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 for Fiscal 2018, including a year-to-year comparison between Fiscal 2018 and Fiscal 2019, 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 2019, filed with theSEC onJune 17, 2020 . 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. 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 championing the enriching benefits of living an organized life.
Our operations consist of two operating segments:
center (which includes business sales), as well as our installation 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 call center. Our
stores receive substantially all of our products directly from one of our two
distribution centers. Our first distribution center in
co-located with our corporate headquarters and call center, and our second
distribution center in
2019. Elfa,The Container Store, Inc.'s wholly owned Swedish subsidiary, Elfa
and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948
and is headquartered in Malmö,
customizable for any area of the home, including closets, kitchens, offices and
? garages. Elfa operates three manufacturing facilities with two located in
1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive
distributor of elfa® products in the
wholesale basis to various retailers in approximately 30 countries around the
world, with a concentration in the Nordic region ofEurope . 36 Table of Contents Business Update Related to Coronavirus The novel coronavirus ("COVID-19") pandemic had a negative impact on the Company's first quarter of fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition. We also saw a significant increase in website-generated sales, including direct-to-customer shipping as well as our curbside pick-up. Since the second quarter of fiscal 2020, all 93 stores were open with strict health and safety protocols and adherence to local regulations. As a result, website-generated sales during the remaining quarters of fiscal 2020 moderated in comparison to the first quarter as customers began shifting back to purchasing in-store. We will continue to monitor local, state, and federal mandates related to COVID-19, which may require us to adjust our operations in response to revised governmental mandates. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company's financial health during the pandemic. In the fourth quarter of fiscal 2019, the company drew down$50,000 under its Revolving Credit Facility as a proactive measure in light of the COVID-19 pandemic, resulting in an outstanding balance of$78,000 , which the Company paid down in the first three quarters of fiscal 2020. In the first quarter of fiscal 2020, the Company furloughed approximately 2,800 employees, primarily in its stores, as well as a portion of corporate employees, and reduced the base salaries of its executive officers and certain other employees, due to COVID-19. During fiscal 2020, the majority of our furloughed employees returned and as ofApril 3, 2021 , we no longer have furloughed employees and have returned temporarily reduced base salaries to their pre-COVID-19 levels. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores, including intensive and frequent cleaning procedures. Furthermore, the CARES Act was signed into law in response to the COVID-19 pandemic onMarch 27, 2020 and the Company has availed itself of the applicable benefits under the CARES Act. As such, we have deferred approximately$5,200 of employer payroll taxes as ofApril 3, 2021 and recorded an employee retention credit of approximately$1,000 . It is not possible to predict the ultimate impact of the COVID-19 pandemic as the situation is continuing to evolve. We will continue to monitor guidance from theCenters for Disease Control and Prevention , local, state and federal guidance, which may require us to adjust our operations in response to revised governmental mandates. There can be no assurance that the continuation of the COVID-19 pandemic will not materially impact our future business operations, results of operations, financial position and cash flows. 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, and selling, general and administrative expenses. 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. Elfa segment revenue is recorded 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. 37 Table of Contents
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. Net sales are historically higher in the fourth quarter due primarily to the impact of Our Annual elfa® Sale, which traditionally begins in late December and runs into February. During the first quarter of fiscal 2020, we experienced significant disruptions to our operations due to the COVID-19 pandemic. As such, we have seen a significant shift in customer trends from shopping in our stores to purchasing online. Online customer order intake substantially increased during fiscal 2020 as compared to the same period in fiscal 2019. For fiscal 2021, we expect online customer order intake to moderate as compared to fiscal 2020, as customers continue to shift back to purchasing in-store.
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 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 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. Additionally, due to COVID-19, we
incurred incremental costs from additional safety measures implemented in our
stores, distribution centers, and corporate office as well as incremental
compensation costs for emergency payments and increased hourly pay for
distribution center employees. However, SG&A expenses in fiscal 2020 were
significantly lower given the COVID-19 driven cost reductions implemented in the
first quarter of fiscal 2020. We expect SG&A expenses to increase in fiscal 2021
as we return to normal operations.
