JOANN INC. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and the related notes thereto and the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 . Some of the information included in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Cautionary Note Regarding Forward-Looking Statements" section in this Quarterly Report on Form 10-Q and the "Summary Risk Factors" and "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year ends on the Saturday closest toJanuary 31 and refers to the year in which the period ends (e.g., fiscal 2023 refers to the year endingJanuary 28, 2023 ). Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal quarters endedJuly 30, 2022 andJuly 31, 2021 were both comprised of 13 weeks. JOANN OverviewJOANN is the nation's category leader in Sewing and one of the fastest growing competitors in the arts and crafts category. We are well-positioned in the marketplace and have multiple competitive advantages, including a broad assortment, established omni-channel platform, multi-faceted digital interface with customers and skilled and knowledgeable team members. As a well-established and trusted brand for over 75 years, we believe we have a deep understanding of our customers, what inspires their creativity and what fuels their incredibly diverse projects. Since 2016, we have embarked on a strategy to transformJOANN , which has helped us pivot from a traditional retailer to a fully-integrated, digitally-connected provider of Creative Products.
Highlights for the Thirteen Weeks Ended
•
Net sales decreased 6.8% compared to the second quarter of fiscal 2022, to
•
Gross profit decreased 19.5% compared to the second quarter of fiscal 2022, to$214.9 million , at a rate to net sales of 46.4%, which was a 730 basis point decrease compared to the same period in the prior fiscal year.
•
Net loss was
•
We declared and paid a quarterly cash dividend of
Effects of COVID-19 on Our Business
The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of the global economy. We continue to follow recommended actions of government authorities and health officials in order to protect the health and well-being of our team members, customers and their families worldwide. As ofJuly 30, 2022 , we operated 843 store locations in 49 states, and all store locations were open and fully operational. In addition, we are still lapping the positive impact of the COVID-19 pandemic on our revenue and business, which was driven by the significant spike in volume related to the demand for materials to create personal protective equipment and support stay-at-home activities. The extent of the impact of the COVID-19 pandemic on our operations will depend upon ongoing developments, such as the recent increase in cases inChina and the shutdown measures being taken by the Chinese government in response, changes in consumer confidence and spending habits, the extent of any recession resulting from the pandemic and the cost and efficiency of our global supply chain, particularly availability of and rates paid for ocean freight and incremental costs incurred due to congestedU.S. ports and availability of domestic trucking. See Part 1, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 for further information regarding the risks associated with the impact of the COVID-19 pandemic on our business. 14 --------------------------------------------------------------------------------
Total Comparable Sales
Total comparable sales are an important measure throughout the retail industry. This measure allows us to evaluate how our store location base and e-commerce business are performing by measuring the change in period-over-period net sales in store locations that have been open for the applicable period. We define total comparable sales as net sales for store locations that have been open for at least 13 months and have not been relocated, expanded or downsized in the last 13 months. In addition, total comparable sales include our e-commerce sales generated via joann.com (online sales for all products) and creativebug.com (online sales of digital videos for crafting projects). There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this Quarterly Report on Form 10-Q regarding our total comparable sales may not be comparable to similar data made available by other retailers.
Non-GAAP Financial Measures
Adjusted EBITDA
We present Adjusted EBITDA, which is not a recognized financial measure under
GAAP, because we believe it assists investors and analysts in comparing our
operating performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core operating
performance. Management believes Adjusted EBITDA is helpful in highlighting
trends in our core operating performance compared to other measures, which can
differ significantly depending on long-term strategic decisions regarding
capital structure, the tax jurisdictions in which companies operate and capital
investments. We also use Adjusted EBITDA in connection with establishing
discretionary annual incentive compensation; supplementing GAAP measures of
performance in the evaluation of the effectiveness of our business strategies;
making budgeting decisions; comparing our performance against that of other peer
companies using similar measures; and because our credit facilities use measures
similar to Adjusted EBITDA to measure our compliance with certain covenants.
