THE CONTAINER STORE GROUP, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, 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" and "Risk Factors" sections of this report 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. For a discussion of the Company's results of operations and liquidity and capital resources for Fiscal 2019, including a year-to-year comparison between Fiscal 2019 and Fiscal 2020, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in Part II of the Company's Annual Report on Form 10-K for Fiscal 2020, filed with theSEC on
June 03, 2021 . Note on Dollar Amounts All dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts, unless otherwise stated. Overview The Container Store® is the original and leading specialty retailer of storage and organization products and solutions inthe United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera® and Laren® closet lines. In fiscal 2021, the Company acquiredCloset Parent Company, Inc. ("Closet Works") which expanded our manufacturing capabilities to include wood-based spaces and enhanced our premium wood-based product offering. OnApril 2, 2022 we added the wood-based closet line PrestonTM closet to The Container Store Custom Closets. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. Our customers crave discovery, inspiration, and solutions that simplify their lives and maximize their spaces within their homes. Our vision is to deepen our relationship with our customers, expand our reach and strengthen our capabilities, all while transforming lives through the power of organization.
Our operations consist of two reportable segments:
center (which includes business sales), as well as our in-home services
business. As of
approximately 25,000 square feet (19,000 selling square feet) in 33 states and
the
customers through our website, responsive mobile site and application, and call
center. Our stores receive substantially all of our products directly from one
? of our two distribution centers. Our first distribution center in
second distribution center is located in
2021, the Company completed the acquisition of Closet Works, a designer,
manufacturer and supplier of wood-based custom home storage and organization
solutions for total cash consideration of
reportable segment. Closet Works, based in
offices, pantries, laundry rooms, murphy beds and built-in wall units.
? AB ("Elfa"), designs and manufactures component-based shelving and drawer
systems and made-to-measure sliding doors. Elfa was
39
Table of Contents
founded in 1948 and is headquartered in Malmö,
drawer systems are customizable for any area of the home, including closets,
kitchens, offices and garages. Elfa operates three manufacturing facilities with
two located in
products in 1978 and acquired Elfa in 1999. Today our TCS segment is the
exclusive distributor of elfa® products in the
on a wholesale basis to various retailers in approximately 30 countries around
the world, with a concentration in the Nordic region ofEurope . How we assess the performance of our business
We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our business is performing are net sales, gross profit, gross margin, selling, general and administrative expenses, pre-opening costs, comparable store sales, and free cash flow. In addition, we also review other important operating metrics including non-GAAP measures such as EBITDA, Adjusted EBITDA, and adjusted net income.
Net sales
Net sales reflect our sales of merchandise plus other services provided, such as installation, shipping, delivery, and organization services, less returns and discounts. Net sales also include wholesale sales by Elfa. Revenue from our TCS segment is recognized upon receipt of the product by our customers or upon completion of the service to our customers. Revenue from our Elfa segment is recognized upon shipment to customers. The retail and wholesale businesses in which we operate are cyclical, and consequently our sales are affected by general economic conditions. Purchases of our products are sensitive to trends in the levels of consumer spending, which are affected by a number of factors such as consumer disposable income, housing market conditions, stock market performance, consumer debt, interest rates, tax rates, health epidemics or pandemics, such as COVID-19, and overall consumer confidence. Our sales are also impacted by changes in promotional cadence and by changes in the depth and breadth of promotions. Our net sales are moderately seasonal. As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our interim results. Prior to fiscal 2021, our business realized a higher portion of net sales, operating income and cash flows from operations in the fourth fiscal quarter. However, in fiscal 2021, sales and profitability did not follow historical patterns due to various factors, including changes in promotional strategy and cadence. For fiscal 2022, we expect that our sales and profitability patterns will be largely consistent with fiscal 2021.
Gross profit and gross margin
Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of net sales is referred to as gross margin. Cost of sales in our TCS segment includes the purchase cost of inventory less vendor rebates, in-bound freight, as well as inventory shrinkage. Direct installation and organization costs, as well as costs incurred to ship or deliver merchandise to customers, are also included in cost of sales in our TCS segment. Elfa segment cost of sales from manufacturing operations includes costs associated with production, primarily material, wages, freight and other variable costs, and applicable manufacturing overhead. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures by other retailers. As a result, data in this report regarding our gross profit and gross margin may not be comparable to similar data made available by other retailers. Our gross profit is variable in nature and generally follows changes in net sales. Our gross margin can be impacted by fluctuations in commodity and freight costs. Our gross margin can also be impacted by changes in the mix of products and services sold. For example, sales from our TCS segment typically provide a higher gross margin than sales to third parties from our Elfa segment. Additionally, sales of products typically provide a higher gross margin than sales of services. Furthermore, sales generated through our website typically have a lower gross margin than sales generated through our stores. Gross margin for our TCS segment is also susceptible to foreign currency risk as certain purchases of elfa® products from our Elfa segment are in Swedish krona, while sales of these products are inU.S. dollars. We mitigate this risk through the use of forward contracts, whereby we hedge purchases of inventory by locking 40 Table of Contents
in foreign currency exchange rates in advance. Similarly, gross margin for our Elfa segment is susceptible to foreign currency risk as certain purchases of raw materials are transacted in currencies other than Swedish krona, which is the functional currency of Elfa.
Selling, general and administrative expenses
Selling, general and administrative expenses include all operating costs not included in cost of sales, stock-based compensation, and pre-opening costs. For our TCS segment, these include payroll and payroll-related expenses, marketing expenses, occupancy expenses (which include operating lease expense, real estate taxes, common area maintenance, utilities, telephone, property insurance, and repairs and maintenance), costs to ship product from the distribution center to our stores, and supplies expenses. We also incur costs for our distribution center and corporate office operations. For our Elfa segment, these include sales and marketing expenses, product development costs, and all expenses related to operations at headquarters. Depreciation and amortization are excluded from both gross profit and selling, general and administrative expenses. Selling, general and administrative expenses include both fixed and variable components and, therefore, are not directly correlated with net sales. The components of our selling, general and administrative expenses may not be comparable to the components of similar measures of other retailers. We expect that our selling, general and administrative expenses will increase in future periods with expected future store growth.
