Item 2. Management’s Discussion and Analysis
Item 2. 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 unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 ("2022 Form 10-K"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those 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 the first quarter of fiscal 2023 and the first quarter of fiscal 2022 refer to the 13 weeks ended April 1, 2023 and April 2, 2022, respectively.
As used in this report, references to "Grocery Outlet," "the Company," "the registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Overview
We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product offering. As of April 1, 2023, we had 444 stores in California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland and New Jersey.
Macroeconomic Conditions
During the first quarter of fiscal 2023, our business continued to be impacted by current macroeconomic conditions including supply chain and labor challenges, inflation, and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their businesses. The extent of the continuing impact of these factors on our operational and financial performance will depend on many factors, including certain factors outside of our control.
We continue to utilize our unique buying model, our strong vendor relationships and our agile approach to inventory management to offer customers a compelling product assortment at a deep competitive value. However, like many companies in the grocery and retail sectors, we continue to experience increased product costs, which we are mitigating in part by actively managing our assortment and higher retail pricing by us and IOs. These cost increases have resulted in part from supply disruptions, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain and other disruptions. In addition to increased product costs, we have incurred greater selling, general and administrative expenses ("SG&A") related to personnel, travel, and other third party and operational costs due to the aforementioned factors. Further, planned construction and opening of new stores has been, and may continue to be, negatively impacted due to both increased lead times to acquire materials, obtain permits and licenses as well as higher construction and development related costs.
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 generally accepted accounting principles ("GAAP") financial measures we use are net sales, gross profit and gross margin, 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.
First Quarter of Fiscal 2023 Overview
Key financial and operating performance results for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 were as follows:
• Net sales increased 16.1% to $965.5 million from $831.4 million in the first quarter of fiscal 2022; comparable store sales increased by 12.1%.
• We opened three new stores, ending the first quarter of fiscal 2023 with 444 stores in eight states.
• Net income increased 18.5% to $13.7 million, or $0.14 per diluted share, compared to net income of $11.6 million, or $0.12 per diluted share, in the first quarter of fiscal 2022.
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• Adjusted EBITDA (1) increased 36.9% to $63.1 million compared to $46.1 million in the first quarter of fiscal 2022.
• Adjusted net income (1) increased 40.7% to $27.0 million, or $0.27 per adjusted diluted share (1) , compared to $19.2 million, or $0.19 per adjusted diluted share, in the first quarter of fiscal 2022.
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(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. Beginning with the fourth quarter of fiscal 2022, we updated our definitions of adjusted EBITDA, adjusted net income and adjusted earnings per share to no longer exclude the impact of non-cash rent expense and the provision for accounts receivable reserves. The presentation for adjusted EBITDA, adjusted net income and adjusted earnings per share for the 13 weeks ended April 2, 2022 has been recast to reflect these changes. See the "Operating Metrics and Non-GAAP Financial Measures" section of our 2022 Form 10-K, for additional information. Furthermore, 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
Net Sales
We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. Discounts provided to customers by us are recognized at the time of sale as a reduction in net sales as the products are sold. Discounts that are funded solely by IOs are not recognized as a reduction in net sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Net sales consist of net sales from comparable stores, described below under "Comparable Store Sales," and non-comparable stores. Growth of our net sales is generally driven by expansion of our store base in existing and new markets as well as comparable store sales growth. Net sales are impacted by the spending habits of our customers, product mix and supply, as well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories supports growth in net sales by attracting new customers and encouraging repeat visits from our existing customers. The spending habits of our customers are affected by changes in macroeconomic conditions, governmental benefit programs such as the Supplemental Nutrition Assistance Program and discretionary income. Our customers' discretionary income is 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 our business has benefited from periods of economic uncertainty.
Cost of Sales, Gross Profit and Gross Margin
Cost of sales includes, among other things, merchandise costs, inventory markdowns, inventory losses, transportation costs and distribution and warehousing costs, including depreciation. Gross profit is equal to our net sales less our cost of sales. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can vary. Our gross profit is variable in nature and generally follows changes in net sales. 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 current macroeconomic conditions, 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 higher variability to our gross margins. The components of our cost of sales, as well as our gross profit and gross margin, may not be comparable to the same or similar measures of our competitors and other retailers.
