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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-30 compared with 2021-03-18 · 110 added, 149 removed, 591 unchanged (30% of the section changed)

2 unchanged sentences

Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets.

We have short-term investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations.

We have investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations.

However, due to the short term nature of our investment portfolio, we do not believe an immediate 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We also have an Revolving Credit Facility which includes a revolving line of credit, which bears interest at a variable rate.

Because our Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

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

The Revolving Credit Facility 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 Revolving Credit Facility are subject to an increase of 2.00% per annum upon an event of default.

We also have a Revolving Credit Facility which includes a revolving line of credit, which bears interest at a variable rate.

Because our Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates, which could materially impact our consolidated statements of operations should we have any material borrowings under our Revolving Credit Facility.

As of January 29, 2022, we had approximatel y $153 million available on the line of credit.

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 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.

We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.

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Index to Consolidated Financial Statements

Report of KPMG LLP, Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of January 30, 2021 and February 1, 2020

Report of KPMG LLP, Independent Registered Public Accounting Firm ( KPMG LLP , Philadelphia, PA , Audit Firm ID:

Consolidated Balance Sheets as of January 29, 2022 and January 30, 2021

Consolidated Statements of Operations for Fiscal Years 2021, 2020 and 2019

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We have audited the accompanying consolidated balance sheets of Five Below, Inc.

and subsidiary (the Company) as of January 30, 2021 and February 1, 2020, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended January 30, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 30, 2021, in conformity with U.S.

and subsidiary (the Company) as of January 29, 2022 and January 30, 2021, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended January 29, 2022, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 29, 2022, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 30, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of February 3, 2019 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842) and the related amendments.

Basis for Opinion

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(in thousands, except share and per share data)

January 30, 2021 February 1, 2020

January 29, 2022 January 30, 2021

Current assets:

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Inventories 455,104 281,267

Prepaid income taxes 6,350 4,063

Prepaid income taxes and tax receivable 11,325 6,350

Prepaid expenses and other current assets 96,196 58,085

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Operating lease assets 1,151,395 975,862

Long-term investment securities 37,717 —

Other assets 9,112 18,144

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Operating income 379,880 154,803 217,284

Interest (expense) income and other, net ( 1,736 ) 4,285 4,623

Interest (expense) income and other (expense) income, net ( 13,177 ) ( 1,736 ) 4,285

Income before income taxes 366,703 153,067 221,569

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Balance, February 2, 2019 55,759,048 $ 557 $ 352,702 $ 261,835 $ 615,094

Cumulative effect of ASC 606 adoption — — — 486 486

Share-based compensation expense — — 12,136 — 12,136

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Net income — — — 123,361 123,361

Balance, February 1, 2020 55,712,067 557 322,330 436,891 759,778

Balance, January 30, 2021 55,935,237 559 321,075 560,252 881,886

Share-based compensation expense — — 25,378 — 25,378

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Inventories ( 173,837 ) 42,761 ( 80,392 )

Prepaid income taxes ( 2,287 ) ( 2,726 ) 927

Prepaid income taxes and tax receivable ( 4,975 ) ( 2,287 ) ( 2,726 )

Prepaid expenses and other assets ( 26,287 ) 17,141 ( 16,603 )

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Net cash used in financing activities ( 66,125 ) ( 12,784 ) ( 42,707 )

Net increase (decrease) in cash and cash equivalents 66,293 ( 49,258 ) 139,079

Net (decrease) increase in cash and cash equivalents ( 203,810 ) 66,293 ( 49,258 )

Cash and cash equivalents at beginning of year 268,783 202,490 251,748

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Non-cash investing activities

(Decrease) increase in accounts payable and accrued purchases of property and equipment $ ( 2,445 ) $ ( 19,411 ) $ 48,723

Increase (decrease) in accounts payable and accrued purchases of property and equipment $ 8,810 $ ( 2,445 ) $ ( 19,411 )

See accompanying notes to consolidated financial statements.

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thus, it is not dependent on a single vendor or a group of vendors.

The Company is incorporated in the Commonwealth of Pennsylvania and, as of January 30, 2021, operated in 38 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California, Arkansas, Iowa, Nebraska, Arizona, Nevada and Colorado.

