What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-24 compared with 2022-03-25 · 95 added, 101 removed, 255 unchanged (43% of the section changed)

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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 estimate that female beauty enthusiasts represent approximately 60% of shoppers and 75% of spend in the U.S.

beauty category.

We estimate beauty enthusiasts represent approximately 65% of shoppers and 80% of beauty products and services spend in the U.S.

We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.

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.

Today, we are the largest specialty 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:

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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 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, the 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.

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 the attractive and growing U.S.

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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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.

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, guest experiences, 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.

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Impact of COVID-19

As previously discussed, our results of operations for fiscal 2020 were significantly impacted by the effects of the COVID-19 pandemic.

During fiscal 2021, we continued to closely monitor the impact of COVID-19 on all facets of our

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

During 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 fiscal 2021 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 future quarantines, shelter-in-place and other 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.

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

While operations during fiscal 2022 did not appear to be negatively impacted, the COVID-19 pandemic and the conditions and trends that originated during the pandemic could have negative impacts in the future.

The extent of the impact of the pandemic and the conditions and trends that originated during the pandemic on our future business and financial results will depend on, among other things, the potential of temporary restrictions on operating hours, in-store services or reclosing of certain stores or other facilities of ours or our brand partners and other suppliers, supply chain disruptions, increased transportation and shipping costs, higher wholesale costs, increased labor costs, and the duration, timing and severity of the impact of the foregoing on consumer spending.

Industry trend s

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 travel, entertainment and social gatherings.

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

However, the COVID-19 pandemic and its various impacts changed consumer behavior and consumption of beauty products, at least temporarily, due to the closures of offices, retail stores, and other businesses and the significant decline in travel, entertainment and social gatherings.

The overall beauty market declined in 2020, stabilized in 2021, and expanded in 2022, as consumers resumed in-person shopping while maintaining some of their online shopping behaviors.

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, a high rate of inflation in the future may have an adverse effect on 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 these increased costs.

Impact of inflation and other macroeconomic trends

Although we do not believe inflation had a material impact on our sales during fiscal 2022, continued pressure from inflation or other evolving macroeconomic conditions could have an adverse impact on consumer spending and could lead to a recession.

Furthermore, inflationary pressures, as well as other macroeconomic trends, 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.

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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 and royalties derived from the partnership with Target, 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 Corporation, 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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Comparable sales

include retail sales and salon services (including stores temporarily closed due to COVID-19), and e-commerce.

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;

● shipping and handling costs;

● retail stores occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, and licenses;

● retail store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, and licenses;

● salon services payroll and benefits;

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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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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, net includes both interest expense and income.

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

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

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.

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Our fiscal years are the 52- or 53-week periods ending on the Saturday closest to January 31.

The Company’s fiscal years ended January 29, 2022 (fiscal 2021), January 30, 2021 (fiscal 2020), and February 1, 2020 (fiscal 2019) were all 52-week years.

The Company’s fiscal years ended January 28, 2023 (fiscal 2022), January 29, 2022 (fiscal 2021), and January 30, 2021 (fiscal 2020) were all 52-week years.

As of January 28, 2023, we operated 1,355 stores across 50 states.

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Operating income

Interest expense (income), net

Interest (income) expense, net

Income before income taxes

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Operating income

Interest expense (income), net

Interest (income) expense, net

Income before income taxes

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Net sales increased $1.6 billion, or 18.3%, to $10.2 billion in fiscal 2022 compared to $8.6 billion in fiscal 2021.

The net sales increase was primarily due to the favorable impact from the continued resilience of the beauty category, retail price increases, the impact of new brands and product innovation, increased social occasions and fewer COVID-19 limitations compared to fiscal 2021, and an increase of $77.3 million in other revenue.

The total comparable sales increase of 15.6% in fiscal 2022, compared to an increase of 37.9% in fiscal 2021, was driven by a 10.8% increase in transactions and a 4.3% increase in average ticket.

Gross profit increased $676.0 million, or 20.1%, to $4.0 billion in fiscal 2022, compared to $3.4 billion in fiscal 2021.

Gross profit as a percentage of net sales increased 60 basis points to 39.6% in fiscal 2022 compared to 39.0% in fiscal 2021.

