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Item 7. Management’s Discussion and Analysis

2023-03-29 compared with 2022-03-30 · 116 added, 158 removed, 156 unchanged (64% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.

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Innovation is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents.

We market and sell our products online directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers.

We market and sell our products through an omni-channel platform that includes direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, and online directly at www.lovesac.com.

We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through express couriers, is unique to the furniture industry.

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Other factors that could affect our results of operations in future periods include:

Although there has been a general improvement in conditions related to the COVID-19 pandemic, there continues to be uncertainties around the scope and severity of the pandemic, its impact on the global economy, including supply chains, and other business disruptions that may impact our operating results and financial condition.

We continue to follow the

guidance issued by federal, state and local governments and health organizations and have taken measures to protect the safety of our associates and customers.

While the COVID-19 pandemic has led to shifts in the way in which we operate, we continue to serve our customers through our online channels as our products can be easily configured, shopped online and delivered quickly in a touchless way, coupled with consumers’ demand for home related products and solutions.

In fiscal 2022, our showroom net sales have increased, other channel including net sales from shop-in-shop and pop-up-shops also increased, while our internet net sales have only decreased slightly demonstrating a customer shift back to in-store purchases.

As our showrooms are fully reopen, we continue to experience growth as our net sales increased $177.5 million, or 55.3%, to $498.2 million for the fiscal year ended 2022, compared to $320.7 million for the fiscal year ended 2021.

Retail sales drove an increase of $152.8 million, or 104.6%, to $299.0 million for the fiscal year ended 2022, compared to $146.2 million for the fiscal year ended 2021.

The increase in retail sales over fiscal 2021 was mainly due to the limited showroom operations related to COVID-19 in fiscal 2021, which more than offset the slight decrease in our internet net sales (net sales made directly to customers through our ecommerce channel) of $0.4 million or 0.3% in the fiscal year ended 2022.

Other channel net sales increased $25.1 million, or 106.7%, to $48.6 million for the fiscal year ended 2022, compared to $23.5 million for the fiscal year ended 2021.

This increase was due to hosting 2 additional online pop-up-shops on Costco.com with higher productivity compared to the prior year period and the addition of 18 new Best Buy shop-in-shops in fiscal 2022, partially offset by sales decrease from shop-in-shop locations related to Macy's closures.

New customers increased by 14.3% for the fiscal year ended 2022, as compared to 32.9% for the fiscal year ended 2021.

The increase is driven by the large number of new retail customers as showrooms are now fully reopened, partially offset by the decrease in new internet customers related to the shift back to in-store purchases and the large number of new internet customers acquired from the Heroes campaign in prior year period.

The industry in which we operate is cyclical.

In addition, our revenues are affected by general economic conditions.

Purchases of our products are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, consumer disposable income, housing market conditions, consumer debt, interest rates and consumer confidence.

Macro-Economic Factors and COVID-19

There are a number of macro-economic factors and uncertainties affecting the overall business environment and our business, including increased inflation, rising interest rates, housing market conditions, consumer debt, and the conflict in Ukraine.

These factors may have a negative impact on markets in which we operate, including the potential for an economic recession, a continued downturn in the housing market, and a reduction in consumer discretionary spending.

We believe that these macro-economic factors have contributed to the slowdown in demand that we have experienced in our business which may continue.

Although the impact of the COVID-19 pandemic has generally improved, there are

uncertainties around the scope and severity of the pandemic and its variants, its impact on the global economy, including supply chains and labor in the countries in which we manufacture and source materials, and other business disruptions that may impact our operating results and financial condition.

Our business is seasonal.

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Net sales reflect our sale of merchandise plus shipping and handling revenue less returns and discounts.

Sales made at Company operated showrooms, including shop-in-shops and pop-up-shops, and via the web are recognized in accordance with the guidance set forth in ASC 606, which is typically at the point of transference of title when the goods are shipped.

Sales made at Company operated showrooms, including shop-in-shops and pop-up-shops, and via the web are recognized, typically at the point of transference of title when the goods are shipped.

Comparable Showroom Sales

Comparable showroom sales are calculated based on point of sale transactions from showrooms that were open at least fifty-two weeks as of the end of the reporting period.

These sales will differ from sales on our income statement which are reported when goods are shipped and title has transferred to the customer.

These sales will differ from net sales on our income statement which are reported when goods are shipped and title has transferred to the customer.

A showroom is not considered a part of the comparable showroom sales base if the square footage of the showroom changed or if the showroom was relocated.

If a showroom was closed for any period of time during the measurement period, that showroom is excluded from comparable showroom sales.

We made an exception to this calculation in fiscal 2021 when all of our showrooms were temporarily closed due to government regulations in response to the COVID-19 pandemic.

