Ollie's Bargain Outlet Holdings, Inc. - Quarter Report: 2021 October (Form 10-Q)

 

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Ollie’s Bargain Outlet Holdings, Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 24, 2021 (“Annual Report”). As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “Ollie’s,” the “Company,” “we,” “our” and “us” refer to Ollie’s Bargain Outlet Holdings, Inc. and subsidiaries.

We operate on a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday nearer to January 31 of the following year. References to “2021” refer to the 52-week period of January 31, 2021 to January 29, 2022.  References to “2020” refer to the 52-week period of February 2, 2020 to January 30, 2021.  References to the “third quarter of fiscal 2021” and the “third quarter of fiscal 2020” refer to the thirteen weeks of August 1, 2021 to October 30, 2021 and August 2, 2020 to October 31, 2020, respectively.  Year-to-date periods ended October 30, 2021 and October 31, 2020 refer to the thirty-nine weeks of January 31, 2021 to October 30, 2021 and February 2, 2020 to October 31, 2020, respectively.  Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as “could,” “may,” “might,” “will,” “likely,” “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “continues,” “projects” and similar references to future periods, prospects, financial performance and industry outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, including, but not limited to, legislation, national trade policy, and the following: our failure to adequately procure and manage our inventory or anticipate consumer demand; changes in consumer confidence and spending; risks associated with our status as a “brick and mortar” only retailer; risks associated with intense competition; our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all; the risks associated with doing business with international manufacturers and suppliers including, but not limited to, transportation and shipping challenges, and potential increases in tariffs on imported goods; outbreak of viruses or widespread illness, including the continued impact of COVID-19 and continuing or renewed regulatory responses thereto; our inability to operate our stores due to civil unrest and related protests or disturbances; our failure to properly hire and to retain key personnel and other qualified personnel; our inability to obtain favorable lease terms for our properties; the failure to timely acquire, develop and open, the loss of, or disruption or interruption in the operations of, our centralized distribution centers; fluctuations in comparable store sales and results of operations, including on a quarterly basis; risks associated with our lack of operations in the growing online retail marketplace; risks associated with litigation, the expense of defense, and potential for adverse outcomes; our inability to successfully develop or implement our marketing, advertising and promotional efforts; the seasonal nature of our business; risks associated with the timely and effective deployment, protection, and defense of computer networks and other electronic systems, including e-mail; changes in government regulations, procedures and requirements; risks associated with natural disasters, whether or not caused by climate change; and our ability to service indebtedness and to comply with our financial covenants together with each of the other factors set forth under “Item 1A - Risk Factors” contained herein and in our filings with the SEC, including our Annual Report. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which such statement is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.  You are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.

  Overview

 

Ollie’s is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices.  Known for our assortment of products offered as “Good Stuff Cheap,” we offer customers a broad selection of brand name products, including housewares, food, books and stationery, bed and bath, flooring, toys and hardware.  Our differentiated go-to market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns.

COVID-19 Update

 

The COVID-19 pandemic has significantly impacted the U.S. and global economies, resulting in business slowdowns or shutdowns, reduced economic activity, changes in consumer behavior, and changes in the mindset and availability of the labor force.   We continue to monitor the impact of the pandemic on our business, including on our associates, customers, business partners and supply chain.

We continue to take measures to protect the health and safety of our associates and customers, a primary concern of our management team.  We have also taken measures to support the communities that we serve to address the challenges posed by the pandemic.

Following the onset of the pandemic, our net sales initially benefited from increased consumer spending associated with federal stimulus funds for said pandemic.  At this time, there is uncertainty with regard to the continuation of these stimulus measures and, as a result, there may be potential changes in consumer spending behavior or demand.   In addition, we are experiencing labor pressures at both our stores and distribution centers, higher import and  trucking costs, and supply chain disruptions due to the impacts of COVID-19 and related measures.  We are increasing our hiring efforts in certain impacted markets and working closely with our suppliers and transportation partners to mitigate the impact of the supply chain challenges.  The significance and duration of these and other potential elevated costs is uncertain, and we will continue to assess and respond to current and evolving conditions.

As we continue to monitor the COVID-19 pandemic and potentially take actions based on the requirements and recommendations of federal, state and local authorities, we intend to focus on managing the business for future, long-term growth.  In certain circumstances, there may be developments outside our control, including resurgences of COVID-19 and, in particular, new and more contagious or vaccine resistant variants, requiring us to refine our operations.  As such, given the evolving nature of the pandemic, we cannot reasonably estimate its impact on our financial condition, results of operations or cash flows in the future.  Refer to Part II, Item 1A. Risk Factors of this Form 10-Q and Part I, Item 1A. Risk Factors of our 2020 Form 10-K for a full discussion of the risks associated with the COVID-19 pandemic.

