FIVE BELOW: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

0
You should read the following discussion together with "Selected Financial
Data," and the consolidated financial statements and related notes included
elsewhere in this Annual Report. The statements in this discussion regarding
expectations of our future performance, liquidity and capital resources and
other non-historical statements are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described in Part I,
Item 1A "Risk Factors" and "Special Note Regarding Forward-Looking Statements."
Our actual results may differ materially from those contained in or implied by
any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results
in a given fiscal year consisting of a 52- or 53-week period ending on the
Saturday closest to January 31 of the following year. References to "fiscal year
2021" or "fiscal 2021" refer to the period from January 31, 2021 to January 29,
2022, which consists of a 52-week fiscal year. References to "fiscal year 2020"
or "fiscal 2020" refer to the period from February 2, 2020 to January 30, 2021,
which consists of a 52-week fiscal year. References to "fiscal year 2019" or
"fiscal 2019" refer to the period from February 3, 2019 to February 1, 2020,
which consists of a 52-week fiscal year. References to "fiscal year 2018" or
"fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019,
which consists of a 52-week fiscal year. References to "fiscal year 2017" or
"fiscal 2017" refer to the period from January 29, 2017 to February 3, 2018,
which consists of a 53-week fiscal year. References to "fiscal year 2016" or
"fiscal 2016" refer to the period from January 31, 2016 to January 28, 2017,
which consists of a 52-week fiscal year. 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.
                                    Overview
Five Below is a rapidly growing specialty value retailer offering a broad range
of trend-right, high-quality merchandise targeted at the tween and teen
customer. We offer a dynamic, edited assortment of exciting products, with most
priced at $5 and below, including select brands and licensed merchandise across
our category worlds. As of January 30, 2021, we operated 1,020 stores in 38
states. In August 2016, we commenced selling merchandise on the internet through
our fivebelow.com e-commerce website. We launched our e-commerce operation as an
additional channel to service our customers. All e-commerce sales, which
includes shipping and handling revenue, are included in net sales and beginning
with the third fiscal quarter of 2016, are included in comparable sales. Our
e-commerce expenses will have components classified as both cost of goods sold
and selling, general and administrative expenses.
We believe that our business model has resulted in strong financial performance
when considered in light of the economic environment. Our comparable sales
decreased by 5.5% in fiscal 2020, and increased by 0.6% in fiscal 2019 and 3.9%
in fiscal 2018, based on the restated calendar. Between fiscal 2018 and fiscal
2020, our net sales increased from $1,559.6 million to $1,962.1 million,
representing a compounded annual growth rate of 12.2%. Over the same period, our
operating income decreased from $187.2 million to $154.8 million. In addition,
we expanded our store base from 750 stores at the end of fiscal 2018 to 1,020
stores at the end of fiscal 2020 and we plan to open approximately 170 to 180
new stores in fiscal 2021.
We expect to continue our strong growth in the future. By offering trend-right
merchandise at a differentiated price points, our stores have been successful in
varying geographic regions, population densities and real estate settings. As of
January 30, 2021, we operated stores in 38 states throughout the United States.
We are primarily located in power, community and lifestyle shopping centers
across a variety of urban, suburban and semi-rural markets with trade areas
including at least 100,000 people in the specified market. We continue believe
we have the opportunity to expand our store base in the United States from 1,020
locations as of January 30, 2021 to more than 2,500 locations over time. Our
ability to open profitable new stores depends on many factors, including our
ability to identify suitable markets and sites; negotiate leases with acceptable
terms; achieve brand awareness in the new markets; efficiently source and
distribute additional merchandise; and achieve sufficient levels of cash flow
and financing to support our expansion. Our store expansion plans for fiscal
2020 were adjusted downward as a result of the COVID-19 pandemic. However, we
were still able to open over 120 stores in fiscal 2020 and expect to remain
aggressive on our store opening plan.
We have a proven and highly profitable store model that has produced consistent
financial results and returns, and our new stores have achieved average payback
periods of less than one year. Our new store model assumes a store size of
approximately 9,000 square feet that achieves annual sales of approximately $2.0
million in the first full year of operation. Our new store model also assumes an
average new store investment of approximately $0.4 million. Our new store
investment includes our store build-out (net of tenant allowances), inventory
(net of payables) and cash pre-opening expenses.
                                       36
--------------------------------------------------------------------------------

