SHOE STATION GROUP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors That May Affect Future Results This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: the duration and spread of the COVID-19 outbreak, mitigating efforts deployed by government agencies and the public at large, and the overall impact from such outbreak on the operations of our stores, economic conditions, financial market volatility, consumer spending and our supply chain and distribution processes; general economic conditions in the areas of the continental United States in which our stores are located and the impact of the ongoing economic crisis in Puerto Rico on sales at, and cash flows of, our stores located in Puerto Rico; the effects and duration of economic downturns and unemployment rates; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; our ability to generate increased sales at our stores; our ability to successfully navigate the increasing use of online retailers for fashion purchases and the impact on traffic and transactions in our physical stores; the success of the open-air shopping centers where our stores are located and its impact on our ability to attract customers to our stores; our ability to attract customers to our e-commerce website and mobile app and to successfully grow our multi-channel sales; the potential impact of national and international security concerns on the retail environment; changes in our relationships with key suppliers; our ability to control costs and meet our labor needs in a rising wage environment; changes in the political and economic environments in, the status of trade relations with, and the impact of changes in trade policies and tariffs impacting, China and other countries which are the major manufacturers of footwear; the impact of competition and pricing; our ability to successfully manage and execute our marketing initiatives and maintain positive brand perception and recognition; our ability to successfully manage our current real estate portfolio and leasing obligations; changes in weather, including patterns impacted by climate change; changes in consumer buying trends and our ability to identify and respond to emerging fashion trends; the impact of disruptions in our distribution or information technology operations; the effectiveness of our inventory management; the impact of natural disasters, other public health crises, political crises, civil unrest, and other catastrophic events on our stores and our suppliers, as well as on consumer confidence and purchasing in general; risks associated with the seasonality of the retail industry; the impact of unauthorized disclosure or misuse of personal and confidential information about our customers, vendors and employees, including as a result of a cyber-security breach; our ability to manage our third-party vendor relationships; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to open new stores in a timely and profitable manner, including our entry into major new markets, and the availability of sufficient funds to implement our business plans; higher than anticipated costs associated with the closing of underperforming stores; the inability of manufacturers to deliver products in a timely manner; the impact of regulatory changes in the United States and the countries where our manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; continued volatility and disruption in the capital and credit markets; and future stock repurchases under our stock repurchase program and future dividend payments. For a more detailed discussion of risk factors impacting us, see the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, “Risk Factors” in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended May 2, 2020 and August 1, 2020, and in Part II, Item 1A of this Quarterly Report on Form 10-Q. General Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information to assist the reader in better understanding and evaluating our financial condition and results of operations. We encourage you to read this in conjunction with our Condensed Consolidated Financial Statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 as filed with the SEC. Overview of Our Business Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing customers the convenience of shopping at any of our store locations, our mobile app or online at www.shoecarnival.com. Our stores combine competitive pricing with a promotional, high-energy in-store environment that encourages customer participation and injects fun and excitement into every shopping experience. We believe our distinctive shopping experience gives us various competitive advantages, including increased multiple unit sales; the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods. A similar customer experience is reflected in our e-commerce site and mobile app through special promotions and limited time sales. Our objective is to be the destination retailer-of-choice for value-priced, on-trend branded and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family. Our average store carries shoes in four general categories – women’s, men’s, children’s and athletics, as well as a broad range of accessories such as socks, belts, shoe care items, handbags, hats, sport bags, backpacks and wallets. Footwear is organized by category and brand, creating strong brand statements within the aisles. These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store. Our signage may highlight a vendor’s product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors. Our e-commerce site offers customers a large assortment of products in all categories of footwear with an increased depth of sizes and colors that may not be available in all stores. 