rate of 17.5% .

In addition, we expanded our store base from 625 stores at the end of fiscal 2017 to 900 stores at the end of fiscal 2019 and we plan to open new stores in fiscal 2020 .

Over the same period, our operating income decreased from $187.2 million to $154.8 million.

In addition, we expanded our store base from 750 stores at the end of fiscal 2018 to 1,020 stores at the end of fiscal 2020 and we plan to open approximately 170 to 180 new stores in fiscal 2021.

We expect to continue our strong growth in the future.

By offering trend-right merchandise at a differentiated price points, our stores have been successful in varying geographic regions, population densities and real estate settings.

As of February 1, 2020 , we operated stores in 36 states throughout the United States.

As of January 30, 2021, we operated stores in 38 states throughout the United States.

We are primarily located in power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets with trade areas including at least 100,000 people in the specified market.

We believe we have the opportunity to expand our store base in the United States from 900 locations as of February 1, 2020 to more than 2,500 locations over time .

We continue believe we have the opportunity to expand our store base in the United States from 1,020 locations as of January 30, 2021 to more than 2,500 locations over time.

Our ability to open profitable new stores depends on many factors, including our ability to identify suitable markets and sites;

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and achieve sufficient levels of cash flow and financing to support our expansion.

Our store expansion plans for fiscal 2020 were adjusted downward as a result of the COVID-19 pandemic.

However, we were still able to open over 120 stores in fiscal 2020 and expect to remain aggressive on our store opening plan.

We have a proven and highly profitable store model that has produced consistent financial results and returns, and our new stores have achieved average payback periods of less than one year.

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In fiscal 2015, we invested in a new ERP and began the multi-year implementation of the ERP, which is designed to enhance functionality and provide timely information to the Company's management team related to the operation of the business.

In fiscal 2020, we invested in a new Retail Merchandising System and began the multi-year implementation of the Retail Merchandising System, which is designed to manage, control, and perform seamless execution of day-to-day merchandising activities, including purchasing, distribution, order fulfillment, and financial close.

In fiscal 2015, we opened a distribution center in Pedricktown, New Jersey.

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In August 2019, we acquired land in Conroe, Texas, to build an approximately 860,000 square foot distribution center for approximately $56 million.

We expect to occupy the distribution center in Conroe, Texas in 2020.

We began operating the distribution center in July 2020.

In July 2020, we acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot distribution center for approximately $65 million.

We expect to occupy the distribution center in Buckeye, Arizona in the second half of 2021.

We are planning to lease or build new distribution centers over the next few years to support our growth objectives.

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• the level of traffic near our locations in the power, community and lifestyle centers in which we operate;

• competition;

• changes in our merchandise mix;

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• weather conditions;

• the impacts associated with the COVID-19 pandemic, including closures of our stores, adverse impacts on our operations, and consumer sentiment regarding discretionary spending.

Opening new stores is an important part of our growth strategy.

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Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as shipping and handling costs, store occupancy, distribution and buying expenses.

Shipping and handling costs include both internal and third-party fulfillment and shipping costs related to our e-commerce operations.

Shipping and handling costs include internal fulfillment and shipping costs related to our e-commerce operations.

Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations.

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We regularly analyze the components of gross profit as well as gross margin.

Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations.

Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of cost of goods sold could have an adverse impact on our gross profit and results of operations.

Changes in the mix of our products may also impact our overall cost of goods sold.

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We expect that our SG&A expenses will increase in future periods due to our continuing store growth.

In addition, any increase in future share-based grants or modifications will increase our share-based compensation expense included in SG&A.

In addition, any increase in future share-based grants or modifications will increase our share-based compensation expense included in SG&A expenses.

Operating Income

Operating income equals gross profit less SG&A expenses.

Operating income excludes interest expense or income and other, loss on debt extinguishment and income tax expense or benefit.

Operating income excludes interest expense or income and other, and income tax expense or benefit.

We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses.

