What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-24 compared with 2020-03-25 · 105 added, 103 removed, 254 unchanged (45% of the section changed)

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

You should read the following discussion together with “Item 6, Selected Consolidated Financial Data” and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

You should read the following discussion together with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements.

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We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday nearer January 31 of the following year.

References to “2019” refer to the fiscal year ended February 1, 2020 and references to “2018” refer to the fiscal year ended February 2, 2019.

References to “2020” refer to the fiscal year ended January 30, 2021 and references to “2019” refer to the fiscal year ended February 1, 2020.

2020 and 2019 each consisted of a 52-week period.

References to “2020” refer to the fiscal year ending January 30, 2021, which consists of a 52-week period.

References to “2021” refer to the 52-week fiscal year ending January 29, 2022.

Ollie’s is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices.

Known for our assortment of “Good Stuff Cheap®,” we offer customers a broad selection of brand name products, including food, housewares, books and stationery, bed and bath, floor coverings, electronics, and toys.

Known for our assortment of “Good Stuff Cheap®,” we offer customers a broad selection of brand name products, including housewares, bed and bath, food, floor coverings, health and beauty aids, books and stationery, toys and electronics.

Our differentiated go-to market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns.

These attributes have driven our rapid growth and strong and consistent store performance as evidenced by our store base expansion from 203 stores to 345 stores, net sales growth from $762.4 million to $1.4 billion and average net sales per store ranging from $3.8 million to $4.2 million from 2015 to 2019.

Key Developments

On December 2, 2019, our Board of Directors announced the unexpected passing of Mark Butler, Founder, Chairman of the Board, President and CEO of the Company, and announced that John Swygert had been named interim President and CEO.

On December 10, 2019, our Board of Directors announced that Mr.

Swygert had been appointed President and Chief Executive Officer and elected Mr.

Swygert to the Board of Directors effective immediately.

Swygert had served as Executive Vice President and Chief Operating Officer of Ollie’s since January 2018, and prior to this served as Chief Financial Officer since 2004.

Certain terms of Mr.

Swygert’s employment agreement were amended in connection with his new appointment.

On February 27, 2020, Omar Segura, our Senior Vice President, Store Operations, announced his intention to retire and separate from employment effective as of the close of business on May 1, 2020.

Segura will continue to serve in his respective capacity with the Company until his retirement date.

In connection with Mr.

Segura’s forthcoming retirement and pursuant to the Company’s executive transition plan, Scott Osborne was promoted to Vice President of Store Operations, effective as of February 27, 2020.

Osborne has been with the Company since April 2002, serving most recently as Regional Vice President of Stores.

In March 2020, the outbreak of COVID-19 (coronavirus) caused by a novel strain of the coronavirus has recently been recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate.

The COVID-19 (coronavirus) outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19 (coronavirus), and there are many unknowns.

While to date we have not been required to close any of our stores, we are currently operating under reduced hours and we have seen increased sales pressure in recent days.

We continue to monitor the impact of the COVID-19 (coronavirus) outbreak closely.

The extent to which the COVID-19 (coronavirus) outbreak will impact our operations or financial results is uncertain.

These attributes have driven our rapid growth and strong and consistent store performance as evidenced by our store base expansion from 234 stores to 388 stores, net sales growth from $890.3 million to $1.8 billion and average annual net sales per store ranging from $4.1 million to $4.9 million from 2016 to 2020.

Impact of COVID-19

The outbreak of the novel coronavirus COVID-19, which was declared a global pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S.

and global economies.

The outbreak of COVID-19 and related measures to quell the outbreak have impacted our supply chain, operations and customer demand.

The COVID-19 pandemic could further affect our operations and the operations of our suppliers and vendors as a result of continued or renewed restrictions and limitations on travel, shelter-in-place orders, limitations on store or facility operations up to and including closures, and other governmental, business or consumer actions.

Our stores and distribution centers have continued to operate as an essential business during the COVID-19 pandemic.

During this time, we have benefited from increased consumer spending that coincided with economic stimulus provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-Related Tax Relief Act of 2020 and having our stores open while several other retailers were closed for a portion of 2020.

The COVID-19 pandemic has significantly affected consumer preferences and shopping patterns.

Since the outbreak of the pandemic, we have effectively responded to changing consumer needs, with timely, value-driven assortments of personal protective equipment and cleaning products, as well increased offerings of products for the home.

We have also benefited from increased consumer spending in our stores driven by a shift in spend from COVID-impacted categories, such as travel, dining and experiences, to retail.