Our planned store expansion will place increased demands on our operational,
managerial, administrative and other resources. Managing our growth effectively
will require us to continue to maintain adequate distribution capacity, enhance
our store management systems, financial and management controls, information
systems and other operational system capabilities. In addition, we will be
required to hire, train and retain store management and other qualified
personnel. For further information, see Part I, Item 1A "Risk Factors-Risk
Relating to our Business and Industry."
Over the past five years, we have invested a significant amount of capital in
infrastructure and systems necessary to support our future growth and we expect
to incur additional capital expenditures related to expansion of our
infrastructure and systems in future periods. In fiscal 2015, we invested in a
new ERP and began the multi-year implementation of the ERP, which is designed to
enhance functionality and provide timely information to the Company's management
team related to the operation of the business. In fiscal 2020, we invested in a
new Retail Merchandising System and began the multi-year implementation of the
Retail Merchandising System, which is designed to manage, control, and perform
seamless execution of day-to-day merchandising activities, including purchasing,
distribution, order fulfillment, and financial close. In fiscal 2015, we opened
a distribution center in Pedricktown, New Jersey. We occupy approximately
1,000,000 square feet at this distribution center, having expanded from 800,000
square feet in September 2018. In fiscal 2016, we signed a 15-year lease for a
new corporate headquarters location in Philadelphia, Pennsylvania. We currently
occupy approximately 190,000 square feet of office space with multiple options
to expand in the future. In March 2019, we completed the purchase of an
approximately 700,000 square foot distribution center in Forsyth, Georgia. We
began operating the distribution center in April 2019. In August 2019, we
acquired land in Conroe, Texas, to build an approximately 860,000 square foot
distribution center for approximately $56 million. We began operating the
distribution center in July 2020. In July 2020, we acquired land in Buckeye,
Arizona, to build an approximately 860,000 square foot distribution center for
approximately $65 million. We expect to occupy the distribution center in
Buckeye, Arizona in the second half of 2021. We are planning to lease or build
new distribution centers over the next few years to support our growth
objectives.
We continuously assess ways to maximize the productivity and efficiency of our
existing facilities, infrastructure and systems. The timing and amount of
investments in our facilities, infrastructure and systems could affect the
comparability of our results of operations in future periods. The completion
date and ultimate cost of future projects could differ significantly from
initial expectations due to construction-related or other reasons.
We believe our business strategy will continue to offer significant opportunity,
but it also presents risks and challenges. These risks and challenges include,
but are not limited to, that we may not be able to effectively identify and
respond to changing trends and customer preferences, that we may not be able to
find desirable locations for new stores and that we may not be able to
effectively manage our future growth. In addition, our financial results can be
expected to be directly impacted by substantial increases in product costs due
to commodity cost increases or general inflation which could lead to a reduction
in our sales as well as greater margin pressure as costs may not be able to be
passed on to consumers. To date, changes in commodity prices and general
inflation have not materially impacted our business. In response to increasing
commodity prices or general inflation, we seek to minimize the impact of such
events by sourcing our merchandise from different vendors and changing our
product mix. See Part I, Item 1A "Risk Factors" for a description of these and
other important factors that could adversely impact us and our results of
operations.
                 How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of
performance and financial measures. These key measures include net sales,
comparable sales, cost of goods sold and gross profit, selling, general and
administrative expenses and operating income.
Net Sales
Net sales constitute gross sales net of merchandise returns for damaged or
defective goods. Net sales consist of sales from comparable stores,
non-comparable stores, and e-commerce, which includes shipping and handling
revenue. Revenue from the sale of gift cards is deferred and not included in net
sales until the gift cards are redeemed to purchase merchandise or as breakage
revenue in proportion to the pattern of redemption of the gift cards by the
customer.
Our business is seasonal and as a result, our net sales fluctuate from quarter
to quarter. Net sales are usually highest in the fourth fiscal quarter due to
the year-end holiday season.
                                       37
--------------------------------------------------------------------------------

Comparable Sales
Comparable sales include net sales from stores that have been open for at least
15 full months from their opening date, and e-commerce sales. Comparable stores
include the following:
•Stores that have been remodeled while remaining open;
•Stores that have been relocated within the same trade area, to a location that
is not significantly different in size, in which the new store opens at about
the same time as the old store closes; and
•Stores that have expanded, but are not significantly different in size, within
their current locations.