We define Adjusted EBITDA as net income (loss) plus income tax provision
(benefit), interest expense, net and depreciation and amortization, as further
adjusted to eliminate the impact of certain non-cash items and other items that
we do not consider indicative of our ongoing operating performance, including
debt related gains and losses, investment remeasurements, sale leaseback gains,
costs related to strategic initiatives, COVID-19 costs, technology development
expenses, stock-based compensation expense, losses on disposal and impairment of
fixed and operating lease assets, sponsor management fees and other one-time
costs. Our adjustments for COVID-19 related costs include, as a separate line
item, excess import freight costs. The excess import freight costs are directly
attributable to surging market demand for shipping capacity as economies begin
to recover from the COVID-19 pandemic, as well as actions taken by government
and industry leaders designed to protect against further spread of the virus,
which have disrupted the efficient operation of domestic and international
supply chains. These COVID-19 related conditions have produced an imbalance of
ocean freight capacity and related demand, as well as port congestion and other
supply chain disruptions that are adding significant cost to our procurement of
imported merchandise. These excess import freight costs include significantly
higher rates paid per container to ocean carriers, as well as fees paid due to
congested ports that we do not normally incur. In a normative operating
environment, we would procure 70% to 80% of our needs for ocean freight under
negotiated contract rates, with the balance procured in a brokered market,
typically at no more than a 10% - 15% premium to our contract rates.
Accordingly, we established a baseline cost ("standard cost") assuming those
contract capacities, established rates and typical premium in the brokered
market for peak volume needs not covered under our contracts. Negotiation of our
current contract rates were finalized in the second quarter of fiscal 2023.
While we have started to see a decline in overall ocean freight rates and a
reduction in other fees associated with port congestion, these savings will
begin to be realized in the back half of fiscal 2023, along with a reduction in
expense recognition heading into fiscal 2024. The amount of excess import
freight costs included as an adjustment to arrive at Adjusted EBITDA is
calculated by subtracting, from our actual import freight costs, our standard
cost for the applicable period. We are identifying these COVID-19 related excess
import freight costs as a separate line item in the table below due to their
magnitude and to distinguish them from other COVID-19 related costs we have
previously excluded in calculating Adjusted EBITDA.
Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
•
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•
Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;
•
Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;
•
Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;
15
--------------------------------------------------------------------------------•
Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;
•
Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and
•
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.
The following is a reconciliation of our net income (loss) to Adjusted EBITDA
for the periods presented:
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 30, July 31, July 30, July 31,
(In millions) 2022 2021 2022 2021
Net income (loss) $ (56.9 ) $ 5.2 $ (92.0 ) $ 20.3
Income tax provision (benefit) (19.8 ) 1.1 (35.4 ) 5.3
Interest expense, net 13.2 14.8 24.4 28.0
Depreciation and amortization (1) 20.2 20.2 40.8 40.8
Debt related loss, net (2) - 3.1 - 3.0
Investment remeasurement (3) - - 1.0 -
Gain on sale leaseback (4) - (24.5 ) - (24.5 )
Strategic initiatives (5) 1.6 0.5 3.7 0.8
Excess import freight costs (6) 27.1 - 56.0 -
Other COVID-19 costs (7) - - - 1.3
Technology development expense (8) 2.9 1.8 5.0 3.6
Stock-based compensation expense 1.2 0.7 2.2 1.3
Loss on disposal and impairment of fixed
and operating lease assets 1.1 - 1.1 -
Sponsor management fee (9) - - - 0.4
Other (10) 0.5 0.6 2.9 0.7
Adjusted EBITDA $ (8.9 ) $ 23.5 $ 9.7 $ 81.0
(1)"Depreciation and amortization" represents depreciation, amortization of intangible assets and amortization of content and capitalized cloud-based system implementation costs.
(2)
"Debt related loss, net" represents net losses and gains associated with debt repurchases and the write off of unamortized fees and original issue discount associated with debt refinancings.
(3)
"Investment remeasurement" represents a loss of$1.0 million as a result of a decrease in the value of our previously held investment in WeaveUp to its fair value.
(4)
"Gain on sale leaseback" represents the gain attributable to the sale leaseback
of our distribution center in
(5)
"Strategic initiatives" represents non-recurring costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives.
(6)
As discussed in greater detail above, "Excess import freight costs" represents excess inbound freight costs (compared to our standard costs based on recently negotiated carrier rates) due to increasing freight rates, in particular the significant transitory impact of constrained ocean freight capacity and incremental domestic transportation costs incurred due to unprecedented congestion inU.S. ports arising from surging market demand for shipping capacity as economies begin to recover from the COVID-19 pandemic.
