and the fair value of the reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. Management believes ASU 2017-04 will have no impact on the Company’s consolidated financial statements.
(3) Property and Equipment
Property and equipment as of August 4, 2018 and February 3, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
August 4,
|
|
February 3,
|
|
|
|
2018
|
|
2018
|
|
Furniture, fixtures, and equipment
|
|
$
|
68,683
|
|
$
|
65,437
|
|
Leasehold improvements
|
|
|
86,408
|
|
|
84,345
|
|
Construction in progress
|
|
|
7,774
|
|
|
2,434
|
|
Total property and equipment, gross
|
|
|
162,865
|
|
|
152,216
|
|
Less accumulated depreciation and amortization
|
|
|
(67,016)
|
|
|
(58,181)
|
|
Total property and equipment, net
|
|
$
|
95,849
|
|
$
|
94,035
|
|
(4) Accrued Expenses
Accrued expenses consisted of the following as of August 4, 2018 and February 3, 2018:
|
|
|
|
|
|
|
|
|
August 4,
|
|
February 3,
|
|
|
2018
|
|
2018
|
Book overdraft
|
|
$
|
15,804
|
|
$
|
9,944
|
Unearned revenue
|
|
|
16,876
|
|
|
22,874
|
Accrued payroll and related expenses
|
|
|
10,682
|
|
|
8,004
|
Sales and use tax payable
|
|
|
4,493
|
|
|
3,277
|
Accrued construction costs
|
|
|
1,287
|
|
|
605
|
Other
|
|
|
8,956
|
|
|
5,898
|
Total Accrued Expenses
|
|
$
|
58,098
|
|
$
|
50,602
|
(5) Revolving Line of Credit
On May 23, 2018, Sportsman’s Warehouse, Inc. (“SWI”), a wholly owned subsidiary of the Company, as borrower, and Wells Fargo Bank, National Association (“Wells Fargo”), with a consortium of banks led by Wells Fargo, entered into an Amended and Restated Credit Agreement (as amended, restated, supplemented or otherwise modified, the “Amended Credit Agreement”). The Amended Credit Agreement amended and restated in its entirety that certain Credit Agreement, dated as of May 28, 2010, by and among SWI, as borrower, and Wells Fargo, as lender, and the other parties listed on the signature pages thereto.
The Amended Credit Agreement increased the amount available to borrow under the Company’s senior secured revolving credit facility (“Revolving Line of Credit”) from $150,000 to $250,000, subject to a borrowing base calculation, and provided for a new $40,000 term loan (the “New Term Loan”).
In conjunction with the Amended Credit Agreement, the Company incurred $1,331 of fees paid to various parties which were capitalized. Fees associated with the Revolving Line of Credit were recorded in prepaid and other assets. Fees associated with the New Term Loan offset the loan balance on the condensed consolidated balance sheet of the Company.
As of August 4, 2018, the Company had $183,886 in outstanding revolving loans under the Amended Credit Agreement and as of February 3, 2018, the Company had $66,621 in outstanding revolving loans under the Revolving Line of Credit. Amounts outstanding are offset on the condensed consolidated balance sheets by amounts in depository accounts under lock-box or similar arrangements, which were $10,065 and $6,629 as of August 4, 2018 and February 3, 2018, respectively. As of August 4, 2018, the Company had stand-by commercial letters of credit of $1,505 under the terms of the Revolving Line of Credit.
The Amended Credit Agreement contains customary affirmative and negative covenants, including covenants that limit the Company’s ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. The Amended Credit Agreement also requires us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base. The Amended Credit Agreement also contains customary events of default. The Revolving Line of Credit matures on
May 23, 2023
.
As of August 4, 2018, the Amended Credit Agreement had $1,207 in outstanding deferred financing fees and as of February 3, 2018, the Revolving Line of Credit had $393 in outstanding deferred financing fees. During the 13 weeks and 26 weeks ended August 4, 2018, the Company recognized $62 and $84 of non-cash interest expense with respect to the amortization of these deferred financing fees. During the 13 and 26 weeks ended July 29, 2017, the Company recognized $40 and $80 of non-cash interest expense with respect to the amortization of deferred financing fees.
(6) Long-Term Debt
Long-term debt consisted of the following as of August 4, 2018 and February 3, 2018:
|
|
|
|
|
|
|
|
|
|
August 4,
|
|
February 3,
|
|
|
|
2018
|
|
2018
|
|
Prior Term Loan
|
|
$
|
—
|
|
$
|
135,127
|
|
New Term loan
|
|
|
40,000
|
|
|
—
|
|
Less discount
|
|
|
—
|
|
|
(678)
|
|
Less debt issuance costs
|
|
|
(410)
|
|
|
(1,110)
|
|
|
|
|
39,590
|
|
|
133,339
|
|
Less current portion, net of discount and debt issuance costs
|
|
|
(7,915)
|
|
|
(990)
|
|
Long-term portion
|
|
$
|
31,675
|
|
$
|
132,349
|
|
Term Loan
On May 23, 2018, the Company entered into the New Term Loan, which was
issued at a price of 100% of the aggregate principal amount of $40,000 and has a maturity date of May 23, 2023.
