Childrens Place, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains or may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company’s strategic initiatives and adjusted net income per diluted share. Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,” “plan,” “project,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company’s current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company’s filings with the Securities and Exchange Commission, including in the “Risk Factors” section of its annual report on Form 10-K for the fiscal year ended January 29, 2022. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company’s business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions, the risks related to the COVID-19 pandemic, including the impact of the COVID-19 pandemic on our business or the economy in general (including decreased customer traffic, schools adopting remote and hybrid learning models, closures of businesses and other activities causing decreased demand for our products and negative impacts on our customers’ spending patterns due to decreased income or actual or perceived wealth, and the impact of legislation related to the COVID-19 pandemic, including any changes to such legislation), the risk that the Company’s strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions and disruptions in the Company’s global supply chain, including resulting from the COVID-19 pandemic or other disease outbreaks, foreign sources of supply in less developed countries, more politically unstable countries, or countries where vendors fail to comply with industry standards or ethical business practices, including the use of forced, indentured or child labor, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion should be read in conjunction with the Company’s unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2022. Terms that are commonly used in our Management’s Discussion and Analysis of Financial Condition and Results of Operations are defined as follows: • 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 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 • Fiscal 2021 – The fifty-two weeks ended January 29, 2022 • SEC — U.S. Securities and Exchange Commission • U.S. GAAP — Generally Accepted Accounting Principles in the United States • FASB — Financial Accounting Standards Board • FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants • AUR — Average unit retail price 19 • Comparable Retail Sales — Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce store, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes. 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. Comparable Retail Sales do not exclude any temporarily closed stores impacted by the COVID-19 pandemic. • Gross Margin — Gross profit expressed as a percentage of net sales • SG&A — Selling, general, and administrative expenses OVERVIEW Our Business 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”, “Sugar & Jade”, and “PJ Place” brand names. 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 In accordance with FASB ASC 280— Segment Reporting , we report segment data based on geography: The Children’s Place U.S. and The Children’s Place International. 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. segment are our U.S. and Puerto Rico-based stores and revenue from our U.S.-based wholesale business. Included in The Children’s Place International segment are our Canadian-based stores, revenue from our Canadian-based wholesale business, as well as revenue from international franchisees. We measure our segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. We periodically review these allocations and adjust them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and we have no customers that individually account for more than 10% of our net sales. COVID-19 Pandemic The COVID-19 pandemic continues to significantly impact regions all around the world, including the United States and Canada. Since March 2020, this has resulted in restrictions of businesses and other activities implemented by national, state, and local authorities and private entities, leading to significant adverse economic conditions and business and lifestyle disruptions, as well as significant volatility in global financial and retail markets. From the onset of the pandemic and as new variants emerged, federal, state, and local governments and health officials worldwide imposed varying degrees of preventative and protective actions in an effort to reduce the spread of the virus. Such factors, among others, have resulted in a significant decline in retail traffic and consumer spending on discretionary items. 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 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. Our U.S. 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. We will continue to assess the pandemic’s impact on our operations and financial situation, and will seek to implement all necessary measures as needed. 20 Recent Developments 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 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. Operating Highlights 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. 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 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. 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. dollars. The table below summarizes the average translation rates that most significantly impact our operating results: Thirteen Weeks Ended Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Average Translation Rates (1) Canadian dollar 0.7525 0.7956 0.7731 0.8015 Hong Kong dollar 0.1274 0.1285 0.1276 0.1287 Chinese renminbi 0.1432 0.1550 0.1497 0.1547 ____________________________________________ (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. dollar equivalent of the respective foreign currency. 21 SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES We describe our significant accounting policies in “Note 1. Basis of Preparation and Summary of Significant Accounting Policies” of the notes to consolidated financial statements included in our most recent Annual Report on Form 10-K for the fiscal year ended January 29, 2022. There have been no significant changes in our accounting policies from those described in our most recent Annual Report on Form 10-K. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses reported during the period. We continuously review the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Consequently, actual results could differ materially from our estimates. Our critical accounting estimates are described under the heading “Critical Accounting Estimates” in Item 7 of our most recent Annual Report on Form 10-K for the fiscal year ended January 29, 2022. Our critical accounting estimates include impairment of long-lived assets, income taxes, stock-based compensation, and inventory valuation. There have been no material changes in these critical accounting estimates from those described in our most recent Annual Report on Form 10-K. Recent Accounting Standards Updates There are no pending accounting standards updates that are currently expected to have a material impact on the Company. RESULTS OF OPERATIONS 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 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 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 Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (exclusive of depreciation and amortization) 65.2 56.1 65.3 57.3 Gross profit 34.8 43.9 34.7 42.7 Selling, general, and administrative expenses 20.9 20.7 26.4 24.0 Depreciation and amortization 2.4 2.5 3.1 3.1 Asset impairment charges — 0.2 0.1 0.1 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 ____________________________________________ Table may not add due to rounding. 22 The following table sets forth net sales by segment, for the periods indicated: Thirteen Weeks Ended Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Net sales: The Children’s Place U.S. $ 457,508 $ 498,836 $ 1,126,692 $ 1,269,196 The Children’s Place International 51,612 59,389 125,663 138,365 Total net sales $ 509,120 $ 558,225 $ 1,252,355 $ 1,407,561 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 $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 $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 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, 23 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 $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. The Children’s Place U.S. 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. Gross profit decreased $166.5 million to $434.4 million during Year-To-Date 2022, compared to $600.9 million during Year-To-Date 2021 . Gross margin deleveraged 800 basis points to 34.7% 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 $1.4 million. 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 and supply chain expenses, 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 $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 $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. Asset impairment charges were $1.3 million during Year-To-Date 2021, inclusive of ROU assets, for two stores. 24 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 $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 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 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 Liquidity Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. 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 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 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. ABL Credit Facility and Term Loan We and certain of our subsidiaries maintain a $350.0 million ABL Credit Facility and a $50.0 million Term Loan with Wells Fargo, Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A., as lenders (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lender and Term Agent. Both the ABL Credit Facility and the Term Loan mature in November 2026, and both of these debt facilities have lower interest rates, reduced reporting requirements, and increased flexibility under the covenants compared to the Previous ABL Credit Facility and Previous Term Loan. 25 The ABL Credit Facility includes a $25.0 million Canadian sublimit and a $50.0 million sublimit for standby and documentary letters of credit. Borrowings outstanding under the ABL Credit Facility bear interest, at our option, at: (i) the prime rate plus a margin of 0.375% or 0.625% based on the amount of our average excess availability under the facility; or (ii) the London InterBank Offered Rate, or “LIBOR”, for an interest period of one, three, or six months, as selected by us, plus a margin of 1.125% or 1.375% based on the amount of our average excess availability under the facility. We are charged an unused line fee of 0.20% on the unused portion of the commitments. Letter of credit fees range from 0.563% to 0.683% for commercial letters of credit and range from 0.625% to 0.875% for standby letters of credit. 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 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. We are not subject to any early termination fees. The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments. These covenants also limit our ability to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions, or to change the nature of our business. Credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of our U.S. and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock. The table below presents the components of our ABL Credit Facility and Previous ABL Credit Facility: October 29, 2022 January 29, 2022 October 30, 2021 (in millions) Credit facility maximum $ 350.0 $ 350.0 $ 360.0 Borrowing base (1) 350.0 279.7 360.0 Outstanding borrowings 265.0 175.3 174.4 Letters of credit outstanding—standby 7.4 7.4 7.4 Utilization of credit facility at end of period 272.4 182.7 181.8 Availability (2) $ 77.6 $ 97.0 $ 178.2 Interest rate at end of period 4.8% 1.6% 3.8% Year-To-Date 2022 Fiscal 2021 Year-To-Date 2021 Average end of day loan balance during the period $ 273.1 $ 187.0 $ 195.0 Highest end of day loan balance during the period $ 297.6 $ 269.7 $ 269.7 Average interest rate 3.0% 3.6% 3.8% ___________________________________________ (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 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 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. 26 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. The Term Loan is guaranteed by each of our subsidiaries that guarantees the ABL Credit Facility and contains substantially the same covenants as provided in the ABL Credit Facility. 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 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 $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 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. 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. 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. Our ability to continue to meet our capital requirements in Fiscal 2022 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility. Cash flows generated from operations depends on our ability to achieve our financial plans. We believe that our existing cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility will be sufficient to fund our capital and other cash requirements for the foreseeable future.