For stores that are relocated or expanded, the following periods are excluded
when calculating comparable sales:
•The period beginning when the closing store receives its last merchandise
delivery from one of our distribution centers through:
?the last day of the fiscal year in which the store was relocated or expanded
(for stores that increased significantly in size); or
?the last day of the fiscal month in which the store re-opens (for all other
stores); and
•The period beginning on the first anniversary of the date the store received
its last merchandise delivery from one of our distribution centers through the
first anniversary of the date the store re-opened.
Comparable sales exclude the 53rd week of sales for 53-week fiscal years. In the
52-week fiscal year subsequent to a 53-week fiscal year, we exclude the sales in
the non-comparable week from the same-store sales calculation. Due to the 53rd
week in fiscal 2017, all comparable sales related to any reporting period during
the year ended February 2, 2019 are reported on a restated calendar basis using
the National Retail Federation's restated calendar comparing similar weeks.
There may be variations in the way in which some of our competitors and other
retailers calculate comparable or "same store" sales. As a result, data in this
Annual Report regarding our comparable sales may not be comparable to similar
data made available by other retailers. Non-comparable sales are comprised of
new store sales, sales for stores not open for a full 15 months, and sales from
existing store relocation and expansion projects that were temporarily closed
(or not receiving deliveries) and not included in comparable sales.
Measuring the change in fiscal year-over-year comparable sales allows us to
evaluate how we are performing. Various factors affect comparable sales,
including:
•consumer preferences, buying trends and overall economic trends;
•our ability to identify and respond effectively to customer preferences and
trends;
•our ability to provide an assortment of high-quality, trend-right and everyday
product offerings that generate new and repeat visits to our stores;
•the customer experience we provide in our stores and online;
•the level of traffic near our locations in the power, community and lifestyle
centers in which we operate;
•competition;
•changes in our merchandise mix;
•pricing;
•our ability to source and distribute products efficiently;
•the timing of promotional events and holidays;
•the timing of introduction of new merchandise and customer acceptance of new
merchandise;
•our opening of new stores in the vicinity of existing stores;
•the number of items purchased per store visit; and
•weather conditions; and
•the impacts associated with the COVID-19 pandemic, including closures of our
stores, adverse impacts on our operations, and consumer sentiment regarding
discretionary spending.
Opening new stores is an important part of our growth strategy. As we continue
to pursue our growth strategy, we expect that a significant percentage of our
net sales will continue to come from new stores not included in comparable
sales. Accordingly, comparable sales is only one measure we use to assess the
success of our growth strategy.
                                       38
--------------------------------------------------------------------------------

Cost of Goods Sold and Gross Profit
Gross profit is equal to our net sales less our cost of goods sold. Gross margin
is gross profit as a percentage of our net sales. Cost of goods sold reflects
the direct costs of purchased merchandise and inbound freight, as well as
shipping and handling costs, store occupancy, distribution and buying expenses.
Shipping and handling costs include internal fulfillment and shipping costs
related to our e-commerce operations. Store occupancy costs include rent, common
area maintenance, utilities and property taxes for all store locations.
Distribution costs include costs for receiving, processing, warehousing and
shipping of merchandise to or from our distribution centers and between store
locations. Buying costs include compensation expense and other costs for our
internal buying organization, including our merchandising and product
development team and our planning and allocation group. These costs are
significant and can be expected to continue to increase as our Company grows.
The components of our cost of goods sold may not be comparable to the components
of cost of goods sold or similar measures of our competitors and other
retailers. As a result, data in this Annual Report regarding our gross profit
and gross margin may not be comparable to similar data made available by our
competitors and other retailers.
The variable component of our cost of goods sold is higher in higher volume
quarters because the variable component of our cost of goods sold generally
increases as net sales increase. We regularly analyze the components of gross
profit as well as gross margin. Any inability to obtain acceptable levels of
initial markups, a significant increase in our use of markdowns, and a
significant increase in inventory shrinkage or inability to generate sufficient
sales leverage on the store occupancy, distribution and buying components of
cost of goods sold could have an adverse impact on our gross profit and results
of operations. Changes in the mix of our products may also impact our overall
cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are composed of payroll
and other compensation, marketing and advertising expense, depreciation and
amortization expense and other selling and administrative expenses. SG&A
expenses as a percentage of net sales are usually higher in lower sales volume
quarters and lower in higher sales volume quarters.
The components of our SG&A expenses may not be comparable to those of other
retailers. We expect that our SG&A expenses will increase in future periods due
to our continuing store growth. In addition, any increase in future share-based
grants or modifications will increase our share-based compensation expense
included in SG&A expenses.
Operating Income
Operating income equals gross profit less SG&A expenses. Operating income
excludes interest expense or income and other, and income tax expense or
benefit. We use operating income as an indicator of the productivity of our
business and our ability to manage SG&A expenses. Operating income percentage
measures operating income as a percentage of our net sales.
                                       39
--------------------------------------------------------------------------------

                       Results of Consolidated Operations
The following tables summarize key components of our results of consolidated
operations for the periods indicated, both in dollars and as a percentage of our
net sales. Refer to Item 7. "Results of Consolidated Operations" in our Annual
Report on Form 10-K for the year ended February 1, 2020 for a comparison of
fiscal years 2019 and 2018.
                                                                                     Fiscal Year
                                                                               2020                2019
                                                                             (in millions, except total
                                                                                       stores)
Consolidated Statements of Operations Data (1):
Net sales                                                                 $  1,962.1           $ 1,846.7
Cost of goods sold                                                           1,309.8             1,172.8
Gross profit                                                                   652.3               674.0
Selling, general and administrative expenses                                   497.5               456.7
Operating income                                                               154.8               217.3
Interest (expense) income and other, net                                        (1.7)                4.3

