Grocery Outlet Holding Corp. - Quarter Report: 2021 July (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended July 3, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-38950
Grocery Outlet Holding Corp.
(Exact name of registrant as specified in its charter)
| Delaware | 47-1874201 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
5650 Hollis Street, Emeryville, California | 94608 | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(510) 845-1999 | ||||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.001 per share | GO | Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 5, 2021, the registrant had 95,920,474 shares of common stock outstanding.
GROCERY OUTLET HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
Item 2. | ||||||||
| Item 4. | ||||||||
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q ("Form 10-Q" or "report") and the documents incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report and the documents incorporated by reference herein other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, business trends, and our objectives for future operations, may constitute forward-looking statements. Words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "outlook," "plan," "project," "seek," "will," and similar expressions, are intended to identify such forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under the headings "Item 1A. Risk Factors," and "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report or as described in the other documents and reports we file with the United States ("U.S.") Securities and Exchange Commission (the "SEC"). We encourage you to read this report and our other filings with the SEC carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance or achievements. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this report. We do not undertake any duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
As used in this report, references to "Grocery Outlet," "the Company," "registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Website Disclosure
We use our website, www.groceryoutlet.com, as a channel of distribution of Company information. Financial and other important information about us is routinely accessible through and posted on our website. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and information accessible through our website is not, however, incorporated by reference or a part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are available, free of charge, on our website as soon as practicable after the we file the reports with the SEC.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
| July 3, 2021 | January 2, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 126,623 | $ | 105,326 | |||||||
Independent operator receivables and current portion of independent operator notes, net of allowance $1,216 and $985 | 6,286 | 5,443 | |||||||||
Other accounts receivable, net of allowance $28 and $39 | 3,064 | 5,950 | |||||||||
| Merchandise inventories | 248,172 | 245,157 | |||||||||
| Prepaid expenses and other current assets | 17,845 | 20,081 | |||||||||
| Total current assets | 401,990 | 381,957 | |||||||||
Independent operator notes, net of allowance $8,961 and $7,124 | 20,197 | 27,440 | |||||||||
| Property and equipment, net | 471,285 | 433,652 | |||||||||
| Operating lease right-of-use assets | 866,687 | 835,397 | |||||||||
| Intangible assets, net | 48,806 | 48,226 | |||||||||
| Goodwill | 747,943 | 747,943 | |||||||||
| Deferred income tax assets, net | — | 3,529 | |||||||||
| Other assets | 8,844 | 7,480 | |||||||||
| Total assets | $ | 2,565,752 | $ | 2,485,624 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | 112,062 | $ | 114,278 | |||||||
| Accrued expenses | 39,180 | 35,699 | |||||||||
| Accrued compensation | 11,033 | 26,447 | |||||||||
| Current lease liabilities | 44,813 | 48,675 | |||||||||
| Income and other taxes payable | 6,805 | 7,547 | |||||||||
| Total current liabilities | 213,893 | 232,646 | |||||||||
| Long-term debt, net | 450,302 | 449,233 | |||||||||
| Deferred income tax liabilities, net | 1,038 | — | |||||||||
| Long-term lease liabilities | 926,636 | 881,438 | |||||||||
| Total liabilities | 1,591,869 | 1,563,317 | |||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders' equity: | |||||||||||
Voting common stock, par value $0.001 per share, 500,000,000 shares authorized; 95,837,220 and 94,854,336 shares issued and outstanding, respectively | 96 | 95 | |||||||||
| Additional paid-in capital | 800,090 | 787,047 | |||||||||
| Retained earnings | 173,697 | 135,165 | |||||||||
| Total stockholders' equity | 973,883 | 922,307 | |||||||||
| Total liabilities and stockholders' equity | $ | 2,565,752 | $ | 2,485,624 | |||||||
See Notes to Condensed Consolidated Financial Statements
3
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Net sales | $ | 775,535 | $ | 803,429 | $ | 1,528,001 | $ | 1,563,737 | |||||||||||||||
| Cost of sales | 537,737 | 549,678 | 1,058,276 | 1,072,960 | |||||||||||||||||||
| Gross profit | 237,798 | 253,751 | 469,725 | 490,777 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 192,955 | 198,002 | 381,553 | 384,933 | |||||||||||||||||||
| Depreciation and amortization | 16,959 | 13,215 | 32,502 | 26,160 | |||||||||||||||||||
| Share-based compensation | 4,210 | 10,175 | 8,149 | 30,452 | |||||||||||||||||||
| Total operating expenses | 214,124 | 221,392 | 422,204 | 441,545 | |||||||||||||||||||
| Income from operations | 23,674 | 32,359 | 47,521 | 49,232 | |||||||||||||||||||
| Other expenses (income): | |||||||||||||||||||||||
| Interest expense, net | 3,922 | 5,270 | 7,828 | 11,104 | |||||||||||||||||||
| Gain on insurance recoveries | (3,970) | — | (3,970) | — | |||||||||||||||||||
| Debt extinguishment and modification costs | — | — | — | 198 | |||||||||||||||||||
| Total other expenses (income) | (48) | 5,270 | 3,858 | 11,302 | |||||||||||||||||||
| Income before income taxes | 23,722 | 27,089 | 43,663 | 37,930 | |||||||||||||||||||
| Income tax expense (benefit) | 4,082 | (2,244) | 5,131 | (4,045) | |||||||||||||||||||
| Net income and comprehensive income | $ | 19,640 | $ | 29,333 | $ | 38,532 | $ | 41,975 | |||||||||||||||
| Basic earnings per share | $ | 0.21 | $ | 0.32 | $ | 0.40 | $ | 0.47 | |||||||||||||||
| Diluted earnings per share | $ | 0.20 | $ | 0.30 | $ | 0.39 | $ | 0.43 | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 95,724 | 90,800 | 95,449 | 90,152 | |||||||||||||||||||
| Diluted | 99,604 | 98,618 | 99,587 | 97,333 | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
4
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
| Voting Common | Additional Paid-In Capital | Retained Earnings | Stockholders' Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of January 2, 2021 | 94,854,336 | $ | 95 | $ | 787,047 | $ | 135,165 | $ | 922,307 | ||||||||||||||||||||
| Exercise and vesting of share-based awards | 647,137 | 1 | 2,952 | 2,953 | |||||||||||||||||||||||||
| Share-based compensation expense | 3,939 | 3,939 | |||||||||||||||||||||||||||
| Dividends paid | (5) | (5) | |||||||||||||||||||||||||||
| Net income and comprehensive income | 18,892 | 18,892 | |||||||||||||||||||||||||||
| Balance as of April 3, 2021 | 95,501,473 | 96 | 793,933 | 154,057 | 948,086 | ||||||||||||||||||||||||
| Exercise and vesting of share-based awards | 335,747 | — | 2,039 | 2,039 | |||||||||||||||||||||||||
| Share-based compensation expense | 4,210 | 4,210 | |||||||||||||||||||||||||||
| Dividends paid | (92) | (92) | |||||||||||||||||||||||||||
| Net income and comprehensive income | 19,640 | 19,640 | |||||||||||||||||||||||||||
| Balance as of July 3, 2021 | 95,837,220 | $ | 96 | $ | 800,090 | $ | 173,697 | $ | 973,883 | ||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
5
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued
(in thousands, except share amounts)
(unaudited)
| Voting Common | Additional Paid-In Capital | Retained Earnings | Stockholders' Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 28, 2019 | 89,005,062 | $ | 89 | $ | 717,282 | $ | 28,013 | $ | 745,384 | ||||||||||||||||||||
| Cumulative effect of accounting change | 439 | 439 | |||||||||||||||||||||||||||
| Exercise and vesting of share-based awards | 902,132 | 1 | 6,032 | 6,033 | |||||||||||||||||||||||||
| Share-based compensation expense | 20,277 | 20,277 | |||||||||||||||||||||||||||
| Dividends paid | (147) | (147) | |||||||||||||||||||||||||||
| Net income and comprehensive income | 12,642 | 12,642 | |||||||||||||||||||||||||||
| Balance as of March 28, 2020 | 89,907,194 | $ | 90 | $ | 743,444 | $ | 41,094 | $ | 784,628 | ||||||||||||||||||||
| Exercise and vesting of share-based awards | 1,511,079 | 1 | 9,844 | 9,845 | |||||||||||||||||||||||||
| Tax paid on behalf of employees related to net settlement of share-based awards | (483) | (483) | |||||||||||||||||||||||||||
| Share-based compensation expense | 10,175 | 10,175 | |||||||||||||||||||||||||||
| Dividends paid | (97) | (97) | |||||||||||||||||||||||||||
| Net income and comprehensive income | 29,333 | 29,333 | |||||||||||||||||||||||||||
| Balance as of June 27, 2020 | 91,418,273 | $ | 91 | $ | 762,883 | $ | 70,427 | $ | 833,401 | ||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| 26 Weeks Ended | |||||||||||
| July 3, 2021 | June 27, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 38,532 | $ | 41,975 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation of property and equipment | 29,969 | 23,832 | |||||||||
| Amortization of intangible and other assets | 3,842 | 3,625 | |||||||||
| Amortization of debt issuance costs and debt discounts | 1,255 | 1,137 | |||||||||
| Gain on insurance recoveries | (3,970) | — | |||||||||
| Debt extinguishment and modification costs | — | 198 | |||||||||
| Share-based compensation | 8,149 | 30,452 | |||||||||
| Provision for accounts receivable | 2,289 | (51) | |||||||||
| Proceeds from insurance recoveries - business interruption and inventory | 2,103 | — | |||||||||
| Deferred income taxes | 4,567 | (4,783) | |||||||||
| Other | 764 | 1,166 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Independent operator and other accounts receivable | 1,869 | (7,244) | |||||||||
| Merchandise inventories | (3,015) | (9,854) | |||||||||
| Prepaid expenses and other current assets | 2,236 | 938 | |||||||||
| Income and other taxes payable | (742) | 5,901 | |||||||||
| Trade accounts payable, accrued compensation and other accrued expenses | (11,279) | (8,367) | |||||||||
| Changes in operating lease assets and liabilities, net | 8,570 | 11,131 | |||||||||
| Net cash provided by operating activities | 85,139 | 90,056 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Advances to independent operators | (4,945) | (3,000) | |||||||||
| Repayments of advances from independent operators | 2,464 | 3,017 | |||||||||
