The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 (Fiscal 2020 10-K). In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled "Safe Harbor Statement." Executive Summary Introduction We are a nationally recognized off-price retailer of high-quality, branded apparel at everyday low prices. We opened our first store inBurlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 832 stores as ofOctober 30, 2021 in 45 states andPuerto Rico . We have diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise at up to 60% off other retailers' prices, including: women's ready-to-wear apparel, menswear, youth apparel, baby, beauty, footwear, accessories, home, toys, gifts and coats. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers. COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus (known as COVID-19) outbreak to be a global pandemic. As a result, we began the temporary closing of some of our stores, and effectiveMarch 22, 2020 , we made the decision to temporarily close all of our stores, distribution centers (other than processing of received inventory) and corporate offices to combat the rapid spread of COVID-19. These developments caused significant disruptions to our business and had a significant adverse impact on our financial condition, results of operations and cash flows. We began re-opening stores onMay 11, 2020 , with substantially all stores re-opened by the end of the second quarter of Fiscal 2020. In response to the COVID-19 pandemic and the temporary closing of our stores, we provided two weeks of financial support to associates impacted by these store closures and by the shutdown of distribution centers. We temporarily furloughed most store and distribution center associates, as well as some corporate associates, but continued to provide benefits to furloughed associates in accordance with our benefit plans. In addition, we paid 100% of their medical benefit premiums during the period they were furloughed. During the second quarter of Fiscal 2020, we recalled all furloughed associates at our re-opened stores, as well as our corporate and distribution facilities.
In order to maintain maximum financial flexibility during the pandemic, we
completed several debt transactions in the first quarter of Fiscal 2020. Refer
to Note 4, “Long Term Debt,” for further discussion regarding these debt
transactions.
Additionally, we took the following steps to further enhance our financial
flexibility:
?
Carefully managed operating expenses, working capital and capital expenditures,
including ceasing substantially all buying activities while stores were closed.
We subsequently resumed our buying activities, while continuing our conservative
approach toward operating expenses and capital expenditures;
?
Negotiated rent deferral agreements with landlords;
?
Temporarily suspended our share repurchase program;
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?
Our CEO voluntarily agreed to not take a salary, our board of directors
voluntarily forfeited their cash compensation, our executive leadership team
voluntarily agreed to decrease their salary by 50% and smaller salary reductions
were temporarily put in place for all employees through a certain level. This
compensation was reinstated once substantially all of our stores re-opened; and
?
The annual incentive bonus payments related to Fiscal 2019 performance were
delayed to the second quarter of Fiscal 2020, and merit pay increases for Fiscal
2020 were delayed to the third quarter of Fiscal 2020.
Due to the aging of inventory related to the temporary store closures discussed
above, as well as the impact of seasonality on our merchandise, we recognized
inventory markdown reserves of $271.9 million during the three month period
ended May 2, 2020 . These reserves covered markdowns taken during the second
quarter of Fiscal 2020. These charges were included in "Cost of sales" on our
Condensed Consolidated Statement of Income (Loss).
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the
CARES Act) was signed into law, which provided emergency economic assistance for
American workers, families and businesses affected by the COVID-19 pandemic. For
the year ended January 30, 2021 we will obtain a one-time tax refund of $245.5
million from the carryback of federal net operating losses (NOLs), which is
included in the line item "Prepaid and other current assets" on our Condensed
Consolidated Balance Sheet.
Fiscal Year
Fiscal 2021 is defined as the 52-week year ending
is defined as the 52-week year ended
Store Openings, Closings, and Relocations
During the nine month period endedOctober 30, 2021 , we opened 93 new stores, inclusive of 17 relocations, and permanently closed five stores, exclusive of the aforementioned relocations, bringing our store count as ofOctober 30, 2021 to 832 stores.
Ongoing Initiatives for Fiscal 2021
Since the beginning of the COVID-19 pandemic, protecting the health and safety of our customers, associates, and the communities that we serve has been our top priority. Accordingly, we moved quickly to close our stores, distribution centers, and corporate offices in March of Fiscal 2020. We continue to keep health and safety as a top priority as we operate our stores and distribution centers. We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparable store sales trends, increasing total sales growth and reducing expenses. These initiatives include, but are not limited to: ?
Driving Comparable Store Sales Growth.
We intend to continue to increase comparable store sales through the following
initiatives:
? More Effectively Chasing the Sales Trend. We are conservatively planning comparable stores sales growth, holding and controlling liquidity and closely analyzing the sales trend by business, ready to chase that trend. We believe that these actions should not only enable us to more effectively chase the trend, but they will also allow us to take more advantage of great opportunistic buys. ? Making aGreater Investment in Merchandising Capabilities. We intend to invest in incremental headcount, especially in our growing and under-developed businesses, training and coaching, improved tools and reporting, and other forms of merchant support. We believe that these investments should improve our ability to develop vendor relationships, source great merchandise buys, more accurately assess value, and better forecast and chase the sales trend. ? Operating with Leaner Inventories. We are planning to carry less inventory going forward, which we believe should result in the customer finding a higher mix of fresh receipts and great merchandise values. We believe that this should drive faster turns and lower markdowns, while simultaneously improving our customers' shopping experience. 24
-------------------------------------------------------------------------------- ? Enhancing Existing Categories and Introducing New Categories. We have opportunities to expand the depth and breadth of certain existing categories, such as ladies' apparel, children's products, bath and cosmetic merchandise, housewares, décor for the home and beauty as we continue to de-weather our business, and maintain the flexibility to introduce new categories as we expand our merchandising capabilities. ? Expanding and Enhancing Our Retail Store Base.
We intend to expand and enhance our retail store base through the following
initiatives:
? Adhering to a Market Focused and Financially Disciplined Real Estate Strategy. We have grown our store base consistently since our founding in 1972, developing more than 99% of our stores organically. We believe there is significant opportunity to expand our retail store base inthe United States . We have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long-term. ? Maintaining Focus on Unit Economics and Returns. We have adopted a market focused approach to new store openings with a specific focus on maximizing sales while achieving attractive unit economics and returns. By focusing on opening stores with attractive unit economics, we are able to achieve attractive returns on capital and continue to grow our margins. We believe that as we continue to reduce our comparable store inventory, we will be able to reduce the square footage of our stores while continuing to maintain our broad assortment. ? Enhancing the Store Experience Through Store Remodels, Downsizes and Relocations. We continue to invest in store remodels and downsizes on a store-by-store basis where appropriate, taking into consideration the age, size, sales and profitability of a store, as well as the potential impact to the customer shopping experience. In our remodeled stores, we have typically incorporated new flooring, painting, lighting and graphics, relocated our fitting rooms and rightsized our selling area to maximize productive selling space, enhanced certain departments such as home and accessories and made various other improvements as appropriate by location. We have also increased our focus on relocations as leases expire to right size our buildings and improve our competitive positioning. ? Enhancing Operating Margins.