As of January 30, 2021 and February 1, 2020, the Company operated 1,020 stores and 900 stores, respectively, each operating under the name “Five Below”, and sells merchandise on the internet, through the Company's fivebelow.com e-commerce website.

The Company is incorporated in the Commonwealth of Pennsylvania and, as of January 29, 2022, operated in 40 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California, Arkansas, Iowa, Nebraska, Arizona, Nevada, Colorado, Utah, and New Mexico.

As of January 29, 2022 and January 30, 2021, the Company operated 1,190 stores and 1,020 stores, respectively, each operating under the name “Five Below,” and sells merchandise on the internet, through the Company's fivebelow.com e-commerce website.

The Company's consolidated financial statements include the accounts of Five Below, Inc.

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(b) Impact of COVID-19

As a result of the coronavirus (or COVID-19) pandemic in 2020, federal, state and local governments and private entities mandated various restrictions.

Such mandates required reduction of operating hours and forced temporary closures of certain retailers and other businesses.

As a result of these restrictions and out of concern for its customers and employees, the Company temporarily closed all of its stores as of March 20, 2020, with stores beginning to reopen at the end of April in compliance with federal, state and local requirements.

To seek to mitigate the effects of the pandemic and to create financial flexibility, the Company took a number of actions to preserve liquidity (some of which were temporary in nature such as temporary pay reductions or furloughs, and some of which were more permanent, such as the amendment of the Company’s credit facility).

The Company also took certain actions designed to ensure, as much as possible, a safe working environment for employees and a safe shopping environment for its customers.

Depending on future developments with respect to the COVID-19 pandemic, including any new federal, state and local governmental restrictions that may be imposed, the Company may determine to reinstate any of the foregoing temporary mitigation measures or take any additional steps that the Company considers necessary.

If the pandemic were to worsen, the Company's business operations and results of operations, including its net sales, earnings and cash flows, may be materially impacted.

As a result of the COVID-19 pandemic, the Company's business operations and results of operations, including its net sales, earnings and cash flows, were materially impacted in fiscal 2020 as a result of the temporary closures of its 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.

The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31.

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.

References to "fiscal year 2019" or "fiscal 2019" refer to the period from February 3, 2019 to February 1, 2020, which consists of a 52-week fiscal year.

References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which consists of a 52-week fiscal year.

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity date of three months or less when purchased to be cash equivalents.

Our cash equivalents consist of credit and debit card receivables, money market funds, corporate bonds and municipal bonds with original maturities of 90 days or less, which are classified as cash and cash equivalents in the accompanying consolidated balance sheets.

The majority of payments due from banks for third-party credit card and debit card transactions resulting from customer purchases at the Company’s retail stores process within 24 to 48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday.

Amounts due from banks for these transactions classified as cash equivalents totaled $ 12.8 million and $ 8.9 million as of January 30, 2021 and February 1, 2020, respectively.

Our cash equivalents consist of cash management solutions, credit and debit card receivables, money market funds, corporate bonds and municipal bonds with original maturities of 90 days or less, which are classified as cash and cash equivalents in the accompanying consolidated balance sheets.

The cash management solutions relate to cash deposit products that provide credit generally processed the next business day for cash deposited in third-party tech-enabled solutions.

For credit card and debit card receivables, the majority of payments due from banks for third-party credit card and debit card transactions resulting from customer purchases at the Company’s retail stores process within 24 to 48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday.

Amounts due from banks for these transactions classified as cash equivalents totaled $ 13.0 million and $ 12.8 million as of January 29, 2022 and January 30, 2021, respectively.

Book overdrafts, which are outstanding checks in excess of funds on deposit, are recorded within accounts payable in the accompanying consolidated balance sheets and within operating activities in the accompanying consolidated statements of cash flows.

As of January 30, 2021 and February 1, 2020, the Company had cash equivalents of $ 250.7 million and $ 200.1 million, respectively.

As of January 29, 2022 and January 30, 2021, the Company had cash equivalents of $ 41.3 million and $ 250.7 million, respectively.

(e) Fair Value of Financial Instruments

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Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that market participants would use.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.

The Company’s financial instruments consist primarily of cash equivalents, short-term investment securities, accounts payable, and borrowings, if any, under a line of credit (as defined in note 5).

The classification of fair value measurements within the hierarchy are based upon the lowest level of input that is significant to the measurement.