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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. In fiscal
2019, our significant investments related to the opening of the second
distribution center were completed. In fiscal 2020, we opened one new store
which reduced our pre-opening costs as compared to fiscal 2019. In fiscal 2021,
we expect higher pre-opening costs as compared to fiscal 2020 related to one new
store opening in calendar 2021 and another anticipated in early calendar 2022.
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 and focused on net sales comparisons when evaluating the Company's topline performance. We do not expect comparable store sales to be a key metric in fiscal 2021. 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, executive 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, impairment charges related to intangible assets, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our Optimization Plan, charges associated with an Elfa manufacturing facility closure, 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 39
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outstanding. For a reconciliation of adjusted net income to the most directly comparable GAAP measure, refer to "Non-GAAP Financial Measures."
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. Results of Operations The following data represents the amounts shown in our audited consolidated statements of operations for the fiscal years endedApril 3, 2021 ,March 28, 2020 andMarch 30, 2019 expressed in dollars and as a percentage of net sales and certain operating data and non-GAAP financial information. For segment data, see Note 14 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Fiscal Year Ended April 3, March 28, March 30, 2021 2020 2019 Net sales$ 990,088 $ 915,953 $ 895,093 Cost of sales (excluding depreciation and amortization) 419,611 382,488 371,410 Gross profit 570,477 533,465 523,683 Selling, general, and administrative expenses (excluding depreciation and amortization) 426,765 440,362 430,997 Stock-based compensation 7,823 3,110 2,846 Pre-opening costs 1,026 8,237 2,103 Depreciation and amortization 34,731 38,638 36,305 Other expenses 1,112 377 177 Loss (gain) on disposal of assets 16 (2) (63) Income from operations 99,004 42,743 51,318 Interest expense, net 17,268 21,541 27,275
Loss on extinguishment of debt 893 - 2,082 Income before taxes 80,843 21,202 21,961 Provision for income taxes 22,560 6,715 281 Net income$ 58,283 $
14,487
Net income per common share - basic$ 1.20 $ 0.30 $ 0.45 Net income per common share - diluted$ 1.17 $
0.30
Weighted-average common shares - basic 48,537,883 48,819,783 48,139,929
Weighted-average common shares - diluted 49,712,637 48,964,564 48,400,407
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Fiscal Year Ended
April 3, March 28, March 30,
2021 2020 2019
Percentage of net sales:
Net sales 100.0 % 100.0 % 100.0 %Cost of sales (excluding depreciation and 42.4
41.5
amortization) % 41.8 % %
Gross profit 57.6 % 58.2 % 58.5 %
Selling, general, and administrative
expenses (excluding depreciation and
amortization) 43.1 % 48.1 % 48.2 %
Stockbased compensation 0.8 % 0.3 % 0.3 %
Preopening costs 0.1 % 0.9 % 0.2 %
Depreciation and amortization 3.5 % 4.2 % 4.1 %
Other expenses 0.1 % 0.0 % 0.0 %Loss (gain) on disposal of assets 0.0 % (0.0) %
(0.0) % Income from operations 10.0 % 4.7 % 5.7 % Interest expense, net 1.7 % 2.4 % 3.0 %
Loss on extinguishment of debt 0.1 % - %
0.2 %
Income before taxes 8.2 % 2.3 % 2.5 %
Provision for income taxes 2.3 % 0.7 % 0.0 %
Net income 5.9 % 1.6 % 2.4 %
Operating data:Number of stores at end of period (1) 93 93
92
NonGAAP measures (2):
Adjusted EBITDA (2) $ 150,523 $ 90,771 $ 96,347
Adjusted net income (2) $ 61,790 $ 14,777 $ 20,432
Adjusted net income per common share -
diluted (2) $ 1.24 $ 0.30 $ 0.42
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 and through the end of
fiscal 2020, all 93 stores were open with strict 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.
