What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-25 compared with 2021-05-27 · 87 added, 63 removed, 200 unchanged (43% of the section changed)

21 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 January 30, 2021, as such may be amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q (including this report).

ended January 30, 2021, as such may be 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.

4 unchanged sentences

and salons and authorized retail outlets for professional hair care products.

We developed a unique specialty retail concept that offers a broad range of brands and price points, a compelling value proposition, and a convenient and welcoming

shopping environment.

We developed a unique specialty retail concept that offers a broad range of brands and price points, a compelling value proposition, and a convenient and welcoming shopping environment.

We define our target consumer as a beauty enthusiast, a consumer who is passionate about the beauty category and has high expectations for the shopping experience.

18 unchanged sentences

Impact of COVID-19

W e continue to closely monitor the impact of the COVID-19 outbreak on all facets of our business.

W e continue to closely monitor the impact of COVID-19 on all facets of our business.

As we navigated the impact of the COVID pandemic, we proactively took steps to optimize our cost structure, while also investing in new capabilities to support future growth.

As of May 1, 2021, all our stores, salons and brow service offerings were open and operating under our Shop Safe Standards.

As of July 31, 2021, all our stores, salons and brow service offerings were open and operating under our Shop Safe Standards.

We intend to resume skin and make-up services when it is safe to do so.

Additionally, during the first quarter of fiscal 2021, as local restrictions lifted, we increased our operating hours and, as store traffic trends improved, we adjusted staffing levels to support the increased demand.

During the first quarter of fiscal 2021, we experienced an increase in sales driven primarily by the favorable impact in the U.S.

from improving consumer confidence, government stimulus payments and the easing of COVID-19 restrictions.

While operations during the first quarter of fiscal 2021 did not appear to be negatively impacted, the COVID-19 pandemic had a material negative impact on fiscal 2020 operations and financial results during the first quarter of fiscal 2020 and could have additional negative impacts in the future.

The extent of the impact of the pandemic on the Company's business and financial results will depend on future developments, including, but not limited to, the potential temporary reclosing of certain 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, supply chain disruptions, the potential for increased freight costs and higher wholesale costs, the duration of the pandemic and any more dangerous variants of the virus, the duration, timing and severity of the impact on

consumer spending, the timing and effectiveness of vaccine distribution, and how quickly and to what extent normal economic and operating conditions can resume.

Additionally,

during the first half of fiscal 2021, as local restrictions lifted, we increased our operating hours and, as store traffic trends improved, we adjusted staffing levels to support the increased demand.

During the first half of fiscal 2021, we experienced an increase in sales driven primarily by the favorable impact from stronger consumer confidence, government stimulus payments and the easing of COVID-19 restrictions.

While operations during the first half of fiscal 2021 did not appear to be negatively impacted, the COVID-19 pandemic had a material negative impact on fiscal 2020 operations and financial results and could have additional negative impacts in the future.

The extent of the impact of pandemic on our business and financial results will depend on future developments, including, but not limited to, the potential temporary reclosing of certain 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, supply chain disruptions, the potential for increased freight costs and higher wholesale costs, the duration of the pandemic and any variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, vaccination rates, and how quickly and to what extent normal economic and operating conditions can resume.

Industry trends

48 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 costs include long-lived asset impairment charges.

Impairment, restructuring and other costs include long-lived asset impairment charges and restructuring costs associated with store closings.

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.

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 first quarter in fiscal 2021 and 2020 ended on May 1, 2021 and May 2, 2020, respectively.

The Company’s second quarter in fiscal 2021 and 2020 ended on July 31, 2021 and August 1, 2020, respectively.

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 costs

Impairment, restructuring 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 costs

Impairment, restructuring and other costs

Pre-opening expenses

4 unchanged sentences

Net income (loss)

Comparison of 13 weeks ended May 1, 2021 to 13 weeks ended May 2, 2020

Net sales increased $765.3 million or 65.2%, to $1.9 billion for the 13 weeks ended May 1, 2021, compared to $1.2 billion for the 13 weeks ended May 2, 2020.

The net sales increase was primarily due to the favorable impact in the U.S.

from improving consumer confidence, government stimulus payments and the easing of COVID-19 restrictions.

The total comparable sales increase of 65.9% was driven by a 52.5% increase in transactions and an 8.8% increase in average ticket.

Gross profit increased $450.2 million or 148.3%, to $753.8 million for the 13 weeks ended May 1, 2021, compared to $303.6 million for the 13 weeks ended May 2, 2020.

Gross profit as a percentage of net sales increased to 38.9% for the

13 weeks ended May 1, 2021, compared to 25.9% for the 13 weeks ended May 2, 2020.