Also on May 23, 2018, the Company borrowed $135,400 under the Revolving Line of Credit and used the proceeds from the New Term Loan and the Revolving Line of Credit to repay the Company’s prior term loan with a financial institution that had an outstanding principal balance of $134,700 and was scheduled to mature on December 3, 2020.
The New Term Loan bears interest at a rate of LIBOR plus 5.75%.
As of August 4, 2018, and February 3, 2018, the New Term Loan and prior Term Loan, respectively had an outstanding balance of $40,000 and $135,127, respectively. The outstanding amounts as of August 4, 2018 and February 3, 2018 are offset on the condensed consolidated balance sheets by an unamortized discount of $0 and $678, respectively, and debt issuance costs of $410 and $1,110, respectively.
During the 13 and 26 weeks ended August 4, 2018, the Company recognized $620 and $678, respectively, of non-cash interest expense with respect to the amortization of the discount. During the 13 and 26 weeks ended August 4, 2018, the Company recognized $1,018 and $1,131, respectively, of non-cash interest expense with respect to the amortization of the debt issuance costs. Of the discount and debt issuance cost amortization recorded during the 26 weeks ended August 4, 2018, $1,617 relates to the write-off associated with the extinguishment of the prior Term Loan.
During the 13 and 26 weeks ended July 29, 2017, the Company recognized $58 and $100, respectively, of non-cash interest expense with respect to the amortization of the discount. During the 13 and 26 weeks ended July 29, 2017, the Company recognized $92 and $168, respectively, of non-cash interest expense with respect to the amortization of the debt issuance costs.
The Company is required to make quarterly payments on the New Term Loan of $2,000 beginning in October 31, 2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018. Also see “Statement Regarding Forward-Looking Statements” preceding Part I in this 10-Q.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this 10-Q.
Overview
We are a high-growth outdoor sporting goods retailer focused on meeting the everyday needs of the seasoned outdoor veteran, the first-time participant and every enthusiast in between. Our mission is to provide a one-stop shopping experience that equips our customers with the right quality, brand name hunting, shooting, fishing and camping gear to maximize their enjoyment of the outdoors.
Our business was founded in 1986 as a single retail store in Midvale, Utah. Today, we operate 91 stores in 23 states, totaling approximately 3.6 million gross square feet. During fiscal year 2018 to date, we have increased our gross square footage by 3.0% through the opening of four stores in the following locations:
|
·
|
|
Sheridan, Wyoming March 8, 2018
|
|
·
|
|
Walla Walla, Washington April 19, 2018
|
|
·
|
|
Anderson, South Carolina June 21, 2018
|
|
·
|
|
Coon Rapids, Minnesota August 2, 2018
|
Individual stores are aggregated into one operating and reportable segment.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, same store sales, gross margin, selling, general, and administrative expenses, income from operations and Adjusted EBITDA.
Net Sales and Same Store Sales
Our net sales are primarily received from revenue generated in our stores and also include sales generated through our e-commerce platform. When measuring revenue generated from our stores, we review our same store sales as well as the performance of our stores that have not operated for a sufficient amount of time to be included in same store sales. We include net sales from a store in same store sales on the first day of the 13th full fiscal month following the store’s opening or acquisition by us. We include net sales from e-commerce in our calculation of same store sales.
Measuring the change in year-over-year same store sales allows us to evaluate how our retail store base is performing. Various factors affect same store sales, including:
|
·
|
|
changes or anticipated changes to regulations related to some of the products we sell;
|
|
·
|
|
consumer preferences, buying trends and overall economic trends;
|
|
·
|
|
our ability to identify and respond effectively to local and regional trends and customer preferences;
|
|
·
|
|
our ability to provide quality customer service that will increase our conversion of shoppers into paying customers;
|
|
·
|
|
competition in the regional market of a store;
|
|
·
|
|
changes in our product mix; and
|
|
·
|
|
changes in pricing and average ticket sales.
|
Opening new stores is also an important part of our growth strategy. For fiscal year 2018 we have opened four stores as of August 4, 2018 and announced one additional location that will be opened in fiscal year 2018. While our target remains to grow square footage at a rate of greater than 10% annually, we will grow our square footage by approximately 5% for fiscal year 2018 as we shift some of our cash use to reducing our debt balance.
For our new locations, we measure our investment by reviewing the new store’s four-wall Adjusted EBITDA margin and pre-tax return on invested capital (“ROIC”). We target a minimum 10% four-wall Adjusted EBITDA margin and a minimum ROIC of 50% excluding initial inventory costs (or 20% including initial inventory cost) for the first full twelve months of operations for a new store. The 48 new stores that we have opened since 2010 and that have been open for a full twelve months (excluding the 10 acquired stores) have achieved an average four-wall Adjusted EBITDA margin of 12.4% and an average ROIC of 66.4% excluding initial inventory cost (and 25.6% including initial inventory cost) during their first full twelve months of operations. Four-wall Adjusted EBITDA means, for any period, a particular store’s Adjusted EBITDA, excluding any allocations of corporate selling, general, and administrative expenses allocated to that store. Four-wall Adjusted EBITDA margin means, for any period, a store’s four-wall Adjusted EBITDA divided by that store’s net sales. For a definition of Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation of net income to Adjusted EBITDA, see “—Non-GAAP Measures.” ROIC means a store’s four-wall Adjusted EBITDA for a given period divided by our initial cash investment in the store. We calculate ROIC both including and excluding the initial inventory cost.