Our net sales increased as store traffic and customer demand increased.

Our top priorities in responding to the pandemic have been and continue to be the safety and well-being of our associates and customers.

We are committed to maintaining a safe work and shopping environment.

In response to COVID-19, we have taken several actions, including the following:

implemented procedures for social distancing, cleaning, sanitation, and use of personal protective equipment in our stores, distribution centers, and store support center to adhere to the appropriate CDC and local guidelines;

implemented temporary premium pay for our in-store associates, store leadership, and distribution center employees;

supported our communities by raising money to provide much needed funding to local food banks through a partnership with Feeding America.

As a result of these efforts, we have incurred and may continue to incur higher payroll expenses at our stores and distribution facilities and incremental cleaning and safety costs at all our facilities.

While we have incurred these additional selling, general and administrative expenses (“SG&A”) in response to operating during the pandemic, we continue to closely manage other controllable expenses.

We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our associates, customers, suppliers and stockholders.

There remains significant uncertainty related to the economic impact of COVID-19 and the long-term impact of the pandemic, generally and in our industry, is unknown at this time.

We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on the U.S.

Moreover, the significant uncertainty surrounding the COVID-19 pandemic and its effects may result in impacts or consequences that we do not anticipate at this time or that develop in unexpected ways, which makes it more challenging for management to estimate future performance of our business, including the cadence of new store openings, particularly over the near term.

For further discussion of the risks and uncertainties associated with the COVID-19 pandemic, see “Part 1.

Risk Factors.”

Our Growth Strategy

Since the founding of Ollie’s in 1982, we have grown organically by backfilling existing markets and leveraging our brand awareness, marketing and infrastructure to expand into new markets in contiguous states.

We have expanded to 345 stores located in 25 states as of February 1, 2020.

During 2019, our stores were supported by two distribution centers, one in York, PA and one in Commerce, GA.

Our third distribution center in Lancaster, TX was constructed in 2019 and commenced operations in February 2020.

We believe our distribution capabilities, once our Lancaster, TX is fully operational, can support a range of 500 to 600 stores over the next several years.

We have expanded to 388 stores located in 25 states as of January 30, 2021.

During 2020, our stores were supported by three distribution centers, one each in York, PA, Commerce, GA, and Lancaster, TX.

We believe our distribution capabilities can support a range of 500 to 600 stores over the next several years.

We have invested in our associates, infrastructure, distribution network and information systems to allow us to continue to rapidly grow our store footprint, including:

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adding members to our senior management team;

expanding the capacity of our distribution centers to our current 1.6 million square feet plus an additional 615,000 square feet once the new distribution center is fully operational;

expanding the capacity of our distribution centers to their current 2.2 million square feet;

investing in information technology, accounting and warehouse management systems.

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Our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately $1.0 million, which includes store fixtures and equipment, store-level and distribution center inventory (net of payables) and pre-opening expenses.

We target new stores sales of approximately $4.0 million .

We target new store sales of approximately $4.0 million in their first full year of operations .

While we are focused on driving comparable store sales and managing our expenses, our revenue and profitability growth will primarily come from opening new stores.

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We also plan to leverage and expand our Ollie’s Army database marketing strategies.

In addition, we plan to continue to manage our selling, general and administrative expenses (“SG&A”) by furthering process improvements and by maintaining our standard policy of reviewing our operating costs.

In addition, we plan to continue to manage our SG&A by furthering process improvements and by maintaining our standard policy of reviewing our operating costs.

Our ability to grow and our results of operations may be impacted by additional factors and uncertainties, such as consumer spending habits, which are subject to macroeconomic conditions and changes in discretionary income.

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SG&A are comprised of payroll and benefits for store, field support and support center associates.

SG&A also include marketing and advertising, occupancy, utilities, supplies, credit card processing fees, insurance and professional services.

SG&A also include marketing and advertising expense, occupancy costs for stores and the store support center, insurance, corporate infrastructure and other general expenses.

The components of our SG&A remain relatively consistent per store and for each new store opening.

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Property and equipment are stated at original cost less accumulated depreciation and amortization.

Depreciation and amortization are calculated over the estimated useful lives of the related assets, or in the case of leasehold improvements, the lesser of the useful lives or the remaining term of the lease.

Depreciation and amortization expenses are calculated over the estimated useful lives of the related assets, or in the case of leasehold improvements, the lesser of the useful lives or the remaining term of the lease.

Expenditures for additions, renewals, and betterments are capitalized;

expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation is computed on the straight-line method for financial reporting purposes.

