What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-26 compared with 2021-12-02 · 92 added, 125 removed, 156 unchanged (58% of the section changed)

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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;

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

● the impact of current inflationary cost pressures on payroll, benefits, supply chain, and other operating costs;

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

● the ability to execute our operational excellence priorities, including continuous improvement, Project SOAR (our replacement enterprise resource planning platform), and supply chain optimization;

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

● 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 that cybersecurity or information security 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 failure to maintain satisfactory compliance with applicable privacy and data protection laws and regulations;

● 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;

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

● 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;

● the impact of climate change on our business operations and/or supply chain;

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

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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 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 developed a unique specialty retail concept that offers a broad range of brands and price points, select beauty services, 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, uses beauty for self-expression, experimentation and self-investment, 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.

Today, 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.

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.

a differentiated assortment of more than 25,000 beauty products across a variety of categories and price points as well as a variety of beauty services, including salon services, in more than 1,300 stores predominantly located in convenient, high-traffic locations;

engaging digital experiences delivered through our website, Ulta.com, and our mobile applications;

our best-in-class loyalty program that enables members to earn points for every dollar spent on products and beauty services and provides us with deep, proprietary customer insights;

and our ability to cultivate human connection with warm and welcoming guest experiences across all of our channels.

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.

1) drive breakthrough and disruptive 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, solidifying Ulta Beauty at the Heart of the Beauty Community, 4) drive operational excellence and optimization, 5) protect and cultivate our world-class culture and talent 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.

beauty products and salon services industry, the expanding definition of beauty and the 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.

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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.

Over the long term, our growth strategy is to increase total net sales through growing our 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.

Current Trends

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

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.

We closely monitor the continuing impact of COVID-19 on all facets of our business.

During the first quarter of fiscal 2022, we experienced an increase in sales driven primarily by the favorable impact from the easing of COVID-19 restrictions.

While operations during the first quarter of fiscal 2022 did not appear to be as negatively impacted, the continuing COVID-19 pandemic could have additional negative impacts in the future.

The extent of the impact of the 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 travel restrictions within the U.S.

and other affected countries, supply chain disruptions, increased freight costs and higher wholesale costs, the continued 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

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.

The overall beauty market declined in 2020 but stabilized in 2021, as consumers began to recover from the impacts of COVID-19.

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.

Impact of inflation and changing prices

Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, continued pressure from inflation could have an adverse impact on consumer spending and sales.

Furthermore, inflation pressure could negatively impact our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with higher costs.

In addition, inflation could materially increase the interest rates on any future debt.

Basis of presentation

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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.

Other revenue includes the private label and co-branded credit card programs, royalties derived from the partnership with Target, and 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.

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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.

Comparable sales include retail sales, salon services, 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.

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Cost of sales includes:

● the cost of merchandise sold, including substantially all vendor allowances, which are treated as a reduction of merchandise costs;

● the cost of merchandise sold, offset by vendor income that is not a reimbursement of specific, incremental, and identifiable costs;

● distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance;

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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.

Changes in our merchandise or channel 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.

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● payroll, bonus, and benefit costs for retail store and corporate employees;

● advertising and marketing costs;

● advertising and marketing costs, offset by vendor income that is a reimbursement of specific, incremental, and identifiable costs;

● occupancy costs related to our corporate office facilities;

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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, 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.

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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.

The Company’s first quarter in fiscal 2022 and 2021 ended on April 30, 2022 and May 1, 2021, 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.

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.

The following tables present the components of our consolidated results of operations for the periods indicated:

13 Weeks Ended

39 Weeks Ended

(Dollars in thousands)

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Selling, general and administrative expenses

Impairment, restructuring and other costs

Pre-opening expenses

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Number of stores end of period

Comparable sales increase (decrease)

13 Weeks Ended

Comparable sales

13 Weeks Ended

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Selling, general and administrative expenses

Impairment, restructuring and other costs

Pre-opening expenses

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Income tax expense

Comparison of 13 weeks ended October 30, 2021 to 13 weeks ended October 31, 2020

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 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 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.

Comparison of 39 weeks ended October 30, 2021 to 39 weeks ended October 31, 2020

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 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.

Comparison of 13 weeks ended April 30, 2022 to 13 weeks ended May 1, 2021

Net sales increased $407.4 million or 21.0%, to $2.3 billion for the 13 weeks ended April 30, 2022, compared to $1.9 billion for the 13 weeks ended May 1, 2021.

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

from fewer COVID-19 restrictions and an increase of $20.4 million in other revenue.

The total comparable sales increase of 18.0% was driven by a 10.0% increase in transactions and an 7.3% increase in average ticket.

Gross profit increased $187.2 million or 24.8%, to $941.0 million for the 13 weeks ended April 30, 2022, compared to $753.8 million for the 13 weeks ended May 1, 2021.

Gross profit as a percentage of net sales increased to 40.1% for the

13 weeks ended April 30, 2022, compared to 38.9% for the 13 weeks ended May 1, 2021.

