What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-27 compared with 2020-05-28 · 120 added, 75 removed, 224 unchanged (47% of the section changed)

6 unchanged sentences

Such forward-looking statements are subject to various risks and uncertainties, which include, without limitation:

● The uncertain negative impacts the coronavirus (COVID-19) has had, and will continue to have, on our business, financial condition, profitability, cash flows and supply chain, as well as consumer spending;

● the negative impacts the coronavirus (COVID-19) has had, and will continue to have, on our business, financial condition, profitability, cash flows and supply chain, as well as consumer spending (including future uncertain impacts);

● epidemics, pandemics like COVID-19 or natural disasters that have and could continue to negatively impact sales;

● changes in the overall level of consumer spending and volatility in the economy, including as a result of the COVID-19 pandemic;

● a decline in operating results that has and may continue to lead to asset impairment and store closures charges;

● our ability to sustain our growth plans and successfully implement our long-range strategic and financial plan;

9 unchanged sentences

● our ability to successfully execute our common stock repurchase program or implement future common stock repurchase programs;

● other risk factors detailed in our public filings with the Securities and Exchange Commission (the SEC), including risk factors contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended February 1, 2020, as such were amended and supplemented in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, and which may be further amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q (including this report).

Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

22 unchanged sentences

Over the long term, our growth strategy is to increase total net sales through increases in our comparable sales, opening new stores, and increasing omnichannel capabilities.

Operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S.

Long term operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S.

with successful e-commerce and competitive omnichannel capabilities.

4 unchanged sentences

The virus has since spread to almost every other part of the world, including the U.S., and in March 2020, the World Health Organization declared COVID-19 a global pandemic.

Federal, state, and local governments have since implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations.

Federal, state, and local governments implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations.

In response to government recommendations and for the health and safety of our associates and guests, on March 19, 2020 we temporarily closed all stores across the U.S., while continuing to support our essential e-commerce operations.

Our results of operations for the 13 weeks ended May 2, 2020 were significantly impacted by the effects of COVID-19.

Prior to the impact of COVID-19, comparable sales performance was strong through mid-March 2020.

However, the rapid spread of COVID-19 and ensuing government restrictions resulted in a significant reduction in customer traffic and demand.

Comparable sales decreased 35.3% for the first quarter ended May 2, 2020, as a result of the COVID-19 pandemic, but the multi-year, strategic investments we have made to enhance our omnichannel and supply chain capabilities, combined with the ongoing commitment of our distribution associates, have enabled us to support increased e-commerce demand and guest engagement.

We have taken several actions as part of our response to the continued spread of COVID-19 to improve our financial flexibility, including drawing down $800.0 million under our $1.0 billion revolving credit facility on March 18, 2020.

Effective April 19, 2020, we temporarily furloughed many of our store and salon associates.

In addition, we have taken the following steps to preserve financial liquidity while our stores remain temporarily closed:

● suspended new hires, and deferred merit increases for all corporate, store, and salon associates;

Throughout the second quarter, stores were reopened on a phased timeline, by taking a thoughtful, measured approach based on a variety of criteria, including state and local guidelines and the adoption of our new Shop Safe Standards related safety protocols.

As of July 20, 2020, we completed our phased reopening process.

As of August 1, 2020, salon services are available in about 88% of stores, and brow services are offered in about 85% of stores.

Reflecting operational limitations related to COVID-19 and the partial resumption of services, the Company has reactivated approximately 17,000 furloughed associates.

Our results of operations for the 13 and 26 weeks ended August 1, 2020, were significantly impacted by the effects of COVID-19.

Comparable sales decreased 26.7% and 31.1% for the 13 and 26 weeks ended August 1, 2020, respectively, as a result of the COVID-19 pandemic, but the multi-year, strategic investments we have made to enhance our omnichannel and supply chain capabilities, combined with the ongoing commitment of our distribution associates, have enabled us to support increased e-commerce demand and guest engagement.

