ACADEMY SPORTS AND OUTDOORS, INC. Cautionary Statement Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. Forward-looking statements include all statements that are not historical facts, including statements reflecting our current views with respect to, among other things, our operations and financial performance. These forward-looking statements are included throughout this Quarterly Report, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the section entitled "Risk Factors," and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "future," "will," "seek," "foreseeable," the negative version of these words or similar terms and phrases to identify forward-looking statements in this Quarterly Report. The forward-looking statements contained in this Quarterly Report are based on management's current expectations and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include but are not limited to those described under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 (the "Annual Report"), as filed with theSecurities and Exchange Commission (the "SEC") onMarch 29, 2022 , and in this Quarterly Report, as such risk factors have been updated from time to time in our periodic filings with theSEC , and are accessible on theSEC's website at www.sec.gov. Any forward-looking statement made by us in this Quarterly Report speaks only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws. The following is a summary of the principal factors that make an investment in our securities speculative or risky (all of which are more fully described in the section entitled "Risk Factors" in the Annual Report):
Risks Related to Our Business and Industry
•overall decline in the health of the economy and consumer discretionary spending;
•our ability to predict or effectively react to changes in consumer tastes and preferences, to acquire and sell brand name merchandise at competitive prices and/or to manage our inventory balances;
•the impact of COVID-19 on our business and the communities we serve;
•intense competition in the sporting goods and outdoor recreation retail industries;
•our ability to safeguard sensitive or confidential data relating to us and our customers, team members and vendors;
•risks associated with our reliance on internationally manufactured merchandise;
•our ability to operate, update or implement our information technology systems;
•risks associated with disruptions in our supply chain and losses of merchandise purchasing incentives;
•harm to our reputation;
•any failure of our third-party vendors of outsourced business services and solutions;
•our ability to successfully continue our store growth plans or manage our
growth effectively, or any failure of our new stores to generate sales and/or
achieve profitability;
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--------------------------------------------------------------------------------•risks associated with our e-commerce business;
•risks related to our owned brand merchandise;
•any disruption in the operation of our distribution centers;
•quarterly and seasonal fluctuations in our operating results;
•the occurrence of severe weather events, catastrophic health events, natural or man-made disasters, social and political conditions or civil unrest;
•our dependence on our ability to meet our labor needs;
•our ability to retain key personnel;
•the geographic concentration of our stores;
•fluctuations in merchandise (including raw material) costs and availability;
•payment-related risks;
•our ability to successfully pursue strategic acquisitions and integrate acquired businesses;
•the effectiveness of our marketing and advertising programs;
Legal and Regulatory Risks
•our ability to comply with laws and regulations affecting our business, including those relating to the sale, manufacture and import of consumer products;
•claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient;
•our ability to protect our intellectual property and avoid the infringement of third-party intellectual property rights;
•new and increased costs, risks, and additional regulations and requirements as a result of becoming a public company;
•our ability to have effective internal controls;
Risks Related to Our Indebtedness
•our level of indebtedness and related debt service payments and our ability to generate sufficient cash flow to satisfy all of our obligations under our indebtedness;
•our ability to incur substantially more debt;
•restrictions on our current and future operations imposed by the terms of our indebtedness;
•our variable rate indebtedness subjects us to interest rate risk;
•our ability to borrow under the ABL Facility (as defined below);
•our level of indebtedness may hinder our ability to negotiate favorable terms with our vendors;
Risks Related to the Ownership of Our Common Stock
•you may be diluted by any future issuances of shares by us;
•our stock price is volatile and may decline;
•our ability to raise capital in the future may be limited;
•lack of or negative coverage by securities analysts;
•our ability to pay dividends on our common stock;
•anti-takeover provisions in our organizational documents could delay or prevent a change of control;
•our board of directors is authorized to issue and designate shares of preferred stock without stockholder approval; and
•our exclusive forum provision.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.
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The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited financial statements and
related notes included elsewhere in this Quarterly Report for the thirteen weeks
ended April 30, 2022 and our audited financial statements for the fiscal year
ended January 29, 2022 and the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Annual Report.
All references to "Academy," "Academy Sports + Outdoors," "ASO, Inc. ", "we,"
"us," "our" or the "Company" in this Quarterly Report refer to Academy Sports
and Outdoors, Inc. , a Delaware corporation and the current parent holding
company of our operations, and its consolidated subsidiaries. We conduct our
operations through our subsidiaries, including our indirect subsidiary, Academy,
Ltd. , an operating company which is doing business as "Academy Sports +
Outdoors."
We operate on a retail fiscal calendar pursuant to which our fiscal year
consists of 52 or 53 weeks, ending on the Saturday closest to January 31 , (which
such Saturday may occur on a date following January 31 ) each year. References to
any year, quarter, or month mean our fiscal year, fiscal quarter, and fiscal
month, respectively, unless the context requires otherwise. References to the
"current quarter", "2022 first quarter" or similar reference refers to the
thirteen week period ended April 30, 2022 , and any reference to the "prior year
quarter", "2021 first quarter" or similar reference refers to the thirteen week
period ended May 1, 2021 . Unless otherwise specified, all comparisons regarding
the current period of 2022 are made to the corresponding period of 2021.