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Selling, General and Administrative Expenses
SG&A are comprised of both store-related expenses and corporate expenses. Our 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 also include payroll, benefits, supplies and utilities. Corporate expenses include payroll and benefits for corporate and field support, depreciation and amortization, share-based compensation, marketing and advertising, insurance and professional services and operator recruiting and training costs. We continue to closely manage our expenses and monitor SG&A as a percentage of net sales. SG&A generally increases as we grow our store base and invest in our corporate infrastructure. SG&A related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as gross profits decline. We expect that our SG&A will continue to increase in future periods as we continue to grow our net sales and gross profits. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers.
In the first quarter of fiscal 2023, in order to enhance the comparability of our results with our peers, we updated our presentation of the condensed consolidated statements of operations and comprehensive income to include depreciation and amortization expenses and share-based compensation expenses within selling, general and administrative expenses. Prior period amounts have been reclassified to conform to current period presentation. The reclassification of these items had no impact on net income, earnings per share, or retained earnings in the current or prior periods.
Operating Income
Operating income is gross profit less SG&A. Operating income excludes interest expense, net, gain on insurance recoveries, loss on debt extinguishment and modification and income tax expense. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
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Results of Operations
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):
13 Weeks Ended
April 1,
2023 April 2,
2022
Net sales $ 965,467 $ 831,427
Cost of sales 664,924 580,538
Gross profit 300,543 250,889
Selling, general and administrative expenses 267,725 231,461
Income from operations 32,818 19,428
Other expenses:
Interest expense, net 5,919 3,682
Loss on debt extinguishment and modification 5,340 —
Total other expenses 11,259 3,682
Income before income taxes 21,559 15,746
Income tax expense 7,839 4,172
Net income and comprehensive income $ 13,720 $ 11,574
13 Weeks Ended
April 1,
2023 April 2,
2022
Percentage of net sales (1)
Net sales 100.0 % 100.0 %
Cost of sales 68.9 % 69.8 %
Gross profit 31.1 % 30.2 %
Selling, general and administrative expenses 27.7 % 27.8 %
Income from operations 3.4 % 2.3 %
Other expenses:
Interest expense, net 0.6 % 0.4 %
Loss on debt extinguishment and modification 0.6 % — %
Total other expenses 1.2 % 0.4 %
Income before income taxes 2.2 % 1.9 %
Income tax expense 0.8 % 0.5 %
Net income and comprehensive income 1.4 % 1.4 %
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(1) Components may not sum to totals due to rounding.
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Operating Metrics and Non-GAAP Financial Measures
Number of New Stores
The number of new stores reflects the number of stores opened during a particular reporting period. New stores require an initial capital investment from us for store build-outs, fixtures and equipment that we amortize over time as well as cash required for inventory and pre-opening expenses.
We expect new store growth to be the primary driver of our net sales growth over the long term. We lease substantially all of our store locations. Our initial lease terms on stores are typically ten years with options to renew for two or three successive five-year periods.
Comparable Store Sales
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 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 was the case with fiscal 2020 and will be the case with fiscal 2025, 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 that a significant portion of our net sales growth will be attributable to non-comparable store net sales. Accordingly, comparable store sales is only one of many measur es we use to assess the success of our growth strategy.
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 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, loss on debt extinguishment and modification, asset impairment and gain or loss on disposition 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 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.
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Beginning with the fourth quarter of fiscal 2022, we updated our definitions of adjusted EBITDA, adjusted net income and adjusted earnings per share to no longer exclude the impact of non-cash rent expense and the provision for accounts receivable reserves. The presentation for adjusted EBITDA, adjusted net income and adjusted earnings per share for the 13 weeks ended April 2, 2022 has been recast to reflect these changes.
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):
13 Weeks Ended
April 1,
2023 April 2,
2022
Other Financial and Operations Data
Number of new stores 3 4
Number of stores open at end of period 444 418
Comparable store sales increase (1)
12.1 % 5.2 %
EBITDA (2)
$ 48,153 $ 38,418
Adjusted EBITDA (2)
$ 63,078 $ 46,081
Adjusted net income (2)
$ 27,024 $ 19,210
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(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.
(2) See "GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.