Depreciation and amortization are computed on the straight-line method for financial reporting purposes.

Depreciation as it relates to our distribution centers is included within cost of sales on the consolidated statements of income.

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

We define EBITDA as net income before net interest income or expense, loss on extinguishment of debt, depreciation and amortization expenses and income taxes.

Adjusted EBITDA represents EBITDA as further adjusted for the non-cash items of stock-based compensation expense and certain purchase accounting items, and a gain on an insurance settlement.

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

Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense and gains on insurance settlements.

EBITDA and Adjusted EBITDA are non-GAAP measures and may not be comparable to similar measures reported by other companies.

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Our historical results are not necessarily indicative of the results that may be expected in the future.

(dollars in thousands)

Cost of sales

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Operating income

Interest (income) expense, net

Loss on extinguishment of debt

Interest income, net

Income before income taxes

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Operating income

Interest (income) expense, net

Loss on extinguishment of debt

Interest income, net

Income before income taxes

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Number of store closings

Number of stores re-opened

Number of stores open at end of period

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(dollars in thousands)

Interest (income) expense, net

Loss on extinguishment of debt

Interest income, net

Depreciation and amortization expenses (1)

Income tax expense

Gain from insurance settlement

Gains from insurance settlements

Non-cash stock-based compensation expense

Non-cash purchase accounting items

Adjusted EBITDA

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Net sales increased to $1.809 billion in 2020 from $1.408 billion in 2019, an increase of $400.6 million, or 28.4%.

The increase was the result of a non-comparable store sales increase of $190.9 million, partially offset by a comparable store sales decrease of $24.1 million.

The increase was the result of a comparable store sales increase of $206.2 million and a non-comparable store sales increase of $194.4 million.

The increase in non-comparable store sales was driven by sales from new stores that have not been open for a full 15 months during 2020.

Comparable store sales decreased 2.1% in 2019 compared with a 4.2% increase in 2018.

The decrease in comparable store sales in 2019 consisted of a decrease in the number of transactions partially offset by an increase in the average transaction size.

Increases in our floor coverings, hardware and clothing departments were offset by sales declines in books, housewares, electronics and toys departments.

Cost of Sales

Cost of sales increased to $852.6 million in 2019 from $743.7 million in 2018, an increase of $108.9 million, or 14.6%.

Comparable store sales increased 15.6% in 2020.

The performance reflects our ability to effectively respond to changing consumer needs throughout the year, creating a strong alignment between a value-driven merchandise assortment and customer demand.

We also benefited from increased consumer spending associated with federal stimulus monies and spending in our stores driven by a shift in spend from COVID-impacted categories, such as travel, dining and experiences, to retail.

The increase in comparable store sales in 2020 consisted of significant growth in the average transaction size as numerous shoppers consolidated their store visits and, to a lesser extent, increased transactions.

Sales were strong across merchandise categories, with over 80% of our departments achieving comparable store sales growth.

On a departmental basis, the increase was driven by strong results in the housewares, health and beauty aids, bed and bath, flooring and food departments, slightly offset by decreases in our candy and luggage departments.

Gross Profit and Gross Margin

Gross profit increased to $723.4 million in 2020 from $555.6 million in 2019, an increase of $167.8 million, or 30.2%.

The increase in gross profit was primarily the result of new store sales growth.

Our gross margin decreased 60 basis points to 39.5% in 2019 from 40.1% in 2018 due to higher supply chain costs as a percentage of net sales.

Merchandise margin was consistent year over year.

The increase in gross profit was primarily the result of both comparable store and new store sales growth and, to a lesser extent, an increase in gross margin.

Our gross margin increased 50 basis points to 40.0% in 2020 from 39.5% in 2019 due to improvement in the merchandise margin and leveraging of supply chain costs.

Selling, General and Administrative Expenses

SG&A increased to $418.9 million in 2020 from $356.1 million in 2019, an increase of $62.8 million, or 17.6%.

As a percentage of net sales, SG&A increased 10 basis points to 25.3% in 2019 compared with 25.2% in 2018.

The dollar increase in SG&A was primarily driven by increased selling expenses associated with 42 new stores.

These increased expenses consisted primarily of store payroll and benefits, store occupancy costs, and other store-related expenses.

SG&A was partially offset by lower incentive compensation and reduced stock compensation expense in 2019.

Included in SG&A in 2019 is $1.0 million of income related to a gain from an insurance settlement.

Excluding this gain, SG&A expenses increased 14.2% over 2018 and as a percentage of net sales increased 20 basis points.

