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Item 7. Management’s Discussion and Analysis

2022-03-02 compared with 2021-03-02 · 229 added, 391 removed, 230 unchanged (73% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes thereto included in "Item 8.

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Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described in "Item 1A.

Risk Factors” or in other sections of this report.

Risk Factors" or set forth in other sections of this report.

We operate on a fiscal year that ends on the Saturday closest to December 31st each year.

References to fiscal 2020, fiscal 2019, and fiscal 2018 refer to the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018, respectively.

Our 2020 fiscal year consisted of 53 weeks, while each of the remaining years listed were 52-week years.

References to fiscal 2021, fiscal 2020, and fiscal 2019 refer to the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively.

Our 2021 and 2019 fiscal years consisted of 52 weeks while our 2020 fiscal year consisted of 53 weeks.

We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores.

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Entrepreneurial independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product offering.

This differentiated approach has driven 17 consecutive years of positive comparable store sales growth.

As of January 2, 2021, we had 380 stores throughout California, Washington, Oregon, Pennsylvania, Idaho and Nevada.

Initial Public Offering

On June 24, 2019, we completed our initial public offering (“IPO”) of 19,765,625 shares of our common stock at a public offering price of $22.00 per share for net proceeds of $407.7 million, after deducting underwriting discounts and commissions of $27.1 million.

We also incurred offering costs payable by us of $7.2 million which we recognized as a charge to additional paid-in-capital.

The shares of common stock sold in the IPO and the net proceeds from the IPO included the full exercise of the underwriters’ option to purchase additional shares.

In connection with the closing of our IPO, we repaid in full the $150.0 million outstanding principal amount and $3.6 million accrued interest on our second lien term loan and terminated the related loan agreement.

Additionally, using the remainder of the net proceeds, together with excess cash on hand, we prepaid a portion of the term loan outstanding under our first lien credit agreement, dated as of October 22, 2018 (as amended, the “First Lien Credit Agreement”) totaling $248.0 million and $3.8 million of accrued interest.

On October 23, 2019, we prepaid an additional $15.0 million of principal on the term loan outstanding under our First Lien Credit Agreement.

As of January 1, 2022, we had 415 stores in California, Washington, Oregon, Pennsylvania, Idaho, Nevada and New Jersey.

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide.

As a result, many states, including states where we have significant operations, declared a state of emergency, closed non-essential businesses and enacted limitations on the size of gatherings.

As we compare fiscal 2021 financial performance with the comparable period in fiscal 2020 that included significantly elevated COVID-related demand (only partially offset by periods of store closures) and financial outperformance relative to historical growth, we are reporting declines in year-over-year net sales and comparable store sales growth.

In fiscal 2021, and ongoing to an extent, consumer behavior has been impacted by increased consumer mobility and travel, higher food-away-from-home spend, continued consolidation of grocery store visits, higher levels of government stimulus (the latter of which has led consumers to prioritize convenience over value) and elevated grocery e-commerce usage, all of which have negatively impacted our net sales.

The combination of these factors, coupled with the evolving nature of the pandemic (especially with respect to the possibility of different variants in the future) and inflationary pressures, makes it difficult to predict near term consumer behavior and resulting sales trends for our business.

We and our IOs also had in fiscal 2021, and continue to have, staffing challenges and increased labor costs for a variety of reasons that are attributable to the COVID-19 pandemic and the related economic and regulatory environment.

There was also a surge of positive COVID-19 cases related to the Delta variant around the country during the third quarter of fiscal 2021 and an additional surge of positive COVID-19 cases related to the Omicron variant in the fourth quarter of fiscal 2021, including states in which we operate, creating additional uncertainty and having a negative impact on staffing.

Since the start of the pandemic, certain inventory items have at times been, and may in the future again be, in short supply.

COVID-19-related supply chain disruptions more recently have caused logistical challenges for us and many other retailers and manufacturers, causing delays in product delivery to our distribution centers, stores and customers.

These logistical challenges also have caused increased delivery costs resulting from higher fuel costs, carrier rates and driver wages due to driver shortages, decreases in transportation capacity, and slowdowns.

All of these factors could impact the ability of stores to operate normal hours of operation or have sufficient inventory at all times, which could result in our inability to satisfy customer demand and potential loss of market share.

Further, we have experienced varying levels of inflation, resulting in part from supply disruptions, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain and other disruptions caused by the COVID-19 pandemic and the uncertain economic environment, which we have not been able to fully offset through price increases.

Planned construction and opening of new stores also have been, and may continue to be, negatively impacted due to increased lead times to acquire materials such as steel, obtain permits and licenses and set up utilities.

Additionally, certain fixture upgrades and new refrigeration units now have longer lead times.

Finally, we have incurred additional COVID-related expenses as a result of certain increased costs related to our IOs.

For example, in fiscal 2021 we paid a portion of the costs of personal protective equipment and cleaning supplies for our IOs as well as reduced interest rates on outstanding IO notes.

The trends leading consumers to prioritize convenience over value that we experienced in fiscal 2021 may continue into fiscal 2022, which could continue to negatively impact same store sales.

The increased costs associated with staffing challenges and fuel, freight and distribution have negatively impacted our cost of sales and gross margin, and we expect this increased cost to continue into fiscal 2022.

We also expect planned construction and opening of new stores to continue to experience delays, which has caused us to plan for lower new store growth in fiscal 2022 than our original goal of 10% and with more new stores weighted towards the second half of the year.

Our operating performance and financial results during fiscal years 2020 and 2021 and the volatility within those periods may not be meaningful indicators of future results.

The impact of the COVID-19 pandemic and changing consumer behavior could continue to have a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2022.

In spite of these headwinds, we believe the flexibility of our unique buying model, our strong vendor relationships and our agile approach to inventory management have allowed us to maintain healthy inventory levels and an assortment of products for our customers.

Initial Public Offering and Secondary Public Offerings

In June 2019, we completed our initial public offering ("IPO") for net proceeds of $400.4 million, after deducting underwriting discounts and commissions and offering costs payable by us.

We used the net proceeds from our IPO, together with excess cash on hand, to prepay a portion of the term loan outstanding under our First Lien Credit Agreement and to repay in full our Second Lien Term Loan, allowing us to terminate such agreement.

See "—Liquidity and Capital Resources" for additional information.

Secondary Public Offerings

On October 8, 2019, certain of our selling stockholders completed a secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred related offering costs of $1.1 million which we recognized in selling, general and administrative expenses during fiscal 2019.

We received $3.2 million in cash (excluding withholding taxes) in connection with the exercise of 451,470 options by certain stockholders participating in this secondary public offering.

On February 3, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred related offering costs of $1.1 million which we recognized in selling, general and administrative expenses during fiscal 2020.

We r eceived $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering.

On April 27, 2020, certain of our selling stockholders completed a third secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred related offering costs of $1.0 million which we recognized in selling, general and administrative expenses during the second quarter of fiscal 2020.

We received $1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.

On May 28, 2020, the H&F Investor distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders.

Between October 2019 and April 2020, certain of our selling stockholders completed secondary public offerings of shares of our common stock.

We did not receive any proceeds from such offerings, but we incurred related offering costs of $3.2 million in the aggregate and received $6.2 million in cash (excluding withholding taxes) in connection with the exercise of options by certain participating stockholders.

In May 2020, the H&F Investor distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders.

We did not receive any proceeds or incur any material costs related to this distribution.

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide.

As a result, many states, including states where we have significant operations, declared a state of emergency, closed schools and non-essential businesses and enacted limitations on the number of people allowed to gather at one time in the same space.

As of the date of this filing, grocery stores are considered essential businesses in states and counties that have enacted requirements that residents leave their homes only for essential business (“shelter in place requirements”) and are able to continue operating.

As COVID-19 has continued to spread and the situation has continued to evolve, there has been a surge of positive COVID-19 cases around the country during, and subsequent to, the fourth quarter of fiscal 2020 as shelter in place requirements have lapsed and other businesses have begun to reopen.

Our IOs have faced and will continue to face staffing challenges as long as school and childcare closures and COVID-19-related concerns exist.

In addition, in early 2021, counties in California and Washington have enacted or are considering enacting ordinances mandating "hazard pay" for grocery workers.