For fiscal years 2022 and 2021, 29 and 19

respectively were excluded from comparable showroom sales.

Comparable showroom sales allow us to evaluate how our showroom base is performing by measuring the change in period-over-period net sales in showrooms that have been open for twelve months or more.

For fiscal years 2023 and 2022, 51 and 29 showrooms respectively, were excluded from comparable showroom sales.

Comparable show room sales allow us to evaluate how our showroom base is performing by measuring the change in period-over-period point of sale transactions in showrooms that have been open for twelve months or more.

While we review comparable showroom sales as one measure of our performance, this measure is less relevant to us than it may be to other retailers due to our fully integrated, omni-channel, go-to-market strategy.

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As a result, the reporting of our comparable showroom sales may not be comparable to sales data made available by other companies.

We define a customer as new when the customer has completed a transaction at Lovesac either at a showroom or internet channel only for the first time or if an existing customer completes another purchase at least 2 years since their last purchase.

Customer Lifetime Value and Customer Acquisition Cost

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We include premium rent for locations above commercial rates, media costs to new customers, and a portion of showroom merchandising costs in our marketing expenses associated with acquiring new customers when calculating our CAC.

Our marketing expenses for fiscal 2022 and fiscal 2021 were both equal to 13.1% of revenue.

We refined our definition of premium rent to includes locations in Malls, Lifestyle centers and urban areas.

Our marketing expenses as a percentage of net sales for fiscal 2023 were 12.3%, and 13.1% of net sales in both fiscal 2022 and fiscal 2021 .

For fiscal 2023, our CAC was $628.16 per customer compared to a CAC of $542.02 for fiscal 2022.

This increase was a result of our increased marketing spend that targeted Sactional customers.

This increase was a result of our increased marketing spend that targeted

Sactional customers.

We expect our CAC to continue to increase over the next few years as a result of our continued focus on increasing marketing efforts.

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inbound freight;

all freight costs to ship merchandise to our showrooms;

design, buying and allocation costs, warehousing and all logistics costs associated with shipping product to our customers.

all freight costs to ship merchandise to our showrooms, and warehousing and all logistics costs associated with shipping product to our customers.

Certain of our competitors and other retailers may report gross profit differently than we do, by excluding from gross profit some or all of the costs related to their distribution network and instead including them in selling, general and administrative expenses.

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showroom expenses, including occupancy costs related to showroom operations, such as rent and common area maintenance;

occupancy and expenses related to many of our operations at our headquarters, including utilities, equity based compensation, financing

related expenses and public company expenses;

occupancy and expenses related to many of our operations at our headquarters, including utilities, equity based compensation, financing related expense;

public company expenses;

and credit card transaction fees.

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Our recent revenue growth has been accompanied by increased selling, general and administrative expenses.

The most significant components of these increases are payroll, rent and selling related costs.

The most significant components of these increases are payroll and rent costs.

We expect these expenses, as well as rent expense associated with the opening of new showrooms, to increase as we grow our business.

We expect to leverage total selling, general and administrative expenses as a percentage of sales as sales volumes continue to grow.

We expect to leverage total selling, general and administrative expenses as a percentage of net sales as net sales volumes continue to grow.

We expect to continue to invest in infrastructure to support the Company’s growth.

Our continued infrastructure investments will include research and development costs on our existing and future products and foundational technology investments to support our continued growth.

These investments will lessen the impact of expense leveraging during the period of investment with the greater impact of expense leveraging happening after the period of investment.

However, total selling, general and administrative expenses generally will leverage during the periods of investments with the most deleverage occurring in the first three quarters of the fiscal year, and the greatest leverage occurring in the fourth quarter.

However, total selling, general and administrative expenses generally will leverage during the periods of investments with the greatest leverage occurring within the fourth quarter.

Advertising and Marketing Expense

Advertising and marketing expense include digital, social, and traditional advertising and marketing initiatives, that cover all of our business channels.

We expect to continue to maintain our advertising and marketing investments at 12% to 14% of net sales on an annual basis.

The investment by quarter may vary.

Advertising and marketing expense is expected to continue to increase as a percentage of net sales as we continue to invest in advertising and marketing which has accelerated net sales growth.

Basis of Presentation and Results of Operations

The following discussion contains references to fiscal years 2022, 2021 and 2020 which represent our fiscal years ended January 30, 2022, January 31, 2021 and February 2, 2020, respectively.

The following discussion contains references to fiscal years 2023, 2022 and 2021 which represent our fiscal years ended January 29, 2023, January 30, 2022 and January 31, 2021 respectively.

Our fiscal year ends on the Sunday closest to February 1.

Fiscal 2023, 2022 and 2021 were all 52-week periods.

