BURLINGTON STORES, INC. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 (Fiscal 2018 10-K). In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled "Safe Harbor Statement." Executive Summary
Introduction and Overview of Operating Results
We are a nationally recognized off-price retailer of high-quality, branded apparel at everyday low prices. We opened our first store inBurlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 726 stores as ofNovember 2, 2019 , inclusive of an internet store, in 45 states andPuerto Rico , and diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise, including women's ready-to-wear apparel, accessories, footwear, menswear, youth apparel, baby, home, coats, beauty, toys and gifts. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers.
Highlights from the three month period ended
• We generated total revenues of
million.
• Net sales improved
sales increased 2.7%.
• Gross margin as a percentage of net sales remained consistent at 42.4%.
Product sourcing costs, which are included in selling, general and
administrative expenses, improved approximately 20 basis points as a
percentage of net sales. Product sourcing costs include the costs of
processing goods through our supply chain and buying costs.
• Selling, general and administrative expenses as a percentage of net sales
remained consistent at 32.9%.
• We earned net income of
million.
• Adjusted Net Income, exclusive of management transition costs (as defined
in the section below entitled "Key Performance Measures") improved $20.9
million to $103.8 million .
• Adjusted EBITDA, exclusive of management transition costs (as defined in
the section below entitled "Key Performance Measures") improved $30.8
million to $193.8 million .
• Adjusted EBIT, exclusive of management transition costs (as defined in the
section below entitled "Key Performance Measures") improved
to
Highlights from the nine month period ended
• We generated total revenues of
million.
• Net sales improved
sales increased 2.2%.
• Gross margin as a percentage of net sales decreased to 41.6% compared with
41.7%. Product sourcing costs, which are included in selling, general and
administrative expenses, improved approximately 10 basis points as a
percentage of net sales.
• Selling, general and administrative expenses as a percentage of net sales
increased to 32.3% compared with 31.9%.
• We earned net income of $258.8 million compared with $230.4 million .
• Adjusted Net Income, exclusive of management transition costs improved
$32.0 million to$280.8 million . 21
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• Adjusted EBITDA, exclusive of management transition costs improved
million to
• Adjusted EBIT, exclusive of management transition costs improved
million to
Fiscal Year
Fiscal 2019 is defined as the 52-week year ending
Store Openings, Closings, and Relocations
During the nine month period endedNovember 2, 2019 , we opened 72 new stores, inclusive of 15 relocations, and closed six stores, exclusive of the aforementioned relocations, bringing our store count as ofNovember 2, 2019 to 726 stores, inclusive of an internet store.
Ongoing Initiatives for Fiscal 2019
We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparable store sales trends, increasing total sales growth and reducing expenses. These initiatives include, but are not limited to:
• Driving Comparable Store Sales Growth.
We intend to continue to increase comparable store sales through the following initiatives:
• Continuing to Enhance Execution of the Off-Price Model. We plan to
drive comparable store sales by focusing on product freshness to
ensure that we consistently deliver newness to the selling floors. We
plan to continue to reduce comparable store inventories, which we
believe will result in faster inventory turnover. We maintain our
ability to leverage our pack-and-hold program, which isdesigned to
take advantage of terrific buys of either highly desirable branded
product or key seasonal merchandise for the next year. While the
amount of goods we purchase on pack-and-hold is purely based on the
right opportunities in the marketplace, this continues to be a great
avenue to source product. We also intend to use our business
intelligence systems to identify sell-through rates by product,
capitalize on strong performing categories, identify and buy into new
fashion trends and opportunistically acquire products in the
marketplace.
• Sharpening Focus on Our Core Female Customer. We have focused on
better serving our core female customer, a brand-conscious fashion
enthusiast, aged 25-49, with an average annual household income of
$25,000-$100,000 , by improving our product offering, store
merchandising and marketing focus on women's ready-to-wearapparel and
accessories to capture incremental sales from our core female customer
and become a destination for her across all categories. We believe
that these efforts will increase the frequency of her visits and her
average spend, further improving the comparable store sales
performance in women's categories.
• Continuing to Improve Our Customer Experience. We have significantly
enhanced the store experience and ease of shopping at all of our
stores by implementing a comprehensive program focused on offering
more brands and styles and simplifying store navigation. We have
accomplished this by utilizing clear way-finding signs and distinct
product signage, highlighting key brands and new arrivals, improving
organization of the floor space, reducing rack density,facilitating
quicker checkouts and delivering better customer service. We have made
particular improvements in product size visibility, queuing and
fitting rooms. To ensure consistent execution of our customer
experience priorities, we have improved our store associate training
and reorganized and strengthened our field managementorganization.
Our much improved store experience continues to resonate with our
customers. We continue to refine our online customer survey to provide
more actionable customer feedback to stores. Stores develop action
plans to address clearly identified areas of focus. Store managers
have the ability to review immediate feedback from theircustomers,
and react accordingly.
• Increasing Our Sales Through e-Commerce. We have been selling to our
customers online for more than a decade. We have leveraged this
heritage and continue to utilize e-commerce strategies offering
merchandise to our customers while driving incremental traffic to our
stores.
• Enhancing Existing Categories and Introducing New Categories. We have
opportunities to expand the depth and breadth of certainexisting
categories such as ladies' apparel, children's products, bath and
cosmetic merchandise, housewares, décor for the home andbeauty as we
continue to de-weather our business, and maintain the flexibility to
introduce new categories.
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• Private Label Credit Card. We have piloted a new private label credit
card program. The program has been rolled out to all our stores and
our e-commerce site. We believe this program has the potential to
deepen customer loyalty, inform customer contact strategies, and drive
increases in trip frequency and transaction size.
• Expanding and Enhancing Our Retail Store Base.
