SPORTSMAN'S WAREHOUSE HOLDINGS, INC. The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the "Risk Factors" section in Part I, Item 1A of this 10-K. Also see "Statement Regarding Forward-Looking Statements" preceding Part I.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included in this 10-K.
Overview
We are an outdoor sporting goods retailer focused on meeting the everyday needs
of the seasoned outdoor veteran, the first-time participant and everyone in
between. Our mission is to provide outstanding gear and exceptional serviceto inspire outdoor memories.
Our business was founded in 1986 as a single retail store inMidvale, Utah . Today, we operate 112 stores in 27 states, totaling approximately 4.5 million gross square feet. During fiscal year 2020, we increased our gross square footage by 8.7% through the opening and acquisition of an aggregate of ten
store locations.
Our stores and our e-commerce platform are aggregated into one operating and reportable segment.
Proposed Merger with Great Outdoors Group, Inc.
On December 21, 2020 , Sportsman's Warehouse entered into the Merger Agreement
with Great Outdoors Group and Merger Subsidiary. Pursuant to the terms and
conditions set forth in the Merger Agreement, Merger Subsidiary will be merged
with and into Sportsman's Warehouse , with Sportsman's Warehouse continuing
as
the surviving corporation
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in the Merger and a wholly-owned subsidiary of Great Outdoors Group . Subject to
the terms and conditions set forth in the Merger Agreement, at the Effective
Time, each share of Sportsman's Warehouse common stock, par value $0.01 per
share outstanding immediately prior to the Effective Time (other than such
Shares held by (i) Great Outdoors Group , Merger Subsidiary, or any other
subsidiary of Great Outdoors Group , (ii) Sportsman's Warehouse or its
subsidiaries, as treasury stock or (iii) stockholders of Sportsman's Warehouse
who properly exercised their appraisal rights for such Shares under the Delaware
General Corporation Law) will automatically be cancelled and converted into the
right to receive $18.00 per Share in cash, without interest and less any
applicable withholding taxes.
The Merger Agreement has been unanimously adopted by the board of directors of
Sportsman's Warehouse , and the stockholders of Sportsman's Warehouse approved
the Merger at the special stockholders meeting held on March 23, 2021 .
Completion of the Merger is subject to the satisfaction of several conditions,
including: (i) the expiration or termination of any applicable waiting period
(and any extensions thereof) relating to the Merger under the HSR Act; (ii) the
absence of any order, injunction, or other judgment by any governmental
authority of competent jurisdiction that enjoins or otherwise prohibits the
consummation of the Merger; (iii) the accuracy of each party's representations
and warranties (subject to certain qualifications); (iv) each party's
performance in all material respects of its obligations contained in the Merger
Agreement; and (v) the absence of a material adverse effect on Sportsman's
Warehouse .
Assuming receipt of required clearance pursuant to the HSR Act and timely
satisfaction of other conditions to closing, we currently expect the closing of
the Merger to occur in the second half of calendar year 2021. For more
information on the Merger, see "Part I. Item 1. Business-Proposed Merger with
Great Outdoor Groups, Inc. " and "Part I. Item 1A. Risk Factors-Risks Related to
the Proposed Merger."
COVID-19 Pandemic
Since mid-March through the end of fiscal year 2020, the Company has experienced
a significant increase in sales. A larger than normal portion of those sales has
come from certain product categories, particularly firearms and ammunition. As a
result of the higher proportion of firearms and ammunition sales, our product
mix during fiscal year 2020 has been impacted, which had a negative effecton our gross margin. The increased demand we have experienced sincemid-March 2020 resulted in our net sales increasing by 63.8% to$1,451.8 million during fiscal year 2020 compared to fiscal year 2019. Within our net sales, our Hunting and Shooting category increased by 91.1% to$832.6 million for fiscal year 2020 compared to fiscal year 2019. Further, our same store sales increased 48.3% during fiscal 2020 compared to fiscal 2019, with our hunting and shooting same store sales increasing 70.0%. Gross profit increased to$476.4 million during fiscal year 2020 compared to$296.6 million for the corresponding period of fiscal year 2019. As a percentage of net sales, gross profit decreased to 32.8% for fiscal year 2020 compared to 33.5% for the corresponding period of fiscal year 2019 due in part to an increase in lower margin products, such as firearms and ammunition, in our product mix. As of the filing of this 10-K, all of our 112 stores are open with no significant restrictions or limitations on their operations. In early fiscal year 2020, we were required to temporarily close four of our stores and significantly limit operations at eight other locations as a result of local and state regulations related to the COVID-19 pandemic. We have taken many actions and made numerous policy changes to adjust our operations in an effort to limit the spread of COVID-19, including requiring masks to be worn at our facilities, installing plastic barriers in stores, additional store and distribution center cleanings and implementing social distancing requirements, among others. Despite our efforts, we may be required to further restrict the operations of our stores and our distribution center if we deem this necessary or if recommended or mandated by authorities. In addition, with respect to our supply chain, we continue to see some interruption with various vendors as a result of restrictions or limitations on their operations due to the pandemic. While our increase in sales shows a significant demand for firearms and ammunition during the pandemic that we believe is outpacing supply, we do not believe supply chain disruptions resulting from restrictions and limitations on supplier operations caused by the pandemic are resulting in significantly less supply and we are working closely with our vendors to limit such disruption. While we have experienced increased sales, especially in our hunting and shooting category, since the beginning of the COVID-19 pandemic, we cannot predict the future impact on us of the COVID-19 outbreak. For instance, our financial results and operations would be significantly impacted if we were required or we deemed it appropriate to temporarily suspend or restrict the operations of a significant number of our stores. Further, the impact of the pandemic on the general economy could impact consumer behavior and dampen discretionary spending. The future impact of the COVID-19 pandemic will depend on a number of future developments, which are highly uncertain and 39
