GROCERY OUTLET HOLDING CORP. You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 filed withthe United States ("U.S.")Securities and Exchange Commission (the "SEC") onMarch 2, 2021 ("2020 Annual Report on Form 10-K"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other sections of this report. We operate on a fiscal year that ends on the Saturday closest toDecember 31st each year. References to the second quarter of fiscal 2021 and the second quarter of fiscal 2020 refer to the 13 weeks endedJuly 3, 2021 andJune 27, 2020 , respectively. As used in this report, references to "Grocery Outlet ," "the Company," "the registrant," "we," "us" and "our," refer toGrocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise. Overview We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product offering. As ofJuly 3, 2021 , we had 400 stores inCalifornia ,Washington ,Oregon, Pennsylvania ,Idaho andNevada . Secondary Public Offerings OnFebruary 3, 2020 , certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of$1.1 million which we recognized in selling, general and administrative expenses during the first quarter of fiscal 2020. We received$1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering. OnApril 27, 2020 , certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of$1.0 million which we recognized in selling, general and administrative expenses during the second quarter of fiscal 2020. We received$1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering. OnMay 28, 2020 , the stockholder affiliated with our former private equity sponsor,Hellman and Friedman LLC , distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders. We did not receive any proceeds or incur any material costs related to this distribution. COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. As a result, many states, including states where we have significant operations, declared a state of emergency, closed schools and non-essential businesses and enacted limitations on the number of people allowed to gather at one time in the same space. As of the date of this filing, the states in which we operate have "re-opened" but states and counties maintain differing and evolving requirements related to COVID-19. As we cycle periods of 2020 that included elevated COVID-related demand, we are reporting declines in year-over-year net sales and comparable store sales growth. In addition, consumer behavior continues to be impacted by a variety of factors including, in part, increased consumer mobility and travel, higher food-away-from-home spend, continued consolidation of grocery store visits, elevated grocery e-commerce usage and higher levels of government stimulus, leading to consumers prioritizing convenience over value. There has also been a recent surge of positive COVID-19 cases related to the Delta variant around the country, including states in which we operate, creating additional uncertainty and potential impacts to staffing. As a result of those factors, it is difficult to predict near term consumer behavior and resulting sales trends for our business. 19
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Our IOs have faced and will continue to face staffing challenges including overtime pay, increased payroll attributable to employeeswho are compensated for their time to receive vaccines, and staffing shortages for a variety of reasons that are attributable to the COVID-19 pandemic. In early 2021, many counties inCalifornia andWashington enacted ordinances mandating "hazard pay" for grocery workers. While most of those ordinances have applied to large companies with more than 300 employees and have not applied to smaller businesses operated by a single employer (such as an Independent Operator), these ordinances do create staffing issues as many competitors are subject to those ordinances. In addition, federal and state governments have enacted legislation, such as the American Rescue Plan Act of 2021 andCalifornia's Senate Bill No. 95 to provide additional company paid benefits for employees and former employees impacted by the COVID-19 pandemic. Also, in the event that a Company employee, an IO, or IO employee tests positive for COVID-19, we may have to temporarily close a store, office or distribution center for cleaning and/or quarantine one or more employees which could negatively impact our financial results. We have incurred, and expect to continue to incur, cleaning and safety costs, supplies, and higher personnel expenses. In addition, since the start of the pandemic certain inventory items have at times been, and may in the future again be, in short supply. Additionally, certain fixture upgrades and new refrigeration units now have longer lead times. All of these factors could impact the ability of stores to operate normal hours of operation or have sufficient inventory at all times which may disrupt our business and negatively impact our financial results. Further, planned construction and opening of new stores have been and may continue to be negatively impacted due to increased time periods to get materials such as steel, obtain permits and licenses and set up utilities. Finally, we have incurred, and expect to continue to incur, additional expenses as a result of certain increased costs related to our IOs. For example, we