In addition to decreases in net revenue, our overall profitability also decreased as compared to the prior year.

These developments have further required us to recognize certain long-lived asset impairment charges and store closure charges.

Further, in connection with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, we recognized payroll subsidies as a reduction of selling, general and administrative expenses in the consolidated statement of operations.

As we navigate these unprecedented circumstances, we continue to focus on our financial flexibility, including drawing down $800.0 million under our $1.0 billion revolving credit facility on March 18, 2020.

In addition, since the onset of the COVID-19 pandemic, we have taken the following steps to preserve financial liquidity:

● limited new hires and delayed merit increases for all corporate, store, and salon associates;

● reduced marketing, travel and controllable expenses;

9 unchanged sentences

And, as a special thank you, all healthcare workers will be able to make appointments for a half-price haircut and styling in the first month their local Ulta Beauty store is re-opened.

On April 23, 2020 we launched curbside pickup in select stores.

On May 11, 2020, we began to reopen select stores.

As of May 28, 2020, 333 Ulta Beauty stores are open for guests and 840 stores offer curbside pickup.

Store re-openings are being done on a phased timeline, taking a thoughtful, measured approach based on a variety of criteria, including state and local guidelines and the adoption of our new Shop Safe Standards related safety protocols.

Even after our stores are re-opened, the pandemic could also negatively impact our results of operations by continuing to weaken demand for our products and services and/or by disrupting our supply chain.

As events are rapidly changing, we are unable to accurately predict the impact that COVID-19 will have on our results of operations due to uncertainties

including, but not limited to, the duration of the closing of our stores, the duration of quarantines, shelter-in-place and other travel restrictions within the U.S.

While sales are expected to be challenged as events continue to change, we are unable to accurately predict the impact that COVID-19 will have on our results of operations due to uncertainties including, but not limited to, the potential temporary reclosing of certain of our stores, the duration of quarantines, shelter-in-place and other travel restrictions within the U.S.

and other affected countries, the severity of the virus, the duration of the outbreak, and the public’s response to the outbreak and its eventual aftermath.

5 unchanged sentences

While demographic trends continue to be favorable, we believe a lack of incremental innovation has resulted in a challenging cycle for the cosmetics category, as innovation brought to the market has not resulted in incremental product purchases.

In addition, COVID-19 and its various impacts have influenced consumer preferences due to the closures of offices, retail stores and other businesses and the significant decline in social gatherings.

In addition, COVID-19 and its various impacts have influenced consumer behavior due to the closures of offices, retail stores and other businesses and the significant decline in social gatherings.

We remain confident that our differentiated and diverse business model, our commitment to strategic investments, and our highly engaged associates will continue to drive market share gains over the long term.

7 unchanged sentences

We provide refunds for merchandise returns within 60 days from the original purchase date;

Due to store closures during the quarter, we are extending our return policy to September 1, 2020 for all items purchased after January 1, 2020.

however, due to store closures during the quarter, we extended our return policy to 180 days.

State sales taxes are presented on a net basis as we consider our self a pass-through conduit for collecting and remitting state sales tax.

5 unchanged sentences

Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one-month grand opening period.

Non-comparable store sales include sales from new stores that have not yet completed their 13 th month of operation and stores that were closed for part or all of the period in either year as a result of remodel activity.

Non-comparable store sales include sales from new stores that have not yet completed their 13 th month of operation and stores that were closed for part or all of the period in either year.

Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period.

28 unchanged sentences

This presentation of items in selling, general and administrative expenses may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.

Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent during the construction period for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising.

Impairment charges, store closures and other costs include long-lived fixed asset and operating lease asset impairment charges and other costs associated with store closings, including severance.

Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent from the control date through store opening date for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising.

Interest expense (income), net includes both interest income and expense.

5 unchanged sentences

Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31.

The Company’s first quarter in fiscal 2020 and 2019 ended on May 2, 2020 and May 4, 2019, respectively.

