ZUMIEZ INC.
MD&A is provided as a supplement to, and should be read in conjunction with, our
consolidated financial statements and related notes included elsewhere in this
document. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those discussed in "Item 1A Risk Factors." See the cautionary note
regarding forward-looking statements set forth at the beginning of Part I of the
Annual Report on Form 10-K.
The following Management's Discussion and Analysis of Financial Condition and
Result of Operations ("MD&A") is intended to help the reader understand the
financial condition, results of operations, and the certainty of cash flows of
Zumiez Inc. and its wholly-owned subsidiaries. This discussion focuses on known
material events and uncertainties that are reasonably likely to cause reported
financial information not to be necessarily indicative of future operating
results or of future financial condition. This includes descriptions and amounts
of matters that have had a material impact on reported operations, as well as
matters that are reasonably likely, based on our assessment, to have a material
impact on future operations.
Fiscal 2021-A Review of This Past Year
Fiscal 2021 was marked by record sales and earnings for the Company including net sales growth of 19.5% and growth in diluted earnings per share of 61.7% to$4.85 . This was up from our previous diluted earnings per share record in the prior year of$3.00 . Our stores were open for approximately 97.0% of the possible operating days in fiscal 2021, while due to COVID-19 related store closures in fiscal 2020, our stores were open for approximately 78.4% of the possible operating days in the prior year. The majority of the improvement in open store days was related tothe United States , while we experienced continued impacts of store closures inEurope ,Canada andAustralia . We also benefitted from domestic government stimulus early in fiscal 2021 resulting in sales growth of 102.6% for first quarter of fiscal 2021 compared with the prior year. Throughout the remainder of the year we drove quarterly year-over-year sales growth in the mid to high single digits resulting in the highest sales in Company history and growth of 14.5% over pre-pandemic fiscal 2019 sales. Fiscal 2021 represented our sixth straight year of product margin gains. Product margins grew by 110 basis points in 2021 as our teams remained focused on providing our customers with a diverse product offering and continued newness. While the year was full of challenges associated with labor shortages, closures, inflation and supply chain, we were able to manage through the issues growing sales and product margin in each quarter of the year. Overall gross margin was also positively impacted by 140 basis points of leverage in our occupancy costs with significant sales growth, as well as a reduction in web fulfillment and web shipping to customers of 100 basis points as sales shifted back to physical stores with fewer closures overall during the year and a resurgence of our customers coming back to malls represented by a store penetration level that was closer to 2019 than 2020. Total gross margin improved 330 basis points from the prior year to 38.6% of sales. In fiscal 2021 we began to see expenses that were eliminated or reduced due to the pandemic in 2020 reintroduced into the business. The most significant of these was store payroll as we had a higher percentage of open stores and many of our stores started shifting back to normal operating hours. Though not fully back to pre-pandemic levels, we also began to reintroduce expenses such as training, travel and other discretionary expenses. These increases combined with a year-over-year reduction in COVD-19 related government subsidies and an increase in incentive compensation due to performance, led to growth in selling, general and administrative expenses of 18.1% from the prior year. With annual sales growth of 19.5%, we did leverage selling general and administrative expenses by 20 basis points from the prior year. Our earnings per diluted share for fiscal 2021 of$4.85 was an all-time high for the Company and grew 61.7% from our previous record high earnings per share of$3.00 in 2020. With our significant cash position entering the year and cash flow generated during 2021, we were able to buy back 4.6 million shares during the year at a total cost of$198.4 million ultimately reducing annual diluted shares outstanding by 3.2% from the prior year and total shares outstanding by 4.4 million when compared to the beginning of the year. This will have a larger impact on 2022 weighted average diluted share counts as most of these shares were repurchased in the back half of the year. We added 7 new stores inNorth America in fiscal 2021, 12 new Blue Tomato stores inEurope and 4 new Fast Times store inAustralia . We believe that we still have meaningful expansion opportunities internationally. 24 -------------------------------------------------------------------------------- As a leading global lifestyle retailer, we continue to differentiate ourselves through our distinctive brand offering and diverse product selection, as well as the unique customer experience across all of our platforms. We remain committed to serving the customer launching over 100 new brands in 2021. We have made investments over several years to integrate the digital and physical channels creating a seamless shopping experience for our customer and one channel expense structure. We believe this has been a critical asset during the pandemic in 2020 and recovery in 2021 marked by significant shifts in demand between physical and digital channels. We are continuing to deliver almost all of our online orders inNorth America from our stores, which has provided substantial improvements in the speed of delivery to our customers and eliminated the need to manage two pools of inventory separately for digital and physical demand. Internationally we continue to see deeper penetration of localized fulfillment and are in various stages of roll-out in different countries. In-store fulfillment is a key part of strategy that we believe will drive long term market share by leveraging the strengths of our store sales team, providing better and faster service to customers, improving product margins, maximizing the productivity of inventory, providing additional selling opportunities, and utilizing one cost structure to serve the customer.