The dollar increase in SG&A was primarily driven by increased selling expenses associated with new stores and higher store payroll and variable selling expenses to support the significant increase in sales as well as increased incentive compensation.

As a percentage of net sales, SG&A decreased 210 basis points to 23.2% in 2020 from 25.3% in 2019.

The decrease was primarily due to significant leverage in occupancy and other costs from the strong increase in comparable store sales in addition to continued tight expense controls throughout the organization.

This leverage was partially offset by certain increased expenses, such as premium pay of $9.7 million, associated with operating through the COVID-19 pandemic.

Included in SG&A in 2020 and 2019 is $0.2 million and $1.0 million, respectively, of income related to gains from insurance settlements.

Excluding the gains in both years, SG&A expenses increased 17.4% in 2020 and as a percentage of net sales decreased 220 basis points.

Depreciation and Amortization Expense

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Pre-Opening Expenses

Pre-opening expenses increased to $13.1 million in 2019 from $11.1 million in 2018, an increase of $1.9 million, or 17.5%.

The increase is primarily due to the comparative number and timing of new store openings year over year.

We opened 42 stores in 2019 compared with 37 stores in 2018.

Interest (Income) Expense, Net

Net interest income totaled $0.9 million in 2019.

Net interest expense was $1.3 million in 2018.

We paid our prior term loan facility in full during 2018, and therefore we had no debt in 2019, which reduced our interest expense.

In addition, we invest cash on hand into highly liquid investments.

These investments generated increased interest income in 2019.

Pre-opening expenses decreased to $10.3 million in 2020 from $13.1 million in 2019, a decrease of $2.8 million, or 21.5%.

The decrease is primarily due to reduced grand opening advertising expenses as we were mindful of crowd size at our store openings in order to maintain compliance with COVID-related social distancing requirements.

We opened 46 new stores and closed a net of three stores in 2020 compared with 42 new store openings in 2019.

Interest Income, Net

Net interest income was $0.3 million in 2020 and $0.9 million in 2019.

Income Tax Expense

Income tax expense increased to $31.6 million in 2019 from $25.6 million in 2018, an increase of $6.0 million.

Income tax expense increased to $35.1 million in 2020 from $31.6 million in 2019, an increase of $3.5 million, or 11.0%.

The effective tax rates for 2020 and 2019 were 12.6% and 18.3%, respectively.

The increased effective tax rate in 2019 was primarily the result of a decrease in excess tax benefits related to stock-based compensation.

The decreased effective tax rate in 2020 was primarily the result of an increase in excess tax benefits related to stock-based compensation, largely due to the exercise of stock options, including exercises by the estate of Mark Butler, our former Chairman of the Board, President and Chief Executive Officer.

These discrete benefits totaled $34.5 million and $11.2 million in 2020 and 2019, respectively.

For further information, see Note 8 under “Notes to Consolidated Financial Statements.”

As a result of the foregoing, net income increased to $242.7 million in 2020 from $141.1 million in 2019, an increase of $101.6 million, or 72.0%.

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Our primary cash needs are for capital expenditures and working capital.

As of February 1, 2020, we had $90.0 million of cash and cash equivalents on hand and $90.8 million available to borrow under our Revolving Credit Facility.

As of January 30, 2021, we had $447.1 million of cash and cash equivalents on hand and $92.0 million available to borrow under our Revolving Credit Facility.

On May 22, 2019, we refinanced our Revolving Credit Facility to extend the maturity to May 22, 2024.

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We spent $30.5 million and $77.0 million for capital expenditures in 2020 and 2019, respectively.

Our 2019 capital expenditures included $42.8 million for the continued build-out of our third distribution center.

Our 2018 capital expenditures included the purchase of 12 former Toys “R” Us locations for approximately $42.0 million.

On May 31, 2019, OBO entered into a sale-leaseback transaction with an unaffiliated third-party for the 12 store locations.

Our 2020 and 2019 capital expenditures included $4.2 million and $42.8 million, respectively, for the build-out of our third distribution center.

In addition, on May 31, 2019, OBO Ventures, Inc.

(“OBO”) entered into a sale-leaseback transaction with an unaffiliated third-party for 12 former Toys “R” Us store locations purchased in 2018.

OBO received approximately $42.0 million for the 12 locations, which resulted in no net gain or loss.

We expect to fund capital expenditures from net cash provided by operating activities.

We opened 42 new stores during 2019 and expect to open between 47 and 49 new stores during 2020.