The following table sets forth, for the periods for fiscal 2022, 2021 and 2020, our consolidated statement of operations as a percentage of total revenues:

All dollar and percentage comparisons made herein refer to the year ended January 29, 2023, compared with the year ended January 30, 2022, unless otherwise noted.

Refer to Part II, Item 7 of our Annual Report on Form 10-K for fiscal 2022 for a comparative discussion of our fiscal 2022 financial results as compared to fiscal 2021 filed with the SEC on March 30, 2022.

The following table sets forth, for the periods for fiscal 2023, 2022, and 2021, our statement of operations as a percentage of total revenues:

For the Fiscal Year Ended

2022 January 31,

2021 February 2, 2020

2023 2022 2021

Statement of Operations Data:

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Depreciation and amortization 2 % 2 % 2 %

Operating income (loss) 8 % 4 % (7) %

Interest (expense) income, net 0 % 0 % 0 %

Net income (loss) before taxes 8 % 4 % (7) %

Benefit from (provision for) income taxes 1 % 0 % 0 %

Net income (loss) 9 % 4 % (7) %

Operating income 6 % 8 % 4 %

Interest expense, net 0 % 0 % 0 %

Net income before taxes 6 % 8 % 4 %

(Provision for) benefit from income taxes (2) % 1 % 0 %

Net income 4 % 9 % 4 %

Fiscal 2023 Compared to Fiscal 2022

Net sales increased $153.3 million, or 30.8%, to $651.5 million in fiscal 2023 as compared to $498.2 million in fiscal 2022.

The increase in overall net sales was driven by our Showroom sales, Other sales and partially offset by a slight decrease in our Internet Sales.

New customers increased by 14.3% in fiscal 2022 as compared to 32.9% in fiscal 2021 driven by the successful Internet Heroes’ campaign in the prior year period.

The increase in overall net sales was driven by our Showroom sales, Internet sales and Other sales.

New customers increased by 9.9% in fiscal 2023 as compared to 14.5% in fiscal 2022 driven by the successful campaigns throughout the year.

We had 195 total showrooms including kiosks and mobile concierges open as of January 29, 2023 compared to 146 total showrooms as of January 30, 2022.

We opened 28 additional showrooms, 8 kiosks, 2 mobile concierges, and remodeled 2 showrooms and did not close any showrooms in fiscal 2022, as compared to opening 19 showrooms and closing 2 showrooms in fiscal 2021.

There were no showroom remodels in

Showroom sales increased $152.8 million, or 104.6%, to $299.0 million in fiscal 2022 as compared to $146.2 million in fiscal 2021, related to higher point of sales transactions driven by limited showroom operations due to COVID-19 in the prior year period, lower promotional discounting and new showroom sales.

This increase was due in large part to our comparable showroom point of sales transaction increase of $129.6 million, or 104.1%, to $254.1 million in fiscal 2022 as compared to $124.5 million in fiscal 2021.

We opened 46 additional showrooms, 6 kiosks, closed 2 showrooms and 1 kiosk and remodeled 4 showrooms in fiscal 2023, as compared to opening 28 sho wrooms, 8 kiosks, 2 mobile concierges, and not closing any showrooms in fiscal 2022.

There were 2 showroom remodels in fiscal 2022.

Showroom net sales increased $$99.5 million, or 33.3%, to $398.5 million in fiscal 2023 as compared to $299.0 million in fiscal 2022, principally related to higher point of sales transactions in all showrooms with slightly higher promotional discounting.

This increase was due in large part to our comparable showroom point of sales transactions increase of $62.7 million, or 24.7%, to $316.8 million in fiscal 2023 as compared to $254.1 million in fiscal 2022 driven by strong promotional campaigns.

Point of sales transactions represent orders placed through our showrooms which does not always reflect the point at which control transfers to the customer, which occurs upon shipment being confirmed.

See Note 11 to the consolidated financial statements.

We believe point of sales transactions is a more accurate way to measure showroom performance and how our showroom associates are incentivized.

Retail sales per selling square foot increased $1,067, or 63.7%, to $2,742 in fiscal 2022 as compared to $1,675 in fiscal 2021.

Total number of units sold at point of transaction increased by approximately 62.3%.

The increase in comparable point of sales transactions, retail sales per selling square foot and number of units sold in fiscal 2022 was principally driven by the limited showroom operations due to COVID-19 in the prior year period.

Other sales, which include pop-up-shop sales, shop-in-shop sales, and barter inventory transactions, increased $25.1 million, or 106.7%, to $48.6 million in fiscal 2022 as compared to $23.5 million in fiscal 2021.

This increase was principally due to hosting 2 additional online pop-up-shops on Costco.com with higher productivity compared to the prior year period and the addition of 18 new Best Buy shop-in-shops in fiscal 2022, partially offset by sales decrease from shop-in-shop locations related to Macy's closures.