(7)
"Other COVID-19 costs" represents costs incurred for store location cleaning and capacity management labor, store location cleaning supplies and deep clean services.
(8)
"Technology development expense" represents one-time IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.
(9)
"Sponsor management fee" represents management fees paid to our sponsor, LGP (or
advisory affiliates thereof), in accordance with our management services
agreement. The management fee was discontinued upon the completion of our
initial public offering in
16
--------------------------------------------------------------------------------(10)
"Other" represents the one-time impact of severance, certain legal matters, executive leadership transition and business transition activities.
17
--------------------------------------------------------------------------------Results of Operations
The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes.
Consolidated Income Data:
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 30, July 31, July 30, July 31,
(In millions) 2022 2021 2022 2021
Net sales $ 463.3 $ 496.9 $ 961.3 $ 1,071.3
Gross profit 214.9 266.8 455.6 569.5
SG&A expenses 258.5 247.0 517.6 496.9
Operating profit (loss) (63.5 ) (0.3 ) (102.0 ) 32.1
Net income (loss) (56.9 ) 5.2 (92.0 ) 20.3
Other Operational Data:
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 30, July 31, July 30, July 31,
(In millions) 2022 2021 2022 2021
Total (decrease) in comparable sales vs.
prior year (6.2 )% (29.9 )% (9.8 )% (11.4 )%
Gross margin 46.4 % 53.7 % 47.4 % 53.2 %
SG&A expenses as a % of net sales 55.8 % 49.7 % 53.8 % 46.4 %
Operating profit (loss) as a % of net
sales (13.7 )% (0.1 )% (10.6 )% 3.0 %
Adjusted EBITDA (1) $ (8.9 ) $ 23.5 $ 9.7 $ 81.0
Pre-opening and closing costs excluding
loss on disposal of fixed assets 6.1 2.8 9.8 4.6
Adjusted EBITDA as a % of net sales (1.9 )% 4.7 % 1.0 % 7.6 %
Total store location count at end of
period 843 853 843 853
(1)See "Non-GAAP Financial Measures" for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss).
Comparison of the Thirteen Weeks ended
Net sales were$463.3 million for the thirteen weeks endedJuly 30, 2022 , a decrease of$33.6 million or 6.8% compared to the same period in fiscal 2022. Total comparable sales for the thirteen weeks endedJuly 30, 2022 decreased 6.2% compared with a total comparable sales decrease of 29.9% in the same period in fiscal 2022. The total comparable sales decrease resulted from a decrease in transaction volume, partially offset by an increase in average ticket. On a category basis, declines in sales were more pronounced in our Craft Technology business, which was unusually strong in the second quarter last year driven by new product launches. Gross Profit Gross profit was$214.9 million for the thirteen weeks endedJuly 30, 2022 , a decrease of$51.9 million or 19.5% compared to the same period in fiscal 2022. Gross margin was 46.4% for the thirteen weeks endedJuly 30, 2022 , a decrease of 730 basis points compared to the same period in fiscal 2022. The decrease in gross margin was primarily driven by increased supply chain costs, which resulted primarily from excess import freight. We believe the increase in excess import freight, including ocean freight and related port congestion costs, was transitory in nature. In addition, we experienced increases in domestic freight expense due to rising carrier rates and fuel costs, as well as higher shrink costs related to the start-up of our new multi-purpose distribution center. These negative factors were partially offset by improved pricing efficiency and optimized promotional offers.
Selling, General and Administrative Expenses
SG&A expenses were$258.5 million for the thirteen weeks endedJuly 30, 2022 , an increase of$11.5 million or 4.7% compared to the same period in fiscal 2022. The increase was primarily driven by incremental distribution costs associated with handling of later arriving spring merchandise as well as incremental operating costs for our new multi-purpose distribution center located in West 18 --------------------------------------------------------------------------------
As a percentage of net sales, SG&A expenses for the thirteen weeks endedJuly 30, 2022 were 55.8%, an increase of 610 basis points compared to the same period in fiscal 2022. The increase as a percentage of sales was primarily driven by the factors listed above as well as the 6.8% decrease in net sales in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022.