The following table shows net sales, operating profit, operating margin and diluted earnings per share for fiscal 2021 compared to fiscal 2020:
Fiscal 2021 Fiscal 2020 % Change
Net sales (in thousands) (1)$ 1,183,867 $ 990,652 19.5 % Operating profit (in thousands)$ 157,810 $ 96,938 62.8 % Operating margin 13.3 % 9.8 % Diluted earnings per share$ 4.85 $ 3.00 61.7 %
(1) The increase in net sales was driven by fewer COVID-19 related store
closures, government stimulus benefits in
quarter of 2021, and the net addition of 18 stores (23 new stores offset by
5 store closures) in fiscal 2021. The increase in net sales was driven by an
increase in transactions and an increase in dollars per transaction. The
increase in dollars per transaction was driven by an increase in average
unit retail, partially offset by a decrease in units per transaction.
Fiscal 2022-A Look At the Upcoming Year
In fiscal 2022, our focus remains on serving the customer with strategic investments largely focused on enhancing the customer experience while increasing market share and creating operational efficiencies to drive long-term operating margin expansion. We are planning accelerated store growth in 2022 anticipating 34 new stores compared with 23 new stores opened in 2021. We expect to open 15 new stores inNorth America , 14 inEurope and 5 inAustralia as we continue to extend our reach in both existing and new markets. Coming off of a record year in sales and earnings in 2021, we are entering fiscal 2022 anticipating some fluctuation in quarterly results. The first and second quarters of 2022 in particular are likely to be challenging as we annualize the substantial benefits from domestic stimulus that positively impacted the first quarter and beginning of the second quarter of fiscal 2021. The first and second quarters of 2022 are likely to be down year-over-year in sales with the second quarter more modestly impacted. As we move to the back half of the year we anticipate sales growth in the third and fourth quarters against more normalized results in 2021. Throughout the year we anticipate we will see stronger results across our international entities inCanada ,Europe andAustralia as we anniversary store closures and continue to benefit from a growing store base. Overall, we anticipate sales will be roughly flat to fiscal 2021. Fiscal 2022 operating expenses are expected to grow at a greater rate than sales. Several factors are expected to contribute to this including wage and other expense inflation, a more normalized operating environment driving longer store hours and higher variable operating costs, additional training, travel and other discretionary expenses foregone in 2021 as a result of COVID-19 restrictions that will return to the business. We are currently expecting operating profit to decrease in fiscal 2022 compared to fiscal 2021. Given our strong cash position, we have the security to manage through potential difficulties while also investing strategically in important long-term initiatives and returning value to our shareholders. At the end of fiscal 2021, we had$83.3 million remaining on our currently active stock repurchase authorization. Given the share repurchases we have completed from 2021 and the current program that we have been executing in fiscal 2021 and early fiscal 2022, we expect that the reduction in shares outstanding will drive a double digit increase in diluted earnings per share in fiscal 2022 compared with fiscal 2021. 25
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General
Net sales constitute gross sales, net of actual and estimated returns and
deductions for promotions, and shipping revenue. Net sales include our store
sales and our ecommerce sales. We record the sale of gift cards as a current
liability and recognize revenue when a customer redeems a gift
card. Additionally, the portion of gift cards that will not be redeemed ("gift
card breakage") is recognized based on our historical redemption rate in
proportion to the pattern of rights exercised by the customer.
We report "comparable sales" based on net sales beginning on the first
anniversary of the first day of operation of a new store or ecommerce
business. We operate a sales strategy that integrates our stores with our
ecommerce platform. There is significant interaction between our store sales and
our ecommerce sales channels and we believe that they are utilized in tandem to
serve our customers. Therefore, our comparable sales also include our ecommerce
sales. Changes in our comparable sales between two periods are based on net
sales of store or ecommerce business which were in operation during both of the
two periods being compared and, if a store or ecommerce business is included in
the calculation of comparable sales for only a portion of one of the two periods
being compared, then that store or ecommerce business is included in the
calculation for only the comparable portion of the other period. Any increase or
decrease less than 25% in square footage of an existing comparable store,
including remodels and relocations within the same mall, or temporary closures
less than seven days does not eliminate that store from inclusion in the
calculation of comparable sales. Any store or ecommerce business that we acquire
will be included in the calculation of comparable sales after the first
anniversary of the acquisition date. Current year foreign exchange rates are
applied to both current year and prior year comparable sales to achieve a
consistent basis for comparison. Stores closed due the impacts of COVID-19 are
excluded from our comparable sales calculation if they were closed for longer
than seven days. Our ecommerce business has remained open during the COVID-19
pandemic and therefore remains reported in our comparable sales
calculation. There may be variations in the way in which some of our competitors
and other apparel retailers calculate comparable sales. As a result, data herein
regarding our comparable sales may not be comparable to similar data made
available by our competitors or other retailers.
