What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-11 compared with 2023-03-29 · 109 added, 127 removed, 145 unchanged (62% of the section changed)

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Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period.

The fiscal year ended February 4, 2024 consisted of 53 weeks.

Fiscal year 2023 and 2022 each consisted of 52 weeks.

We are a technology driven company that designs, manufactures and sells unique, high quality furniture derived through our proprietary "Designed for Life" approach which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do.

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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 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 market and sell our products through an omni-channel platform that includes direct-to-consumer touch points in the form of our own showrooms, which include our 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:

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.

Macroeconomic Factors

There are a number of macroeconomic factors and uncertainties affecting the overall business environment and our business, including increased inflation, rising interest rates, housing market conditions, consumer debt and available credit, global conflicts and uncertainties in the global financial markets.

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 macroeconomic factors have contributed to the slowdown in demand that we have experienced in our business which may continue in future periods.

Seasonality in Quarterly Results

Our business is seasonal.

As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our results between periods.

Working capital requirements are typically higher in the third fiscal quarter due to inventory built-up in advance of the holiday selling season.

Net sales are historically higher in the fourth fiscal quarter due primarily to the impact of the holiday selling season.

As such, results of a period shorter than a full year may not be indicative of results expected for the entire year.

The retail industry is highly competitive and retailers compete based on a variety of factors, including design, quality, price and customer service.

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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 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.

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.

As a result, measures that analyze a single channel are less indicative of the performance of our business than they might be for other companies that operate their distribution channels as separate businesses.

Further, certain of our competitors and other retailers calculate comparable showroom sales (or similar measures) differently than we do.

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

We calculate CAC on an annual basis by dividing our expenses associated with acquiring new customers for a fiscal year by the number of new customers we acquire in that fiscal year.

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.

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.

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

We expect this increase in CAC to correspond with a continued increase in CLV.

We monitor repeat customer transactions in aggregate through our point of sale platform and in groups based upon the year in which customers first made a purchase from us, which we refer to as cohorts, as a way to measure our customer’s engagement with our products over their lifetime.

Our fiscal 2023 cohorts CLV is $3,224 compared to $2,853 in fiscal 2022.

In addition, our fiscal 2015 cohort has increased its CLV from $1,071 in fiscal 2015 to $1,426 in fiscal 2023, a 33.1% increase in customer value since the fiscal 2015 cohorts’ first purchases with Lovesac.

Retail Sales Per Selling Square Foot

Retail sales per selling square foot is calculated by dividing the total point of sales transactions for all comparable showrooms, by the average selling square footage for the period.

Selling square footage is retail space at our showrooms used to sell our products.

Selling square footage excludes backrooms at showrooms used for storage, office space or similar matters.

Omni-channel Comparable Net Sales

Omni-channel comparable net sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior-period of equivalent length.

Comparable net sales includes sales at all retail locations and online, open greater than 12 months (including remodels and relocations) and excludes closed stores.

Comparable net sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.

In fiscal year 2024, we updated how we calculate comparable sales to better reflect our business, store growth and omni-channel sales approach.

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.

In fiscal 2024, we updated how we calculate new and repeat customers to better reflect business across all of our channels as well as the purchase cycle of the categories in which we compete.

Repeat customers accounted for approximately 43.6% of all transactions in fiscal 2024 compared to 41.3% in fiscal 2023.

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

Cost of Merchandise Sold

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We expect gross profit to increase to the extent that we successfully grow our net sales and continue to realize scale economics with our manufacturing partners.

We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products.

We review our inventory levels on an

ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products.

The timing and level of markdowns are driven primarily by customer acceptance of our merchandise.

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public company expenses;

customer financing fees;

and credit card transaction fees.

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Basis of Presentation and Results of Operations

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.

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

The following discussion provides an analysis of the Company’s financial condition and results of operations from management's perspective and should be read in conjunction with the financial statements and related notes included in this report.

The discussion in this Form 10-K generally focuses on fiscal 2024 compared to fiscal 2023.

Our fiscal 2024 results contain an additional, non-comparable 53rd week when compared to fiscal 2023.

A discussion of our results of operations and changes in financial condition for fiscal 2023 compared to fiscal 2022 has been excluded from this report, but can be found in Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2023 Annual Report on Form 10-K, as amended by Amendment No.

1 and Amendment No.

2 on Form 10-K/A filed on November 2, 2023 and November 30, 2023, respectively.

