UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OctoberApril 29, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-08897
BIG LOTS, INC.
(Exact name of registrant as specified in its charter)
Ohio 06-1119097
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
4900 E. Dublin-Granville Road, Columbus, Ohio 43081
(Address of Principal Executive Offices) (Zip Code)
(614) 278-6800
(Registrant’sRegistrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common shares | BIG | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerþ | ☐ | Accelerated filer | o☑ | Non-accelerated filer o☐ | Smaller reporting companyo | ☐ | Emerging growth company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ Noþ
The number of the registrant’s common shares, $0.01 par value, outstanding as of DecemberJune 2, 2022,2023, was 28,958,865.29,177,478.
BIG LOTS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBERAPRIL 29, 20222023
TABLE OF CONTENTS
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Item 1. | | |
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a) | | |
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b) | | |
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c) | | |
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d) | | |
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e) | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Part I. Financial Information
Item 1. Financial Statements
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive IncomeLoss (Unaudited) (In thousands, except per share amounts) |
| | | Thirteen Weeks Ended | | Thirty-nine Weeks Ended | | Thirteen Weeks Ended |
| | October 29, 2022 | October 30, 2021 | | October 29, 2022 | October 30, 2021 | | April 29, 2023 | April 30, 2022 |
Net sales | Net sales | $ | 1,204,281 | | $ | 1,335,656 | | | $ | 3,925,216 | | $ | 4,418,582 | | Net sales | $ | 1,123,577 | | $ | 1,374,714 | |
Cost of sales (exclusive of depreciation expense shown separately below) | Cost of sales (exclusive of depreciation expense shown separately below) | 794,821 | | 816,475 | | | 2,572,614 | | 2,667,657 | | Cost of sales (exclusive of depreciation expense shown separately below) | 731,108 | | 870,120 | |
Gross margin | Gross margin | 409,460 | | 519,181 | | | 1,352,602 | | 1,750,925 | | Gross margin | 392,469 | | 504,594 | |
Selling and administrative expenses | Selling and administrative expenses | 503,016 | | 487,378 | | | 1,494,239 | | 1,473,454 | | Selling and administrative expenses | 617,066 | | 480,779 | |
Depreciation expense | Depreciation expense | 37,255 | | 35,930 | | | 111,808 | | 105,196 | | Depreciation expense | 36,582 | | 37,356 | |
Operating (loss) profit | (130,811) | | (4,127) | | | (253,445) | | 172,275 | | |
Operating loss | | Operating loss | (261,179) | | (13,541) | |
Interest expense | Interest expense | (6,256) | | (2,284) | | | (12,910) | | (7,148) | | Interest expense | (9,149) | | (2,750) | |
Other income (expense) | Other income (expense) | 62 | | 285 | | | 1,359 | | 1,112 | | Other income (expense) | 5 | | 1,040 | |
(Loss) income before income taxes | (137,005) | | (6,126) | | | (264,996) | | 166,239 | | |
Income tax (benefit) expense | (33,992) | | (1,796) | | | (66,751) | | 38,299 | | |
Net (loss) income and comprehensive (loss) income | $ | (103,013) | | $ | (4,330) | | | $ | (198,245) | | $ | 127,940 | | |
Loss before income taxes | | Loss before income taxes | (270,323) | | (15,251) | |
Income tax benefit | | Income tax benefit | (64,250) | | (4,169) | |
Net loss and comprehensive loss | | Net loss and comprehensive loss | $ | (206,073) | | $ | (11,082) | |
| Earnings (loss) per common share | Earnings (loss) per common share | | | | Earnings (loss) per common share | |
Basic | Basic | $ | (3.56) | | $ | (0.14) | | | $ | (6.88) | | $ | 3.80 | | Basic | $ | (7.10) | | $ | (0.39) | |
Diluted | Diluted | $ | (3.56) | | $ | (0.14) | | | $ | (6.88) | | $ | 3.73 | | Diluted | $ | (7.10) | | $ | (0.39) | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | | | | Weighted-average common shares outstanding | |
Basic | Basic | 28,943 | | 31,679 | | | 28,828 | | 33,677 | | Basic | 29,018 | | 28,621 | |
Dilutive effect of share-based awards | Dilutive effect of share-based awards | — | | — | | | — | | 617 | | Dilutive effect of share-based awards | — | | — | |
Diluted | Diluted | 28,943 | | 31,679 | | | 28,828 | | 34,294 | | Diluted | 29,018 | | 28,621 | |
| Cash dividends declared per common share | Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | | | $ | 0.90 | | $ | 0.90 | | Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands, except par value) |
| | | October 29, 2022 | | January 29, 2022 | | April 29, 2023 | | January 28, 2023 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 62,138 | | | $ | 53,722 | | Cash and cash equivalents | $ | 51,320 | | | $ | 44,730 | |
Inventories | Inventories | 1,345,280 | | | 1,237,797 | | Inventories | 1,087,656 | | | 1,147,949 | |
Other current assets | Other current assets | 122,581 | | | 119,449 | | Other current assets | 88,887 | | | 92,635 | |
Total current assets | Total current assets | 1,529,999 | | | 1,410,968 | | Total current assets | 1,227,863 | | | 1,285,314 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 1,693,138 | | | 1,731,995 | | Operating lease right-of-use assets | 1,522,917 | | | 1,619,756 | |
Property and equipment - net | Property and equipment - net | 718,642 | | | 735,826 | | Property and equipment - net | 745,232 | | | 691,111 | |
Deferred income taxes | Deferred income taxes | 53,962 | | | 10,973 | | Deferred income taxes | 121,926 | | | 56,301 | |
Other assets | Other assets | 39,671 | | | 37,491 | | Other assets | 39,797 | | | 38,449 | |
Total assets | Total assets | $ | 4,035,412 | | | $ | 3,927,253 | | Total assets | $ | 3,657,735 | | | $ | 3,690,931 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
Accounts payable | Accounts payable | $ | 481,779 | | | $ | 587,496 | | Accounts payable | $ | 316,900 | | | $ | 421,680 | |
Current operating lease liabilities | Current operating lease liabilities | 245,768 | | | 242,275 | | Current operating lease liabilities | 250,204 | | | 252,320 | |
Property, payroll, and other taxes | Property, payroll, and other taxes | 101,597 | | | 90,728 | | Property, payroll, and other taxes | 72,805 | | | 71,274 | |
Accrued operating expenses | Accrued operating expenses | 125,518 | | | 120,684 | | Accrued operating expenses | 133,750 | | | 111,752 | |
Insurance reserves | Insurance reserves | 39,335 | | | 36,748 | | Insurance reserves | 35,321 | | | 35,871 | |
Accrued salaries and wages | Accrued salaries and wages | 27,700 | | | 45,762 | | Accrued salaries and wages | 26,100 | | | 26,112 | |
Income taxes payable | Income taxes payable | 1,225 | | | 894 | | Income taxes payable | 918 | | | 845 | |
Total current liabilities | Total current liabilities | 1,022,922 | | | 1,124,587 | | Total current liabilities | 835,998 | | | 919,854 | |
Long-term debt | Long-term debt | 459,900 | | | 3,500 | | Long-term debt | 501,600 | | | 301,400 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | 1,575,678 | | | 1,569,713 | | Noncurrent operating lease liabilities | 1,483,394 | | | 1,514,009 | |
Deferred income taxes | — | | | 21,413 | | |
Insurance reserves | Insurance reserves | 60,269 | | | 62,591 | | Insurance reserves | 58,224 | | | 58,613 | |
Unrecognized tax benefits | Unrecognized tax benefits | 8,170 | | | 10,557 | | Unrecognized tax benefits | 8,372 | | | 8,091 | |
Other liabilities | Other liabilities | 126,243 | | | 127,529 | | Other liabilities | 218,788 | | | 125,057 | |
Shareholders’ equity: | Shareholders’ equity: | | | | Shareholders’ equity: | | | |
Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | — | | | — | | Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | — | | | — | |
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 28,949 shares and 28,476 shares, respectively | 1,175 | | | 1,175 | | |
Treasury shares - 88,546 shares and 89,019 shares, respectively, at cost | (3,105,617) | | | (3,121,602) | | |
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 29,139 shares and 28,959, respectively | | Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 29,139 shares and 28,959, respectively | 1,175 | | | 1,175 | |
Treasury shares - 88,356 shares and 88,536 shares, respectively, at cost | | Treasury shares - 88,356 shares and 88,536 shares, respectively, at cost | (3,095,791) | | | (3,105,175) | |
Additional paid-in capital | Additional paid-in capital | 624,894 | | | 640,522 | | Additional paid-in capital | 620,971 | | | 627,714 | |
Retained earnings | Retained earnings | 3,261,778 | | | 3,487,268 | | Retained earnings | 3,025,004 | | | 3,240,193 | |
Total shareholders’ equity | Total shareholders’ equity | 782,230 | | | 1,007,363 | | Total shareholders’ equity | 551,359 | | | 763,907 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 4,035,412 | | | $ | 3,927,253 | | Total liabilities and shareholders’ equity | $ | 3,657,735 | | | $ | 3,690,931 | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity (Unaudited) (In thousands) |
| | | Common | Treasury | Additional Paid-In Capital | Retained Earnings | | | Common | Treasury | Additional Paid-In Capital | Retained Earnings | |
| | Shares | Amount | Shares | Amount | Total | | Shares | Amount | Shares | Amount | Total |
Thirteen Weeks Ended October 30, 2021 | |
Balance - July 31, 2021 | 32,550 | | $ | 1,175 | | 84,945 | | $ | (2,934,912) | | $ | 625,651 | | $ | 3,461,455 | | $ | 1,153,369 | | |
Thirteen Weeks Ended April 30, 2022 | | Thirteen Weeks Ended April 30, 2022 |
Balance - January 29, 2022 | | Balance - January 29, 2022 | 28,476 | | $ | 1,175 | | 89,019 | | $ | (3,121,602) | | $ | 640,522 | | $ | 3,487,268 | | $ | 1,007,363 | |
Comprehensive loss | Comprehensive loss | — | | — | | — | | — | | — | | (4,330) | | (4,330) | | Comprehensive loss | — | | — | | — | | — | | — | | (11,082) | | (11,082) | |
Dividends declared ($0.30 per share) | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (10,209) | | (10,209) | | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (8,981) | | (8,981) | |
Purchases of common shares | Purchases of common shares | (2,059) | | — | | 2,059 | | (97,690) | | — | | — | | (97,690) | | Purchases of common shares | (280) | | — | | 281 | | (10,639) | | — | | — | | (10,639) | |