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Fiscal 2020 compared to Fiscal 2019
Net sales
The following table summarizes our net sales for fiscal 2020 and fiscal 2019:
April 3, 2021 % total March 28, 2020 % total
TCS net sales $ 923,083 93.2 % $ 852,349 93.1 %
Elfa third party net sales 67,005 6.8 % 63,604 6.9 %
Net sales $ 990,088 100.0 % $ 915,953 100.0 %
Net sales in fiscal 2020 increased by
Net sales
Net sales for fiscal 2019 $ 915,953
Incremental net sales increase (decrease) due to:
All stores (including a
53,000
53rd week impact
17,734
Elfa third party net sales (excluding impact of foreign currency translation)
(1,448)
Impact of foreign currency translation on Elfa third party net sales 4,849 Net sales for fiscal 2020$ 990,088
The Company's consolidated net sales for fiscal 2020 increased$74,135 , or 8.1%, compared to fiscal 2019, inclusive of the$17.7 million impact from the 53rd week in fiscal 2020. TCS net sales increased$70,734 , or 8.3%, with other product categories up 10.4%, contributing 550 basis points of the increase, and Custom Closets up 5.9%, contributing 280 basis points. Our online sales increased 109.5% compared to fiscal 2019. Elfa third party net sales increased$3,401 , or 5.3%, in fiscal 2020. After converting Elfa's third party net sales from Swedish krona toU.S. dollars using the prior year's conversion rate for both fiscal 2020 and fiscal 2019, Elfa third party net sales decreased$1,448 , or 2.2%. TCS and Elfa net sales were negatively impacted by COVID-19 during the first quarter of fiscal 2020. As a result of the impact of the COVID-19 pandemic on our Company stores 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 2020.
Gross profit and gross margin
Gross profit in fiscal 2020 increased by$37,012 , or 6.9%, compared to fiscal 2019. The increase in gross profit was primarily the result of increased consolidated net sales, partially offset by a decrease in consolidated gross margin. The following table summarizes gross margin for fiscal 2020 and fiscal 2019 by segment and in total. The segment margins include the impact of intersegment sales from the Elfa segment to the TCS segment: April 3, 2021 March 28, 2020 TCS gross margin 56.1 % 57.4 % Elfa gross margin 40.9 % 37.8 % Total gross margin 57.6 % 58.2 % TCS gross margin decreased 130 basis points during fiscal 2020, primarily due to increased shipping costs as a result of a higher mix of online sales, partially offset by a favorable mix of higher margin product and service sales. Elfa segment gross margin increased 310 basis points, primarily due to lower direct material costs, favorable customer and product sales mix and production efficiencies. On a consolidated basis, gross margin decreased 60 basis points, primarily due to the decline in TCS gross margin during fiscal 2020. 42
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Selling, general and administrative expenses
Selling, general and administrative expenses in fiscal 2020 decreased by$13,597 , or 3.1%, compared to fiscal 2019. As a percentage of consolidated net sales, selling, general and administrative expenses decreased by 500 basis points. The following table summarizes selling, general and administrative expenses as a percentage of consolidated net sales for fiscal 2020 and fiscal 2019 by segment and in total: April 3, 2021 March 28, 2020 % of Net sales % of Net sales TCS selling, general and administrative 40.2 % 44.8 % Elfa selling, general and administrative 2.9 % 3.3 % Total selling, general and administrative 43.1 % 48.1 % TCS selling, general and administrative expenses decreased by 460 basis points as a percentage of consolidated net sales. The decrease was primarily due to reduced spending in payroll and marketing, combined with leverage on occupancy costs due to higher sales in fiscal 2020. Elfa selling, general and administrative expenses decreased by 40 basis points as a percentage of consolidated net sales primarily due to ongoing savings and efficiency efforts.
Stock-based compensation
Stock-based compensation increased to$7,823 in fiscal 2020 from$3,110 in fiscal 2019. The increase was primarily 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. The increase was also impacted by fiscal 2020 performance awards that were achieved at the maximum level. Pre-opening costs
Pre-opening costs decreased by$7,211 , or 87.5%, in fiscal 2020 to$1,026 , as compared to$8,237 in fiscal 2019. The decrease is primarily related to$7,247 of net costs associated with the opening of the second distribution center in fiscal 2019. We opened one store in fiscal 2020, and we opened two stores, including one relocation, in fiscal 2019.