In addition, since the start of the pandemic certain inventory items such as water, beans and bread, as well as key cleaning supplies and protective equipment have at times been, and may in the future again be, in short supply.

These factors could impact the ability of stores to operate normal hours of operation or have sufficient inventory at all times which may disrupt our business and negatively impact our financial results.

Further, planned construction and opening of new stores have been and may continue to be negatively impacted due to shelter in place requirements and the closure of government offices in certain areas.

During fiscal 2020, from time to time we had to temporarily close certain stores for cleaning after persons at those locations tested positive for COVID-19.

In the event that an employee, IO, or IO employee tests positive for COVID-19, we may have to again temporarily close a store, office or distribution center for cleaning and/or quarantine one or more employees which could negatively impact our financial results.

We have incurred, and expect to continue to incur, cleaning and safety costs, costs for protective equipment and supplies, and higher personnel expenses.

In addition, we have incurred, and expect to continue to incur, additional expenses as a result of certain increased costs related to our IOs.

For example, we are paying a portion of the costs of protective equipment and cleaning supplies for our IOs as well as reducing interest rates on outstanding IO Notes.

We cannot reasonably estimate the length or severity of this pandemic, but it could have a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2021.

See “Item 1A.

Risk Factors—Major health epidemics, such as the outbreak caused by COVID-19, and other outbreaks could disrupt and adversely affect our operations, financial condition and business” for additional information.

Key Factors and Measures We Use to Evaluate Our Business

We consider a variety of financial and operating measures in assessing the performance of our business.

The key GAAP measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses (“SG&A”) and operating income.

The key operational metrics and non-GAAP measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA and non-GAAP adjusted net income.

The key generally accepted accounting principles ("GAAP") financial measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A") and operating income.

The key operational metrics and non-GAAP financial measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share.

Fiscal 2021 Overview

Key financial and operating performance results for our fiscal 2020 (53 weeks) compared to our fiscal 2019 (52 weeks) are as follows:

• Net sales increased by 22.5% to approximately $3.13 billion for fiscal 2020 from approximately $2.56 billion for fiscal 2019;

comparable store sales increased by 12.7% in fiscal 2020 on a 52-week basis compared to a 5.2% increase in fiscal 2019.

Key financial and operating performance results for our fiscal 2021 (52 weeks) compared to our fiscal 2020 (53 weeks) were as follows:

• Net sales decreased 1.8% to approximately $3.08 billion for fiscal 2021 from approximately $3.13 billion for fiscal 2020;

on a 52-week basis, comparable store sales decreased by 6.0% in fiscal 2021 compared to a 12.7% increase in fiscal 2020.

Fiscal 2020 contained one additional week ("53rd week") as compared to fiscal 2021.

The 53rd week included $53.3 million in net sales.

• We opened 35 new stores and closed 2, ending fiscal 2020 with 380 stores in six states.

• Net income increased 592.1% to $106.7 million, or $1.08 per diluted share for fiscal 2020, compared to net income of $15.4 million, or $0.19 per diluted share, for fiscal 2019.

• Adjusted EBITDA (1) increased 32.4% to $222.9 million for fiscal 2020 compared to $168.3 million for fiscal 2019.

• Non-GAAP adjusted net income (1) increased 86.9% to $112.7 million, or $1.14 per non-GAAP diluted share, for fiscal 2020 compared to $60.3 million, or $0.74 per non-GAAP diluted share, for fiscal 2019.

• We opened 36 new stores and closed one, ending fiscal 2021 with 415 stores in seven states.

• Net income decreased 41.6% to $62.3 million, or $0.63 per diluted share for fiscal 2021, compared to net income of $106.7 million, or $1.08 per diluted share, for fiscal 2020.

• Adjusted EBITDA (1) decreased 11.0% to $198.5 million for fiscal 2021 compared to $222.9 million for fiscal 2020.

• Adjusted net income (1) decreased 20.2% to $89.9 million, or $0.90 per adjusted diluted share (1) , for fiscal 2021 compared to $112.7 million, or $1.14 per adjusted diluted share, for fiscal 2020.

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(1) Adjusted EBITDA, non-GAAP adjusted net income and non-GAAP adjusted diluted earnings per share are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and non-GAAP adjusted net income to simplify our presentation and enhance comparability between periods.

See GAAP to non-GAAP reconciliations in the “Operating Metrics and Non-GAAP Financial Measures” section below for additional information.

(1) Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures, which exclude the impact of certain special items.

Please note that our non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

See the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including their definitions, how management utilizes such non-GAAP financial measures and reconciliations of the non-GAAP measures and the most directly comparable GAAP measures.

Key Components of Results of Operations

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Our ever-changing selection of offerings across diverse product categories supports growth in sales by attracting new customers and encouraging repeat visits from our existing customers.

The spending habits of our customers are subject to changes in macroeconomic conditions, such as those experienced beginning in March 2020 due to the COVID-19 pandemic, and changes in discretionary income.

The spending habits of our customers are affected by changes in macroeconomic conditions, such as those experienced due to the COVID-19 pandemic, and changes in discretionary income.

Since the onset of the pandemic, consumer behavior has been impacted by consolidation of grocery store visits, elevated grocery e-commerce usage and higher levels of government stimulus, leading consumers to prioritize convenience over value and negatively impacting our sales .

Our customers' discretionary income is primarily impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment.

Because we offer a broad selection of merchandise at extreme values, historically we have benefited from periods of economic uncertainty.

Because we offer a broad selection of merchandise at extreme values, historically our business has benefited from periods of economic uncertainty.

Cost of Sales, Gross Profit and Gross Margin

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Our gross profit is variable in nature and generally follows changes in sales.

The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers.

While our disciplined buying approach has produced consistent gross margins throughout economic cycles which we believe has helped to mitigate adverse impacts on gross profit and results of operations, changes in consumer demand like we experienced and continue to experience as a result of the COVID-19 pandemic, including inflationary cost increases for goods, labor and transportation, supply chain constraints and changes in discretionary income, have resulted and could continue to result in unexpected changes to our gross margins.

The components of our cost of sales may not be comparable to the components of cost of sales or similar

measures of our competitors and other retailers.

As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

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SG&A expenses are comprised of both store-related expenses and corporate expenses.

Store-related expenses include commissions paid to IOs, occupancy and shared maintenance costs, Company-operated store expenses, including payroll, benefits, supplies and utilities and the cost of opening new IO stores.

In addition, in fiscal 2020, SG&A included incremental costs associated with COVID-19, such as cleaning and safety costs, costs for protective equipment and supplies.

Our IO store-related expenses include commissions paid to IOs, occupancy and our portion of maintenance costs and the cost of opening new IO stores.

Company-operated store-related expenses include payroll, benefits, supplies and utilities.

In addition, beginning in fiscal 2020, SG&A included incremental costs associated with COVID-19, such as cleaning and safety costs, costs for PPE and supplies.

Corporate expenses include payroll and benefits for corporate and field support, marketing and advertising, insurance and professional services and operator recruiting and training costs.

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We continue to closely manage our expenses and monitor SG&A as a percentage of sales.

The components of our SG&A may not be comparable to the components of similar measures of other retailers.

We expect that our SG&A will continue to increase in future periods as we continue to grow our sales revenue.

The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers.

We expect that our SG&A will continue to increase in future periods as we continue to grow our sales revenue and gross profits.

Operating Income

Operating income is gross profit less SG&A, depreciation and amortization and share-based compensation.

Operating income excludes interest expense, net, debt extinguishment and modification costs and income tax expense.

Operating income excludes interest expense, net, gain on insurance recoveries, debt extinguishment and modification costs and income tax expense (benefit).

