Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021. Some of the information included in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” section in this Quarterly Report and the “Summary Risk Factors” and “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Our fiscal year ends on the Saturday closest to January 31 and refers to the year in which the period ends (e.g., fiscal 2022 refers to the year ending January 29, 2022). Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal quarters ended October 30, 2021 and October 31, 2020 were both comprised of 13 weeks. The year-to-date periods ended October 30, 2021 and October 31, 2020 were both comprised of 39 weeks.
JOANN Overview
JOANN is the nation’s category leader in Sewing and one of the fastest growing competitors in the arts and crafts category. We are well-positioned in the marketplace and have multiple competitive advantages, including a broad assortment, established omni-channel platform, multi-faceted digital interface with customers and skilled and knowledgeable team members. As a well-established and trusted brand for over 75 years, we believe we have a deep understanding of our customers, what inspires their creativity and what fuels their incredibly diverse projects. Since 2016, we have embarked on a strategy to transform JOANN, which has helped us pivot from a traditional retailer to a fully-integrated, digitally-connected provider of Creative Products.
Highlights for the Thirteen Weeks Ended October 30, 2021
Net sales decreased 14.4% compared to the third quarter of fiscal 2021, to $611.0 million with total comparable sales decreasing 14.2% compared with a total comparable sales increase of 25.2% in the same period in fiscal 2021.
Gross profit decreased 14.9% compared to the same period in the prior fiscal year, to $318.8 million, at a rate to net sales of 52.2% which was a 20 basis point decrease over the prior fiscal year.
Net income was $22.8 million in the third quarter of fiscal 2022, compared to $47.7 million in the same period in the prior fiscal year.
We repurchased 978,930 shares of common stock at an average price of $11.07, for a total of $10.8 million during the third quarter of fiscal 2022.
We declared and paid a quarterly cash dividend of $4.2 million.
Effects of COVID-19 on Our Business
We continue to closely monitor the impact of the COVID-19 pandemic on all facets of our business. We have taken actions to protect the safety of our team members and customers and to manage the business through the resulting fluid and challenging environment. Our steps to manage operation of our supply chain and locations during the pandemic have added costs to our business, some of which are non-recurring in nature, including incremental labor hours and supplies to maintain sanitation and social distancing protocols. These precautions may change from time to time as local conditions and applicable health mandates change, and therefore, it is possible we may be required to temporarily close locations or limit our operations. As of October 30, 2021, we operated 852 locations in 49 states and all locations were open and fully operational.
As the circumstances around the COVID-19 pandemic remain fluid, we continue to actively monitor the pandemic's impact on the Company, including our financial position, liquidity, results of operations and cash flows, while managing our response to the crisis through collaboration with team members, customers, suppliers, government authorities, health officials and other business partners. Please see Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 for further information regarding the risks associated with the impact of the COVID-19 pandemic on our business.
15
Total Comparable Sales
Total comparable sales are an important measure throughout the retail industry. This measure allows us to evaluate how our location base and e-commerce business are performing by measuring the change in period-over-period net sales in locations that have been open for the applicable period. We define total comparable sales as net sales for locations that have been open for at least 13 months and have not been relocated, expanded or downsized in the last 13 months. In addition, total comparable sales include our e-commerce sales generated via joann.com (online sales for all products) and creativebug.com (online sales of digital videos for crafting projects). There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this Quarterly Report on Form 10-Q regarding our total comparable sales may not be comparable to similar data made available by other retailers.
Non-GAAP Financial Measures
Adjusted EBITDA
We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; supplementing GAAP measures of performance in the evaluation of the effectiveness of our business strategies; making budgeting decisions; comparing our performance against that of other peer companies using similar measures; and because our credit facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants.
We define Adjusted EBITDA as net income plus income tax provision, interest expense, net, debt related (gain) loss, sale leaseback gains and depreciation and amortization, as further adjusted to eliminate the impact of certain non-cash items and other items that we do not consider indicative of our ongoing operating performance, including costs related to strategic initiatives, COVID-19 costs, excess import freight costs, technology development expense, stock-based compensation expense, loss on disposal and impairment of fixed and operating lease assets, sponsor management fees and other one-time costs. The further adjustments are itemized in the table below.
Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;
Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;
Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;
Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;
Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.
16
The following is a reconciliation of our net income to Adjusted EBITDA for the periods presented:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
Net income
|
|
$
|
22.8
|
|
|
$
|
47.7
|
|
|
$
|
43.1
|
|
|
$
|
174.0
|
|
Income tax provision
|
|
|
7.0
|
|
|
|
3.0
|
|
|
|
12.3
|
|
|
|
17.6
|
|
Interest expense, net
|
|
|
11.8
|
|
|
|
14.0
|
|
|
|
39.8
|
|
|
|
55.0
|
|
Debt related (gain) loss (1)
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|
|
—
|
|
|
|
(3.0
|
)
|
|
|
3.0
|
|
|
|
(152.9
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)
|
Gain on sale leaseback (2)
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—
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|
|
—
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|
|
|
(24.5
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)
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|
|
—
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|
Depreciation and amortization (3)
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|
|
19.8
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|
|
|
20.6
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|
|
|
60.6
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|
|
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60.2
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Strategic initiatives (4)
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0.6
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|
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1.7
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|
|
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1.4
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|
|
|
4.1
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|
Excess import freight costs (5)
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|
|
11.3
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|
|
|
—
|
|
|
|
11.3
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|
|
|
—
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|
COVID-19 costs (6)
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|
|
—
|
|
|
|
16.6
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|
|
|
1.3
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|
|
|
48.4
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|
Technology development expense (7)
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|
|
2.6
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|
|
|
1.2
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|
|
|
6.2
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|
|
|
3.6
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|
Stock-based compensation expense
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
2.1
|
|
|
|
1.1
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|
(Gain) loss on disposal and impairment of fixed and operating lease assets
|
|
|
(0.1
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)
|
|
|
(0.2
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)
|
|
|
(0.1
|
)
|
|
|
3.6
|
|
Sponsor management fee (8)
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
|
|
0.8
|
|
Other (9)
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|
|
(4.0
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)
|
|
|
0.5
|
|
|
|
(3.3
|
)
|
|
|
1.7
|
|
Adjusted EBITDA
|
|
$
|
72.6
|
|
|
$
|
102.4
|
|
|
$
|
153.6
|
|
|
$
|
217.2
|
|
(1)
“Debt related (gain) loss” represents losses and gains associated with debt repurchases below par and the write off of unamortized fees and original issue discount associated with debt refinancings.
(2)
“Gain on sale leaseback” represents the gain attributable to the sale leaseback of our distribution center in Opelika, Alabama.
(3)
“Depreciation and amortization” represents depreciation, amortization of intangible assets and amortization of content costs.
(4)
“Strategic initiatives” represents non-recurring costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives, including costs (i) to design a new prototype and assortment optimization process for locations, (ii) related to our efforts to initially evaluate and implement opportunities to offset the significant costs incurred due to the new U.S. tariffs on merchandise produced in China, (iii) to start up a new technology product that would traditionally be incurred by our vendors, (iv) to evaluate our opportunity in new potential lines of business and (v) to analyze improved supply chain capabilities.
(5)
"Excess import freight costs" represents excess inbound freight costs due to increasing freight rates, in particular the significant transitory impact of constrained ocean freight capacity and incremental domestic transportation costs incurred due to unprecedented congestion in U.S. ports.
(6)
“COVID-19 costs” represents premium pay for location team members, cleaning and location capacity management labor, one-time supply chain disruption costs, incremental seasonal clearance associated with location closures, donations for our mask making initiative and additional location cleaning supplies.
(7)
“Technology development expense” represents one-time IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.
(8)
“Sponsor management fee” represents management fees paid to our sponsor, LGP (or advisory affiliates thereof), in accordance with our management services agreement. The management fee was discontinued upon the completion of our initial public offering in March 2021, as LGP no longer provides managerial services to us in any form.