Cost of goods sold consists of branded merchandise costs and our private label
merchandise costs including design, sourcing, importing and inbound freight
costs. Our cost of goods sold also includes shrinkage, buying, occupancy,
ecommerce fulfillment, distribution and warehousing costs (including associated
depreciation) and freight costs for store merchandise transfers. This may not be
comparable to the way in which our competitors or other retailers compute their
cost of goods sold. Cash consideration received from vendors is reported as a
reduction of cost of goods sold if the inventory has sold, a reduction of the
carrying value of the inventory if the inventory is still on hand, or a
reduction of selling, general and administrative expense if the amounts are
reimbursements of specific, incremental and identifiable costs of selling the
vendors' products.
With respect to the freight component of our ecommerce sales, amounts billed to
our customers are included in net sales and the related freight cost is charged
to cost of goods sold.
Selling, general and administrative expenses consist primarily of store
personnel wages and benefits, administrative staff and infrastructure expenses,
freight costs for merchandise shipments from the distribution centers to the
stores, store supplies, depreciation on fixed assets at our home office and
stores, facility expenses, training expenses and advertising and marketing
costs. Credit card fees, insurance, public company expenses, legal expenses,
amortization of intangibles, and other miscellaneous operating costs are also
included in selling, general and administrative expenses. This may not be
comparable to the way in which our competitors or other retailers compute their
selling, general and administrative expenses.
Key Performance Indicators
Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:
Net sales. Net sales constitute gross sales, net of sales returns and deductions
for promotions, and shipping revenue. Net sales includes comparable sales and
new store sales for all our store and ecommerce businesses. We consider net
sales to be an important indicator of our current performance. Net sales results
are important to achieve
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leveraging of our costs, including store payroll and store occupancy. Net sales also have a direct impact on our operating profit, cash and working capital.
Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations. Operating profit. We view operating profit as a key indicator of our success. Operating profit is the difference between gross profit and selling, general and administrative expenses. The key drivers of operating profit are net sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense. Diluted earnings per share. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period. We view diluted earnings per share as a key indicator of our success in increasing shareholder value.
Trends and Uncertainties Affecting Our Results and Comparability
We have been, and we expect to continue to be affected by a number of factors that may cause actual results to differ from our historical results or current expectations. These factors include the impact of the COVID-19 pandemic on our operations and financial results; foreign currency rates; changes in laws, includingU.S. tax law changes; fluctuations in variable costs, and changes in general economic conditions in the markets in which we operate. Additionally, while there was not a significant impact from inflation on our operations during the past three fiscal years, we experienced increased costs during 2021 that are expected to continue into 2022. Our ability to raise our selling prices depends on market conditions and there may be periods during which we are unable to fully recover increases in our costs.
These and other factors can affect our operations and net earnings for any period and may cause such results not to be comparable to the same period in previous years and the results presented in this report are not necessarily indicative of future operating results.
Results of Operations
InDecember 2019 , a novel strain of coronavirus (COVID-19) was first identified, and inMarch 2020 , theWorld Health Organization categorized COVID-19 as a pandemic. In the best interest of our customers and employees and in line with governmental regulations, all stores were closed byMarch 19, 2020 . We began gradually re-opening physical stores at the end of the first fiscal quarter and into the second fiscal quarter, with the majority of our stores open through the third and fourth quarter. In certain regions, COVID-19 related short-term closures have continued into fiscal 2021, primarily inEurope ,Canada , andAustralia . Our stores were open, on an aggregate basis, approximately 97.0% of the possible days during fiscal 2021 compared to 78.4% of the possible days during fiscal 2020.
The following table presents selected items on the consolidated statements of income as a percent of net sales:
Fiscal 2021 Fiscal 2020 Fiscal 2019
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold 61.4 % 64.7 % 64.6 %
Gross profit 38.6 % 35.3 % 35.4 %
Selling, general and administrative expenses 25.3 % 25.5 % 27.1 %
Operating profit 13.3 % 9.8 % 8.3 %
Interest and other income (expense), net 0.3 % 0.5 % 0.5 %
Earnings before income taxes 13.6 % 10.3 % 8.8 %
Provision for income taxes 3.5 % 2.6 % 2.3 %
Net income 10.1 % 7.7 % 6.5 %
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Fiscal 2021 Results Compared With Fiscal 2020
Net sales were$1,183.9 million for fiscal 2021 compared to$990.7 million for fiscal 2020, an increase of$193.2 million or 19.5%. The increase in sales was primarily driven by the re-opening of stores compared to the wide spread short-term store closures related to the COVID-19 pandemic in the prior year, our ability to capitalize on current trends and the impact of domestic economic stimulus on the business during the year. For the year, our stores were open approximately 97.0% of the possible days compared to 78.4% of the possible days during fiscal 2020. The increase in net sales was driven by an increase in transactions and an increase in dollars per transaction. Dollars per transaction increased due to an increase in average unit retail partially offset by a decrease in units per transaction. For the year, the men's category was our largest growth category followed by accessories, footwear, and women's. Our only negative category for the year was hardgoods. By region,North America sales increased$165.1 million or 19.1% and other international sales increased$28.1 million or 22.5% during fiscal 2021 compared to fiscal 2020. Net sales for the year endedJanuary 29, 2022 included a$4.2 million increase due to the change in foreign exchange rates, which consisted of$3.0 million inCanada ,$1.0 million inAustralia , and$0.3 million inEurope . Excluding the impact of changes in foreign exchange rates,North America sales increased$162.2 million or 18.7% and other international sales increased$26.8 million or 21.4% during fiscal 2021 compared to fiscal 2020.
