What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-26 compared with 2022-06-01 · 134 added, 79 removed, 157 unchanged (58% of the section changed)

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Terms that are commonly used in our Management’s Discussion and Analysis of Financial Condition and Results of Operations are defined as follows:

• Second Quarter 2022 — The thirteen weeks ended July 30, 2022

• Second Quarter 2021 — The thirteen weeks ended July 31, 2021

• First Quarter 2022 — The thirteen weeks ended April 30, 2022

• First Quarter 2021 — The thirteen weeks ended May 1, 2021

• Fiscal 2022 – The 52 weeks ending January 28, 2023

• Fiscal 2021 – The 52 weeks ended January 29, 2022

• Year-To-Date 2022 — The twenty-six weeks ended July 30, 2022

• Year-To-Date 2021 — The twenty-six weeks ended July 31, 2021

• Fiscal 2022 – The fifty-two weeks ending January 28, 2023

• Fiscal 2021 – The fifty-two weeks ended January 29, 2022

Securities and Exchange Commission

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A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred.

However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is

reopened for a full fiscal month.

However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is reopened for a full fiscal month.

Comparable Retail Sales do not exclude any temporarily closed stores impacted by the COVID-19 pandemic.

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We design, contract to manufacture, sell at retail and wholesale, and license to sell, trend right, high quality merchandise predominantly at value prices, primarily under our proprietary “The Children’s Place”, “Place”, “Baby Place”, “Gymboree”, and “Sugar & Jade” brand names.

As of April 30, 2022, we had 665 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , and www.sugarandjade.com, and had 212 international points of distribution with our six franchise partners in 16 countries.

As of July 30, 2022, we had 658 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , and www.sugarandjade.com, and had 212 international points of distribution with our six franchise partners in 16 countries.

Segment Reporting

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In addition, we have experienced, and will likely continue to experience, disruptions in our global supply chain, which have caused delays in the production and transportation of our products, which we are seeking to mitigate, including through shifting production schedules.

As of the First Quarter 2022, the progress achieved nationwide in addressing the effects of the pandemic has allowed most businesses and shopping malls to reopen and resume operations, with some malls continuing to restrict hours of operation and the number of people permitted in stores.

Our distribution centers remained open and operating during the pandemic to support our retail stores and e-commerce business, and as of April 30, 2022, all of our stores are open to the public in the U.S., Canada, and Puerto Rico.

As of the Second Quarter 2022, the progress achieved nationwide in addressing the effects of the pandemic has allowed businesses and shopping malls to reopen and resume operations.

Our distribution centers remained open and operating during the pandemic to support our retail stores and e-commerce business, and as of July 30, 2022, all of our stores are open to the public in the U.S., Canada, and Puerto Rico.

office and certain of our foreign offices are also open in a hybrid work environment, while we continue to monitor the developments of the pandemic for our other foreign offices.

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Recent macroeconomic events have increased the cost of goods and services necessary to produce and distribute our products, including cotton and other materials used in production, as well as labor, transportation, fuel and energy.

We expect these increased product input and transportation costs to continue to impact the remainder of 2022.

lending group led by an affiliate of Wells Fargo Bank, National Association (“Wells Fargo”) by entering into a Fourth amendment to our Credit Agreement, dated as of May 9, 2019, with the lenders party thereto (the “Fourth Amendment”).

The same inflationary pressures have adversely affected our core customer, resulting in a decrease in apparel purchases during the Second Quarter 2022.

We expect these increased product input costs, transportation costs, and inflationary pressures to continue to impact the remainder of 2022 and into 2023.

On November 16, 2021, we completed the refinancing of our previous $360.0 million asset-based revolving credit facility (the “Previous ABL Credit Facility”) and our previous $80.0 million term loan (the “Previous Term Loan”) with a new lending group led by an affiliate of Wells Fargo Bank, National Association (“Wells Fargo”) by entering into a Fourth amendment to our Credit Agreement, dated as of May 9, 2019, with the lenders party thereto (the “Fourth Amendment”).

