What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-30 compared with 2023-06-07 · 137 added, 102 removed, 152 unchanged (61% 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:

• First Quarter 2023 — The thirteen weeks ended April 29, 2023

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

• Second Quarter 2023 — The thirteen weeks ended July 29, 2023

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

• Year-To-Date 2023 — The twenty-six weeks ended July 29, 2023

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

• Fiscal 2023 – The fifty-three weeks ending February 3, 2024

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• SG&A — Selling, general, and administrative expenses

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 April 29, 2023, we had 599 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , www.sugarandjade.com, and www.pjplace.com , and had 212 international points of distribution with our five franchise partners in 15 countries.

We are an omni-channel children’s specialty portfolio of brands with an industry-leading digital-first operating model.

We design, contract to manufacture, and sell fashionable, high quality apparel, accessories and footwear predominantly at value prices, primarily under our proprietary brands:

“The Children’s Place”, “Gymboree”, “Sugar & Jade”, and “PJ Place”.

As of July 29, 2023, we had 596 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , www.sugarandjade.com, and www.pjplace.com , social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest, and 221 international points of distribution with our six franchise partners in 16 countries.

Segment Reporting

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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.

Net sales to external customers are derived from merchandise sales, and we have one wholesale customer that individually accounted for more than 10% of our net sales for the Second Quarter 2023.

COVID-19 Pandemic

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

Inflationary pressures have also adversely affected our core customer, resulting in a decrease in discretionary apparel purchases during the First Quarter 2023.

Inflationary pressures have also adversely affected our core customer, resulting in a decrease in discretionary apparel purchases during Year-To-Date 2023.

We expect these macroeconomic conditions, including but not limited to increased product input costs, transportation costs and inflationary pressures, to continue to impact Fiscal 2023.

On May 26, 2023, the Company proactively issued a voluntary termination notice for its corporate office building lease, to accelerate the termination date to June 1, 2024, and paid a termination fee of approximately $4 million.

This termination was executed in order to capitalize on the prevailing tenant-favorable market conditions, as compared to the existing lease escalations contained in the Company’s agreement which was signed in 2009.

The lease termination will reduce the Company’s right-of-use (“ROU”) assets and operating lease liabilities balance by approximately $17 million.

On June 5, 2023, we entered into the Fifth Amendment to our credit agreement, dated as of May 9, 2019, with the lenders party thereto (as amended from time to time, the “Credit Agreement”), pursuant to which, among other things, (i) PNC Bank, National Association (“PNC Bank”) was added as a new lender, (ii) our ABL Credit Facility was increased to $445.0 million, (iii) the London InterBank Offered Rate (“LIBOR”) was replaced by the Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark, and (iv) the pricing grid for applicable margins on borrowings was updated.

All other material terms and conditions of the Credit Agreement remained unchanged.

In support of our ongoing structural transformation from a legacy store operating model to a digital-first retailer, during the Second Quarter 2023, we voluntarily entered into an early termination of our corporate office lease and implemented a workforce reduction.

On May 26, 2023, we proactively accelerated the termination of our corporate office lease to capitalize on the prevailing tenant-favorable market conditions.

That lease will now expire in May 2024.

On June 28, 2023, we announced that we implemented a 17% reduction in the number of our salaried workforce, the substantial majority of whom were located at our corporate offices in Secaucus, New Jersey, with the balance at other domestic and international locations.

The voluntary lease termination, combined with the workforce reduction, will enable us to reduce our current space configuration and capitalize on lower prevailing market rates than would have been applicable under our existing lease, which included escalations in occupancy costs, and did not expire until 2029.

In connection with the voluntary early termination of our corporate office lease and workforce reduction, we incurred non-operating charges of $10.6 million in restructuring costs during the Second Quarter 2023 and Year-To-Date 2023 on a pretax basis, consisting of employee severance and benefit costs associated with the workforce reduction, in addition to the lease termination payment, accelerated depreciation associated with the early termination of our corporate office lease, and professional fees.

Operating Highlights

Net sales decreased $40.8 million, or 11.2%, to $321.6 million during the First Quarter 2023 from $362.4 million during the First Quarter 2022, primarily due to the combination of the ongoing macroeconomic conditions and the resulting outsized pressure on our customer.