Gross Profit
Gross profit was$456.7 million for fiscal 2021 compared to$350.0 million for fiscal 2020, an increase of$106.7 million , or 30.5%. As a percentage of net sales, gross profit increased 330 basis points in fiscal 2021 to 38.6%, as we leverage meaningfully across the fixed cost structures compared to the period of COVID-19 related closures in the prior year. The increase was primarily driven by a 140 basis point leverage in our store occupancy costs when compared to the prior year, which included the continuation of rent charges without associated sales during COVID-19 related closures in fiscal 2020. In addition, there was a 110 basis point increase in product margin and a 100 basis point decrease in web fulfillment and web shipping costs due to leverage of distribution fixed costs and decreased total web sales activity compared to the prior year which increased as a result of COVID-19 related short-term closures.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $298.9 million for
fiscal 2021 compared to $253.1 million for fiscal 2020, an increase of
$45.8 million , or 18.1%. SG&A expenses as a percent of net sales decreased 20
basis points in fiscal 2021 to 25.3% as we leveraged meaningfully across our
fixed costs compared to the period of COVID-19 related closures in the prior
year. The decrease was primarily driven by 90 basis points of leverage in
non-wage store operating costs partially offset by a 50 basis point unfavorable
impact related to fewer government subsidies received in fiscal 2021.
Net Income
Net income for fiscal 2021 was
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Fiscal 2020 Results Compared With Fiscal 2019
Net sales were$990.7 million for fiscal 2020 compared to$1,034.1 million for fiscal 2019, a decrease of$43.4 million or 4.2%. The decrease in sales was primarily driven by the closure of our physical retail globally due to the impact of COVID-19. For the year, our stores were open approximately 78.4% of the possible days. This decrease was partially offset by a 13.6% increase in comparable sales driven by the increase in ecommerce sales as well as the strong performance of our physical stores upon re-opening. The 13.6% increase in comparable sales was primarily driven by an increase in comparable transactions and an increase in dollars per transaction. Dollars per transaction increased due to an increase in average unit retail and units per transaction. Comparable sales were primarily driven by an increase in hardgoods followed by men's clothing, accessories, and women's clothing partially offset by a decrease in footwear. For information as to how we define comparable sales, see "General" above. By region,North America sales decreased$48.7 million or 5.3% and other international sales increased$5.3 million or 4.4% during fiscal 2020 compared to fiscal 2019. Net sales for the year endedJanuary 30, 2021 included a$4.6 million increase due to the change in foreign exchange rates, which consisted of$4.3 million inEurope ,$0.5 million inAustralia offset by a$0.2 million decrease inCanada . Excluding the impact of changes in foreign exchange rates,North America sales decreased$48.5 million or 5.3% and other international sales increased$0.5 million or 0.3% during fiscal 2020 compared to fiscal 2019.
Gross Profit
Gross profit was$350.0 million for fiscal 2020 compared to$366.6 million for fiscal 2019, a decrease of$16.6 million , or 4.5%. As a percentage of net sales, gross profit decreased 10 basis points in fiscal 2020 to 35.3%. The decrease was primarily driven by a 120 basis point increase in web fulfillment and shipping costs due to increased web activity as a result of COVID-19, however leveraged to the prior year when compared to total shipped sales and a 30 basis point increase due to the impairment of operating lease right-of-use assets. This was partially offset by an 80 basis point decrease in inventory shrinkage and a 70 basis point increase in product margin.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $253.1 million for
fiscal 2020 compared to $280.8 million for fiscal 2019, a decrease of $27.7
million , or 9.9%. SG&A expenses as a percent of net sales decreased 160 basis
points in fiscal 2020 to 25.5%. The decrease was primarily driven by a 70 basis
point decrease due to governmental credits, a 60 basis point decrease in store
wages, a 30 basis point decrease in national training and recognition events and
a 20 basis point decrease in corporate costs.
