CHILDRENS PLACE, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS. (Form 10-K)
The following discussion should be read in conjunction with our audited financial statements and notes thereto included in Part IV, Item 15.-Exhibits and Financial Statement Schedules. This Annual Report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company's strategic initiatives. Forward-looking statements typically are identified by use of terms such as "may", "will", "should", "plan", "project", "expect", "anticipate", "estimate", and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company's current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company's filings with the
Securities and Exchange Commission, including in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K for the fiscal year ended January 29, 2022. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company's business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions, the risks related to the COVID-19 pandemic, including the impact of the COVID-19 pandemic on our business or the economy in general (including decreased customer traffic, schools adopting remote and hybrid learning models, closures of businesses and other activities causing decreased demand for our products and negative impacts on our customers' spending patterns due to decreased income or actual or perceived wealth, and the impact of the CARES Act and other legislation related to the COVID-19 pandemic, and any changes to the CARES Act or such other legislation), the risk that the Company's strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions and disruptions in the Company's global supply chain, including resulting from the COVID-19 pandemic or other disease outbreaks, or foreign sources of supply in less developed countries or more politically unstable countries, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. As used in this Annual Report on Form 10-K, references to the "Company", " The Children's Place", "we", "us", "our", and similar terms refer to The Children's Place, Inc.and its subsidiaries. Our fiscal year ends on the Saturday on or nearest to January 31. Other terms that are commonly used in our Management's Discussion and Analysis of Financial Condition and Results of Operations are defined as follows:
• Financial year 2021: the fifty-two weeks ended
• Financial year 2020: the fifty-two weeks ended
• Financial year 2019: the fifty-two weeks ended
• Fiscal Year 2022 – Our next fiscal year representing the fifty-two weeks ending
• DRY –
• US GAAP – Generally accepted accounting principles in
• FASB –
•FASB ASC - FASB Accounting Standards Codification, which serves as the source for authoritative
U.S.GAAP, except that rules and interpretive releases by the SECare also sources of authoritative U.S.GAAP for SECregistrants
• AUR – Average Unit Selling Price
•Comparable Retail Sales - Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce store, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes. A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is 30
reopened for a full fiscal month. Comparable retail sales do not exclude temporarily closed stores impacted by the COVID-19 pandemic.
• Gross Margin – Gross profit expressed as a percentage of net sales
• SG&A – Selling, general and administrative expenses
We are the largest pure-play children's specialty apparel retailer in
North America. We design, contract to manufacture, sell at retail and wholesale, and license to sell trend right, high quality merchandise predominantly at value prices, primarily under our proprietary " The Children's Place", "Place", " Baby Place", "Gymboree", and "Sugar & Jade" brand names. As of January 29, 2022, we had 672 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com, and had 211 international points of distribution with our seven franchise partners in 16 countries. Segment Reporting In accordance with FASB ASC 280-Segment Reporting, we report segment data based on geography: The Children's Place U.S. and The Children's Place International. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com. Included in The Children's Place U.S.segment are our U.S.and Puerto Rico-based stores and revenue from our U.S.-based wholesale business. Included in The Children's Place Internationalsegment are our Canadian-based stores, revenue from our Canadian-based wholesale business, as well as revenue from international franchisees. We measure our segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children's Place U.S.segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children's Place Internationalsegment based primarily on net sales. The assets related to these functions are not allocated. We periodically review these allocations and adjust them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and we have no customers that individually account for more than 10% of our net sales.