Comparable retail sales decreased 8.2% for the First Quarter 2023.

Gross profit decreased $45.4 million to $96.5 million or 30.0% of net sales during the First Quarter 2023 from $141.9 million or 39.2% of net sales during the First Quarter 2022.

The 920 basis point decrease in gross margin was primarily the result of higher input costs, including cotton and other supply chain costs such as inbound transportation expenses, all of which are embedded in our inventory, and the deleverage of fixed expenses resulting from the decline in net sales.

Operating income (loss) decreased $49.4 million to a loss of $30.1 million during the First Quarter 2023 compared to income of $19.3 million during the First Quarter 2022.

Net sales decreased $35.3 million, or 9.3%, to $345.6 million during the Second Quarter 2023 from $380.9 million during the Second Quarter 2022, 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, and the impact of permanent store closures.

Comparable retail sales decreased 9.0% for the Second Quarter 2023.

Gross profit decreased $27.7 million to $87.8 million or 25.4% of net sales during the Second Quarter 2023 from $115.5 million or 30.3% of net sales during the Second Quarter 2022.

The 490 basis point decrease in gross margin was primarily the result of lower merchandise margins due to the accelerated liquidation of seasonal inventory, the impact of a significantly larger wholesale business which operates at a lower gross margin rate but is accretive to operating margin, higher input and supply chain costs, and the deleveraging of fixed expenses resulting from the decline in net sales.

Operatin g loss increased $(23.1) million to a loss of $(36.9) million during the Second Quarter 2023 compared to $(13.8) million during the Second Quarter 2022.

Operating loss deleveraged 710 basis points to (10.7)% of net sales.

Net income (loss) decreased $48.6 million to a loss of $28.8 million, or $(2.33) per diluted share, during the First Quarter 2023 compared to income of $19.8 million, or $1.43 per diluted share, during the First Quarter 2022, due to the factors discussed above.

While we continue to face a challenging macroeconomic environment, including increases in the cost of goods and services necessary to produce, import, and distribute our products, including cotton and other inputs, 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, alternative channels of distribution, and fleet optimization.

Net loss increased $(22.1) million to $(35.4) million, or $(2.82) per diluted share, during the Second Quarter 2023 compared to $(13.3) million, or $(1.01) per diluted share, during the Second Quarter 2022, due to the factors discussed above.

While we continue to face a challenging macroeconomic environment, including increases in the cost of goods and services necessary to produce, import, and distribute our products, including cotton and other inputs, as well as labor, transportation, fuel and energy, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, alternative channels of distribution, and fleet optimization.

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

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

We have closed 600 stores, including 14 stores closed during the First Quarter 2023, since the announcement of our fleet optimization initiative in 2013.

We have closed 603 stores, including three stores closed during the Second Quarter 2023, since the announcement of our fleet optimization initiative in 2013.

We are currently targeting approximately 80 - 100 store closures in Fiscal 2023, which will leave us with approximately 500 stores entering 2024.

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In November 2021, our Board of Directors authorized a $250.0 million share repurchase program (the “Share Repurchase Program”).

During the First Quarter 2023, we repurchased approximately 0.2 million shares of our common stock for $6.1 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards.

As of April 29, 2023, there was $158.3 million remaining availability under the Share Repurchase Program.

During the Second Quarter 2023, we repurchased shares of our common stock for $0.9 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards.

As of July 29, 2023, there was $157.4 million remaining availability under the Share Repurchase Program.

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

2023 April 30,

Thirteen Weeks Ended Twenty-six Weeks Ended

2023 July 30,

2022 July 29,

2023 July 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 500 basis points to 35.1% of Net sales during the First Quarter 2023 from 30.1% during the First Quarter 2022.

For example, SG&A increased 230 basis points to 32.4% of Net sales during the Second Quarter 2023 from 30.1% during the Second Quarter 2022.

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., “deleveraging”), we have less efficiently utilized the investments we have made in our business.