The increase in gross profit margin was primarily due to:

● 100 basis points of leverage of fixed costs attributed to the impact of higher sales and ongoing occupancy cost optimization efforts;

● 60 basis points of leverage in other revenue primarily due to credit card income growth, an increase in royalty income from our partnership with Target, and higher loyalty point redemptions;

● 20 basis points of leverage due to favorable channel mix shifts;

partially offset by

● 70 basis points of deleverage in inventory shrink;

● 50 basis points of deleverage in merchandise margins driven by brand mix and lapping benefits from favorable inventory reserve adjustments in fiscal 2021, partially offset by the timing of retail price changes.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $333.8 million, or 16.2%, to $2.4 billion in fiscal 2022 compared to $2.1 billion in fiscal 2021.

As a percentage of net sales, SG&A expenses decreased 40 basis points to 23.5% in fiscal 2022 compared to 23.9% in fiscal 2021.

The leverage of SG&A expenses was primarily due to:

● 80 basis points of leverage due to lower marketing expenses;

● 20 basis points of leverage of incentive compensation due to higher sales;

partially offset by

● 40 basis points of deleverage of corporate overhead primarily due to strategic investments;

● 20 basis points of deleverage of store payroll and benefits due to wage investments.

Pre-opening expenses

Pre-opening expenses increased $1.1 million, or 11.4%, to $10.6 million in fiscal 2022 compared to $9.5 million in fiscal 2021.

Interest (income) expense, net

Interest income, net was $4.9 million in fiscal 2022 compared to $1.7 million of interest expense, net in fiscal 2021.

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

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

We did not have any outstanding borrowings on our credit facility as of January 28, 2023 and January 29, 2022.

Income tax expense

Income tax expense of $401.1 million in fiscal 2022 represents an effective tax rate of 24.4%, compared to fiscal 2021 income tax expense of $310.0 million and an effective tax rate of 23.9%.

The higher income tax expense is primarily due

to less tax benefit from the income tax accounting for share-based compensation and an increase in state tax expense compared to fiscal 2021.

Net income increased $256.6 million to $1.2 billion in fiscal 2022 compared to $985.8 million in fiscal 2021.

The increase in net income was primarily due to a $676.0 million increase in gross profit, partially offset by a $333.8 million increase in SG&A expenses and $91.1 million increase in income taxes.

Fiscal year 2021 versus fiscal year 2020

Net sales increased $2.5 billion, or 40.3%, to $8.6 billion in fiscal 2021 compared to $6.2 billion in fiscal 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, and an increase of $15.1 million in other revenue.

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Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $0.5 billion, or 30.2%, to $2.1 billion in fiscal 2021 compared to $1.6 billion in fiscal 2020.

SG&A expenses increased $0.5 billion, or 30.2%, to $2.1 billion in fiscal 2021 compared to $1.6 billion in fiscal 2020.

As a percentage of net sales, SG&A expenses decreased 180 basis points to 23.9% in fiscal 2021 compared to 25.7% in fiscal 2020.

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The increase in net income was primarily due to a $1.4 billion increase in gross profit and a $114.3 million decrease in impairment, restructuring and other costs, partially offset by a $0.5 billion increase in SG&A expenses and $254.7 million increase in income taxes.

Fiscal year 2020 versus fiscal year 2019

Net sales decreased $1.2 billion, or 16.8%, to $6.2 billion in fiscal 2020 compared to $7.4 billion in fiscal 2019.

The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including the temporary closing of our brick-and-mortar retail stores, social distancing and quarantines, reduction of operating hours, and limitations on in-store capacity, and a decrease of $6.6 million in other revenue.

Total comparable sales in fiscal 2020 decreased 17.9% compared to an increase of 5.0% in fiscal 2019.

During fiscal 2020, transactions declined 24.5% and average ticket increased 8.8%.

Gross profit decreased $0.7 billion, or 27.3%, to $1.9 billion in fiscal 2020, compared to $2.7 billion in fiscal 2019.

Gross profit as a percentage of net sales decreased 450 basis points to 31.7% in fiscal 2020 compared to 36.2% in fiscal 2019.

The decrease in gross profit margin was primarily due to:

● 220 basis points of deleverage due to channel mix shifts;

● 220 basis points deleverage of fixed costs and 90 basis points of deleverage in salon services, both attributed to the impact of lower sales;

partially offset by

● 80 basis points of leverage driven by lower promotional activity and cost optimization efforts.

Selling, general and administrative expenses

SG&A expenses decreased $0.2 billion, or 10.1%, to $1.6 billion in fiscal 2020 compared to $1.8 billion in fiscal 2019.