We also have been scaling our e-commerce platform and increasing sales through our website,
www.sportsmanswarehouse.com
.
We believe the key drivers to increasing our total net sales will be:
|
·
|
|
increasing our total gross square footage by opening new stores in our existing and new markets
|
|
·
|
|
continuing to increase same store sales through merchandise strategies and improved utilization of the existing square footage at our stores;
|
|
·
|
|
increasing customer visits to our stores and improving our conversion rate through focused marketing efforts, expanded loyalty engagement and continually high standards of customer service;
|
|
·
|
|
increasing the average ticket sale per customer; and
|
|
·
|
|
expanding our omni-channel capabilities.
|
Gross Margin
Gross profit is our net sales less cost of goods sold. Gross margin measures our gross profit as a percentage of net sales. Our cost of goods sold primarily consists of merchandise acquisition costs, including freight-in costs, shipping costs, payment term discounts received from the vendor and vendor allowances and rebates associated directly with merchandise and shipping costs related to e-commerce sales.
We believe the key drivers to improving our gross margin are increasing the product mix to higher margin products, particularly clothing and footwear, increasing foot traffic within our stores, improving buying opportunities with our vendor partners and coordinating pricing strategies among our stores and our merchandising department. Our ability to properly manage our inventory can also impact our gross margin. Successful inventory management ensures we have sufficient high margin products in stock at all times to meet customer demand, while overstocking of items could lead to markdowns in order to help a product sell. We believe that the overall growth of our business will allow us to generally maintain or increase our gross margins, because increased merchandise volumes will enable us to maintain our strong relationships with our vendors.
We expect the current industry inventory oversupply to result in continued high levels of promotions and resulting margin pressure through the remainder of fiscal year 2018.
Selling, General, and Administrative Expenses
We closely manage our selling, general, and administrative expenses. Our selling, general, and administrative expenses are comprised of payroll, rent and occupancy, depreciation and amortization, acquisition expenses, pre-opening expenses
and other operating expenses, including stock-based compensation expense. Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.
Our selling, general, and administrative expenses are primarily influenced by the volume of net sales of our locations, except for our corporate payroll, rent and occupancy and depreciation and amortization, which are generally fixed in nature. We control our selling, general, and administrative expenses through a budgeting and reporting process that allows our personnel to adjust our expenses as trends in net sales activity are identified.
We expect that our selling, general, and administrative expenses will increase in future periods due to our continuing growth. Furthermore, 43 of our current stores are being impacted by minimum wage increases in fiscal year 2018 that will drive up our selling, general, and administrative costs during fiscal year 2018.
Income from Operations
Income from operations is gross profit less selling, general, and administrative expenses. We use income from operations as an indicator of the productivity of our business and our ability to manage selling, general, and administrative expenses.
Adjusted EBITDA
We define Adjusted EBITDA as net income plus interest expense, income tax expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, and other gains, losses and expenses that we do not believe are indicative of our ongoing expenses. In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as an additional measurement tool for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. See “—Non-GAAP Measures.”