The COVID-19 pandemic continues to significantly impact regions all around the world, including
the United Statesand Canada. This has resulted in continuing restrictions of businesses and other activities implemented by national, state, and local authorities and private entities, leading to significant adverse economic conditions and business and lifestyle disruptions, as well as significant volatility in global financial and retail markets. Federal, state, and local governments and health officials worldwide continue to impose varying degrees of preventative and protective actions, such as travel bans, restrictions on public gatherings, forced closures of businesses and other activities, social distancing, and the adoption of remote or hybrid learning models for schools, all in an effort to reduce the spread of the virus. In addition, certain U.S.and Canadian mall owners continue to restrict hours of operation and the number of people permitted in stores. Such factors, among others, have resulted in a significant decline in retail traffic and consumer spending on discretionary items. As a result of the impact of the COVID-19 pandemic, we continue to experience business disruption with many of our retail stores across the U.S.and Canada. As of January 29, 2022, all of our stores were open to the public in the U.S., Canada, and Puerto Rico. Our distribution centers have remained open and operating during the pandemic to support our retail stores and e-commerce business. We have experienced, and will likely continue to experience, disruptions in our global supply chain, which have caused delays in the production and transportation of our products, which we are mitigating through shifting production schedules.
Recent macroeconomic events have increased the cost of goods necessary to produce and distribute our products, including cotton and other materials used in production, as well as labor, fuel and energy. We expect these product input costs to continue to increase in 2022, which is planned to be partially mitigated by higher price realization. On
November 16, 2021, we completed the refinancing of our previous $360.0 millionasset-based revolving credit facility (the "Previous ABL Credit Facility") and our previous $80.0 millionterm loan (the "Previous Term Loan") with a new lending group led by an affiliate of Wells Fargo Bank, National Association("Wells Fargo") by entering into a fourth amendment to our Credit Agreement, dated as of May 9, 2019, with the lenders party thereto (the "Fourth Amendment"). The new debt consists of a revolving credit facility with $350.0 millionof availability (the "ABL Credit Facility") and a $50.031
term loan (the “Term Loan”), both with five-year terms, lower interest rates, reduced reporting requirements and increased covenant flexibility.
The ABL Credit Facility is secured by a first-priority lien on substantially all of our
U.S.and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock; and a second-priority lien on our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock. Interest on borrowings is payable monthly and is based on the amount of our average excess availability under the facility, at (a) the prime rate plus 0.375% or 0.625%, or (b) LIBOR plus 1.125% or 1.375%. The ABL Credit Facility has an unused line fee of 0.20%. The Term Loan is secured by a first-priority lien on our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second-priority lien on the assets securing the ABL Credit Facility on a first-priority basis. Interest is payable monthly at (a) LIBOR plus 2.50% for any portion that is a LIBOR loan, or (b) the base rate plus 1.75% for any portion that is a base rate loan. The Term Loan does not require amortization if certain conditions are met and is pre-payable at any time without penalty.
Simultaneously, we repaid our then unpaid principal of
The description of the Fourth Amendment set forth herein is qualified in its entirety by reference to the full text thereof, a copy of which was filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the third quarter of Fiscal 2021.
Net sales increased
$392.8 million, or 25.8%, to $1.915 billionduring Fiscal 2021 from $1.523 billionduring Fiscal 2020. The increase in net sales was driven primarily by strong customer response to our product assortment, strategic pricing and promotion changes, and the unprecedented level of stimulus and enhanced child tax credit payments to our customers resulting from the government pandemic relief legislation. During Fiscal 2021, we opened one new store and closed 78 stores. Gross profit increased $461.4 million, or 138.4%, to $794.7 millionduring Fiscal 2021 from $333.3 millionduring Fiscal 2020. Gross margin increased 1,960 basis points to 41.5% during Fiscal 2021 from 21.9% during Fiscal 2020. The increase in gross margin resulted primarily from the leverage of fixed expenses resulting from the increase in net sales, higher merchandise margins in both our digital and stores channels due to strategic pricing and promotion changes, lower occupancy expenses due to rent abatements of $12.1 million, favorable lease negotiations, permanent store closures, and lower e-commerce fulfillment costs, resulting from our continuing