ACADEMY SPORTS AND OUTDOORS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report for the fiscal year endedJanuary 29, 2022 (this "Annual Report"). This discussion contains forward-looking statements that involve risks and uncertainties. See the section of this Annual Report entitled "Cautionary Statement Regarding Forward-Looking Statements." When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. Known material factors that could affect our financial performance and actual results, and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this discussion or otherwise made by our management, are described in the "Risk Factors" section of this Annual Report. Any reference in this Annual Report to "year" or any year in particular refers to our fiscal year, which represents the fifty-two or fifty-three week period ending on the Saturday closest toJanuary 31 . Unless otherwise specified, all comparisons or changes regarding 2021 are made to 2020. All statements in this Annual 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.
All references in this discussion and analysis to "2021", "2020" and "2019" or like terms relate to our fiscal years as follows:
Fiscal Year Ended Weeks 2021 January 29, 2022 52 2020 January 30, 2021 52 2019 February 1, 2020 52 Overview We are one of the leading full-line sporting goods and outdoor recreation retailers inthe United States . Our mission is to provide "Fun for All" and we 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, apparel, sports & recreation and footwear (representing 32%, 27%, 22% and 19% of our 2021 net sales, respectively) through both leading national brands and a portfolio of 20 owned brands, which go well beyond traditional sporting goods and apparel offerings. Our business is subject to seasonal fluctuations. A significant portion of our net sales and profits is driven by summer holidays, such asMemorial Day ,Father's Day andIndependence Day , during the second quarter. Our net sales and profits are also impacted by the November/December holiday selling season, and in part by the sales of cold weather sporting goods and apparel during the fourth quarter. As ofJanuary 29, 2022 , we operated 259 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 southernUnited 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 curbside pickup and ship-to-store programs, which we launched in 2020. 45
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The following table summarizes store activity for the periods indicated:
Fiscal Year Ended
January 29, 2022 January 30, 2021 February 1, 2020
Beginning stores 259 259 253
Q1 new stores - - 1
Q2 new stores - - 2
Q3 new stores - - 5
Q4 new stores - - -
Closed - - (2)
Ending stores 259 259 259
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 Annual 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 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 years from (0.7%) in 2019 to 16.1% and 18.9% in 2020 and 2021, respectively. See the discussion onNet Sales below for some contributing factors to these increases. Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow. Management uses Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma 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 Financial 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,
increasing our average inventory turns from 2.84x in 2019 to 3.89x in 2020 and
2021. 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.
We expect that the expansion and enhancement of our omnichannel capabilities has
resulted in increased sales in recent years and will be a key 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, especially in light of changing consumer
preferences as a result of the COVID-19 pandemic, which, together with recent
enhancements made to our website and omnichannel capabilities, contributed to
the substantial increase in e-commerce sales during 2020. During 2021, 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 support of 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. Most of our stores achieve
profitability within the first twelve months of opening a store. 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 supply and high inflationary costs. These factors have negatively impacted transportation and inventory costs, as we continue to pay higher rates 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. General trade tensions betweenthe United States andChina began escalating in 2018 with theTrump Administration ultimately imposing multiple rounds of tariffs on exports fromChina , where we and many of our vendors source commodities. As a result, we have experienced rising inventory costs on owned brand products we directly source fromChina , as well as national brand products fromChina that we source through our vendors. In certain cases these factors have resulted in higher inventory costs and higher sales prices and/or lower margins, thus resulting in a negative impact to net sales and/or gross margin. During early 2020, due to changing demand as a result of the initial stages of the COVID-19 pandemic, customer preferences rapidly changed throughout certain categories (see below, "Impact of COVID-19 on Our Business") and initially sales increased in categories such as fitness equipment, camping gear and hunting. These items generally have a lower margin than some of our other categories such as apparel. A demand shift in our sales mix in which we sell more units of our lower margin products can negatively impact our overall gross margin as a percent of sales. 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% in 2019, 2020 and 2021, respectively. 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 accompanying consolidated financial statements) 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 (see Note 4 to the accompanying consolidated financial statements). These actions have resulted in interest expense reductions in 2020 and 2021. Income Tax Expense (Benefit). Prior toOctober 1, 2020 ,New Academy Holding Company, LLC , our prior ultimate parent company, was treated as a flow through entity forU.S. federal income tax purposes and thus no federal income tax expense was recorded in our consolidated statements of income for periods prior toOctober 1, 2020 . Our tax rate prior toOctober 1, 2020 was almost entirely the result of state income taxes. In connection with our initial public offering ("IPO"), as a result of the Reorganization Transactions (see Note 1 to the accompanying consolidated financial statements) completed onOctober 1, 2020 ,Academy Sports and Outdoors, Inc. ("ASO, Inc. ") is treated as aU.S. corporation forU.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 sinceOctober 1, 2020 .
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, and has resulted in federal, state and
local governmental authority safety recommendations and requirements aimed at
mitigating the spread of the virus, such as stay-at-home orders, prohibitions of
large group gatherings, travel restrictions and closures of certain businesses,
including in response to resurgence of COVID-19 cases. The scope and nature of
these impacts continue to evolve.