Restricted shares vested | Restricted shares vested | 43 | | — | | (43) | | 1,518 | | (1,518) | | — | | — | | Restricted shares vested | 356 | | — | | (356) | | 12,483 | | (12,483) | | — | | — | |
Performance shares vested | Performance shares vested | — | | — | | — | | — | | — | | — | | — | | Performance shares vested | 341 | | — | | (342) | | 11,952 | | (11,952) | | — | | — | |
Other | 1 | | — | | (1) | | — | | (1) | | — | | (1) | | |
Share-based employee compensation expense | Share-based employee compensation expense | — | | — | | — | | — | | 8,701 | | — | | 8,701 | | Share-based employee compensation expense | — | | — | | — | | — | | 3,667 | | — | | 3,667 | |
Balance - October 30, 2021 | 30,535 | | $ | 1,175 | | 86,960 | | $ | (3,031,084) | | $ | 632,833 | | $ | 3,446,916 | | $ | 1,049,840 | | |
| Thirty-nine Weeks Ended October 30, 2021 | |
Balance - January 30, 2021 | 35,535 | | $ | 1,175 | | 81,960 | | $ | (2,709,259) | | $ | 634,813 | | $ | 3,351,002 | | $ | 1,277,731 | | |
Comprehensive income | — | | — | | — | | — | | — | | 127,940 | | 127,940 | | |
Dividends declared ($0.90 per share) | — | | — | | — | | — | | — | | (32,026) | | (32,026) | | |
Purchases of common shares | (6,008) | | — | | 6,008 | | (355,508) | | — | | — | | (355,508) | | |
Restricted shares vested | 471 | | — | | (471) | | 15,778 | | (15,778) | | — | | — | | |
Performance shares vested | 536 | | — | | (536) | | 17,879 | | (17,879) | | — | | — | | |
Other | 1 | | — | | (1) | | 26 | | 32 | | — | | 58 | | |
Share-based employee compensation expense | — | | — | | — | | — | | 31,645 | | — | | 31,645 | | |
Balance - October 30, 2021 | 30,535 | | $ | 1,175 | | 86,960 | | $ | (3,031,084) | | $ | 632,833 | | $ | 3,446,916 | | $ | 1,049,840 | | |
| Thirteen Weeks Ended October 29, 2022 | |
Balance - July 30, 2022 | 28,932 | | $ | 1,175 | | 88,563 | | $ | (3,106,360) | | $ | 621,925 | | $ | 3,373,987 | | $ | 890,727 | | |
Balance - April 30, 2022 | | Balance - April 30, 2022 | 28,893 | | $ | 1,175 | | 88,602 | | $ | (3,107,806) | | $ | 619,754 | | $ | 3,467,205 | | $ | 980,328 | |
Thirteen Weeks Ended April 29, 2023 | | Thirteen Weeks Ended April 29, 2023 |
Balance - January 28, 2023 | | Balance - January 28, 2023 | 28,959 | | 1,175 | | 88,536 | | (3,105,175) | | 627,714 | | 3,240,193 | | 763,907 | |
Comprehensive loss | Comprehensive loss | — | | — | | — | | — | | — | | (103,013) | | (103,013) | | Comprehensive loss | — | | — | | — | | — | | — | | (206,073) | | (206,073) | |
Dividends declared ($0.30 per share) | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (9,196) | | (9,196) | | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (9,116) | | (9,116) | |
Purchases of common shares | Purchases of common shares | (9) | | — | | 9 | | (190) | | — | | — | | (190) | | Purchases of common shares | (128) | | — | | 128 | | (1,417) | | — | | — | | (1,417) | |
Restricted shares vested | Restricted shares vested | 20 | | — | | (20) | | 718 | | (718) | | — | | — | | Restricted shares vested | 308 | | — | | (308) | | 10,801 | | (10,801) | | — | | — | |
Performance shares vested | Performance shares vested | 6 | | — | | (6) | | 215 | | (215) | | — | | — | | Performance shares vested | — | | — | | — | | — | | — | | — | | — | |
| Share-based employee compensation expense | Share-based employee compensation expense | — | | — | | — | | — | | 3,902 | | — | | 3,902 | | Share-based employee compensation expense | — | | — | | — | | — | | 4,058 | | — | | 4,058 | |
Balance - October 29, 2022 | 28,949 | | $ | 1,175 | | 88,546 | | $ | (3,105,617) | | $ | 624,894 | | $ | 3,261,778 | | $ | 782,230 | | |
| Thirty-nine Weeks Ended October 29, 2022 | |
Balance - January 29, 2022 | 28,476 | | $ | 1,175 | | 89,019 | | $ | (3,121,602) | | $ | 640,522 | | $ | 3,487,268 | | $ | 1,007,363 | | |
Comprehensive loss | — | | — | | — | | — | | — | | (198,245) | | (198,245) | | |
Dividends declared ($0.90 per share) | — | | — | | — | | — | | — | | (27,245) | | (27,245) | | |
Purchases of common shares | (298) | | — | | 298 | | (11,070) | | — | | — | | (11,070) | | |
Restricted shares vested | 424 | | — | | (424) | | 14,888 | | (14,888) | | — | | — | | |
Performance shares vested | 347 | | — | | (347) | | 12,167 | | (12,167) | | — | | — | | |
| Share-based employee compensation expense | — | | — | | — | | — | | 11,427 | | — | | 11,427 | | |
Balance - October 29, 2022 | 28,949 | | $ | 1,175 | | 88,546 | | $ | (3,105,617) | | $ | 624,894 | | $ | 3,261,778 | | $ | 782,230 | | |
Balance - April 29, 2023 | | Balance - April 29, 2023 | 29,139 | | 1,175 | | 88,356 | | (3,095,791) | | 620,971 | | 3,025,004 | | 551,359 | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) |
| | | Thirty-nine Weeks Ended | | | Thirteen Weeks Ended | |
| | October 29, 2022 | October 30, 2021 | | | April 29, 2023 | April 30, 2022 | |
Operating activities: | Operating activities: | | | Operating activities: | | |
Net (loss) income | $ | (198,245) | | $ | 127,940 | | | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | |
Net loss | | Net loss | $ | (206,073) | | $ | (11,082) | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization expense | Depreciation and amortization expense | 112,818 | | 106,058 | | | Depreciation and amortization expense | 37,196 | | 37,631 | | |
Non-cash lease amortization expense | 205,481 | | 196,826 | | | |
Non-cash lease expense | | Non-cash lease expense | 118,921 | | 68,473 | | |
Deferred income taxes | Deferred income taxes | (64,402) | | 1,015 | | | Deferred income taxes | (65,624) | | 2,215 | | |
Non-cash impairment charge | Non-cash impairment charge | 46,051 | | 1,015 | | | Non-cash impairment charge | 84,449 | | 222 | | |
(Gain) loss on disposition of property and equipment | (1,492) | | 1,104 | | | |
Gain on disposition of property and equipment | | Gain on disposition of property and equipment | (3,419) | | (1,568) | | |
Non-cash share-based compensation expense | Non-cash share-based compensation expense | 11,427 | | 31,645 | | | Non-cash share-based compensation expense | 4,058 | | 3,667 | | |
Unrealized loss (gain) on fuel derivatives | 285 | | (1,582) | | | |
Loss on extinguishment of debt | — | | 535 | | | |
Unrealized gain on fuel derivatives | | Unrealized gain on fuel derivatives | — | | (699) | | |
Change in assets and liabilities: | Change in assets and liabilities: | | | Change in assets and liabilities: | | |
Inventories | Inventories | (107,483) | | (336,931) | | | Inventories | 60,294 | | (100,940) | | |
Accounts payable | Accounts payable | (105,717) | | 206,903 | | | Accounts payable | (104,780) | | (98,972) | | |
Operating lease liabilities | Operating lease liabilities | (191,211) | | (170,950) | | | Operating lease liabilities | (117,874) | | (66,127) | | |
Current income taxes | Current income taxes | 17,516 | | (72,497) | | | Current income taxes | 7,050 | | (8,856) | | |
Other current assets | Other current assets | 5,853 | | (2,867) | | | Other current assets | (3,985) | | 3,908 | | |
Other current liabilities | Other current liabilities | (5,530) | | (14,812) | | | Other current liabilities | 23,262 | | (20,432) | | |
Other assets | Other assets | 857 | | 1,545 | | | Other assets | (1,583) | | 107 | | |
Other liabilities | Other liabilities | (5,247) | | 759 | | | Other liabilities | (830) | | (3,780) | | |
Net cash (used in) provided by operating activities | (279,039) | | 75,706 | | | |
Net cash used in operating activities | | Net cash used in operating activities | (168,938) | | (196,233) | | |
Investing activities: | Investing activities: | | | Investing activities: | | |
Capital expenditures | Capital expenditures | (127,355) | | (122,696) | | | Capital expenditures | (16,861) | | (43,741) | | |
Cash proceeds from sale of property and equipment | Cash proceeds from sale of property and equipment | 2,521 | | 185 | | | Cash proceeds from sale of property and equipment | 4,386 | | 2,505 | | |
Other | Other | (17) | | (34) | | | Other | (6) | | (5) | | |
Net cash used in investing activities | Net cash used in investing activities | (124,851) | | (122,545) | | | Net cash used in investing activities | (12,481) | | (41,241) | | |
Financing activities: | Financing activities: | | | Financing activities: | | |
Net proceeds from (repayments of) long-term debt | 456,400 | | (50,264) | | | |
Net proceeds from long-term debt | | Net proceeds from long-term debt | 200,200 | | 267,300 | | |
Net repayments of sale and leaseback financing | | Net repayments of sale and leaseback financing | (743) | | — | | |
Payment of finance lease obligations | Payment of finance lease obligations | (1,383) | | (2,268) | | | Payment of finance lease obligations | (444) | | (497) | | |
Dividends paid | Dividends paid | (28,263) | | (32,554) | | | Dividends paid | (9,587) | | (10,705) | | |
Payment for treasury shares acquired | Payment for treasury shares acquired | (11,070) | | (355,508) | | | Payment for treasury shares acquired | (1,417) | | (10,639) | | |
Payment for debt issuance cost | (3,378) | | (1,147) | | | |
Payments to extinguish debt | — | | (438) | | | |
Other | — | | 58 | | | |
Net cash provided by (used in) financing activities | 412,306 | | (442,121) | | | |
Increase (decrease) in cash and cash equivalents | 8,416 | | (488,960) | | | |
Net cash provided by financing activities | | Net cash provided by financing activities | 188,009 | | 245,459 | | |
Increase in cash and cash equivalents | | Increase in cash and cash equivalents | 6,590 | | 7,985 | | |
Cash and cash equivalents: | Cash and cash equivalents: | | | Cash and cash equivalents: | | |
Beginning of period | Beginning of period | 53,722 | | 559,556 | | | Beginning of period | 44,730 | | 53,722 | | |
End of period | End of period | $ | 62,138 | | $ | 70,596 | | | End of period | $ | 51,320 | | $ | 61,707 | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
BIG LOTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) |
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All references in this report to “we,” “us,” or “our” are to Big Lots, Inc. and its subsidiaries. We are a home discount retailer in the United States (“U.S.”). At OctoberApril 29, 2022,2023, we operated 1,4571,427 stores in 48 states and an e-commerce platform. We make available, free of charge, through the “Investor Relations” section of our website (www.biglots.com) under the “SEC Filings” caption, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). The contents of our websites are not part of this report.
