What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-30 compared with 2022-08-26 · 98 added, 106 removed, 185 unchanged (52% 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

• Third Quarter 2022 — The thirteen weeks ended October 29, 2022

• Third Quarter 2021 — The thirteen weeks ended October 30, 2021

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

• Year-To-Date 2022 — The thirty-nine weeks ended October 29, 2022

• Year-To-Date 2021 — The thirty-nine weeks ended October 30, 2021

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

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We are the largest pure-play children’s specialty apparel retailer in North America.

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 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.

As of October 29, 2022, we had 658 stores across North America, our e-commerce business at www.childrensplace.com , www.gymboree.com, www.sugarandjade.com , and www.pjplace.com , and had 213 international points of distribution with our five franchise partners in 16 countries, and in October 2022, we launched the PJ Place e-commerce website at www.pjplace.com .

Segment Reporting

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and The Children’s Place International.

Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com .

Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, www.sugarandjade.com , and www.pjplace.com .

Included in The Children’s Place U.S.

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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 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.

As of the Third 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 October 29, 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.

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

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

Net sales decreased $49.1 million, or 8.8%, to $509.1 million during the Third Quarter 2022 from $558.2 million during the Third Quarter 2021, primarily due to the impact of permanent store closures, a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and lapping the impact of the enhanced child tax credit and a record Back to School season last August.

Comparable retail sales decreased 10.0% for the Third Quarter 2022.

Gross profit decreased $67.9 million to $176.9 million during the Third Quarter 2022 from $244.8 million during the Third Quarter 2021.

Gross margin deleveraged 910 basis points to 34.8% of net sales in the Third Quarter 2022.

The decrease was primarily the result of higher supply chain costs, including inbound freight, outbound freight, and distribution costs, and the deleverage of fixed expenses resulting from the decline in net sales.

Operating income decreased $56.0 million to $57.8 million during the Third Quarter 2022 from $113.8 million during the Third Quarter 2021.

Operating margin deleveraged 900 basis points to 11.4% of net sales.

Net income decreased $36.0 million to $42.9 million, or $3.26 per diluted share, during the Third Quarter 2022, compared to $78.9 million, or $5.30 per diluted share, during the Third Quarter 2021.

During the Third Quarter 2022, we repurchased approximately 0.4 million shares of our common stock for $17.8 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 October 29, 2022, there was $178.4 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.

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

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.

We have closed 541 stores since the announcement of our fleet optimization initiative in 2013.

We are planning to close a total of approximately 40 to 50 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.

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

Thirteen Weeks Ended Twenty-six Weeks Ended

2022 July 31,

2021 July 30,

2022 July 31,

Thirteen Weeks Ended Thirty-nine Weeks Ended

2022 October 30,

2021 October 29,

2022 October 30,

Average Translation Rates (1)

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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 217 basis points to 30.1% of net sales during the Second Quarter 2022 from 27.9% during the Second Quarter 2021.

For example, SG&A increased 20 basis points to 20.9% of net sales during the Third Quarter 2022 from 20.7% during the Third 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 Twenty-six Weeks Ended

2022 July 31,

2021 July 30,

2022 July 31,

Thirteen Weeks Ended Thirty-nine Weeks Ended

2022 October 30,

2021 October 29,

2022 October 30,

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Asset impairment charges — 0.2 0.1 0.1

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

Operating income 11.4 20.4 5.1 15.5

Income before provision for income taxes 10.6 19.7 4.4 14.5

Provision for income taxes 2.2 5.6 0.5 4.0

Net income 8.4 % 14.1 % 3.9 % 10.5 %

Number of Company stores, end of period 658 703 658 703

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

Thirteen Weeks Ended Twenty-six Weeks Ended

2022 July 31,

2021 July 30,

2022 July 31,

Thirteen Weeks Ended Thirty-nine Weeks Ended

2022 October 30,

2021 October 29,

2022 October 30,

(in thousands)

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Total net sales $ 509,120 $ 558,225 $ 1,252,355 $ 1,407,561

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.

Third Quarter 2022 Compared to Third Quarter 2021

Net sales decreased $49.1 million or 8.8%, to $509.1 million during the Third Quarter 2022 from $558.2 million during the Third Quarter 2021, primarily due to the impact of permanent store closures, a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and lapping the impact of the enhanced child tax credit and a record Back to School season last August.

Comparable retail sales decreased 10.0% for the Third Quarter 2022.

The Children’s Place U.S.