Income before income taxes                                                     153.1               221.6
Income tax expense                                                              29.7                46.5
Net income                                                                $    123.4           $   175.1
Percentage of Net Sales (1):
Net sales                                                                      100.0   %           100.0  %
Cost of goods sold                                                              66.8   %            63.5  %
Gross profit                                                                    33.2   %            36.5  %
Selling, general and administrative expenses                                    25.4   %            24.7  %
Operating income                                                                 7.9   %            11.8  %
Interest (expense) income and other, net                                        (0.1)  %             0.2  %

Income before income taxes                                                       7.8   %            12.0  %
Income tax expense                                                               1.5   %             2.5  %
Net income                                                                       6.3   %             9.5  %
Operational Data:
Total stores at end of period                                                  1,020                 900
Comparable sales (decrease) increase                                            (5.5)  %             0.6  %
Average net sales per store (2)                                           $      2.0           $     2.2


(1) Items may not add to total due to rounding. (2) Only includes stores opened before the start of the financial year.

Fiscal Year 2020 Compared to Fiscal Year 2019
Net Sales
Net sales increased to $1,962.1 million in fiscal year 2020 from $1,846.7
million in fiscal year 2019, an increase of $115.4 million, or 6.2%. The
increase was the result of a non-comparable sales increase of $209.9 million,
partially offset by comparable sales decrease of $94.5 million. In fiscal year
2020, we opened 120 net new stores compared to 150 new stores in fiscal year
2019. The increase in non-comparable sales was primarily driven by new stores
that opened in fiscal 2020 and the number of stores that opened in fiscal 2019
but have not been open for 15 full months.
Comparable sales decreased 5.5%. The decrease was primarily the result of the
impact of COVID-19 as we temporarily closed all of our stores as of March 20,
2020. We began reopening our stores at the end of April in compliance with
federal, state and local requirements, and as of the end of June, the Company
had reopened substantially all of its stores to the general public.

                                       40
--------------------------------------------------------------------------------

Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $1,309.8 million in fiscal year 2020 from
$1,172.8 million in fiscal year 2019, an increase of $137.0 million, or 11.7%.
The increase in cost of goods sold was primarily the result of an increase in
the merchandise costs of goods resulting from an increase in sales. Also
contributing to the increase in cost of goods sold was an increase in store
occupancy costs resulting from new store openings.
Gross profit decreased to $652.3 million in fiscal year 2020 from $674.0 million
in fiscal year 2019, a decrease of $21.7 million, or 3.2%. Gross margin
decreased to 33.2% in fiscal year 2020 from 36.5% in fiscal year 2019, a
decrease of approximately 330 basis points. The decrease in gross margin was
primarily the result of an increase as a percentage of sales in merchandise cost
of goods sold and an increase as a percentage of sales in store occupancy costs
due to the impact of COVID-19 as we temporarily closed all of our stores while
still incurring rent expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $497.5 million in
fiscal year 2020 from $456.7 million in fiscal year 2019, an increase of $40.8
million, or 8.9%. As a percentage of net sales, selling, general and
administrative expenses increased approximately 70 basis points to 25.4% in
fiscal year 2020 compared to 24.7% in fiscal year 2019. The increase in selling,
general and administrative expenses was the result of an increase of $30.7
million of corporate-related expenses, which is net of the benefit related to
the CARES Act. The increase was also driven by an increase of $10.1 million in
store-related expenses to support new store growth, which is net of the expense
savings from the temporary closure of all of our stores, furloughing of
employees, and other non-payroll expense reductions due to the impact of
COVID-19.
Income Tax Expense
Income tax expense decreased to $29.7 million in fiscal year 2020 from $46.5
million in fiscal year 2019, a decrease of $16.8 million, or approximately
36.1%. This decrease in income tax expense was primarily due to a $68.5 million
decrease in pre-tax net income and discrete items, which includes the impact of
the CARES Act, partially offset by a reduction of the benefit of ASU 2016-09,
"Improvements to Employee Share-Based Payment Accounting," with respect to the
requirements to recognize excess income tax benefits or deficiencies as income
tax benefit or expense in the consolidated statements of operations rather than
as additional paid-in capital in the consolidated balance sheets.
Our effective tax rate for fiscal year 2020 was 19.4% compared to 21.0% in
fiscal year 2019. The decrease in our effective tax rate was primarily driven by
discrete items, which includes the impact of the CARES Act, partially offset by
a reduction of the benefit of ASU 2016-09, "Improvements to Employee Share-Based
Payment Accounting."
Net Income
As a result of the foregoing, net income decreased to $123.4 million in fiscal
year 2020 from $175.1 million in fiscal year 2019, a decrease of approximately
$51.7 million, or 29.5%.
                              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 assure you, however, that
our results of operations and financial condition will not be materially
impacted by inflation in the future.
                                  Seasonality
Our business is seasonal in nature with the highest level of net sales and net
income generated in the fourth fiscal quarter due to the year-end holiday season
and, therefore, operating results for any fiscal quarter are not necessarily
indicative of results for the full fiscal year. To prepare for the holiday
season, we must order and keep in stock more merchandise than we carry during
other parts of the year. We expect inventory levels, along with an increase in
accounts payable and accrued expenses, generally to reach their highest levels
in the third and fourth fiscal quarters in anticipation of the increased net
sales during the year-end holiday season. As a result of this seasonality, and
generally because of variation in consumer spending habits, we experience
fluctuations in net sales, net income and working capital requirements during
the year.


