SLEEP NUMBER CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to provide a reader of our condensed consolidated
financial statements with a narrative from the perspective of management on our
financial condition, results of operations, liquidity and certain other factors
that may affect our future results. Our MD&A is presented in eight sections:
•Forward-Looking Statements and Risk Factors
•Business Overview
•COVID-19 Pandemic - Impact on our Business
•Results of Operations
•Liquidity and Capital Resources
•Non-GAAP Data Reconciliations
•Off-Balance-Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies
Forward-Looking Statements and Risk Factors
The discussion in this Quarterly Report contains certain forward-looking
statements that relate to future plans, events, financial results or
performance. You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as "may,"
"will," "should," "could," "expect," "anticipate," "believe," "estimate,"
"plan," "project," "predict," "intend," "potential," "continue" or the negative
of these or similar terms. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from our
historical experience and our present expectations or projections. These risks
and uncertainties include, among others:
•Current and future general and industry economic trends and consumer
confidence;
•Risks inherent in outbreaks of pandemics or contagious disease, including the
COVID-19 pandemic;
•The effectiveness of our marketing messages;
•The efficiency of our advertising and promotional efforts;
•Our ability to execute our Total Retail distribution strategy;
•Our ability to achieve and maintain acceptable levels of product and service
quality, and acceptable product return and warranty claims rates;
•Our ability to continue to improve and expand our product line, and consumer
acceptance of our products, product quality, innovation and brand image;
•Industry competition, the emergence of additional competitive products and the
adequacy of our intellectual property rights to protect our products and brand
from competitive or infringing activities;
•Claims that our products, processes, advertising, or trademarks infringe the
intellectual property rights of others;
•Availability of attractive and cost-effective consumer credit options;
•Our manufacturing processes with minimal levels of inventory, which may leave
us vulnerable to shortages in supply;
•Our dependence on significant suppliers and third parties and our ability to
maintain relationships with key suppliers or third-parties, including several
sole-source suppliers or providers of services;
•Rising commodity costs and other inflationary pressures;
•Risks inherent in global sourcing activities, including tariffs, outbreaks of
pandemics or contagious diseases, strikes and the potential for shortages in
supply;
•Risks of disruption in the operation of any of our main manufacturing
facilities or assembly facilities;
•Increasing government regulation;
•Pending or unforeseen litigation and the potential for adverse publicity
associated with litigation;
•The adequacy of our and third-party information systems to meet the evolving
needs of our business and existing and evolving risks and regulatory standards
applicable to data privacy and security;
•The costs and potential disruptions to our business related to upgrading our
information systems;
•The vulnerability of our and third-party information systems to attacks by
hackers or other cyber threats that could compromise the security of our
systems, result in a data breach or disrupt our business; and
•Our ability to attract, retain and motivate qualified management, executive and
other key team members, including qualified retail sales professionals and
managers.
Additional information concerning these, and other risks and uncertainties is
contained under the caption "Risk Factors" below in Part II: Item 1A of this
Quarterly Report on Form 10-Q and under the same caption in our Annual Report on
Form 10-K.
We have no obligation to publicly update or revise any of the forward-looking
statements contained in this Quarterly Report on Form 10-Q.
12
--------------------------------------------------------------------------------Business Overview
Individuality is core toSleep Number . Our purpose driven Company is comprised of over 5,000 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. Our award-winning 360 smart beds provide each sleeper with effortlessly adjustable, individualized comfort for proven-quality sleep. With a purpose of improving the health and wellbeing of society through higher-quality sleep, we have already improved over 13 million lives. Sleep science and data are the foundation of our innovations. Our 360 smart beds benefit from our proprietary SleepIQ technology, which leverages and learns from nearly 11 billion hours' worth of highly-accurate sleep data. This enables our 360 smart beds to provide effortless comfort and sleep health insights for each sleeper, including their daily SleepIQ score.Sleep Number is a leader in sleep innovation. By pairing our data and innovations with meaningful collaborations including world-leading partners in sleep, we are leveraging the potential of our research and technology to advance sleep health and sleep science, develop new products, services and synergistic interactions. Our vertically integrated business model and role as the exclusive designer, manufacturer, marketer, retailer and servicer ofSleep Number beds allows us to offer consumers high-quality, individualized sleep solutions and services.
We generate revenue by marketing our innovations directly to new and existing customers, and selling products through our Stores, Online, Phone and Chat (Total Retail).
