What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-27 compared with 2021-06-10 · 99 added, 68 removed, 200 unchanged (46% of the section changed)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”), as well as the corresponding Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (the “2020 Form 10-K”) .

The discussion and analysis below contain certain forward-looking statements about our business and operations that are subject to the risks, uncertainties, and other factors described in the sections entitled “Risk Factors” in Part I, Item 1A in the 2020 Form 10-K and Part II, Item 1A in this Form 10-Q.

These risks, uncertainties, and other factors could cause our actual results to differ materially from those expressed in, or implied by, the forward-looking statements.

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Petco Health and Wellness Company, Inc.

(“Petco”, the “Company”, “we”, “our” and “us”) is category-defining health and wellness company focused on improving the lives of pets, pet parents and our own partners.

(“Petco”, the “Company”, “we”, “our” and “us”) is a category-defining health and wellness company focused on improving the lives of pets, pet parents, and our own partners.

Since our founding in 1965, we have been striving to set new standards in pet care, delivering comprehensive wellness solutions through our products and services, and creating communities that deepen the pet-pet parent bond.

Over the last three years, our world-class leadership team and our dedicated and passionate partners have transformed the business form a successful yet traditional retailer to a disruptive, fully integrated, digital-focused provider of premium nutrition, products, services and veterinary care.

We operate more than 1,500 Petco locations across the U.S., Mexico, and Puerto Rico, including a growing network of 137 in-store veterinary hospitals, and offer a complete online resource for pet health and wellness at petco.com and on the Petco app.

Over the last three years, our world-class leadership team and our dedicated and passionate partners have transformed the business from a successful yet traditional retailer to a disruptive, fully integrated, digital-focused provider of premium nutrition, products, services and veterinary care.

We operate more than 1,500 Petco locations across the U.S., Mexico, and Puerto Rico, including a growing network of more than 150 in-store veterinary hospitals, and offer a complete online resource for pet health and wellness at petco.com and on the Petco app.

Our go-to-market strategy is powered by a multi-channel platform that integrates our digital presence with a nationwide physical network.

Our e-commerce site and personalized mobile app serve as a hub for pet parents to manage their pets’ health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want.

By leveraging an extensive physical network we are able to offer a comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over the competition.

We strive to be a truly unique company, one that is saving and improving millions of pet lives and tangibly improving the lives of the partners who work for us, while at the same time executing our differentiated strategy with excellence.

Our e-commerce site and personalized mobile app serve as hubs for pet parents to manage their pets’ health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want.

By leveraging an extensive physical network, we are able to offer a comprehensive product and service offering in a localized manner with a meaningful last-mile delivery advantage over the competition.

We strive to be a truly unique company, one that is saving and improving millions of pet lives and tangibly improving the lives of pet parents and the partners who work for us, while at the same time executing our differentiated strategy with excellence.

In tandem with Petco Love (formerly the Petco Foundation), an independent nonprofit organization, we work with and support thousands of local animal welfare groups across the country and, through in-store adoption events, we have helped find homes for more than 6.5 million animals.

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We cannot predict the duration or severity of COVID-19 or its ultimate impact on the broader economy or our operations and liquidity.

Please refer to the risk factors described in the sections entitled “Risk Factors” in Part I, Item 1A in the 2020 Form 10-K and Part II, Item 1A in this Form 10-Q.

Please refer to the risk factors described in the sections entitled “Risk Factors” in Part I, Item 1A in the 2020 Form 10-K and Part II, Item 1A in the Q1 Form 10-Q and this Form 10-Q.

How We Assess the Performance of Our Business

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Our business transformation initiatives, accelerated by an increase in pet ownership and a shift in customer discretionary spend toward the pet category, have driven strong top and bottom-line growth in our business.

Comparing the thirteen weeks ended May 1, 2021 with the thirteen weeks ended May 2, 2020, we achieved the following results:

Comparing the thirteen weeks ended July 31, 2021 with the thirteen weeks ended August 1, 2020, we achieved the following results:

an increase in net sales from $1.21 billion to $1.43 billion, representing period-over-period growth of 18.7%;

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an increase in operating income from $65.0 million to $73.5 million, representing period-over-period growth of 12.9%;

an increase in net income (loss) attributable to Class A and B-1 common stockholders from a loss of $31.2 million to income of $7.6 million, representing a period-over-period improvement of 124.3%;

an increase in net income attributable to Class A and B-1 common stockholders from $7.4 million to $75.1 million, representing a period-over-period improvement of 909.4%;

an increase in Adjusted EBITDA from $130.8 million to $155.1 million, representing period-over-period growth of 18.5%;

net operating cash flows improved from $32.3 million used in operating activities during the thirteen weeks ended May 2, 2020 to $115.0 million provided by operating activities during the thirteen weeks ended May 1, 2021.

net cash flows provided by operating activities improved from $92.4 million during the twenty-six weeks ended August 1, 2020 to $202.4 million during the twenty-six weeks ended July 31, 2021.