Net Income
Net income for fiscal 2020 was$76.2 million , or$3.00 per diluted share, compared with net income of$66.9 million , or$2.62 per diluted share, for fiscal 2019. Our effective income tax rate for fiscal 2020 was 25.6% compared to 26.5% for fiscal 2019. The decrease in the effective tax rate for fiscal 2020 compared to fiscal 2019 was primarily related to a reduction in net losses in certain jurisdictions where there is uncertainty as to the realization of deferred tax assets and the proportion of earnings or loss before income taxes across jurisdictions.
Liquidity and Capital Resources
Our cash requirements are subject to change as business conditions warrant and
opportunities arise. Our primary uses of cash are for operational expenditures,
inventory purchases, common stock repurchases and capital investments, including
new stores, store remodels, store relocations, store fixtures and ongoing
infrastructure improvements. Historically, our main source of liquidity has been
cash flows from operations.
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The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.
AtJanuary 29, 2022 andJanuary 30, 2021 , cash, cash equivalents and current marketable securities were$294.5 million and$375.5 million . Working capital, the excess of current assets over current liabilities, was$263.2 million at the end of fiscal 2021, a decrease of 22.5% from$339.8 million at the end of fiscal 2020. The decrease in cash, cash equivalents and current marketable securities in fiscal 2021 was due repurchases of common stock of$193.8 million and$15.7 million of capital expenditures primarily related to the opening of 23 new stores and 3 remodels and relocations, partially offset by$135.0 million of cash provided by operating activities.
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Fiscal 2021 Fiscal 2020 Fiscal 2019
Total cash provided by (used in)
Operating activities $ 134,950 $ 138,412 $ 106,070
Investing activities 101,643 (110,541 ) (102,931 )
Financing activities (191,409 ) (9,694 ) 2,010Effect of exchange rate changes on cash and cash
equivalents (1,822 ) 3,522 (429 ) Increase in cash and cash equivalents$ 43,362 $ 21,699 $ 4,720 Operating Activities Net cash provided by operating activities decreased by$3.5 million in fiscal 2021 to$135.0 million from$138.4 million in fiscal 2020. Net cash provided by operating activities increased by$32.3 million in fiscal 2020 to$138.4 million from$106.1 million in fiscal 2019. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit cards or cash to buy from us, our receivables from customers settle quickly. Changes to our operating cash flows have historically been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, amortization and accretion, deferred taxes, and changes to the components of working capital. Investing Activities Net cash provided by investing activities was$101.6 million in fiscal 2021 related to$117.4 million in net sales of marketable securities and$15.7 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Net cash used in investing activities was$110.5 million in fiscal 2020 related to$101.4 million in net purchases of marketable securities and$9.1 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Net cash used in investing activities was$102.9 million in fiscal 2019 related to$84.1 million in net purchases of marketable securities and$18.8 million of capital expenditures primarily for new store openings and existing store remodels or relocations.
Financing Activities
Net cash used in financing activities in fiscal 2021 was$191.4 million related to$193.8 million used in the repurchase of common stock and$0.6 million in payments for tax withholding obligations upon vesting of restricted stock partially offset by$3.0 million in proceeds from the issuance and exercise of stock-based awards. Net cash used in financing activities in fiscal 2020 was$9.7 million related to$13.4 million used in the repurchase of common stock and$0.2 million in payments on tax withholding obligation upon vesting of restricted stock partially offset by$3.9 million in proceeds from the issuance and exercise of stock-based awards. Net cash provided by financing activities in fiscal 2019 was$2.0 million related to$2.3 million in proceeds from issuance of stock-based awards partially offset by$0.3 million in payments on tax withholding obligation upon vesting of restricted stock. 30
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Capital Expenditures
Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. In that regard, our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future. During fiscal 2021, we spent$15.7 million on capital expenditures which consisted of$11.5 million of costs related to investment in 23 new stores and 3 remodeled or relocated stores,$1.1 million associated with improvements to our websites and$3.1 million in other improvements. During fiscal 2020, we spent$9.1 million on capital expenditures, which consisted of$6.6 million of costs related to investment in 12 new stores and 3 remodeled or relocated stores,$2.1 million associated with improvements to our websites and$0.4 million in other improvements. During fiscal 2019, we spent$18.8 million on capital expenditures, which consisted of$13.7 million of costs related to investment in 16 new stores and 17 remodeled or relocated stores,$1.2 million associated with improvements to our websites and the Customer Engagement Suite and$3.9 million in other improvements. In fiscal 2022, we expect to spend approximately$30 million to$32 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 34 new stores we plan to open in fiscal 2022 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2022 will not be different from the number of stores we plan to open, or that actual fiscal 2022 capital expenditures will not differ from this expected amount.