We intend to increase our operating margins through the following initiatives:
? Improving Operational Flexibility. Our store and supply chain teams must continue to respond to the challenge of becoming more responsive to the sales chase, enhancing their ability to flex up and down based on trends. Their ability to appropriately flex based on the ongoing trends allows us to maximize leverage on sales, regardless of the trend. ? Optimizing Markdowns. We believe that our markdown system allows us to maximize sales and gross margin dollars based on forward-looking sales forecasts, sell-through targets and exit dates. Additionally, as we plan to carry less inventory in our stores, we expect to drive faster turns, which in turn will reduce the amount of markdowns taken. ?Enhancing Purchasing Power . We believe that increasing our store footprint and expanding our west coast andNew York buying offices provides us with the opportunity to capture incremental buying opportunities and realize economies of scale in our merchandising and non-merchandising purchasing activities. ? Challenging Expenses to Drive Operating Leverage. We believe that we will be able to leverage our growing sales over the fixed costs of our business. In addition, by more conservatively planning our comparable store sales growth, we are forcing even tighter expense control. We believe that this should put us in a strong position to drive operating leverage on any sales ahead of the plan. Additionally, we plan to continue challenging the processes and operating norms throughout the organization with the belief that this will lead to incremental efficiency improvements and savings.
Uncertainties and Challenges
As we strive to increase profitability through achieving positive comparable
store sales and leveraging productivity initiatives focused on improving the
in-store experience, more efficient movement of products from the vendors to the
selling floors, and modifying our marketing plans to increase our core customer
base and increase our share of our current customers' spending, there are
uncertainties and challenges that we face as an off-price retailer of apparel
and accessories for men, women and children and home furnishings that could have
a material impact on our revenues or income.
25
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COVID-19. The extent of the continuing impact of the COVID-19 pandemic on our
business will depend largely on future developments, including the production
and administration of effective medical treatments and vaccines, the timing and
extent of the recovery in traffic and consumer spending at our stores, supply
chain delays due to closed factories or distribution centers, reduced workforces
or labor shortages and scarcity of raw materials, and any future required store
closures because of COVID-19 resurgences. COVID-19 presents material uncertainty
and risk with respect to our business, financial performance and condition,
operating results, liquidity and cash flows.
General Economic Conditions. Consumer spending habits, including spending for
the merchandise that we sell, are affected by, among other things, prevailing
global economic conditions, inflation, levels of employment, salaries and wage
rates, prevailing interest rates, housing costs, energy costs, commodities
pricing, income tax rates and policies, consumer confidence and consumer
perception of economic conditions. In addition, consumer purchasing patterns may
be influenced by consumers' disposable income, credit availability and debt
levels.
A broader, protracted slowdown in the U.S. economy, an extended period of high
unemployment rates, an uncertain global economic outlook or a credit crisis
could adversely affect consumer spending habits resulting in lower net sales and
profits than expected on a quarterly or annual basis. Consumer confidence is
also affected by the domestic and international political situation. Our
financial condition and operations could be impacted by changes in government
regulations in areas including, but not limited to, taxes and healthcare.
Ongoing international trade and tariff negotiations could have a direct impact
on our income and an indirect impact on consumer prices. The outbreak or
escalation of war, or the occurrence of terrorist acts or other hostilities in
or affecting the U.S. , or public health issues such as pandemics or epidemics,
including the continuing COVID-19 pandemic, could lead to a decrease in spending
by consumers. In addition, natural disasters, public health issues, industrial
accidents and acts of war in various parts of the world could have the effect of
disrupting supplies and raising prices globally which, in turn, may have adverse
effects on the world and U.S. economies and lead to a downturn in consumer
confidence and spending.
We closely monitor our net sales, gross margin and expenses. We have performed
scenario planning such that if our net sales decline for an extended period of
time, we have identified variable costs that could be reduced to partially
mitigate the impact of these declines. If we were to experience adverse economic
trends and/or if our efforts to counteract the impacts of these trends are not
sufficiently effective, there could be a negative impact on our financial
performance and position in future fiscal periods.
Seasonality of Sales and Weather Conditions. Our sales, like most other
retailers, are subject to seasonal influences. In the second half of the year,
which includes the back-to-school and holiday seasons, we generally realize a
higher level of sales and net income.
Weather continues to be a contributing factor to the sale of our clothing.
Generally, our sales are higher if the weather is cold during the Fall and warm
during the early Spring. Sales of cold weather clothing are increased by early
cold weather during the Fall, while sales of warm weather clothing are improved
by early warm weather conditions in the Spring. Although we have diversified our
product offerings, we believe traffic to our stores is still driven, in part, by
weather patterns.
Competition and Margin Pressure. We believe that in order to remain competitive
with retailers, including off-price retailers and discount stores, we must
continue to offer brand-name merchandise at a discount to prices offered by
other retailers as well as an assortment of merchandise that is appealing to our
customers.
The U.S. retail apparel and home furnishings markets are highly fragmented and
competitive. We compete for business with department stores, off-price
retailers, internet retailers, specialty stores, discount stores, wholesale
clubs, and outlet stores as well as with certain traditional, full-price retail
chains that have developed off-price concepts. At various times throughout the
year, traditional full-price department store chains and specialty shops offer
brand-name merchandise at substantial markdowns, which can result in prices
approximating those offered by us at our Burlington stores. We anticipate that
competition will increase in the future. Therefore, we will continue to look for
ways to differentiate our stores from those of our competitors.
The U.S. retail industry continues to face increased pressure on margins as
overall challenging retail conditions have led consumers to be more value
conscious. Our "open to buy" paradigm, in which we purchase both pre-season and
in-season merchandise, allows us the flexibility to purchase less pre-season
with the balance purchased in-season and opportunistically. It also provides us
with the flexibility to shift purchases between suppliers and categories. This
enables us to obtain better terms with our suppliers, which we expect to help
offset any rising costs of goods.
Industry-wide supply chain issues have led to increased freight and labor costs
during Fiscal 2021 and may continue to add pressure on margins for the remainder
of the year and potentially into Fiscal 2022. Additionally, the higher our sales
volume is, and the more sales we chase above our initial plans, the more these
increased supply chain costs will impact our margins.
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Key Performance Measures
We consider numerous factors in assessing our performance. Key performance
measures used by management include net income (loss), Adjusted Net Income
(Loss), Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin,
inventory, store payroll and liquidity .
Net income (loss). We earned net income of$13.6 million during the three month period endedOctober 30, 2021 compared with net income of$8.0 million during the three month period endedOctober 31, 2020 . This increase was primarily driven by our strong sales growth during the third quarter of Fiscal 2021, predominantly offset by an$86.4 million debt extinguishment charge related to the partial repurchase of our$805.0 million 2.25% Convertible Senior Notes due 2025 (Convertible Notes). We earned net income of$287.2 million during the nine month period endedOctober 30, 2021 compared with a net loss of$372.5 million during the nine month period endedOctober 31, 2020 . This increase was primarily driven by the temporary closure of all our stores during Fiscal 2020, caused by the COVID-19 pandemic, as well as our sales growth during Fiscal 2021. Refer to the section below entitled "Results of Operations" for further explanation.
Adjusted Net Income (Loss), Adjusted EBITDA and Adjusted EBIT: Adjusted Net
Income (Loss), Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures
of our performance.
