What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-30 compared with 2021-03-18 · 81 added, 104 removed, 248 unchanged (43% of the section changed)

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References to "fiscal year 2022" or "fiscal 2022" refer to the period from January 30, 2022 to January 28, 2023, which consists of a 52-week fiscal 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 2017” or “fiscal 2017” refer to the period from January 29, 2017 to February 3, 2018, which consists of a 53-week fiscal year.

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.

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.

Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer.

Five Below, Inc.

(collectively referred to herein with its wholly owned subsidiary as "we," "us," or "our") is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer.

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 January 29, 2022, we operated 1,190 stores in 40 states.

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

In addition, in fall 2019, we rolled out new pricing to our full chain, increasing prices on certain products over $5.

Most of our products remain at $5 and below.

We also offer our merchandise on the internet, through our fivebelow.com e-commerce website.

We launched our e-commerce operation as an additional channel to service our customers.

All e-commerce sales, which includes shipping and handling revenue, are included in net sales and beginning with the third fiscal quarter of 2016, are included in comparable sales.

During fiscal 2020, we entered into a partnership with an on demand third party delivery service to enable our customers to shop online and receive convenient same day delivery.

All e-commerce sales, which includes shipping and handling revenue, are included in net sales and are included in comparable sales.

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 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.

Our comparable sales increased by 30.3% in fiscal 2021, and decreased by 5.5% in fiscal 2020 and increased by 0.6% in fiscal 2019.

Between fiscal 2019 and fiscal 2021, our net sales increased from $1,846.7 million to $2,848.4 million, representing a compounded annual growth rate of 24.2%.

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.

Over the same period, our operating income increased from $217.3 million to $379.9 million, representing a compounded annual growth rate of 32.2%.

In addition, we expanded our store base from 900 stores at the end of fiscal 2019 to 1,190 stores at the end of fiscal 2021 and we plan to open approximately 375 to 400 new stores over the next two fiscal years including approximately 160 new stores in fiscal 2022.

We expect to continue our strong growth in the future.

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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 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.

We continue to believe we have the opportunity to expand our store base in the United States from 1,190 locations as of January 29, 2022 to more than 3,500 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.

Our new store model assumes a store size of approximately 9,000 square feet that achieves annual sales of approximately $2.0 million in the first full year of operation.

Our new store model assumes a store size of approximat ely 9,000 square f eet that achieves annual sales of approximate ly $2.0 million in the first full year of operation.

Our new store model also assumes an average new store investment of approximately $0.4 million.

Our new store investment includes our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses.

O ur new store investment includes our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses.

Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources.

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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.

We began operating the distribution center in August 2021.

In March 2021, we acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot distribution center for approximately $61 million.

We expect to occupy the distribution cent er in fiscal 2022.

As a result of the significant expansion of our network of distribution facilities over the last several years, including the planned opening in the first half of fiscal 2022 of our Indianapolis, Indiana distribution center, we expect to cease operations at our distribution centers in Olive Branch, Mississippi and Cincinnati, Ohio in the first half of fiscal 2022, and expect the costs incurred to be immaterial to our consolidated statements of operations.

We continuously assess ways to maximize the productivity and efficiency of our existing facilities, infrastructure and systems.

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Gross margin is gross profit as a percentage of our net sales.

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.

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

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

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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.

In addition, current global supply chain disruptions, the cost of freight and constraints on shipping capacity to transport inventory may have an adverse impact on our gross profit and results of operations, as well as our sales.

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

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Operating income equals gross profit less SG&A expenses.

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

Operating income excludes interest expense or income, other expense or income, 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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The following tables summarize key components of our results of consolidated operations for the periods indicated, both in dollars and as a percentage of our net sales.

Refer to Item 7.

"Results of Consolidated Operations" in our Annual Report on Form 10-K for the year ended February 1, 2020 for a comparison of fiscal years 2019 and 2018.

(in millions, except total stores)

Refer to Item 7 "Results of Consolidated Operations" in our Annual Report on Form 10-K for the year ended January 30, 2021 for a comparison of fiscal years 2020 and 2019.

(in millions, except percentages and total stores data)

Consolidated Statements of Operations Data (1) :

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Operating income 379.9 154.8

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

Interest (expense) income and other (expense) income, net (13.2) (1.7)

Income before income taxes 366.7 153.1

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Operating income 13.3 % 7.9 %

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

Interest (expense) income and other (expense) income, net (0.5) % (0.1) %

Income before income taxes 12.9 % 7.8 %

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Total stores at end of period 1,190 1,020

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

Comparable sales increase (decrease) 30.3 % (5.5) %

Average net sales per store (2)

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Net sales increased to $2,848.4 million in fiscal year 2021 from $1,962.1 million in fiscal year 2020, an increase of $886.3 million, or 45.2%.