Other Material Cash Requirements
Our material cash requirements include the following contractual and other obligations: (1) purchase obligations (for additional information, see Note 11 to the Consolidated Financial Statements); (2) supply and service arrangements entered in the normal course of business; (3) operating lease payments (for additional information, see Note 10 to the Consolidated Financial Statements); and (4) employee wages, benefits, and incentives; (5) commitments for capital expenditures; and (6) tax payables. Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions, and other matters. AtJanuary 29, 2022 , we did not have any "off-balance sheet arrangements," as defined in relevantSEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Sources of Liquidity
Our most significant sources of liquidity continue to be funds generated by
operating activities and available cash, cash equivalents and current marketable
securities. We expect these sources of liquidity and available borrowings under
our revolving credit facility will be sufficient to meet our foreseeable cash
requirements for operations and planned capital expenditures for at least the
next twelve months. Beyond this time frame, if cash flows from operations are
not sufficient to meet our capital requirements, then we will be required to
obtain additional equity or debt financing in the future. However, there can be
no assurance that equity or debt financing will be available to us when we need
it or, if available, that the terms will be satisfactory to us and not dilutive
to our then-current shareholders.
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As of January 29, 2022 , we maintained a secured credit agreement with Wells
Fargo Bank, N.A. , which provided us with a senior secured credit facility
("credit facility") of up to $25.0 million through December 1, 2023 , and up to
$35.0 million after December 1, 2023 and through December 1, 2024 . The credit
facility is available for working capital and other general corporate purposes.
The credit facility provides for the issuance of standby letters of credit in an
amount not to exceed $17.5 million outstanding at any time and with a term not
to exceed 365 days. The commercial line of credit provides for the issuance of
commercial letters of credit in an amount not to exceed $10.0 million and with
terms not to exceed 120 days. The credit facility will mature on December 1,
2024 . The credit facility is secured by a first-priority security interest in
substantially all of the personal property (but not the real property) of the
borrowers and guarantors. Amounts borrowed under the credit facility bear
interest at a daily simple SOFR rate plus a margin of 1.35% per annum. There
were no borrowings or open commercial letters of credit outstanding under the
secured credit facility at January 29, 2022 .
Additionally, we maintain a credit facility with UBS Switzerland AG of up to
15.0 million Euro ($16.7 million ), which may be used to guarantee payment of
letters of credit. The credit facility bears interest at 1.25%. There were no
borrowings outstanding under the credit agreement at January 29, 2022 .
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance withU.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2, "Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K. We believe that the following accounting estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements.
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Judgments and Effect If Actual Results Differ
Description Uncertainties From Assumptions
Valuation of Merchandise
Inventories
We value our inventory at Our write-down reserve We have not made any material
the lower of average cost or contains uncertainties changes in the accounting
net realizable value through because the calculation methodology used to calculate
the establishment of requires management to our write-down and shrinkage
write-down and inventory make assumptions based reserves in the past three
loss reserves. on the current rate of fiscal years. We do not believe
Our write-down reserve sales, the age and there is a reasonable
represents the excess of the profitability of likelihood that there will be a
carrying value over the inventory and other material change in the future
amount we expect to realize factors. estimates we use to calculate
from the ultimate sales or Our shrinkage reserve our inventory reserves.
other disposal of the contains uncertainties However, if actual results are
inventory. Write-downs because the calculation not consistent with our
establish a new cost basis requires management to estimates, we may be exposed to
for our inventory. make assumptions and to losses or gains that could be
Subsequent changes in facts apply judgment material. Our inventory
or circumstances do not regarding a number of reserves have increased by $1.3
result in the restoration of factors, including million in fiscal 2021.
previously recorded historical percentages A 10% decrease in the sales
write-downs or an increase that can be affected by price of our inventory at
in that newly established changes in merchandise January 29, 2022 would have
cost basis. mix and changes in decreased net income by less
Our inventory loss reserve actual shrinkage than $0.1 million in fiscal
represents anticipated trends. 2021.
physical inventory losses A 10% increase in actual
("shrinkage reserve") that physical inventory shrinkage
have occurred since the last rate at January 29, 2022 would
physical inventory. have decreased net income by
$0.2 million in fiscal 2021.
Valuation of Long-Lived
Assets
We review the carrying value Events that may result We do not believe there is a
of our long-lived assets, in an impairment reasonable likelihood that
including fixed assets and include the decision to there will be a material change
operating lease right-of-use close a store or in the estimates or assumptions
assets, for impairment facility or a we use to calculate long-lived
whenever events or changes significant decrease in asset impairment losses.
in circumstances indicate the operating However, if actual results are
that the carrying value of performance of a not consistent with our
such asset or asset group long-lived asset group. estimates and assumptions, our
may not be recoverable. Our impairment operating results could be
Recoverability of assets to calculations contain adversely affected. Declines in
be held and used is uncertainties because projected cash flow of the
determined by a comparison they require management assets could result in
of the carrying amount of an to make assumptions and impairment. We recognized
asset to future undiscounted to apply judgment to impairment losses of $2.2
net cash flows expected to estimate future cash million related to long-lived
be generated by the asset. flows and asset fair assets in fiscal 2021.
