You should read the following discussion together with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Item 1A, Risk Factors" and "Cautionary note regarding forward-looking statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements. We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday nearerJanuary 31 of the following year. References to "2021" refer to the fiscal year endedJanuary 29, 2022 and references to"2020" refer to the fiscal year endedJanuary 30, 2021 . 2021 and 2020 each consisted of 52 weeks. References to "2022" refer to the 52-week fiscal year endingJanuary 28, 2023 .
Overview
Ollie's is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices. Known for our assortment of "Good Stuff Cheap®," we offer customers a broad selection of brand name products, including housewares, bed and bath, food, floor coverings, health and beauty aids, books and stationery, toys and electronics. Our differentiated go-to market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns. These attributes have driven our rapid growth and strong store performance as evidenced by our store base expansion from 268 stores to 431 stores and net sales growth from$1.077 billion to$1.753 billion from 2017 to 2021 and average annual net sales per store of$4.4 million for the five-year period.
COVID-19 Update
The COVID-19 pandemic has significantly impacted theU.S. and global economies, resulting in business slowdowns or shutdowns, reduced economic activity, changes in consumer behavior, and changes in the mindset and availability of the labor force. We continue to monitor the impact of the pandemic on our business, including on our associates, customers, business partners and supply chain. We continue to take measures to protect the health and safety of our associates and customers, a primary concern of our management team. We have also taken measures to support the communities that we serve to address the challenges posed by the pandemic. Following the onset of the pandemic through the first quarter of 2021, our net sales benefited from increased consumer spending associated with federal stimulus funds for said pandemic. At this point, there is uncertainty with regard to any additional stimulus measures and, as a result, there may be potential changes in consumer spending behavior or demand. In addition, we are experiencing labor pressures at both our stores and distribution centers, higher import and trucking costs, and supply chain disruptions due to the impacts of COVID-19 and related measures. We are increasing our hiring efforts in certain impacted markets and working closely with our suppliers and transportation partners to mitigate the impact of the supply chain challenges. The potential significance and duration of these elevated costs is uncertain, and we will continue to assess and respond to current and evolving conditions. 40
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As we continue to monitor the COVID-19 pandemic and potentially take actions based on the requirements and recommendations of federal, state and local authorities, we intend to focus on managing the business for future, long-term growth. In certain circumstances, there may be developments outside our control, including resurgences of COVID-19 and, in particular, new and more contagious or vaccine resistant variants, requiring us to refine our operations. As such, given the evolving nature of the pandemic, we cannot reasonably estimate its impact on our financial condition, results of operations or cash flows in the future.
For a more in-depth discussion of the risks and uncertainties associated with the COVID-19 pandemic, see “Part 1. Item 1A. Risk Factors”.
Our growth strategy
Since founding Ollie’s in 1982, we have grown organically by filling existing markets and leveraging our brand awareness, marketing and infrastructure to expand into new markets in contiguous states. We have expanded to 431 stores located in 29 states from
Our stores are supported by three distribution centers, one in each
We have invested in our associates, infrastructure, distribution network and information systems to allow us to continue to rapidly grow our store footprint, including:
• Develop our Merchant Buying team to increase our brand name/closure access
merchandise;
• add members to our senior management team;
• expand the capacity of our distribution centers to their current 2.2 million
square feet; and
• invest in information technology, accounting and warehouse management
systems. Our business model has produced consistent and predictable store growth over the past several years, during both strong and weaker economic cycles. We plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies:
• develop our store base;
• increase our bargain offers; and
• Exploit and develop Ollie’s army.