The accompanying consolidated financial statements and these notes have been prepared in accordance with the rules and regulations of the SEC for interim financial information. The consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly our financial condition, results of operations, and cash flows for all periods presented. The consolidated financial statements, however, do not include all information necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Interim results may not necessarily be indicative of results that may be expected for, or actually result during, any other interim period or for the year as a whole. We have historically experienced seasonal fluctuations, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter. The accompanying consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 28, 2023 (“2022 (“2021 Form 10-K”).
Fiscal Periods
Our fiscal year ends on the Saturday nearest to January 31, which results in fiscal years consisting of 52 or 53 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years. Fiscal year 2023 (“2023”) is comprised of the 53 weeks that began on January 29, 2023 and will end on February 3, 2024. Fiscal year 2022 (“2022”) iswas comprised of the 52 weeks that began on January 30, 2022 and will endended on January 28, 2023. Fiscal year 2021 (“2021”) was comprised of the 52 weeks that began on January 31, 2021 and ended on January 29, 2022. The fiscal quarters ended OctoberApril 29, 20222023 (“thirdfirst quarter of 2022”2023”) and OctoberApril 30, 20212022 (“thirdfirst quarter of 2021”2022”) were both comprised of 13 weeks. The year-to-date periods ended October 29, 2022 (“year-to-date 2022”) and October 30, 2021 (“year-to-date 2021”) were both comprised of 39 weeks.
Long-Lived Assets
As a result of the net loss andsignificant decline in net sales and an increase in operating loss during year-to-date 2022,the first quarter of 2023, we performed impairment analyses at the store level. Our long-lived assets primarily consist of property and equipment - net and operating lease right-of-use assets. If the net book value of a store’s long-lived assets is not recoverable by the expected undiscounted future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term.
During the thirdfirst quarter of 2022,2023, the Company recorded aggregate asset impairment charges of $21.7$83.8 million related to 86237 underperforming store locations, which were comprised of $16.3$62.1 million of operating lease right-of-use assets, and $5.4$22.4 million of property and equipment - net. In the year-to-date 2022, the Company recorded aggregate asset impairment chargesnet, and partially offset by a gain on extinguishment of $45.8 million related to 104 underperforminga lease liability resulting from a lease cancellation from a previous impaired store locations, which were comprised of $33.8 million of operating lease right-of-use assets and $12.0 million of property and equipment - net.$0.7 million. The impairment charges were recorded in selling and administrative expenses in our accompanying consolidated statements of operations and comprehensive income.loss.
In the thirdfirst quarter of 2022,2023, the Company entered into multiple purchase andcompleted the sale agreements to sell land and building-related assets for 25of one owned store locations and one unoccupied land parcel. The Company expects to completelocation that was held for sale at the majorityend of these sales during the fiscal quarter ended January 28, 2023 (“fourth quarter of 2022”) and the remainder in fiscal 2023, subject to customary closing conditions. Accordingly, at October 29, 2022 land and building-related assets for such 25 owned store locations and one unoccupied land parcel with an aggregate carryingnet book value of $30.6 million were classified as held for sale$0.7 million. The net cash proceeds on the consolidated balance sheets. We expect the proceeds from these asset sales to significantly exceed the carrying value. The assets held for sale of real estate were recorded within other current assets within our accompanying consolidated balance sheets.$4.4 million and resulted in a gain after related expenses of $3.8 million.
Selling and Administrative Expenses
Selling and administrative expenses include impairment charges, store expenses (such as payroll and occupancy costs) and costs related to warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance, non-income taxes, accepting credit/debit cards, impairment charges, and overhead. Our selling and administrative expense rates may not be comparable to those of other retailers that include warehousing, distribution, and outbound transportation costs to stores in cost of sales. Distribution and outbound transportation costs included in selling and administrative expenses were $81.8$140.2 million and $79.6$82.0 million for the thirdfirst quarter of 2023 and the first quarter of 2022, respectively. Included in our distribution and outbound transportation costs for the thirdfirst quarter of 2021, respectively,2023 were $8.6 million of closing costs associated with the planned closure of our forward distribution
centers (“FDCs”), which we expect to fully wind down by the end of the second quarter of 2023, and $245.8$53.6 million and $217.7 million forof expense associated with the year-to-date 2022 andexit of the year-to-date 2021, respectively.former synthetic lease on our Apple Valley, CA distribution center that was refinanced in the first quarter of 2023.
Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, digital, social media, internet and e-mail marketing and advertising, payment card-linked marketing and in-store point-of-purchase signage and presentations. Advertising expenses are included in selling and administrative expenses. Advertising expenses were $20.9$24.8 million and $18.3$21.4 million for the thirdfirst quarter of 20222023 and the thirdfirst quarter of 2021, respectively, and $64.3 million and $62.1 million for the year-to-date 2022, and the year-to-date 2021, respectively.
Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for the year-to-date 2022first quarter of 2023 and the year-to-date 2021:first quarter of 2022:
| | | Thirty-nine Weeks Ended | | Thirteen Weeks Ended |
(In thousands) | (In thousands) | October 29, 2022 | | October 30, 2021 | (In thousands) | April 29, 2023 | | April 30, 2022 |
Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | | | |
Cash paid for interest | Cash paid for interest | $ | 14,213 | | | $ | 5,167 | | Cash paid for interest | $ | 7,945 | | | $ | 3,326 | |
Cash paid for income taxes, excluding impact of refunds | Cash paid for income taxes, excluding impact of refunds | 4,283 | | | 109,787 | | Cash paid for income taxes, excluding impact of refunds | 267 | | | 2,933 | |
Gross proceeds from long-term debt | Gross proceeds from long-term debt | 1,877,700 | | | 1,800 | | Gross proceeds from long-term debt | 533,100 | | | 648,200 | |
Gross payments of long-term debt | Gross payments of long-term debt | 1,421,300 | | | 52,064 | | Gross payments of long-term debt | 332,900 | | | 380,900 | |
| Cash paid for operating lease liabilities | Cash paid for operating lease liabilities | 276,919 | | | 251,671 | | Cash paid for operating lease liabilities | 149,007 | | | 90,725 | |
Non-cash activity: | Non-cash activity: | | | | Non-cash activity: | | | |
Assets acquired under finance lease | 3,859 | | | 260 | | |
Assets acquired under finance leases | | Assets acquired under finance leases | 38 | | | 1,377 | |
Accrued property and equipment | Accrued property and equipment | 26,210 | | | 22,491 | | Accrued property and equipment | 9,919 | | | 26,073 | |
Operating lease assets obtained in exchange for operating lease liabilities | 200,669 | | | 294,327 | | |
Deemed acquisition in “failed sale-leaseback transaction” | | Deemed acquisition in “failed sale-leaseback transaction” | 100,000 | | | — | |
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | | Operating lease right-of-use assets obtained in exchange for operating lease liabilities | 85,933 | | | 65,753 | |
Reclassifications
We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
Recent Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Enhanced Disclosures about the Supplier Finance Programs. ASU 2022-04 requires buyers in supplier finance programs to disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a rollforward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. The Company adopted this ASU in fiscal year 2023, except for the disclosure of rollforward activity, which is effective on a prospective basis beginning in fiscal year 2024. See Note 9, Supplier Financingfor interim and annual reporting periods beginning after December 15, 2022,disclosure related to the Company’s supplier financing program obligations.
There are currently no additional new accounting pronouncements with early adoption permitted. The Company is currently evaluating the impacta future effective date that this standard will have on our consolidated financial statements. We do not expectare of significance, or potential significance, to early adopt this standard.
NOTE 2 – DEBT
Bank Credit Facility
On September 21, 2022, we entered into a five-year asset-based revolving credit facility (“2022 Credit Agreement”) in an aggregate committed amount of up to $900 million (the “Commitments”) that expires on September 21, 2027. In connection with our entry into the 2022 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $3.4 million, which are being amortized over the term of the 2022 Credit Agreement.
The 2022 Credit Agreement replaced the $600 million
five-year unsecured credit facility we entered into on September 22, 2021 (“2021 Credit Agreement”). The 2021 Credit Agreement was scheduled to expire on September 22, 2026, but was terminated concurrent with our entry into the 2022 Credit Agreement. We did not incur any material early termination penalties in connection with the terminationTable of the 2021 Credit Agreement.Contents
Revolving loans under the 2022 Credit Agreement are available in an aggregate amount equal to the lesser of (1) the aggregate Commitments and (2) a borrowing base consisting of eligible credit card receivables and eligible inventory (including in-transit inventory), subject to customary exceptions and reserves and a reserve for the then outstanding balance owing under the Synthetic Lease (as defined below).reserves. Under the 2022 Credit Agreement, we may obtain additional Commitments on no more than five occasions in an aggregate amount of up to $300 million, subject to agreement by the lenders to increase their respective Commitments and certain other conditions. The 2022 Credit Agreement includes a swing loan sublimit of 10% of the then applicable aggregate Commitments and a $90 million letter of credit sublimit. Loans made under the 2022 Credit Agreement may be prepaid without penalty. Borrowings under the 2022 Credit Agreement are available for general corporate purposes, working capital and to repay certain of our indebtedness. Our obligations under the 2022 Credit Agreement are secured by our working capital assets (including inventory, credit card receivables and other accounts receivable, deposit accounts, and cash), subject to customary exceptions. The pricing and certain fees under the 2022 Credit Agreement fluctuate based on our availability under the 2022 Credit Agreement. The 2022 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or one, three or six month adjusted Term SOFR. We will also pay an unused commitment fee of 0.20% per annum on the unused Commitments. The 2022 Credit Agreement contains an environmental, social and governance (“ESG”) provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the 2022 Credit Agreement.