(9)
“Other” represents one-time impact of severance, certain legal matters, executive leadership transition and business transition activities.
17
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes.
Statement of Consolidated Income Data:
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Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
Net sales
|
|
$
|
611.0
|
|
|
$
|
714.1
|
|
|
$
|
1,682.3
|
|
|
$
|
1,921.5
|
|
Gross profit
|
|
|
318.8
|
|
|
|
374.5
|
|
|
|
888.3
|
|
|
|
971.7
|
|
SG&A expenses
|
|
|
257.6
|
|
|
|
292.5
|
|
|
|
754.5
|
|
|
|
818.2
|
|
Depreciation and amortization
|
|
|
19.6
|
|
|
|
20.3
|
|
|
|
60.1
|
|
|
|
59.8
|
|
Operating profit
|
|
|
41.6
|
|
|
|
61.7
|
|
|
|
73.7
|
|
|
|
93.7
|
|
Net income
|
|
|
22.8
|
|
|
|
47.7
|
|
|
|
43.1
|
|
|
|
174.0
|
|
Other Operational Data:
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|
|
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|
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|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
(Dollars in millions)
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
Total (decrease) increase in comparable sales vs. prior year
|
|
|
(14.2
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)%
|
|
|
25.2
|
%
|
|
|
(12.4
|
)%
|
|
|
24.6
|
%
|
Gross margin
|
|
|
52.2
|
%
|
|
|
52.4
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%
|
|
|
52.8
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%
|
|
|
50.6
|
%
|
SG&A expenses as a % of net sales
|
|
|
42.2
|
%
|
|
|
41.0
|
%
|
|
|
44.8
|
%
|
|
|
42.6
|
%
|
Operating profit as a % of net sales
|
|
|
6.8
|
%
|
|
|
8.6
|
%
|
|
|
4.4
|
%
|
|
|
4.9
|
%
|
Adjusted EBITDA (1)
|
|
$
|
72.6
|
|
|
$
|
102.4
|
|
|
$
|
153.6
|
|
|
$
|
217.2
|
|
Pre-opening and closing costs excluding loss on disposal of fixed assets
|
|
|
2.0
|
|
|
|
1.2
|
|
|
|
6.6
|
|
|
|
5.0
|
|
Adjusted EBITDA as a % of net sales
|
|
|
11.9
|
%
|
|
|
14.3
|
%
|
|
|
9.1
|
%
|
|
|
11.3
|
%
|
Total retail location count at end of period
|
|
|
852
|
|
|
|
857
|
|
|
|
852
|
|
|
|
857
|
|
(1)
See “Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.
Comparison of the Thirteen Weeks ended October 30, 2021 and October 31, 2020
Net Sales
Net sales were $611.0 million for the thirteen weeks ended October 30, 2021, a decrease of $103.1 million or 14.4% compared to the same period in fiscal 2021. Total comparable sales for the thirteen weeks ended October 30, 2021 decreased 14.2% compared with a total comparable sales increase of 25.2% in the same period in fiscal 2021. The total comparable sales decrease resulted primarily from a decrease in transaction volume partially offset by an increase in average ticket. We saw declines in our Sewing category due to the reduction in demand for supplies to produce personal protective equipment compared to the prior year. We also saw a decrease in sales in our Arts and Crafts and Home Décor category as a result of increased traffic in the prior year, which was in part pandemic-driven.
Gross Profit
Gross profit was $318.8 million for the thirteen weeks ended October 30, 2021, a decrease of $55.7 million or 14.9% compared to the same period in fiscal 2021. Gross margin was 52.2% for the thirteen weeks ended October 30, 2021, a decrease of 20 basis points compared to the thirteen weeks ended October 31, 2020. The decrease in gross profit was driven by our decline in total comparable sales along with additional freight costs, both domestic and import, primarily due to increasing freight rates. The increase in freight rates was primarily driven by the significant transitory impact of constrained ocean freight capacity and incremental domestic transportation costs incurred due to unprecedented congestion in U.S. ports. These negative factors were partially offset by reduced product costs due to our strategic sourcing efforts, improved optimization of our promotional discounts, favorable shrink results driven by various initiatives implemented last year to better control inventory theft, and reduced clearance expense due to improved sell-through on our seasonal merchandise and lower levels of overall clearance to total inventory.