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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 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):
13 Weeks Ended
April 1,
2023 April 2,
2022
Net income $ 13,720 $ 11,574
Interest expense, net 5,919 3,682
Income tax expense 7,839 4,172
Depreciation and amortization expenses 20,675 18,990
EBITDA 48,153 38,418
Share-based compensation expenses (1)
6,676 5,795
Loss on debt extinguishment and modification (2)
5,340 —
Asset impairment and gain or loss on disposition (3)
107 363
Other (4)
2,802 1,505
Adjusted EBITDA $ 63,078 $ 46,081
13 Weeks Ended
April 1,
2023 April 2,
2022
Net income $ 13,720 $ 11,574
Share-based compensation expenses (1)
6,676 5,795
Loss on debt extinguishment and modification (2)
5,340 —
Asset impairment and gain or loss on disposition (3)
107 363
Other (4)
2,802 1,505
Amortization of purchase accounting assets and deferred financing costs (5)
1,567 3,112
Tax adjustment to normalize effective tax rate (6)
1,592 (176)
Tax effect of total adjustments (7)
(4,780) (2,963)
Adjusted net income $ 27,024 $ 19,210
GAAP earnings per share
Basic $ 0.14 $ 0.12
Diluted $ 0.14 $ 0.12
Adjusted earnings per share
Basic $ 0.28 $ 0.20
Diluted $ 0.27 $ 0.19
Weighted average shares outstanding
Basic 97,920 96,148
Diluted 100,569 99,434
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(1) Includes non-cash share-based compensation expense and cash dividends paid on vested share-based awards as a result of dividends declared in connection with a recapitalization that occurred in fiscal 2018. See "Share-based Compensation Expense" in the "Comparison of the 13 weeks ended April 1, 2023 and April 2, 2022" section below for additional information.
(2) Represents the write-off of debt issuance costs and debt discounts as well as debt modification costs related to refinancing and/or repayment of our credit facilities. See Note 3 to the condensed consolidated financial statements for additional information.
(3) Represents asset impairment charges and gains or losses on dispositions of assets.
(4) Represents other non-recurring, non-cash or non-operational items, such as technology upgrade implementation costs, costs related to employer payroll taxes associated with equity awards, legal settlements and other legal expenses, certain personnel-related costs, store closing costs and miscellaneous costs.
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(5) 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.
(6) 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 expenses or benefits related to stock option exercises and vesting of restricted stock units ("RSUs") that are recorded in earnings as discrete items in the reporting period in which they occur.
(7) 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 the 13 weeks ended April 1, 2023 and April 2, 2022 (amounts in thousands, except percentages)
Net Sales
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Net sales $ 965,467 $ 831,427 $ 134,040 16.1 %
The increase in net sales for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily attributable to an increase in comparable store sales as well as non-comparable store net sales growth primarily from the 26 net new stores opened over the last 12 months.
Comparable store sales increased 12.1% for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022. The increase in comparable store sales for the 13 weeks ended April 1, 2023 was driven by a 7.9% increase in the number of transactions combined with a 3.9% increase in average transaction size.
Cost of Sales
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Cost of sales $ 664,924 $ 580,538 $ 84,386 14.5 %
% of net sales 68.9 % 69.8 %
The increase in cost of sales for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily the result of an increase in comparable store sales combined with non-comparable net sales from 26 net new stores opened over the last 12 months.
Costs as a percentage of net sales decreased for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 due to higher opportunistic product mix, distribution cost leverage as a result of our higher net sales and higher retail pricing to offset product cost increases.
Gross Profit and Gross Margin
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Gross profit $ 300,543 $ 250,889 $ 49,654 19.8 %
Gross margin 31.1 % 30.2 %
The increase in gross profit for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 26 net new stores opened over the last 12 months.
Gross margin increased for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 due to higher opportunistic product mix, distribution cost leverage as a result of our higher net sales and higher retail pricing to offset product cost increases.
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Selling, General and Administrative Expenses
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
SG&A $ 267,725 $ 231,461 $ 36,264 15.7 %
% of net sales 27.7 % 27.8 %
The increase in SG&A for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was driven by $27.2 million in higher store-related expenses and $9.1 million in higher corporate-related expenses. Store-related expenses primarily increased as a result of higher commission payments to IOs, reflecting gross profit growth, as well as higher store occupancy costs due to 26 net new stores opened over the last 12 months. Corporate-related expenses increased largely due to increased personnel costs as a result of the Company's growth as well as the resumption of our annual IO conference and business travel following a COVID suspension.