The new debt consists of a revolving credit facility with $350.0 million of availability (the “ABL Credit Facility”) and a $50.0 million term loan (the “Term Loan”), both with five year maturities, lower interest rates, reduced reporting requirements, and increased flexibility under the covenants.

Operating Highlights

Net sales decreased $73.1 million, or 16.8%, to $362.4 million during the First Quarter 2022 from $435.5 million during the First Quarter 2021, primarily due to lapping the COVID-19 stimulus relief program last year, the impact of unprecedented inflation on our customers, prolonged unseasonably cold temperatures through the end of the First Quarter 2022 in our major markets, and the impact of permanent store closures.

Comparable retail sales decreased 16.9% for the First Quarter 2022.

Gross profit decreased $46.3 million to $141.9 million during the First Quarter 2022 from $188.2 million during the First Quarter 2021.

Gross margin deleveraged 406 basis points to 39.2% of net sales in the First Quarter 2022.

The decrease was primarily the result of higher inbound transportation expenses and the deleverage of fixed expenses resulting from the decline in net sales, partially offset by higher merchandise margins in our brick-and-mortar retail and e-commerce channels, driven by AUR increases in both channels.

Operating income decreased $46.6 million to $19.3 million during the First Quarter 2022 from $65.9 million during the First Quarter 2021.

Operating income deleveraged 982 basis points to 5.3% of net sales.

Net income decreased $25.4 million to $19.8 million, or $1.43 per diluted share, during the First Quarter 2022 compared to $45.2 million, or $3.01 per diluted share, during the First Quarter 2021, due to the factors discussed above.

During the First Quarter 2022, we repurchased approximately 0.7 million shares of our common stock for $38.8 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards and shares acquired in the open market.

As of April 30, 2022, there was $218.6 million remaining under our share repurchase program.

Although we are facing challenging macroeconomic events, including increases in the cost of goods and services necessary to produce and distribute our products, including cotton and other materials used in production, as well as labor, transportation, fuel and energy and continuing uncertainty regarding the future impact of the COVID-19 pandemic, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, and fleet optimization.

The transformation of our digital capabilities continues to expand given a completely redesigned responsive site and mobile application, providing a rich online shopping experience geared toward the needs of our “on-the-go” mobile customers, expanded customer personalization, to drive sales, loyalty and retention, and the ability to have our entire store fleet equipped with ship-from-store capabilities.

Also, in response to increased digital demand, including as a result of the COVID-19 pandemic, we have increased and will continue to monitor the utilization of our third-party logistics provider to further support both our U.S.

and Canadian e-commerce operations.

Net sales decreased $33.0 million, or 8.0%, to $380.9 million during the Second Quarter 2022 from $413.9 million during the Second Quarter 2021, primarily due to the impact of a slowdown in consumer demand, resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, lapping the impact of the enhanced child tax credit last July, and the impact of permanent store closures.

Comparable retail sales decreased 8.7% for the Second Quarter 2022.

Gross profit decreased $52.4 million to $115.5 million during the Second Quarter 2022 from $167.9 million during the Second Quarter 2021.

Gross margin deleveraged 1,025 basis points to 30.3% of net sales in the Second Quarter 2022.

The decrease was primarily the result of lower merchandise margins, due to unplanned AUR pressure resulting from an abrupt slowdown in consumer demand, coupled with an increase in promotional activity across the sector, higher domestic supply chain costs, increased penetration of our wholesale business, which operates at a lower gross margin, higher inbound transportation expenses, and the deleverage of fixed expenses resulting from the decline in net sales.

Operating income (loss) decreased $51.6 million to a loss of $13.8 million during the Second Quarter 2022 from income of $37.8 million during the Second Quarter 2021.

Operating income (loss) deleveraged 1,278 basis points to (3.6%) of net sales.

Net income (loss) decreased $37.4 million to a loss of $13.3 million, or $(1.01) per diluted share, during the Second Quarter 2022 compared to income of $24.1 million, or $1.60 per diluted share, during the Second Quarter 2021, due to the factors discussed above.