18
Selling, General and Administrative Expenses
SG&A expenses were $257.6 million for the thirteen weeks ended October 30, 2021, a decrease of $34.9 million or 11.9% compared to the same period in fiscal 2021. The decrease was primarily driven by lower store labor expenses as additional labor hours for intensified cleaning to ensure a safe environment for our customers and team members and additional labor costs associated with premium pay incurred in fiscal 2021 did not recur in fiscal 2022. In addition, SG&A expenses were favorably impacted by lower incentive compensation accruals in fiscal 2022 compared to the prior fiscal year. As a percentage of net sales, SG&A expenses for the thirteen weeks ended October 30, 2021 were 42.2%, an increase of 120 basis points compared to the same period in fiscal 2021. The increase as a percentage of sales was driven by the 14.4% decrease in net sales in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021.
Depreciation and Amortization
Depreciation and amortization expense was $19.6 million in the thirteen weeks ended October 30, 2021, a decrease of $0.7 million compared to the same period in fiscal 2021. This decrease was driven by lower depreciation after the sale and leaseback of our distribution center in Opelika, Alabama in the second quarter of fiscal 2022 partially offset by investments in location refresh and technology projects in fiscal 2021.
Interest Expense
Interest expense for the thirteen weeks ended October 30, 2021 was $11.8 million, a decrease of $2.2 million compared to the same period in fiscal 2021. This decrease in interest expense was primarily due to lower average borrowings. The decrease was also partially due to lower interest rates as a result of the repayment of the Term Loan due 2024 during the first quarter of fiscal 2022 and our term loan refinancing in the second quarter of fiscal 2022. The average debt level in the thirteen weeks ended October 30, 2021 was $841.6 million compared to $918.5 million in the thirteen weeks ended October 31, 2020. The weighted average interest rate was 5.04 percent and 5.46 percent for the thirteen weeks ended October 30, 2021 and October 31, 2020, respectively.
We had $869.9 million of debt outstanding (face value) as of October 30, 2021 versus $929.7 million as of October 31, 2020.
Debt Related (Gain) Loss
During the third quarter of fiscal 2021, we repurchased $8.2 million in face value of the Term Loan due 2023 and the Term Loan due 2024 at an average of 64 percent of par, resulting in a $3.0 million gain, which is included in debt related (gain) loss within the accompanying Consolidated Statements of Comprehensive Income and the accompanying Consolidated Statements of Cash Flows. A write-off of the deferred charges and original issue discount, totaling $0.1 million, associated with the original debt issuance was recognized as an offset to the gain recognized in debt related (gain) loss.
Income Taxes
The effective income tax rate for the third quarter of fiscal 2022 was 23.5 percent compared to 5.9 percent for the third quarter of fiscal 2021. The change in the effective tax rate primarily relates to the release of valuation allowances resulting from the enactment of the CARES Act during the third quarter of fiscal 2021.
Net Income
Net income was $22.8 million for the thirteen weeks ended October 30, 2021, a decrease of $24.9 million compared to the same period in fiscal 2021. The decrease was driven by the factors described above.
Adjusted EBITDA
Adjusted EBITDA (as defined above) decreased 29.1% to $72.6 million or 11.9% of net sales for the thirteen weeks ended October 30, 2021 compared to $102.4 million or 14.3% of net sales for the same period in fiscal 2021. Our decrease in Adjusted EBITDA of $29.8 million and lower Adjusted EBITDA as a percentage of net sales of 240 basis points was driven primarily by declines in total comparable sales and lower gross margin partially offset by reductions in our SG&A expenses.