Our Growth Strategy

 

Since the founding of Ollie’s in 1982, we have grown organically by backfilling existing markets and leveraging our brand awareness, marketing and infrastructure to expand into new markets in contiguous states.  We have expanded to 426 stores located in 29 states as of October 30, 2021.

 

Our stores are supported by three distribution centers, one each in York, PA, Commerce, GA and Lancaster, TX. We believe our distribution capabilities can support a range of 500 to 600 stores over the next several years.

 

We have invested in our associates, infrastructure, distribution network and information systems to allow us to continue to rapidly grow our store footprint, including:

 

 

 

 

 

Our business model has produced consistent and predictable store growth over the past several years, during both strong and weaker economic cycles.  We plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies:

 

 

 

 

We have a proven portable, flexible and highly profitable store model that has produced consistent financial results and returns.  Our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately $1.0 million, which includes store fixtures and equipment, store-level and distribution center inventory (net of payables) and pre-opening expenses.  We target new store sales of approximately $4 million in their first full year of operations.

While we are focused on driving comparable store sales and managing our expenses, our revenue and profitability growth will primarily come from opening new stores.  The core elements of our business model are procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins.  In addition, our new stores generally open strong, contributing to the growth in net sales and profitability of our business.  We plan to achieve continued net sales growth, including comparable stores sales, by adding stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers.  We also plan to leverage and expand our Ollie’s Army database marketing strategies.  In addition, we plan to continue to manage our selling, general and administrative expenses (“SG&A”) by continuing to make process improvements and by maintaining our standard policy of reviewing our operating costs.

Our ability to grow and our results of operations may be impacted by additional factors and uncertainties, such as consumer spending habits, which are subject to macroeconomic conditions and changes in discretionary income.  Our customers’ discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment. The potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers.

Our key competitive advantage is our direct buying relationships with many major manufacturers, wholesalers, distributors, brokers and retailers for our brand name and closeout products and unbranded goods.  We also augment our product mix with private label brands.  As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal.

 

How We Assess the Performance of Our Business and Key Line Items

 

We consider a variety of financial and operating measures in assessing the performance of our business.  The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.

 

Number of New Stores

 

The number of new stores reflects the number of stores opened during a particular reporting period.  Before we open new stores, we incur pre-opening expenses described below under “Pre-Opening Expenses” and we make an initial investment in inventory.  We also make initial capital investments in fixtures and equipment, which we amortize over time.

We expect new store growth to be the primary driver of our sales growth.  Our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods.  Our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states.  Our new stores often open with higher sales levels as a result of greater advertising and promotional spend in connection with grand opening events, but decline shortly thereafter to our new store model levels.

Net Sales

 

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of the merchandise.  Also included in net sales is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage.  Net sales are presented net of returns and sales tax.  Net sales consist of sales from comparable stores and non-comparable stores, described below under “Comparable Store Sales.”  Growth of our net sales is primarily driven by expansion of our store base in existing and new markets.  As we continue to grow, we believe we will have greater access to brand name and closeout merchandise and an increased deal selection, resulting in more potential offerings for our customers.  Net sales are impacted by product mix, merchandise mix and availability, as well as promotional activities and the spending habits of our customers. Our broad selection of offerings across diverse product categories supports growth in net sales by attracting new customers, which results in higher spending levels and frequency of shopping visits from our customers, including Ollie’s Army members.

The spending habits of our customers are subject to macroeconomic conditions and changes in discretionary income.  Our customers’ discretionary income is primarily impacted by gas prices, wages, and consumer trends and preferences, which fluctuate depending on the environment.  However, because we offer a broad selection of merchandise at extreme values, we believe we are generally less impacted than other retailers by economic cycles that correspond with declines in general consumer spending habits.  We believe we also benefit from periods of increased consumer spending.

 

Comparable Store Sales

 

Comparable store sales 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 consist of net sales from our stores beginning on the first day of the sixteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved.  Comparable store sales are impacted by the same factors that impact net sales.

 

We define comparable stores to be stores that:

 

 

 

 

 

Non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months.  Stores which are closed temporarily, but for more than five days in any fiscal month, are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales.