are paying a portion of the costs of personal protective equipment ("PPE") and cleaning supplies for our IOs as well as reducing interest rates on outstanding IO notes. We cannot reasonably estimate the length or severity of this pandemic, but it could have a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2021. See "Item 1A. Risk Factors-Major health epidemics, such as the outbreak caused by COVID-19, and other outbreaks could disrupt and adversely affect our operations, financial condition and business" in our 2020 Annual Report on Form 10-K for additional information. Key Factors and Measures We Use to Evaluate Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A") and operating income. The key operational metrics and non-GAAP measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA and adjusted net income. Second Quarter of Fiscal 2021 Overview Key financial and operating performance results for the second quarter of fiscal 2021 were as follows: •Net sales decreased by 3.5% to$775.5 million from$803.4 million in the second quarter of fiscal 2020; comparable store sales decreased by 10.0% compared to a 16.7% increase in the same period last year. •We opened 11 new stores, ending the second quarter of fiscal 2021 with 400 stores in six states. •Net income decreased 33.0% to$19.6 million , or$0.20 per diluted share, compared to net income of$29.3 million , or$0.30 per diluted share, in the second quarter of fiscal 2020. •Adjusted EBITDA(1) decreased 15.7% to$50.8 million compared to$60.3 million in the second quarter of fiscal 2020. •Adjusted net income(1) decreased 27.1% to$23.3 million , or$0.23 per adjusted diluted share, compared to$32.0 million , or$0.32 per adjusted diluted share, in the second quarter of fiscal 2020. _______________________ (1)Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. The presentations for adjusted EBITDA, adjusted net income and adjusted diluted earnings per share for fiscal 2020 have been recast to reflect these changes. See GAAP to non-GAAP reconciliations in the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information. 20
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Key Components of Results of OperationsNet Sales We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. Discounts provided to customers by us are recognized at the time of sale as a reduction in sales as the products are sold. Discounts that are funded solely by IOs are not recognized as a reduction in sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Sales consist of sales from comparable stores and non-comparable stores, described below under "Comparable Store Sales." Growth of our sales is generally driven by expansion of our store base in existing and new markets as well as comparable store sales growth. Sales are impacted by the spending habits of our customers, product mix and availability, as well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories supports growth in sales by attracting new customers and encouraging repeat visits from our existing customers. The spending habits of our customers are affected by changes in macroeconomic conditions, such as those experienced beginning inMarch 2020 due to the COVID-19 pandemic, and changes in discretionary income. As another example, the recent re-opening of businesses has led to a decrease in our customer count as customers are again traveling and eating out at restaurants. Our customers' discretionary income is primarily impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment. Because we offer a broad selection of merchandise at extreme values, historically we have benefited from periods of economic uncertainty. Cost of Sales, Gross Profit and Gross Margin Cost of sales includes, among other things, merchandise costs, inventory markdowns, inventory losses and transportation, distribution and warehousing costs, including depreciation. Gross profit is equal to our sales less our cost of sales. Gross margin is gross profit as a percentage of our sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can vary. Our gross profit is variable in nature and generally follows changes in sales. While our disciplined buying approach has produced consistent gross margins throughout economic cycles which we believe has helped to mitigate adverse impacts on gross profit and results of operations, rapid changes in consumer demand like we experienced at the beginning of the COVID-19 pandemic could result in unexpected changes to our gross margins. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers. As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers. Selling, General and Administrative Expenses SG&A expenses are comprised of both store-related expenses and corporate expenses. Store-related expenses include commissions paid to IOs, occupancy and shared maintenance costs, the cost of opening new IO stores, and Company-operated store expenses, including payroll, benefits, supplies and utilities. In addition, beginning in fiscal 2020, SG&A included incremental costs associated with COVID-19, such as cleaning and safety costs, costs for PPE and supplies. Corporate expenses include payroll and benefits for corporate and field support, marketing and advertising, insurance and professional services and operator recruiting and training costs. SG&A generally increases as we grow our store base and invest in our corporate infrastructure. SG&A expenses related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as gross profits decline. The remainder of our expenses are primarily fixed in nature. We continue to closely manage our expenses and monitor SG&A as a percentage of sales. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers. We expect that our SG&A will continue to increase in future periods as we continue to grow our sales revenue. Operating Income Operating income is gross profit less SG&A, depreciation and amortization and share-based compensation. Operating income excludes interest expense, net, gain on insurance recoveries, debt extinguishment and modification costs and income tax expense (benefit). We use operating income as an indicator of the productivity of our business and our ability to manage expenses. 21
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Results of Operations
The following tables summarize key components of our results of operations both
in dollars and as a percentage of sales (amounts in thousands, except for
percentages):
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net sales $ 775,535 $ 803,429 $ 1,528,001 $ 1,563,737
Cost of sales 537,737 549,678 1,058,276 1,072,960
Gross profit 237,798 253,751 469,725 490,777
Operating expenses:
Selling, general and administrative 192,955 198,002 381,553 384,933
Depreciation and amortization 16,959 13,215 32,502 26,160
Share-based compensation 4,210 10,175 8,149 30,452
Total operating expenses 214,124 221,392 422,204 441,545
Income from operations 23,674 32,359 47,521 49,232
Other expenses (income):
Interest expense, net 3,922 5,270 7,828 11,104
Gain on insurance recoveries (3,970) - (3,970) -
Debt extinguishment and modification costs - - - 198
Total other expenses (income) (48) 5,270 3,858 11,302
Income before income taxes 23,722 27,089 43,663 37,930
Income tax expense (benefit) 4,082 (2,244) 5,131 (4,045)
Net income and comprehensive income
$ 38,532 $ 41,975 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020 Percentage of sales (1) Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 69.3 % 68.4 % 69.3 % 68.6 % Gross profit 30.7 % 31.6 % 30.7 % 31.4 % Operating expenses: Selling, general and administrative 24.9 % 24.6 % 25.0 % 24.6 % Depreciation and amortization 2.2 % 1.6 % 2.1 % 1.7 % Share-based compensation 0.5 % 1.3 % 0.5 % 1.9 % Total operating expenses 27.6 % 27.6 % 27.6 % 28.2 % Income from operations 3.1 % 4.0 % 3.1 % 3.1 % Other expenses (income): Interest expense, net 0.5 % 0.7 % 0.5 % 0.7 % Gain on insurance recoveries (0.5) % - % (0.3) % - % Debt extinguishment and modification costs - % - % - % - % Total other expenses (income) - % 0.7 % 0.3 % 0.7 % Income before income taxes 3.1 % 3.4 % 2.9 % 2.4 % Income tax expense (benefit) 0.5 % (0.3) % 0.3 % (0.3) % Net income and comprehensive income 2.5 % 3.7 % 2.5 % 2.7 %
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(1)Components may not sum to totals due to rounding.
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Operating Metrics and Non-GAAP Financial Measures Number of New Stores The number of new stores reflects the number of stores opened during a particular reporting period. New stores require an initial capital investment in the store build-outs, fixtures and equipment which we amortize over time as well as cash required for inventory and pre-opening expenses. We expect new store growth to be the primary driver of our sales growth over the long term. We lease substantially all of our store locations. Our initial lease terms on stores are typically ten years with options to renew for two or three successive five-year periods. Comparable Store Sales We use comparable store sales as an operating metric to measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales are impacted by the same factors that impact sales. Comparable store sales consists of sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas. Excluded from our comparable store definition are those stores that have been closed for an extended period as well as any planned store closures or dispositions. When applicable, as was the case with fiscal 2020, we exclude the sales in the non-comparable week of a 53-week year from the same store sales calculation. Opening new stores is a primary component of our growth strategy and, as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy. EBITDA, Adjusted EBITDA and Adjusted Net Income EBITDA, adjusted EBITDA and adjusted net income are key metrics used by management and our board of directors to assess our financial performance. EBITDA, adjusted EBITDA and adjusted net income are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use EBITDA, adjusted EBITDA and adjusted net income to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. In addition, we use EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results. We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business. We define EBITDA as net income before net interest expense, income taxes and depreciation and amortization expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, non-cash rent, asset impairment and gain or loss on disposition, provision for accounts receivable reserves and certain other expenses. Adjusted net income represents net income adjusted for the previously mentioned EBITDA adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs, tax impact of option exercises and vesting of RSUs, and tax effect of total adjustments. EBITDA, adjusted EBITDA and adjusted net income are non-GAAP measures and may not be comparable to similar measures reported by other companies. EBITDA, adjusted EBITDA and adjusted net income 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. We address the limitations of the non-GAAP measures through the use of various GAAP measures. In the future we may incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income. Our presentation of adjusted EBITDA and adjusted net income should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive our non-GAAP measures. Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. We no longer exclude new store pre-opening expenses from our presentation of adjusted EBITDA and adjusted net income. We also updated our definition of adjusted net income to exclude the tax impact of options exercises and vesting of RSUs. Lastly, debt extinguishment and modification costs were reclassified to the other adjustments line item within the presentation of both adjusted EBITDA and adjusted net income. The presentations for adjusted EBITDA and adjusted net income for the 13 and 26 weeks ended endedJune 27, 2020 have been recast to reflect these changes and reconciliations between the revised and previous 23
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definitions of adjusted EBITDA and adjusted net income for each quarter of fiscal years 2020 and 2019 were provided in our Form 8-K filed with theSEC onMarch 2, 2021 . The following table summarizes key operating metrics and non-GAAP components of our results of operations for the periods presented (amounts in thousands, except for percentages and store counts): 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020 Other Financial and Operations Data Number of new stores 11 7 21 17 Number of stores open at end of period 400 362 400 362 Comparable store sales increase (decrease) (1) (10.0) % 16.7 % (9.1) % 17.0 % EBITDA (2)$ 45,311 $ 46,246 $ 85,302 $ 76,491 Adjusted EBITDA (2)$ 50,836 $ 60,307 $ 99,673 $ 116,928 Adjusted net income (2)$ 23,335 $ 31,993
_______________________
(1)Comparable store sales consist of sales from our stores beginning on the
first day of the fourteenth full fiscal month following the store's opening,
which is when we believe comparability is achieved.
(2)See "GAAP to Non-GAAP Reconciliations" section below for a reconciliation
from our net income to EBITDA and adjusted EBITDA, net income to adjusted net
income, and GAAP earnings per share to adjusted earnings per share for the
periods presented. Beginning with the fourth quarter of fiscal 2020, we updated
our definitions of adjusted EBITDA and adjusted net income to simplify our
presentation and enhance comparability between periods.
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GAAP to Non-GAAP Reconciliations
The following tables provide a reconciliation from our GAAP net income to EBITDA
and adjusted EBITDA, GAAP net income to adjusted net income, and our GAAP
earnings per share to adjusted earnings per share for the periods presented
(amounts in thousands, except per share data):
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net income $ 19,640 $ 29,333 $ 38,532 $ 41,975
Interest expense, net 3,922 5,270 7,828 11,104
Income tax expense (benefit) 4,082 (2,244) 5,131 (4,045)
Depreciation and amortization expenses (1) 17,667 13,887 33,811 27,457
EBITDA 45,311 46,246 85,302 76,491
Share-based compensation expenses (2) 4,210 10,175 8,149 30,452
Non-cash rent (3) 3,061 2,759 5,969 4,973
Asset impairment and gain or loss on
disposition (4) 305 (22) 757 953
Provision for accounts receivable reserves
(5) 1,334 (899) 2,289 (51)
Other (6) (3,385) 2,048 (2,793) 4,110
Adjusted EBITDA $ 50,836 $ 60,307 $ 99,673 $ 116,928
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net income $ 19,640 $ 29,333 $ 38,532 $ 41,975
Share-based compensation expenses (2) 4,210 10,175 8,149 30,452
Non-cash rent (3) 3,061 2,759 5,969 4,973
Asset impairment and gain or loss on
disposition (4) 305 (22) 757 953
Provision for accounts receivable reserves
(5) 1,334 (899) 2,289 (51)
Other (6) (3,385) 2,048 (2,793) 4,110
Amortization of purchase accounting assets
and deferred financing costs (7) 2,943 2,944 5,886 5,880
Tax impact of stock option exercises and
vesting of restricted stock units (8) (2,402) (9,584) (6,658) (14,578)
Tax effect of total adjustments (9) (2,371) (4,761) (5,672) (12,968)
Adjusted net income $ 23,335 $ 31,993 $ 46,459 $ 60,746
GAAP earnings per share
Basic $ 0.21 $ 0.32 $ 0.40 $ 0.47
Diluted $ 0.20 $ 0.30 $ 0.39 $ 0.43
Adjusted earnings per share
Basic $ 0.24 $ 0.35 $ 0.49 $ 0.67
Diluted $ 0.23 $ 0.32 $ 0.47 $ 0.62
Weighted average shares outstanding
Basic 95,724 90,800 95,449 90,152
Diluted 99,604 98,618 99,587 97,333
___________________________
(1)Includes depreciation related to our distribution centers which is included
within the cost of sales line item in our condensed consolidated statements of
operations and comprehensive income. See Note 1 to the condensed consolidated
financial statements for additional information about the components of cost of
sales.