The increase in gross profit margin was primarily due to leverage in fixed costs due to higher sales, improvement in merchandise margins, lower salon expenses, and favorable channel mix shifts.

Comparison of 13 weeks ended July 31, 2021 to 13 weeks ended August 1, 2020

Net sales increased $739.2 million or 60.2%, to $2.0 billion for the 13 weeks ended July 31, 2021, compared to $1.2 billion for the 13 weeks ended August 1, 2020.

The net sales increase was primarily due to the favorable impact from improving consumer confidence and the easing of COVID-19 restrictions.

The total comparable sales increase of 56.3% during the 13 weeks ended July 31, 2021 was driven by a 52.5% increase in transactions and a 2.5% increase in average ticket.

Gross profit increased $469.0 million or 142.5%, to $798.0 million for the 13 weeks ended July 31, 2021, compared to $329.0 million for the 13 weeks ended August 1, 2020.

Gross profit as a percentage of net sales increased to 40.6% for the 13 weeks ended July 31, 2021, compared to 26.8% for the 13 weeks ended August 1, 2020.

The increase in gross profit margin was primarily due to leverage of fixed costs, improvement in merchandise margins, favorable channel mix shifts, and leverage of salon expenses.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $63.0 million or 16.5%, to $443.9 million for the 13 weeks ended May 1, 2021, compared to $380.9 million for the 13 weeks ended May 2, 2020, primarily due to higher store payroll and benefits and higher advertising.

SG&A expenses as a percentage of net sales decreased to 22.9% for the 13 weeks ended May 1, 2021, compared to 32.5% for the 13 weeks ended May 2, 2020, driven by an increase in net sales.

Impairment costs

There were no impairment costs recognized in the 13 weeks ended May 1, 2021, compared to $19.5 million for the 13 weeks ended May 2, 2020.

Selling, general and administrative (SG&A) expenses increased $192.7 million or 71.0%, to $464.3 million for the 13 weeks ended July 31, 2021, compared to $271.6 million for the 13 weeks ended August 1, 2020.

SG&A expenses as a percentage of net sales increased to 23.6% for the 13 weeks ended July 31, 2021, compared to 22.1% for the 13 weeks ended August 1, 2020, due to deleverage related to higher store payroll and benefits primarily due to less employee retention credits received under the CARES Act, and higher marketing expense, partially offset by leverage in corporate overhead and store expenses due to higher sales.

Impairment, restructuring and other costs

There were no impairment, restructuring and other costs recognized in the 13 weeks ended July 31, 2021, compared to $40.8 million for the 13 weeks ended August 1, 2020.

Pre-opening expenses

Pre-opening expenses of $4.6 million for the 13 weeks ended May 1, 2021 were consistent with the 13 weeks ended May 2, 2020.

Pre-opening expenses decreased $2.6 million to $1.4 million for the 13 weeks ended July 31, 2021 compared to $3.9 million for the 13 weeks ended August 1, 2020.

Interest expense, net

Interest expense, net was $0.4 million for the 13 weeks ended May 1, 2021, compared to $1.3 million for the 13 weeks ended May 2, 2020.

Interest expense, net was $0.4 million for the 13 weeks ended July 31, 2021 compared to $2.6 million of interest expense, net for the 13 weeks ended August 1, 2020.

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.

We did not have any outstanding borrowings on the credit facility as of May 1, 2021.

We had $800.0 million outstanding under the credit facility as of May 2, 2020.

We did not have any outstanding borrowings on our credit facility as of July 31, 2021 and January 30, 2021.

We had $800.0 million outstanding under the credit facility as of August 1, 2020.

Income tax expense

Income tax expense of $81.0 million for the 13 weeks ended July 31, 2021 represents an effective tax rate of 24.4%, compared to $2.1 million of tax expense representing an effective tax rate of 20.6% for the 13 weeks ended August 1, 2020.

The higher effective tax rate is primarily due to a decrease in the benefit of state tax credits compared to the 13 weeks ended August 1, 2020 as a result of an increase in pre-tax income.

Net income was $250.9 million for the 13 weeks ended July 31, 2021, compared to $8.1 million for the 13 weeks ended August 1, 2020.

The increase in net income is primarily due to the $469.0 million increase in gross profit and $40.8

million decrease in impairment, restructuring and other costs, partially offset by a $192.7 million increase in SG&A expenses and a $78.9 million increase in income taxes.