Depreciation and Amortization
Depreciation and amortization expense was$19.9 million in the thirteen weeks endedJuly 30, 2022 , a decrease of$0.2 million compared to the same period in fiscal 2022. This decrease was driven by lower depreciation after the sale and leaseback of our distribution center inOpelika, Alabama in the second quarter of fiscal 2022, partially offset by investments in our multi-purpose distribution center as well as store location refresh and technology projects in fiscal 2022. Interest Expense Interest expense for the thirteen weeks endedJuly 30, 2022 was$13.2 million , a decrease of$1.6 million compared to the same period in fiscal 2022. The decrease in interest expense was primarily due to lower interest rates as a result of the repayment of the Term Loan due 2024 during the first quarter of fiscal 2022 and our Term Loan Due 2023 refinancing in the second quarter of fiscal 2022. The average debt level in the thirteen weeks endedJuly 30, 2022 was$980.5 million compared to$762.2 million in the thirteen weeks endedJuly 31, 2021 . The weighted average interest rate was 5.00% and 5.44% for the thirteen weeks endedJuly 30, 2022 andJuly 31, 2021 , respectively.
We had
Debt Related Loss, Net
During the second quarter of fiscal 2022, we refinanced our Term Loan due 2023 with a new$675 million term loan. A write-off of the deferred charges and original issue discount, totaling$3.1 million , associated with the original debt issuance was recognized as a debt-related loss.
Gain on Sale Leaseback
We recognized a gain on the sale of fixed assets of$24.5 million during the thirteen weeks endedJuly 31, 2021 . The gain was attributable to the sale and leaseback of our distribution center inOpelika, Alabama .
Income Taxes
The effective income tax rate for the second quarter of fiscal 2023 was 25.8 percent, which was an income tax benefit on a pre-tax book loss, compared to 17.5 percent for the second quarter of fiscal 2022, which was an income tax provision on pre-tax book income. The effective tax rate increased from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 because there was a pre-tax loss in fiscal 2023 and pre-tax income in fiscal 2022. Favorable permanent book-tax differences decrease the effective tax rate when applied to pre-tax income, while favorable permanent book-tax differences increase the effective tax rate when there is a pre-tax loss.
Net Income (Loss)
Net loss was
Adjusted EBITDA
Adjusted EBITDA (as defined above) was a loss of$8.9 million for the thirteen weeks endedJuly 30, 2022 compared to income of$23.5 million for the same period in fiscal 2022. The decrease was driven primarily by the decline in total comparable sales. 19 --------------------------------------------------------------------------------
Comparison of the Twenty-Six Weeks ended
Net sales were$961.3 million for the twenty-six weeks endedJuly 30, 2022 , a decrease of$110.0 million or 10.3% compared to the same period in fiscal 2022. Total comparable sales for the twenty-six weeks endedJuly 30, 2022 decreased 9.8% compared with a total comparable sales decrease of 11.4% in the same period in fiscal 2022. The total comparable sales decrease resulted from a decrease in transaction volume, partially offset by an increase in average ticket. On a category basis, declines in sales were more pronounced in our Craft Technology business, which was unusually strong in the first half of last year driven by new product launches. In addition, higher customer discretionary spending driven by government stimulus payments had a favorable impact on net sales in the first half of fiscal 2022. Gross Profit Gross profit was$455.6 million for the twenty-six weeks endedJuly 30, 2022 , a decrease of$113.9 million or 20.0% compared to the same period in fiscal 2022. Gross margin was 47.4% for the twenty-six weeks endedJuly 30, 2022 , a decrease of 580 basis points compared to the same period in fiscal 2022. The decrease in gross margin was primarily driven by increased supply chain costs, which resulted primarily from excess import freight. We believe the increase in excess import freight, including ocean freight and related port congestion costs, was transitory in nature. In addition, we experienced increases in domestic freight expense due to rising carrier rates and fuel costs, as well as higher shrink costs. These negative factors were partially offset by improved pricing efficiency, optimized promotional offers and lower levels of overall clearance markdowns due to improved inventory quality.
