The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 (Fiscal 2021 10-K). In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled "Safe Harbor Statement." Executive Summary Introduction We are a nationally recognized off-price retailer of high-quality, branded merchandise at everyday low prices. We opened our first store inBurlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 866 stores as ofApril 30, 2022 in 46 states andPuerto Rico . We have diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise at up to 60% off other retailers' prices, including: women's ready-to-wear apparel, menswear, youth apparel, baby, beauty, footwear, accessories, home, toys, gifts and coats. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers. Fiscal Year
Fiscal year 2022 is defined as the 52-week year ending
Store openings, closings and relocations
During the three month period endedApril 30, 2022 , we opened 33 new stores, inclusive of five relocations, and permanently closed two stores, exclusive of the aforementioned relocations, bringing our store count as ofApril 30, 2022 to 866 stores.
Ongoing initiatives for fiscal year 2022
We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability. These initiatives include, but are not limited to:
•
Drive comparable store sales growth.
We intend to continue to grow comparable store sales through the following initiatives:
•
More Effectively Chasing the Sales Trend. We plan sales using conservative comparable stores sales growth, holding and controlling liquidity, closely analyzing the sales trend by business, and remaining ready to chase that trend. We believe that these actions will also allow us to take more advantage of great opportunistic buys.
•
Operating with Leaner Inventories. We are planning to carry less inventory in our stores going forward compared to historical levels, which we believe should result in the customer finding a higher mix of fresh receipts and great merchandise values. We believe that this should drive faster turns and lower markdowns, while simultaneously improving our customers' shopping experience.
•
Making aGreater Investment in Merchandising Capabilities. We intend to invest in incremental headcount, especially in growing or under-developed businesses, training and coaching, improved tools and reporting, and other forms of merchant support. We believe that these investments should improve our ability to develop vendor 19 --------------------------------------------------------------------------------
relationships, find great merchandise buys, more accurately assess value, and better predict and track sales trends.
•
Enhancing Existing Categories and Introducing New Categories. We have opportunities to expand the depth and breadth of certain existing categories, such as ladies' apparel, children's products, bath and cosmetic merchandise, housewares, décor for the home and beauty as we continue to de-weather our business, and maintain the flexibility to introduce new categories as we expand our merchandising capabilities.
•
Expand and improve our retail store base.
We intend to expand and enhance our retail store base through the following initiatives:
•
Adhering to a Market Focused and Financially Disciplined Real Estate Strategy. We have grown our store base consistently since our founding in 1972, developing more than 99% of our stores organically. We believe there is significant opportunity to expand our retail store base inthe United States . As a result of our smaller store prototype, we have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long term.
•
Maintaining Focus on Unit Economics and Returns. We have adopted a market focused approach to new store openings in more productive retail locations, with a specific focus on maximizing sales while achieving attractive unit economics and returns. Additionally, as we continue to execute our smaller store prototype, we believe we can reduce occupancy and operating expenses.
•
Enhancing the Store Experience. We continue to invest in select store relocations and downsizes to improve the customer experience, taking into consideration the age, size, sales, and location of a store. Relocations provide an opportunity, upon leases expiration, to right-size our stores, improve our competitive positioning, incorporate our new prototype store designs and reduce occupancy costs. Downsizes provide an opportunity to right-size our stores, within our existing space, improve co-tenancy, incorporate all of our new store designs and reduce occupancy costs.
•
Improved operating margins.
We intend to increase our operating margins through the following initiatives:
•
Improving Operational Flexibility. Our store and supply chain teams must continue to respond to the challenge of becoming more responsive to the sales chase, enhancing their ability at flexing up and down based on trends. Their ability to appropriately flex based on the ongoing trends allows us to maximize leverage on sales, regardless of the trend.
•
Optimizing Markdowns. We believe that our markdown system allows us to maximize sales and gross margin dollars based on forward-looking sales forecasts, sell-through targets and exit dates. Additionally, as we plan to carry less inventory in our stores compared to historical levels, we expect to drive faster turns, which in turn will reduce the amount of markdowns taken.
•
Enhancing Purchasing Power. We believe that increasing our store footprint and expanding our east and west coast buying offices provides us with the opportunity to capture incremental buying opportunities and realize economies of scale in our merchandising and non-merchandising purchasing activities.
•
Challenging Expenses to Drive Operating Leverage. We believe that we will be able to leverage our growing sales over the fixed costs of our business. In addition, by more conservatively planning our comparable store sales growth, we are forcing even tighter expense control throughout all areas of our business. We believe that this should put us in a strong position to drive operating leverage on any sales ahead of the plan. Additionally, we plan to continue challenging the processes and operating norms throughout the organization with the belief that this will lead to incremental efficiency improvements and savings.