If such assets are values, including
considered impaired, the forecasting future
impairment recognized is sales, gross profit,
measured by comparing the operating expenses, or
fair value of the asset to sub-lease income. In
the asset carrying addition to historical
value. The fair value of the results, current trends
asset is based on the future and initiatives, and
discounted cash flow of long-term
current market rents that we macro-economic and
could receive as sublease industry factors are
income. qualitatively
considered.
Additionally,
management seeks input
from store operations
related to local
economic conditions,
including the impact of
closures of selected
co-tenants who occupy
the mall.
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Judgments and Effect If Actual Results Differ
Description Uncertainties From Assumptions
Right-of-use Assets and
Lease Liabilities
Significant judgment is We do not believe there is a
We determine if a contract required in determining reasonable likelihood that
contains a lease at our incremental there will be a material change
inception. Our operating borrowing rate and the in the estimates or assumptions
leases primarily consist of expected lease term, we use to calculate
retail store locations, both of which impact right-of-use assets and lease
distribution centers and the determination of liabilities. Given the
corporate office space. We lease classification significant operating lease
do not have any material and the present value assets and liabilities
leases, individually or in of lease payments. recorded, changes in the
the aggregate, classified as Generally, our lease estimates made by management or
a finance leasing contracts do not the underlying assumptions
arrangement. provide a readily could have a material impact on
determinable implicit our consolidated financial
Operating lease right-of-use rate and, therefore, we statements.
assets and liabilities are use an estimated
recognized at commencement incremental borrowing Total undiscounted future
date based on the present rate as of the lease payments for lease liabilities
value of lease payments over commencement date in were $288.5 million at January
the lease term, net of lease determining the present 29, 2022. If the incremental
incentives received and value of lease borrowing rate increased 10
initial direct costs paid. payments. The estimated basis points from the rate in
Our retail store leases are incremental borrowing effect at January 29, 2022, the
generally for an initial rate reflects lease liability balance would
period of 5-10 years, with considerations such as decrease by $0.3 million .
some of our international market rates for our
leases structured to include outstanding
renewal options at our collateralized debt and
election. We include renewal interpolations of rates
options that we are for leases with terms
reasonably certain to that differ from our
exercise in the measurement outstanding debt.
our lease liabilities and
right-of-use assets. Our lease terms include
option periods to
extend or terminate the
lease when it is
reasonably certain that
those options will be
exercised, which is
generally through an
initial period of 5-10
years.
Revenue Recognition
Revenue is recognized upon Our revenue recognition We have not made any material
purchase at our retail store accounting methodology changes in the accounting
locations. For our ecommerce contains uncertainties methodology used to measure
sales, revenue is recognized because it requires future sales returns or gift
upon shipment to the management to make card breakage in the past three
customer. Revenue is assumptions regarding fiscal years.
recorded net of sales future sales returns
returns and deductions for and the amount and We do not believe there is a
promotions. timing of gift cards reasonable likelihood that
Revenue is not recorded on projected to be there will be a material change
the sale of gift cards. We redeemed by gift card in the future estimates or
record the sale of gift recipients. Our assumptions we use to recognize
cards as a current liability estimate of the amount revenue. However, if actual
and recognize revenue when a and timing of sales results are not consistent with
customer redeems a gift returns and gift cards our estimates or assumptions,
card. Additionally, the to be redeemed is based we may be exposed to losses or
portion of gift cards that primarily on historical gains that could be material.
will not be redeemed ("gift experience.
card breakage") is Our sales return reserve has
recognized in proportion of decreased by $0.1 million in
the patterns used by the fiscal 2021. A 10% increase in
customer based on our our sales return reserve at
historical redemption January 29, 2022 would have
patterns. decreased net income by $0.3
million in fiscal 2021.
Our gift card breakage reserve
has increased by $1.5 million
in fiscal 2021. A 1% increase
in the estimated gift card
redemption rate would have
decreased net income by $0.1
million in fiscal 2021.