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Consolidated Statements of Operations Data (1) :

Net sales $ 1,962.1 $ 1,846.7

Cost of goods sold 1,309.8 1,172.8

Gross profit 652.3 674.0

Selling, general and administrative expenses 497.5 456.7

Operating income 154.8 217.3

Interest income and other, net

Interest (expense) income and other, net (1.7) 4.3

Income before income taxes 153.1 221.6

Income tax expense 29.7 46.5

Net income $ 123.4 $ 175.1

Percentage of Net Sales (1) :

Net sales 100.0 % 100.0 %

Cost of goods sold 66.8 % 63.5 %

Gross profit 33.2 % 36.5 %

Selling, general and administrative expenses 25.4 % 24.7 %

Operating income 7.9 % 11.8 %

Interest income and other, net

Interest (expense) income and other, net (0.1) % 0.2 %

Income before income taxes 7.8 % 12.0 %

Income tax expense 1.5 % 2.5 %

Net income 6.3 % 9.5 %

Operational Data:

Total stores at end of period 1,020 900

Comparable sales growth

Comparable sales (decrease) increase (5.5) % 0.6 %

Average net sales per store (2)

(1) Components may not add to total due to rounding.

Only includes stores open during the full fiscal year.

(2) Only includes stores open before the beginning of the fiscal year.

Fiscal Year 2020 Compared to Fiscal Year 2019

Net sales increased to $1,962.1 million in fiscal year 2020 from $1,846.7 million in fiscal year 2019, an increase of $115.4 million, or 6.2%.

The increase was the result of a non-comparable sales increase of $278.2 million and a comparable sales increase of $8.9 million .

In fiscal year 2019 , we opened 150 new stores compared to 125 net new stores in fiscal year 2018 .

The increase was the result of a non-comparable sales increase of $209.9 million, partially offset by comparable sales decrease of $94.5 million.

In fiscal year 2020, we opened 120 net new stores compared to 150 new stores in fiscal year 2019.

The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2020 and the number of stores that opened in fiscal 2019 but have not been open for 15 full months.

Comparable sales increased 0.6% .

This increase resulted from an increase of approximately 1.1% in the average dollar value of transactions partially offset by a decrease of approximately 0.5% in the number of transactions.

Comparable sales decreased 5.5%.

The decrease was primarily the result of the impact of COVID-19 as we temporarily closed all of our stores as of March 20, 2020.

We began reopening our stores at the end of April in compliance with federal, state and local requirements, and as of the end of June, the Company had reopened substantially all of its stores to the general public.

Cost of Goods Sold and Gross Profit

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Also contributing to the increase in cost of goods sold was an increase in store occupancy costs resulting from new store openings.

Gross profit increased to $674.0 million in fiscal year 2019 from $565.1 million in fiscal year 2018 , an increase of $108.9 million , or 19.3% .

Gross margin increased to 36.5% in fiscal year 2019 from 36.2% in fiscal year 2018 , an increase of approximately 30 basis points.

The increase in gross margin was primarily the result of a decrease as a percentage of sales in merchandise cost of goods sold partially offset by an increase as a percentage of sales in store occupancy costs.

Gross profit decreased to $652.3 million in fiscal year 2020 from $674.0 million in fiscal year 2019, a decrease of $21.7 million, or 3.2%.

Gross margin decreased to 33.2% in fiscal year 2020 from 36.5% in fiscal year 2019, a decrease of approximately 330 basis points.

The decrease in gross margin was primarily the result of an increase as a percentage of sales in merchandise cost of goods sold and an increase as a percentage of sales in store occupancy costs due to the impact of COVID-19 as we temporarily closed all of our stores while still incurring rent expense.

Selling, General and Administrative Expenses

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As a percentage of net sales, selling, general and administrative expenses increased approximately 70 basis points to 25.4% in fiscal year 2020 compared to 24.7% in fiscal year 2019.

The increase in selling, general and administrative expenses was the result of increases of $67.2 million in store-related expenses to support new store growth, which also includes the impact of the new lease accounting standard, and $11.6 million of corporate-related expenses.

