Forward-Looking Statements
Except for specific historical information, many of the matters discussed in
this Form 10-Q may express or imply projections of revenues or expenditures,
statements of plans and objectives for future operations, growth or initiatives,
statements of future economic performance, capital allocation expectations or
statements regarding the outcome or impact of pending or threatened litigation.
These, and similar statements, are forward-looking statements concerning matters
that involve risks, uncertainties and other factors that may cause the actual
performance of the Company to differ materially from those expressed or implied
by these statements. All forward-looking information should be evaluated in the
context of these risks, uncertainties and other factors. The words "believe,"
"anticipate," "project," "plan," "expect," "estimate," "objective," "forecast,"
"goal," "intend," "could," "will likely result," or "will continue" and similar
words and expressions generally identify forward-looking statements, although
not all forward-looking statements contain such language. The Company believes
the assumptions underlying these forward-looking statements are reasonable;
however, any of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those projected in the forward-looking
statements.
The factors that may result in actual results differing from such
forward-looking information include, but are not limited to: uncertainties
relating to general economic conditions, including inflation, energy and fuel
costs, unemployment levels, and any deterioration whether caused by acts of war,
terrorism, political or social unrest (including any resulting store closures,
damage or loss of inventory) or other factors; changes in market interest rates
and market levels of wages; natural disasters such as hurricanes; public health
emergencies such as the ongoing COVID-19 pandemic and associated containment and
remediation efforts; the potential negative impacts of COVID-19 on the global
economy and foreign sourcing; the impacts of COVID-19 on the Company's financial
condition, business operation and liquidity, including the re-closure of any or
all of the Company's retail stores and distribution centers; transportation and
distribution delays or interruptions; changes in freight rates; the Company's
ability to attract and retain workers; the Company's ability to negotiate
effectively the cost and purchase of merchandise; inventory risks due to shifts
in market demand; the Company's ability to gauge fashion trends and changing
consumer preferences; consumer confidence and changes in consumer spending
patterns; competition within the industry; competition in our markets; the
duration and extent of any economic stimulus programs; changes in product mix;
interruptions in suppliers' businesses; temporary changes in demand due to
weather patterns; seasonality of the Company's business; delays associated with
building, opening, remodeling and operating new stores; the results of pending
or threatened litigation; delays associated with building, opening or expanding
new or existing distribution centers; and other factors described in the section
titled "Item 1A. Risk Factors" and elsewhere in the Company's Annual Report on
Form 10-K for the fiscal year ended January 29, 2022, and in Part II, "Item 1A.
Risk Factors" and elsewhere in the Company's Quarterly Reports on Form 10-Q and
any amendments thereto and in the other documents the Company files with the
SEC, including reports on Form 8-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Form 10-Q. Except as may be
required by law, the Company undertakes no obligation to update or revise
publicly any forward-looking statements contained herein to reflect events or
circumstances occurring after the date of this Form 10-Q or to reflect the
occurrence of unanticipated events. Readers are advised, however, to read any
further disclosures the Company may make on related subjects in its public
disclosures or documents filed with the SEC, including reports on Form 8-K.
Executive Overview
We are a leading specialty value retailer of apparel, accessories and home
trends for way less spend primarily for African American and Latinx families.
Our high-quality and trend-right merchandise offerings at everyday low prices
are designed to appeal to the fashion and trend preferences of value-conscious
multicultural customers. As of October 29, 2022, we operated 615 stores in
urban, suburban and rural markets in 33 states.
Uncertainties and Challenges
COVID-19
There is still uncertainty regarding the lingering effects of the COVID-19
pandemic on our business, financial condition, results of operations, cash flows
and liquidity. We cannot reasonably predict the extent to which our future
business will be impacted by the COVID-19 pandemic.
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Inflation
Our operations have been impacted by the recent surge in prices for food, fuel,
housing and energy due to inflationary pressures, which may continue in the near
term and are particularly impactful to the communities we serve. We are closely
monitoring the impacts of inflationary pressures, higher unemployment, wage
inflation and costs to source our merchandise. The future impact of inflation
remains highly uncertain, and our business and results of operations could
continue to be adversely impacted.
Supply Chain Disruptions
Beginning in the second half of fiscal 2021, we encountered increasing supply
chain disruptions, such as production delays for our vendors and industry-wide
U.S. port and ground transportation delays. In response, we have taken various
actions, including ordering merchandise earlier, leveraging our packaway
merchandise stock and expanding the direct shipping program from our vendors to
our stores that we initiated in fiscal 2020. These supply chain disruptions have
resulted in increased costs. We continue to actively monitor and manage the
impact on product availability and expenses. The future impact of the supply
chain disruption remain highly uncertain, and our business and results of
operations could continue to be adversely impacted.