Uncertainties and challenges
As we strive to increase profitability, there are uncertainties and challenges
that we face that could have a material impact on our revenues or income. Some
of these uncertainties and challenges are summarized below. For a further
discussion, please refer to the description under the heading "Risk Factors" in
the Fiscal 2021 10-K.
COVID-19. The extent of the continuing impact of the COVID-19 pandemic on our
business will depend largely on future developments, including the production
and administration of effective medical treatments and vaccines, additional
costs and delays related to our supply chain, reduced workforces or labor
shortages and scarcity of raw materials, and any future required store closures
20
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because of COVID-19 resurgences. COVID-19 presents material uncertainty and risk
with respect to our business, financial performance and condition, operating
results, liquidity and cash flows.
General Economic Conditions. Consumer spending habits, including spending for
the merchandise that we sell, are affected by, among other things, prevailing
global economic conditions, inflation, including the costs of basic necessities
and other goods, levels of employment, salaries and wage rates, prevailing
interest rates, housing costs, energy costs, commodities pricing, income tax
rates and policies, consumer confidence and consumer perception of economic
conditions. In addition, consumer purchasing patterns may be influenced by
consumers' disposable income, credit availability and debt levels.
A broad, protracted slowdown in the U.S. economy, an extended period of high
unemployment rates, an uncertain global economic outlook or a credit crisis
could adversely affect consumer spending habits resulting in lower net sales and
profits than expected on a quarterly or annual basis. Consumer confidence is
also affected by the domestic and international political situation. Our
financial condition and operations could be impacted by changes in government
regulations in areas including, but not limited to, taxes and healthcare.
Ongoing international trade and tariff negotiations could have a direct impact
on our income and an indirect impact on consumer prices. The outbreak or
escalation of war, or the occurrence of terrorist acts or other hostilities in
or affecting the U.S. , or public health issues such as pandemics or epidemics,
including the continuing COVID-19 pandemic, could lead to a decrease in spending
by consumers. In addition, natural disasters, public health issues, industrial
accidents and acts of war in various parts of the world, such as the current
conflict in Ukraine , could have the effect of disrupting supplies and raising
prices globally which, in turn, may have adverse effects on the world and U.S.
economies and lead to a downturn in consumer confidence and spending.
We closely monitor our net sales, gross margin and expenses. We have performed
scenario planning such that if our net sales decline for an extended period of
time, we have identified variable costs that could be reduced to partially
mitigate the impact of these declines. If we were to experience adverse economic
trends and/or if our efforts to counteract the impacts of these trends are not
sufficiently effective, there could be a negative impact on our financial
performance and position in future fiscal periods.
Seasonality of Sales and Weather Conditions. Our business, like that of most
retailers, is subject to seasonal influences. In the second half of the year,
which includes the back-to-school and holiday seasons, we generally realize a
higher level of sales and net income.
Weather continues to be a contributing factor to the sale of our merchandise.
Generally, our sales are higher if the weather is cold during the Fall and warm
during the early Spring. Sales of cold weather clothing are increased by early
cold weather during the Fall, while sales of warm weather clothing are improved
by early warm weather conditions in the Spring. Although we have diversified our
product offerings, we believe traffic to our stores is still driven, in part, by
weather patterns.
Competition and Margin Pressure. We believe that in order to remain competitive
with retailers, including off-price retailers and discount stores, we must
continue to offer brand-name merchandise at a discount to prices offered by
other retailers as well as an assortment of merchandise that is appealing to our
customers.
The U.S. retail apparel and home furnishings markets are highly fragmented and
competitive. We compete for business with department stores, off-price
retailers, internet retailers, specialty stores, discount stores, wholesale
clubs, and outlet stores as well as with certain traditional, full-price retail
chains that have developed off-price concepts. At various times throughout the
year, traditional full-price department store chains and specialty shops offer
brand-name merchandise at substantial markdowns, which can result in prices
approximating those offered by us at our Burlington Stores . We anticipate that
competition will increase in the future. Therefore, we will continue to look for
ways to differentiate our stores from those of our competitors.
The U.S. retail industry continues to face increased pressure on margins as
overall challenging retail conditions have led consumers to be more value
conscious. Our strategy to chase the sales trend allows us the flexibility to
purchase less pre-season merchandise with the balance purchased in-season and
opportunistically. It also provides us with the flexibility to shift purchases
between suppliers and categories. This enables us to obtain better terms with
our suppliers, which we expect to help offset any rising costs of goods.
Industry-wide supply chain issues led to increased freight and labor costs
during Fiscal 2021 and continue to add pressure on margins in Fiscal 2022. These
costs significantly impacted results in Fiscal 2021 and the first quarter of
Fiscal 2022, and there remains significant uncertainty around when and if
freight costs will return to pre-pandemic levels. Additionally, the higher our
sales volume is, and the more sales we chase above our initial plans, the more
these increased supply chain costs will impact our margins.