The increase in selling, general and administrative expenses was the result of an increase of $30.7 million of corporate-related expenses, which is net of the benefit related to the CARES Act.

The increase was also driven by an increase of $10.1 million in store-related expenses to support new store growth, which is net of the expense savings from the temporary closure of all of our stores, furloughing of employees, and other non-payroll expense reductions due to the impact of COVID-19.

Income Tax Expense

Income tax expense increased to $46.5 million in fiscal year 2019 from $42.2 million in fiscal year 2018 , an increase of $4.3 million , or approximately 10.3% .

This increase in income tax expense was primarily due to a $29.8 million increase in pre-tax net income partially offset by discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to the requirements to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets.

Income tax expense decreased to $29.7 million in fiscal year 2020 from $46.5 million in fiscal year 2019, a decrease of $16.8 million, or approximately 36.1%.

This decrease in income tax expense was primarily due to a $68.5 million decrease in pre-tax net income and discrete items, which includes the impact of the CARES Act, partially offset by a reduction of the benefit of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to the requirements to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets.

Our effective tax rate for fiscal year 2020 was 19.4% compared to 21.0% in fiscal year 2019.

The decrease in our effective tax rate was primarily driven by discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."

As a result of the foregoing, net income increased to $175.1 million in fiscal year 2019 from $149.6 million in fiscal year 2018 , an increase of approximately $25.5 million , or 17.0% .

The decrease in our effective tax rate was primarily driven by discrete items, which includes the impact of the CARES Act, partially offset by a reduction of the benefit of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."

As a result of the foregoing, net income decreased to $123.4 million in fiscal year 2020 from $175.1 million in fiscal year 2019, a decrease of approximately $51.7 million, or 29.5%.

Impact of Inflation

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Liquidity and Capital Resources

Our primary source of liquidity is cash flows from operations.

Our primary cash needs are for capital expenditures and working capital.

Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments.

We plan to make capital expenditures of approximately $270 million in fiscal 2020 , which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations and cash on-hand.

We expect to incur

approximately $75 million of our capital expenditure budget in fiscal 2020 to construct and open new stores, with the remainder projected to be spent on our distribution facilities (existing and new), store relocations and remodels, and our corporate infrastructure.

Cash capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments.

We plan to make cash capital expenditures of approximately $315 million in fiscal 2021, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations, cash on-hand, short-term investments and, as needed, borrowings under our Revolving Credit Facility.

We expect to incur approximately $95 million of our cash capital expenditure budget in fiscal 2021 to construct and open approximately 170 to 180 new stores, with the remainder projected to be spent on our distribution facilities (existing and new), store relocations and remodels, and our corporate infrastructure.

Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs.

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Fluctuations in working capital are also driven by the timing of new store openings.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Amended Revolving Credit Facility and Revolving Credit Facility.

When we have used our Amended Revolving Credit Facility and Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Revolving Credit Facility, as needed, and we expect that funding to continue.

When we have used our Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year.

To the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year with cash generated during our peak selling season in the fourth quarter.

We did not have any direct borrowings under our Amended Revolving Credit Facility during fiscal year 2019 .

As of February 1, 2020 and February 2, 2019 , we had approximately $20.0 million available on the line of credit.

Effective March 18, 2020, we exercised our right to increase the Amended Revolving Credit Facility to $50.0 million and have this full amount available on the line of credit.

Although it is not possible to reliably estimate the duration or severity of the COVID-19 pandemic and the resulting financial impact on our results of operations, financial position and liquidity, we have the ability to draw down on our Revolving Credit Facility if and as needed.

During the thirteen weeks ended May 2, 2020, we borrowed and repaid approximately $50 million from our Revolving Credit Facility.

As of January 30, 2021, we did not have any direct borrowings under our Revolving Credit Facility.

As of January 30, 2021, we had approximately $191 million available on the line of credit.

On March 20, 2018, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $100 million of our common stock through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise.

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In fiscal 2019, we repurchased 337,552 shares under this program at an aggregate cost of approximately $36.9 million.