(2)Includes non-cash share-based compensation expense and cash dividends paid on
vested share-based awards as a result of dividends declared in connection with
recapitalizations that occurred in fiscal 2018 and 2016. See "Share-based
Compensation
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Expense" in the "Comparison of the 13 and 26 weeks endedJuly 3, 2021 andJune 27, 2020 " section below for additional information. (3)Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments. The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth in recent years. (4)Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs. (5)Represents non-cash changes in reserves related to our IO notes and accounts receivable. See Note 2 to the condensed consolidated financial statements for additional information. (6)Represents other non-recurring, non-cash or non-operational items, such as gain on insurance recoveries, costs related to employer payroll taxes associated with equity awards, personnel-related costs, store closing costs, legal expenses, secondary equity offering transaction costs, debt extinguishment and modification costs, and miscellaneous costs. (7)Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated withHellman & Friedman LLC , which included trademarks, customer lists, and below-market leases. (8)Represents excess tax benefits related to stock option exercises and vesting of RSUs to be recorded in earnings as discrete items in the reporting period in which they occur. (9)Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items. Comparison of the 13 and 26 weeks endedJuly 3, 2021 andJune 27, 2020 (amounts in thousands, except percentages)Net Sales 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Net sales$ 775,535 $ 803,429 $ (27,894) (3.5) %$ 1,528,001 $ 1,563,737 $ (35,736) (2.3) % The decrease in net sales for the 13 and 26 weeks endedJuly 3, 2021 compared to the same periods in fiscal 2020 was primarily attributable to a decrease in comparable store sales, partially offset by non-comparable store sales growth attributable to the net 38 new stores opened over the last 12 months. Comparable store sales decreased 10.0% for the 13 weeks endedJuly 3, 2021 and 9.1% for the 26 weeks endedJuly 3, 2021 compared to the same periods in fiscal 2020. As we cycle periods of 2020 that included elevated COVID-related demand starting inMarch 2020 , the decrease in comparable store sales for the 13 weeks endedJuly 3, 2021 was due to decreases in both average transaction size and customer traffic, while the decrease in comparable stores sales for the 26 weeks endedJuly 3, 2021 was attributable to a decrease customer traffic, partially offset by an increase in average transaction size. Cost of Sales 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Cost of sales
(2.2) %
(1.4) %
% of net sales 69.3 % 68.4 % 69.3 % 68.6 %
The decrease in cost of sales for the 13 and 26 weeks ended July 3, 2021
compared to the same periods in fiscal 2020 was primarily the result of a
decrease in comparable store sales (as discussed above), partially offset by new
store growth.
Costs as a percentage of sales increased as a result of product inflation, fuel
and freight cost increases, and inventory turns more in line with historical
averages. For the 13 and 26 weeks ended June 27, 2020 , costs as a percentage of
sales decreased significantly compared to historical averages due to reduced
product markdowns and throwaways resulting from faster inventory turns driven by
COVID-19 demand.
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Gross Profit and Gross Margin
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Gross profit $ 237,798 $ 253,751 $ (15,953) (6.3) % $ 469,725 $ 490,777 $ (21,052) (4.3) %
Gross margin 30.7 % 31.6 % 30.7 % 31.4 %
The decrease in gross profit for the 13 and 26 weeks ended July 3, 2021 compared
to the same periods in fiscal 2020 was primarily the result of a decrease in
comparable store sales (as discussed above), partially offset by new store
growth. Our gross margin decreased for the 13 and 26 weeks ended July 3, 2021
compared to the same period in fiscal 2020 primarily due to higher cost of sales
as a percentage of sales as discussed previously.
Selling, General and Administrative Expenses ("SG&A")
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
SG&A $ 192,955 $ 198,002 $ (5,047) (2.5) % $ 381,553 $ 384,933 $ (3,380) (0.9) %
% of net sales 24.9 % 24.6 % 25.0 % 24.6 %
The decrease in SG&A for the 13 and 26 weeks ended July 3, 2021 compared to the
same periods in fiscal 2020 was primarily driven by decreases in variable
commission payments to IOs and decreases to management incentive bonus expenses,
partially offset by higher store occupancy and maintenance costs due to a higher
store count and higher personnel expenses as a result of the Company's growth.