Pre-opening costs
Non-capital expenditures associated with opening new stores, relocating stores, and net costs associated with opening the second distribution center, including lease expenses, marketing expenses, travel and relocation costs, training costs, and certain corporate overhead costs, are expensed as incurred and are included in pre-opening costs in the consolidated statement of operations. We expect that our pre-opening costs will increase in future periods with expected future
store growth. Comparable store sales Due to the significant business disruption from COVID-19 that led to the temporary closure of all of our stores to in-store traffic in the first quarter of fiscal 2020, we did not evaluate comparable store sales as a key metric in fiscal 2020 or fiscal 2021 and focused on net sales comparisons when evaluating the Company's topline performance. We expect to present comparable store sales in fiscal 2022. Comparable store sales includes all net sales from our TCS segment, except for sales from stores open less than sixteen months, stores that have been closed permanently, and stores that have been closed temporarily for more than seven days. A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening. When a store is relocated, we continue to consider sales from that store to be comparable store sales. A store permanently closed is not considered comparable in the fiscal month that it closes. A store temporarily closed for more than seven days is not considered comparable in the fiscal month it is closed. The store then becomes comparable on the first day of the following fiscal month in which it reopens. Comparable store sales allow us to evaluate how our retail store base is performing by measuring the change in period over period net sales in stores that have been open for fifteen months or more. The comparable store sales growth metric is an operating measure intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. Various factors affect comparable store sales, including:
• national and regional economic trends in
• changes in our merchandise mix;
• changes in pricing;
41
Table of Contents
• changes in timing of promotional events or holidays; and
• weather.
Opening new stores is part of our long-term growth strategy. As we continue to pursue our growth strategy, we anticipate that a portion of our net sales will come from stores not included in our comparable store sales calculation. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are key metrics used by management, our Board ofDirectors andLeonard Green and Partners, L.P. ("LGP") to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance, incentive compensation performance evaluations, and to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and the Revolving Credit Facility (defined below) and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash and other items, that we do not consider representative of our ongoing operating performance. For reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, refer to "Non-GAAP Financial Measures."
Adjusted net income and adjusted net income per common share-diluted
We use adjusted net income and adjusted net income per common share-diluted to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and adjusted net income per common share-diluted because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as net income before restructuring charges, charges related to the impact of COVID-19 on business operations, credits pursuant to the CARES Act, severance charges associated with COVID-19, acquisition-related costs, impairment charges related to intangible assets, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred, charges related to the closure ofElfa France operations, and the tax impact of these adjustments and unusual or infrequent tax items. We define adjusted net income per common share-diluted as adjusted net income divided by the diluted weighted average common shares outstanding. For a reconciliation of adjusted net income to the most directly comparable GAAP measure, refer to "Non-GAAP Financial Measures." 42 Table of Contents Free cash flow
The Company presents free cash flow, which the Company defines as net cash provided by operating activities in a period minus payments for property and equipment made in that period, because it believes it is a useful indicator of the Company's overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Adjustment for currency exchange rate fluctuations
Additionally, this Management's Discussion and Analysis of Financial Condition and Results of Operations also refers to the change in Elfa third party net sales after the conversion of Elfa's net sales from Swedish krona toU.S. dollars using the prior year's conversion rate, which is a financial measure not calculated in accordance with GAAP. The Company believes the disclosure of the change in Elfa third party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company's underlying performance. 43 Table of Contents Results of Operations
The following data represents the amounts shown in our audited consolidated statements of operations for the fiscal years endedApril 2, 2022 andApril 3, 2021 expressed in dollars and as a percentage of net sales and certain operating data and non-GAAP financial information. For segment data, see Note 15 to our audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
Fiscal Year Ended
April 2, April 3,
2022 2021
Net sales $ 1,094,119 $ 990,088 Cost of sales (excluding depreciation and amortization) 457,882
419,611
Gross profit 636,237
570,477
Selling, general, and administrative expenses (excluding depreciation and amortization) 471,586
426,765 Stock-based compensation 4,263 7,823 Pre-opening costs 694 1,026 Depreciation and amortization 34,289 34,731 Other expenses - 1,112
(Gain) loss on disposal of assets (49)
16
Income from operations 125,454 99,004
Interest expense, net 12,760 17,268Loss on extinguishment of debt -
893
Income before taxes 112,694
80,843
Provision for income taxes 30,976
22,560
Net income$ 81,718 $
58,283
Net income per common share - basic$ 1.65 $
1.20
Net income per common share - diluted$ 1.62 $
1.17
Weighted-average common shares - basic 49,447,612
48,537,883
Weighted-average common shares - diluted 50,294,118
49,712,637
44
Table of Contents
Fiscal Year Ended
April 2, April 3,
2022 2021
Percentage of net sales:
Net sales 100.0 % 100.0 %
Cost of sales (excluding depreciation and 41.8
amortization) % 42.4 %
Gross profit 58.2 % 57.6 %
Selling, general, and administrative expenses
(excluding depreciation and amortization) 43.1 % 43.1 % Stockbased compensation 0.4 % 0.8 % Preopening costs 0.1 % 0.1 % Depreciation and amortization 3.1 % 3.5 % Other expenses - % 0.1 %
(Gain) loss on disposal of assets (0.0) %
0.0 % Income from operations 11.5 % 10.0 % Interest expense, net 1.2 % 1.7 %
Loss on extinguishment of debt - %
0.1 % Income before taxes 10.3 % 8.2 % Provision for income taxes 2.8 % 2.3 % Net income 7.5 % 5.9 % Operating data:
Number of stores at end of period (1) 94
93 NonGAAP measures (2): Adjusted EBITDA (2)$ 159,009 $ 150,523 Adjusted net income (2)$ 82,854 $ 61,790 Adjusted net income per common share - diluted (2)$ 1.65 $
1.24
In fiscal 2019, the Company operated a total of 93 store locations, of which
19 stores were temporarily closed for at least seven days of the fourth (1) quarter, as a result of COVID-19, and therefore were not considered
comparable. Since the second quarter of fiscal 2020 through the end of fiscal
2021, all 94 stores were open with health and safety protocols and adherence
to local regulations.
We have presented Adjusted EBITDA, adjusted net income, and adjusted net
income per common share-diluted as supplemental measures of financial
performance that are not required by, or presented in accordance with, GAAP.
These non-GAAP measures should not be considered as alternatives to net
income as a measure of financial performance or cash flows from operations as
a measure of liquidity, or any other performance measure derived in
accordance with GAAP and they should not be construed as an inference that
our future results will be unaffected by unusual or non-recurring items.