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

Results of Operations

The following tables summarize key components of our results of operations both in dollars and as a percentage of sales (amounts in thousands, except for percentages):

The following tables summarize key components of our results of operations both in dollars and as a percentage of net sales (amounts in thousands, except for percentages):

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 December 28,

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Income from operations 89,095 107,375 68,343

Other expense:

Other expenses (income):

Interest expense, net 15,564 20,043 45,927

Gain on insurance recoveries (3,970) — —

Debt extinguishment and modification costs — 198 5,634

Total other expense 20,241 51,561 60,615

Total other expenses (income) 11,594 20,241 51,561

Income before income taxes 77,501 87,134 16,782

Income tax expense (benefit) 15,191 (19,579) 1,363

Net income $ 106,713 $ 15,419 $ 15,868

Net income and comprehensive income $ 62,310 $ 106,713 $ 15,419

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 December 28,

Percentage of sales (1)

Percentage of net sales (1)

Net sales 100.0 % 100.0 % 100.0 %

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Income from operations 2.9 % 3.4 % 2.7 %

Other expense:

Other expense (income):

Interest expense, net 0.5 % 0.6 % 1.8 %

Gain on insurance recoveries (0.1) % — % — %

Debt extinguishment and modification costs — % — % 0.2 %

Total other expense 0.6 % 2.0 % 2.6 %

Total other expense (income) 0.4 % 0.6 % 2.0 %

Income before income taxes 2.5 % 2.8 % 0.7 %

Income tax expense (benefit) 0.5 % (0.6) % 0.1 %

Net income 3.4 % 0.6 % 0.7 %

Net income and comprehensive income 2.0 % 3.4 % 0.6 %

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We use comparable store sales as an operating metric to measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year.

Comparable store sales are impacted by the same factors that impact sales.

Comparable store sales consists of sales from our stores beginning on the first day of the fourteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved.

Comparable store sales are impacted by the same factors that impact net sales.

Comparable store sales consists of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved.

Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas.

Excluded from our comparable store definition are those stores that have been closed for an extended period as well as any planned store closures or dispositions.

When applicable, as is the case with fiscal 2020, we exclude the sales in the non-comparable week of a 53-week year from the same store sales calculation.

When applicable, as was the case with fiscal 2020, we exclude the net sales in the non-comparable week of a 53-week year from the same store sales calculation after comparing the current and prior year weekly periods that are most closely aligned.

Opening new stores is a primary component of our growth strategy and, as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales.

Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.

EBITDA, Adjusted EBITDA and Non-GAAP Adjusted Net Income

EBITDA, adjusted EBITDA and non-GAAP adjusted net income are key metrics used by management and our board of directors to assess our financial performance.

EBITDA, adjusted EBITDA and non-GAAP adjusted net income are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

We use EBITDA, adjusted EBITDA and non-GAAP adjusted net income to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

In addition, we use EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share

EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are supplemental key metrics used by management and our Board of Directors to assess our financial performance.

EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are also frequently used by analysts, investors and other interested parties to evaluate us and other companies in our industry.

We use EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

In addition, we use adjusted EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions.

Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results.

We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business.

We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides additional information for analyzing trends in our business.

We define EBITDA as net income before net interest expense, income taxes and depreciation and amortization expenses.

Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, purchase accounting inventory adjustments, non-cash rent, asset impairment and gain or loss on disposition, provision for accounts receivable reserves and certain other expenses.

Non-GAAP adjusted net income represents net income adjusted for the previously mentioned EBITDA adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs, tax impact of option exercises and vesting of restricted stock units ("RSUs"), and tax effect of total adjustments.

EBITDA, adjusted EBITDA and non-GAAP adjusted net income are non-GAAP measures and may not be comparable to similar measures reported by other companies.

EBITDA, adjusted EBITDA and non-GAAP adjusted net income have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, non-cash rent, asset impairment and gain or loss on disposition, provision for (write-off of) accounts receivable reserves and certain other expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude.

Adjusted net income represents net income adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs, tax adjustment to normalize the effective tax rate, and tax effect of total adjustments.

Basic adjusted earnings per share is calculated using adjusted net income, as defined above, and basic weighted average shares outstanding.

Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding.

EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP measures and may not be comparable to similar measures reported by other companies.

EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

We address the limitations of the non-GAAP measures through the use of various GAAP measures.

In the future we may incur expenses or charges such as those added back to calculate adjusted EBITDA or non-GAAP adjusted net income.

Our presentation of adjusted EBITDA and non-GAAP adjusted net income should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive our non-GAAP measures.

We no longer exclude new store pre-opening expenses from our presentation of adjusted EBITDA and non-GAAP adjusted net income.

We also updated our definition of non-GAAP adjusted net income to exclude the tax impact of options exercises and vesting of RSUs.

Lastly, debt extinguishment and modification costs were reclassified to the other adjustments line item within the

presentation of both adjusted EBITDA and non-GAAP adjusted net income.

The presentation for adjusted EBITDA and non-GAAP adjusted net income for fiscal 2019 and 2018 has been recast to reflect these changes and a reconciliation between the current and previous definitions of adjusted EBITDA and non-GAAP adjusted net income have been provided within the “—GAAP to Non-GAAP Reconciliations” section below.

The following table summarizes key operating metrics and non-GAAP components of our results of operations for the periods presented (amounts in thousands, except for percentages and store counts):

In the future we will incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income.

Our presentation of EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive our non-GAAP measures.

The following table summarizes key operating metrics and non-GAAP financial measures for the periods presented (amounts in thousands, except for percentages and store counts):

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 December 28,

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Number of stores open at end of period 415 380 347

Comparable store sales growth (1)

Comparable store sales increase (decrease) (1)

(6.0) % 12.7 % 5.2 %

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$ 198,458 $ 222,922 $ 168,333

Non-GAAP adjusted net income (2)

Adjusted net income (2)

$ 89,913 $ 112,665 $ 60,291

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(1) Comparable store sales consist of sales from our stores beginning on the first day of the fourteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved.

For fiscal 2020, which is a 53-week year, we excluded the sales in the non-comparable week from the comparable store sales calculation.

(2) See “—GAAP to Non-GAAP Reconciliations” section below for a reconciliation from our net income to EBITDA and adjusted EBITDA, net income to non-GAAP adjusted net income, and GAAP to non-GAAP earnings per share for the periods presented.

(1) Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved.

For fiscal 2020, which is a 53-week year, we excluded the sales in the non-comparable week from the comparable store sales calculation after comparing the current and prior year weekly periods that are most closely aligned.

(2) See "—GAAP to Non-GAAP Reconciliations" section below for a reconciliation from our net income to EBITDA and adjusted EBITDA, net income to adjusted net income and GAAP earnings per share to adjusted earnings per share for the periods presented.

GAAP to Non-GAAP Reconciliations

The following tables provide a reconciliation from our GAAP net income to EBITDA and adjusted EBITDA, GAAP net income to non-GAAP adjusted net income, and our GAAP to non-GAAP earnings per share for the periods presented (amounts in thousands):

The following tables provide a reconciliation from our GAAP net income to EBITDA and adjusted EBITDA, GAAP net income to adjusted net income, and our GAAP earnings per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data):

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 December 28,

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Income tax expense (benefit) 15,191 (19,579) 1,363

Depreciation and amortization expenses (a)

Depreciation and amortization expenses (1)

71,124 58,051 50,143

EBITDA 164,189 165,228 112,852

Share-based compensation expenses (b)

38,084 31,439 10,409

Non-cash rent (c)

Share-based compensation expenses (2)

17,615 38,084 31,439

Asset impairment and gain or loss on disposition (d)

Non-cash rent (3)

10,753 10,673 10,582

Provision for (write-off of) accounts receivable reserves (e)

Asset impairment and gain or loss on disposition (4)

1,241 1,727 1,957

Provision for (write-off of) accounts receivable reserves (5)

4,813 (456) 2,575

Adjusted EBITDA, revised definition $ 222,922 $ 168,333 $ 152,023

Revised definition no longer adjusts for:

New store pre-opening expenses (g)

(153) 7,666 8,928

Adjusted EBITDA, previous definition $ 224,464 $ 169,842 $ 153,578

Adjusted EBITDA $ 198,458 $ 222,922 $ 168,333

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 December 28,

Net income $ 62,310 $ 106,713 $ 15,419

Share-based compensation expenses (b)

Share-based compensation expenses (2)

17,615 38,084 31,439

Non-cash rent (c)

Non-cash rent (3)

10,753 10,673 10,582

Asset impairment and gain or loss on disposition (d)

Asset impairment and gain or loss on disposition (4)