During the Second Quarter 2022, we repurchased approximately 0.5 million shares of our common stock for $22.6 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards and shares acquired in the open market.

As of July 30, 2022, there was $196.1 million remaining under our share repurchase program.

While we continue to face a challenging macroeconomic environment, including increases in the cost of goods and services necessary to produce and distribute our products, including cotton and other materials used in production, as well as labor, transportation, fuel and energy and continuing uncertainty regarding the future impact of the COVID-19 pandemic, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, and fleet optimization.

Digital remains our top priority and we continue to expand our digital capabilities.

We have migrated to a new responsive site and mobile application, and we have expanded our partnerships with our outside providers to help us monitor and reallocate our marketing budgets in a more efficient and timely manner to drive acquisition, retention and reactivation.

As our digital business continues to expand, we continue to strengthen our partnership with our third party logistics provider to help provide our customer with a best-in-class digital experience.

We continue to evaluate our store fleet through our fleet optimization initiative.

We have closed 534 stores, including 7 stores closed during the First Quarter 2022, since the announcement of our fleet optimization initiative in 2013.

We have closed 541 stores, including 7 stores closed during the Second Quarter 2022, since the announcement of our fleet optimization initiative in 2013.

We are planning to close a total of approximately 40 stores this year.

With over 75% of our store fleet coming up for lease action in the next 24 months, we continue to maintain meaningful financial flexibility in our lease portfolio.

We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S.

The table below summarizes the average translation rates that most significantly impact our operating results:

Thirteen Weeks Ended

Thirteen Weeks Ended Twenty-six Weeks Ended

2022 July 31,

2021 July 30,

2022 July 31,

Average Translation Rates (1)

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____________________________________________

(1) The average translation rates are the average of the monthly translation rates used during each period to translate the respective income statements.

(1) The average translation rates are the average of the monthly translation rates used during each period to translate the respective statement of operations.

Each rate represents the U.S.

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Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales.

The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of net sales.

The following table sets forth, for the periods indicated, selected Statement of Operations data expressed as a percentage of net sales.

We primarily evaluate the results of our operations as a percentage of net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of net sales (i.e., “basis points”).

For example, SG&A increased 558 basis points to 30.1% of net sales during the First Quarter 2022 from 24.5% during the First Quarter 2021.

For example, SG&A increased 217 basis points to 30.1% of net sales during the Second Quarter 2022 from 27.9% during the Second Quarter 2021.

Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business.

Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “de-leveraging”), we have less efficiently utilized the investments we have made in our business.

Thirteen Weeks Ended

Thirteen Weeks Ended Twenty-six Weeks Ended

2022 July 31,

2021 July 30,

2022 July 31,

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Depreciation and amortization 3.5 3.5 3.6 3.5

Operating income 5.3 15.1

Income before provision (benefit) for income taxes 4.8 14.1

Asset impairment charges 0.4 — 0.2 —

Operating income (loss) (3.6) 9.1 0.7 12.2

Income (loss) before provision (benefit) for income taxes (4.3) 8.0 0.2 11.1

Provision (benefit) for income taxes (0.8) 2.2 (0.7) 3.0

Net income 5.5 % 10.4 %

Net income (loss) (3.5 %) 5.8 % 0.9 % 8.2 %

Number of Company stores, end of period 658 708 658 708

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The following table sets forth net sales by segment, for the periods indicated:

Thirteen Weeks Ended

Thirteen Weeks Ended Twenty-six Weeks Ended

2022 July 31,

2021 July 30,

2022 July 31,

(in thousands)

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Total net sales $ 380,885 $ 413,855 $ 743,235 $ 849,336

First Quarter 2022 Compared to First Quarter 2021

Net sales decreased $73.1 million or 16.8%, to $362.4 million during the First Quarter 2022 from $435.5 million during the First Quarter 2021, primarily due to lapping the COVID-19 stimulus relief program last year, the impact of unprecedented inflation on our customers, prolonged unseasonably cold temperatures through the end of the First Quarter 2022 in our major markets, and the impact of permanent store closures.