Selling, General and Administrative Expenses
SG&A expenses were$517.6 million for the twenty-six weeks endedJuly 30, 2022 , an increase of$20.7 million or 4.2% compared to the same period in fiscal 2022. This increase was primarily driven by incremental operating costs for our new multi-purpose distribution center located inWest Jefferson, Ohio . We also had increases in spending on strategic initiatives including pre-opening costs associated with our new and remodeled store locations as well as costs incurred to support several emerging businesses, which we are referring to as our "Blue Ocean " initiatives. We have also experienced inflationary pressures in energy, commodity and labor costs that have been partially offset by improved operating efficiencies and lower incentive compensation costs. As a percentage of net sales, SG&A expenses for the twenty-six weeks endedJuly 30, 2022 , were 53.8%, an increase of 740 basis points compared to the same period in fiscal 2022. This increase was primarily driven by the factors listed above as well as the 10.3% decrease in net sales in the first twenty-six weeks of fiscal 2023 compared to the same period in fiscal 2022.
Depreciation and Amortization
Depreciation and amortization expense was$40.0 million in the twenty-six weeks endedJuly 30, 2022 , a decrease of$0.5 million compared to the same period in fiscal 2022. This decrease was driven primarily by lower depreciation after the sale and leaseback of our distribution center inOpelika, Alabama in the second quarter of fiscal 2022, partially offset by investments in our multi-purpose distribution center as well as store location refresh and technology projects in fiscal 2022. Interest Expense Interest expense for the twenty-six weeks endedJuly 30, 2022 was$24.4 million , a decrease of$3.6 million compared to the same period in fiscal 2022. The decrease was due to lower interest rates as a result of the repayment of the Term Loan due 2024 and our term loan refinancing during the first twenty-six weeks of fiscal 2022. The average debt level in the twenty-six weeks endedJuly 30, 2022 was$936.7 million compared to$791.4 million in the twenty-six weeks endedJuly 31, 2021 . The weighted average interest rate was 4.82 percent and 5.58 percent for the twenty-six weeks endedJuly 30, 2022 andJuly 31, 2021 , respectively.
We had
Debt Related Loss, Net
During the second quarter of fiscal 2022, we refinanced our Term Loan due 2023. A write-off of the deferred charges and original issue discount, totaling$3.1 million , associated with the original debt issuance was recognized as a debt related loss. During the first quarter of fiscal 2022, we repurchased$1.9 million in face value of the Term Loan due 2024 at an average of 53 percent of par, resulting in a$1.0 million gain. A write-off of the deferred charges and original issue discount, totaling less than$0.1 million , associated with 20 -------------------------------------------------------------------------------- the original debt issuance was recognized as an offset to this gain. Also offsetting the gain was a$0.9 million write-off of the original issue discount and deferred issuance costs related to the paydown of the Term Loan due 2024. The Term Loan due 2024 was retired at face value.
Gain on Sale Leaseback
We recognized a gain on the sale of fixed assets of$24.5 million during the twenty-six weeks endedJuly 31, 2021 . The gain was attributable to the sale and leaseback of our distribution center inOpelika, Alabama .
Income Taxes
The effective income tax rate for the first twenty-six weeks of fiscal 2023 was 27.8 percent, which was an income tax benefit on a pre-tax book loss, compared to 20.7 percent for the first twenty-six weeks of fiscal 2022, which was an income tax provision on pre-tax book income. The effective tax rate increased from the first half of fiscal 2022 to the first half of fiscal 2023 because there was a pre-tax loss in fiscal 2023 and pre-tax income in fiscal 2022. Favorable permanent book-tax differences decrease the effective tax rate when applied to pre-tax income, while favorable permanent book-tax differences increase the effective tax rate when there is a pre-tax loss.
Net Income (Loss)
Net loss was
Adjusted EBITDA
Adjusted EBITDA (as defined above) decreased 88.0% to$9.7 million or 1.0% of net sales for the twenty-six weeks endedJuly 30, 2022 compared to$81.0 million or 7.6% of net sales for the same period in fiscal 2022. Our decrease in Adjusted EBITDA of$71.3 million and decline of Adjusted EBITDA as a percentage of net sales of 660 basis points was driven primarily by lower total comparable sales partially offset by reductions in our SG&A expenses.