We intend to expand and enhance our retail store base through the following initiatives:
• Adhering to a Market Focused and Financially Disciplined Real Estate
Strategy. We have grown our store base consistently since our founding
in 1972, developing more than 99% of our stores organically. We
believe there is significant opportunity to expand our retail store
base in the United States . We have identified numerous market
opportunities that we believe will allow us to reach 1,000stores over
the long-term.
• Maintaining Focus on Unit Economics and Returns. We have adopted a
market focused approach to new store openings with a specific focus on
maximizing sales while achieving attractive unit economics and
returns. By focusing on opening stores with attractive unit economics,
we are able to achieve attractive returns on capital andcontinue to
grow our margins. We believe that as we continue to reduce our
comparable store inventory, we will be able to reduce the square
footage of our stores while continuing to maintain our broad
assortment.
• Enhancing the Store Experience Through Store Remodels and Relocations.
We continue to invest in store remodels on a store-by-store basis
where appropriate, taking into consideration the age, sales and
profitability of a store, as well as the potential impact to the
customer shopping experience. In our remodeled stores, we have
typically incorporated new flooring, painting, lighting and graphics,
relocated our fitting rooms to maximize productive selling space,
added new departments such as home and accessories and made various
other improvements as appropriate by location.
• Enhancing Operating Margins.
We intend to increase our operating margins through the following initiatives:
• Optimize Markdowns. We believe that our markdown system allows us to
maximize sales and gross margin dollars based on forward-looking sales
forecasts, sell-through targets, and exit dates. This allows us to
optimize markdowns at the style and color level by store cluster.
• Enhance Purchasing Power . We believe that increasing our store
footprint and expanding our West Coast buying office provides us with
the opportunity to capture incremental buying opportunities and
realize economies of scale in our merchandising andnon-merchandising
purchasing activities.
• Drive Operating Leverage. We believe that we will be able to leverage
our growing sales over the fixed costs of our business. In addition,
we are focused on continuing to improve the efficiency of our
corporate and in-store operations.
Uncertainties and Challenges
As we strive to increase profitability through achieving positive comparable
store sales and leveraging productivity initiatives focused on improving the
in-store experience, more efficient movement of products from the vendors to the
selling floors, and modifying our marketing plans to increase our core customer
base and increase our share of our current customers' spending, there are
uncertainties and challenges that we face as an off-price retailer of apparel
and accessories for men, women and children and home furnishings that could have
a material impact on our revenues or income.
Seasonality of Sales and Weather Conditions. Our sales, like most other
retailers, are subject to seasonal influences, with the majority of our sales
and net income derived during the second half of the year, which includes the
back-to-school and holiday seasons.
Weather continues to be a contributing factor to the sale of our clothing.
Generally, our sales are higher if the weather is cold during the Fall and warm
during the early Spring. Sales of cold weather clothing are increased by early
cold weather during the Fall, while sales of warm weather clothing are improved
by early warm weather conditions in the Spring. Although we have diversified our
product offerings, we believe traffic to our stores is still driven, in part, by
weather patterns.
General Economic Conditions. Consumer spending habits, including spending for
the merchandise that we sell, are affected by, among other things, prevailing
global economic conditions, inflation, levels of employment, salaries and wage
rates, prevailing interest rates, housing costs, energy costs, commodities
pricing, income tax rates and policies, consumer confidence and consumer
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perception of economic conditions. In addition, consumer purchasing patterns may be influenced by consumers' disposable income, credit availability and debt levels.
A slowdown in theU.S. economy, an uncertain global economic outlook or a credit crisis could adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis. Consumer confidence is also affected by the domestic and international political situation. Our financial condition and operations could be impacted by changes in government regulations in areas including, but not limited to, taxes and healthcare. Ongoing international trade and tariff negotiations could have a direct impact on our income and an indirect impact on consumer prices. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting theU.S. , could lead to a decrease in spending by consumers. In addition, natural disasters, industrial accidents and acts of war in various parts of the world could have the effect of disrupting supplies and raising prices globally which, in turn, may have adverse effects on the world andU.S. economies and lead to a downturn in consumer confidence and spending. We closely monitor our net sales, gross margin and expenses. We have performed scenario planning such that if our net sales decline, we have identified variable costs that could be reduced to partially mitigate the impact of these declines. If we were to experience adverse economic trends and/or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods. Competition and Margin Pressure. We believe that in order to remain competitive, we must continue to offer brand-name merchandise at a discount to prices offered by other retailers as well as an assortment of merchandise that is appealing to our customers. TheU.S. retail apparel and home furnishings markets are highly fragmented and competitive. We compete for business with department stores, off-price retailers, internet retailers, specialty stores, discount stores, wholesale clubs, and outlet stores as well as with certain traditional, full-price retail chains that have developed off-price concepts. At various times throughout the year, traditional full-price department store chains and specialty shops offer brand-name merchandise at substantial markdowns, which can result in prices approximating those offered by us at ourBurlington stores. We anticipate that competition will increase in the future. Therefore, we will continue to look for ways to differentiate our stores from those of our competitors. TheU.S. retail industry continues to face increased pressure on margins as overall challenging retail conditions have led consumers to be more value conscious. Our "open to buy" paradigm, under which we purchase both pre-season and in-season merchandise, allows us the flexibility to purchase less pre-season with the balance purchased in-season and opportunistically. It also provides us with the flexibility to shift purchases between suppliers and categories. This enables us to obtain better terms with our suppliers, which we expect to help offset any rising costs of goods.
Key Performance Measures
We consider numerous factors in assessing our performance. Key performance measures used by management include net income, Adjusted Net Income, Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin, inventory, store payroll as a percentage of net sales and liquidity. Net income. We earned net income of$96.5 million during the three month period endedNovember 2, 2019 compared with$76.8 million during the three month period endedNovember 3, 2018 . We earned net income of$258.8 million during the nine month period endedNovember 2, 2019 compared with$230.4 million during the nine month period endedNovember 3, 2018 . These improvements were primarily driven by our increased gross margin dollars, partially offset by an increase in selling, general and administrative expenses. Refer to the section below entitled "Results of Operations" for further explanation.
Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT: Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance.
We define Adjusted Net Income as net income, exclusive of the following items,
if applicable: (i) net favorable lease cost; (ii) costs related to debt
amendments; (iii) loss on extinguishment of debt; (iv) impairment charges; and
(v) other unusual, non-recurring or extraordinary expenses, losses, charges or
gains, all of which are tax effected to arrive at Adjusted Net Income.
We define Adjusted EBITDA as net income, exclusive of the following items, if
applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense; (v) depreciation and
amortization; (vi) impairment charges; (vii) costs related to debt amendments;
and (viii) other unusual, non-recurring or extraordinary expenses, losses,
charges or gains.
24
-------------------------------------------------------------------------------- We define Adjusted EBIT as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) income tax expense; (v) impairment charges; (vi) net favorable lease costs; (vii) costs related to debt amendments; and (viii) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We present Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT, because we believe they are useful supplemental measures in evaluating the performance of our business and provide greater transparency into our results of operations. In particular, we believe that excluding certain items that may vary substantially in frequency and magnitude from what we consider to be our core operating results are useful supplemental measures that assist in evaluating our ability to generate earnings and leverage sales, and to more readily compare core operating results between past and future periods. Adjusted Net Income has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted Net Income does not reflect the following items, net of their tax effect: • favorable lease costs; • costs related to debt amendments; • losses on extinguishment of debt; • impairment charges on long-lived assets; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and nine months endedNovember 2, 2019 , Adjusted Net Income, exclusive of management transition costs, improved$20.9 million to$103.8 million and$32.0 million to$280.8 million , respectively. These improvements were primarily driven by our improved gross margin dollars, partially offset by an increase in selling, general and administrative expenses. Refer to the section below entitled "Results of Operations" for further explanation.
The following table shows our reconciliation of net income to Adjusted Net
Income for the three and nine months ended
(unaudited)
(in thousands)
Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Reconciliation of net income to Adjusted
Net Income:
Net income $ 96,459 $ 76,849 $ 258,791 $ 230,394
Net favorable lease costs (a) 8,355 5,286 28,262 20,162
Costs related to debt amendments (b) - 2,418 (375 ) 2,496
Loss on extinguishment of debt (c) - 462 - 1,823
Tax effect (d) (2,140 ) (2,075 ) (7,070 ) (6,079 )
Adjusted Net Income 102,674 82,940 279,608 248,796
Management transition costs, net of tax
effect (e) 1,171 - 1,171 -
Adjusted Net Income, exclusive of
management transition costs $ 103,845 $ 82,940 $ 280,779 $ 248,796 (a) Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of purchase
accounting related to the
a result of adoption of Accounting Standards Update (ASU) 2016-02, "Leases"
(ASU 2016-02), these expenses are recorded in the line item "Selling,
general and administrative expenses" in our Condensed Consolidated
Statements of Income for the three and nine months ended
These expenses are recorded in the line item "Depreciation and
amortization" in our Condensed Consolidated Statements of Income for the
three and nine months ended November 3, 2018 .
(b) Represents costs incurred in connection with review and execution of
refinancing opportunities and the reversal of previously estimated costs
related to the repricing of our senior secured term loan facility (the Term
Loan Facility) in Fiscal 2018.
(c) Amounts relate to the refinancing of the Term Loan Facility, the
million prepayment on the Term Loan Facility, as well as an amendment to
our Second Amended and Restated Credit Agreement, dated September 2, 2011
(the ABL Credit Agreement).
(d) Tax effect is calculated based on the effective tax rates (before discrete
items) for the respective periods, adjusted for the tax effect for the
impact of items (a) through (c).
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(e) Represents costs incurred as a result of hiring a new Chief Executive
Officer, primarily related to sign-on and duplicative compensation costs.
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect: • interest expense on our debt; • losses on the extinguishment of debt; • costs related to debt amendments;
• cash requirements for replacement of assets. Although depreciation and
amortization are non-cash charges, the assets being depreciated and
amortized will likely have to be replaced in the future;
• impairment charges on long-lived assets;
• income tax expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and nine months endedNovember 2, 2019 , Adjusted EBITDA, exclusive of management transition costs, improved$30.8 million to$193.8 million and$52.0 million to$532.1 million , respectively. These improvements were primarily driven by our improved gross margin dollars, partially offset by an increase in selling, general and administrative expenses. Refer to the section below entitled "Results of Operations" for further explanation. The following table shows our reconciliation of net income to Adjusted EBITDA for the three and nine months endedNovember 2, 2019 compared with the three and nine months endedNovember 3, 2018 : (unaudited) (in thousands) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2019 2018 2019 2018 Reconciliation of net income to Adjusted EBITDA: Net income$ 96,459 $ 76,849 $ 258,791 $ 230,394 Interest expense 12,149 14,460 38,954 43,563 Interest income (103 ) (113 ) (496 ) (302 ) Loss on extinguishment of debt (a) - 462 - 1,823 Costs related to debt amendments (b) - 2,418 (375 ) 2,496 Depreciation and amortization (c) 61,035 53,770 183,570 161,201 Income tax expense 22,957 15,206 50,302 40,929 Adjusted EBITDA 192,497 163,052 530,746 480,104 Management transition costs (d) 1,346 - 1,346 - Adjusted EBITDA, exclusive of management transition costs$ 193,843 $ 163,052 $ 532,092 $ 480,104
(a) Amounts relate to the refinancing of the Term Loan Facility, the
million prepayment on our Term Loan Facility, as well as an amendment to
our ABL Credit Agreement.
(b) Represents costs incurred in connection with review and execution ofrefinancing opportunities and the reversal of previously estimated costs
related to the repricing of our Term Loan Facility in Fiscal 2018.