Thirteen Weeks Ended

2023 April 30,

Thirteen Weeks Ended Twenty-six Weeks Ended

2023 July 30,

2022 July 29,

2023 July 30,

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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

Thirteen Weeks Ended

2023 April 30,

Thirteen Weeks Ended Twenty-six Weeks Ended

2023 July 30,

2022 July 29,

2023 July 30,

(in thousands)

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Total net sales $ 345,599 $ 380,885 $ 667,239 $ 743,235

First Quarter 2023 Compared to First Quarter 2022

Net sales decreased $40.8 million or 11.2%, to $321.6 million during the First Quarter 2023 from $362.4 million during the First Quarter 2022, primarily due to the combination of the ongoing macroeconomic conditions and the resulting outsized pressure on our consumer.

Second Quarter 2023 Compared to Second Quarter 2022

Net sales decreased $35.3 million or 9.3%, to $345.6 million during the Second Quarter 2023 from $380.9 million during the Second Quarter 2022, 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, and the impact of permanent store closures.

Comparable retail sales decreased 9.0% for the quarter.

The Children’s Place U.S.

net sales decreased $34.5 million or 10.5%, to $293.5 million in the First Quarter 2023, compared to $328.0 million in the First Quarter 2022.

This decrease was primarily due to the combination of the ongoing macroeconomic conditions and the resulting outsized pressure on our consumer.

The Children’s Place International net sales decreased $6.2 million or 18.1%, to $28.2 million in the First Quarter 2023, compared to $34.4 million in the First Quarter 2022.

This decrease was primarily due to the ongoing macroeconomic conditions and the resulting outsized pressure on our consumer.

Total e-commerce sales, which include postage and handling, were 46.4% of net retail sales and 42.4% of net sales during the First Quarter 2023, compared to 44.5% and 42.1%, respectively, during the First Quarter 2022.

Gross profit decreased $45.4 million to $96.5 million or 30.0% in the First Quarter 2023, compared to $141.9 million or 39.2% in the First Quarter 2022.

net sales decreased $28.0 million or 8.2%, to $313.2 million in the Second Quarter 2023, compared to $341.2 million in the Second Quarter 2022.

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, and the impact of permanent store closures.

The Children’s Place International net sales decreased $7.3 million or 18.4%, to $32.4 million in the Second Quarter 2023, compared to $39.7 million in the Second Quarter 2022.

This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer.

Total e-commerce sales, which include postage and handling, were 50.8% of net retail sales and 44.3% of net sales during the Second Quarter 2023, compared to 47.0% and 43.2%, respectively, during the Second Quarter 2022.

Gross profit decreased $27.7 million to $87.8 million in the Second Quarter 2023, compared to $115.5 million in the Second Quarter 2022.

Gross margin deleveraged 490 basis points to 25.4% of net sales in the Second Quarter 2023.

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 shipping and 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 $3.9 million to $112.9 million during the First Quarter 2023 from $109.0 million during the First Quarter 2022.

SG&A deleveraged 500 basis points to 35.1% of net sales in the First Quarter 2023.

The First Quarter 2023 results included incremental operating expenses, including contract termination costs of $2.4 million, fleet optimization costs of $1.1 million and restructuring costs of $0.3 million.

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.

Excluding the impact of these incremental charges, SG&A deleveraged 400 basis points to 33.9% 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 $11.8 million during the First Quarter 2023, compared to $13.6 million during the First Quarter 2022.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 66 stores during the past twelve months.

Asset impairment charges were $1.8 million during the First Quarter 2023, inclusive of ROU assets.

These charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections.

There were no asset impairment charges recorded during the First Quarter 2022.

Operating income (loss) decreased $49.4 million to a loss of $30.1 million during the First Quarter 2023, compared to income of $19.3 million during the First Quarter 2022.

Operating loss deleveraged 1,460 basis points to (9.3)% of net sales in the First Quarter 2023.

The First Quarter 2023 results included incremental operating expenses of $5.5 million, as described above, and included all asset impairment charges recorded, compared to $1.4 million in the First Quarter 2022.

Selling, general, and administrative expenses decreased $2.7 million to $112.0 million during the Second Quarter 2023 from $114.7 million during the Second Quarter 2022.

SG&A deleveraged 230 basis points to 32.4% of net sales in the Second Quarter 2023.

The Second Quarter 2023 results included incremental operating expenses, including restructuring costs of $9.7 million, contract termination fees of $0.5 million, and fleet optimization costs of $0.1 million.