We define Adjusted Net Income (Loss) as net income (loss), exclusive of the
following items, if applicable: (i) net favorable lease costs; (ii) costs
related to debt issuances and amendments; (iii) loss on extinguishment of debt;
(iv) impairment charges; (v) amounts related to certain litigation matters; (vi)
non-cash interest expense on the Convertible Notes; (vii) costs related to
closing the e-commerce store; and (viii) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains, all of which are tax effected
to arrive at Adjusted Net Income (Loss).
We define Adjusted EBITDA as net income (loss), exclusive of the following
items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense (benefit); (v) depreciation and
amortization; (vi) impairment charges; (vii) costs related to debt issuances and
amendments; (viii) amounts related to certain litigation matters; (ix) costs
related to closing the e-commerce store; and (x) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains.
We define Adjusted EBIT as net income (loss), exclusive of the following items,
if applicable: (i) interest expense; (ii) interest income; (iii) loss on
extinguishment of debt; (iv) income tax expense (benefit); (v) impairment
charges; (vi) net favorable lease costs; (vii) costs related to debt issuances
and amendments; (viii) amounts related to certain litigation matters; (ix) costs
related to closing the e-commerce store; and (x) other unusual, non-recurring or
extraordinary expenses, losses, charges or gains.
We present Adjusted Net Income (Loss), Adjusted EBITDA and Adjusted EBIT,
because we believe they are useful supplemental measures in evaluating the
performance of our business and provide greater transparency into our results of
operations. In particular, we believe that excluding certain items that may vary
substantially in frequency and magnitude from what we consider to be our core
operating results are useful supplemental measures that assist in evaluating our
ability to generate earnings and leverage sales, and to more readily compare
core operating results between past and future periods.
We believe that these non-GAAP measures provide investors helpful information
with respect to our operations and financial condition. Other companies in the
retail industry may calculate these non-GAAP measures differently such that our
calculation may not be directly comparable.
Adjusted Net Income (Loss) has limitations as an analytical tool, and should not
be considered either in isolation or as a substitute for net income (loss) or
other data prepared in accordance with GAAP. Among other limitations, Adjusted
Net Income (Loss) does not reflect the following items, net of their tax effect:
•
favorable lease costs;
•
costs related to debt issuances and amendments;
•
losses on extinguishment of debt;
•
amounts charged for certain litigation matters;
•
non-cash interest expense related to original issue discount on the Convertible
Notes;
•
impairment charges on long-lived assets;
•
costs related to closing the e-commerce store; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or
gains.
27
-------------------------------------------------------------------------------- During the three month period endedOctober 30, 2021 , Adjusted Net Income (Loss) increased$73.4 million to$92.9 million compared to the same period in the prior year. This increase was primarily driven by sales growth during the third quarter of Fiscal 2021, as well as weak sales during the third quarter of Fiscal 2020 due to COVID-19 related business disruptions. During the nine months endedOctober 30, 2021 , Adjusted Net Income (Loss) increased$734.7 million to$402.0 million compared to the same period in the prior year. This increase was primarily driven by the temporary closure of all our stores during Fiscal 2020, caused by the COVID-19 pandemic, as well as our sales growth during Fiscal 2021. Refer to the section below entitled "Results of Operations" for further explanation. The following table shows our reconciliation of net income (loss) to Adjusted Net Income (Loss) for the three and nine months endedOctober 30, 2021 compared with the three and nine months endedOctober 31, 2020 : (unaudited) (in thousands) Three Months Ended Nine Months Ended October 30, October 31, October 30, October 31, 2021 2020 2021 2020 Reconciliation of net income (loss) to Adjusted Net Income (Loss): Net income (loss)$ 13,619 $ 8,016 $ 287,203 $ (372,493 ) Net favorable lease costs (a) 5,275 5,776 17,188 18,402 Non-cash interest expense on convertible notes (b) - 7,542 - 16,295 Costs related to debt issuances and amendments (c) 89 (719 ) 3,419 3,633 Loss on extinguishment of debt (d) 86,362 - 117,756 202 Impairment charges 1,488 2,575 3,235 5,575 Litigation matters (e) - - - 20,788 E-commerce closure (f) - 556 - 1,526 Tax effect (g) (13,891 ) (4,209 ) (26,835 ) (26,634 ) Adjusted Net Income (Loss)$ 92,942 $ 19,537 $ 401,966 $ (332,706 ) (a) Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of purchase accounting related to theApril 13, 2006 Bain Capital acquisition ofBurlington Coat Factory Warehouse Corporation (the Merger Transaction). These expenses are recorded in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income (Loss). (b) Represents non-cash accretion of original issue discount on the Convertible Notes. The original issue discount was eliminated as of the beginning of Fiscal 2021, as a result of adopting Accounting Standards Update (ASU) 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" (ASU 2020-06). (c) Represents costs incurred in connection with the review and execution of refinancing opportunities, as well as the issuance of the$300.0 million 6.25% Senior Secured Notes due 2025 (Secured Notes) and the Convertible Notes. (d) Amounts relate to the partial repurchase of the Convertible Notes, the full redemption of the Secured Notes, as well as the refinancing of the Term Loan Credit Agreement governing our senior secured credit term loan facility (Term Loan Facility). (e) Represents amounts charged for certain litigation matters. (f) Represents costs related to the closure of our e-commerce store. (g) Tax effect is calculated based on the effective tax rates (before discrete items) for the respective periods, adjusted for the tax effect for the impact of items (a) through (f). The effective tax rate during Fiscal 2020 includes the benefit of loss carrybacks to prior years with higher statutory tax rates. Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income (loss) or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect: • interest expense on our debt; • losses on the extinguishment of debt; • costs related to debt issuances and amendments; • cash requirements for replacement of assets. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will likely have to be replaced in the future; • amounts charged for certain litigation matters; 28 --------------------------------------------------------------------------------
•
impairment charges on long-lived assets; • costs related to closing the e-commerce store; • income tax expense; and • other unusual, non-recurring or extraordinary expenses, losses, charges or gains. During the three month period endedOctober 30, 2021 , Adjusted EBITDA increased$91.5 million to$205.0 million compared to the same period in the prior year. This increase was primarily driven by sales growth during the third quarter of Fiscal 2021, as well as weak sales during the third quarter of Fiscal 2020 due to COVID-19 related business disruptions. During the nine months endedOctober 30, 2021 , Adjusted EBITDA increased$1,087.0 million to$744.2 million compared to the same period in the prior year. This increase was primarily driven by the temporary closure of all our stores during Fiscal 2020, caused by the COVID-19 pandemic, as well as our sales growth during Fiscal 2021. Refer to the section below entitled "Results of Operations" for further explanation. The following table shows our reconciliation of net income (loss) to Adjusted EBITDA for the three and nine months endedOctober 30, 2021 compared with the three and nine months endedOctober 31, 2020 : (unaudited) (in thousands) Three Months Ended Nine Months Ended October 30, October 31, October 30, October 31, 2021 2020 2021 2020 Reconciliation of net income (loss) to Adjusted EBITDA: Net income (loss)$ 13,619 $ 8,016 $ 287,203 $ (372,493 ) Interest expense 15,609 27,456 52,710 70,508 Interest income (38 ) (163 ) (156 ) (1,178 ) Loss on extinguishment of debt (a) 86,362 - 117,756 202 Costs related to debt issuances and amendments (b) 89 (719 ) 3,419 3,633 Litigation matters (c) - - - 20,788 E-commerce closure (d) - 556 - 1,526 Depreciation and amortization (e) 69,938 60,712 200,275 181,934 Impairment charges 1,488 2,575 3,235 5,575 Income tax expense (benefit) 17,922 15,088 79,769 (253,327 ) Adjusted EBITDA$ 204,989 $ 113,521 $ 744,211 $ (342,832 ) (a) Amounts relate to the partial repurchase of the Convertible Notes, the full redemption of the Secured Notes, as well as the refinancing of the Term Loan Facility. (b) Represents costs incurred in connection with the review and execution of refinancing opportunities, as well as the issuance of the Secured Notes and the Convertible Notes. (c) Represents amounts charged for certain litigation matters. (d) Represents costs related to the closure of our e-commerce store. (e) Includes$5.3 million and$17.2 million of favorable lease cost included in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income (Loss) for the three and nine months endedOctober 30, 2021 , and$5.7 million and$18.3 million for the three and nine months endedOctober 31, 2020 , respectively. Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. Adjusted EBIT has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income (loss) or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBIT does not reflect: • interest expense on our debt; • losses on the extinguishment of debt; • costs related to debt issuances and amendments; • favorable lease cost; • amounts charged for certain litigation matters; • impairment charges on long-lived assets; 29 --------------------------------------------------------------------------------
•
costs related to closing the e-commerce store; • income tax expense; and • other unusual, non-recurring or extraordinary expenses, losses, charges or gains. During the three month period endedOctober 30, 2021 , Adjusted EBIT increased$81.7 million to$140.3 million compared to the same period in the prior year. This increase was primarily driven by sales growth during the third quarter of Fiscal 2021, as well as weak sales during the third quarter of Fiscal 2020 due to COVID-19 related business disruptions. During the nine months endedOctober 30, 2021 , Adjusted EBIT increased$1,067.5 million to$561.1 million compared to the same period in the prior year. This increase was primarily driven by the temporary closure of all our stores during Fiscal 2020, caused by the COVID-19 pandemic, as well as our sales growth during Fiscal 2021. Refer to the section below entitled "Results of Operations" for further explanation.
The following table shows our reconciliation of net income (loss) to Adjusted
EBIT for the three and nine months ended
three and nine months ended
(unaudited)
(in thousands)
Three Months Ended Nine Months Ended
October 30, October 31, October 30, October 31,
2021 2020 2021 2020
Reconciliation of net income (loss) to
Adjusted EBIT:
Net income (loss) $ 13,619 $ 8,016 $ 287,203 $ (372,493 )
Interest expense 15,609 27,456 52,710 70,508
Interest income (38 ) (163 ) (156 ) (1,178 )
Loss on extinguishment of debt (a) 86,362 - 117,756 202
Costs related to debt issuances and
amendments (b) 89 (719 ) 3,419 3,633
Net favorable lease costs (c) 5,275 5,776 17,188 18,402
Impairment charges 1,488 2,575 3,235 5,575
Litigation matters (d) - - - 20,788
E-commerce closure (e) - 556 - 1,526
Income tax expense (benefit) 17,922 15,088 79,769 (253,327 )
Adjusted EBIT $ 140,326 $ 58,585 $ 561,124 $ (506,364 )
(a)
Amounts relate to the partial repurchase of the Convertible Notes, the full
redemption of the Secured Notes, as well as the refinancing of the Term Loan
Facility.
(b)
Represents costs incurred in connection with the review and execution of
refinancing opportunities, as well as the issuance of the Secured Notes and the
Convertible Notes.
(c)
Net favorable lease cost represents the non-cash expense associated with
favorable and unfavorable leases that were recorded as a result of the Merger
Transaction. These expenses are recorded in the line item "Selling, general and
administrative expenses" in our Condensed Consolidated Statements of Income
(Loss).
(d)
Represents amounts charged for certain litigation matters.
(e)
Represents costs related to the closure of our e-commerce store.
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 a prior year. Due to the impact of the COVID-19
pandemic, including the temporary closing of all stores during Fiscal 2020, we
are using Fiscal 2019 as the comparable previous year period when calculating
comparable store sales for Fiscal 2021. The method of calculating comparable
store sales varies across the retail industry. As a result, our definition of
comparable store sales may differ from other retailers.
For Fiscal 2021, we define comparable store sales as merchandise sales of those
stores, commencing on the first day of the fiscal month two years after the end
of their grand opening activities, which normally conclude within the first two
months of operations. If a store is closed for seven or more days during a
month, our policy is to remove that store from our calculation of comparable
stores sales for any such month, as well as during the month(s) of their grand
re-opening activities. Comparable store sales increased 16% for the three month
period ended October 30, 2021 , compared to the three month period ended November
2, 2019 , and 18% for the nine month period ended October 30, 2021 compared to
the nine month period ended November 2, 2019 .
30
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Various factors affect comparable store sales, including, but not limited to,
weather conditions, current economic conditions, the timing of our releases of
new merchandise and promotional events, the general retail sales environment,
consumer preferences and buying trends, changes in sales mix among distribution
channels, competition, and the success of marketing programs.
Gross Margin. Gross margin is the difference between net sales and the cost of
sales. Our cost of sales and gross margin may not be comparable to those of
other entities, since some entities may include all of the costs related to
their buying and distribution functions, certain store-related costs and other
costs, in cost of sales. We include certain of these costs in the line items
"Selling, general and administrative expenses" and "Depreciation and
amortization" in our Condensed Consolidated Statements of Income (Loss). We
include in our "Cost of sales" line item all costs of merchandise (net of
purchase discounts and certain vendor allowances), inbound freight, distribution
center outbound freight and certain merchandise acquisition costs, primarily
commissions and import fees.
Gross margin as a percentage of net sales decreased to 41.4% during the three
month period ended October 30, 2021 , compared with 45.0% during the three month
period ended October 31, 2020 . Industry-wide supply chain issues have led to
increased freight and labor costs during Fiscal 2021, which we expect to
continue for the remainder of the year and potentially into Fiscal 2022. Product
sourcing costs, which are included in selling, general and administrative
expenses, were $173.5 million during the three month period ended October 30,
2021 , compared with $143.5 million during the three month period ended October
31, 2020 , driven by an increase in sales and increased processing costs.
Gross margin as a percentage of net sales increased to 42.3% during the nine
month period ended October 30, 2021 , compared with 35.3% during the nine month
period ended October 31, 2020 , driven primarily by a $271.9 million charge
against aged inventory during the first quarter of Fiscal 2020 due to the
extended store closures. This improvement is partially offset by industry-wide
supply chain issues that have led to increased freight and labor costs during
Fiscal 2021, which we expect to continue for the remainder of the year and
potentially into Fiscal 2022. Product sourcing costs were $459.9 million during
the nine month period ended October 30, 2021 , compared with $290.3 million
during the nine month period ended October 31, 2020 , driven by an increase in
sales and increased processing costs.