Opening new stores is the 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 are only one measure we use to assess the success of our growth strategy.

 

Gross Profit and Gross Margin

 

Gross profit is equal to our net sales less our cost of sales.  Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation and amortization. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit.

In addition, our gross margin is impacted by product mix, as some products generally provide higher gross margins, by our merchandise mix and availability, and by our merchandise cost, which can vary.

Our gross profit is variable in nature and generally follows changes in net sales.  We regularly analyze the components of gross profit, as well as gross margin.  Specifically, our product margin and merchandise mix is reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals.  Our disciplined buying approach has produced consistent gross margins and we believe helps to mitigate adverse impacts on gross profit and results of operations.

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 are comprised of payroll and benefits for store, field support and support center associates.  SG&A also include marketing and advertising expense, occupancy costs for stores and the store support center, insurance, corporate infrastructure and other general expenses. The components of our SG&A remain relatively consistent per store and for each new store opening. The components of our SG&A may not be comparable to the components of similar measures of other retailers.  Consolidated SG&A generally increase as we grow our store base and as our net sales increase. A significant portion of our expenses is primarily fixed in nature, and we expect to continue to maintain strict discipline while carefully monitoring SG&A as a percentage of net sales.  We expect that our SG&A will continue to increase in future periods with future growth.

 

Depreciation and Amortization Expenses

 

Property and equipment are stated at original cost less accumulated depreciation and amortization. Depreciation and amortization expenses are calculated over the estimated useful lives of the related assets, or in the case of leasehold improvements, the lesser of the useful lives or the remaining term of the lease. Expenditures for additions, renewals, and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed on the straight-line method for financial reporting purposes. Depreciation and amortization as it relates to our distribution centers is included within cost of sales on the condensed consolidated statements of income.

 

Pre-Opening Expenses

 

Pre-opening expenses consist of expenses of opening new stores and distribution centers, as well as store closing costs.  For opening new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs.  Pre-opening expenses for new stores are expensed as they are incurred, which is typically within 30 to 45 days of opening a new store. For opening distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs.  Store closing costs primarily consist of insurance deductibles, rent and store payroll.

 

Operating Income

 

Operating income is gross profit less SG&A, depreciation and amortization and pre-opening expenses.  Operating income excludes net interest income or expense and income tax expense.  We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

 

EBITDA and Adjusted EBITDA

 

EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance.  EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.  We use Adjusted EBITDA to supplement U.S. generally accepted accounting principles (“GAAP”) measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures.  Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate the Company’s 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 income or expense, depreciation and amortization expenses and income taxes.  Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense and the gain from an insurance settlement.  EBITDA and Adjusted EBITDA are non-GAAP measures and may not be comparable to similar measures reported by other companies.  EBITDA and Adjusted EBITDA 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. In the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA, see “Results of Operations.”

 

Factors Affecting the Comparability of our Results of Operations

 

Our results over the past two years have been affected by the following factors, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.

 

Historical Results

 

Historical results are not necessarily indicative of the results to be expected for any future period.

 

Store Openings and Closings

 

We opened 18 new stores and temporarily closed one store due to weather-related events in the third quarter of fiscal 2021. We opened 19 new stores, including one relocated store, and re-opened a temporarily closed store in the third quarter of fiscal 2020. In connection with these store openings, relocations and closings, we incurred expenses of $3.3 million and $3.7 million for the third quarters of fiscal 2021 and fiscal 2020, respectively. We opened 41 new stores, including two relocated stores, and temporarily closed one additional store due to weather-related events in the thirty-nine weeks ended October 30, 2021. We opened 42 new stores, including one relocated store, and closed two additional stores in the thirty-nine weeks ended October 31, 2020. In connection with these store openings, relocations and closings, we incurred expenses of $8.4 million and $8.9 million for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively.

 

Seasonality

 

Our business is seasonal in nature and demand is generally the highest in our fourth fiscal quarter due to the holiday sales season.  To prepare for the holiday sales season, we must order and keep in stock more merchandise than we carry during other times of the year and generally engage in additional marketing efforts.  We expect inventory levels, along with accounts payable and accrued expenses, to reach their highest levels in our third and fourth fiscal quarters in anticipation of increased net sales during the holiday sales season.  As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year.  Because we offer a broad selection of merchandise at extreme values, we believe we are generally less impacted than other retailers by economic cycles which correspond with declines in general consumer spending habits and we believe we still benefit from periods of increased consumer spending.

 

Results of Operations

 

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales.