The Company’s financial instruments consist primarily of cash equivalents, investment securities, accounts payable, borrowings, if any, under a line of credit (as defined in note 5), equity method investments, and notes receivable.

The Company believes that:

(1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments;

and (2) the carrying value of any current or future borrowings under the line of credit approximates their fair value because the line of credit’s interest rates vary with market interest rates.

and (2) the carrying value of the borrowings, if any, under the line of credit approximates fair value because the line of credit’s interest rates vary with market interest rates.

Under the fair value hierarchy, the fair market values of cash equivalents and the investments in corporate bonds are Level 1 while the investments in municipal bonds are Level 2.

The fair market values of level 2 investments are determined by management with the assistance of a third party pricing service.

The fair market values of Level 2 instruments are determined by management with the assistance of a third party pricing service.

Since quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.

As of January 30, 2021 and February 1, 2020, the Company's short-term investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity.

As of January 29, 2022 and January 30, 2021, the Company's investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity.

Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):

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Total $ 277,141 $ — $ 330 $ 276,811

As of February 1, 2020

Corporate bonds

$ 37,717 $ — $ 199 $ 37,518

Total $ 37,717 $ — $ 199 $ 37,518

As of January 30, 2021

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value

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45,398 — 7 45,391

Short-term investment securities as of January 30, 2021 and February 1, 2020 all mature in one year or less.

$ 140,928 $ — $ 60 $ 140,868

Short-term investment securities as of January 29, 2022 and January 30, 2021 all mature in one year or less.

Long-term investment securities as of January 29, 2022 all mature after one year but in less than two years.

(f) Inventories

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Property and equipment, net, consists of the following (in thousands):

January 30, 2021 February 1, 2020

January 29, 2022 January 30, 2021

Land $ 29,625 $ 23,541

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In the event of a store closure, the Company will record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of the asset.

Based on its Company's most recent analysis, management believes that no impairment of long-lived assets exists for the period ended January 30, 2021.

Based on the Company's analysis performed in fiscal 2021 and fiscal 2020, management believes that no impairment of long-lived assets exists for the periods ended January 29, 2022 and January 30, 2021.

(j) Deferred Financing Costs

Deferred financing costs are amortized to interest expense over the term of the related credit agreement.

As of January 30, 2021, the Company had $ 1.6 million remaining on the balance sheet within Other Assets.

As of February 1, 2020, the Company had an immaterial balance remaining on the balance sheet.

As of January 29, 2022 and January 30, 2021, the Company had $ 0.9 million and $ 1.6 million remaining in the accompanying consolidated balance sheets within Other Assets.

(k) Operating Leases

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The distribution center in Pedricktown, New Jersey is leased under a lease agreement expiring in 2025 with options to renew for three successive five-year periods.

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, the Company expects to cease operations at the Company's distribution centers in Olive Branch, Mississippi and Cincinnati, Ohio in the first half of fiscal 2022, and expects the costs incurred to be immaterial to its consolidated statements of operations.

Generally, the Company’s store leases have expected lease terms of ten years, which are comprised of an initial term of ten years or an initial term of five years and one assumed five-year extension, resulting in a ten-year life.

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In addition, the Company's leases may include early termination options.

(l) Finance Leases

The Company establishes assets and liabilities for the estimated construction costs incurred under lease arrangements where the Company is considered the owner for accounting purposes only, or build-to-suit leases, to the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.

Upon occupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance.

If the transaction does not qualify for sales recognition under the sale-leaseback accounting guidance, the Company continues to be the deemed accounting owner.

There were no material finance leases as of January 30, 2021 and February 1, 2020, respectively.

(m) Other Accrued Expenses

(l) Other Accrued Expenses

Other accrued expenses include accrued capital expenditures of $ 41.7 million and $ 29.2 million in fiscal 2021 and fiscal 2020, respectively.

(m) Deferred Compensation

The Company approved and adopted the Five Below, Inc.

Nonqualified Deferred Compensation Plan (the "Deferred Comp Plan") and a related, irrevocable grantor trust (the "Trust") during fiscal 2021.

The Deferred Comp Plan provides eligible key employees with the opportunity to elect to defer up to 80% of their eligible compensation.

The Company may make discretionary contributions, at the discretion of the Board.

Payments under the Deferred Comp Plan will be made from the general assets of the Company or from the assets of the Trust, funded by the Company.