Our operating results for the 13 weeks ended May 2, 2020 may not be indicative of the results that may be expected for the fiscal year ending January 30, 2021 because of the COVID-19 pandemic.

The Company’s second quarter in fiscal 2020 and 2019 ended on August 1, 2020 and August 3, 2019, respectively.

Our operating results for the 13 and 26 weeks ended August 1, 2020 may not be indicative of the results that may be expected for the fiscal year ending January 30, 2021 because of the COVID-19 pandemic.

In addition, our quarterly results of operations have varied in the past and are likely to do so again in the future.

2 unchanged sentences

13 Weeks Ended

26 Weeks Ended

(Dollars in thousands)

1 unchanged sentence

Selling, general and administrative expenses

Impairment charges

Impairment charges, store closures and other costs

Pre-opening expenses

8 unchanged sentences

13 Weeks Ended

26 Weeks Ended

(Percentage of net sales)

1 unchanged sentence

Selling, general and administrative expenses

Impairment charges

Impairment charges, store closures and other costs

Pre-opening expenses

4 unchanged sentences

Net income (loss)

Comparison of 13 weeks ended May 2, 2020 to 13 weeks ended May 4, 2019

Net sales decreased $569.8 million or 32.7%, to $1.2 billion for the 13 weeks ended May 2, 2020, compared to $1.7 billion for the 13 weeks ended May 4, 2019.

The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including the temporary closing of our brick-and-mortar retail stores, shelter in place orders, social distancing and quarantines, partially offset by an increase of $2.3 million in other revenue.

The total comparable sales decrease of 35.3% was driven by a 38.6% decrease in transactions, partially offset by a 3.3% increase in average ticket.

Gross profit decreased $341.2 million or 52.9%, to $303.6 million for the 13 weeks ended May 2, 2020, compared to $644.8 million for the 13 weeks ended May 4, 2019.

Gross profit as a percentage of net sales decreased to 25.9% for the

13 weeks ended May 2, 2020, compared to 37.0% for the 13 weeks ended May 4, 2019.

The decrease in gross profit margin was primarily due to deleverage of fixed store costs, pressure from channel mix shifts, and deleverage of salon expenses due to lower sales.

Comparison of 13 weeks ended August 1, 2020 to 13 weeks ended August 3, 2019

Net sales decreased $438.6 million or 26.3%, to $1.2 billion for the 13 weeks ended August 1, 2020, compared to $1.7 billion for the 13 weeks ended August 3, 2019.

Total comparable sales for the 13 weeks ended August 1, 2020, decreased 26.7% compared to an increase of 6.2% for the 13 weeks ended August 3, 2020.

During the 13 weeks ended August 1, 2020, transactions declined 36.2% and average ticket increased 14.9%.

Gross profit decreased $276.9 million or 45.7%, to $329.0 million for the 13 weeks ended August 1, 2020, compared to $605.9 million for the 13 weeks ended August 3, 2019.

Gross profit as a percentage of net sales decreased to 26.8% for the 13 weeks ended August 1, 2020, compared to 36.4% for the 13 weeks ended August 3, 2019.

The decrease in gross profit margin was primarily due to deleverage of fixed costs due to lower sales, channel mix shifts, deleverage of salon expenses due to lower sales, and an increase in inventory reserves.

These pressures were partially offset by lower promotional activity.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses decreased $22.2 million or 5.5%, to $380.9 million for the 13 weeks ended May 2, 2020, compared to $403.1 million for the 13 weeks ended May 4, 2019.

Lower store expenses and lower marketing expenses were partially offset by higher expenses related to investments made in fiscal 2019 to support growth initiatives.

SG&A expenses as a percentage of net sales increased to 32.5% for the 13 weeks ended May 2, 2020, compared to 23.1% for the 13 weeks ended May 4, 2019.