                                       41
--------------------------------------------------------------------------------

                        Liquidity and Capital Resources

Overview

Cash capital expenditures typically vary depending on the timing of new store
openings and infrastructure-related investments. We plan to make cash capital
expenditures of approximately $315 million in fiscal 2021, which exclude the
impact of tenant allowances, and which we expect to fund from cash generated
from operations, cash on-hand, short-term investments and, as needed, borrowings
under our Revolving Credit Facility. We expect to incur approximately $95
million of our cash capital expenditure budget in fiscal 2021 to construct and
open approximately 170 to 180 new stores, with the remainder projected to be
spent on our distribution facilities (existing and new), store relocations and
remodels, and our corporate infrastructure.
Our primary working capital requirements are for the purchase of store inventory
and payment of payroll, rent, other store operating costs and distribution
costs. Our working capital requirements fluctuate during the year, rising in the
third and fourth fiscal quarters as we take title to increasing quantities of
inventory in anticipation of our peak, year-end holiday shopping season in the
fourth fiscal quarter. Fluctuations in working capital are also driven by the
timing of new store openings.
Historically, we have funded our capital expenditures and working capital
requirements during the fiscal year with cash on hand, net cash provided by
operating activities and borrowings under our Revolving Credit Facility, as
needed, and we expect that funding to continue. When we have used our Revolving
Credit Facility, the amount of indebtedness outstanding under it has tended to
be the highest in the beginning of the fourth quarter of each fiscal year. To
the extent that we have drawn on the facility, we have paid down the borrowings
before the end of the fiscal year with cash generated during our peak selling
season in the fourth quarter. Although it is not possible to reliably estimate
the duration or severity of the COVID-19 pandemic and the resulting financial
impact on our results of operations, financial position and liquidity, we have
the ability to draw down on our Revolving Credit Facility if and as needed.
During the thirteen weeks ended May 2, 2020, we borrowed and repaid
approximately $50 million from our Revolving Credit Facility. As of January 30,
2021, we did not have any direct borrowings under our Revolving Credit Facility.
As of January 30, 2021, we had approximately $191 million available on the line
of credit.
On March 20, 2018, our Board of Directors approved a share repurchase program
authorizing the repurchase of up to $100 million of our common stock through
March 31, 2021, on the open market, in privately negotiated transactions, or
otherwise. In fiscal 2018, we repurchased 21,810 shares under this program at an
aggregate cost of approximately $2.0 million. In fiscal 2019, we repurchased
337,552 shares under this program at an aggregate cost of approximately $36.9
million. In fiscal 2020, we repurchased 137,023 shares under this program at an
aggregate cost of approximately $12.7 million. Since approval of the share
repurchase program in March 2018, we have purchased approximately 500,000 shares
for an aggregate cost of approximately $50 million. On March 9, 2021, our Board
of Directors approved a new share repurchase program for up to $100 million of
our common shares through March 31, 2024. There can be no assurances that any
additional repurchases will be completed, or as to the timing or amount of any
repurchases. The share repurchase program may be modified or discontinued at any
time.
Based on our growth plans, we believe that our cash position which includes our
cash equivalents and short-term investments, net cash provided by operating
activities and availability under our Revolving Credit Facility will be adequate
to finance our planned capital expenditures, authorized share repurchases and
working capital requirements over the next 12 months and for the foreseeable
future thereafter. If cash flows from operations and borrowings under our
Revolving Credit Facility are not sufficient or available to meet our
requirements, then we will be required to obtain additional equity or debt
financing in the future. There can be no assurance that equity or debt financing
will be available to us when we need it or, if available, that the terms will be
satisfactory to us and not dilutive to our then-current shareholders.
Although, we began reopening stores at the end of April where permitted in
compliance with federal, state, and local requirements, any significant
reduction in consumer willingness to visit malls and shopping centers or
purchase merchandise using curbside pickup where available, levels of consumer
spending at our stores or employee willingness to staff our stores or the
temporary closure of our stores or distribution centers relating to the pandemic
or its impact on the economy, disruptions in the supply chains related to our
products or consumer sentiment or health concerns would result in a further loss
of sales and profits and other material adverse effects. In order to mitigate
the negative impact on our liquidity, management took several short term and
long term actions, which included the following:
• we cancelled certain vendor orders and delayed receipts on others in order to
manage inventory levels, and extended payment terms for product and non-product
vendors, although we have since returned to more normalized payment terms;
• we amended our Credit Agreement and increased our Revolving Credit Facility
from $50 million to $225 million;
• we implemented significant non-payroll expense reductions, including
advertising, occupancy and other store operating expenses (including rent
abatements and deferrals for a significant part of our lease portfolio),
distribution and corporate office operating expenses, as well as professional
and consulting fees;
                                       42
--------------------------------------------------------------------------------