As a percentage of sales, SG&A increased slightly for the 13 and 26 weeks ended
July 3, 2021 compared to the same periods in fiscal 2020 due to lower expense
leverage as a result of reduced net sales.
Depreciation and Amortization Expense
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Depreciation and
amortization $ 16,959 $ 13,215 $ 3,744 28.3 % $ 32,502 $ 26,160 $ 6,342 24.2 %
% of net sales 2.2 % 1.6 % 2.1 % 1.7 %
The increase in depreciation and amortization expenses for the 13 and 26 weeks
ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily
driven by new store growth and other capital investments.
Share-based Compensation Expense
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Share-based compensation $ 4,210 $ 10,175 $ (5,965) (58.6) % $ 8,149 $ 30,452 $ (22,303) (73.2) %
% of net sales 0.5 % 1.3 % 0.5 % 1.9 %
The decrease in share-based compensation expenses for the 13 weeks ended July 3,
2021 compared to the same period in fiscal 2020 was primarily driven by $7.6
million in share-based compensation expense related to 1.7 million
performance-based stock options that vested in conjunction with the closing of
our April 2020 secondary offering, partially offset by an increase in expense
related to RSUs and PSUs granted during fiscal 2021 and 2020.
The decrease in share-based compensation expenses for the 26 weeks ended July 3,
2021 compared to the same period in fiscal 2020 was primarily due to $18.5
million in share-based compensation expense we incurred in February 2020 related
to 4.1 million performance-based stock options that vested in connection with
the closing of our February 2020 secondary offering as well as the above noted
$7.6 million in share-based compensation expense for performance-based stock
options recognized in the second quarter of fiscal 2020. This decrease was
partially offset by an increase in expense related to RSUs and PSUs granted
during fiscal 2021 and 2020. See Note 4 to the condensed consolidated financial
statements for additional information.
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Interest Expense, Net
13 Weeks Ended 26 Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Interest expense, net $ 3,922 $ 5,270 $ (1,348) (25.6) %
(29.5) % % of net sales 0.5 % 0.7 % 0.5 % 0.7 % The decrease in net interest expense for the 13 and 26 weeks endedJuly 3, 2021 compared to the same periods in fiscal 2020 was primarily driven by lower interest rates incurred under our First Lien Credit Agreement as a result of decreases in the London Inter-bank Offered Rate. Furthermore, the 13 and 26 weeks endedJune 27, 2020 included interest expense from the$90.0 million borrowed under the revolving credit facility of our First Lien Credit Agreement between March and May of 2020. See Note 3 to the condensed consolidated financial statements for additional information. Gain on Insurance Recoveries 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Gain on insurance recoveries$ (3,970) $ -$ (3,970) N/A$ (3,970) $ -$ (3,970) N/A % of net sales (0.5) % - % (0.3) % - % During the 13 weeks endedJuly 3, 2021 we recorded a$4.0 million gain on insurance recoveries related to the loss of ourParadise, California store in 2018 due to a wildfire. Debt Extinguishment and Modification Costs 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Debt extinguishment and modification costs $ - - $ - - % $ - 198$ (198) (100.0) % % of net sales - % - % - % - % During the 26 weeks endedJune 27, 2020 we wrote off approximately$0.1 million of debt issuance costs and incurred$0.1 million of debt modification costs related to the repricing and amendment of our First Lien Credit Agreement. See Note 3 to the condensed consolidated financial statements for additional information. Income Tax Expense (Benefit) 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Income tax expense (benefit)$ 4,082 $ (2,244) $ 6,326 281.9 %$ 5,131 $ (4,045) $ 9,176 226.8 % % of net sales 0.5 % (0.3) % 0.3 % (0.3) % Effective tax rate 17.2 % (8.3) % 11.8 % (10.7) % During the 13 weeks endedJuly 3, 2021 , we recorded an income tax expense of$4.1 million compared to an income tax benefit of$2.2 million for the 13 weeks endedJune 27, 2020 . This change was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs as compared to the same period in fiscal 2020. Such excess tax benefits totaled$2.4 million for the 13 weeks endedJuly 3, 2021 compared to$9.6 million for the 13 weeks endedJune 27, 2020 . During the 26 weeks endedJuly 3, 2021 , we recorded an income tax expense of$5.1 million compared to an income tax benefit of$4.0 million for the 26 weeks endedJune 27, 2020 . This increase was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs as compared to the same period in fiscal 28