Other expenses
Other expenses were$1,112 in fiscal 2020 as compared to$377 in fiscal 2019. The increase was 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$4,273 , or 19.8%, in fiscal 2020 to$17,268 , as compared to$21,541 in fiscal 2019. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan 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. The Company expects to incur less interest expense in fiscal 2021 than it incurred in fiscal 2020.
Additionally, as a result of the Seventh Amendment, the Company recorded
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Taxes
The provision for income taxes in fiscal 2020 was $22,560 as compared to $6,715
in fiscal 2019. The effective tax rate for fiscal 2020 was 27.9%, as compared to
31.7% in fiscal 2019. The decrease in the effective tax rate is primarily due to
the impact of discrete items on higher pre-tax income in fiscal 2020.
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Non-GAAP Financial Measures
Adjusted net income, adjusted net income per diluted share, EBITDA and Adjusted
EBITDA 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.
A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below:
Fiscal Year Ended
April 3, March 28, March 30,
2021 2020 2019
Net income $ 58,283 $ 14,487 $ 21,680 Depreciation and amortization 34,731 38,638
36,305 Interest expense, net 17,268 21,541 27,275 Income tax provision 22,560 6,715 281 EBITDA 132,842 81,381 85,541 Pre-opening costs (a) 1,026 8,237 2,103 Non-cash lease expense (b) 4,147 (2,169) (1,327)
Stock-based compensation (c) 7,823 3,110
2,846
Management transition costs (d) 1,200 -
-
Loss on extinguishment of debt (e) 893 -
2,082
Foreign exchange losses (gains) (f) 200 (167)
60
Optimization Plan implementation charges (g) - -
4,864
Elfa France closure (h) - 402 -
Employee retention credit (i) (1,028) - -
COVID-19 costs (j) 2,266 - -Severance and other costs (credits) (k) 1,154 (23)
178
Adjusted EBITDA $ 150,523 $ 90,771 $ 96,347
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
operating lease payments, while our GAAP operating lease expense on older
leases is typically less than our cash operating lease payments. Non-cash (b) lease expense increased in fiscal 2020 due to renegotiated terms with
landlords due to COVID-19 that resulted in deferral of
cash lease payments, of which approximately
portion of our leased properties. In fiscal 2019, lease expenses associated
with the opening of the second distribution center were excluded from
Non-cash lease expense and included in Pre-opening costs.
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 and (d) relocation expenses recorded as selling, general and administrative expenses,
which we do not consider in our evaluation of ongoing performance.
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Loss recorded as a result of the amendments made to the Senior Secured Term
(e) Loan Facility in
in our evaluation of our ongoing operations.
(f) Realized foreign exchange transactional gains/losses our management does not
consider in our evaluation of our ongoing operations.
Charges incurred to implement our four-part optimization plan to driveimproved sales and profitability (the "Optimization Plan"), which include
certain consulting costs recorded in selling, general and administrative (g) expenses ("SG&A"), cash severance payments associated with the elimination of
certain full-time positions at the TCS segment recorded in other expenses,
and cash severance payments associated with organizational realignment at the
Elfa segment recorded in other expenses, which we do not consider in our
evaluation of ongoing performance.
Charges related to the closure of
performance.
Employee retention credit related to the CARES Act recorded in the third (i) quarter of fiscal 2020 as selling, general and administrative expense, which
we do not consider in our evaluation of ongoing performance.
Includes incremental costs attributable to the COVID-19 pandemic, whichconsist of hazard pay for distribution center employees in the first quarter (j) of fiscal 2020 and sanitization costs in 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 credits/costs include amounts our management does not
consider in our evaluation of our ongoing operations. The fiscal 2020 amounts (k) include 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.
