Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
The following information should
be read in
conjunction with the Consolidated
Financial Statements,
including the accompanying Notes appearing in Part
II, Item 8 of this
report on Form 10-K.
This section
of the Form
10-K
generally discusses fiscal 2020
and fiscal 2019
and year-to-year comparisons between
fiscal 2020
and fiscal
2019.
Discussions of
fiscal 2018
items and
year-to-year comparisons
between
fiscal 2019
and fiscal
2018 that
are not
included in
this Form
10-K
can be
found in
“Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations”
in Part
II, Item
7 of
the
Company’s Annual Report on Form 10-K
for the fiscal year ended February 1, 2020.
COVID-19 Update
The COVID
-19 pandemic
has adversely
impacted the
Company's business,
financial condition
and
operating results
through fiscal
2020, and
we expect
that it
will continue
to do
so in
fiscal 2021
and
possibly beyond. Adverse
financial impacts associated
with the outbreak
include, but are
not limited to,
(i) lower net
sales in markets
affected by the
actual or potential
outbreak, whether due to
state and local
orders to
close stores,
reductions in
store traffic
and customer
demand, labor
shortages, or
all of
these
factors, (ii) lower net sales caused
by the delay of inventory production and fulfillment,
(iii) and
incremental costs
associated with
efforts to
mitigate the
effects of
the outbreak,
including increased
freight and logistics costs and other expenses.
Responses to
the pandemic
by customers,
government and
the private
sector have
and will
likely
continue to
adversely impact
our business
operations.
In the
first quarter
of fiscal
2020, the
pandemic
resulted in state and local orders mandating store closures and other measures to mitigate
the spread of the
virus.
Though the Company’s stores
were reopened in the second quarter of fiscal 2020,
they continue to
operate at
reduced hours.
Periodic increases
in infection
rates in
communities where
our stores
are
located may prompt
further governmental
measures or
public health
guidance to
reduce public
activity
and gatherings
in order
to mitigate
the spread
of the
virus, and
may also
continue to
adversely affect
consumer confidence.
There continues to
be significant uncertainty
regarding the breadth,
severity and
duration of
business disruptions
related to
COVID-19, as
well as
its impact
on the
global and
U.S.
economy, consumer willingness to visit malls and shopping centers, and its impact
on appropriate
associate staffing levels for our stores.
The Company’s
pre-pandemic liquidity
position has
enabled it
to offset
the downturn
in operating
cash flows
since the
onset of
the pandemic
by liquidating
short-term investments
and drawing
and
repaying under
its revolving
credit facility.
The Company
has also
implemented various
cost-cutting
measures to
conserve cash,
such as
suspending dividend
payments, reducing
non-committed capital
expenditures (only half of planned new stores were opened during 2020)
and reducing corporate field and
store overhead.
The Company is grateful for
the efforts
of its
associates in helping to address the
considerable
challenges created by
the pandemic.
In recognition of
these efforts and
to aid with
retention, on March
24, 2021 the
Compensation Committee approved a
discretionary bonus of
$1.6 million ($1.3
million net
of taxes) to key associates as discussed in more detail in “Other Information”
in Part II, Item 9B.
The extent
to which
the COVID
-19 pandemic
ultimately impacts the
Company’s business,
financial
condition, results of operations, cash flows, and liquidity may differ from management’s current estimates
due to inherent uncertainties regarding the duration and further spread of the outbreak,
its severity, actions
taken to contain
the virus or
treat its impact,
and how quickly
and to what
extent normal economic
and
operating conditions can resume.
28
While the Company
currently anticipates a
continuation of the
adverse impacts of
COVID-19 during
2021 and possibly
beyond, the duration
and severity of
these effects will
depend on the
course of future
developments, which are
highly uncertain, including
the relative speed
and success of,
as well as
public
confidence in, mitigation measures
such as the current
effort to vaccinate substantial
portions of the U.S.
and global
population, emerging
information regarding
variants of
the virus
or new
viruses and
their
potential impact on
current mitigation efforts,
public attitudes toward
continued compliance with
containment and
mitigation measures, and
possible new information
and understanding that
could alter
the course and duration of current measures to combat the spread of the virus.
Results of Operations
The table below sets forth certain financial data of the Company expressed
as a percentage of retail sales for the
years indicated:
Fiscal Year Ended
January 30,
2021
February 1,
2020
February 2,
2019
Retail sales ....................................................................
100.0
%
100.0
%
100.0
%
Other revenue..................................................................
1.3
1.1
1.0
Total revenues ................................................................
101.3
101.1
101.0
Cost of goods sold ...........................................................
76.3
62.4
63.6
Selling, general and administrative........................................
36.4
32.3
32.0
Depreciation ..................................................................
2.6
1.9
2.0
Interest and other income ...................................................
1.2
0.7
0.6
Income (loss) before income taxes .................................
(12.8)
5.3
4.0
Net income (loss) ............................................................