For a description of our non-GAAP measures and reconciliations to their most comparable GAAP measures, please read the section below titled “Reconciliation of Non-GAAP Financial Measures to GAAP Measures.”

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Thirteen weeks ended

Twenty-six weeks ended

Cost of sales

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Loss on extinguishment and modification of debt

Income (loss) before income taxes and income from

equity method investees

Other non-operating income

Income (loss) before income taxes and income

from equity method investees

Income tax expense (benefit)

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Net loss attributable to noncontrolling interest

Net income (loss) attributable to Class A and B-1 common

Net income (loss) attributable to Class A and B-1

common stockholders

Thirteen weeks ended

Twenty-six weeks ended

Cost of sales

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Loss on extinguishment and modification of debt

Income (loss) before income taxes and income from

equity method investees

Other non-operating income

Income (loss) before income taxes and income

from equity method investees

Income tax expense (benefit)

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Net loss attributable to noncontrolling interest

Net income (loss) attributable to Class A and B-1 common

Net income (loss) attributable to Class A and B-1

common stockholders

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Twenty-six weeks ended

Operational Data:

Comparable sales increase (decrease)

Comparable sales

Total pet care centers at end of period

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Adjusted EBITDA (in thousands)

Thirteen Weeks Ended May 1, 2021 Compared with Thirteen Weeks Ended May 2, 2020

Thirteen and Twenty-six Weeks Ended July 31, 2021 Compared with Thirteen and Twenty-six Weeks Ended August 1, 2020

Net Sales and Comparable Sales

Net sales increased $301.5 million, or 27.1%, to $1.41 billion in the thirteen weeks ended May 1, 2021 compared to net sales of $1.11 billion in the thirteen weeks ended May 2, 2020, driven by a 28.4% increase in our comparable sales.

Our sales growth period-over-period was driven by our strong execution and unique model across digital and in our pet care centers, coupled with an increase in pet ownership associated with the COVID-19 pandemic and benefits from government stimulus payments.

Pet care centers delivered growth of 26.1% driven by an increase in pet adoptions and more customer traffic in our centers.

Our e-commerce and digital sales increased 21.2%, lapping strong digital sales growth in the same period last year at the start of the COVID-19 pandemic.

This growth is driven by the increase in pets as well as our integrated offerings, which include buy online and pick up in store , curbside pick-up, ship-from-store, repeat delivery, and same day delivery.

Supplies and companion animal sales increased 33.3% between the periods d ue to increases in pet ownership and shifts in disposable income toward pets.

Dog and cat food sales increased 13.2% and services and other sales increased 71.9% between the periods, respectively.

The increase in services was due in part to growth in our veterinary hospital business with the addition of 48 new hospitals period-over-period coupled with headwinds experienced during the thirteen weeks ended May 2, 2020 with the temporary suspension of our training, grooming and vaccination clinic services while stay-at-home orders were in place.

Cost of Goods Sold and Gross Profit

Gross profit increased $130.7 million, or 28.0%, to $597.0 million in the thirteen weeks ended May 1, 2021 compared to gross profit of $466.3 million for the thirteen weeks ended May 2, 2020.

As a percentage of sales, our gross profit rate improved slightly at 42.2% for the thirteen weeks ended May 1, 2021 compared to 41.9% for the thirteen weeks ended May 2, 2020.

The increase in gross profit was due to the overall increase in net sales across key business areas, which was partially offset by an increase in supply chain expenses to support higher sales volume.

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Supplies and companion animals

Services and other

Net sales increased $225.6 million, or 18.7%, to $1.43 billion in the thirteen weeks ended July 31, 2021 compared to net sales of $1.21 billion in the thirteen weeks ended August 1, 2020, driven by a 19.7% increase in our comparable sales.

