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 31of the following year. References to "fiscal year 2022" or "fiscal 2022" refer to the period from January 30, 2022to January 28, 2023, which consists of a 52-week fiscal year. References to "fiscal year 2021" or "fiscal 2021" refer to the period from January 31, 2021to 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, 2020to 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, 2019to 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, 2018to 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, 2017to February 3, 2018, which consists of a 53-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, Inc.(collectively referred to herein with its wholly owned subsidiary as "we," "us," or "our") 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 $5and below, including select brands and licensed merchandise across our category worlds. As of January 29, 2022, we operated 1,190 stores in 40 states. In addition, in fall 2019, we rolled out new pricing to our full chain, increasing prices on certain products over $5. Most of our products remain at $5and below. We also offer our 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. During fiscal 2020, we entered into a partnership with an on demand third party delivery service to enable our customers to shop online and receive convenient same day delivery. All e-commerce sales, which includes shipping and handling revenue, are included in net sales and 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 increased by 30.3% in fiscal 2021, and decreased by 5.5% in fiscal 2020 and increased by 0.6% in fiscal 2019. Between fiscal 2019 and fiscal 2021, our net sales increased from $1,846.7 millionto $2,848.4 million, representing a compounded annual growth rate of 24.2%. Over the same period, our operating income increased from $217.3 millionto $379.9 million, representing a compounded annual growth rate of 32.2%. In addition, we expanded our store base from 900 stores at the end of fiscal 2019 to 1,190 stores at the end of fiscal 2021 and we plan to open approximately 375 to 400 new stores over the next two fiscal years including approximately 160 new stores in fiscal 2022. 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 29, 2022, we operated stores in 40 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 to believe we have the opportunity to expand our store base in the United Statesfrom 1,190 locations as of January 29, 2022to more than 3,500 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. 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 millionin 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. 39 -------------------------------------------------------------------------------- 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 began operating the distribution center in August 2021. In March 2021, we acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot distribution center for approximately $61 million. We expect to occupy the distribution center in fiscal 2022. As a result of the significant expansion of our network of distribution facilities over the last several years, including the planned opening in the first half of fiscal 2022 of our Indianapolis, Indianadistribution center, we expect to cease operations at our distribution centers in Olive Branch, Mississippiand Cincinnati, Ohioin the first half of fiscal 2022, and expect the costs incurred to be immaterial to our consolidated statements of operations. 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
To assess 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 margin, selling, general and administrative expenses, and operating profit.
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. 40 --------------------------------------------------------------------------------
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 from the calculation of 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, 2019are reported on a restated calendar basis using the National Retail Federation'srestated 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 comparable sales from one year to the next allows us to assess our performance. 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. 41 --------------------------------------------------------------------------------
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 and tariffs, 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. In addition, current global supply chain disruptions, the cost of freight and constraints on shipping capacity to transport inventory may have an adverse impact on our gross profit and results of operations, as well as our sales. 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 equals gross profit less SG&A expenses. Operating income excludes interest expense or income, other expense or income, 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. 42 -------------------------------------------------------------------------------- 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
January 30, 2021for a comparison of fiscal years 2020 and 2019. Fiscal Year 2021 2020 (in
millions, except percentages and total
stores data) Consolidated Statements of Operations Data (1): Net sales
$ 2,848.4 $ 1,962.1Cost of goods sold 1,817.9 1,309.8 Gross profit 1,030.4 652.3 Selling, general and administrative expenses 650.6 497.5 Operating income 379.9 154.8 Interest (expense) income and other (expense) income, net (13.2) (1.7) Income before income taxes 366.7 153.1 Income tax expense 87.9 29.7 Net income $ 278.8 $ 123.4Percentage of Net Sales(1): Net sales 100.0 % 100.0 % Cost of goods sold 63.8 % 66.8 % Gross profit 36.2 % 33.2 % Selling, general and administrative expenses 22.8 % 25.4 % Operating income 13.3 % 7.9 % Interest (expense) income and other (expense) income, net (0.5) % (0.1) % Income before income taxes 12.9 % 7.8 % Income tax expense 3.1 % 1.5 % Net income 9.8 % 6.3 % Operational Data: Total stores at end of period 1,190 1,020 Comparable sales increase (decrease) 30.3 % (5.5) % Average net sales per store (2) $ 2.5 $ 2.0
(1)Components may not add to total due to rounding. (2) Only includes stores opened before the beginning of the financial year.