16 Critical Accounting Policies We use judgment in reporting our financial results. This judgment involves estimates based in part on our historical experience and incorporates the impact of the current general economic climate and company-specific circumstances. However, because future events and economic conditions are inherently uncertain, our actual results could differ materially from these estimates. Our accounting policies that require more significant judgments include those with respect to merchandise inventories, valuation of long-lived assets, leases, insurance reserves and income taxes. The accounting policies that require more significant judgment are discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020. There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020. Results of Operations Summary Information Number of Stores Store Square Footage Beginning End of Net End Comparable Quarter Ended Of Period Opened Closed Period Change of Period Store Sales May 2, 2020 392 0 2 390 (22,000 ) 4,198,000 (42.3 )% August 1, 2020 390 2 10 382 (66,000 ) 4,132,000 12.6 % October 31, 2020 382 1 0 383 10,000 4,142,000 0.9 % Year-to-date 392 3 12 383 (78,000 ) 4,142,000 (8.8 )% May 4, 2019 397 0 2 395 (22,000 ) 4,246,000 (0.2 )% August 3, 2019 395 0 2 393 (16,000 ) 4,230,000 1.4 % November 2, 2019 393 1 1 393 1,000 4,231,000 3.5 % Year-to-date 397 1 5 393 (37,000 ) 4,231,000 1.6 % Comparable store sales for the periods indicated include stores that have been open for 13 full months after such store’s grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores opened or closed during the periods indicated are not included in comparable store sales. We include e-commerce sales in our comparable store sales. Due to our multi-channel strategy, we view e-commerce sales as an extension of our physical stores. The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated: Thirteen Weeks Ended October 31, 2020 Thirteen Weeks Ended November 2, 2019 Thirty-nine Weeks Ended October 31, 2020 Thirty-nine Weeks Ended November 2, 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (including buying, distribution and occupancy costs) 68.0 69.1 72.1 69.6 Gross profit 32.0 30.9 27.9 30.4 Selling, general and administrative expenses 24.7 24.3 26.3 24.2 Operating income 7.3 6.6 1.6 6.2 Interest income 0.0 (0.1 ) 0.0 (0.1 ) Income tax expense 1.9 1.7 0.4 1.3 Net income 5.4 % 5.0 % 1.2 % 5.0 % Information regarding the COVID-19 Coronavirus Pandemic (“COVID-19”) We continue to closely monitor and manage the impact of the COVID-19 pandemic, and the safety and well-being of our customers, employees and business partners remains a top priority. The COVID-19 pandemic has significantly impacted, and is expected to continue to impact, our operations, supply chains, overall economic conditions, and consumer spending for the foreseeable future. As guidance and mandates from governments and health officials continue to evolve, closures of some or all our stores may reoccur, and sales, including e-commerce sales, may be reduced. The COVID-19 pandemic delayed and extended the back-to-school shopping period and, at this time, uncertainty remains regarding how the COVID-19 pandemic may affect the Christmas shopping period. 17 In response to the COVID-19 pandemic, a ll of our physical stores were closed effective March 19, 2020. Our website and mobile app continued to accept order s after March 19, 2020 , and our e-commerce sales have increased significantly in fiscal 2020 as customers shifted to our online channel . We began reopening our physical stores in accordance with applicable public health guidelines in late April. B y the beginning of our second fiscal quarter, approximately 50 percent of our stores were reopened , and b y early June, substantially all of our stores had reopened . As stores have reopened, we experienced increases in conversion and total average transaction despite reduced traffic due to the COVID-19 pandemic . In our markets, back-to-school shopping continued into October , as many school districts in our markets delayed their back-to-school start dates . We do not have any stores closed due to the pandemic as of October 31, 2020. We have undertaken a number of actions to mitigate the financial impact of the COVID-19 pandemic, preserve capital and keep our customers and employees safe. These actions include: • Implementing new health and safety procedures at our stores, corporate headquarters and distribution center. Materials, such as thermometers, cleaning supplies, social distancing signage, and personal protective equipment have been distributed to our facilities. • Enhancing our liquidity by exercising the full accordion feature under our existing credit facility to increase our borrowing capacity under the facility, now collateralized by our inventory, from $50.0 million to $100.0 million, and eliminating a covenant through the first quarter of fiscal year 2021 that may have limited our