(c) Includes
cost included in the line item "Selling, general and administrative
expenses" in our Condensed Consolidated Statements of Income for the three
and nine months ended
the non-cash expense associated with favorable and unfavorable leases that
were recorded as a result of the Merger Transaction. As a result of
adoption of ASU 2016-02, these expenses are recorded in the line item
"Selling, general and administrative expenses" in our Condensed
Consolidated Statements of Income for the three and nine months ended
"Depreciation and amortization" in our Condensed Consolidated Statements of
Income for the three and nine months ended
(d) Represents costs incurred as a result of hiring a new Chief Executive
Officer, primarily related to sign-on and duplicative compensation costs.
Adjusted EBIT has limitations as an analytical tool, and should not be
considered either in isolation or as a substitute for net income or other data
prepared in accordance with GAAP. Among other limitations, Adjusted EBIT does
not reflect:
• interest expense on our debt;
26
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• losses on the extinguishment of debt; • costs related to debt amendments; • favorable lease cost; • impairment charges on long-lived assets; • income tax expense; and
• other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
During the three and nine months endedNovember 2, 2019 , Adjusted EBIT, exclusive of management transition costs, improved$26.6 million to$141.2 million and$37.7 million to$376.8 million , respectively. These improvements were primarily driven by our improved gross margin dollars, partially offset by an increase in selling, general and administrative expenses. Refer to the section below entitled "Results of Operations" for further explanation. The following table shows our reconciliation of net income to Adjusted EBIT for the three and nine months endedNovember 2, 2019 compared with the three and nine months endedNovember 3, 2018 : (unaudited) (in thousands) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2019 2018 2019 2018 Reconciliation of net income to Adjusted EBIT: Net income$ 96,459 $ 76,849 $ 258,791 $ 230,394 Interest expense 12,149 14,460 38,954 43,563 Interest income (103 ) (113 ) (496 ) (302 ) Loss on extinguishment of debt (a) - 462 - 1,823 Costs related to debt amendments (b) - 2,418 (375 ) 2,496 Net favorable lease costs (c) 8,355 5,286 28,262 20,162 Income tax expense 22,957 15,206 50,302 40,929 Adjusted EBIT 139,817 114,568 375,438 339,065 Management transition costs (d) 1,346 - 1,346 - Adjusted EBIT, exclusive of management transition costs$ 141,163 $ 114,568 $ 376,784 $ 339,065
(a) Amounts relate to the refinancing of the Term Loan Facility, the
million prepayment on our Term Loan Facility, as well as an amendment to
our ABL Credit Agreement.
(b) Represents costs incurred in connection with review and execution ofrefinancing opportunities and the reversal of previously estimated costs
related to the repricing of our Term Loan Facility in Fiscal 2018.(c) Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of the
Merger Transaction. As a result of adoption of ASU 2016-02, these expenses
are recorded in the line item "Selling, general and administrative
expenses" in our Condensed Consolidated Statements of Income for the three
and nine months ended
line item "Depreciation and amortization" in our Condensed Consolidated
Statements of Income for the three and nine months ended
(d) Represents costs incurred as a result of hiring a new Chief Executive
Officer, primarily related to sign-on and duplicative compensation costs.
Comparable Store Sales. Comparable store sales measure performance of a store
during the current reporting period against the performance of the same store in
the corresponding period of the previous year. The method of calculating
comparable store sales varies across the retail industry. As a result, our
definition of comparable store sales may differ from other retailers.
We define comparable store sales as merchandise sales of those stores, including
our online store, commencing on the first day of the fiscal month one year after
the end of their grand opening activities, which normally conclude within the
first two months of operations. If a store is closed for seven or more days
during a month, our policy is to remove that store from our calculation of
comparable stores sales for any such month, as well as during the month(s) of
their grand re-opening activities. The increase in our comparable store sales
was as follows:
Three Months Ended Nine Months Ended
November 2, 2019 2.7% 2.2%
November 3, 2018 4.4% 4.0%
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-------------------------------------------------------------------------------- Various factors affect comparable store sales, including, but not limited to, weather conditions, current economic conditions, the timing of our releases of new merchandise and promotional events, the general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, competition, and the success of marketing programs. Gross Margin. Gross margin is the difference between net sales and the cost of sales. Our cost of sales and gross margin may not be comparable to those of other entities, since some entities may include all of the costs related to their buying and distribution functions, certain store-related costs and other costs, in cost of sales. We include certain of these costs in the line items "Selling, general and administrative expenses" and "Depreciation and amortization" in our Condensed Consolidated Statements of Income. We include in our "Cost of sales" line item all costs of merchandise (net of purchase discounts and certain vendor allowances), inbound freight, distribution center outbound freight and certain merchandise acquisition costs, primarily commissions and import fees. Gross margin as a percentage of net sales remained consistent at 42.4% during the three month period endedNovember 2, 2019 , compared with the three month period endedNovember 3, 2018 . Increased merchandise margin was offset by higher freight costs and inventory write-offs. Product sourcing costs, which are included in selling, general and administrative expenses, improved approximately 20 basis points as a percentage of net sales. Gross margin as a percentage of net sales decreased approximately 10 basis points to 41.6% during the nine month period endedNovember 2, 2019 , compared with the nine month period endedNovember 3, 2018 , driven primarily by higher freight costs and inventory write-offs, partially offset by increased merchandise margin. Product sourcing costs, which are included in selling, general and administrative expenses, improved approximately 10 basis points as a percentage of net sales. Inventory. Inventory atNovember 2, 2019 decreased to$1,004.4 million compared with$1,056.6 million atNovember 3, 2018 . The decrease was primarily related to our pack-and-hold inventory levels, which were 15% of total inventory at the end of the third quarter of Fiscal 2019 compared to 18% at the end of the third quarter of Fiscal 2018, as well as an approximately 4% decrease in comparable store inventory at the end of the third quarter of Fiscal 2019 and a decrease in short stay inventory. These decreases were partially offset by our 47 net new stores opened fromNovember 3, 2018 throughNovember 2, 2019 .