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.

Excluding the impact of these incremental charges, SG&A leveraged 40 basis points to 29.4% of net sales, primarily as a result of reductions in performance-based equity compensation expense, store expenses, and home office payroll, partially offset by the deleveraging of fixed expenses resulting from the decline in net sales and higher planned marketing spend.

Depreciation and amortization was $12.0 million during the Second Quarter 2023, compared to $13.2 million during the Second Quarter 2022.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 62 stores during the past twelve months, partially offset by the accelerated depreciation related to the voluntary early termination of the corporate office lease.

Asset impairment charges were $0.8 million during the Second Quarter 2023, inclusive of ROU assets.

These charges were relate d to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections.

A sset impairment charges were $1.4 million during the Second Quarter 2022, inclusive or ROU assets.

Operating loss increased $(23.1) million to a loss of $(36.9) million during the Second Quarter 2023, compared to $(13.8) million during the Second Quarter 2022.

Operating loss deleveraged 710 basis points to (10.7)% of net sales in the Second Quarter 2023.

The Second Quarter 2023 results included incremental operating expenses of $12.0 million, as described above, and included all asset impairment charges recorded, compared to $2.1 million in the Second Quarter 2022.

Excluding the impact of these incremental charges, operating loss deleveraged 410 basis points to (7.2)% of net sales.

Net interest expense was $5.9 million during the First Quarter 2023, compared to $1.7 million during the First Quarter 2022.

The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the ABL Credit Facility and Term Loan due to continued market-based rate increases.

Benefit for income taxes was $7.1 million during the First Quarter 2023, compared to $2.3 million during the First Quarter 2022.

Our effective tax rate was a benefit of 19.8% and 13.0% in the First Quarter 2023 and First Quarter 2022, respectiv ely.

The increase in our effective tax rate for the First Quarter 2023 compared to the First Quarter 2022 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 which was nonrecurring and the First Quarter 2023 pretax loss as compared to pretax income in the First Quarter 2022.

Net income (loss) decreased $48.6 million to a loss of $28.8 million, or $(2.33) per diluted share during the First Quarter 2023, compared to income of $19.8 million, or $1.43 per diluted share during the First Quarter 2022, due to the factors discussed above .

Net interest expense was $7.6 million during the Second Quarter 2023, compared to $2.6 million during the Second Quarter 2022.

The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the our revolving credit facility and term loan due to continued market-based rate increases.

Benefit for income taxes was $9.2 million during the Second Quarter 2023, compared to $3.1 million during the Second Quarter 2022.

Our effective tax rate was a benefit of 20.7% and 19.0% in the Second Quarter 2023 and Second Quarter 2022, respectiv ely.

The increase in our effective tax rate and income tax benefit for the Second Quarter 2023 compared to the Second Quarter 2022 was primarily driven by the increase in the Second Quarter 2023 pretax loss compared to the pretax loss in the Second Quarter 2022 and the impact of nonrecurring items recognized in the Second Quarter 2023.

Net los s increased $(22.1) million to $(35.4) million, or $(2.82) per diluted share during the Second Quarter 2023, compared to $(13.3) million, or $(1.01) per diluted share during the Second Quarter 2022, due to the factors discussed above .

Year-To-Date 2023 Compared to Year-To-Date 2022

Net sales decreased $76.0 million or 10.2%, to $667.2 million during Year-To-Date 2023 from $743.2 million during Year-To-Date 2022, 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, and the impact of permanent store closures.

Comparable retail sales decreased 8.6% during Year-To-Date 2023.

The Children’s Place U.S.

net sales decreased $62.5 million or 9.3%, to $606.7 million during Year-To-Date 2023, compared to $669.2 million during Year-To-Date 2022.

The Children’ s Place International net sales decreased $13.5 million or 18.3%, to $60.5 million during Year-To-Date 2023, compared to $74.1 million during Year-To-Date 2022.

This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer.

Total e-commerce sales, which include postage and handling, were 48.0% of net retail sales and 42.9% of net sales during Year-To-Date 2023, compared to 45.8% and 42.6%, respectively, during Year-To-Date 2022.

Gross profit decreased $73.2 million to $184.2 million during Year-To-Date 2023, compared to $257.4 million during Year-To-Date 2022 .