The related liability is recorded as deferred compensation and included in other long-term liabilities in the consolidated balance sheets.

(n) Equity Method Investments

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Equity method investments are initially recorded at cost in other assets in the consolidated balance sheets.

The cost is adjusted to recognize the Company's proportionate share of the investee’s net income or loss after the date of investment and is also adjusted for any impairments resulting from other-than-temporary declines in fair value.

These adjustments are recorded in interest (expense) income and other, net in the consolidated statements of operations.

Additional adjustments to cost may include any additional contributions made and dividends received and both are recorded in other assets in the consolidated balance sheets.

During fiscal 2021, the Company recorded an other-than-temporary impairment utilizing the market and cost approach considering historical and projected financial results to calculate fair value.

Also related to this investment, management recorded a reserve against outstanding debt owed to the Company based on management’s evaluation of collectability.

The total amount of impairment and reserve was approximately $ 9.7 million and was recorded in interest (expense) income and other (expense) income, net in the consolidated statements of operations.

(o) Share-Based Compensation

The Company measures the cost of employee services received in exchange for share-based compensation based on the grant date fair value of the employee stock award.

The Company recognizes compensation expense generally on a straight-line basis over the employee's requisite service period (generally the vesting period of the equity grant) based on the estimated grant date fair value of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") except for PSUs that have a market condition based on our total shareholder return relative to a pre-defined peer group which are subject to multi-year performance objectives with a vesting date in 2023 (if the applicable performance objectives are achieved).

The fair value of these PSUs are determined using a Monte Carlo valuation model.

The Company recognizes compensation expense generally on a straight-line basis over the employee's requisite service period (generally the vesting period of the equity grant) based on the estimated grant date fair value of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") except for PSUs that have a market condition based on its total shareholder return relative to a pre-defined peer group, which are subject to multi-year performance objectives with vesting periods of approximately three years from the date of grant (if the applicable performance objectives are achieved).

The fair value of these PSUs that have a market condition are determined using a Monte Carlo valuation model.

The Company uses the Black-Scholes option-pricing model for grants of stock options.

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Revenue from store operations is recognized at the point of sale when control of the product is transferred to the customer at such time.

Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the consumer receives the product as control transfers upon delivery.

Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the customer receives the product as control transfers upon delivery.

Returns subsequent to the period end are immaterial;

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Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer in net sales.

Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, excluded from sales in the accompanying consolidated statements of operations.

The transaction price for the Company’s sales is based on the item’s stated price.

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Shipping and handling costs, which include fulfillment and shipping costs related to the Company's e-commerce operations, are included in costs of goods sold.

The Company has chosen ASU 2014-09's policy election which allows it to exclude all sales taxes from net sales in the accompanying consolidated statements of operations.

As permitted by applicable accounting guidance, ASU 2014-09 "Revenue from Contracts with Customers," the Company has elected to exclude all sales taxes collected from customers and remitted to governmental authorities from net sales in the accompanying consolidated statements of operations.

(q) Shipping and Handling Revenues and Costs

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(r) Cost of Goods Sold

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

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

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Actual results could differ from those estimates.

Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, adjustments to net realizable value for inventories, income taxes, share-based compensation expense and the incremental borrowing rate utilized in operating lease liabilities.

Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, net realizable value for inventories, income taxes, share-based compensation expense, the incremental borrowing rate utilized in operating lease liabilities, equity method investments, and notes receivable.

(z) Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months.

The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted.

On February 3, 2019, the Company adopted this pronouncement on a modified retrospective basis and applied the new standard to all leases.

As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward the existing lease classification.

The Company also elected the practical expedient related to land easements, allowing the Company to carry forward its accounting treatment for land easements on existing agreements.

At adoption, the new standard had a material impact on the Company's balance sheets resulting in an increase in net assets and liabilities of approximately $ 618 million, as the Company has a significant number of leases for its stores.

Although the standard impacts the treatment of certain initial direct leases costs that were previously capitalizable, it did not materially impact the Company's consolidated statements of operations and had no impact on the Company's cash flows.

See Note 3 ‘‘Leases’’ for additional information.

In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider.

The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted.

The standard can be adopted either using the prospective or retrospective transition approach.

During the thirteen weeks ended November 3, 2018, the Company adopted the pronouncement using the prospective transition method and it did not have a significant impact to the Company's financial statements.

