Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “plans,” “estimates,” “targets,” “strategies,” or other comparable words. 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. Such forward-looking statements are subject to various risks and uncertainties, which include, without limitation:
● The negative impacts the COVID-19 pandemic 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 and/or government aid programs;
● a decline in operating results that has and may continue to lead to asset impairment and store closure charges;
● our ability to sustain our growth plans and successfully implement our long-range strategic and financial plan;
● our ability to gauge beauty trends and react to changing consumer preferences in a timely manner;
● the possibility that we may be unable to compete effectively in our highly competitive markets;
● our ability to execute our operational excellence priorities, including continuous improvement, Project SOAR (our replacement enterprise resource planning platform), and supply chain optimization;
● the possibility that cybersecurity breaches and other disruptions could compromise our information or result in the unauthorized disclosure of confidential information;
● the possibility of material disruptions to our information systems;
● the possibility that the capacity of our distribution and order fulfillment infrastructure and the performance of our distribution centers and fast fulfillment centers may not be adequate to support our expected future growth plans;
● changes in the wholesale cost of our products;
● the possibility that new store openings and existing locations may be impacted by developer or co-tenant issues;
● our ability to attract and retain key executive personnel;
● our ability to successfully execute our common stock repurchase program or implement future common stock repurchase programs; and
● 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).
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.
References in the following discussion to “we,” “us,” “our,” “Ulta Beauty,” the “Company,” and similar references mean Ulta Beauty, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Overview
We were founded in 1990 as a beauty retailer at a time when prestige, mass, and salon products were sold through distinct channels – department stores for prestige products; drug stores and mass merchandisers for mass products; and salons and authorized retail outlets for professional hair care products. We developed a unique specialty retail concept
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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. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.
We are the largest beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services. We provide unmatched product breadth, value, and convenience in a distinctive specialty retail environment. Key aspects of our business include: 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, prestige and mass 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; and convenience, as our stores are predominantly located in convenient, high-traffic locations such as power centers.
The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic priorities: 1) drive growth through an expanded definition of all things beauty, 2) evolve the omnichannel experience through connected physical and digital ecosystems all in your world, 3) expand and deepen our presence across the beauty journey as the heart of the beauty community, 4) drive operational excellence and optimization, 5) develop our talent and strengthen our culture, and 6) expand our environmental and social impact. We believe that the attractive and growing U.S. beauty products and salon services industry, expanding definition of beauty and role that omnichannel capabilities play in consumers’ lives, coupled with Ulta Beauty’s competitive strengths, position us to capture additional market share in the industry.
Comparable sales is a key metric that is monitored closely within the retail industry. Our comparable sales have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable sales, including general U.S. economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others.
Over the long term, our growth strategy is to increase total net sales through growing comparable sales, expanding omnichannel capabilities and opening new stores. Long term operating profit is expected to increase as a result of our efforts to optimize our real estate portfolio, expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies, partially 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.
Impact of COVID-19
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 October 30, 2021, all our stores, salons and brow service offerings were open and operating under our Shop Safe Standards. During the third quarter, we resumed skin and make-up services in select locations. 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 nine months 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 nine months 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
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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
Our research indicates that Ulta Beauty has captured meaningful market share across all categories over the last several years. However, the COVID-19 pandemic 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. Despite the overall beauty market decline in 2020, we expect the beauty category will return to growth in 2021 as consumers recover from the impacts of COVID-19, and 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.
Basis of presentation
The Company has one reportable segment, which includes retail stores, salon services, and e-commerce.
We recognize merchandise revenue at the point of sale in our retail stores. E-commerce sales are recognized upon shipment or guest pickup of the merchandise based on meeting the transfer of control criteria. Retail store and e-commerce sales are recorded net of estimated returns. Shipping and handling are treated as costs to fulfill the contract and not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is at the time of shipment or guest pickup. We provide refunds for merchandise returns within 60 days from the original purchase date. 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. Salon service revenue is recognized at the time the service is provided to the guest. Gift card sales revenue is deferred until the guest redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Other revenue sources include the private label and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.
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. 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. Comparable sales include retail sales and salon services (including stores temporarily closed due to COVID-19), and e-commerce. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.