Seasonality and Weather Patterns
The nature of our business is seasonal. Historically, sales in the first and
fourth quarters have been higher than sales achieved in the second and third
quarters of the fiscal year. In addition, sales of clothing are directly
impacted by the timing of the seasons to which the clothing relates. While we
have greatly expanded our product offerings to become a one-stop-shop, traffic
to our stores is still influenced by weather patterns to some extent.
Basis of Presentation
Net sales consist of store sales and layaway fees, net of returns by customers.
Cost of sales consists of the cost of products we sell and associated freight
costs. Depreciation is not considered a component of Cost of sales and is
included as a separate line item in the consolidated statements of operations.
Selling, general and administrative expenses are comprised of store costs,
including payroll and occupancy costs, corporate and distribution center costs
and advertising costs.
The following discussion contains references to fiscal years 2022 and 2021,
which represent fiscal years ending or ended on January 28, 2023 and January 29,
2022, respectively. Fiscal 2022 and fiscal 2021 both have 52-week accounting
periods. This discussion and analysis should be read with the unaudited
condensed consolidated financial statements and the notes thereto contained in
Part 1, Item 1 of this Report.
Results of Operations
The following discussion of the Company's financial performance is based on the
unaudited condensed consolidated financial statements set forth herein. Expenses
and, to a greater extent, operating income, vary by quarter. Results of a period
shorter than a full year may not be indicative of results expected for the
entire year as a result of the seasonality of the business, the current economic
uncertainty and the extent to which future business will be impacted by the
COVID-19 pandemic.
Key Operating Statistics
We measure performance using key operating statistics. One of the main
performance measures we use is comparable store sales growth. We define a
comparable store as a store that has been opened for an entire fiscal year.
Therefore, a store will not be considered a comparable store until its 13th
month of operation at the earliest or until its 24th month at the latest. As an
example, stores opened in fiscal 2021 and fiscal 2022 are not considered
comparable stores in fiscal 2022. Relocated and expanded stores are included in
the comparable store sales results. Stores that are closed permanently or for an
extended period are excluded from the comparable store sales results. We also
use other operating statistics, most notably average sales per store, to measure
our performance. As we typically occupy existing space in established shopping
centers rather than sites built specifically for our stores, store square
footage (and therefore sales per square foot) varies by store. We focus on
overall store sales volume as the critical driver of profitability. In addition
to sales, we measure cost of sales as a percentage of sales and store operating
expenses, with a particular focus on labor, as a percentage of sales. These
results translate into store level contribution, which we use to evaluate
overall performance of each individual store. Finally, we monitor corporate
expenses against budgeted amounts.
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Thirteen Weeks Ended October 29, 2022 and October 30, 2021
Net Sales. Net sales decreased $35.7 million, or 15.6%, to $192.3 million in the
third quarter of 2022 from $228.0 million in the third quarter of 2021. The
decrease in sales was due to an 18.3% decrease in comparable store sales,
partially offset by a $5.0 million increase from net store opening and closing
activity. The decrease in comparable store sales was due to outsized sales in
the third quarter of last year driven by government stimulus payments, combined
with inflationary pressures in the third quarter of this year that are
particularly impactful to our core customers.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of
depreciation) decreased $20.4 million, or 14.9%, to $115.7 million in the third
quarter of 2022 from $136.1 million in the third quarter of 2021. Cost of sales
as a percentage of sales increased to 60.2% from 59.7%. The change of 50 basis
points was due to a decrease of 55 basis points in the core merchandise margin
(initial mark-up, net of markdowns) due to lower markdowns in the third quarter
of last year during outsized stimulus-driven demand, along with an increase of
25 basis points in shrinkage, partially offset by a decrease of 30 basis points
in freight costs in the current quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $5.7 million, or 7.6%, to $69.1 million in the
third quarter of 2022 from $74.8 million in the third quarter of 2021. The
decrease was driven by: (1) a $4.7 million decrease in incentive-based
compensation as a result of unfavorable operating results in relation to budget
this year (compared to overperformance in the third quarter of last year) as
well as an adjustment to compensation costs for certain performance-based awards
that are no longer probable to vest; (2) a decrease of $1.5 million in payroll
expenses related to reduced headcount; (3) the capitalization of $0.5 million of
payroll related to a technology upgrade; (4) decreases in travel expenses and
credit card processing fees; and (5) decreases in various other expenses related
to our initiative to reduce costs. These decreases were partially offset by an
increase of $1.6 million in rent expense related to the sale-leasebacks of our
distribution centers. As a percentage of sales, Selling, general and
administrative expenses increased to 35.9% in the third quarter of 2022 from
32.8% in the third quarter of 2021, primarily due to the deleveraging effect of
lower sales.