Results of Operations
The following table summarizes key components of our results of operations as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Percentage of net sales:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
64.4
|
|
64.2
|
|
66.7
|
|
66.4
|
|
Gross profit
|
|
35.6
|
|
35.8
|
|
33.3
|
|
33.6
|
|
Selling, general, and administrative expenses
|
|
29.1
|
|
28.4
|
|
30.9
|
|
30.6
|
|
Income from operations
|
|
6.5
|
|
7.4
|
|
2.4
|
|
3.0
|
|
Interest expense
|
|
2.1
|
|
1.8
|
|
2.1
|
|
1.9
|
|
Income before income taxes
|
|
4.4
|
|
5.6
|
|
0.3
|
|
1.1
|
|
Income tax expense
|
|
1.1
|
|
2.2
|
|
0.2
|
|
0.5
|
|
Net income
|
|
3.3%
|
|
3.4%
|
|
0.1%
|
|
0.6%
|
|
Adjusted EBITDA
|
|
9.3%
|
|
10.7%
|
|
6.2%
|
|
7.1%
|
|
The following table shows our sales during the periods presented by department:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-six Weeks Ended
|
|
|
|
|
August 4,
|
|
July 29,
|
|
|
August 4,
|
|
July 29,
|
|
Department
|
|
Product Offerings
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Camping
|
|
Backpacks, camp essentials, canoes and kayaks, coolers, outdoor cooking equipment, sleeping bags, tents and tools
|
|
20.4%
|
|
20.6%
|
|
|
16.2%
|
|
16.9%
|
|
Clothing
|
|
Camouflage, jackets, hats, outerwear, sportswear, technical gear and work wear
|
|
7.3%
|
|
7.4%
|
|
|
7.3%
|
|
7.3%
|
|
Fishing
|
|
Bait, electronics, fishing rods, flotation items, fly fishing, lines, lures, reels, tackle and small boats
|
|
17.0%
|
|
16.7%
|
|
|
14.5%
|
|
14.2%
|
|
Footwear
|
|
Hiking boots, socks, sport sandals, technical footwear, trail shoes, casual shoes, waders and work boots
|
|
7.6%
|
|
7.5%
|
|
|
7.0%
|
|
7.3%
|
|
Hunting and Shooting
|
|
Ammunition, archery items, ATV accessories, blinds and tree stands, decoys, firearms, reloading equipment and shooting gear
|
|
39.7%
|
|
40.3%
|
|
|
47.4%
|
|
46.4%
|
|
Optics, Electronics, Accessories, and Other
|
|
Gift items, GPS devices, knives, lighting, optics (e.g. binoculars), two-way radios, and License and Background check revenue, net of revenue discounts
|
|
8.0%
|
|
7.5%
|
|
|
7.6%
|
|
7.9%
|
|
Total
|
|
|
|
100.0%
|
|
100.0%
|
|
|
100.0%
|
|
100.0%
|
|
13 Weeks Ended August 4, 2018 Compared to 13 Weeks Ended July 29, 2017
Net Sales.
Net sales increased by $11.8 million, or 6.2%, to $203.3 million in the 13 weeks ended August 4, 2018 compared to $191.5 million in the corresponding period of fiscal year 2017. Net sales increased primarily due to sales from new store openings that have been open for less than 12 months and were, therefore, not included in same store sales. Stores that were opened in the 13 weeks ended August 4, 2018 contributed $0.9 million to this increase. Stores that were opened in fiscal year 2017 and that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed to $10.1 million of this increase. Included in the increase was also an increase in same store sales for the period of 0.2% compared to the comparable 13 week period of fiscal year 2017.
All our departments recognized an increase in net sales in the second quarter of fiscal year 2018 compared to the comparable 13-week period of fiscal year 2017. Our hunting and fishing departments experienced the largest increases in
net sales of $3.8 million and $2.1 million, respectively. Our camping, clothing, footwear, and optics, electronics and accessories departments also had increases of $0.2 million, $0.4 million, $0.9 million and $0.7 million, respectively, during the second quarter of fiscal year 2018 compared to the comparable period of fiscal year 2017.
With respect to same store sales, during the 13 weeks ended August 4, 2018, our footwear, fishing, and hunting departments had increases of 3.1%, 1.7%, and 0.5%, respectively while the camping, clothing, and optics, electronics and accessories departments had decreases of 2.5%, 0.7%, and 0.2%, respectively, compared to the comparable 13-week period of fiscal year 2017. We had increased sales in our hunting category as we continue to gain firearm and ammunition market share. Within our hunting and shooting department, firearms and ammunition increased on a same store sales basis by 3.6% and 0.6%, respectively, during the 13 weeks ended August 4, 2018 compared to the comparable 13-week period of fiscal year 2017. We experienced a decrease in demand for camping and clothing gear due to the extensive forest fires seen in the western United States which has had an impact on several key camping areas. As of August 4, 2018, we had 84 stores included in our same store sales calculation.
Gross Profit.
Gross profit increased by $3.7 million, or 5.3%, to $72.3 million for the 13 weeks ended August 4, 2018 from $68.6 million for the corresponding period of fiscal year 2017. As a percentage of net sales, gross profit remained relatively stable at 35.6% for the 13 weeks ended August 4, 2018, compared to 35.8% for the corresponding period of fiscal year 2017. Gross profit as a percentage of net sales was negatively impacted by a sales mix change compared to the prior year period from our higher margin product categories (clothing, footwear, and camping), to our lower margin product categories (hunting and shooting), which was partially offset by an increase in vendor incentives.
Selling, General, and Administrative Expenses.
Selling, general, and administrative expenses increased by $4.7 million, or 8.7%, to $59.1 million for the 13 weeks ended August 4, 2018 from $54.4 million for the corresponding period of fiscal year 2017. As a percentage of net sales, selling, general, and administrative expenses increased to 29.1% of net sales in the second quarter of fiscal year 2018 compared to 28.4% of net sales in the second quarter of fiscal year 2017. We incurred additional payroll, rent, depreciation, and other operating expenses of $3.0 million, $1.3 million, $0.1 million, and $0.9 million, respectively, primarily related to the opening of new stores and the impact of minimum wage increases across most of our stores. These increases were partially offset by a decrease in preopening expenses of $0.6 million.
Interest Expense.