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 was the result of a comparable sales increase of $566.6 million and a non-comparable sales increase of $319.7 million.

In fiscal year 2021, we opened 170 net new stores compared to 120 net new stores in fiscal year 2020.

The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2021 and the number of stores that opened in fiscal 2020 but have not been open for 15 full months.

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.

Comparable sales increased 30.3%.

The increase was primarily the result of the impact of COVID-19 during fiscal year 2020 as we temporarily closed all of our stores as of March 20, 2020, began reopening our stores at the end of April 2020, and had reopened substantially all of our stores by the end of June 2020.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $1,817.9 million in fiscal year 2021 from $1,309.8 million in fiscal year 2020, an increase of $508.1 million, or 38.8% .

The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from an increase in sales.

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

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.

The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from an increase in net sales and due to the impact of COVID-19 in fiscal 2020.

Gross profit increased to $1,030.4 million in fiscal year 2021 from $652.3 million in fiscal year 2020, an increase of $378.1 million, or 58.0%.

Gross margin increased to 36.2% in fiscal year 2021 from 33.2% in fiscal year 2020, an increase of approximately 300 basis points.

The increase in gross margin was primarily the result of a decrease as a percentage of net sales in store occupancy costs due to the impact of COVID-19 in fiscal year 2020 as we temporarily closed all of our stores while still incurring rent expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $650.6 million in fiscal year 2021 from $497.5 million in fiscal year 2020, an increase of $153.1 million, or 30.8%.

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 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.

As a percentage of net sales, selling, general and administrative expenses decreased approximately 260 basis points to 22.8% in fiscal year 2021 compared to 25.4% in fiscal year 2020.

The increase in selling, general and administrative expenses was the result of an increase of $107.0 million in store-related expenses to support new store growth and due to the impact of COVID-19 during fiscal year 2020, which included the temporary closure of all of our stores, furloughing of employees, and other non-payroll expense reductions.

This increase was also driven by an increase of $46.1 million of corporate-related expenses, which included both the benefit related to the CARES Act and the reversal of certain compensation related accruals in fiscal year 2020.

Interest (Expense) Income and Other (Expense) Income, net

Interest expense and other, net increased to $13.2 million in fiscal year 2021 from $1.7 million in fiscal year 2020, an increase of $11.5 million.

The increase in interest expense and other, net was primarily driven by an other than temporary impairment related to an equity method investment.

Income Tax Expense

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.

Income tax expense increased to $87.9 million in fiscal year 2021 from $29.7 million in fiscal year 2020, an increase of $58.2 million, or approximately 195.9%.

This increase in income tax expense was primarily due to a $213.6 million increase in pre-tax net income and discrete items, which includes the impact of the CARES Act in fiscal year 2020 and 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.

Our effective tax rate for fiscal year 2021 was 24.0% compared to 19.4% in fiscal year 2020.

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

Our results of operations and financial condition are presented based on historical cost.

While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial.

We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

The increase 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" and the impact of the CARES Act in fiscal year 2020.

As a result of the foregoing, net income increased to $278.8 million in fiscal year 2021 from $123.4 million in fiscal year 2020, an increase of approximately $155.4 million, or 126.0%.

Our business is seasonal in nature with the highest level of net sales and net income generated in the fourth fiscal quarter due to the year-end holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year.

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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.

We plan to make cash capital expenditures of approximately $220 million in fiscal 2022, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations, cash on-hand, investments and, as needed, borrowings under our Revolving Credit Facility.

We expect to incur approximately $85 million of our cash capital expenditure budget in fiscal 2022 to construct and open approximately 160 new stores of the planned 375 to 400 new stores over the next two fiscal years, with the remainder projected to be spent on our store relocations and remodels, distribution facilities 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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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.

As of January 29, 2022, we did not have any direct borrowings under our Revolving Credit Facility and had approximately $153 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.

In fiscal 2018, we repurchased 21,810 shares under this program at an aggregate cost of approximately $2.0 million.

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

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

In fiscal 2018, we purchased 21,810 shares under this program at an aggregate cost of approximately $2.0 million, or an average price of $91.07 per share.

In fiscal 2019, we purchased 337,552 shares under this program at an aggregate cost of approximately $36.9 million, or an average price of $109.27 per share.

In fiscal 2020, we purchased 137,023 shares under this program at an aggregate cost of approximately $12.7 million, or an average price of $92.42 per share.

In fiscal 2021, we purchased 368,699 shares under this program at an aggregate cost of approximately $60.0 million, or an average price of $162.75 per share.

Since March 2018, we have purchased approximately 865,000 shares for an aggregate cost of approximately $112 million.

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

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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, 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.