The increase was primarily due to deleverage related to lower sales resulting from the COVID-19 pandemic.

Impairment charges

We recognized $19.5 million of impairment primarily for tangible long-lived assets and operating lease assets associated with our retail stores during the 13 weeks ended May 2, 2020.

Selling, general and administrative (SG&A) expenses decreased $121.3 million or 30.9%, to $271.6 million for the 13 weeks ended August 1, 2020, compared to $392.8 million for the 13 weeks ended August 3, 2019.

SG&A expenses as a percentage of net sales decreased to 22.1% for the 13 weeks ended August 1, 2020, compared to 23.6% for the 13 weeks ended August 3, 2019.

The decrease was primarily due to leverage related to lower store payroll and benefits, including the employee retention credits made available under the CARES Act, and lower marketing expense, partially offset by increased expenses related to strategic growth investments made in 2019 and deleverage of store expenses due to lower sales resulting from the impact of COVID-19.

Impairment charges, store closures and other costs

We recognized $20.9 million of impairment primarily for tangible long-lived assets and operating lease assets associated with our retail stores during the 13 weeks ended August 1, 2020.

The impairment charges were driven by lower than projected revenues in certain stores and were determined using entity-specific assumptions related to our anticipated use of store assets.

3 unchanged sentences

and the remaining useful lives of the assets.

Additionally, for the 13 weeks ended August 1, 2020, we recognized $19.6 million of long-lived asset impairment charges and $0.3 million in related severance charges related to the permanent closure of 19 stores.

There were no related asset impairment charges for the 13 weeks ended August 3, 2019.

Pre-opening expenses

Pre-opening expenses increased $0.4 million to $4.6 million for the 13 weeks ended May 2, 2020, compared to $4.2 million for the 13 weeks ended May 4, 2019.

During the 13 weeks ended May 2, 2020, we opened 11 new stores and relocated one store, compared to the 13 weeks ended May 4, 2019, when we opened 22 new stores and remodeled one store.

Pre-opening expenses decreased $1.1 million to $3.9 million for the 13 weeks ended August 1, 2020, compared to $5.0 million for the 13 weeks ended August 3, 2019.

New store activity was temporarily paused during the quarter due to COVID-19.

As a result, during the 13 weeks ended August 1, 2020, we had no new store openings, compared to the 13 weeks ended August 3, 2019, when we opened 20 new stores, remodeled eight stores, and relocated four stores.

Interest expense (income), net

Interest expense, net was $1.3 million for the 13 weeks ended May 2, 2020 compared to $2.0 million of interest income, net for the 13 weeks ended May 4, 2019.

Interest expense, net was $2.6 million for the 13 weeks ended August 1, 2020 compared to $1.7 million of interest income for the 13 weeks ended August 3, 2019.

Interest expense represents interest on borrowings and fees related to the credit facility.

Interest income results from cash equivalents and short-term investments with maturities of twelve months

or less from the date of purchase.

As of August 1, 2020, we had $800.0 million outstanding under the credit facility.

We did not have any outstanding borrowings on our credit facility as of August 3, 2019.

Income tax expense (benefit)

Income tax expense of $2.1 million for the 13 weeks ended August 1, 2020 represents an effective tax rate of 20.6%, compared to $48.4 million of tax expense representing an effective tax rate of 23.1% for the 13 weeks ended August 3, 2019.

The lower effective tax rate is primarily due to a decrease in operating income.

Net income was $8.1 million for the 13 weeks ended August 1, 2020, compared to $161.3 million for the 13 weeks ended August 3, 2019.

The decrease in net income is primarily due to the $276.9 million decrease in gross profit partially offset by a decrease in SG&A expenses of $121.3 million and $46.3 million decrease in income taxes.

These decreases were partially offset by a $40.8 million increase in impairment charges, store closures and other costs.