access to the increased borrowing capacity. • Voluntarily suspending repurchases under our share repurchase program until further notice. • Continuing to pay employees while our stores were closed and recording tax credits in selling, general and administrative (“SG&A”) expenses that offset wage expense. This credit was associated with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and represents an employee retention tax credit to support wages paid to employees while such employees were not working. • Reaching agreements with certain landlords to defer approximately $3.1 million of April, May and June lease payments with repayments scheduled primarily for the second half of fiscal 2020. We continued to recognize lease expense on a straight-line basis in accordance with Generally Accepted Accounting Principles. • Temporarily reducing the base salaries of our named executive officers and the annual cash retainer fee of the Board of Directors while a majority of our physical stores were closed. • Temporarily reducing inventory receipts and inventory on hand and extending payment terms with many of our business partners. • Reducing or deferring non-essential corporate spending and capital projects and implementing hiring freezes. • Postponing marketing activities for physical stores and evaluating promotional activities. Year-to-date in fiscal 2020, we impaired nine and closed 12 physical stores and recorded $3.5 million in impairment charges and closing costs. Given the uncertainties surrounding the COVID-19 pandemic, additional impairments and closures may result in future periods. Executive Summary for the Third Fiscal Quarter Ended October 31, 2020 Our third quarter sales have historically been impacted by back-to-school shopping and the transition to fall seasonal shopping. Our sales patterns in the third quarter of fiscal 2020 have been significantly impacted by the COVID-19 pandemic, which caused a delay in the timing of back-to-school start dates in the markets we serve. As a result, we saw sales shift from August into September and October, and we ended the third quarter with a 0.9 percent increase in comparable store sales. We achieved this comparable store sales gain despite approximately 10 percent of schools in our markets not having returned to in-person learning at the end of the period. Our third quarter comparable store increase was primarily driven by a high-single digit increase in adult athletics and increases in seasonal sandals and men’s work boots. In the third quarter of fiscal 2020, we posted record levels of gross profit, net income and diluted net income per share. Highlights for the third quarter of fiscal 2020 and a brief discussion of some key initiatives are as follows: • Net sales for the third quarter of fiscal 2020 of $274.6 million were generally flat compared to the prior year third quarter. E-commerce sales increased over 150 percent compared to the prior year and represented more than 13 percent of net sales. The increase in e-commerce sales drove a chain-wide comparable store sales increase of 0.9 percent on top of a 3.5 percent comparable store sales increase in the third quarter of fiscal 2019. • Net income for the third quarter of fiscal 2020 was $14.7 million, or $1.03 per diluted share, compared to net income of $13.7 million, or $0.94 per diluted share, in the third quarter of fiscal 2019. Net income and diluted net income per share in the third quarter of 2020 were both quarterly records, surpassing the previous records by 5.8 percent and 9.6 percent, respectively. 18 • We posted a record quarterly g ross profit of $87.8 million, a $3.0 million increase compared to the prior year third quarter . As a percentage of net sales, gross profit increased to 32.0 percent compared to 30.9 percent in the third quarter of fiscal 2019 . • We had no cash borrowings during the third quarter and ended the quarter with $46.7 million of cash and cash equivalents. • In the third quarter of fiscal 2020, we continued to increase membership in our Shoe Perks customer loyalty program, approaching 10 percent growth compared to the prior year third quarter. This brought total membership in the program to nearly 26 million customers as of October 31, 2020. Membership in our Gold tier, which offers premium perks and rewards, increased over 17 percent compared to the third quarter of the prior year. We believe our Shoe Perks program affords us opportunities to communicate, build relationships and engage with our most loyal shoppers, which we believe will result in long-term customer commitment to our brand. • In the third quarter of fiscal 2020, we launched a third-party order management system to support our growing multi-channel business. In the second quarter of fiscal 2020, we implemented third-party transportation and warehouse management platforms that provide enhanced productivity, flexibility and optimized operations for our supply chain. These upgrades reflect our goal of implementing best practices and systems to meet the complex demands of multi-channel fulfillment, and believe they will position us for long-term growth and provide enhanced customer satisfaction and convenience in an increasingly competitive environment. Moreover, these platforms will provide the capacity needed to fulfill increased activity from our multi-channel sales