We derived the condensed consolidated statements of income for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 from our unaudited condensed consolidated financial statements and related notes.  Our historical results are not necessarily indicative of the results that may be expected in the future.

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The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented:

 

 

Third Quarter of Fiscal 2021 Compared to Third Quarter of Fiscal 2020

 

Net Sales

 

 

Gross Profit and Gross Margin

 

Gross profit decreased to $152.6 million in the third quarter of fiscal 2021 from $171.5 million in the third quarter of fiscal 2020, a decrease of $18.9 million, or 11.0%. Gross margin decreased 160 basis points to 39.8% in the third quarter of fiscal 2021 from 41.4% in the third quarter of fiscal 2020.  The decrease in gross margin in the third quarter of fiscal 2021 is due to increased supply chain costs, primarily the result of higher import and trucking costs and, to a lesser extent, higher wage rates in the distribution centers, partially offset by an increased merchandise margin.

 

Selling, General and Administrative Expenses

 

SG&A increased to $114.0 million in the third quarter of fiscal 2021 from $105.8 million in the third quarter of fiscal 2020, an increase of $8.2 million, or 7.8%, primarily driven by an increased number of stores and higher wage rates in select markets.  As a percentage of net sales, SG&A increased 420 basis points to 29.7% in the third quarter of fiscal 2021 from 25.5% in the third quarter of fiscal 2020.  The increase was primarily due to deleveraging as a result of the decrease in sales.

 

Included in SG&A in the third quarter of fiscal 2021 is $0.3 million of income related to a gain from an insurance settlement. Excluding this gain, SG&A expenses increased 8.1% over third quarter of fiscal 2020 and as a percentage of net sales increased 430 basis points.

  Pre-Opening Expenses

 

Pre-opening expenses for new stores decreased to $3.3 million in the third quarter of fiscal 2021 from $3.7 million in the third quarter of fiscal 2020 due to the comparative number and timing of new stores.  We opened 18 new stores and temporarily closed one store in the third quarter of fiscal 2021. We opened 19 new stores, including one relocation, and re-opened one temporarily closed store in the third quarter of fiscal 2020.  As a percentage of net sales, pre-opening expenses were 0.9% in both the third quarters of fiscal 2021 and fiscal 2020.

 

Income Tax Expense

 

Income tax expense totaled $7.0 million and $12.7 million in the third quarter of fiscal 2021 and the third quarter of fiscal 2020, respectively.  The effective tax rates for the third quarters of fiscal 2021 and fiscal 2020 were 23.1% and 21.9%, respectively.  The increased effective tax rate in the quarter was primarily due to a decrease in excess tax benefits related to stock-based compensation.  Discrete tax benefits totaled $1.0 million and $2.0 million in the third quarter of fiscal 2021 and the third quarter of fiscal 2020, respectively.

 

Net Income

 

As a result of the foregoing, net income decreased to $23.2 million in the third quarter of fiscal 2021 from $45.2 million in the third quarter of fiscal 2020, a decrease of $22.0 million or 48.7%.

 

Adjusted EBITDA

 

Adjusted EBITDA decreased to $37.9 million in the third quarter of fiscal 2021 from $65.3 million in the third quarter of fiscal 2020, a decrease of $27.4 million, or 41.9%.

 

Thirty-nine Weeks 2021 Compared to Thirty-nine Weeks 2020

 

Net Sales

 

 

Gross Profit and Gross Margin

 

Gross profit decreased to $498.2 million in the thirty-nine weeks ended October 30, 2021 from $518.7 million in the thirty-nine weeks ended October 31, 2020, a decrease of $20.5 million, or 4.0%. Gross margin decreased 30 basis points to 39.8% in the thirty-nine weeks ended October 30, 2021 from 40.1% in the thirty-nine weeks ended October 31, 2020.  The decrease in gross margin in the thirty-nine weeks ended October 30, 2021 is due to increased supply chain costs, primarily the result of higher import and trucking costs, partially offset by improvement in the merchandise margin.

 

Selling, General and Administrative Expenses

 

SG&A increased to $328.5 million in the thirty-nine weeks ended October 30, 2021 from $304.7 million in the thirty-nine weeks ended October 31, 2020, an increase of $23.8 million, or 7.8%, primarily driven by an increased number of stores and partially offset by tight expense controls throughout the organization.  As a percentage of net sales, SG&A increased 260 basis points to 26.2% in the thirty-nine weeks ended October 30, 2021 from 23.6% in the thirty-nine weeks ended October 31, 2020.  The increase was primarily due to a significant deleveraging as a result of the decrease in sales.