Measuring comparable sales allows us to evaluate the performance of our store base as well as several other aspects of our overall strategy. Several factors could positively or negatively impact our comparable sales results:
● the general national, regional, and local economic conditions and corresponding impact on customer spending levels;
● the introduction of new products or brands;
● the location of new stores in existing store markets;
● competition;
● our ability to respond on a timely basis to changes in consumer preferences;
● the effectiveness of our various merchandising and marketing activities; and
● the number of new stores opened and the impact on the average age of all of our comparable stores.
Cost of sales includes:
● the cost of merchandise sold, including substantially all vendor allowances, which are treated as a reduction of merchandise costs;
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● distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance;
● shipping and handling costs;
● retail stores occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, and licenses;
● salon services payroll and benefits; and
● shrink and inventory valuation reserves.
Our cost of sales may be negatively impacted as we open new stores. Changes in our merchandise mix may also have an impact on cost of sales. This presentation of items included in cost of sales may not be comparable to the way in which our competitors or other retailers compute their cost of sales.
Selling, general and administrative expenses include:
● payroll, bonus, and benefit costs for retail store and corporate employees;
● advertising and marketing costs;
● occupancy costs related to our corporate office facilities;
● stock-based compensation expense;
● depreciation and amortization for all assets, except those related to our retail stores and distribution operations, which are included in cost of sales; and
● legal, finance, information systems, and other corporate overhead costs.
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, 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.
Interest expense (income), net includes both interest expense and income. Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates. Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.
Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which we operate stores.
Results of operations
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 third quarter in fiscal 2021 and 2020 ended on October 30, 2021 and October 31, 2020, respectively. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.
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The following tables present the components of our consolidated results of operations for the periods indicated:
13 Weeks Ended
39 Weeks Ended
October 30,
October 31,
October 30,
October 31,
(Dollars in thousands)
2021
2020
2021
2020
Net sales
$
1,995,775
$
1,552,033
$
5,901,501
$
3,953,252
Cost of sales
1,206,301
1,006,514
3,560,276
2,775,121
Gross profit
789,474
545,519
2,341,225
1,178,131
Selling, general and administrative expenses
503,403
416,378
1,411,577
1,068,877
Impairment, restructuring and other costs
—
23,624
—
83,924
Pre-opening expenses
1,832
4,240
7,778
12,782
Operating income
284,239
101,277
921,870
12,548
Interest expense, net
413
1,383
1,196
5,272
Income before income taxes
283,826
99,894
920,674
7,276
Income tax expense
68,537
25,096
224,203
2,935
Net income
$
215,289
$
74,798
$
696,471
$
4,341
Other operating data:
Number of stores end of period
1,302
1,262
1,302
1,262
Comparable sales increase (decrease)
25.8%
(8.9)%
47.1%
(23.8)%
13 Weeks Ended
39 Weeks Ended
October 30,
October 31,
October 30,
October 31,
(Percentage of net sales)
2021
2020
2021
2020
Net sales
100.0%
100.0%
100.0%
100.0%
Cost of sales
60.4%
64.9%
60.3%
70.2%
Gross profit
39.6%
35.1%
39.7%
29.8%
Selling, general and administrative expenses
25.2%
26.8%
23.9%
27.1%
Impairment, restructuring and other costs
0.0%
1.5%
0.0%
2.1%
Pre-opening expenses
0.1%
0.3%
0.1%
0.3%
Operating income
14.2%
6.5%
15.6%
0.3%
Interest expense, net
0.0%
0.1%
0.0%
0.1%
Income before income taxes
14.2%
6.4%
15.6%
0.2%
Income tax expense
3.4%
1.6%
3.8%
0.1%
Net income
10.8%
4.8%
11.8%
0.1%
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Comparison of 13 weeks ended October 30, 2021 to 13 weeks ended October 31, 2020
Net sales
Net sales increased $443.7 million or 28.6%, to $2.0 billion for the 13 weeks ended October 30, 2021, compared to $1.6 billion for the 13 weeks ended October 31, 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 25.8% during the 13 weeks ended October 30, 2021 was driven by a 16.8% increase in transactions and a 7.7% increase in average ticket.