Comparison of 26 weeks ended August 1, 2020 to 26 weeks ended August 3, 2019

Net sales decreased $1.0 billion or 29.6%, to $2.4 billion for the 26 weeks ended August 1, 2020, compared to $3.4 billion for the 26 weeks ended August 3, 2019.

Total comparable sales decreased 31.1%.

During the 26 weeks ended August 1, 2020, transactions declined 37.4% and average ticket increased 10.1%.

Gross profit decreased $618.1 million or 49.4%, to $632.6 million for the 26 weeks ended August 1, 2020, compared to $1.3 billion for the 26 weeks ended August 3, 2019.

Gross profit as a percentage of net sales decreased to 26.3% for the 26 weeks ended August 1, 2020, compared to 36.7% for the 26 weeks ended August 3, 2019.

These pressures were partially offset by lower promotional activity.

Selling, general and administrative expenses

SG&A expenses decreased $143.5 million or 18.0%, to $652.5 million for the 26 weeks ended August 1, 2020, compared to $796.0 million for the 26 weeks ended August 3, 2019.

SG&A expenses as a percentage of net sales increased to 27.2% for the 26 weeks ended August 1, 2020, compared to 23.3% for the 26 weeks ended August 3, 2019.

The increase was primarily due to deleverage in store expenses due to lower sales resulting from the impact of COVID-19 and increased expenses related to strategic growth investments made in 2019, partially offset by leverage related to the store payroll and benefits, including the employee retention credits made available under the CARES Act.

Impairment charges, store closures and other costs

We recognized $40.4 million of impairment primarily for tangible long-lived assets and operating lease assets associated with our retail stores during the 26 weeks ended August 1, 2020.

The impairment charges were driven by lower than projected revenues in certain stores and were determined using entity-specific assumptions related to our anticipated use of store assets.

In our review, we considered multiple factors including, but not limited to:

forecasted scenarios related to store performance and likelihood that these scenarios would be ultimately realized;

the historical performance of the stores before the temporary store closures in response to the COVID-19 pandemic;

and the remaining useful lives of the assets.

Additionally, for the 26 weeks ended August 1, 2020, we recognized $19.6 million of long-lived asset impairment charges and $0.3 million in related severance charges related to the permanent closure of 19 stores.

There were no related asset impairment charges for the 26 weeks ended August 3, 2019.

Pre-opening expenses

Pre-opening expenses decreased $0.7 million to $8.5 million for the 26 weeks ended August 1, 2020, compared to $9.2 million for the 26 weeks ended August 3, 2019.

New store activity was temporarily paused during the second quarter.

As a result, during the 26 weeks ended August 1, 2020, we opened 11 new stores and relocated one store, compared to the 26 weeks ended August 3, 2019, when we opened 42 new stores, remodeled nine stores, and relocated four stores.

Interest expense (income), net

Interest expense, net was $3.9 million for the 26 weeks ended August 1, 2020 compared to $3.7 million of interest income, net for the 26 weeks ended August 3, 2019.

Interest expense represents interest on borrowings and fees related to the credit facility.

Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

As of May 2, 2020, the Company had $800.0 million outstanding under the credit facility.

We did not have any outstanding borrowings on our credit facility as of May 4, 2019.

As of August 1, 2020, we had $800.0 million outstanding under the credit facility.

We did not have any outstanding borrowings on our credit facility as of August 3, 2019.

Income tax expense (benefit)

Income tax benefit of $24.2 million for the 13 weeks ended May 2, 2020 represents an effective tax rate of 23.6%, compared to $47.4 million of tax expense representing an effective tax rate of 19.8% for the 13 weeks ended May 4, 2019.

The higher effective tax rate is due to a reduction of tax deductible stock option expense in the first quarter of fiscal 2020.

Income tax benefit of $22.2 million for the 26 weeks ended August 1, 2020 represents an effective tax rate of 23.9%, compared to $95.8 million of tax expense representing an effective tax rate of 21.3% for the 26 weeks ended August 3, 2019.