We have also experienced inflationary pressure in our supply chain and with
respect to raw materials and finished goods, as well as in occupancy and other
operating costs. There can be no assurance that we will be able to offset
inflationary pressure in the future by increasing prices or through other means,
or that our business will not be negatively affected by continued inflation in
the future.
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Key Performance Measures and Non-GAAP Measures
We consider numerous factors in assessing our performance. Key performance and non-GAAP measures used by management include net income, Adjusted Net Income, Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin, inventory, store payroll and liquidity. Net income. We earned net income of$16.2 million during the three month period endedApril 30, 2022 compared with net income of$171.0 million during the three month period endedMay 1, 2021 . This decrease was primarily driven by lower sales, as well as decreased gross margin rate due to industry wide supply chain issues. Refer to the section below entitled "Results of Operations" for further explanation.
Adjusted net income, Adjusted EBITDA and Adjusted EBIT: Adjusted net income, Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance.
We define Adjusted Net Income as net income, exclusive of the following items, if applicable: (i) net favorable lease costs; (ii) loss on extinguishment of debt; (iii) impairment charges; (iv) amounts related to certain litigation matters; and (v) other unusual, non-recurring or extraordinary expenses, losses, charges or gains, all of which are tax effected to arrive at Adjusted Net Income. We define Adjusted EBITDA as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) income tax expense; (v) depreciation and amortization; (vi) impairment charges; (vii) amounts related to certain litigation matters; and (viii) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We define Adjusted EBIT as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) income tax expense; (v) impairment charges; (vi) net favorable lease costs; (vii) amounts related to certain litigation matters; and (viii) other unusual, non-recurring or extraordinary expenses, losses, charges or gains. We present Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT, because we believe they are useful supplemental measures in evaluating the performance of our business and provide greater transparency into our results of operations. In particular, we believe that excluding certain items that may vary substantially in frequency and magnitude from what we consider to be our core operating results are useful supplemental measures that assist investors and management in evaluating our ability to generate earnings and leverage sales, and to more readily compare core operating results between past and future periods. We believe that these non-GAAP measures provide investors helpful information with respect to our operations and financial condition. Other companies in the retail industry may calculate these non-GAAP measures differently such that our calculation may not be directly comparable. Adjusted Net Income has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted Net Income does not reflect the following items, net of their tax effect:
•
favorable net rental charges;
•
losses on extinguishment of debt;
•
amounts billed for certain disputes;
•
impairment charges on long-lived assets; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
During the three months endedApril 30, 2022 , Adjusted Net Income decreased$139.9 million to$36.1 million compared to the same period in the prior year. This decrease was primarily driven by lower sales, as well as decreased gross margin rate due to industry wide supply chain issues. Refer to the section below entitled "Results of Operations" for further explanation. 22 -------------------------------------------------------------------------------- The following table shows our reconciliation of net income to Adjusted Net Income for the three months endedApril 30, 2022 compared with the three months endedMay 1, 2021 : (unaudited) (in thousands) Three Months EndedApril 30 ,May 1, 2022 2021
Reconciliation of net income to adjusted net income: Net income
$ 16,174 $
171,030
Net favorable lease costs (a) 4,702
5,911
Loss on extinguishment of debt (b) 14,657 - Impairment charges 2,543 777 Litigation matters (c) 5,000 - Tax effect (d) (7,017 ) (1,771 ) Adjusted Net Income$ 36,059 $ 175,947 (a) Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of purchase accounting related to theApril 13, 2006 Bain Capital acquisition ofBurlington Coat Factory Warehouse Corporation (the Merger Transaction). These expenses are recorded in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income.
(b)
The amounts relate to partial redemptions of
(vs)
Represents amounts billed for certain disputes.
(D)
The tax effect is calculated based on the effective tax rates (before discrete items) for the respective periods, adjusted for the tax effect for the impact of items (a) through (c).
