What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-03 compared with 2020-08-27 · 103 added, 118 removed, 226 unchanged (49% of the section changed)

4 unchanged sentences

Any forward-looking statements contained in this Form 10-Q are based upon our historical performance and on current plans, estimates, and expectations.

The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, targets, strategies, or expectations contemplated by us will be achieved.

The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, targets, strategies, or expectations

contemplated by us will be achieved.

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

28 unchanged sentences

our ability to offer our guests a unique combination of more than 25,000 beauty products from across the categories of prestige and mass cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools, as well as a full-service salon in every store featuring hair, skin, and brow services;

our focus on delivering a compelling value proposition to our guests across all of our product categories;

our focus on delivering a compelling value proposition to our guests across all of our

product categories;

and convenience, as our stores are predominantly located in convenient, high-traffic locations such as power centers.

17 unchanged sentences

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.

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

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

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.

By October 31, 2020, salon and brow services had resumed in almost all stores.

Reflecting operational limitations related to COVID-19 and the partial resumption of services, the Company has reactivated more than half of the furloughed associates.

Our results of operations for the 13 and 39 weeks ended October 31, 2020, were significantly impacted by the effects of COVID-19.

Comparable sales decreased 8.9% and 23.8% for the 13 and 39 weeks ended October 31, 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.

These developments have further required us to recognize certain long-lived asset impairment charges and restructuring 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:

1 unchanged sentence

● reduced marketing, travel and controllable expenses;

● moderated the pace of investments to build international capabilities;

● aligned inventory receipts with current sales trends;

1 unchanged sentence

● reduced new store openings, relocations and remodel projects;

● suspended our stock repurchase program.

● suspended our stock repurchase program, which may be resumed in the fourth quarter of fiscal 2020.

To help support our associates through this crisis, we expanded the criteria for our Associate Relief Program to include those who need assistance due to a personal hardship as a result of COVID-19.

The Ulta Beauty executive team and Board of Directors have each made personal donations to the program.

We also provided support for those who are working on the front lines.

Since the crisis began, Ulta Beauty has donated 450,000 gloves and 141,000 essential beauty items to several national organizations serving local communities and healthcare workers.

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.

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.

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 potential temporary restrictions on certain store operating hours and/or in-store capacity, the duration of potential future quarantines, shelter-in-place and other travel restrictions within the U.S.

and other affected countries, the severity of the virus, the duration and spread of the virus, the duration, timing and severity of the impact on consumer spending, how quickly and to what extent normal economic and operating conditions can resume, and the public’s response to resurgences of the virus and its eventual aftermath.

Industry trends

4 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 behavior 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 changed consumer behavior and consumption of beauty products 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;

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

however, due to store closures during the first half of fiscal 2020, 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.

4 unchanged sentences

Comparable sales reflect sales for stores beginning on the first day of the 14 th month of operation.

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.

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.

29 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.

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.

Impairment, restructuring and other costs include long-lived asset impairment charges, restructuring costs associated with store closings, costs associated with the suspension of our Canadian expansion, and employee related severance costs.

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.

6 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 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.

The Company’s third quarter in fiscal 2020 and 2019 ended on October 31, 2020 and November 2, 2019, respectively.

Our operating results for the 13 and 39 weeks ended October 31, 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.

6 unchanged sentences

Selling, general and administrative expenses

Impairment charges, store closures and other costs

Impairment, restructuring and other costs

Pre-opening expenses

Operating income (loss)

Operating income

Interest expense (income), net

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Income before income taxes

Income tax expense

Other operating data:

6 unchanged sentences

Selling, general and administrative expenses

Impairment charges, store closures and other costs

Impairment, restructuring and other costs

Pre-opening expenses

Operating income (loss)

Operating income

Interest expense (income), net

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

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.

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, and a decrease of $4.3 million in other revenue.

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.

Income before income taxes

Income tax expense

Comparison of 13 weeks ended October 31, 2020 to 13 weeks ended November 2, 2019

Net sales decreased $130.5 million or 7.8%, to $1.6 billion for the 13 weeks ended October 31, 2020, compared to $1.7 billion for the 13 weeks ended November 2, 2019.

The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including social distancing, reduction of operating hours, limitations on in-store capacity and in some cases, mandated store closures and a decrease of $2.5 million in other revenue.

Total comparable sales for the 13 weeks ended October 31, 2020, decreased 8.9% compared to an increase of 3.2% for the 13 weeks ended November 2, 2019.

During the 13 weeks ended October 31, 2020, transactions declined 15.4% and average ticket increased 7.6%.

Gross profit decreased $77.9 million or 12.5%, to $545.5 million for the 13 weeks ended October 31, 2020, compared to $623.4 million for the 13 weeks ended November 2, 2019.