 

Included in SG&A in the thirty-nine weeks ended October 30, 2021 is $0.3 million of income related to a gain from an insurance settlement. Excluding this gain, SG&A expenses increased 7.9% over the thirty-nine weeks ended October 31, 2020 and as a percentage of net sales increased 270 basis points.

 

Pre-Opening Expenses

 

Pre-opening expenses for new stores decreased to $8.4 million in the thirty-nine weeks ended October 30, 2021 from $8.9 million in the thirty-nine weeks ended October 31, 2020 due to the comparative number and timing of new stores.  During the thirty-nine weeks ended October 30, 2021, we opened 41 stores, including two relocated stores, and temporarily closed one additional store. During the thirty-nine weeks ended October 31, 2020, we opened 42 stores, including one relocated store, and closed two additional stores.  As a percentage of net sales, pre-opening expenses were 0.7% in both the thirty-nine weeks ended October 30, 2021 and October 31, 2020.

 

Income Tax Expense

 

Income tax expense in the thirty-nine weeks ended October 30, 2021 was $34.3 million compared to income tax expense of $15.0 million in the thirty-nine weeks ended October 31, 2020.   The effective tax rates for the thirty-nine weeks ended October 30, 2021 and October 31, 2020 were 23.3% and 7.8%, respectively. The variance in the effective tax rates in the thirty-nine week periods was primarily due to a significant decrease in excess tax benefits related to stock-based compensation.  The prior year effective tax rate was impacted by tax benefits due to the exercise of stock options by the estate of the Company’s former chief executive officer.  Discrete tax benefits totaled $3.4 million and $33.8 million in the thirty-nine weeks ended October 30, 2021 and the thirty-nine weeks ended October 31, 2020, respectively.

 

Net Income

 

As a result of the foregoing, net income decreased to $112.7 million in the thirty-nine weeks ended October 30, 2021 from $178.0 million in the thirty-nine weeks ended October 31, 2020, a decrease of $65.3 million or 36.7%.

 

Adjusted EBITDA

 

Adjusted EBITDA decreased to $171.2 million in the thirty-nine weeks ended October 30, 2021 from $214.4 million in the thirty-nine weeks ended October 31, 2020, a decrease of $43.2 million, or 20.1%.

 

Liquidity and Capital Resources

 

Overview

 

Our primary sources of liquidity are net cash flows provided by operating activities and available borrowings under our revolving credit facility (“Revolving Credit Facility”).  Our primary cash needs are for capital expenditures and working capital.  As of October 30, 2021, we had $86.4 million available to borrow under our Revolving Credit Facility and $229.7 million of cash and cash equivalents on hand. For further information regarding our Revolving Credit Facility, see Note 6 under “Notes to Unaudited Condensed Consolidated Financial Statements.”

 

Our capital expenditures are primarily related to new store openings, store resets, which consist of improvements to stores as they are needed, expenditures related to our distribution centers, and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems.  We spent $11.9 million and $7.8 million for capital expenditures during the third quarters of fiscal 2021 and fiscal 2020, respectively. For the thirty-nine weeks ended October 30, 2021, we spent $29.6 million for capital expenditures compared to $25.9 million for the thirty-nine weeks ended October 31, 2020. We expect to fund capital expenditures from net cash provided by operating activities. We opened 41 new stores including two relocated stores, and temporarily closed one additional store due to weather-related events during the thirty-nine weeks ended October 30, 2021 and expect to open 46 stores during fiscal 2021.  In fiscal 2022, we intend to expand our York, PA distribution center by 200,000 square feet.  We have experienced, and may continue to experience, delays in construction and permitting of new stores and other projects due to COVID-19.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash flows from operations.

 

Our primary working capital requirements are for the purchase of inventory, payroll, rent, other store operating costs, distribution costs and general and administrative costs.  Our working capital requirements fluctuate during the year, rising in our third fiscal quarter as we increase quantities of inventory in anticipation of our peak holiday sales season in our fourth fiscal quarter.  Fluctuations in working capital are also driven by the timing of new store openings.

 

Based on our new store growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements, debt service and other financing activities over the next 12 months.  If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, we will then 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 needed or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.