• we significantly reduced our 2020 capital expenditure budget, including
reducing the number of new stores to be opened in 2020 and delaying purchase and
construction of a new Midwest distribution center; and
• as permitted by the Coronavirus Aid, Relief, and Economic Security ("CARES")
Act, we have applied for and received payroll tax credits with the IRS, and
elected to defer the payment of the employer's portion of FICA taxes.
The extent to which COVID-19 continues to impact our results, financial position
and liquidity will depend on future developments, which are highly uncertain and
cannot be predicted, including new federal, state and local governmental
restrictions that may be taken to contain COVID-19 or treat its impact, and any
new mitigation measures we may determine to take in response to any such
restrictions.

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

                                                                                  Fiscal Year
                                                                            2020              2019

Net cash provided by operating activities                                $  366.0          $  187.0
Net cash used in investing activities                                      (286.9)           (193.6)
Net cash used in financing activities                                       (12.8)            (42.7)

Net increase (decrease) during the period in cash and cash equivalents $ (1)

66.3 $ (49.3)

(1) Items may not add to total due to rounding.

Cash Provided by Operating Activities
Net cash provided by operating activities for fiscal 2020 was $366.0 million, an
increase of $179.0 million compared to fiscal 2019. The increase was primarily
due to changes in working capital and a decrease in income taxes paid, partially
offset by a decrease in operating cash flows from store performance due to the
impact of COVID-19 as we temporarily closed all of our stores in March and had
reopened substantially all of our stores as of the end of June. During fiscal
2020, we added 120 net new stores.
Cash Used in Investing Activities
Net cash used in investing activities for fiscal 2020 was $286.9 million, an
increase of $93.3 million compared to fiscal 2019. The increase was primarily
due to an increase in net purchases of investment securities and other
investments, partially offset by a decrease in capital expenditures.
Cash Used in Financing Activities
Net cash used in financing activities for fiscal year 2020 was $12.8 million, a
decrease of $29.9 million compared to fiscal 2019. The decrease was primarily
the result of decreases in the repurchase and retirement of common stock and in
common shares withheld for taxes.
Line of Credit
On May 10, 2017, the Company entered into a Fourth Amendment and Restated Loan
and Security Agreement (the "Prior Credit Agreement"), among the Company, 1616
Holdings, Inc., a wholly owned subsidiary of the Company ("1616 Holdings"), and
Wells Fargo Bank, National Association, which includes a secured asset-based
revolving line of credit in the amount of up to $20 million (the "Revolving
Credit Facility"). On March 20, 2020, the Company exercised its right under the
Prior Credit Agreement to increase the aggregate commitments under the Revolving
Credit Facility from $20 million to $50 million.
On April 24, 2020, the Company entered into a Fifth Amended and Restated Credit
Agreement (the "Credit Agreement"), among the Company, 1616 Holdings, Inc.
(together with the Company, the "Loan Parties"), Wells Fargo Bank, National
Association as administrative agent (the "Agent"), and other lenders party
thereto (the "Lenders"). The Credit Agreement amends and restates the Prior
Credit Agreement.
The Credit Agreement increased the Revolving Credit Facility to $225.0 million.
Pursuant to the Credit Agreement, advances under the Revolving Credit Facility
are tied to a borrowing base consisting of eligible credit card receivables and
inventory, as reduced by certain reserves in effect from time to time. The
Revolving Credit Facility expires on the earliest to occur of (i) April 24, 2023
or (ii) an event of default. The Revolving Credit Facility may be increased by
up to $150.0 million, subject to certain conditions, including obtaining
commitments from one or more Lenders. The entire amount of the Revolving Credit
Facility is available for the issuance of letters of credit and allows for
swingline loans.
                                       43
--------------------------------------------------------------------------------