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect: • interest expense on our debt; • interest income; •
losses on extinguishment of debt;
•
cash requirements for asset replacement. Although depreciation and amortization are non-cash charges, depreciated assets will likely need to be replaced in the future;
•
amounts billed for certain disputes;
•
impairment charges on long-lived assets;
•
income tax expense; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
During the three months endedApril 30, 2022 , Adjusted EBITDA decreased$168.1 million to$125.4 million compared to the same period in the prior year. This decrease was primarily driven by lower sales, as well as decreased gross margin rate due to industry wide supply chain issues. Refer to the section below entitled "Results of Operations" for further explanation. 23 -------------------------------------------------------------------------------- The following table shows our reconciliation of net income to Adjusted EBITDA for the three months endedApril 30, 2022 compared with the three months endedMay 1, 2021 : (unaudited) (in thousands) Three Months Ended April 30, May 1, 2022 2021 Reconciliation of net income to Adjusted EBITDA: Net income$ 16,174 $ 171,030 Interest expense 14,606 19,599 Interest income (119 ) (74 ) Loss on extinguishment of debt (a) 14,657 - Litigation matters (b) 5,000 - Depreciation and amortization (c) 71,006 61,521 Impairment charges 2,543 777 Income tax expense 1,533 40,637 Adjusted EBITDA$ 125,400 $ 293,490 (a)
Amounts relate to partial redemptions of convertible notes.
(b)
Represents amounts billed for certain disputes.
(vs)
Includes$4.7 million and$5.9 million of favorable lease cost included in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income for the three months endedApril 30, 2022 and three months endedMay 1, 2021 , respectively. Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. Adjusted EBIT has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBIT does not reflect: • interest expense on our debt; • interest income; •
losses on extinguishment of debt;
•
favorable net rental cost;
•
amounts billed for certain disputes;
•
impairment charges on long-lived assets;
•
income tax expense; and
•
other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
During the three months endedApril 30, 2022 , Adjusted EBIT decreased$178.8 million to$59.1 million compared to the same period in the prior year. This decrease was primarily driven by lower sales, as well as decreased gross margin rate due to industry wide supply chain issues. Refer to the section below entitled "Results of Operations" for further explanation. The following table shows our reconciliation of net income to Adjusted EBIT for the three months endedApril 30, 2022 compared with the three months endedMay 1, 2021 : 24 --------------------------------------------------------------------------------
(unaudited)
(in thousands)
Three Months Ended
April 30, May 1,
2022 2021
Reconciliation of net income to Adjusted EBIT:
Net income $ 16,174 $ 171,030
Interest expense 14,606 19,599
Interest income (119 ) (74 )
Loss on extinguishment of debt (a) 14,657 -
Net favorable lease costs (b) 4,702 5,911
Impairment charges 2,543 777
Litigation matters (c) 5,000 -
Income tax expense 1,533 40,637
Adjusted EBIT $ 59,096 $ 237,880
(a)
Amounts relate to partial redemptions of convertible notes.
(b)
Net favorable lease cost represents the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. These expenses are recorded in the line item "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Income.
(vs)
Represents amounts billed for certain disputes.
Comparable Store Sales. Comparable store sales measure performance of a store
during the current reporting period against the performance of the same store in
the corresponding period of a prior year. Due to the impact of the COVID-19
pandemic, including the temporary closing of all stores during Fiscal 2020, we
are using Fiscal 2019 as the comparable previous year period when calculating
comparable store sales for Fiscal 2021. The method of calculating comparable
store sales varies across the retail industry. As a result, our definition of
comparable store sales may differ from other retailers.
For Fiscal 2022, we define comparable store sales as merchandise sales of those
stores commencing on the first day of the fiscal month one year after the end of
their grand opening activities, which normally conclude within the first two
months of operations. If a store is closed for seven or more days during a
month, our policy is to remove that store from our calculation of comparable
stores sales for any such month, as well as during the month(s) of their grand
re-opening activities. The change in our comparable store sales was as follows:
Three Months Ended
April 30, 2022 -18%
May 1, 2021 20%
Various factors affect comparable store sales, including, but not limited to,
weather conditions, current economic conditions, the timing of our releases of
new merchandise and promotional events, the general retail sales environment,
consumer preferences and buying trends, changes in sales mix among distribution
channels, competition, and the success of marketing programs.
Gross Margin. Gross margin is the difference between net sales and the cost of
sales. Our cost of sales and gross margin may not be comparable to those of
other entities, since some entities may include all of the costs related to
their buying and distribution functions, certain store-related costs and other
costs, in cost of sales. We include certain of these costs in the line items
"Selling, general and administrative expenses" and "Depreciation and
amortization" in our Condensed Consolidated Statements of Income. We include in
our "Cost of sales" line item all costs of merchandise (net of purchase
discounts and certain vendor allowances), inbound freight, distribution center
outbound freight and certain merchandise acquisition costs, primarily
commissions and import fees.
Gross margin as a percentage of net sales decreased to 41.0% during the three
month period ended April 30, 2022 , compared with 43.3% during the three month
period ended May 1, 2021 , driven primarily by industry-wide supply chain issues
that have led to increased freight and labor costs. Product sourcing costs,
which are included in selling, general and administrative expenses, increased
approximately 180 basis points as a percentage of net sales.