19
Comparison of the Thirty-Nine Weeks ended October 30, 2021 and October 31, 2020
Net Sales
Net sales were $1,682.3 million for the thirty-nine weeks ended October 30, 2021, a decrease of $239.2 million or 12.4% compared to the same period in fiscal 2021. Total comparable sales for the thirty-nine weeks ended October 30, 2021 decreased 12.4% compared with a total comparable sales increase of 24.6% in the same period in fiscal 2021. The total comparable sales decrease resulted primarily from a decrease in transaction volume. We saw a decline in our Sewing category due to the reduction in demand for supplies to produce personal protective equipment as well as the benefit of competitor store closures in the prior year.
Gross Profit
Gross profit was $888.3 million for the thirty-nine weeks ended October 30, 2021, a decrease of $83.4 million or 8.6% compared to the same period in fiscal 2021. That decrease was driven by lower net sales and partially offset by an increase in our gross margin. Gross margin was 52.8% for the thirty-nine weeks ended October 30, 2021, an increase of 220 basis points compared to the thirty-nine weeks ended October 31, 2020. Improvement in our gross margin was driven by reduced product costs due to our strategic sourcing efforts along with optimization of our promotional discounts. In addition, we experienced favorable shrink results driven by various initiatives implemented last year to better control inventory theft, along with reduced outbound freight costs associated with a lower penetration to total sales of ship-from-store online orders compared to the first thirty-nine weeks of fiscal 2021, which were in part pandemic driven. These savings were offset in part by additional freight costs, both domestic and import, primarily due to increasing freight rates. The increase in freight rates was primarily driven by the significant transitory impact of constrained ocean freight capacity and incremental domestic transportation costs incurred due to unprecedented congestion in U.S. ports.
Selling, General and Administrative Expenses
SG&A expenses were $754.5 million for the thirty-nine weeks ended October 30, 2021, a decrease of $63.7 million or 7.8% compared to the same period in fiscal 2021. This decrease was primarily driven by additional store labor expense in fiscal 2021 due to premium pay and additional labor needed to support the significant increase in ship-from-store orders along with support needed for the excess cleaning and facilities management in our stores that did not reoccur in fiscal 2022. In addition, SG&A expenses were favorably impacted by lower incentive compensation accruals in fiscal 2022 compared to the prior fiscal year.
As a percentage of net sales, SG&A expenses for the thirty-nine weeks ended October 30, 2021, were 44.8%, an increase of 220 basis points compared to the same period in fiscal 2021. This increase was primarily due to our 12.4% total comparable sales decline in the first thirty-nine weeks of fiscal 2022.
Depreciation and Amortization
Depreciation and amortization expense was $60.1 million in the thirty-nine weeks ended October 30, 2021, an increase of $0.3 million compared to the same period in fiscal 2021. This increase was driven primarily by investments in location refresh and technology projects in fiscal 2021 partially offset by lower depreciation after the sale and leaseback of our distribution center in Opelika, Alabama in the second quarter of fiscal 2022.
Interest Expense
Interest expense for the thirty-nine weeks ended October 30, 2021 was $39.8 million, a decrease of $15.2 million compared to the same period in fiscal 2021. This decrease in interest expense was primarily due to lower average borrowings. The decrease was also partially due to lower interest rates as a result of the repayment of the Term Loan due 2024 and our term loan refinancing during the first thirty-nine weeks of fiscal 2022. Partially offsetting these decreases, we recorded $2.9 million of financing costs related to our term loan refinancing in July of this year. The average debt level in the thirty-nine weeks ended October 30, 2021 was $808.1 million compared to $1,122.2 million in the thirty-nine weeks ended October 31, 2020. The weighted average interest rate was 5.39 percent and 6.01 percent for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively.
We had $869.9 million of debt outstanding (face value) as of October 30, 2021 versus $929.7 million as of October 31, 2020.
Debt Related (Gain) Loss
During the second quarter of fiscal 2022, we refinanced our Term Loan due 2023. A write-off of the deferred charges and original issue discount, totaling $3.1 million associated with the original debt issuance was recognized as a debt related loss. During the first quarter of fiscal 2022, we repurchased $1.9 million in face value of the Term Loan due 2024 at an average of 53 percent of par, resulting
20
in a $1.0 million gain, which is included in debt related (gain) loss within the accompanying Consolidated Statements of Comprehensive Income and the accompanying Consolidated Statements of Cash Flows. A write-off of the deferred charges and original issue discount, totaling less than $0.1 million, associated with the original debt issuance was recognized as an offset to debt related gain. Also offsetting the gain was a $0.9 million write-off of the original issue discount and deferred issuance costs related to the paydown of the Term Loan due 2024. The Term Loan due 2024 was retired at face value.