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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 3, March 28, March 30,
2021 2020 2019
Numerator:
Net income $ 58,283 $ 14,487 $ 21,680 Gain on disposal of real estate (a) - - (374) Management transition costs (b) 1,200 - - Loss on extinguishment of debt (c) 893 - 2,082 Elfa France closure (d) - 402 - Optimization Plan implementation charges (e) - - 4,864 Employee retention credit (f) (1,028)
- -
COVID-19 costs (g) 2,266 - -
Severance (h) 1,111 - -
Taxes (i) (935) (112) (7,820)
Adjusted net income $ 61,790 $ 14,777 $ 20,432
Denominator:
Weighted-average common shares outstanding - diluted 49,712,637 48,964,564 48,400,407
Net income per common share - diluted $ 1.17 $ 0.30 $ 0.45
Adjusted net income per common share - diluted $ 1.24 $
0.30
Gain recorded as a result of the sale of a building in Lahti,
consider in our evaluation of ongoing performance.
Costs related to the transition of key executives including signing bonus and (b) relocation expenses 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
(c) Loan Facility in December 2020 and
in our evaluation of our ongoing operations.
Charges related to the closure of
performance.
Charges incurred to implement our Optimization Plan, which include certain
consulting costs recorded in SG&A, cash severance payments associated with (e) the elimination of certain full-time positions at the TCS segment recorded in
other expenses, and cash severance payments associated with organizational
realignment at the Elfa segment recorded in other expenses, which we do not
consider in our evaluation of ongoing performance.
Employee retention credit related to the CARES Act recorded in the third (f) quarter of fiscal 2020 as selling, general and administrative expense, which
we do not consider in our evaluation of ongoing performance.
Includes incremental costs attributable to the COVID-19 pandemic, whichconsist of hazard pay for distribution center employees in the first quarter (g) of fiscal 2020 and sanitization costs in 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 (h) 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.
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Tax impact of adjustments to net income that are considered to be unusual or
infrequent tax items, the tax benefit recorded in the first quarter of fiscal
2018 as a result of a reduction in the Swedish tax rate, the tax benefit (i) recorded in the third quarter of fiscal 2018 as a result of the finalization
of the impact of the Tax Cuts and Jobs Act (the "Tax Act"), and the tax
impact related to the closure of
of fiscal 2019, all of which we do not consider in our evaluation of ongoing
performance.
Seasonality
Our storage and organization product offering makes us less susceptible to
holiday shopping patterns than many retailers. Historically, our business has
realized a higher portion of net sales, operating income and cash flows from
operations in the fourth fiscal quarter, attributable primarily to the impact of
Our Annual elfa® Sale, which traditionally starts in late December and runs into
February. Over half of our adjusted net income has historically been derived in
the fiscal fourth quarter.
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
$12,617 as of April 3, 2021 ) 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.
Due to the uncertainty related to COVID-19, the Company took various actions to
preserve its liquidity and increase its financial flexibility. In the fourth
quarter of fiscal 2019, the Company drew down $50,000 under its Revolving Credit
Facility as a proactive measure, resulting in an outstanding balance of $78,000 ,
which the Company paid down in the first three quarters of fiscal 2020. We
extended payment terms for most goods and services and renegotiated alternative
terms for lease payments as well as other business contracts. In addition, we
significantly reduced merchandise purchases and reduced or stopped discretionary
spending across all areas of the business. As stores reopened and sales trends
increased, we significantly increased merchandise purchases to align with sales
trends. We also returned to normal payment terms for most vendors by the end of
the third quarter of fiscal 2020. The Company substantially reduced capital
expenditures for fiscal 2020 as compared to fiscal 2019 with a primary focus on
critical activities, such as maintenance capital and necessary technology
investments. In fiscal 2021, we expect total capital expenditures to be
approximately $47,000 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 calendar 2021 and
another anticipated in early calendar 2022.
Our primary cash needs are for purchases of 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 Custom Closet promotion, the holiday season, and Our Annual
elfa® Sale. 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 with favorable terms or at all.
At
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availability under the 2019 Elfa Revolving Facilities atApril 3, 2021 . There were$4,048 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date. Pursuant to the Tax Act, we were required to pay a one-time transition tax on earnings of certain foreign subsidiaries that was previously tax deferred. The Company finalized the provisional amount for the one-time transition tax in fiscal 2018. As ofApril 3, 2021 , the Company has a remaining transition tax liability of$1,221 , which will be paid in installments over the next four years. Future amounts earned in our foreign subsidiaries are not expected to be subject to federal income taxes upon transfer tothe United States . However, if these funds were transferred tothe United States , we may be required to pay taxes in certain international jurisdictions as well as certain states.