Internet sales (sales made directly to customers through our ecommerce channel) decreased $0.4 million, or 0.3%, to $150.6 million in fiscal 2022 as compared to $151.1 million in the fiscal 2021.

The slight decrease in Internet sales was due primarily to the sales shift into the internet channel in fiscal 2021 as a result of the limited showroom operations due to COVID-19 in fiscal 2021.

Comparable showroom point of sales transaction per selling square foot remains flat at $2,771 in fiscal 2023 as compared to $2,751 in fiscal 2022.

The average point of sales transaction per location including non-comparable showrooms decrease by approximately 5.4% driven by higher new showroom openings.

Internet sales (sales made directly to customers through our ecommerce channel) increased $25.9 million, or 17.2%, to $176.5 million in fiscal 2023 as compared to $150.6 million

in the fiscal 2022.

We believe that the increase in Internet sales was due primarily to our strong promotional campaigns and our increased marketing initiatives.

Other sales, which include pop- up-shop sales, barter inventory transactions and shop-in-shop sales, increased $27.9 million, or 57.4%, to $76.5 million in fiscal 2023 as compared to $48.6 million in fiscal 2022.

This increase was driven by higher barter inventory transactions, operating 22 Best Buy shop-in-shops, and the addition of 113 new Costco in store pop-up-shops in fiscal 2023, partially offset by lower productivity in our online pop-up-shops on Costco.com in fiscal 2023.

We expect to continue hosting both online pop-ups on Costco.com and Costco in store pop-up-shops.

Gross profit increased $72.5 million, or 26.5%, to $345.8 million in fiscal 2023 from $273.3 million in fiscal 2022.

Gross margin increased to 54.9% of net sales in fiscal 2022 from 54.5% of net sales in fiscal 2021.

The increase in gross margin percentage of 40 basis points was primarily driven by an increase of 330 basis points improvement due to lower promotional discounts and continuing vendor negotiations to assist with the mitigation of tariffs, partially offset by an increase of 290 basis points in total freight including tariff expenses and warehousing costs.

The increase in total freight including tariffs and warehousing costs over the prior year period is principally related to the increase of 720 basis points in inbound container freight costs, partially offset by higher leverage of 430 basis points in warehousing and outbound freight costs.

Gross margin decreased to 53.1% of net sales in fiscal 2023 from 54.9% of net sales in fiscal 2022.

The decrease in gross margin percentage of 180 basis points was primarily driven by an increase of 160 basis points in total freight including tariff expenses and warehousing costs and a decrease of 20 basis points in product margin.

The increase in total freight including tariffs and warehousing costs over the prior year period is related to 90 basis points deleverage in warehousing and outbound freight costs and the increase of 70 basis points in inbound container freight costs.

The product margin decrease is driven by 60 basis points in higher promotional discounting, partially offset by 40 basis points benefit from continuing vendor negotiations to assist with the mitigation of tariffs and additional one-time US dollar denominated rebates related to currency impact.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 33.4%, or $54.1 million, to $216.1 million for the fiscal year ended January 29, 2023 compared to $162.0 million for the fiscal year ended January 30, 2022.

The increase in selling, general and administrative expenses in fiscal 2022 was primarily related to an increase in employment costs, rent, overhead expenses, and selling related expenses.

The increase in selling, general and administrative expenses in fiscal 2023 was primarily related to an increase in employment costs, overhead, rent, and selling related expenses.

Employment costs increased by $26.3 million driven by an increase in new hires and variable compensation.

Rent increased by $10.3 million related to $5.4 million rent expense primarily related to our net addition of 28 showrooms and $4.9 million in higher percentage rent from the increase in sales.

Overhead expenses increased $9.6 million consisting of an increase of $7.3 million in infrastructure investments, an increase of $1.3 million in equity-based compensation, an increase of $0.6 million in travel expenses, and an increase of $0.4 million in insurance expenses.

Selling related expenses increased $7.9 million due to an increase of $7.2 million in credit card fees and an increase of $0.7 million in selling agent fees which includes $2.0 million in fees to terminate an agreement with vendor partners, higher sales volume, partially offset by new lower rates of selling related fees compared to the prior year period.

Overhead expenses increased $10.8 million consisting of an increase of $4.5 million in equity-based compensation, an increase of $4.2 million in infrastructure investments, an increase of $1.4 million in travel expenses, and an increase of $0.6 million in insurance expenses.

Rent increased by $9.8 million related to $6.8 million rent expense primarily related to our net addition of 44 showrooms and 5 kiosks and $3.0 million in higher percentage rent from the increase in net sales.