The increase in gross profit margin was primarily due to leverage in fixed costs, strong growth in other revenue, and favorable channel mix shifts, partially offset by deleverage in merchandise margins.

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.

Selling, general and administrative (SG&A) expenses increased $57.1 million or 12.9%, to $501.0 million for the 13 weeks ended April 30, 2022, compared to $443.9 million for the 13 weeks ended May 1, 2021.

SG&A expenses as a percentage of net sales decreased to 21.4% for the 13 weeks ended April 30, 2022, compared to 22.9% for the 13 weeks ended May 1, 2021, primarily due to lower marketing expenses and leverage in store payroll and benefits due to higher sales, partially offset by deleverage in corporate overhead due to strategic investments.

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.

Pre-opening expenses were $2.3 million for the 13 weeks ended April 30, 2022 compared to $4.6 million for the 13 weeks ended May 1, 2021.

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, net of $0.4 million for the 13 weeks ended April 30, 2022 was consistent with the 13 weeks ended May 1, 2021.

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.

We did not have any outstanding borrowings on the credit facility as of April 30, 2022 and May 1, 2021.

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 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

$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.

Income tax expense of $105.9 million for the 13 weeks ended April 30, 2022 represents an effective tax rate of 24.2%, compared to $74.7 million of income tax expense representing an effective tax rate of 24.5% for the 13 weeks ended May 1, 2021.

Net income was $331.4 million for the 13 weeks ended April 30, 2022, compared to $230.3 million for the 13 weeks ended May 1, 2021.

The increase in net income is primarily related to the $187.2 million increase in gross profit, partially offset by the $57.1 million increase in SG&A expenses and the $31.2 million increase in income tax expense.

Liquidity and capital resources

Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, and borrowings under our credit facility.

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

As of April 30, 2022, January 29, 2022, and May 1, 2021, we had cash and cash equivalents of $654.5 million, $431.6 million, and $947.5 million, respectively.

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:

Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for lease expenses, inventory, labor, distribution, advertising and marketing, and tax liabilities) as well as periodic spend for capital expenditures, investments, and share repurchases.

Our working capital needs are greatest from August through November as a result of inventory build-up during this period for the holiday season.

Long-term cash requirements primarily relate to funding lease expenses and other purchase commitments.

We generally fund short-term and long-term cash requirements with cash from operating activities.

We believe our primary sources of liquidity will satisfy our cash requirements over both the short-term (the next twelve months) and long-term.

We believe our ability to generate substantial cash from operating activities and readily secure financing at competitive rates are key strengths that give us significant flexibility to meet our short and long-term financial commitments.

The following table presents a summary of our cash flows:

13 Weeks Ended

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Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

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.

Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, 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 the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was mainly due to the increase in net income and an increase in inventory , partially offset by the timing of accounts payable and accrued liabilities.

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

Merchandise inventories, net were $1.57 billion at April 30, 2022, compared to $1.35 billion at May 1, 2021, representing an increase of $217.0 million or 16.0%.

The change in inventory is primarily due to the following:

● $29 million increase due to the addition of 28 net new stores opened since May 1, 2021;

● $78 million increase due to new key brand launches;

● $110 million increase due to increased inventory costs and the acceleration of inventory receipts to support expected demand and mitigate 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

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.

Investment activities for capital expenditures were $71.1 million during the 13 weeks ended April 30, 2022 compared to $34.6 million during the 13 weeks ended May 1, 2021.

During the 13 weeks ended April 30, 2022, we opened 10 new stores and relocated six stores, compared to the 13 weeks ended May 1, 2021, when we opened 28 new stores and relocated one store.

The increase in net cash used in investing activities in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was primarily due to more capital expenditures compared to the first quarter of fiscal 2021.

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

Financing activities primarily include share repurchases, borrowing and repayment of our revolving credit facility, 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.

The decrease in net cash used in financing activities in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was primarily due to a decrease in share repurchases.

We had no borrowings outstanding under the credit facility as of April 30, 2022, January 29, 2022, and May 1, 2021.

The zero outstanding borrowings position continues to be due to a combination of factors including sales demand, overall performance of management initiatives including expense control, and 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, seasonal inventory needs, or share repurchases.

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.

In March 2020, the Board of Directors authorized a share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company could 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 earlier share repurchase program.

The 2020 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.

In March 2022, the Board of Directors authorized a new share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company may repurchase up to $2.0 billion of the Company’s common stock.

The 2022 Share Repurchase Program revokes the previously authorized but unused amounts from the 2020 Share Repurchase Program.

The 2022 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

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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 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.

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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.

As of April 30, 2022, January 29, 2022, and May 1, 2021 we had no borrowings outstanding under the credit facility.

As of April 30, 2022, we were in compliance with all terms and covenants of the Loan Agreement.

Our business is subject to seasonal fluctuation.

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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

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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 29, 2022.

Recently adopted accounting pronouncements

See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recently adopted accounting pronouncements.”

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