1,241 1,727 1,957

Provision for (write-off of) accounts receivable reserves (e)

Provision for (write-off of) accounts receivable reserves (5)

4,813 (456) 2,575

(153) 7,666 8,928

Amortization of purchase accounting assets and deferred financing costs (h)

Amortization of purchase accounting assets and deferred financing costs (7)

11,821 11,808 11,917

Tax impact of option exercises and vesting of restricted stock units (i)

Tax adjustment to normalize effective tax rate (8)

(5,928) (44,089) (3,587)

Tax effect of total adjustments (j)

Tax effect of total adjustments (9)

(12,559) (19,461) (18,939)

Non-GAAP adjusted net income, revised definition $ 112,665 $ 60,291 $ 48,179

GAAP earnings per share (k)

Basic $ 1.16 $ 0.20 $ 0.24

Diluted $ 1.08 $ 0.19 $ 0.23

Non-GAAP adjusted earnings per share, revised definition (k)

Adjusted net income $ 89,913 $ 112,665 $ 60,291

GAAP earnings per share

Basic $ 0.65 $ 1.16 $ 0.20

Diluted $ 0.63 $ 1.08 $ 0.19

Revised definition no longer adjusts for:

New store pre-opening expenses (g)

1,542 1,509 1,555

Revised definition now adjusts for:

Tax impact of option exercises and vesting of restricted stock units (i)

44,089 3,587 —

Change in tax effect of total adjustments (j)

(431) (424) (426)

Non-GAAP adjusted net income, previous definition $ 157,865 $ 64,963 $ 49,308

Non-GAAP adjusted earnings per share, previous definition (k)

Adjusted earnings per share

Basic $ 0.94 $ 1.23 $ 0.76

Diluted $ 0.90 $ 1.14 $ 0.74

GAAP & Non-GAAP weighted average shares outstanding (k)

Weighted average shares outstanding

Basic 95,725 91,818 79,044

1 unchanged sentence

___________________________

(a) Includes depreciation related to our distribution centers which is included within the cost of sales line item in our consolidated statements of operations and comprehensive income.

(1) Includes depreciation related to our distribution centers which is included within the cost of sales line item in our consolidated statements of operations and comprehensive income.

See NOTE 1—Organization and Summary of Significant Accounting Policies to our Consolidated Financial Statements for additional information about the components of cost of sales.

(b) Includes non-cash share-based compensation expense and $0.4 million, $3.6 million, and $10.0 million of cash dividends paid in fiscal 2020, 2019, and 2018 respectively, in respect of vested options as a result of dividends declared in connection with our recapitalizations in fiscal 2018 and 2016.

(c) Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments.

The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth in recent years.

(d) Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs.

(e) Represents non-cash changes in reserves related to our IO Notes and accounts receivable.

(f) Represents other non-recurring, non-cash or non-operational items, such as transaction related costs, including costs related to employer payroll taxes associated with equity awards, secondary equity offerings, store closing costs, personnel-related costs, legal expenses, debt extinguishment and modification costs, strategic project costs, and miscellaneous costs.

(g) Includes marketing, occupancy and other expenses incurred in connection with store grand openings, including costs that will be the IO’s responsibility after store opening.

(h) Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to the 2014 H&F Acquisition which included trademarks, customer lists, and below-market leases.

(i) Represents excess tax benefits related to stock option exercises and vesting of RSUs to be recorded in earnings as discrete items in the reporting period in which they occur.

(j) Represents the tax effect of the total adjustments.

Because of the increased impact of discrete items on our effective tax rate including the excess tax benefits from the exercise and vesting of share-based awards, beginning in the fourth quarter of fiscal 2019, we changed our methodology in order to tax effect the total adjustments on a discrete basis excluding any non-recurring and unusual tax items.

Prior to the fourth quarter of fiscal 2019, the methodology we used was to calculate the tax effect of the total adjustments using our quarterly effective tax rate.

(k) All share amounts and per share disclosures for all periods presented reflect a 1.403 for 1 forward stock split effected on June 6, 2019.

(2) Includes non-cash share-based compensation expense and $0.2 million, $0.4 million, and $3.6 million of cash dividends paid in fiscal 2021, 2020, and 2019 respectively, on vested share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016.

(3) Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments.

The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant store growth in recent years.

(4) Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs.

(5) Represents non-cash changes in reserves related to our IO notes and accounts receivable.

(6) Represents other non-recurring, non-cash or non-operational items, such as gain on insurance recoveries, technology upgrade implementation costs, personnel-related costs, costs related to employer payroll taxes associated with equity awards, legal settlements and other legal expenses, store closing costs, strategic project costs, secondary equity offering transaction costs, debt extinguishment and modification costs, and miscellaneous costs.

(7) Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases.

(8) Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not consider in our evaluation of ongoing performance, including excess tax benefits related to stock option exercises and vesting of RSUs that are recorded in earnings as discrete items in the reporting period in which they occur.

(9) Represents the tax effect of the total adjustments.

We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items.

Comparison of fiscal 2021 (52 weeks) to fiscal 2020 (53 weeks) (amounts in thousands, except percentages)

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

Net sales $ 3,079,582 $ 3,134,640 $ (55,058) (1.8) %

The increase in net sales for fiscal 2020 compared to fiscal 2019 was primarily attributable to an increase in comparable stores sales, non-comparable store sales growth attributable to the net 33 new stores opened during fiscal 2020, as well as $53.3 million of net sales from the 53rd week of fiscal 2020.

Comparable store sales increased 12.7% for fiscal 2020 on a 52-week basis compared to fiscal 2019, primarily driven by increases in average transaction size partially offset by traffic declines, as customer shopping behaviors changed in response to COVID-19.

The decrease in net sales for fiscal 2021 compared to fiscal 2020 was primarily attributable to a decrease in comparable stores sales as well as the impact of the 53rd week of fiscal 2020 which included $53.3 million of net sales, partially offset by non-comparable store sales growth attributable to the net 35 new stores opened during fiscal 2021.

Comparable store sales decreased 6.0% for fiscal 2021 compared to fiscal 2020 on a 52-week basis for both periods.

The decrease was primarily attributable to a decrease in customer traffic, partially offset by an increase in average transaction size.

Cost of Sales

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales 69.2 % 68.9 %

The increase in cost of sales for fiscal 2020 compared to fiscal 2019 was primarily the result of new store growth, an increase in comparable store sales, and cost of sales from the 53rd week of fiscal 2020.

Costs as a percentage of sales decreased due in large part to reduced product markdowns and throwaways resulting from faster inventory turnover as well as lower freight expense to stores, predominantly as a result of buying patterns since the start of the COVID-19 pandemic.

The decrease in cost of sales for fiscal 2021 compared to fiscal 2020 was primarily the result of the comparable store sales decrease discussed above combined with cost of sales from the 53rd week of fiscal 2020, partially offset by new store growth and higher costs as a percentage of net sales.

Costs as a percentage of net sales increased for fiscal 2021 compared to fiscal 2020 due in large part to inflationary cost increases for goods, labor and transportation as well as supply chain constraints.

Gross Profit and Gross Margin

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

Gross margin 30.8 % 31.1 %

The increase in gross profit for fiscal 2020 compared to fiscal 2019 was primarily the result of new store growth, an increase in comparable store sales, and gross profit from the 53rd week of fiscal 2020.

Our gross margin increased modestly for fiscal 2020 compared to fiscal 2019 due to lower cost of sales as a percentage of sales, as discussed previously.

Selling, General and Administrative Expenses (“SG&A”)

The decrease in gross profit for fiscal 2021 compared to fiscal 2020 was primarily the result of a decrease in comparable stores sales and gross profit from the 53rd week of fiscal 2020, partially offset by new store growth.

Our gross margin decreased modestly for fiscal 2021 compared to fiscal 2020 due to higher cost of sales as a percentage of net sales, as discussed previously.

Selling, General and Administrative Expenses

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales 25.1 % 24.6 %

The increase in SG&A for fiscal 2020 compared to fiscal 2019 was primarily driven by increased selling expenses related to higher sales volume.

These increased expenses consisted primarily of variable commission payments to IOs, store occupancy and maintenance costs, incentive compensation expenditures, as well as investments in general and administrative infrastructure to support the continued growth in the business.