We have a proven portable, flexible, and highly profitable store model that has produced consistent financial results and returns. Our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately$1.0 million , which includes store fixtures and equipment, store-level and distribution center inventory (net of payables) and pre-opening expenses. We target new store sales of approximately$4.0 million in their first full year of operations. While we are focused on driving comparable store sales and managing our expenses, our revenue and profitability growth will primarily come from opening new stores. The core elements of our business model are procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins. In addition, our new stores generally open strong, contributing to the growth in net sales and profitability of our business. From 2017 to 2021, net sales grew at a CAGR of 13.0%. We plan to achieve continued net sales growth, including comparable stores sales, by adding stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers. We also plan to leverage and expand our Ollie's Army database marketing strategies. In addition, we plan to continue to manage our selling, general and administrative expenses ("SG&A") by continuing to make process improvements and by maintaining our standard policy of reviewing our operating costs. 41
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Our ability to grow and our results of operations may be impacted by additional factors and uncertainties, such as consumer spending habits, which are subject to macroeconomic conditions and changes in discretionary income. Our customers' discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment. The potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers. Our key competitive advantage is our direct buying relationships with many major manufacturers, wholesalers, distributors, brokers and retailers for our brand name and closeout products and unbranded goods. We also augment our product mix with private label brands. As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal.
How we assess the performance of our businesses and our main line items
We consider a variety of financial and operational measures to assess our business performance. The main measures we use are the number of new stores, net sales, comparable store sales, gross profit and margin, general and administrative expenses, pre-opening expenses, operating profit, EBITDA and Adjusted EBITDA.
Number of new stores
The number of new stores reflects the number of stores opened during a particular reporting period. Before we open new stores, we incur pre-opening expenses described below under "Pre-Opening Expenses" and we make an initial investment in inventory. We also make initial capital investments in fixtures and equipment, which we amortize over time. We opened 46 new stores in 2021. We expect new store growth to be the primary driver of our sales growth. Our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods. Our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states. Our new stores often open with higher sales levels as a result of greater advertising and promotional spend in connection with grand opening events, but decline shortly thereafter to our new store model levels.
We recognize retail sales in our stores when merchandise is sold and the
customer takes possession of the merchandise. Also included in net sales is
revenue allocated to certain redeemed discounts earned via the Ollie's Army
loyalty program and gift card breakage. Net sales are presented net of returns
and sales tax. Net sales consist of sales from comparable stores and
non-comparable stores, described below under "Comparable Store Sales." Growth
of our net sales is primarily driven by the expansion of our store base in
existing and new markets. As we continue to grow, we believe we will have
greater access to brand name and closeout merchandise and an increased deal
selection, resulting in more potential offerings for our customers. Net sales
are impacted by product mix, merchandise mix and availability, as well as
promotional activities and the spending habits of our customers. Our broad
selection of offerings across diverse product categories supports growth in net
sales by attracting new customers, which results in higher spending levels and
frequency of shopping visits from our customers, including Ollie's Army members.
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The spending habits of our customers are subject to macroeconomic conditions and changes in discretionary income. Our customers' discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment. However, because we offer a broad selection of merchandise at extreme values, we believe we are generally less impacted than other retailers by economic cycles that correspond with declines in general consumer spending habits. We believe we also benefit from periods of increased consumer spending.
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 the previous year. Comparable store sales consist of net sales from our stores beginning on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. Comparable store sales are impacted by the same factors that impact net sales.
We define comparable stores as stores that:
• have been refurbished while remaining open;
• are closed for five days or less in a fiscal month;
• are temporarily closed and relocated to their respective catchment areas; and
• have grown, but are not significantly different in size, within their
current locations. Non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months. Stores which are closed temporarily, but for more than five days in any fiscal month, are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales. Opening new stores is the primary component of our growth strategy and as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.
Gross profit and gross margin
Gross profit is equal to our net sales less our cost of sales. Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation and amortization. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit.
In addition, our gross margin is influenced by product mix, as certain products generally offer higher gross margins, our merchandise mix and availability, and the cost of our goods, which may vary.
Our gross profit is variable in nature and generally follows changes in net
sales. We regularly analyze the components of gross profit, as well as gross
margin. Specifically, our product margin and merchandise mix is reviewed by our
merchant team and senior management, ensuring strict adherence to internal
margin goals. Our disciplined buying approach has produced consistent gross
margins and we believe helps to mitigate adverse impacts on gross profit and
results of operations.
The components of our cost of sales may not be comparable to the components of
cost of sales or similar measures of our competitors and other retailers. As a
result, our gross profit and gross margin may not be comparable to similar data
made available by our competitors and other retailers.