channels out of our distribution center. • In fiscal 2020, we commenced implementation of a new, third-party merchandise planning system. This hosted, cloud-based platform is a multi-year project that includes a complete range of critical financial planning functions that will enhance the efficiency and effectiveness of our merchandise buying process. The new merchandise planning system will provide a unified strategic planning and budgeting process that is supported by various solutions, including strategic and assortment planning, store allocation and replenishment and in-season management. We believe this collaborative platform will unify our buy plans, optimize inventory levels, help achieve more sales at higher margins and allow us to set goals for multiple channels and formats common in today’s competitive environment. Results of Operations for the Third Quarter Ended October 31, 2020 Net Sales Net sales were $274.6 million during the third quarter of fiscal 2020 and were generally flat compared to the third quarter of the prior year. Comparable stores sales increased 0.9 percent, with e-commerce sales increasing over 150 percent compared to the prior year and representing 13 percent of total sales in the third quarter. Gross Profit Gross profit was a record $87.8 million during the third quarter, an increase of $3.0 million compared to the prior year. Gross profit margin in the third quarter increased to 32.0 percent compared to 30.9 percent in the third quarter of fiscal 2019. The increase in gross profit was primarily due to our broad assortment of inventory and our ability to effectively replenish fast-selling product, such as sandals and athletics, during the quarter, which enabled us to be less promotional. Merchandise margin as a percentage of net sales increased 1.6 percent compared to the prior year quarter due to the lower promotional activity. This 1.6 percent increase included offsetting shipping-related costs associated with e-commerce sales that were higher as a percentage of sales in the current year compared to the prior year. Our buying, distribution and occupancy costs increased 0.5 percent as a percentage of net sales compared to the third quarter of fiscal 2019 primarily due to higher distribution expense. Investments in our distribution center during fiscal 2020 resulted in higher implementation costs related to software, depreciation and labor during the third quarter of fiscal 2020 compared to the prior year quarter. Selling, General and Administrative Expenses SG&A expense was $67.6 million during the third quarter, an increase of $1.0 million compared to the third quarter of fiscal 2019 primarily due to higher advertising and e-commerce related operating expenses. Income Taxes The effective income tax rate for the third quarter of fiscal 2020 was 26.8 percent as compared to 24.9 percent for the same period in fiscal 2019. Our provision for income taxes is based on the current estimate of our annual effective tax rate and is adjusted as necessary for quarterly events. The lower tax rate in the prior year quarter was primarily driven by the reversal of a valuation allowance associated with our Puerto Rico operations. For the full fiscal year of 2020, we expect our tax rate to be approximately 25 percent compared to our 21.6 percent effective tax rate in fiscal 2019. 19 Results of Operations for the Nine -Month Period Ended October 31, 2020 Net Sales Year-to-date net sales were $722.9 million, a 9.3 percent decrease compared to the prior year’s year-to-date net sales of $796.7 million. The decrease in net sales was primarily due to the temporary closure of our physical stores for approximately 50 percent of the first quarter of fiscal 2020 as a result of the COVID-19 pandemic. The decrease in physical store sales was partially offset by a more than 200 percent increase in year-to-date e-commerce sales as our customers shifted to online shopping amid government mandated stay-at-home orders and continued health concerns. Gross Profit Year-to-date gross profit margin in fiscal 2020 decreased to 27.9 percent compared to 30.4 percent in fiscal 2019. The decrease was primarily due to higher shipping-related costs associated with the increase in e-commerce sales, increased distribution costs resulting from our investments in our distribution center, and the deleveraging effect of lower sales, primarily on occupancy costs, which are generally fixed in nature. Selling, General and Administrative Expenses SG&A expense was $190.5 million on a year-to-date basis, a decrease of $2.0 million compared to fiscal 2019. The primary factors attributable to the decrease were lower store wages as a result of employee payroll retention tax credits related to the CARES Act and reductions in stock-based compensation expense and depreciation and amortization expense. This overall decrease in SG&A expense was partially offset by increases in contracted services associated with e-commerce fulfillment, impairment charges on long-lived assets and advertising expense. Income Taxes The effective income tax rate year-to-date for fiscal 2020 was 23.0 percent as compared to 20.9 percent for the same period in fiscal 2019. The primary reason for the change in our effective tax rate was the $1.9 million tax benefit related to the vesting of stock-based compensation recognized