Inventory at
In order to better serve our customers and maximize sales, we continue to refine our merchandising mix and inventory levels within our stores. By appropriately managing our inventories, we believe we will be better able to deliver a continual flow of fresh merchandise to our customers. We continue to move toward more productive inventories by increasing the amount of current inventory as a percent of total inventory.
Inventory turnover and comparable store inventory turnover are performance metrics that indicate how efficiently inventory is bought and sold. They each measure the length of time that we own our inventory.
Inventory turnover is calculated by dividing cost of goods sold by the 13 month
average cost value of our inventory for the period being measured. Our inventory
turnover rate declined approximately 4% for the third quarter of Fiscal 2019
compared with the third quarter of Fiscal 2018.
Comparable store inventory turnover is calculated by dividing comparable store
sales by the average comparable store retail value of inventory for the period
being measured. The comparable store retail value of inventories is estimated
based on the original sales price of items on hand reduced by retail reductions
(which include sales, markdowns, an estimated shortage adjustment and employee
discounts) for our comparable stores. The calculation is based on a rolling 13
month average of inventory (at estimated retail value) and the last 12 months'
comparable store sales. Our comparable store inventory turnover rate improved
approximately 5% during the third quarter of Fiscal 2019 compared with the third
quarter of Fiscal 2018.
The difference between inventory turnover and comparable store inventory
turnover is primarily the result of the latter not including distribution center
and warehouse inventory or inventory at new and non-comparable stores. Inventory
held at our warehouses and distribution centers includes merchandise being
readied for shipment to our stores and pack-and-hold inventory acquired
opportunistically for future store release. The magnitude of pack-and-hold
inventory, at any one point in time, is dependent on the buying opportunities
identified in the marketplace.
We present inventory turnover, because it demonstrates how effective we are at
managing our inventory. We present comparable store inventory turnover as we
believe this is a useful supplemental metric in evaluating the effectiveness of
our merchandising efforts, as a faster comparable store inventory turnover
generally leads to reduced markdowns and more fresh merchandise in our stores.
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-------------------------------------------------------------------------------- Store Payroll as a Percentage ofNet Sales . Store payroll as a percentage of net sales measures our ability to manage our payroll in accordance with increases or decreases in net sales. The method of calculating store payroll varies across the retail industry. As a result, our store payroll as a percentage of net sales may differ from other retailers. We define store payroll as regular and overtime payroll for all store personnel as well as regional and territory personnel, exclusive of payroll charges related to corporate and warehouse employees. Store payroll as a percentage of net sales was 9.0% and 8.9% during the three and nine month periods endedNovember 2, 2019 , respectively, compared with 8.9% and 8.8%, respectively, during the three and nine month periods endedNovember 3, 2018 . Liquidity. Liquidity measures our ability to generate cash. Management measures liquidity through cash flow, which is the measure of cash generated from or used in operating, financing, and investing activities. Cash and cash equivalents, including restricted cash and cash equivalents, increased$12.9 million during the nine months endedNovember 2, 2019 , compared with a decrease of$53.8 million during the nine months endedNovember 3, 2018 . Refer to the section below entitled "Liquidity and Capital Resources" for further explanation.
Results of Operations
The following table sets forth certain items in the Condensed Consolidated
Statements of Income as a percentage of net sales for the three and nine months
ended
Percentage of Net Sales
Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Other revenue 0.4 0.4 0.4 0.4
Total revenue 100.4 100.4 100.4 100.4
Cost of sales 57.6 57.6 58.4 58.3
Selling, general and administrative expenses 32.9 32.9 32.3 31.9
Costs related to debt amendments - 0.1 (0.0 ) 0.1
Depreciation and amortization 3.0 3.3 3.1 3.5
Other income - net (0.5 ) (0.1 ) (0.3 ) (0.2 )
Loss on extinguishment of debt - 0.0 - 0.0
Interest expense 0.7 0.9 0.8 0.9
Total costs and expenses 93.7 94.7 94.3 94.5
Income before income tax expense 6.7 5.7 6.1 5.9
Income tax expense 1.3 0.9 1.0 0.9
Net income 5.4 % 4.8 % 5.1 % 5.0 %
Three Month Period Ended
Net sales
Net sales improved approximately
• an increase in net sales of
stores, inclusive of approximately
result of seven stores that were temporarily closed during the quarter;
and
• an increase in comparable store sales of
million; partially offset by
• a
other sales adjustments.
Cost of sales
Cost of sales as a percentage of net sales remained consistent at approximately 57.6% during the third quarter of Fiscal 2019. Increased merchandise margin was offset by higher freight costs and inventory write-offs at temporarily closed stores. Product sourcing costs, which are included in selling, general and administrative expenses, improved approximately 20 basis points as a percentage of net sales. On a dollar basis, cost of sales increased$80.9 million , or 8.6%, primarily driven by our overall increase in sales. 29
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Selling, general and administrative expenses
Selling, general and administrative expenses as a percentage of net sales remained consistent for the third quarter of Fiscal 2019. The following table details selling, general and administrative expenses for the three month period endedNovember 2, 2019 compared with the three month period endedNovember 3, 2018 . Prior year amounts have been reclassified to conform to the current period presentation: (in millions) Three Months Ended Percentage Percentage November 2, of November 3, of 2019 Net Sales 2018 Net Sales $ Variance % Change Store related costs$ 377.6 21.3 %$ 350.1 21.4 %$ 27.5 7.9 % Product sourcing costs 89.7 5.1 85.7 5.3 4.0 4.7 Corporate costs 57.0 3.2 54.1 3.3 2.9 5.4 Marketing and strategy costs 27.4 1.5 26.6 1.6 0.8 3.0 Favorable lease cost 8.3 0.5 - - 8.3 N/A Other selling, general and administrative expenses 23.6 1.3 21.6 1.3 2.0 9.3 Selling, general and administrative expenses$ 583.6 32.9 %$ 538.1 32.9 %$ 45.5 8.5 % Selling, general and administrative expenses remained flat as a percentage of net sales. The reclassification of favorable lease cost from depreciation and amortization expense to selling, general and administrative expense as a result of adopting ASU 2016-02 resulted in a 50 basis point increase. This increase was offset by a 20 basis point improvement in product sourcing costs, a 10 basis point improvement in store related costs, a 10 basis point improvement in corporate costs and a 10 basis point improvement in our national television advertising and direct marketing efforts, as a result of our profit improvement initiatives.