The 2022 Credit Agreement contains customary affirmative and negative covenants (including, where applicable, restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, redeem or repurchase stock, prepay certain indebtedness, make certain loans and investments, dispose of assets, enter into restrictive agreements, engage in transactions with affiliates, modify organizational documents, incur liens and consummate mergers and other fundamental changes) and events of default. In addition, the 2022 Credit Agreement requires us to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million. A violation of these covenants could result in a default under the 2022 Credit Agreement which could permit the lenders to restrict our ability to further access the 2022 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2022 Credit Agreement.
As of OctoberApril 29, 2022,2023, we had a Borrowing Base (as defined under the 2022 Credit Agreement) of $876.5$900.0 million under the 2022 Credit Agreement. At OctoberApril 29, 2022,2023, we had $459.9$501.6 million in borrowings outstanding under the 2022 Credit Agreement and $35.3$31.7 million committed to outstanding letters of credit, leaving $381.3$366.7 million available under the 2022 Credit Agreement, subject to certainthe borrowing base limitations as furtherdiscussed above. At April 29, 2023, we had $276.7 million available under the 2022 Credit Agreement, net of the borrowing base limitations discussed above.
Synthetic Lease
Simultaneous with our entry into the 2022 Credit Agreement, we entered into an amendment (the “Synthetic Lease Amendment”) to the synthetic lease for our distribution center in Apple Valley, CA (the “Synthetic Lease”). The Synthetic Lease Amendment amended the Synthetic Lease to, among other things, (1) amend the lessor yield payable thereunder from a LIBOR-based rate to a SOFR-based rate, and to fix the SOFR margin paid on the lessor yield at 2.60%, (2) remove the financial covenants thereunder, (3) change the maturity date of the Synthetic Lease from May 30, 2024 to June 1, 2023, (4) permit the liens and indebtednesslong-term obligations under the 2022 Credit Agreement and (5) restrict our ability to amend the 2022 Credit Agreement, without the consent of all of the Synthetic Lease participants, to (a) increase the Commitments under the 2022 Credit Agreement to an amount in excess of $900 million, (b) remove or reduce the reserve for the then outstanding balance under the Synthetic Lease from the borrowing base under the 2022 Credit Agreement and (c) revise the maturity date under the 2022 Credit Agreement to an earlier date.
The fair value of our long-term debt isare estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for similar instruments. These fair value measurements are classified as Level 2 within the fair value hierarchy. Given the variable rate features and relatively short maturity of the instruments underlying our long-term debt, theThe carrying value of these instruments approximates theirour debt is a reasonable estimate for fair value.
NOTE 3 – SYNTHETIC LEASE
Synthetic Lease
On March 15, 2023, the Company, Bankers Commercial Corporation (“Lessor”), the rent assignees parties thereto (“Rent Assignees” and, together with Lessor, “Participants”), MUFG Bank, Ltd., as collateral agent for the Rent Assignees (in such capacity, “Collateral Agent”), and MUFG Bank, Ltd., as administrative agent for the Participants, entered into a Participation Agreement (the “Participation Agreement”), pursuant to which the Participants funded $100 million to Wachovia Service Corporation (“Prior Lessor”) to finance Lessor’s purchase of the land and building related to our Apple Valley, CA distribution center (“Leased Property”) from the Prior Lessor.
Also on March 15, 2023, we entered into a Lease Agreement and supplement to the Lease Agreement (collectively, the “Lease” and together with the Participation Agreement and related agreements, the “2023 Synthetic Lease”) pursuant to which the Lessor will lease the Leased Property to the Company for an initial term of 60 months. The Lease may be extended for up to an additional five years, in one-year or longer annual periods, with each renewal subject to approval by the Participants. The 2023 Synthetic Lease requires the Company to pay basic rent on the scheduled payment dates in arrears in an amount equal to (a) a per annum rate equal to Term SOFR for the applicable payment period plus a 10 basis point spread adjustment plus an applicable margin equal to 250 basis points multiplied by (b) the portion of the lease balance not constituting the investment by Lessor in the Leased Property. In addition to basic rent, the Company must pay all costs and expenses associated with the use or occupancy of the Leased Property, including without limitation, maintenance, insurance and certain indemnity payments. GAAP treatment of the synthetic lease refinancing transaction requires us to treat the assignment of the purchase option from Prior Lessor to Lessor as a deemed acquisition of the Leased Property due to the Company’s control of the Leased Property
under GAAP at the time the assigned purchase option was exercised. Accordingly, the Company applied sale and leaseback accounting to the transfer of the property from the Prior Lessor to the Lessor. The transaction met the criteria of a “failed sale-leaseback” under GAAP, which required us to record an asset for the deemed acquisition and an equivalent financing liability that represents the cost to acquire the Leased Property. The asset of $100.0 million was recorded in property and equipment – net in the consolidated balance sheets. The financing liability of $100.0 million was recorded in accrued operating expenses (current) and other liabilities (noncurrent) in the consolidated balance sheets.
Concurrently with Lessor’s purchase of the Leased Property from Prior Lessor, the participation agreement and lease agreement associated with our former synthetic lease arrangement, in each case entered into on November 30, 2017 and most recently amended on September 21, 2022 (the “Prior Synthetic Lease”), were terminated effective on March 15, 2023. In connection with the termination of the Prior Synthetic Lease, the Company paid a termination fee of approximately $53.4 million to Prior Lessor using borrowings under the 2022 Credit Agreement. As a result of the termination of the Prior Synthetic Lease, the borrowing base under the 2022 Credit Agreement is no longer subject to a reserve for the outstanding balance under the Prior Synthetic Lease.
The Company, together with all of its direct and indirect subsidiaries that serve as guarantors under the 2022 Credit Agreement guarantee the payment and performance obligations under the 2023 Synthetic Lease. The obligations under the 2023 Synthetic Lease are also secured by a pledge of the Company’s interest in the Leased Property. In addition, the Company, no less frequently than annually, will be subject to a test (the “LTV Test”) that requires the ratio of (a) the adjusted lease balance minus any Lessee Letter of Credit (as defined below) to (b) the Leased Property’s fair market value to not be greater than 60 percent. If the Company does not comply with the LTV Test, the Company must deliver or adjust a letter of credit in favor of the Collateral Agent (“Lessee Letter of Credit”) in an amount necessary to comply with the LTV Test. The 2023 Synthetic Lease also contains customary representations and warranties, covenants and events of default.
The Participation Agreement also requires us to maintain a fixed charge coverage ratio of not less than 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million, which is consistent with the terms of the 2022 Credit Agreement.
If an event of default occurs under the Lease, Lessor generally has the right to recover the adjusted lease balance and certain other costs and amounts payable under the 2023 Synthetic Lease and, following such payment, the Company would be entitled to receive ownership in the Leased Property from Lessor.
NOTE 34 – SHAREHOLDERS’ EQUITY
Earnings per Share
There were no adjustments required to be made to the weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share for all periods presented. At OctoberApril 29, 2022,2023, performance share units that vest based on relative total shareholder return (“TSR PSUs” - see Note 45 for a more detailed description of these awards), and shareholder value creation awards (“SVCA PSUs” - see Note 5 for a more detailed description of these awards) were excluded from our computation of earnings (loss) per share because the minimum applicable performance conditions had not been attained. At April 30, 2022, TSR PSUs were excluded from our computation of earnings (loss) per share because the minimum applicable performance conditions had not been attained. Antidilutive restricted stock units (“RSUs”), performance share units (“PSUs”), TSR PSUs, and TSRSVCA PSUs are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. The RSUs, PSUs, TSR PSUs, and TSRSVCA PSUs that were antidilutive, as determined under the treasury stock method, were 0.6 million and 0.20.9 million for the thirdfirst quarter of 2022 and the third quarter of 2021, respectively,2023 and 0.4 million and 0.2 million for the year-to-date 2022 and the year-to-date 2021, respectively.first quarter of 2022. Due to the net loss in both the thirdfirst quarter of 2022 and the year-to-date 2022,first quarter of 2023, any potentially dilutive shares were excluded from the denominator in computing diluted earnings (loss) per common share for the thirdfirst quarter of 20222023 and the year-to-datefirst quarter of 2022.
Share Repurchase Programs
On December 1, 2021, our Board of Directors authorized the repurchase of up to $250 million of our common shares (“2021 Repurchase Authorization”). Pursuant to the 2021 Repurchase Authorization, we may repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions our compliance with the terms of the 2022 Credit Agreement, and other factors. The 2021 Repurchase Authorization has no scheduled termination date. In the thirdfirst quarter of 2022 and in the year-to-date 2022,2023, no shares were repurchased under the 2021 Repurchase Authorization. As of OctoberApril 29, 2022,2023, we had $159.4 million available for future repurchases under the 2021 Repurchase Authorization.
Purchases of common shares reported in the consolidated statements of shareholders’ equity includeare comprised of shares acquired to satisfy income tax withholdings associated with the vesting of share-based awards.
Dividends
The CompanyWe declared and paid cash dividends per common share during the quarterly periods presentedfirst quarter of 2023 as follows:
| | | | | | | | | | | | | | | | | |
| Dividends Per Share | | Amount Declared | | Amount Paid |
2022: | | | (In thousands) | | (In thousands) |
First quarter | $ | 0.30 | | | $ | 8,981 | | | $ | 10,705 | |
Second quarter | 0.30 | | | 9,068 | | | 8,791 | |
Third quarter | 0.30 | | | 9,196 | | | 8,767 | |
Total | $ | 0.90 | | | $ | 27,245 | | | $ | 28,263 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Dividends Per Share | | Amount Declared | | Amount Paid |
2023: | | | (In thousands) | | (In thousands) |
First quarter | $ | 0.30 | | | $ | 9,116 | | | $ | 9,587 | |
Total | $ | 0.30 | | | $ | 9,116 | | | $ | 9,587 | |
| | | | | |
The amount of dividends declared may vary from the amount of dividends paid in a period due to the vesting of share-based awards. On May 23, 2023, our Board of Directors suspended the Company’s quarterly cash dividend. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with applicable laws and agreements including the 2022 Credit Agreement, and any other factors deemed relevant by our Board of Directors.