During the thirty-nine weeks ended October 31, 2020, we repurchased $347.1 million in face value of the term loans provided pursuant to our Term Loan Facilities, at an average of 54% of par, resulting in a $152.9 million gain, which is included in debt related (gain) loss within the accompanying Consolidated Statements of Comprehensive Income and the accompanying Consolidated Statements of Cash Flows. The term loan repurchases were executed, following a competitive market bidding process, through several open market purchases on arm’s length terms and in compliance with the terms of the underlying credit agreements. A write-off of the deferred charges and original issue discount, totaling $5.9 million, associated with the original debt issuance was recognized as an offset to the gain recognized.
Gain on Sale Leaseback
We recognized a gain on the sale of fixed assets of $24.5 million during the thirty-nine weeks ended October 30, 2021. The gain was attributable to the sale and leaseback of our distribution center in Opelika, Alabama.
Income Taxes
The effective income tax rate for the first thirty-nine weeks of fiscal 2022 was 22.2 percent compared to 9.2 percent for the first thirty-nine weeks of fiscal 2021. The change in the effective tax rate primarily relates to the recording of the favorable impact of the enactment of the CARES Act, including the release of a valuation allowance for the interest deduction limitation, during the first thirty-nine weeks of fiscal 2021.
Net Income
Net income was $43.1 million for the thirty-nine weeks ended October 30, 2021, a decrease of $130.9 million compared to the same period in fiscal 2021. The decrease was driven by the factors described above.
Adjusted EBITDA
Adjusted EBITDA (as defined above) decreased 29.3% to $153.6 million or 9.1% of net sales for the thirty-nine weeks ended October 30, 2021 compared to $217.2 million or 11.3% of net sales for the same period in fiscal 2021. Our decrease in Adjusted EBITDA of $63.6 million and decline of Adjusted EBITDA as a percentage of net sales of 220 basis points was driven primarily by lower total comparable sales partially offset by improvements in our gross margin and reductions in our SG&A expenses.
Liquidity and Capital Resources
We have three principal sources of liquidity: cash and cash equivalents on hand, cash from operations and available borrowings under our Revolving Credit Facility. We believe that our cash and cash equivalents on hand, cash from operations and availability under our Revolving Credit Facility will be sufficient to cover our working capital, capital expenditure and debt service requirement needs as well as dividend payments and share repurchases for the foreseeable future. As of October 30, 2021, we were in compliance with all covenants under our debt facilities and notes. For the four quarters ended October 30, 2021, our net cash provided by operating activities was $17.7 million and our Credit Facility Adjusted EBITDA was $266.8 million.
We define “Credit Facility Adjusted EBITDA” as Adjusted EBITDA (as defined above) plus pre-opening and closing costs excluding loss on disposal of fixed assets, which is calculated consistently with our calculation of Adjusted EBITDA under our Revolving Credit Facility and Term Loan due 2028 (collectively “Credit Facilities”). We reference Credit Facility Adjusted EBITDA because it is a measure that is calculated in accordance with our Credit Facilities and used to determine our compliance with certain ratios in our Credit Facilities, tested each quarter on the basis of the preceding four quarters. For example, we are permitted to prepay debt and make distributions on account of equity up to a certain amount under our Term Loan due 2028 if our ratio of consolidated net debt to Credit Facility Adjusted EBITDA for the prior four quarters as of the quarterly test is not greater than 4.90 to 1.0 and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA for such period is not greater than 3.60 to 1.0. As of October 30, 2021, our ratio of consolidated net debt to Credit Facility Adjusted EBITDA was 3.2 to 1.0, and of consolidated senior secured net debt to Credit Facility Adjusted EBITDA was 3.2 to 1.0. Other provisions in our Credit Facilities utilize ratios including Credit Facility Adjusted EBITDA for calculating permitted limits for us to incur additional debt and make certain investments. Additionally, our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA is measured once per year following the completion of our
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annual Consolidated Financial Statements and determines what percentage of our excess cash flow (as defined in our Term Loan due 2028) we are required to apply for the repayment of principal on our Term Loan due 2028, ranging from 50% of excess cash flow for ratios in excess of 2.50x to 0% of excess cash flow for ratios of less than 2.00x. For fiscal 2021, no excess cash flow payment was required. Accordingly, we believe that Credit Facility Adjusted EBITDA is material to an investor’s understanding of our financial condition and liquidity.