In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which addresses certain fair value disclosure requirements, the measurement basis under the measurement alternative and which equity securities have to be remeasured at historical exchange rates.

In May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief," which gives entities the ability to irrevocably elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-13.

The effective date of the standards will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018.

The new standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align the Company's credit loss methodology with the new standard.

The Company adopted the standard on February 2, 2020.

The adoption did not impact the Company's financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):

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In response to the COVID-19 pandemic, certain of the Company's landlords agreed to temporary rent concessions.

These rent concessions generally related to abatements and deferrals of certain rent payments due between April through October into future periods.

In accordance with the Financial Accounting Standards Board's recent staff guidance regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has elected to account for the concessions agreed to by landlords that do not result in a substantial increase in the obligations of the lessee as if the enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected to not remeasure the related lease liabilities and right-of-use assets.

These rent concessions generally related to deferrals and abatements of certain rent payments due between April 2020 through October 2020 into future periods.

In accordance with the Financial Accounting Standards Board's staff guidance regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has elected to account for the concessions agreed to by landlords that do not result in a substantial increase in the obligations of the lessee as if the enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected to not remeasure the related lease liabilities and right-of-use assets.

For qualifying rent abatement concessions, the Company has recorded negative variable lease expense for the amount of the concession during the period of relief, and for qualifying deferrals of rental payments, the Company has recognized a non-interest bearing payable in lieu of recognizing a decrease in cash for the lease payment that would have been made based on the original terms of the lease agreement, which will be reduced when the deferred payment is made in the future.

All of the Company's leases are classified as operating leases and the associated assets and liabilities are presented as separate captions in the consolidated balance sheets.

As of January 30, 2021 and February 1, 2020, the weighted average remaining lease term for the Company's operating leases was 7.9 years and 8.1 years respectively, and the weighted average discount rate is 6.2 % and 6.6 %, respectively.

The following table is a summary of the Company's components for net lease costs as of January 30, 2021 and February 1, 2020 (in thousands):

As of January 29, 2022 and January 30, 2021, the weighted average remaining lease term for the Company's operating leases was 7.7 years and 7.9 years respectively, and the weighted average discount rate was 5.4 % and 6.2 %, respectively.

The following table is a summary of the Company's components for net lease costs as of January 29, 2022 and January 30, 2021 (in thousands):

Fifty-Two Weeks Ended

Lease Cost January 30, 2021 February 1, 2020

Lease Cost January 29, 2022 January 30, 2021

Operating lease cost $ 201,566 $ 171,390

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Present value of lease liabilities $ 1,298,993

The following table summarizes the supplemental cash flow disclosures related to leases as of January 30, 2021 and February 1, 2020 (in thousands):

The following table summarizes the supplemental cash flow disclosures related to leases as of January 29, 2022 and January 30, 2021 (in thousands):

Fifty-Two Weeks Ended

January 30, 2021 February 1, 2020

January 29, 2022 January 30, 2021

Cash paid for amounts included in the measurement of lease liabilities:

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During the fifty-two weeks ended January 29, 2022, the Company committed to 156 new store leases with average terms of approximately ten years that have future minimum lease payments of approximately $ 355.5 million .

The following disclosures for the year ended February 2, 2019 were made in accordance with the accounting guidance for operating leases in effect at that time.

The Company’s minimum rental commitments under operating lease agreements, including assumed extensions, as of February 2, 2019, are as follows (in thousands):

Retail stores Corporate office, distribution centers and other Total

2019 $ 136,858 $ 10,529 $ 147,387

2020 139,892 11,885 151,777

2021 133,356 11,834 145,190

2022 123,858 11,441 135,299

2023 115,229 9,897 125,126

Thereafter 379,150 55,071 434,221

$ 1,028,343 $ 110,657 $ 1,139,000

Rent expense, including base and contingent rent under operating leases, was $ 119.0 million in fiscal 2018.

Contingent rents was $ 0.6 million in fiscal 2018.

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

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Basic income per common share amounts are calculated using the weighted-average number of common shares outstanding for the period.

Diluted income per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of exercise of stock options as well as assumed vesting of restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, using the treasury stock method.

Diluted income per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of exercised stock options as well as assumed vesting of restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, using the treasury stock method.

Performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted-average shares until the performance conditions are met.

The dilutive impact, if any, for performance-based restricted stock units, which are subject to market conditions based on our total shareholder return relative to a pre-defined peer group, are included in the weighted average shares.

The dilutive impact, if any, for performance-based restricted stock units, which are subject to market conditions based on the Company's total shareholder return relative to a pre-defined peer group, are included in the weighted average shares.

The following table reconciles net income and the weighted average common shares outstanding used in the computations of basic and diluted income per common share (in thousands, except for share and per share data):

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Diluted income per common share $ 4.95 $ 2.20 $ 3.12

The effects of restricted stock units outstanding as of January 30, 2021, February 1, 2020 and February 2, 2019 for 20,425 , 576 and 2,315 shares of common stock, respectively, were excluded from the fiscal 2020, fiscal 2019 and fiscal 2018 calculation of diluted income per common share as their impact would have been anti-dilutive.

The effects of the assumed vesting of restricted stock units outstanding as of January 29, 2022, January 30, 2021 and February 1, 2020 for 9,781 , 20,425 and 576 shares of common stock, respectively, were excluded from the fiscal 2021, fiscal 2020 and fiscal 2019 calculation of diluted income per common share as their impact would have been anti-dilutive.

The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.

(5) Line of Credit

On May 10, 2017, the Company entered into a Fourth Amended 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 $ 20.0 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, the Company 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, 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 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 0.25 % to 0.75 % or (b) a LIBOR rate plus a margin ranging from 1.25 % to 1.75 %.

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

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.

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 the 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 conditions.

In addition, the Company 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 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 Credit Agreement.

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.

During fiscal 2020, the Company borrowed and repaid approximately $ 50 million from its Revolving Credit Facility.

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, the Company was in compliance with the covenants applicable to it under the First Amendment and the Revolving Credit Facility.

During fiscal 2021 and fiscal 2019, the Company had no borrowings or interest expense under the Revolving Credit Facility.

During fiscal 2020, the Company borrowed and repaid approximately $ 50 million from its Revolving Credit Facility.

As of January 29, 2022, the Company had approximately $ 153 million available on the Revolving Credit Facility.

As of February 1, 2020 and February 2, 2019, the Company had approximately $ 20 million available on the Revolving Credit Facility.

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

As of January 30, 2021 and February 1, 2020, the Company was in compliance with the covenants applicable to it under the First Amendment and the Revolving Credit Facility.

As of January 30, 2021 the Company had approximately $ 191 million available on the Revolving Credit Facility.

(6) Commitments and Contingencies

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The Company has an executive severance plan that is applicable to certain key employees that provide for, among other things, salary, bonus, severance, and change-in-control provisions.

As of January 30, 2021, the Company had other purchase commitments of approximately $ 5.9 million consisting of purchase agreements for materials that will be used in the construction of new stores.

In July 2020, the Company acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot distribution center to support the Company's anticipated growth.

As of January 29, 2022, the Company has other purchase commitments of approximately $ 9.9 million consisting of purchase agreements for materials that will be used in the construction of new stores.

In July 2020, the Company acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot distribution.

The total amount paid for the land and building was approximately $ 65 million.

We began operating the distribution center in August 2021.

In March 2021, the Company acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot distribution center to support the Company's anticipated growth.

The total cost of the land and building is expected to be approximately $ 61 million, of which approximately $ 43 million has been paid through January 29, 2022.

The Company expects to occupy the distribution center in Buckeye, Arizona in the second half of 2021.

The Company expects to occupy the distribution center in the first half of 2022.

Contingencies

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(7) Shareholders’ Equity

As of January 30, 2021, the Company is authorized to issue 120,000,000 shares of $ 0.01 par value common stock and 5,000,000 shares of $ 0.01 par value preferred stock.

As of January 29, 2022, the Company is authorized to issue 120 million shares of $ 0.01 par value common stock and 5 million shares of $ 0.01 par value preferred stock.

The holders of the common stock are entitled to one vote per share of common stock and are entitled to receive dividends if declared by the Board of Directors.

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The Plan, as amended, allows for the issuance of up to a total of 7.6 million shares under the Plan.

As of January 30, 2021, 2.8 million stock options, restricted shares, or restricted stock units were available for grant.