As a percentage of net sales, SG&A remained relatively flat for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 as leverage on store-related expenses was offset by higher corporate-related expenses.
Interest Expense, Net
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Interest expense, net $ 5,919 $ 3,682 $ 2,237 60.8 %
% of net sales 0.6 % 0.4 %
The increase in net interest expense for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily driven by increases in the effective borrowing rate, partially offset by increased interest income from cash and cash equivalents as well as a decrease in principal debt outstanding over the last 12 months. See Note 3 to the condensed consolidated financial statements for additional information.
Loss on Debt Extinguishment and Modification
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Loss on debt extinguishment and modification $ 5,340 $ — $ 5,340 N/A
% of net sales 0.6 % — %
During the 13 weeks ended April 1, 2023, we recorded a $5.3 million loss on debt extinguishment related to the payoff of $385.0 million of principal on the senior term loan outstanding under our prior first lien credit facility. See Note 3 to the condensed consolidated financial statements for additional information.
Income Tax Expense
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Income tax expense $ 7,839 $ 4,172 $ 3,667 87.9 %
% of net sales 0.8 % 0.5 %
Effective tax rate 36.4 % 26.5 %
The increase in income tax expense for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily due to higher pretax income combined with excess tax expense related to the vesting of RSUs and
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PSUs below their grant price during the 13 weeks ended April 1, 2023 as compared to excess tax benefits from the exercise of stock options and vesting of RSUs during the same period in fiscal 2022.
Net Income
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Net income $ 13,720 $ 11,574 $ 2,146 18.5 %
% of net sales 1.4 % 1.4 %
As a result of the foregoing factors, net income increased for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022.
Adjusted EBITDA
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Adjusted EBITDA $ 63,078 $ 46,081 $ 16,997 36.9 %
The increase in adjusted EBITDA for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily due to an increase in comparable store sales of 12.1% for the 13 weeks ended April 1, 2023, as well as higher net sales resulting from new store growth, combined with increased gross margin.
Adjusted Net Income
13 Weeks Ended
April 1,
2023 April 2,
2022 $ Change % Change
Adjusted net income $ 27,024 $ 19,210 $ 7,814 40.7 %
The increase in adjusted net income for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily due to an increase in comparable store sales of 12.1% for the 13 weeks ended April 1, 2023, as well as higher net sales resulting from new store growth, combined with increased gross margin.
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Liquidity and Capital Resources
Sources of Liquidity
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 credit agreement, dated as of February 21, 2023 (the "2023 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. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive.
As of April 1, 2023, we had cash and cash equivalents of $82.1 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 $400.0 million in borrowing capacity under our 2023 Credit Agreement. As of April 1, 2023, we had $25.0 million of borrowings outstanding under the revolving credit facility and $3.5 million of outstanding standby letters of credit, resulting in $371.5 million of remaining borrowing capacity available under this revolving credit facility.
The senior secured credit facilities of the 2023 Credit Agreement permit us to add incremental term loan facilities, increase any existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving credit facility tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in excess of the sum of the greater of $200.0 million and 100% of Consolidated EBITDA (as defined in the 2023 Credit Agreement), subject to certain limitations, plus (b) voluntary prepayments of the term loan facility, voluntary permanent reductions of the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens on the collateral securing the credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn, and after giving effect to any appropriate pro forma adjustment events) we would be in compliance, on a pro forma basis (but excluding the cash proceeds of such incurrence), with a Total Net Leverage Ratio (as defined in the 2023 Credit Agreement) of 3.00 to 1.00.
We may also, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt. On April 21, 2023, we repaid the $25.0 million of principal on our revolving credit facility.
2023 Refinancing
On February 21, 2023, we entered into the 2023 Credit Agreement, which provides for senior secured credit facilities consisting of (i) a senior secured term loan facility (the "senior term loan") in an aggregate principal amount of $300.0 million and (ii) a senior secured revolving credit facility (the "revolving credit facility" and, together with the senior term loan, the "new credit facilities") in an aggregate principal amount of $400.0 million. The senior term loan was borrowed in full on such date, and $25.0 million of the revolving credit facility was borrowed on such date. See Note 3 to our condensed consolidated financial statements for additional information.
Material Cash Requirements
Other than the update to debt obligation payments noted below, there has been no material change in our material cash requirements since the end of fiscal 2022. See our 2022 Form 10-K for additional information.