Depreciation. Depreciation expense decreased $0.4 million, or 8.2%, to $5.1
million in the third quarter of 2022 from $5.5 million in the third quarter of
2021.
Gain on sale-leaseback. In the third quarter of 2022, we completed a
sale-leaseback transaction for our distribution center in Roland, Oklahoma that
resulted in a $29.2 million gain.
Income Tax Expense. Income tax expense was $7.1 million in the third quarter of
2022 compared to $2.5 million in the third quarter of 2021 due primarily to
higher pretax income in the current period, including the impact of the gain on
the sale of our distribution center.
Net Income. Net income was $24.6 million in the third quarter of 2022 compared
to $9.0 million in the third quarter of 2021 due to the factors discussed above.
Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021
Net Sales. Net sales decreased $165.0 million, or 22.0%, to $585.6 million in
the first thirty-nine weeks of 2022 from $750.6 million in the same period of
2021. The decrease in sales was due to a 24.5% decrease in comparable store
sales, partially offset by a $15.9 million increase from net store opening and
closing activity. The decrease in comparable store sales was due to outsized
sales in the first thirty-nine weeks of last year driven by government stimulus
payments, combined with inflationary pressures in the first thirty-nine weeks of
this year that are particularly impactful to our core customers.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of
depreciation) decreased $83.1 million, or 18.9%, to $357.3 million in the first
thirty-nine weeks of 2022 from $440.4 million in the same period of 2021. Cost
of sales as a percentage of sales increased to 61.0% in the first thirty-nine
weeks of 2022 from 58.7% in the same period of 2021. The change of 230 basis
points was due to a decrease of 180 basis points in the core merchandise margin
(initial mark-up, net of markdowns) due to lower markdowns in the first
thirty-nine weeks of last year during outsized stimulus-driven demand, along
with an increase of 35 basis points in shrinkage and 15 basis points in freight
costs in the current period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $19.5 million, or 8.5%, to $208.6 million in
the first thirty-nine weeks of 2022 from $228.1 million in the same period of
2021. The decrease was due to: (1) a $16.6 million decrease in incentive-based
compensation as a result of unfavorable operating results in relation to budget
this year (compared to overperformance in the first thirty-nine weeks last year)
and an adjustment to compensation costs for certain performance-based awards
that are no longer probable to vest, as well as higher costs last year related
to the recognition of incremental compensation costs related to the conversion
of nonvested cash-settled units to nonvested shares; (2) $2.9 million of
one-time items consisting of an insurance gain, adjustments to accrued vacation
expense and the capitalization of payroll related to a
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technology upgrade; (3) a decrease of $1.6 million in payroll expenses related
to reduced headcount; and (4) decreases in credit card processing fees and
professional fees. These decreases were partially offset by a $2.8 million
increase in rent related to the sale-leasebacks of our distribution centers,
higher utility costs and the general impact on expenses of opening and operating
more stores. As a percentage of sales, Selling, general and administrative
expenses increased to 35.6% in the first thirty-nine weeks of 2022 from 30.4% in
the first thirty-nine weeks of 2021, primarily due to the deleveraging effect of
lower sales.
Depreciation. Depreciation expense increased $0.6 million, or 3.8%, to $15.8
million in the first thirty-nine weeks of 2022 from $15.2 million in the same
period last year.
Gain on sale-leaseback. In the first quarter of 2022, we completed a
sale-leaseback transaction for our distribution center in Darlington, South
Carolina that resulted in a $34.9 million gain. In the third quarter of 2022, we
completed a sale-leaseback transaction for our distribution center in Roland,
Oklahoma that resulted in a $29.2 million gain.
Income Tax Expense. Income tax expense was $15.6 million in the first
thirty-nine weeks of 2022 compared to $14.4 million in the first thirty-nine
weeks of 2021 due to higher pretax income this year, combined with a slightly
higher rate because the prior year had a favorable tax impact of restricted
stock vestings.
Net Income. Net income was $52.3 million in the first thirty-nine weeks of 2022
compared to $52.4 million in the same period of 2021 due to the factors
discussed above.
Liquidity and Capital Resources
Capital Allocation
Our capital allocation strategy is to prioritize investments in opportunities to
profitably grow our business and maintain current operations, then to return
excess cash to shareholders through our repurchase programs. Our quarter-end
cash and cash equivalents balance was $77.8 million compared to cash and cash
equivalents and short-term investments of $47.5 million at the end of the third
quarter last year. Until required for other purposes, we maintain cash and cash
equivalents in deposit or money market accounts.