As of January 29, 2022, approximately 2.6 million stock options, restricted shares, or restricted stock units were available for grant.

Common Stock Options

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Exercised ( 176,846 ) 30.23

Balance as of February 1, 2020 231,525 30.92 4.1

Balance as of January 30, 2021 53,029 33.22 3.2

Forfeited ( 432 ) 4.28

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The total intrinsic value of stock options exercised during fiscal 2021, fiscal 2020 and fiscal 2019 was $ 2.1 million, $ 17.6 million and $ 14.0 million, respectively.

The aggregate intrinsic value of stock options outstanding and exercisable was $7.5 million as of January 30, 2021.

The aggre gate intrinsic value of stock options outstanding and exercisable was $ 4.9 million as of January 29, 2022.

In fiscal 2021, fiscal 2020 and fiscal 2019, the Company received cash from the exercise of options of $ 0.4 million , $ 5.3 million and $ 4.1 million, respectively.

8 unchanged sentences

Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.

PSUs that have a market condition based on our total shareholder return relative to a pre-defined peer group are subject to multi-year performance objectives with a vesting date in 2023 (if the applicable performance objectives are achieved).

PSUs that have a market condition based on our total shareholder return relative to a pre-defined peer group are subject to multi-year performance objectives with vesting periods of approximately three years from the date of grant (if the applicable performance objectives are achieved).

The fair value of these PSUs are determined using a Monte Carlo valuation model.

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Forfeited ( 23,519 ) 87.54 ( 340,381 ) 89.54

Non-vested balance as of February 1, 2020 250,352 79.37 357,166 66.96

Non-vested balance as of January 30, 2021 304,398 99.94 259,776 151.73

Granted 77,966 185.62 89,460 196.36

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Non-vested balance as of January 29, 2022 254,295 $ 126.93 349,236 $ 163.16

In connection with the vesting of RSUs and PSUs during fiscal 2020, the Company withheld 51,734 shares with an aggregate value of $ 3.9 million in satisfaction of minimum tax withholding obligations due upon vesting.

In connection with the vesting of RSUs and PSUs during fiscal 2021, the Company withh eld 38,342 shares with an aggregate value of $ 7.3 million in satisfaction of minimum tax withholding obligations due upon vesting.

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In fiscal 2020, the Company repurchased 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, the Company repurchased 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, the Company has 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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The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.

As of January 30, 2021, no valuation allowance has been provided for net deferred tax assets as management believes that it is more likely than not that the Company will realize all deferred tax assets as of January 30, 2021.

As of January 29, 2022, there were no material valuation allowances that have been provided for net deferred tax assets as management believes that it is more likely than not that the Company will realize all material deferred tax assets before any expirations as of January 29, 2022.

The components of the income tax expense are as follows (in thousands):

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(1) Other line includes excess tax benefits relating to share-based payment accounting.

The effective tax rate for fiscal 2020 compared to fiscal 2019 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" 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.

The effective tax rate for fiscal 2019 compared to fiscal 2018 was primarily driven by discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."

The effective tax rate for fiscal 2021 compared to fiscal 2020 was primarily driven 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 and the impact of the CARES Act in fiscal 2020.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are (in thousands):

January 30, 2021 February 1, 2020

January 29, 2022 January 30, 2021

Deferred tax assets:

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Deferred tax assets 372,513 305,757

Valuation allowance ( 1,383 ) —

Deferred tax assets, net of valuation allowance 371,130 305,757

Deferred tax liabilities:

4 unchanged sentences

$ ( 36,156 ) $ ( 28,911 )

The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s balance sheets as of January 30, 2021 and February 1, 2020, and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for fiscal 2020, fiscal 2019, or fiscal 2018.

The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s balance sheets as of January 29, 2022 and January 30, 2021, and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for fiscal 2021, fiscal 2020, or fiscal 2019.

The Company files a federal income tax return as well as state tax returns.

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(12) Quarterly Results of Operations and Seasonality (Unaudited)

Quarterly financial results for fiscal 2020 and fiscal 2019 were as follows:

(in thousands except for per share data).

Quarterly financial results for fiscal 2021 and fiscal 2020 were as follows (in thousands except for per share data):

Fiscal Year 2021 (1)

20 unchanged sentences

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 7A. Quantitative and Qualitative Disclosures About Market Risk