in the first quarter of fiscal 2019 and the timing of other tax adjustments. Liquidity and Capital Resources Our primary sources of liquidity are cash and cash equivalents on hand, receipts from customers and availability under our credit facility. While the economic uncertainty and future effects on customer behavior caused by the COVID-19 pandemic make our operating cash flow less predictable, we believe our resources will be sufficient to fund our cash needs, as they arise, for at least the next 12 months. Our primary uses of cash are working capital needs, which are principally inventory purchases, store initiatives, dividend payments, the financing of capital projects, including investments in new systems, and various other commitments and obligations. We have voluntarily suspended repurchases under our share repurchase program to preserve liquidity during the COVID-19 pandemic. Cash Flow - Operating Activities Net cash generated from operating activities was $0.2 million on a year-to-date basis in fiscal 2020 compared to net cash generated from operating activities of $28.0 million during the same prior year period. The decrease in operating cash flow was primarily driven by lower earnings. Working capital was nearly flat on a year-over-year basis, totaling $214.9 million at October 31, 2020 and $214.4 million at November 2, 2019. Our current ratio was 2.7 as of October 31, 2020 compared to 2.6 as of November 2, 2019. Cash Flow – Investing Activities Our cash outflows for investing activities are primarily for capital expenditures. We expended $10.1 million on a year-to-date basis in fiscal 2020 for the purchase of property and equipment, primarily related to investments in our distribution center, new stores and remodels and normal asset replacement activities. For the same prior year period, we expended $15.1 million for the purchase of property and equipment, of which approximately $7.0 million was for the purchase of our corporate headquarters and the remainder was for continued investments in technology and normal asset replacement activities. 20 Cash Flow – Financing Activities Our cash outflows for financing activities are primarily for cash dividend payments, share repurchases and payments on our credit facility. Shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of equity awards. Our cash inflows from financing activities have represented purchases under our Employee Stock Purchase Plan and borrowings under our credit facility. Net cash used in financing activities was $5.4 million on a year-to-date basis in fiscal 2020 compared to $46.3 million in the same prior year period. The decrease in net cash used in financing activities was primarily due to reduced stock buybacks under our share repurchase program and fewer shares withheld upon the vesting of equity awards during the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019. Year-to-date in fiscal 2020, we borrowed and repaid $24.9 million under our credit facility. We had no outstanding borrowings under our credit facility at October 31, 2020. During the same period in fiscal 2019, we borrowed and repaid $20.0 million under our credit facility. Letters of credit outstanding were $1.2 million at October 31, 2020. Our credit facility requires us to maintain compliance with various financial covenants, the most restrictive of which are disclosed in Note 7 – “Debt” to our Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. W e were in compliance with these covenants as of October 31, 2020. Capital Expenditures Capital expenditures for fiscal 2020, including actual expenditures for the nine months ended October 31, 2020, are expected to be between $14 million and $15 million, with approximately $8 million to $9 million to be used for new stores, relocations and remodels and approximately $4 million for upgrades to our distribution center. The remaining capital expenditures are expected to be incurred for various other store improvements, continued investments in technology and normal asset replacement activities. The resources allocated to these projects are subject to near-term changes depending on the impacts associated with the COVID-19 pandemic. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, the number of stores relocated, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. The number of new store openings and relocations will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending. Store Openings and Closings – Fiscal 2020 Increasing market penetration by opening new stores has historically been a key component of our growth strategy, and we continue to focus on generating positive long-term financial performance for our store portfolio. In fiscal 2020, we opened four new stores within our existing 35-state geographic footprint, three of which were opened by the end of the third quarter and the remaining store was opened in November. We closed 12 stores during the nine months ended October 31, 2020 and closed one additional store in November. No additional store openings or closings are expected for fiscal 2020. Dividends On September 15, 2020, our Board of Directors approved the payment of our third quarter cash dividend to our shareholders. The third quarter dividend of $0.090 per share was paid on October 19, 2020 to our shareholders of record as of the close of business