NOTE 45 – SHARE-BASED PLANS
We have issued RSUs, PSUs, SVCA PSUs, and TSR PSUs under our shareholder-approved equity compensation plans. We recognized share-based compensation expense of $3.9$4.1 million and $8.7$3.7 million in the thirdfirst quarter of 20222023 and the thirdfirst quarter of 2021, respectively, and $11.4 million and $31.6 million for the year-to-date 2022, and the year-to-date 2021, respectively.
Non-vested Restricted Stock Units
The following table summarizes the non-vested restricted stock unitsRSU activity for the year-to-date 2022:first quarter of 2023:
| | | Number of Shares | Weighted Average Grant-Date Fair Value Per Share | | Number of Shares | Weighted Average Grant-Date Fair Value Per Share |
Outstanding non-vested RSUs at January 29, 2022 | 909,287 | | $ | 33.87 | | |
Outstanding non-vested RSUs at January 28, 2023 | | Outstanding non-vested RSUs at January 28, 2023 | 875,503 | | $ | 34.75 | |
Granted | Granted | 418,247 | | $ | 38.13 | | Granted | 1,354,505 | | 13.40 | |
Vested | Vested | (355,911) | | $ | 29.29 | | Vested | (308,051) | | 29.28 | |
Forfeited | Forfeited | (23,271) | | $ | 29.59 | | Forfeited | (45,949) | | 29.99 | |
Outstanding non-vested RSUs at April 30, 2022 | 948,352 | | $ | 37.52 | | |
Granted | 83,912 | | $ | 27.34 | | |
Vested | (48,096) | | $ | 43.03 | | |
Forfeited | (83,399) | | $ | 41.98 | | |
Outstanding non-vested RSUs at July 30, 2022 | 900,769 | | $ | 35.87 | | |
Granted | 46,307 | | $ | 19.66 | | |
Vested | (20,489) | | $ | 30.40 | | |
Forfeited | (15,741) | | $ | 37.71 | | |
Outstanding non-vested RSUs at October 29, 2022 | 910,846 | | $ | 35.13 | | |
Outstanding non-vested RSUs at April 29, 2023 | | Outstanding non-vested RSUs at April 29, 2023 | 1,876,008 | | $ | 20.35 | |
The non-vested restricted stock unitsRSUs granted in the year-to-date 2022first quarter of 2023 generally vest, and are expensed, on a ratable basis over three years from the grant date of the award, as a threshold financial performance objective is expected to be achieved andif the grantee remains employed by us through the vesting dates. In the year-to-date 2022, an immaterial amount of non-vested restricted stock units wereThe RSUs granted with a minimum service requirement of one year andin 2023 have no required financial performance objectives.
Non-vested Restricted StockPerformance Share Units Granted to Non-Employee Directors
In the secondfirst quarter of 2022, 14,770 common shares underlying2023, we issued PSUs to certain members of management, which will vest if certain minimum financial performance objectives are achieved over a three-year performance period and the restricted stock units granted in 2021 tograntee remains employed by us during the non-employee directors vested onperformance period. The minimum financial performance objectives will be established for each fiscal year within the trading day immediately preceding our 2022 Annual Meeting of Shareholders (“2022 Annual Meeting”). These units were part ofthree-year performance period and are generally approved by the annual compensation of the non-employee directors of the Board. In the second quarter of 2022, the chairmanHuman Capital and Compensation Committee of our Board received anof Directors during the first quarter of the respective fiscal year. Based on the uncertain macroeconomic environment and a wide range of potential outcomes, the Committee chose to defer establishment of the financial performance objectives for 2023 to later in the fiscal year.
The 2023 PSU awards were issued with three distinct annual restricted stock unit grant havingminimum financial performance objectives. The annual 2023 minimum financial performance objective is expected to be established in July 2023. The annual minimum financial performance objectives for the fiscal years 2024 and 2025 are expected to be set at the beginning of each of the respective fiscal years. As a result of the process used to establish the minimum financial performance objectives, we may meet the requirements for establishing a grant date for the 2023 PSUs when we communicate the financial performance objectives for 2023 to the award recipients, which will then trigger the service inception date, the fair value of approximately $245,000the awards, and the remaining non-employees elected to our Board at our 2022 Annual Meeting each received an annual restricted stock unit grant having a grant date fair valueassociated expense recognition period. If we meet the applicable minimum threshold financial performance objectives in any of approximately $145,000. The 2022 restricted stock unitsthree performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the earlier of (1) thefirst trading day immediately precedingafter we file our 2023 Annual Meeting of Shareholders, or (2)Report on Form 10-K for the non-employee director’s death or disability. However, the non-employee directors will forfeit their restricted stock units if their service on the Board terminates before either vesting event occurs.
Performance Share Units
Prior to 2020, in 2021, andlast fiscal year in the year-to-dateperformance period.
In 2021 and 2022, we issued PSUs to certain members of management, which will vest if certain financial performance objectives are achieved over a three-year performance period and the grantee remains employed by us during the performance period. The financial performance objectives for each fiscal year within the three-year performance period are generally approved by the Human Capital and Compensation Committee of our Board of Directors during the first quarter of the respective fiscal year. Based on the uncertain macroeconomic environment and a wide range of potential outcomes, the Committee chose to defer establishment of the 2023 financial performance objectives to later in the fiscal year.
As a result of the process used to establish the financial performance objectives, we will only meet the requirements for establishing a grant date for PSUs issued in 2021 and 2022 when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.
The number of shares distributed upon vesting of the 2021 and 2022 PSUs depends on the average performance attained during the three-year performance period compared to the performance targets established by the Human Capital and Compensation Committee, and may result in the distribution of an amount of shares that is greater or less than the number of 2021 and 2022 PSUs granted, as defined in the award agreement.
In 2022 and the year-to-date 2022,first quarter of 2023, we also awarded TSR PSUs to certain members of management, which vest based on the achievement of total shareholder return (“TSR”) targets relative to a peer group over a three-year performance period and require the grantee to remain employed by us through the end of the performance period. If we meet the applicable performance thresholds over the three-year performance period and the grantee remains employed by us through the end of the performance period, the TSR PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period. We use a Monte Carlo simulation to estimate the fair value of the TSR PSUs on the grant date and recognize expense over the service period. The TSR PSUs have a contractual period of three years.
The number of shares distributed upon vesting of the TSR PSUs depends on the average performance attained during the three-year performance period compared to the performance targets established by the Human Capital and Compensation Committee, and may result in the distribution of an amount of shares that is greater or less than the number of TSR PSUs granted, as defined in the award agreement. As
In the first quarter 2023, we also awarded SVCA PSUs to certain members of October 29, 2022,management, which vest based on the achievement of multiple share price performance goals over a three-year contractual term and require the grantee to remain employed by us through the end of the contractual term. We use a Monte Carlo simulation to estimate the fair value of the SVCA PSUs on the grant date and recognize expense ratably over the service period. If we have granted 63,491 TSR PSU shares, whichmeet the applicable performance thresholds over the three-year performance period and the grantee remains employed by us through the end of the contractual term, the SVCA PSUs will vest at the end of the contractual term. If the share price performance goals applicable to the SVCA PSUs are not achieved prior to expiration, the unvested portion of the awards will be expensed through fiscal 2024.forfeited.
We have begun or expect to begin recognizing expense related to PSUs, TSR PSUs, and SVCA PSUs as follows:
| | | | | | | | | | | | | |
Issue Year | | Outstanding PSUs at October 29, 2022 | | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
2021 | | 143,062 | | | March 2023 | Fiscal 2023 |
2022 | | 254,003 | | | March 2024 | Fiscal 2024 |
Total | | 397,065 | | | | |
As of October 29, 2022, we had a total of 460,556 outstanding performance share units.
We recognized $0.3 million and $5.0 million of share-based compensation expense related to performance share units in the third quarter of 2022 and third quarter of 2021, respectively, and $0.7 million and $20.7 million of share-based compensation expense related to performance share units in the year-to-date 2022 and the year-to-date 2021, respectively. | | | | | | | | | | | | | | | | | |
Issue Year | PSU Category | Outstanding Units at April 29, 2023 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
2021 | PSU | 130,902 | | | July 2023 | Fiscal 2023 |
2022 | TSR PSU | 58,778 | | Fiscal 2022 | | Fiscal 2022 - 2024 |
2022 | PSU | 235,151 | | | March 2024 | Fiscal 2024 |
2023 | PSU | 508,089 | | | July 2023 | Fiscal 2023 - 2025 |
2023 | TSR PSU | 127,016 | | March 2023 | | Fiscal 2023 - 2025 |
2023 | SVCA PSU | 581,673 | | March 2023 | | Fiscal 2023 - 2025 |
Total | | 1,641,609 | | | | |
| | | | | |
During the first quarters of 2023 and 2022, we recognized $0.4 million and $0.1 million, respectively, in share-based compensation expense related to PSUs, TSR PSUs and SVCA PSUs. As of April 29, 2023, financial performance objectives have not been set for the 2021 PSUs, 2022 PSUs, and the 2023 PSUs, as a result, there were no PSUs outstanding at April 29, 2023.
The following table summarizes the activity related to TSR PSUs and TSRSVCA PSUs for the year-to-date 2022:first quarter of 2023:
| | | Number of Units | Weighted Average Grant-Date Fair Value Per Share | | Number of Units | Weighted Average Grant-Date Fair Value Per Share |
Outstanding PSUs and TSR PSUs at January 29, 2022 | 240,110 | | $ | 70.24 | | |
Outstanding TSR PSUs and SVCA PSUs at January 28, 2023 | | Outstanding TSR PSUs and SVCA PSUs at January 28, 2023 | 60,924 | | $ | 55.76 | |
Granted | Granted | 68,231 | | $ | 58.09 | | Granted | 712,293 | | 4.82 | |
Vested | Vested | (234,001) | | $ | 70.24 | | Vested | — | | — | |
Forfeited | Forfeited | — | | $ | — | | Forfeited | (5,750) | | 24.36 | |
Outstanding PSUs and TSR PSUs at April 30, 2022 | 74,340 | | $ | 59.09 | | |
Granted | 2,609 | | $ | 30.33 | | |
Vested | — | | $ | — | | |
Forfeited | (9,605) | | $ | 58.09 | | |
Outstanding PSUs and TSR PSUs at July 30, 2022 | 67,344 | | $ | 58.12 | | |
Granted | 2,494 | | $ | 30.33 | | |
Vested | (6,109) | | $ | 70.24 | | |
Forfeited | (238) | | $ | 58.09 | | |
Outstanding PSUs and TSR PSUs at October 29, 2022 | 63,491 | | $ | 55.86 | | |
Outstanding TSR PSUs and SVCA PSUs at April 29, 2023 | | Outstanding TSR PSUs and SVCA PSUs at April 29, 2023 | 767,467 | | $ | 8.90 | |
The following activity occurred under our share-based plans during the respective periods shown:
| | | Third Quarter | | Year-to-Date | | First Quarter |
(In thousands) | (In thousands) | 2022 | 2021 | | 2022 | 2021 | (In thousands) | 2023 | | 2022 |
Total fair value of restricted stock vested | Total fair value of restricted stock vested | $ | 418 | | $ | 2,141 | | | $ | 14,339 | | $ | 31,459 | | Total fair value of restricted stock vested | $ | 3,410 | | | $ | 12,631 | |
Total fair value of performance shares vested | Total fair value of performance shares vested | $ | 125 | | $ | — | | | $ | 13,877 | | $ | 37,387 | | Total fair value of performance shares vested | $ | — | | | $ | 13,753 | |
The total unearned compensation costexpense related to all share-based awards outstanding, excluding PSUs issued in 2021, 2022 and 2022,2023, at OctoberApril 29, 20222023 was approximately $23.8$35.3 million. We expect to recognize this compensation cost through October 2025March 2026 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 1.92.4 years from OctoberApril 29, 2022.2023.