Fiscal 2021 vs. Fiscal 2020
Net sales increased to
$2,848.4 millionin fiscal year 2021 from $1,962.1 millionin fiscal year 2020, an increase of $886.3 million, or 45.2%. The increase was the result of a comparable sales increase of $566.6 millionand a non-comparable sales increase of $319.7 million. In fiscal year 2021, we opened 170 net new stores compared to 120 net new stores in fiscal year 2020. The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2021 and the number of stores that opened in fiscal 2020 but have not been open for 15 full months. Comparable sales increased 30.3%. The increase was primarily the result of the impact of COVID-19 during fiscal year 2020 as we temporarily closed all of our stores as of March 20, 2020, began reopening our stores at the end of April 2020, and had reopened substantially all of our stores by the end of June 2020. 43 --------------------------------------------------------------------------------
Cost of goods sold and gross profit
Cost of goods sold increased to
$1,817.9 millionin fiscal year 2021 from $1,309.8 millionin fiscal year 2020, an increase of $508.1 million, or 38.8%. 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 net sales and due to the impact of COVID-19 in fiscal 2020. Gross profit increased to $1,030.4 millionin fiscal year 2021 from $652.3 millionin fiscal year 2020, an increase of $378.1 million, or 58.0%. Gross margin increased to 36.2% in fiscal year 2021 from 33.2% in fiscal year 2020, an increase of approximately 300 basis points. The increase in gross margin was primarily the result of a decrease as a percentage of net sales in store occupancy costs due to the impact of COVID-19 in fiscal year 2020 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
$650.6 millionin fiscal year 2021 from $497.5 millionin fiscal year 2020, an increase of $153.1 million, or 30.8%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 260 basis points to 22.8% in fiscal year 2021 compared to 25.4% in fiscal year 2020. The increase in selling, general and administrative expenses was the result of an increase of $107.0 millionin store-related expenses to support new store growth and due to the impact of COVID-19 during fiscal year 2020, which included the temporary closure of all of our stores, furloughing of employees, and other non-payroll expense reductions. This increase was also driven by an increase of $46.1 millionof corporate-related expenses, which included both the benefit related to the CARES Act and the reversal of certain compensation related accruals in fiscal year 2020.
Interest (expenses) income and other (expenses) income, net
Interest expense and other, net increased to
$13.2 millionin fiscal year 2021 from $1.7 millionin fiscal year 2020, an increase of $11.5 million. The increase in interest expense and other, net was primarily driven by an other than temporary impairment related to an equity method investment.
income tax expense
Income tax expense increased to
$87.9 millionin fiscal year 2021 from $29.7 millionin fiscal year 2020, an increase of $58.2 million, or approximately 195.9%. This increase in income tax expense was primarily due to a $213.6 millionincrease in pre-tax net income and discrete items, which includes the impact of the CARES Act in fiscal year 2020 and the impact 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 2021 was 24.0%, compared to 19.4% for fiscal 2020. The increase in our effective tax rate is primarily due to discrete items, which include the Impact of ASU 2016-09, “Improvements to Employee Stock Ownership”. Payment-Based Accounting” and the impact of the CARES Act on fiscal year 2020.
As a result of the foregoing, net income increased to
$278.8 millionin fiscal year 2021 from $123.4 millionin fiscal year 2020, an increase of approximately $155.4 million, or 126.0%. 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. 44
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
$220 millionin fiscal 2022, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations, cash on-hand, investments and, as needed, borrowings under our Revolving Credit Facility. We expect to incur approximately $85 millionof our cash capital expenditure budget in fiscal 2022 to construct and open approximately 160 new stores of the planned 375 to 400 new stores over the next two fiscal years, with the remainder projected to be spent on our store relocations and remodels, distribution facilities 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. As of January 29, 2022, we did not have any direct borrowings under our Revolving Credit Facility and had approximately $153 millionavailable 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 millionof our common stock through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise. On March 9, 2021, our Board of Directors approved a new share repurchase program for up to $100 millionof our common stock through March 31, 2024. In fiscal 2018, we purchased 21,810 shares under this program at an aggregate cost of approximately $2.0 million, or an average price of $91.07per share. In fiscal 2019, we purchased 337,552 shares under this program at an aggregate cost of approximately $36.9 million, or an average price of $109.27per share. In fiscal 2020, we purchased 137,023 shares under this program at an aggregate cost of approximately $12.7 million, or an average price of $92.42per share. In fiscal 2021, we purchased 368,699 shares under this program at an aggregate cost of approximately $60.0 million, or an average price of $162.75per share. Since March 2018, we have purchased approximately 865,000 shares for an aggregate cost of approximately $112 million. 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. As a result of the COVID-19 pandemic, our business operations and results of operations, including our net sales, earnings and cash flows, were materially impacted in fiscal 2020 as a result of the temporary closures of our stores in the first half of 2020, and decreased customer traffic in stores, as the result of limitations on the number of persons permitted in stores at one time by certain local and state regulations. The Company's ability to operate improved beginning in the second half of fiscal 2020 and extending into fiscal 2021. 45 --------------------------------------------------------------------------------
A summary of our cash flows from operating, investing and financing activities is shown in the following table (in millions):
Fiscal Year 2021 2020 Net cash provided by operating activities
$ 327.9 $ 366.0Net cash used in investing activities (465.6) (286.9) Net cash used in financing activities (66.1) (12.8)
(Decrease) net increase during the period in cash and cash equivalents (1)
(1) Components may not add to total due to rounding.