|
|
|
|
|
(In millions)
|
|
Four Quarters Ended
October 30, 2021
|
|
Net cash provided by operating activities
|
|
$
|
17.7
|
|
Non-cash operating lease expense
|
|
|
(160.0
|
)
|
Depreciation and amortization excluding content cost amortization
|
|
|
(80.4
|
)
|
Deferred income taxes
|
|
|
1.0
|
|
Stock-based compensation expense
|
|
|
(2.5
|
)
|
Amortization of deferred financing costs and original issue discount
|
|
|
(2.8
|
)
|
Debt related loss
|
|
|
(0.8
|
)
|
Gain on sale leaseback
|
|
|
24.5
|
|
Loss on disposal and impairment of other fixed assets
|
|
|
(1.2
|
)
|
Change in operating assets and liabilities
|
|
|
285.9
|
|
Net income
|
|
$
|
81.4
|
|
Income tax provision
|
|
|
22.7
|
|
Interest expense, net
|
|
|
53.8
|
|
Debt related loss
|
|
|
0.8
|
|
Gain on sale leaseback
|
|
|
(24.5
|
)
|
Depreciation and amortization
|
|
|
81.0
|
|
Strategic initiatives
|
|
|
3.5
|
|
Excess import freight costs
|
|
|
11.3
|
|
COVID-19 costs
|
|
|
17.9
|
|
Technology development expense
|
|
|
8.4
|
|
Stock-based compensation expense
|
|
|
2.5
|
|
Loss on disposal and impairment of fixed and operating lease assets
|
|
|
1.9
|
|
Sponsor management fee
|
|
|
0.9
|
|
Other
|
|
|
(1.9
|
)
|
Adjusted EBITDA
|
|
$
|
259.7
|
|
Pre-opening and closing costs excluding loss on disposal of fixed assets
|
|
|
7.1
|
|
Credit Facility Adjusted EBITDA
|
|
$
|
266.8
|
|
Our capital requirements are primarily for capital expenditures in connection with new location openings, location remodels, investments in information technology, investments in distribution centers and working capital requirements for seasonal inventory build. These requirements fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season during the months of September through December and complete most of our capital spending projects.
The following table provides a summary of our cash provided by operating, investing and financing activities for the thirty-nine weeks ended October 30, 2021 and October 31, 2020:
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|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
Net cash (used for) provided by operating activities
|
|
$
|
(123.6
|
)
|
|
$
|
185.8
|
|
Net cash provided by (used for) investing activities
|
|
|
5.0
|
|
|
|
(28.2
|
)
|
Net cash provided by (used for) financing activities
|
|
|
122.1
|
|
|
|
(148.8
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
3.5
|
|
|
$
|
8.8
|
|
Comparison of the Thirty-Nine Weeks ended October 30, 2021 and October 31, 2020
Net Cash (Used for) Provided by Operating Activities
Net cash used for operating activities was $123.6 million in the thirty-nine weeks ended October 30, 2021, compared with $185.8 million of net cash provided by operating activities in the thirty-nine weeks ended October 31, 2020. The decrease in net cash provided
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by operating activities was primarily due to lower comparable sales results, changes in inventory due to lower balances in fiscal 2021 and increased freight costs in fiscal 2022, the repayment of deferred cash payments negotiated with our landlords as a result of the COVID-19 pandemic and payment of fiscal 2021 incentive compensation to salaried store support center and distribution center team members as well as store and district managers.