Net sales increased $527.0 million, or 22.7%, to $2.85 billion in the twenty-six weeks ended July 31, 2021 compared to net sales of $2.32 billion in the twenty-six weeks ended August 1, 2020, driven by a 23.9% increase in our comparable sales.

Our sales growth period-over-period was driven by our strong execution and differentiated model across digital and in our pet care centers, coupled with an increase in new pet ownership and a resulting increase in sales to meet the needs of these pet parents.

For the thirteen and twenty-six weeks ended July 31, 2021, pet care center merchandise delivered growth of 16.9% and 20.9%, respectively, with strong growth in all major categories including consumables, supplies and companion animals.

Our e-commerce and digital sales increased 14.3% and 17.9% during the thirteen and twenty-six weeks ended July 31, 2021 respectively, lapping strong sales growth in the same period last year at the start of the COVID-19 pandemic.

This digital sales growth excludes the impact associated with the closure of our Live Aquaria business during the thirteen and twenty-six weeks ended August 1, 2020 .

The increase in services and other was due in part to growth in our veterinary hospital business with the addition of 62 new hospitals period-over-period coupled with headwinds experienced during the thirteen and twenty-six weeks ended August 1, 2020 with the temporary suspension of our training, grooming and vaccination clinic services while stay-at-home orders were still in place.

The increase in consumables between the periods is driven by the increase in new pets and our strategic investments in customer acquisition and retention.

Also affecting the comparison in our sales mix for the thirteen and twenty-six weeks ended July 31, 2021 was the prior year impact of the COVID-19 pandemic.

After experiencing an increase in consumables sales due to pantry loading during the first quarter of fiscal year 2020, we saw our sales mix shift heavily to supplies and companion animals during the thirteen weeks ended August 1, 2020 due to increases in new pets and shifts in disposable income towards pets, and initial stimulus payments which provided additional disposable income to pet parents.

Gross profit increased $69.7 million, or 13.1%, to $599.4 million in the thirteen weeks ended July 31, 2021 compared to gross profit of $529.8 million for the thirteen weeks ended August 1, 2020.

As a percentage of sales, our gross profit rate was 41.8% for the thirteen weeks ended July 31, 2021 compared with 43.8% for the thirteen weeks ended August 1, 2020.

Gross profit increased $200.4 million, or 20.1%, to $1,196.4 million in the twenty-six weeks ended July 31, 2021 compared to gross profit of $996.0 million for the twenty-six weeks ended August 1, 2020.

As a percentage of sales, our gross profit rate was 42.0% for the twenty-six weeks ended July 31, 2021 compared with gross profit 42.9% for the twenty-six weeks ended August 1, 2020.

The decrease in gross profit rate between the periods was primarily due to the unique macroeconomic conditions that impacted our sales mix during the early months of the COVID-19 pandemic, as described above.

In particular, the influx of new pets in fiscal 2020 drove a higher supplies sales mix, which typically carry higher gross margin rates compared to other categories of sales.

During the thirteen and twenty-six weeks ended July 31, 2021, this sales mix has shifted from supplies to higher consumables, though we expect overall customer sales patterns to moderate over time.

Sales channel impacts driven by strength in our digital, services and vet business, and moderate increases in distribution costs also contributed to the decrease in gross profit rate during the thirteen and twenty-six weeks ended July 31, 2021 as compared to the prior year.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses increased $99.3 million, or 22.1%, to $549.2 million for the thirteen weeks ended May 1, 2021 compared to $449.9 million for the thirteen weeks ended May 2, 2020.

As a percentage of net sales, SG&A expenses improved from 40.4% for the thirteen weeks ended May 2, 2020 to 38.8% for the thirteen weeks ended May 1, 2021, reflecting operating leverage from net sales growth.

SG&A expenses increased $61.2 million, or 13.2%, to $525.9 million for the thirteen weeks ended July 31, 2021 compared to $464.7 million for the thirteen weeks ended August 1, 2020.

As a percentage of net sales, SG&A expenses was 36.7% for the thirteen weeks ended July 31, 2021 compared with 38.4% for the thirteen weeks ended August 1, 2020, reflecting operating leverage from net sales growth.

The increase in expenses period over period was partially due to a $34.0 million increase in G&A expenses.

A portion of this increase was due to a legal settlement accrual for a class action matter as well as increase in stock-based compensation expense driven by our initial public offering.