These non-GAAP measures are key metrics used by management, our Board of
Directors, and LGP to assess our financial performance. We present these
non-GAAP measures because we believe they assist investors in comparing our
performance across reporting periods on a consistent basis by excluding items
that we do not believe are indicative of our core operating performance and
because we believe it is useful for investors to see the measures that
management uses to evaluate the Company. These non-GAAP measures are also
frequently used by analysts, investors and other interested parties to (2) evaluate companies in our industry. In evaluating these non-GAAP measures,
you should be aware that in the future we will incur expenses that are the
same as or similar to some of the adjustments in this presentation. Our
presentation of these non-GAAP measures should not be construed to imply that
our future results will be unaffected by any such adjustments. Management
compensates for these limitations by relying on our GAAP results in addition
to using non-GAAP measures supplementally. Our non-GAAP measures are not
necessarily comparable to other similarly titled captions of other companies
due to different methods of calculation. For more information regarding our
use of EBITDA and Adjusted EBITDA and a reconciliation of EBITDA and Adjusted
EBITDA to the GAAP financial measure of net income, see "How we assess the
performance of our business" above and "Non-GAAP Financial Measures" below.
For more information regarding our use of adjusted net income and adjusted
net income per common share-diluted, and a reconciliation of adjusted net
income and adjusted net income per common share-diluted to the GAAP financial
measures of net income and diluted net income per common share, see "How we
assess the performance of our business" above and "Non-GAAP Financial
Measures" below.
45
Table of Contents
Fiscal 2021 compared to Fiscal 2020
Net sales
The following table summarizes our net sales for fiscal 2021 and fiscal 2020:
April 2, 2022 % total April 3, 2021 % total
TCS net sales $ 1,023,193 93.5 % $ 923,083 93.2 %
Elfa third-party net sales 70,926 6.5 % 67,005 6.8 %
Net sales $ 1,094,119 100.0 % $ 990,088 100.0 %
Net sales in fiscal 2021 increased by
Net sales
Net sales for fiscal 2020 $ 990,088
Incremental net sales increase due to:
TCS net sales (including a decrease of
100,110
Elfa third-party net sales (excluding impact of foreign currency translation)
3,317
Impact of foreign currency translation on Elfa third-party net sales 604 Net sales for fiscal 2021$ 1,094,119 TCS net sales increased$100,110 , or 10.8%, with other product categories up 6.4%, contributing 340 basis points of the increase, and Custom Closets up 16.0%, contributing 740 basis points. Custom Closets includes metal-based and wood-based custom space products and in-home services, as well as closet lifestyle department products sold by the TCS segment. Elfa third-party net sales increased$3,921 , or 5.9%, in fiscal 2021. After converting Elfa's third party net sales from Swedish krona toU.S. dollars using the prior year's conversion rate for both fiscal 2021 and fiscal 2020, Elfa third party net sales increased$3,317 , or 5.0%. As a result of the impact of the COVID-19 pandemic on our Company stores in fiscal 2019 and fiscal 2020 and the Company's policy of excluding extended store closures from its comparable sales calculation, the Company does not believe that comparable store sales is a meaningful metric to present for fiscal 2021, however we do expect to present this metric in fiscal 2022.
Gross profit and gross margin
Gross profit in fiscal 2021 increased by$65,760 or 11.5%, compared to fiscal 2020. The increase in gross profit was primarily the result of increased consolidated net sales combined with increased consolidated gross margin. The following table summarizes gross margin for fiscal 2021 and fiscal 2020 by segment and in total. The segment margins include the impact of intersegment sales from the Elfa segment to the TCS segment: April 2, 2022 April 3, 2021 TCS gross margin 57.6 % 56.1 % Elfa gross margin 31.9 % 40.9 % Total gross margin 58.2 % 57.6 % TCS gross margin increased 150 basis points during fiscal 2021, primarily due to less promotional activity and decreased shipping costs as a result of a lower mix of online sales, partially offset by increased freight and commodity costs in fiscal 2021. Elfa segment gross margin decreased 900 basis points, primarily due to higher direct material costs. On a consolidated basis, gross margin increased 60 basis points, primarily due to the improvement in TCS gross margin during fiscal 2021. 46 Table of Contents
Selling, general and administrative expenses
Selling, general and administrative expenses in fiscal 2021 increased by$44,821 , or 10.5%, compared to fiscal 2020. As a percentage of consolidated net sales, selling, general and administrative expenses remained consistent at 43.1%. The following table summarizes selling, general and administrative expenses as a percentage of consolidated net sales for fiscal 2021 and fiscal 2020 by segment and in total: April 2, 2022 April 3, 2021 % of Net sales % of Net sales TCS selling, general and administrative 40.5 % 40.2 % Elfa selling, general and administrative 2.6 % 2.9 % Total selling, general and administrative 43.1 %
43.1 %
During fiscal 2021, leverage of occupancy costs on higher sales was partially offset by increased compensation and benefit costs. Additionally, fiscal 2020 benefited from fixed cost leverage of approximately 30 basis points associated with$17,734 of incremental sales in the 53rd week.
Stock-based compensation
Stock-based compensation decreased to$4,263 in fiscal 2021 from$7,823 in fiscal 2020. Fiscal 2020 stock-based compensation was higher than fiscal 2021 due to liability accounting for a portion of performance awards that were significantly impacted by increases in our stock price during fiscal 2020 combined with the acceleration of expense for awards made to certain executives under employment agreements whose service periods expired in the fourth quarter of fiscal 2020. Other expenses Other expenses of$1,112 in fiscal 2020, were primarily due to severance costs associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020.
Interest expense and loss on extinguishment of debt
Interest expense decreased by$4,508 , or 26.1%, in fiscal 2021 to$12,760 . The decrease is primarily due to a lower principal balance on the Senior Secured Term Loan Facility (as defined below) combined with lower interest rates and decreased borrowings on the Revolving Credit Facility (as defined below). OnNovember 25, 2020 , the Company entered into a seventh amendment (the "Seventh Amendment") to the Senior Secured Term Loan Facility. The Seventh Amendment amended the Senior Secured Term Loan Facility to, among other things, allow the applicable interest rate margin to remain at 4.75% for LIBOR loans and 3.75% for base rate loans. The Company paid down$47,172 on the Senior Secured Term Loan Facility in conjunction with the Seventh Amendment.