In response to COVID-19 related recommendations and requirements, and in order
to serve our customers while also providing for the safety of our customers,
team members and service providers, we have taken many actions, including
cleaning each store professionally on a more frequent basis, equipping each
store with hand sanitizer stations and signage illustrating how to socially
distance within the store, requiring or suggesting that customers, team members
and service providers wear face coverings, at certain times limiting the number
of customers admitted at one time, and having protective shields installed at
cash registers and other countertops. We have incurred increased costs related
to the implementation of these measures as well as additional sick time for our
active store and distribution center team members.
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Towards the beginning of the pandemic during the thirteen weeks ended May 2,
2020 , to mitigate the cost of these measures, we temporarily furloughed a
significant number of corporate, store and distribution center team members and
enforced temporary pay cuts for executives and remaining active team members as
well as other strategic actions to significantly reduce operating expenses
during the period. We also drew down $500 million on our ABL Facility in March
2020 as a precautionary measure to ensure financial flexibility and maximize
liquidity. All three of our distribution centers remained open during 2020 and
through 2021, all of our 259 stores have been fully operational since May 20,
2020 , and our corporate office has been fully open since June 8, 2020 . We
continue to monitor the evolving situation and expect to continue to adapt our
operations to address federal, state, and local requirements as well as to
implement standards or processes that we determine to be in the best interest of
our team members, customers, and communities.
The impact of the pandemic and actions taken in response to it had varying
effects on our results of operations, as further discussed below, and our
business has been especially unpredictable. However, as an essential retailer,
we have been able to serve our customers as their needs evolved during the
pandemic. Early in the pandemic, we saw the acceleration of sales in specific
categories, such as outdoor cooking, camping, shooting sports and hunting. Later
in the 2020 first quarter, customers realized they needed to find ways to
entertain their families and stay fit while schools and gyms closed, so they
turned to us for isolated recreation, outdoor and leisure activities that we
support, and as a result, we saw increased sales of weights, yoga mats,
treadmills, indoor bicycles, fishing, hunting and camping gear, backyard and
driveway games, trampolines, patio seating and grills. We anticipate that the
increased popularity of isolated recreation, outdoor and leisure activity
products will continue for the duration of the pandemic and will result in a
long-term increase to our customer base. At the same time, during 2020 we
experienced decreased sales of certain of our offerings, primarily for apparel
and footwear, and had to occasionally cancel certain of our purchase orders for
these products. Despite the initial challenges in 2020 with sales declines in
our footwear and apparel merchandise divisions, these categories ultimately
experienced positive comparable sales growth for 2020. The outdoors and sports
and recreation divisions had consistent positive store sales growth throughout
2020 and ultimately experienced significant positive comparable sales growth in
2020.
During 2020, we believe that our consumers felt more comfortable visiting our
stores relative to other retailers due to our big-box stores and curbside
pick-up availability for online orders, making it easier to socially distance,
and that we are not in, or tethered to, malls, as customers seek to avoid
crowded spaces. We also saw a significant increase during 2020 of customers
purchasing our products through omnichannel platforms, specifically as customers
increasingly take advantage of our curbside pick-up service, which we launched
during the 2020 first quarter and ship-to-store, which launched in the 2020
third quarter, which gives our customers more options on how to shop Academy.
During 2021, we experienced double digit comparable sales growth in all of our
merchandise divisions. In-store traffic has increased recently and relative to
the prior year. We believe the in-store traffic increase is attributable to the
easing of COVID-19 restrictions and increased availability of vaccinations
throughout our footprint, which has contributed to increased customer comfort
with shopping in our stores. Additionally, we have seen recent demand increases
from various factors, such as the U.S. government stimulus payments, enhanced
unemployment benefits and the gradual return of team sports and in-person
education.
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 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 this Annual
Report entitled "Risk Factors-Risks Related to Our Business-The impact of
COVID-19 may adversely affect our business and financial results."