Selling related expenses increased $7.2 million due to an increase of $9.7 million in credit card fees, partially offset by lower selling related fees in the Other channel by a one time settlement fee in the prior year to terminate an existing agreement with a vendor partner.

Selling, general and administrative expenses were 33.2% of net sales for fiscal year ended January 29, 2023 compared to 32.5% of net sales for fiscal year ended January 30, 2022.

SG&A expense as a percent of net sales decreased 221 basis points in fiscal 2022 due to a higher leverage within infrastructure investments, rent, equity-based compensation, insurance, and selling related expenses, partially offset by deleverage in employment costs and travel.

The deleverage in certain expenses relate to the investments we are making into the business that were put on hold in the prior year relating to COVID-19 financial resilience measures.

SG&A expense as a percent of net sales increased by 70 basis points in fiscal 2023 due to deleveraging of approximately 230 bps in employment costs, credit card fees, equity-based compensation, and travel, partially offset by higher leverage of approximately 160 bps within general operating expenses and sales agent fees related to a fiscal 2022 fee settlement.

The deleverage in payroll and travel relates to the continuous investments we are making into the business to support our ongoing growth.

The deleverage in equity-based compensation is driven by an increase in expense related to long term performance awards granted in fiscal 2021 for which the performance metrics were achieved in fiscal 2023.

Credit card fee deleverage is related to the increase in customer utilization of credit coupled with the impact of the increase in interest rates on credit card fees.

Advertising and marketing expenses

Advertising and marketing expenses increased $14.8 million, or 22.7%, to $79.9 million for the fiscal year ended January 29, 2023 compared to $65.1 million for the fiscal year ended January 30, 2022.

The increase in advertising and marketing costs relates to ongoing investments in marketing spends to support our sales growth.

Advertising and marketing expenses were 13.1% of net sales in both fiscal year 2022 and fiscal 2021.

We expect to continue to maintain our advertising and marketing investments at 12% to 14% of net sales on an annual basis.

The investment by quarter may vary.

The increase in advertising and marketing costs relates to ongoing investments in marketing spends to support our net sales growth.

Advertising and marketing expenses were 12.3% of net sales in fiscal 2023 and 13.1% in fiscal 2022.

Depreciation and amortization expenses

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Interest expense

Interest expense, net w as $0.2 million in fiscal 2022, principally related to the interest expense for unused line fees and amortization of deferred financing fees on the asset-based loan.

Interest expense, net in fiscal 2021 was $0.1 million, which reflects $0.1 million of interest income on cash and cash equivalents, offset by $0.2 million of interest expense related to unused line fees, interest on borrowings and amortization of deferred financing fees on the asset-based loan for the fiscal year ended January 31, 2021.

Interest expense, net of interest earned on the Company's money market account was $0.1 million and $0.2 million in fiscal 2023 and fiscal 2022, respectively, principally related to the interest expense for unused line fees and amortization of deferred financing fees on the asset based loan.

Provision for income taxes

During fiscal 2022, the Company recorded an income tax benefit of $7.6 million compared to income tax expense of $0.1 million in fiscal 2021.

During fiscal 2023, the Company recorded an income tax expense of $10.7 million compared to income tax benefit of $7.6 million during fiscal 2022.

During fiscal 2022 the company recognized a reversal of the valuation allowance on deferred tax assets of $16.4 million, offset by recognition of deferred tax expense of $9.8 million.

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Repeat customers accounted for approximately 45.6% of all transactions in fiscal 2023 compared to 41.6% in fiscal 2022.

We expect new transactions to continue to become a larger portion of our transaction mix as we spend on acquisition.

We expect a healthy mix between new transactions and repeat customers in our transaction mix as we spend on acquisition.

Quarterly Results

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As such, results of a period shorter than a full year may not be indicative of results expected for the entire year, and the seasonal nature of our business may affect comparisons between periods.

For a comparison of Fiscal 2021 to Fiscal 2020 please refer to Item 7 within the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2021 filed with the Securities and Exchange Commission on April 14, 2021.

Liquidity and Capital Resources

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Our primary cash needs are for marketing and advertising, inventory, payroll, showroom rent, capital expenditures associated with opening new showrooms and updating existing showrooms, as well as infrastructure and information technology.

The most significant components of our working capital are cash and cash equivalents, inventory, accounts receivable, accounts payable and other current liabilities and customer deposits.

Borrowings generally increase in our third fiscal quarter as we prepare for the holiday selling season, which is in our fourth fiscal quarter.

The most significant components of our working capital are cash and cash equivalents, merchandise inventory, prepaid expenses, accounts payable, accrued expenses, other current liabilities and customer deposits.

Borrowings generally increase in our third fiscal quarter as we prepare to build our inventory levels in preparation for the fourth quarter holiday selling season.