NOTE 56 – INCOME TAXES
The provision for income taxes was based on a current estimate of the annual effective tax rate, adjusted to reflect the effect of discrete items.
For the year-to-date 2022,first quarter of 2023, the Company determined it could estimate the effective income tax rate with sufficient precision. Therefore,based the income tax benefit was based on the estimated annual effective tax rate, adjusted to reflect the effect of discrete items.
We have estimated the reasonably possible expected net change in unrecognized tax benefits through October 28, 2023,May 4, 2024, based on (1) expected cash and noncash settlements or payments of uncertain tax positions, and (2) lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $1.0$2.0 million. Actual results may differ materially from this estimate.
AsWe regularly evaluate the realizability of October 29, 2022, theour net deferred tax assets were $54.0 million compared tobased on both positive and negative evidence available. As of April 29, 2023, we have an established valuation allowance on certain state and local deferred tax assets. There is a reasonable possibility that further valuation allowances on our federal, state and local net deferred tax liabilities of $10.4 million as of January 29, 2022. The change was primarily driven by deferredassets may be required in future quarters. If insufficient positive evidence exists in future quarters and if financial conditions do not improve, it could be appropriate to record an increase in non-cash, discrete income tax assets recorded during year-to-date 2022 as a result ofexpense related to changes in the net operating losses generated during fiscal 2022.
valuation allowance in future quarters.
NOTE 67 – CONTINGENCIES
Legal Proceedings
We are involved in legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material effect on our financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material effect on our financial condition, results of operations, and liquidity.
NOTE 78 – BUSINESS SEGMENT DATA
We use the following seven merchandise categories, which are consistent with our internal management and reporting of merchandise net sales: Food; Consumables; Soft Home; Hard Home; Furniture; Seasonal; and Apparel, Electronics, & Other. The Food category includes our beverage & grocery; specialty foods; and pet departments. The Consumables category includes our health, beauty and cosmetics; plastics; paper; and chemical departments. The Soft Home category includes our home décor; frames;organization; fashion bedding; utility bedding; bath; window; decorative textile; and area rugs departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; home maintenance; home organization; and toys departments. The Furniture category includes our upholstery; mattress; ready-to-assemble; case goods; and case goodshome décor departments. The Seasonal category includes our lawn & garden; summer; Christmas; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the assortments for The Lot, our cross-category presentation solution, and the Queue Line, our streamlined checkout experience.experience, and our “Bargains, Treasures, and Essentials” closeout offerings.
We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
The following table presents net sales data by merchandise category:
| | | Third Quarter | | Year-to-Date | | First Quarter |
(In thousands) | (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 |
Furniture | Furniture | | $ | 303,703 | | | $ | 401,256 | | | $ | 988,307 | | | $ | 1,291,765 | | Furniture | | $ | 312,144 | | | $ | 423,259 | |
Seasonal | | Seasonal | | 177,008 | | | 234,171 | |
Food | Food | | 187,021 | | | 182,936 | | | 536,153 | | | 541,400 | | Food | | 164,820 | | | 176,620 | |
Soft Home | Soft Home | | 168,243 | | | 194,217 | | | 489,325 | | | 601,320 | | Soft Home | | 141,880 | | | 169,666 | |
Consumables | Consumables | | 156,224 | | | 163,350 | | | 462,066 | | | 485,039 | | Consumables | | 135,768 | | | 157,234 | |
Seasonal | | 136,970 | | | 125,147 | | | 702,440 | | | 688,747 | | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | | 115,695 | | | 123,035 | |
Hard Home | Hard Home | | 126,622 | | | 141,905 | | | 383,325 | | | 439,805 | | Hard Home | | 76,262 | | | 90,729 | |
Apparel, Electronics, & Other | | 125,498 | | | 126,845 | | | 363,600 | | | 370,506 | | |
Net sales | Net sales | | $ | 1,204,281 | | | $ | 1,335,656 | | | $ | 3,925,216 | | | $ | 4,418,582 | | Net sales | | $ | 1,123,577 | | | $ | 1,374,714 | |
|
NOTE 9 – SUPPLIER FINANCE PROGRAM
We facilitate a voluntary supply chain finance (“SCF”) program through a participating financial institution. This SCF program enables our suppliers to sell their receivables due from the Company to a participating financial institution at their discretion. As of April 29, 2023, the SCF program had a $55.0 million revolving capacity. We are not a party to the agreements between the participating financial institution and the suppliers in connection with the SCF program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program.
The amounts payable to the participating financial institution for suppliers who voluntarily participate in the SCF program are included within the accounts payable on our consolidated balance sheets. Amounts under the SCF program included within accounts payable were $13.3 million and $35.4 million as of April 29, 2023 and January 28, 2023, respectively. Payments made under the SCF program to the financial institution, like payments of other accounts payable, are a reduction to our operating cash flow.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.
Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “approximate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.
Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, developments related to the COVID-19 pandemic, the current economic and credit conditions, inflation, the cost of goods, our inability to successfully execute strategic initiatives, competitive pressures, economic pressures on our customers and us, the availability of brand name closeout merchandise, trade restrictions, freight costs, the risks discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, (as updated in this Quarterly Report on the 10-Q), and other factors discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report should be read in conjunction with such filings, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.
OVERVIEW
The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes. Each term defined in the notes to the accompanying consolidated financial statements has the same meaning in this item and the balance of this report.
The following are the results from the thirdfirst quarter of 20222023 that we believe are key indicators of our operating performance when compared to our operating performance from the thirdfirst quarter of 2021:2022:
•Net sales decreased $131.4$251.1 million, or 9.8%18.3%.
•Comparable sales for stores open at least fifteen months, plus our e-commerce net sales,operations, decreased $151.5$238.5 million, or 11.7%18.2%.
•Gross margin dollars decreased $109.7$112.1 million, while gross margin rate decreased 490180 basis points to 34.0%34.9% of net sales.
•Selling and administrative expenses increased $15.6 million to $503.0$136.3 million. As a percentage of net sales, selling and administrative expenses increased 530 basis points to 41.8%54.9% of net sales.
•Included within our selling and administrative expenses were non-cash store asset impairment charges and a gain on extinguishment of a lease liability resulting from a lease cancellation related to underperforming storesa previous impaired store of $21.7$83.8 million, orwhich increased loss per share by approximately $2.18 per diluted share.
•Also included within our selling and administrative expenses were lease exit costs associated with our prior synthetic lease of $53.6 million and contract termination costs associated with closure of our forward distribution centers of $8.6 million, which increased loss per diluted share in the first quarter of 2023 by approximately $1.37 and $0.25, respectively.
•Also included within our selling and administrative expenses was a gain on sale of real estate and related expenses of $3.8 million, which decreased loss of $0.56 per share.diluted share by approximately $0.10.
•Operating loss rate increased 2,220 basis points to an operating loss of $130.8 million from an operating loss of $4.1 million.(23.2)%.
•Diluted loss per share increased to $3.56$(7.10) per share from $0.14$(0.39) per share.
•Cash and cash equivalents decreased $8.5$10.4 million, from $70.6$61.7 million at the end of the thirdfirst quarter of 20212022 to $62.1$51.3 million at the end of the thirdfirst quarter of 2022.2023.
•Inventory increased by 5.3%,decreased 18.8% or $68.1$251.0 million, from $1,277.2$1,338.7 million at the end of the thirdfirst quarter of 20212022 to $1,345.3$1,087.7 million at the end of the thirdfirst quarter 2023, primarily as a result of 2022. This increase is largely due to a 14%12% decrease in units on hand and a decrease in-transit inventory, partially offset by a 3% increase in average unit cost of on hand inventory and a 2% increase in units on hand, partially offset by a decrease in in-transit inventory due to earlier receipt of Christmas inventory compared to third quarter of 2021.inventory.
•We declared and paid a quarterly cash dividend in the amount of $0.30 per common share in the thirdfirst quarter of 2022,2023, which was consistent with the quarterly cash dividend of $0.30 per common share we paid in the thirdfirst quarter of 2021.2022.
See the discussion and analysis below for additional details regarding our operating results.
STORES
The following table presents stores opened and closed during the year-to-date 2022first quarter of 2023 and the year-to-date 2021:first quarter of 2022:
| | | | 2022 | 2021 | | | 2023 | 2022 |
Stores open at the beginning of the fiscal year | Stores open at the beginning of the fiscal year | 1,431 | | 1,408 | | Stores open at the beginning of the fiscal year | 1,425 | | 1,431 | |
Stores opened during the period | Stores opened during the period | 38 | | 34 | | Stores opened during the period | 3 | | 7 | |
Stores closed during the period | Stores closed during the period | (12) | | (18) | | Stores closed during the period | (1) | | (4) | |
| | Stores open at the end of the period | 1,457 | | 1,424 | | | Stores open at the end of the period | 1,427 | | 1,434 | |
We expect our store count at the end of 20222023 to decrease slightly compared to our store count at the end of 2021.2022.