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.

net sales decreased $41.3 million or 8.3%, to $457.5 million in the Third Quarter 2022, compared to $498.8 million in the Third Quarter 2021.

This decrease was primarily the impact of permanent store closures, a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and lapping the impact of the enhanced child tax credit and a record Back to School season last August .

The Children’s Place International net sales decreased $7.8 million or 13.1%, to $51.6 million in the Third Quarter 2022, compared to $59.4 million in the Third Quarter 2021.

This decrease was primarily driven by the impact of unprecedented inflation on our customer and permanent store closures.

Total e-commerce sales, which include postage and handling, were 50.2% of net retail sales and 46.0% of net sales during the Third Quarter 2022, compared to 47.5% and 45.4%, respectively, during the Third Quarter 2021.

Gross profit decreased $67.9 million to $176.9 million in the Third Quarter 2022, compared to $244.8 million in the Third Quarter 2021.

Gross margin deleveraged 910 basis points to 34.8% of net sales in the Third Quarter 2022.

The Third 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.

The decrease in gross margin was primarily the result of higher supply chain costs, including inbound freight, outbound freight, and distribution costs, and the deleverage of fixed expenses resulting from the decline in net sales.

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 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.

Selling, general, and administrative expenses decreased $9.0 million to $106.6 million during the Third Quarter 2022 from $115.6 million during the Third Quarter 2021.

SG&A deleveraged 20 basis points to 20.9% of net sales in the Third Quarter 2022.

The Third Quarter 2022 results included incremental operating expenses, including fleet optimization costs of $0.2 million, restructuring costs of $1.0 million, and professional and consulting fees of $0.1 million.

The Third Quarter 2021 results included incremental operating expenses, primarily personal protective equipment for our associates, of $0.3 million, restructuring costs of $0.1 million, and fleet optimization costs of $0.3 million.

Excluding the impact of these incremental charges, SG&A deleveraged 10 basis points to 20.7% 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, partially offset by lower incentive compensation expenses and a reduction in discretionary spend.

Asset impairment charges were zero during the Third Quarter 2022, compared to $1.3 million during the Third Quarter 2021, inclusive of ROU assets, primarily related to two stores.

Depreciation and amortization was $12.5 million during the Third Quarter 2022, compared to $14.2 million during the Third Quarter 2021.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 45 stores during the past twelve months.

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 .

Operating income decreased $56.0 million to $57.8 million during the Third Quarter 2022 from $113.8 million during the Third Quarter 2021.

Operating margin deleveraged 900 basis points to 11.4% of net sales in the Third Quarter 2022.

The Third Quarter 2022 and Third Quarter 2021 results included incremental operating expenses of $1.3 million and $2.7 million,

respectively, as described above.

Excluding the impact of these incremental charges, operating margin deleveraged 930 basis points to 11.6% of net sales.

Interest expense, net was $3.8 million during the Third Quarter 2022, compared to $4.0 million during the Third 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 Third Quarter 2022.

Provision for income taxes was $11.2 million during the Third Quarter 2022, compared to $31.0 million during the Third Quarter 2021.

Our effective tax rate was a provision of 20.7% and 28.2% in the Third Quarter 2022 and the Third Quarter 2021, respectively.

The decrease in our effective tax rate for the Third Quarter 2022 compared to the Third Quarter 2021 was primarily due to a decrease in the forecasted effective income tax rate resulting from a favorable mix of income on forecasted earnings compared to the prior year.

Net income decreased $36.0 million to $42.9 million, or $3.26 per diluted share during the Third Quarter 2022, compared to $78.9 million, or $5.30 per diluted share during the Third 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 .

Net sales decreased $155.2 million or 11.0%, to $1.252 billion during Year-To-Date 2022 from $1.408 billion 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 11.7% 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.

net sales decreased $142.5 million or 11.2%, to $1.127 billion during Year-To-Date 2022, compared to $1.269 billion during Year-To-Date 2021.

This decrease was 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.

The Children’ s Place International net sales decreased $12.7 million or 9.2%, to $125.7 million during Year-To-Date 2022, compared to $138.4 million during Year-To-Date 2021.

This decrease was primarily driven by the impact of a slowdown in consumer demand, resulting from the unprecedented inflation impacting our customer and permanent store closures, partially offset by the favorable impact of stores that were temporarily closed in Canada during Year-To-Date 2021.

Total e-commerce sales, which include postage and handling, were 47.5% of net retail sales and 44.0% of net sales during Year-To-Date 2022, compared to 45.7% and 43.7%, respectively, during Year-To-Date 2021.