The Credit Agreement provides that the interest rate payable on borrowings shall
be, at the Company's option, a per annum rate equal to (a) a base rate plus an
applicable margin ranging from 1.00% to 1.25% or (b) a LIBOR rate plus a margin
ranging from 2.00% to 2.25%. Letter of credit fees will range from 2.00% to
2.25%. The interest rate and letter of credit fees under the Credit Agreement
are subject to an increase of 2.00% per annum upon an event of default.
The Credit Agreement contains customary covenants that limit, absent lender
approval, the ability of Company and certain of its affiliates to, among other
things, pay cash dividends, incur debt, create liens and encumbrances, redeem or
repurchase stock, enter into certain acquisition transactions or transactions
with affiliates, merge, dissolve, repay certain indebtedness, change the nature
of Company's business, enter sale or leaseback transactions, make investments or
dispose of assets. In some cases, these restrictions are subject to certain
negotiated exceptions or permit Company to undertake otherwise restricted
activities if it satisfies certain required conditions. In addition, the Company
will be required to maintain availability of not less than (i) 15% of the lesser
of (x) aggregate commitments under the Revolving Credit Facility and (y) the
borrowing base (the "loan cap") prior to a stepdown date (as described below)
and (ii) 10% of the loan cap after the stepdown date. The stepdown date is the
first date occurring after both (i) the date that 75% of the number of stores as
of the closing date of the Revolving Credit Facility have reopened ("store
opening date") and (ii) the date occurring at least six months after the store
reopening date on which the fixed charge coverage ratio is at least 1.00 to
1.00.
If there exists an event of default or availability under the Revolving Credit
Facility is less than 15% of the loan cap, amounts in any of the Loan Parties'
or subsidiary guarantors' designated deposit accounts will be transferred daily
into a blocked account held by the Agent and applied to reduce outstanding
amounts under the Revolving Credit Facility (the "Cash Dominion Event"), so long
as (i) such event of default has not been waived and/or (ii) until availability
has exceeded 15% of the loan cap for sixty (60) consecutive calendar days
(provided that such ability to discontinue the Cash Dominion Event shall be
limited to two times during the term of the Agreement).
The Credit Agreement also contains a provision stating that the Company cannot
borrow in excess of $50 million under the Revolving Credit Facility at any time
the amount of the consolidated cash and cash equivalents of the Loan Parties
(excluding certain long-term investments and certain other items) exceeds $50
million.
The Credit Agreement contains customary events of default including, among other
things, failure to pay obligations when due, initiation of bankruptcy or
insolvency proceedings, defaults on certain other indebtedness, change of
control, incurrence of certain material judgments that are not stayed,
satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity
of the credit documents, and violation of affirmative and negative covenants or
breach of representations and warranties set forth in the Credit Agreement.
Amounts under the Revolving Credit Facility may become due upon events of
default (subject to any applicable grace or cure periods).
Under the Credit Agreement, all obligations under the Revolving Credit Facility
are guaranteed by 1616 Holdings and are secured by substantially all of the
assets of the Company and 1616 Holdings.
On January 27, 2021, the Company entered into a First Amendment to Credit
Agreement (the "First Amendment") among the Loan Parties, the Lenders and Agent,
which amended the Credit Agreement.
Pursuant to the First Amendment, the Company obtained commitments from the
Lenders that would allow the Company at its election (subject only to
satisfaction of certain customary conditions such as the absence of any Event of
Default), to increase the amount of the Revolving Credit Facility by an
aggregate principal amount up to $50,000,000 (the "Committed Increase"). The
First Amendment preserves the existing provisions of the Credit Agreement
allowing for further increases to the total commitment under the Revolving
Credit Facility, subject to certain conditions including obtaining commitments
from one or more Lenders ("Uncommitted Incremental Capacity"), provided that the
total amount of the facility, as increased pursuant to a Committed Increase or
Uncommitted Incremental Capacity, cannot exceed $375,000,000. The current amount
of the Revolving Credit Facility is maintained at $225,000,000.
Pursuant to the First Amendment, availability under the Revolving Credit
Facility will continue to be based upon quarterly (or monthly or weekly, in
certain cases) borrowing base certifications valuing the loan parties' eligible
credit card receivables and inventory, as reduced by certain reserves in effect
from time to time. The First Amendment provides for the deferral of inventory
appraisals and certain other diligence items, with reduced advance rates
applicable during the period that such appraisals have not been delivered.
The First Amendment also reduced the pricing under the Revolving Credit
Facility. Giving effect to the First Amendment, outstanding borrowings under the
Revolving Credit Facility would accrue interest at floating rates plus an
applicable margin ranging from 1.25% to 1.75% for LIBOR loans and 0.25% to 0.75%
for base rate loans, and letter of credit fees range from 1.25% to 1.75%., in
each case based on the average availability under the Revolving Credit Facility.
The First Amendment makes a number of other revisions to the covenants in the
Credit Agreement, including a revision to the minimum availability covenant to
require availability of 12.5% during the diligence deferral period referenced
above and 10.0% at all other times.
                                       44
--------------------------------------------------------------------------------