Liquidity and Capital Resources
We have three principal sources of liquidity: cash and cash equivalents on hand, cash from operations and available borrowings under our Second Amended Revolving Credit Facility. We believe that our cash and cash equivalents on hand, cash from operations and availability under our Second Amended Revolving Credit Facility will be sufficient to cover our working capital, capital expenditure and debt service requirement needs as well as dividend payments and share repurchases for the foreseeable future. Subject to market conditions, we may from time to time repurchase our outstanding debt. As ofJuly 30, 2022 , we were in compliance with all covenants under our debt facilities and notes. For the four quarters endedJuly 30, 2022 , our net cash used for operating activities was$107.6 million and our Credit Facility Adjusted EBITDA was$185.2 million . We define "Credit Facility Adjusted EBITDA" as Adjusted EBITDA (as defined above) plus pre-opening and closing costs excluding loss on disposal of fixed assets, which is calculated consistently with our calculation of Adjusted EBITDA under our Second Amended Revolving Credit Facility and Term Loan due 2028 (collectively, the "Credit Facilities"). We reference Credit Facility Adjusted EBITDA because it is a measure that is calculated in accordance with our Credit Facilities and used to determine our compliance with certain ratios in our Credit Facilities, tested each quarter on the basis of the preceding four quarters. For example, we are permitted to prepay debt and make distributions on account of equity up to a certain amount under our Term Loan due 2028 if our ratio of consolidated net debt to Credit Facility Adjusted EBITDA for the prior four quarters as of the quarterly test is not greater than 4.90 to 1.0 and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA for such period is not greater than 3.60 to 1.0. As ofJuly 30, 2022 , our ratio of consolidated net debt to Credit Facility Adjusted EBITDA was 5.5 to 1.0, and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA was 5.5 to 1.0. Other provisions in our Credit Facilities utilize ratios including Credit Facility Adjusted EBITDA for calculating permitted limits for us to incur additional debt and make certain investments. Additionally, our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA is measured once per year following the completion of our annual Consolidated Financial Statements and determines what percentage of our excess cash flow (as defined in our Term Loan due 2028) we are required to apply for the repayment of principal on our Term Loan due 2028, ranging from 50% of excess cash flow for ratios in excess of 2.50x to 0% of excess cash flow for ratios of less than 2.00x. Accordingly, we believe that Credit Facility Adjusted EBITDA is material to an investor's understanding of our financial condition and liquidity. 21 --------------------------------------------------------------------------------
Four Quarters Ended
(In millions) July 30, 2022
Net cash used for operating activities $ (107.6 )
Non-cash operating lease expense (167.6 )
Depreciation and amortization (79.6 )
Deferred income taxes 1.0
Stock-based compensation expense (3.4 )
Amortization of deferred financing costs and original issue
discount (2.0 )
Debt related loss, net (0.3 )
Investment remeasurement (1.0 )
Loss on disposal and impairment of other fixed assets (1.1 )
Change in operating assets and liabilities 306.0
Net loss $ (55.6 )
Income tax benefit (27.7 )
Interest expense, net 47.6
Depreciation and amortization (1) 80.8
Debt related loss, net 0.3
Investment remeasurement 1.0
Strategic initiatives 6.6
Excess import freight costs 102.6
Other COVID-19 costs 0.2
Technology development expense 10.4
Stock-based compensation expense
3.4
Loss on disposal and impairment of fixed and operating lease assets 2.2 Other (0.6 ) Adjusted EBITDA $ 171.2
Pre-opening and closing costs excluding loss on disposal of fixed assets
14.0
Credit Facility Adjusted EBITDA $ 185.2 (1)
Includes amortization of content and capitalized cloud-based system implementation costs.
Our capital requirements are primarily for capital expenditures in connection with new store location openings, store location remodels, investments in information technology, investments in distribution centers and working capital requirements for seasonal inventory build. These requirements fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season during the months of September through December and complete most of our capital spending projects.