The higher effective tax rate is primarily due to a reduction of tax-deductible stock option expense in the first 26 weeks of fiscal 2020.

Net income (loss)

Net loss was $78.5 million for the 13 weeks ended May 2, 2020, compared to net income of $192.2 million for the 13 weeks ended May 4, 2019.

The decrease in net income is primarily related to the $341.2 million decrease in gross profit and $19.5 million increase in impairment charges.

Net loss was $70.5 million for the 26 weeks ended August 1, 2020, compared to net income of $353.5 million for the 26 weeks ended August 3, 2019.

The decrease in net income is primarily due to the $618.1 million decrease in gross profit partially offset by a $143.5 million decrease in SG&A expenses and $118.0 million decrease to income taxes.

These decreases were partially offset by a $60.3 million increase in impairment charges, store closures and other costs.

Liquidity and capital resources

Our primary cash needs are for rent, capital expenditures for new, remodeled, relocated, and refreshed stores (prestige boutiques and related in-store merchandising upgrades), increased merchandise inventories related to store expansion and new brand additions, in-store boutiques (sets of custom-designed fixtures configured to prominently display certain

prestige brands within our stores), supply chain improvements, share repurchases, and continued improvement in our information technology systems.

Our primary sources of liquidity are cash and cash equivalents, short-term investments, cash flows from operations, including changes in working capital, and borrowings under our credit facility.

As of May 2, 2020, February 1, 2020, and May 4, 2019, we had cash and cash equivalents and short-term investments of $1.2 billion, $502.3 million, and $521.8 million, respectively.

As part of our response to the continued spread of COVID-19 and to improve our financial flexibility, we drew down $800.0 million under our $1.0 billion revolving credit facility on March 18, 2020.

As mentioned above, to preserve financial liquidity while our stores remain temporarily closed, we have reduced our capital expenditure plans, temporarily furloughed certain store and salon associates, suspended our stock repurchase program, suspended new hires, and deferred merit increases for all corporate, store, and salon associates, reduced marketing, travel and controllable expenses, moderated the pace of investment to support international capabilities, and reduced planned new store openings, relocations and remodel projects.

As of August 1, 2020, February 1, 2020, and August 3, 2019, we had cash and cash equivalents of $1.2 billion, $502.3 million, and $327.4 million, respectively.

The most significant components of our working capital are merchandise inventories and cash and cash equivalents reduced by related accounts payable and accrued expenses.

5 unchanged sentences

(In thousands)

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

2 unchanged sentences

Operating activities

Operating activities consist of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, impairment charges, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes.

The decrease over the prior period is mainly due to the decrease in net income and the timing of accrued liabilities, partially offset by the timing of receivables and accounts payable.

The decrease in net income was primarily due to a decrease in gross profit resulting from lower sales as a result of the COVID-19 pandemic and an increase in impairment charges.

Merchandise inventories, net were $1.34 billion at May 2, 2020, compared to $1.25 billion at May 4, 2019, representing an increase of $90.5 million or 7.2%.

Average inventory per store increased 1.5% compared to prior year.

The increase in inventory is primarily due to the following:

● approximately $71 million due to the addition of 68 net new stores opened since May 4, 2019;

● approximately $21 million increase in total inventory was driven by the impact of the temporary closing of all of our brick-and-mortar stores for most of the quarter.

Operating activities consist of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, impairment charges, store closures and other costs, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes.

The decrease over the prior period is mainly due to the decrease in net income and the timing of accounts payable, partially offset by increase in disposals of property and equipment and impairment charges, store closures and other costs.

The decrease in net income was primarily due to a decrease in gross profit resulting from lower sales as a result of the COVID-19 pandemic and an increase in impairment charges, partially offset by a decrease in SG&A expenses and income taxes.

Merchandise inventories, net were $1.4 billion at August 1, 2020, compared to $1.3 billion at August 3, 2019, representing an increase of $52.5 million or 4.0%.

