What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-04 compared with 2023-08-30 · 111 added, 95 removed, 194 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 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

• Third Quarter 2023 — The thirteen weeks ended October 28, 2023

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

• Year-To-Date 2023 — The thirty-nine weeks ended October 28, 2023

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

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

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“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.

As of October 28, 2023, we had 591 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 226 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 one wholesale customer that individually accounted for more than 10% of our net sales for the Second Quarter 2023.

Net sales to external customers are derived from merchandise sales, and we have one U.S.

wholesale customer that individually accounted for more than 10% of our net sales, amounting to $54.5 million and $116.0 million for the Third Quarter 2023 and Year-To-Date 2023, respectively, and accounts for a majority of our accounts receivable.

COVID-19 Pandemic

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Recent Developments

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.

Recent macroeconomic conditions have increased the cost of goods and services necessary to produce, import, and distribute our products, including increases in wage rates.

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.

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.

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

As previously disclosed in our Form 8-K dated October 30, 2023, we became aware of an inadvertent calculation error contained in the June, July and August 2023 borrowing base certificates provided to the lenders under our credit agreement, all of which have since been remedied.

While the lenders determined the calculation error resulted in certain technical defaults under the credit agreement (including us not being in compliance with certain debt covenants), we and the lenders entered into a Waiver and Amendment Agreement (the “Waiver Agreement”) on October 24, 2023, pursuant to which the lenders waived all of the defaults and we agreed to certain temporary enhanced reporting requirements and temporary restrictions on certain payments.

These enhanced reporting requirements and restrictions will cease once we achieve certain excess availability thresholds.

At no time prior to or following entering into the Waiver Agreement were we prevented from borrowing under the Credit Agreement in the ordinary course.

In addition, the lease for our distribution center in Toronto, Canada (“TODC”) expires in April 2024.

We expect to move these operations to the United States to our current distribution center in Alabama, which will result in a further headcount reduction at the TODC.

The transition out of the TODC is expected to be substantially completed by the end of the first quarter of 2024.

Operating Highlights

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 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.

Net sales decreased $28.9 million, or 5.7%, to $480.2 million during the Third Quarter 2023 from $509.1 million during the Third Quarter 2022, primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

Comparable retail sales decreased 7.3% for the Third Quarter 2023.

Gross profit decreased $14.8 million to $162.1 million or 33.7% of net sales during the Third Quarter 2023 from $176.9 million or 34.8% of net sales during the Third Quarter 2022.

The 110 basis point decrease reflects the largely unplanned but addressable impact of higher distribution and fulfillment expenses stemming from incremental shipping and processing costs, partially offset by decreases in supply chain and cotton costs.

The increases in distribution costs were driven by higher e-commerce volumes than anticipated, which resulted in higher compensation expense to fulfill orders as we incurred significant overtime premiums to process orders, increased wage rates to retain talent and added incentives to attract new associates.

In addition, we also increased the utilization of our third-party fulfillment partner which operates at higher rates.

We also experienced an outsized increase in the number of packages shipped due to decreases in average order size, given the significant macroeconomic pressures our customers continue to face, and a highly promotional retail environment, which resulted in increased freight costs and deleveraging of freight expense.

In addition to the distribution costs, our margin rate was negatively impacted by the growth of our wholesale business, which operates at a lower gross margin but also operates at a lower SG&A and is accretive to our operating margin.

Operatin g income decreased $12.8 million to $45.0 million during the Third Quarter 2023 compared to $57.8 million during the Third Quarter 2022.

Operating income deleveraged 200 basis points to 9.4% of net sales.

Net income decreased $4.4 million to $38.5 million, or $3.05 per diluted share, during the Third Quarter 2023 compared to $42.9 million, or $3.26 per diluted share, during the Third 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, 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 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.

We have closed 608 stores, including five stores closed during the Third Quarter 2023, since the announcement of our fleet optimization initiative in 2013.

We now plan to close an additional 64 stores during the fourth quarter of 2023, bringing our total closures for Fiscal 2023 to 86 stores, which will leave us with approximately 530 stores entering fiscal 2024.

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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In November 2021, our Board of Directors authorized a $250.0 million share repurchase program (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.

Currently, pursuant to the Waiver Agreement described above, we are temporarily restricted from repurchasing any shares.

As of October 28, 2023, there was $157.3 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 Twenty-six Weeks Ended

2023 July 30,

2022 July 29,

2023 July 30,

Thirteen Weeks Ended Thirty-nine Weeks Ended

2023 October 29,

2022 October 28,

2023 October 29,

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 230 basis points to 32.4% of Net sales during the Second Quarter 2023 from 30.1% during the Second Quarter 2022.