SG&A has also increased as a result of incremental costs associated with COVID-19 such as cleaning and safety costs, costs for protective equipment and supplies, and higher personnel expense in addition to costs to comply with public company requirements and expenses associated with our secondary offerings.

As a percentage of sales, SG&A decreased slightly for fiscal 2020 compared to fiscal 2019 due to the factors noted above.

The increase in SG&A for fiscal 2021 compared to fiscal 2020 was primarily driven by higher store occupancy and maintenance costs due to a higher store count and increased marketing expenses, partially offset by lower personnel costs as a result of decreased incentive compensation expenses and decreased commission payments to IOs.

As a percentage of net sales, SG&A increased slightly for fiscal 2021 compared to fiscal 2020 due to lower expense leverage as a result of reduced net sales.

Depreciation and Amortization Expense

Fiscal Year End

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales 2.2 % 1.8 %

The increase in depreciation and amortization expenses for fiscal 2020 compared to fiscal 2019 is primarily driven by new store growth.

The increase in depreciation and amortization expenses for fiscal 2021 compared to fiscal 2020 was primarily driven by new store growth and existing store investments.

Share-based Compensation Expense

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales 0.6 % 1.2 %

For fiscal 2020, share-based compensation expenses were primarily comprised of $26.1 million in expense related to 5.8 million performance-based stock options that vested in conjunction with the closing of the February 3, 2020 and April 27, 2020 secondary offerings as well as $6.7 million in expense related to RSUs and PSUs granted during fiscal 2020 .

For fiscal 2019, share-based compensation expenses were driven largely by $24.3 million in expense related to time-based options granted prior to our IPO, with the remaining difference primarily relating to payment of dividends declared in connection with our recapitalizations in fiscal 2018 and 2016 for outstanding stock options that became exercisable during fiscal 2019.

We did not record compensation expense for time-based stock options grants prior to our IPO in June 2019 because such time-based options were subject to a post-termination repurchase right by us until certain contingent events occurred, and such contingent events were not deemed probable prior to our IPO.

When the IPO occurred and the repurchase feature lapsed, this contingent event resulted in share-based compensation expense on these options being recorded.

We recognized share-based compensation expense for prior service completed as of the IPO date and began recognizing the remaining unamortized share-based compensation expense related to these outstanding time-based options over the remaining service period.

The decrease in share-based compensation expenses for fiscal 2021 compared to fiscal 2020 was primarily due to $26.1 million in share-based compensation expense we incurred in fiscal 2020 related to 5.8 million performance-based stock options that vested in connection with performance events achieved with the closing of our February and April 2020 secondary offerings.

This decrease was partially offset by an increase in expense driven by RSUs and PSUs granted during fiscal 2021.

See NOTE 8—Share-based Awards to our Consolidated Financial Statements for additional information.

1 unchanged sentence

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales 0.5 % 0.6 %

The decrease in interest expense, net for fiscal 2020 compared to fiscal 2019 was primarily driven by lower total borrowings under our First Lien Credit Agreement and the repayment in full of our Second Lien Credit Agreement in June 2019.

In connection with the closing of our IPO in the second quarter of fiscal 2019, we repaid in full the $150.0 million outstanding principal amount on our second lien term loan and terminated the related loan agreement.

Additionally, we prepaid a portion of our term loan outstanding under the First Lien Credit Agreement totaling $263.0 million.

In July 2019, we repriced and amended our existing First Lien Credit Agreement by replacing the existing term loan with a new $475.2 million senior secured term loan credit facility, The First Replacement Term Loan, discussed below under “—Liquidity and Capital Resources.” The First Replacement Term Loan reduced the applicable margin rates compared to the prior term loan.

On October 23, 2019, we prepaid an additional $15.0 million of principal on the First Replacement Term Loan.

The decrease in interest expense, net for fiscal 2021 compared to fiscal 2020 was primarily driven by lower effective interest rates experienced under our First Lien Credit Agreement as a result of decreases in the London Inter-bank Offered Rate ("LIBOR").

Furthermore, fiscal 2020 included interest expense from the $90.0 million borrowed under the revolving credit facility of our First Lien Credit Agreement between March and May 2020, compared to no borrowings thereunder in fiscal 2021.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.

Gain on Insurance Recoveries

Fiscal Year Ended

2022 January 2,

2021 $ Change % Change

Gain on insurance recoveries $ (3,970) $ — $ (3,970) N/A

% of net sales (0.1) % — %

During fiscal 2021, we recorded a $4.0 million gain on insurance due to proceeds received related to the loss of our Paradise, California store due to a wildfire in 2018.

Debt Extinguishment and Modification Costs

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales — % — %

During fiscal 2019, we wrote-off $4.1 million of debt issuance costs and $1.4 million of unamortized loan discounts and incurred $0.2 million of debt modification costs related to the repricing and amendment of our First Lien Credit Agreement, and repaid in full our outstanding second lien term loan and terminated the related loan agreement.

During fiscal 2020, we wrote off $0.1 million of debt issuance costs and incurred $0.1 million of debt modification costs related to the repricing and amendment of our First Lien Credit Agreement.

No such write-offs were made or debt modification costs incurred in fiscal 2021.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.

1 unchanged sentence

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 $ Change % Change

2 unchanged sentences

Effective tax rate 19.6 % (22.5) %

During fiscal 2020, we recorded a net income tax benefit of $19.6 million compared to a net income tax expense of $1.4 million for fiscal 2019.

This change was primarily the result of excess tax benefits in the current year related to the exercise of stock options and vesting of employee RSUs.

Such excess tax benefits totaled $44.1 million for fiscal year 2020.

During fiscal 2021, we recorded a net income tax expense of $15.2 million compared to a net income tax benefit of $19.6 million for fiscal 2020.

This change was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs.

Such excess tax benefits totaled $8.0 million for fiscal year 2021 compared to $44.1 million for fiscal year 2020.

See NOTE 10—Income Taxes to our Consolidated Financial Statements for additional information.

Fiscal Year Ended

2021 December 28,

2019 $ Change % Change

Net income $ 106,713 $ 15,419 $ 91,294 592.1 %

% of net sales 3.4 % 0.6 %

As a result of the foregoing factors, including the excess tax benefits described above, net income increased substantially in fiscal 2020 compared to fiscal 2019.

Adjusted EBITDA

Fiscal Year Ended

2021 December 28,

2019 $ Change % Change

Adjusted EBITDA $ 222,922 $ 168,333 $ 54,589 32.4 %

Th e increase in adjusted EBITDA for fiscal 2020 compared to fiscal 2019 was primarily due to the increase in net sales, which was driven by an increase in comparable store sales of 12.7% for fiscal 2020 on a 52-week basis compared to fiscal 2019, net sales from the 53rd week of fiscal 2020, along with an increase in store count compared to fiscal 2019.

Additionally, gross margin rate increased modestly in fiscal 2020 compared to fiscal 2019 as discussed above.

Non-GAAP Adjusted Net Income

Fiscal Year Ended

2021 December 28,

2019 $ Change % Change

Non-GAAP adjusted net income $ 112,665 $ 60,291 $ 52,374 86.9 %

The increase in non-GAAP adjusted net income for fiscal 2020 compared to fiscal 2019 was primarily driven by an increase in comparable store sales of 12.7% for fiscal 2020 on a 52-week basis compared to fiscal 2019, net sales from the 53rd week of fiscal 2020, along with an increase in store count compared to fiscal 2019.

In addition, non-GAAP adjusted net income benefited from lower net interest expense for fiscal year 2020 compared to fiscal 2019 as discussed above.

Comparison of fiscal 2019 to fiscal 2018 (amounts in thousands, except for percentages)

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Net sales $ 2,559,617 $ 2,287,660 $ 271,957 11.9 %

The increase in net sales for fiscal 2019 compared to fiscal 2018 was due to non-comparable store sales growth attributable to the net 31 stores opened during fiscal 2019 as well as an increase in comparable store sales.

Comparable store sales increased 5.2% for fiscal 2019 compared to fiscal 2018, primarily driven by strong opportunistic and every day product purchasing, continued growth of our NOSH business and expansion and effectiveness of our corporate and IO-led marketing initiatives.