The increase in inventory is primarily due to the addition of 51 net new stores opened since August 3, 2019.

Average inventory per store was down slightly compared to prior year.

Investing activities

We have historically used cash primarily for new, remodeled, relocated, and refreshed stores, supply chain investments, short-term investments, and investments in information technology systems.

Investment activities for capital expenditures were $41.5 million during the 13 weeks ended May 2, 2020, compared to $71.8 million during the 13 weeks ended May 4, 2019.

As of May 2, 2020, we had $110.0 million of short-term investments, which consist of certificates of deposit with maturities of three to twelve months from the date of purchase.

Investment activities for capital expenditures were $77.1 million during the 26 weeks ended August 1, 2020, compared to $151.2 million during the 26 weeks ended August 3, 2019.

During the 26 weeks ended August 1, 2020, we contributed $5.4 million to equity method investments.

Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems, and supply chain investments we undertake and the timing of these expenditures.

In light of the pandemic, we have reduced our capital expenditure plan for fiscal 2020, and now anticipate capital expenditures will be between $200 and $210 million.

In light of the pandemic, we have reduced our capital expenditure plan for fiscal 2020, and now anticipate capital expenditures will be between $180 million and $200 million.

Financing activities

1 unchanged sentence

Purchases of treasury shares represent the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock.

As of May 2, 2020, we had $800.0 million outstanding under the credit facility, and we had no borrowings outstanding under our credit facility as of February 1, 2020 and May 4, 2019.

As of August 1, 2020, we had $800.0 million outstanding under the credit facility, and we had no borrowings outstanding under our credit facility as of February 1, 2020 and August 3, 2019.

Share repurchase plan

12 unchanged sentences

(Dollars in millions)

August 1, 2020

August 3, 2019

Shares repurchased

2 unchanged sentences

On March 11, 2020, we entered into Amendment No.

1 to the Second Amended and Restated Loan Agreement (as so amended, the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers

and Bookrunners, JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender, PNC Bank, National Association, as Documentation Agent and a Lender, and the other lenders party thereto.

1 to the Second Amended and Restated Loan Agreement (as so amended, the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder;

Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners;

JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender;

PNC Bank, National Association, as Documentation Agent and a Lender;

and the other lenders party thereto.

The Loan Agreement matures on March 11, 2025, provides maximum revolving loans equal to the lesser of $1.0 billion or a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of qualified cash), contains a $50.0 million subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $100.0 million, subject to the consent by each lender and other conditions.

2 unchanged sentences

Outstanding borrowings bear interest, at the Company’s election, at either a base rate plus a margin of 0% to 0.125% or the London Interbank Offered Rate plus a margin of 1.125% to 1.250%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.20% per annum.

As of May 2, 2020, we had $800.0 million outstanding under the credit facility and the weighted average interest rate was 1.94%.

As of February 1, 2020 and May 4, 2019, we had no borrowings outstanding under the credit facility.

As of May 2, 2020 we were in compliance with all terms and covenants of the Loan Agreement.

As of August 1, 2020, we had $800.0 million outstanding under the credit facility and the weighted average interest rate was 1.59%.

As of February 1, 2020 and August 3, 2019, we had no borrowings outstanding under the credit facility.

As of August 1, 2020, we were in compliance with all terms and covenants of the Loan Agreement.

Our business is subject to seasonal fluctuation.

5 unchanged sentences

Off-balance sheet arrangements

As of May 2, 2020, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

As of August 1, 2020, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

We do, however, have off-balance sheet purchase obligations incurred in the ordinary course of business.

1 unchanged sentence

Our contractual obligations consist of operating lease obligations, purchase obligations, and our revolving line of credit.

During the 13 weeks ended May 2, 2020, we increased our long-term debt by $800.0 million.

During the 26 weeks ended August 1, 2020, we increased our long-term debt by $800.0 million.

Critical accounting policies and estimates

10 unchanged sentences

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