Comparison of 26 weeks ended July 31, 2021 to 26 weeks ended August 1, 2020

Net sales increased $1.5 billion or 62.7%, to $3.9 billion for the 26 weeks ended July 31, 2021, compared to $2.4 billion for the 26 weeks ended August 1, 2020.

The net sales increase was primarily due to the favorable impact from stronger consumer confidence, government stimulus payments, and the easing of COVID-19 restrictions.

The total comparable sales increase of 60.9% during the 26 weeks ended July 31, 2021 was driven by a 52.5% increase in transactions and a 5.5% increase in average ticket.

Gross profit increased $919.1 million or 145.3%, to $1.6 billion for the 26 weeks ended July 31, 2021, compared to $632.6 million for the 26 weeks ended August 1, 2020.

Gross profit as a percentage of net sales increased to 39.7% for the 26 weeks ended July 31, 2021, compared to 26.3% for the 26 weeks ended August 1, 2020.

The increase in gross profit margin was primarily due to leverage of fixed costs, improvement in merchandise margins, leverage of salon expenses, and favorable channel mix shifts.

Selling, general and administrative expenses

SG&A expenses increased $255.7 million or 39.2%, to $908.2 million for the 26 weeks ended July 31, 2021, compared to $652.5 million for the 26 weeks ended August 1, 2020.

SG&A expenses as a percentage of net sales decreased to 23.3% for the 26 weeks ended July 31, 2021, compared to 27.2% for the 26 weeks ended August 1, 2020, due to leverage in corporate overhead and store expenses due to higher sales, partially offset by deleverage related to higher store payroll and benefits primarily due to less employee retention credits received under the CARES Act, and higher marketing expense.

Impairment, restructuring and other costs

There were no impairment, restructuring and other costs recognized in the 26 weeks ended July 31, 2021, compared to $60.3 million for the 26 weeks ended August 1, 2020.

Pre-opening expenses

Pre-opening expenses decreased $2.6 million to $5.9 million for the 26 weeks ended July 31, 2021, compared to $8.5 million for the 26 weeks ended August 1, 2020.

Interest expense, net

Interest expense, net was $0.8 million for the 26 weeks ended July 31, 2021 compared to $3.9 million of interest expense, net for the 26 weeks ended August 1, 2020.

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.

We did not have any outstanding borrowings on our credit facility as of July 31, 2021 and January 30, 2021.

We had $800.0 million outstanding under the credit facility as of August 1, 2021.

Income tax expense (benefit)

Income tax expense of $74.7 million for the 13 weeks ended May 1, 2021 represents an effective tax rate of 24.5%, compared to $24.2 million of income tax benefit representing an effective tax rate of 23.6% for the 13 weeks ended May 2, 2020.

The higher effective tax rate is primarily due to a decrease in the benefit of state tax credits compared to the first quarter of fiscal 2020 as a result of an increase in pretax income.

Income tax expense of $155.7 million for the 26 weeks ended July 31, 2021 represents an effective tax rate of 24.4%, compared to $22.2 million of tax benefit representing an effective tax rate of 23.9% for the 26 weeks ended August 1, 2020.

The higher effective tax rate is primarily due to a decrease in the benefit of state tax credits compared to the 26 weeks ended August 1, 2020 as a result of an increase in pre-tax income.

Net income (loss)

Net income was $230.3 million for the 13 weeks ended May 1, 2021, compared to net loss of $78.5 million for the 13 weeks ended May 2, 2020.

The increase in net income is primarily related to the $450.2 million increase in gross profit and $19.5 million decrease in impairment charges, partially offset by the $63.0 million increase in SG&A expenses and the $98.9 million increase in income tax expense.

Net income was $481.2 million for the 26 weeks ended July 31, 2021 compared to a net loss of $70.5 million for the 26 weeks ended August 1, 2020.

The increase in net income is primarily due to a $919.1 million increase in gross profit and a $60.3 million decrease in impairment, restructuring and other costs, partially offset by a $255.7 million increase in SG&A expenses and a $177.8 million increase in income taxes.

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 May 1, 2021, January 30, 2021, and May 2, 2020, we had cash and cash equivalents and short-term investments of $947.5 million, $1.0 billion, and $1.2 billion, respectively.

As of July 31, 2021, January 30, 2021, and August 1, 2020, we had cash and cash equivalents of $770.1 million, $1.0 billion, and $1.2 billion, 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.

1 unchanged sentence

Based on past performance and current expectations, we believe that cash and cash equivalents, short-term investments, cash generated from operations, and borrowings under the credit facility will satisfy the Company’s working capital needs, capital expenditure needs, commitments, and other liquidity requirements through at least the next twelve months.