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Selling, general and administrative expenses
SG&A are comprised of payroll and benefits for store, field support and support center associates. SG&A also include marketing and advertising expense, occupancy costs for stores and the store support center, insurance, corporate infrastructure and other general expenses. The components of our SG&A remain relatively consistent per store and for each new store opening. Consolidated SG&A generally increase as we grow our store base and as our net sales increase. A significant portion of our expenses is primarily fixed in nature, and we expect to continue to maintain strict discipline while carefully monitoring SG&A as a percentage of net sales. We expect that our SG&A will continue to increase in future periods with future growth. The components of our SG&A may not be comparable to the components of SG&A or similar measures of our competitors and other retailers. As a result, our SG&A may not be comparable to similar data made available by our competitors and other retailers.
Depreciation and amortization
Property and equipment are stated at original cost less accumulated depreciation and amortization. Depreciation and amortization expenses are calculated over the estimated useful lives of the related assets, or in the case of leasehold improvements, the lesser of the useful lives or the remaining term of the lease. Expenditures for additions, renewals, and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed on the straight-line method for financial reporting purposes. Depreciation and amortization as it relates to our distribution centers is included within cost of sales on the consolidated statements of income.
Pre-opening expenses
Pre-opening expenses consist of expenses of opening new stores and distribution centers, as well as store closing costs. For opening new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs. Pre-opening expenses for new stores are expensed as they are incurred, which is typically within 30 to 45 days of opening a new store. For opening distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs. Store closing costs primarily consist of insurance deductibles, rent and store payroll.
Operating result
Operating income is gross profit less SG&A, depreciation and amortization and pre-opening expenses. Operating income excludes net interest expense or income and income tax expense. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA to supplementU.S. Generally Accepted Accounting Principles ("GAAP") measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate the Company's operating results. We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business. 44
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We define EBITDA as net income before net interest expense or income, depreciation and amortization expenses and income taxes. Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense and gains on insurance settlements. EBITDA and Adjusted EBITDA are non-GAAP measures and may not be comparable to similar measures reported by other companies. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA, see "Results of Operations." Results of Operations This section includes comparisons of certain 2021 financial information to the same information for 2020. Year-to-year comparisons of the 2020 financial information to the same information for fiscal 2019, the 52-week period endedFebruary 1, 2020 ("2019"), are contained in Item 7 of our Form 10-K for 2020 filed with theSEC onMarch 24, 2021 and available through theSEC's website at https://www.sec.gov/edgar/searchedgar/companysearch.html.
The following tables summarize the major components of our operating results for 2021 and 2020, both in dollars and as a percentage of our net sales.
We have prepared the consolidated statements of income for 2021 and 2020 based on our consolidated financial statements and the notes thereto. Our historical results are not necessarily indicative of results that may be expected in the future.
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2021 2020
(dollars in thousands)
Net sales $ 1,752,995 $ 1,808,821
Cost of sales 1,071,749 1,085,455
Gross profit 681,246 723,366
Selling, general and administrative expenses 447,615 418,889 Depreciation and amortization
19,364 16,705 Pre-opening expenses 9,675 10,272 Operating income 204,592 277,500 Interest expense (income), net 209 (278 ) Income before income taxes 204,383 277,778 Income tax expense 46,928 35,082 Net income$ 157,455 $ 242,696 Percentage of net sales(1): Net sales 100.0 % 100.0 % Cost of sales 61.1 60.0 Gross profit 38.9 40.0 Selling, general and administrative expenses 25.5 23.2 Depreciation and amortization expenses 1.1 0.9 Pre-opening expenses 0.6 0.6 Operating income 11.7 15.3 Interest expense (income), net 0.0 (0.0 ) Income before income taxes 11.7 15.4 Income tax expense 2.7 1.9 Net income 9.0 % 13.4 % Select operating data: Number of new stores 46 46 Number of store closings (3 ) (4 ) Number of stores re-opened - 1 Number of stores open at end of period 431 388 Average net sales per store (2)$ 4,254 $ 4,866 Comparable stores sales change (11.1 )% 15.6 % --------------------------------------------------------------------------------
(1) Components may not add to totals due to rounding.
(2) Average net sales per store represent the weighted average of the
weekly sales divided by the number of stores open at the end of each week for
the respective periods presented.
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The following table provides a reconciliation of our net income and Adjusted EBITDA for the periods presented:
2021 2020
(dollars in thousands)
Net income $ 157,455 $ 242,696
Interest expense (income), net 209 (278 )
Depreciation (1) 25,114 22,746 Income tax expense
46,928 35,082 EBITDA 229,706 300,246 Gains from insurance settlements (416 ) (247 ) Non-cash stock-based compensation expense 8,042 6,501 Adjusted EBITDA$ 237,332 $ 306,500 --------------------------------------------------------------------------------
(1) Includes depreciation charges relating to our distribution centers,
which is included within cost of sales on our consolidated statements of
income.
2021 Compared with 2020
Net Sales
Net sales decreased to $1.753 billion in 2021 from $1.809 billion in 2020, a
decrease of $55.8 million , or 3.1%. The decrease was the result of a comparable
store sales decrease of $189.3 million , partially offset by a non-comparable
store sales increase of $133.5 million . The increase in non-comparable store
sales was driven by sales from new stores that have not been open for a full 15
months during 2021.
Comparable store sales decreased 11.1% in 2021 compared with a record increase
of 15.6% in 2020. The decrease in comparable store sales consisted of a
decrease in the number of transactions partially offset by an increase in
average transaction size. Sales in our health and beauty aids, housewares and
bed and bath departments significantly decreased in 2021 due to a prior-year
surge of COVID-related personal protective equipment, cleaning supplies and
home-related sales.
In 2020, we benefited from increased consumer spending associated with federal
economic stimulus funds for the COVID-19 pandemic and having our stores open
while other competitors were closed for a portion of the year.
Gross profit and gross margin
Gross profit decreased to$681.2 million in 2021 from$723.4 million in 2020, a decrease of$42.1 million , or 5.8%. Gross margin decreased 110 basis points to 38.9% in 2021 from 40.0% in 2020. The decrease in gross margin in 2021 is due to increased supply chain costs, primarily the result of higher import, trucking and labor costs, partially offset by improvement in the merchandise margin.
Selling, general and administrative expenses
SG&A increased to$447.6 million in 2021 from$418.9 million in 2020, an increase of$28.7 million , or 6.9%. The dollar increase in SG&A was primarily driven by higher selling expenses associated with a net increase of 43 stores, partially offset by tight expense controls throughout the organization. As a percentage of net sales, SG&A increased 230 basis points to 25.5% in 2021 from 23.2% in 2020. The increase was primarily due to significant deleveraging as a result of the decrease in sales in 2021. 47
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Included in SG&A in 2021 and 2020 is$0.4 million and$0.2 million , respectively, of income related to gains from insurance settlements. Excluding the gains in both years, SG&A increased 240 basis points as a percentage of net sales in 2021.
Depreciation and amortization
Depreciation and amortization expenses increased to$19.4 million in 2021 from$16.7 million in 2020, an increase of$2.7 million , or 15.9%, the result of the increased asset base due to new store growth.
Pre-opening expenses
Pre-opening expenses decreased slightly to$9.7 million in 2021 from$10.3 million in 2020, a decrease of$0.6 million , or 5.8%. The decrease is primarily due to the timing of store openings as the new store activity was very similar year to year. We opened 46 new stores and closed three stores in 2021 compared with 46 new store openings and net three store closures in 2020. As a percentage of net sales, pre-opening expenses were 0.6% in both 2021 and 2020.
Interest expense (income), net
Net interest expense was
Income Tax Expense Income tax expense increased to$46.9 million in 2021 from$35.1 million in 2020, an increase of$11.8 million , or 33.8%. The effective tax rates for 2021 and 2020 were 23.0% and 12.6%, respectively. The variance in the effective tax rates between the periods was primarily due to a significant current year decrease in excess tax benefits related to stock-based compensation. The prior year effective tax rate was impacted by tax benefits due to the exercise of stock options by the estate of our former chief executive officer. Discrete tax benefits totaled$4.2 million and$34.5 million in 2021 and 2020, respectively. For further information, see Note 7 under "Notes to Consolidated Financial Statements."
Net revenue
As a result of the above, net profit decreased for
Adjusted EBITDA
Adjusted EBITDA decreased to
Cash and capital resources
Overview
Our primary sources of liquidity are net cash flows provided by operating activities and available borrowings under our$100.0 million Revolving Credit Facility. As ofJanuary 29, 2022 , we had$247.0 million of cash and cash equivalents on hand and$84.7 million available to borrow under our Revolving Credit Facility.
Our primary cash requirements are for capital expenditures and working capital. In addition, we have made and may continue to make discretionary share buybacks (see “Share Buyback Programme” below for more information).
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Our capital expenditures are primarily related to new store openings, store resets, which consist of improvements to stores as they are needed, expenditures related to our distribution centers, and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems. We spent$35.0 million and$30.5 million for capital expenditures in 2021 and 2020, respectively. We opened 46 new stores, including two relocated stores, and temporarily closed one additional store due to weather-related events during 2021. Capital expenditures in 2022 are planned to be approximately$53 million to$58 million , with expenditures for the opening of 46 to 48 new stores, including two relocations, store-level initiatives at our existing stores as well as general corporate capital expenditures, including information technology. We will also be investing in our distribution center network, including material handling equipment in connection with a 200,000 square foot expansion of ourYork, PA distribution center, giving us the capacity for an additional 50 stores upon completion. We have experienced, and may continue to experience, delays in construction and permitting of new stores and other projects due to COVID-19. Our primary working capital requirements are for the purchase of merchandise inventories, payroll, store rent associated with our operating leases, other store operating costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, rising in our third fiscal quarter as we increase quantities of inventory in anticipation of our peak holiday sales season in our fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.
Historically, we have funded our capital expenditures and working capital requirements during the year with cash flow from operations.
We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe our cash and cash equivalents position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements, debt service, and other financing activities over the next 12 months. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when needed or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.
We are not currently receiving, and do not intend to apply for, loans under federal or state programs implemented as a result of the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act.
Share buyback program
OnMarch 26, 2019 , the Board of Directors of the Company authorized the repurchase of up to$100.0 million of shares of our common stock. This initial tranche expired onMarch 26, 2021 . The Board authorized the repurchase of another$100.0 million of our common stock onDecember 15, 2020 and a$100.0 million increase onMarch 16, 2021 , resulting in$200.0 million approved for share repurchases throughJanuary 13, 2023 . OnNovember 30, 2021 , the Board authorized an additional$200.0 million to repurchase stock pursuant to the Company's share repurchase program, expiring onDecember 15, 2023 . The shares to be repurchased may be purchased from time to time in open market conditions (including blocks), privately negotiated transactions, accelerated share repurchase programs or other derivative transactions, issuer self-tender offers or any combination of the foregoing. The timing of repurchases and the actual amount purchased will depend on a variety of factors, including the market price of our shares, general market, economic and business conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow us to purchase our shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from cash on hand or through the utilization of our Revolving Credit Facility. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by our Board of Directors at any time. 49
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During 2021, we repurchased 3,113,981 shares of our common stock for$220.0 million , inclusive of transaction costs, pursuant to our share repurchase program, and during 2020, we repurchased 3,885 shares of our common stock for$0.3 million , inclusive of transaction costs. These expenditures were funded by cash generated from operations. As ofJanuary 29, 2022 , we had approximately$180.0 million remaining under our share repurchase authorization. There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases.
Cash flow summary
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
2021
2020
(in thousands) Net cash provided by operating activities$ 45,033 $
361,254
Net cash used in investing activities (31,830 ) (30,448 ) Net cash (used in) provided by financing activities (213,352 ) 26,370 Net (decrease) increase in cash and cash equivalents$ (200,149 ) $ 357,176
Cash flow from operating activities
Net cash provided by operating activities in 2021 totaled$45.0 million compared with$361.3 million in 2020. The decrease in net cash provided by operating activities in 2021 was primarily due to increased working capital needs (largely due to a substantial increase in capitalized costs in inventory, as well as the timing of inventory receipts and payments) and a decrease from the prior year's record net income.
Cash used in investing activities
Net cash used in investing activities totaled$31.8 million in 2021 compared with$30.4 million in 2020. The comparative increase in cash used in investing activities is primarily due to an increase in cash used for capital expenditures, partially offset by the proceeds from the sale of property and equipment in the current year.
Cash (used in) provided by fundraising activities
Net cash used in financing activities totaled$213.4 million in 2021 as compared with net cash provided by financing activities of$26.4 million in 2020. The net cash outflow in 2021 is due to$220.0 million paid for the repurchase of the Company's shares, partially offset by proceeds from stock option exercises.
Credit facilities
OnMay 22, 2019 , we completed a transaction in which we refinanced our Credit Facility. The Credit Facility provides for a five-year$100.0 million Revolving Credit Facility, which includes a$45.0 million sub-facility for letters of credit and a$25.0 million sub-facility for swingline loans. The loans under the Revolving Credit Facility mature onMay 22, 2024 . In addition, we may at any time add term loan facilities or additional revolving commitments up to$150.0 million pursuant to terms and conditions set out in the Credit Facility. 50
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The interest rates for the Credit Facility are calculated as follows: for Base Rate Loans, the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or the Eurodollar Rate plus 1.0%, plus the Applicable Margin, or, for Eurodollar Loans, the Eurodollar Rate plus the Applicable Margin. The Applicable Margin will vary from 0.00% to 0.50% for a Base Rate Loan and 1.00% to 1.50% for a Eurodollar Loan, based on availability under the Credit Facility. The Eurodollar Rate is subject to a 0% floor. Under the terms of the Revolving Credit Facility, as ofJanuary 29, 2022 , we could borrow up to 90.0% of the most recent appraised value (valued at cost, discounted for the current net orderly liquidation value) of our eligible inventory, as defined, up to$100.0 million . As ofJanuary 29, 2022 , we had no outstanding borrowings under the Revolving Credit Facility, with$84.7 million of borrowing availability, outstanding letters of credit commitments of$15.1 million and$0.2 million of rent reserves. The Revolving Credit Facility also contains a variable unused line fee ranging from 0.125% to 0.250% per annum. We incurred unused line fees of$0.1 million in each of 2021 and 2020. The Credit Facility is collateralized by the Company's assets and equity and contains a financial covenant, as well as certain business covenants, including restrictions on dividend payments, which we must comply with during the term of the agreement. The financial covenant is a consolidated fixed charge coverage ratio test of at least 1.0 to 1.0 applicable during a covenant period, based on reference to availability. We were in compliance with all terms of the Credit Facility during 2021. The provisions of the Credit Facility restrict all of the net assets of the Company's consolidated subsidiaries, which constitutes all of the net assets on our consolidated balance sheet as ofJanuary 29, 2022 from being used to pay any dividends or make other restricted payments to the Company without prior written consent from the financial institutions that are a party to the Credit Facility, subject to material exceptions including proforma compliance with the applicable conditions described in the Credit Facility.
Contractual obligations
We enter into long-term contractual obligations and commitments in the normal
course of business, primarily operating leases. The following table summarizes
our material cash requirements over the next several periods from known
contractual obligations, including contractual lease obligations:
Less than 1 1-3 Years 3-5 Years Thereafter Total
year
(in thousands)
Operating leases (1) $ 81,360 $ 170,593 $ 111,660 $ 116,040 $ 479,653
Finance leases 607 525 - - 1,132
Purchase obligations (2) 12,300 - - - 12,300
Total $ 94,267 $ 171,118 $ 111,660 $ 116,040 $ 493,085
(1) Operating lease payments excluding
rents from leases signed but not yet started.
(2) Purchase obligations represent
agreement for the expansion of our
onMarch 7, 2022 ). We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 51
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Seasonality
Our business is seasonal in nature and demand is generally the highest in our fourth fiscal quarter due to the holiday sales season. To prepare for the holiday sales season, we must order and keep in stock more merchandise than we carry during other times of the year and generally engage in additional marketing efforts. We expect inventory levels, along with accounts payable and accrued expenses, to reach their highest levels in our third and fourth fiscal quarters in anticipation of increased net sales during the holiday sales season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year. Because we offer a broad selection of merchandise at extreme values, we believe we are generally less impacted than other retailers by economic cycles which correspond with declines in general consumer spending habits and we believe we still benefit from periods of increased consumer spending.
Critical accounting estimates
Our consolidated financial statements have been prepared in accordance with GAAP. A summary of our significant accounting policies can be found in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. These judgments and estimates are based on historical and other factors believed to be reasonable under the circumstances. We have identified the policies below as critical to our business operations and understanding of our results of operations.
Inventories
Inventories are stated at the lower of cost or market determined using the retail inventory method on a first-in, first-out basis. The cost of inventories includes the merchandise cost, transportation costs, and certain distribution and storage costs. Such costs are thereafter expensed as cost of sales upon the sale of the merchandise. Under the retail inventory method, which is widely used in the retail industry, inventory is segregated into departments of merchandise having similar characteristics. The valuation of inventories and the resulting gross profit is derived by applying a calculated cost-to-retail ratio to the retail value of inventories for each department. Inherent in the retail inventory method are certain management judgments and estimates including, among others, merchandise markups, the amount and timing of permanent markdowns, and shrinkage, which may significantly impact both the ending inventory valuation and gross profit. Factors considered in the determination of permanent markdowns include uncertainties related to inventory obsolescence, excess inventories, current and anticipated demand, age of the merchandise and customer preferences. A significant increase in the demand for merchandise could result in a short-term increase in inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand.
Yes
our inventory is determined to be overvalued in the future, we would be required to recognize such costs in cost of sales and reduce operating income at the time of such determination. Therefore, although every effort is made to ensure the accuracy of forecasts of merchandise demand, any significant unanticipated changes in demand or in economic conditions within our markets could have a significant impact on the value of our inventory and reported operating results. Similarly, if higher than anticipated levels of shrinkage were to occur, it could have a material effect on our results of operations. We have not made any material changes in the methodology used to recognize permanent markdowns or inventory shrinkage in the financial periods presented nor do we anticipate material changes in assumptions we use for permanent markdowns or shrinkage. As previously stated, however, if our actual experience does not accurately reflect our assumptions and forecasts, we may be exposed to losses or gains that could be material. We believe a 10% change in our assumptions as ofJanuary 29, 2022 would have impacted net income by approximately$0.7 million in 2021. 52
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We amortize intangible assets over their useful lives unless we determine such lives to be indefinite.Goodwill and intangible assets having indefinite useful lives are not amortized to earnings, but instead are subject to annual impairment testing or more frequently if events or circumstances indicate that the value of goodwill or intangible assets having indefinite useful lives might be impaired.Goodwill and intangible assets having indefinite useful lives are tested for impairment annually in the fiscal month of October. We have the option to evaluate qualitative factors to determine if it is more likely than not that the carrying amount of our sole reporting unit or our nonamortizing intangible assets (consisting of a tradename) exceed their implied respective fair value and whether it is necessary to perform a quantitative analysis to determine impairment. As part of this qualitative assessment, we weigh the relative impact of factors that are specific to our sole reporting unit or our nonamortizing intangible assets as well as industry, regulatory and macroeconomic factors that could affect the inputs used to determine the fair value of the assets. If management determines a quantitative goodwill impairment test is required, or it elects to perform a quantitative test, the test is performed by determining the fair value of our sole reporting unit. Fair value is determined based on our public market capitalization. The carrying value of goodwill is considered impaired when the reporting unit's fair value is less than its carrying value and the Company would record an impairment loss equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit. If management determines a quantitative analysis of intangible assets having indefinite useful lives is required, the test is performed using the discounted cash flow method based on management's projection of future revenues and an estimated royalty rate to determine the fair value of the asset, specifically, our tradename. An impairment loss is recognized for any excess of the carrying amount of the asset over the implied fair value of that asset. Our impairment calculations contain uncertainties as they require management to make assumptions and apply judgment to qualitative factors as well as estimate future cash flows by forecasting financial performance. Our policy is to conduct impairment testing based on our most current business plans, which reflect anticipated changes in the economy and the retail industry. Should significant changes in our overall business strategy, future results or economic events cause us to adjust our projected cash flows, future estimates of fair value may not support the carrying amount of these assets. If actual results prove inconsistent with our assumptions and judgments, we could be exposed to an impairment charge.
For 2021 and 2020, we performed an impairment test of our goodwill and determined that no goodwill impairment existed. Similarly, for 2021 and 2020, we performed an impairment test of our trade name and determined that no asset impairment existed.
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