We opened 46 new stores and closed a net of three stores during 2020 and expect to open 50 new stores, including three or four relocations, during 2021.

We will be investing in these new stores, store resets, our distribution centers and general corporate capital expenditures, including information technology, in 2021.

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Fluctuations in working capital are also driven by the timing of new store openings.

Based on our new store growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements, debt service, and other financing activities over the next 12 months.

If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future.

We believe our cash and cash equivalents position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements, debt service, and other financing activities over the next 12 months.

If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, we will be required to obtain additional equity or debt financing in the future.

There can be no assurance equity or debt financing will be available to us when needed or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.

We are not currently receiving, and do not currently intend to apply for, loans under any federal or state programs implemented as a result of the COVID-19 pandemic, including the CARES Act.

Share Repurchase Program

On March 26, 2019, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of shares of our common stock.

The Board subsequently authorized a $100.0 million increase in the share repurchase program on December 15, 2020, and another $100.0 million increase on March 16, 2021.

The shares to be repurchased may be purchased from time to time in open market conditions (including blocks or in privately negotiated transactions).

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Repurchases are expected to be funded from cash on hand or through the utilization of our Revolving Credit Facility.

The repurchase authorization does not require the purchase of a specific number of shares, has a two-year term, and is subject to suspension or termination by our Board of Directors at any time.

The repurchase authorization does not require the purchase of a specific number of shares, has a term of approximately two years, and is subject to suspension or termination by our Board of Directors at any time.

During 2020, we repurchased 3,885 shares of our common stock for $0.3 million, inclusive of transaction costs, pursuant to our share repurchase program.

During 2019, we repurchased 689,457 shares of our common stock for $40.0 million, inclusive of transaction costs.

These expenditures were funded by cash generated from operations.

As of February 1, 2020, we had $60.0 million remaining under our share repurchase authorization.

As of January 30, 2021, we had $159.7 million remaining under our share repurchase authorization.

There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases.

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Net cash used in investing activities

Net cash used in financing activities

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents

Cash Provided by Operating Activities

Net cash provided by operating activities in 2019 totaled $105.3 million, decreasing from $126.1 million in 2018.

The decrease in net cash provided by operating activities was primarily the result of increased working capital requirements due to the increased number of new store openings in 2019, partially offset by increased current year net income and an increase in deferred income taxes.

Net cash provided by operating activities in 2020 totaled $361.3 million, increasing from $105.3 million in 2019.

The increase in net cash provided by operating activities was primarily the result of increased current year net income and reduced working capital requirements due to the timing of payments.

Cash Used in Investing Activities

Net cash used in investing activities decreased to $34.1 million in 2019 from $73.8 million in 2018.

The net change in investing activities is primarily related to the purchase of 12 former Toys “R” Us store sites in August 2018 and the proceeds from the sale-leaseback transaction for the same properties of approximately $42.0 million in May 2019 as described in Note 4 of the accompanying “Notes to Consolidated Financial Statements.” 2019 capital expenditures included $42.8 million invested in the build-out of our third distribution center.

In 2018, we spent $4.4 million to obtain land for and begin construction of our third distribution center.

Cash Used In Financing Activities

Net cash used in financing activities totaled $33.2 million and $39.5 million in 2019 and 2018, respectively.

The net change in financing activities is primarily due to $40.0 million used to repurchases shares of our common stock in 2019, compared with $48.8 million of prepayments made on our prior term loan to pay off the outstanding balance in full in 2018.

Net cash used in investing activities totaled $30.4 million in 2020 compared with $34.1 million in 2019.

Investing activities in 2020 and 2019 included $4.2 million and $42.8 million, respectively, invested in the build-out of our third distribution center.

In 2019 we received approximately $42.0 million from a sale-leaseback transaction as described in Note 4 of the accompanying “Notes to Consolidated Financial Statements.”

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities totaled $26.4 million in 2020.

Net cash used in financing activities totaled $33.2 million in 2019.

The net change in financing activities is primarily due to incremental proceeds from stock option exercises in 2020 and $40.0 million used to repurchase shares of our common stock in 2019.

Credit Facilities

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The Eurodollar Rate is subject to a 0% floor.

Under the terms of the Revolving Credit Facility, as of February 1, 2020, we could borrow up to 90.0% of the most recent appraised value (valued at cost, discounted for the current net orderly liquidation value) of our eligible inventory, as defined, up to $100.0 million.

As of February 1, 2020, we had no outstanding borrowings under the Revolving Credit Facility, with $90.8 million of borrowing availability, outstanding letters of credit commitments of $9.0 million and $0.2 million of rent reserves.