Subsequent to February 1, 2020, we repurchased 137,023 shares under this program at an aggregate cost of approximately $12.7 million.

In fiscal 2020, we repurchased 137,023 shares under this program at an aggregate cost of approximately $12.7 million.

Since approval of the share repurchase program in March 2018, we have purchased approximately 500,000 shares for an aggregate cost of approximately $50 million.

On March 9, 2021, our Board of Directors approved a new share repurchase program for up to $100 million of our common shares through March 31, 2024.

There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases.

The share repurchase program may be modified or discontinued at any time.

We believe that our cash position which includes our cash equivalents and short-term investments, net cash provided by operating activities and availability under our Amended Revolving Credit Facility will be adequate to finance our planned capital expenditures, authorized share repurchases and working capital requirements over the next 12 months and for the foreseeable future thereafter.

If cash flows from operations and borrowings under our Amended Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future.

Based on our growth plans, we believe that our cash position which includes our cash equivalents and short-term investments, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, authorized share repurchases and working capital requirements over the next 12 months and for the foreseeable future thereafter.

If cash flows from operations and borrowings under our Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future.

There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.

Although it is not possible to reliably estimate the duration or severity of the COVID-19 outbreak and hence its financial impact on the Company, the temporary closure of our stores is expected to have an adverse impact on our results of operations, financial position and liquidity.

After some or all of our stores reopen any significant reduction in consumer willingness to visit malls and shopping centers, levels of consumer spending at our stores or employee willingness to staff our stores or the temporary closure of our stores or distribution centers, relating to the pandemic or its impact on the economy, consumer sentiment or health concerns would result in a further loss of sales and profits and other material adverse effects.

The extent to which COVID-19 impact our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and the actions to contain COVID-19 or treat its impact, among others.

Although, we began reopening stores at the end of April where permitted in compliance with federal, state, and local requirements, any significant reduction in consumer willingness to visit malls and shopping centers or purchase merchandise using curbside pickup where available, levels of consumer spending at our stores or employee willingness to staff our stores or the temporary closure of our stores or distribution centers relating to the pandemic or its impact on the economy, disruptions in the supply chains related to our products or consumer sentiment or health concerns would result in a further loss of sales and profits and other material adverse effects.

In order to mitigate the negative impact on our liquidity, management took several short term and long term actions, which included the following:

• we cancelled certain vendor orders and delayed receipts on others in order to manage inventory levels, and extended payment terms for product and non-product vendors, although we have since returned to more normalized payment terms;

• we amended our Credit Agreement and increased our Revolving Credit Facility from $50 million to $225 million;

• we implemented significant non-payroll expense reductions, including advertising, occupancy and other store operating expenses (including rent abatements and deferrals for a significant part of our lease portfolio), distribution and corporate office operating expenses, as well as professional and consulting fees;

• we significantly reduced our 2020 capital expenditure budget, including reducing the number of new stores to be opened in 2020 and delaying purchase and construction of a new Midwest distribution center;

• as permitted by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, we have applied for and received payroll tax credits with the IRS, and elected to defer the payment of the employer's portion of FICA taxes.

The extent to which COVID-19 continues to impact our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including new federal, state and local governmental restrictions that may be taken to contain COVID-19 or treat its impact, and any new mitigation measures we may determine to take in response to any such restrictions.

A summary of our cash flows from operating, investing and financing activities is presented in the following table (in millions):

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Net cash used in financing activities (12.8) (42.7)

Net (decrease) increase during period in cash and cash equivalents (1)

Net increase (decrease) during period in cash and cash equivalents (1)

$ 66.3 $ (49.3)

(1) Components may not add to total due to rounding.

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Net cash provided by operating activities for fiscal 2020 was $366.0 million, an increase of $179.0 million compared to fiscal 2019.

The increase was primarily due to an increase in operating cash flows from store performance partially offset by changes in working capital.

During fiscal 2019 , we added 150 new stores.

The increase was primarily due to changes in working capital and a decrease in income taxes paid, partially offset by a decrease in operating cash flows from store performance due to the impact of COVID-19 as we temporarily closed all of our stores in March and had reopened substantially all of our stores as of the end of June.