Inventory. Inventory at April 30, 2022 increased to $1,257.1 million compared
with $767.6 million at May 1, 2021 . The increase was attributable primarily to
increased reserve inventory, which was 50% of total inventory as of April 30,
2022 , compared with 35% as of May 1, 2021 (a 128% increase on a dollar basis),
as well as 82 net new stores opened since the end of the first quarter of Fiscal
2021 and a 2% increase in comparable store inventory.
25
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Reserve inventory includes all inventory that is being stored for release either
later in the season, or in a subsequent season. We intend to use our reserve
merchandise to effectively chase sales trends. Inventory at January 29, 2022 was
$1,021.0 million .
In order to better serve our customers and maximize sales, we continue to refine
our merchandising mix and inventory levels within our stores. By appropriately
managing our inventories, we believe we will be better able to deliver a
continual flow of fresh merchandise to our customers.
Store Payroll as a Percentage of Net Sales . Store payroll as a percentage of net
sales measures our ability to manage our payroll in accordance with increases or
decreases in net sales. The method of calculating store payroll varies across
the retail industry. As a result, our store payroll as a percentage of net sales
may differ from other retailers. We define store payroll as regular and overtime
payroll for all store personnel as well as regional and territory personnel,
exclusive of payroll charges related to corporate and warehouse employees. Store
payroll as a percentage of net sales was 8.1% during the three month period
ended April 30, 2022 , compared with 7.8% during the three month period ended May
1, 2021 .
Liquidity. Liquidity measures our ability to generate cash. Management measures
liquidity through cash flow, which is the measure of cash generated from or used
in operating, financing, and investing activities. Cash and cash equivalents,
including restricted cash and cash equivalents, decreased $464.0 million during
the three months ended April 30, 2022 , compared with an increase of $150.3
million during the three months ended May 1, 2021 . Refer to the section below
entitled "Liquidity and Capital Resources" for further explanation.
Operating results
The following table sets forth certain items of the Condensed Consolidated Statements of Earnings as a percentage of net sales for the three months ended
Percentage of Net Sales
Three Months Ended
April 30, May 1,
2022 2021
Net sales 100.0 % 100.0 %
Other revenue 0.2 0.1
Total revenue 100.2 100.1
Cost of sales 59.0 56.7
Selling, general and administrative expenses 35.3
30.3
Depreciation and amortization 3.4
2.6
Impairment charges - long-lived assets 0.1
0.0
Other income - net (0.2 ) (0.1 ) Loss on extinguishment of debt 0.8 - Interest expense 0.8 0.9 Total costs and expenses 99.2 90.4 Income before income tax expense 1.0 9.7 Income tax expense 0.1 1.9 Net income 0.9 % 7.8 %
Three-month period ended
Net sales Net sales decreased approximately$265.0 million , or 12.1%, to$1,925.6 million during the first quarter of Fiscal 2022, primarily driven by a decrease of 18% in comparable stores sales during the first quarter of Fiscal 2022, primarily due to government stimulus payments during the first quarter of Fiscal 2021, as well as lower than optimal inventory levels early in the first quarter of Fiscal 2022. Cost of sales Cost of sales as a percentage of net sales increased to 59.0% during the first quarter of Fiscal 2022, compared to 56.7% during the first quarter of Fiscal 2021. This increase is related to industry-wide supply chain issues that have led to increased freight and labor costs. On a dollar basis, cost of sales decreased$105.2 million , or 8.5%, primarily driven by our overall decrease in sales. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 180 basis points as a percentage of net sales. 26 --------------------------------------------------------------------------------
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the three month period endedApril 30, 2022 compared with the three month period endedMay 1, 2021 . (in millions) Three Months Ended Percentage Percentage April 30, of May 1, of 2022 Net Sales 2021 Net Sales $ Variance % Change Store related costs$ 407.1 21.1 %$ 411.4 18.8 %$ (4.3 ) (1.0 )% Product sourcing costs 157.3 8.2 140.5 6.4 16.8 12.0 Corporate costs 78.0 4.1 75.9 3.5 2.1 2.8 Marketing and strategy costs 14.0 0.7 12.3 0.6 1.7 13.8 Other selling, general and administrative expenses 23.9 1.2 24.7 1.0 (0.8 ) (3.2 ) Selling, general and administrative expenses$ 680.3 35.3 %$ 664.8 30.3 %$ 15.5 2.3 % The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by deleverage on store related costs and increased product sourcing costs. On a dollar basis, the increase in selling, general and administrative expenses was primarily driven by increases in product sourcing costs and occupancy costs, partially offset by a decrease in incentive compensation and store payroll costs.
Depreciation and amortization
Depreciation and amortization expense amounted to$66.3 million during the first quarter of Fiscal 2022 compared with$55.6 million during the first quarter of Fiscal 2021. The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our new and non-comparable stores.