Our principal sources of liquidity consist of: (i) cash and cash equivalents on
hand; (ii) short-term trade credit arising from customary payment terms and
trade practices with our vendors; (iii) cash generated from operations on an
ongoing basis; and (iv) a revolving credit facility with a $75.0 million credit
commitment.
In addition, in April 2022, we completed a sale-leaseback transaction of our
distribution center in Darlington, South Carolina, for pretax proceeds of $45.5
million. In September 2022, we completed a sale-leaseback transaction of our
distribution center in Roland, Oklahoma, for pretax proceeds of $35.6 million.
Inventory
Our quarter-end inventory balance was $128.5 million, compared with $126.9
million at the end of the third quarter last year. The increase was primarily
due to reduced inventory levels at the end of the third quarter last year driven
by outsized sales, combined with opportunistic purchases of packaway inventory
at the end of fiscal 2021 and during the first quarter of this year.
Capital Expenditures
Capital expenditures in the first thirty-nine weeks of 2022 were $19.2 million,
a decrease of $1.6 million over the first thirty-nine weeks of 2021 as we
invested in our strategic initiatives, including opening 12 new stores,
remodeling 35 stores and continuing our investments in system upgrades and
distribution center enhancements. We anticipate capital expenditures in fiscal
2022 of approximately $22 million.
Share Repurchases
During the first thirty-nine weeks of 2022 and 2021, we returned $10.0 million
and $107.2 million, respectively, to shareholders through share repurchases. See
Part II of this Report and Note 7 to the Financial Statements for more
information.
Revolving Credit Facility
We have a revolving credit facility that matures in April 2026 and provides
a $75.0 million credit commitment and a $25.0 million uncommitted "accordion"
feature. Additional details of the credit facility are in Note 4 to the
Financial Statements. At the end of the third quarter of 2022, we had
no borrowings under the credit facility and $0.6 million in letters of credit
outstanding.
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Cash Flows
Cash Flows From Operating Activities. Net cash used in operating activities was
$23.1 million in the first thirty-nine weeks of 2022 compared to cash provided
of $54.9 million in the same period of 2021. Sources of cash this year included
net income adjusted for insurance proceeds, non-cash expenses and gain on
sale-leasebacks totaling $48.5 million (compared to $110.8 million in the first
thirty-nine weeks of 2021) and an increase of $6.9 million in income tax
payable.
Significant uses of cash from operating activities in the first thirty-nine
weeks of 2022 included (1) a $44.8 million decrease in accrued expenses and
other long-term liabilities (compared to a $36.3 million decrease in the first
thirty-nine weeks of 2021) due primarily to payments of operating lease
liabilities; (2) a $15.6 million decrease in accounts payable (compared to a
$15.9 million increase last year) due to significantly fewer inventory purchases
in the last two months of the current quarter; (3) a $15.2 million decrease in
accrued compensation (compared to a $6.5 million decrease in the same period
last year) due to payment in the first quarter of incentive compensation accrued
in the preceding fiscal year; and (4) a $5.9 million increase in inventory
(compared to a $23.4 million increase in the same period last year).
Cash Flows From Investing Activities. Cash provided by investing activities was
$63.3 million in the first thirty-nine weeks of 2022 compared to cash used of
$56.1 million in the same period last year. Cash provided in the first
thirty-nine weeks of 2022 consisted of $81.1 million net proceeds from the sale
of buildings in the sale-leaseback transactions, partially offset by $19.2
million for purchases of property and equipment. Cash used for investing
activities in the first thirty-nine weeks of 2021 consisted of $35.5 million
purchases of investment securities and $20.8 million purchases of property and
equipment.
Cash Flows From Financing Activities. Cash used in financing activities was
$12.2 million in the first thirty-nine weeks of 2022 compared to $109.9 million
in the same period last year. Cash used in the first thirty-nine weeks of 2022
consisted of $10.0 million for repurchases of our common stock and $2.2 million
paid to settle withholding taxes on restricted stock that vested. Cash used in
the first thirty-nine weeks of 2021 consisted primarily of repurchases of our
common stock.
Cash Requirements and Commitments
Our principal cash requirements consist of (1) inventory purchases; (2) capital
expenditures to invest in our infrastructure; and (3) operational needs,
including salaries, occupancy costs, taxes and other operating costs. We may
also use cash to fund any share repurchases, make any required debt payments and
satisfy other contractual obligations. Historically, we have met these cash
requirements using cash flow from operations and short-term trade credit. As of
October 29, 2022, our contractual commitments for operating leases totaled
$270.7 million (with $48.3 million due within 12 months). See Note 9 to the
Financial Statements for more information regarding lease commitments.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
There have been no material changes to the Critical Accounting Policies outlined
in the Company's Annual Report on Form 10-K for the fiscal year ended
January 29, 2022.
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