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cannot be predicted, including, but not limited to the duration, spread and severity of the COVID-19 outbreak, the resurgence of COVID-19, the effects of the outbreak on our customers and vendors and the remedial actions and stimulus measures adopted by local and federal governments, including the potential temporary closing or restrictions on the operations of our stores. Fiscal Year
We operate using a 52/53 week fiscal year ending on the Saturday closest toJanuary 31 . Fiscal years 2020, 2019 and 2018 ended onJanuary 30, 2021 ,February 1, 2020 , andFebruary 2, 2019 , respectively. Fiscal years 2020, 2019, and 2018 contained 52 weeks of operations. How We Assess the Performance of Our Business In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, same store sales, gross margin, selling, general and administrative expenses, income from operations and adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA").
Our net sales are primarily received from revenue generated in our stores and also include sales generated through our e-commerce platform. When measuring revenue generated from our stores, we review our same store sales as well as the performance of our stores that have not operated for a sufficient amount of time to be included in same store sales. We include net sales from a store in same store sales on the first day of the 13th full fiscal month following the store's opening or acquisition by us. We exclude sales from stores that were closed during the period from our same store sales calculation. We include net sales from e-commerce in our calculation of same store sales. For fiscal years consisting of 53 weeks, we exclude net sales during the 53rd week from our calculation of same store sales. Some of our competitors and other retailers may calculate same store sales differently than we do. As a result, data regarding our same store sales may not be comparable to similar data made available by other retailers.
Measuring the change in year-over-year same store sales allows us to evaluate our retail store base performance. Various factors affect same store sales, including:
? the impact of the COVID-19 pandemic;
? changes or anticipated changes to regulations related to some of the products
we sell;
? consumer preferences, buying trends and overall economic trends;
? our ability to identify and respond effectively to local and regional trends
and customer preferences;
? our ability to provide quality customer service that will increase our
conversion of shoppers into paying customers;
? the success of our omni-channel strategy and our e-commerce platform;
? competition in the regional market of a store;
? atypical weather;
? changes in our product mix; and
? changes in pricing and average ticket sales.
Opening new stores and acquiring store locations is also an important part of
our growth strategy. For fiscal year 2020 we opened or acquired 10 stores and
plan to add 8 to 12 locations in fiscal year 2021. While our target is to grow
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square footage at a rate of 8% to 10% annually, we may deviate from this target
if attractive opportunities are presented to open stores or acquire new store
locations outside of our target growth rate.
We also have been scaling our e-commerce platform and increasing sales through our website, www.sportsmans.com.
We believe the key drivers to increasing our total net sales include:
? increasing our total gross square footage by opening or acquiring new stores;
? continuing to increase and improve same store sales in our existing markets;
increasing customer visits to our stores and improving our conversion rate
? through focused marketing efforts and continually high standards of customer
service;
? increasing the average ticket sale per customer; and
? expanding our omni channel capabilities.
Gross Margin Gross profit is our net sales less cost of goods sold. Gross margin measures our gross profit as a percentage of net sales. Our cost of goods sold primarily consists of merchandise acquisition costs, including freight-in costs, shipping costs, payment term discounts received from the vendor and vendor allowances and rebates associated directly with merchandise and shipping costs related to e-commerce sales. We believe the key drivers to improving our gross margin are increasing the product mix to higher margin products, particularly apparel and footwear, increasing foot traffic within our stores and traffic to our website, improving buying opportunities with our vendor partners and coordinating pricing strategies among our stores and our merchandise group. Our ability to properly manage our inventory can also impact our gross margin. Successful inventory management ensures we have sufficient high margin products in stock at all times to meet customer demand, while overstocking of items could lead to markdowns in order to help a product sell. We believe that the overall growth of our business will allow us to generally maintain or increase our gross margins, because increased merchandise volumes will enable us to maintain our strong relationships with our vendors.
Selling, General and Administrative Expenses
We closely manage our selling, general and administrative expenses. Our selling, general and administrative expenses are comprised of payroll, rent and occupancy, depreciation and amortization, acquisition expenses, pre-opening expenses and other operating expenses, including stock-based compensation expense. Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location. Our selling, general and administrative expenses are primarily influenced by the volume of net sales of our locations, except for our corporate payroll, rent and occupancy and depreciation and amortization, which are generally fixed in nature. We control our selling, general and administrative expenses through a budgeting and reporting process that allows our personnel to adjust our expenses as trends in net sales activity are identified. We expect that our selling, general and administrative expenses will increase in future periods due to our continuing growth. Furthermore, 62 of our current stores were impacted by minimum wage increases in fiscal year 2020 that have and will continue to increase our selling, general and administrative expenses
during fiscal year 2021. Income from Operations Income from operations is gross profit less selling, general and administrative expenses. We use income from operations as an indicator of the productivity of our business and our ability to manage selling, general and administrative
expenses.
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Adjusted EBITDA
We define Adjusted EBITDA as net income plus interest expense, income tax
expense, depreciation and amortization, stock-based compensation expense,
pre-opening expenses, and other gains, losses, and expenses that we do not
believe are indicative of our ongoing expenses. In evaluating our business, we
use Adjusted EBITDA and Adjusted EBITDA margin as an additional measurement tool
for purposes of business decision-making, including evaluating store
performance, developing budgets and managing expenditures. See "Non-GAAP
Measures."
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Results of Operations
The following table summarizes key components of our results of operations as a percentage of net sales for the periods indicated:
Fiscal Year Ended
January 30, February 1, February 2,
2021 2020 2019
Percentage of net sales:
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 67.2 66.5 66.4
Gross profit 32.8 33.5 33.6
Selling, general, and administrative expenses 24.3 29.7 28.4
Income from operations 8.5 3.8 5.2
Gain on bargain purchase (0.2) - -
Interest expense 0.3 0.9 1.6
Income before income taxes 8.4 2.9 3.6
Income tax expense 2.1 0.6 0.8
Net income 6.3% 2.3% 2.8%
Adjusted EBITDA 11.3% 6.7% 8.1%
The following table shows our sales during the periods presented by department:
Fiscal Year Ended
January 30, February 1, February 2,
Department Product Offerings 2021 2020 2019
Camping Backpacks, camp essentials, canoes 12.7% 14.4% 14.2%
and kayaks, coolers, outdoor cooking
equipment, sleeping bags, tents and
tools
Apparel Camouflage, jackets, hats, outerwear, 7.5% 9.3% 8.9%
sportswear, technical gear and work
wear
Fishing Bait, electronics, fishing rods, 9.9% 11.1% 10.6%
flotation items, fly fishing, lines,
lures, reels, tackle and small boats
Footwear Hiking boots, socks, sport sandals, 5.6% 7.5% 7.3%
technical footwear, trail shoes,
casual shoes, waders and work bootsHunting and Shooting Ammunition, archery items, ATV 57.6%
49.1% 48.3%
accessories, blinds and tree stands,
decoys, firearms, reloading equipment
and shooting gear
Optics, Electronics, Gift items, GPS devices, knives, 6.7%
8.6% 10.7%
Accessories, and lighting, optics, two-way radios, and
Other other license revenue, net of revenue
discounts
Total 100.0% 100.0% 100.0%
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Fiscal Year 2020 Compared to Fiscal Year 2019
Net Sales . Net sales increased by$565.4 million , or 63.8%, to$1,451.8 million in fiscal year 2020 compared to$886.4 million in fiscal year 2019. Our net sales increased due to a variety of reasons including; increased outdoor activity participation, demand driven by the change in consumer behavior associated with the COVID-19 pandemic, increased demand due to the presidential election and social unrest, increased demand driven by the exit of competitors and market share gains due to increased participation in outdoor activities, and strong growth in our e-commerce platform. Stores that were opened in fiscal year 2020 and stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed$155.3 million to net sales. Same store sales increased by 48.3% for fiscal year 2020 compared to fiscal year 2019, primarily driven by increases in our hunting and shooting department due to the drivers of increased demand discussed above. Existing stores that were included in same store sales generated$408.6 million in additional net sales in fiscal year 2020 over fiscal year 2019. All of our departments had increases in net sales for fiscal year 2020 compared to fiscal year 2019, led by our hunting and shooting department with an increase in net sales of$397.1 million , or 91.1%. Our camping, fishing, apparel, footwear, and optics, electronics, and accessories departments also had increases in net sales of$57.4 million ,$44.8 million ,$25.7 million ,$14.6 million and$27.7 million , respectively, for fiscal year 2020 compared to fiscal year 2019 due to increased traffic within our stores and higher online sales. Within hunting, our firearm and ammunition categories saw increases of$194.8 million , or 115.5%, and$122.6 million , or 93.7%, respectively, for fiscal year 2020 compared to fiscal year 2019, which increases resulted from the drivers of increased demand discussed above. Each of our departments had increases in same store sales for fiscal year 2020 compared to fiscal year 2019, led by our hunting and shooting department with an increase in same store sales of 70.0%. Our camping, fishing, optics, electronics and accessories, footwear, and apparel departments had increases in same store sales of 34.0%, 30.8%, 28.9%, 18.5%, and 13.0% respectively, for fiscal year 2020 compared to fiscal year 2019. As ofJanuary 30, 2021 , we had 102 stores included in our same store sales calculation. Gross Profit. Gross profit increased by$179.8 million , or 60.6%, to$476.4 million for fiscal year 2020 from$296.6 million for fiscal year 2019. As a percentage of net sales, gross profit decreased to 32.8% for fiscal year 2020 compared to 33.5% for fiscal year 2019 due to the change in product mix as a result of the majority of revenue being generated from lower margin categories such as firearms and ammunition and a channel mix shift to higher e-commerce driven sales causing increased freight costs. The gross margin decline was partially offset by higher product margins, volume incentives, and other adjustments, which positively impacted gross margin. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by$90.5 million , or 34.4%, to$353.7 million for fiscal year 2020 from$263.2 million for fiscal year 2019. This increase was primarily due to an increase in our payroll expense of$51.9 million , which mostly resulted from the opening of 10 new or acquired store locations during fiscal year 2020, minimum wage increases impacting 62 of our stores in fiscal year 2020 and the payment of$6.5 million in hazard pay. We also had increases in other selling, general, and administration expenses, rent, and depreciation of$24.8 million ,$8.2 million , and$3.3 million , respectively, each primarily related to the opening or acquiring of 10 new store locations during fiscal year 2020. The increase in other selling, general and administrative expenses was primarily due to increased credit card fees. Additionally, we incurred increased acquisitions costs of$3.0 million with respect to our merger with theGreat Outdoors Group , which was announced onDecember 21, 2020 . Selling, general and administrative expenses decreased to 24.3% of net sales in fiscal year 2020 compared to 29.7% of net sales in fiscal year 2019, primarily because of the significant increase in net sales we experienced in fiscal year 2020 compared to fiscal year 2019.
Interest Expense. Interest expense decreased by$4.5 million , or 56.2%, to$3.5 million in fiscal year 2020 from$8.0 million for fiscal year 2019. Interest expense decreased primarily as a result of our lower debt balances during fiscal year 2020 compared to fiscal year 2019, including our repayment of our term loan and all outstanding amounts under our revolving credit facility during fiscal year 2020.
Income Taxes. We recorded an income tax expense of$30.1 million for fiscal year 2020 compared to income tax expense of$5.3 million for fiscal year 2019. Our effective tax rate changed from fiscal year 2019 of 20.6% to 24.8% in 2020 primarily due to discrete items recognized in 2019 relating to prior year tax credits and changes in our estimated deferred state tax rate which did not
repeat in 2020.
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Fiscal Year 2019 Compared to Fiscal Year 2018
Net Sales . Net sales increased by$37.3 million , or 4.4%, to$886.4 million in fiscal year 2019 compared to$849.1 million in fiscal year 2018. Net sales increased due to$46.9 million in incremental sales from new stores opened or acquired since the beginning of fiscal 2018, which stores are not yet included in same store sales, partially offset by a$9.6 million decrease in same store sales or a decrease of 0.9%. Our eleven new stores that opened in fiscal 2019 generated net sales of$36.2 million during this period. Existing stores that were not included in same store sales generated$10.7 million in additional net sales in fiscal year 2019 over fiscal year 2018. Our net sales were negatively impacted by the shorter and more competitive holiday selling season, in which we noticed key competitors discounting their firearm and ammunition inventory as they continue to de-emphasize or completely exit these categories. Our same store sales were also adversely impacted by legislative changes inWashington andCalifornia . With respect to same store sales, our fishing department realized an increase in same store sales of 2.3%. Our camping, gift bar, apparel, and hunting departments incurred decreases in same store sales of 1.8%, 1.6%, 1.1%, and 1.0%, respectively. Firearms same store sales decreased by 3.0% and ammunition same store sales decreased by 0.5% during fiscal year 2019 compared to fiscal year 2018. As ofFebruary 1, 2020 , we had 92 stores included in our same store sales calculation.
Gross Profit. Gross profit increased by
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by$22.3 million , or 9.2%, to$263.2 million for fiscal year 2019 from$240.9 million for fiscal year 2018. Selling, general and administrative expenses were 29.7% of net sales in fiscal year 2019 compared to 28.4% of net sales in fiscal year 2018. We incurred additional payroll, rent, depreciation and amortization, pre-opening and other operating expenses of$8.3 million ,$5.8 million ,$1.1 million ,$0.9 million , and$5.6 million , respectively, during fiscal year 2019 compared to fiscal year 2018, which were caused by the opening and acquisition of 11 new stores, our investment in our employees, and the impact of minimum wage increases across 44 of our stores in fiscal 2019 and 58 of our stores in fiscal 2018. Interest Expense. Interest expense decreased by$5.2 million , or 39.4%, to$8.0 million in fiscal year 2019 from$13.2 million for fiscal year 2018. Interest expense decreased primarily as a result of the refinancing of our credit facility inMay 2018 , which resulted in lower interest rates than our prior term loan, combined with a reduction in our total debt balance during the year. Income Taxes. We recorded an income tax expense of$5.3 million for fiscal year 2019 compared to income tax expense of$7.1 million for fiscal year 2018. Our effective tax rate changed from fiscal year 2018 of 22.9% to 20.6% in 2019 primarily due to discrete items recognized in 2019 relating to prior year tax credits and changes in our estimated deferred state tax rate. Seasonality Due to the openings of hunting season across the country and consumer holiday buying patterns, net sales are typically higher in the third and fourth fiscal quarters than in the first and second fiscal quarters. We also incur additional expenses in the third and fourth fiscal quarters due to higher sales volume and increased staffing in our stores. We anticipate our net sales will continue to reflect this seasonal pattern. The timing of our new retail store openings also may have an impact on our quarterly results. First, we incur certain non-recurring expenses related to opening each new retail store, which are expensed as they are incurred. Second, most store expenses generally vary proportionately with net sales, but there is also a fixed cost component, which includes occupancy costs. These fixed costs typically result in lower store profitability during the initial period after a new retail store opens. Due to both of these factors, new retail store openings may result in a temporary decline in operating profit, in dollars and/or as
a
percentage of net sales.
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Weather conditions affect outdoor activities and the demand for related apparel
and equipment. Customers' demand for our products, and, therefore, our net
sales, can be significantly impacted by weather patterns on a local, regional
and national basis.
Quarterly Results of Operations
The following table sets forth unaudited financial and operating data for each
fiscal quarter of fiscal years 2020 and 2019. This quarterly information has
been prepared on a basis consistent with our audited financial statements and
includes all normal recurring adjustments that we consider necessary for a fair
presentation of the information shown. This information should be read in
conjunction with "Part II, Item 8. Financial Statements and Supplementary Data"
of this 10-K. Our quarterly operating results may fluctuate significantly as a
result of the factors described above and a variety of other factors, and
operating results for any fiscal quarter are not necessarily indicative of
results for a full fiscal year.
Fiscal Year 2020 Fiscal Year 2019
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(unaudited)
(in thousands, except per share data, percentages and number of stores)
Net sales $ 438,195 $ 385,748 $ 380,989 $
246,835
142,005 130,582 129,093 74,744 85,027 84,210 73,222 54,173 Income (loss) from
39,375 38,330 45,487 (445) 13,186 15,874 9,762 (5,357) operations Net income (loss)
29,567 30,482 32,461 (1,130) 9,684 10,493 5,498 (5,459) Diluted earnings (loss)
0.66 0.68 0.73 (0.03) 0.22 0.24 0.13 (0.13)
per share
As a percentage of full
year results:
Net sales 30.2% 26.6% 26.2% 17.0% 29.1% 27.4% 23.9% 19.6%
Gross profit 9.8% 9.0% 8.9% 5.1% 9.6% 9.5% 8.3% 6.1%
Income (loss) from 2.7% 2.6% 3.1% 0.0% 1.5% 1.8% 1.1% (0.6)%
operations
Net income (loss) 2.0% 2.1% 2.2% (0.1)% 1.1% 1.2% 0.6% (0.6)%
Operating data:
Number of stores open at 112 112 106 105 103 103 94 92
end of period
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Liquidity and Capital Resources
Our primary capital requirements are for seasonal working capital needs and
capital expenditures related to opening and acquiring new store locations. Our
sources of liquidity to meet these needs have primarily been operating cash
flows, borrowings under our revolving credit facility, and short and long-term
debt financings from banks and financial institutions. We believe that our cash
on hand, cash generated by operating activities and funds available under our
revolving credit facility will be sufficient to finance our operating activities
for at least the next twelve months.
For fiscal year 2020, we incurred approximately $19.2 million in capital
expenditures primarily related to the opening of new stores during the period.
We expect capital expenditures between $42 million and $52 million for fiscal
year 2021 primarily to refurbish many of our existing stores and to open eight
to twelve new stores in fiscal year 2021. We intend to fund these capital
expenditures with our operating cash flows and funds available under our
revolving credit facility. Other investment opportunities, such as potential
strategic acquisitions or store expansion rates in excess of those presently
planned, may require additional funding.
Cash flows from operating, investing and financing activities are shown in the
following table:
Fiscal Year Ended
January 30, February 1,
2021 2020
(in thousands)
Cash flows provided by operating activities
(26,227) (49,064)
Cash used in financing activities (148,749) (28,664) Cash at end of period 65,525 1,685 Net cash provided by operating activities was$238.8 million for fiscal year 2020, compared to$77.9 million for fiscal year 2019. The increase in our cash flows from operating activities was primarily the result of our increase in net income, which was generated from a significant increase in net sales during fiscal year 2020 compared to fiscal year 2019, and decreased inventory and higher accounts payable at the end of fiscal year 2020 compared to fiscal year 2019. Net cash used in investing activities was$26.2 million for fiscal year 2020 compared to$49.1 million for fiscal year 2019. For fiscal year 2020, we incurred capital expenditures with respect to opening new stores and the acquisition of four new store locations. Our cash flows used in investing activities in fiscal year 2019 primarily related to costs incurred in connection with constructing our new corporate office and the acquisition of eight store locations. Net cash used in financing activities was$148.7 million for fiscal year 2020 compared to net cash used in financing activities of$28.7 million for fiscal year 2019. The increase in net cash used in financing in fiscal year 2020 compared to fiscal year 2019 was primarily due to our repayment of our term loan and all outstanding borrowings under our revolving credit facility. Amended and Restated Credit Facility. We had no outstanding indebtedness as ofJanuary 30, 2021 . We repaid in full our prior$40.0 million term loan during fiscal year 2020. We continue to maintain a$250.0 million revolving credit facility. Borrowings under our revolving credit facility are subject to a borrowing base calculation. Our revolving credit facility is governed by an amended and restated credit agreement with a consortium of banks led byWells Fargo Bank, National Association ("Wells Fargo"). The revolving credit facility matures onMay 23, 2023 . As ofJanuary 30, 2021 , we had no outstanding borrowings under our revolving credit facility, with$154.6 million available for borrowing and$2.0 million in stand-by commercial letters of credit. Borrowings under our revolving credit facility bear interest based on either, at our option, the base rate or LIBOR, in each case plus an applicable margin. The base rate is the higher of (1) Wells Fargo's prime rate, (2) the federal funds rate (as defined in the credit agreement) plus 0.50% and (3) the one-month LIBOR (as defined in the credit agreement) plus 1.00%. The applicable margin for loans under the revolving credit facility, which varies based on the average daily availability, ranges from 0.25% to 0.75% per year for base rate loans and from 1.25% to 1.75% per year for LIBOR loans. 47 Table of Contents Interest on base rate loans is payable monthly in arrears and interest on LIBOR loans is payable based on the LIBOR interest period selected by us, which can be 7, 30, 60 or 90 days. All amounts that are not paid when due under our revolving credit facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. Each of the subsidiaries of Holdings is a borrower under the revolving credit facility and Holdings guarantees all obligations under the revolving credit facility. All obligations under the revolving credit facility are secured by a lien on substantially all of Holdings' tangible and intangible assets and the tangible and intangible assets of all of Holdings' subsidiaries, including a pledge of all capital stock of each of the Holdings' subsidiaries. The lien securing the obligations under the revolving credit facility is a first priority lien as to certain liquid assets, including cash, accounts receivable, deposit accounts and inventory. In addition, our credit agreement contains provisions that enable Wells Fargo to require us to maintain a lock-box, or similar arrangement, for the collection of all receipts. We may be required to make mandatory prepayments under the revolving credit facility in the event of a disposition of certain property or assets, in the event of receipt of certain insurance or condemnation proceeds, upon the issuance of certain debt or equity securities, upon the incurrence of certain indebtedness for borrowed money or upon the receipt of certain payments not received in the ordinary course of business. Our revolving credit facility requires us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base. In addition, the credit agreement governing our revolving credit facility contains customary affirmative and negative covenants, including covenants that limit our ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. The credit agreement also contains customary events of default. As ofJanuary 30, 2021 , we were in compliance with all covenants under the revolving credit facility. We repaid our term loan in full during fiscal year 2020. Our term loan was issued at a price of 100% of the$40.0 million aggregate principal amount and had a maturity date ofMay 23, 2023 . The term loan accrued interest at a rate of LIBOR plus 5.75%. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2 to our Consolidated Financial Statements elsewhere in this 10-K. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results.
Revenue Recognition
We adopted Accounting Standard Codification ("ASC") Topic 606 ("Topic 606") in
February 2018 . Topic 606 required changes to how our revenue is recognized and
resulted in updates to our accounting policies. The changes to our accounting
policies and procedures under Topic 606 most significantly impacted the method
that we use to record breakage for gift cards and loyalty reward points
associated with our gift card and loyalty reward programs. Prior to the adoption
of Topic 606, breakage was recorded when it was determined that the gift cards
or loyalty rewards points were not probable to be redeemed, which was after two
years for gift cards and 12 months for loyalty reward points. Under Topic 606,
the breakage calculations for these items now apply assumptions allowable under
Topic 606, which require significant judgments relating to the estimated
breakage for our outstanding gift cards and loyalty reward liabilities.
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Revenue recognition accounting policy
We operate solely as an outdoor retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products inthe United States and online. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Accordingly, we implicitly enter into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since we only extend immaterial credit purchases to certain municipalities.
Substantially all of our revenue is for single performance obligations for the following distinct items:
? Retail store sales ? e-commerce sales
? Gift cards and loyalty reward program
For performance obligations related to retail store and e-commerce sales contracts, we typically transfer control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the products are tendered for delivery to the common carrier.
The transaction price for each contract is the stated price on the product, reduced by any stated discounts at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit point-of-sale contract with the customer, as reflected in the transaction receipt, states the final terms of the sale, including the description, quantity, and price of each product purchased. Payment for our contracts is due in full upon delivery. The customer agrees to a stated price implicit in the contract that does not vary over the contract. The transaction price relative to sales subject to a right of return reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Actual amounts of consideration ultimately received may differ from our estimates. The allowance for sales returns is estimated based upon historical experience and a provision for estimated returns is recorded as a reduction in sales in the relevant period. The estimated merchandise inventory cost related to the sales returns is recorded in prepaid expenses and other. If actual results in the future vary from our estimates, we adjust these estimates, which would affect net sales and earnings in the period such variances become known. Contract liabilities are recognized primarily for gift card sales and our loyalty reward program. Cash received from the sale of gift cards is recorded as a contract liability in accrued expenses, and we recognize revenue upon the customer's redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying a historical breakage rate of 3.5% when no escheat liability to relevant jurisdictions exists. We do not sell or provide gift cards that carry expiration dates. We recognized revenue for the breakage of loyalty reward points as revenue in proportion to the pattern of customer redemption of the points by applying a historical breakage rate of 50% when no escheat liability to relevant jurisdictions exists. We offer promotional financing and credit cards issued by a third-party bank that manages and directly extends credit to our customers. We provide a license to our brand and marketing services, and we facilitate credit applications in our stores and online. The banks are the sole owners of the accounts receivable generated under the program and, accordingly, we do not hold any customer receivables related to these programs and act as an agent in the financing transactions with customers. We are eligible to receive a profit share from certain of our banking partners based on the annual performance of their corresponding portfolio, and we receive monthly payments based on forecasts of full-year performance. This is a form of variable consideration. We record such profit share as revenue over time using the most likely amount method, which reflects the amount earned each month when it is determined that the likelihood of a significant revenue reversal is not probable, which is typically monthly. Profit-share payments occur monthly, shortly after the end of each program
month.
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Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Sales returns
We estimate a reserve for sales returns and record the respective reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience of actual returns, and customer return rights are the key factors used in determining the estimated sales returns.
Inventory Valuation Inventory is measured at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. We estimate a provision for inventory shrinkage based on our historical inventory accuracy rates as determined by periodic cycle counts. The allowance for damaged goods from returns is based upon our historical experience. We also adjust inventory for obsolete or slow moving inventory based on inventory productivity reports and by specific identification of obsolete or slow moving inventory. Had our estimated inventory reserves been lower or higher by 10% as ofJanuary 30, 2021 , our cost of sales would have been correspondingly lower or higher by approximately$0.3 million .
Valuation of Long-Lived Assets
We review our long-lived assets with definite lives for impairment whenever events or changes in circumstances may indicate that the carrying value of an asset may not be recoverable. We use an estimate of the future undiscounted net cash flows of the related asset or group of assets over their remaining useful lives in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the year endedJanuary 30, 2021 the Company recorded an impairment charge of$1.0 million relating to the closure of one store. No impairment charge to long-lived assets was recorded during the fiscal year endedFebruary 1, 2020 . Leases We have operating leases for the Company's retail stores facilities, distribution center, and corporate office. In accordance with ASC 842, which we adopted onFebruary 3, 2019 , we determine if an arrangement is a lease at inception. Operating lease liabilities are calculated using the present value of future payments and recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As our leases generally do not provide an implicit rate, we used an estimated incremental borrowing rate ("IBR") to determine the present value of lease payments. The IBR is determined by using our credit rating to develop a yield curve that approximates our market risk profile. Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 to our Consolidated Financial Statements included elsewhere in this report.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Non-GAAP Measures
In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as
supplemental measures of our operating performance. We define Adjusted EBITDA as
net income plus interest expense, income tax expense,
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depreciation and amortization, stock-based compensation expense, pre-opening expenses, and other gains/losses, and expenses that we do not believe are indicative of our ongoing expenses. Adjusted EBITDA excludes pre-opening expenses because we do not believe these expenses are indicative of the underlying operating performance of our stores. The amount and timing of pre-opening expenses are dependent on, among other things, the size of new stores opened and the number of new stores opened during any given period. Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. We consider Adjusted EBITDA and Adjusted EBITDA margin important supplemental measures of our operating performance and believe they are frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Other companies in our industry, however, may calculate Adjusted EBITDA and Adjusted EBITDA margin differently than we do. Management also uses Adjusted EBITDA and Adjusted EBITDA margin as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. Management believes Adjusted EBITDA and Adjusted EBITDA margin allow investors to evaluate our operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of our core operating performance. Adjusted EBITDA is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP. Some of these limitations include, but are not limited to:
? Adjusted EBITDA does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
? Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
Adjusted EBITDA may be defined differently by other companies, and, therefore,
? it may not be directly comparable to the results of other companies in our
industry;
? Adjusted EBITDA does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments, on our debt; and
? Adjusted EBITDA does not reflect income taxes or the cash requirements for any
tax payments.
A reconciliation of net income to Adjusted EBITDA is set forth below.
Fifty-Two Weeks Ended
January 30, February 1, February 2,
2021 2020 2019
Net income $ 91,380 $ 20,215 $ 23,750
Interest expense 3,506 7,995 13,206
Income tax expense 30,080 5,254 7,063Depreciation and amortization 21,830 19,321
18,250
Stock-based compensation expense (1) 3,302 2,104
1,742
Pre-opening expenses (2) 1,942 2,695
1,838
Hazard pay and CEO retirement (3) 6,526 -
2,647
Acquisition costs (4) 3,710 662 -
Bargain purchase (5) (2,218) - -
Legal accrual (6) 2,125 - -
Store closure (7) 1,039 - -Executive transition costs (8) - 770
-
Adjusted EBITDA $ 163,222 $ 59,016 $ 68,496
Net sales $ 1,451,767 $ 886,401 $ 849,129
Net income margin (9) 6.3% 2.3% 2.8%Adjusted EBITDA margin (9) 11.2% 6.7%
8.1%
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Stock-based compensation expense represents non-cash expenses related to (1) equity instruments granted to employees under our 2019 Performance Incentive
Plan and Employee Stock Purchase Plan.
Pre-opening expenses include expenses incurred in the preparation and opening (2) of a new store location, such as payroll, travel and supplies, but do not
include the cost of the initial inventory or capital expenditures required to
open a location.
Expense relating to bonuses and increased wages paid to front-line and back
office associates due to the COVID-19 pandemic for the fiscal year ended
(3)
in conjunction with the retirement of our former CEO during the first quarter
of fiscal 2018, for the fiscal year ended Ferbuary 2, 2019.
Includes $237 of expenses incurred relating to the acquisition of cash,
inventory, furniture, fixtures, and equipment, and certain other assets
(4) related to
includes
Excess of the fair value over the purchase price of tangible assets acquired
(5) in connection with the
2020. See Note 3 to the financial statements for additional information.
(6) Accrual relating to pending labor litigation in the state of
Costs and impairments recorded relating to the closure of one store during (7) the first quarter of 2020. These costs were recorded as a component of
selling, general, and administration expenses on the condensed consolidated
statement of operations.
(8) Costs incurred for the recruitment and hiring of key executive officers.
(9) We calculate net income margin as net income divided by net sales and we
define adjusted EBITDA margin as adjusted EBITDA divided by net sales
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