Gross profit
Gross profit increased $244.0 million or 44.7%, to $789.5 million for the 13 weeks ended October 30, 2021, compared to $545.5 million for the 13 weeks ended October 31, 2020. Gross profit as a percentage of net sales increased to 39.6% for the 13 weeks ended October 30, 2021, compared to 35.1% for the 13 weeks ended October 31, 2020. The increase in gross profit margin was primarily due to leverage of fixed costs, favorable channel mix shifts, leverage of salon expenses, and improvement in merchandise margins.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses increased $87.0 million or 20.9%, to $503.4 million for the 13 weeks ended October 30, 2021, compared to $416.4 million for the 13 weeks ended October 31, 2020. SG&A expenses as a percentage of net sales decreased to 25.2% for the 13 weeks ended October 30, 2021, compared to 26.8% for the 13 weeks ended October 31, 2020, primarily due to leverage of corporate overhead, store expenses and store payroll and benefits due to higher sales, partially offset by higher marketing expenses.
Impairment, restructuring and other costs
There were no impairment, restructuring and other costs recognized in the 13 weeks ended October 30, 2021, compared to $23.6 million for the 13 weeks ended October 31, 2020.
Pre-opening expenses
Pre-opening expenses decreased $2.4 million to $1.8 million for the 13 weeks ended October 30, 2021 compared to $4.2 million for the 13 weeks ended October 31, 2020.
Interest expense, net
Interest expense, net was $0.4 million for the 13 weeks ended October 30, 2021 compared to $1.4 million of interest expense, net for the 13 weeks ended October 31, 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 October 30, 2021, January 30, 2021, and October 31, 2020.
Income tax expense
Income tax expense of $68.5 million for the 13 weeks ended October 30, 2021 represents an effective tax rate of 24.1%, compared to $25.1 million of tax expense representing an effective tax rate of 25.1% for the 13 weeks ended October 31, 2020. The lower effective tax rate is primarily due to favorable provision to tax return adjustments, driven by federal employment tax credits, compared to third quarter of fiscal 2020.
Net income
Net income was $215.3 million for the 13 weeks ended October 30, 2021, compared to $74.8 million for the 13 weeks ended October 31, 2020. The increase in net income is primarily due to the $244.0 million increase in gross profit and $23.6 million decrease in impairment, restructuring and other costs, partially offset by a $87.0 million increase in SG&A expenses and a $43.4 million increase in income taxes.
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Comparison of 39 weeks ended October 30, 2021 to 39 weeks ended October 31, 2020
Net sales
Net sales increased $1.9 billion or 49.3%, to $5.9 billion for the 39 weeks ended October 30, 2021, compared to $4.0 billion for the 39 weeks ended October 31, 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 47.1% during the 39 weeks ended October 30, 2021 was driven by a 40.7% increase in transactions and a 4.6% increase in average ticket.
Gross profit
Gross profit increased $1.2 billion or 98.7%, to $2.3 billion for the 39 weeks ended October 30, 2021, compared to $1.2 billion for the 39 weeks ended October 31, 2020. Gross profit as a percentage of net sales increased to 39.7% for the 39 weeks ended October 30, 2021, compared to 29.8% for the 39 weeks ended October 31, 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 $342.7 million or 32.1%, to $1.4 billion for the 39 weeks ended October 30, 2021, compared to $1.1 billion for the 39 weeks ended October 31, 2020. SG&A expenses as a percentage of net sales decreased to 23.9% for the 39 weeks ended October 30, 2021, compared to 27.1% for the 39 weeks ended October 31, 2020, due to leverage of 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 expenses.
Impairment, restructuring and other costs
There were no impairment, restructuring and other costs recognized in the 39 weeks ended October 30, 2021, compared to $83.9 million for the 39 weeks ended October 31, 2020.
Pre-opening expenses
Pre-opening expenses decreased $5.0 million to $7.8 million for the 39 weeks ended October 30, 2021, compared to $12.8 million for the 39 weeks ended October 31, 2020.
Interest expense, net
Interest expense, net was $1.2 million for the 39 weeks ended October 30, 2021 compared to $5.3 million of interest expense, net for the 39 weeks ended October 31, 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 October 30, 2021, January 30, 2021, and October 31, 2020.