Gross profit as a percentage of net sales decreased to 35.1% for the 13 weeks ended October 31, 2020, compared to 37.1% for the 13 weeks ended November 2, 2019.

The decrease in gross profit margin was primarily due to deleverage of fixed costs due to lower sales and channel mix shifts.

These pressures were partially offset by higher merchandise margins primarily due to lower promotional activity.

Selling, general and administrative expenses

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.

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 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.

Selling, general and administrative (SG&A) expenses decreased $32.8 million or 7.3%, to $416.4 million for the 13 weeks ended October 31, 2020, compared to $449.2 million for the 13 weeks ended November 2, 2019.

Lower store payroll and benefits, store expenses, and marketing expenses were partially offset by higher corporate overhead expense and personal protective equipment (PPE) and COVID-related expenses.

SG&A expenses as a percentage of net sales increased to 26.8% for the 13 weeks ended October 31, 2020, compared to 26.7% for the 13 weeks ended November 2, 2019, due to lower sales resulting from the impact of COVID-19.

Impairment, restructuring and other costs

Impairment, restructuring and other costs were $23.6 million for the 13 weeks ended October 31, 2020, which consisted of $15.9 million related to the suspension of our planned expansion to Canada.

We expect to incur pre-tax costs in the range of $30,000 to $40,000 as a result of the suspension, the majority of which will be recognized in fiscal 2020.

The remaining estimated charges primarily relate to lease termination costs.

During the 13 weeks ended October 31, 2020, impairment, restructuring and other costs also included $5.7 million of severance charges and $2.0 million of lease terminations costs related to the previously announced permanent closure of 19 stores.

There was no impairment, restructuring and other costs for the 13 weeks ended November 2, 2019.

Pre-opening expenses

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.

Pre-opening expenses decreased $2.2 million to $4.2 million for the 13 weeks ended October 31, 2020, compared to $6.5 million for the 13 weeks ended November 2, 2019.

During the 13 weeks ended October 31, 2020, we opened 17 new stores and relocated two stores, compared to the 13 weeks ended November 2, 2019, when we opened 31 new stores, remodeled three stores, and relocated two stores.

Interest expense (income), net

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, net was $1.4 million for the 13 weeks ended October 31, 2020 compared to $0.9 million of interest income for the 13 weeks ended November 2, 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.

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

We did not have any outstanding borrowings on our credit facility as of October 31, 2020 and November 2, 2019.

Income tax expense

Income tax expense of $25.1 million for the 13 weeks ended October 31, 2020 represents an effective tax rate of 25.1%, compared to $38.9 million of tax expense representing an effective tax rate of 23.1% for the 13 weeks ended November 2, 2019.

The higher effective tax rate is primarily due to less investment tax credits received.

Net income was $74.8 million for the 13 weeks ended October 31, 2020, compared to $129.7 million for the 13 weeks ended November 2, 2019.

The decrease in net income is primarily due to the $77.9 million decrease in gross profit partially offset by a decrease in SG&A expenses of $32.8 million and $13.8 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.

These decreases were partially offset by a $23.6 million increase in impairment, restructuring and other costs.

Comparison of 39 weeks ended October 31, 2020 to 39 weeks ended November 2, 2019

Net sales decreased $1.1 billion or 22.4%, to $4.0 billion for the 39 weeks ended October 31, 2020, compared to $5.1 billion for the 39 weeks ended November 2, 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.

Total comparable sales for the 39 weeks ended October 31, 2020, decreased 23.8% compared to an increase of 5.4% for the 39 weeks ended November 2, 2019.

During the 39 weeks ended October 31, 2020, transactions declined 30.1% and average ticket increased 9.0%.

Gross profit decreased $696.0 million or 37.1%, to $1.2 billion for the 39 weeks ended October 31, 2020, compared to $1.9 billion for the 39 weeks ended November 2, 2019.

Gross profit as a percentage of net sales decreased to 29.8% for the 39 weeks ended October 31, 2020, compared to 36.8% for the 39 weeks ended November 2, 2019.

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

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.

SG&A expenses decreased $176.3 million or 14.2%, to $1.1 billion for the 39 weeks ended October 31, 2020, compared to $1.2 billion for the 39 weeks ended November 2, 2019.

SG&A expenses as a percentage of net sales increased to 27.1% for the 39 weeks ended October 31, 2020, compared to 24.5% for the 39 weeks ended November 2, 2019.

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

Impairment, restructuring and other costs

Impairment, restructuring and other costs were $83.9 million for the 39 weeks ended October 31, 2020, which consisted of $40.4 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain retail stores, $21.9 million related to the permanent closure of 19 stores, and $5.7 million of severance charges.