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed assets amounted to$52.7 million during the third quarter of Fiscal 2019 compared with$53.8 million during the third quarter of Fiscal 2018. The decrease was primarily driven by the reclassification of favorable lease cost from depreciation and amortization expense to selling, general and administrative expense as a result of adopting ASU 2016-02, partially offset by capital expenditures related to our new and non-comparable stores.
Interest expense
Interest expense improved$2.3 million to$12.1 million . The improvement was primarily driven by lower average borrowings on the ABL Line of Credit, as well as the repricing of our Term Loan Facility at the end of the third quarter of Fiscal 2018. Our average interest rates and average balances related to our Term Loan Facility and our ABL Line of Credit, for the third quarter of Fiscal 2019 compared with the third quarter of Fiscal 2018, are summarized in the table below: Three Months EndedNovember 2 ,November 3, 2019 2018 Average interest rate - ABL Line of Credit 3.5%
3.4%
Average interest rate - Term Loan Facility 4.1%
4.6%
Average balance - ABL Line of Credit (in millions)$ 32.6 $
166.5
Average balance - Term Loan Facility (in millions) (a)$ 961.4 $ 961.4 (a) Excludes original issue discount.
Income tax expense
Income tax expense was$23.0 million during the third quarter of Fiscal 2019 compared with$15.2 million during the third quarter of Fiscal 2018. The effective tax rate for the third quarter of Fiscal 2019 was 19.2% compared with 16.5% during the third quarter of Fiscal 2018. The lower tax rate in the prior year was primarily related to the impact of the US Tax Cuts and Jobs Act of 2017 on the Fiscal 2017 federal tax return filed during the third quarter of Fiscal 2018. 30
-------------------------------------------------------------------------------- At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the third quarter of Fiscal 2019 resulted in an annual effective income tax rate of approximately 25% (before discrete items) as our best estimate. This is consistent with the annual effective tax rate for the third quarter of Fiscal 2018 of approximately 25% (before discrete items).
Net income
We earned net income of
Nine Month Period Ended
Net sales Net sales improved approximately$408.3 million , or 8.8%, to$5,059.9 million during the nine month period endedNovember 2, 2019 , driven primarily by the following:
• an increase in net sales of
stores, and
• an increase in comparable store sales of
million; partially offset by
• a
stores and other sales adjustments.
Cost of sales
Cost of sales as a percentage of net sales increased approximately 10 basis points to 58.4% during the nine month period endedNovember 2, 2019 , driven primarily by higher freight costs and inventory write-offs at temporarily closed stores, partially offset by increased merchandise margin. Product sourcing costs, which are included in selling, general and administrative expenses, improved approximately 10 basis points as a percentage of net sales. On a dollar basis, cost of sales increased$242.5 million , or 8.9%, primarily driven by our overall increase in sales.
Selling, general and administrative expenses
Selling, general and administrative expenses as a percentage of net sales increased approximately 40 basis points during the nine month period endedNovember 2, 2019 , compared with the nine month period endedNovember 3, 2018 . The following table details selling, general and administrative expenses for the nine month period endedNovember 2, 2019 compared with the nine month period endedNovember 3, 2018 . Prior year amounts have been reclassified to conform to the current period presentation: (in millions) Nine Months Ended Percentage Percentage November of November of 2, 2019 Net Sales 3, 2018 Net Sales $ Variance % Change Store related costs$ 1,073.9 21.2 %$ 987.5 21.2 %$ 86.4 8.7 % Product sourcing costs 250.4 4.9 233.0 5.0 17.4 7.5 Corporate costs 163.0 3.2 151.8 3.3 11.2 7.4 Marketing and strategy costs 56.1 1.1 57.1 1.2 (1.0 ) (1.8 ) Favorable lease cost 27.9 0.6 - - 27.9 N/A Other selling, general and administrative expenses 61.6 1.3 56.1 1.2 5.5 9.8 Selling, general and administrative expenses$ 1,632.9 32.3 %$ 1,485.5 31.9 %$ 147.4 9.9 % The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by the reclassification of favorable lease cost from depreciation and amortization expense to selling, general and administrative expense as a result of adopting ASU 2016-02, which resulted in a 60 basis point increase. This increase was partially offset by a 10 basis point improvement in product sourcing costs and a 10 basis point improvement in our national television advertising and direct marketing efforts, as a result of our profit improvement initiatives. 31
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Costs related to debt amendments
During Fiscal 2018, we recorded total estimated costs related to debt amendments of$2.5 million , primarily as a result of the repricing of our Term Loan Facility. During the nine month period endedNovember 2, 2019 , we reversed$0.4 million of this estimated expense based on actual expenses incurred.
Depreciation and amortization
Depreciation and amortization expense related to the depreciation of fixed assets amounted to$155.6 million during the nine month period endedNovember 2, 2019 compared with$161.2 million during the nine month period endedNovember 3, 2018 . The decrease in depreciation and amortization expense was primarily driven by the reclassification of favorable lease cost from depreciation and amortization expense to selling, general and administrative expense as a result of adopting ASU 2016-02, partially offset by capital expenditures related to our new and non-comparable stores.
Interest expense
Interest expense improved$4.6 million to$39.0 million . The improvement was primarily driven by the$150 million paydown and repricing of our Term Loan Facility during Fiscal 2018, partially offset by higher average borrowings and a higher average interest rate on our ABL Line of Credit.
Our average interest rates and average balances related to our Term Loan
Facility and our ABL Line of Credit, for the nine month period ended
Nine Months Ended
November 2 , November 3,
2019 2018
Average interest rate - ABL Line of Credit 3.7% 3.4%
Average interest rate - Term Loan Facility 4.3%
4.4%
Average balance - ABL Line of Credit (in millions)$ 108.7 $
103.4
Average balance - Term Loan Facility (in millions) (a)$ 961.4 $ 1,033.9
(a) Excludes original issue discount.
Income tax expense
Income tax expense was$50.3 million during the nine month period endedNovember 2, 2019 compared with$40.9 million during the nine month period endedNovember 3, 2018 . The effective tax rate for the nine month period endedNovember 2, 2019 was 16.3% compared with 15.1% during the nine month period endedNovember 3, 2018 . The lower tax rate in the prior year was primarily related to the impact of the US Tax Cuts and Jobs Act of 2017 and the changes toNew Jersey tax law enacted during the second quarter of Fiscal 2018.
Net income
We earned net income of$258.8 million during the nine month period endedNovember 2, 2019 compared with$230.4 million for the nine month period endedNovember 3, 2018 . This improvement was primarily driven by our improved gross margin dollars, partially offset by an increase in selling, general and administrative expenses.
Liquidity and Capital Resources
Our ability to satisfy interest payment and future principal payment obligations
on our outstanding debt will depend largely on our future performance which, in
turn, is subject to prevailing economic conditions and to financial, business
and other factors beyond our control. If we do not have sufficient cash flow to
service interest payment and future principal payment obligations on our
outstanding indebtedness and if we cannot borrow or obtain equity financing to
satisfy those obligations, our business and results of operations will be
materially adversely affected. We cannot be assured that any replacement
borrowing or equity financing could be successfully completed on terms similar
to our current financing agreements, or at all.
We believe that cash generated from operations, along with our existing cash and
our ABL Line of Credit, will be sufficient to fund our expected cash flow
requirements and planned capital expenditures for at least the next twelve
months as well as the foreseeable future. However, there can be no assurance
that we would be able to offset declines in our comparable store sales with
savings initiatives in the event that the economy declines.
32--------------------------------------------------------------------------------
Cash Flow for the Nine Month Period Ended
We generated
Net cash provided by operating activities amounted to$476.9 million during the nine month period endedNovember 2, 2019 compared with$375.4 million during the nine month period endedNovember 3, 2018 . The increase in our operating cash flows was primarily driven by our improved operating results and changes in working capital. Net cash used in investing activities was$256.0 million during the nine month period endedNovember 2, 2019 compared with$225.3 million during the nine month period endedNovember 3, 2018 . This change was primarily the result of an increase in capital expenditures related to a new distribution center and our store expenditures (new stores, remodels, and other store expenditures). Net cash used in financing activities was$207.9 million during the nine month period endedNovember 2, 2019 compared with a use of$203.9 million during the nine month period endedNovember 3, 2018 . This change was primarily driven by an increase in the value of share repurchases, partially offset by a decrease in the net payments on our debt and increased proceeds from stock option exercises. Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had a working capital deficit atNovember 2, 2019 of$199.1 million compared with a working capital deficit of$26.7 million atNovember 3, 2018 . The decrease in working capital was primarily related to our adoption of ASU 2016-02, which resulted in adding a portion of the new lease liability to current liabilities, as well as a decrease in merchandise inventories. This was partially offset by a decrease in accounts payable, as well as increases in cash and accounts receivable. We had working capital atFebruary 2, 2019 of$2.3 million .
Capital Expenditures
For the nine month period endedNovember 2, 2019 , cash spend for capital expenditures, net of$36.0 million of landlord allowances and$5.1 million in insurance recoveries related to property and equipment, amounted to$219.5 million . We estimate that we will spend approximately$310 million , net of approximately$55 million of landlord allowances, in capital expenditures during Fiscal 2019, including approximately$175 million , net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately$60 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives. Share Repurchase Program OnAugust 15, 2018 , our Board of Directors authorized the repurchase of up to$300 million of common stock, which is authorized to be executed throughAugust 2020 . OnAugust 14, 2019 , our Board of Directors authorized the repurchase of up to an additional$400 million of common stock, which is authorized to be executed throughAugust 2021 . These repurchase programs are funded using our available cash and borrowings on our ABL Line of Credit. During the nine month period endedNovember 2, 2019 , we repurchased 1,365,211 shares of our common stock for$216.9 million , inclusive of commissions, under the share repurchase programs. As ofNovember 2, 2019 , we had$481.6 million remaining under our share repurchase authorizations. We are authorized to repurchase, from time to time, shares of our outstanding common stock on the open market or in privately negotiated transactions under our repurchase programs. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase programs may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the programs.
Dividends
We currently do, and intend to continue to, retain all available funds and any
future earnings to fund all of the Company's capital expenditures, business
initiatives, and to support any potential opportunistic capital structure
initiatives. Therefore, at this time, we do not anticipate paying cash dividends
in the near term. Our ability to pay dividends on our common stock will be
limited by restrictions on the ability of our subsidiaries to pay dividends or
make distributions under the terms of current and any future agreements
governing our indebtedness. Any future determination to pay dividends will be at
the discretion of our Board of Directors, subject to compliance with covenants
in our current and future agreements governing our indebtedness, and will depend
upon our results of operations, financial condition, capital requirements and
other factors that our Board of Directors deems relevant.
33
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In addition, since we are a holding company, substantially all of the assets
shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries.
Accordingly, our earnings, cash flow and ability to pay dividends are largely
dependent upon the earnings and cash flows of our subsidiaries and the
distribution or other payment of such earnings to us in the form of dividends.
Operational Growth
During the nine month period endedNovember 2, 2019 , we opened 72 new stores, inclusive of 15 relocations, and closed six stores, exclusive of the aforementioned relocations, bringing our store count as ofNovember 2, 2019 to 726 stores, inclusive of an internet store. We continue to pursue our growth plans and invest in capital projects that meet our financial requirements. During Fiscal 2019, we plan to open 51 net new stores, which includes approximately 76 gross new stores, along with approximately 25 store relocations and closings. We continue to explore expansion opportunities both within our current market areas and in other regions. We believe that our ability to find satisfactory locations for our stores is essential for the continued growth of our business. The opening of stores generally is contingent upon a number of factors including, but not limited to, the availability of desirable locations with suitable structures and the negotiation of acceptable lease terms. There can be no assurance, however, that we will be able to find suitable locations for new stores or that even if such locations are found and acceptable lease terms are obtained, we will be able to open the number of new stores presently planned. Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores. Debt and Hedging As ofNovember 2, 2019 , our obligations include$957.3 million , inclusive of original issue discount, under our Term Loan Facility and no outstanding borrowings on our ABL Line of Credit. Our debt obligations also include$30.8 million of capital lease obligations as ofNovember 2, 2019 .
Term Loan Facility
At
ABL Line of Credit
At
Hedging
OnDecember 17, 2018 , the Company entered into an interest rate swap contract, which was designated as a cash flow hedge. This interest rate swap, which hedges$450 million of our Term Loan Facility, became effectiveMay 31, 2019 and maturesDecember 29, 2023 .
Certain Information Concerning Contractual Obligations
The Company had
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Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management's judgments and estimates. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the consolidated financial statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Leases
InFebruary 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, "Leases." The standard's core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. We adopted this ASU as of the beginning of Fiscal 2019. We applied the changes from the new guidance at the adoption date and recognized a cumulative effect adjustment to retained earnings in the period of adoption, as allowed under ASU 2018-11, "Leases: Targeted Improvements." We did not adjust prior periods. We made an accounting policy election not to capitalize leases with an initial term of twelve months or less. We elected the transition package of practical expedients, which allows us to carry forward for our existing leases: i) the historical lease classification as either operating or capital; ii) assessment of whether any expired or existing contracts are or contain leases; and iii) capitalization of initial direct costs. Additionally, we elected the practical expedients to not separate lease and non-lease components, to not assess whether existing or expired land easements contain a lease, and to employ hindsight when determining lease terms for existing leases on the date of adoption. Adoption of this standard also resulted in a change in the timing of certain expense recognition, primarily related to net favorable lease cost, as well as a reclassification of favorable lease cost from "Depreciation and amortization" to "Selling, general and administrative expenses" on our Condensed Consolidated Statements of Income for the three and nine months endedNovember 2, 2019 . This guidance did not have a material impact on our liquidity. Other than the lease accounting policy discussed above, our critical accounting policies and estimates are consistent with those disclosed in Note 1, "Summary of Significant Accounting Policies," to the audited Consolidated Financial Statements, included in Part II, Item 8 of the Fiscal 2018 10-K.
Safe Harbor Statement
This report contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about us, the industry in
which we operate and other matters, as well as management's beliefs and
assumptions and other statements regarding matters that are not historical
facts. For example, when we use words such as "projects," "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "should,"
"would," "could," "will," "opportunity," "potential" or "may," variations of
such words or other words that convey uncertainty of future events or outcomes,
we are making forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (Securities Act) and Section 21E of the Securities
Exchange Act of 1934 (Exchange Act). Our forward-looking statements are subject
to risks and uncertainties. Such statements include, but are not limited to,
proposed store openings and closings, proposed capital expenditures, projected
financing requirements, proposed developmental projects, projected sales and
earnings, our ability to maintain selling margins, and the effect of the
adoption of recent accounting pronouncements on our consolidated financial
position, results of operations and cash flows. Actual events or results may
differ materially from the results anticipated in these forward-looking
statements as a result of a variety of factors. While it is impossible to
identify all such factors, factors that could cause actual results to differ
materially from those estimated by us include: general economic conditions; our
ability to successfully implement one or more of our strategic initiatives and
growth plans; the availability of desirable store locations on suitable terms;
changing consumer preferences and demand; industry trends, including changes in
buying, inventory and other business practices; competitive factors, including
pricing and promotional activities of major competitors and an increase in
competition within the markets in which we compete; the availability, selection
and purchasing of attractive merchandise on favorable terms; import risks,
including tax and trade policies, tariffs and government regulations; weather
patterns, including, among other things, changes in year-over-year temperatures;
our future profitability; our ability to control costs and expenses;
35
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unforeseen cyber-related problems or attacks; any unforeseen material loss or
casualty; the effect of inflation; regulatory and tax changes; our relationships
with employees; the impact of current and future laws and the interpretation of
such laws; terrorist attacks, particularly attacks on or within markets in which
we operate; natural and man-made disasters, including fire, snow and ice storms,
flood, hail, hurricanes and earthquakes; our substantial level of indebtedness
and related debt-service obligations; restrictions imposed by covenants in our
debt agreements; availability of adequate financing; our dependence on vendors
for our merchandise; domestic events affecting the delivery of merchandise to
our stores; existence of adverse litigation; and other risks discussed from time
to time in our filings with the Securities and Exchange Commission (SEC).
Many of these factors are beyond our ability to predict or control. In addition,
as a result of these and other factors, our past financial performance should
not be relied on as an indication of future performance. The cautionary
statements referred to in this section also should be considered in connection
with any subsequent written or oral forward-looking statements that may be
issued by us or persons acting on our behalf. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law. In light
of these risks and uncertainties, the forward-looking events and circumstances
discussed in this report might not occur. Furthermore, we cannot guarantee
future results, events, levels of activity, performance or achievements.
Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact in our Condensed Consolidated Financial Statements.
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