During fiscal 2020, we added 120 net new stores.

Cash Used in Investing Activities

Net cash used in investing activities for fiscal 2020 was $286.9 million, an increase of $93.3 million compared to fiscal 2019.

The increase was primarily due to an increase in capital expenditures and a decrease in net sales, maturities, and redemptions of investment securities.

The increase in capital expenditures was primarily for our distribution facilities, our new store construction, and our corporate infrastructure.

The increase was primarily due to an increase in net purchases of investment securities and other investments, partially offset by a decrease in capital expenditures.

Cash Used in Financing Activities

Net cash used in financing activities for fiscal year 2019 was $42.7 million , an increase of $37.1 million compared to fiscal 2018 .

The increase was primarily the result of an increase in the repurchase and retirement of common stock.

Net cash used in financing activities for fiscal year 2020 was $12.8 million, a decrease of $29.9 million compared to fiscal 2019.

The decrease was primarily the result of decreases in the repurchase and retirement of common stock and in common shares withheld for taxes.

Line of Credit

On May 10, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan and Security Agreement”), among Five Below Inc., 1616 Holdings, Inc.

(formerly known as Five Below Merchandising, Inc.), a wholly owned subsidiary of the Company, and Wells Fargo Bank, National Association.

The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among Five Below Inc., 1616 Holdings, Inc.

and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.

The Amended Loan and Security Agreement includes a revolving line of credit in the amount of up to $20.0 million (the “Amended Revolving Credit Facility”).

Pursuant to the Amended Loan and Security Agreement, advances under the Amended Revolving Credit Facility are no longer tied to a borrowing base;

however, we are required to maintain eligible inventory at all times in an amount equal to at least $100.0 million.

The Amended Revolving Credit Facility expires on the earliest to occur of (i) May 10, 2022 or (ii) an event of default.

The Amended Revolving Credit Facility may be increased up to $50.0 million, subject to certain conditions.

The Amended Revolving Credit Facility also includes a $20.0 million sub limit for the issuance of letters of credit.

The Amended Loan and Security Agreement reduces the interest rate payable on borrowings to be, at our option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00%.

Letter of credit fees are equal to the interest rate payable on LIBOR-based loans.

The interest rate and letter of credit fees under the Amended Loan and Security Agreement are subject to an increase of 2.00% per annum upon an event of default.

The Amended Loan and Security Agreement removes restrictions related to our ability to pay or make dividends and distributions or repurchase our stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among other things, limitations on our ability to (i) incur additional debt;

(ii) create liens;

(iii) make certain investments, loans and advances;

(iv) sell assets;

(v) engage in mergers or consolidations;

or (vi) change our business.

The Amended Loan and Security Agreement also removes the provisions that required us to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receipt of certain proceeds, including those from the sale of certain assets.

Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, our failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.

Under the Amended Loan and Security Agreement, all obligations under the Amended Revolving Credit Facility continue to be guaranteed by our subsidiary and are secured by substantially all of our and our subsidiary's assets.

As of February 1, 2020 and February 2, 2019 , we had approximately $20.0 million available on the line of credit.

All obligations under the Amended Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by our subsidiary.

As of February 1, 2020 , we were in compliance with the covenants applicable to us under the Amended Revolving Credit Facility.

Effective March 18, 2020, we exercised our right to increase the Amended Revolving Credit Facility to $50.0 million and have this full amount available on the line of credit.

On May 10, 2017, the Company entered into a Fourth Amendment and Restated Loan and Security Agreement (the "Prior Credit Agreement"), among the Company, 1616 Holdings, Inc., a wholly owned subsidiary of the Company ("1616 Holdings"), and Wells Fargo Bank, National Association, which includes a secured asset-based revolving line of credit in the amount of up to $20 million (the "Revolving Credit Facility").

On March 20, 2020, the Company exercised its right under the Prior Credit Agreement to increase the aggregate commitments under the Revolving Credit Facility from $20 million to $50 million.