The remainder of the increase in SG&A was predominately due to higher incentive compensation for corporate and field partners along with increased variable costs associated with our higher sales growth.

In addition, SG&A expenses were lower for the thirteen weeks ended August 1, 2020 due to precautionary cost containment measures put in place throughout the early stages of the COVID-19 pandemic.

SG&A expenses increased $160.6 million, or 17.6%, to $1,075.2 million for the twenty-six weeks ended July 31, 2021 compared to $914.6 million for the twenty-six weeks ended August 1, 2020.

As a percentage of net sales, SG&A expenses was 37.7% for the twenty-six weeks ended July 31, 2021 compared with 39.4% for the twenty-six weeks ended August 1, 2020, reflecting operating leverage from net sales growth.

The increase in expenses period-over-period was driven by a $45.5 million increase in advertising expenses to support the acceleration of our sales growth.

The remainder of the increase was predominately due to higher incentive compensation for corporate and field employees along with increased variable costs associated with our higher sales growth.

In addition, SG&A expenses were lower for the thirteen weeks ended May 2, 2020 due to cost containment measures implemented at the start of the COVID-19 pandemic.

The remainder of the increase was predominately due to the drivers discussed in the paragraph above.

Interest Expense

Interest expense decreased $40.3 million, or 66.2%, to $20.5 million in the thirteen weeks ended May 1, 2021 compared with $60.8 million in the thirteen weeks ended May 2, 2020.

The decrease was primarily driven by the redemption/cancellation of the Floating Rate Senior Notes and the 3.00% Senior Notes (each as defined in Note 3 , “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q ) and repayment of a portion of our then-outstanding senior secured term loan facility (the “Amended Term Loan Facility”) in connection with our initial public offering.

Interest expense decreased $35.3 million, or 64.8%, to $19.2 million in the thirteen weeks ended July 31, 2021 compared with $54.5 million in the thirteen weeks ended August 1, 2020.

Interest expense decreased $75.6 million, or 65.5%, to $39.7 million in the twenty-six weeks ended July 31, 2021 compared with $115.3 million in the twenty-six weeks ended August 1, 2020.

The decrease was primarily driven by the redemption/cancellation of the Floating Rate Senior Notes and the 3.00% Senior Notes and repayment of a portion of our then-outstanding Amended Term Loan Facility (each as defined in Note 4 , “ Senior Notes ,” and Note 3, “ Senior Secured Credit Facilities, ” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q ) in connection with our initial public offering.

In March 2020, we borrowed $250.0 million on our then-outstanding senior secured asset-based revolving credit facility (the “Amended Revolving Credit Facility”) as a precautionary measure given the uncertainty of the macroeconomic environment at the start of the COVID-19 pandemic.

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Loss on Extinguishment and Modification of Debt

Loss on extinguishment and modification of debt was $20.8 million for the thirteen weeks ended May 1, 2021.

Loss on extinguishment and modification of debt was $20.8 million for the twenty-six weeks ended July 31, 2021.

This loss was recognized in conjunction with the March 4, 2021 debt refinancing transaction described above.

There was no loss on debt extinguishment and modification for the thirteen weeks ended May 2, 2020.

information regarding these activities, refer to Note 3 , “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q .

There was no loss on debt extinguishment and modification for the thirteen weeks ended July 31, 2021 or the thirteen and twenty-six weeks ended August 1, 2020.

For more information regarding these activities, refer to Note 3 , “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Other Non-Operating Income

Other non-operating income was $45.2 million for the thirteen and twenty-six weeks ended July 31, 2021.

This income relates to a non-cash gain from the remeasurement of the fair value of our investment in A Place for Rover, Inc.

There was no other non-operating income recognized during the thirteen or twenty-six weeks ended August 1, 2020.

For more information regarding this activity, refer to Note 6 , “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Income Tax Expense (Benefit)

Our effective tax rate was 26.2% for the thirteen weeks ended May 1, 2021, resulting in income tax expense of $2.7 million, compared to an effective tax rate of 25.8% and income tax benefit of $10.6 million for the thirteen weeks ended May 2, 2020.

The increase in effective tax rate is primarily driven by an increase in earnings along with an increase in stock-based compensation for the thirteen weeks ended May 1, 2021.