Interest expense increased by $0.9 million, or 26.1%, to $4.3 million in the 13 weeks ended August 4, 2018 from $3.4 million for the corresponding period of fiscal year 2017. Interest expense increased primarily as a result of the write-off of $1.6 million in deferred financing fees and debt discount associated with our prior term loan offset by increased borrowing on our Amended Credit Facility which bear interest at lower rates than our prior term loan.
Income Taxes.
We recognized an income tax expense of $2.3 million and $4.2 million in the 13 weeks ended August 4, 2018 and July 29, 2017, respectively. Our effective tax rate for the 13 weeks ended August 4, 2018 and July 29, 2017 was 26.0% and 39.3%, respectively. Our effective tax rate declined compared to last year as a result of the adoption of the Tax Cuts and Jobs Act, which reduced the U.S. Federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018. Our effective tax rate generally differs from the U.S. Federal statutory rate of 21.0%, due to state taxes, permanent items, and discrete items.
26 Weeks Ended August 4, 2018 Compared to 26 Weeks Ended July 29, 2017
Net Sales.
Net sales increased by $35.0 million, or 10.0%, to $383.3 million in the 26 weeks ended August 4, 2018 compared to $348.4 million in the corresponding period of fiscal year 2017. Net sales increased primarily due to sales from new store openings that have been open for less than 12 months and were, therefore, not included in same store sales. Stores that were opened in the 26 weeks ended August 4, 2018 contributed $3.5 million to this increase. Stores that were opened in fiscal year 2017 and that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed to $25.6 million of this increase. Included in the increase was also an increase in same store sales for the period of 1.7% compared to the comparable 26 week period of fiscal year 2017.
All our departments recognized an increase in net sales in the first half of fiscal year 2018 compared to the comparable first half of fiscal year 2017. Our hunting and fishing departments experienced the largest increases in net sales of $18.2 million and $4.1 million, respectively. Our camping, clothing, footwear and optics, electronics and accessories departments also had increases of $0.3 million, $2.0 million, $0.9 million, and $1.4 million, respectively, during the first half of fiscal year 2018 compared to the comparable period of fiscal year 2017.
With respect to same store sales, during the 26 weeks ended August 4, 2018, our fishing, hunting, and clothing departments had increases of 2.4%, 4.6%, and 2.7%, respectively while the camping, footwear, and optics, electronics, and accessories departments had decreases of 3.4%, 0.5%, and 0.7%, respectively, compared to the comparable 26 week period of fiscal year 2017. We had increased sales in our hunting category due to the continuing political environment surrounding gun control, and actions taken by our competitors with respect to firearm policies. Within hunting and shooting, firearms and ammunition increased by 11.1% and 5.3%, respectively, during the 26 weeks ended August 4, 2018 compared to the comparable 26 week period of fiscal year 2017. We experienced a decrease in demand for camping and footwear gear as the spring was warmer than normal and due to the extensive forest fires seen in the western United States which has had an impact on several key camping areas. As of August 4, 2018, we had 84 stores included in our same store sales calculation.
Gross Profit.
Gross profit increased by $10.6 million, or 9.1%, to $127.8 million for the 26 weeks ended August 4, 2018 from $117.2 million for the corresponding period of fiscal year 2017. As a percentage of net sales, gross profit remained relatively stable at 33.3% for the 26 weeks ended August 4, 2018 compared to 33.6% for the corresponding period of fiscal year 2017. Gross profit as a percentage of net sales was negatively impacted by a sales mix change compared to the prior year period from our higher margin product categories (clothing, footwear, and camping), to our lower margin product categories (hunting and shooting), which was partially offset by an increase in vendor incentives.
Selling, General, and Administrative Expenses.
Selling, general, and administrative expenses increased by $11.5 million, or 10.8%, to $118.3 million for the 26 weeks ended August 4, 2018 from $106.8 million for the corresponding period of fiscal year 2017. As a percentage of net sales, selling, general, and administrative expenses increased to 30.9% of net sales in the first half of fiscal year 2018 compared to 30.6% of net sales in the first half of fiscal year 2017. Selling, general, and administrative expenses primarily increased due to $2.6 million of compensation expense relating to the retirement of our former Chief Executive Officer that was recognized during the first quarter of 2018. We incurred additional payroll, rent, depreciation, and other operating expenses of $9.0 million, $2.9 million, $0.8 million, and $2.1 million, respectively, primarily related to the opening of new stores and the impact of minimum wage increases across most of our stores. These increases were partially offset by a decrease in preopening expenses of $1.5 million and professional fees of $1.7 million
incurred in 2017 in connection with our bid for certain inventory and other assets of Gander Mountain Company.
Interest Expense.
Interest expense increased by $1.3 million, or 19.8%, to $7.9 million in the 26 weeks ended August 4, 2018 from $6.6 million for the corresponding period of fiscal year 2017. Interest expense increased primarily as a result of the write-off of $1.6 million in deferred financing fees and debt discount associated with our prior term loan offset by increased borrowing on our Amended Credit Facility which bear interest at lower rates than our prior term loan.
Income Taxes.