Gross margin deleveraged 700 basis points to 27.6% of net sales during Year-To-Date 2023.

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 of a closed store.

Excluding the impact of these charges, gross margin deleveraged 690 basis points to 27.6% of net sales.

The decrease was primarily the result of lower merchandise margins due to the accelerated liquidation of seasonal inventory, the impact of a significantly larger wholesale business which operates at a lower gross margin rate but is accretive to operating margin, higher input and supply chain costs, and the deleveraging 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 $1.2 million to $224.9 million during Year-To-Date 2023 from $223.7 million dur ing Year-To-Date 2022.

SG&A deleveraged 360 basis points to 33.7% of net sales during Year-To-Date 2023.

The Year-To-Date 2023 results included incremental operating expenses, including restructuring costs of $9.9 million, contract termination fees of $3.0 million, and fleet optimization costs of $1.2 million.

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.

Excluding the impact of these incremental charges, SG&A deleveraged 180 basis points to 31.6% of net sales, primarily as a result of the deleveraging of fixed expenses resulting from the decline in net sales as well as higher planned marketing spend, partially offset by reductions in performance-based equity compensation expense, store expenses, and home office payroll.

Depreciation and amortization was $23.8 million during Year-To-Date 2023, compared to $26.9 million during Year-To-Date 2022.

Asset impairment charges were $2.5 million during Year-To-Date 2023, inclusive of ROU assets.

Asset impairment charges were $1.4 million during Year-To-Date 2022, inclusive of ROU assets.

Operating income (loss) decreased $(72.4) million to a loss of $(67.0) million during Year-To-Date 2023 from income of $5.4 million during Year-To-Date 2022.

Operating margin deleveraged 1,070 basis points to (10.0)% of net sales during Year-To-Date 2023.

The Year-To-Date 2023 results included incremental operating expenses of $17.5 million, compared to $3.5 million during Year-To-Date 2022.

Excluding the impact of these incremental charges, operating margin deleveraged 860 basis points to (7.4%) of net sales.

Net interest expense was $13.5 million during Year-To-Date 2023, compared to $4.3 million during Year-To-Date 2022.

The increase was primarily driven by higher borrowings and higher average interest rates associated with our revolving credit facility and term loan due to continued market-based rate increases.

Benefit for income taxes was $16.4 million during Year-To-Date 2023 compared to $5.4 million during Year-To-Date 2022.

Our effective tax rate was 20.3% and (477.6)% during Year-To-Date 2023 and Year-To-Date 2022, respectively.

The increase in our effective tax rate for Year-To-Date 2023 was primarily driven by the Year-To-Date 2023 pretax loss as compared to near break-even pretax income for Year-To-Date 2022 and the release of a reserve in the first quarter of Fiscal 2022 of $6.4 million for unrecognized tax benefits as a result of a settlement with a taxing authority which was nonrecurring, partially offset by the impact of nonrecurring items recognized in the Second Quarter 2023.

Net income (loss) decreased $(70.7) million to a loss of $(64.2) million, or $(5.16) per diluted share during Year-To-Date 2023, compared to income of $6.5 million, or $0.48 per diluted share during Year-To-Date 2022 , due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

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Currently, o ur primary uses of cash are for working capital requirements, which are principally inventory purchases, and the financing of capital projects.

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 the Fourth Amendment to our Credit Agreement, with the lenders party thereto.

The refinanced debt consists of a $350.0 million asset-based revolving credit facility (the “ABL Credit Facility”) and a $50.0 million term loan (the “Term Loan”).

On November 16, 2021, we completed the refinancing of our previous $360.0 million asset-based revolving credit facility and our previous $80.0 million 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 (as amended from time to time, the “Credit Agreement”).

The refinanced debt consisted of a $350.0 million asset-based revolving credit facility (the “ABL Credit Facility”) and a $50.0 million term loan (the “Term Loan”).

Subsequently, on June 5, 2023, we entered into a fifth amendment to our Credit Agreement, pursuant to which, among other things, our ABL Credit Facility was increased to $445.0 million.