Additionally, as a result of the Seventh Amendment, the Company recorded
Taxes
The provision for income taxes in fiscal 2021 was$30,976 as compared to$22,560 in fiscal 2020. The effective tax rate for fiscal 2021 was 27.5%, as compared to 27.9% in fiscal 2020. The decrease in the effective tax rate is primarily due to the impact of discrete items on higher pre-tax income in fiscal 2021. 47 Table of Contents Non-GAAP Financial Measures Adjusted net income, adjusted net income per diluted share, EBITDA, Adjusted EBITDA and free cash flow are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. These non-GAAP measures should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that the Company's future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management and the Company's board of directors, to assess its financial performance. See "How we assess the performance of our business" above for further information. For a reconciliation of free cash flow to net cash provided by operating activities, see "Liquidity and Capital Resources - Free cash flow (Non-GAAP)" below. A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below: Fiscal Year Ended April 2, April 3, 2022 2021 Net income$ 81,718 $ 58,283 Depreciation and amortization 34,289 34,731 Interest expense, net 12,760 17,268 Income tax provision 30,976 22,560 EBITDA 159,743 132,842 Pre-opening costs (a) 694 1,026 Non-cash lease expense (b) (7,115) 4,147 Stock-based compensation (c) 4,263 7,823 Management transition costs (d) 473 1,200 Loss on extinguishment of debt (e) - 893 Foreign exchange (gains) losses (f) (14) 200 Employee retention credit (g) - (1,028) Acquisition-related costs (h) 745 - COVID-19 costs (i) 203 2,266 COVID-19 severance and other costs (j) 17 1,154 Adjusted EBITDA$ 159,009 $ 150,523
Non-capital expenditures associated with opening new stores, relocating
stores, and net costs associated with opening the second distribution center, (a) including marketing expenses, travel and relocation costs, and training
costs. We adjust for these costs to facilitate comparisons of our performance
from period to period.
Reflects the extent to which our annual GAAP operating lease expense has been
above or below our cash operating lease payments. The amount varies depending
on the average age of our lease portfolio (weighted for size), as our GAAP
operating lease expense on younger leases typically exceeds our cash (b) operating lease payments, while our GAAP operating lease expense on older
leases is typically less than our cash operating lease payments. Non-cash
lease expense increased in fiscal 2020 due to renegotiated terms with
landlords due to COVID-19 that resulted in deferral of
cash lease payments, which was repaid as of
Non-cash charges related to stock-based compensation programs, which vary (c) from period to period depending on volume and vesting timing of awards. We
adjust for these charges to facilitate comparisons from period to period.
Costs related to the transition of key executives including signing bonus, (d) severance and relocation expenses recorded as selling, general and
administrative expenses, which we do not consider in our evaluation of
ongoing performance.
48
Table of Contents
Loss recorded as a result of the amendments made to the Senior Secured Term
(e) Loan Facility in
our ongoing operations.
(f) Realized foreign exchange transactional gains/losses our management does not
consider in our evaluation of our ongoing operations.
Employee retention credit related to the CARES Act recorded in the third (g) quarter of fiscal 2020 as selling, general and administrative expense, which
we do not consider in our evaluation of ongoing performance.
Includes costs incurred in fiscal 2021 associated with the acquisition of
(h) Closet Works on
general and administrative expenses, which we do not consider in our
evaluation of ongoing performance.
Includes incremental costs attributable to the COVID-19 pandemic, whichconsist of sanitization costs in fiscal 2021 and in fiscal 2020, and hazard (i) pay for distribution center employees in the first quarter of fiscal 2020,
all of which are recorded as selling, general and administrative expenses,
which we do not consider in our evaluation of ongoing performance.
Severance and other costs include amounts our management does not consider in
our evaluation of our ongoing operations. The fiscal 2020 amounts include (j) costs primarily incurred in the first and second quarters of fiscal 2020
associated with the reduction in workforce as a result of the COVID-19
pandemic and the related temporary store closures in fiscal 2020.
49
Table of Contents
A reconciliation of the GAAP financial measures of net income and net income per
common share-diluted to the non-GAAP financial measures of adjusted net income
and adjusted net income per common share-diluted is set forth below:
Fiscal Year Ended
April 2, April 3,
2022 2021
Numerator:
Net income $ 81,718 $ 58,283 Management transition costs (a) 473
1,200
Loss on extinguishment of debt (b) -
893
Employee retention credit (c) -
(1,028)
Acquisition-related costs (d) 745 - COVID-19 costs (e) 203
2,266
COVID-19 severance and other costs (f) 17
1,111
Taxes (g) (302) (935)
Adjusted net income $ 82,854 $ 61,790
Denominator:Weighted-average common shares outstanding - diluted 50,294,118
49,712,637
Net income per common share - diluted$ 1.62 $ 1.17 Adjusted net income per common share - diluted$ 1.65
Costs related to the transition of key executives including signing bonus, (a) severance, and relocation costs recorded as selling, general and
administrative expenses, which we do not consider in our evaluation of
ongoing performance.
Loss recorded as a result of the amendments made to the Senior Secured Term
(b) Loan Facility in
our ongoing operations.
Employee retention credit related to the CARES Act recorded in the third (c) quarter of fiscal 2020 as selling, general and administrative expense, which
we do not consider in our evaluation of ongoing performance.
Includes costs incurred in fiscal 2021 associated with the acquisition of
(d) Closet Works on
general and administrative expenses, which we do not consider in our
evaluation of ongoing performance.
Includes incremental costs attributable to the COVID-19 pandemic, whichprimarily consist of sanitization costs in the first quarter of fiscal 2021 (e) and fiscal 2020, and hazard pay for distribution center employees in the
first quarter of fiscal 2020, all of which are recorded as selling, general
and administrative expenses, which we do not consider in our evaluation of
ongoing performance.
Includes costs primarily incurred in the first and second quarters of fiscal (f) 2020 associated with the reduction in workforce as a result of the COVID-19
pandemic and the related temporary store closures in fiscal 2020, which we do
not consider in our evaluation of ongoing performance.
Tax impact of adjustments to net income that are considered to be unusual or (g) infrequent tax items, which we do not consider in our evaluation of ongoing
performance.
50
Table of Contents
Seasonality
Our storage and organization product offering makes us less susceptible to holiday shopping patterns than many retailers. Prior to fiscal 2021, our business realized a higher portion of net sales, operating income and cash flows from operations in the fourth fiscal quarter. However, fiscal 2021 sales and profitability did not follow historical patterns due to various factors, including changes in promotional strategy and cadence. For fiscal 2022, we expect that our sales and profitability patterns will be largely consistent
with
fiscal 2021.