During the 39 weeks ended October 31, 2020, impairment, restructuring and other costs also included $15.9 million related to the suspension of our planned expansion to Canada.

We expect to incur pre-tax costs in the range of $30,000 to $40,000 as a result of the suspension, the majority of which will be recognized in fiscal 2020.

The remaining estimated charges primarily relate to lease termination costs.

There was no impairment, restructuring and other costs for the 39 weeks ended November 2, 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.

Pre-opening expenses decreased $2.9 million to $12.8 million for the 39 weeks ended October 31, 2020, compared to $15.7 million for the 39 weeks ended November 2, 2019.

During the 39 weeks ended October 31, 2020, we opened 28 new stores and relocated three stores, compared to the 39 weeks ended November 2, 2019, when we opened 73 new stores, remodeled 12 stores, and relocated six 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, net was $5.3 million for the 39 weeks ended October 31, 2020 compared to $4.6 million of interest income, net for the 39 weeks ended November 2, 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 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 $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.

We did not have any outstanding borrowings on our credit facility as of October 31, 2020 and November 2, 2019.

Income tax expense

Income tax expense of $2.9 million for the 39 weeks ended October 31, 2020 represents an effective tax rate of 40.3%, compared to $134.7 million of tax expense representing an effective tax rate of 21.8% for the 39 weeks ended November 2, 2019.

The higher effective tax rate is primarily due to a near break-even pre-tax operating income in fiscal 2020, less investment tax credits received, and tax expense from the income tax accounting for share-based compensation compared to a tax benefit in fiscal 2019.

Net income was $4.3 million for the 39 weeks ended October 31, 2020, compared to $483.2 million for the 39 weeks ended November 2, 2019.

The decrease in net income is primarily due to the $696.0 million decrease in gross profit partially offset by a $176.3 million decrease in SG&A expenses and $131.8 million decrease to income taxes.

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

These decreases were partially offset by an $83.9 million increase in impairment, restructuring and other costs.

Liquidity and capital resources

1 unchanged sentence

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 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.

As of October 31, 2020, February 1, 2020, and November 2, 2019, we had cash and cash equivalents and short-term investments of $560.9 million, $502.3 million, and $208.8 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.

On September 2, 2020, we repaid the $800 million of borrowing that was outstanding under the facility.

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

6 unchanged sentences

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net cash used in investing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

1 unchanged sentence

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, 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.

Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, long-lived asset impairment charge, 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, merchandise inventories, and the timing of 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, restructuring and other costs, partially offset by a decrease in SG&A expenses and income taxes.

Merchandise inventories, net were $1.4 billion at October 31, 2020, compared to $1.6 billion at November 2, 2019, representing a decrease of $177.8 million or 11.0%.

The decrease in total inventory was primarily driven by the decline in sales due to COVID-19 and lower holiday receipts, partially offset by an increase due to 21 net new stores opened since November 2, 2019 and the opening of our Jacksonville, FL fast fulfillment center.

Average inventory per store was down 12.5% 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 $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.

Investment activities for capital expenditures were $116.7 million during the 39 weeks ended October 31, 2020, compared to $241.1 million during the 39 weeks ended November 2, 2019.

During the 39 weeks ended October 31, 2020, we contributed $5.7 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 $180 million and $200 million.

In light of the pandemic, we reduced our capital expenditure plan for fiscal 2020, and anticipate capital expenditures will be between $150 million and $160 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 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.

As of October 31, 2020, February 1, 2020, and November 2, 2019, we had no borrowings outstanding under our credit facility.

Share repurchase plan

8 unchanged sentences

The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

On April 2, 2020, we announced that the share repurchase program has been suspended in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.

On April 2, 2020, we announced that the share repurchase program had been suspended in order to strengthen our liquidity and preserve cash in the early stages of the COVID-19 pandemic.

While no shares were repurchased in the third quarter, the Company may resume its stock repurchase program in the fourth quarter of fiscal 2020.

A summary of the Company’s common stock repurchase activity is presented in the following table:

1 unchanged sentence

(Dollars in millions)

August 1, 2020

August 3, 2019

Shares repurchased

11 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 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.

As of October 31, 2020, February 1, 2020, and November 2, 2019, we had no borrowings outstanding under the credit facility.

As of October 31, 2020, the weighted average interest rate was 1.56% and 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 August 1, 2020, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

As of October 31, 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 26 weeks ended August 1, 2020, we increased our long-term debt by $800.0 million.

During the 39 weeks ended October 31, 2020, we drew down and repaid $800 million of borrowing under the facility.

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