We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently.
COVID-19 Pandemic - Impact on our Business
At the onset of the COVID-19 pandemic inmid-March 2020 , government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance. The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong financial performance during the full-year of 2020 and the first six months of 2021. However, the pandemic's future effects on consumer demand and our ongoing financial performance remains uncertain. See Part I: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , for additional discussion on the COVID-19 pandemic and the impact on our business.
Results of Operations
Quarterly and Year-to-Date Results
Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the extent to which our business and our condensed consolidated financial results are impacted will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period. Highlights
Financial highlights for the three months ended
•Net sales for the three months endedJuly 3, 2021 increased 70% to$484 million , compared with$285 million for the COVID-19 affected period in 2020. Net sales for the current quarter increased 36% compared with$356 million for the three months endedJune 29, 2019 . Supply constraints late in the second quarter limited 2021 delivered net sales for the three months endedJuly 3, 2021 . 13 -------------------------------------------------------------------------------- •The 70% net sales increase consisted of a 65% comparable sales increase in Total Retail and sales from 23 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15. •Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-months basis for the period endedJuly 3, 2021 totaled$3.5 million , 25% higher than the same period last year. •Operating income for the three months endedJuly 3, 2021 was$30 million , an increase of$42 million , compared with the$12 million operating loss in the prior-year period. The$42 million increase in operating income was driven by the 70% increase in net sales, a 3.3 ppt. improvement in the gross profit rate and a 7.2 ppt. reduction in our operating expenses rate. Operating income for the current quarter increased 310% compared with$7 million for the same period of 2019. •The 3.3 ppt. gross profit rate improvement primarily resulted from the leveraging impact of the 70% net sales increase and a more favorable sales mix of higher-margin products, partially offset by$13 million of incremental costs from labor and material inflation, and expediting costs. See the Gross profit discussion on page 17 for additional details. •The 7.2 ppt. reduction in our operating expenses rate was mainly due to the leveraging impact of the 70% net sales increase and digitally-led operating efficiencies. During the three months endedJuly 3, 2021 , we continued to prioritize investments in near- and long-term growth drivers, including$16 million of R&D expenses, 93% more than the same period one year ago. •Net income for the three months endedJuly 3, 2021 increased to$22 million , compared with a net loss of$13 million for the same period one year ago. Net income per diluted share was$0.88 , compared with a net loss per diluted share of$0.45 last year. •We achieved a return on invested capital (ROIC) of 33% on a trailing twelve-month basis for the period endedJuly 3, 2021 , compared with 17% for the comparable period one year ago. •Cash provided by operating activities for the six months endedJuly 3, 2021 increased by$74 million , or 86%, to$161 million , compared with$87 million for the same period one year ago. •AtJuly 3, 2021 , we had$382 million of borrowings under our revolving credit facility. Net liquidity available under our revolving credit facility was$214 million atJuly 3, 2021 . •OnApril 21, 2021 , we amended our revolving credit facility to expand the aggregate availability from$450 million to$600 million . We also replenished our outstanding share repurchase authorization to$600 million effective at the beginning of the fiscal second quarter,April 4, 2021 . We remain committed to our capital deployment priorities focused on performance drivers. 14 -------------------------------------------------------------------------------- The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences. Three Months Ended Six Months Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020 Net sales$ 484.3 100.0 %$ 284.9 100.0 %$ 1,052.6 100.0 %$ 757.5 100.0 % Cost of sales 191.5 39.5 % 121.9 42.8 % 403.8 38.4 % 292.4 38.6 % Gross profit 292.9 60.5 % 163.0 57.2 % 648.8 61.6 % 465.1 61.4 % Operating expenses: Sales and marketing 206.0 42.5 % 130.2 45.7 % 429.6 40.8 % 337.9 44.6 % General and administrative 41.2 8.5 % 36.7 12.9 % 83.8 8.0 % 67.8 8.9 % Research and development 15.9 3.3 % 8.3 2.9 % 29.2 2.8 % 18.8 2.5 % Total operating expenses 263.1 54.3 % 175.1 61.5 % 542.6 51.6 % 424.5 56.0 % Operating income (loss) 29.7 6.1 % (12.1) (4.3 %) 106.1 10.1 % 40.7 5.4 % Interest expense, net 1.6 0.3 % 3.9 1.4 % 2.6 0.2 % 6.3 0.8 % Income (loss) before income taxes 28.1 5.8 % (16.1) (5.6 %) 103.6 9.8 % 34.4 4.5 % Income tax expense (benefit) 5.9 1.2 % (3.4) (1.2 %) 14.7 1.4 % 7.9 1.0 % Net income (loss)$ 22.3 4.6 %$ (12.6) (4.4 %)$ 88.9 8.4 %$ 26.5 3.5 % Net income (loss) per share: Basic$ 0.91 $ (0.45) $ 3.57 $ 0.95 Diluted$ 0.88 $ (0.45) $ 3.44 $ 0.93 Weighted-average number of common shares: Basic 24.4 27.9 24.9 27.9 Diluted 25.2 27.9 25.9 28.5