cost optimization initiatives. Selling, general, and administrative expenses ("SG&A") increased $31.0 million, or 7.2%, to $459.2 millionduring Fiscal 2021 from $428.2 millionduring Fiscal 2020, driven by higher incentive compensation expense and higher marketing spend. As a percentage of net sales, SG&A decreased 410 basis points to 24.0% during Fiscal 2021 from 28.1% during Fiscal 2020, primarily as a result of the leverage of fixed expenses resulting from the increase in net sales. Interest expense was $18.6 millionduring Fiscal 2021, compared to $11.8 millionduring Fiscal 2020. The increase in interest expense was driven by a higher average debt balance and the higher interest rate associated with the Previous ABL Credit Facility and Previous Term Loan for the first nine months of Fiscal 2021. In addition, interest expense for Fiscal 2021 included a charge of $3.7 millionrelated to the refinancing of our Previous ABL Credit Facility and Previous Term Loan. Provision for income taxes was $69.9 millionduring Fiscal 2021, compared to a benefit of $71.4 millionduring Fiscal 2020. Our effective tax rate was an expense of 27.2% and a benefit of 33.7% during Fiscal 2021 and Fiscal 2020, respectively. The decrease in our effective tax rate was primarily driven by tax benefits from the CARES Act in Fiscal 2020. Net income increased $327.6 millionto $187.2 million, or $12.59per diluted share, during Fiscal 2021, compared to a net loss of $140.4 million, or $9.59per share, during Fiscal 2020, due to the factors discussed above.
Although we face a period of uncertainty regarding the future impact of the COVID-19 pandemic, we continue to focus on our core strategic growth initiatives – superior product, digital transformation and fleet optimization.
Focus on product remains our top priority. We reintroduced the Gymboree brand in
February 2020on an enhanced Gymboree website and in certain co-branded locations in Company stores in the U.S.and Canada, and in November 2021, we introduced our new brand, Sugar & Jade, which is targeted at the girls' "tween" market and is offered exclusively online. The transformation of our digital capabilities continues to expand given a completely redesigned responsive site and mobile application, providing a rich online shopping experience geared toward the needs of our "on-the-go" mobile customers, expanded customer personalization, which delivers unique, relevant content to drive sales, loyalty and retention, and the ability to have our entire store fleet equipped with ship-from-store capabilities. Also, in response to increased digital demand, including as a result of the COVID-19 pandemic, we have increased and will continue to increase the utilization of our third-party logistics provider to further support both our U.S.and Canadian e-commerce operations. 32
As a result of the heightened demand for online purchasing, including due to the COVID-19 pandemic, we accelerated our planned store closures under our fleet optimization initiative and have closed 256 stores, against our original target of 300 stores, over the past two fiscal years, including the 78 stores closed during Fiscal 2021. We have closed 527 stores since the announcement of this initiative in 2013. We are targeting 40 retail store closures in Fiscal 2022, which would bring our total store closures since the fleet optimization initiative began to 567 stores. In
March 2018, our Board of Directors authorized a $250.0 millionshare repurchase program (the "2018 Share Repurchase Program"). In November 2021, our Board of Directors approved another $250.0 millionshare repurchase program, which added to the remaining availability under the 2018 Share Repurchase Program. During Fiscal 2021, we repurchased approximately 1.0 million shares of our common stock for $85.6 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards and shares acquired in the open market. As of January 29, 2022, there was $257.3 millionremaining under these programs. We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S.dollars. The table below summarizes the average translation rates that most significantly impact our operating results: Fiscal Years Ended January 29, January 30, February 1, 2022 2021 2020
Average translation rates (1)
Canadian dollar 0.7986 0.7481
0.7550 Hong Kong dollar0.1286 0.1290 0.1277 Chinese renminbi 0.1548 0.1459 0.1446
(1)The average conversion rates are the average of the monthly conversion rates used during each financial year to translate the respective income statements. Each rate represents the
CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with
U.S.GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses reported during the period. We continuously review the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Consequently, actual results could differ materially from our estimates. "Note 1. Basis of Presentation and Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. The accounting estimates discussed below include those that we believe are the most critical to aid in fully understanding and evaluating our financial results. Senior management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors, which has reviewed our related disclosures herein.