| Purchases of property and equipment | (63,988) | (49,972) | |||||||||
| Proceeds from sales of assets | 20 | 216 | |||||||||
| Intangible assets and licenses | (3,637) | (2,431) | |||||||||
| Proceeds from insurance recoveries - property and equipment | 1,867 | — | |||||||||
| Net cash used in investing activities | (68,219) | (52,170) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from exercise of stock options | 4,992 | 15,878 | |||||||||
| Proceeds from revolving credit facility loan | — | 90,000 | |||||||||
| Principal payments on revolving credit facility loan | — | (90,000) | |||||||||
| Payments made for net settlement of employee share-based compensation awards | — | (483) | |||||||||
| Principal payments on term loans | — | (187) | |||||||||
| Principal payments on other borrowings | (518) | (447) | |||||||||
| Dividends paid | (97) | (244) | |||||||||
| Debt issuance costs paid | — | (701) | |||||||||
| Net cash provided by financing activities | 4,377 | 13,816 | |||||||||
| Net increase in cash and cash equivalents | 21,297 | 51,702 | |||||||||
| Cash and cash equivalents at beginning of period | 105,326 | 28,101 | |||||||||
| Cash and cash equivalents at end of period | $ | 126,623 | $ | 79,803 | |||||||
See Notes to Condensed Consolidated Financial Statements
7
GROCERY OUTLET HOLDING CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned subsidiaries, collectively, "Grocery Outlet," "we," or the "Company") is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. As of July 3, 2021, we had 400 stores throughout California, Washington, Oregon, Pennsylvania, Idaho and Nevada.
Secondary Public Offerings — On February 3, 2020, certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.1 million which we recognized in selling, general and administrative expenses ("SG&A") during the first quarter of fiscal 2020. We received $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering.
On April 27, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.0 million which we recognized in SG&A during the second quarter of fiscal 2020. We received $1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.
On May 28, 2020, the stockholder affiliated with our former private equity sponsor, Hellman and Friedman LLC, distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders. We did not receive any proceeds or incur any material costs related to this distribution.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the United States ("U.S.") Securities and Exchange Commission (the "SEC") for interim reporting. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 filed with the SEC on March 2, 2021. The condensed consolidated balance sheet as of January 2, 2021 included herein has been derived from those audited consolidated financial statements.
Our unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions were eliminated. In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future interim or annual period.
Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties. Changes in these estimates are recorded when known.
Segment Reporting — We manage our business as one operating segment. All of our sales were made to customers located in the United States and all property and equipment is located in the United States.
Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages. This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts.
Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities on our condensed consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities on our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term,
8
reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date, to determine the present value of our lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Amortization of finance lease right-of-use assets, interest expense on finance lease liabilities and operating and financing cash flows for finance leases are immaterial.
We have lease agreements with retail facilities for store locations, distribution centers, office space and equipment with lease and non-lease components, which are accounted for separately. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. The short-term lease expense is reflective of the short-term lease commitments on a go-forward basis. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores.
Fair Value Measurements — Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions
The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There were no assets or liabilities measured at fair value on a recurring basis as of July 3, 2021 or January 2, 2021. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. There were no transfers of assets or liabilities between levels within the fair value hierarchy as of July 3, 2021 or January 2, 2021.
Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below:
Cash and cash equivalents, independent operator ("IO") receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature or their variable interest rates.
IO notes receivable (net) — The carrying value of such financial instruments approximates their fair value due to the effect of the related allowance for expected credit losses.
Notes payable and term loans — The carrying value of such financial instruments approximates their fair value since the stated interest rates approximates market rates for loans with similar terms for borrowers with similar credit profiles. However, in accordance with Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, the fair values of our term loans as of July 3, 2021 and January 2, 2021 are disclosed in the below table.
The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values of our significant financial liabilities that are not recorded at fair value on the condensed consolidated balance sheets (amounts in thousands):
| July 3, 2021 | January 2, 2021 | ||||||||||||||||||||||
Carrying Amount (1) | Estimated Fair Value (2) | Carrying Amount (1) | Estimated Fair Value (2) | ||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| Term loans (Level 2) | $ | 458,887 | $ | 459,425 | $ | 458,757 | $ | 460,000 | |||||||||||||||
_______________________
(1)The carrying amounts as of July 3, 2021 and January 2, 2021 are net of unamortized debt discounts of $1.1 million and $1.2 million, respectively.
(2)The estimated fair value of our term loans was determined based on the average quoted bid-ask prices for the term loans in an over-the-counter market on the last trading day of the periods presented.
9
Revenue Recognition
Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Discounts provided to customers by us are recognized at the time of sale as a reduction in sales as the products are sold. Discounts provided by IOs are not recognized as a reduction in sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons.
We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any performance obligations, or any material costs to obtain or fulfill a contract as of July 3, 2021 and January 2, 2021.
Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize revenue for the unused portion of the gift cards (“breakage”) under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $2.4 million and $3.2 million as of July 3, 2021 and January 2, 2021, respectively. Breakage amounts were immaterial for the 13 and 26 weeks ended July 3, 2021 and June 27, 2020.
Disaggregated Revenues — The following table presents sales revenue by type of product for the periods indicated (amounts in thousands):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
Perishable (1) | $ | 270,856 | $ | 275,819 | $ | 532,274 | $ | 529,267 | |||||||||||||||
Non-perishable (2) | 504,679 | 527,610 | 995,727 | 1,034,470 | |||||||||||||||||||
| Total sales | $ | 775,535 | $ | 803,429 | $ | 1,528,001 | $ | 1,563,737 | |||||||||||||||
_______________________
(1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood.
(2) Non-perishable departments include grocery; general merchandise; health and beauty care; frozen foods; and beer and wine.
10
Variable Interest Entities — In accordance with the variable interest entities sub-section of ASC Topic 810, Consolidation, we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity (“VIE”) and therefore required to consolidate the financial results of the VIE in our consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE’s primary beneficiary. A reporting entity is determined to be a VIE’s primary beneficiary if it has the power to direct the activities that most significantly impact a VIE’s economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE.
We had 396, 375 and 357 stores operated by IOs as of July 3, 2021, January 2, 2021 and June 27, 2020, respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO may select a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. IOs are required to furnish initial working capital and to acquire certain store and safety assets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days’ notice.
As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us. Sales related to IO stores were $762.1 million and $788.5 million for the 13 weeks ended July 3, 2021 and June 27, 2020, respectively, and $1.50 billion and $1.53 billion for the 26 weeks ended July 3, 2021 and June 27, 2020, respectively. We, in turn, pay IOs a commission based on a share of the gross profit of the store. Inventories and related sales proceeds are our property, and we are responsible for store rent and related occupancy costs. IO commissions were expensed and included in SG&A. IO commissions were $115.4 million and $122.5 million for the 13 weeks ended July 3, 2021 and June 27, 2020, respectively, and $228.1 million and $236.9 million for the 26 weeks ended July 3, 2021 and June 27, 2020, respectively. IO commissions of $6.3 million and $6.0 million were included in accrued expenses as of July 3, 2021 and January 2, 2021, respectively.
IOs may fund their initial store investment from existing capital, a third-party loan or most commonly through a loan from us, as further discussed in Note 2. As collateral for IO obligations and performance, the Operator Agreements grant us the security interests in the assets owned by the IOs related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, the IOs are VIEs which we have variable interests in. To determine if we are the primary beneficiary of these VIEs, we evaluate whether we have (i) the power to direct the activities that most significantly impact the IO’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of its ability to direct those activities.
Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of their own labor. Labor activities that significantly impact the IO’s economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreements illustrate the lack of ultimate control over the IO.