The percentage of our total net sales, by dollar volume, was as follows:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Retail stores 88.1 % 72.2 % 87.0 % 84.6 %
Online, phone, chat and other 11.9 % 27.8 % 13.0 % 15.4 %
Total Company 100.0 % 100.0 % 100.0 % 100.0 %
The components of total net sales change, including comparable net sales changes, were as follows:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Sales change rates:
Retail comparable-store sales (1) 102 % (40 %) 41 % (14 %)
Online, phone and chat (28 %) 209 % 17 % 107 %
Total Retail comparable sales change (1) 65 % (21 %) 37 % (5 %)
Net opened/closed stores and other 5 % 1 % 2 % 2 %
Total Company 70 % (20 %) 39 % (3 %)
___________________________
(1)Stores are included in the comparable-store calculations in the 13th full
month of operations. Stores that have been remodeled or repositioned within the
same shopping center remain in the comparable-store base.
15
--------------------------------------------------------------------------------Other sales metrics were as follows:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Average sales per store (1)(4) ($ in
thousands) $ 3,542 $ 2,830 Average sales per square foot (1)(4)
82 % 63 %
Stores >$3 million in net sales (2)(4) 47 % 25 %
Average revenue per mattress unit (3)
___________________________
(1)Trailing-twelve months Total Retail comparable sales per store open at least
one year.
(2)Trailing-twelve months for stores open at least one year (excludes online,
phone and chat sales).
(3)Represents Total Retail (stores, online, phone and chat) net sales divided by
Total Retail mattress units.
(4)Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 2021 and
2019. The additional week in 2020 was in the fiscal fourth quarter. Total Retail
comparable sales have been adjusted to remove the estimated impact of the
additional week on those metrics.
The number of retail stores operating was as follows:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Beginning of period 607 611 602 611
Opened 26 6 37 14
Closed (12) (19) (18) (27)
End of period 621 598 621 598
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Comparison of Three Months Ended
Net sales Net sales for the three months endedJuly 3, 2021 increased by$199 million , or 70%, to$484 million , compared with$285 million for the same period one year ago, which was impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on average. Net sales for the current quarter increased 36% compared with$356 million for the three months endedJune 29, 2019 . Supply constraints late in the second quarter limited 2021 delivered net sales for the three months endedJuly 3, 2021 . The 70% net sales increase consisted primarily of a 65% comparable sales increase in Total Retail and sales from 23 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15. The$199 million net sales increase compared with the same period one year ago was comprised of the following: (i) a$178 million increase in our Total Retail comparable net sales; and (ii) a$21 million increase from net store openings. Total Retail mattress unit sales increased 59% compared with the prior year. Total Retail average revenue per mattress unit increased by 7% to$5,094 , compared with$4,767 in the prior-year period.
Gross profit
Gross profit of$293 million increased by$130 million , or 80%, compared with$163 million for the same period one year ago. The gross profit rate improved to 60.5% of net sales for the three months endedJuly 3, 2021 , compared with 57.2% for the prior-year comparable period. The current-year gross profit rate improvement of 3.3 ppt. was mainly due to: (i) leverage from the 70% net sales increase, combined with a more favorable sales mix of higher-margin products (3.8 ppt.), partially offset by$13 million of incremental costs from labor and material inflation, and expediting costs. The prior-year's gross profit rate was impacted by COVID-19 related inefficiencies, including the lower sales volumes. Our prior-year's sales mix was negatively impacted by temporary store closures due to the pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.). In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the three months endedJuly 3, 2021 were$206 million , or 42.5% of net sales, compared with$130 million , or 45.7% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of 3.2 ppt. was primarily due to: (i) the leveraging impact of the 70% net sales increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.