Cost of Sales

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Cost of sales $ 1,772,515 $ 1,592,263 $ 180,252 11.3 %

% of net sales 69.2 % 69.6 %

The increase in cost of sales for fiscal 2019 compared to fiscal 2018 was primarily the result of new store growth and an increase in comparable store sales.

Costs as a percentage of sales decreased slightly due to strong purchasing and inventory management.

Gross Profit and Gross Margin

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Gross profit $ 787,102 $ 695,397 $ 91,705 13.2 %

Gross margin 30.8 % 30.4 %

The increase in gross profit for fiscal 2019 compared to fiscal 2018 was primarily the result of new store growth and an increase in comparable store sales.

Our gross margin increased modestly for fiscal 2019 compared to fiscal 2018 due to strong purchasing and inventory management.

Selling, General and Administrative Expenses

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

SG&A $ 639,437 $ 557,100 $ 82,337 14.8 %

% of net sales 25.0 % 24.4 %

The increase in SG&A for fiscal 2019 compared to fiscal 2018 was primarily driven by increased selling expenses related to new store growth and higher sales volume.

These increased expenses consisted primarily of commissions paid to IOs, store occupancy and shared maintenance costs, as well as investments in general and administrative infrastructure to

support the continued growth in the business.

SG&A was also impacted by the adoption of ASC 842, Leases, which moved approximately $3.2 million of below-market lease amortization expense into non-cash rent.

As a percentage of sales, SG&A increased modestly for fiscal 2019 compared to fiscal 2018 partially as a result of approximately $4.5 million in additional costs incurred to comply with public company requirements including incremental insurance, accounting, and legal expense as well as costs required to comply with the Sarbanes-Oxley Act.

Depreciation and Amortization Expense

Fiscal Year End

2019 December 29,

2018 $ Change % Change

Depreciation and amortization $ 47,883 $ 45,421 $ 2,462 5.4 %

% of net sales 1.9 % 2.0 %

The increase in depreciation and amortization expenses for fiscal 2019 compared to fiscal 2018 is primarily driven by new store growth and other capital investments, partially offset by the adoption of ASC 842, Leases, which moved approximately $3.2 million of below-market lease amortization expense into SG&A expenses.

Share-based Compensation Expense

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Share-based compensation $ 31,439 $ 10,409 $ 21,030 202.0 %

% of net sales 1.2 % 0.5 %

The increase in share-based compensation expense for fiscal 2019 compared to fiscal 2018 was primarily driven by $24.3 million for share-based compensation expense related to time-based stock options granted prior to our IPO and $3.0 million for share-based compensation expense related to time-based stock options and RSUs granted as part of and subsequent to our IPO, with the remaining difference primarily relating to payment of dividends declared in connection with our recapitalizations in fiscal 2018 and 2016 for outstanding stock options that became exercisable during fiscal 2019.

When the IPO occurred and the repurchase feature lapsed, this contingent event resulted in share-based compensation expense on these options being recorded.

Prior to our IPO, share-based compensation expense was primarily related to the equity awards granted to our board of directors and dividends paid in connection with our recapitalizations in fiscal 2018 and 2016.

Interest Expense, net

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Interest expense, net $ 45,927 $ 55,362 $ (9,435) (17.0) %

% of net sales 1.8 % 2.4 %

The decrease in interest expense, net for fiscal 2019 compared to fiscal 2018 was primarily driven by lower total borrowings under our First Lien Credit Agreement and the repayment in full of our Second Lien Credit Agreement.

Additionally, we prepaid a portion of our term loan outstanding under the First Lien Credit Agreement totaling $263.0 million.

The First Replacement Term Loan reduced the applicable margin rates compared to the prior term loan.

On October 23, 2019, we prepaid an additional $15.0 million of principal on the First Replacement Term Loan.

Debt Extinguishment and Modification Costs

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Debt extinguishment and modification costs $ 5,634 5,253 $ 381 7.3%

% of net sales 0.2 % 0.2 %

During fiscal 2019, we wrote-off $4.1 million of debt issuance costs and incurred $0.2 million of debt modification costs related to the repricing and amendment of our First Lien Credit Agreement, and repaid in full our outstanding second lien term loan and terminated the related loan agreement.

During fiscal 2018, we wrote-off $3.5 million of debt issuance costs and incurred $1.8 million of debt modification costs related to the 2018 recapitalization and related repayment in full of our prior first lien credit agreement.

Income Tax Expense

Fiscal Year Ended

2019 December 29,

2018 $ Change % Change

Income tax expense $ 1,363 $ 5,984 $ (4,621) (77.2) %

% of net sales 0.1 % 0.3 %

Effective tax rate 8.1 % 27.4 %

The decrease in income tax expense in fiscal 2019 compared to fiscal 2018 was primarily the result of lower income before taxes, which was mainly due to the share-based compensation expense of $31.4 million we recognized in connection with the IPO as discussed previously.

As a result, our effective tax rate decreased to 8.1% for fiscal 2019 from 27.4% for fiscal 2018 primarily due to excess tax benefits from the exercise and vesting of share-based awards.

Fiscal Year Ended

2019 December 29,

2022 January 2,

2021 $ Change % Change

1 unchanged sentence

% of net sales 2.0 % 3.4 %

As a result of the foregoing, net income decreased modestly in fiscal 2019 compared to fiscal 2018 .

As a result of the foregoing factors, net income decreased in fiscal 2021 compared to fiscal 2020.

Adjusted EBITDA

Fiscal Year Ended

2019 December 29,

2022 January 2,

2021 $ Change % Change

Adjusted EBITDA $ 198,458 $ 222,922 $ (24,464) (11.0) %

The increase in adjusted EBITDA for fiscal 2019 compared to fiscal 2018 was primarily due to the aforementioned sales growth and gross margin expansion, partially offset by increased SG&A expenses including the impact of approximately $4.5 million in additional costs incurred to comply with public company requirements.

Non-GAAP Adjusted Net Income

The decrease in adjusted EBITDA for fiscal 2021 compared to fiscal 2020 was primarily due to a decrease in gross profit, which was primarily driven by a decrease in comparable store sales, on a 52-week basis, of 6.0% for fiscal 2021 compared to fiscal 2020, the impact of net sales from the 53rd week of fiscal 2020, and increases in cost of sales as a percentage of net sales primarily caused by inflationary pressures and supply chain constraints, partially offset by contribution from our non-comparable stores.

Adjusted Net Income

Fiscal Year Ended

2019 December 29,

2022 January 2,

2021 $ Change % Change

Non-GAAP adjusted net income $ 60,291 $ 48,179 $ 12,112 25.1 %

The increase in non-GAAP adjusted net income for fiscal 2019 compared to fiscal 2018 was primarily due to our increase in sales, which was primarily driven by the increase in store count for fiscal 2019 compared to fiscal 2018 and comparable sales of 5.2% and 3.9%, respectively.

Additionally, our interest expense decreased for fiscal 2019 compared to fiscal 2018 as discussed previously.

Adjusted net income $ 89,913 $ 112,665 $ (22,752) (20.2) %

The decrease in adjusted net income for fiscal 2021 compared to fiscal 2020 was primarily a result of the aforementioned drivers of the decrease in Adjusted EBITDA as well as increases in depreciation and amortization expenses caused by new store growth and other capital investments.

Comparison of fiscal 2020 (53 weeks) to fiscal 2019 (52 weeks)

For the comparison of fiscal 2020 to fiscal 2019, refer to "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, as amended, under the subheading "Comparison of fiscal 2020 (53 weeks) to fiscal 2019 (52 weeks)."

Liquidity and Capital Resources

Sources of Liquidity

As of January 2, 2021, we had cash and cash equivalents of $105.3 million, which consisted primarily of cash held in checking and money market accounts with financial institutions.

Our liquidity requirements arise primarily from our working capital needs, capital expenditures and debt service requirements.

Historically, we have funded our working capital and capital expenditures requirements with internally generated cash on hand, and most recently through our initial public offering of our common stock in June 2019 as described further below.

Our current primary sources of liquidity are net cash provided by operating activities and borrowings and availability under our First Lien Credit Agreement.