As a percentage of net sales, SG&A expenses increased 190 basis points to 25.7% in fiscal 2020 compared to 23.8% in fiscal 2019.

The deleverage in SG&A expenses was primarily due to:

● 170 basis points of deleverage primarily due to higher corporate overhead;

● 80 basis points of deleverage of store payroll and benefits and variable store expenses due to the impact of lower sales and personal protective equipment and COVID-related expenses;

● 30 basis points of deleverage of marketing expenses attributed to the impact of lower sales volume;

partially offset by

● 90 basis points of leverage related to the employee retention credits made available under the CARES Act.

Impairment, restructuring and other costs

Impairment, restructuring and other costs were $114.3 million for fiscal 2020, which consisted of $41.9 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain retail stores, $29.1 million related to the suspension of the planned expansion to Canada, $27.5 million related to the permanent closure of 19 stores,

and $15.8 million of severance charges.

All restructuring expenses were recognized in fiscal 2020.

There was no impairment, restructuring and other costs in fiscal 2019.

Pre-opening expenses

Pre-opening expenses decreased $4.3 million, or 22.1%, to $15.0 million in fiscal 2020 compared to $19.3 million in fiscal 2019 due to current year real estate activity and stores expected to open in the first quarter of fiscal 2021.

During fiscal 2020, we opened 30 new stores and relocated five stores.

During fiscal 2019, we opened 86 new stores, remodeled 12 stores, and relocated eight stores.

Interest expense (income), net

Interest expense, net was $5.7 million in fiscal 2020 compared to $5.1 million of interest income, net in fiscal 2019.

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

Interest income results from short-term investments.

We did not have any outstanding borrowings on our credit facility as of January 30, 2021 and February 1, 2020.

Income tax expense

Income tax expense of $55.3 million in fiscal 2020 represents an effective tax rate of 23.9%, compared to fiscal 2019 income tax expense of $200.2 million and an effective tax rate of 22.1%.

The higher effective tax rate is primarily due to less investment tax credits received and tax expense from the income tax accounting for stock-based compensation compared to a benefit in fiscal 2019.

Net income decreased $530.1 million, or 75.1%, to $175.8 million in fiscal 2020 compared to $705.9 million in fiscal 2019.

The decrease in net income was primarily due to a $731.9 million decrease in gross profit and a $114.3 million increase in impairment, restructuring and other costs, partially offset by a $177.6 million decrease in SG&A expenses and $145.0 million decrease in income taxes.

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.

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.

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

As of January 28, 2023 and January 29, 2022, we had cash and cash equivalents of $737.9 million and $431.6 million, respectively.

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.

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.

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

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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 deferred revenue, partially offset by higher merchandise inventories, higher cash outflow from higher 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.

The increase in net cash provided by operating activities in fiscal 2022 is mainly due to the increase in net income, a smaller increase in merchandise inventories in fiscal 2022, and the timing of receivable collections, partially offset by the timing of payables and a smaller increase in deferred revenue compared to fiscal 2021.

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 $1.6 billion at January 28, 2023, compared to $1.5 billion at January 29, 2022, representing an increase of $104.2 million or 7.0%.

The increase in total inventory was primarily driven by the addition of 44 net new stores opened since January 30, 2021, inventory to support new brand launches, and the acceleration of inventory receipts to support expected demand and mitigate anticipated global supply chain disruptions.

The decrease in net cash provided by operating activities in fiscal 2020 relative to fiscal 2019 was primarily due to the decrease in net income, merchandise inventories, and the timing of accounts payable due to the COVID-19 pandemic.

The increase in total inventory is primarily due to the following:

● $54 million increase due to the addition of 47 new stores opened since January 29, 2022;

● $25 million increase due to new key brand launches;

● $25 million increase primarily due to inventory cost increases.

The increase in net cash provided by operating activities in fiscal 2021 relative to fiscal 2020 was primarily due to the increase in net income and deferred revenue, partially offset by higher merchandise inventories, higher cash outflow from higher income taxes, and lower long-lived asset impairment charges compared to fiscal 2020.

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 $312.1 million during fiscal 2022, compared to $172.2 million during fiscal 2021.

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

The increase in net cash used in investing activities in fiscal 2021 relative to fiscal 2020 was primarily due to less proceeds of short-term investments and more capital expenditures compared to fiscal 2020.