Our effective tax rates were 26.4% and 26.4%, resulting in income tax expense of $27.0 million and $29.7 million for the thirteen and twenty-six weeks ended July 31, 2021, respectively, compared to effective tax rates of 39.4% and 19.2%, resulting in income tax expense (benefit) of $5.0 million and $(5.6) million for the thirteen and twenty-six weeks ended August 1, 2020, respectively.

The increase in effective tax rate for the twenty-six weeks

ended July 31, 2021 is primarily driven by an increase in earnings along with an increase in stock-based compensation expense.

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

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Twenty-six weeks ended

Reconciliation of Net Income (Loss) Attributable to Class A and B-1

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Equity-based compensation

Other non-operating income

Mexico joint venture EBITDA (1)

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(dollars in thousands)

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Foreign currency (gain) loss

Interest expense (income), net

Interest expense, net

50% of EBITDA

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Non-recurring costs include:

unrealized fair market value adjustments on non-operating investments;

legal reserves and related fees;

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discontinuation and liquidation costs;

and costs related to our initial public offering.

and costs related to our initial public offering and refinancing.

While we incurred significant costs associated with the COVID-19 pandemic during fiscal 2020, we have not classified any of these costs as non-recurring due to the uncertainty surrounding the pandemic’s length and long-term impact on the macroeconomic operating environment.

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Free Cash Flow is a non-GAAP financial measure that is calculated as net cash provided by operations less cash paid for fixed assets.

Management believes that Free Cash Flow, which measures our ability to generate additional cash from our business operations, is an important financial measure for use in evaluating the Company’s financial performance.

Management believes that Free Cash Flow, which measures our ability to generate

additional cash from our business operations, is an important financial measure for use in evaluating the C ompany’s financial performance.

Although other companies report their free cash flow, numerous methods exist for calculating a company’s free cash flow.

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The table below reflects the calculation of Free Cash Flow for the periods presented:

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(dollars in thousands)

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Cash paid for fixed assets

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Our ability to fund our operations, to make planned capital investments, to make scheduled debt payments and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond our control.

Our liquidity as of May 1, 2021 was $594.5 million inclusive of cash and cash equivalents of $174.0 million and $420.5 million of availability on the ABL Revolving Credit Facility.

Our liquidity as of July 31, 2021 was $644.5 million, inclusive of cash and cash equivalents of $203.4 million and $441.1 million of availability on the ABL Revolving Credit Facility.

We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under the ABL Revolving Credit Facility will be sufficient to finance our operations, meet our current cash requirements, and fund anticipated capital investments for at least the next 12 months.

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There have been no material changes to our contractual obligations as compared to those described in the 2020 Form 10-K , except for the debt refinancing transaction that occurred on March 4, 2021.

For more information regarding our primary obligations,

refer to Note 3 , “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for amounts outstanding as of May 1, 2021 related to our debt .

For more information regarding our primary obligations, refer to Note 3 , “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for amounts outstanding as of July 31, 2021 related to our debt .

Also refer to further discussion on our debt refinancing transaction in “Sources of Liquidity” below.

The following table summarizes our consolidated cash flows:

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(dollars in thousands)

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Financing activities

Net increase in cash, cash equivalents and restricted cash

Net increase in cash, cash equivalents

and restricted cash

Operating Activities

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impairments of goodwill and intangible assets;

other non-operating income;

and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $115.0 million in the thirteen weeks ended May 1, 2021 compared with net cash used in operating activities of $32.3 million in the thirteen weeks ended May 2, 2020.

The increase in operating cash flow was due to strong operating performance and working capital benefit generated by higher sales as well as lower interest payments due to the reduction of debt balances in connection with the initial public offering and the refinancing transaction that occurred on March 4, 2021 discussed under “Sources of Liquidity” below.

The increase in operating cash flows between the periods was partially offset by higher payroll, bonus and fringe benefits driven by operating performance and pet care center appreciation bonuses, an increase in cash paid for inventory driven by higher inventory turns, an increase in cash paid on operating leases due to the timing of rent payments and an increase in advertising spend.

Net cash provided by operating activities was $202.4 million in the twenty-six weeks ended July 31, 2021 compared with net cash provided by operating activities of $92.4 million in the twenty-six weeks ended August 1, 2020.

The increase in operating cash flow was due to strong operating performance and working capital benefit generated by higher sales as well as lower interest payments due to the reduction of debt balances in connection with the initial public offering and related recapitalization, and the refinancing transaction that occurred on March 4, 2021 discussed under “Sources of Liquidity” below.