Results of Operations
A discussion regarding Results of Operations and Analysis of Financial Condition for the fiscal year endedJanuary 30, 2021 , as compared to the fiscal year endedFebruary 1, 2020 , is included in "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" to our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 . 49 --------------------------------------------------------------------------------
2021 (52 weeks) Compared to 2020 (52 weeks)
The following table sets forth amounts and information derived from our
consolidated statements of income for the periods indicated as follows (dollar
amounts in thousands):
Fiscal Year Ended Change
January 29, 2022 January 30, 2021 Dollars Percent
Net sales $ 6,773,128 100.0 % $ 5,689,233 100.0 % $ 1,083,895 19.1 %
Cost of goods sold 4,422,033 65.3 % 3,955,188 69.5 % 466,845 11.8 %
Gross margin 2,351,095 34.7 % 1,734,045 30.5 % 617,050 35.6 %
Selling, general and
administrative expenses 1,443,148 21.3 % 1,313,647 23.1 % 129,501 9.9 %
Operating income 907,947 13.4 % 420,398 7.4 % 487,549 116.0 %
Interest expense, net 48,989 0.7 % 86,514 1.5 % (37,525) (43.4) %
(Gain) loss on early retirement
of debt, net 2,239 0.0 % (3,582) (0.1) % 5,821 NM
Other (income), net (2,821) (0.0) % (1,654) 0.0 % (1,167) 70.6 %
Income before income taxes 859,540 12.7 % 339,120 6.0 % 520,420 153.5 %
Income tax expense 188,159 2.8 % 30,356 0.5 % 157,803 519.8 %
Net income $ 671,381 9.9 % $ 308,764 5.4 % $ 362,617 117.4 %
* Percentages in table may not sum properly due to rounding. **NM - Not meaningful
Net Sales . Net sales increased$1,083.9 million , or 19.1%, in 2021 over the prior year as a result of increased comparable sales of 18.9% and strong sales performances across all of our merchandise divisions. The increase in sales, which included no new stores, was driven by an increase in both transactions and average ticket. The 18.9% increase in comparable sales was a result of increased sales across all merchandise divisions and almost every product category, which was led by strong performances in the apparel and footwear merchandise divisions. The apparel merchandise division experienced strong sales across all product categories, with the highest sales increases in outdoor and seasonal apparel and athletic apparel. The footwear merchandise division also increased due to higher sales across every category, especially in athletic footwear and casual and seasonal footwear. The sports and recreation merchandise division comparable sales increase was led by increased sales in team sports such as baseball, football, basketball and other sports and recreation activities, which were all adversely impacted by the pandemic during 2020. The outdoor merchandise division increase was attributable to an increase in the shooting sports category, driven by increased ammunition sales and an increase in the camping category, partially offset by a decrease in the fishing category, which had a significant increase in the prior year due to the heightened popularity of isolated recreation. E-commerce sales increased$36.7 million , or 6.2%, in 2021 when compared to the prior year and represented 9.3% and 10.4% of merchandise sales for 2021 and 2020, respectively. We believe the decline in e-commerce penetration was generated by a change in customer shopping preferences, especially evident in the first quarter of 2021 as compared to the first quarter of 2020, from e-commerce to in-store sales caused by the easing of the COVID-19 restrictions, as well as a greater comfort level amongst our customers for visiting our stores in person. Gross Margin. Gross margin for 2021 increased$617.1 million , or 35.6%, when compared to 2020. Our gross margin, as a percentage of net sales, was 34.7% in 2021 compared to 30.5% in 2020, an increase of 420 basis points. This increase is primarily due to: •357 basis points of favorability in merchandise margins due to a shift in higher margin goods driving the increased sales, higher average unit retails, and less promotional activity from the prior year; •92 basis points of favorability in inventory overhead expenditures as a result of lower expense absorption rates from higher inventory flow through on increased sales; partially offset by •89 basis points of unfavorability in import freight as a result of increased costs of ocean freight. 50
-------------------------------------------------------------------------------- Selling, General and Administrative Expenses. SG&A expenses increased$129.5 million , or 9.9%, to$1,443.1 million in 2021 from$1,313.6 million in 2020. As a percentage of net sales, SG&A expenses were down 1.8% to 21.3% in 2021 compared to 23.1% in 2020. The decrease of 180 basis points in SG&A is primarily attributable to: •100 basis point decrease in property and facility fees as a result of leveraging costs on increased sales; •70 basis point decrease in employee costs from leveraging costs on increased sales, partially offset by increased wages in our stores and distribution centers and increased payroll tax expense resulting from the 2021 Vesting Event (see Note 1 to the accompanying consolidated financial statements); and •21 basis point decrease related to a 2020 third quarter expense for the termination of our Monitoring Agreement (see Note 13 to the accompanying consolidated financial statements), which occurred upon the completion of our IPO. (Gain) loss on early retirement of debt, net. (Gain) loss on early retirement of debt, net decreased$5.8 million to a loss of$2.2 million from a gain of$3.6 million in 2020. During the 2021 second quarter, we refinanced our Term Loan, which resulted in a loss on early retirement of debt of$2.2 million . During the second quarter of 2020, we repurchased$23.9 million in principal on the Term Loan, which was trading at a discount, in open market transactions for$16.0 million and recognized a net gain of$7.8 million . Additionally, during the fourth quarter of 2020, the Refinancing Transactions (see Note 4 to the accompanying consolidated financial statements) resulted in a loss on early retirement of debt of$4.2 million .
Interest Expense. Interest expense decreased
Other (Income), net. Other income increased$1.2 million in 2021 when compared with 2020 caused by a portion of the underlying cash flows related to$100.0 million of swap notional principal amount which were no longer probable of occurring due to the Refinancing Transactions and resulted in the immediate recognition of$1.3 million of expense in 2020.
Income Tax Expense. Income tax expense increased
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--------------------------------------------------------------------------------Non-GAAP Measures
Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow, as shown below, have been presented in this Annual 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, payroll taxes associated with the 2021 Vesting Event 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, payroll taxes associated with the 2021 Vesting Event 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, payroll taxes associated with the 2021 Vesting Event and other adjustments, less the tax effect of these adjustments. We define Pro Forma Adjusted Net Income as Adjusted Net Income less the retrospective tax effect of Adjusted Net Income at our estimated effective tax rate of approximately 25% for periods prior toOctober 1, 2020 , the effective date of our conversion to a C-Corporation. We define basic Pro Forma Adjusted Earnings per Share as Pro Forma Adjusted Net Income divided by the basic weighted average common shares outstanding during the period and diluted Pro Forma Adjusted Earnings per Share as Pro Forma 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, Pro Forma Adjusted Net Income and Pro Forma 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, Pro Forma Adjusted Net Income and Pro Forma 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, Pro Forma Adjusted Net Income and Pro Forma 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, Pro Forma Adjusted Net Income, Pro Forma 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. 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, Pro Forma Adjusted Net Income, Pro Forma 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, Pro Forma Adjusted Net Income and Pro Forma 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, Pro Forma Adjusted Net Income, Pro Forma 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, Pro Forma Adjusted Net Income, Pro Forma 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. 52
-------------------------------------------------------------------------------- Our Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma 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, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share do not reflect costs or cash outlays for capital expenditures or contractual commitments; •Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma 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, Pro Forma Adjusted Net Income and Pro Forma 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, Pro Forma Adjusted Net Income, Pro Forma 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, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and
Adjusted Free Cash Flow supplementally.
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Adjusted EBITDA and Adjusted EBIT
The following table provides reconciliations of net income (loss) to Adjusted
EBITDA and to Adjusted EBIT for the periods presented (amounts in thousands):
Fiscal Year Ended
January 29, 2022 January 30, 2021 February 1, 2020
Net income $ 671,381 $ 308,764 $ 120,043
Interest expense, net 48,989 86,514 101,307
Income tax expense 188,159 30,356 2,817
Depreciation and amortization 105,274 105,481 117,254
Consulting fees (a) - 285 3,601
Private equity sponsor monitoring fee (b) - 14,793 3,636
Equity compensation (c) 39,264 31,617 7,881
(Gain) loss on early retirement of debt, net 2,239 (3,582) (42,265)
Severance and executive transition costs (d) - 6,571 1,429
Costs related to the COVID-19 pandemic (e) - 17,632 -
Payroll taxes associated with the 2021 Vesting
Event (f) 15,418 - -
Other (g) 3,118 8,592 7,111
Adjusted EBITDA $ 1,073,842 $ 607,023 $ 322,814 Less: Depreciation and amortization
(105,274) (105,481) (117,254)
Adjusted EBIT $ 968,568 $ 501,542 $ 205,560
(a) Represents outside consulting fees associated with our strategic cost savings and business optimization initiatives. (b) Represents our contractual payments under the Monitoring Agreement. (c) Represents non-cash charges related to equity based compensation, which vary from period to period depending on certain
factors such as the 2021 Vesting Event (see Note 1 to theaccompanying consolidated financial statements), timing and
valuation of awards, achievement of performance targets andequity award forfeitures. (d) Represents severance costs associated with executive leadership changes and enterprise-wide organizational changes. (e) Represents costs incurred during the first half of 2020 as a result of the COVID-19 pandemic, including temporary wage
premiums, additional sick time, costs of additional cleaning supplies and third party cleaning services for the stores,
corporate office and distribution centers, accelerated freight costs associated with shifting our inventory purchases
earlier in the year to maintain stock, and legal fees associated with consulting in local jurisdictions. These costs
were no longer added back beginning in the third quarter of2020.
(f) Represents cash expenses related to taxes on equity-based compensation resulting from the 2021 Vesting Event. (g) Other adjustments include (representing deductions or additions to Adjusted EBITDA and Adjusted EBIT) amounts that
management believes are not representative of our operatingperformance, including investment income, installation
costs for energy savings associated with our profitabilityinitiatives, legal fees associated with a distribution to
NAHC's (see Note 1 to the accompanying consolidated financial statements) members and our omnibus incentive plan, store
exit costs and other costs associated with strategic costsavings and business optimization initiatives.
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Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share
The following table provides a reconciliation of net income to Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share for the periods presented (amounts in thousands, except per share data):
Fiscal Year Ended
January 29, 2022 January 30, 2021 February 1, 2020
Net income $ 671,381 $ 308,764 $ 120,043
Consulting fees (a) - 285 3,601
Private equity sponsor monitoring fee (b) - 14,793 3,636
Equity compensation (c) 39,264 31,617 7,881
(Gain) loss on early retirement of debt, net 2,239 (3,582) (42,265)
Severance and executive transition costs (d) - 6,571 1,429
Costs related to the COVID-19 pandemic (e) - 17,632 -
Payroll taxes associated with the 2021 Vesting
Event (f) 15,418 - -
Other (g) 3,118 8,592 7,111
Tax effects of these adjustments (h) (14,884) (136) 33
Adjusted Net Income 716,536 384,536 101,469
Estimated tax effect of change to C-Corporation
status (i) - (72,844) (25,542)
Pro Forma Adjusted Net Income $ 716,536 $ 311,692 $ 75,927
Pro Forma Adjusted Earnings per Share Basic $ 7.88 $ 4.00 $ 1.05 Diluted $ 7.60 $ 3.83 $ 1.02 Weighted average common shares outstanding Basic 90,956 77,994 72,477 Diluted 94,284 81,431 74,795
(a) Represents outside consulting fees associated with our strategic cost savings and business optimization initiatives. (b) Represents our contractual payments under the Monitoring Agreement. (c) Represents non-cash charges related to equity based compensation, which vary from period to period depending on certain
factors such as the 2021 Vesting Event, timing and valuation of awards, achievement of performance targets and equity
award forfeitures.
(d) Represents severance costs associated with executive leadership changes and enterprise-wide organizational changes. (e) Represents costs incurred during the first half of 2020 as a result of the COVID-19 pandemic, including temporary wage
premiums, additional sick time, costs of additional cleaning supplies and third party cleaning services for the stores,
corporate office and distribution centers, accelerated freight costs associated with shifting our inventory purchases
earlier in the year to maintain stock, and legal fees associated with consulting in local jurisdictions. These costs
were no longer added back beginning in the third quarter of 2020.
(f) Represents cash expenses related to taxes on equity-based compensation resulting from the 2021 Vesting Event. (g) Other adjustments include (representing deductions or additions to Adjusted Net Income) amounts that management
believes are not representative of our operating performance, including investment income, installation costs for
energy savings associated with our profitability initiatives, legal fees associated with a distribution to NAHC's
members and our omnibus incentive plan, store exit costs and other costs associated with strategic cost savings and
business optimization initiatives.
(h) Represents the tax effect of the total adjustments made to arrive at Adjusted Net Income at our historical tax rate. (i) Represents the retrospective tax effect of Adjusted Net Income at our estimated effective tax rate of approximately 25%
for periods prior to October 1, 2020 , the effective date of our conversion to a C-Corporation, upon which we became
subject to federal income taxes.
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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):
Fiscal Year Ended
January 29, 2022 January 30, 2021 February 1, 2020
Net cash provided by operating activities $ 673,265 $ 1,011,597 $ 263,669
Net cash used in investing activities (76,017) (33,144) (66,783)
Adjusted Free Cash Flow $ 597,248 $ 978,453 $ 196,886
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, our principal sources of cash have included: •cash generated from operating activities; •issuances of debt securities, including the Notes; and •borrowings under our Term Loan and ABL Facility.
Our historical uses of cash have been associated primarily with: •cash used for operating activities such as the purchase and growth of inventory, labor costs and other working capital needs; •cash used for capital improvements and support of expansion plans, as well as various investments in store renovations, store fixtures and on-going infrastructure improvements; •cash used to pay our debt obligations and related interest expense; •cash used to pay partnership distributions to our members; •cash used to pay for the repurchase of common stock; and •fluctuations in working capital due to timing differences of cash receipts and cash disbursements.
On
During early 2020, we focused on navigating the challenges presented by COVID-19 through the preservation of our long-term liquidity and management of cash flow through preemptive actions to enhance our ability to meet our short-term liquidity needs. We took various cost cutting measures to maximize operational cash flows (see "Impact of COVID-19 on Our Business" in the section of this Annual Report entitled Management's Discussion & Analysis). Such actions included, but were not limited to, reduction of discretionary spending, deferring or cancelling our planned expenses, revisiting and reprioritizing our strategic investments, and reducing our payroll costs, including temporary team member furloughs, workforce reductions and pay cuts. As 2020 progressed, we transitioned our focus from preservation of long-term liquidity to strengthening our balance sheet through a reduction of debt. OnAugust 28, 2020 , we paid a$257.0 million one-time special distribution to our members of record as ofAugust 25, 2020 ,$248.0 million of which was paid with cash on hand and the remainder of which was distributed through an offset of outstanding loans receivable from a member as well as state income tax withholdings made on behalf of NAHC's members. Related cash payments of$32.2 million to vested share-based award holders were paid in-full as ofJuly 31, 2021 and no further payments are required relative to this distribution. OnOctober 6, 2020 , we completed our IPO in which we issued and sold 15,625,000 shares of common stock,$0.01 par value, to the IPO underwriters for cash consideration of$12.22 per share (representing an initial public offering price of$13.00 per share, net of underwriting discounts) that resulted in net proceeds of approximately$184.9 million after deducting underwriting discounts, which included approximately$2.7 million paid toKKR Capital Markets LLC ("KCM"), an affiliate of KKR, for underwriting services in connection with the IPO, and$6.1 million in costs directly associated with the IPO, such as legal and accounting fees (see "Initial Public Offering and Reorganization Transactions" in Note 1 to the accompanying consolidated financial statements). The shares sold in the offering were registered under the Securities Act of 1933, as amended, pursuant to our registration statement on Form S-1 (File No. 333-248683, which was declared effective by theSecurities and Exchange Commission onOctober 1, 2020 ). 56 -------------------------------------------------------------------------------- OnNovember 3, 2020 , the Company issued and sold an additional 1,807,495 shares of the Company's common stock, par value$0.01 per share, for cash consideration of$12.22 per share (representing an initial public offering price of$13.00 per share, net of underwriting discounts) to the IPO underwriters, resulting in approximately$22.1 million in proceeds net of underwriting discounts (see "IPO Over-Allotment Exercise" in Note 1 to the accompanying consolidated financial statements included in this Annual Report), which included$0.3 million paid to KCM, for underwriting services, pursuant to the partial exercise by the underwriters of their option to purchase up to 2,343,750 additional shares to cover over-allotments in connection with our IPO. The option has expired with respect to the remaining shares. OnNovember 6, 2020 , the Company (1) issued$400.0 million of 6.00% senior secured notes (the "Notes"), which are dueNovember 15, 2027 , (2) entered into a$400.0 million first lien term loan (the "2020 Term Loan" and, together with the 2015 Term Loan (as defined in the notes to the accompanying consolidated financial statements), the "Term Loan"), which is dueNovember 6, 2027 and (3) extended the maturity ofAcademy, Ltd.'s asset-based revolving credit facility thereunder toNovember 6, 2025 (as extended, the "2020 ABL Facility" and, together with the 2015 ABL Facility (as defined in the notes to the accompanying consolidated financial statements), the "ABL Facility"). We used the net proceeds from the Notes and the net proceeds from the 2020 Term Loan, together with cash on hand, to repay in full the 2015 Term Loan, in the amount of$1,431.4 million (see Note 4 to the accompanying consolidated financial statements). OnMay 10, 2021 , the Company completed a repurchase and simultaneous retirement of 3,229,974 shares from theMay 2021 Underwriters for cash consideration of$30.96 per share, resulting in a payment of approximately$100.0 million to theMay 2021 Underwriters (see "May 2021 Secondary Offering and Stock Repurchase" in Note 1 to the accompanying consolidated financial statements). TheMay 2021 Secondary Offering reduced KKR's ownership interest in the Company and resulted in the 2021 Vesting Event for awards granted under the 2011 Unit Incentive Plan, whereby unvested time awards, and performance-based awards which had previously met their performance targets, vested, and unvested performance-based awards which had not previously met their performance targets were forfeited. As a result, we incurred approximately$24.9 million in non-cash expenses related to equity-based compensation and approximately$15.4 million of cash expenses related to taxes on equity-based compensation. 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" and as amended by the "Amended 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$300.0 million under the Amended Credit Agreement. Borrowings under the Amended Credit Agreement will continue to mature onNovember 6, 2027 , and all other material terms and provisions of the Existing Credit Agreement remain substantially the same as the terms and provisions in place immediately prior to the effectiveness of the Amendment (see Note 4 to the accompanying consolidated financial statements). The following table summarizes our current debt obligations by fiscal year (in thousands): 2022 2023 2024 2025 2026 After 2026 Total Term Loan and related interest (1)$ 17,309 $ 19,538 $ 19,684 $ 19,445 $ 19,241 $ 296,186 $ 391,403 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) 2,500 2,500 2,500 2,500 1,909 - 11,909 (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. OnSeptember 2, 2021 , the Board of Directors of the Company authorized a share repurchase program (the "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 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 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 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 ofJanuary 29, 2022 ,$188.6 million remained available for share repurchases pursuant to our Share Repurchase Program. 57
-------------------------------------------------------------------------------- The following table summarizes our share repurchases for the fiscal year endedJanuary 30, 2022 : Total Number of Shares Average Price Total Amount Purchased Paid per Share Repurchased First Quarter (January 30, 2021 to May 1, 2021) - $ - $ - Second Quarter (May 2, 2021 to July 31, 2021) 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 30, 2022) 1,613,930 40.63 65,571,394 Total Shares Repurchased 10,566,796$ 38.93 $ 411,408,575 OnMarch 3, 2022 , the Company's Board of Directors declared a quarterly cash dividend in the amount of$0.075 per share on the Company's common stock, payable onApril 14, 2022 to stockholders of record as of the close of business onMarch 17, 2022 . 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 atJanuary 29, 2022 . The following table summarizes our operating lease obligations by fiscal year: 2022 2023 2024
2025 2026 After 2026 Total
Operating lease payments (1)
(1) Minimum lease payments have not been reduced by sublease rentals of
We expect to use existing cash balances, internally generated cash flows, and available borrowings under the ABL Facility to fund anticipated capital expenditures, dividends, stock repurchases, working capital needs and scheduled debt service costs and maturities over at least the next twelve months. The ABL Facility provides for these financing needs and other general corporate purposes, as well as to support certain letter of credit requirements. We may continue to use the ABL Facility to repay debt under the Term Loan. Availability under the ABL Facility is subject to customary asset-backed loan borrowing base and availability provisions. Amounts outstanding under the ABL Facility may fluctuate materially during each quarter mainly due to cash flow from operations, normal changes in working capital, capital expenditures and debt service costs. Our historical availability under the ABL Facility has been ample to support our operations and our debt service requirements. We had no borrowings under the ABL Facility in 2021.
Liquidity information related to the ABL Facility is as follows for the periods shown (dollar amounts in thousands):
Fiscal Year Ended
January 29, 2022 January 30, 2021 February 1, 2020
Average funds drawn $ - $ 126,648 $ 29,593
Number of days with outstanding balance - 99 182
Maximum daily amount outstanding $ - $ 500,000 $ 147,100
Minimum available borrowing capacity $ 780,945 $ 161,089 $ 771,750
Liquidity information related to the ABL Facility (amounts in thousands) as of:
January 29, 2022 January 30, 2021
Outstanding borrowings $ - $ -
Outstanding letters of credit $ 17,828 $ 20,112 Available borrowing capacity $ 874,831 $ 718,763
58
-------------------------------------------------------------------------------- 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 store relocations is expected to account for approximately 30% of the planned cash outflow and the remaining 20% is expected to be utilized through investments in 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:
Our consolidated statements of cash flows are summarized as follows (in
thousands):
Fiscal Year Ended
January 29, 2022 January 30, 2021 February 1, 2020
Net cash provided by operating activities $ 673,265
(76,017) (33,144) (66,783)
Net cash used in financing activities (488,854) (750,234) (123,192)
Net increase in cash and cash equivalents $ 108,394 $ 228,219 $ 73,694
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 inventory increase being the most significant.
Cash provided by operating activities in 2021 decreased
•$772.1 million net decrease in cash flows provided by operating assets and liabilities; partially offset by •$362.6 million increase in net income; and •$71.1 million net increase in non-cash charges.
The decrease in cash flows from operating assets and liabilities was primarily attributable to:
•$412.1 million decrease in cash flows from accounts payable related to the prior year extension of vendor payment terms intended to help mitigate the impact of COVID-19 on our business; and •$291.3 million decrease in cash flows from merchandise inventories, net related to an increase in inventory receipts during 2021 coupled with a prior year reduction of inventory from higher inventory turnover and supply chain constraints resulting from the COVID-19 pandemic.
The increase from non-cash charges was primarily caused by:
•$78.8 million increase in deferred income taxes.
Investing Activities. Cash used in investing activities increased$42.9 million in 2021 compared to 2020. The increase in cash used in investing activities is primarily related to:
•$34.5 million higher capital expenditures on updates in the stores and distribution centers, various digital projects, and other improvements coupled with the strategic reduction of capital expenditures in the prior year in response to the COVID-19 pandemic; and
•$8.1 million decrease from cash proceeds for repayment of notes receivable from one NAHC member which occurred during 2020.
59
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Financing Activities. Cash used in financing activities decreased
•$562.8 million decrease in cash outflows primarily due to the prior year long-term debt reduction associated with the Refinancing Transactions;
•$257.0 million decrease in cash outflows from a distribution to NAHC's members in the prior year; partially offset by
•$411.4 million increase in cash outflows related to Company's repurchase and simultaneous retirement of common stock in the current year;
•$207.0 million decrease in cash inflows related to net proceeds from the issuance of common stock during 2020, net of offering costs.
Future Liquidity
We expect to use existing cash balances, internally generated cash flows and borrowings under our ABL Facility to fulfill anticipated obligations such as capital expenditures, dividends, stock repurchases, working capital needs and scheduled debt maturities over at least the next twelve months. As ofJanuary 29, 2022 , we had$874.8 million of available capacity under our ABL Facility and$486.0 million of cash and cash equivalents.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (U.S. GAAP). The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. See Note 2 to the consolidated financial statements for additional information. Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions. As conditions resulting from the COVID-19 pandemic continue to evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods. The Company believes the following are its critical accounting estimates:
Merchandise Inventories, net
Description: Merchandise inventories are valued at the lower of weighted average
cost or net realizable value using the last-in first-out ("LIFO") method.
Merchandise inventories include the direct cost of merchandise and capitalized
costs related to procurement, warehousing and distribution and are reflected net
of shrinkage, vendor allowances and other valuation accounts.
Judgments and Uncertainties: We record an inventory reserve for the estimated
shrinkage between physical inventories on a store-by-store basis. We generally
perform a full physical inventory count for each store at least once a year,
throughout the year, after which our shrinkage accrual rate to sales for each
store is updated based on historical results. For vendor allowances based on
contractual provisions, we develop accrual rates for reserves as determined by
the agreements, which are typically linked to purchase volumes. Other
non-contractual vendor allowances received are applied upon receipt. We
regularly review inventories and record a valuation adjustment when necessary
such as for inventory that has a carrying value in excess of the net realizable
value or for slow moving or obsolete inventory.
Impact of Assumptions: For inventory shrinkage, our reserves may be inaccurate
if our historical physical inventory shrinkage rates, used in our assumptions,
differ significantly from actual rates due to consistent misses to our accrual.
However, due to the frequency with which we perform full physical inventory
counts, our assumptions are regularly updated, and we constantly analyze the
physical inventory results to our accruals and, where necessary, adjust our
store accruals to compensate for consistent patterns identified. We have not had
a history of significant differences to our reserves for vendor allowances and
the assumptions generally do not have a significant impact on reserves since
they are typically short-term and contractual in nature. We book a reserve for
inventory permanently marked down below the inventory's historical cost.
Additionally, for slow moving or obsolete inventory, we book reserves based on
historical margins received for marked down inventory with similarly slow
historical sell-through rates. A twenty percent decrease in assumed margins
would not have a material impact to our financial statements. We believe our
long history of operations has given us sufficient data to enable us to
accurately predict these reserves.
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--------------------------------------------------------------------------------Impairment of long-lived assets
Description: We review the carrying value of long-lived assets, including property and equipment at our stores, for indicators of impairment regularly and whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Judgments and Uncertainties: We test stores operating over a long enough time span, based on our previous store history for similar locations, to allow for meaningful analysis of future operating results. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows expected to be generated by the use of the assets, which is generally based on historical results. If such assets are considered to be impaired, the impairment loss recognized is the amount by which the carrying amount of the assets exceeds its estimated fair value, which is calculated using discounted expected future cash flows. Impact of Assumptions: The assumptions used to project store impairment loss is based on projected future store income and considers variables such as historical and current trends, macroeconomic conditions, store location and local economy and supply chain factors. Additionally, the long-term store income projections also contain a projection of future store specific costs such as store wages and advertising. Actual long-term income results could vary significantly from our projections due to a variety of reasons such as changes in the local retail environment or macroeconomic factors not used in our assumptions. In addition to variables considered in developing projected long-term store income, assumptions are made to develop the assumed discount rate based on company specific factors. There is significant judgment used in determining these assumptions used in the assessment of store impairment and variability in the assumptions could cause us to reach a materially different conclusion on impairment, however, we do not believe the net book value of any individual store assets are material to the Company's operations.
Description:Goodwill represents the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a business combination.Goodwill is tested for impairment annually or more frequently if events or circumstances indicate that the carrying value of goodwill may not be recoverable. We test for goodwill at the reporting unit level, which is the operating segment level. We operate in one segment with one reporting unit. Judgments and Uncertainties: The annual goodwill impairment test provides for the option of first performing a qualitative assessment to evaluate the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. However, if the qualitative assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. Our quantitative assessment for determining the fair value of our reporting unit includes using an estimated discounted cash flow model (income approach) and market value approach. The output of this assessment is an estimated fair value for our reporting unit that is compared to its carrying value to determine whether an impairment charge is necessary. The income approach uses a discounted cash flow analysis of our projected long-term future company income, and the market value approach is based on earnings multiples for a comparable set of public companies. These approaches use key input assumptions such as our projected future operating results, the discount rate, the weighting for each valuation approach and the comparable set of companies. Impact of Assumptions: The assumptions used to project long-term company income consider variables such as historical and current trends, macroeconomic conditions, supply chain factors, projections consistent with the Company's operating strategy, such as the future development of e-commerce and our assumptions used on future store openings, and other variables expected to impact future sales. Additionally, the long-term company income projections also contain a projection of future company costs such as wages, freight and transportation, and advertising. Actual long-term company income results could vary significantly from our projections due to a variety of reasons such as changes in the retail environment or macroeconomic factors not used in our assumptions. In addition to variables considered in developing projected long-term company income, assumptions are made to develop the discount rate, which is based on an assumed risk-free rate, and an equity risk premium developed from general historical market data and comparable companies. The earnings multiples used in the market approach can vary dependent on which companies are selected in our comparable set. A history of declining trends in our operating results such as comparable sales, gross margin, net income and cash flow from operations could impact these assumptions and serve as indicators of future impairment. There is significant judgment used in determining these assumptions used in the assessment of goodwill impairment and variability in the assumptions could cause us to reach a different conclusion on impairment. In 2021, we performed a qualitative impairment assessment and determined a quantitative assessment was not necessary. 61 --------------------------------------------------------------------------------
Intangible Assets
Description: Intangible assets primarily consists of the trade name "Academy Sports + Outdoors" (the "Trade Name"). The Trade Name is expected to generate cash flows indefinitely and, therefore, is accounted for as an indefinite-lived asset not subject to amortization. The Trade Name is tested for impairment annually or whenever events or circumstances indicate that the carrying amount of the Trade Name may not be recoverable. Judgments and Uncertainties: The annualTrade Name impairment test provides for the option of first performing a qualitative assessment to evaluate the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment for the Trade Name. However, if the qualitative assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. Impairment is calculated as the excess of the Trade Name's carrying value over its fair value. The fair value of the Trade Name is determined using the relief-from-royalty method, a variation of the income approach. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. Once a supportable royalty rate is determined, the rate is then applied to the projected long-term sales over the expected remaining life of the intangible assets to estimate the royalty savings. This approach is dependent on a number of factors, including projections of long-term sales, royalty rates, discount rates and other variables. Impact of Assumptions: The assumptions used to project long-term company sales consider variables such as historical and current trends, macroeconomic conditions, supply chain factors, projections consistent with the Company's operating strategy, such as the future development of e-commerce and our assumptions used on future store openings, and other variables expected to impact future sales. Actual long-term income results could vary significantly from our projections due to a variety of reasons such as changes in the retail environment or macroeconomic factors not used in our assumptions. In addition to variables considered in developing projected long-term sales, assumptions are made to develop the royalty rates and discount rates. The royalty rates are based on market data where royalty rates are applicable and the discount rates are based on an assumed risk-free rate, and an equity risk premium based on general historical market data and comparable companies. A history of declining trends in our operating results such as comparable sales, gross margin, net income and cash flow from operations could impact these assumptions and serve as indicators of future impairment. There is significant judgment used in determining these assumptions on intangible asset impairment and variability in the assumptions could cause us to reach a different conclusion on impairment. In 2021, we performed a qualitative impairment assessment and determined a quantitative assessment was not necessary.
Recent Accounting Pronouncements
For discussion of recent accounting pronouncements, see Note 2 to the accompanying consolidated financial statements.
Related Party Transactions
For discussion of related party transactions, see Note 13 to the accompanying consolidated financial statements.
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