We believe that cash expected to be generated from operations, the availability under our revolving line of credit and our existing cash balances are sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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2023 January 30,

2021 February 2,

Provided by (used in) operating activities $ 34,018 $ 40,521 $ (11,194)

Used in investing activities (16,488) (9,052) (10,651)

(Used in) provided by financing activities (3,479) (1,667) 21,313

Increase (decrease) in cash and cash equivalents 14,051 29,802 (532)

2022 January 31,

Net Cash (Used in) Provided by Operating Activities $ (21,375) $ 34,018 $ 40,521

Net Cash Used in Investing Activities (25,549) (16,488) (9,052)

Net Cash Used in Financing Activities (1,935) (3,479) (1,667)

(Decrease) increase in cash and cash equivalents (48,859) 14,051 29,802

Cash and cash equivalents at end of period $ 43,533 $ 92,392 $ 78,341

Net Cash Provided by (Used in) Operating Activities

Cash from operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation, amortization, loss (gain) on disposal of property and equipment, impairment of property and equipment, equity based compensation, deferred rent, and non-cash interest expense and the effect of changes in working capital and other activities.

Net Cash (Used in) Provided by Operating Activities

Cash (used in) provided by operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation, amortization, loss on disposal of property and equipment, impairment of property and equipment, equity based compensation, non-cash operating lease cost and the effect of changes in working capital and other activities.

In fiscal 2023, net cash used in operating activities was $21.4 million and consisted of changes in operating assets and liabilities of $90.8 million, net income of $28.2 million, and non-cash items of $41.2 million.

Working capital and other activities consisted primarily of increases in inventory of $11.5 million, trade accounts receivable of $0.9 million, other assets of $21.4 million, decreases in accounts payable and accrued expenses of $33.0 million, operating lease liabilities of $18.3 million, customer deposits of $6.6 million, and prepaid and other current assets of $0.9 million.

In fiscal 2022, net cash provided by operating activities was $34.0 million and consisted of changes in operating assets and liabilities of $31.2 million, a net income of $45.9 million, and non-cash items of $19.9 million.

Working capital and other activities consisted primarily of increases in inventory of $56.8 million, trade accounts receivable of $4.0 million, customer deposits of $7.3 million, accounts payable and accrued expenses of $39.2 million, and prepaid expenses and other current assets of $2.5 million, partially offset by a decrease in operating lease liabilities of $14.4 million.

Working capital and other activities consisted primarily of increases in inventory of $56.8 million trade accounts receivable of $4.0 million, prepaid expenses and other current assets of $2.5 million, accounts payable and accrued expenses of $39.2 million, customer deposits of $7.3 million, offset by a $14.4 million decrease in operating lease liabilities.

In fiscal 2021, net cash provided by operating activities was $40.5 million and consisted of changes in operating assets and liabilities of $10.5 million, a net income of $14.7 million, and non-cash items of $15.3 million.

Working capital and other activities consisted primarily of increases in inventory of $14.0 million and prepaid expenses and other current assets of $2.1 million, partially offset by a decrease in accounts receivable of $2.7 million and increases in accrued liabilities and accounts payable of $19.6 million, and customer deposits of $4.3 million.

In fiscal 2020, net cash used in operating activities was $11.2 million and consisted of changes in operating assets and liabilities of $7.8 million, a net loss of $15.2 million, and non-cash items of $11.8 million.

Working capital and other activities consisted primarily of increases in inventory of $10.2 million, accounts receivable of $3.2 million, and prepaid expenses of $2.2 million, partially offset by increases in accrued liabilities and accounts payable of $7.2 million, and other current liabilities of $0.6 million.

Net Cash Used in Investing Activities

Investing activities consist primarily of investments related to capital expenditures for new showroom openings, the remodeling of existing showrooms, and the acquisition of intangible assets.

For fiscal 2022, capital expenditures were $16.5 million as a result of investments in new and remodeled showrooms and intangibles.

For fiscal 2021, capital expenditures were $9.1 million as a result of investments in new and remodeled showrooms and intangibles.

For fiscal 2020, capital expenditures were $10.7 million as a result of investments in new and remodeled showrooms and intangibles which included $0.3 million in proceeds from the disposal of property and equipment.

Net Cash (Used in) Provided By Financing Activities

Capital expenditures were $25.5 million, $16.5 million and $9.1 million for fiscal years 2023, 2022, and 2021, respectively, as a result of investments in new and remodeled showrooms and the acquisition of intangible assets.

Net Cash Used in Financing Activities

Financing activities consist primarily of taxes paid for the net settlement of equity awards.

For fiscal 2022, net cash used in financing activities was $3.5 million primarily due to taxes paid for net share settlement of equity awards of $3.6 million offset by proceeds from the exercise of warrants of $0.1 million .