Our maximum exposure to the IOs is generally limited to the gross operator notes and receivables due from these entities, which was $36.7 million and $41.0 million as of July 3, 2021 and January 2, 2021, respectively. See Note 2 for additional information.
11
Recently Adopted Accounting Standards
ASU No. 2019-12 — In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies accounting guidance for certain tax matters including franchise taxes, certain transactions that result in a step-up in tax basis of goodwill, and enacted changes in tax laws in interim periods. In addition, it eliminates a company’s need to evaluate certain exceptions relating to the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We adopted ASU 2019-12 beginning in the first quarter of fiscal 2021. The adoption of ASU 2019-12 did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
No recently issued accounting pronouncements are expected to have a material effect on our condensed consolidated financial statements.
Note 2. Independent Operator Notes and Receivables
The amounts included in IO notes and accounts receivable consist primarily of funds we loaned to IOs, net of estimated uncollectible amounts. IO notes are payable on demand and typically bear interest at rates between 3.00% and 9.95%. Accrued interest receivable on IO notes is included within the “independent operator receivables and current portion of independent operator notes, net of allowance” line item on the condensed consolidated balance sheets and was $0.3 million and $0.4 million as of July 3, 2021 and January 2, 2021, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of July 3, 2021 or January 2, 2021. Notes and receivables of our IOs participating in our TCAP, as defined below, are not considered to be past due or on a non-accrual status due to delinquency and are excluded from such measures.
IO notes and receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets.
The allowance is estimated using an expected loss framework, which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include:
•TCAP — Includes the notes and receivables of IOs with stores that have been open for more than 18 months that are participating in our Temporary Commission Adjustment Program (“TCAP”) as of the end of each reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in IO skills and experience.
•Non-TCAP — Includes the notes and receivables of IOs with stores that have been open for more than 18 months that are not participating in TCAP as of the end of each reporting period.
•New store — Includes the notes and receivables of IOs with stores that have been open for less than 18 months as of the end of each reporting period.
Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an individual basis.
Amounts due from IOs and the related allowances as of July 3, 2021 and January 2, 2021 consisted of the following (amounts in thousands):
| Allowance | Current Portion | Long-term Portion | |||||||||||||||||||||||||||||||||
| Gross | Current Portion | Long-term Portion | Net | ||||||||||||||||||||||||||||||||
| July 3, 2021 | |||||||||||||||||||||||||||||||||||
| Independent operator notes | $ | 31,353 | $ | (586) | $ | (8,961) | $ | 21,806 | $ | 1,609 | $ | 20,197 | |||||||||||||||||||||||
| Independent operator receivables | 5,307 | (630) | — | 4,677 | 4,677 | — | |||||||||||||||||||||||||||||
| Total | $ | 36,660 | $ | (1,216) | $ | (8,961) | $ | 26,483 | $ | 6,286 | $ | 20,197 | |||||||||||||||||||||||
12
| Allowance | Current Portion | Long-term Portion | |||||||||||||||||||||||||||||||||
| Gross | Current Portion | Long-term Portion | Net | ||||||||||||||||||||||||||||||||
| January 2, 2021 | |||||||||||||||||||||||||||||||||||
| Independent operator notes | $ | 37,238 | $ | (514) | $ | (7,124) | $ | 29,600 | $ | 2,160 | $ | 27,440 | |||||||||||||||||||||||
| Independent operator receivables | 3,754 | (471) | — | 3,283 | 3,283 | — | |||||||||||||||||||||||||||||
| Total | $ | 40,992 | $ | (985) | $ | (7,124) | $ | 32,883 | $ | 5,443 | $ | 27,440 | |||||||||||||||||||||||
A summary of activity in the IO notes and receivable allowance was as follows (amounts in thousands):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Beginning balance | $ | 9,003 | $ | 10,592 | $ | 8,109 | $ | 10,371 | |||||||||||||||
| Provision for independent operator notes and receivables | 1,400 | (921) | 2,300 | (73) | |||||||||||||||||||
| Cumulative effect of accounting change | — | — | — | (439) | |||||||||||||||||||
| Write-off of provision for independent operator notes and receivables | (226) | (493) | (232) | (681) | |||||||||||||||||||
| Ending Balance | $ | 10,177 | $ | 9,178 | $ | 10,177 | $ | 9,178 | |||||||||||||||
The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of July 3, 2021 (amounts in thousands):
| Credit Quality Indicator | 2021 (YTD) | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
| TCAP | $ | 1,086 | $ | 1,853 | $ | 2,304 | $ | 1,444 | $ | 533 | $ | — | $ | 7,220 | |||||||||||||||||||||||||||
| Non-TCAP | 2,800 | 2,354 | 4,908 | 2,627 | 1,308 | 666 | 14,663 | ||||||||||||||||||||||||||||||||||
| New store | 3,397 | 6,073 | — | — | — | — | 9,470 | ||||||||||||||||||||||||||||||||||
| Total | $ | 7,283 | $ | 10,280 | $ | 7,212 | $ | 4,071 | $ | 1,841 | $ | 666 | $ | 31,353 | |||||||||||||||||||||||||||
Note 3. Long-term Debt
Long-term debt consisted of the following (amounts in thousands):
| July 3, 2021 | January 2, 2021 | ||||||||||
| First Lien Credit Agreement: | |||||||||||
| Term loan | $ | 460,000 | $ | 460,000 | |||||||
| Long-term debt, gross | 460,000 | 460,000 | |||||||||
Less: Unamortized debt discounts and debt issuance costs | (9,698) | (10,767) | |||||||||
| Long-term debt, net | $ | 450,302 | $ | 449,233 | |||||||
First Lien Credit Agreement
GOBP Holdings, Inc ("GOBP Holdings"), our wholly owned subsidiary, together with another of our wholly owned subsidiaries, has a first lien credit agreement (the “First Lien Credit Agreement”) with a syndicate of lenders that consists of a $460.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, with sub-commitments for a $35.0 million letter of credit and $20.0 million of swingline loans as of July 3, 2021. The First Lien Credit Agreement permits voluntary prepayment on borrowings without premium or penalty. Borrowings under the First Lien Credit Agreement are secured by substantially all the assets of the borrower subsidiary and its guarantors.
Term Loan
Our $460.0 million senior term loan matures on October 22, 2025 and had an interest rate of 2.84% as of July 3, 2021. Due to previous prepayments on the term loan, no further principal payment on the term loan will be due until the maturity date.
13
On January 24, 2020, GOBP Holdings together with another of our wholly owned subsidiaries, entered into a second incremental agreement (the "Second Incremental Agreement") which amended a previous incremental agreement (the "First Incremental Agreement"). The Second Incremental Agreement refinanced a previous replacement term loan under the First Incremental Agreement with a replacement $460.0 million senior secured term loan (the "Second Replacement Term Loan") with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings, and made certain other corresponding technical changes and updates to the First Incremental Agreement. We wrote off debt issuance costs of $0.1 million and incurred debt modification costs of $0.1 million during the first quarter of fiscal 2020 in connection with this refinance.
Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement (collectively, the "First Lien Credit Agreement").
Revolving Credit Facility
As of July 3, 2021, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under the revolving credit facility. No amounts were outstanding under the revolving credit facility as of July 3, 2021 and January 2, 2021.
We are required to pay a quarterly commitment fee ranging from 0.25% to 0.50% on the daily unused amount of the commitment under the revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We are also required to pay fronting fees and other customary fees for letters of credit issued under the revolving credit facility. The interest rate for the revolving credit facility is determined based on a formula using certain market rates.
On March 19, 2020, we borrowed $90.0 million under the revolving credit facility of our First Lien Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. On May 26, 2020, we repaid the Revolving Credit Facility Loan in full.
Debt Covenants
The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement has the ability to restrict us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7.00 to 1.00.
As of July 3, 2021, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement.
14
Schedule of Principal Maturities
Principal maturities of debt as of July 3, 2021 are as follows (amounts in thousands):
| Remainder of fiscal 2021 | $ | — | |||
| Fiscal 2022 | — | ||||
| Fiscal 2023 | — | ||||
| Fiscal 2024 | — | ||||
| Fiscal 2025 | 460,000 | ||||
| Thereafter | — | ||||
| Total | $ | 460,000 | |||
Interest Expense, Net
Interest expense, net, consisted of the following (amounts in thousands):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Interest on loans | $ | 3,530 | $ | 4,998 | $ | 7,094 | $ | 10,788 | |||||||||||||||
| Amortization of debt issuance costs | 563 | 564 | 1,126 | 1,120 | |||||||||||||||||||
| Interest on finance leases | 97 | 76 | 190 | 187 | |||||||||||||||||||
| Other | 3 | 7 | 6 | 13 | |||||||||||||||||||
| Interest income | (271) | (375) | (588) | (1,004) | |||||||||||||||||||
| Interest expense, net | $ | 3,922 | $ | 5,270 | $ | 7,828 | $ | 11,104 | |||||||||||||||
Debt Extinguishment and Modification Costs
Debt extinguishment and modification costs consisted of the following (amounts in thousands):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Write off of debt issuance costs | $ | — | $ | — | $ | — | $ | 74 | |||||||||||||||
| Debt modification costs | — | — | — | 124 | |||||||||||||||||||
| Debt extinguishment and modification costs | $ | — | $ | — | $ | — | $ | 198 | |||||||||||||||
15
Note 4. Share-based Awards
For a discussion of our share-based incentive plans, refer to NOTE 7 —Share-based Awards of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 filed with the SEC on March 2, 2021.