Results of Operations

The following table summarizes key components of our results of operations for fiscal 2024, 2023, and 2022:

2024 2023 2022 2024 2023 2022

Statement of Operations Data:

Net sales 100 % 100 % 100 %

(In thousands) (Percentage of net sales)

Showrooms $ 437,394 $ 398,184 $ 298,989 62.5 % 61.2 % 60.0 %

Internet 199,778 176,519 150,622 28.5 % 27.1 % 30.2 %

Other 63,093 76,476 48,628 9.0 % 11.7 % 9.8 %

Total net sales 700,265 651,179 498,239 100.0 % 100.0 % 100.0 %

Cost of merchandise sold 299,222 307,528 224,707 42.7 % 47.2 % 45.1 %

Gross profit 401,043 343,651 273,532 57.3 % 52.8 % 54.9 %

Selling, general and administrative expenses 33 % 32 % 35 %

Operating expenses:

Selling, general and administration expenses 264,314 215,979 160,017 37.7 % 33.2 % 32.1 %

Advertising and marketing 94,050 79,864 65,078 13.4 % 12.3 % 13.1 %

Depreciation and amortization 12,603 10,842 7,859 1.8 % 1.7 % 1.6 %

Total operating expenses 370,967 306,685 232,954 52.9 % 47.2 % 46.8 %

Operating income 30,076 36,966 40,578 4.4 % 5.6 % 8.1 %

Interest expense, net 0 % 0 % 0 %

Interest income (expense), net 1,747 (117) (179) 0.2 % — % — %

Net income before taxes 31,823 36,849 40,399 4.6 % 5.6 % 8.1 %

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Net income $ 23,861 $ 26,488 $ 47,488 3.5 % 4.0 % 9.5 %

Other Operational Data

Our recent showroom growth is summarized in the following table:

Showroom Count:

February 4, 2024 January 29, 2023

Showrooms open at beginning of period

Showrooms opened

Showrooms closed

Showrooms open at end of period (1)

Showroom remodels

(1) Showrooms open at the end of the period include 6 kiosks and 2 mobile concierges as of fiscal 2024, and 13 kiosks and 2 mobile concierges as of fiscal 2023.

Fiscal 2024 Compared to Fiscal 2023

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, 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 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.

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

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 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.

Net sales increased $49.1 million , or 7.5%, in fiscal 2024 compared to the prior year period .

The increase in overall net sales was driven by new showroom openings, partially offset by a decrease of 4.1% in omni-channel comparable net sales.

New customers increased by 13.3% in fiscal 2024 as compared to 6.5% in the prior year period.

Showroom net sales increased $39.2 million, or 9.8% in fiscal 2024 compared to the prior year period.

Internet sales (sales made directly to customers through our ecommerce channel) increased $23.3 million, or 13.2% , in fiscal 2024 compared to the prior year period driven by strong promotional campaigns.

Other sales, which include pop- up-shop sales, shop-in-shop sales and barter inventory transactions, decreased $13.4 million , or 17.5% in fiscal 2024 compared to the prior year period.

This decrease was principally due to the timing of inventory barter transactions coupled with lower productivity of our temporary online pop-up-shops on Costco.com, partially offset by an increase of 311 Costco in store pop-up-shops compared to the prior year period.

We also opened 22 additional Best Buy shop-in-shop locations compared to the prior year period.

Gross profit increased $57.3 million, or 16.7% , in fiscal 2024 compared to the prior year period .

Gross margin increased to 57.3% of net sales in fiscal 2024 from 52.8% of net sales in the prior year period.

The increase in gross margin percentage of 450 basis points was primarily driven by a decrease of approximately 550 basis points in total distribution and related tariff expenses, partially offset by a decrease of 100 basis points in product margin driven by higher promotional discounting.

The decrease in total distribution and related tariff expenses over prior year is principally related to the positive impact of 670 basis points decrease in inbound transportation costs partially offset by 120 basis points in higher outbound transportation and warehousing costs.

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 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.

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 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.

Selling, general and administrative expenses increased $48.3 million, or 22.4% , in fiscal 2024 compared to the prior year period .

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

Employment costs increased by $21.3 million driven by an increase in new hires.

Overhead expenses increased $18.6 million mainly consisting of an increase of $13.2 million in investments in the business to support current and future growth and $11.7 million in professional fees primarily related to the restatement of previously issued financial statements, partially offset by a $6.3 million decrease in equity-based compensation.

Selling related expenses increased $6.0 million principally due to credit card fees related to the increase in net sales and an increase in credit card rates.

Rent increased by $2.4 million related to a $6.1 million increase in rent expense from our net addition of 35 showrooms partially offset by a $3.7 million reduction in percentage rent.

Selling, general and administrative expenses were 37.7% of net sales in fiscal 2024, an increase of 450 basis points as compared to 33.2% of net sales in the prior year period.

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.

Advertising and marketing expenses increased $14.2 million, or 17.8% , in fiscal 2024 compared to the prior year period.

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.

Advertising and marketing expenses were 13.4% and 12.3% of net sales in fiscal 2024 and 2023, respectively.

Depreciation and amortization expenses

Depreciation and amortization expenses increased 37.4%, or $2.9 million to $10.8 million in fiscal 2023 compared to $7.9 million in fiscal 2022.