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2020. Such excess tax benefits totaled$6.7 million for the 26 weeks endedJuly 3, 2021 compared to$14.6 million for the 26 weeks endedJune 27, 2020 . Net Income 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Net income$ 19,640 $ 29,333 $ (9,693) (33.0) %$ 38,532 $ 41,975 $ (3,443) (8.2) % % of net sales 2.5 % 3.7 % 2.5 % 2.7 % As a result of the foregoing factors, net income decreased for the 13 and 26 weeks endedJuly 3, 2021 compared to the same periods in fiscal 2020. Adjusted EBITDA 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Adjusted EBITDA$ 50,836 $ 60,307 $ (9,471) (15.7) %$ 99,673 $ 116,928 $ (17,255) (14.8) % The decrease in adjusted EBITDA for the 13 and 26 weeks endedJuly 3, 2021 compared to the same periods in fiscal 2020 was primarily due to a decrease in net sales (as discussed above), which was primarily driven by a decrease in comparable store sales of 10.0% for the 13 weeks endedJuly 3, 2021 and 9.1% for the 26 weeks endedJuly 3, 2021 , partially offset by a decrease to SG&A compared to the same periods in fiscal 2020, each as discussed above. Adjusted Net Income 13 Weeks Ended 26 Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Adjusted net income$ 23,335 $ 31,993 $ (8,658) (27.1) %$ 46,459 $ 60,746 $ (14,287) (23.5) % The decrease in adjusted net income for the 13 and 26 weeks endedJuly 3, 2021 compared to the same periods in fiscal 2020 was primarily due to a decrease in net sales (as discussed above), which was primarily driven by a decrease in comparable store sales of 10.0% for the 13 weeks endedJuly 3, 2021 and 9.1% for the 26 weeks endedJuly 3, 2021 , partially offset by a decrease to SG&A compared to the same periods in fiscal 2020, each as discussed above. 29
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Liquidity and Capital Resources Sources of Liquidity As ofJuly 3, 2021 , we had cash and cash equivalents of$126.6 million , which consisted primarily of cash held in checking and money market accounts with financial institutions. Our liquidity requirements arise primarily from our working capital needs, capital expenditures and debt service requirements. We have funded our working capital and capital expenditures requirements with internally generated cash on hand and through proceeds from the initial public offering of our common stock inJune 2019 . Our current primary sources of liquidity are net cash provided by operating activities and borrowings under our First Lien Credit Agreement (as defined below). In addition, we have a revolving credit facility with$100.0 million in borrowing capacity under our First Lien Credit Agreement. As ofJuly 3, 2021 , we had$3.5 million of outstanding standby letters of credit and$96.5 million of remaining borrowing capacity available under this revolving credit facility. Public Offerings OnFebruary 3, 2020 , certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred offering costs of$1.1 million , which we recognized in SG&A during the first quarter of fiscal 2020. We received$1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering. OnApril 27, 2020 , certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of$1.0 million , which we recognized in SG&A during the second quarter of fiscal 2020. We received$1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering. First Lien Credit Agreement Second Incremental Agreement - OnJanuary 24, 2020 , we entered into a second incremental agreement (the "Second Incremental Agreement") which amended a previous incremental agreement (the "First Incremental Agreement"). The Second Incremental Agreement refinanced a previous replacement term loan under the First Incremental Agreement with a replacement$460.0 million senior secured term loan credit facility (the "Second Replacement Term Loan") with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, and made certain other corresponding technical changes and updates to the previously amended First Lien Credit Agreement. The interest rate on the Second Replacement Term Loan was 2.84% as ofJuly 3, 2021 . The Second Replacement Term Loan matures onOctober 22, 2025 , which is the same maturity date as the prior term loans under the original First Lien Credit Agreement and First Incremental Agreement. Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement, including voluntary prepayment on borrowings without premium or penalty. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement (collectively, the "First Lien Credit Agreement"). Revolving Credit Facility - OnMarch 19, 2020 , we borrowed$90.0 million under the revolving credit facility of our First Lien Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. OnMay 26, 2020 , we repaid the Revolving Credit Facility Loan in full. Liquidity Requirements Our primary working capital requirements are for the purchase of inventory, payroll, rent, issuance of IO notes, other store facilities costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by the timing of inventory fluctuations, new store openings and capital spending. Our capital expenditures are primarily related to new store openings, ongoing store maintenance and improvements, expenditures related to our distribution centers and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems and corporate offices. We expect to fund capital expenditures through cash generated from our operations. 30