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Excluding the impact of these charges, gross margin deleveraged 820 basis points to 34.6% 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.

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 and supply chain expenses, 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.

Selling, general, and administrative expenses decreased $7.4 million to $330.5 million during Year-To-Date 2022 from $337.9 million dur ing Year-To-Date 2021.

SG&A deleveraged 240 basis points to 26.4% of net sales during Year-To-Date 2022.

The Year-To-Date 2022 results included incremental operating expenses, including fleet optimization costs of $1.0 million, professional and consulting fees of $0.7 million, a provision for foreign settlement of $0.4 million, and restructuring costs of $1.2 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.

The Year-To-Date 2021 results included incremental operating expenses, including personal protective equipment and incentive pay for our associates, of $1.6 million, restructuring costs of $1.2 million, fleet optimization costs of $1.3 million, and contract termination costs of $0.8 million.

Excluding the impact of these incremental charges, SG&A deleveraged 240 basis points to 26.1% 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.

Asset impairment charges were $1.3 million during Year-To-Date 2021, inclusive of ROU assets, for two stores.

Depreciation and amortization was $39.3 million during Year-To-Date 2022, compared to $44.2 million during Year-To-Date 2021.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 45 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.

Operating income decreased $154.3 million to $63.3 million during Year-To-Date 2022 from $217.6 million during Year-To-Date 2021.

Operating margin deleveraged 1,040 basis points to 5.1% of net sales during Year-To-Date 2022.

The Year-To-Date 2022 results included incremental operating expenses of $4.8 million, compared to $9.8 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.

Excluding the impact of these incremental charges, operating margin deleveraged 1,080 basis points to 5.4% of net sales.

Interest expense, net was $8.1 million during Year-To-Date 2022, compared to $13.1 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.

Provision for income taxes was $5.8 million during Year-To-Date 2022 compared to $56.3 million during Year-To-Date 2021.

Our effective tax rate was a provision of 10.5% and 27.5% during Year-To-Date 2022 and Year-To-Date 2021, respectively.

The decrease in our effective income tax rate for Year-To-Date 2022 was primarily due to a decrease in the forecasted effective income tax rate resulting from a favorable mix of income on forecasted earnings compared to the prior year and 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 $98.8 million to $49.4 million, or $3.68 per diluted share during Year-To-Date 2022, compared to $148.2 million, or $9.89 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, 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.

The new debt consists of a revolving credit facility with $350.0 million of availability and a $50.0 million term loan.

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 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 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”).

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

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.

Our working capital deficit increased $1.8 million to a deficit of $18.9 million at October 29, 2022, compared to a deficit of $17.1 million at October 30, 2021, primarily reflecting higher outstanding borrowings and payables, and a decrease in our cash balance, partially offset by a higher inventory balance, reflecting higher average unit costs, higher inbound transportation costs, and amounts on hand to support growth initiatives.

During Year-To-Date 2022, we used $75.7 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.

At October 29, 2022, we had $265.0 million of outstanding borrowings and $77.6 million available for borrowing under our ABL Credit Facility.

At October 29, 2022, we had $7.4 million of outstanding letters of credit with $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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2022 January 29,

2022 July 31,

2022 October 30,

(in millions)

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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 July 30, 2022, January 29, 2022, and July 31, 2021.

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

For the Third Quarter 2022 and Year-To-Date 2022, we recognized $0.6 million and $1.5 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 July 30, 2022, unamortized deferred financing costs amounted to $2.6 million, of which $2.3 million related to our ABL Credit Facility.

As of October 29, 2022, unamortized deferred financing costs amounted to $2.4 million, of which $2.2 million related to our ABL Credit Facility.

Cash Flows and Capital Expenditures

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 was $17.0 million during Year-To-Date 2022, compared to cash generated from operating activities of $67.4 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 $15.7 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 generated from operating activities during Year-To-Date 2021 was primarily the result of earnings generated during the period, partially offset by the repayment 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.

Cash used in investing activities was $31.6 million during Year-To-Date 2022, compared to $22.0 million during Year-To-Date 2021.

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

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

The increase was driven by capital expenditures primarily related to digital and supply chain fulfillment initiatives.

Cash provided by financing activities was $14.0 million during Year-To-Date 2022, compared to cash used in financing activities of $41.9 million during Year-To-Date 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 Year-To-Date 2022 compared to Year-To-Date 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