Impairment of long-lived assets
We periodically review our long-lived assets for impairment when events indicate that their carrying value may not be recoverable. Such events include a historical or projected trend of cash flow losses or a future expectation that we will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, we group our long-lived assets at the lowest possible level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We review all stores that have reached comparable sales status for impairment on at least an annual basis, or sooner if circumstances so dictate. We believe waiting this period of time allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed. For each store that shows indications of impairment, we perform a recoverability test comparing estimated undiscounted future cash flows to the carrying value of the related long-lived assets. If the undiscounted future cash flows are less than the related net book value of the long-lived assets, they are written down to their fair market value. We primarily use discounted future cash flows directly associated with those assets, which consist principally of property and equipment and right-of-use ("ROU") lease assets, to determine their fair market values. Estimating the fair market value of long-lived assets using the discounted cash flow model requires management to estimate future revenues, expenses, discount rates, long-term growth rates, and other factors in order to project future cash flows. The assumptions used to assess impairment consider external and internal factors. External factors comprise the local environment 33
in which the store resides, including mall traffic, competition, and their effect on sales trends, as well as macroeconomic factors, such as the global pandemic. Internal factors include our ability to gauge the fashion taste of our customers, control over variable costs such as cost of sales and payroll, and in certain cases, our ability to renegotiate lease costs. If external factors should change unfavorably, if actual sales should differ from our projections, or if our ability to control costs is insufficient to sustain the necessary cash flows, changes in these estimates can have a significant impact on the assessment of fair market value, which could result in material impairment charges.
We utilize the liability method of accounting for income taxes as set forth in FASB ASC 740-Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities, as well as for net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to taxable income in effect for the years in which the basis differences and tax assets are expected to be realized. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts reflected for income taxes in our consolidated financial statements. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances, we consider projected future taxable income, the availability of tax planning strategies, taxable income in prior carryback years, and future reversals of existing taxable temporary differences. The assumptions utilized in determining future taxable income require significant judgment. Actual operating results in future years could differ from our current assumptions, judgments and estimates. If, in the future, we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would decrease earnings in the period in which such determination is made. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements. Due to uncertainties in any income tax audit, our assumptions regarding the ultimate settlement of unrecognized tax positions may change and the actual tax benefits may differ significantly from current estimates.
We account for stock-based compensation according to the provisions of FASB ASC 718- Compensation-Stock Compensation. We grant time-vesting and performance-based stock awards to employees at various management levels. We also grant time-vesting stock awards to our non-employee directors. Time-vesting awards are granted in the form of restricted stock units that require each recipient to complete a service period ("Deferred Awards"). Deferred Awards granted to employees generally vest ratably over three years. Deferred Awards granted to non-employee directors generally vest after one year. Performance-based stock awards are granted in the form of restricted stock units, which have performance criteria that must be achieved for the awards to be earned, in addition to a service period requirement ("Performance Awards"), and each Performance Award has a defined number of shares that an employee can earn (the "Target Shares"). With the approval of the
Human Capital & Compensation Committee, we may settle vested Deferred Awards and Performance Awards in shares, in a cash amount equal to the market value of such shares at the time all requirements for delivery of the award have been met, or in part shares and cash. For Performance Awards granted in Fiscal 2021, employees may earn from 0% to 300% of their Target Shares and for Performance Awards granted in Fiscal 2020 and Fiscal 2019, employees may earn from 0% to 250% of their Target Shares, based on the terms of the award and our achievement of certain performance goals established at the beginning of the applicable service period. Performance Awards cliff vest, if earned, after completion of the applicable service period, which is generally three years. The expense recognized for Performance Awards throughout the service period and the number of shares that are projected to ultimately vest, are based on the estimated degree to which the related performance metrics are expected to be achieved. Actual performance may differ from such projections, which would impact the number of shares that vest and the total amount of expense recognized for the related Performance Awards, which could have a material impact on our consolidated financial statements.