Net Cash Provided by (Used for) Investing Activities
Cash provided by investing activities for the thirty-nine weeks ended October 30, 2021 was due to the completion of the sale and leaseback of our Opelika, Alabama distribution center. Cash used for investing activities in fiscal 2022 and 2021 consists primarily of capital expenditures, the majority of which are focused on strategic initiatives including: new location openings, location remodels and refreshes and information technology investments, particularly those supporting our omni-channel platforms and other customer facing systems. We also incur capital outlays for equipment and facility management in our distribution centers, locations and corporate offices.
Specifically, investment for each refresh project is tailored to each location’s needs and unit economics. We have four general levels of investment and project scope tailored to what would benefit each location, with future investment expected to range from $150,000 for the lightest-touch refreshes to $3 million for the relatively few but most-extensive refreshes. Over 80% of our existing locations are refresh project targets over the next seven to ten years and we expect investments in relation to these future refresh projects to remain consistent with our capital expenditures in connection with completed refresh projects.
In fiscal 2022, we made significant investments to expand our distribution center network capabilities, primarily toward our new multi-purpose distribution center located in West Jefferson, Ohio.
Historical capital expenditures for the thirty-nine weeks ended October 30, 2021 and October 31, 2020 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
|
October 30,
2021
|
|
|
October 31,
2020
|
|
Retail locations
|
|
$
|
17.1
|
|
|
$
|
17.7
|
|
Distribution centers
|
|
|
17.5
|
|
|
|
1.6
|
|
Information technology
|
|
|
7.0
|
|
|
|
7.9
|
|
Other
|
|
|
1.3
|
|
|
|
1.5
|
|
Total capital expenditures
|
|
|
42.9
|
|
|
|
28.7
|
|
Landlord contributions
|
|
|
(1.4
|
)
|
|
|
(3.4
|
)
|
Total capital expenditures, net of landlord contributions
|
|
$
|
41.5
|
|
|
$
|
25.3
|
|
Net Cash Provided by (Used for) Financing Activities
Net cash provided by financing activities was $122.1 million during the thirty-nine weeks ended October 30, 2021 compared with $148.8 million of net cash used for financing activities during the thirty-nine weeks ended October 31, 2020. Net cash provided by financing activities for the first thirty-nine weeks of fiscal 2022 was the result of net proceeds received from the initial public offering and borrowings from the Revolving Credit Facility to repay all of the outstanding borrowings and accrued interest under the Term Loan due 2024 totaling $72.7 million. In addition, we refinanced our Term Loan due 2023 with a $675 million Term Loan due 2028, with excess proceeds used to reduce amounts borrowed under our Revolving Credit Facility and fund working capital needs. We used cash for financing activities to repurchase $10.8 million of common stock as part of our share repurchase program and to pay dividends totaling $8.4 million during the thirty-nine weeks ended October 30, 2021. As of October 30, 2021, we had the ability to borrow an additional $270.0 million under our Revolving Credit Facility subject to the facility’s borrowing base calculation.
Net cash used for financing activities in the first thirty-nine weeks of fiscal 2021 was primarily the result of the repurchase of portions of the Term Loan due 2023 and the Term Loan due 2024.
Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions other than letters of credit, which are typical in a retail environment.
Seasonality
Our business exhibits seasonality, which is typical for most retail companies. Our net sales are stronger in the second half of the year than the first half of the year. Net income is highest during the months of September through December when sales volumes provide
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significant operating leverage. Working capital needed to finance our operations fluctuates during the year and reach its highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season. However, the COVID-19 pandemic may have an impact to consumer behaviors and customer traffic that result in changes in the seasonal fluctuations of our business.
Critical Accounting Policies and Estimates
Accounting policies and estimates are considered critical when they require management to make subjective and complex judgments, estimates and assumptions about matters that have a material impact on the presentation of our financial statements and accompanying notes. For a description of our critical accounting policies and estimates, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.