Inventory. Inventory at October 30, 2021 increased to $1,059.7 million compared
with $867.0 million at October 31, 2020 . The increase was attributable primarily
to 63 net new stores opened since the end of the third quarter of Fiscal 2020.
Comparable store inventory at October 30, 2021 decreased 24% compared to
November 2, 2019 , driven by our strategy of operating with leaner in-store
inventory. Reserve inventory was 30% of total inventory as of October 30, 2021 ,
compared with 21% as of November 2, 2019 . Reserve inventory includes all
inventory that is being stored for release either later in the season, or in a
subsequent season. We intend to continue to build up our reserve merchandise in
order to more effectively chase sales trends. Inventory at January 30, 2021 was
$740.8 million .
In order to better serve our customers and maximize sales, we continue to refine
our merchandising mix and inventory levels within our stores. By appropriately
managing our inventories, we believe we will be better able to deliver a
continual flow of fresh merchandise to our customers.
Store Payroll. The method of calculating store payroll varies across the retail
industry. As a result, our store payroll may differ from other retailers. We
define store payroll as regular and overtime payroll for all store personnel as
well as regional and territory personnel, exclusive of payroll charges related
to corporate and warehouse employees.
As a result of the COVID-19 outbreak, we temporarily furloughed most store
associates in March 2020 , while providing two weeks of financial support to
impacted associates. We also continued to provide benefits to furloughed
associates, including paying 100% of their current medical benefit premiums. As
a result of the furloughs in Fiscal 2020, as well as our new stores opened since
the end of the third quarter of Fiscal 2020, store payroll costs increased to
$192.8 million and $543.7 million during the three and nine month periods ended
October 30, 2021 , respectively, compared with $163.0 million and $378.6 million
during the three and nine month periods ended October 31, 2020 .
Liquidity. Liquidity measures our ability to generate cash. Management measures
liquidity through cash flow, which is the measure of cash generated from or used
in operating, financing, and investing activities. Cash and cash equivalents,
including restricted cash and cash equivalents, decreased $194.9 million during
the nine months ended October 30, 2021 , compared with an increase of $945.6
million during the nine months ended October 31, 2020 . Refer to the section
below entitled "Liquidity and Capital Resources" for further explanation.
During Fiscal 2020, we took several steps to effectively manage our liquidity
during the COVID-19 pandemic, including careful management of operating
expenses, working capital and capital expenditures, as well as temporarily
suspending our share repurchase program. Additionally, we borrowed
million
credit facility
31
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(ABL Line of Credit), issued $805.0 million of our Convertible Notes, and
through BCFWC, issued $300.0 million of our Secured Notes. We repaid $150.0
million on the ABL Line of Credit during the second quarter of Fiscal 2020, and
the remaining $250.0 million during the fourth quarter of Fiscal 2020. On June
11, 2021 , BCFWC redeemed the full $300.0 million aggregate principal amount of
the Secured Notes. During Fiscal 2021, we redeemed $160.4 million related to the
partial repurchase of the Convertible Notes. At October 30, 2021 , we had $541.0
million available under the ABL Line of Credit.
Results of Operations
The following table sets forth certain items in the Condensed Consolidated Statements of Income (Loss) as a percentage of net sales for the three and nine months endedOctober 30, 2021 and the three and nine months endedOctober 31, 2020 . Percentage of Net Sales Three Months Ended Nine Months Ended October 30, October 31, October 30, October 31, 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Other revenue 0.2 0.2 0.2 0.2 Total revenue 100.2 100.2 100.2 100.2 Cost of sales 58.6 55.0 57.7 64.7 Selling, general and administrative expenses 33.0 38.8 31.7 46.7 Costs related to debt issuances and amendments 0.0 (0.0 ) 0.1 0.1 Depreciation and amortization 2.8 3.3 2.7 4.7 Impairment charges - long-lived assets 0.1 0.2 0.0 0.2 Other income - net (0.1 ) (0.1 ) (0.2 ) (0.1 ) Loss on extinguishment of debt 3.8 - 1.8 0.0 Interest expense 0.7 1.6 0.8 2.0 Total costs and expenses 98.9 98.8 94.6 118.3 Income (loss) before income tax expense (benefit) 1.3 1.4 5.6 (18.1 ) Income tax expense (benefit) 0.8 0.9 1.2 (7.3 ) Net income (loss) 0.5 % 0.5 % 4.4 % (10.8 )%
Three Month Period Ended
Ended
Net sales Net sales improved approximately$634.9 million , or 38.1%, to$2,299.6 million during the third quarter of Fiscal 2021, primarily driven by strong sales growth in our existing stores compared with weak sales during the third quarter of Fiscal 2020 due to COVID-19 related business disruptions, as well as our 63 net new stores opened since the end of the third quarter of Fiscal 2020.
Cost of sales
Cost of sales as a percentage of net sales increased to 58.6% during the third quarter of Fiscal 2021, compared to 55.0% during the third quarter of Fiscal 2020. This increase is related to industry-wide supply chain issues that have led to increased freight and labor costs during Fiscal 2021, which we expect to continue for the remainder of the year and potentially into Fiscal 2022. On a dollar basis, cost of sales increased$431.7 million , or 47.1%, primarily driven by our overall increase in sales as well as the industry-wide supply chain issues. Product sourcing costs, which are included in selling, general and administrative expenses, were$173.5 million during the third quarter of Fiscal 2021, compared with$143.5 million during the third quarter of Fiscal 2020. 32 --------------------------------------------------------------------------------
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the three month period endedOctober 30, 2021 compared with the three month period endedOctober 31, 2020 . (in millions) Three Months Ended Percentage Percentage October 30, of October 31, of 2021 Net Sales 2020 Net Sales $ Variance % Change Store related costs$ 453.5 19.7 %$ 398.7 23.9 %$ 54.8 13.8 % Product sourcing costs 173.5 7.5 143.5 8.6 30.0 20.9 Corporate costs 85.7 3.7 62.0 3.7 23.7 38.2 Marketing and strategy costs 17.9 0.8 17.7 1.1 0.2 1.1 Other selling, general and administrative expenses 29.2 1.3 23.4 1.5 5.8 24.7 Selling, general and administrative expenses$ 759.8 33.0 %$ 645.3 38.8 %$ 114.5 17.7 % The decrease in selling, general and administrative expenses as a percentage of net sales was primarily driven by the overall increase in sales. On a dollar basis, the increase in selling, general and administrative expenses was primarily due to our higher product sourcing costs. Additionally, store payroll costs, occupancy, and incentive compensation drove higher expense during Fiscal 2021.
Depreciation and amortization
Depreciation and amortization expense amounted to$64.7 million during the third quarter of Fiscal 2021 compared with$55.0 million during the third quarter of Fiscal 2020. The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores.
Impairment charges – long-lived assets
Impairment charges on long-lived assets were
quarter of Fiscal 2021, related to store-level assets at four stores. Impairment
charges on long-lived assets were
Fiscal 2020, related to store-level assets at 10 stores.