We value inventory at the lower of cost or net realizable value, with cost determined using an average cost method. The estimated market value of inventory is determined based on an analysis of historical sales trends of our individual product categories, the impact of market trends and economic conditions, and a forecast of future demand, as well as plans to sell through inventory. Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory, 34
consumer and retailer preferences, and market conditions such as those resulting from disease pandemics and other catastrophic events. Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. Our historical estimates for inventory obsolescence and shrinkage have not differed materially from actual results.
Recently issued accounting standards
Refer to "Item 8. Financial Statements and Supplementary Data - Note 1. Basis of Presentation and Summary of Significant Accounting Policies" for discussion regarding the impact of recently issued accounting standards on our consolidated financial statements. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of net sales. We primarily evaluate the results of our operations as a percentage of net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of net sales (i.e., "basis points"). For example, SG&A decreased approximately 410 basis points to 24.0% of net sales during Fiscal 2021 from 28.1% during Fiscal 2020. Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., "leveraging"), the more efficiently we have utilized the investments we have made in our business. Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., "de-leveraging"), we have less efficiently utilized the investments we have made in our business. Fiscal Years Ended January 29, January 30, February 1, 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales (exclusive of depreciation and amortization) 58.5 78.1 65.0 Gross profit 41.5 21.9 35.0 Selling, general, and administrative expenses 24.0 28.1 25.6 Depreciation and amortization 3.0 4.4 4.0 Asset impairment charges 0.1 2.5 0.3 Operating income (loss) 14.4 (13.1) 5.2 Income (loss) before provision (benefit) for income taxes 13.4 (13.9) 4.7 Provision (benefit) for income taxes 3.6 (4.7) 0.8 Net income (loss) 9.8 % (9.2) % 3.9 % Number of Company stores, end of period 672 749 924 The following table sets forth net sales by segment, for the periods indicated: Fiscal Years Ended January 29, January 30, February 1, 2022 2021 2020 (in thousands) Net sales: The Children's Place U.S.
$ 1,723,887 $ 1,372,079 $ 1,671,165
$ 1,915,364 $ 1,522,598 $ 1,870,667
Fiscal 2021 vs. Fiscal 2020
Net sales increased
$392.8 million, or 25.8%, to $1.915 billionduring Fiscal 2021 from $1.523 billionduring Fiscal 2020. The increase in net sales was driven primarily by strong customer response to our product assortment, strategic pricing and promotion changes, and the unprecedented level of stimulus and enhanced child tax credit payments to our customers resulting from the government pandemic relief legislation. We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales. 35
The Children's Place
U.S.net sales increased $351.8 million, or 25.6%, to $1.724 billionduring Fiscal 2021, compared to $1.372 billionduring Fiscal 2020. The increase in net sales was driven primarily by strong customer response to our product assortment, strategic pricing and promotion changes, and the unprecedented level of stimulus and enhanced child tax credit payments to our customers resulting from the government pandemic relief legislation. The Children's Place Internationalnet sales increased $41.0 million, or 27.2%, to $191.5 millionduring Fiscal 2021, compared to $150.5 millionduring Fiscal 2020. The increase in net sales was driven primarily by the strong customer response to our product assortment and strategic pricing and promotion changes.
Total e-commerce sales, which include shipping and handling, were 44.8% of net sales in fiscal 2021, compared to 52.7% in fiscal 2020.