Cash flow analysis
A summary of our key components and measures of liquidity are shown in the
following table:
Fiscal Year Ended
April 3, March 28, March 30,
2021 2020 2019
Net cash provided by operating activities $ 138,287 $ 30,748 $ 54,896
Net cash used in investing activities (17,111) (33,602) (32,771)
Net cash (used in) provided by financing activities (172,063) 64,394 (22,007)
Effect of exchange rate changes on cash 819 (1,149) (1,153)
Net (decrease) increase in cash $ (50,068) $ 60,391 $ (1,035)
Free cash flow (Non-GAAP) (1) $ 121,111 $
(2,871)
(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$138,287 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 an increase in working capital of$39,250 . The increase 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 provided by operating activities was$30,748 for fiscal 2019. Net income of$14,487 was combined with non-cash items of$44,072 (primarily depreciation and amortization as well as stock-based compensation) and a decrease in working capital of$27,811 . The decrease in working capital during fiscal 2019 was primarily due to an increase in merchandise inventory and income taxes combined with a decrease in accounts payable and accrued liabilities. The increase in merchandise inventory was primarily due to inventory build-up related to the second distribution center and new product introductions. The decrease in accounts payable was primarily driven by timing of inventory receipts and payments.
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.
Our total capital expenditures for fiscal 2020 were
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$5,641 related to the distribution centers. The remaining$3,460 of capital expenditures were primarily related to one new store opening and existing store maintenance. The Company expects capital expenditures for fiscal 2021 to be approximately$47,000 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 calendar 2021 and another anticipated in early calendar 2022. Our total capital expenditures for fiscal 2019 were$33,619 . We incurred capital expenditures of$14,851 related to the opening of the second distribution center inAberdeen, Maryland , which became fully operational in fiscal 2019. We incurred$10,684 of capital expenditures for new store openings, relocations, and existing store remodels. We opened two new stores, including one relocation, during fiscal 2019. The remaining capital expenditures of$8,084 were primarily for investments in information technology and new product rollouts.
Net cash (used in) provided by 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$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. Net cash provided by financing activities was$64,394 for fiscal 2019. This included$66,000 of net borrowings on the Revolving Credit Facility and$4,000 of net borrowings on the 2019 Elfa Revolving Facilities. The increase in net borrowings was primarily attributable to the Company's drawdown of$50,000 under its Revolving Credit Facility as a proactive measure in light of the COVID-19 pandemic. In addition, the Company made net payments of$5,109 on indebtedness outstanding under the Senior Secured Term Loan Facility, net payments of$143 on the 2019 Elfa Senior Secured Term Loan Facility, and$373 for taxes paid in connection with the withholding of shares upon vesting of restricted stock awards.
As of
As of
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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 positive free
cash flow of $121,111 for fiscal 2020 increased as compared to negative free
cash flow of $2,871 in fiscal 2019. Free cash flow generation during fiscal 2020
was strong, despite the significant impact of COVID-19 in the first quarter of
fiscal 2020, as a result of the many actions undertaken by the Company to
preserve liquidity, including temporary reductions in inventory purchases,
temporary extension of payment terms, and substantially reduced capital
expenditures with a primary focus on critical activities such as maintenance
capital and necessary technology investments. 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 pandemic, which resulted in the deferral of
approximately $11,900 of certain cash lease payments, of which approximately
$4,700 remains deferred as of April 3, 2021 , and the modification of certain
lease terms for a substantial portion of our leased properties. We expect to
make deferred lease repayments of approximately $4,700 , primarily in fiscal
2021.