 

We are not currently receiving, and do not currently intend to apply for, loans under any federal or state programs implemented as a result of the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

 

Share Repurchase Program

 

On March 26, 2019, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of shares of our common stock.  This initial tranche expired on March 26, 2021.  The Board authorized the repurchase of another $100.0 million of our common stock on December 15, 2020 and a $100.0 million increase on March 16, 2021, resulting in $200.0 million approved for share repurchases through January 13, 2023.  The shares to be repurchased may be purchased from time to time in open market conditions (including blocks), privately negotiated transactions, accelerated share repurchase programs or other derivative transactions, issuer self-tender offers or any combination of the foregoing.  The timing of repurchases and the actual amount purchased will depend on a variety of factors, including the market price of our shares, general market, economic and business conditions, and other corporate considerations.  Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow us to purchase our shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.  Repurchases are expected to be funded from cash on hand or through the utilization of our Revolving Credit Facility.  The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by our Board of Directors at any time.

 

During the thirty-nine weeks ended October 30, 2021, we repurchased 2,679,507 shares of our common stock for $200.0 million, inclusive of transaction costs, pursuant to our share repurchase program. We made no share repurchases during the thirty-nine weeks ended October 31, 2020.  These expenditures were funded by cash generated from operations.  As of October 30, 2021, we had $33,000 remaining under our share repurchase authorization.

 

On November 30, 2021, the Board of Directors of the Company authorized an additional $200.0 million to repurchase stock pursuant to the Company’s share repurchase program, expiring on December 15, 2023, subject to extension or earlier termination by the Board of Directors at any time. There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases.

 

Summary of Cash Flows

 

A summary of our cash flows from operating, investing and financing activities is presented in the following table:

 

Cash Provided by Operating Activities

 

Net cash provided by operating activities was $2.7 million for the thirty-nine weeks ended October 30, 2021 compared to $235.9 million for the thirty-nine weeks ended October 31, 2020.  The decrease in net cash provided by operating activities for the thirty-nine weeks ended October 30, 2021 was primarily due to increased working capital needs and a decrease in net sales.

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the thirty-nine weeks ended October 30, 2021 was $26.5 million compared to net cash used in investing activities of $25.8 million for the thirty-nine weeks ended October 31, 2020.  The comparative increase in cash used in investing activities is primarily from an increase in cash used for capital expenditures, partially offset by the proceeds from sale of property and equipment in the current year.

 

Cash (Used in) Provided by Financing Activities

 

Net cash used in financing activities was $193.6 million in the thirty-nine weeks ended October 30, 2021 as compared with net cash provided by financing activities of $25.5 million in the thirty-nine weeks ended October 31, 2020.  The net cash outflow in the thirty-nine weeks ended October 30, 2021 is due to payment for shares repurchased, partially offset by proceeds from stock option exercises.

 

Contractual Obligations

 

We enter into long-term contractual obligations and commitments in the normal course of business, primarily operating leases. Except as set forth in Note 4 of the accompanying unaudited condensed consolidated financial statements, there have been no material changes to our contractual obligations as disclosed in our Annual Report, other than those which occur in the ordinary course of business.

 

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. There have been no significant changes in the significant accounting policies and estimates.

 

Recently Issued Accounting Pronouncements

 

Not applicable.

 

Interest Rate Risk

 

We are subject to interest rate risk in connection with borrowings under our Revolving Credit Facility, which bears interest at variable rates. As of October 30, 2021, we had no outstanding variable rate debt.

 

As of October 30, 2021, there were no material changes in the market risks described in the “Quantitative and Qualitative Disclosure of Market Risks” section of our Annual Report.

 

Impact of Inflation

 

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot be assured that our results of operations and financial condition will not be materially impacted by inflation in the future.

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is: (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting during the thirteen weeks ended October 30, 2021 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

 

 

Information on Share Repurchases

 

Information regarding shares of common stock the Company repurchased during the thirteen weeks ended October 30, 2021 is as follows:

Period		Total number of shares repurchased (1)				Average price paid per share (2)				Total number of shares purchased as part of publicly announced plans or programs (3)				Approximate dollar value of shares that may yet be purchased under the plans or programs (3)
August 1, 2021 through August 28, 2021			311,078			$	79.53				311,078			$	140,001,083
August 29, 2021 through October 2, 2021			1,938,251			$	72.21				1,938,251			$	32,562
October 3, 2021 through October 30, 2021			—				—				—			$	32,562
Total			2,249,329								2,249,329

 

 

 

 

 

Not applicable.

 

 

Not applicable.

 

 

None.

 

* Filed herewith.

 

** Submitted electronically with this Report.

 

† Previously filed.

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.

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