Liquidity and Capital Resources
We have relied on cash flows from operations, a $100,000 asset-based revolving
credit agreement (the "Revolving Credit Facility" as further discussed under
"Revolving Credit Facility" below), and the SEK 110.0 million (approximately
$11,769 as of April 2, 2022 ) 2019 Elfa revolving credit facility (the "2019
Original Revolving Facility" as further discussed under "2019 Elfa Senior
Secured Credit Facilities" below), as our primary sources of liquidity.
Our primary cash needs are for merchandise inventories, direct materials,
payroll, store leases, capital expenditures associated with opening new stores
and updating existing stores, as well as information technology and
infrastructure, including our distribution centers and Elfa manufacturing
facility enhancements. The most significant components of our operating assets
and liabilities are merchandise inventories, accounts receivable, prepaid
expenses, operating lease assets, other assets, accounts payable, operating
lease liabilities, other current and non-current liabilities, taxes receivable
and taxes payable. Our liquidity fluctuates as a result of our building
inventory for key selling periods, and as a result, our borrowings are generally
higher during these periods when compared to the rest of our fiscal year. Our
borrowings generally increase in our second and third fiscal quarters as we
prepare for our promotional campaigns and the holiday season. In fiscal 2022, we
expect total capital expenditures to be in the range of $60,000 to $65,000 for
technology infrastructure and software projects, existing store merchandising
and refresh activities, our Elfa business, and new store development inclusive
of one new store opening in the fall of calendar year 2022 and one new store
anticipated in the winter of calendar year 2022. In addition, on December 30,
2021 , we acquired Closet Works for total cash consideration of $21,438 ,
partially offset by cash acquired of $1,993 . We believe that cash expected to be
generated from operations and the remaining availability of borrowings under the
Revolving Credit Facility and the 2019 Elfa Revolving Facilities (as further
discussed under "2019 Elfa Senior Secured Credit Facilities" below) will be
sufficient to meet liquidity requirements, anticipated capital expenditures and
payments due under our existing credit facilities for at least the next 12
months. In the future, we may seek to raise additional capital, which could be
in the form of loans, bonds, convertible debt or equity, to fund our operations
and capital expenditures. There can be no assurance that we will be able to
raise additional capital on favorable terms or at all.
At April 2, 2022 , we had $14,252 of cash, of which $2,602 was held by our
foreign subsidiaries. In addition, we had $96,830 of additional availability
under the Revolving Credit Facility and approximately $9,978 of additional
availability under the 2019 Elfa Revolving Facilities at April 2, 2022 . There
were $3,967 in letters of credit outstanding under the Revolving Credit Facility
and other contracts at that date.
As further described in Note 1 to our consolidated financial statements, the
Company has reclassified $2,346 of net cash inflows from operating activities
into investing activities in the fourth quarter of fiscal 2021, of which $2,462
of net cash inflows is related to the second quarter of fiscal 2021. Net cash
inflows of $1,628 were reclassified from operating activities into investing
activities for the fiscal year ended April 3, 2021 . The financial statement line
item impacted within operating activities is Prepaid expenses and other assets,
and the financial statement line items impacted within investing activities are
Investments in non-qualified plan trust and Proceeds from non-qualified plan
trust redemptions. The table below presents the reclassified amounts.
51
Table of Contents
Cash flow analysis
A summary of our key components and measures of liquidity are shown in the
following table:
Fiscal Year Ended
April 2 , April 3,
2022 2021
Net cash provided by operating activities
(9,381) (172,063)
Effect of exchange rate changes on cash (622) 819
Net decrease in cash $ (3,435) $ (50,068)
Free cash flow (Non-GAAP) (1) $ 23,601 $ 119,483 (1) See below for a discussion of this non-GAAP financial measure and
reconciliation to its most directly comparable GAAP financial measure.
Net cash provided by operating activities
Cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes and the effect of changes in operating assets and liabilities. Net cash provided by operating activities was$56,990 for fiscal 2021. Net income of$81,718 was combined with non-cash items of$42,686 (primarily depreciation and amortization) and partially offset by an increase in working capital of$67,414 . The increase in working capital during fiscal 2021 was primarily due to an increase in merchandise inventory as a result of increased commodity and freight costs in fiscal 2021, combined with lower units on hand at the end of fiscal 2020. Net cash provided by operating activities was$136,659 for fiscal 2020. Net income of$58,283 was combined with non-cash items of$40,754 (primarily depreciation and amortization as well as stock-based compensation) and a decrease in working capital of$37,622 . The decrease in working capital during fiscal 2020 was primarily due to an increase in accounts payable and accrued liabilities, primarily driven by timing of inventory receipts and payments combined with an increase in unearned revenue and accrued payroll costs.
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels and maintenance, infrastructure, information systems, and our distribution centers, as well as acquisition costs and investments and proceeds in the Company's non-qualified retirement plan. Net cash used in investing activities was$50,422 for fiscal 2021. Our total capital expenditures for fiscal 2021 were$33,389 . We incurred capital expenditures of$21,007 primarily related to investments in information technology and new product rollouts. We incurred capital expenditures of$8,287 related to one new store opening and existing store maintenance. The remaining$4,095 of capital expenditures were primarily related to the distribution centers. The Company expects capital expenditures for fiscal 2022 to be in the range of approximately$60,000 to$65,000 for technology infrastructure and software projects, existing store merchandising and refresh activities, our Elfa business, and new store development inclusive of one new store opening in fall of calendar year 2022 and one new store anticipated in winter of calendar year 2022. In addition, we had net investing cash outflows of$19,445 related to the acquisition of Closet Works, partially offset by net proceeds of$2,346 from the non-qualified retirement plan and proceeds of$66 from the sale of property and equipment. Net cash used in investing activities was$15,483 for fiscal 2020. Our total capital expenditures for fiscal 2020 were$17,176 . We incurred capital expenditures of$8,075 primarily related to investments in information technology and new product rollouts. We incurred capital expenditures of$5,641 related to the distribution centers during fiscal 52
Table of Contents
2020. The remaining capital expenditures of$3,460 were primarily related to one new store opening and existing store maintenance. In addition, we had net proceeds of$1,628 from the non-qualified retirement plan and proceeds of$65 from the sale of property and equipment.