on October 5, 2020. In fiscal 2019, the third quarter dividend was $0.085 per share. During the nine months ended October 31, 2020 and November 2, 2019, we returned $3.9 million and $4.5 million, respectively, to our shareholders through our quarterly cash dividends. The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. Our credit facility permits the payment of cash dividends as long as no default or event of default exists under the credit agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash dividends for a fiscal year do not exceed $10.0 million. See Note 7 – “Debt” to our Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for a further discussion of our credit facility and its covenants. Share Repurchase Program On December 12, 2019, our Board of Directors authorized a new share repurchase program for up to $50.0 million of outstanding common stock, effective January 1, 2020. The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2020 and in accordance with applicable laws, rules and regulations. The share repurchase program may be amended, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand, and any shares acquired will be available for stock-based compensation awards and other corporate purposes. The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market conditions. We purchased approximately 184,000 shares at an aggregate cost of $6.9 million under this share repurchase program in fiscal 2019. 21 No share repurchases have been made in fiscal 2020, and given the uncertainty associated with the COVID-19 pandemic, we do not anticipate repurchasing any shares under our share repurchase program in fiscal 2020. However, we expect to reevaluate further share repurchases on an ongoing basis. As of October 31, 2020, we had $43.1 million available for future repurchases. The new share repurchase program replaced the prior $50.0 million share repurchase program that was authorized in December 2018 and expired in accordance with its terms on December 31, 2019. At its expiration, we had purchased approximately 933,000 shares at an aggregate cost of $30.9 million under the prior repurchase program. Our credit facility stipulates that distributions in the form of redemptions of Equity Interests (as defined in the credit agreement) can be made solely with cash on hand so long as before and immediately after such distributions there are no revolving loans outstanding under the credit agreement . See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for a further discussion of our credit facility and its covenants. Impact of Store Count and Seasonality on Quarterly Results Our quarterly results of operations have fluctuated and are expected to continue to fluctuate in the future, primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores and closing underperforming stores. Seasonality We have three distinct peak selling periods: Easter, back-to-school and Christmas. Our operating results depend significantly upon the sales generated during these periods. To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year. We experienced reduced sales during the fiscal 2020 Easter season as a result of the COVID-19 pandemic. We canceled any seasonal merchandise that had a short selling window and moved seasonal merchandise with longer selling periods to later shipping dates, as applicable. The back-to-school shopping period in fiscal 2020 started later and lasted longer than previous years in many of our markets. In addition, approximately 10 percent of school districts in the markets where we operate have not yet returned to in-person learning, which decreased our sales in those markets. Any other unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively affect our profitability. Store Count We continually analyze our store portfolio and the potential for new stores based on our view of the internal and external opportunities and challenges in the marketplace. In fiscal 2021 and beyond, we expect to pursue opportunities for store growth across large and mid-size markets as we leverage customer data from our customer relationship management program and more attractive real estate options become available. When stores are identified that produce, or may potentially in the future produce, low or negative contribution, we either renegotiate lease terms, relocate it, or close it. Even though store closings could reduce our overall net sales volume, we believe this strategy will realize long-term improvement in operating income and diluted net income per share. Depending upon the results of lease negotiations with certain landlords of underperforming stores, we may increase or decrease the number of store closures in future periods. Non-capital expenditures, such as advertising and payroll incurred prior to the opening of a new store, are charged to expense as incurred. The timing and actual amount of expense recorded in closing an individual store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout. Therefore, our results of operations may be adversely affected in any quarter in which we incur pre-opening expenses related to the opening of new stores or incur store closing costs related to the closure of existing stores. Our future store strategies may also continue to be impacted by the current economic uncertainty associated with the COVID-19 pandemic. 22