The decrease in net cash used in investing activities in fiscal 2020 relative to fiscal 2019 was primarily due to less capital expenditures due to actions we took to preserve liquidity as we navigated through the COVID-19 pandemic and an increase in proceeds of short-term investments offset by less purchases of short-term investments.

Capital expenditures

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Stores relocated

Stores refreshed

During fiscal 2022, the average investment required to open a new Ulta Beauty store was approximately $1.7 million, which includes capital investment net of landlord contributions, pre-opening expenses, and initial inventory net of payables.

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

We expect fiscal 2022 capital expenditures will be $425 million, and will be used to fund our new, remodeled, and relocated stores and strategic priorities, including investments in information technology systems and supply chain optimization.

We expect fiscal 2023 capital expenditures will be up to $475 million and will be used primarily to fund our new, remodeled, and relocated stores and strategic priorities, including investments in information technology systems and supply chain optimization.

Financing activities

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

Financing activities 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.

The increase in net cash used in financing activities in fiscal 2021 relative to fiscal 2020 was primarily due to an increase in share repurchases offset by an increase in stock option exercises, and no activity under our revolving credit facility during fiscal 2021.

The decrease in net cash used in financing activities in fiscal 2020 relative to fiscal 2019 was primarily due to borrowing and repayment under our revolving credit facility and the suspension of the share repurchase program in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.

The decrease in net cash used in financing activities in fiscal 2022 relative to fiscal 2021 was primarily due to a decrease in share repurchases.

We had no borrowings outstanding under the credit facility at the end of fiscal 2022, 2021 and 2020.

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Share repurchase program

In March 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.

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 2019 Share Repurchase Program.

The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amounts 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.

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 authorization 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.

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

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Total cost of shares repurchased

On March 7, 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 authorization 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.

Credit facility

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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.

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.

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Inventory valuation

Merchandise inventories are carried at the lower of cost or market (net realizable value).

Merchandise inventories are carried at the lower of cost or net realizable value.

Cost is determined using the moving average cost method and includes costs incurred to purchase and distribute goods as well as related vendor allowances including co-op advertising, markdowns, and volume discounts.

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These estimates are based on management’s judgment regarding future demand, age of inventory, and analysis of historical experience.

If actual demand or market conditions are different than those projected by management, future merchandise margin rates may be unfavorably or favorably affected by adjustments to these estimates.

If actual demand or market conditions are different than those projected by management, future merchandise margin rates may be affected by adjustments to these estimates.

Inventories are adjusted for the results of periodic physical inventory counts at each of our locations.

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Adjustments to earnings resulting from revisions to management’s estimates of the inventory reserves have been insignificant during fiscal 2022, 2021 and 2020.

An increase or decrease in the lower of cost or market (net realizable value) reserve of 10% would not have a material impact on our operating income for fiscal 2021.

An increase or decrease in the lower of cost or net realizable value reserve of 10% would not have a material impact on our operating income for fiscal 2022.

An increase or decrease in the shrink rate included in the shrink reserve calculation of 10% would not have a material impact on our operating income for fiscal 2022.

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An impairment loss would be recorded if the carrying amount of the long-lived asset exceeds its fair value.

We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our impairment charges.

During fiscal 2020, we recognized $72.5 million of impairment of long-lived tangible and right-of-use assets which consisted of $41.9 million due to impairment analysis which indicated that the carrying values of certain long-lived assets exceeded their respective fair values, $19.6 million related to the suspension of the planned expansion to Canada, and $11.0 million related to the permanent closure of 19 stores.

No significant impairment charges were recognized in fiscal 2021 or fiscal 2019.

We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate our impairment charges.

During fiscal 2020, we recognized $72.5 million of impairment of long-lived tangible and right-of-use assets which consisted of $41.9 million due to the carrying values of certain long-lived assets exceeding their respective fair values, $19.6 million related to the suspension of the planned expansion to Canada, and $11.0 million related to the permanent closure of 19 stores.

No impairment charges were recognized in fiscal 2022 or fiscal 2021.

Loyalty program

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The expected redemption percentage is based on historical redemption patterns and considers current information or trends.

The estimated redemption rate is evaluated each reporting period.

We do not believe that there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to calculate the estimated redemption rate.

The standalone selling price of points earned and the estimated redemption rate is evaluated each reporting period.

We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to calculate the estimated redemption rate.

Adjustments to earnings resulting from revisions to management’s estimates of the redemption rates have been insignificant during fiscal 2022, 2021 and 2020.

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Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

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-K

Item 7. Management’s Discussion and Analysis