Second Quarter 2022 Compared to Second Quarter 2021

Net sales decreased $33.0 million or 8.0%, to $380.9 million during the Second Quarter 2022 from $413.9 million during the Second Quarter 2021, primarily due to the impact of a slowdown in consumer demand, resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, lapping the impact of the enhanced child tax credit last July, and the impact of permanent store closures.

Comparable retail sales decreased 8.7% for the quarter.

The Children’s Place U.S.

net sales decreased $71.7 million or 17.9%, to $328.0 million in the First Quarter 2022, compared to $399.7 million in the First Quarter 2021.

This decrease was primarily due to lapping the COVID-19 stimulus relief program last year, the impact of unprecedented inflation on our customers, prolonged unseasonably cold temperatures through the end of the First Quarter 2022 in our major markets, and the impact of permanent store closures .

The Children’s Place International net sales decreased $1.4 million or 4.0%, to $34.4 million in the First Quarter 2022, compared to $35.8 million in the First Quarter 2021.

This decrease was primarily driven by the impact of unprecedented inflation on our customers and permanent store closures, partially offset by the favorable impact of stores that were temporarily closed in Canada during the First Quarter 2021 .

Total e-commerce sales, which include postage and handling, were 42.1% of net sales during the First Quarter 2022, compared to 42.6% during the First Quarter 2021.

Gross profit decreased $46.3 million to $141.9 million in the First Quarter 2022, compared to $188.2 million in the First Quarter 2021.

Gross margin deleveraged 406 basis points to 39.2% of net sales in the First Quarter 2022.

The First Quarter 2021 results included incremental expenses related to the COVID-19 pandemic, including personal protective equipment and incentive pay for our associates of $1.0 million.

net sales decreased $31.1 million or 8.4%, to $341.2 million in the Second Quarter 2022, compared to $372.3 million in the Second Quarter 2021.

This decrease was primarily due to the impact of a slowdown in consumer demand, resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, lapping the impact of the enhanced child tax credit last July, and the impact of permanent store closures .

The Children’s Place International net sales decreased $1.9 million or 4.5%, to $39.7 million in the Second Quarter 2022, compared to $41.5 million in the Second Quarter 2021.

This decrease was primarily driven by the impact of unprecedented inflation on our customer and permanent store closures, partially offset by the favorable impact of stores that were temporarily closed in Canada during the Second Quarter 2021.

Total e-commerce sales, which include postage and handling, were 47.0% of net retail sales and 43.2% of net sales during the Second Quarter 2022, compared to 44.5% and 42.7%, respectively, during the Second Quarter 2021.

Gross profit decreased $52.4 million to $115.5 million in the Second Quarter 2022, compared to $167.9 million in the Second Quarter 2021.

Gross margin deleveraged 1,025 basis points to 30.3% of net sales in the Second Quarter 2022.

The Second Quarter 2022 results included a net credit of $0.6 million primarily related to the write-off of the lease liability and related right-of-use asset of a closed store.

The Second Quarter 2021 results included incremental expenses related to the COVID-19 pandemic, including personal protective equipment and incentive pay for our associates of $0.2 million.

Excluding the impact of these charges, gross margin deleveraged 1,046 basis points to 30.2% of net sales.

The decrease was primarily the result of higher inbound transportation expenses, higher occupancy expenses and the deleverage of fixed expenses resulting from the decline in net sales, partially offset by higher merchandise margins in our brick-and-mortar retail and e-commerce channels, driven by AUR increases in both channels.

Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in material costs.

These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.

Selling, general, and administrative expenses increased $2.3 million to $109.0 million during the First Quarter 2022 from $106.7 million during the First Quarter 2021.

SG&A deleveraged 558 basis points to 30.1% of net sales in the First Quarter 2022.

The First Quarter 2022 results included incremental operating expenses, including professional and consulting fees of $0.5 million and fleet optimization costs of $0.3 million.