General and administrative expenses
General and administrative (G&A) expenses totaled$41 million , or 8.5% of net sales, for the three months endedJuly 3, 2021 , compared with$37 million , or 12.9% of net sales, in the prior-year period. The$4.5 million increase in G&A expenses consisted primarily of: (i) a$2.2 million increase in employee compensation primarily resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); (ii) a$1.8 million increase in professional and consulting expenses; and (iii) a$0.5 million net increase in other miscellaneous expenses. The G&A expenses rate decreased by 4.4 ppt. in the current-year period, compared with the same period one year ago due to leveraging impact of the 70% net sales increase, partially offset by the items discussed above.
Research and development expenses
Research and development (R&D) expenses increased by 93% to$16 million for the three months endedJuly 3, 2021 , compared with$8 million for the same period last year as we continued to prioritize our long-term innovation initiatives. 17 --------------------------------------------------------------------------------
Interest expense, net
Interest expense, net decreased to$1.6 million for the three months endedJuly 3, 2021 , compared with$3.9 million for the same period one year ago. The$2.3 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the three months endedJuly 3, 2021 , compared with the same period one year ago. InMarch 2020 , we fully drew down our credit line and secured a$75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.
Income tax expense
Income tax expense totaled$5.9 million for the three months endedJuly 3, 2021 , compared with a$3.4 million tax benefit last year. The effective income tax rate for the three months endedJuly 3, 2021 decreased to 20.9%, compared with 21.4% for the comparable period last year, reflecting greater stock-based compensation excess tax benefits in the current-year three-month period.
Comparison of Six Months Ended
Net sales
Net sales for the six months endedJuly 3, 2021 increased by$295 million , or 39%, to$1.1 billion , compared with$758 million for the same period one year ago, which were impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on average. Net sales for the current year-to-date period increased 35% compared with$782 million for the same period of 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the six months endedJuly 3, 2021 . The 39% net sales increase consisted of a 37% comparable sales increase in Total Retail in addition to 2 percentage points (ppt.) of sales growth from net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 15. The$295 million net sales increase compared with the same period one year ago was comprised of the following: (i) a$249 million increase in our Total Retail comparable net sales; (ii) a$26 million increase resulting from net store openings; and (iii) a$20 million increase in phone, online, chat and other sales. Total Retail mattress unit sales increased 33%, compared with the prior year. Average revenue per mattress unit in Total Retail increased by 5% to$5,059 , compared with$4,839 in the prior-year period.
Gross profit
Gross profit of$649 million increased by$184 million , or 39%, compared with$465 million for the same period one year ago. The gross profit rate improved to 61.6% of net sales for the six months endedJuly 3, 2021 , compared with 61.4% for the prior-year comparable period. The current-year gross profit rate improvement of 0.2 ppt. was mainly due to: (i) leverage from the 39% net sales increase combined with a more favorable sales mix of higher-margin products (1.1 ppt.), partially offset by$13 million of incremental costs from labor and material inflation, and expediting costs in the second quarter. Our prior-year's sales mix was negatively impacted by temporary store closures due to the pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.). In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the six months endedJuly 3, 2021 were$430 million , or 40.8% of net sales, compared with$338 million , or 44.6% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of 3.8 ppt. was primarily due to: (i) the leveraging impact of the 39% net sales increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.
General and administrative expenses
General and administrative (G&A) expenses totaled$84 million , or 8.0% of net sales, for the six months endedJuly 3, 2021 , compared with$68 million , or 8.9% of net sales, in the prior-year period. The$16 million increase in G&A expenses consisted of: (i) a$9 million year-over-year increase in company-wide performance-based incentive compensation; (ii) a$7 million increase in employee compensation resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); and (iii)$2 million of higher professional and consulting fees; partially offset by (iv) a$2 million reduction in travel expenses and other miscellaneous expenses. The G&A expenses 18 -------------------------------------------------------------------------------- rate decreased by 0.9 ppt. in the current-year period, compared with the same period one year ago due to the leveraging impact of the 39% net sales increase, partially offset by the items discussed above.
Research and development expenses
Research and development (R&D) expenses increased by 56% to$29 million for the six months endedJuly 3, 2021 , compared with$19 million for the same period one year ago. The R&D expense rate for the six months endedJuly 3, 2021 increased to 2.8% of net sales, compared with 2.5% of net sales for the prior year. The spending level increase supports our ongoing consumer innovation strategy.