The following table sets forth a reconciliation of free cash flow, a non-GAAP
financial measure, to net cash provided by operating activities, which we
believe to be the GAAP financial measure most directly comparable to free cash
flow:
Fiscal Year Ended
April 3, March 28, March 30,
2021 2020 2019
Net cash provided by operating activities
54,896
Less: Additions to property and equipment (17,176) (33,619)
(33,670) Free cash flow$ 121,111 $ (2,871) $ 21,226
Senior Secured Term Loan Facility
OnApril 6, 2012 ,The Container Store Group, Inc. ,The Container Store, Inc. and certain of its domestic subsidiaries entered into a credit agreement withJPMorgan Chase Bank, N.A ., as Administrative Agent and Collateral Agent, and the lenders party thereto (as amended, 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. Commencing onMarch 31, 2021 , 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 . Beginning from the date that a compliance certificate is 51
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delivered to the administrative agent for the fiscal year endedApril 3, 2021 , the applicable interest rate margin for LIBOR loans is 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. In the fourth quarter of fiscal 2020, the Company paid down an additional$25,500 of the outstanding loans under the Senior Secured Term Loan Facility. As ofApril 3, 2021 , the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was$165,649 , net of deferred financing costs. 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 byThe Container Store Group, Inc. 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 3, 2021 , 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 Container Store Group, Inc. ,The Container Store, Inc. and certain of its 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 Amendment") to the Revolving Credit Facility. 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 byThe Container Store Group, Inc. and each ofThe Container Store, Inc.'s U.S. subsidiaries. 52
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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 3, 2021 , we were in compliance with all covenants 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$12,617 as ofApril 3, 2021 ) revolving credit facility (the "2019 Original Revolving Facility"), (ii) upon Elfa's request, an additionalSEK 115.0 million (approximately$13,190 as ofApril 3, 2021 ) 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$2,867 as ofApril 3, 2021 ), 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 contain a number of covenants that, among other things, restrict Elfa's ability, subject 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 3, 2021 , we were in compliance with all covenants and no Event of Default (as such term is defined in the 2019 Elfa Senior Secured Credit Facilities) had occurred. Critical accounting policies and 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 policies and 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.
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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.
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 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). 54
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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.
Leases
Prior to fiscal 2019, rent expense on operating leases, including rent holidays
and scheduled rent increases, was recorded on a straight-line basis over the
term of the lease, commencing on the date we take possession of the leased
property. Rent expense is recorded in selling, general and administrative
expenses. Pre-opening rent expense is recorded in pre-opening costs in the
consolidated statement of operations. The net excess of rent expense over the
actual cash paid has been recorded as deferred rent in the accompanying
consolidated balance sheets. Tenant improvement allowances are also included in
the accompanying consolidated balance sheets as deferred rent liabilities and
are amortized as a reduction of rent expense over the term of the lease from the
possession date. Contingent rental payments, typically based on a percentage of
sales, are recognized in rent expense when payment of the contingent rent is
probable.
Starting in fiscal 2019, upon the adoption of 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 SG&A.
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.
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.
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. 55
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To 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, such as the economic downturn as a result of the COVID-19 pandemic, 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 ofDecember 27, 2020 , we determined that there was no impairment of goodwill. Future impairment charges could 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.
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. 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 of
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
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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, such as the duration and severity of the economic downturn caused by the COVID-19 pandemic 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.
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 3, 2021 , 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$ 174,500 $ 2,000 $ 4,000 $ 168,500 $ - Revolving loans - - - - - Operating leases (1) 528,272 93,032 157,839 125,898 151,503 Finance lease obligations 335 166 136 33 - Transition tax 1,221 199 872 150 - Unrecorded contractual obligations Estimated interest (2) 56,631 12,040 23,641 20,950 - Letters of credit 4,048 4,048 - - - Purchase obligations (3) 15,963 12,671 3,176 116 - Total (4)$ 780,970 $ 124,156 $ 189,664 $ 315,647 $ 151,503
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
exercise these options, or if we were to enter into additional operating (1) 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
lease terms for a substantial portion of our leased properties.
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 (3) capital expenditures, and legally binding service contracts. Purchase orders
for other services are not included in the table above. Purchase orders
represent authorizations to purchase rather than binding agreements. For the
purposes
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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.
The table above excludes defined benefit pension plan obligations which were (4) included in "Other long-term liabilities" in the consolidated balance sheet
as of
from the table as the timing of the forthcoming cash payments is uncertain.
Off-Balance Sheet Arrangements
Other than letters of credit and purchase obligations discussed above, we are not party to any off-balance sheet arrangements.
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.
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