Gross profit increased
$461.4 million, or 138.4%, to $794.7 millionduring Fiscal 2021 from $333.3 millionduring Fiscal 2020. Gross margin increased 1,960 basis points to 41.5% during Fiscal 2021 from 21.9% during Fiscal 2020. Fiscal 2021 results included incremental expenses, including personal protective equipment and incentive pay for our associates of $1.4 million. Fiscal 2020 results included an inventory provision of $63.2 millionrelated to the adverse business disruption resulting from the COVID-19 pandemic, including store closures and incremental expenses, personal protective equipment and incentive pay for our associates of $11.6 million, and fleet optimization costs of $0.6 million. Excluding the impact of these charges, gross margin leveraged 1,472 basis points to 41.6% of net sales, primarily from the leverage of fixed expenses resulting from the increase in net sales, higher merchandise margins resulting from significant AUR increases in both our digital and stores channels due to strategic pricing and promotion changes, lower occupancy expenses due to rent abatements of $12.1 million, favorable lease negotiations, permanent store closures, and lower e-commerce fulfillment costs, resulting from our continuing cost optimization initiatives.
Gross margin as a percentage of net sales depends on a variety of factors, including changes in the relative mix of sales between distribution channels, changes in the mix of products sold, the timing and level of promotional activities, changes in foreign exchange, and fluctuations in material costs. These and other factors can cause gross margin as a percentage of net sales to fluctuate from period to period.
Selling, general, and administrative expenses increased
$31.0 million, or 7.2%, to $459.2 millionduring Fiscal 2021 from $428.2 millionduring Fiscal 2020. As a percentage of net sales, SG&A decreased 410 basis points to 24.0% during Fiscal 2021 from 28.1% during Fiscal 2020. Fiscal 2021 results included incremental expenses, including personal protective equipment and incentive pay for our associates of $1.6 million, restructuring costs, primarily related to severance costs for corporate and store associates, of $2.3 million, fleet optimization costs of $2.4 million, and contract termination costs of $0.8 million. Fiscal 2020 results included incremental operating expenses, including personal protective equipment and incentive pay for our associates, of $10.9 million, restructuring costs, primarily related to severance costs for corporate and store associates, of $10.5 million, the write-off of certain accounts receivable of $1.1 million, fleet optimization costs of $2.8 million, Gymboree integration costs of $0.6 million, and legal reserves of $0.3 million. Excluding the impact of these charges, SG&A expenses leveraged 281 basis points to 23.6% of net sales, primarily as a result of the leverage of fixed expenses resulting from the increase in net sales. Asset impairment charges were $1.5 millionduring Fiscal 2021, inclusive of ROU assets, primarily related to two stores. Asset impairment charges during Fiscal 2020 were $38.5 million, inclusive of ROU assets, primarily related to 419 stores. These charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections. Depreciation and amortization was $58.4 millionduring Fiscal 2021, compared to $66.4 millionduring Fiscal 2020. This decrease was primarily driven by reduced depreciation of capitalized software, the permanent closure of 78 stores during Fiscal 2021, and a decrease in net book value as a result of the impairment charges recorded in Fiscal 2020. Operating income (loss) increased to $275.6 million, or 14.4% of net sales for Fiscal 2021, from an operating loss of $199.9 million, or 13.1% of net sales for Fiscal 2020, reflecting the factors discussed above. Interest expense, net was $18.6 millionduring Fiscal 2021, compared to $11.8 millionduring Fiscal 2020. The increase in interest expense was driven by a higher average debt balance and the higher interest rate associated with the Previous ABL Credit Facility and Previous Term Loan for the first nine months of Fiscal 2021. In addition, interest expense for Fiscal 2021 included a charge of $3.7 millionrelated to the refinancing of our Previous ABL Credit Facility and Previous Term Loan. Provision (benefit) for income taxes was an expense of $69.9 millionduring Fiscal 2021, compared to a benefit of $71.4 millionduring Fiscal 2020. Our effective tax rate was an expense of 27.2% and a benefit of 33.7% during Fiscal 2021 and Fiscal 2020, respectively. The decrease in our effective tax rate was primarily driven by tax benefits from the CARES Act in Fiscal 2020. 36
Net profit (loss) increased to
Fiscal 2020 vs. Fiscal 2019