Impairment charges – long-lived assets
Impairment charges for long-lived assets have been
The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, "Fair Value Measurements," for further discussion regarding impairment charges.
Loss on extinguishment of debt
During the first quarter of Fiscal 2022, we entered into separate, privately negotiated exchange agreements (Exchange Agreements) with certain holders of the Convertible Notes. Under the terms of the Exchange Agreements, the holders exchanged$64.6 million in aggregate principal amount of Convertible Notes held by them for$78.2 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of$14.7 million .
Interest expense
Interest expense improved$5.0 million during the first quarter of Fiscal 2022 to$14.6 million , compared to the same period in the prior year. The decrease was driven by the redemption in full of the$300.0 million 6.25% Senior Secured Notes due 2025 (Secured Notes) and repurchase of$297.3 million of Convertible Notes since the end of the first quarter of Fiscal 2021, partially offset by the increase in LIBOR rates on our Term Loan Facility. 27 -------------------------------------------------------------------------------- The average interest rates and average balances related to our variable rate debt for the first quarter of Fiscal 2022 compared with the first quarter of Fiscal 2021, are summarized in the table below: Three Months EndedApril 30 ,May 1, 2022 2021
Average Balance – ABL Line of Credit (in millions) $ ?? $?? Average interest rate – ABL line of credit
??
??
Average balance – Term Loan Facility (in millions) (a)
Average Interest Rate – Term Loan Facility
2.3%
1.9%
(a) Excluding initial issue discount.
income tax expense
Income tax expense was$1.5 million during the first quarter of Fiscal 2022 compared with income tax expense of$40.6 million during the first quarter of Fiscal 2021. The effective tax rate for the first quarter of Fiscal 2022 was 8.7% compared with 19.2% during the first quarter of Fiscal 2021. The decrease in income tax expense in the first quarter of Fiscal 2022 was a result of lower pre-tax income. The decrease in effective tax rate is due to favorable permanent items having a greater impact as a result of the lower pretax income compared to the prior year. At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the first quarter of Fiscal 2022 resulted in an annual effective income tax rate of approximately 27% (before discrete items) as our best estimate. Net income We earned net income of$16.2 million for the first quarter of Fiscal 2022 compared with$171.0 million for the first quarter of Fiscal 2021. This decrease was primarily driven by lower sales, as well as decreased gross margin rate due to industry wide supply chain issues.
Cash and capital resources
Our ability to satisfy interest payment and future principal payment obligations on our outstanding debt will depend largely on our future performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service interest payment and future principal payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed on terms similar to our current financing agreements, or at all. We completed several debt transactions in order to facilitate increased financial flexibility. OnJune 11, 2021 , we redeemed the full$300.0 million aggregate principal amount of the Secured Notes. The redemption price of the Secured Notes was$323.7 million , plus accrued and unpaid interest to, but not including, the date of redemption. Additionally, we repurchased$232.7 million of principal on the Convertible Notes during Fiscal 2021. During the first quarter of Fiscal 2022, we repurchased an additional$64.6 million of principal on the Convertible Notes We believe that cash generated from operations, along with our existing cash and our ABL Line of Credit, will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future. However, there can be no assurance that we would be able to offset declines in our comparable store sales with savings initiatives in the event that the economy declines. As market conditions warrant, we may, from time to time, repurchase our outstanding debt securities in the open market, in privately negotiated transactions, by tender offer, by exchange transaction or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity and other factors and may be commenced or suspended at any time. The amounts involved and total consideration paid may be material.
Cash flow for the three-month period ended
We used$464.0 million of cash during the three month period endedApril 30, 2022 compared with net proceeds of$150.3 million during the three month period endedMay 1, 2021 . 28 -------------------------------------------------------------------------------- Net cash used in operating activities amounted to$172.3 million during the three month period endedApril 30, 2022 , compared with net cash provided of$223.4 million during the three month period endedMay 1, 2021 . The decrease in our operating cash flows was primarily driven by lower sales and decreased gross margin rate, as well as changes in working capital, primarily increased inventory. Net cash used in investing activities was$107.0 million during the three month period endedApril 30, 2022 compared with$71.8 million during the three month period endedMay 1, 2021 . This change was primarily the result of an increase in capital expenditures related to our stores (new stores, remodels and other store expenditures). Net cash used in financing activities was$184.8 million during the three month period endedApril 30, 2022 compared with$1.3 million during the three month period endedMay 1, 2021 . This change was primarily driven by our partial repurchase of the Convertible Notes for$78.2 million in cash, inclusive of third party fees during the first quarter of Fiscal 2022. Additionally, this change was driven by our repurchase of shares of common stock for$99.1 million under our share repurchase program during the first quarter of Fiscal 2022. Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had working capital atApril 30, 2022 of$445.2 million compared with$1,002.8 million atMay 1, 2021 . The decrease in working capital was primarily due to a decrease in cash and cash equivalents due to payments on the Convertible Notes and Secured Notes, partially offset by an increase to the inventory balance. We had working capital atJanuary 29, 2022 of$593.4 million .