The following table provides a summary of our cash provided by (used for)
operating, investing and financing activities for the twenty-six weeks ended
Twenty-Six Weeks Ended
July 30, July 31,
(In millions) 2022 2021
Net cash (used for) operating activities $ (166.1 ) $ (82.1 )
Net cash provided by (used for) investing activities (55.0 ) 19.3
Net cash provided by financing activities 220.1
57.5
Net (decrease) in cash and cash equivalents$ (1.0 ) $
(5.3 )
Net cash used for operating activities was$166.1 million in the twenty-six weeks endedJuly 30, 2022 , compared with$82.1 million of net cash used for operating activities in the twenty-six weeks endedJuly 31, 2021 . The increase in net cash used for operating activities was primarily due to our total comparable sales decline, changes in inventory due to lower balances in fiscal 2022 and higher per unit product costs, most notably, increased import freight costs in fiscal 2023, as well as the timing of vendor payments. These items were partially offset by the repayment of deferred cash payments negotiated with our landlords as a result of the COVID-19 pandemic and payment of fiscal 2021 incentive compensation to salaried store support center and distribution center team members as well as store and district managers in fiscal 2022. 22 --------------------------------------------------------------------------------
Net Cash Provided by (Used for) Investing Activities
Cash used for investing activities in fiscal 2023 and 2022 consisted primarily of capital expenditures, the majority of which were focused on strategic initiatives including: new store location and distribution center openings, store location remodels and refreshes and information technology investments, particularly those supporting our omni-channel platforms and other customer facing systems. We also incurred capital outlays for equipment and facility investments in our distribution centers, store locations and corporate offices. Specifically, investment for each refresh project is tailored to each store location's needs and unit economics. We have four general levels of investment and project scope tailored to what would benefit each store location, with future investment expected to range from$150,000 for the lightest-touch refreshes to$3 million for the relatively few but most-extensive refreshes. Over 80% of our existing store locations are refresh project targets over the next seven to ten years and we expect investments in relation to these future refresh projects to remain consistent with our capital expenditures in connection with completed refresh projects.
Capital expenditures for the twenty-six weeks ended
Twenty-Six Weeks Ended
July 30, July 31,
(In millions) 2022 2021
Store locations $ 41.1 $ 11.2
Distribution centers 3.1 12.2
Information technology 6.0 4.6
Other 0.5 0.6
Total capital expenditures 50.7 28.6
Landlord contributions (10.2 ) (0.4 )
Total capital expenditures, net of landlord contributions
The increase in capital expenditures for store locations was primarily driven by an increase in new store location and refresh projects planned for fiscal 2023 compared to fiscal 2022.
Additionally, we purchased the remaining outstanding stock of WeaveUp for
The cash used for investing activities in fiscal 2022 was more than offset by proceeds of$48.1 million from the sale leaseback of the Opelika Distribution Center in the second quarter of fiscal 2022, which resulted in net cash provided by investing activities for fiscal 2022.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was$220.1 million during the twenty-six weeks endedJuly 30, 2022 compared with$57.5 million of net cash provided by financing activities during the twenty-six weeks endedJuly 31, 2021 . Net cash provided by financing activities for the first twenty-six weeks of fiscal 2023 was the result of net borrowings from the Second Amended Revolving Credit Facility. This inflow of cash was partially offset by cash used to pay down debt and finance lease obligations, as well as to pay dividends totaling$8.9 million during the twenty-six weeks endedJuly 30, 2022 . As ofJuly 30, 2022 , we had the ability to borrow an additional$89.7 million under the Second Amended Revolving Credit Facility subject to the facility's borrowing base calculation. Net cash provided by financing activities during the first twenty-six weeks of fiscal 2022 was the result of net proceeds received from the initial public offering and borrowings from the Second Amended Revolving Credit Facility to repay all of the outstanding borrowings and accrued interest under the Term Loan due 2024 totaling$72.7 million . In addition, we refinanced our Term Loan due 2023 with a$675 million Term Loan due 2028, with excess proceeds used to reduce amounts borrowed under our Revolving Credit Facility and fund working capital needs.
Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions other than letters of credit, which are typical in a retail environment.
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--------------------------------------------------------------------------------Seasonality
Our business exhibits seasonality, which is typical for most retail companies. Our net sales are stronger in the second half of the year than the first half of the year. Net income is highest during the months of September through December when sales volumes provide significant operating leverage. Working capital needed to finance our operations fluctuates during the year and reaches its highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season.
Critical Accounting Policies and Estimates
Accounting policies and estimates are considered critical when they require management to make subjective and complex judgments, estimates and assumptions about matters that have a material impact on the presentation of our financial statements and accompanying notes. For a description of our critical accounting policies and estimates, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 . 24
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