Grant Activity
The following table summarizes stock option activity under all equity incentive plans during the 26 weeks ended July 3, 2021:
| Time-Based Stock Options | Performance-Based Stock Options | ||||||||||||||||||||||
| Number of Options | Weighted-Average Exercise Price | Number of Options | Weighted-Average Exercise Price | ||||||||||||||||||||
Options outstanding as of January 2, 2021 | 3,864,772 | $ | 12.42 | 2,325,580 | $ | 4.54 | |||||||||||||||||
| Exercised | (371,294) | 7.49 | (493,408) | 4.21 | |||||||||||||||||||
| Forfeitures | (114,621) | 20.39 | — | — | |||||||||||||||||||
Options outstanding as of July 3, 2021 | 3,378,857 | $ | 12.69 | 1,832,172 | $ | 4.62 | |||||||||||||||||
Options vested and exercisable as of July 3, 2021 | 2,010,885 | $ | 7.58 | 1,832,172 | $ | 4.62 | |||||||||||||||||
The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 26 weeks ended July 3, 2021:
| Number of Shares | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested balance as of January 2, 2021 | 341,842 | $ | 35.16 | ||||||||
| Granted | 324,832 | 35.46 | |||||||||
| Vested | (96,138) | 36.91 | |||||||||
| Forfeitures | (23,894) | 35.09 | |||||||||
Unvested balance as of July 3, 2021 | 546,642 | $ | 35.03 | ||||||||
The following table summarizes performance-based restricted stock unit ("PSU") activity under the Grocery Outlet Holding Corp. 2019 Incentive Plan during the 26 weeks ended July 3, 2021:
| Number of Shares | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested balance as of January 2, 2021 | 407,462 | $ | 36.90 | ||||||||
Granted (1) | 319,606 | 35.45 | |||||||||
| Forfeitures | (31,581) | 36.76 | |||||||||
Unvested balance as of July 3, 2021 (2) | 695,487 | $ | 36.24 | ||||||||
_______________________
(1)Represents initial grant of PSUs based on performance target level achievement of 100%.
(2)An additional 443,008 PSUs could potentially be included if the maximum performance levels are reached for all PSUs outstanding as of July 3, 2021.
16
Share-Based Compensation Expense
We recognize compensation expense for stock options, RSUs and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. We recognize share-based award forfeitures in the period such forfeitures occur.
Share-based compensation expense consisted of the following (amounts in thousands):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Time-based stock options | $ | 315 | $ | 711 | $ | 1,037 | $ | 1,470 | |||||||||||||||
| Performance-based stock options | — | 7,581 | — | 26,079 | |||||||||||||||||||
| RSUs | 1,917 | 1,319 | 3,413 | 2,192 | |||||||||||||||||||
| PSUs | 1,886 | 467 | 3,602 | 467 | |||||||||||||||||||
Dividends (1) | 92 | 97 | 97 | 244 | |||||||||||||||||||
| Share-based compensation expense | $ | 4,210 | $ | 10,175 | $ | 8,149 | $ | 30,452 | |||||||||||||||
_______________________
(1)Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016.
Note 5. Income Taxes
Our income tax expense (benefit) and effective income tax rate were as follows (amounts in thousands, except percentages):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Income tax expense (benefit) | $ | 4,082 | $ | (2,244) | $ | 5,131 | $ | (4,045) | |||||||||||||||
| Effective income tax rate | 17.2 | % | (8.3) | % | 11.8 | % | (10.7) | % | |||||||||||||||
The change from income tax benefits of $2.2 million and $4.0 million for the 13 and 26 weeks ended June 27, 2020, respectively, to income tax expenses of $4.1 million and $5.1 million for the 13 and 26 weeks ended July 3, 2021, respectively, was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs, as compared to the same periods in fiscal 2020.
The Company's tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, the Company updates the estimated annual effective tax rate. Our effective income tax rate for the 13 and 26 weeks ended July 3, 2021 was lower than the U.S. statutory income tax rate of 21% primarily due to excess tax benefits related to the exercise of stock options and vesting of RSUs. The increase in our effective income tax rate for the 13 and 26 weeks ended July 3, 2021 compared to the corresponding period in fiscal 2020 was primarily due to the above mentioned reduction in discrete items related to the exercise of stock options and vesting of employee RSUs.
Our policy is to recognize interest and penalties associated with uncertain tax benefits as part of the income tax provision and include accrued interest and penalties with the related income tax liability on our condensed consolidated balance sheets. To date, we have not recognized any interest and penalties in our condensed consolidated statements of operations and comprehensive income, nor have we accrued for or made payments for interest and penalties. We had no unrecognized tax benefits as of July 3, 2021 and January 2, 2021, respectively, and do not anticipate any changes to our uncertain tax positions within the next 12 months.
Note 6. Related Party Transactions
Related Party Leases
We leased property from entities affiliated with certain of our non-controlling stockholders for 15 store locations and one warehouse location as of both July 3, 2021 and June 27, 2020. Affiliated entities received aggregate lease payments from us of $1.5 million for each of the 13 weeks ended July 3, 2021 and June 27, 2020, respectively, and $3.0 million for each of the 26 weeks ended July 3, 2021 and June 27, 2020, respectively. We had total prepaid rent for these properties of $0.5 million as of July 3, 2021 and zero as of January 2, 2021.
17
Independent Operator Notes and Receivables
We offer interest-bearing notes to IOs and the gross operating notes and receivables due from these IOs was $36.7 million and $41.0 million as of July 3, 2021 and January 2, 2021, respectively. See Note 2 for additional information.
Note 7. Commitments and Contingencies
We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We do not believe the impact of such litigation will have a material adverse effect on our condensed consolidated financial statements taken as a whole.
Note 8. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net income and comprehensive income | $ | 19,640 | $ | 29,333 | $ | 38,532 | $ | 41,975 | |||||||||||||||
| Denominator | |||||||||||||||||||||||
Weighted-average shares outstanding — basic | 95,724 | 90,800 | 95,449 | 90,152 | |||||||||||||||||||
| Effect of dilutive stock options | 3,783 | 7,729 | 4,023 | 7,103 | |||||||||||||||||||
| Effect of dilutive RSUs | 97 | 89 | 115 | 78 | |||||||||||||||||||
Weighted-average shares outstanding — diluted (1) | 99,604 | 98,618 | 99,587 | 97,333 | |||||||||||||||||||
| Earnings per share : | |||||||||||||||||||||||
| Basic | $ | 0.21 | $ | 0.32 | $ | 0.40 | $ | 0.47 | |||||||||||||||
| Diluted | $ | 0.20 | $ | 0.30 | $ | 0.39 | $ | 0.43 | |||||||||||||||
_______________________
(1)We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued assuming the end of our reporting period was the end of the relevant PSU award contingency period. No PSUs were included in diluted weighted-average shares outstanding for the 13 and 26 weeks ended July 3, 2021 and June 27, 2020.
The following weighted-average common stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive (amounts in thousands):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| RSUs | 2 | 121 | 2 | 61 | |||||||||||||||||||
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and the audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 filed with the United States ("U.S.") Securities and Exchange Commission (the "SEC") on March 2, 2021 ("2020 Annual Report on Form 10-K"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other sections of this report.
We operate on a fiscal year that ends on the Saturday closest to December 31st each year. References to the second quarter of fiscal 2021 and the second quarter of fiscal 2020 refer to the 13 weeks ended July 3, 2021 and June 27, 2020, respectively.
As used in this report, references to "Grocery Outlet," "the Company," "the registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Overview
We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial independent operators (“IOs”) run our stores and create a neighborhood feel through personalized customer service and a localized product offering. As of July 3, 2021, we had 400 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.
Secondary Public Offerings
On February 3, 2020, certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.1 million which we recognized in selling, general and administrative expenses during the first quarter of fiscal 2020. We received $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering.
On April 27, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.0 million which we recognized in selling, general and administrative expenses during the second quarter of fiscal 2020. We received $1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.
On May 28, 2020, the stockholder affiliated with our former private equity sponsor, Hellman and Friedman LLC, distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders. We did not receive any proceeds or incur any material costs related to this distribution.
COVID-19
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. As a result, many states, including states where we have significant operations, declared a state of emergency, closed schools and non-essential businesses and enacted limitations on the number of people allowed to gather at one time in the same space. As of the date of this filing, the states in which we operate have "re-opened" but states and counties maintain differing and evolving requirements related to COVID-19. As we cycle periods of 2020 that included elevated COVID-related demand, we are reporting declines in year-over-year net sales and comparable store sales growth. In addition, consumer behavior continues to be impacted by a variety of factors including, in part, increased consumer mobility and travel, higher food-away-from-home spend, continued consolidation of grocery store visits, elevated grocery e-commerce usage and higher levels of government stimulus, leading to consumers prioritizing convenience over value. There has also been a recent surge of positive COVID-19 cases related to the Delta variant around the country, including states in which we operate, creating additional uncertainty and potential impacts to staffing. As a result of those factors, it is difficult to predict near term consumer behavior and resulting sales trends for our business.