The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, "Fair Value Measurements," for further discussion regarding impairment charges.
Loss on Extinguishment of Debt
During the third quarter of Fiscal 2021, we entered into separate, privately negotiated exchange agreements (Exchange Agreements) with certain holders of the Convertible Notes. Under the terms of the Exchange Agreements, the holders exchanged$160.4 million in aggregate principal amount of Convertible Notes held by them for a combination of an aggregate of$90.8 million in cash and 513,991 shares of our common stock. This exchange resulted in a pre-tax debt extinguishment charge of$86.4 million in the three month period endedOctober 30, 2021 . Interest expense Interest expense improved$11.8 million during the third quarter of Fiscal 2021 to$15.6 million , compared to the same period in the prior year. The decrease was primarily driven by the adoption of Accounting Standards Update 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" (ASU 2020-06), which eliminated the amortization of debt discount previously associated with the Convertible Notes. The decrease was also driven by the redemption in full of the$300.0 million Secured Notes, repurchase of$160.4 million of Convertible Notes, as well as paydown of our ABL Line of Credit during Fiscal 2020. 33
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The average interest rates and average balances related to our variable rate
debt for the third quarter of Fiscal 2021 compared with the third quarter of
Fiscal 2020, are summarized in the table below:
Three Months Ended
October 30, October 31,
2021 2020
Average balance - ABL Line of Credit (in
millions) $ ?? $
250.0
Average interest rate - ABL Line of Credit ??
1.6%
Average balance - Term Loan Facility (in millions) (a)$ 960.6 $
961.4
Average interest rate - Term Loan Facility 2.1% 1.9%
(a) Excludes original issue discount.
Income tax expense
Income tax expense was$17.9 million during the third quarter of Fiscal 2021 compared with income tax benefit of$15.1 million during the third quarter of Fiscal 2020. The effective tax rate for the third quarter of Fiscal 2021 was 56.8% compared with 65.3% during the third quarter of Fiscal 2020. The increase in income tax expense in the current year was a result of higher pre-tax income, partially offset by a decreased tax rate. The higher income tax rate in the prior year is primarily due to the reversal of income tax benefit recorded in the first two quarters of Fiscal 2020 related to the net operating loss carry-back as permitted under the CARES Act. The decrease in income tax rate this year was partially offset by the disallowance of certain debt extinguishment costs related to partial settlement of the Convertible Notes during the third quarter of Fiscal 2021. At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the third quarter of Fiscal 2021 resulted in an annual effective income tax rate of approximately 30% (before discrete items) as our best estimate. This is a decrease compared to the annual effective tax rate for the third quarter of Fiscal 2020 of approximately 35% (before discrete items), due to prior year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate.
Net income
We earned net income of
compared with
improvement was primarily driven by our strong sales growth during the third
quarter of Fiscal 2021, predominately offset by an
extinguishment charge related to the partial repurchase of our Convertible
Notes.
Nine Month Period Ended
Ended
Net sales Net sales improved$3,230.5 million , or 93.0%, to$6,703.1 million during the nine month period endedOctober 30, 2021 , primarily due to the temporary closure of all our stores during Fiscal 2020. This improvement was also driven by net sales from our 63 net new stores opened since the end of the third quarter of Fiscal 2020. Cost of sales Cost of sales as a percentage of net sales decreased to 57.7% during the nine month period endedOctober 30, 2021 , compared to 64.7% during the nine month period endedOctober 31, 2020 , driven primarily by a$271.9 million charge against aged inventory in the first quarter of Fiscal 2020 due to the extended store closures, partially offset by increased industry-wide supply chain costs. On a dollar basis, cost of sales increased$1,623.9 million , or 72.3%, primarily driven by our overall increase in sales as well as increased industry-wide supply chain costs. Product sourcing costs, which are included in selling, general and administrative expenses, were$459.9 million during the nine month period endedOctober 30, 2021 , compared with$290.3 million during the nine month period endedOctober 31, 2020 , primarily driven by the impact of COVID-19 on our warehouse operations. 34
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Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the nine month period endedOctober 30, 2021 compared with the nine month period endedOctober 31, 2020 . (in millions) Nine Months Ended Percentage Percentage October of October of 30, 2021 Net Sales 31, 2020 Net Sales $ Variance % Change Store related costs$ 1,297.9 19.4 %$ 1,053.2 30.3 %$ 244.7 23.2 % Product sourcing costs 459.9 6.9 290.3 8.4 169.6 58.4 Corporate costs 246.4 3.7 198.3 5.7 48.1 24.3 Marketing and strategy costs 42.9 0.6 28.7 0.8 14.2 49.5 Other selling, general and administrative expenses 79.8 1.1 51.5 1.5 28.3 55.0 Selling, general and administrative expenses$ 2,126.9 31.7 %$ 1,622.0 46.7 %$ 504.9 31.1 % The decrease in selling, general and administrative expenses as a percentage of net sales was primarily driven by the overall increase in sales. On a dollar basis, the increase in selling, general and administrative expenses was primarily due to our higher product sourcing costs, as well as the significant steps taken to reduce selling, general and administrative expenses during the period stores were closed during Fiscal 2020. Additionally, store payroll costs, occupancy, and incentive compensation drove higher expense during Fiscal 2021.
Costs related to debt issuances and amendments
During Fiscal 2021, we incurred
to the refinancing of our Term Loan Facility. During the Fiscal 2020, we
incurred legal fees related to the issuance of our Secured Notes of
million
refinancing our Term Loan Facility. Refer to Note 4, “Long Term Debt,” for
further discussion regarding our debt transactions.
Depreciation and amortization
Depreciation and amortization expense amounted to$183.1 million during the nine month period endedOctober 30, 2021 compared with$163.7 million during the nine month period endedOctober 31, 2020 . The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores.
Impairment charges – long-lived assets
Impairment charges on long-lived assets were$3.2 million during the nine month period endedOctober 30, 2021 , related to the impairment of one store down to its expected sale price, as well as declines in revenues and operating results for five stores. Impairment charges on long-lived assets were$5.6 million during the nine month period endedOctober 31, 2020 , related to store-level assets at 14 stores. The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, "Fair Value Measurements," for further discussion regarding impairment charges.
Other income – net
Other income improved
Fiscal 2021.
35
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Loss on Extinguishment of Debt
During Fiscal 2021, we incurred a debt extinguishment charge of$86.4 million related to the partial repurchase of the Convertible Notes,$30.2 million related to the premium paid on redemption of the Secured Notes, as well as$1.2 million related to the refinancing of our Term Loan Facility. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
Interest expense
Interest expense improved$17.8 million during the nine month period endedOctober 30, 2021 to$52.7 million , compared to the same period in the prior year. The decrease was primarily driven by the adoption of ASU 2020-06, which eliminated the amortization of debt discount previously associated with the Convertible Notes. The decrease was also driven by the partial repurchase of$160.4 million of Convertible Notes, redemption in full of the$300.0 million Secured Notes, as well as paydown of our ABL Line of Credit during Fiscal 2020. The average interest rates and average balances related to our variable rate debt for the nine month period endedOctober 30, 2021 compared with the prior year, are summarized in the table below: Nine Months Ended October 30, October 31, 2021 2020 Average balance - ABL Line of Credit (in millions) $ ?? $
276.2
Average interest rate - ABL Line of Credit ??