Interest expense, net
Interest expense, net decreased to$2.6 million for the six months endedJuly 3, 2021 , compared with$6.3 million for the same period one year ago. The$3.7 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the six months endedJuly 3, 2021 , compared with the same period one year ago. InMarch 2020 , we fully drew down our credit line and secured a$75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.
Income tax expense
Income tax expense totaled$15 million for the six months endedJuly 3, 2021 , compared with$8 million last year. The effective income tax rate for the six months endedJuly 3, 2021 decreased to 14.2%, compared with 22.9% for the comparable period last year, reflecting higher stock-based compensation excess tax benefits in the current-year six-month period.
Liquidity and Capital Resources
Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value over time. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our$600 million revolving credit facility (increased from$450 million to$600 million as ofApril 21, 2021 ). The cash generated from ongoing operations and cash available under our revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion and strategic initiatives for the foreseeable future. Changes in cash and cash equivalents during the six months endedJuly 3, 2021 primarily consisted of$161 million of cash provided by operating activities and a$146 million net increase in short-term borrowings, offset by$32 million of cash used to purchase property and equipment, and$281 million of cash used to repurchase our common stock (based on settlement,$264 million under our Board-approved share repurchase program and$17 million in connection with the vesting of employee restricted stock grants).
The following table summarizes our cash flows ($ in millions). Amounts may not add due to rounding differences:
Six Months Ended
July 3, June 27,
2021 2020
Total cash provided by (used in):
Operating activities $ 161.4 $ 87.0
Investing activities (32.0) (22.6)
Financing activities (131.5) (64.3)
Net (decrease) increase in cash and cash equivalents
0.1
Cash provided by operating activities for the six months endedJuly 3, 2021 was$161 million , compared with$87 million for the six months endedJune 27, 2020 . Significant components of the year-over-year change in cash provided by operating activities included: (i) a$62 million increase in net income for the six months endedJuly 3, 2021 , compared with the same period one year ago; (ii) a$38 million change in accounts payable due to higher business activity in the current-year period and timing of vendor payments; (iii) a$30 million fluctuation in customer prepayments due to strong customer demand and temporary supply constraints which extended customer delivery timelines during the current-year period; (iv) a$20 million fluctuation in prepaid expenses and other assets due to both periods being impacted by the timing of rent payments and prior-year's reduction in business activities due to the pandemic; and (v) a$15 million fluctuation in the amount of compensation and benefits accrued and timing of the related payments resulting from year-over-year changes in Company-wide performance-based incentive compensation. 19 -------------------------------------------------------------------------------- Net cash used in investing activities to purchase property and equipment was$32 million for the six months endedJuly 3, 2021 , compared with$22 million for the same period one year ago. The year-over-year increase was due to higher property and equipment purchases for new and remodeled stores. Prior-year property and equipment purchases reflect actions taken to temporarily reduce capital spending based on the economic uncertainties associated with the pandemic. Net cash used in financing activities was$131 million for the six months endedJuly 3, 2021 , compared with$64 million for the same period last year. During the six months endedJuly 3, 2021 , we repurchased$281 million of our stock (based on settlement dates,$264 million under our Board-approved share repurchase program and$17 million in connection with the vesting of employee restricted stock awards), compared with$42 million during the same period one year ago. Based on the uncertainty surrounding the impact of COVID-19, inMarch 2020 we temporarily suspended share repurchases. Short-term borrowings increased by$146 million during the current-year period due to a$138 million increase in borrowings under our revolving credit facility to$382 million and a$8 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings decreased by$26 million during the prior-year period due to a$4 million decrease in borrowings under our credit facility to$227 million and a decrease in book overdrafts which are included in the net change in short-term borrowings. Under our Board-approved share repurchase program, we repurchased 2.1 million shares at a cost of$267 million (based on trade dates, an average of$125.86 per share) during the six months endedJuly 3, 2021 . During the six months endedJune 27, 2020 , we repurchased 0.8 million shares at a cost of$38 million (based on trade dates, an average of$49.42 per share). There is no expiration date governing the period over which we can repurchase shares. Effective as ofApril 4, 2021 , our Board approved an increase in our total remaining share repurchase authorization to$600 million . As ofJuly 3, 2021 , we had$382 million of borrowings under our revolving credit facility. We also had$4 million in outstanding letters of credit. Net liquidity available under our credit facility was$214 million atJuly 3, 2021 . The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). Our leverage ratio as defined in our credit agreement was 2.2x as ofJuly 3, 2021 . Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit agreement is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. As ofJuly 3, 2021 , the weighted-average interest rate on borrowings under the credit facility was 1.6% and we were in compliance with all financial covenants. OnApril 21, 2021 , we amended our revolving credit facility to increase our net aggregate availability from$450 million to$600 million . We maintain the accordion feature which allows us to increase the amount of the credit facility from$600 million to$800 million , subject to lenders' approval. The amended credit facility matures inFebruary 2024 . There were no other significant changes to the credit facility's terms and conditions. We have an agreement withSynchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio consistent with our credit agreement. As ofJuly 3, 2021 , we were in compliance with all financial covenants.
Under the terms of the Synchrony Agreement,
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Index
Non-GAAP Data Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
We define earnings before interest, taxes, depreciation and amortization
(Adjusted EBITDA) as net income plus: income tax expense, interest expense,
depreciation and amortization, stock-based compensation and asset impairments.
Management believes Adjusted EBITDA is a useful indicator of our financial
performance and our ability to generate cash from operating activities. Our
definition of Adjusted EBITDA may not be comparable to similarly titled
definitions used by other companies. The table below reconciles Adjusted EBITDA,
which is a non-GAAP financial measure, to the comparable GAAP financial measure.
Our Adjusted EBITDA calculations are as follows (in thousands):
Fifty-Three Fifty-Two
Three Months Ended Weeks Ended Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net income (loss) $ 22,250 $ (12,630) $ 201,563 $ 78,657
Income tax expense (benefit) 5,864 (3,435) 43,564 22,141
Interest expense 1,607 4,022 5,227 12,131
Depreciation and amortization 15,006 15,253 59,802 60,951
Stock-based compensation 5,968 5,033 27,114 15,853
Asset impairments - 246 142 294
Adjusted EBITDA $ 50,695 $ 8,489 $ 337,412 $ 190,027
Free Cash Flow
Our "free cash flow" data is considered a non-GAAP financial measure and is not
in accordance with, or preferable to, "net cash provided by operating
activities," or GAAP financial data. However, we are providing this information
as we believe it facilitates analysis for investors and financial analysts.
The following table summarizes our free cash flow calculations (in thousands):
Fifty-Three Fifty-Two
Six Months Ended Weeks Ended Weeks Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net cash provided by operating activities
$ 354,080 $ 205,814 Subtract: Purchases of property and equipment 32,012 21,695 47,417 47,038 Free cash flow$ 129,408 $ 65,306 $ 306,663 $ 158,776 21
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Non-GAAP Data Reconciliations (continued) Return onInvested Capital (ROIC) (dollars in thousands) ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures: Fifty-Three Fifty-Two Weeks Ended Weeks Ended July 3, June 27, 2021 2020 Net operating profit after taxes (NOPAT) Operating income$ 250,352 $ 112,831 Add: Rent expense (1) 95,226 90,349 Add: Interest income 2 97
Less: Depreciation on capitalized operating leases (2) (24,577)
(23,331) Less: Income taxes (3) (76,939) (42,735) NOPAT$ 244,064 $ 137,211 Average invested capital Total deficit$ (403,658) $ (163,018) Add: Long-term debt (4) 382,794 227,944 Add: Capitalized operating lease obligations (5) 761,808
722,792
Total invested capital at end of period$ 740,944 $
787,718
Average invested capital (6)$ 733,151 $
797,862
Return on invested capital (ROIC) (7) 33.3 %
17.2 %
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(1)Rent expense is added back to operating income to show the impact of owning versus leasing the related assets. (2)Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets. (3)Reflects annual effective income tax rates, before discrete adjustments, of 24.0% and 23.7% for 2021 and 2020, respectively. (4)Long-term debt includes existing finance lease liabilities. (5)A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency. (6)Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances. (7)ROIC equals NOPAT divided by average invested capital. Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. GAAP - generally accepted accounting principles in theU.S. 22
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Off-Balance-Sheet Arrangements and Contractual Obligations As ofJuly 3, 2021 , we were not involved in any unconsolidated special purpose entity transactions. Other than our$4 million in outstanding letters of credit, we do not have any off-balance-sheet financing. There have been no material changes in our contractual obligations, other than the amendments to our credit agreement, since the end of fiscal 2020. See Note 5, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 for additional information regarding our other contractual obligations.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in 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 2, 2021 . There were no significant changes in our critical accounting policies since the end of fiscal 2020.
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