The First Quarter 2021 results included incremental operating expenses, primarily personal protective equipment for our associates, of $0.6 million, fleet optimization costs of $0.8 million, contract termination costs of $0.8 million, and restructuring costs, primarily related to severance costs for corporate associates, of $0.5 million.

Excluding the impact of these incremental charges, SG&A deleveraged 595 basis points to 29.9% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales as well as planned higher marketing spend.

Depreciation and amortization was $13.6 million during the First Quarter 2022, compared to $15.6 million during the First Quarter 2021.

Selling, general, and administrative expenses decreased $0.9 million to $114.7 million during the Second Quarter 2022 from $115.6 million during the Second Quarter 2021.

SG&A deleveraged 217 basis points to 30.1% of net sales in the Second Quarter 2022.

The Second Quarter 2022 results included incremental operating expenses, including fleet optimization costs of $0.4 million, a provision for foreign settlement of $0.4 million, restructuring costs of $0.2 million, and professional and consulting fees of $0.1 million.

The Second Quarter 2021 results included incremental operating expenses, primarily personal protective equipment for our associates, of $0.7 million, restructuring costs, primarily related to severance costs for corporate associates, of $0.5 million, and fleet optimization costs of $0.3 million.

Excluding the impact of these incremental charges, SG&A deleveraged 223 basis points to 29.8% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales and higher planned marketing spend.

Asset impairment charges were $1.4 million during the Second Quarter 2022, inclusive of ROU assets, primarily related to four stores.

There were no asset impairment charges during the Second Quarter 2021.

Depreciation and amortization was $13.2 million during the Second Quarter 2022, compared to $14.4 million during the Second Quarter 2021.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 50 stores during the past twelve months.

Operating income decreased $46.6 million to $19.3 million during the First Quarter 2022 from $65.9 million during the First Quarter 2021.

Operating income deleveraged 982 basis points to 5.3% of net sales in the First Quarter 2022.

The First Quarter 2022 results included incremental operating expenses of $1.4 million, compared to $4.8 million in the First Quarter 2021.

Operating income (loss) decreased $51.6 million to a loss of $13.8 million during the Second Quarter 2022 from income of $37.8 million during the Second Quarter 2021.

Operating income (loss) deleveraged 1,278 basis points to (3.6%) of net sales in the Second Quarter 2022.

The Second Quarter 2022 and Second Quarter 2021 results included incremental operating expenses of $2.1 million and $2.2 million, respectively, as described above.

Excluding the impact of these incremental charges, operating income (loss) deleveraged 1,277 basis points to (3.1%) of net sales.

Interest expense, net was $2.6 million during the Second Quarter 2022, compared to $4.7 million during the Second Quarter 2021.

The decrease was primarily driven by lower interest rates due to our refinancing in November 2021 and a lower Term Loan balance in the Second Quarter 2022.

Provision (benefit) for income taxes was a benefit of $3.1 million during the Second Quarter 2022, compared to a provision of $9.1 million during the Second Quarter 2021.

Our effective tax rate was a benefit of 19.0% and a provision of 27.3% in the Second Quarter 2022 and the Second Quarter 2021, respectively.

The decrease in our effective tax rate for the Second Quarter 2022 compared to the Second Quarter 2021 was primarily due to a favorable mix of income on forecasted earnings compared to the prior year and the impact of discrete items recognized in the Second Quarter 2022.

Net income (loss) decreased $37.4 million to a loss of $13.3 million, or $(1.01) per diluted share during the Second Quarter 2022, compared to income of $24.1 million, or $1.60 per diluted share during the Second Quarter 2021, due to the factors discussed above .

Year-To-Date 2022 Compared to Year-To-Date 2021

Net sales decreased $106.1 million or 12.5%, to $743.2 million during Year-To-Date 2022 from $849.3 million during Year-To-Date 2021, primarily due to lapping the COVID-19 stimulus relief program in 2021, the impact of a slowdown in consumer demand, resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, and the impact of permanent store closures .