For fiscal 2021, net cash used in financing activities was $1.7 million which is mainly attributable taxes paid for net share settlement of equity awards.

For fiscal 2020, net cash provided by financing activities was $21.3 million, primarily due to $25.6 million of net proceeds from a primary share offering net of $4.3 million of taxes paid for net share settlement of equity awards.

For fiscal 2023, net cash used in financing activities was $1.9 million due to taxes paid for net share settlement of equity awards of $1.6 million and payments of deferred financing costs of $0.3 million.

For fiscal 2022, net cash used in financing activities was $3.5 million due to taxes paid for net share settlement of equity awards of $3.6 million offset by proceeds from the exercise of warrants of $0.1 million.

For fiscal 2021, net cash used in financing activities was $1.7 million primarily due to taxes paid for net share settlement of equity awards.

Revolving Line of Credit

On March 25, 2022, we amended our existing credit agreement providing for an asset-based revolving credit facility with the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent.

The maturity date of our credit agreement was extended to March 25, 2024 and, among other things, the maximum revolver commitment was increased from $25.0 million to $40.0 million, subject to borrowing base and availability restrictions.

Our credit agreement includes a $1,000,000 sublimit for the issuance of letters of credit and a $4,000,000 sublimit for swing line loans.

There were no outstanding borrowings under our credit facility as of January 30, 2022 and March 30, 2022.

There were no outstanding borrowings under our credit facility as of January 29, 2023 and January 30, 2022.

We are required to pay a commitment fee of 0.30% based on the daily unused portion of the credit facility.

Amounts outstanding under the credit facility, at our option, bear interest at either a base rate or a term SOFR based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the credit facility and ranging from 0.50% to 0.75% for borrowings accruing interest at base rate and from 1.625% to 1.850% for borrowings accruing interest at term SOFR.

Amounts outstanding under the credit facility, at our option, bear interest at either a base rate or a term secured overnight term rate ("SOFR") based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the credit facility and ranging from 0.50% to 0.75% for borrowings accruing interest at base rate and from 1.625% to 1.850% for borrowings accruing interest at term SOFR.

Swing line loans will at all times accrue interest at a base rate plus the applicable margin.

The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the credit facility.

For additional information regarding our line of credit with Wells, see Note 10 to our consolidated financial statements.

Severance Contingency

We have employment agreements with our senior level executives.

These agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those associates are terminated without cause or resign for good reason.

The total amount of exposure to us under these agreements was $5.5 million at January 30, 2022 if all executives with employment agreements were terminated without cause or resign for good reason and the full amount of severance was payable.

Contractual Obligations

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

As of January 30, 2022, our contractual cash obligations over the next several periods were as follows:

Payments due by period

Total Less than 1 year 1 - 3

Years More than

Employment agreements $ 5,543 $ 5,543 $ — $ — $ —

Operating leases 130,962 20,493 38,776 31,364 40,329

Total $ 136,505 $ 26,036 $ 38,776 $ 31,364 $ 40,329

On March 24, 2023, the Company amended the credit agreement to extend the maturity date to September 30, 2024.

All other terms of the credit agreement remain unchanged.

For additional information regarding our line of credit with Wells Fargo, see Note 10.

Financing Arrangements in the Notes to the Financial Statements included in Part IV of this report.

Critical Accounting Policies and Estimates

The management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with GAAP.

Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control.

As a result, they are subject to an inherent degree of uncertainty.

The management's discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with U.S.

Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and requires us to make significant estimates and assumptions.

Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions and conditions.

In applying these policies, management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates.

Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.

Please see Note 1 to our audited consolidated financial statements included in this Annual Report on Form 10-K for a complete description of our

significant accounting policies.

There have been no material changes to the significant accounting policies during fiscal 2022.

Revenue Recognition

Our revenue consists substantially of product sales.

We report product sales net of discounts and recognize them at the point in time when control transfers to the customer, which occurs when shipment is confirmed.

Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies.

We record estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase in inventory and customers returns liability on the balance sheet.

In some cases, deposits are received before we transfer control, resulting in contract liabilities.

These contract’s liabilities are reported as deposits on the Company’s balance sheet.

Upon adoption of ASC 606, we have elected the following accounting policies and practical expedients:

We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred.

Accordingly, we record the expenses for shipping and handling activities at the same time we recognize revenue.

We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue- producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).

We do not adjust revenue for the effects of any financing components if the contract has a duration of one year or less, as we receive payment from the customer within one year from when we transferred control of the related goods.

We offer our products through an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms and through the internet.

The other channel predominantly represents sales through the use of pop-up-shops that typically average ten days at a time and are staffed with associates trained to demonstrate and sell our product.