Under the terms of the Revolving Credit Facility, as of January 30, 2021, we could borrow up to 90.0% of the most recent appraised value (valued at cost, discounted for the current net orderly liquidation value) of our eligible inventory, as defined, up to $100.0 million.

As of January 30, 2021, we had no outstanding borrowings under the Revolving Credit Facility, with $92.0 million of borrowing availability, outstanding letters of credit commitments of $7.8 million and $0.2 million of rent reserves.

The Revolving Credit Facility also contains a variable unused line fee ranging from 0.125% to 0.250% per annum.

We incurred unused line fees of $0.2 million in both 2019 and 2018.

We incurred unused line fees of $0.1 million and $0.2 million in 2020 and 2019, respectively.

The Credit Facility is collateralized by the Company’s assets and equity and contains a financial covenant, as well as certain business covenants, including restrictions on dividend payments, which we must comply with during the term of the agreement.

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We were in compliance with all terms of the Credit Facility during 2020.

The provisions of the Credit Facility restrict all of the net assets of the Company’s consolidated subsidiaries, which constitutes all of the net assets on our consolidated balance sheet as of February 1, 2020, from being used to pay any dividends or make other restricted payments to the Company without prior written consent from the financial institutions that are a party to the Credit Facility, subject to material exceptions including proforma compliance with the applicable conditions described in the Credit Facility.

The provisions of the Credit Facility restrict all of the net assets of the Company’s consolidated subsidiaries, which constitutes all of the net assets on our consolidated balance sheet as of January 30, 2021, from being used to pay any dividends or make other restricted payments to the Company without prior written consent from the financial institutions that are a party to the Credit Facility, subject to material exceptions including proforma compliance with the applicable conditions described in the Credit Facility.

Contractual Obligations

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

As of February 1, 2020, our contractual lease obligations were:

As of January 30, 2021, our contractual obligations, including contractual lease obligations were:

(in thousands)

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Finance leases

Purchase obligations (2)

(1) Operating lease payments exclude $42.2 million of legally binding minimum lease payments for leases signed, but not yet commenced.

(2) The Company has entered into an agreement with Valassis Communications, Inc.

for marketing services.

This agreement has a guaranteed spend commitment of $23.0 million over a two-year period ending on May 28, 2022.

Off-Balance Sheet Arrangements

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Under the retail inventory method, which is widely used in the retail industry, inventory is segregated into departments of merchandise having similar characteristics.

The valuation of inventories and the resulting gross margin is derived by applying a calculated cost-to-retail ratio to the retail value of inventories for each department.

Inherent in the retail inventory method are certain management judgments and estimates including, among others, merchandise markups, the amount and timing of permanent markdowns, and shrinkage, which may significantly impact both the ending inventory valuation and gross margin.

The valuation of inventories and the resulting gross profit is derived by applying a calculated cost-to-retail ratio to the retail value of inventories for each department.

Factors considered in the determination of permanent markdowns include inventory obsolescence, excess inventories, current and anticipated demand, age of the merchandise and customer preferences.

A significant increase in the demand for merchandise could result in a short-term increase in inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand.

If our inventory is determined to be overvalued in the future, we would be required to recognize such costs in costs of goods sold and reduce operating income at the time of such determination.

If our inventory is determined to be overvalued in the future, we would be required to recognize such costs in cost of sales and reduce operating income at the time of such determination.

Therefore, although every effort is made to ensure the accuracy of forecasts of merchandise demand, any significant unanticipated changes in demand or in economic conditions within our markets could have a significant impact on the value of our inventory and reported operating results.

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Fair value is determined based upon our public market capitalization.

The quantitative test is a two-step test.

Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill).

If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement).

Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.

The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.

The residual fair value after the allocation is the implied fair value of the reporting unit’s goodwill.

The carrying value of goodwill is considered impaired when the reporting unit’s fair value is less than its carrying value and the Company would record an impairment loss equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit.

For 2020 and 2019, we completed an impairment test of our goodwill and determined that no impairment of goodwill existed.

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For 2020 and 2019, we completed an impairment test of our tradename and determined that no impairment of the asset existed.

For 2018, intangible assets with determinable useful lives were amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Due to the adoption of Accounting Standards Update 2016-02, Leases , as of February 3, 2019, intangible assets are now included in the operating lease right-of-use assets on the consolidated balance sheet.

Our policy is to conduct impairment testing based on our most current business plans, which reflect anticipated changes in the economy and the retail industry.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis