What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-25 compared with 2021-03-24 · 323 added, 206 removed, 153 unchanged (78% of the section changed)

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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.

These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Item 1A, Risk Factors” and “Cautionary note regarding forward-looking statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

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

The statements in

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

These forward-looking statements are subject to numerous risks and

uncertainties, including, but not limited to, the risks and uncertainties described in “Item 1A, Risk Factors” and “Cautionary note regarding forward-looking statements.” Our actual results may differ materially from those contained in or implied

by any forward-looking statements.

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 “2021” refer to the fiscal year ended January 29, 2022 and references to“2020” refer to the fiscal year ended January 30, 2021.

2021 and 2020 each consisted of 52 weeks.

References to “2022” refer

to the 52-week fiscal year ending January 28, 2023.

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 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 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.

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 store performance as evidenced by our store base expansion from 268 stores to 431 stores and net sales growth from $1.077 billion to $1.753 billion from 2017 to 2021 and average annual net sales per store

of $4.4 million for the five-year period.

COVID-19 Update

The COVID-19 pandemic has significantly impacted the U.S.

and global economies, resulting in business slowdowns or shutdowns, reduced economic activity, changes in consumer behavior, and changes in the mindset and

availability of the labor force.

We continue to monitor the impact of the pandemic on our business, including on our associates, customers, business partners and supply chain.

We continue to take measures to protect the health and safety of our associates and customers, a primary concern of our management team.

We have also taken measures to support the communities that we serve to

address the challenges posed by the pandemic.

Following the onset of the pandemic through the first quarter of 2021, our net sales benefited from increased consumer spending associated with federal stimulus funds for said pandemic.

At this point, there is

uncertainty with regard to any additional stimulus measures and, as a result, there may be potential changes in consumer spending behavior or demand.

In addition, we are experiencing labor pressures at both our stores and distribution centers,

higher import and trucking costs, and supply chain disruptions due to the impacts of COVID-19 and related measures.

We are increasing our hiring efforts in certain impacted markets and working closely with our suppliers and transportation

partners to mitigate the impact of the supply chain challenges.

The potential significance and duration of these elevated costs is uncertain, and we will continue to assess and respond to current and evolving conditions.

As we continue to monitor the COVID-19 pandemic and potentially take actions based on the requirements and recommendations of federal, state and local authorities, we intend to focus on managing the business for

future, long-term growth.

In certain circumstances, there may be developments outside our control, including resurgences of COVID-19 and, in particular, new and more contagious or vaccine resistant variants, requiring us to refine our

As such, given the evolving nature of the pandemic, we cannot reasonably estimate its impact on our financial condition, results of operations or cash flows in the future.

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

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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 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.

have expanded to 431 stores located in 29 states as of January 29, 2022.

Our stores are supported by three distribution centers, one each in York, PA, Commerce, GA, and Lancaster, TX.

We believe our current 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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Our business model has produced consistent and predictable store growth over the past several years, during both strong and weaker economic cycles.

We plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies:

We plan to continue to enhance our competitive positioning and

drive growth in sales and profitability by executing on the following strategies:

growing our store base;

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We have a proven portable, flexible, and highly profitable store model that has produced consistent financial results and returns.

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

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 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.

The core elements of our business model are procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins.

In addition, our new stores generally open strong, immediately contributing to the growth in net sales and profitability of our business.

The core elements of our business model are

procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins.

In addition, our new stores generally open strong, contributing to the growth in net sales and profitability of our

From 2017 to 2021, net sales grew at a CAGR of 13.0%.

We plan to achieve continued net sales growth, including increases in our comparable stores sales, by adding stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers.

We plan to achieve continued net sales growth, including comparable stores sales, by adding stores to our store base and by continuing to provide quality merchandise at a value for

our customers as we scale and gain more access to purchase directly from major manufacturers.

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

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.

In addition, we plan to continue to manage our selling, general

and administrative expenses (“SG&A”) by continuing to make process improvements and by maintaining our standard policy of reviewing our operating costs.

discretionary income.

Our customers’ discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment.

The potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers.

The potential consolidation of our competitors or other

changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers.

Our key competitive advantage is our direct buying relationships with many major manufacturers, wholesalers, distributors, brokers and retailers for our brand name and closeout products and unbranded goods.

We also augment our product mix with private label brands.

As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal.

also augment our product mix with private label brands.

As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an

How We Assess the Performance of Our Business and Key Line Items

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

The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.

The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross

margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.

Number of New Stores

The number of new stores reflects the number of stores opened during a particular reporting period.

Before we open new stores, we incur pre-opening expenses described below under “Pre-Opening Expenses” and we make an initial investment in inventory.

Before we open new stores, we incur pre-opening expenses described below under “Pre-Opening Expenses” and we make

an initial investment in inventory.

We also make initial capital investments in fixtures and equipment, which we amortize over time.

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We expect new store growth to be the primary driver of our sales growth.

Our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods.

Our initial lease terms are approximately seven years with options to renew for three

to five successive five-year periods.

Our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states.

Our new stores often open with higher sales levels as a result of greater advertising and promotional spend in connection with grand opening events but decline shortly thereafter to our new store model levels.

Our new stores often open with higher sales levels as a result of greater

advertising and promotional spend in connection with grand opening events, but decline shortly thereafter to our new store model levels.

We recognize retail sales in our stores when merchandise is sold and the customer takes possession of the merchandise.

Also included in net sales in 2020, 2019 and 2018 is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage.

Also included in net sales is revenue allocated to certain redeemed discounts earned via the

Ollie’s Army loyalty program and gift card breakage.

Net sales are presented net of returns and sales tax.

Net sales consist of sales from comparable stores and non-comparable stores, described below under “Comparable Store Sales.” Growth of our net sales is primarily driven by expansion of our store base in existing and new markets.

As we continue to grow, we believe we will have greater access to brand name and closeout merchandise and an increased deal selection, resulting in more potential offerings for our customers.

Net sales consist of sales from comparable stores and non-comparable stores, described below under “Comparable Store Sales.” Growth of

our net sales is primarily driven by the expansion of our store base in existing and new markets.

As we continue to grow, we believe we will have greater access to brand name and closeout merchandise and an increased deal selection, resulting in

more potential offerings for our customers.

Net sales are impacted by product mix, merchandise mix and availability, as well as promotional activities and the spending habits of our customers.

Our broad selection of offerings across diverse product categories supports growth in net sales by attracting new customers, which results in higher spending levels and frequency of shopping visits from our customers, including Ollie’s Army members.

Our broad selection of offerings across diverse

product categories supports growth in net sales by attracting new customers, which results in higher spending levels and frequency of shopping visits from our customers, including Ollie’s Army members.

The spending habits of our customers are subject to macroeconomic conditions and changes in discretionary income.

Our customers’ discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment.

However, because we offer a broad selection of merchandise at extreme values, we believe we are less impacted than other retailers by economic cycles.

These cycles correspond with declines in general consumer spending habits and we benefit from periods of increased consumer spending.

Our customers’ discretionary income is primarily impacted by gas prices, wages and consumer trends

and preferences, which fluctuate depending on the environment.

However, because we offer a broad selection of merchandise at extreme values, we believe we are generally less impacted than other retailers by economic cycles that correspond with

declines in general consumer spending habits.

We believe we also benefit from periods of increased consumer spending.

Comparable Store Sales

Comparable store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year.

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

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

We define comparable stores to be stores:

that have been remodeled while remaining open;

that are closed for five or fewer days in any fiscal month;

that are closed temporarily and relocated within their respective trade areas;

that have expanded, but are not significantly different in size, within their current locations.

Comparable store sales consist

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

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

We define comparable stores to be stores that:

have been remodeled while remaining open;

are closed for five or fewer days in any fiscal month;

are closed temporarily and relocated within their respective trade areas;

have expanded, but are not significantly different in size, within their current locations.

Non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months.

Stores which are closed temporarily, but for more than five days in any fiscal month, are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales.

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

Stores which are closed temporarily, but for more than five days in any fiscal month, are included in

non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales.

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

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Gross profit is equal to our net sales less our cost of sales.

Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation.

Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including

depreciation and amortization.

Gross margin is gross profit as a percentage of our net sales.

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We regularly analyze the components of gross profit, as well as gross margin.

Specifically, our product margin and merchandise mix is reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals.

Our disciplined buying approach has produced consistent gross margins and we believe helps to mitigate adverse impacts on gross profit and results of operation.

Specifically, our product margin and merchandise

mix is reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals.

Our disciplined buying approach has produced consistent gross margins and we believe helps to mitigate adverse impacts on gross

profit and results of operations.

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

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

As a result, our gross profit and gross margin may not be

comparable to similar data made available by our competitors and other retailers.

Selling, General and Administrative Expenses

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

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

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.

Consolidated SG&A generally increase as we grow our store base and as our net sales increase.

Consolidated SG&A generally increase as we grow our store base and

as our net sales increase.

A significant portion of our expenses is primarily fixed in nature, and we expect to continue to maintain strict discipline while carefully monitoring SG&A as a percentage of net sales.

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

We expect that our SG&A will continue to increase in future periods with future growth.

We expect that our SG&A

will continue to increase in future periods with future growth.

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

As a result, our SG&A may not be comparable to similar data made

available by our competitors and other retailers.

Depreciation and Amortization Expenses

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

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.

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.

expenditures for maintenance and repairs are

charged to expense as incurred.

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.

Depreciation and amortization as it relates to our distribution centers is included within cost of sales on

the consolidated statements of income.

Pre-Opening Expenses

Pre-opening expenses consist of expenses of opening new stores and distribution centers, as well as store closing costs.

For opening new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs.

For opening new stores, pre-opening expenses include grand opening advertising costs,

payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs.

Pre-opening expenses for new stores are expensed as they are incurred, which is typically within 30 to 45 days of opening a new store.

For opening distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs.

distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs.

Store closing costs primarily consist of insurance deductibles, rent and store payroll.

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Operating income is gross profit less SG&A, depreciation and amortization and pre-opening expenses.

Operating income excludes net interest income or expense and income tax expense.

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

Operating income excludes net interest expense or income and income tax expense.

We use operating income as

an indicator of the productivity of our business and our ability to manage expenses.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance.

EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures.

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

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

We 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 also frequently used by analysts, investors and other interested

parties to evaluate companies in our industry.

We use Adjusted EBITDA to supplement U.S.

Generally Accepted Accounting Principles (“GAAP”) measures of performance to evaluate the effectiveness of our

business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures.

Management believes it is useful

to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate the Company’s operating results.

We believe that excluding items from operating income, net income and net income per diluted share

that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business.

We define EBITDA as net income before net interest expense or income, 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.

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

EBITDA and Adjusted EBITDA have limitations as analytical

tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

In the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA.

Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.

For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA, see “Results of Operations.”

Our presentation of

Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.

For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of net income, the most directly comparable GAAP

measure, to EBITDA and Adjusted EBITDA, see “Results of Operations.”

Results of Operations

This section includes comparisons of certain 2021 financial information to the same information for 2020.

Year-to-year comparisons of the 2019 financial information to the same information for fiscal 2018, the 52-week period ended February 2, 2019, are contained in Item 7 of our Form 10-K for 2019 filed with the SEC on March 25, 2020 and available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html .

Year-to-year comparisons of the 2020 financial information to the same information for fiscal 2019, the

52-week period ended February 1, 2020 (“2019”), are contained in Item 7 of our Form 10-K for 2020 filed with the SEC on March 24, 2021 and available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html .

The following tables summarize key components of our results of operations for 2021 and 2020, both in dollars and as a percentage of our net sales.

We derived the consolidated statements of income for 2021 and 2020 from our consolidated financial statements and related notes.

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

Our historical results are not necessarily indicative of the results that may be

expected in the future.

(dollars in thousands)

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Operating income

Interest income, net

Interest expense (income), net

Income before income taxes

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Operating income

Interest income, net

Interest expense (income), net

Income before income taxes

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(dollars in thousands)

Interest income, net

Interest expense (income), net

Depreciation and amortization expenses (1)

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Includes depreciation and amortization relating to our distribution centers, which is included within cost of sales on our consolidated statements of income.

2020 compared to 2019

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 comparable store sales increase of $206.2 million and a non-comparable store sales increase of $194.4 million.

2021 Compared with 2020

Net sales decreased to $1.753 billion in 2021 from $1.809 billion in 2020, a decrease of $55.8 million, or 3.1%.

The decrease was the result of a comparable store sales decrease of $189.3 million, partially offset

by a non-comparable store sales increase of $133.5 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 2021.

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.

Comparable store sales decreased 11.1% in 2021 compared with a record increase of 15.6% in 2020.

The decrease in comparable store sales consisted of a decrease in the number of transactions partially offset by an

increase in average transaction size.

Sales in our health and beauty aids, housewares and bed and bath departments significantly decreased in 2021 due to a prior-year surge of COVID-related personal protective equipment, cleaning supplies and

home-related sales.

In 2020, we benefited from increased consumer spending associated with federal economic stimulus funds for the COVID-19 pandemic and having our stores open while other competitors were closed for a portion of the

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 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.

Gross profit decreased to $681.2 million in 2021 from $723.4 million in 2020, a decrease of $42.1 million, or 5.8%.

Gross margin decreased 110 basis points to 38.9% in 2021 from 40.0% in 2020.

The decrease in

gross margin in 2021 is due to increased supply chain costs, primarily the result of higher import, trucking and labor costs, partially offset by improvement in the merchandise margin.

Selling, General and Administrative Expenses

SG&A increased to $447.6 million in 2021 from $418.9 million in 2020, an increase of $28.7 million, or 6.9%.

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.

The dollar increase in SG&A was primarily driven by higher selling expenses associated with a

net increase of 43 stores, partially offset by tight expense controls throughout the organization.

As a percentage of net sales, SG&A increased 230 basis points to 25.5% in 2021 from 23.2% in 2020.

The increase was primarily due to

significant deleveraging as a result of the decrease in sales in 2021.

Included in SG&A in 2021 and 2020 is $0.4 million and $0.2 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

Depreciation and amortization expenses increased to $16.7 million in 2020 from $14.6 million in 2019, an increase of $2.1 million, or 14.6%, the result of the i ncreased asset base due to new store growth .

Excluding the gains in both years, SG&A increased 240 basis points

as a percentage of net sales in 2021.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased to $19.4 million in 2021 from $16.7 million in 2020,

an increase of $2.7 million, or 15.9%, the result of the i ncreased asset base due to new store growth .

Pre-Opening Expenses

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.

Pre-opening expenses decreased slightly to $9.7 million in 2021 from $10.3 million in 2020, a decrease of $0.6 million, or 5.8%.

The decrease is primarily due to the timing of store openings as the new store

activity was very similar year to year.

We opened 46 new stores and closed three stores in 2021 compared with 46 new store openings and net three store closures in 2020.

As a percentage of net sales, pre-opening expenses were 0.6% in both 2021

Interest Expense (Income), Net

Net interest expense was $0.2 million in 2021 compared with net interest income of $0.3 million in 2020.

Income Tax Expense

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The effective tax rates for 2021 and 2020 were 23.0% and 12.6%, respectively.

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%.

in the effective tax rates between the periods was primarily due to a significant current year decrease in excess tax benefits related to stock-based compensation.

The prior year effective tax rate was impacted by tax benefits due to the

exercise of stock options by the estate of our former chief executive officer.

Discrete tax benefits totaled $4.2 million and $34.5 million in 2021 and 2020, respectively.

For further information, see Note 7 under “Notes to Consolidated

Financial Statements.”

As a result of the foregoing, net income decreased to $157.5 million in 2021 from $242.7 million in 2020, a decrease of $85.2 million, or 35.1%.

Adjusted EBITDA

Adjusted EBITDA increased to $306.5 million in 2020 from $196.0 million in 2019, an increase of $110.5 million, or 56.4%.

Adjusted EBITDA decreased to $237.3 million in 2021 from $306.5 million in 2020, a decrease of $69.2 million, or 22.6%.

Liquidity and Capital Resources

Our primary sources of liquidity are net cash flows provided by operating activities and available borrowings under our Revolving Credit Facility.

Our primary sources of liquidity are net cash flows provided by operating activities and available borrowings under our $100.0 million Revolving Credit Facility.

As of January 29, 2022, we had $247.0 million of

cash and cash equivalents on hand and $84.7 million available to borrow under our Revolving Credit Facility.

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

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.

For further information, see Note 6 under “Notes to Consolidated Financial Statements.”

Our capital expenditures are primarily related to new store openings, store resets, which consist of improvements to stores as they are needed, expenditures related to our distribution centers, and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems.

Additionally, we have made and may continue to make discretionary share repurchases (see ‘Share Repurchase Program’ below for further

Our capital expenditures are primarily related to new store openings, store resets, which consist of improvements to stores as they are needed, expenditures related to our distribution centers, and

infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems.

We spent $35.0 million and $30.5 million for capital expenditures in 2021 and 2020, respectively.

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 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.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash flows from operations.

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

new stores, including two relocated stores, and temporarily closed one additional store due to weather-related events during 2021.

Capital expenditures in 2022 are planned to be approximately $53 million to $58 million, with expenditures for the opening of 46 to 48 new stores,

including two relocations, store-level initiatives at our existing stores as well as general corporate capital expenditures, including information technology.

We will also be investing in our distribution center network, including material

handling equipment in connection with a 200,000 square foot expansion of our York, PA distribution center, giving us the capacity for an additional 50 stores upon completion.

We have experienced, and may continue to experience, delays in

construction and permitting of new stores and other projects due to COVID-19.

Our primary working capital requirements are for the purchase of merchandise inventories, payroll, store rent associated with our operating leases, other store operating costs, distribution costs and general and

administrative costs.

Our working capital requirements fluctuate during the year, rising in our third fiscal quarter as we increase quantities of inventory in anticipation of our peak holiday sales season in our fourth fiscal quarter.

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

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.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash flows from operations.

We are not aware of any trends or events that would materially affect our capital requirements or liquidity.

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 Coronavirus Aid, Relief, and

Economic Security 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).

The timing of repurchases and the actual amount purchased will depend on a variety of factors, including the market price of our shares, general market, economic, and business conditions, and other corporate considerations.

Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow us to purchase our shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

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 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.

This initial tranche expired on March 26, 2021.

The Board authorized the

repurchase of another $100.0 million of our common stock on December 15, 2020 and a $100.0 million increase on March 16, 2021, resulting in $200.0 million approved for share repurchases through January 13, 2023.

On November 30, 2021, the Board

authorized an additional $200.0 million to repurchase stock pursuant to the Company’s share repurchase program, expiring on December 15, 2023.

The shares to be repurchased may be purchased from time to time in open market conditions (including

blocks), privately negotiated transactions, accelerated share repurchase programs or other derivative transactions, issuer self-tender offers or any combination of the foregoing.

The timing of repurchases and the actual amount purchased will

depend on a variety of factors, including the market price of our shares, general market, economic and business conditions, and other corporate considerations.

Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under

the Securities Exchange Act of 1934, which could allow us to purchase our shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

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 and is subject to suspension or termination by our

Board of Directors at any time.

During 2021, we repurchased 3,113,981 shares of our common stock for $220.0 million, inclusive of transaction costs, pursuant to our share repurchase program, and during 2020, we repurchased 3,885 shares of our

common stock for $0.3 million, inclusive of transaction costs.

These expenditures were funded by cash generated from operations.

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

As of January 29, 2022, we had approximately $180.0 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 provided by (used in) financing activities

Net increase in cash and cash equivalents

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash Provided by Operating Activities

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.

Net cash provided by operating activities in 2021 totaled $45.0 million compared with $361.3 million in 2020.

The decrease in net cash provided by operating activities in 2021 was primarily due to increased

working capital needs (largely due to a substantial increase in capitalized costs in inventory, as well as the timing of inventory receipts and payments) and a decrease from the prior year’s record net income.

Cash Used in Investing Activities

Net cash used in investing activities totaled $31.8 million in 2021 compared with $30.4 million in 2020.

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.

The comparative increase in cash used in investing activities is primarily due to an increase in cash used

for capital expenditures, partially offset by the proceeds from the sale of property and equipment in the current year.

Cash (Used in) Provided by Financing Activities

Net cash used in financing activities totaled $213.4 million in 2021 as compared with net cash provided by financing activities of $26.4 million in 2020.

The net cash outflow in 2021 is due to $220.0 million paid

for the repurchase of the Company’s shares, partially offset by proceeds from stock option exercises.

Credit Facilities

Our prior credit facilities consisted of a $200.0 million term loan, which was fully paid as of February 2, 2019, and a $100.0 million revolving credit facility, which included a $25.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans.

Loans under the prior credit facilities would have matured January 29, 2021, however, we made voluntary prepayments under the prior term loan facility totaling $48.8 million during 2018, paying the balance in full.

On May 22, 2019, we completed a transaction in which we refinanced our credit facility (the “Credit Facility”).

The Credit Facility provides for a five-year $100.0 million revolving credit facility, which includes a $45.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans (the “Revolving Credit Facility”).

On May 22, 2019, we completed a transaction in which we refinanced our Credit Facility.

The Credit Facility provides for a five-year $100.0 million Revolving Credit Facility, which includes a

$45.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans.

The loans under the Revolving Credit Facility mature on May 22, 2024.

In addition, we may at any time add term loan facilities or additional revolving commitments up to $150.0 million pursuant to terms and conditions set out in the Credit Facility.

In addition, we may at any time add term loan facilities or additional

revolving commitments up to $150.0 million pursuant to terms and conditions set out in the Credit Facility.

The interest rates for the Credit Facility are calculated as follows:

for Base Rate Loans, the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or the Eurodollar Rate plus 1.0%, plus the Applicable Margin, or, for Eurodollar Loans, the Eurodollar Rate plus the Applicable Margin.

The Applicable Margin will vary from 0.00% to 0.50% for a Base Rate Loan and 1.00% to 1.50% for a Eurodollar Loan, based on availability under the Credit Facility.

for Base Rate Loans, the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or the Eurodollar Rate plus

1.0%, plus the Applicable Margin, or, for Eurodollar Loans, the Eurodollar Rate plus the Applicable Margin.

The Applicable Margin will vary from 0.00% to 0.50% for a Base Rate Loan and 1.00% to 1.50% for a Eurodollar Loan, based on availability

under the Credit Facility.

The Eurodollar Rate is subject to a 0% floor.

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.

Under the terms of the Revolving Credit Facility, as of January 29, 2022, 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 29, 2022, we had no outstanding borrowings under the Revolving Credit Facility, with $84.7 million of borrowing availability, outstanding letters of credit commitments of $15.1 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 $0.1 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.

We incurred unused line fees of $0.1 million in each of 2021 and 2020.

with during the term of the agreement.

The financial covenant is a consolidated fixed charge coverage ratio test of at least 1.0 to 1.0 applicable during a covenant period, based on reference to availability.

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 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.

We were in compliance with all

terms of the Credit Facility during 2021.

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

The following table summarizes our material cash requirements over the next several periods from known contractual

obligations, including contractual lease obligations:

(in thousands)

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Operating lease payments exclude $46.7 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

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Purchase obligations represent $12.3 million associated with a construction agreement for the expansion of our York, PA distribution center (entered into on March 7, 2022).

expenditures or capital resources that is material to investors.

Our business is seasonal in nature and demand is generally the highest in our fourth fiscal quarter due to the holiday sales season.

To prepare for the holiday sales season, we must order and keep in stock more merchandise than we carry during other times of the year and generally engage in additional marketing efforts.

We expect inventory levels, along with accounts payable and accrued expenses, to reach their highest levels in our third and fourth fiscal quarters in anticipation of increased net sales during the holiday sales season.

As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year.

Because we offer a broad selection of merchandise at extreme values, we believe we are less impacted than other retailers by economic cycles which correspond with declines in general consumer spending habits and we believe we still benefit from periods of increased consumer spending.

Critical Accounting Policies and Estimates

To prepare for the holiday sales season, we must order and keep in stock more

merchandise than we carry during other times of the year and generally engage in additional marketing efforts.

We expect inventory levels, along with accounts payable and accrued expenses, to reach their highest levels in our third and fourth

fiscal quarters in anticipation of increased net sales during the holiday sales season.

As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital

requirements during the year.

Because we offer a broad selection of merchandise at extreme values, we believe we are generally less impacted than other retailers by economic cycles which correspond with declines in general consumer spending

habits and we believe we still benefit from periods of increased consumer spending.

Critical Accounting Estimates

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

A summary of our significant accounting policies can be found in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

These judgements and estimates are based on historical and other factors believed to be reasonable under the circumstances.

A summary of our

significant accounting policies can be found in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The preparation of these consolidated financial statements requires us to make

judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

These judgments and estimates are based on historical and other factors believed to be reasonable under the

circumstances.

We have identified the policies below as critical to our business operations and understanding of our results of operations.

Inventories are stated at the lower of cost or market determined using the retail inventory method on a first-in, first-out basis.

The cost of inventories includes the merchandise cost, transportation costs, and certain distribution and storage costs.

The cost of inventories includes the merchandise cost,

transportation costs, and certain distribution and storage costs.

Such costs are thereafter expensed as cost of sales upon the sale of the merchandise.

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 profit 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 profit.

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.

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.

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 profit.

Factors considered in the determination of permanent markdowns include uncertainties related to inventory obsolescence, excess inventories, current and anticipated demand, age of the

merchandise and customer preferences.

inventory quantities on-hand.

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.

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.

Similarly, if higher than anticipated levels of shrinkage were to occur, it could have a material effect on our results of operations.

We have not made any material changes in the methodology used to recognize permanent markdowns or inventory shrinkage in the financial periods presented nor do we anticipate material changes in

assumptions we use for permanent markdowns or shrinkage.

As previously stated, however, if our actual experience does not accurately reflect our assumptions and forecasts, we may be exposed to losses or gains that could be material.

a 10% change in our assumptions as of January 29, 2022 would have impacted net income by approximately $0.7 million in 2021.

Goodwill/Intangible Assets

We amortize intangible assets over their useful lives unless we determine such lives to be indefinite.

Goodwill and intangible assets having indefinite useful lives are not amortized to earnings, but instead are subject to annual impairment testing or more frequently if events or circumstances indicate that the value of goodwill or intangible assets having indefinite useful lives might be impaired.

Goodwill and intangible assets having indefinite useful lives are not amortized to

earnings, but instead are subject to annual impairment testing or more frequently if events or circumstances indicate that the value of goodwill or intangible assets having indefinite useful lives might be impaired.

Goodwill and intangible assets having indefinite useful lives are tested for impairment annually in the fiscal month of October.

We have the option to evaluate qualitative factors to determine if it is more likely than not that the carrying amount of our sole reporting unit or our nonamortizing intangible assets (consisting of a tradename) exceed their implied respective fair value and whether it is necessary to perform a quantitative analysis to determine impairment.

As part of this qualitative assessment, we weigh the relative impact of factors that are specific to our sole reporting unit or our nonamortizing intangible assets as well as industry, regulatory and macroeconomic factors that could affect the inputs used to determine the fair value of the assets.

If management determines a quantitative goodwill impairment test is required, or it elects to perform a quantitative test, the test is performed by determining the fair value of our sole reporting unit.

Fair value is determined based upon our public market capitalization.

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.

If management determines a quantitative analysis of intangible assets having indefinite useful lives is required, the test is performed using the discounted cash flow method based on management’s projection of future revenues and an estimated royalty rate to determine the fair value of the asset, specifically, our tradename.

An impairment loss is recognized for any excess of the carrying amount of the asset over the implied fair value of that asset.

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

We have the option to evaluate qualitative factors to determine

if it is more likely than not that the carrying amount of our sole reporting unit or our nonamortizing intangible assets (consisting of a tradename) exceed their implied respective fair value and whether it is necessary to perform a quantitative

analysis to determine impairment.

As part of this qualitative assessment, we weigh the relative impact of factors that are specific to our sole reporting unit or our nonamortizing intangible assets as well as industry, regulatory and

macroeconomic factors that could affect the inputs used to determine the fair value of the assets.

If management determines a quantitative goodwill impairment test is required, or it elects to perform a quantitative test, the test is performed by determining the fair value of our sole

reporting unit.

Fair value is determined based on our public market capitalization.

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.

If management determines a quantitative analysis of intangible assets having indefinite useful lives is required, the test is performed using the discounted cash flow method based on

management’s projection of future revenues and an estimated royalty rate to determine the fair value of the asset, specifically, our tradename.

An impairment loss is recognized for any excess of the carrying amount of the asset over the implied

fair value of that asset.

Our impairment calculations contain uncertainties as they require management to make assumptions and apply judgment to qualitative factors as well as estimate future cash flows by forecasting

financial performance.

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.

Should significant changes in our overall business strategy, future results or economic events cause us to adjust our projected cash flows, future estimates of fair value may not support the carrying amount of these assets.

If actual results prove inconsistent with our assumptions and judgments, we could be exposed to an impairment charge.

Should significant changes in our overall business strategy,

future results or economic events cause us to adjust our projected cash flows, future estimates of fair value may not support the carrying amount of these assets.

If actual results prove inconsistent with our assumptions and judgments, we could

be exposed to an impairment charge.

For 2021 and 2020, we completed an impairment test of our goodwill and determined that no impairment of goodwill existed.

Similarly, for 2021 and 2020, we completed an impairment test of our

tradename and determined that no impairment of the asset existed.

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