19
Our IOs have faced and will continue to face staffing challenges including overtime pay, increased payroll attributable to employees who are compensated for their time to receive vaccines, and staffing shortages for a variety of reasons that are attributable to the COVID-19 pandemic. In early 2021, many counties in California and Washington enacted ordinances mandating "hazard pay" for grocery workers. While most of those ordinances have applied to large companies with more than 300 employees and have not applied to smaller businesses operated by a single employer (such as an Independent Operator), these ordinances do create staffing issues as many competitors are subject to those ordinances. In addition, federal and state governments have enacted legislation, such as the American Rescue Plan Act of 2021 and California's Senate Bill No. 95 to provide additional company paid benefits for employees and former employees impacted by the COVID-19 pandemic. Also, in the event that a Company employee, an IO, or IO employee tests positive for COVID-19, we may have to temporarily close a store, office or distribution center for cleaning and/or quarantine one or more employees which could negatively impact our financial results. We have incurred, and expect to continue to incur, cleaning and safety costs, supplies, and higher personnel expenses. In addition, since the start of the pandemic certain inventory items have at times been, and may in the future again be, in short supply. Additionally, certain fixture upgrades and new refrigeration units now have longer lead times. All of these factors could impact the ability of stores to operate normal hours of operation or have sufficient inventory at all times which may disrupt our business and negatively impact our financial results. Further, planned construction and opening of new stores have been and may continue to be negatively impacted due to increased time periods to get materials such as steel, obtain permits and licenses and set up utilities. Finally, we have incurred, and expect to continue to incur, additional expenses as a result of certain increased costs related to our IOs. For example, we are paying a portion of the costs of personal protective equipment ("PPE") and cleaning supplies for our IOs as well as reducing interest rates on outstanding IO notes. We cannot reasonably estimate the length or severity of this pandemic, but it could have a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2021. See "Item 1A. Risk Factors—Major health epidemics, such as the outbreak caused by COVID-19, and other outbreaks could disrupt and adversely affect our operations, financial condition and business" in our 2020 Annual Report on Form 10-K for additional information.
Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses (“SG&A”) and operating income. The key operational metrics and non-GAAP measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA and adjusted net income.
Second Quarter of Fiscal 2021 Overview
Key financial and operating performance results for the second quarter of fiscal 2021 were as follows:
•Net sales decreased by 3.5% to $775.5 million from $803.4 million in the second quarter of fiscal 2020; comparable store sales decreased by 10.0% compared to a 16.7% increase in the same period last year.
•We opened 11 new stores, ending the second quarter of fiscal 2021 with 400 stores in six states.
•Net income decreased 33.0% to $19.6 million, or $0.20 per diluted share, compared to net income of $29.3 million, or $0.30 per diluted share, in the second quarter of fiscal 2020.
•Adjusted EBITDA(1) decreased 15.7% to $50.8 million compared to $60.3 million in the second quarter of fiscal 2020.
•Adjusted net income(1) decreased 27.1% to $23.3 million, or $0.23 per adjusted diluted share, compared to $32.0 million, or $0.32 per adjusted diluted share, in the second quarter of fiscal 2020.
_______________________
(1)Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. The presentations for adjusted EBITDA, adjusted net income and adjusted diluted earnings per share for fiscal 2020 have been recast to reflect these changes. See GAAP to non-GAAP reconciliations in the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information.
20
Key Components of Results of Operations
Net Sales
We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. Discounts provided to customers by us are recognized at the time of sale as a reduction in sales as the products are sold. Discounts that are funded solely by IOs are not recognized as a reduction in sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Sales consist of sales from comparable stores and non-comparable stores, described below under “Comparable Store Sales.” Growth of our sales is generally driven by expansion of our store base in existing and new markets as well as comparable store sales growth. Sales are impacted by the spending habits of our customers, product mix and availability, as well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories supports growth in sales by attracting new customers and encouraging repeat visits from our existing customers. The spending habits of our customers are affected by changes in macroeconomic conditions, such as those experienced beginning in March 2020 due to the COVID-19 pandemic, and changes in discretionary income. As another example, the recent re-opening of businesses has led to a decrease in our customer count as customers are again traveling and eating out at restaurants. Our customers’ discretionary income is primarily impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment. Because we offer a broad selection of merchandise at extreme values, historically we have benefited from periods of economic uncertainty.
Cost of Sales, Gross Profit and Gross Margin
Cost of sales includes, among other things, merchandise costs, inventory markdowns, inventory losses and transportation, distribution and warehousing costs, including depreciation. Gross profit is equal to our sales less our cost of sales. Gross margin is gross profit as a percentage of our sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can vary. Our gross profit is variable in nature and generally follows changes in sales. While our disciplined buying approach has produced consistent gross margins throughout economic cycles which we believe has helped to mitigate adverse impacts on gross profit and results of operations, rapid changes in consumer demand like we experienced at the beginning of the COVID-19 pandemic could result in unexpected changes to our gross margins. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers. As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.
Selling, General and Administrative Expenses
SG&A expenses are comprised of both store-related expenses and corporate expenses. Store-related expenses include commissions paid to IOs, occupancy and shared maintenance costs, the cost of opening new IO stores, and Company-operated store expenses, including payroll, benefits, supplies and utilities. In addition, beginning in fiscal 2020, SG&A included incremental costs associated with COVID-19, such as cleaning and safety costs, costs for PPE and supplies. Corporate expenses include payroll and benefits for corporate and field support, marketing and advertising, insurance and professional services and operator recruiting and training costs. SG&A generally increases as we grow our store base and invest in our corporate infrastructure. SG&A expenses related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as gross profits decline. The remainder of our expenses are primarily fixed in nature. We continue to closely manage our expenses and monitor SG&A as a percentage of sales. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers. We expect that our SG&A will continue to increase in future periods as we continue to grow our sales revenue.
Operating Income
Operating income is gross profit less SG&A, depreciation and amortization and share-based compensation. Operating income excludes interest expense, net, gain on insurance recoveries, debt extinguishment and modification costs and income tax expense (benefit). We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
21
Results of Operations
The following tables summarize key components of our results of operations both in dollars and as a percentage of sales (amounts in thousands, except for percentages):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Net sales | $ | 775,535 | $ | 803,429 | $ | 1,528,001 | $ | 1,563,737 | |||||||||||||||
| Cost of sales | 537,737 | 549,678 | 1,058,276 | 1,072,960 | |||||||||||||||||||
| Gross profit | 237,798 | 253,751 | 469,725 | 490,777 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 192,955 | 198,002 | 381,553 | 384,933 | |||||||||||||||||||
| Depreciation and amortization | 16,959 | 13,215 | 32,502 | 26,160 | |||||||||||||||||||
| Share-based compensation | 4,210 | 10,175 | 8,149 | 30,452 | |||||||||||||||||||
| Total operating expenses | 214,124 | 221,392 | 422,204 | 441,545 | |||||||||||||||||||
| Income from operations | 23,674 | 32,359 | 47,521 | 49,232 | |||||||||||||||||||
| Other expenses (income): | |||||||||||||||||||||||
| Interest expense, net | 3,922 | 5,270 | 7,828 | 11,104 | |||||||||||||||||||
| Gain on insurance recoveries | (3,970) | — | (3,970) | — | |||||||||||||||||||
| Debt extinguishment and modification costs | — | — | — | 198 | |||||||||||||||||||
| Total other expenses (income) | (48) | 5,270 | 3,858 | 11,302 | |||||||||||||||||||
| Income before income taxes | 23,722 | 27,089 | 43,663 | 37,930 | |||||||||||||||||||
| Income tax expense (benefit) | 4,082 | (2,244) | 5,131 | (4,045) | |||||||||||||||||||
| Net income and comprehensive income | $ | 19,640 | $ | 29,333 | $ | 38,532 | $ | 41,975 | |||||||||||||||
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
Percentage of sales (1) | |||||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of sales | 69.3 | % | 68.4 | % | 69.3 | % | 68.6 | % | |||||||||||||||
| Gross profit | 30.7 | % | 31.6 | % | 30.7 | % | 31.4 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 24.9 | % | 24.6 | % | 25.0 | % | 24.6 | % | |||||||||||||||
| Depreciation and amortization | 2.2 | % | 1.6 | % | 2.1 | % | 1.7 | % | |||||||||||||||
| Share-based compensation | 0.5 | % | 1.3 | % | 0.5 | % | 1.9 | % | |||||||||||||||
| Total operating expenses | 27.6 | % | 27.6 | % | 27.6 | % | 28.2 | % | |||||||||||||||
| Income from operations | 3.1 | % | 4.0 | % | 3.1 | % | 3.1 | % | |||||||||||||||
| Other expenses (income): | |||||||||||||||||||||||
| Interest expense, net | 0.5 | % | 0.7 | % | 0.5 | % | 0.7 | % | |||||||||||||||
| Gain on insurance recoveries | (0.5) | % | — | % | (0.3) | % | — | % | |||||||||||||||
| Debt extinguishment and modification costs | — | % | — | % | — | % | — | % | |||||||||||||||
| Total other expenses (income) | — | % | 0.7 | % | 0.3 | % | 0.7 | % | |||||||||||||||
| Income before income taxes | 3.1 | % | 3.4 | % | 2.9 | % | 2.4 | % | |||||||||||||||
| Income tax expense (benefit) | 0.5 | % | (0.3) | % | 0.3 | % | (0.3) | % | |||||||||||||||
| Net income and comprehensive income | 2.5 | % | 3.7 | % | 2.5 | % | 2.7 | % | |||||||||||||||
_______________________
(1)Components may not sum to totals due to rounding.