For example, SG&A increased 90 basis points to 21.8% of Net sales during the Third Quarter 2023 from 20.9% during the Third 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 Twenty-six Weeks Ended

2023 July 30,

2022 July 29,

2023 July 30,

Thirteen Weeks Ended Thirty-nine Weeks Ended

2023 October 29,

2022 October 28,

2023 October 29,

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Interest expense, net (1.7) (0.8) (1.9) (0.7)

Income (loss) before benefit for income taxes (12.9) (4.3) (12.1) 0.2

Benefit for income taxes (2.7) (0.8) (2.5) (0.7)

Income (loss) before provision (benefit) for income taxes 7.7 10.6 (3.8) 4.4

Provision (benefit) for income taxes (0.3) 2.2 (1.6) 0.5

Net income (loss) 8.0 % 8.4 % (2.2) % 3.9 %

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

Thirteen Weeks Ended Twenty-six Weeks Ended

2023 July 30,

2022 July 29,

2023 July 30,

Thirteen Weeks Ended Thirty-nine Weeks Ended

2023 October 29,

2022 October 28,

2023 October 29,

(in thousands)

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Total net sales $ 480,234 $ 509,120 $ 1,147,474 $ 1,252,355

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.

Third Quarter 2023 Compared to Third Quarter 2022

Net sales decreased $28.9 million or 5.7%, to $480.2 million during the Third Quarter 2023 from $509.1 million during the Third Quarter 2022, primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

Comparable retail sales decreased 7.3% for the quarter.

The Children’s Place U.S.

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.

net sales decreased $15.6 million or 3.4%, to $441.9 million in the Third Quarter 2023, compared to $457.5 million in the Third Quarter 2022.

This decrease was primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

The Children’s Place International net sales decreased $13.2 million or 25.7%, to $38.4 million in the Third Quarter 2023, compared to $51.6 million in the Third Quarter 2022.

This decrease was primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from geo-political concerns weighing on consumer confidence, and an increase in promotional activity across the sector.

Total e-commerce sales, which include postage and handling, were 57.0% of net retail sales and 50.0% of net sales during the Third Quarter 2023, compared to 50.2% and 46.0%, respectively, during the Third Quarter 2022.

Gross profit decreased $14.8 million to $162.1 million in the Third Quarter 2023, compared to $176.9 million in the Third Quarter 2022.

Gross margin deleveraged 110 basis points to 33.7% of net sales in the Third Quarter 2023.

In addition, we also increased the utilization of our third-party fulfillment partner which operates at higher rates.

We also experienced an outsized increase in the number of packages shipped due to decreases in average order size, given the significant macro pressures our customers continue to face, and a highly promotional retail environment, which resulted in increased freight costs and deleveraging of freight expense.

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 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.

Selling, general, and administrative expenses decreased $1.8 million to $104.8 million during the Third Quarter 2023 from $106.6 million during the Third Quarter 2022.

SG&A deleveraged 90 basis points to 21.8% of net sales in the Third Quarter 2023.

The Third Quarter 2023 results included incremental operating expenses, including restructuring costs of $0.8 million, credit agreement amendment costs of $0.8 million, and fleet optimization costs of $0.4 million.

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

Excluding the impact of these incremental charges, SG&A deleveraged 70 basis points to 21.4% 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 permanent reductions in store expenses and home office payroll, and adjustments to variable profitability-based equity compensation, amounting to a benefit of $4.8 million in the Third Quarter 2023, compared to an expense of $4.9 million in the Third Quarter 2022.

Depreciation and amortization was $11.7 million during the Third Quarter 2023, compared to $12.5 million during the Third Quarter 2022.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 67 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.

Asset impairment charges were $0.6 million during the Third 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 $7.6 million during the Second Quarter 2023, compared to $2.6 million during the Second Quarter 2022.

No impairment charge was recorded in the Third Quarter 2022.

Operating income decreased $12.8 million to $45.0 million during the Third Quarter 2023, compared to $57.8 million during the Third Quarter 2022.

Operating income deleveraged 200 basis points to 9.4% of net sales in the Third Quarter 2023.

The Third Quarter 2023 results included incremental operating expenses of $2.9 million, as described above, and included all asset impairment charges recorded, compared to $1.3 million in the Third Quarter 2022.

Excluding the impact of these incremental charges, operating income deleveraged 160 basis points to 10.0% of net sales.

Net interest expense was $7.9 million during the Third Quarter 2023, compared to $3.8 million during the Third 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 .

Provision (benefit) for income taxes was a benefit of $(1.5) million during the Third Quarter 2023, compared to a provision of $11.2 million during the Third Quarter 2022.

Our effective tax rate was a benefit of (3.9)% and a provision of 20.7% in the Third Quarter 2023 and Third Quarter 2022, respectively.

The change in our effective tax rate and income tax benefit for the Third Quarter 2023 compared to the Third Quarter 2022 was primarily driven by the utilization of the discrete tax provision methodology discussed in “Note 12.

Income Taxes” to the accompanying consolidated financial statements, and the impact of certain non-deductible executive compensation.

Net income decreased $4.4 million to $38.5 million, or $3.05 per diluted share during the Third Quarter 2023, compared to $42.9 million, or $3.26 per diluted share during the Third 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.

Net sales decreased $104.9 million or 8.4%, to $1.147 billion during Year-To-Date 2023 from $1.252 billion during Year-To-Date 2022, primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

Comparable retail sales decreased 8.1% 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.

net sales decreased $78.1 million or 6.9%, to $1.049 billion during Year-To-Date 2023, compared to $1.127 billion 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, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

The Children’ s Place International net sales decreased $26.8 million or 21.3%, to $98.9 million during Year-To-Date 2023, compared to $125.7 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.