The increase in operating cash flows between the periods was partially offset by an increase in cash paid for inventory driven by higher inventory turns, higher payroll, bonus and fringe benefits driven by operating performance and pet care center appreciation bonuses, an increase in advertising spend, and an increase in cash paid on operating leases due to the timing of rent payments.

Investing Activities

Cash used in investing activities consists of capital expenditures, which in the thirteen weeks ended May 1, 2021 and the thirteen weeks ended May 2, 2020 primarily supported our transformation initiatives.

Net cash used in investing activities was $47.4 million and $27.9 million for the thirteen weeks ended May 1, 2021 and May 2, 2020, respectively.

The increase in capital expenditures between the periods is partially due to a reduction in capital expenditures put in place for the thirteen weeks ended May 2, 2020 at the start of the COVID-19 pandemic.

Cash used in investing activities consists of capital expenditures, which in the twenty-six weeks ended July 31, 2021 and the twenty-six weeks ended August 1, 2020 primarily supported our transformation initiatives.

Net cash used in investing activities was $102.6 million and $48.7 million for the twenty-six weeks ended July 31, 2021 and August 1, 2020, respectively.

The increase in capital expenditures between the periods is partially due to a reduction in capital expenditures put in place for the twenty-six weeks ended August 1, 2020 throughout the early stages of the

COVID-19 pandemic.

The majority of our capital expenditures are discretionary in nature and made to expand our business.

Financing Activities

Net cash used in financing activities was $7.2 million for the thirteen weeks ended May 1, 2021, compared with $253.8 million provided by financing activities in the thirteen weeks ended May 2, 2020.

Financing cash flows in the thirteen weeks ended May 1, 2021 primarily consisted of borrowings and repayments of debt in connection with the March 4, 2021 debt refinancing transaction.

Net cash used in financing activities was $11.2 million for the twenty-six weeks ended July 31, 2021, compared with $19.1 million used in financing activities in the twenty-six weeks ended August 1, 2020.

Financing cash flows in the twenty-six weeks ended July 31, 2021 primarily consisted of borrowings and repayments of debt in connection with the March 4, 2021 debt refinancing transaction.

For more information regarding these activities, refer to Note 3 “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q .

Financing cash flows in the thirteen weeks ended May 2, 2020 included a precautionary draw on the Amended Revolving Credit Facility of $250.0 million in March 2020 at the start of the COVID-19 pandemic.

Financing cash flows in the twenty-six weeks ended August 1, 2020 included a precautionary draw on the Amended Revolving Credit Facility of $250.0 million in March 2020 at the start of the COVID-19 pandemic.

As operations stabilized and financial results improved, the balance was repaid in full in the second quarter of fiscal 2020.

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On March 4, 2021, the Company completed a refinancing transaction by entering into the $1,700 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and the ABL Revolving Credit Facility, which matures on March 4, 2026 and has availability of up to $500.0 million, subject to a borrowing base.

The refinancing transaction, in combination with the application of the proceeds from the Company’s initial public offering and other recapitalization transactions in connection therewith, reduced the Company’s total debt by 52.3% percent over the thirteen weeks ended May 2, 2020.

Net Debt as a result of these transactions decreased $1,700 million or 52.7% to $1,500 million at May 1, 2021.

Net Debt as a result of these transactions decreased $1,619.5 million or 52.3% to $1,475.2 million at July 31, 2021.

Our Net Debt to Adjusted EBITDA ratio as a result of these transactions improved from 6.9x at August 1, 2020 to 2.7x at July 31, 2021.

Interest under the First Lien Term Loan is at the Company’s option, either a base rate or Adjusted LIBOR, subject to a 0.75% floor, payable upon maturity of the LIBOR contract, in either case plus the applicable rate.

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For more information regarding this indebtedness, refer to Note 3, “ Senior Secured Credit Facilities ,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q .

Derivative Instruments

In March 2016, the Company entered into a series of five interest rate cap agreements with four counterparties totaling $1,950.0 million to limit the maximum interest rate on a portion of the variable-rate debt and limit exposure to interest rate variability when three-month LIBOR exceeds 2.25%.

The interest rate caps were accounted for as cash flow hedges, and changes in the fair value of the interest rate caps were reported as a component of accumulated other comprehensive income.

The interest rate caps were settled in accordance with their contractual terms on January 29, 2021.

Critical Accounting Policies and Estimates

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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