RESULTS OF OPERATIONS
The following table compares components of our consolidated statements of operations and comprehensive incomeloss as a percentage of net sales at the end of each period:
| | | Third Quarter | Year-to-Date | | First Quarter |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 |
Net sales | Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | Net sales | 100.0 | % | 100.0 | % |
Cost of sales (exclusive of depreciation expense shown separately below) | Cost of sales (exclusive of depreciation expense shown separately below) | 66.0 | | 61.1 | | 65.5 | | 60.4 | | Cost of sales (exclusive of depreciation expense shown separately below) | 65.1 | | 63.3 | |
Gross margin | Gross margin | 34.0 | | 38.9 | | 34.5 | | 39.6 | | Gross margin | 34.9 | | 36.7 | |
Selling and administrative expenses | Selling and administrative expenses | 41.8 | | 36.5 | | 38.1 | | 33.3 | | Selling and administrative expenses | 54.9 | | 35.0 | |
Depreciation expense | Depreciation expense | 3.1 | | 2.7 | | 2.8 | | 2.4 | | Depreciation expense | 3.3 | | 2.7 | |
| Operating (loss) profit | (10.9) | | (0.3) | | (6.5) | | 3.9 | | |
Operating loss | | Operating loss | (23.2) | | (1.0) | |
Interest expense | Interest expense | (0.5) | | (0.2) | | (0.3) | | (0.2) | | Interest expense | (0.8) | | (0.2) | |
Other income (expense) | Other income (expense) | 0.0 | | 0.0 | | 0.0 | | 0.0 | | Other income (expense) | 0.0 | | 0.1 | |
(Loss) income before income taxes | (11.4) | | (0.5) | | (6.8) | | 3.8 | | |
Income tax (benefit) expense | (2.8) | | (0.1) | | (1.7) | | 0.9 | | |
Net (loss) income and comprehensive (loss) income | (8.6) | % | (0.3) | % | (5.1) | % | 2.9 | % | |
Loss before income taxes | | Loss before income taxes | (24.1) | | (1.1) | |
Income tax benefit | | Income tax benefit | (5.7) | | (0.3) | |
Net loss and comprehensive loss | | Net loss and comprehensive loss | (18.3) | % | (0.8) | % |
THIRDFIRST QUARTER OF 20222023 COMPARED TO THIRDFIRST QUARTER OF 20212022
Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comparable sales (“comp” or “comps”) in the thirdfirst quarter of 2023 compared to the first quarter of 2022 compared to the third quarter of 2021 were as follows:
| Third Quarter | |
First Quarter | | First Quarter | |
($ in thousands) | ($ in thousands) | 2022 | | 2021 | | Change | | Comps | ($ in thousands) | 2023 | | 2022 | | Change | | Comps |
Furniture | Furniture | $ | 303,703 | | 25.2 | % | | $ | 401,256 | | 30.1 | % | | $ | (97,553) | | (24.3) | % | | (26.4) | % | Furniture | $ | 312,144 | | 27.8 | % | | $ | 423,259 | | 30.8 | % | | $ | (111,115) | | (26.3) | % | | (27.2) | % |
Seasonal | | Seasonal | 177,008 | | 15.8 | | | 234,171 | | 17.0 | | | (57,163) | | (24.4) | | | (24.6) | |
Food | Food | 187,021 | | 15.5 | | | 182,936 | | 13.7 | | | 4,085 | | 2.2 | | | 0.9 | | Food | 164,820 | | 14.6 | | | 176,620 | | 12.8 | | | (11,800) | | (6.7) | | | (4.8) | |
Soft Home | Soft Home | 168,243 | | 14.0 | | | 194,217 | | 14.5 | | | (25,974) | | (13.4) | | | (15.1) | | Soft Home | 141,880 | | 12.6 | | | 169,666 | | 12.4 | | | (27,786) | | (16.4) | | | (16.5) | |
Consumables | Consumables | 156,224 | | 13.0 | | | 163,350 | | 12.2 | | | (7,126) | | (4.4) | | | (5.4) | | Consumables | 135,768 | | 12.1 | | | 157,234 | | 11.5 | | | (21,466) | | (13.7) | | | (10.9) | |
Seasonal | 136,970 | | 11.4 | | | 125,147 | | 9.4 | | | 11,823 | | 9.4 | | | 7.2 | | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | 115,695 | | 10.3 | | | 123,035 | | 8.9 | | | (7,340) | | (6.0) | | | (6.8) | |
Hard Home | Hard Home | 126,622 | | 10.5 | | | 141,905 | | 10.6 | | | (15,283) | | (10.8) | | | (12.4) | | Hard Home | 76,262 | | 6.8 | | | 90,729 | | 6.6 | | | (14,467) | | (15.9) | | | (15.4) | |
Apparel, Electronics, & Other | 125,498 | | 10.4 | | | 126,845 | | 9.5 | | | (1,347) | | (1.1) | | | (3.8) | | |
Net sales | Net sales | $ | 1,204,281 | | 100.0 | % | | $ | 1,335,656 | | 100.0 | % | | $ | (131,375) | | (9.8) | % | | (11.7) | % | Net sales | $ | 1,123,577 | | 100.0 | % | | $ | 1,374,714 | | 100.0 | % | | $ | (251,137) | | (18.3) | % | | (18.2) | % |
We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
Net sales decreased $131.4$251.1 million, or 9.8%18.3%, to $1,204.3$1,123.6 million in the thirdfirst quarter of 2022,2023, compared to $1,335.7$1,374.7 million in the thirdfirst quarter of 2021.2022. The decrease in net sales was primarily driven by an 11.7%18.2% decrease in our comps, which decreased net sales by $151.5 million. This decrease was partially offset by$238.5 million and our non-comparable sales, which increaseddecreased net sales by $20.1$12.6 million, driven by increased sales in our new and relocatedthe net decrease of 7 stores compared to closed stores.since the first quarter of 2022. Our comps are calculated based on the results of all stores that were open at least fifteen months plus the results of our e-commerce net sales.
Our decreased net sales and comps in the first quarter of 2023 were significantly impacted by macro economic pressures on our customers, which has negatively impacted the discretionary spending of our customers, particularly with respect to large-ticket Furniture and Seasonal products.
We believe thatIn the decreases in net sales and comps in the thirdfirst quarter of 2022 compared to the third quarter of 2021 were primarily attributable to a decrease in demand as a result of economic pressures on our customers caused by inflation and the absence of government disbursements and enhanced unemployment benefits compared to third quarter of 2021, which we believe negatively impacted the discretionary spending of our customers.
In the third quarter of 2022,2023, we experienced decreased comps and net sales in all of our merchandise categories. Our home products categories - Furniture, Seasonal, Soft Home, and Hard Home merchandise categories. These categories, particularly the Furniture category,- were most impacted, byas purchases from these categories are generally more discretionary. In the first quarter of 2023, the lack of our Broyhill® branded product had negative impact on comps and sales for our home product categories, particularly Furniture. In November 2022, our largest Broyhill® furniture supplier, United Furniture, Inc., abruptly closed, which resulted in an immediate shortage in Broyhill® inventory available for us to purchase. To mitigate the shortage while we sought new suppliers for Broyhill® furniture, we purchased replacement product from other suppliers, which has not performed as well as our Broyhill® branded product performed in the first quarter of 2022. As discussed above, we believe that macro economic pressures significantly reduced our customer's discretionary spending, habits due to economic pressures, inflation and the absence of government disbursements, as discussed above, and as comparedwhich has led to the thirddecreased net sales and comps in all our home products categories. We believe our Seasonal net sales and comps in the first quarter of 2021. To address this situation, we expect to introduce more closeout offerings2023, particularly our lawn & garden and Summer departments, were also adversely impacted by later-arriving warm weather in these categories as we implement our “Bargains, Treasures, and Essentials” merchandising strategy, which would change our merchandise mix to one-third Bargains (largely synonymous with closeouts), one-third Treasures (fun, unique, one-of-a-kind items), and one-third Essentials (staple product offerings that bring consistency to our mixmany parts of products). In order to expand our lower entry-level price points, we expect more price point mix adjustments within these categories throughout the fourthU.S. versus the first quarter of 2022 and beyond. We also continue to offer high value products with higher price points that we believe will attract customers from higher income households such as our Broyhill® branded home products.2022.
The increased net salesWhile our Food and positive comps in our Seasonal category compared to the third quarter of 2021 was primarily driven by our Halloween, harvest, summer, and lawn & garden departments partially offset by decreases in sporting goods and other departments. The net sales and comps of the lawn & garden and summer departments were impacted by increased inventory levels and category-specific promotional activity in the third quarter of 2022 as we aggressively discounted these departments to reduce our inventory levels and create space for our Halloween, harvest, and Christmas inventory. Our Halloween department benefited from favorable weather conditions, promotional selling activity and an elevated inventory level entering the third quarter of 2022. The Christmas department experienced positive comps and net sales compared to the third quarter of 2021 when we experienced supply chain challenges that delayed the receipt of Christmas inventory in our stores.
Our Consumables and Apparel, Electronics, & Other categories experienced decreases in net sales and comps which were primarily driven by the decreased discretionary spending discussed above.
Our Food category experienced increases in comps and net sales in the thirdfirst quarter of 2022. This category2023, these categories performed relatively better than our home products categories in the first quarter of 2023 as it isthey are less sensitive to changes in discretionary spending.
Our Apparel, Electronics, & Other category experienced a decrease in comps as a result of the decreased discretionary spending in the first quarter of 2023 discussed above. We believe that the net sales of our Apparel, Electronics, & Other category benefited from our “Bargains, Treasures, and Essentials” merchandising strategy as we began to implement lower entry-level price points with name brand closeout offerings in the first quarter of 2023.
Gross Margin
Gross margin dollars decreased $109.7$112.1 million, or 21.1%22.2%, to $409.5$392.5 million for the thirdfirst quarter of 2022,2023, compared to $519.2$504.6 million for the thirdfirst quarter of 2021.2022. The decrease in gross margin dollars was primarily due to a decrease in net sales and gross margin rate, which decreased gross margin dollars by $58.6 million, and a decrease in net sales, which decreased gross margin dollars by $51.1 million.rate. Gross margin as a percentage of net sales decreased 490180 basis points to 34.0%34.9% in the thirdfirst quarter of 2022 as2023 compared to 38.9%36.7% in the thirdfirst quarter of 2021.2022. The gross margin rate decrease was primarily due to a result of higher markdownsmarkdown rate, and a higher shrink rate, partially offset by lower inbound freight costs. The higher markdowns were driven by increased promotionsmarkdown rate was a result of the decline in sales in the thirdfirst quarter of 2023 compared to the first quarter of 2022, comparedas our markdown volume in the first quarter of 2023 was similar to the thirdfirst quarter of 2021. We aggressively discounted merchandise2022. The higher shrink rate was primarily driven by sales deleverage as our unit loss and dollar loss in our 2023 physical inventory counts have both improved versus the prior year. The higher shrink rate was also driven by a cumulative adverse adjustment to our shrink accrual rate in the thirdfirst quarter of 2022 to drive traffic to2023 as we projected better results for our stores, move through Seasonal product, and reduce our overall2023 physical inventory levels to an appropriate positioncount results at the end of 2022 versus the quarter. The increaseactualized results in inboundthe first quarter of 2022. Inbound freight costs wasdeclined due to higherlower ocean carriage rates, higher rail rateslower fuel costs, and higher fuel costs.decreased inbound volume versus the first quarter of 2022.