22
Operating Metrics and Non-GAAP Financial Measures
Number of New Stores
The number of new stores reflects the number of stores opened during a particular reporting period. New stores require an initial capital investment in the store build-outs, fixtures and equipment which we amortize over time as well as cash required for inventory and pre-opening expenses.
We expect new store growth to be the primary driver of our sales growth over the long term. We lease substantially all of our store locations. Our initial lease terms on stores are typically ten years with options to renew for two or three successive five-year periods.
Comparable Store Sales
We use comparable store sales as an operating metric to measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales are impacted by the same factors that impact sales.
Comparable store sales consists of sales from our stores beginning on the first day of the fourteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved. Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas. Excluded from our comparable store definition are those stores that have been closed for an extended period as well as any planned store closures or dispositions. When applicable, as was the case with fiscal 2020, we exclude the sales in the non-comparable week of a 53-week year from the same store sales calculation.
Opening new stores is a primary component of our growth strategy and, as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.
EBITDA, Adjusted EBITDA and Adjusted Net Income
EBITDA, adjusted EBITDA and adjusted net income are key metrics used by management and our board of directors to assess our financial performance. EBITDA, adjusted EBITDA and adjusted net income are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use EBITDA, adjusted EBITDA and adjusted net income 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. In addition, we use EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results. We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business.
We define EBITDA as net income before net interest expense, income taxes and depreciation and amortization expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, non-cash rent, asset impairment and gain or loss on disposition, provision for accounts receivable reserves and certain other expenses. Adjusted net income represents net income adjusted for the previously mentioned EBITDA adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs, tax impact of option exercises and vesting of RSUs, and tax effect of total adjustments. EBITDA, adjusted EBITDA and adjusted net income are non-GAAP measures and may not be comparable to similar measures reported by other companies. EBITDA, adjusted EBITDA and adjusted net income have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of the non-GAAP measures through the use of various GAAP measures. In the future we may incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income. Our presentation of adjusted EBITDA and adjusted net income should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive our non-GAAP measures.
Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. We no longer exclude new store pre-opening expenses from our presentation of adjusted EBITDA and adjusted net income. We also updated our definition of adjusted net income to exclude the tax impact of options exercises and vesting of RSUs. Lastly, debt extinguishment and modification costs were reclassified to the other adjustments line item within the presentation of both adjusted EBITDA and adjusted net income. The presentations for adjusted EBITDA and adjusted net income for the 13 and 26 weeks ended ended June 27, 2020 have been recast to reflect these changes and reconciliations between the revised and previous
23
definitions of adjusted EBITDA and adjusted net income for each quarter of fiscal years 2020 and 2019 were provided in our Form 8-K filed with the SEC on March 2, 2021.
The following table summarizes key operating metrics and non-GAAP components of our results of operations for the periods presented (amounts in thousands, except for percentages and store counts):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
Other Financial and Operations Data | |||||||||||||||||||||||
| Number of new stores | 11 | 7 | 21 | 17 | |||||||||||||||||||
| Number of stores open at end of period | 400 | 362 | 400 | 362 | |||||||||||||||||||
Comparable store sales increase (decrease) (1) | (10.0) | % | 16.7 | % | (9.1) | % | 17.0 | % | |||||||||||||||
EBITDA (2) | $ | 45,311 | $ | 46,246 | $ | 85,302 | $ | 76,491 | |||||||||||||||
Adjusted EBITDA (2) | $ | 50,836 | $ | 60,307 | $ | 99,673 | $ | 116,928 | |||||||||||||||
Adjusted net income (2) | $ | 23,335 | $ | 31,993 | $ | 46,459 | $ | 60,746 | |||||||||||||||
_______________________
(1)Comparable store sales consist of sales from our stores beginning on the first day of the fourteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved.
(2)See "GAAP to Non-GAAP Reconciliations" section below for a reconciliation from our net income to EBITDA and adjusted EBITDA, net income to adjusted net income, and GAAP earnings per share to adjusted earnings per share for the periods presented. Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods.
24
GAAP to Non-GAAP Reconciliations
The following tables provide a reconciliation from our GAAP net income to EBITDA and adjusted EBITDA, GAAP net income to adjusted net income, and our GAAP earnings per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data):
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Net income | $ | 19,640 | $ | 29,333 | $ | 38,532 | $ | 41,975 | |||||||||||||||
| Interest expense, net | 3,922 | 5,270 | 7,828 | 11,104 | |||||||||||||||||||
| Income tax expense (benefit) | 4,082 | (2,244) | 5,131 | (4,045) | |||||||||||||||||||
Depreciation and amortization expenses (1) | 17,667 | 13,887 | 33,811 | 27,457 | |||||||||||||||||||
| EBITDA | 45,311 | 46,246 | 85,302 | 76,491 | |||||||||||||||||||
Share-based compensation expenses (2) | 4,210 | 10,175 | 8,149 | 30,452 | |||||||||||||||||||
Non-cash rent (3) | 3,061 | 2,759 | 5,969 | 4,973 | |||||||||||||||||||
Asset impairment and gain or loss on disposition (4) | 305 | (22) | 757 | 953 | |||||||||||||||||||
Provision for accounts receivable reserves (5) | 1,334 | (899) | 2,289 | (51) | |||||||||||||||||||
Other (6) | (3,385) | 2,048 | (2,793) | 4,110 | |||||||||||||||||||
| Adjusted EBITDA | $ | 50,836 | $ | 60,307 | $ | 99,673 | $ | 116,928 | |||||||||||||||
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||||||
| Net income | $ | 19,640 | $ | 29,333 | $ | 38,532 | $ | 41,975 | |||||||||||||||
Share-based compensation expenses (2) | 4,210 | 10,175 | 8,149 | 30,452 | |||||||||||||||||||
Non-cash rent (3) | 3,061 | 2,759 | 5,969 | 4,973 | |||||||||||||||||||
Asset impairment and gain or loss on disposition (4) | 305 | (22) | 757 | 953 | |||||||||||||||||||
Provision for accounts receivable reserves (5) | 1,334 | (899) | 2,289 | (51) | |||||||||||||||||||
Other (6) | (3,385) | 2,048 | (2,793) | 4,110 | |||||||||||||||||||
Amortization of purchase accounting assets and deferred financing costs (7) | 2,943 | 2,944 | 5,886 | 5,880 | |||||||||||||||||||
Tax impact of stock option exercises and vesting of restricted stock units (8) | (2,402) | (9,584) | (6,658) | (14,578) | |||||||||||||||||||
Tax effect of total adjustments (9) | (2,371) | (4,761) | (5,672) | (12,968) | |||||||||||||||||||
| Adjusted net income | $ | 23,335 | $ | 31,993 | $ | 46,459 | $ | 60,746 | |||||||||||||||
| GAAP earnings per share | |||||||||||||||||||||||
| Basic | $ | 0.21 | $ | 0.32 | $ | 0.40 | $ | 0.47 | |||||||||||||||
| Diluted | $ | 0.20 | $ | 0.30 | $ | 0.39 | $ | 0.43 | |||||||||||||||
| Adjusted earnings per share | |||||||||||||||||||||||
| Basic | $ | 0.24 | $ | 0.35 | $ | 0.49 | $ | 0.67 | |||||||||||||||
| Diluted | $ | 0.23 | $ | 0.32 | $ | 0.47 | $ | 0.62 | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | 95,724 | 90,800 | 95,449 | 90,152 | |||||||||||||||||||
| Diluted | 99,604 | 98,618 | 99,587 | 97,333 | |||||||||||||||||||
___________________________
(1)Includes depreciation related to our distribution centers which is included within the cost of sales line item in our condensed consolidated statements of operations and comprehensive income. See Note 1 to the condensed consolidated financial statements for additional information about the components of cost of sales.
(2)Includes non-cash share-based compensation expense and cash dividends paid on vested share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016. See "Share-based Compensation
25
Expense" in the "Comparison of the 13 and 26 weeks ended July 3, 2021 and June 27, 2020" section below for additional information.
(3)Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments. The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth in recent years.
(4)Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs.