As of January 30, 2021 and February 1, 2020, we had approximately $191 million
and $20 million, respectively, available in the Revolving Credit Facility.
All obligations under the First Amendment are secured by substantially all of
our assets and are guaranteed by 1616 Holdings. As of January 30, 2021, we were
in compliance with the covenants applicable to us under the First Amendment.
                   Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and
understanding of our consolidated results of operations. The impact and any
associated risks related to these policies on our business operations are
discussed throughout "Management's Discussion and Analysis of Financial
Condition and Results of Operations" where such policies affect our reported and
expected financial results. Our consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted accounting principles,
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. We base our
estimates on historical experience and various other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ from these
estimates. For a detailed discussion on the application of these and other
accounting policies, see Note 1 in our annual consolidated financial statements
included elsewhere in this Annual Report.
Inventories
Inventories consist of finished goods purchased for resale, including freight
and tariffs, and are stated at the lower of cost and net realizable value, at
the individual product level. Cost is determined on a weighted average cost
method. The market value used in the lower of cost or market analysis is subject
to the effects of consumer demands, customer preferences and the broader
economy. The effects of the previously listed criteria are not controllable by
management. Our management reviews inventory levels in order to identify
obsolete and slow-moving merchandise as these factors can indicate a decline in
the market value of inventory on hand. Inventory cost is reduced when the
selling price less costs of disposal is below cost. We accrue an estimate for
inventory shrink for the period between the last physical count and the balance
sheet date. The shrink estimate can be affected by changes in merchandise mix
and changes in actual shrink trends. These estimates are derived using available
data and our historical experience. Our estimates may be impacted by changes in
certain underlying assumptions and may not be indicative of future activity.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Assets are grouped and evaluated for
impairment at the lowest level of which there are identifiable cash flows, which
is generally at a store level. Assets are reviewed for impairment using factors
including, but not limited to, our future operating plans and projected cash
flows. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated undiscounted future cash flows, then an impairment charge
is recognized as the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Fair value is based on discounted future cash
flows of the asset using a discount rate commensurate with the risk. In the
event of a store closure, we will record an impairment charge, if appropriate,
or accelerate depreciation over the revised useful life of the asset. Based on
the analysis performed, our management believes that there was no impairment of
long-lived assets for each of the 2020, 2019 and 2018 fiscal years. The
impairment loss analysis requires management to apply judgment and make
estimates.
Leases
Effective February 3, 2019, we adopted ASU 2016-02, "Leases" (Topic 842). We are
required to recognize an operating lease asset and an operating lease liability
for all of our leases (other than leases that meet the definition of a
short-term lease). The liability is equal to the present value of lease payments
using an estimated incremental borrowing rate, on a collateralized basis over a
similar term, that we would have incurred to borrow the funds necessary to
purchase the leased asset. The asset is based on the liability, subject to
certain adjustments, such as for initial direct costs. For income statement
purposes, a dual model was retained, requiring leases to be classified as either
operating or finance leases. Operating leases result in straight-line expense
(similar to operating leases under the prior accounting standard) while finance
leases result in a front-loaded expense pattern (similar to capital leases under
the prior accounting standard). See the Recently Issued Accounting Standards
section of Note 1 ''Summary of Significant Accounting Policies'' to the
consolidated financial statements for a detailed discussion of the adoption of
this new lease standard.
                                       45
--------------------------------------------------------------------------------

Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
recognize the effect of income tax positions only if those positions are more
likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes
in recognition or measurement are reflected in the period in which the change in
judgment occurs.
We record a valuation allowance to reduce our deferred tax assets when
uncertainty regarding their realizability exists. In assessing the realizability
of deferred tax assets, our management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during periods in which those temporary differences
become deductible. Our management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
Recently Issued Accounting Pronouncements
See "Note 1 - Summary of Significant Accounting Policies" to the consolidated
financial statements included in "Item 8. Consolidated Financial Statements and
Supplementary Data" of this Form 10-K, for a detailed description of recently
issued accounting pronouncements.

                            Contractual Obligations
The following table summarizes, as of January 30, 2021, our minimum rental
commitments under operating lease agreements including assumed extensions,
minimum payments for long-term debt and other obligations in future periods:

                                                                              Payments Due By Period
                                                                Less than                                                   More than
(In millions)                                 Total              1 year             1-3 years           3-5 years            5 years
Operating lease obligations (1)            $ 1,394.5          $    204.2          $    369.7          $    325.8          $    494.8
Purchase obligations (2)                         5.9                 5.9                   -                   -                   -
Total                                      $ 1,400.4          $    210.1          $    369.7          $    325.8          $    494.8



(1)Our store leases generally have initial lease terms of 10 years and include
renewal options on substantially the same terms and conditions as the original
lease. Also included in operating leases are our leases for the corporate
office, distribution centers and other.
(2)Purchase obligations are primarily for materials that will be used in the
construction of new stores and purchase commitments for infrastructure and
systems that will be used by the corporate office and distribution centers.
From January 31, 2021 to March 18, 2021, we committed to 23 new leases with
terms of 10 years that have future minimum lease payments of approximately $46.0
million.
                         Off Balance Sheet Arrangements
For the fiscal year ended January 30, 2021, we were not party to any material
off-balance sheet arrangements that are reasonably likely to have a current or
future effect on our financial condition, net sales, expenses, results of
operations, liquidity, capital expenditures or capital resources.

© Edgar online, source Previews

Leave A Reply

Your email address will not be published.