On April 24, 2020, the Company entered into a Fifth Amended and Restated Credit Agreement (the “Credit Agreement”), among the Company, 1616 Holdings, Inc.

(together with the Company, the "Loan Parties"), Wells Fargo Bank, National Association as administrative agent (the “Agent”), and other lenders party thereto (the "Lenders").

The Credit Agreement amends and restates the Prior Credit Agreement.

The Credit Agreement increased the Revolving Credit Facility to $225.0 million.

Pursuant to the Credit Agreement, advances under the Revolving Credit Facility are tied to a borrowing base consisting of eligible credit card receivables and inventory, as reduced by certain reserves in effect from time to time.

The Revolving Credit Facility expires on the earliest to occur of (i) April 24, 2023 or (ii) an event of default.

The Revolving Credit Facility may be increased by up to $150.0 million, subject to certain conditions, including obtaining commitments from one or more Lenders.

The entire amount of the Revolving Credit Facility is available for the issuance of letters of credit and allows for swingline loans.

The Credit Agreement provides that the interest rate payable on borrowings shall be, at the Company’s option, a per annum rate equal to (a) a base rate plus an applicable margin ranging from 1.00% to 1.25% or (b) a LIBOR rate plus a margin ranging from 2.00% to 2.25%.

Letter of credit fees will range from 2.00% to 2.25%.

The interest rate and letter of credit fees under the Credit Agreement are subject to an increase of 2.00% per annum upon an event of default.

The Credit Agreement contains customary covenants that limit, absent lender approval, the ability of Company and certain of its affiliates to, among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, enter into certain acquisition transactions or transactions with affiliates, merge, dissolve, repay certain indebtedness, change the nature of Company’s business, enter sale or leaseback transactions, make investments or dispose of assets.

In some cases, these restrictions are subject to certain negotiated exceptions or permit Company to undertake otherwise restricted activities if it satisfies certain required conditions.

In addition, the Company will be required to maintain availability of not less than (i) 15% of the lesser of (x) aggregate commitments under the Revolving Credit Facility and (y) the borrowing base (the "loan cap") prior to a stepdown date (as described below) and (ii) 10% of the loan cap after the stepdown date.

The stepdown date is the first date occurring after both (i) the date that 75% of the number of stores as of the closing date of the Revolving Credit Facility have reopened ("store opening date") and (ii) the date occurring at least six months after the store reopening date on which the fixed charge coverage ratio is at least 1.00 to 1.00.

If there exists an event of default or availability under the Revolving Credit Facility is less than 15% of the loan cap, amounts in any of the Loan Parties’ or subsidiary guarantors' designated deposit accounts will be transferred daily into a blocked account held by the Agent and applied to reduce outstanding amounts under the Revolving Credit Facility (the “Cash Dominion Event”), so long as (i) such event of default has not been waived and/or (ii) until availability has exceeded 15% of the loan cap for sixty (60) consecutive calendar days (provided that such ability to discontinue the Cash Dominion Event shall be limited to two times during the term of the Agreement).

The Credit Agreement also contains a provision stating that the Company cannot borrow in excess of $50 million under the Revolving Credit Facility at any time the amount of the consolidated cash and cash equivalents of the Loan Parties (excluding certain long-term investments and certain other items) exceeds $50 million.

The Credit Agreement contains customary events of default including, among other things, failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control, incurrence of certain material judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity of the credit documents, and violation of affirmative and negative covenants or breach of representations and warranties set forth in the Credit Agreement.

Amounts under the Revolving Credit Facility may become due upon events of default (subject to any applicable grace or cure periods).

Under the Credit Agreement, all obligations under the Revolving Credit Facility are guaranteed by 1616 Holdings and are secured by substantially all of the assets of the Company and 1616 Holdings.

On January 27, 2021, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”) among the Loan Parties, the Lenders and Agent, which amended the Credit Agreement.