Capital expenditure
For the three-month period ended
We estimate that we will spend approximately$730 million , net of approximately$15 million of landlord allowances, in capital expenditures during Fiscal 2022, including approximately$255 million , net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately$290 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives.
Share buyback program
On
OnFebruary 16, 2022 , our Board of Directors authorized the repurchase of up to an additional$500.0 million of common stock, which is authorized to be executed throughFebruary 2024 . During the first quarter of Fiscal 2022, we repurchased 512,905 shares of common stock for$99.1 million under this repurchase program. As ofApril 30, 2022 , we had$550.9 million remaining under our share repurchase authorization. We are authorized to repurchase shares of our outstanding common stock from time to time on the open market or in privately negotiated transactions under our repurchase program. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program. Dividends We currently do, and intend to continue to, retain all available funds and any future earnings to fund all of the Company's capital expenditures, business initiatives, and to support any potential opportunistic capital structure initiatives. Therefore, at this time, we do not anticipate paying cash dividends in the near term. Our ability to pay dividends on our common stock will be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions under the terms of current and any future agreements governing our indebtedness. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to 29 -------------------------------------------------------------------------------- compliance with covenants in our current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our Board of Directors deems relevant. In addition, since we are a holding company, substantially all of the assets shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries. Accordingly, our earnings, cash flow and ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends.
Operational growth
During the three month period endedApril 30, 2022 , we opened 33 new stores, inclusive of five relocations, and closed two stores, exclusive of the aforementioned relocations, bringing our store count as ofApril 30, 2022 to 866 stores. During Fiscal 2022, we plan to open 90 net new stores, which includes approximately 120 gross new stores, along with approximately 30 store relocations and closings. We have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long-term. We believe that our ability to find satisfactory locations for our stores is essential for the continued growth of our business. The opening of stores generally is contingent upon a number of factors including, but not limited to, the availability of desirable locations with suitable structures and the negotiation of acceptable lease terms. There can be no assurance, however, that we will be able to find suitable locations for new stores or that we will be able to open the number of new stores presently planned, even if such locations are found and acceptable lease terms are obtained. Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores.
Debt and hedging
As ofApril 30, 2022 , our obligations, inclusive of original issue discount, include$948.5 million under our Term Loan Facility,$507.7 million of Convertible Notes and no outstanding borrowings on our ABL Line of Credit. Our debt obligations also include$42.8 million of finance lease obligations as ofApril 30, 2022 . Term Loan Facility OnJune 24, 2021 ,Burlington Coat Factory Warehouse Corporation , an indirect subsidiary of the Company (BCFWC), entered into Amendment No. 9 (the Ninth Amendment) to the Term Loan Credit Agreement governing the Term Loan Facility. The Ninth Amendment, among other things, extended the maturity date fromNovember 17, 2024 toJune 24, 2028 , and changed the interest rate margins applicable to the Term Loan Facility from 0.75% to 1.00%, in the case of prime rate loans, and from 1.75% to 2.00%, in the case of LIBOR loans, with a 0.00% LIBOR floor. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
To
ABL line of credit
AtApril 30, 2022 , we had$597.5 million available under the ABL Line of Credit. There were no borrowings on the ABL Line of Credit during the three month period endedApril 30, 2022 . Convertible Notes OnApril 16, 2020 , we issued$805.0 million of Convertible Notes. The Convertible Notes have an initial conversion rate of 4.5418 shares per$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately$220.18 per share of the Company's common stock), subject to adjustment if certain events occur.
Convertible Notes are general unsecured obligations of the Company. The convertible notes bear interest at the rate of 2.25% per annum, payable semi-annually in cash, in arrears on
During Fiscal 2021, we entered into separate, privately negotiated exchange agreements with certain holders of the Convertible Notes. Under the terms of these exchange agreements, the holders exchanged$232.7 million in aggregate principal amount of Convertible Notes held by them for a combination of an aggregate of$199.8 million in cash and 513,991 shares of our common stock. These exchanges resulted in aggregate pre-tax debt extinguishment charges of$124.6 million in Fiscal 2021. 30 -------------------------------------------------------------------------------- During the first quarter of Fiscal 2022, we entered into separate, privately negotiated exchange agreements with certain holders of the Convertible Notes. Under the terms of the exchange agreements, the holders exchanged$64.6 million in aggregate principal amount of Convertible Notes held by them for$78.2 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of$14.7 million .
Secure tickets
OnApril 16, 2020 , BCFWC, issued$300.0 million of Secured Notes. The Secured Notes are senior, secured obligations of BCFWC, and interest was payable semiannually in cash at a rate of 6.25% per annum onApril 15 andOctober 15 of each year, beginning onOctober 15, 2020 . The Secured Notes were guaranteed on a senior secured basis byBurlington Coat Factory Holdings, LLC ,Burlington Coat Factory Investments Holdings, Inc. and BCFWC's subsidiaries that guarantee the loans under the Term Loan Facility and ABL Line of Credit. OnJune 11, 2021 , BCFWC redeemed the full$300.0 million aggregate principal amount of the Secured Notes. The redemption price of the Secured Notes was$323.7 million , plus accrued and unpaid interest to, but not including, the date of redemption. Refer to Note 4, "Long Term Debt," for further discussion regarding our debt transactions.
Cover
OnJune 24, 2021 , the Company terminated its previous interest rate swap and entered into a new interest rate swap. The new interest rate swap, which hedges$450 million of variable rate exposure under our Term Loan Facility, is designated as a cash flow hedge and expires onJune 24, 2028 . Refer to Note 5, "Derivative Instruments and Hedging Activities," for further discussion regarding our derivative transactions.
Certain information regarding contractual obligations
We had$1,452.3 million of purchase commitments related to goods that were not received as ofApril 30, 2022 , and had$3,728.0 million of future minimum lease payments under operating leases as ofApril 30, 2022 . Additionally, during the first quarter of Fiscal 2022, we repurchased$64.6 million in aggregate principal amount of the Convertible Notes. See Note 4, "Long Term Debt," for additional information related to our debt transactions. There were no other significant changes regarding our obligations to make future payments under current contracts from those included in our Fiscal 2021 10-K.
Significant Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management's judgments and estimates. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As of the end of the first quarter of Fiscal 2022, the impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and judgments carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the consolidated financial statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Our significant accounting policies and estimates are consistent with those disclosed in Note 1, “Summary of Significant Accounting Policies”, to the audited consolidated financial statements, included in Part II, Item 8 of 10-K FY2021.
Safe Harbor Statement
This report contains forward-looking statements based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements.
31 -------------------------------------------------------------------------------- regarding matters that are not historical facts. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Our forward-looking statements are subject to risks and uncertainties. Such statements may include, but are not limited to, future impacts of the COVID-19 pandemic, proposed store openings and closings, proposed capital expenditures, projected financing requirements, proposed developmental projects, projected sales and earnings, our ability to maintain selling margins, and the effect of the adoption of recent accounting pronouncements on our consolidated financial position, results of operations and cash flows. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual events or results to differ materially from those we expected include: the impact of the COVID-19 pandemic and actions taken to slow its spread and the related impacts on economic activity, financial markets, labor markets and the global supply chain; general economic conditions, including inflation, and the related impact on consumer confidence and spending; competitive factors, including pricing and promotional activities of major competitors and an increase in competition within the markets in which we compete; weather patterns, including changes in year-over-year temperatures; the reduction in traffic to, or the closing of, the other destination retailers in the shopping areas where our stores are located; changing consumer preferences and demand; industry trends, including changes in buying, inventory and other business practices; natural and man-made disasters, including fire, snow and ice storms, flood, hail, hurricanes and earthquakes; our ability to successfully implement one or more of our strategic initiatives and growth plans; the availability, selection and purchasing of attractive merchandise on favorable terms; the availability of desirable store locations on suitable terms; industry trends, including changes in buying, inventory and other business practices; terrorist attacks, particularly attacks on or within markets in which we operate; our ability to attract, train and retain quality employees and temporary personnel in appropriate numbers; our ability to control costs and expenses; the solvency of parties with whom we do business and their willingness to perform their obligations to us; import risks, including tax and trade policies, tariffs and government regulations; our dependence on vendors for our merchandise; domestic and international events affecting the delivery of merchandise to our stores; unforeseen cyber-related problems or attacks; regulatory and tax changes; issues with merchandise safety and shrinkage; any unforeseen material loss or casualty or the existence of adverse litigation; the impact of current and future laws and the interpretation of such laws; our substantial level of indebtedness and related debt-service obligations; consequences of the failure to comply with covenants in our debt agreements; the availability of adequate financing; and other risks discussed from time to time in our filings with theSecurities and Exchange Commission (SEC), including those under the heading "Risk Factors" in the Fiscal 2021 10-K. Many of these factors, including the ultimate impact of the COVID-19 pandemic, are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
Recent accounting pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact on our Condensed Consolidated Financial Statements.
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