2.0%
Average balance - Term Loan Facility (in millions) (a)$ 961.2 $
961.4
Average interest rate - Term Loan Facility 2.0% 2.3% (a)
Excludes original issue discount.
Income tax expense (benefit)
Income tax expense was$79.8 million during the nine month period endedOctober 30, 2021 compared with income tax benefit of$253.3 million during the nine month period endedOctober 31, 2020 . The effective tax rate for the nine month period endedOctober 30, 2021 was 21.7% compared with 40.5% during the nine month period endedOctober 31, 2020 . The income tax benefit in the prior year was a result of the pre-tax loss and the carry-back of net operating losses arising in 2020 to the five prior tax years, as permitted under the CARES Act. The higher income tax rate in the prior year is a function of prior year losses facilitating a refund receivable upon amending previously filed returns at a 35% tax rate. Net income (loss) We earned net income of$287.2 million during the nine month period endedOctober 30, 2021 compared with a net loss of$372.5 million for the nine month period endedOctober 31, 2020 . This improvement was primarily driven by the temporary closure of all our stores during Fiscal 2020, caused by the COVID-19 pandemic, as well as our sales growth during Fiscal 2021.
Liquidity and Capital Resources
Our ability to satisfy interest payment and future principal payment obligations on our outstanding debt will depend largely on our future performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service interest payment and future principal payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed on terms similar to our current financing agreements, or at all. As a result of the uncertainty regarding the COVID-19 pandemic, the Company took a number of measures to manage its cash flow. These measures included carefully managing operating expenses, working capital and capital expenditures, as well as temporarily suspending the Company's share repurchase program. We resumed the share repurchase program during the third quarter of Fiscal 2021. We completed several debt transactions in order to facilitate increased financial flexibility in response to the COVID-19 pandemic. DuringMarch 2020 , we borrowed$400.0 million on our existing ABL Line of Credit. We repaid$150.0 million on the ABL Line of Credit during the second quarter of Fiscal 2020, and the remaining$250.0 million during the fourth quarter of Fiscal 2020. OnApril 16, 2020 , we issued$805.0 million of our Convertible Notes, and through BCFWC, issued$300.0 million of Secured 36 -------------------------------------------------------------------------------- Notes. The proceeds of the Convertible Notes are being used for general corporate purposes. OnJune 11, 2021 , BCFWC redeemed the full$300.0 million aggregate principal amount of the Secured Notes. The redemption price of the Secured Notes was$323.7 million , plus accrued and unpaid interest to, but not including, the date of redemption. Additionally, during the third quarter of Fiscal 2021, we repurchased$160.4 million of principal on the Convertible Notes. We believe that cash generated from operations, along with our existing cash and our ABL Line of Credit, will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future. However, there can be no assurance that we would be able to offset declines in our comparable store sales with savings initiatives in the event that the economy declines. As market conditions warrant, we may, from time to time, repurchase our outstanding debt securities in the open market, in privately negotiated transactions, by tender offer, by exchange transaction or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity and other factors and may be commenced or suspended at any time. The amounts involved and total consideration paid may be material.
Cash Flow for the Nine Month Period Ended
Nine Month Period Ended
We used$194.9 million of cash during the nine month period endedOctober 30, 2021 compared with a generation of$945.6 million during the nine month period endedOctober 31, 2020 . Net cash provided by operating activities amounted to$608.4 million during the nine month period endedOctober 30, 2021 , compared with a use of$116.9 million during the nine month period endedOctober 31, 2020 . The increase in our operating cash flows was primarily driven by the temporary closure of all our stores during Fiscal 2020, caused by the COVID-19 pandemic, as well as our strong sales performance during Fiscal 2021. Net cash used in investing activities was$233.3 million during the nine month period endedOctober 30, 2021 compared with$215.3 million during the nine month period endedOctober 31, 2020 . This change was primarily the result of an increase in capital expenditures related to our stores (new stores, remodels and other store expenditures). Net cash used in financing activities was$570.0 million during the nine month period endedOctober 30, 2021 compared with net cash provided of$1,277.9 million during the nine month period endedOctober 31, 2020 . This change was primarily driven by our cash flow management efforts during Fiscal 2020 in response to the COVID-19 pandemic, which included drawing$400.0 million on our ABL Line of Credit, issuing$805.0 million of our Convertible Notes, and through BCFWC, issuing$300.0 million of Secured Notes, and temporarily suspending our share repurchase program. We repaid$150.0 million on the ABL Line of Credit during the second quarter of Fiscal 2020. OnJune 11, 2021 , BCFWC redeemed the full$300.0 million aggregate principal amount of the Secured Notes. The redemption price of the Secured Notes was$323.7 million , plus accrued and unpaid interest to, but not including, the date of redemption. During the third quarter of Fiscal 2021, we repurchased$160.4 million of the Convertible Notes for a combination of$92.3 million in cash, inclusive of third party fees, and 513,991 shares of common stock. Additionally, during the third quarter of Fiscal 2021, we repurchased shares of common stock for$150.0 million under our share repurchase program. Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had working capital atOctober 30, 2021 of$686.0 million compared with$887.6 million atOctober 31, 2020 . The decrease in working capital was primarily due to an increase in accounts payable and a decrease in cash and cash equivalents, partially offset by an increase in merchandise inventories. We had working capital atJanuary 30, 2021 of$820.0 million .
Capital Expenditures
For the nine month period endedOctober 30, 2021 , cash spend for capital expenditures, net of$24.6 million of landlord allowances, amounted to$213.9 million . We estimate that we will spend approximately$425 million , net of approximately$30 million of landlord allowances, in capital expenditures during Fiscal 2021, including approximately$175 million , net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately$120 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives. 37
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Share Repurchase Programs
OnAugust 14, 2019 , our Board of Directors authorized the repurchase of up to$400.0 million of common stock, which expired inAugust 2021 . OnAugust 18, 2021 , our board of directors authorized the repurchase of up to$400.0 million of common stock, which is authorized to be executed throughAugust 2023 . This repurchase program is funded using our available cash and borrowings under the ABL Line of Credit. During Fiscal 2021, we repurchased 512,363 shares of common stock for$150.0 million under this repurchase program. As ofOctober 30, 2021 , we had$250.0 million remaining under our share repurchase authorization. We are authorized to repurchase, from time to time, shares of our outstanding common stock on the open market or in privately negotiated transactions under our repurchase program. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program.
Dividends
We currently do, and intend to continue to, retain all available funds and any future earnings to fund all of the Company's capital expenditures, business initiatives, and to support any potential opportunistic capital structure initiatives. Therefore, at this time, we do not anticipate paying cash dividends in the near term. Our ability to pay dividends on our common stock will be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions under the terms of current and any future agreements governing our indebtedness. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to compliance with covenants in our current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our Board of Directors deems relevant. In addition, since we are a holding company, substantially all of the assets shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries. Accordingly, our earnings, cash flow and ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends.