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended
CASH AND CAPITAL RESOURCES
Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the financing of capital projects, including investments in new systems, and for the capital return program (other than payment of dividends, which continue to be temporarily suspended due to the COVID-19 pandemic). On
November 16, 2021, we completed the refinancing of the Previous ABL Credit Facility and Previous Term Loan with a new lending group led by an affiliate of Wells Fargo by entering into the Fourth Amendment to our Credit Agreement with the lenders party thereto. The new debt consists of a revolving credit facility with $350.0 millionof availability and a $50.0 millionterm loan. (See "Revolving Credit Facility and Term Loan" below for further information). Our working capital deficit improved $161.1 millionto a deficit of $10.3 millionat January 29, 2022, compared to a deficit of $171.4 millionat January 30, 2021, primarily reflecting operating results over the past twelve months, as well as lower current lease liabilities resulting from favorable lease negotiations. During Fiscal 2021, we repurchased approximately 1.0 million shares for $85.6 million. During Fiscal 2020, prior to the suspension of our capital return program, we repurchased approximately 0.3 million shares for $15.5 million. At January 29, 2022, we had $175.3 millionof outstanding borrowings and $97.0 millionavailable for borrowing under our ABL Credit Facility. In addition, at January 29, 2022, we had $7.4 millionof outstanding letters of credit with an additional $42.6 millionavailable for issuing letters of credit under our ABL Credit Facility.
We expect to be able to meet our working capital and capital expenditure requirements for the foreseeable future using our free cash, operating cash flow and availability under our ABL credit facility.
ABL credit facility and term loan
We and certain of our subsidiaries maintain a
$350 millionABL Credit Facility and a $50 millionTerm Loan with Wells Fargo Bank, National Association("Wells Fargo"), Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A., as lenders (collectively, the "Lenders") and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lenderand Term Agent. Both the ABL Credit Facility and the Term Loan mature in November 2026, and both of these debt facilities have lower interest rates, reduced reporting requirements, and increased flexibility under the covenants compared to the Previous ABL Credit Facility and Previous Term Loan.
The ABL credit facility includes a
Borrowings outstanding under the ABL Credit Facility bear interest, at our option, at:
(i) the prime rate plus a margin of 0.375% or 0.625% depending on the amount of our average excess availability under the facility; Where
(ii)the London InterBank Offered Rate, or "LIBOR", for an interest period of one, three, or six months, as selected by us, plus a margin of 1.125% or 1.375% based on the amount of our average excess availability under the facility. We are charged an unused line fee of 0.20% on the unused portion of the commitments. Letter of credit fees range from 0.563% to 0.683% for commercial letters of credit and range from 0.625% to 0.875% for standby letters of credit. Letter of credit fees are determined based on the amount of our average excess availability under the facility. The amount available for loans and letters of credit under the Credit Agreement is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves. The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other 37
material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods. We are not subject to any early termination fees. The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments. These covenants also limit the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of its business. Credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of the Company's
U.S.and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the Company's intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock. The table below presents the components of our ABL Credit Facility and Previous ABL Credit Facility: January 29, January 30, 20222021 (in millions)
Credit facility maximum $ 350.0 $ 360.0 Borrowing base (1) 279.7 282.2 Outstanding borrowings 175.3 169.8 Letters of credit outstanding-standby 7.4 8.2 Utilization of credit facility at end of period 182.7 178.0 Availability (2) $ 97.0 $ 104.2 Interest rate at end of period 1.6% 4.2% Fiscal Years Ended January 29, January 30, 2022 2021 Average end of day loan balance during the period
$ 187.0$ 216.2 Highest end of day loan balance during the period 269.7 275.6 Average interest rate 3.6% 3.8%
(1) Lower between the maximum of the credit facility or the total of the basic loan guarantee.