(8.4)
%
4.4
%
3.7
%
Fiscal 2020 Compared to Fiscal 2019
Retail sales decreased by 30.5% to $567.5 million
in fiscal 2020 compared to $816.2 million in fiscal 2019.
The decrease in
retail sales in
fiscal 2020 was
primarily due to
a 32% decrease
in same-store sales,
partially
offset by sales
from new store
openings. Same-store sales
includes stores that
have been open
more than 15
months.
Stores that have been relocated or expanded
are also included in the same-store sales calculation after
they have been
open more than
15 months.
In fiscal 2020
and fiscal 2019,
e-commerce sales were
less than
5% of
total sales
and same
-store sales.
The method
of calculating
same-store sales
varies across
the retail
industry. As
a result,
our same
-store sales
calculation may
not be
comparable to
similarly titled
measures
reported by other
companies.
Total revenues, comprised of retail sales and
other revenue (principally
finance
charges and late
fees on customer
accounts receivable, gift card
breakage,
shipping charges for
e-commerce
purchases
and layaway fees),
decreased by 30.3% to
$575.1 million in fiscal 2020
compared to $825.3 million
in fiscal 2019.
The Company operated 1,330
stores at January 30,
2021 compared to 1,281
stores operated at
February 1, 2020.
In fiscal 2020, the Company opened 76 new stores
and closed 27 stores.
Other revenue
in total
decreased to
$7.6 million
in fiscal
2020 from
$9.2 million
in fiscal
2019.
The
decrease resulted primarily due to
decreases in finance and
layaway charges, partially offset
by an increase in
e-commerce shipping revenues.
Credit revenue of
$2.7 million represented
0.5% of total
revenue in fiscal
2020,
a $0.9 million
decrease
compared to
fiscal 2019
credit revenue
of $3.6
million or
0.4% of
total revenue.
The decrease
in credit
revenue was
primarily due
to reductions
in finance
and late
charge income
as a
result of
lower accounts
receivable balances.
Credit revenue is comprised of interest earned on the Company’s private label credit card
portfolio and
related fee
income. Related
expenses include
principally payroll,
postage and
other
administrative expenses and totaled
$1.5 million in
fiscal 2020 compared
to $1.8 million
in fiscal 2019.
See
Note 14
of Notes to
Consolidated Financial Statements for
a schedule of
credit-related expenses. Total
credit
29
segment income before taxes
decreased $0.6 million to
$1.2 million in fiscal
2020 from $1.8 million
in fiscal
2019.
Cost of goods sold was $433.2 million, or 76.3% of retail sales, in fiscal 2020
compared to $508.9 million,
or 62.4%
of retail sales
,
in fiscal 2019.
The increase in
cost of
goods sold
as a
percentage of sales
resulted
primarily
from an increase
in markdown sales due
to liquidating spring and
summer
merchandise,
goods
marked out
of stock,
and deleveraging
occupancy,
distribution
and buying
costs
.
Cost of goods sold includes
merchandise costs, net
of discounts and
allowances, buying costs, distribution
costs, occupancy costs, freight
and inventory shrinkage. Net merchandise costs
and in-bound freight are capitalized as inventory
costs. Buying
and distribution costs include payroll, payroll-related costs and
operating expenses for the buying departments
and distribution
center. Occupancy
expenses include rent,
real estate
taxes, insurance,
common area
maintenance, utilities and maintenance
for stores and distribution
facilities.
Total gross
margin dollars (retail
sales less cost of
goods sold and excluding
depreciation) decreased by 56.3% to
$134.3 million in fiscal 2020
from $307.3
million in
fiscal 2019.
Gross margin
as presented
may not
be comparable
to that
of other
companies.
Selling,
general and
administrative expenses
(“SG&A”), which
primarily include
corporate and
store
payroll, related payroll
taxes and
benefits, insurance,
supplies, advertising, bank
and credit
card processing
fees were $206.7 million
in fiscal 2020 compared
to $263.8 million in
fiscal 2019, a decrease
of 21.7%.
As a
percent of retail sales,
SG&A was 36.4% compared
to 32.3% in the
prior year. The
dollar decrease in SG&A
expense was primarily
attributable
to lower
store expenses
due to stores
being closed,
phased store
re-opening
in the
second
quarter, reduced store
operating
hours,
lower corporate expenses
and the
elimination
of
incentive
compensation,
resulting
from the failure
to meet targets
under the Company’s
annual incentive
compensation
plan, partially
offset by
higher store
impairment
charges.
Depreciation expense was $14.7
million in fiscal 2020
compared to $15.5 million
in fiscal 2019.
Depreciation expense decreased
from fiscal 2019
due to
fully depreciated older
stores and
previous
impairments of leasehold
improvements and fixtures,
partially offset
by store
development and
information
technology expenditures.
Interest and other income increased to
$6.6 million in fiscal 2020
compared to $6.1 million in fiscal
2019.
The increase is primarily due to a gain
on the sale of land held
for investment, partially offset by a decrease in
short-term investments.
Income tax
benefit was
$25.3 million,
or 4.5%
of retail