(5)Represents non-cash changes in reserves related to our IO notes and accounts receivable. See Note 2 to the condensed consolidated financial statements for additional information.
(6)Represents other non-recurring, non-cash or non-operational items, such as gain on insurance recoveries, costs related to employer payroll taxes associated with equity awards, personnel-related costs, store closing costs, legal expenses, secondary equity offering transaction costs, debt extinguishment and modification costs, and miscellaneous costs.
(7)Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases.
(8)Represents excess tax benefits related to stock option exercises and vesting of RSUs to be recorded in earnings as discrete items in the reporting period in which they occur.
(9)Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items.
Comparison of the 13 and 26 weeks ended July 3, 2021 and June 27, 2020 (amounts in thousands, except percentages)
Net Sales
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 775,535 | $ | 803,429 | $ | (27,894) | (3.5) | % | $ | 1,528,001 | $ | 1,563,737 | $ | (35,736) | (2.3) | % | |||||||||||||||||||||||||||||||
The decrease in net sales for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily attributable to a decrease in comparable store sales, partially offset by non-comparable store sales growth attributable to the net 38 new stores opened over the last 12 months.
Comparable store sales decreased 10.0% for the 13 weeks ended July 3, 2021 and 9.1% for the 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020. As we cycle periods of 2020 that included elevated COVID-related demand starting in March 2020, the decrease in comparable store sales for the 13 weeks ended July 3, 2021 was due to decreases in both average transaction size and customer traffic, while the decrease in comparable stores sales for the 26 weeks ended July 3, 2021 was attributable to a decrease customer traffic, partially offset by an increase in average transaction size.
Cost of Sales
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 537,737 | $ | 549,678 | $ | (11,941) | (2.2) | % | $ | 1,058,276 | $ | 1,072,960 | $ | (14,684) | (1.4) | % | |||||||||||||||||||||||||||||||
| % of net sales | 69.3 | % | 68.4 | % | 69.3 | % | 68.6 | % | |||||||||||||||||||||||||||||||||||||||
The decrease in cost of sales for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily the result of a decrease in comparable store sales (as discussed above), partially offset by new store growth.
Costs as a percentage of sales increased as a result of product inflation, fuel and freight cost increases, and inventory turns more in line with historical averages. For the 13 and 26 weeks ended June 27, 2020, costs as a percentage of sales decreased significantly compared to historical averages due to reduced product markdowns and throwaways resulting from faster inventory turns driven by COVID-19 demand.
26
Gross Profit and Gross Margin
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 237,798 | $ | 253,751 | $ | (15,953) | (6.3) | % | $ | 469,725 | $ | 490,777 | $ | (21,052) | (4.3) | % | |||||||||||||||||||||||||||||||
| Gross margin | 30.7 | % | 31.6 | % | 30.7 | % | 31.4 | % | |||||||||||||||||||||||||||||||||||||||
The decrease in gross profit for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily the result of a decrease in comparable store sales (as discussed above), partially offset by new store growth. Our gross margin decreased for the 13 and 26 weeks ended July 3, 2021 compared to the same period in fiscal 2020 primarily due to higher cost of sales as a percentage of sales as discussed previously.
Selling, General and Administrative Expenses (“SG&A”)
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| SG&A | $ | 192,955 | $ | 198,002 | $ | (5,047) | (2.5) | % | $ | 381,553 | $ | 384,933 | $ | (3,380) | (0.9) | % | |||||||||||||||||||||||||||||||
| % of net sales | 24.9 | % | 24.6 | % | 25.0 | % | 24.6 | % | |||||||||||||||||||||||||||||||||||||||
The decrease in SG&A for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily driven by decreases in variable commission payments to IOs and decreases to management incentive bonus expenses, partially offset by higher store occupancy and maintenance costs due to a higher store count and higher personnel expenses as a result of the Company's growth.
As a percentage of sales, SG&A increased slightly for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 due to lower expense leverage as a result of reduced net sales.
Depreciation and Amortization Expense
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 16,959 | $ | 13,215 | $ | 3,744 | 28.3 | % | $ | 32,502 | $ | 26,160 | $ | 6,342 | 24.2 | % | |||||||||||||||||||||||||||||||
| % of net sales | 2.2 | % | 1.6 | % | 2.1 | % | 1.7 | % | |||||||||||||||||||||||||||||||||||||||
The increase in depreciation and amortization expenses for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily driven by new store growth and other capital investments.
Share-based Compensation Expense
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | $ | 4,210 | $ | 10,175 | $ | (5,965) | (58.6) | % | $ | 8,149 | $ | 30,452 | $ | (22,303) | (73.2) | % | |||||||||||||||||||||||||||||||
| % of net sales | 0.5 | % | 1.3 | % | 0.5 | % | 1.9 | % | |||||||||||||||||||||||||||||||||||||||
The decrease in share-based compensation expenses for the 13 weeks ended July 3, 2021 compared to the same period in fiscal 2020 was primarily driven by $7.6 million in share-based compensation expense related to 1.7 million performance-based stock options that vested in conjunction with the closing of our April 2020 secondary offering, partially offset by an increase in expense related to RSUs and PSUs granted during fiscal 2021 and 2020.
The decrease in share-based compensation expenses for the 26 weeks ended July 3, 2021 compared to the same period in fiscal 2020 was primarily due to $18.5 million in share-based compensation expense we incurred in February 2020 related to 4.1 million performance-based stock options that vested in connection with the closing of our February 2020 secondary offering as well as the above noted $7.6 million in share-based compensation expense for performance-based stock options recognized in the second quarter of fiscal 2020. This decrease was partially offset by an increase in expense related to RSUs and PSUs granted during fiscal 2021 and 2020. See Note 4 to the condensed consolidated financial statements for additional information.
27
Interest Expense, Net
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | $ | 3,922 | $ | 5,270 | $ | (1,348) | (25.6) | % | $ | 7,828 | $ | 11,104 | $ | (3,276) | (29.5) | % | |||||||||||||||||||||||||||||||
| % of net sales | 0.5 | % | 0.7 | % | 0.5 | % | 0.7 | % | |||||||||||||||||||||||||||||||||||||||
The decrease in net interest expense for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily driven by lower interest rates incurred under our First Lien Credit Agreement as a result of decreases in the London Inter-bank Offered Rate. Furthermore, the 13 and 26 weeks ended June 27, 2020 included interest expense from the $90.0 million borrowed under the revolving credit facility of our First Lien Credit Agreement between March and May of 2020. See Note 3 to the condensed consolidated financial statements for additional information.
Gain on Insurance Recoveries
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Gain on insurance recoveries | $ | (3,970) | $ | — | $ | (3,970) | N/A | $ | (3,970) | $ | — | $ | (3,970) | N/A | |||||||||||||||||||||||||||||||||
| % of net sales | (0.5) | % | — | % | (0.3) | % | — | % | |||||||||||||||||||||||||||||||||||||||
During the 13 weeks ended July 3, 2021 we recorded a $4.0 million gain on insurance recoveries related to the loss of our Paradise, California store in 2018 due to a wildfire.
Debt Extinguishment and Modification Costs
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Debt extinguishment and modification costs | $ | — | — | $ | — | — | % | $ | — | 198 | $ | (198) | (100.0) | % | |||||||||||||||||||||||||||||||||
| % of net sales | — | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||
During the 26 weeks ended June 27, 2020 we wrote off approximately $0.1 million of debt issuance costs and incurred $0.1 million of debt modification costs related to the repricing and amendment of our First Lien Credit Agreement. See Note 3 to the condensed consolidated financial statements for additional information.
Income Tax Expense (Benefit)
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | $ | 4,082 | $ | (2,244) | $ | 6,326 | 281.9 | % | $ | 5,131 | $ | (4,045) | $ | 9,176 | 226.8 | % | |||||||||||||||||||||||||||||||
| % of net sales | 0.5 | % | (0.3) | % | 0.3 | % | (0.3) | % | |||||||||||||||||||||||||||||||||||||||
| Effective tax rate | 17.2 | % | (8.3) | % | 11.8 | % | (10.7) | % | |||||||||||||||||||||||||||||||||||||||
During the 13 weeks ended July 3, 2021, we recorded an income tax expense of $4.1 million compared to an income tax benefit of $2.2 million for the 13 weeks ended June 27, 2020. This change was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs as compared to the same period in fiscal 2020. Such excess tax benefits totaled $2.4 million for the 13 weeks ended July 3, 2021 compared to $9.6 million for the 13 weeks ended June 27, 2020.
During the 26 weeks ended July 3, 2021, we recorded an income tax expense of $5.1 million compared to an income tax benefit of $4.0 million for the 26 weeks ended June 27, 2020. This increase was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs as compared to the same period in fiscal
28
2020. Such excess tax benefits totaled $6.7 million for the 26 weeks ended July 3, 2021 compared to $14.6 million for the 26 weeks ended June 27, 2020.
Net Income
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 19,640 | $ | 29,333 | $ | (9,693) | (33.0) | % | $ | 38,532 | $ | 41,975 | $ | (3,443) | (8.2) | % | |||||||||||||||||||||||||||||||
| % of net sales | 2.5 | % | 3.7 | % | 2.5 | % | 2.7 | % | |||||||||||||||||||||||||||||||||||||||
As a result of the foregoing factors, net income decreased for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020.