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Based on our new store growth plans, we believe our existing cash and cash equivalents position, cash generated from our operations, and borrowings under our revolving credit facility will be adequate to finance our working capital requirements, planned capital expenditures and debt service over the next 12 months. If cash generated from our operations and borrowings under our revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time, in our sole discretion, purchase or retire all or a portion of our existing debt instruments through privately negotiated or open market transactions. Debt Covenant The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement has the ability to restrict us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7:00 to 1:00. As ofJuly 3, 2021 , we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement. 31
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Cash Flows
The following table summarizes our cash flows for the periods presented (amounts
in thousands, except percentages):
26 Weeks Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net cash provided by operating activities
(5.5) %
Net cash used in investing activities
30.8 %
Net cash provided by financing activities
(68.3) %
Net increase in cash and cash equivalents
(58.8) %
Cash Provided by Operating Activities
Net cash provided by operating activities was $85.1 million for the 26 weeks
ended July 3, 2021 compared to $90.1 million for the same period in fiscal 2020.
The decrease in net cash provided by operating activities of $4.9 million for
the 26 weeks ended July 3, 2021 compared to the same period in fiscal 2020 was
primarily the result of lower net sales driven by a decrease in comparable store
sales (as discussed above), partially offset by non-comparable store sales
growth attributable to the net 38 new stores opened over the last 12 months.
Cash Used in Investing Activities
Net cash used in investing activities was $68.2 million for the 26 weeks ended
July 3, 2021 compared to $52.2 million for the same period in fiscal 2020. The
increase in net cash used in investing activities of $16.0 million for the 26
weeks ended July 3, 2021 compared to the same period in fiscal 2020 was
primarily related to capital expenditures including the construction of newly
opened stores and stores under development as well as existing store capital
investments. We had 21 new store openings and two store relocations in the 26
weeks ended July 3, 2021 compared to 17 new store openings and one store
relocation in the same period of fiscal 2020.
Cash Provided by Financing Activities
Net cash provided by financing activities was $4.4 million for the 26 weeks
ended July 3, 2021 compared to $13.8 million net cash provided by financing
activities for the same period in fiscal 2020. The decrease in net cash provided
by financing activities was primarily due to a decrease in proceeds received
from the exercise of stock options.
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Off-Balance Sheet Arrangements As ofJuly 3, 2021 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Contractual Obligations There have been no material changes outside the ordinary course of business to our contractual obligations during the 26 weeks endedJuly 3, 2021 from those disclosed in our 2020 Annual Report on Form 10-K. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and the applicable rules and regulations of theSEC for interim reporting. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes to our critical accounting policies and estimates during the 26 weeks endedJuly 3, 2021 from those disclosed in our 2020 Annual Report on Form 10-K. Recent Accounting Pronouncements Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our operating results are subject to market risk from interest rate fluctuations on our credit facilities, which bear variable interest rates. As ofJuly 3, 2021 , our outstanding credit facilities included a$460.0 million term loan (the "Second Replacement Term Loan"). As ofJuly 3, 2021 , the interest rate on the Second Replacement Term Loan was 2.84%. See Note 3 to the condensed consolidated financial statements for additional information. Based on the outstanding balance and interest rate of our Second Replacement Term Loan as ofJuly 3, 2021 , a hypothetical 10% relative increase or decrease in the effective interest rate would cause an increase or decrease in interest expense of approximately$1.3 million over the next 12 months. We do not currently use derivative financial instruments for speculative or trading purposes. This practice does not preclude our adoption of specific hedging strategies in the future. 33
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