In addition, we also have a $100.0 million revolving credit facility available under our First Lien Credit Agreement.

As of January 2, 2021, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under this revolving credit facility.

Public Offerings

On June 24, 2019, we completed our IPO in which we sold 19,765,625 shares of our common stock, including 2,578,125 shares from the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $22.00 per share.

We received net proceeds of $407.7 million after deducting underwriting discounts and commissions of $27.1 million and offering costs of $7.2 million.

On October 8, 2019, certain of our selling stockholders completed a secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred offering costs payable by us of $1.1 million which are included in SG&A expenses for fiscal 2019.

We received $3.2 million in cash (excluding withholding taxes) in connection with the exercise of 451,470 options by certain stockholders participating in this secondary public offering.

On February 3, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred offering costs payable by us of $1.1 million whic h were included in SG&A expenses in fiscal 2020.

We received $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering.

On April 27, 2020, certain of our selling stockholders completed a third secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred related offering costs of $1.0 million which we recognized in SG&A during the second quarter of fiscal 2020.

We received $1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.

The terms of our First Lien Credit Agreement permit voluntarily prepayment without premium or penalty.

In connection with the closing of our IPO on June 24, 2019, we used the net proceeds from the offering to repay in full the outstanding $150.0 million in principal on the term loan under our second lien credit agreement, dated as of October 22, 2019 (as amended, the "Second Lien Credit Agreement"), as well as accrued and unpaid interest as of that date of $3.6 million, and terminated the Second Lien Credit Agreement.

In addition, using the remainder of the net proceeds, together with excess cash on hand, we prepaid a portion of the term loan outstanding under our First Lien Credit Agreement totaling $248.0 million plus accrued interest of $3.8 million.

We elected to apply the prepayment against the remaining principal installments in the direct order of maturity.

No further principal payment on this term loan will be due until its maturity in October 2025.

First Lien Credit Agreement

First Incremental Agreement — On July 23, 2019, we entered into an incremental agreement (the “First Incremental Agreement”) to amend the First Lien Credit Agreement.

The First Incremental Agreement refinanced the term loan outstanding under the First Lien Credit Agreement with a replacement $475.2 million senior secured term loan credit facility (the “First Replacement Term Loan”) with an applicable margin of 3.50% or 3.25% for Eurodollar loans and 2.50% or 2.25% for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings.

The First Replacement Term Loan was to mature on October 22, 2025, which was the same maturity date as the prior term loan under our First Lien Credit Agreement.

On October 23, 2019, we prepaid $15.0 million of principal on the First Replacement Term Loan.

Second Incremental Agreement — On January 24, 2020, we entered into a second incremental agreement (the “Second Incremental Agreement”) to further amend the First Lien Credit Agreement.

The Second Incremental Agreement refinanced the First Replacement Term Loan with a replacement $460.0 million senior secured term loan credit facility (the “Second Replacement Term Loan”) with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, and made certain other corresponding technical changes and updates to the previously amended First Lien Credit Agreement.

The interest rate on the Second Replacement Term Loan was 2.90% as of January 2, 2021 .

The Second Replacement Term Loan matures on October 22, 2025, which is the same maturity date as the prior term loans under the original First Lien Credit Agreement and First Incremental Agreement.

Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement.

Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement (collectively, the “First Lien Credit Agreement”).

Revolving Credit Facility — On March 19, 2020, we borrowed $90.0 million under the revolving credit facility of our First Line Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic.

On May 26, 2020, we repaid the Revolving Credit Facility Loan in full.

As of January 2, 2021, we had $96.5 million of borrowing capacity available under the revolving credit facility.

Liquidity Requirements

As of January 2, 2021, we expect to pay an additional $0.4 million related to dividends declared in our recapitalizations in 2018 and 2016 for stock options that will vest during fiscal 2021 and beyond, of which $0.2 million, $0.1 million, $0.1 million is expected to be paid in fiscal 2021, fiscal 2022 and fiscal 2023 respectively.

Pursuant to The Globe Holding Corp.

2014 Plan, if we are unable to make those payments, we may instead elect to reduce the per share exercise price of each such option by an amount equal to the dividend amount in lieu of making the applicable dividend payment.

Our primary working capital requirements are for the purchase of inventory, payroll, rent, issuance of IO notes, other store facilities costs, distribution costs and general and administrative costs.

Our working capital requirements fluctuate during the year, driven primarily by the timing of inventory fluctuations, new store openings and capital spending.

Our capital expenditures are primarily related to new store openings, ongoing store maintenance and improvements, expenditures related to our distribution centers and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems and corporate offices.

We expect to fund capital expenditures through cash generated from our operations.

Based on our new store growth plans, we believe our existing cash and cash equivalents position, cash generated from our operations, and borrowings under our revolving credit facility will be adequate to finance our working capital requirements, planned capital expenditures and debt service over the next 12 months.

Based on our current operations and new store growth plans, we expect to satisfy our short-term and long-term cash requirements through a combination of our existing cash and cash equivalents position, funds generated from operating activities, and the borrowing capacity available in the revolving credit facility under our first lien credit agreement (the "First Lien Credit Agreement").

If cash generated from our operations and borrowings under our revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future.

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We may also, from time to time, in our sole discretion, purchase or retire all or a portion of our existing debt instruments through privately negotiated or open market transactions.

Debt Covenant

As of January 1, 2022, we had cash and cash equivalents of $140.1 million, which consisted primarily of cash held in checking and money market accounts with financial institutions.

In addition, we have a revolving credit facility with $100.0 million in borrowing capacity under our First Lien Credit Agreement.

We did not borrow under this revolving credit facility during fiscal 2021 and had no borrowings outstanding thereunder as of January 1, 2022.

As of January 1, 2022, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under this revolving credit facility.

Material Cash Requirements

We have operating and finance lease arrangements for substantially all store locations, distribution centers, and certain office space and equipment.

As of January 1, 2022, total lease assets and lease liabilities were $905.0 million and $1.0 billion, respectively, and we had executed leases for 25 store locations that we had not yet taken possession of with total undiscounted future lease payments of $141.9 million and lease terms through 2039.

See NOTE 4—Leases to our Consolidated Financial Statements for further detail of our lease obligations and the timing of lease liability maturities.

Debt Obligations and Interest Payments

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for further detail of our First Lien Credit Agreement, which consists of a $460.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, and the timing of principal maturities.

As of January 1, 2022, based on the then current interest rate of 2.85%, e xpected future interest payments associated with our debt totaled $50.7 million, with $13.3 million payable during fiscal year 2022.

Capital Expenditures

We expect to fund capital expenditures through cash generated from our operations.

We expect capital expenditures of approximately $115.0 million, net of tenant improvement allowances, in fiscal year 2022, primarily related to new store openings and ongoing store maintenance and improvements.

Working Capital and Purchase Commitments

Our primary working capital requirements are for the purchase of inventory, payroll, rent, issuance of IO notes, other store facilities costs, distribution costs and general and administrative costs.

Our working capital requirements fluctuate during the year, driven primarily by the timing of inventory fluctuations, new store openings and capital spending.

Our purchase commitments consist of non-cancelable obligations under service and supply contracts.

As of January 1, 2022, we had total purchase obligations of $11.8 million, with $10.1 million payable during fiscal year 2022.

Share Repurchases and Dividends

We may repurchase our common stock pursuant to programs approved by our Board of Directors.

As of January 1, 2022, we had $100.0 million of repurchase authority remaining under the current share repurchase program.

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Issuer Purchases of Equity Securities" for discussion about our Board-authorized share repurchase program.

As of January 1, 2022, we expect to pay an additional $0.2 million related to dividends declared in our recapitalization in 2018 for stock options that will vest during fiscal 2022 and beyond, of which $0.1 million is expected to be paid in fiscal 2022.

Pursuant to The Globe Holding Corp.

Debt Covenants

The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants.

The First Lien Credit Agreement has the ability to restrict us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchases and other similar distributions, with certain exceptions.

Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio of 7:00 to 1:00, tested quarterly if, and only if, the aggregate principal amount from the revolving facility, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of $10.0 million and the stated face amount of letters of credit outstanding on the closing date) and swingline loans outstanding and/or issued, as applicable, exceeds 35% of the total amount of the revolving credit facility commitments.