Adjusted EBITDA
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 50,836 | $ | 60,307 | $ | (9,471) | (15.7) | % | $ | 99,673 | $ | 116,928 | $ | (17,255) | (14.8) | % | |||||||||||||||||||||||||||||||
The decrease in adjusted EBITDA for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily due to a decrease in net sales (as discussed above), which was primarily driven by a decrease in comparable store sales of 10.0% for the 13 weeks ended July 3, 2021 and 9.1% for the 26 weeks ended July 3, 2021, partially offset by a decrease to SG&A compared to the same periods in fiscal 2020, each as discussed above.
Adjusted Net Income
| 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Adjusted net income | $ | 23,335 | $ | 31,993 | $ | (8,658) | (27.1) | % | $ | 46,459 | $ | 60,746 | $ | (14,287) | (23.5) | % | |||||||||||||||||||||||||||||||
The decrease in adjusted net income for the 13 and 26 weeks ended July 3, 2021 compared to the same periods in fiscal 2020 was primarily due to a decrease in net sales (as discussed above), which was primarily driven by a decrease in comparable store sales of 10.0% for the 13 weeks ended July 3, 2021 and 9.1% for the 26 weeks ended July 3, 2021, partially offset by a decrease to SG&A compared to the same periods in fiscal 2020, each as discussed above.
29
Liquidity and Capital Resources
Sources of Liquidity
As of July 3, 2021, we had cash and cash equivalents of $126.6 million, which consisted primarily of cash held in checking and money market accounts with financial institutions.
Our liquidity requirements arise primarily from our working capital needs, capital expenditures and debt service requirements. We have funded our working capital and capital expenditures requirements with internally generated cash on hand and through proceeds from the initial public offering of our common stock in June 2019. Our current primary sources of liquidity are net cash provided by operating activities and borrowings under our First Lien Credit Agreement (as defined below). In addition, we have a revolving credit facility with $100.0 million in borrowing capacity under our First Lien Credit Agreement. As of July 3, 2021, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under this revolving credit facility.
Public Offerings
On February 3, 2020, certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred offering costs of $1.1 million, which we recognized in SG&A during the first quarter of fiscal 2020. We received $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering.
On April 27, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.0 million, which we recognized in SG&A during the second quarter of fiscal 2020. We received $1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.
First Lien Credit Agreement
Second Incremental Agreement — On January 24, 2020, we entered into a second incremental agreement (the “Second Incremental Agreement”) which amended a previous incremental agreement (the "First Incremental Agreement"). The Second Incremental Agreement refinanced a previous replacement term loan under the First Incremental Agreement with a replacement $460.0 million senior secured term loan credit facility (the "Second Replacement Term Loan") with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, and made certain other corresponding technical changes and updates to the previously amended First Lien Credit Agreement. The interest rate on the Second Replacement Term Loan was 2.84% as of July 3, 2021. The Second Replacement Term Loan matures on October 22, 2025, which is the same maturity date as the prior term loans under the original First Lien Credit Agreement and First Incremental Agreement.
Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement, including voluntary prepayment on borrowings without premium or penalty. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement (collectively, the “First Lien Credit Agreement”).
Revolving Credit Facility — On March 19, 2020, we borrowed $90.0 million under the revolving credit facility of our First Lien Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. On May 26, 2020, we repaid the Revolving Credit Facility Loan in full.
Liquidity Requirements
Our primary working capital requirements are for the purchase of inventory, payroll, rent, issuance of IO notes, other store facilities costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by the timing of inventory fluctuations, new store openings and capital spending.
Our capital expenditures are primarily related to new store openings, ongoing store maintenance and improvements, expenditures related to our distribution centers and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems and corporate offices. We expect to fund capital expenditures through cash generated from our operations.
30
Based on our new store growth plans, we believe our existing cash and cash equivalents position, cash generated from our operations, and borrowings under our revolving credit facility will be adequate to finance our working capital requirements, planned capital expenditures and debt service over the next 12 months. If cash generated from our operations and borrowings under our revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time, in our sole discretion, purchase or retire all or a portion of our existing debt instruments through privately negotiated or open market transactions.
Debt Covenant
The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement has the ability to restrict us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7:00 to 1:00.
As of July 3, 2021, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement.
31
Cash Flows
The following table summarizes our cash flows for the periods presented (amounts in thousands, except percentages):
| 26 Weeks Ended | |||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | $ Change | % Change | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 85,139 | $ | 90,056 | $ | (4,917) | (5.5) | % | |||||||||||||||
| Net cash used in investing activities | $ | (68,219) | $ | (52,170) | $ | (16,049) | 30.8 | % | |||||||||||||||
| Net cash provided by financing activities | $ | 4,377 | $ | 13,816 | $ | (9,439) | (68.3) | % | |||||||||||||||
Net increase in cash and cash equivalents | $ | 21,297 | $ | 51,702 | $ | (30,405) | (58.8) | % | |||||||||||||||
Cash Provided by Operating Activities
Net cash provided by operating activities was $85.1 million for the 26 weeks ended July 3, 2021 compared to $90.1 million for the same period in fiscal 2020. The decrease in net cash provided by operating activities of $4.9 million for the 26 weeks ended July 3, 2021 compared to the same period in fiscal 2020 was primarily the result of lower net sales driven by a decrease in comparable store sales (as discussed above), partially offset by non-comparable store sales growth attributable to the net 38 new stores opened over the last 12 months.
Cash Used in Investing Activities
Net cash used in investing activities was $68.2 million for the 26 weeks ended July 3, 2021 compared to $52.2 million for the same period in fiscal 2020. The increase in net cash used in investing activities of $16.0 million for the 26 weeks ended July 3, 2021 compared to the same period in fiscal 2020 was primarily related to capital expenditures including the construction of newly opened stores and stores under development as well as existing store capital investments. We had 21 new store openings and two store relocations in the 26 weeks ended July 3, 2021 compared to 17 new store openings and one store relocation in the same period of fiscal 2020.
Cash Provided by Financing Activities
Net cash provided by financing activities was $4.4 million for the 26 weeks ended July 3, 2021 compared to $13.8 million net cash provided by financing activities for the same period in fiscal 2020. The decrease in net cash provided by financing activities was primarily due to a decrease in proceeds received from the exercise of stock options.
32
Off-Balance Sheet Arrangements
As of July 3, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
There have been no material changes outside the ordinary course of business to our contractual obligations during the 26 weeks ended July 3, 2021 from those disclosed in our 2020 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the SEC for interim reporting. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
There have been no material changes to our critical accounting policies and estimates during the 26 weeks ended July 3, 2021 from those disclosed in our 2020 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our operating results are subject to market risk from interest rate fluctuations on our credit facilities, which bear variable interest rates. As of July 3, 2021, our outstanding credit facilities included a $460.0 million term loan (the "Second Replacement Term Loan"). As of July 3, 2021, the interest rate on the Second Replacement Term Loan was 2.84%. See Note 3 to the condensed consolidated financial statements for additional information. Based on the outstanding balance and interest rate of our Second Replacement Term Loan as of July 3, 2021, a hypothetical 10% relative increase or decrease in the effective interest rate would cause an increase or decrease in interest expense of approximately $1.3 million over the next 12 months.
We do not currently use derivative financial instruments for speculative or trading purposes. This practice does not preclude our adoption of specific hedging strategies in the future.
33
Item 4. Control Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Our disclosure controls are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of July 3, 2021.
Changes in Internal Control over Financial Reporting
During the quarter ended July 3, 2021, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be party to litigation that arises in the ordinary course of our business. Management believes that we do not have any pending litigation that, separately or in the aggregate, would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of our 2020 Annual Report on Form 10-K under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price. There have been no material changes to our risk factors since the 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
None.
35
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | |||||||||||||||||||||||||||
| 3.1 | S-8 | 333-232318 | 6/24/2019 | 4.1 | ||||||||||||||||||||||||||||
| 3.2 | S-8 | 333-232318 | 6/24/2019 | 4.2 | ||||||||||||||||||||||||||||
| 31.1* | ||||||||||||||||||||||||||||||||
| 31.2* | ||||||||||||||||||||||||||||||||
| 32.1** | ||||||||||||||||||||||||||||||||
| 32.2** | ||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Extension Label Linkbase Document | |||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||
____________________________________
| * | Filed herewith. | |||||||
** | Furnished herewith. The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Grocery Outlet Holding Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. | |||||||
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Grocery Outlet Holding Corp. | ||||||||||||||
| Date: | August 11, 2021 | By: | /s/ Charles C. Bracher | |||||||||||
| Charles C. Bracher Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
| Grocery Outlet Holding Corp. | ||||||||||||||
| Date: | August 11, 2021 | By: | /s/ Lindsay E. Gray | |||||||||||
| Lindsay E. Gray Vice President and Corporate Controller (Principal Accounting Officer) | ||||||||||||||
37