Comparable retail sales decreased 12.8% during Year-To-Date 2022 .

We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory.

Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales.

The Children’s Place U.S.

net sales decreased $102.8 million or 13.3%, to $669.2 million during Year-To-Date 2022, compared to $772.0 million during Year-To-Date 2021.

The Children’ s Place International net sales decreased $3.3 million or 4.3%, to $74.1 million during Year-To-Date 2022, compared to $77.4 million during Year-To-Date 2021.

Total e-commerce sales, which include postage and handling, were 45.8% of net retail sales and 42.6% of net sales during Year-To-Date 2022, compared to 44.5% and 42.6%, respectively, during Year-To-Date 2021.

Gross profit decreased $98.7 million to $257.4 million during Year-To-Date 2022, compared to $356.1 million during Year-To-Date 2021 .

Gross margin deleveraged 730 basis points to 34.6% of net sales during Year-To-Date 2022.

The Year-To-Date 2022 results included a net credit of $0.6 million primarily related to the write-off of the lease liability and related right-of-use asset of a closed store.

The Year-To-Date 2021 results included incremental expenses related to the COVID-19 pandemic, including personal protective equipment and incentive pay for our associates, of $1.2 million.

Excluding the impact of these charges, gross margin deleveraged 752 basis points to 34.5% of net sales.

The decrease was primarily the result of lower merchandise margins due to unplanned AUR pressure resulting from an abrupt slowdown in consumer demand, coupled with an increase in promotional activity across the sector, higher inbound transportation expenses, increased penetration of our wholesale business, which operates at a lower gross margin, and the deleverage of fixed expenses resulting from the decline in net sales.

These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.

Selling, general, and administrative expenses increased $1.3 million to $223.7 million during Year-To-Date 2022 from $222.4 million dur ing Year-To-Date 2021.

SG&A deleveraged 392 basis points to 30.1% of net sales during Year-To-Date 2022.

The Year-To-Date 2022 results included incremental operating expenses, including fleet optimization costs of $0.8 million, professional and consulting fees of $0.6 million, a provision for foreign settlement of $0.4 million, and restructuring costs of $0.2 million.

The Year-To-Date 2021 results included incremental operating expenses, including personal protective equipment and incentive pay for our associates, of approximately $1.2 million, restructuring costs, primarily related to severance costs for corporate and store associates, of approximately $1.1 million, fleet optimization costs of $1.0 million, and contract termination costs of $0.8 million.

Excluding the impact of these incremental charges, SG&A deleveraged 414 basis points to 29.8% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales as well as higher planned marketing spend.

Asset impairment charges were $1.4 million during Year-To-Date 2022, inclusive of ROU assets, primarily related to four stores.

There were no asset impairment charges during Year-To-Date 2021.

Depreciation and amortization was $26.9 million during Year-To-Date 2022, compared to $30.0 million during Year-To-Date 2021.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 50 stores during the past twelve months.

Operating income decreased $98.4 million to $5.4 million during the Year-To-Date 2022 from $103.8 million during the Year-To-Date 2021.

Operating income deleveraged 1,149 basis points to 0.7% of net sales during Year-To-Date 2022.

The Year-To-Date 2022 results included incremental operating expenses of $3.5 million, compared to $7.1 million during Year-To-Date 2021.

Excluding the impact of these incremental charges, operating income deleveraged 1,185 basis points to 1.2%of net sales.

Interest expense, net was $1.7 million during the First Quarter 2022, compared to $4.4 million during the First Quarter 2021.

The decrease was primarily driven by lower interest rates due to our recent refinancing and a lower Term Loan balance in the First Quarter 2022 .

Provision (benefit) for income taxes was a benefit of $2.3 million during the First Quarter 2022, compared to a provision of $16.3 million during the First Quarter 2021.

Our effective tax rate was a benefit of 13.0% and a provision of 26.5% in the First Quarter 2022 and the First Quarter 2021, respectiv ely.