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

Our working capital deficit increased $82.5 million to $112.7 million at April 29, 2023, compared to $30.2 million at April 30, 2022, primarily reflecting a decrease in our inventory balance and cash on hand, and an increase in borrowings on our ABL Credit Facility, partially offset by a decrease in our accounts payable balance.

During the First Quarter 2023, we used $6.1 million of cash to repurchase shares, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards.

At April 29, 2023, we had $300.8 million of outstanding borrowings under our $350.0 million ABL Credit Facility.

At April 29, 2023, we had total liquidity of $25.0 million, including $6.8 million of availability under our ABL Credit Facility (after factoring in our excess availability requirement), and $18.2 million of cash on hand.

In addition, at April 29, 2023, 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.

On June 5, 2023, we entered into the Fifth Amendment to our Credit Agreement, dated as of May 9, 2019, with the lenders party thereto, pursuant to which, among other things, our ABL Credit Facility was increased to $445.0 million.

(See “Recent Developments” for further information.) As a result of the amendment, our liquidity increased by approximately $85 million (after factoring in our excess availability requirement), based upon our borrowing base availability as of June 5, 2023.

Our working capital deficit increased $101.5 million to $146.1 million at July 29, 2023, compared to $44.6 million at July 30, 2022, primarily reflecting a decrease in our inventory balance from accelerated liquidation of seasonal inventory and cash on hand, and an increase in borrowings on our ABL Credit Facility, partially offset by a decrease in our accounts payable balance.

At July 29, 2023, we had $347.5 million of outstanding borrowings under our $445.0 million ABL Credit Facility and we had total liquidity of $64.4 million, including $45.6 million of availability under our ABL Credit Facility (after factoring in our excess availability requirement), and $18.8 million of cash on hand.

In addition, at July 29, 2023, 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.

ABL Credit Facility and Term Loan

We and certain of our subsidiaries maintain the $350.0 million ABL Credit Facility and the $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.

We and certain of our subsidiaries maintain the $445.0 million ABL Credit Facility and the $50.0 million Term Loan with Wells Fargo, Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., JPMorgan Chase Bank, N.A., and PNC Bank, National Association, 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.

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;

(ii) the LIBOR rate, 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 tour average excess availability under the facility.

For the First Quarter 2023 and First Quarter 2022, we recognized $4.7 million and $1.6 million, respectively, in interest expense related to the ABL Credit Facility.

Under the ABL Credit Facility, based on the amount of our average daily excess availability under the facility, borrowings outstanding bear interest, at our option, at:

(i) the prime rate per annum, plus a margin of 1.250% or 1.500%;

(ii) the Secured Overnight Financing Rate (“SOFR”) per annum, plus a margin of 2.000% or 2.250%.

We are charged a fee of 0.200% on the unused portion of the commitments.

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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.

Once we achieve a consolidated EBITDA of at least $200.0 million across four consecutive fiscal quarters, and based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility would bear interest, at our option, at:

(i) the prime rate per annum, plus a margin of 0.625% or 0.875%;

(ii) the SOFR per annum, plus a margin of 1.375% or 1.625%.

Letter of credit fees would range from 0.688% to 0.813% for commercial letters of credit and would range from 0.875% to 1.125% for standby letters of credit.

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

For the Second Quarter 2023 and Year-To-Date 2023, we recognized $6.1 million and $10.8 million, respectively, in interest expense related to the ABL Credit Facility.

For the Second Quarter 2022 and Year-To-Date 2022, we recognized $2.4 million and $3.9 million, respectively, in interest expense related to the ABL Credit Facility.

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, and a fixed-charge coverage ratio covenant, which only becomes effective in the event that borrowings and other uses of credit exceed $315.0 million.

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.

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2023 January 28,

2023 April 30,

2023 July 30,

(in millions)

Total borrowing base availability $ 466.8 $ 404.2 $ 478.0

Credit facility maximum 350.0 350.0 350.0

Credit facility maximum, net of the excess availability requirement, as applicable 400.5 315.0 350.0

Maximum borrowing availability (1)

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Interest rate at end of period 8.1% 5.9% 3.4%

First Quarter 2023 Fiscal 2022 First Quarter 2022

Year-To-Date 2023 Fiscal 2022 Year-To-Date 2022

(in millions)

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____________________________________________

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

(2) The sub-limit availability for the letters of credit was $42.6 million at April 29, 2023, January 28, 2023, and April 30, 2022.