The following table presents a summary of our cash flows for the 13 weeks ended May 1, 2021 and May 2, 2020:

The following table presents a summary of our cash flows for the 26 weeks ended July 31, 2021 and August 1, 2020:

26 Weeks Ended

(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

3 unchanged sentences

Operating activities consist of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, long-lived asset 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 first quarter of 2021 increase over the first quarter of 2020 is mainly due to the increase in net income, income taxes, and the timing of accounts payable and accrued liabilities, partially offset by a decrease in inventory and long-lived asset impairment charges.

The increase in net income was primarily due to an increase in gross profit resulting from higher sales and a decrease in impairment costs, partially offset by an increase in SG&A expenses and income taxes.

Merchandise inventories, net were $1.4 billion at May 1, 2021, compared to $1.3 billion at May 2, 2020, representing an increase of $13.0 million or 1.0%.

The change in inventory is primarily due to the following:

● $28 million increase due to the addition of 26 net new stores opened since May 2, 2020

● $25 million increase due to the opening of the Jacksonville, FL fast fulfillment center

● $40 million decrease due to higher sales

The first 26 weeks of 2021 increase over the first 26 weeks of 2020 is mainly due to the increase in net income, and the timing of accounts payable and accrued liabilities, partially offset by decreases in merchandise inventories and long-lived asset impairment charges.

The increase in net income was primarily due to an increase in gross profit resulting from higher sales and a decrease in impairment, restructuring and other costs, partially offset by an increase in SG&A expenses and income taxes.

Merchandise inventories, net were $1.44 billion at July 31, 2021, compared to $1.37 billion at August 1, 2020, representing an increase of $75.14 million or 5.5%.

The increase in total inventory was primarily driven by the addition of 32 net new stores opened since August 1, 2020, the opening of the Jacksonville, FL fast fulfillment center, and increased purchases to support strong demand.

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 $34.6 million during the 13 weeks ended May 1, 2021 compared to $41.5 million during the 13 weeks ended May 2, 2020.

During the 13 weeks ended May 1, 2021, we opened 28 new stores and relocated one store, compared to the 13 weeks ended May 2, 2020, when we opened 11 new stores and relocated one store.

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

Investment activities for capital

expenditures were $57.3 million during the 26 weeks ended July 31, 2021, compared to $77.1 million during the 26 weeks ended August 1, 2020.

During the 26 weeks ended August 1, 2020, we received $110.0 million in short-term investments and we contributed $5.4 million to equity investments.

During the 26 weeks ended July 31, 2021, we opened 35 new stores, relocated two stores and remodeled five stores, compared to the 26 weeks ended August 1, 2020, when we opened 11 new stores and relocated one store.

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.

Based on past performance and current expectations, we believe our sources of liquidity will be sufficient to fund future capital expenditures.

1 unchanged sentence

Financing activities consist principally of borrowings on our revolving credit facility, share repurchases, and capital stock transactions.

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.

We had no borrowings outstanding under the credit facility as of May 1, 2021 and January 30, 2021.

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

The zero outstanding borrowings position at May 1, 2021 and January 30, 2021 continues to be due to a combination of factors including an improvement in sales trends as compared to the first quarter of fiscal 2020, overall performance of management initiatives including expense control, as well as inventory and other working capital reductions.

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.

We had no borrowings outstanding under the credit facility as of July 31, 2021 and January 30, 2021.

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

The zero outstanding borrowings position at July 31, 2021 and January 30, 2021 continues to be due to a combination of factors including an improvement in sales trends as compared to the 26 weeks ended August 1, 2020, overall performance of management initiatives including expense control, as well as inventory and other working capital reductions.

We may require borrowings under the facility from time to time in future periods for unexpected business disruptions, to support our new store program, share repurchases, and seasonal inventory needs.

Share repurchase plan

Share repurchase program

On March 14, 2019, the Board of Directors authorized a share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company could repurchase up to $875.0 million of the Company’s common stock.

16 unchanged sentences

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.

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.

The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold.

1 unchanged sentence

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 1, 2021 and January 30, 2021, we had no borrowings outstanding under the credit facility.

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 May 1, 2021, we were in compliance with all terms and covenants of the Loan Agreement.

As of July 31, 2021 and January 30, 2021, we had no borrowings outstanding under the credit facility.

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 July 31, 2021, 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 1, 2021, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

As of July 31, 2021, 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.

No material changes outside the ordinary course of business have occurred in our contractual obligations during the 13 weeks ended May 1, 2021.

No material changes outside the ordinary course of business have occurred in our contractual obligations during the 26 weeks ended July 31, 2021.

Critical accounting policies and estimates

8 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