Income tax expense
Income tax expense of $224.2 million for the 39 weeks ended October 30, 2021 represents an effective tax rate of 24.4%, compared to $2.9 million of tax expense representing an effective tax rate of 40.3% for the 39 weeks ended October 31, 2020. The lower effective tax rate is primarily due to a benefit from the income tax accounting for share-based compensation and favorable provision to tax return adjustments, driven by federal employment tax credits, compared to fiscal 2020.
Net income
Net income was $696.5 million for the 39 weeks ended October 30, 2021 compared to $4.3 million for the 39 weeks ended October 31, 2020. The increase in net income is primarily due to a $1.2 billion increase in gross profit and an
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$83.9 million decrease in impairment, restructuring and other costs, partially offset by a $342.7 million increase in SG&A expenses and a $221.3 million increase in income taxes.
Liquidity and capital resources
Our primary cash needs are for rent, capital expenditures for new, remodeled, and relocated stores, increased merchandise inventories related to store expansion and new brand additions, 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 October 30, 2021, January 30, 2021, and October 31, 2020, we had cash and cash equivalents of $605.1 million, $1.0 billion, and $560.9 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. Our working capital needs are greatest from August through November each year as a result of our inventory build-up during this period for the approaching holiday season. 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 39 weeks ended October 30, 2021 and October 31, 2020:
39 Weeks Ended
October 30,
October 31,
(In thousands)
2021
2020
Net cash provided by operating activities
$
414,857
$
259,045
Net cash used in investing activities
(108,418)
(13,630)
Net cash used in financing activities
(747,381)
(76,752)
Effect of exchange rate changes on cash and cash equivalents
(56)
(86)
Net increase (decrease) in cash and cash equivalents
$
(440,998)
$
168,577
Operating activities
Operating activities consist of net income 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 increase in net cash provided by operating activities in fiscal 2021 is mainly due to the increase in net income and the timing of accounts payable, partially offset by higher merchandise inventories, higher prepaid income taxes and lower long-lived asset impairment charges compared to fiscal 2020.
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 $1.92 billion at October 30, 2021, compared to $1.44 billion at October 31, 2020, representing an increase of $477.2 million or 33.2%. The increase in total inventory was primarily driven by the addition of 40 net new stores opened since October 31, 2020 and the acceleration of inventory receipts to support expected demand and mitigate anticipated global supply chain disruptions.
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 $108.4 million during the 39 weeks ended October 30, 2021, compared to $116.7 million during the
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39 weeks ended October 31, 2020. During the 39 weeks ended October 31, 2020, we received $110.0 million in short-term investments and we contributed $5.7 million to equity investments.
During the 39 weeks ended October 30, 2021, we opened 42 new stores, relocated four stores and remodeled eight stores, compared to the 39 weeks ended October 31, 2020, when we opened 28 new stores and relocated three stores.
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.
Financing activities
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 October 30, 2021, January 30, 2021, and October 31, 2020. The zero outstanding borrowings position continues to be due to a combination of factors including strong sales growth, overall performance of management initiatives including expense control. 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 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. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25.4 million from the earlier share repurchase program. The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 12, 2020, the Board of Directors authorized a share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company may repurchase up to $1.6 billion of the Company’s common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amount of $177.8 million from the 2019 Share Repurchase Program. The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
A summary of common stock repurchase activity is presented in the following table:
39 Weeks Ended
October 30,
October 31,
(Dollars in millions)
2021
2020
Shares repurchased
2,330,244
326,970
Total cost of shares repurchased
$
762.2
$
73.0
Credit facility
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. 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
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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. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. 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 October 30, 2021, January 30, 2021, and October 31, 2020, we had no borrowings outstanding under the credit facility. As of October 31, 2020, the weighted average interest rate was 1.56%.
As of October 30, 2021, we were in compliance with all terms and covenants of the Loan Agreement.
Seasonality
Our business is subject to seasonal fluctuation. Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season. To a lesser extent, our business is also affected by Mother’s Day and Valentine’s Day. Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.
Off-balance sheet arrangements
As of October 30, 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.
Contractual obligations
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 39 weeks ended October 30, 2021.
Critical accounting policies and estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates. There have been no significant changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
Recently adopted accounting pronouncements
See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recently adopted accounting pronouncements.”
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.