Those estimates are based on our historical operations, our future business plans and projected financial results, and other various other assumptions that we believe to be reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

We continue to monitor the effects of global macroeconomic and geopolitical uncertainty, including COVID-19 pandemic related factors and general market, political and economic conditions.

All of our significant accounting policies are outlined in Note 1.

Basis of Presentation, and Summary of Significant Accounting Policies in the Notes to the Financial Statements included in Part IV of this report.

here have been no material changes to the significant accounting policies during fiscal 2023.

Barter Arrangements

The Company has a bartering arrangement with a third-party vendor, whereby the Company will provide inventory in exchange for media credits.

Barter sales transaction with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up in our warehouse.

Fair value is estimated using various considerations, including the cost of similar media advertising if transacted directly, the expected sales price of product given up in exchange for the media credits, and the expected usage of media credits prior to expiration based on a marketing spend forecast.

Projecting marketing spend requires estimating such factors as sales growth, inflation, overall economics of the retail industry, and changes in marketing trends, and are therefore subject to variability and difficult to predict, among other things.

The Company recognizes an asset for media credits which is subsequently evaluated for impairment at each reporting period for any changes in circumstances.

The Company recognized $21.3 million and $3.5 million for media credits and did not recognize any impairment for the years ended January 29, 2023, and January 30, 2022, respectively.

Impairment of Long-Lived Assets

Our long-lived assets consist of property and equipment and right-of-use assets from leases.

Property and equipment includes leasehold improvements, and other intangible assets.

Property and equipment includes leasehold improvements, and other tangible assets.

Long-lived assets are reviewed for potential impairment at such time that events or changes in circumstances indicate that the carrying amount of an asset might not be recovered.

1 unchanged sentence

When evaluating long-lived assets for potential impairment, we will first compare the carrying amount of the assets to the future undiscounted cash flows for the respective long-lived asset.

If the estimated future cash flows are less than the carrying amounts of the assets, an impairment loss calculation is prepared.

An impairment loss is measured based upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimated future discounted cash flow.

If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.

In fiscal 2022, we recognized impairment charges totaling $0.6 million associated with showroom-level right of use lease assets.

During fiscal 2021, we recorded impairment charges of $0.2 million, associated with the assets of an underperforming retail location.

The impairments in fiscal 2022 and fiscal were 2021 calculated using a discounted cash flow model and were recorded in selling, general and administrative in our Consolidated Statements of Operations.

If the estimated future cash flows are less than the carrying amounts of the assets, an impairment loss is measured as the excess of the carrying value over its fair value.

We estimate fair value based on future discounted cash flow based on our historical operations of the showroom and estimates of future showroom profitability and economic conditions.

These estimates include factors such as sales growth, gross margin, employment costs, lease escalation, and overall macroeconomic conditions, and are therefore subject to variability.

Actual future results may differ from those estimates.

If required, an impairment loss is recorded for that portion of the assets' carrying value in excess of fair value.

In fiscal 2023, we did not recognize any impairment charges associated with showroom-level right-of-use assets.

During fiscal 2022, we recorded impairment charges of $0.6 million associated with the assets of an underperforming retail location in selling, general and administrative expenses in our Statements of Operations.

We did not recognize any impairment charges with showroom-level right of use assets during the fiscal year ended January 31, 2021.

Merchandise Inventories

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If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.

Equity-based Compensation

We account for equity-based compensation for associates and directors by recognizing the fair value of equity-based compensation as an expense in the calculation of net income, based on the grant-date fair value.

We recognize equity-based compensation expense in the periods in which the associate or director is required to provide service, which is generally over the vesting period of the individual equity instruments.

The fair value of the equity-based awards is determined using the Black-Scholes option pricing model or the stock price on the date of grant.

Recent Accounting Pronouncements

Except as described below, we have considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements.

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842) amending lease guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

2020-05 extended the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted.

We adopted the guidance in fiscal 2022 and there was not a material effect on the Company’s consolidated results of operations.

Adoption of this standard resulted in the recognition of operating lease right-to-use (“ROU”) assets and corresponding lease liabilities of approximately $90 million and $97 million, respectively, and reclassification of deferred rent of $6.7 million as a reduction of the right-of-use assets on the consolidated balance sheet as of January 30, 2022.

The new standard also provides practical expedients for an entity’s ongoing accounting.

The Company elected the short-term lease recognition exemption for all leases that qualify.

This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

We also elected the practical expedient to not separate lease and non-lease components for all of our leases.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718).

ASU 2018-07 eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees.

The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

We adopted the guidance in fiscal 2022 and there was not a material effect on the Company’s consolidated results of operations.

Basis of Presentation, and Summary of Significant Accounting Policies in the Notes to the Financial Statements included within this report for a discussion of recently issued and adopted accounting standards.

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