Pursuant to the First Amendment, the Company obtained commitments from the Lenders that would allow the Company at its election (subject only to satisfaction of certain customary conditions such as the absence of any Event of Default), to increase the amount of the Revolving Credit Facility by an aggregate principal amount up to $50,000,000 (the “Committed Increase”).

The First Amendment preserves the existing provisions of the Credit Agreement allowing for further increases to the total commitment under the Revolving Credit Facility, subject to certain conditions including obtaining commitments from one or more Lenders (“Uncommitted Incremental Capacity”), provided that the total amount of the facility, as increased pursuant to a Committed Increase or Uncommitted Incremental Capacity, cannot exceed $375,000,000.

The current amount of the Revolving Credit Facility is maintained at $225,000,000.

Pursuant to the First Amendment, availability under the Revolving Credit Facility will continue to be based upon quarterly (or monthly or weekly, in certain cases) borrowing base certifications valuing the loan parties’ eligible credit card receivables and inventory, as reduced by certain reserves in effect from time to time.

The First Amendment provides for the deferral of inventory appraisals and certain other diligence items, with reduced advance rates applicable during the period that such appraisals have not been delivered.

The First Amendment also reduced the pricing under the Revolving Credit Facility.

Giving effect to the First Amendment, outstanding borrowings under the Revolving Credit Facility would accrue interest at floating rates plus an applicable margin ranging from 1.25% to 1.75% for LIBOR loans and 0.25% to 0.75% for base rate loans, and letter of credit fees range from 1.25% to 1.75%., in each case based on the average availability under the Revolving Credit Facility.

The First Amendment makes a number of other revisions to the covenants in the Credit Agreement, including a revision to the minimum availability covenant to require availability of 12.5% during the diligence deferral period referenced above and 10.0% at all other times.

As of January 30, 2021 and February 1, 2020, we had approximately $191 million and $20 million, respectively, available in the Revolving Credit Facility.

All obligations under the First Amendment are secured by substantially all of our assets and are guaranteed by 1616 Holdings.

As of January 30, 2021, we were in compliance with the covenants applicable to us under the First Amendment.

Critical Accounting Policies and Estimates

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Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard).

See the Recently Issued Accounting Pronouncements

Recently section of Note 1 ‘‘Summary of Significant Accounting Policies’’ to the consolidated financial statements for a detailed discussion of the adoption of this new lease standard.

See the Recently Issued Accounting Standards section of Note 1 ‘‘Summary of Significant Accounting Policies’’ to the consolidated financial statements for a detailed discussion of the adoption of this new lease standard.

Income taxes are accounted for under the asset-and-liability method .

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Contractual Obligations

The following table summarizes, as of February 1, 2020 , our minimum rental commitments under operating lease agreements including assumed extensions, minimum payments for long-term debt and other obligations in future periods:

(In millions)

Payments Due By Period

The following table summarizes, as of January 30, 2021, our minimum rental commitments under operating lease agreements including assumed extensions, minimum payments for long-term debt and other obligations in future periods:

(In millions) Payments Due By Period

Total Less than

1 year 1-3 years 3-5 years More than

Operating lease obligations (1)

$ 1,394.5 $ 204.2 $ 369.7 $ 325.8 $ 494.8

Purchase obligations (2)

5.9 5.9 — — —

Total $ 1,400.4 $ 210.1 $ 369.7 $ 325.8 $ 494.8

(1) Our store leases generally have initial lease terms of 10 years and include renewal options on substantially the same terms and conditions as the original lease.

1 unchanged sentence

(2) Purchase obligations are primarily for materials that will be used in the construction of new stores and purchase commitments for infrastructure and systems that will be used by the corporate office and distribution centers.

From February 2, 2020 to March 19, 2020 , we committed to 19 new store leases with terms of 10 years that have future minimum lease payments of approximately $34.4 million .

From January 31, 2021 to March 18, 2021, we committed to 23 new leases with terms of 10 years that have future minimum lease payments of approximately $46.0 million.

Off Balance Sheet Arrangements

For the fiscal year ended February 1, 2020 , we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.

For the fiscal year ended January 30, 2021, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.

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