All statements in this Quarterly Report concerning our current and planned
operations are modified by reference to our discussion of recent developments
related to the COVID-19 pandemic, and our ability to carry out our current and
planned operations are dependent on further developments associated with the
COVID-19 pandemic.
Overview
We are one of the leading full-line sporting goods and outdoor recreation
retailers in the United States . Our mission is to provide "Fun for All" and
fulfill this mission with a localized merchandising strategy and value
proposition that deeply connect with a broad range of consumers. Our product
assortment focuses on key categories of outdoor, sports & recreation, apparel,
and footwear (representing 31%, 24%, 24% and 21% of our 2022 first quarter net
sales, respectively) through both leading national brands and a portfolio of
owned brands and private label brands, which go well beyond traditional sporting
goods and apparel offerings.
We sell a range of sporting and outdoor recreation products, including sporting
equipment, apparel, footwear, camping gear, patio furniture, outdoor cooking
equipment, and hunting and fishing gear, among many others. Our strong
merchandise assortment is anchored by our broad offering of year-round items,
such as fitness equipment and apparel, work and casual wear, folding chairs,
wagons and tents, training and running shoes, and coolers. We also carry a deep
selection of seasonal items, such as sports equipment and apparel, seasonal wear
and accessories, hunting and fishing equipment and apparel, patio furniture,
trampolines, play sets, bicycles, and severe weather supplies. We provide
locally relevant offerings, such as crawfish boilers in Louisiana , licensed
apparel for area sports fans, baits and lures for area fishing spots, and beach
towels in coastal markets.
As of April 30, 2022 , we operated 260 stores that range in size from
approximately 40,000 to 130,000 gross square feet, with an average size of
approximately 70,000 gross square feet, throughout 16 contiguous states located
primarily in the southern United States . Our stores are supported by
approximately 22,000 team members, three distribution centers, and our rapidly
growing e-commerce platform, which includes our website at www.academy.com and
our mobile app, newly introduced in the 2021 second quarter. Additionally, we
are deepening our customer relationships, further integrating our e-commerce
platform with our stores and driving operating efficiencies by developing our
omnichannel capabilities, such as our mobile app, optimizing the website
experience and upgrading our fulfillment capabilities.
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--------------------------------------------------------------------------------The following table summarizes store activity for the periods indicated:
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
Beginning stores 259 259
Q1 new stores 1 -
Closed - -
Ending stores 260 259
Relocated stores - 1
How We Assess the Performance of Our Business and Recent Trends
Our management considers a number of financial and operating metrics, including
the following key metrics, to evaluate our business, measure our performance,
identify trends affecting our business, determine the allocation of resources,
make decisions regarding corporate strategies and evaluate projections. These
metrics include operational measures and non-GAAP metrics supplemental to our
GAAP results.
Comparable Sales. We define comparable sales as the percentage of
period-over-period net sales increase or decrease, in the aggregate, for stores
open after thirteen full fiscal months, as well as for all e-commerce sales.
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
regarding our comparable sales may not be comparable to similar data made
available by other retailers. Stores which have been significantly remodeled or
relocated are removed from this calculation until the new store has been in
operation for substantially all of the periods being compared. Stores which have
been closed for an extended period of time due to circumstances beyond our
control are also removed from the calculation. Any sales made through our
website or mobile app are allocated to e-commerce sales for the purpose of
measuring comparable sales, regardless of how those sales are fulfilled, whether
shipped to home or picked up in-store or curbside through our
buy-online-pickup-in-store program ("BOPIS"). For example, all BOPIS
transactions, which are originated by our website, are allocated to e-commerce
sales for the purpose of comparable sales, despite the fact that our customers
pick-up these purchases from a specific store.
Increases or decreases in e-commerce between periods being compared directly
impact the comparable sales results. Various factors affect comparable sales,
including consumer preferences, buying trends and overall economic trends; our
ability to identify and respond effectively to customer preferences and local
and regional trends; our ability to provide an assortment of high quality/value
oriented product offerings that generate new and repeat visits to our stores and
our website; the customer experience and unique services we provide in our
stores; our ability to execute our omnichannel strategy, including the growth of
our e-commerce business; changes in product mix and pricing, including
promotional activities; the number of items purchased per visit and average
order value; a shift in the timing of a holiday between comparable periods; and
the number of stores that have been in operation for more than 13 months.
We have seen a significant comparable store sales increase in recent full year
results from (0.7%) in 2019 to 16.1% and 18.9% in 2020 and 2021, respectively.
However, we experienced a decrease in comparable sales of (7.5)% for the 2022
first quarter as compared to an increase in the 2021 first quarter of 38.9%. The
large 2021 first quarter comparable sales were affected by U.S. government
stimulus packages, which had a positive impact on sales in the first quarter of
2021 and a negative impact to comparable sales for the first quarter of 2022.
See the discussion on Net Sales below for some contributing factors to these
changes.
Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share
and Adjusted Free Cash Flow. Management uses Adjusted EBITDA, Adjusted EBIT,
Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow to
supplement GAAP measures of performance in the evaluation of the effectiveness
of our business strategies, to make budgeting decisions, and to compare our
performance against that of other peer companies using similar measures.
Management also uses Adjusted EBIT as a performance target to establish and
award discretionary annual incentive compensation. See "Non-GAAP Measures"
below.
Components of Our Results of Operations. Our profitability is primarily influenced by fluctuations in net sales, gross margin and our ability to leverage selling, general and administrative expenses.
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Net sales fluctuations can be driven by new store openings, comparable sales
increases or decreases including e-commerce sales, our ability to adjust
inventory based on sales fluctuations, our management of vendor relations and
meeting customer demand, allowances and logistics, seasonality, unseasonal or
extreme weather, changes in consumer shopping preferences, consumer
discretionary spending, and market and sales promotions.
We must maintain sufficient inventory levels of merchandise that our customers
desire to successfully operate our business. A shortage of popular merchandise
could reduce our net sales. Conversely, we also must seek to avoid accumulating
excess inventory to avoid markdowns and clearance which negatively impact sales
and gross margin. We have deployed several new tools over recent years to
improve inventory handling and vendor management, including third-party programs
to analyze our inventory stock and execute a disciplined markdown strategy
throughout the year at every location. This implementation, along with other
factors, has allowed us to improve our inventory management in stores over the
past few years. We have coupled these tools with the data we have been able to
collect from our Academy Credit Card program and targeted customer surveys, so
that we can better estimate future inventory requirements. It is imperative that
we continue to find innovative ways to strengthen our inventory management if we
are to remain competitive and expand our margins on a go-forward basis.
We anticipate that the increased popularity of isolated recreation, outdoor and
leisure activity products brought on by customer demand during the COVID-19
pandemic will continue and will result in a long-term increase to our customer
base. Additionally, we have benefited from recent shifting of customer spend
towards in-home health and wellness and dedicating more time to memory-making
experiences. Our broad assortment gives us an advantage over mass general
merchants who typically do not carry the leading national brands sold at
Academy. We have also continued to add owned brand products to our assortment of
products, which we generally price lower than the national brand products of
comparable quality that we also offer. A shift in our sales mix in which we sell
more units of our owned brand products and fewer units of the national brand
products would generally have a positive impact on our gross margin but an
adverse impact on our total net sales.
The expansion and enhancement of our omnichannel capabilities has resulted in
increased sales in recent years and we expect that it will continue to be a
driver of growth in our net sales and gross margin. We continue to invest in
initiatives that will increase traffic to our e-commerce platform, which
includes our website and mobile app, and drive increased online sales
conversion. Our improved e-commerce platform supports our stores with digital
marketing and our BOPIS and ship-to-store programs. Additionally, our e-commerce
platform allows us to reach customers outside of our current store footprint and
introduces new customers to the Academy brand. It also allows for us to connect
further with our customers for marketing and product education. We believe it is
important that we continue to grow our omnichannel capabilities, which, together
with recent enhancements made to our website and omnichannel capabilities,
contributed to the increase in e-commerce sales during 2021 and in the first
quarter of 2022. During the year-to-date 2022, stores facilitated approximately
95% of our total sales, including ship-from-store, BOPIS and in-store retail
sales. We expect to continue to invest in expanding and enhancing our
omnichannel capabilities, including our mobile app, optimizing the web site
experience and upgrading our fulfillment capabilities, which will continue to
require significant investments by us.
We expect that new stores will be a key driver of growth in our net sales and
gross margin in the future. Our results of operations have been and will
continue to be materially affected by the timing and number of new store
openings. We are continually assessing the number of locations available that
could accommodate our preferred size of stores in markets we would consider, and
we expect to open at least eight new stores in 2022. Additionally, we intend to
open a significant number of new stores over the next five years. Most of our
stores achieve profitability within the first twelve months of opening. We
believe our real estate strategy has positioned us well for further expansion.
Gross Margin. Gross margin is our net sales less cost of goods sold. Our cost of
goods sold includes the direct cost of merchandise and costs related to
procurement, warehousing and distribution. These costs consist primarily of
payroll and benefits, distribution center occupancy costs and freight and are
generally variable in nature relative to our sales volume.
Our gross margin depends on a number of factors, such as net sales increases or
decreases, our promotional activities, product mix including owned brand
merchandise sales, and our ability to control cost of goods sold, such as
inventory and logistics cost management. Our gross margin is also impacted by
variables including commodity costs, freight costs, shrinkage and inventory
processing costs and e-commerce shipping costs. We track and measure gross
margin as a percentage of net sales in order to evaluate our performance against
profitability targets.
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For the past several quarters, we have seen increased competition across the
industry for resources throughout the supply chain, which has resulted in
disruptions to the flow of products from our vendors, labor shortages, reduced
shipping container availability, and longer delays at the port. As a result, we
have begun to experience a period of decreased or delayed supply and high
inflationary levels. These factors have negatively impacted transportation and
inventory costs, as we continue to pay higher prices to maintain our inventory
levels. To help mitigate these constraints and potential disruptions to our
supply chain, we continue to work with our partners by ordering merchandise
earlier, securing transportation capacity, and utilizing different ports of
entry.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses include store and corporate administrative
payroll and payroll benefits, store and corporate headquarters occupancy costs,
advertising, credit card processing, information technology, pre-opening costs
and other store and administrative expenses. These expenses are both variable
and fixed in nature. As sales increase at a higher rate than our SG&A, this
results in sales leverage and a higher sales flow through to net income, which
we have experienced in recent years with SG&A expenses as a percentage of sales
declining from 25.9% to 23.1% to 21.3% for the full years of 2019, 2020 and
2021, respectively. SG&A expenses as a percentage of sales increased from 20.5%
in the 2021 first quarter to 21.5% in the 2022 first quarter. We track and
measure operating expenses as a percentage of net sales in order to evaluate our
performance against profitability targets. Management of SG&A expenses depends
on our ability to balance a control of operating costs, such as store,
distribution center, and corporate headcount, information technology
infrastructure and marketing and advertising expenses, with efficiently and
effectively servicing our customers.
Interest Expense. Interest expense includes regular interest payable related to
our Term Loan, Notes and ABL Facility (see Note 4 to the financial statements
included in this Quarterly Report) and the amortization of our deferred loan
costs and original issuance discounts associated with the acquisition of the
debt. In November of 2020, we refinanced our debt resulting in an approximate
$630 million reduction in our overall debt outstanding. Subsequently, in May of
2021 we entered into an amendment to our Term Loan which reduced the applicable
margin on our LIBOR rate by 1.25% and paid down $99 million . These actions have
resulted in interest expense reductions in the full year 2021 and in the 2022
first quarter.
Income Tax Expense. ASO, Inc. is treated as a U.S. corporation for U.S. federal,
state, and local income tax purposes and accordingly, a provision for income
taxes has been recorded for the anticipated tax consequences of our reported
results of operations for federal, state and local income taxes. Recent
fluctuations in income tax expense have been primarily as a result of changes in
income before income taxes.
Impact of COVID-19 on Our Business
The COVID-19 pandemic continues to affect our business, as well as our customers, team members and suppliers. Governmental authority safety recommendations and requirements such as stay at home orders and business closures aimed at mitigating the spread of the virus, both in theU.S. and internationally, have contributed to the recent supply chain disruptions. These disruptions have resulted in decreased transportation, goods and labor availability and increased inflationary levels. Additionally, theU.S. government released stimulus packages throughout 2020 and 2021 as a result of the economic situation caused by the pandemic, which had a positive impact on sales during those periods. The extent to which our operations and business trends will be impacted by, and any unforeseen costs will result from, the pandemic will depend largely on future developments, including whether there are additional periods of increases or spikes in the number of COVID-19 cases, further mutations or related strains of the virus (or even the threat or perception that this could occur), within the markets in which we operate and from which we and our suppliers source products and materials and the related impact on consumer confidence and spending, labor supply or product supply, all of which are highly uncertain. We continue to monitor the evolving situation. See the section of the Annual Report entitled "Risk Factors-Risks Related to Our Business-The impact of COVID-19 may adversely affect our business and financial results." 23 --------------------------------------------------------------------------------
Results of Operations
Thirteen Weeks Ended
The following table sets forth amounts and information derived from our
unaudited statements of income for the periods indicated as follows (dollar
amounts in thousands):
Thirteen Weeks Ended Change
April 30, 2022 May 1, 2021 Dollars Percent
Net sales $ 1,467,730 100.0 % $ 1,580,333 100.0 % $ (112,603) (7.1) %
Cost of goods sold 946,306 64.5 % 1,016,632 64.3 % (70,326) (6.9) %
Gross margin 521,424 35.5 % 563,701 35.7 % (42,277) (7.5) %
Selling, general and
administrative expenses 315,931 21.5 % 324,627 20.5 % (8,696) (2.7) %
Operating income 205,493 14.0 % 239,074 15.1 % (33,581) (14.0) %
Interest expense, net 10,920 0.7 % 14,549 0.9 % (3,629) (24.9) %
Other (income), net (697) 0.0 % (397) 0.0 % (300) 75.6 %
Income before income taxes 195,270 13.3 % 224,922 14.2 % (29,652) (13.2) %
Income tax expense 45,464 3.1 % 47,126 3.0 % (1,662) (3.5) %
Net income $ 149,806 10.2 % $ 177,796 11.3 % $ (27,990) (15.7) %
*Percentages in table may not sum properly due to rounding.
Net Sales . Net sales decreased$112.6 million , or 7.1%, for the 2022 first quarter compared to 2021 first quarter as a result of decreased comparable sales of 7.5% and partially offset by increased sales from the addition of one new store during the period. The decrease in sales was the result of fewer transactions partially offset by an increase in average ticket. The decrease of 7.5% in comparable sales was driven by lower sales across all merchandise divisions and higher comparable sales in the prior year quarter that were partially due to stimulus payments issued by theU.S. government during that period. The sports and recreation division sales were lower, primarily driven by recreation and fitness as these divisions were particularly impacted by increased prior year isolated recreation demands brought on by the COVID-19 pandemic, especially in categories such as bikes, outdoor games and fitness equipment. These decreases in the current year were partially offset by increased sales in team sports, including baseball, basketball and soccer. The apparel division experienced declining sales largely due to athletic apparel, youth apparel, and outdoor and seasonal apparel, which were partially offset by increased sales in licensed apparel. The outdoor merchandise division had declines in fishing and shooting sports, partially offset by an increase in camping. The footwear division decreased due to lower sales in the casual and seasonal category and the team sports category, partially offset by increases in the youth category.
E-commerce net sales increased
Gross Margin. Gross margin decreased$42.3 million , or 7.5%, to$521.4 million for the 2022 first quarter from$563.7 million for the 2021 first quarter. As a percentage of net sales, gross margin decreased 0.2% from 35.7% in the 2021 first quarter to 35.5% in the 2022 first quarter. The decrease of 20 basis points in gross margin is primarily attributable to:
•23 basis points of unfavorability on inventory valuation adjustments; •18 basis points of unfavorability in e-commerce shipping costs due to an increase in e-commerce sales during the 2022 first quarter; partially offset by •20 basis points of favorability related to merchandise margins.
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Selling, General and Administrative Expenses. SG&A expenses decreased $8.7
million , or 2.7%, to $315.9 million for the 2022 first quarter from $324.6
million for the 2021 first quarter. As a percentage of net sales, SG&A expenses
were up 1.0% to 21.5% in the 2022 first quarter compared to 20.5% in the 2021
first quarter. The increase of 100 basis points in SG&A is primarily
attributable to deleverage from decreased sales on decreased SG&A costs.
Interest Expense. Interest expense decreased $3.6 million , or 24.9%, for the
2022 first quarter when compared to the 2021 first quarter, resulting from a
lower outstanding balance and a reduction in interest rates on our long-term
debt as a result of the repricing of our Term Loan which occurred in May 2021 .
Other (Income), net. Other income, net, remained relatively flat, increasing
Income Tax Expense. Income tax expense decreased$1.7 million to$45.5 million for the 2022 first quarter as compared to$47.1 million for the 2021 first quarter, resulting primarily from decreased income before income taxes.ASO, Inc.'s effective tax rate for the 2022 first quarter was 23.3% compared to 20.9% in the 2021 first quarter. The change in effective tax rate was primarily driven by a prior year benefit from tax deductions related to the exercise of several equity compensation awards during the 2021 first quarter.
Non-GAAP Measures
Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow, as shown below, have been presented in this Quarterly Report as supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted inthe United States of America ("GAAP"). We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense and depreciation, amortization and impairment, further adjusted to exclude consulting fees, private equity sponsor monitoring fees, equity compensation expense, (gain) loss on early retirement of debt, net, severance and executive transition costs, costs related to the COVID-19 pandemic, pre-opening expenses and other adjustments. We define Adjusted EBIT as net income (loss) before interest expense, net, and income tax expense, further adjusted to exclude consulting fees, private equity sponsor monitoring fees, equity compensation expense, (gain) loss on early retirement of debt, net, severance and executive transition costs, costs related to the COVID-19 pandemic, pre-opening expenses and other adjustments. We describe these adjustments reconciling net income (loss) to Adjusted EBITDA and to Adjusted EBIT in the applicable table below. We define Adjusted Net Income as net income (loss), plus consulting fees, private equity sponsor monitoring fees, equity compensation expense, (gain) loss on early retirement of debt, net, severance and executive transition costs, costs related to the COVID-19 pandemic, pre-opening expenses and other adjustments, less the tax effect of these adjustments. We define basic Adjusted Earnings per Share as Adjusted Net Income divided by the basic weighted average common shares outstanding during the period and diluted Adjusted Earnings per Share as Adjusted Net Income divided by the diluted weighted average common shares outstanding during the period. We describe these adjustments by reconciling net income (loss) to Adjusted Net Income and Adjusted Earnings per Share in the applicable table below. We describe Adjusted Free Cash Flow as net cash provided by (used in) operating activities less net cash used in investing activities. We describe this adjustment by reconciling net cash provided by operating activities to Adjusted Free Cash Flow in the applicable table below. We believe Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share assist 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, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management believes Adjusted Free Cash Flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash. Management uses Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Management also uses Adjusted EBIT as a performance target to establish and award discretionary annual incentive compensation. 25 -------------------------------------------------------------------------------- Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow are not recognized terms under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or net cash provided by operating activities as a measure of liquidity, or any other performance measures derived in accordance with GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management's discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share should not be construed to imply that our future results will be unaffected by unusual or non-recurring items. In evaluating Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow should not be construed to imply that our future results will be unaffected by any such adjustments. Our Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted Free Cash Flow measures have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share do not reflect costs or cash outlays for capital expenditures or contractual commitments;
•Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share do not reflect changes in, or cash requirements for, our working capital needs; •Adjusted EBITDA and Adjusted EBIT do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, and Adjusted Free Cash Flow does not reflect the cash requirements necessary to service principal payments on our debt;
•Adjusted EBITDA and Adjusted EBIT do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;
•Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, and Adjusted Earnings per Share do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted Free Cash Flow do not reflect cash requirements for such replacements; and
•other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA, Adjusted EBIT, Adjusted Net
Income, Adjusted Earnings per Share and Adjusted Free Cash Flow should not be
considered as measures of discretionary cash available to invest in business
growth or to reduce indebtedness. Management compensates for these limitations
by primarily relying on our GAAP results in addition to using Adjusted EBITDA,
Adjusted EBIT, Adjusted Net Income, Adjusted Earnings per Share and Adjusted
Free Cash Flow supplementally.
26
--------------------------------------------------------------------------------Adjusted EBITDA and Adjusted EBIT
The following table provides reconciliations of net income to Adjusted EBITDA and to Adjusted EBIT for the periods presented (amounts in thousands):
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
Net income $ 149,806 $ 177,796
Interest expense, net 10,920 14,549
Income tax expense 45,464 47,126
Depreciation and amortization 25,578 25,298
Equity compensation (a) 3,499 5,874
Pre-opening expenses (b) 962 -
Other (c) - 350
Adjusted EBITDA $ 236,229 $ 270,993
Less: Depreciation and amortization (25,578) (25,298)
Adjusted EBIT $ 210,651 $ 245,695 (a) Represents non-cash charges related to equity-based compensation,
which vary from period to period depending on certain factors such as
timing and valuation of awards, achievement of performancetargets and
equity award forfeitures.
(b) Represents pre-opening expenses which are non-capital expenditures
associated with opening new stores and incurred prior to the store
opening and generating sales. These costs consist primarily of
occupancy costs, marketing, payroll and recruiting costs. These costs
are expensed as incurred.
(c) Other adjustments include (representing deductions or additions to
Adjusted EBITDA and Adjusted EBIT) amounts that management believes
are not representative of our operating performance, such as costs
associated with secondary offerings, installation costs for energy
savings associated with our profitability initiatives and other costs
associated with business optimization initiatives.
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Adjusted Net Income and Adjusted Earnings per Share
The following table provides a reconciliation of net income to Adjusted Net Income and Adjusted Earnings per Share for the periods presented (amounts in thousands, except per share data):
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
Net income $ 149,806 $ 177,796
Equity compensation (a) 3,499 5,874
Pre-opening expenses (b) 962 -
Other (c) - 350
Tax effects of these adjustments (d) (1,040) (1,489)
Adjusted Net Income $ 153,227 $ 182,531
Adjusted Earnings per Share:
Basic $ 1.77 $ 1.98
Diluted $ 1.73 $ 1.89
Weighted average common shares outstanding:
Basic 86,658 92,088
Diluted 88,614 96,472
(a) Represents non-cash charges related to equity-based compensation,
which vary from period to period depending on certain factors such as
timing and valuation of awards, achievement of performance targets
and equity award forfeitures.
(b) Represents pre-opening expenses which are non-capital expenditures
associated with opening new stores and incurred prior to the store
opening and generating sales. These costs consist primarily of
occupancy costs, marketing, payroll and recruiting costs. These costs
are expensed as incurred.
(c) Other adjustments include (representing deductions or additions to
Adjusted Net Income) amounts that management believes are notrepresentative of our operating performance, such as costs associated
with secondary offerings, installation costs for energy savings
associated with our profitability initiatives and other costs
associated with business optimization initiatives.
(d) For the thirteen weeks ended April 30, 2022 and May 1, 2021, this
represents the tax effect of the total adjustments made to arrive at
Adjusted Net Income at the estimated effective tax rate for the
fiscal year ended January 28, 2023 and January 29, 2022 ,
respectively.
Adjusted Free Cash Flow
The following table provides a reconciliation of net cash provided by operating
activities to Adjusted Free Cash Flow for the periods presented (amounts in
thousands):
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
Net cash provided by operating activities $ 97,097 $ 219,228
Net cash used in investing activities (17,312) (16,808)
Adjusted Free Cash Flow $ 79,785 $ 202,420
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Liquidity and Capital Resources
Sources and Uses of Liquidity
Our principal liquidity requirements are for working capital, capital expenditures and cash used to pay our debt obligations and related interest expense. We also use cash to pay dividends and occasionally use cash to repurchase common stock. We fund these liquidity requirements through cash and cash equivalents, cash generated from operating activities, issuances of debt (such as the Notes) and borrowings under our ABL Facility. OnApril 30, 2022 , our cash and cash equivalents totaled$472.4 million . We believe our cash and cash equivalents, as well as our availability under the ABL Facility, will be sufficient to fund our cash requirements for at least the next 12 months.
Long-Term Debt
OnMay 25, 2021 , the Company entered into an Amendment No. 4 (the "Amendment") to the Second Amended and Restated Credit Agreement (as previously amended, the "Existing Credit Agreement") which (i) reduced the applicable margin on LIBOR borrowings under the Term Loan from 5.00% to 3.75% and (ii) utilized cash on hand to repay$99.0 million of outstanding borrowings under the Term Loan, leaving an outstanding principal balance of$300.0 million under the Amended Credit Agreement. Borrowings under the Amended Credit Agreement will continue to mature onNovember 6, 2027 , and all other material terms and provisions of the Existing Credit Agreement remain substantially the same as the terms and provisions in place immediately prior to the effectiveness of the Amendment (see Note 4 to the financial statements included in this Quarterly Report). The following table summarizes our current debt obligations by fiscal year (amounts in thousands): 2022 2023 2024 2025 2026 After 2026 Total Term Loan and related interest (1)$ 15,240 $ 23,576 $ 22,621 $ 21,857 $ 21,408 $ 298,025 $ 402,727 Notes and related interest (2) 24,000 24,000 24,000 24,000 24,000 424,000 544,000 ABL Facility and related interest (3) 1,868 2,500 2,500 1,909 - - 8,777 (1) Interest payments are future cash payments which do not include amortization of discount and debt issuance costs and are approximated based on projected interest rates and assumes no unscheduled principal payments until maturity. (2) Assumes Notes are paid in full at maturity date. (3) Assumes a minimum revolving credit commitment of$1.0 billion and assumes no balances drawn on our ABL Facility.
Liquidity information related to the ABL Facility is as follows for the periods shown (dollar amounts in thousands):
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
Average funds drawn $ - $ -
Number of days with outstanding balance - -
Maximum daily amount outstanding $ - $
-
Minimum available borrowing capacity
Liquidity information related to the ABL Facility (amounts in thousands) as of:
April 30, 2022 January 29, 2022 May 1, 2021
Outstanding borrowings $ - $ - $ -
Issued letters of credit $ 17,828 $ 17,828 $ 13,577
Available borrowing capacity $ 982,172 $ 874,831 $ 819,401
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Leases
We lease store locations, distribution centers, office space and certain equipment under operating leases expiring between fiscal years 2022 and 2043. Operating lease obligations include future minimum lease payments under all of our non-cancelable operating leases atApril 30, 2022 . The following table summarizes our remaining operating lease obligations by fiscal year: 2022 2023 2024 2025 2026 After 2026 Total Operating lease payments (1) (2)$ 151,805 $ 199,343 $ 190,321 $
183,786
(1) Minimum lease payments have not been reduced by sublease rentals of
In the first quarter of 2022, we opened our first new location in two years. We intend to open at least eight stores in 2022.
Share Repurchases
OnSeptember 2, 2021 , the Board of Directors of the Company authorized a share repurchase program (the "2021 Share Repurchase Program") under which the Company may purchase up to$500 million of its outstanding shares during the three-year period endingSeptember 2, 2024 . Under the 2021 Share Repurchase Program, repurchases can be made using a variety of methods, which may include open market purchases, block trades, privately negotiated transactions and/or a non-discretionary trading plan, all in compliance with the rules of theSEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the 2021 Share Repurchase Program are determined by the Company in its discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions. The 2021 Share Repurchase Program does not obligate the Company to acquire any particular number of common shares, and the program may be suspended, extended, modified or discontinued at any time. As ofApril 30, 2022 ,$100.2 million remained available for share repurchases pursuant to our 2021 Share Repurchase Program. The following table summarizes our share repurchases for the fiscal year endedJanuary 29, 2022 : Total Number of Shares Average Price Paid Total Amount Purchased per Share Repurchased First Quarter (January 31, 2021 to May 1, 2021) - $ - $ - Second Quarter (May 2, 2021 to July 31, 2021) (1) 3,229,974 30.96 99,999,995 Third Quarter (August 1, 2021 to October 30, 2021) 5,722,892 42.96 245,837,186 Fourth Quarter (October 31, 2021 to January 29, 2022) 1,613,930 40.63 65,571,394 Total Shares Repurchased 10,566,796
$ 38.93
The following table summarizes our share repurchases for the year-to-date 2022:
Total Number of Average Price Paid Total Amount
Shares Purchased per Share Repurchased
First Quarter (January 30, 2022 to April
30, 2022) (2) 2,272,349 $ 38.95 $ 88,500,881
Total Shares Repurchased 2,272,349 $ 38.95 $ 88,500,881
(2) See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for further detail on the 2022
first quarter share repurchases.
30
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On June 2, 2022 , the Board of Directors of the Company authorized a new share
repurchase program (the "2022 Share Repurchase Program") under which the Company
may purchase up to $600 million of its outstanding shares during the three-year
period ending June 2, 2025 . The total availability under the combined 2022 Share
Repurchase Program and 2021 Share Repurchase Program is approximately $700.2
million (see Note 13 to the accompanying financial statements).
Dividend
OnMarch 3, 2022 , the Company's Board of Directors declared an inaugural quarterly cash dividend in the amount of$0.075 per share on the Company's common stock, which was paid onApril 14, 2022 to stockholders of record as of the close of business onMarch 17, 2022 . The total dividend paid in the 2022 first quarter was$6.5 million . OnJune 2, 2022 , the Company's Board of Directors declared a quarterly cash dividend with respect to the fiscal quarter endedApril 30, 2022 , of$0.075 per share of the Company's common stock, payable onJuly 14, 2022 , to stockholders of record as of the close of business onJune 16, 2022 (see Note 13 to the accompanying financial statements).
Capital Expenditures
We expect capital expenditures for fiscal year 2022 to be approximately$140.0 million . Approximately 50% of our planned cash outflow relate to investments in our corporate, e-commerce and information technology programs. Investments in new stores and relocations are expected to be 30% of our planned cash outflow and the remaining 20% of the planned cash outflow is expected to be utilized in updates for existing stores and distribution centers. We review forecasted capital expenditures throughout the year and will adjust or modify projects based on business conditions at that time.
Cash Flows for the Thirteen Weeks Ended
Our unaudited statements of cash flows are summarized as follows (in thousands):
Thirteen Weeks Ended
April 30, 2022 May 1, 2021
Net cash provided by operating activities $ 97,097 $ 219,228
Net cash used in investing activities (17,312) (16,808)
Net cash provided by (used in) financing activities (93,388)
13,264
Net increase (decrease) in cash and cash equivalents
Operating Activities. Cash flows from operating activities are seasonal in our business. Typically, cash flows from operations are used to build inventory in advance of peak selling seasons, with the fourth quarter pre-holiday season inventory increase being the most significant. Cash provided by operating activities in the 2022 first quarter decreased$122.1 million , compared to 2021 first quarter. This decrease in cash was attributable to:
•$73.0 million net decrease in cash flows provided by operating assets and liabilities;
•$28.0 million decrease in net income; and
•$21.2 million net decrease in non-cash charges.
The decrease in cash flows from operating assets and liabilities was primarily attributable to:
•$61.3 million decrease in cash flows from merchandise inventories, net related to increased inventory in the 2022 first quarter due to higher sales in the prior year period;
•$37.4 million decrease in cash flows from accrued expenses and other current liabilities related primarily to increased employee costs, largely driven by performance compensation payments made in the 2022 first quarter; partially offset by
•$17.2 million increase in income taxes payable due to timing of payments.
The decrease from non-cash charges was primarily caused by:
•$17.9 million decrease in deferred income taxes.
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Investing Activities. Cash used in investing activities increased $0.5 million
in the 2022 first quarter compared to the 2021 first quarter. The increase in
cash used in investing activities is primarily due to:
•$0.5 million higher capital expenditures related to new stores and store updates, partially offset by decreased costs related to the distribution centers for improvements made in the 2021 first quarter.
Financing Activities. Cash used in financing activities increased
•$88.5 million increase in cash outflows related to Company's repurchase and simultaneous retirement of common stock in the 2022 first quarter;
•$14.0 million decrease in net proceeds from the exercise of stock options relative to the 2021 first quarter; and
•$6.5 million increase in cash outflows related to cash dividend paid in the 2022 first quarter.
Critical Accounting Policies and Estimates
This management's discussion and analysis of our financial condition and results of operations is based upon our unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Our management bases its estimates on historical experience and other assumptions it believes to be reasonable under the circumstances. Actual results could differ significantly from those estimates. Management evaluated the development and selection of our critical accounting policies and estimates used in the preparation of the Company's unaudited financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical. Our most significant estimates and assumptions that materially affect the financial statements involve difficult, subjective or complex judgments by management, including the valuation of merchandise inventories and performing goodwill, intangible and long-lived asset impairment analyses. Given the global economic climate and the possibility of additional unforeseen effects from the COVID-19 pandemic, these estimates remain challenging, and actual results could differ materially from our estimates. More information on all of our significant accounting policies can be found in the "Critical Accounting Policies and Estimates" section of the Annual Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the Annual Report.
Recent Accounting Pronouncements
The information set forth in Note 2 to our unaudited consolidated financial statements under Part I, Item 1 of this Quarterly Report is incorporated herein by reference.
Related Party Transactions
The information set forth in Note 11 to our unaudited consolidated financial statements under Part I, Item 1 under the heading of this Quarterly Report entitled "Related Party Transactions" is incorporated herein by reference.
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