Cash flow from operating activities
Net cash provided by operating activities for fiscal 2021 was
$327.9 million, a decrease of $38.1 millioncompared to fiscal 2020. The decrease was primarily due to changes in working capital and an increase in income taxes paid, partially offset by an increase in operating cash flows from store performance due to the impact of COVID-19 as we temporarily closed all of our stores in March 2020and had reopened substantially all of our stores as of the end of June 2020. During fiscal 2021, we added 170 net new stores.
Cash used in investing activities
Net cash used in investing activities for fiscal 2021 was
$465.6 million, an increase of $178.7 millioncompared to fiscal 2020. The increase was primarily due to increases in net purchases of investment securities and other investments and capital expenditures. The increase in capital expenditures was primarily for our distribution centers, new store construction and corporate infrastructure.
Cash used in financing activities
Net cash used in financing activities for fiscal year 2021 was
$66.1 million, an increase of $53.3 millioncompared to fiscal 2020. The increase was primarily the result of an increase in the repurchase and retirement of common stock.
January 27, 2021, we entered into a First Amendment to Credit Agreement (the "First Amendment") which amended the Fifth Amended and Restated Credit Agreement (as amended by the Fifth Amendment, the "Credit Agreement") dated April 24, 2020among the Company, 1616 Holdings, Inc., a wholly-owned subsidiary of the Company ("1616 Holdings" and together with the Company, the "Loan Parties"), Wells Fargo Bank, National Associationas administrative agent (the "Agent"), and other lenders party thereto (the "Lenders"). The Credit Agreement provides for a secured asset-based revolving line of credit in the amount of up to $225 million(the "Revolving Credit Facility"). Advances under the Revolving Credit Facility are tied to a borrow base consisting of eligible credit card receivables and inventory, as reduced by certain reserves in effect from time to time. Pursuant to the Credit Agreement, inventory appraisals and certain other diligence items are deferred, with reduced advance rates during the period that such appraisals have not been delivered. The Revolving Credit Facility expires on the earliest to occur of (i) April 24, 2023or (ii) an event of default. The Revolving Credit Facility may be increased up to $150.0 million, subject to certain conditions, including obtaining commitments from one or more Lenders (the "Accordion"). Pursuant to the First Amendment, we obtained commitments from the Lenders that would allow us at our 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 millionwithin the Accordion (the "Committed Increase"). The entire amount of the Revolving Credit Facility is available for the issuance of letters of credit and allows for swingline loans. The Credit Agreement provides that the interest rate payable on borrowings shall be, at our option, a per annum rate equal to (a) a base rate plus an applicable margin ranging from 0.25% to 0.75%, or (b) a LIBOR rate plus a margin ranging from 1.25% to 1.75%. Letter of credit fees range from 1.25% to 1.75%. 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. 46 -------------------------------------------------------------------------------- The Credit Agreement contains customary covenants that limits, absent lender approval, the ability of the 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 with affiliates, merge, dissolve, repay certain indebtedness, change the nature of our 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 us to undertake otherwise restricted activities if it satisfies certain conditions. In addition, we will be required to maintain availability of not less than (i) 12.5% of the lesser of (x) aggregate commitments under the Revolving Credit Facility and (y) the borrowing base (the "loan cap") during the period that inventory appraisals have not been delivered as described above and (ii) at all other times 10.0% of the loan cap. 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 Credit Agreement). 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). All obligations under the Revolving Credit Facility are guaranteed by 1616 Holdings, and secured by substantially all of the assets of the Company and 1616 Holdings. As of January 29, 2022and January 30, 2021, we were in compliance with the covenants applicable to us under the First Amendment and the Revolving Credit Facility.
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 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. 47 --------------------------------------------------------------------------------
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 2021, 2020 and 2019 fiscal years. The impairment loss analysis requires management to apply judgment and make estimates.
Leases are accounted for in accordance with the guidance in "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, leases are required to be classified as either operating or finance leases. Operating leases result in straight-line expense while finance leases result in a front-loaded expense pattern.
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 published 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
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)
$ 1,566.1 $ 227.0 $ 434.3 $ 378.5 $ 526.3Purchase obligations (2) 9.9 9.9 - - - Total $ 1,576.0 $ 236.9 $ 434.3 $ 378.5 $ 526.3(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.
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