The increase in depreciation and amortization expense is principally related to capital investments for new and remodeled showrooms in fiscal 2023.

Interest expense

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.

Depreciation and amortization expenses increased $1.8 million, or 16.2%, in fiscal 2024 compared to the prior year period.

The increase in depreciation and amortization expense is principally related to capital investments for new showrooms in fiscal 2024.

Interest income (expense), net

Interest income was $1.7 million in fiscal 2024 compared to interest expense of $0.1 million in fiscal 2023.

Interest income earned on the Company’s cash and cash equivalents balances was favorable from higher interest rates compared to the prior year period.

Provision for income taxes

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.

Repeat customers

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

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

Quarterly Results

Our business is seasonal and we have historically realized a higher portion of our net sales and net income in the fourth fiscal quarter due primarily to the holiday selling season.

Working capital requirements are typically higher in the third fiscal quarter due to inventory built-up in advance of the holiday selling season.

During these peak periods we have historically increased our borrowings under our line of credit.

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.

Income tax expense was $8.0 million in fiscal 2024 compared to $10.4 million in fiscal 2023.

The change in provision is primarily driven by lower net income before taxes, partially offset by a decrease in the effective tax rate.

Liquidity and Capital Resources

Our business relies on cash flows from operations, our revolving line of credit (see “Revolving Line of Credit” below) and securities issuances as our primary sources of liquidity.

At February 4, 2024, we had $87.0 million in cash and cash equivalents.

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, 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.

Capital Expenditures

Historically, we have invested significant capital expenditures in opening new showrooms and updating existing showrooms.

These capital expenditures have increased in the past and may continue to increase in future periods as we open additional showrooms.

Capital expenditures are anticipated to support our showroom growth, including capital outlays for leasehold improvements, fixtures and equipment, and the construction of new showrooms.

Capital expenditures during fiscal 2025 are projected to be in the range of $22.0 million to $30.0 million.

Capital expenditures were $29.2 million in fiscal 2024.

The majority of our operating leases relate to company showrooms.

We also lease our corporate facilities.

At February 4, 2024, we had aggregate lease obligations of $214.5 million, with $17.6 million payable within 12 months.

See Note 6, “Leases” of the Notes to Financial Statements for further discussion of our operating leases.

Cash Flow Analysis

A summary of operating, investing, and financing activities during the periods indicated are shown in the following table:

in thousands Fiscal Year Ended

2023 January 30,

2022 January 31,

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

The following table summarizes operating, investing, and financing activities for fiscal 2024, 2023, and 2022:

in thousands 2024 2023 2022

Net cash provided by (used in) operating activities $ 76,441 $ (21,375) $ 32,648

Net cash used in investing activities (29,211) (25,549) (15,118)

Net cash used in financing activities (3,727) (1,935) (3,479)

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

Net change in cash and cash equivalents 43,503 (48,859) 14,051

Cash and cash equivalents at end of period $ 87,036 $ 43,533 $ 92,392

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, 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.

Net cash provided by (used in) operating activities

Net cash provided by (used in) 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 deferred income taxes, and the effect of changes in working capital and other activities.

Net cash provided by operating activities was $76.4 million in fiscal 2024, an increase from net cash used in operating activities of $21.4 million in the prior year period, primarily driven by changes in working capital related to inventory management actions, timing of payments to vendors, and a decrease in income tax payments.

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.

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 investing activities was $29.2 million in fiscal 2024, an increase from $25.5 million in the prior year period, primarily resulting from increased capital expenditures related to new showrooms.

Net cash used in financing activities

Financing activities consist primarily of taxes paid for the net 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.

Financing activities consists of taxes paid for the net settlement of equity awards and payment of deferred financing costs.

Net cash used in financing activities was $3.7 million in fiscal 2024, an increase from $1.9 million in the prior year period, primarily resulting from an increase in taxes paid for the net settlement of equity awards.

Revolving Line of Credit

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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 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.

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All other terms of the credit agreement remain unchanged.

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

For additional information regarding our line of credit with Wells Fargo Bank, see Note 8.

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

As of February 4, 2024 and January 29, 2023, the Company’s borrowing availability under the line of credit was $36.0 million, and there were no outstanding borrowings under our credit facility.

Critical Accounting Policies and Estimates

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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.

We continue to monitor the effects of global macroeconomic and geopolitical uncertainty,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.

There have been no material changes to the significant accounting policies during fiscal 2024.

Barter Arrangements

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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.

For fiscal 2024, 2023, and 2022, the Company recognized $12.3 million, $21.3 million, and $3.5 million, respectively, of barter sales in exchange for media credits.

The Company had $32.8 million and $25.2 million of unused media credits as of February 4, 2024, and January 29, 2023, respectively, and did not recognize any impairment.

Impairment of Long-Lived Assets

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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.

In fiscal 2024 and 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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Recent Accounting Pronouncements

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.

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