Capital Expenditures
Capital expenditures include purchases of capital assets such as property and equipment as well as intangible assets and licenses. Capital expenditures for the 13 weeks ended April 1, 2023, before the impact of tenant improvement allowances, were $40.8 million, and, net of tenant improvement allowances, were $38.5 million. We continue to expect total capital expenditures, net of tenant improvement allowances, to be approximately $155.0 million for fiscal 2023.
Debt Obligations
The 2023 Credit Agreement requires us to make scheduled quarterly amortization payments of the senior term loan starting in June 2023. Such payments total $56.3 million over the remaining term of the senior term loan, with $3.8 million payable over the remainder of fiscal 2023. The remaining senior term loan principal balance will become due in February 2028 at maturity. See Note 3 to our condensed consolidated financial statements for additional information.
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Debt Covenants
The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among other things, limit the our ability and the ability of our restricted subsidiaries to: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments to the borrower. The 2023 Credit Agreement also contains financial performance covenants requiring us to satisfy a maximum total net leverage ratio test and a minimum interest coverage ratio test as of the last day of each fiscal quarter ending on or after April 1, 2023. The maximum total net leverage ratio test requires us to be in compliance with a Total Net Leverage Ratio no greater than 3.50 to 1.00 as of the last day of each test period ending prior to the test period ending on or about December 31, 2025, and no greater than 3.25 to 1.00 as of the last day of each test period ending thereafter, subject to certain adjustments set forth in the 2023 Credit Agreement. The minimum interest coverage ratio test requires us to be in compliance with a Consolidated Interest Coverage Ratio (as defined in the 2023 Credit Agreement) no less than 1.75 to 1.00 as of the last day of each test period.
As of April 1, 2023, we were in compliance with all applicable financial covenant requirements for our 2023 Credit Agreement.
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Cash Flows
The following table summarizes our cash flows for the periods presented (amounts in thousands, except percentages):
13 Weeks Ended
April 1, 2023 April 2, 2022 $ Change % Change
Net cash provided by operating activities $ 87,632 $ 36,329 $ 51,303 141.2 %
Net cash used in investing activities (40,347) (35,522) (4,825) 13.6 %
Net cash used in financing activities (67,898) (2,896) (65,002) 2,244.5 %
Net decrease in cash and cash equivalents $ (20,613) $ (2,089) $ (18,524) 886.7 %
Cash Provided by Operating Activities
Net cash provided by operating activities was $87.6 million for the 13 weeks ended April 1, 2023 compared to $36.3 million for the same period in fiscal 2022. The increase in net cash provided by operating activities of $51.3 million for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily driven by decreases to merchandise inventories combined with increased net sales that were driven by comparable stores sales and new store growth.
Cash Used in Investing Activities
Net cash used in investing activities for the 13 weeks ended April 1, 2023 and April 2, 2022 was primarily for capital expenditures and loans to IOs.
Net cash used in investing activities was $40.3 million for the 13 weeks ended April 1, 2023 compared to $35.5 million for the same period in fiscal 2022. The increase in net cash used in investing activities of $4.8 million for the 13 weeks ended April 1, 2023 compared to the same period in fiscal 2022 was primarily due to increased investments in computer software intangible assets, partially offset by a decrease in loans made to IOs.
Cash Used in Financing Activities
Net cash used in financing activities of $67.9 million for the 13 weeks ended April 1, 2023 was primarily due to the payoff of $385.0 million of principal on the prior senior term loan outstanding under our prior first lien credit facility as well as the repurchase of $3.3 million worth of common stock, partially offset by $325.0 million in proceeds from the issuance of the senior term loan and revolving credit facility borrowings under the 2023 Credit Agreement. Net cash used in financing activities of $2.9 million for the 13 weeks ended April 2, 2022 was primarily due to the repurchase of $3.5 million worth of common stock, partially offset by $0.9 million in proceeds from the exercise of stock options.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting. The preparation of our condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our judgments and estimates are based on historical experience and other factors believed to be reasonable under the circumstances. With respect to critical accounting policies, even a relatively minor variance between actual and expected results can potentially have a materially favorable or unfavorable impact on subsequent results of operations.
There have be en no material changes to our critical accounting policies and estimates during the 13 weeks ended April 1, 2023 from those disclosed in our 2022 Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report.
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