We recognized an income tax expense of $0.9 million and $1.8 million in the 26 weeks ended August 4, 2018 and July 29, 2017, respectively. Our effective tax rate for the 26 weeks ended August 4, 2018 and July 29, 2017 was 59.8% and 47.3%, respectively. Our effective tax rate increased compared to last year as a result of nondeductilble retirement expenses of our former CEO. Our effective tax rate generally differs from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, and discrete items relating to stock shortfalls and retirement expenses for our former CEO.
Seasonality
Due to holiday buying patterns and the openings of hunting season across the country, net sales are typically higher in the third and fourth fiscal quarters than in the first and second fiscal quarters. We also incur additional expenses in the third and fourth fiscal quarters due to higher volume and increased staffing in our stores. We anticipate our net sales will continue to reflect this seasonal pattern.
The timing of our new retail store openings also may have an impact on our quarterly results. First, we incur certain one-time expenses related to opening each new retail store, all of which are expensed as they are incurred. Second, most store expenses generally vary proportionately with net sales, but there is also a fixed cost component, which includes occupancy costs. These fixed costs typically result in lower store profitability during the initial period after a new retail store opens. Due to both of these factors, new retail store openings may result in a temporary decline in operating profit, in dollars and/or as a percentage of net sales.
Weather conditions affect outdoor activities and the demand for related clothing and equipment. Customers’ demand for our products, and, therefore, our net sales, can be significantly impacted by weather patterns on a local, regional and national basis.
Liquidity and Capital Resources
Our primary capital requirements are for seasonal working capital needs and capital expenditures related to opening new stores. Our sources of liquidity to meet these needs have primarily been borrowings under our revolving credit facility, operating cash flows and short and long-term debt financings from banks and financial institutions. We believe that our cash on hand, cash generated by operating activities and funds available under our revolving credit facility will be sufficient to finance our operating activities for at least the next twelve months.
For the 26 weeks ended August 4, 2018, we incurred approximately $10.6 million in capital expenditures. We expect total capital expenditures between $17.0 million and $20.0 million for fiscal year 2018. We intend to fund our capital expenditures with operating cash flows and funds available under our revolving credit facility. Other investment opportunities, such as potential strategic acquisitions or store expansion rates in excess of those presently planned, may require additional funding.
Cash flows from operating, investing and financing activities are shown in the following table:
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Twenty-Six Weeks Ended
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|
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August 4,
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|
July 29,
|
|
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
Cash flows (used in) operating activities
|
|
$
|
(11,184)
|
|
$
|
(18,123)
|
|
Cash flows (used in) investing activities
|
|
|
(10,585)
|
|
|
(31,347)
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|
Cash flows provided by financing activities
|
|
|
22,734
|
|
|
49,380
|
|
Cash at end of period
|
|
|
2,734
|
|
|
1,821
|
|
Net cash used in operating activities was $11.2 million for the 26 weeks ended August 4, 2018, compared to cash used in operations of $18.1 million for the corresponding period of fiscal year 2017, a change of approximately $6.9 million. The change in our cash used in operating activities is primarily a result of timing of payments made on our accounts payable and accrued expenses.
Net cash used in investing activities was $10.6 million for the 26 weeks ended August 4, 2018 compared to $31.3 million for the corresponding period of fiscal year 2017. The change in our cash flows from investing activities is primarily a result of fewer store openings in 2018 compared to 2017.
Net cash provided by financing activities was $22.7 million for the 26 weeks ended August 4, 2018, compared to $49.4 million for the corresponding period of fiscal year 2017. The decrease in net cash provided by financing activities when compared to 2017 was primarily due to lower net borrowings made on the credit facility in the 26 weeks ended August 4, 2018.
Our outstanding debt consists of our Amended Credit Facility and our New Term Loan.
Amended and Restated Credit Agreement.
On May 23, 2018, we amended and restated our credit agreement
with a consortium of banks led by Wells Fargo, National Association (“Wells Fargo”). The amended credit agreement, among other things, increased our available borrowing capacity under our revolving credit facility from $150.0 million to $250.0 million, subject to a borrowing base calculation, and provided a
new $40.0 million term loan. Both the revolving credit facility and new term loan will mature on May 23, 2023.
On May 23, 2018, we borrowed $135.4 million under the revolving credit facility and used the proceeds from the new term loan and the revolving credit facility to repay our prior term loan that had an outstanding principal balance of $134.7 million and was scheduled to mature on December 3, 2020. As of August 4, 2018, we had $173.8 million outstanding under our revolving credit facility.
Borrowings under the revolving credit facility bear interest based on either, at our option, the base rate or LIBOR, in each case plus an applicable margin. The base rate is the higher of (1) Wells Fargo’s prime rate, (2) the federal funds rate (as defined in the credit agreement) plus 0.50% and (3) the one-month LIBOR (as defined in the credit agreement) plus 1.00%. The applicable margin for loans under the revolving credit facility, which varies based on the average daily
availability, ranges from 0.25% to 0.75% per year for base rate loans and from 1.25% to 1.75% per year for LIBOR loans.