As a result of the COVID-19 pandemic, our business operations and results of operations, including our net sales, earnings and cash flows, were materially impacted in fiscal 2020 as a result of the temporary closures of our stores in the first half of 2020, and decreased customer traffic in stores, as the result of limitations on the number of persons permitted in stores at one time by certain local and state regulations.

The Company's ability to operate improved beginning in the second half of fiscal 2020 and extending into fiscal 2021.

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 (66.1) (12.8)

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

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

$ (203.8) $ 66.3

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Cash Provided by Operating Activities

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 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.

Net cash provided by operating activities for fiscal 2021 was $327.9 million, a decrease of $38.1 million compared to fiscal 2020.

The decrease was primarily due to changes in working capital and an increase in income taxes paid, partially offset by an increase in operating cash flows from store performance due to the impact of COVID-19 as we temporarily closed all of our stores in March 2020 and had reopened substantially all of our stores as of the end of June 2020.

During fiscal 2021, we added 170 net new stores.

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Net cash used in investing activities for fiscal 2021 was $465.6 million, an increase of $178.7 million compared to fiscal 2020.

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.

The increase was primarily due to increases in net purchases of investment securities and other investments and capital expenditures.

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

Cash Used in Financing Activities

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.

Net cash used in financing activities for fiscal year 2021 was $66.1 million, an increase of $53.3 million compared to fiscal 2020.

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

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.

On January 27, 2021, we entered into a First Amendment to Credit Agreement (the “First Amendment”) which amended the Fifth Amended and Restated Credit Agreement (as amended by the Fifth Amendment, the "Credit Agreement") dated April 24, 2020 among the Company, 1616 Holdings, Inc., a wholly-owned subsidiary of the Company ("1616 Holdings" and 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 provides for a secured asset-based revolving line of credit in the amount of up to $225 million (the "Revolving Credit Facility").

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

Pursuant to the Credit Agreement, inventory appraisals and certain other diligence items are deferred, with reduced advance rates during the period that such appraisals have not been delivered.

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 Revolving Credit Facility may be increased up to $150.0 million, subject to certain conditions, including obtaining commitments from one or more Lenders (the "Accordion").

Pursuant to the First Amendment, we obtained commitments from the Lenders that would allow us at our 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 million within the Accordion (the "Committed Increase").

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 Credit Agreement provides that the interest rate payable on borrowings shall be, at our option, a per annum rate equal to (a) a base rate plus an applicable margin ranging from 0.25% to 0.75%, or (b) a LIBOR rate plus a margin ranging from 1.25% to 1.75%.

Letter of credit fees range from 1.25% to 1.75%.

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 covenants that limits, absent lender approval, the ability of the 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 with affiliates, merge, dissolve, repay certain indebtedness, change the nature of our 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 us to undertake otherwise restricted activities if it satisfies certain conditions.

In addition, we will be required to maintain availability of not less than (i) 12.5% of the lesser of (x) aggregate commitments under the Revolving Credit Facility and (y) the borrowing base (the "loan cap") during the period that inventory appraisals have not been delivered as described above and (ii) at all other times 10.0% of the loan cap.

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 Credit Agreement).

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.

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

As of January 29, 2022 and January 30, 2021, we were in compliance with the covenants applicable to us under the First Amendment and the Revolving Credit Facility.

As of January 29, 2022 and January 30, 2021, we had approximately $1 53 million and $191 million, respectively, available in the Revolving Credit Facility.

Critical Accounting Policies and Estimates

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The impairment loss analysis requires management to apply judgment and make estimates.

Effective February 3, 2019, we adopted ASU 2016-02, “Leases" (Topic 842).

Leases are accounted for in accordance with the guidance in “Leases" (Topic 842).

We are required to recognize an operating lease asset and an operating lease liability for all of our leases (other than leases that meet the definition of a short-term lease).

1 unchanged sentence

The asset is based on the liability, subject to certain adjustments, such as for initial direct costs.

For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases.

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 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.

For income statement purposes, leases are required to be classified as either operating or finance leases.

Operating leases result in straight-line expense while finance leases result in a front-loaded expense pattern.

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

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Recently Issued Accounting Pronouncements

See "Note 1 - Summary of Significant Accounting Policies" to the consolidated financial statements included in "Item 8.

Consolidated Financial Statements and Supplementary Data" of this Form 10-K, for a detailed description of recently issued accounting pronouncements.

See "Note 1 - Summary of Significant Accounting Policies" to the consolidated financial statements included in Item 8 "Consolidated Financial Statements and Supplementary Data" of this Form 10-K, for a detailed description of recently issued accounting pronouncements.

Contractual Obligations

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From January 30, 2022 to March 30, 2022, we committed to 28 new leases with terms of 10 years that have future minimum lease payments of approximately $62.1 million.

Off Balance Sheet Arrangements

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