Net cash used in financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa Senior Secured Credit Facilities.
Net cash used in financing activities was$9,381 for fiscal 2021. This included repayments of$7,167 on indebtedness outstanding under the Senior Secured Term Loan Facility and the 2019 Elfa Revolving Facilities combined with tax payments of$4,677 in connection with the withholding of shares upon vesting of restricted stock awards, partially offset by net borrowings of$1,898 on the 2019 Elfa Revolving Facilities and proceeds of$565 from the exercise of stock options. Net cash used in financing activities was$172,063 for fiscal 2020. This included net repayments of$78,000 on the Revolving Credit Facility and net repayments of$10,095 for the 2019 Elfa Revolving Facilities. The Company also made net repayments of$77,781 on indebtedness outstanding under the Senior Secured Term Loan Facility of which$47,172 was in conjunction with the Seventh Amendment,$5,109 was related to quarterly payments made prior to the Seventh Amendment, and an additional$25,500 payment made in the fourth quarter of fiscal 2020. The Company also incurred payments of$5,579 related to debt issuance costs and repayments of$173 on indebtedness outstanding under the 2019 Elfa Senior Secured Term Loan Facility. In addition, the Company paid$931 in taxes in connection with the withholding of shares upon vesting of restricted stock awards and received proceeds of$496 from the exercise of stock options.
As of
As of
Free cash flow (Non-GAAP)
The Company presents free cash flow, which the Company defines as net cash provided by operating activities in a period minus payments for property and equipment made in that period, because it believes it is a useful indicator of the Company's overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow. Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels and maintenance, infrastructure, information systems, and our distribution centers, among other things. Our free cash flow of$23,601 for fiscal 2021 decreased as compared to free cash flow of$119,483 in fiscal 2020. The decrease in free cash flow for fiscal 2021 compared to fiscal 2020, reflects the many actions undertaken by the Company to preserve liquidity in fiscal 2020 as a result of COVID-19, including temporary reductions in inventory purchases, temporary extension of payment terms, and reduced capital expenditures. The Company returned to normal payment terms for most vendors by the end of the third quarter of fiscal 2020. Additionally, during fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 53
Table of Contents
pandemic, which resulted in the deferral of approximately
The following table sets forth a reconciliation of free cash flow, a non-GAAP
financial measure, to net cash provided by operating activities, which we
believe to be the GAAP financial measure most directly comparable to free cash
flow:
Fiscal Year Ended
April 2 , April 3,
2022 2021
Net cash provided by operating activities
$ 23,601 $ 119,483
Senior Secured Term Loan Facility
OnApril 6, 2012 , the Company,The Container Store, Inc. and certain of our domestic subsidiaries entered into a credit agreement withJPMorgan Chase Bank, N.A ., as Administrative Agent and Collateral Agent, and the lenders party thereto (the "Senior Secured Term Loan Facility"). OnNovember 25, 2020 , the Company entered into Amendment No. 7 (the "Seventh Amendment") to the Senior Secured Term Loan Facility. In connection with the Seventh Amendment, theCompany (a) paid down approximately$47,200 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the loans under the facility to$200,000 and (b) amended the Senior Secured Term Loan Facility to, among other things, extend the maturity date toJanuary 31, 2026 and impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within the one year anniversary of the Seventh Amendment. The Company is required to make quarterly amortization payments of$500 on the term loan facility, with the balloon payment for the remaining balance due onJanuary 31, 2026 . Prior to the date of delivery of a compliance certificate for the fiscal year endedApril 2, 2022 , the applicable interest rate margin for LIBOR loans was 4.75%, subject to a LIBOR floor of 1.00%, and 3.75% for base rate loans and, thereafter, may step up to 5.00% for LIBOR Loans and 4.00% for base rate loans unless the consolidated leverage ratio achieved is less than or equal to 2.75 to 1.00. As ofApril 2, 2022 , the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was$160,481 , net of deferred financing costs, and the consolidated leverage ratio was approximately 1.0. The Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of 65%, assets of non-guarantors and subject to certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed by the Company and each ofThe Container Store, Inc.'s U.S. subsidiaries. The Senior Secured Term Loan Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions and also require certain mandatory prepayments of the Senior Secured Term Loan Facility, among these an Excess Cash Flow (as such term is defined in the Senior Secured Term Loan Facility) requirement. As ofApril 2, 2022 , we were in compliance with all covenants under the Senior Secured Term Loan Facility and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.
Revolving Credit Facility
OnApril 6, 2012 , the Company,The Container Store, Inc. and certain of our domestic subsidiaries entered into an asset-based revolving credit agreement with the lenders party thereto,JPMorgan Chase Bank, N.A ., as Administrative Agent and Collateral Agent, andWells Fargo Bank, National Association , as Syndication Agent (as amended, the "Revolving Credit Facility"). OnNovember 25, 2020 , the Company entered into Amendment No. 5 (the "Fifth 54
Table of Contents
Amendment"). The Fifth Amendment amends the Revolving Credit Facility to extend the maturity date to the earlier of (a)November 25, 2025 and (b)October 31, 2025 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended. The aggregate principal amount of the facility is$100,000 . Borrowings under the Revolving Credit Facility accrue interest at LIBOR +1.25%. In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of$50,000 , which is subject to receipt of lender commitments and satisfaction of specified conditions. The Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to$15,000 and the issuance of letters of credit of up to$40,000 . The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility). The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed by the Company and each ofThe Container Store, Inc.'s U.S. subsidiaries. The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than$10,000 at any time. As ofApril 2, 2022 , we were in compliance with all covenants under the Revolving Credit Facility and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
2019 Elfa Senior Secured Credit Facilities
OnApril 1, 2014 , Elfa entered into a master credit agreement withNordea Bank AbpAB, filial i Sverige ("Nordea Bank "), which consisted of a term loan facility (the "2014 Elfa Term Loan Facility") and a revolving credit facility (the "2014 Elfa Revolving Credit Facility," and together with the 2014 Elfa Term Loan Facility, the "2014 Elfa Facilities"). OnMarch 18, 2019 , Elfa refinanced the 2014 Elfa Facilities and entered into a master credit agreement with Nordea Bank Abp, filial i Sverige ("Nordea Bank "), which consists of (i) anSEK 110.0 million (approximately$11,769 as ofApril 2, 2022 ) revolving credit facility (the "2019 Original Revolving Facility"), (ii) upon Elfa's request, an additionalSEK 115.0 million (approximately$12,304 as ofApril 2, 2022 ) revolving credit facility (the "2019 Additional Revolving Facility" and together with the 2019 Original Revolving Facility, the "2019 Elfa Revolving Facilities"), and (iii) an uncommitted term loan facility in the amount ofSEK 25.0 million (approximately$2,675 as ofApril 2, 2022 ), which is subject to receipt ofNordea Bank's commitment and satisfaction of specified conditions (the "Incremental Term Facility", together with the 2019 Elfa Revolving Facilities, the "2019 Elfa Senior Secured Credit Facilities"). The term for the 2019 Elfa Senior Secured Credit Facilities began onApril 1, 2019 and matures onApril 1, 2024 . Loans borrowed under the 2019 Elfa Revolving Facilities bear interest atNordea Bank's base rate +1.40%. Any loan borrowed under the Incremental Term Facility would bear interest at the Stockholm Interbank Offered Rate (Stibor) +1.70%. The 2019 Elfa Senior Secured Credit Facilities are secured by the majority of assets of Elfa. The 2019 Elfa Senior Secured Credit Facilities contains a number of covenants that, among other things, restrict Elfa's ability, subject 55
Table of Contents
to specified exceptions, to incur additional liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a Group Equity Ratio (as defined in the 2019 Elfa Senior Secured Credit Facilities) of not less than 32.5% and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 2019 Elfa Senior Secured Credit Facilities) of less than 3.20. As ofApril 2, 2022 , Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the 2019 Elfa Senior Secured Credit Facilities) had occurred. Critical Accounting Estimates The preparation of financial statements in accordance with GAAP inthe United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Management evaluated the development and selection of its critical accounting estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Note 1-Nature of Business and Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Revenue recognition
We recognize revenues and the related cost of goods sold for our TCS segment when merchandise is received by our customers, which reflects an estimate of shipments that have not yet been received by the customer. This estimate is based on shipping terms and historical delivery times. We recognize revenues and the related cost of goods sold for our Elfa segment upon shipment. We recognize shipping and handling fees as revenue when the merchandise is shipped to the customer. Costs of shipping and handling are included in cost of goods sold. We recognize fees for installation and other services as revenue upon completion of the service to the customer. Costs of installation and other services are included in cost of goods sold.
Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.
We reserve for projected merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. The reserve reduces sales and cost of sales, accordingly. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve. We have not made any material changes to our assumptions used to recognize revenue during the periods presented.
Inventories
Inventories at retail stores are comprised of finished goods and are valued at
the lower of cost or estimated net realizable value, with cost determined on a
weighted-average cost method including associated in-bound freight costs.
Manufacturing inventories are comprised of raw materials, work in process, and
finished goods and are valued on a first-in, first out basis using full
absorption accounting which includes material, labor, other variable costs, and
other applicable manufacturing overhead. To determine if the value of inventory
is recoverable at cost, we consider current and anticipated demand, customer
preference, the merchandise age and general economic conditions, including the
duration and severity of the economic downturn caused by the COVID-19 pandemic.
The significant estimates used in
56
Table of Contents
inventory valuation are obsolescence (including excess and slow-moving inventory) and estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging reports, specific identification and our estimates of future retail sales prices. Reserves for shrinkage are estimated and recorded throughout the period as a percentage of cost of sales based on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year based upon periodic cycle counts. Actual inventory shrinkage can vary from estimates due to factors including the mix of our inventory and execution against loss prevention initiatives in our stores and distribution center. Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that require management to make assumptions and to apply judgments regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimates, we will adjust our inventory reserves accordingly throughout the period. Management does not believe that changes in the assumptions used in these estimates would have a significant effect on our inventory balances. We have not made any material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves during the periods presented.
Income taxes
We account for income taxes utilizing theFinancial Accounting Standards Board ("FASB") ASC 740, Income Taxes ("ASC 740"). ASC 740 requires an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established against deferred tax assets when it is more-likely-than-not that the realization of those deferred tax assets will not occur. Valuation allowances are released as positive evidence of future taxable income sufficient to realize the underlying deferred tax assets becomes available (e.g., three-year cumulative financial income). Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in the tax rate is recognized through continuing operations in the period that includes the enactment of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. We operate in certain jurisdictions outsidethe United States . ASC 740-30 provides that the undistributed earnings of a foreign subsidiary be accounted for as a temporary difference under the presumption that all undistributed earnings will be distributed to the parent company as a dividend. Sufficient evidence of the intent to permanently reinvest the earnings in the jurisdiction where earned precludes a company from recording the temporary difference. For purposes of ASC 740-30, the Company does not consider the earnings subject to the transition tax and global intangible low-taxed income under the Tax Act permanently reinvested. All other earnings are considered permanently reinvested. Judgment is required in determining the provision for income and other taxes and related accruals, and deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company's various tax returns are subject to audit by various tax authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.
Leases
In accordance with Accounting Standards Update ("ASU") 2016-02, Leases (Topic
842), we recognize a lease liability upon lease commencement, measured at the
present value of the fixed future minimum lease payments over the lease term. We
have elected the practical expedient to not separate lease
and non-lease components. Therefore, lease payments included in the measurement
of the lease liability include all fixed payments in the lease arrangement. We
record a right-of-use asset for an amount equal to the lease liability,
increased for any prepaid lease costs and initial direct costs and reduced by
any lease incentives. We remeasure the lease liability and right-of-use asset
when a change to our future minimum lease payments occurs. Lease expense on
operating leases is recorded on a straight-line basis over the term of the lease
and is recorded in Selling, general, and administrative expense ("SG&A").
57
Table of Contents
Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to the present value of the future lease payments, and the exercise of renewal options. Our leases do not provide information about the rate implicit in the lease; therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. A significant basis point change in the incremental borrowing rate would have a material impact on the value of our new or remeasured right-of-use assets and lease liabilities. Additionally, many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option. Although we believe that the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
Intangibles and long-lived assets
We evaluate goodwill annually to determine whether it is impaired.Goodwill is also tested between annual impairment tests if an event occurs or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset. If an impairment indicator exists, we test goodwill for recoverability. We have identified two reporting units and we have selected the first day of the fourth fiscal quarter as the date we perform our annual goodwill impairment testing. When performing a quantitative test for impairment, we compare the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying amount of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we would record an impairment loss equal to the difference. The fair value of each reporting unit is determined by using a discounted cash flow analysis using the income approach, as well as a market approach to compare the estimated fair value to comparable companies. The determination of fair value requires assumptions and estimates of many critical factors, including among others, our nature and our history, financial and economic conditions affecting us, our industry and the general economy, past results, our current operations and future prospects, sales of similar businesses or capital stock of publicly held similar businesses, as well as prices, terms and conditions affecting past sales of similar businesses. Forecasts of future operations are based, in part, on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material. As of our annual testing date ofJanuary 2, 2022 , we performed a qualitative assessment for our annual goodwill impairment analysis, which did not result in an impairment of goodwill. The qualitative analysis considered relevant factors specific to the reporting units, including macroeconomic conditions, industry and market considerations, overall financial performance, and relevant entity-specific events. As part of our qualitative assessment, we included quantitative factors to assess the likelihood of an impairment and concluded it more likely than not that an impairment has not occurred. Future impairment charges could also be required if we do not achieve our current net sales and profitability projections or if our weighted average cost of capital increases. Moreover, changes in our market capitalization may impact certain assumptions used in our income approach calculations. 58 Table of Contents Trade names
We annually evaluate whether our trade names continue to have an indefinite life. Trade names are reviewed for impairment annually on the first day of the fourth fiscal quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. When performing a quantitative test, the impairment review is performed by comparing the carrying amount of the trade name to the estimated fair value, determined using a discounted cash flow methodology. If the recorded carrying amount of the trade name exceeds its estimated fair value, an impairment charge is recorded to write the trade name down to its estimated fair value. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, future revenue growth assumptions, estimated market royalty rates that could be derived from the licensing of our trade names to third parties, and a rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value). The valuation of trade names requires assumptions and estimates of many critical factors, which are consistent with the factors discussed under "Goodwill" above. Forecasts of future operations are based, in part, on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material. As discussed above, as of our annual testing date ofJanuary 2, 2022 , we performed a qualitative assessment for our annual impairment review, which did not result in an impairment of trade names. The qualitative analysis considered relevant factors specific to the reporting units, including macroeconomic conditions, industry and market considerations, overall financial performance, and relevant entity-specific events. As part of our qualitative assessment, we included quantitative factors to assess the likelihood of an impairment and concluded it more likely than not that an impairment has not occurred.
Future impairment charges could be required if we do not achieve our current net sales and profitability projections.
Long-lived assets
Long-lived assets, such as property and equipment, lease right-of-use assets,
and intangible assets subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Conditions that may indicate impairment
include, but are not limited to, a significant adverse change in customer demand
or business climate that could affect the value of an asset, a product recall or
an adverse action or assessment by a regulator. If the sum of the estimated
undiscounted future cash flows related to the asset are less than the carrying
amount, we recognize a loss equal to the difference between the carrying amount
and the fair value, usually determined by the estimated discounted cash flow
analysis of the asset.
For our TCS segment, we generally evaluate long-lived tangible assets at the
store level, which is the lowest level at which independent cash flows can be
identified. We evaluate corporate assets or other long-lived assets that are not
store-specific at the consolidated level. For our Elfa segment, we evaluate
long-lived tangible assets at the segment level.
Since there is typically no active market for our long-lived tangible assets, we
estimate fair values based on the expected future cash flows. We estimate future
cash flows based on store-level historical results, current trends, and
operating and cash flow projections. Our estimates are subject to uncertainty
and may be affected by a number of factors outside our control, including
general economic conditions and the competitive environment. While we believe
our estimates and judgments about future cash flows are reasonable, future
impairment charges may be required if the expected cash flow estimates, as
projected, do not occur or if events change requiring us to revise our
estimates.
59
Table of Contents
Business combinations
The Company accounts for business combinations under the acquisition method of accounting. The cost of an acquired company is assigned to the tangible and identifiable intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when market value is not readily available. Any excess of the purchase price over the fair value of tangible and intangible assets acquired is assigned to goodwill. The transaction costs associated with business combinations are expensed as they are incurred. We recognize any adjustments to provisional amounts and goodwill that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, with the effect on current period earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Although we believe that the fair value assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
Contractual obligations
We enter into long-term obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating leases. As ofApril 2, 2022 , our contractual cash obligations over the next several periods were as follows: Payments due by period Within Total 1 Year 1 3 Years 3 5 Years After 5 Years Recorded contractual obligations Term loans$ 167,500 $ 2,000 $ 4,000 $ 161,500 $ - 2019 Elfa revolving facilities 1,790 1,790
- - - Operating leases (1) 535,799 89,667 159,518 123,107 163,507 Finance lease obligations 179 97 64 18 - Transition tax 1,022 374 648 - - Unrecorded contractual obligations Estimated interest (2) 38,082 10,230 19,847 8,005 - Letters of credit 3,967 3,967 - - - Purchase obligations (3) 36,449 31,533 4,859 57 - Total (4)$ 784,788 $ 139,658 $ 188,936 $ 292,687 $ 163,507
We enter into operating leases during the normal course of business. Most
lease arrangements provide us with the option to renew the leases at defined
terms. The future operating lease obligations would change if we were to (1) exercise these options, or if we were to enter into additional operating
leases. During fiscal 2020, the Company renegotiated terms with landlords as
a result of the COVID-19 pandemic, which resulted in the deferral of
approximately
For purposes of this table, interest has been estimated based on interest
(2) rates in effect for our indebtedness as of
borrowing levels in the future. Actual borrowing levels and interest costs
may differ.
Purchase obligations include legally binding contracts such as firmcommitments for inventory, equipment purchases, marketing-related contracts,
software acquisition/license commitments, as well as commitments to make
capital expenditures, and legally binding service contracts. Purchase orders
for other services are not included in the table above. Purchase orders (3) represent authorizations to purchase rather than binding agreements. For the
purposes of this table, contractual obligations for the purchase of goods or
services are defined as agreements that are enforceable and legally binding
and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and
the approximate timing of the transaction.
60
Table of Contents
The table above excludes defined benefit pension plan obligations of
which were included in "Other long-term liabilities" in the consolidated
(4) balance sheet as of
were excluded from the table as the timing of the forthcoming cash payments
is uncertain.
Recent Accounting Pronouncements
Please refer to Note 1-Nature of Business and Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recent accounting pronouncements.
© Edgar Online, source