(2) The sub-limit available for letters of credit was
The Term Loan bears interest, payable monthly, at (a) the LIBOR Rate plus 2.50% for any portion that is a LIBOR loan, or (b) the base rate plus 1.75% for any portion that is a base rate loan. The Term Loan is pre-payable at any time without penalty, and does not require amortization. For Fiscal 2021, we recognized
$5.9 millionin interest expense related to the Term Loan and the Previous Term Loan. The Term Loan is secured by a first priority security interest in the Company's intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the collateral securing the ABL Credit Facility on a first-priority basis. The Term Loan is guaranteed by each of the Company's subsidiaries that guarantee the ABL Credit Facility and shares substantially the same covenants as provided in the ABL Credit Facility. Both the ABL Credit Facility and the Term Loan contain customary events of default, which include (subject in certain cases to customary grace and cure periods), nonpayment of principal or interest, breach of other covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization. As of January 29, 2022and January 30, 2021, unamortized deferred financing costs amounted to $2.9 millionand $3.6 million, respectively, of which $2.6 millionand $1.2 million, respectively, related to our asset-based revolving credit facility.
Cash flow and capital expenditure
Cash provided by operating activities was
$133.3 millionduring Fiscal 2021, compared to $35.7 millionof cash used by operating activities of during Fiscal 2020. Cash provided by operating activities during Fiscal 2021 was primarily the result of earnings generated during the period, partially offset by planned changes in working capital, which brought our vendor 38
payables in line with historical payment terms. Cash used in operating activities during Fiscal 2020 was primarily the result of the net loss in the year due to the impact of the COVID-19 pandemic disruption, resulting in the acceleration of permanent store closures and extensive government mandated temporary store closures, partially offset by the impact of strategic working capital management and the extension of vendor payment terms. Cash used in investing activities was
$29.3 millionduring Fiscal 2021, compared to $30.4 millionduring Fiscal 2020. This change was primarily driven by the timing of capital expenditures. Cash used in financing activities was $112.7 millionduring Fiscal 2021, compared to cash provided by financing activities of $60.9 millionduring Fiscal 2020. The decrease primarily resulted from net proceeds received from the issuance of long-term debt during Fiscal 2020, compared to the use of cash in Fiscal 2021 to repay long-term debt, and increased repurchases of our common stock during Fiscal 2021, compared to Fiscal 2020. Our ability to continue to meet our capital requirements in Fiscal 2022 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility. Cash flows generated from operations depends on our ability to achieve our financial plans. We believe that our existing cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility will be sufficient to fund our capital and other cash requirements for the foreseeable future.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
For a discussion of our contractual obligations and commercial commitments, see "Item 8. Financial Statements and Supplementary Data" - "Note 7. Leases", "Note 8. Debt", and "Note 9. Commitments and Contingencies."
Off-balance sheet arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
QUARTERLY RESULTS AND SEASONALITY
Our quarterly results of operations have fluctuated and are expected to continue to fluctuate materially depending on a variety of factors, including overall economic conditions, the timing and number of store closures, increases or decreases in Comparable Retail Sales, weather conditions (such as unseasonable temperatures or storms), shifts in timing of certain holidays, and changes in our merchandise mix and pricing strategy, including changes to address competitive factors. The combination and severity of one or more of these factors could result in material fluctuations in our results of operations. The following table sets forth certain statement of operations data for each of our last four fiscal quarters. The quarterly statement of operations data set forth below reflect, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the results of operations for these fiscal quarters (unaudited):
First Second Third Fourth Quarter Quarter Quarter Quarter (in thousands, except earnings per share) Net sales
188,206 167,861 244,831 193,842 Selling, general, and administrative expenses 106,738 115,620 115,563 121,248 Depreciation and amortization 15,561 14,392 14,204 14,260 Asset impairment charges - - 1,254 252 Operating income 65,907 37,849 113,810 58,082 Income before provision for income taxes 61,496 33,153 109,851 52,530 Provision for income taxes 16,291 9,058 30,983 13,527 Net income
Diluted earnings per share
Common Diluted Weighted Average
shares outstanding 15,002 15,062 14,873 14,543 39
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