The decrease in our effective tax rate for the First Quarter 2022 compared to the First Quarter 2021 was primarily driven by the release of a reserve for unrecognized tax benefits as a result of a settlement with a taxing authority in the First Quarter 2022.

Net income decreased $25.4 million to $19.8 million, or $1.43 per diluted share during the First Quarter 2022, compared to $45.2 million, or $3.01 per diluted share during the First Quarter 2021, due to the factors discussed above .

Interest expense, net was $4.3 million during Year-To-Date 2022, compared to $9.1 million during Year-To-Date 2021.

The decrease was primarily driven by lower interest rates due to our refinancing in November 2021 and a lower Term Loan balance during Year-To-Date 2022.

Provision (benefit) for income taxes was a benefit of $5.4 million during Year-To-Date 2022 compared to a provision of $25.3 million during Year-To-Date 2021.

Our effective tax rate was a benefit of 477.6% and a provision of 26.8% during Year-To-Date 2022 and Year-To-Date 2021, respectively.

The effective income tax rate for Year-To-Date 2022 reflected the release of a reserve for unrecognized tax benefits as a result of a settlement with a taxing authority in the First Quarter 2022.

Net income (loss) decreased $62.8 million to $6.5 million, or $0.48 per diluted share during Year-To-Date 2022, compared to $69.3 million, or $4.61 per diluted share during Year-To-Date 2021 , due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases.

However, during Fiscal 2022, we anticipate our working capital needs will remain elevated in the second fiscal quarter, in part due to actions taken in an effort to mitigate the global supply chain disruption.

Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the financing of capital projects, including investments in new systems, and for our capital return program (other than payment of dividends, which continue to be temporarily suspended due to the COVID-19 pandemic).

However, our working capital needs were elevated in the Second Quarter 2022, in part due to the actions taken in an effort to mitigate the global supply chain disruptions.

Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the financing of capital projects, including investments in new systems, and for our

capital return program (other than payment of dividends, which continue to be temporarily suspended due to the COVID-19 pandemic).

On November 16, 2021, we completed the refinancing of the Previous ABL Credit Facility and Previous Term Loan with a new lending group led by an affiliate of Wells Fargo by entering into the Fourth Amendment to our Credit Agreement with the lenders party thereto.

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(See “ABL Credit Facility and Term Loan” below for further information).

Our working capital deficit improved $66.8 million to a deficit of $30.2 million at April 30, 2022, compared to a deficit of $97.0 million at May 1, 2021, primarily reflecting operating results over the past twelve months, as well as lower current lease liabilities.

During the First Quarter 2022, we used $40.4 million of cash to repurchase shares, inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards.

At April 30, 2022, we had $249.5 million of outstanding borrowings and $93.1 million available for borrowing under our ABL Credit Facility.

In addition, at April 30, 2022, we had $7.4 million of outstanding letters of credit with an additional $42.6 million available for issuing letters of credit under our ABL Credit Facility.

Our working capital deficit improved $18.5 million to a deficit of $44.6 million at July 30, 2022, compared to a deficit of $63.1 million at July 31, 2021, primarily reflecting operating results over the past twelve months, as well as a higher inventory balance, reflecting higher average unit costs, higher inbound transportation costs, amounts on hand to support growth initiatives and elevated in-transit times, partially offset by higher payables and amounts outstanding under our ABL Credit Facility.

During Year-To-Date 2022, we used $62.9 million of cash to repurchase shares, inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards.

At July 30, 2022, we had $283.9 million of outstanding borrowings and $58.7 million available for borrowing under our ABL Credit Facility.

In addition, at July 30, 2022, we had $7.4 million of outstanding letters of credit with an additional $42.6 million available for issuing letters of credit under our ABL Credit Facility.

We expect to be able to meet our working capital and capital expenditure requirements for the foreseeable future by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility.

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Letter of credit fees are determined based on the amount of our average excess availability under the facility.

The amount available for

loans and letters of credit under the ABL Credit Facility is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves.

The amount available for loans and letters of credit under the ABL Credit Facility is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves.

The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods.