Operational Growth
During the nine month period endedOctober 30, 2021 , we opened 93 new stores, inclusive of 17 relocations, and closed five stores, exclusive of the aforementioned relocations, bringing our store count as ofOctober 30, 2021 to 832 stores. During Fiscal 2021, we plan to open 77 net new stores, which includes approximately 101 gross new stores, along with approximately 24 store relocations and closings. We have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long-term. We believe that our ability to find satisfactory locations for our stores is essential for the continued growth of our business. The opening of stores generally is contingent upon a number of factors including, but not limited to, the availability of desirable locations with suitable structures and the negotiation of acceptable lease terms. There can be no assurance, however, that we will be able to find suitable locations for new stores or that we will be able to open the number of new stores presently planned, even if such locations are found and acceptable lease terms are obtained. Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores.
Debt and Hedging
As ofOctober 30, 2021 , our obligations, inclusive of original issue discount, include$952.8 million under our Term Loan Facility,$644.6 million of Convertible Notes and no outstanding borrowings on our ABL Line of Credit. Our debt obligations also include$45.0 million of finance lease obligations as ofOctober 30, 2021 . Term Loan Facility OnJune 24, 2021 , BCFWC entered into Amendment No. 9 (the Ninth Amendment) to the Term Loan Credit Agreement governing the Term Loan Facility. The Ninth Amendment, among other things, extended the maturity date fromNovember 17, 2024 toJune 24, 2028 , and changed the interest rate margins applicable to the Term Loan Facility from 0.75% to 1.00%, in the case of prime rate loans, and from 1.75% to 2.00%, in the case of LIBOR loans, with a 0.00% LIBOR floor. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
At
2.1%.
38
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ABL Line of Credit
At
Credit. There were no borrowings on the ABL Line of Credit during the nine month
period ended
Convertible Notes
OnApril 16, 2020 , we issued$805.0 million of Convertible Notes. The Convertible Notes have an initial conversion rate of 4.5418 shares per$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately$220.18 per share of the Company's common stock), subject to adjustment if certain events occur.
The Convertible Notes are general unsecured obligations of the Company. The
Convertible Notes bear interest at a rate of 2.25% per year, payable
semi-annually in cash, in arrears on
beginning on
2025
During the third quarter of Fiscal 2021, we entered into separate, privately negotiated the Exchange Agreements with certain holders of the Convertible Notes. Under the terms of the Exchange Agreements, the holders exchanged$160.4 million in aggregate principal amount of Convertible Notes held by them for a combination of an aggregate of$90.8 million in cash and 513,991 shares of our common stock. This exchange resulted in a pre-tax debt extinguishment charge of$86.4 million in the three month period endedOctober 30, 2021 . See Note 4, "Long Term Debt," for additional information.
Secured Notes
OnApril 16, 2020 , BCFWC, issued$300.0 million of Senior Secured Notes. The Secured Notes are senior, secured obligations of BCFWC, and interest was payable semiannually in cash at a rate of 6.25% per annum onApril 15 andOctober 15 of each year, beginning onOctober 15, 2020 . The Secured Notes were guaranteed on a senior secured basis byBurlington Coat Factory Holdings, LLC ,Burlington Coat Factory Investments Holdings, Inc. and BCFWC's subsidiaries that guarantee the loans under the Term Loan Facility and ABL Line of Credit. OnJune 11, 2021 , BCFWC redeemed the full$300.0 million aggregate principal amount of the Secured Notes. The redemption price of the Secured Notes was$323.7 million , plus accrued and unpaid interest to, but not including, the date of redemption. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
Hedging
OnJune 24, 2021 , the Company terminated its previous interest rate swap and entered into a new interest rate swap. The new interest rate swap, which hedges$450 million of variable rate exposure under our Term Loan Facility, is designated as a cash flow hedge and expires onJune 24, 2028 . Refer to Note 5, "Derivative Instruments and Hedging Activities," for further discussion regarding our derivative transactions.
Certain Information Concerning Contractual Obligations
We had$1,766.0 million of purchase commitments related to goods that were not received as ofOctober 30, 2021 , and had$3,558.4 million of future minimum lease payments under operating leases as ofOctober 30, 2021 . Additionally, we redeemed the full$300.0 million aggregate principal amount of the Secured Notes, and we extended and repriced the Term Loan Facility during the second quarter of Fiscal 2021. During the third quarter of Fiscal 2021, we also repurchased$160.4 million in aggregate principal amount of the Convertible Notes. See Note 4, "Long Term Debt," for additional information related to our debt transactions. There were no other significant changes regarding our obligations to make future payments under current contracts from those included in our Fiscal 2020 10-K. 39
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Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management's judgments and estimates. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As of the end of the third quarter of Fiscal 2021, the impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and judgments carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the consolidated financial statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Our critical accounting policies and estimates are consistent with those
disclosed in Note 1, “Summary of Significant Accounting Policies,” to the
audited Consolidated Financial Statements, included in Part II, Item 8 of the
Fiscal 2020 10-K.
Safe Harbor Statement This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Our forward-looking statements are subject to risks and uncertainties. Such statements may include, but are not limited to, future impacts of the COVID-19 pandemic, proposed store openings and closings, proposed capital expenditures, projected financing requirements, proposed developmental projects, projected sales and earnings, our ability to maintain selling margins, and the effect of the adoption of recent accounting pronouncements on our consolidated financial position, results of operations and cash flows. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual events or results to differ materially from those we expected include: general economic conditions; pandemics, including the duration of the COVID-19 pandemic and actions taken to slow its spread and the related impact on consumer confidence and spending; increased freight and labor costs associated with industry-wide supply chain issues; our ability to successfully implement one or more of our strategic initiatives and growth plans; the availability of desirable store locations on suitable terms; changing consumer preferences and demand; industry trends, including changes in buying, inventory and other business practices; competitive factors, including pricing and promotional activities of major competitors and an increase in competition within the markets in which we compete; the availability, selection and purchasing of attractive merchandise on favorable terms; import risks, including tax and trade policies, tariffs and government regulations; weather patterns, including, among other things, changes in year-over-year temperatures; our future profitability; our ability to control costs and expenses; unforeseen cyber-related problems or attacks; any unforeseen material loss or casualty; the effect of inflation; regulatory and tax changes; our relationships with employees; the impact of current and future laws and the interpretation of such laws; terrorist attacks, particularly attacks on or within markets in which we operate; natural and man-made disasters, including fire, snow and ice storms, flood, hail, hurricanes and earthquakes; our substantial level of indebtedness and related debt-service obligations; restrictions imposed by covenants in our debt agreements; availability of adequate financing; our dependence on vendors for our merchandise; domestic events affecting the delivery of merchandise to our stores; existence of adverse litigation; and other risks discussed from time to time in our filings with theSecurities and Exchange Commission (SEC). Many of these factors, including the ultimate impact of the COVID-19 pandemic, are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements. 40 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact on our Condensed Consolidated Financial Statements.
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