As of January 2, 2021, we were not subject to the first lien secured leverage ratio testing requirement.

Additionally, we were in compliance with all applicable covenant requirements as of January 2, 2021 for our First Lien Credit Agreement.

The following table summarizes our cash flows for the periods presented (in thousands):

The First Lien Credit Agreement restricts us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchases and other similar distributions, with certain exceptions.

Additionally, borrowing availability under the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio of 7.00 to 1.00 (as defined in the First Lien Credit Agreement), tested quarterly if, and only if, the aggregate principal amount outstanding and/or issued, as applicable, from the revolving facility, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of $10.0 million and the stated face amount of letters of credit outstanding on the closing date) and swingline loans exceeds 35% of the total amount of the revolving credit facility commitments.

As of January 1, 2022, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement.

The following table summarizes our cash flows for the periods presented (amounts in thousands):

Fiscal Year Ended

2021 December 28,

2022 January 2,

2021 December 28,

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Cash Provided by Operating Activities

Net cash provided by operating activities was $181.2 million, $132.8 million, and $105.8 million for fiscal 2020, fiscal 2019, and fiscal 2018, respectively.

The improvements in net cash provided by operating activities for each fiscal year presented compared to prior fiscal years was primarily the result of increased net sales driven by new store growth and comparable store sales growth, partially offset by increased cost of sales and operating expenses, particularly commissions paid to IOs.

Net cash provided by operating activities was $165.6 million for fiscal 2021 compared to $181.2 million for fiscal 2020.

The $15.7 million decrease was primarily due to lower net sales driven by a decrease in comparable store sales combined with fiscal 2020 including net sales from its 53rd week, partially offset by contribution from non-comparable stores.

The decrease was additionally due to an increase of $4.6 million in cash used for merchandise inventory.

Net cash provided by operating activities was $181.2 million for fiscal 2020 compared to $132.8 million for fiscal 2019.

The $48.4 million increase was primarily the result of increased net sales driven by new store growth and comparable store sales growth, partially offset by increased cost of sales and operating expenses, particularly commissions paid to IOs.

Cash Used in Investing Activities

Net cash used in investing activities for fiscal 2020, fiscal 2019, and fiscal 2018 was primarily for capital expenditures and cash advances to IOs.

Net cash used in investing activities for fiscal 2021, fiscal 2020, and fiscal 2019 was primarily for capital expenditures and loans to IOs.

Net cash used in investing activities was $136.7 million for fiscal 2021 compared to $133.8 million for fiscal 2020.

The $25.8 million increase was primarily related to an increase in the number of stores opened and under construction in fiscal 2020 compared to fiscal 2019.

The $2.9 million increase was primarily related to an increase of investments in computer software intangible assets in fiscal 2021 compared to fiscal 2020.

Of the $136.7 million net cash used in investing activities during fiscal 2021, $123.4 million represented purchases of property and equipment prior to the application of tenant improvement allowances.

Net cash used in investing activities was $133.8 million for fiscal 2020 compared to $108.0 million for fiscal 2019.

The $34.5 million increase was primarily related to capital expenditures for 34 new store openings and one relocation in fiscal 2019 compared to 26 new store openings in fiscal 2018.

We expect capital expenditures of approximately $130.0 million, net of tenant improvement allowances, in fiscal year 2021.

Cash Used in Financing Activities

The $25.8 million increase was primarily related to an increase in the number of stores opened and under construction in fiscal 2020 compared to fiscal 2019.

Of the $133.8 million net cash used in investing activities during fiscal 2020, $124.9 million represented purchases of property and equipment prior to the application of tenant improvement allowances.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $5.9 million for fiscal 2021 compared to $29.8 million for fiscal 2020.

The $23.9 million decrease was primarily due to a decrease in proceeds received from the exercise of stock options.

Net cash provided by financing activities was $29.8 million for fiscal 2020 compared to $17.8 million net cash used in financing activities for fiscal 2019.

The net cash provided by financing activities of $29.8 million for fiscal 2020 was primarily due to proceeds received from the exercise of share-based awards slightly offset by principal payments on debt.

As discussed below, the net cash used in financing activities of $17.8 million for fiscal 2019 was primarily due to principal payments on debt and offering cost payments related to our IPO, partially offset by net proceeds from the IPO.

Net cash used in financing activities was $17.8 million for fiscal 2019 compared to $17.0 million for fiscal 2018.

The $0.8 million increase was primarily due to debt and interest repayments and offering cost payments related to our IPO.

In June 2019, using the net proceeds from our IPO and excess cash on hand, we repaid in full the $150.0 million outstanding second lien term loan plus $3.6 million of accrued interest, and prepaid a portion of our outstanding term loan under the First Lien Credit Agreement totaling $248.0 million plus $3.8 million of accrued interest.

Additionally, on October 23, 2019, we prepaid an additional $15.0 million of principal on our outstanding term loan under the First Lien Credit Agreement.

These debt and interest payments were partially offset by proceeds of $407.7 million from our IPO, net of $27.1 million of underwriting discounts and commissions paid.

We also incurred offering costs of $7.2 million related to our IPO.

Off-Balance Sheet Arrangements

As of January 2, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Contractual Obligations

We enter into long-term contractual obligations and commitments in the normal course of business, primarily operating leases.

The contractual commitment amounts in the table below are associated with agreements that are enforceable and legally binding.

Obligations under contracts that we can cancel without a significant penalty are not included in the below table.

Our contractual obligations and other commitments as of January 2, 2021 were as follows (in thousands):

Total Less than 1 Year 1-2 Years 3-5 Years More than 5 Years

Lease obligations (1)

$ 1,388,723 $ 113,528 $ 229,257 $ 225,839 $ 820,099

Principal payments of long-term debt 460,000 — — 460,000 —

Interest on long-term debt (2)

64,802 13,456 26,911 24,435 —

Purchase commitments (3)

18,755 10,360 8,395 — —

Total $ 1,932,280 $ 137,344 $ 264,563 $ 710,274 $ 820,099

______________________

(1) Represents the maturities of lease liabilities of our operating and finance leases as disclosed in NOTE 4—Leases to our Consolidated Financial Statements.

(2) Represents the expected cash payments for interest on our long-term debt based on the amounts outstanding as of the end of each period and the interest rates applicable on such debt as of January 2, 2021.

(3) Consists of purchase commitments under non-cancelable service and supply contracts.

The net cash used in financing activities of $17.8 million for fiscal 2019 was primarily due to $414.8 million of principal payments on debt and $7.2 million of offering cost payments related to our IPO, partially offset by proceeds of $407.7 million from the IPO, net of $27.1 million of underwriting discounts and commissions paid.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Our consolidated financial statements have been prepared in accordance with GAAP.

A summary of our significant accounting policies can be found in NOTE 1—Organization and Summary of Significant Accounting Policies to our Consolidated Financial Statements.

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A long-lived asset or asset group may be impaired if its carrying value exceeds its estimated undiscounted future cash flows over its remaining useful life.

Our estimate of future cash flows requires us to make assumptions and apply judgment, including forecasting future net sales and gross margin and estimating the useful lives of the assets.

The total amount of property and equipment, including store assets, and operating lease right-of-use assets as of January 1, 2022 were $499.4 million and $898.2 million, respectively.

Our impairment calculations contain uncertainties because they require us to make assumptions and to apply judgment to estimate future cash flows.

Key assumptions used in estimating future cash flows include projected sales growth and operating expenses.

Estimates of sales growth and operating expenses are based on internal projections and consider the store’s historical performance, length of time the store has been open, the local market economics and the business environment impacting the store’s performance.

These estimates are subjective and our ability to realize future cash flows is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the last three fiscal years.

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments of long-lived assets.

However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material.

If a long-lived asset or asset group is determined to be impaired, we record an impairment loss for the amount by which the carrying value of the asset or asset group exceeds its fair value.

The estimated fair value of the asset or asset group is based on the estimated discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk.

There were no adjustments to the carrying value of long-lived assets due to impairment charges during fiscal 2021 and 2020.

We recorded impairment charges of $0.5 million during fiscal 2019.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis