BURLINGTON STORES, INC. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 (Fiscal 2021 10-K). In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled "Safe Harbor Statement." Executive Summary Introduction We are a nationally recognized off-price retailer of high-quality, branded merchandise at everyday low prices. We opened our first store inBurlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 877 stores as ofJuly 30, 2022 in 46 states andPuerto Rico . We have diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise at up to 60% off other retailers' prices, including: women's ready-to-wear apparel, menswear, youth apparel, baby, beauty, footwear, accessories, home, toys, gifts and coats. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers. Fiscal Year
Fiscal 2022 is defined as the 52-week year ending
Store Openings, Closings, and Relocations
During the six month period endedJuly 30, 2022 , we opened 46 new stores, inclusive of seven relocations, and permanently closed two stores, exclusive of the aforementioned relocations, bringing our store count as ofJuly 30, 2022 to 877 stores.
Ongoing Initiatives for Fiscal 2022
We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability. These initiatives include, but are not limited to:
•
Driving Comparable Store Sales Growth.
We strive to increase comparable store sales through the following initiatives:
•
More Effectively Chasing the Sales Trend. We plan sales using conservative comparable stores sales growth, holding and controlling liquidity, closely analyzing the sales trend by business, and remaining ready to chase that trend. We believe that these actions will also allow us to take more advantage of great opportunistic buys.
•
Operating with Leaner Inventories. We are planning to carry less inventory in our stores going forward compared to historical levels, which we believe should result in the customer finding a higher mix of fresh receipts and great merchandise values. We believe that this should drive faster turns and lower markdowns, while simultaneously improving our customers' shopping experience.
•
Making aGreater Investment in Merchandising Capabilities. We intend to invest in incremental headcount, especially in growing or under-developed businesses, training and coaching, improved tools and reporting, and other forms of merchant support. We believe that these investments should improve our ability to develop vendor 20 --------------------------------------------------------------------------------
relationships, source great merchandise buys, more accurately assess value, and better forecast and chase the sales trend.
•
Enhancing Existing Categories and Introducing New Categories. We have opportunities to expand the depth and breadth of certain existing categories, such as ladies' apparel, children's products, bath and cosmetic merchandise, housewares, décor for the home and beauty as we continue to de-weather our business, and maintain the flexibility to introduce new categories as we expand our merchandising capabilities.
•
Expanding and Enhancing Our Retail Store Base.
We intend to expand and enhance our retail store base through the following initiatives:
•
Adhering to a Market Focused and Financially Disciplined Real Estate Strategy. We have grown our store base consistently since our founding in 1972, developing more than 99% of our stores organically. We believe there is significant opportunity to expand our retail store base inthe United States . As a result of our smaller store prototype, we have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long term.
•
Maintaining Focus on Unit Economics and Returns. We have adopted a market focused approach to new store openings in more productive retail locations, with a specific focus on maximizing sales while achieving attractive unit economics and returns. Additionally, as we continue to execute our smaller store prototype, we believe we can reduce occupancy and operating expenses.
•
Enhancing the Store Experience. We continue to invest in select store relocations and downsizes to improve the customer experience, taking into consideration the age, size, sales, and location of a store. Relocations provide an opportunity, upon leases expiration, to right-size our stores, improve our competitive positioning, incorporate our new prototype store designs and reduce occupancy costs. Downsizes provide an opportunity to right-size our stores, within our existing space, improve co-tenancy, incorporate our new store designs and reduce occupancy costs. • Enhancing Operating Margins.
We intend to increase our operating margins through the following initiatives:
•
Improving Operational Flexibility. Our store and supply chain teams must continue to respond to the challenge of becoming more responsive to the sales chase, enhancing their ability at flexing up and down based on trends. Their ability to appropriately flex based on the ongoing trends allows us to maximize leverage on sales, regardless of the trend.
•
Optimizing Markdowns. We believe that our markdown system allows us to maximize sales and gross margin dollars based on forward-looking sales forecasts, sell-through targets and exit dates. Additionally, as we plan to carry less inventory in our stores compared to historical levels, we expect to drive faster turns, which in turn should reduce the amount of markdowns taken.
•
Enhancing Purchasing Power. We believe that increasing our store footprint and expanding our east and west coast buying offices provides us with the opportunity to capture incremental buying opportunities and realize economies of scale in our merchandising and non-merchandising purchasing activities.
•
Challenging Expenses to Drive Operating Leverage. We believe that we will be able to leverage our growing sales over the fixed costs of our business. In addition, by more conservatively planning our comparable store sales growth, we are forcing even tighter expense control throughout all areas of our business. We believe that this should put us in a strong position to drive operating leverage on any sales ahead of the plan. Additionally, we plan to continue challenging the processes and operating norms throughout the organization with the belief that this will lead to incremental efficiency improvements and savings.
Uncertainties and Challenges
As we strive to increase profitability, there are uncertainties and challenges
that we face that could have a material impact on our revenues or income. Some
of these uncertainties and challenges are summarized below. For a further
discussion, please refer to the description under the heading "Risk Factors" in
the Fiscal 2021 10-K.
COVID-19. The extent of the continuing impact of the COVID-19 pandemic on our
business will depend largely on future developments, including the production
and administration of effective medical treatments and vaccines, additional
costs and delays related to our supply chain, reduced workforces or labor
shortages and scarcity of raw materials, and any future required store closures
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because of COVID-19 resurgences. COVID-19 presents material uncertainty and risk
with respect to our business, financial performance and condition, operating
results, liquidity and cash flows.
General Economic Conditions. Consumer spending habits, including spending for
the merchandise that we sell, are affected by, among other things, prevailing
global economic conditions, inflation, including the costs of basic necessities
and other goods, levels of employment, salaries and wage rates, prevailing
interest rates, housing costs, energy costs, commodities pricing, income tax
rates and policies, consumer confidence and consumer perception of economic
conditions. In addition, consumer purchasing patterns may be influenced by
consumers' disposable income, credit availability and debt levels.
A broad, protracted slowdown in the U.S. economy, an extended period of high
unemployment rates, inflation rates, an uncertain global economic outlook or a
credit crisis could adversely affect consumer spending habits resulting in lower
net sales and profits than expected on a quarterly or annual basis. Consumer
confidence is also affected by the domestic and international political
situation. Our financial condition and operations could be impacted by changes
in government regulations in areas including, but not limited to, taxes and
healthcare. Ongoing international trade and tariff negotiations could have a
direct impact on our income and an indirect impact on consumer prices. The
outbreak or escalation of war, or the occurrence of terrorist acts or other
hostilities in or affecting the U.S. , or public health issues such as pandemics
or epidemics, including the continuing COVID-19 pandemic, could lead to a
decrease in spending by consumers. In addition, natural disasters, public health
issues, industrial accidents and acts of war in various parts of the world, such
as the current war in Ukraine , could have the effect of disrupting supplies and
raising prices globally which, in turn, may have adverse effects on the world
and U.S. economies and lead to a downturn in consumer confidence and spending.
We closely monitor our net sales, gross margin and expenses. We have performed
scenario planning such that if our net sales decline for an extended period of
time, we have identified variable costs that could be reduced to partially
mitigate the impact of these declines. If we were to experience adverse economic
trends and/or if our efforts to counteract the impacts of these trends are not
sufficiently effective, there could be a negative impact on our financial
performance and position in future fiscal periods.
Seasonality of Sales and Weather Conditions. Our business, like that of most
retailers, is subject to seasonal influences. In the second half of the year,
which includes the back-to-school and holiday seasons, we generally realize a
higher level of sales and net income.
Weather continues to be a contributing factor to the sale of our merchandise.
Generally, our sales are higher if the weather is cold during the Fall and warm
during the early Spring. Sales of cold weather clothing are increased by early
cold weather during the Fall, while sales of warm weather clothing are improved
by early warm weather conditions in the Spring. Although we have diversified our
product offerings, we believe traffic to our stores is still driven, in part, by
weather patterns.
Competition and Margin Pressure. We believe that in order to remain competitive
with retailers, including off-price retailers and discount stores, we must
continue to offer brand-name merchandise at a discount to prices offered by
other retailers as well as an assortment of merchandise that is appealing to our
customers.
The U.S. retail apparel and home furnishings markets are highly fragmented and
competitive. We compete for business with department stores, off-price
retailers, internet retailers, specialty stores, discount stores, wholesale
clubs, and outlet stores as well as with certain traditional, full-price retail
chains that have developed off-price concepts. At various times throughout the
year, traditional full-price department store chains and specialty shops offer
brand-name merchandise at substantial markdowns, which can result in prices
approximating those offered by us at our Burlington Stores . We anticipate that
competition will increase in the future. Therefore, we will continue to look for
ways to differentiate our stores from those of our competitors.
The U.S. retail industry continues to face increased pressure on margins as
overall challenging retail conditions have led consumers to be more value
conscious. Our strategy to chase the sales trend allows us the flexibility to
purchase less pre-season merchandise with the balance purchased in-season and
opportunistically. It also provides us with the flexibility to shift purchases
between suppliers and categories. This enables us to obtain better terms with
our suppliers, which we expect to help offset any rising costs of goods.
Industry-wide supply chain issues led to increased freight and labor costs
during Fiscal 2021 and continue to add pressure on margins in Fiscal 2022. These
costs significantly impacted results in Fiscal 2021 and the first half of Fiscal
2022, and there remains significant uncertainty around when and if freight costs
will return to pre-pandemic levels. Additionally, the higher our sales volume
is, and the more sales we chase above our initial plans, the more these
increased supply chain costs will impact our margins.
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We have also experienced inflationary pressure in our supply chain and with
respect to raw materials and finished goods, as well as in occupancy and other
operating costs. There can be no assurance that we will be able to offset
inflationary pressure in the future by increasing prices or through other means,
or that our business will not be negatively affected by continued inflation in
the future.
Key Performance and Non-GAAP Measures
We consider numerous factors in assessing our performance. Key performance and non-GAAP measures used by management include net income, Adjusted Net Income, Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin, inventory, store payroll and liquidity. Net income. We earned net income of$12.0 million during the three month period endedJuly 30, 2022 compared with net income of$102.6 million during the three month period endedJuly 31, 2021 . We earned net income of$28.1 million during the six month period endedJuly 30, 2022 compared with a net income of$273.6 million during the six month period endedJuly 31 , 2021.This decrease was primarily driven by lower sales, as well as decreased gross margin rate. Refer to the section below entitled "Results of Operations" for further explanation.
Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT: Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance.
We define Adjusted Net Income as net income, exclusive of the following items, if applicable: (i) net favorable lease costs; (ii) loss on extinguishment of debt; (iii) impairment charges; (iv) costs related to debt issuances and amendments; (v) amounts related to certain litigation matters; and (vi) other unusual, non-recurring or extraordinary expenses, losses, charges or gains, all of which are tax effected to arrive at Adjusted Net Income. We define Adjusted EBITDA as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) costs related to debt issuances and amendments; (v) income tax expense; (vi) depreciation and amortization; (vii) impairment charges; (viii) amounts related to certain litigation matters; and (ix) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We define Adjusted EBIT as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) costs related to debt issuances and amendments; (v) income tax expense; (vi) impairment charges; (vii) net favorable lease costs; (viii) amounts related to certain litigation matters; and (ix) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We present Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT, because we believe they are useful supplemental measures in evaluating the performance of our business and provide greater transparency into our results of operations. In particular, we believe that excluding certain items that may vary substantially in frequency and magnitude from what we consider to be our core operating results are useful supplemental measures that assist investors and management in evaluating our ability to generate earnings and leverage sales, and to more readily compare core operating results between past and future periods. We believe that these non-GAAP measures provide investors helpful information with respect to our operations and financial condition. Other companies in the retail industry may calculate these non-GAAP measures differently such that our calculation may not be directly comparable. Adjusted Net Income has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted Net Income does not reflect the following items, net of their tax effect:
•
net favorable lease costs;
•
costs related to debt issuances and amendments;
•
losses on extinguishment of debt;
•
impairment charges on long-lived assets;
•
amounts charged for certain litigation matters; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
During the three and six months endedJuly 30, 2022 , Adjusted Net Income decreased$110.1 million to$22.9 million and decreased$250.0 million to$59.0 million , respectively, compared to the same periods in the prior year. These decreases were 23 --------------------------------------------------------------------------------
primarily driven by lower sales, as well as decreased gross margin rate. Refer to the section below entitled "Results of Operations" for further explanation.
The following table shows our reconciliation of net income to Adjusted Net
Income for the three and six months ended
(unaudited)
(in thousands)
Three Months Ended Six Months Ended
July 30, July 31, July 30, July 31,
2022 2021 2022 2021
Reconciliation of net income to Adjusted
Net Income:
Net income $ 11,966 $ 102,554 $ 28,139 $ 273,584
Net favorable lease costs (a) 4,769 6,002 9,471 11,913
Costs related to debt issuances and
amendments (b) - 3,331 - 3,331
Loss on extinguishment of debt (c) - 31,395 14,657 31,395
Impairment charges 4,415 970 6,958 1,747
Litigation matters (d) 5,500 - 10,500 -
Tax effect (e) (3,702 ) (11,175 ) (10,719 ) (12,946 )
Adjusted Net Income $ 22,948 $ 133,077 $ 59,006 $ 309,024
(a)
Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of purchase
accounting related to the April 13, 2006 Bain Capital acquisition of Burlington
Coat Factory Warehouse Corporation (the Merger Transaction). These expenses are
recorded in the line item "Selling, general and administrative expenses" in our
Condensed Consolidated Statements of Income.
(b)
Represents certain costs incurred to refinance our senior secured term loan facility (the Term Loan Facility).
(c)
Fiscal 2022 amounts relate to the partial repurchases of the Convertible Note in the first quarter of Fiscal 2022. Fiscal 2021 amounts relate to the redemption of the Secured Notes, as well as the refinancing of the Term Loan Facility.
(d)
Represents amounts charged for certain litigation matters.
(e)
Tax effect is calculated based on the effective tax rates (before discrete items) for the respective periods, adjusted for the tax effect for the impact of items (a) through (d).
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect: • interest expense on our debt; • interest income; •
losses on the extinguishment of debt;
•
costs related to debt issuances and amendments;
•
amounts charged for certain litigation matters;
•
cash requirements for replacement of assets. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will likely have to be replaced in the future;
•
impairment charges on long-lived assets;
•
income tax expense; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
During the three and six months endedJuly 30, 2022 , Adjusted EBITDA decreased$135.1 million to$110.6 million and decreased$303.2 million to$236.0 million , respectively, compared to the same periods in the prior year. These decreases were primarily driven by lower sales, as well as decreased gross margin rate. Refer to the section below entitled "Results of Operations" for further explanation. 24 -------------------------------------------------------------------------------- The following table shows our reconciliation of net income to Adjusted EBITDA for the three and six months endedJuly 30, 2022 compared with the three and six months endedJuly 31, 2021 : (unaudited) (in thousands) Three Months Ended Six Months Ended July 30, July 31, July 30, July 31, 2022 2021 2022 2021 Reconciliation of net income to Adjusted EBITDA: Net income$ 11,966 $ 102,554 $ 28,139 $ 273,584 Interest expense 15,435 17,502 30,041 37,101 Interest income (3,463 ) (46 ) (3,582 ) (120 ) Loss on extinguishment of debt (a) - 31,395 14,657 31,395 Costs related to debt issuances and amendments (b) - 3,331 - 3,331 Litigation matters (c) 5,500 - 10,500 - Depreciation and amortization (d) 72,739 68,816 143,745 130,337 Impairment charges 4,415 970 6,958 1,747 Income tax expense 3,991 21,210 5,524 61,847 Adjusted EBITDA$ 110,583 $ 245,732 $ 235,982 $ 539,222 (a) Fiscal 2022 amounts relate to the partial repurchases of the Convertible Notes. Fiscal 2021 amounts relate to the redemption of the Secured Notes, as well as the refinancing of the Term Loan Facility.
(b)
Represents certain costs incurred to execute refinancing of the Term Loan Facility.
(c)
Represents amounts charged for certain litigation matters.
(d)
Includes$4.8 million and$9.5 million of favorable lease cost included in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income for the three and six months endedJuly 30, 2022 and$6.0 million and$11.9 million for the three and six months endedJuly 31, 2021 , respectively. Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. Adjusted EBIT has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBIT does not reflect: • interest expense on our debt; • interest income; •
losses on the extinguishment of debt;
•
costs related to debt issuances and amendments;
•
net favorable lease cost;
•
impairment charges on long-lived assets;
•
amounts charged for certain litigation matters;
•
income tax expense; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
During the three and six months endedJuly 30, 2022 , Adjusted EBIT decreased$140.3 million to$42.6 million and decreased$319.1 million to$101.7 million , respectively, compared to the same periods in the prior year. These decreases were primarily driven by lower sales, as well as decreased gross margin rate. Refer to the section below entitled "Results of Operations" for further explanation. The following table shows our reconciliation of net income to Adjusted EBIT for the three and six months endedJuly 30, 2022 compared with the three and six months endedJuly 31, 2021 : 25 --------------------------------------------------------------------------------
(unaudited)
(in thousands)
Three Months Ended Six Months Ended
July 30, July 31, July 30, July 31,
2022 2021 2022 2021
Reconciliation of net income to Adjusted
EBIT:
Net income $ 11,966 $ 102,554 $ 28,139 $ 273,584
Interest expense 15,435 17,502 30,041 37,101
Interest income (3,463 ) (46 ) (3,582 ) (120 )
Loss on extinguishment of debt (a) - 31,395 14,657 31,395
Costs related to debt issuances and
amendments (b) - 3,331 - 3,331
Net favorable lease costs (c) 4,769 6,002 9,471 11,913
Impairment charges 4,415 970 6,958 1,747
Litigation matters (d) 5,500 - 10,500 -
Income tax expense 3,991 21,210 5,524 61,847
Adjusted EBIT $ 42,613 $ 182,918 $ 101,708 $ 420,798
(a)
Fiscal 2022 amounts relate to the partial repurchases of the Convertible Notes.
Fiscal 2021 amounts relate to the redemption of the Secured Notes, as well as
the refinancing of the Term Loan Facility.
(b)
Represents certain costs incurred to execute refinancing of the Term Loan Facility.
(c)
Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. These expenses are recorded in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income.
(d)
Represents amounts charged for certain litigation matters.
Comparable Store Sales. Comparable store sales measure performance of a store
during the current reporting period against the performance of the same store in
the corresponding period of a prior year. Due to the impact of the COVID-19
pandemic, including the temporary closing of all stores during Fiscal 2020, we
are using Fiscal 2019 as the comparable previous year period when calculating
comparable store sales for Fiscal 2021. The method of calculating comparable
store sales varies across the retail industry. As a result, our definition of
comparable store sales may differ from other retailers.
For Fiscal 2022, we define comparable store sales as merchandise sales of those
stores commencing on the first day of the fiscal month one year after the end of
their grand opening activities, which normally conclude within the first two
months of operations. If a store is closed for seven or more days during a
month, our policy is to remove that store from our calculation of comparable
stores sales for any such month, as well as during the month(s) of their grand
re-opening activities. The change in our comparable store sales was as follows:
Three Months Ended Six Months Ended
July 30, 2022 -17% -17%
July 31, 2021 19% 20%
Various factors affect comparable store sales, including, but not limited to,
weather conditions, current economic conditions, the timing of our releases of
new merchandise and promotional events, the general retail sales environment,
consumer preferences and buying trends, changes in sales mix among distribution
channels, competition, and the success of marketing programs.
Gross Margin. Gross margin is the difference between net sales and the cost of
sales. Our cost of sales and gross margin may not be comparable to those of
other entities, since some entities may include all of the costs related to
their buying and distribution functions, certain store-related costs and other
costs, in cost of sales. We include certain of these costs in the line items
"Selling, general and administrative expenses" and "Depreciation and
amortization" in our Condensed Consolidated Statements of Income. We include in
our "Cost of sales" line item all costs of merchandise (net of purchase
discounts and certain vendor allowances), inbound freight, distribution center
outbound freight and certain merchandise acquisition costs, primarily
commissions and import fees.
Gross margin as a percentage of net sales decreased to 38.9% during the three
month period ended July 30, 2022 , compared with 42.2% during three month period
ended July 31, 2021 , driven primarily by decreased merchandise margins,
primarily due to higher markdowns and increased shortage, as well as increased
freight costs. Product sourcing costs, which are included in selling, general
and administrative expenses, increased approximately 130 basis points as a
percentage of net sales.
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Gross margin as a percentage of net sales decreased to 39.9% during the six
months ended July 30, 2022 , compared with 42.7% during six months ended July 31,
2021 , driven primarily by decreased merchandise margins, primarily due to higher
markdowns and increased shortage, as well as increased freight costs. Product
sourcing costs, which are included in selling, general and administrative
expenses, increased approximately 150 basis points as a percentage of net sales.
Inventory. Inventory at July 30, 2022 increased to $1,266.7 million compared
with $828.2 million at July 31, 2021 . The increase was attributable primarily to
increased reserve inventory, which was 52% of total inventory as of July 30,
2022 , compared with 31% as of July 30, 2021 , as well as 85 net new stores opened
since the end of the second quarter of Fiscal 2021, partially offset by a 5.4%
decrease in comparable store inventory.
The difference between inventory and comparable store inventory is primarily the
result of the latter not including distribution center and warehouse inventory
or inventory at new and non-comparable stores. Inventory held at our warehouses
and distribution centers includes merchandise being readied for shipment to our
stores and reserve inventory acquired opportunistically for future store
release. The magnitude of reserve inventory, at any one point in time, is
dependent on the buying opportunities identified in the marketplace.
Reserve inventory includes all inventory that is being stored for release either
later in the season, or in a subsequent season. We intend to use our reserve
merchandise to effectively chase sales trends. Inventory at January 29, 2022 was
$1,021.0 million .
In order to better serve our customers and maximize sales, we continue to refine
our merchandising mix and inventory levels within our stores. By appropriately
managing our inventories, we believe we will be better able to deliver a
continual flow of fresh merchandise to our customers.
Store Payroll as a Percentage of Net Sales . Store payroll as a percentage of net
sales measures our ability to manage our payroll in accordance with increases or
decreases in net sales. The method of calculating store payroll varies across
the retail industry. As a result, our store payroll as a percentage of net sales
may differ from other retailers. We define store payroll as regular and overtime
payroll for all store personnel as well as regional and territory personnel,
exclusive of payroll charges related to corporate and warehouse employees. Store
payroll as a percentage of net sales was 8.2% and 8.1% during the three and six
month periods ended July 30, 2022 , respectively, compared with 8.1% and 8.0%
during the three and six month periods ended July 31, 2021 , respectively.
Liquidity. Liquidity measures our ability to generate cash. Management measures
liquidity through cash flow, which is the measure of cash generated from or used
in operating, financing, and investing activities. Cash and cash equivalents,
including restricted cash and cash equivalents, decreased $636.1 million during
the six months ended July 30, 2022 , compared with a decrease of $36.0 million
during the six months ended July 31, 2021 . Refer to the section below entitled
"Liquidity and Capital Resources" for further explanation.
Results of Operations
The following table sets forth certain items in the Condensed Consolidated
Statements of Income as a percentage of net sales for the three and six months
ended
Percentage of Net Sales
Three Months Ended Six Months Ended
July 30, July 31, July 30, July 31,
2022 2021 2022 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Other revenue 0.2 0.1 0.2 0.1
Total revenue 100.2 100.1 100.2 100.1
Cost of sales 61.1 57.8 60.1 57.3
Selling, general and administrative expenses 34.6 31.7 34.9 31.0
Costs related to debt issuances and amendments - 0.2 - 0.1
Depreciation and amortization 3.4 2.8 3.4 2.7
Impairment charges - long-lived assets 0.2 0.0 0.2 0.0
Other income - net (0.6 ) (0.3 ) (0.4 ) (0.2 )
Loss on extinguishment of debt - 1.4 0.4 0.7
Interest expense 0.8 0.8 0.8 0.8
Total costs and expenses 99.5 94.4 99.4 92.4
Income before income tax expense 0.7 5.7 0.8 7.7
Income tax expense 0.2 1.0 0.1 1.4
Net income 0.5 % 4.7 % 0.7 % 6.3 %
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Three Month Period Ended
Net sales
Net sales decreased approximately$228.9 million , or 10.3%, to$1,983.9 million during the second quarter of Fiscal 2022, primarily driven by a decrease of 17% in comparable stores sales during the second quarter of Fiscal 2022. We believe this decrease was driven by economic pressure on our core customers and promotional activity throughout the retail environment. This decrease was partially offset by the net sales of 85 net new stores since the end of the second quarter of Fiscal 2021.
Cost of sales
Cost of sales as a percentage of net sales increased to 61.1% during the second quarter of Fiscal 2022, compared to 57.8% during the second quarter of Fiscal 2021. This increase was primarily driven by decreased merchandise margins, primarily due to higher markdowns and increased shortage, as well as increased freight costs. On a dollar basis, cost of sales decreased$68.4 million , or 5.3%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 130 basis points as a percentage of net sales.
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the three month period endedJuly 30, 2022 compared with the three month period endedJuly 31, 2021 . (in millions) Three Months Ended Percentage Percentage July 30, of July 31, of 2022 Net Sales 2021 Net Sales $ Variance % Change Store related costs$ 417.2 21.0 %$ 432.9 19.6 %$ (15.7 ) (3.6 )% Product sourcing costs 157.2 7.9 145.9 6.6 11.3 7.7 Corporate costs 79.6 4.0 84.9 3.8 (5.3 ) (6.2 ) Marketing and strategy costs 6.7 0.3 12.7 0.6 (6.0 ) (47.2 ) Other selling, general and administrative expenses 24.8 1.4 25.9 1.1 (1.1 ) (4.2 ) Selling, general and administrative expenses$ 685.5 34.6 %$ 702.3
31.7 %
The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by deleverage on store related costs and increased product sourcing costs. On a dollar basis, the decrease in selling, general and administrative expenses was primarily driven by decreases in store payroll costs, incentive compensation, and marketing costs, partially offset by increases in occupancy costs and product sourcing costs.
Depreciation and amortization
Depreciation and amortization expense amounted to
Impairment charges - long-lived assets
Impairment charges on long-lived assets were$4.4 million during the second quarter of Fiscal 2022, related to declines in revenue and operating results for two stores. Impairment charges on long-lived assets were$1.0 million during the second quarter of Fiscal 2021, related to the expected sale of one owned store. The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, "Fair Value Measurements," for further discussion regarding impairment charges. 28 --------------------------------------------------------------------------------
Other income - net
Other income - net improved
Loss on Extinguishment of Debt
During the second quarter of Fiscal 2021, we incurred a debt extinguishment charge of$30.2 million related to the premium paid on redemption of the Secured Notes, as well as a$1.2 million charge related to the refinancing of our Term Loan Facility. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
Interest expense
Interest expense improved$2.1 million during the second quarter of Fiscal 2022 to$15.4 million , compared to the same period in the prior year. The decrease was driven by the redemption in full of the$300.0 million aggregate principal amount of Secured Notes and repurchase of$297.3 million of Convertible Notes since the end of the second quarter of Fiscal 2021, partially offset by the increase in LIBOR rates on our Term Loan Facility. The average interest rates and average balances related to our variable rate debt for the second quarter of Fiscal 2022 compared with the second quarter of Fiscal 2021, are summarized in the table below: Three Months Ended July 30, July 31, 2022 2021 Average balance - ABL Line of Credit (in millions) $ - $ - Average interest rate - ABL Line of Credit - - Average balance - Term Loan Facility (in millions) (a)$ 953.4 $ 961.4 Average interest rate - Term Loan Facility 3.2% 2.0%
(a) Excludes original issue discount.
Income tax expense
Income tax expense was$4.0 million during the second quarter of Fiscal 2022 compared with income tax expense of$21.2 million during the second quarter of Fiscal 2021. The effective tax rate for the second quarter of Fiscal 2022 was 25.0% compared with 17.1% during the second quarter of Fiscal 2021. The decrease in income tax expense in the current year was primarily the result of lower pre-tax income. The lower tax rate in the prior year is primarily related to higher tax benefit from stock compensation. At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the second quarter of Fiscal 2022 resulted in an annual effective income tax rate of approximately 26% (before discrete items) as our best estimate. Net income
We earned net income of
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Six Month Period Ended
Net sales Net sales decreased approximately$493.9 million , or 11.2%, to$3,909.5 million during the first half of Fiscal 2022, primarily driven by a decrease of 17% in comparable stores sales during the first half of Fiscal 2022, partially offset by the net sales of 85 net new stores since the end of the second quarter of Fiscal 2021. Cost of sales Cost of sales as a percentage of net sales increased to 60.1% during the first half of Fiscal 2022, compared to 57.3% during the first half of Fiscal 2021. This increase was primarily driven by decreased merchandise margins, primarily due to higher markdowns and increased shortage, as well as increased freight costs. On a dollar basis, cost of sales decreased$173.7 million , or 6.9%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 150 basis points as a percentage of net sales.
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the six month period endedJuly 30, 2022 compared with the six month period endedJuly 31, 2021 . (in millions) Six Months Ended Percentage Percentage of of July 30, 2022 Net Sales July 31, 2021 Net Sales $ Variance % Change Store related costs $ 824.8 21.1 % $ 844.4 19.2 %$ (19.6 ) (2.3 )% Product sourcing costs 313.9 8.0 286.4 6.5 27.5 9.6 Corporate costs 157.6 4.0 160.7 3.6 (3.1 ) (1.9 ) Marketing and strategy costs 20.7 0.5 25.0 0.6 (4.3 ) (17.2 ) Other selling, general and administrative expenses 48.8 1.3 50.6 1.1 (1.8 ) (3.6 ) Selling, general and administrative expenses$ 1,365.8 34.9 %$ 1,367.1 31.0 %$ (1.3 ) (0.1 )% The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by deleverage on store related costs and increased product sourcing costs. On a dollar basis, the decrease in selling, general and administrative expenses was primarily driven by decreases in store payroll costs, incentive compensation, and marketing costs, partially offset by increases in occupancy costs and product sourcing costs.
Depreciation and amortization
Depreciation and amortization expense amounted to$134.3 million during the first half of Fiscal 2022 compared with$118.4 million during the first half of Fiscal 2021. The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores.
Impairment charges - long-lived assets
Impairment charges on long-lived assets were$7.0 million during the first half of Fiscal 2022, related to declines in revenue and operating results for two stores, one owned store expected to be sold below net carrying value, and unrecoverable fixed assets at two relocating stores. Impairment charges on long-lived assets were$1.7 million during the first half of Fiscal 2021, related to the expected sale of one owned store, as well as declines in revenues and operating results for one store. The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, "Fair Value Measurements," for further discussion regarding impairment charges. 30 --------------------------------------------------------------------------------
Other income - net
Other income - net improved$8.8 million to$16.0 million during the first half of Fiscal 2022, compared to the same period in the prior year. The increase was primarily driven by the gain on sale of real estate related assets and interest income on a tax refund.
Loss on Extinguishment of Debt
During the first half of Fiscal 2022, we entered into separate, privately negotiated exchange agreements (Exchange Agreements) with certain holders of the Convertible Notes. Under the terms of the Exchange Agreements, the holders exchanged$64.6 million in aggregate principal amount of Convertible Notes held by them for$78.2 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of$14.7 million . During the first half of Fiscal 2021, we incurred a debt extinguishment charge of$30.2 million related to the premium paid on redemption of the Secured Notes, as well as$1.2 million related to the refinancing of our Term Loan Facility. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions. Interest expense Interest expense improved$7.1 million during the first half of Fiscal 2022 to$30.0 million , compared to the same period in the prior year. The decrease was driven by the redemption in full of the$300.0 million aggregate principal amount of Secured Notes and repurchase of$297.3 million of Convertible Notes since the end of the second quarter of Fiscal 2021, partially offset by the increase in LIBOR rates on our Term Loan Facility. The average interest rates and average balances related to our variable rate debt for the first half of Fiscal 2022 compared with the first half of Fiscal 2021, are summarized in the table below: Six Months Ended July 30, July 31, 2022 2021 Average balance - ABL Line of Credit (in millions) $ - $ - Average interest rate - ABL Line of Credit - - Average balance - Term Loan Facility (in millions) (a)$ 954.6 $ 961.4 Average interest rate - Term Loan Facility 2.7% 1.9%
(a) Excludes original issue discount.
Income tax expense
Income tax expense was$5.5 million during the first half of Fiscal 2022 compared with income tax expense of$61.8 million during the first half of Fiscal 2021. The effective tax rate for the first half of Fiscal 2022 was 16.4% compared with 18.4% during the first half of Fiscal 2021. The decrease in income tax expense in the first half of Fiscal 2022 was a result of lower pre-tax income. The decrease in effective tax rate is due to favorable permanent items having a greater impact as a result of the lower pretax income compared to the prior year. At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the first half of Fiscal 2022 resulted in an annual effective income tax rate of approximately 26% (before discrete items) as our best estimate.
Net income
We earned net income of
Liquidity and Capital Resources
Our ability to satisfy interest payment and future principal payment obligations
on our outstanding debt will depend largely on our future performance which, in
turn, is subject to prevailing economic conditions and to financial, business
and other factors beyond our control. If we do not have sufficient cash flow to
service interest payment and future principal payment obligations on our
outstanding indebtedness and if we cannot borrow or obtain equity financing to
satisfy those obligations, our business and results of
31
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operations will be materially adversely affected. We cannot be assured that any
replacement borrowing or equity financing could be successfully completed on
terms similar to our current financing agreements, or at all.
On June 11, 2021 , we redeemed the full $300.0 million aggregate principal amount
of the Secured Notes. The redemption price of the Secured Notes was $323.7
million , plus accrued and unpaid interest to, but not including, the date of
redemption. Additionally, we repurchased $232.7 million of principal on the
Convertible Notes during the second half of Fiscal 2021. During the first
quarter of Fiscal 2022, we repurchased an additional $64.6 million of principal
on the Convertible Notes. During the second quarter of Fiscal 2022, we finalized
an increase to the aggregate principal amount of the commitments of our current
asset-based lending facility (the ABL Line of Credit) from $650.0 million to
$900.0 million .
We believe that cash generated from operations, along with our existing cash and
our ABL Line of Credit, will be sufficient to fund our expected cash flow
requirements and planned capital expenditures for at least the next twelve
months as well as the foreseeable future. However, there can be no assurance
that we would be able to offset declines in our comparable store sales with
savings initiatives in the event that the economy declines.
As market conditions warrant, we may, from time to time, repurchase our
outstanding debt securities in the open market, in privately negotiated
transactions, by tender offer, by exchange transaction or otherwise. Such
repurchases, if any, will depend on prevailing market conditions, our liquidity
and other factors and may be commenced or suspended at any time. The amounts
involved and total consideration paid may be material.
Cash Flow for the Six Month Period Ended
We used$636.1 million of cash during the six month period endedJuly 30, 2022 compared with a use of$36.0 million during the six month period endedJuly 31, 2021 . Net cash used in operating activities amounted to$152.9 million during the six month period endedJuly 30, 2022 , compared with net cash provided of$426.9 million during the six month period endedJuly 31, 2021 . The decrease in our operating cash flows was primarily driven by lower sales and decreased gross margin rate, as well as changes in working capital, primarily decreased accounts payable and increased inventory. The decrease was partially offset by a$245.5 million tax refund received during Fiscal 2022. Net cash used in investing activities was$186.4 million during the six month period endedJuly 30, 2022 compared with$141.6 million during the six month period endedJuly 31, 2021 . This change was primarily the result of an increase in capital expenditures related to our stores (new stores, remodels and other store expenditures). Net cash used in financing activities was$296.8 million during the six month period endedJuly 30, 2022 compared with$321.2 million during the six month period endedJuly 31, 2021 . This change was primarily driven by full paydown of Secured Notes in Fiscal 2021, partially offset by repurchase of shares of our common stock under our share repurchase program, as well as cash paid for partial redemptions of Convertible Notes during Fiscal 2022. Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had working capital atJuly 30, 2022 of$320.5 million compared with$853.8 million atJuly 31, 2021 . The decrease in working capital was primarily due to a decrease in cash and cash equivalents due to payments on the Convertible Notes and Secured Notes, partially offset by an increase to the inventory balance and decreased accounts payable. We had working capital atJanuary 29, 2022 of$593.4 million . Capital Expenditures
For the six month period ended
We estimate that we will spend approximately$640 million , net of approximately$15 million of landlord allowances, in capital expenditures during Fiscal 2022, including approximately$240 million , net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately$255 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives. 32 --------------------------------------------------------------------------------
Share Repurchase Program
On
OnFebruary 16, 2022 , our Board of Directors authorized the repurchase of up to an additional$500.0 million of common stock, which is authorized to be executed throughFebruary 2024 . During the first half of Fiscal 2022, we repurchased 1,111,183 shares of common stock for$200.1 million under these repurchase programs. As ofJuly 30, 2022 , we had$449.9 million remaining under our share repurchase authorization. We are authorized to repurchase shares of our outstanding common stock from time to time on the open market or in privately negotiated transactions under our repurchase program. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program. Dividends We currently do, and intend to continue to, retain all available funds and any future earnings to fund all of the Company's capital expenditures, business initiatives, and to support any potential opportunistic capital structure initiatives. Therefore, at this time, we do not anticipate paying cash dividends in the near term. Our ability to pay dividends on our common stock will be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions under the terms of current and any future agreements governing our indebtedness. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to compliance with covenants in our current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our Board of Directors deems relevant. In addition, since we are a holding company, substantially all of the assets shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries. Accordingly, our earnings, cash flow and ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends.
Operational Growth
During the six month period ended
We have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long-term. We believe that our ability to find satisfactory locations for our stores is essential for the continued growth of our business. The opening of stores generally is contingent upon a number of factors including, but not limited to, the availability of desirable locations with suitable structures and the negotiation of acceptable lease terms. There can be no assurance, however, that we will be able to find suitable locations for new stores or that we will be able to open the number of new stores presently planned, even if such locations are found and acceptable lease terms are obtained. Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores.
Debt and Hedging
As ofJuly 30, 2022 , our obligations, inclusive of original issue discount, include$946.3 million under our Term Loan Facility,$507.7 million of Convertible Notes and no outstanding borrowings on our ABL Line of Credit. Our debt obligations also include$41.6 million of finance lease obligations as ofJuly 30, 2022 . Term Loan Facility OnJune 24, 2021 ,Burlington Coat Factory Warehouse Corporation , an indirect subsidiary of the Company (BCFWC), entered into Amendment No. 9 (the Ninth Amendment) to the Term Loan Credit Agreement governing the Term Loan Facility. The Ninth Amendment, among other things, extended the maturity date fromNovember 17, 2024 toJune 24, 2028 , and changed the interest rate margins applicable to the Term Loan Facility from 0.75% to 1.00%, in the case of prime rate loans, and from 1.75% to 2.00%, in the 33 --------------------------------------------------------------------------------
case of LIBOR loans, with a 0.00% LIBOR floor. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
At
ABL Line of Credit
OnJuly 20, 2022 , we entered into a Fourth Amendment to Second Amended and Restated Credit Agreement (the "Amendment"), by and among BCFWC, as lead borrower and the other borrowers party thereto, the facility guarantors party thereto, the lenders party thereto andBank of America, N.A ., as administrative agent and collateral agent, which Amendment amends that certain Second Amended and Restated Credit Agreement dated as ofSeptember 2, 2011 , by and among the BCFWC, the other borrowers party thereto, the facility guarantors party thereto, the lenders party thereto andBank of America, N.A ., as administrative agent and collateral agent. The Amendment increased the aggregate principal amount of the commitments of the ABL Line of Credit from$650.0 million to$900.0 million and replaced the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on a term secured overnight financing rate (SOFR) or a daily SOFR rate (in the case of daily SOFR, available for borrowings up to$100 million , or up to the full amount of the commitments if the term SOFR rate is not available). AtJuly 30, 2022 , we had$842.5 million available under the ABL Line of Credit. There were no borrowings on the ABL Line of Credit during the six month period endedJuly 30, 2022 . Convertible Notes OnApril 16, 2020 , we issued$805.0 million of Convertible Notes. The Convertible Notes have an initial conversion rate of 4.5418 shares per$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately$220.18 per share of the Company's common stock), subject to adjustment if certain events occur.
The Convertible Notes are general unsecured obligations of the Company. The
Convertible Notes bear interest at a rate of 2.25% per year, payable
semi-annually in cash, in arrears on
During the second half of Fiscal 2021, we entered into separate, privately negotiated exchange agreements with certain holders of the Convertible Notes. Under the terms of these exchange agreements, the holders exchanged$232.7 million in aggregate principal amount of Convertible Notes held by them for a combination of an aggregate of$199.8 million in cash and 513,991 shares of our common stock. These exchanges resulted in aggregate pre-tax debt extinguishment charges of$124.6 million in Fiscal 2021. During the first quarter of Fiscal 2022, we entered into separate, privately negotiated exchange agreements with certain holders of the Convertible Notes. Under the terms of the exchange agreements, the holders exchanged$64.6 million in aggregate principal amount of Convertible Notes held by them for$78.2 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of$14.7 million .
Secured Notes
OnApril 16, 2020 , BCFWC, issued$300.0 million of Secured Notes. The Secured Notes are senior, secured obligations of BCFWC, and interest was payable semiannually in cash at a rate of 6.25% per annum onApril 15 andOctober 15 of each year, beginning onOctober 15, 2020 . The Secured Notes were guaranteed on a senior secured basis byBurlington Coat Factory Holdings, LLC ,Burlington Coat Factory Investments Holdings, Inc. and BCFWC's subsidiaries that guarantee the loans under the Term Loan Facility and ABL Line of Credit. OnJune 11, 2021 , BCFWC redeemed the full$300.0 million aggregate principal amount of the Secured Notes. The redemption price of the Secured Notes was$323.7 million , plus accrued and unpaid interest to, but not including, the date of redemption. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
Hedging
OnJune 24, 2021 , the Company terminated its previous interest rate swap and entered into a new interest rate swap. The new interest rate swap, which hedges$450 million of variable rate exposure under our Term Loan Facility, is designated as a cash flow hedge and expires onJune 24, 2028 . Refer to Note 5, "Derivative Instruments and Hedging Activities," for further discussion regarding our derivative transactions. 34 --------------------------------------------------------------------------------
Certain Information Concerning Contractual Obligations
We had$1,059.3 million of purchase commitments related to goods that were not received as ofJuly 30, 2022 , and had$3,738.8 million of future minimum lease payments under operating leases as ofJuly 30, 2022 . Additionally, during the first quarter of Fiscal 2022, we repurchased$64.6 million in aggregate principal amount of the Convertible Notes. See Note 4, "Long Term Debt," for additional information related to our debt transactions. There were no other significant changes regarding our obligations to make future payments under current contracts from those included in our Fiscal 2021 10-K.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management's judgments and estimates. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As of the end of the second quarter of Fiscal 2022, the impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and judgments carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the consolidated financial statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Our critical accounting policies and estimates are consistent with those disclosed in Note 1, "Summary of Significant Accounting Policies," to the audited Consolidated Financial Statements, included in Part II, Item 8 of the Fiscal 2021 10-K.
Safe Harbor Statement
This report contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about us, the industry in
which we operate and other matters, as well as management's beliefs and
assumptions and other statements regarding matters that are not historical
facts. For example, when we use words such as "projects," "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "should,"
"would," "could," "will," "opportunity," "potential" or "may," variations of
such words or other words that convey uncertainty of future events or outcomes,
we are making forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). Our forward-looking statements
are subject to risks and uncertainties. Such statements may include, but are not
limited to, future impacts of the COVID-19 pandemic, proposed store openings and
closings, proposed capital expenditures, projected financing requirements,
proposed developmental projects, projected sales and earnings, our ability to
maintain selling margins, and the effect of the adoption of recent accounting
pronouncements on our consolidated financial position, results of operations and
cash flows. Actual events or results may differ materially from the results
anticipated in these forward-looking statements as a result of a variety of
factors. While it is impossible to identify all such factors, factors that could
cause actual events or results to differ materially from those we expected
include: the impact of the COVID-19 pandemic and actions taken to slow its
spread and the related impacts on economic activity, financial markets, labor
markets and the global supply chain; general economic conditions, including
inflation, and the related impact on consumer confidence and spending;
competitive factors, including pricing and promotional activities of major
competitors and an increase in competition within the markets in which we
compete; weather patterns, including changes in year-over-year temperatures; the
reduction in traffic to, or the closing of, the other destination retailers in
the shopping areas where our stores are located; changing consumer preferences
and demand; industry trends, including changes in buying, inventory and other
business practices; natural and man-made disasters, including fire, snow and ice
storms, flood, hail, hurricanes and earthquakes; our ability to successfully
implement one or more of our strategic initiatives and growth plans; the
availability, selection and purchasing of attractive merchandise on favorable
terms; the availability of desirable store locations on suitable terms; industry
trends, including changes in buying, inventory and other business practices;
terrorist attacks, particularly attacks on or within markets in which we
operate; our ability to attract, train and retain quality employees and
temporary personnel in appropriate numbers; our ability to control costs and
expenses; the solvency of parties with whom we do business and their willingness
to perform their obligations to us; import risks, including tax and trade
policies, tariffs and government regulations; our dependence on vendors for our
merchandise; domestic and international events affecting the delivery of
merchandise to our stores; unforeseen cyber-related problems or attacks;
regulatory and tax changes; issues with merchandise safety and shrinkage; any
35
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unforeseen material loss or casualty or the existence of adverse litigation; the
impact of current and future laws and the interpretation of such laws; our
substantial level of indebtedness and related debt-service obligations;
consequences of the failure to comply with covenants in our debt agreements; the
availability of adequate financing; and other risks discussed from time to time
in our filings with the Securities and Exchange Commission (SEC), including
those under the heading "Risk Factors" in the Fiscal 2021 10-K.
Many of these factors, including the ultimate impact of the COVID-19 pandemic,
are beyond our ability to predict or control. In addition, as a result of these
and other factors, our past financial performance should not be relied on as an
indication of future performance. The cautionary statements referred to in this
section also should be considered in connection with any subsequent written or
oral forward-looking statements that may be issued by us or persons acting on
our behalf. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report might not occur. Furthermore, we cannot guarantee future results, events,
levels of activity, performance or achievements.
Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact on our Condensed Consolidated Financial Statements.
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