This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from geo-political concerns weighing on consumer confidence, and an increase in promotional activity across the sector.

Total e-commerce sales, which include postage and handling, were 52.1% of net retail sales and 46.2% of net sales during Year-To-Date 2023, compared to 47.5% and 44.0%, respectively, during Year-To-Date 2022.

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Excluding the impact of these charges, gross margin deleveraged 440 basis points to 30.2% 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.

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, higher than planned distribution and fulfillment costs, 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 $1.2 million to $224.9 million during Year-To-Date 2023 from $223.7 million dur ing Year-To-Date 2022.

Selling, general, and administrative expenses decreased $0.7 million to $329.8 million during Year-To-Date 2023 from $330.5 million during Year-To-Date 2022.

SG&A deleveraged 230 basis points to 28.7% 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.

The Year-To-Date 2023 results included incremental operating expenses, including restructuring costs of $10.7 million, contract termination fees of $3.0 million, fleet optimization costs of $1.5 million, and credit agreement amendment costs of $0.8 million.

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

Excluding the impact of these incremental charges, SG&A deleveraged 120 basis points to 27.3% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales and higher planned marketing spending, partially offset by permanent reductions in store expenses and home office payroll, and adjustments to variable profitability-based equity compensation, amounting to a benefit of $6.4 million during Year-To-Date 2023 , compared to an expense of $17.9 million during Year-To-Date 2022.

Depreciation and amortization was $35.5 million during Year-To-Date 2023, compared to $39.3 million during Year-To-Date 2022.

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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.

Provision (benefit) for income taxes was a benefit of $(17.8) million during Year-To-Date 2023 compared to a provision of $5.8 million during Year-To-Date 2022.

Our effective tax rate was a benefit of (40.9)% and a provision of 10.5% during Year-To-Date 2023 and Year-To-Date 2022, respectively.

The change in our effective tax rate and income tax benefit for Year-To-Date 2023 was primarily driven by the Year-To-Date 2023 pretax loss as compared to pretax income for Year-To-Date 2022, jurisdictional earnings mix, the impact of certain non-deductible executive compensation, 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, in addition to the utilization of the discrete tax provision methodology discussed in “Note 12.

Income Taxes” to the accompanying consolidated financial statements.

Net income (loss) decreased $75.1 million to a loss of $(25.7) million, or $(2.06) per diluted share during Year-To-Date 2023, compared to income of $49.4 million, or $3.68 per diluted share during Year-To-Date 2022 , due to the factors discussed above.

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

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

Currently, o ur primary uses of cash are for working capital requirements, which are principally inventory purchases, the payment of interest expense on our revolving credit facility and term loan, 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 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”).

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

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.

As previously disclosed in our Form 8-K dated October 30, 2023, we became aware of an inadvertent calculation error contained in the June, July and August 2023 borrowing base certificates provided to the lenders under our Credit Agreement, all of which have since been remedied.

While the lenders determined the calculation error resulted in certain technical defaults under the Credit Agreement (including us not being in compliance with certain debt covenants), we and the lenders entered into a Waiver and Amendment Agreement (the “Waiver Agreement”) on October 24, 2023, pursuant to which the lenders waived all of the defaults and we agreed to certain temporary enhanced reporting requirements and temporary restrictions on certain payments.

These enhanced reporting requirements and restrictions will cease once we achieve certain excess availability thresholds.

At no time prior to or following entering into the Waiver Agreement were we prevented from borrowing under the Credit Agreement in the ordinary course.

Our working capital deficit increased $89.5 million to $108.4 million at October 28, 2023, compared to $18.9 million at October 29, 2022, primarily reflecting a decrease in our inventory balance from the 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 October 28, 2023, we had $358.7 million of outstanding borrowings under our $445.0 million ABL Credit Facility and we had total liquidity of $42.1 million, including $28.6 million of availability under our ABL Credit Facility (after factoring in our excess availability threshold, as defined below), and $13.5 million of cash on hand.

In addition, at October 28, 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.

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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.

For the Third Quarter 2023 and Year-To-Date 2023, we recognized $7.2 million and $18.0 million, respectively, in interest expense related to the ABL Credit Facility.

For the Third Quarter 2022 and Year-To-Date 2022, we recognized $3.0 million and $6.9 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 $400.5 million (the “excess availability requirement”).

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 the maximum borrowing availability (as reflected in the table below), based on our ability to maintain a certain amount of excess availability for borrowings (the “excess availability threshold”).

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 July 30,

2023 October 29,

(in millions)

Total borrowing base availability $ 466.8 $ 404.2 $ 478.0

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

Total borrowing base availability, net of the excess availability threshold, as applicable $ 394.7 $ 363.8 $ 463.9

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

Maximum borrowing availability (1)

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(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.

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

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

For the Third Quarter 2023 and Year-To-Date 2023, we recognized $0.4 million, and $2.4 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 29, 2023, unamortized deferred financing costs amounted to $2.6 million, of which $2.3 million related to our ABL Credit Facility.

As of October 28, 2023, 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

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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