(3) The ABL Credit Facility contains an excess availability requirement which would effectively reduce this amount to $6.8 million as of April 29, 2023.

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.

(1) Lower of the credit facility maximum net of the excess availability requirement, and the total borrowing base availability.

(2) The sub-limit availability for the letters of credit was $42.6 million at July 29, 2023, January 28, 2023, and July 30, 2022.

The Term Loan bears interest, payable monthly, at (a) the SOFR per annum plus 2.750% for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.000% 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 2023 and First Quarter 2022, we recognized $0.9 million and $0.4 million, respectively, in interest expense related to the Term Loan.

For the Second Quarter 2023 and Year-To-Date 2023, we recognized $1.0 million, and $1.9 million, respectively, 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 29, 2023, unamortized deferred financing costs amounted to $2.2 million, of which $1.9 million related to our ABL Credit Facility.

Fifth Amendment to the Credit Agreement

On June 5, 2023, we entered into the Fifth Amendment to our Credit Agreement, dated as of May 9, 2019, with the lenders party thereto, pursuant to which, among other things, (i) PNC Bank was added as a new lender, (ii) our ABL Credit Facility was increased to $445.0 million, (iii) LIBOR was replaced by SOFR as the interest rate benchmark, and (iv) the pricing grid for applicable margins on borrowings was updated.

Under the amended ABL Credit Facility, based on the amount of our average daily excess availability under the facility, borrowings outstanding bear interest, at our option, at:

(i) the prime rate per annum, plus a margin of 1.25% or 1.50%;

(ii) the SOFR rate per annum, plus a margin of 2.00% or 2.25%.

Letter of credit fees range from 1.000% to 1.125% for commercial letters of credit and range from 1.500% to 1.750% for standby letters of credit.

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

(i) the prime rate per annum, plus a margin of 0.625% or 0.875%;

(ii) the SOFR rate per annum, plus a margin of 1.375% or 1.625%.

Letter of credit fees would range from 0.688% to 0.813% for commercial letters of credit and would range from 0.875% to 1.125% for standby letters of credit.

Letter of credit fees are determined based on the amount of the Company’s average daily excess availability under the facility.

The Term Loan bears interest, payable monthly, at (a) the SOFR rate per annum plus 2.75% for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.00% for any portion that is a base rate loan.

All other material terms and conditions of the Credit Agreement remain unchanged.

As of July 29, 2023, 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 provided by operating activities was $5.1 million during the First Quarter 2023, compared to cash used in operating activities of $18.8 million during the First Quarter 2022.

Cash provided by operating activities during the First Quarter 2023 was primarily the result of a lower inventory balance, partially offset by losses incurred during the period and other planned changes in working capital.

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 investing activities was $11.0 million during the First Quarter 2023 and First Quarter 2022, primarily driven by capital expenditures.

Cash provided by financing activities was $7.8 million during the First Quarter 2023, compared to $33.9 million during the First Quarter 2022.

The decrease primarily resulted from lower net borrowings under our ABL Credit Facility, and lower repurchases of our common stock during the First Quarter 2023 compared to the First Quarter 2022.

Cash used in operating activities was $32.7 million during Year-To-Date 2023, compared to $52.8 million during Year-To-Date 2022.

Cash used in operating activities during Year-To-Date 2023 was primarily the result of a lower inventory balance and losses incurred during the period, partially offset by other planned changes in working capital.

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 investing activities was $18.3 million during Year-To-Date 2023, compared to $19.1 million during Year-To-Date 2022, primarily driven by the timing of capital expenditures.

Cash provided by financing activities was $53.0 million during Year-To-Date 2023, compared to $45.7 million during Year-To-Date 2022.

The increase primarily resulted from net borrowings under our ABL Credit Facility, offset by lower repurchases of our common stock during Year-To-Date 2023 compared to Year-To-Date 2022.

We anticipate total capital expenditures to be in the range of $20 million to $25 million in Fiscal 2023, primarily to support our distribution center expansion, digital initiatives, and enhancement of our fulfillment capabilities, compared to $45.6 million in Fiscal 2022.

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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