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Judgments and Effect If Actual Results Differ
Description Uncertainties From Assumptions
Accounting for Income Taxes
As part of the process of Significant judgment is Although management believes
preparing the consolidated required in evaluating that the income tax related
financial statements, income our tax positions and judgments and estimates are
taxes are estimated for each determining our reasonable, actual results
of the jurisdictions in provision for income could differ and we may be
which we operate. This taxes. During the exposed to losses or gains that
process involves estimating ordinary course of could be material.
actual current tax exposure business, there are At January 29, 2022 and January
together with assessing many transactions and 30, 2021, we had valuation
temporary differences calculations for which allowances on our deferred tax
resulting from differing the ultimate tax assets of $10.0 million and
treatment of items for tax determination is $8.7 million ,
and accounting purposes. uncertain. For example, respectively. Significant
These differences result in our effective tax rates changes in performance or
deferred tax assets and could be adversely estimated taxable income may
liabilities, which are affected by earnings result in a change in our
included on the consolidated being lower than assessment of the valuation
balance sheets. Valuation anticipated in allowance.
allowances are established jurisdictions where we Upon income tax audit, any
when necessary to reduce have lower statutory unfavorable tax settlement
deferred tax assets to the rates and higher than generally would require use of
amount expected to be anticipated in our cash and may result in an
realized. jurisdictions where we increase in our effective
We regularly evaluate the have higher statutory income tax rate in the period
likelihood of realizing the rates. of resolution. A favorable tax
benefit for income tax settlement may be recognized as
positions we have taken in The assessment of a reduction in our effective
various federal, state and whether we will realize income tax rate in the period
foreign filings by the value of our of resolution.
considering all relevant deferred tax assets
facts, circumstances and requires estimates and
information available to us. judgments related to
If we believe it is more amount and timing of
likely than not that our future taxable income.
position will be sustained, Actual results may
we recognize a benefit at differ from those
the largest amount that we estimates.
believe is cumulatively
greater than 50% likely to Additionally, changes
be realized. in the relevant tax,
accounting and other
laws, regulations,
principles and
interpretations may
adversely affect
financial results.
Accounting for Contingencies
We are subject to various Significant judgment is Although management believes
claims and contingencies required in evaluating that the contingency related
related to lawsuits, our claims and judgments and estimates are
insurance, regulatory and contingencies, reasonable, our accrual for
other matters arising out of including determining claims and contingencies could
the normal course of the probability that a fluctuate as additional
business. We accrue a liability has been information becomes known,
liability if the likelihood incurred and whether thereby creating variability in
of an adverse outcome is such liability is our results of operations from
probable and the amount is reasonably period to period. Additionally,
estimable. If the likelihood estimable. The actual results could differ and
of an adverse outcome is estimated accruals for we may be exposed to losses or
only reasonably possible (as claims and gains that could be material.
opposed to probable), or if contingencies are made See Note 11, "Commitments and
an estimate is not based on the best Contingencies," in the Notes to
determinable, we provide information available, the consolidated financial
disclosure of a material which can be highly statements found in Part IV
claim or contingency. subjective. Item 15 of this Form 10-K.
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Judgments and Effect If Actual Results Differ
Description Uncertainties From Assumptions
Goodwill and
Indefinite-lived Intangible
Assets
We assess goodwill and The goodwill and Based on the results of our
indefinite-lived intangible indefinite-lived annual impairment test for
assets for impairment on an intangible assets goodwill and indefinite-lived
annual basis or more impairment tests intangible assets, no
frequently if indicators of require management to impairment was recorded. All
impairment arise. We perform make assumptions and reporting units had a fair
this analysis at the judgments. value substantially in excess
reporting unit level. of the carrying value. If
Our quantitative actual results are not
We have an option to first goodwill analysis of consistent with our estimates
perform a qualitative fair value is or assumptions, or there are
assessment to determine determined using a significant changes in any of
whether it is more likely combination of the these estimates, projections
than not that the fair value income and market and assumptions, could have a
of a reporting unit is less approaches. Key material effect of the fair
than its carrying amount. If assumptions in the value of these assets in future
we choose not to perform the income approach include measurement periods and result
qualitative test or we estimating future cash in an impairment, which could
determine that it is more flows, long-term growth materially affect our results
likely than not that the rates and weighted of operations.
fair value of the reporting average cost of
unit is less than the capital. Our ability to A goodwill impairment analysis
carrying amount, we compare realize the future cash was performed for each of our
the carrying value of the flows used in our fair reporting units as of November
reporting unit to its value calculations is 1, 2021. Based on this analysis
estimated fair value, which affected by factors the implied fair value of each
is based on the perspective such as changes in of our reporting units was
of a market-participant. If economic conditions, substantially in excess of its
the fair value of the operating performance carrying value. A 10% decrease
reporting unit is lower than and our business in the estimated fair value of
the carrying value, an strategies. Key any of our reporting units
impairment loss is recorded assumptions in the would not have resulted in
for the amount in which the market approach include different conclusion.
carrying value exceeds the identifying companies
estimated fair value. and transactions with
comparable business
factors, such as
earnings growth,
profitability, business
and financial risk.
The fair value of the
trade names and
trademarks is
determined using the
relief from royalty
method, which requires
assumptions including
forecasting future
sales, discount rates
and royalty rates.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K.
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