Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
is intended
to provide information to assist readers in better
understanding and evaluating our 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 2022
and fiscal
2021 and
year-to-
year comparisons between fiscal
2022 and fiscal
2021, as well,
as certain fiscal
2020 items.
Discussions
of
fiscal
2020
items
and
year-to-year
comparisons
between
fiscal
2021
and
fiscal
2020
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 January 29, 2022.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
The current high
inflationary environment continues to
impact the Company
through higher operating
costs, including costs to ship our products to stores and customers, operating supplies, wages, and
fuel.
In
addition
to
the
price
increases,
costs
for
fuel,
food,
and
housing,
including
rent,
as
well
as
other
consumables across
the economy,
are increasingly
impacting our
customers’ disposable
income, as
well
as our customers’ willingness to purchase discretionary items such as
apparel, jewelry or shoes.
In
response
to
the
inflationary
pressures,
the
Federal
Reserve
began
raising
interest
rates
and
is
committed to continue
raising interest rates
until the inflationary
pressures subside.
These rising interest
rates
have
adversely
affected
the
availability
and
cost
of
credit
for
businesses
and
our
customers.
In
addition,
the
rising
interest
rates
are
increasing
the
costs
related
to
revolving
credit,
auto
loans
and
mortgages, which increasingly is
negatively impacting our customers’
discretionary income.
In addition,
rising interest rates may negatively impact our customers’ willingness
to purchase our products.
We
believe that
these price
increases and
rising interest
rates have
had an
impact during
fiscal 2022,
and will likely continue to have
a negative impact on consumer behavior
and, by extension, our results of
operations and financial condition during fiscal 2023.
Labor Challenges and Wage Inflation
The COVID-19
pandemic
and the
resulting factors
above have
also
created challenges
related to
the
availability of sufficient labor from time to time, and have caused a significant increase in the competition
for labor
among consumer-facing companies.
This competition
for labor
has driven
significant increases
in
wages
in
order
to
compete
for
sufficient
labor
availability
and/or
to
prevent
the
loss
of
existing
workforce in
our
stores,
distribution center
and
corporate office.
We
expect these
pressures to
continue
throughout fiscal 2023.
28
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 28, 2023
January 29, 2022
Retail sales ....................................................................
100.0
%
100.0
%
Other revenue..................................................................
0.9
1.0
Total revenues ................................................................
100.9
101.0
Cost of goods sold ...........................................................
67.7
59.5
Selling, general and administrative........................................
32.3
35.1
Depreciation ..................................................................
1.5
1.6
Interest and other income ...................................................
0.8
0.3
Income before income taxes ................................................
0.2
5.1
Net income ....................................................................
-
%
4.8
%
Fiscal 2022 Compared to Fiscal 2021
Retail sales
decreased by
1.2% to
$752.4 million
in fiscal
2022 compared
to $761.4
million in
fiscal
2021. The
decrease in
retail sales
in fiscal
2022 was
primarily due
to a
1% decrease
in same-store
sales
and sales
from closed
stores in
2021,
partially offset by
stores opened
in
2022. Same-store sales
for
the
fiscal
year 2022
decreased primarily
due to
lower
average unit
selling price
resulting from
late
arriving
merchandise due to supply chain disruptions in the first half of 2022. 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 2022 and fiscal
2021, e-commerce
sales were
less than
6% and
5% of
total sales
and same-store sales,
respectively.
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
1.3%
to
$759.3
million
in
fiscal
2022
compared
to
$769.3
million
in
fiscal
2021.
The
Company
operated
1,280
stores
at
January
28,
2023
compared
to
1,311
stores
operated
at
January
29,
2022.
In fiscal 2022, the Company opened 19 new stores and closed 50 stores.
Other
revenue,
a
component
of
total
revenues,
decreased
to
$6.9
million
in
fiscal
2022
from
$7.9
million in fiscal 2021.
The decrease resulted primarily due to
decreases in gift card breakage income and
e-commerce shipping revenues,
partially offset by an increase in finance and layaway charges.
Credit
revenue
of
$2.2
million
represented
0.3%
of
total
revenue
in
fiscal
2022,
a
$0.1
million
increase compared to fiscal 2021 credit
revenue of $2.1 million or 0.3% of
total revenue.
The increase in
credit revenue was
primarily due to
increases in finance
charges and late
fee income as
a result of
higher
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
$1.7
million
in
fiscal
2022
compared
to
$1.4
million
in
fiscal 2021.
See Note
13 of
Notes to
Consolidated Financial
Statements for
a schedule
of credit-related
expenses. Total
credit segment
income before
taxes was
$0.6 million
in
fiscal 2022
and $0.6
million in
fiscal 2021.
Cost
of
goods sold
was $509.7
million, or
67.7% of
retail
sales, in
fiscal
2022 compared
to
$453.1
million, or 59.5% of retail sales, in fiscal 2021. The increase in cost of goods sold as a
percentage of sales
resulted primarily
from
higher sales
of
marked down
goods
and
increases in
freight and
distribution
costs.
The Company
expects markdown
sales to
decrease in
2023 and
beyond, as
the markdown
sales increase
is
29
primarily
attributed
to
the
supply
chain
disruption
in
the
first
half
of
2022,
causing
goods
to
miss
their
optimum selling
times.
Cost of
goods sold
includes merchandise
costs, net
of discounts
and allowances,
buying costs,
distribution costs,
occupancy costs,
and freight
and inventory
shrinkage. Net
merchandise
costs
and
in-bound
freight
are
capitalized
as
inventory
costs.
Buying
and
distribution