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
annual report
on Form 10-K.
This section of the annual report
on Form 10-K generally discusses fiscal 2023
and fiscal
2022
and
year-to-year
comparisons
between
fiscal
2023
and
fiscal
2022,
as
well
as
certain
fiscal
2021
items.
Discussions
of
fiscal
2021
items
and
year-to-year
comparisons
between
fiscal
2022
and
fiscal
2021 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 28, 2023.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
Our
customers’
disposable
income
was
negatively
impacted
by
high
interest
rates
and
continued
inflation related to
fuel, food, housing,
including rent, and
other consumable products
and a flattening
of
wage rates in 2023. The
persistence of high interest rates and
inflation negatively affected our customers’
willingness to purchase discretionary items such as apparel, jewelry
and shoes.
Though the Federal Reserve paused
raising rates in the
fall of 2023, it
has indicated it is
committed to
maintaining
interest
rates
at
or
near
these
elevated
levels
until
inflation
subsides
to
its
targeted
levels.
These high interest rates have adversely affected the availability and cost of credit for both businesses and
our
customers.
Increasing
costs
related
to
revolving
credit,
auto
loans
and
mortgages
continue
to
negatively
impact
our
customers’
discretionary
income.
Our
customers’
willingness
to
purchase
our
products may continue to be negatively impacted by these inflationary
pressures and high interest rates.
We
believe continued
inflation and
high interest
rates negatively
impacted fiscal
2023 and
will likely
continue to have a negative impact on
consumer behavior and, by extension, our results of
operations and
financial condition during fiscal 2024.
Merchandise Supply Chain
A
significant
amount
of
our
merchandise
is
manufactured
overseas,
principally
Southeast
Asia,
and
traverses through the Panama Canal or
the Suez Canal.
Due to a sustained regional
drought, the Panama
Canal
has
reduced
the
number
of
transits
by
approximately
37%
and
has
also
reduced
the
permissible
draft of vessels
transiting the Panama Canal,
which reduces the volume
and number of
containers carried
by container
ships and
increases our
costs.
The recent
hostilities affecting
the Red
Sea and
Suez Canal
are
causing
container
ships
to
travel
a
much
longer
distance
around
the
Cape
of
Good
Hope,
which
is
increasing both lead times for merchandise during our key selling times and our costs to ship
these goods.
Both of these situations have negatively impacted 2023 and will likely continue to have a negative impact
on our results of operations and financial condition during fiscal 2024.
30
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
February 3, 2024
January 28, 2023
Retail sales ....................................................................
100.0
%
100.0
%
Other revenue..................................................................
1.1
0.9
Total revenues ................................................................
101.1
100.9
Cost of goods sold ...........................................................
66.3
67.7
Selling, general and administrative........................................
36.1
32.3
Depreciation ..................................................................
1.4
1.5
Interest and other income ...................................................
0.7
0.8
Income (loss) before income taxes ................................................
(2.0)
0.2
Net income (loss)....................................................................
(3.4)
%
-
%
Fiscal 2023 Compared to Fiscal 2022
Retail sales
decreased by
6.9% to
$700.3 million
in fiscal
2023 compared
to $752.4
million in
fiscal
2022. The decrease in
retail sales in fiscal
2023 was primarily due
to a 5.9% decrease
in same-store sales
and
sales from
closed stores
in
2022
and
stores
closed
in
the
first
half
of
2023,
partially offset
by
an
additional
week of sales
in 2023 and a
small increase in
sales from stores opened in 2023. Fiscal
2023 had
53 weeks
versus 52
weeks in
fiscal 2022.
Same-store sales
for the
fiscal year
2023 decreased
primarily
due
to
lower
transactions,
partially
offset
by
fewer
returns
and
slightly
higher
average
sales
per
transaction. 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
2023 and
fiscal
2022,
e-commerce sales
were less
than
5%
and
6%
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 6.7%
to $708.1
million in
fiscal 2023
compared
to
$759.3
million
in
fiscal
2022.
The
Company
operated
1,178
stores
at
February
3,
2024
compared to 1,280 stores operated at January 28, 2023.
In fiscal 2023, the Company opened nine new stores and closed 111 stores.
Other
revenue,
a
component
of
total
revenues,
increased
to
$7.7
million
in
fiscal
2023
from
$6.9
million
in
fiscal
2022.
The
increase
was
due
to
increases
in
gift
card
breakage
and
finance
charges
associated
with
the
Company’s
proprietary
credit
card,
partially
offset
by
decreases
in
e-commerce
shipping revenue.
Credit
revenue
of
$2.6
million
represented
0.4%
of
total
revenue
in
fiscal
2023,
a
$0.4
million
increase compared to fiscal 2022 credit
revenue of $2.2 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
2023
compared
to
$1.7
million
in
fiscal
2022.
See
Note 13
to
the
Consolidated Financial
Statements,
“Reportable Segment
Information”
for
a schedule
of
credit-related expenses.
Total
credit segment
income before
taxes
was $0.9
million in
fiscal 2023 and $0.6 million in fiscal 2022.
31
Cost
of
goods sold
was $464.3
million, or
66.3% of
retail
sales, in
fiscal
2023 compared
to
$509.7
million, or 67.7% of retail sales, in fiscal 2022. The decrease in cost of goods sold as a percentage of sales
resulted
primarily
from
lower
ocean
freight
costs
and
increased
sales
of
regular
priced
goods,
partially
offset
by deleveraging
of
occupancy and
buying costs.
Cost of
goods sold
includes
merchandise costs,
net
of