Interest on base rate loans is payable monthly in arrears and interest on LIBOR loans is payable based on the LIBOR interest period selected by us, which can be 30, 60 or 90 days. All amounts that are not paid when due under our revolving credit facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full.
Our new term loan was issued at a price of 100% of the $40.0 million aggregate principal amount and has a maturity date of May 23, 2023. The new term loan will bear interest at a rate of LIBOR plus 5.75%.
The new term loan requires quarterly principal payments of $2.0 million payable quarterly beginning on October 31, 2018 and continuing up to and including May 23, 2023 at which time the remaining balance is due in full.
Each of the subsidiaries of Sportsman’s Warehouse Holdings, Inc. (“Holdings”) is a borrower under the revolving credit facility and the new term loan, and Holdings guarantees all obligations under the revolving credit facility and new term loan. All obligations under the revolving credit facility and new term loan are secured by a lien on substantially all of Holdings’ tangible and intangible assets and the tangible and intangible assets of all of Holdings’ subsidiaries, including a pledge of all capital stock of each of the Holdings’ subsidiaries. The lien securing the obligations under the revolving credit facility and new term loan is a first priority lien as to certain liquid assets, including cash, accounts receivable, deposit accounts and inventory. In addition, our credit agreement contains provisions that enable Wells Fargo to require us to maintain a lock-box or similar arrangement for the collection of all receipts.
We may be required to make mandatory prepayments under the revolving credit facility and new term loan in the event of a disposition of certain property or assets, in the event of receipt of certain insurance or condemnation proceeds, upon the issuance of certain debt or equity securities, upon the incurrence of certain indebtedness for borrowed money or upon the receipt of certain payments not received in the ordinary course of business.
The credit agreement governing our revolving credit facility and new term loan contains customary affirmative and negative covenants, including covenants that limit our ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. The Revolving Line of Credit also requires us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base. The credit agreement also contains customary events of default. As of August 4, 2018, we were in compliance with all covenants under our credit agreement.
Critical Accounting Policies
Our financial statements are prepared in accordance with GAAP. In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
There have been no significant changes to our critical accounting policies as described in our Fiscal 2017 Form 10-K except for the implementation of certain estimates for revenue recognition under Topic 606 as disclosed below.
Revenue Recognition
Topic 606 has required changes to how our revenue is recognized. Updates to our accounting policies have been made as part of the adoption of this new standard. The changes to our accounting policies and procedures under the new standard have most significantly impacted the method that we use to record breakage for gift cards and loyalty reward points associated with the our loyalty reward programs. The new breakage calculations for these items apply assumptions allowable under Topic 606, which require judgments. In applying these new assumptions, and in the application of Topic 606, we have determined that the updated accounting policies, to ensure compliance under Topic 606, continue to be critical accounting policies.
Revenue recognition accounting policy
We operate solely as an outdoor retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the United States and online. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Accordingly, we implicitly enter into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since we only extend immaterial credit purchases to certain municipalities.
Substantially all of our revenue is for single performance obligations for the following distinct items:
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·
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Gift cards and loyalty reward program
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For performance obligations related to retail store and e-commerce sales contracts, we typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the products are tendered for delivery to the common carrier.
The transaction price for each contract is the stated price on the product, reduced by any stated discounts at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit point-of-sale contract with the customer, as reflected in the transaction receipt, states the final terms of the sale, including the description, quantity, and price of each product purchased. Payment for the our contracts is due in full upon delivery. The customer agrees to a stated price implicit in the contract that does not vary over the contract.
The transaction price relative to sales subject to a right of return reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Actual amounts of consideration ultimately received may differ from our estimates. The allowance for sales returns is estimated based upon historical experience and a provision for estimated returns is recorded as a reduction in sales in the relevant period. The estimated merchandise inventory cost related to the sales returns is recorded in prepaid expenses and other. If actual results in the future vary from our estimates, we adjust these estimates, which would affect net sales and earnings in the period such variances become known.
Contract liabilities are recognized primarily for gift card sales and our loyalty reward program. Cash received from the sale of gift cards is recorded as a contract liability in accrued expenses, and we recognize revenue upon the customer’s redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying a historical breakage rate of 2.5% when no escheat liability to relevant jurisdictions exists. We do not sell or provide gift cards that carry expiration dates. We recognized revenue for the breakage of loyalty reward points as revenue in proportion to the pattern of customer redemption of the points by applying a historical breakage rate of 25% when no escheat liability to relevant jurisdictions exists.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Sales returns
We estimate a reserve for sales returns and record the respective reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience of actual returns, and customer return rights are the key factors used in determining the estimate sales returns.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Contractual Obligations
As noted above, on May 23, 2018, we amended and restated our credit agreement which, among other things,
increased our available borrowing capacity under our revolving credit facility from $150.0 million to $250.0 million, subject to a borrowing base calculation, and provided for
a new $40.0 million term loan.