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2022 January 29,

2022 July 31,

(in millions)

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Interest rate at end of period 3.4% 1.6% 3.8%

First Quarter 2022 Fiscal 2021 First Quarter 2021

Year-To-Date 2022 Fiscal 2021 Year-To-Date 2021

Average end of day loan balance during the period $ 268.2 $ 187.0 $ 213.5

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(1) Lower of the credit facility maximum or the total borrowing base collateral.

(2) The sub-limit availability for the letters of credit was $42.6 million at April 30, 2022, January 29, 2022, and May 1, 2021.

(2) The sub-limit availability for the letters of credit was $42.6 million at July 30, 2022, January 29, 2022, and July 31, 2021.

The Term Loan bears interest, payable monthly, at (a) the LIBOR Rate plus 2.50% for any portion that is a LIBOR loan, or (b) the base rate plus 1.75% for any portion that is a base rate loan.

The Term Loan is pre-payable at any time without penalty, and does not require amortization.

For the First Quarter 2022, we recognized $0.4 million in interest expense related to the Term Loan.

For the Second Quarter 2022 and Year-To-Date 2022, we recognized $0.5 million and $0.8 million, respectively, in interest expense related to the Term Loan.

The Term Loan is secured by a first priority security interest in our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the collateral securing the ABL Credit Facility on a first-priority basis.

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Both the ABL Credit Facility and the Term Loan contain customary events of default, which include (subject in certain cases to customary grace and cure periods), nonpayment of principal or interest, breach of covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization.

As of April 30, 2022, unamortized deferred financing costs amounted to $2.7 million, of which $2.4 million related to our ABL Credit Facility.

As of July 30, 2022, unamortized deferred financing costs amounted to $2.6 million, of which $2.3 million related to our ABL Credit Facility.

Cash Flows and Capital Expenditures

Cash used in operating activities was $18.8 million during the First Quarter 2022, compared to $16.6 million during the First Quarter 2021.

Cash used in operating activities during the First Quarter 2022 was primarily the result of the timing of inventory receipts as a result of global supply chain disruptions, partially offset by earnings generated during the period, the receipt of a net income tax refund of $21.6 million, as well as other planned changes in working capital.

Cash used in operating activities during the First Quarter 2021 was primarily the result of the payment of certain suspended 2020 rents, net of abatements, as well as other planned changes in working capital, which brought our vendor payables in line with historical payment terms, partially offset by earnings generated during the period.

Cash used in investing activities was $11.0 million during the First Quarter 2022, compared to $6.7 million during the First Quarter 2021.

Cash used in operating activities was $52.8 million during Year-To-Date 2022, compared to $3.3 million during Year-To-Date 2021.

Cash used in operating activities during Year-To-Date 2022 was primarily the result of the timing of inventory receipts as a result of global supply chain disruptions, partially offset by earnings generated during the period, the receipt of a net income tax refund of $16.4 million, as well as other planned changes in working capital.

Cash used in operating activities during Year-To-Date 2021 was primarily the result of the payment of certain suspended 2020 rents, net of abatements, as well as other planned changes in working capital, which brought our vendor payables in line with historical payment terms, partially offset by earnings generated during the period.

Cash used in investing activities was $19.1 million during Year-To-Date 2022, compared to $13.5 million during Year-To-Date 2021.

This change was primarily driven by the timing of capital expenditures.

Cash provided by financing activities was $33.9 million during the First Quarter 2022, compared to $24.5 million during the First Quarter 2021.

The increase primarily resulted from additional net borrowings under our asset-based revolving credit facility, partially offset by increased repurchases of our common stock during the First Quarter 2022 compared to the First Quarter 2021.

Cash provided by financing activities was $45.7 million during Year-To-Date 2022, compared to $16.2 million during Year-To-Date 2021.

We anticipate total capital expenditures to approximate $45 million in Fiscal 2022, primarily related to digital and supply chain fulfillment initiatives, compared to $29.3 million in Fiscal 2021.

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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-Q

Item 2. Management’s Discussion and Analysis