On May 23, 2018, we borrowed $135.4 million under the revolving credit facility and used the proceeds from our new term loan and the revolving credit facility to repay our prior term loan that had an outstanding principal balance of $134.7 million and was scheduled to mature on December 3, 2020.
Both the revolving credit facility and new term loan will mature on May 23, 2023. The interest rate did not change on our revolving credit facility.
The new term loan bears interest at a rate of LIBOR plus 5.75%. The new term loan also requires quarterly principal payments of $2.0 million payable quarterly beginning on October 31, 2018 and continuing up to and including May 23, 2023 at which time the remaining balance is due in full.
All other changes to our contractual obligations during the 26 weeks ended August 4, 2018 were completed in the normal course of business and are not considered material.
Non-GAAP Measures
In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our operating performance. We define Adjusted EBITDA as net income plus interest expense, income tax expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, and other gains, losses and expenses that we do not believe are indicative of our ongoing expenses. In addition, Adjusted EBITDA excludes pre-opening expenses because we do not believe these expenses are indicative of the underlying operating performance of our stores. The amount and timing of pre-opening expenses are dependent on, among other things, the size of new stores opened and the number of new stores opened during any given period. Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. We consider Adjusted EBITDA and Adjusted EBITDA margin important supplemental measures of our operating performance and believe they are frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Other companies in our industry, however, may calculate Adjusted EBITDA and Adjusted EBITDA margin differently than we do. Management also uses Adjusted EBITDA and Adjusted EBITDA margin as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures.
Management believes Adjusted EBITDA and Adjusted EBITDA margin allow investors to evaluate the company’s operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of the company’s core operating performance.
Adjusted EBITDA is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net income or other condensed consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to:
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·
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|
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
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|
·
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|
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
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|
·
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|
Adjusted EBITDA may be defined differently by other companies, and, therefore, it may not be directly comparable to the results of other companies in our industry;
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|
·
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|
Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
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|
·
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|
Adjusted EBITDA does not reflect income taxes or the cash requirements for any tax payments.
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The following table presents a reconciliation of net income, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA for the 13 weeks ended August 4, 2018 and July 29, 2017.
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Thirteen Weeks Ended
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|
Twenty-Six Weeks Ended
|
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|
|
August 4,
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|
July 29,
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|
August 4,
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|
July 29,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
(dollars in thousands)
|
|
Net income
|
|
$
|
6,551
|
|
$
|
6,554
|
|
$
|
722
|
|
$
|
2,046
|
|
Interest expense
|
|
|
4,334
|
|
|
3,436
|
|
|
7,891
|
|
|
6,586
|
|
Income tax expense
|
|
|
2,304
|
|
|
4,245
|
|
|
925
|
|
|
1,835
|
|
Depreciation and amortization
|
|
|
4,500
|
|
|
4,393
|
|
|
9,163
|
|
|
8,334
|
|
Stock-based compensation expense (1)
|
|
|
482
|
|
|
399
|
|
|
967
|
|
|
1,052
|
|
Pre-opening expenses (2)
|
|
|
795
|
|
|
1,395
|
|
|
1,511
|
|
|
3,023
|
|
CEO retirement (3)
|
|
|
—
|
|
|
—
|
|
|
2,647
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|
|
—
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|
Professional Fees (4)
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|
|
—
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|
|
—
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|
|
—
|
|
|
1,744
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|
Adjusted EBITDA
|
|
$
|
18,966
|
|
$
|
20,422
|
|
$
|
23,826
|
|
$
|
24,620
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|
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|
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|
|
|
|
|
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|
|
Adjusted EBITDA margin
|
|
|
9.3%
|
|
|
10.7%
|
|
|
6.2%
|
|
|
7.1%
|
|
|
(1)
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Stock-based compensation expense represents non-cash expenses related to equity instruments granted to employees under our 2013 Performance Incentive Plan and Employee Stock Purchase Plan.
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|
(2)
|
|
Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.
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|
(3)
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|
Payroll and stock compensation expenses incurred in conjunction with the retirement of our former CEO.
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(4)
Professional and other fees incurred in connection with the evaluation of a strategic acquisition.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 to our condensed consolidated financial statements in this 10-Q. Under the Jumpstart Our Business Startup Act, “emerging growth companies” (“EGCs”), we can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not EGCs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to changes in interest rates. Our revolving credit facility and term loan carry floating interest rates that are tied to LIBOR, the federal funds rate and the prime rate, and, therefore, our income and cash flows will be exposed to changes in interest rates to the extent that we do not have effective hedging arrangements in place. We historically have not used interest rate swap agreements to hedge the variable cash flows associated with the interest on our credit facilities. At August 4, 2018, the weighted average interest rate on our borrowings under our revolving credit facility was 3.22%. Based on a sensitivity analysis at August 4, 2018, assuming the amount outstanding under our revolving credit facility would be outstanding for a full year, a 100 basis point increase in interest rates would increase our annual interest expense by approximately $2.5 million. We do not use derivative financial instruments for speculative or trading purposes. However, this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon and as of the date of the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of August 4, 2018 to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the 13 weeks ended August 4, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.