Selling and Administrative Expenses
Selling and administrative expenses were $503.0$617.1 million for the thirdfirst quarter of 2022,2023, compared to $487.4$480.8 million for the thirdfirst quarter of 2021.2022. The increase of $15.6$136.3 million in selling and administrative expenses was primarily driven by $21.7 million of store asset impairment charges (see Note 1 to the accompanying consolidated financial statements) resulting from a review of underperforming stores and partially offset by a gain on extinguishment of a lease liability resulting from a lease cancellation related to a previous impaired store of $83.8 million, a lease payment related to the exit of our Prior Synthetic Lease of $53.6 million, termination costs and related expenses, related to the exit of our FDCs of $8.6 million, and an increase in distribution and transportation costsadvertising expense of $2.2$3.4 million, partially offset by decreasesa decrease in share-based compensation expensestore payroll of $4.8$12.3 million and self-insurance expensea gain on sale of $3.9real estate and related expenses of $3.8 million. The increase in advertising expense was related to a shift from a broad or mass distribution in the first quarter of 2022 to a more targeted approach in the first quarter of 2023. The more targeted approach includes specific customer, product and transportation expensesregional focused advertising. The decrease in store payroll was driven by increased fuel costs and outbound transportation rates as well as the costs associated with the forward distribution centers (“FDCs”) opened in the past year, partially offset bya lower inbound and outbound volumes. Our share-based compensation expense decreased duestore count compared to the 2019 PSUs, for which the grant date was established in 2021, which carried a higher grant date fair value and for which substantially more awards were granted than the 2022 TSR PSUs, and forfeitures resulting from executive departures. The decrease in self-insurance expense was primarily driven by a net decrease in self-insurance claims, which led to lower incurred expense in the thirdfirst quarter of 2022 compared to the third quarter of 2021.and an overall reduction in store headcount and payroll hours.
As a percentage of net sales, selling and administrative expenses increased 5301,990 basis points to 41.8%54.9% for the thirdfirst quarter of 20222023 compared to 36.5%35.0% for the thirdfirst quarter of 2021.2022.
Depreciation Expense
Depreciation expense decreased $0.8 million to $36.6 million in the first quarter of 2023, compared to $37.4 million in the first quarter of 2022. Depreciation expense as a percentage of sales increased 60 basis points compared to the first quarter of 2022. The decrease was primarily driven by impairment charges taken in the last twelve months and decreased capital spend in the last twelve months, partially offset by accelerated depreciation costs related to the anticipated exit from our FDCs.
Depreciation Expense
Depreciation expense increased $1.4 million to $37.3 million in the third quarter of 2022, compared to $35.9 million in the third quarter of 2021. The increase in depreciation expense was driven by increased investments in our strategic initiatives, new stores, and supply chain improvements in the last twelve months.
Depreciation expense as a percentage of sales increased 40 basis points compared to the third quarter of 2021.
Interest Expense
Interest expense was $6.3$9.1 million in the thirdfirst quarter of 2022,2023, compared to $2.3$2.8 million in the thirdfirst quarter of 2021.2022. The increase in interest expense was primarily driven by an increase in total average borrowings (including finance leases and the sale and leaseback financing liability) and an increase in the average interest rate. We had total average borrowings of $479.8$574.5 million in the thirdfirst quarter of 20222023 compared to total average borrowings of $132.2$301.1 million in the thirdfirst quarter of 2021.2022. The increase in total average borrowings was driven by our borrowings under our credit facilities in the third2022 Credit Agreement throughout the first quarter of 20222023 compared to no borrowings under our credit facilities in the thirdfirst quarter of 2021.2022.
Other Income (Expense)
Other income (expense) was $0.1$0.0 million in the thirdfirst quarter of 2022, compared to $0.32023 and $1.0 million in the thirdfirst quarter of 2021. The income in both years was driven by unrealized gains on our diesel fuel derivatives.2022.
Income Taxes
The effective income tax rate for the thirdfirst quarter of 2023 and the first quarter of 2022 was 23.8% and the third quarter of 2021 was 24.8% and 29.3%27.3%, respectively. The decrease in the effective income tax rate was driven by lower nondeductible executive compensation, partially offset by the effect of employment related tax credits and audit settlements. The effective income tax rate comparison was also significantly impacted by the increased loss before income taxes in the third quarter of 2022 comparedprimarily attributable to the loss before income taxes in the third quarter of 2021.
YEAR-TO-DATE 2022 COMPARED TO YEAR-TO-DATE 2021
Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales) in the year-to-date 2022 and the year-to-date 2021, and the change in net sales (in dollars and percentage) and the change in comps (in percentage) from the year-to-date 2022 compared to the year-to-date 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-to-Date |
($ in thousands) | 2022 | | 2021 | | Change | | Comps |
Furniture | $ | 988,307 | | 25.2 | % | | $ | 1,291,765 | | 29.2 | % | | $ | (303,458) | | (23.5) | % | | (25.3) | % |
Seasonal | 702,440 | | 17.9 | | | 688,747 | | 15.6 | | | 13,693 | | 2.0 | | | 0.4 | |
Food | 536,153 | | 13.7 | | | 541,400 | | 12.3 | | | (5,247) | | (1.0) | | | (2.1) | |
Soft Home | 489,325 | | 12.5 | | | 601,320 | | 13.6 | | | (111,995) | | (18.6) | | | (20.1) | |
Consumables | 462,066 | | 11.8 | | | 485,039 | | 11.0 | | | (22,973) | | (4.7) | | | (5.7) | |
Hard Home | 383,325 | | 9.7 | | | 439,805 | | 9.9 | | | (56,480) | | (12.8) | | | (14.4) | |
Apparel, Electronics, & Other | 363,600 | | 9.2 | | | 370,506 | | 8.4 | | | (6,906) | | (1.9) | | | (4.6) | |
Net sales | $ | 3,925,216 | | 100.0 | % | | $ | 4,418,582 | | 100.0 | % | | $ | (493,366) | | (11.2) | % | | (12.8) | % |
Net sales decreased $493.4 million, or 11.2%, to $3,925.2 million in the year-to-date 2022, compared to $4,418.6 million in the year-to-date 2021. The decrease in net sales was driven by a comp decrease of 12.8%, which decreased net sales by $549.3 million, partially offset by our non-comparable sales which increased net sales by $55.9 million as a result of increased net sales in our new and relocated stores compared to closed stores, and an increase in net store count compared to the year-to-date 2021. Our decreased comps and net sales in the year-to-date 2022 is primarily due to the absence of government sponsored relief packages that were present in the year-to-date 2021, which included government stimulus paymentsaudit settlements and enhanced unemployment benefits. Additionally, we experienced decreased demand in the year-to-date 2022 as a result of general economic pressures on our customers caused by inflation, which we believe impacted the discretionary spending of our customers.
In the year-to-date 2022, we experienced decreased comps and net sales in all of our merchandise categories except our Seasonal category in which our net sales and comps modestly increased. Our home products categories - Furniture, Soft Home, and Hard Home - were most impacted, as purchases from these categories are generally more discretionary in nature. An inflationary environment and absence of government stimulus payments reduced our customer's discretionary spending. As discussed above, we expect price point mix adjustments within these categories throughout the fourth quarter of 2022 and beyond to expand our lower entry-level price points. Additionally, we expect to introduce more closeout offerings in these categories as we implement our “Bargains, Treasures, and Essentials” merchandising strategy, which would change our merchandise mix to one-third Bargains, one-third Treasures, and one-third Essentials.
Our Food category performed marginally better than our home products categories in the year-to-date 2022 as this category is less sensitive to changes in discretionary spending.
Our Consumables and Apparel, Electronics, & Other categories experienced decreases in net sales and comps which were driven by the decreased discretionary spending discussed above.
The increased net sales and comps within our Seasonal category in the year-to-date 2022 compared to the year-to-date 2021 was primarily driven by our Halloween and lawn & garden departments. Our Halloween department benefited from promotional selling activity and an increased inventory level entering the Halloween selling season. The lawn & garden department continued to benefit from increased inventory levels and category-specific promotional activity as we aggressively discounted our lawn & garden assortments to be competitive in the current market, reduce our inventory levels, and create space for Halloween, harvest, and Christmas inventory. Our Christmas department benefited from early holiday season net sales and ended the quarter with a more favorable inventory position compared to the prior year inventory levels which were impacted by supply chain challenges that delayed our receipt of Christmas inventory.
Gross Margin
Gross margin dollars decreased $398.3 million, or 22.7%, to $1,352.6 million for the year-to-date 2022, compared to $1,750.9 million for the year-to-date 2021. The decrease in gross margin dollars was due to a decrease in gross margin rate, which decreased gross margin by $202.8 million and a decrease in net sales, which decreased gross margin by $195.5 million. Gross margin as a percentage of net sales decreased 510 basis points to 34.5% in the year-to-date 2022, compared to 39.6% in the year-to-date 2021. The gross margin rate decrease was primarily a result of higher markdowns, higher inbound freight costs, and a higher shrink rate, partially offset by a higher initial markup. The higher markdowns were driven by increased promotions in the year-to-date 2022 compared to the year-to-date 2021, as we aggressively discounted Seasonal and other products to drive net sales in the second and third quarters of 2022. Inbound freight costs increased due to higher ocean carriage rates, higher rail rates, detention and demurrage charges related to supply chain delays, and higher fuel costs. The higher shrink rate was driven by a higher rate of theft and other loss in our stores during 2021, which has led to unfavorable physical inventory counts in the 2022 physical inventory cycle and a higher shrink accrual rate in the year-to-date 2022. The higher initial markup was driven by modest price increases in targeted merchandise categories and on specific items that have been most impacted by higher freight costs.
Selling and Administrative Expenses
Selling and administrative expenses were $1,494.2 million for the year-to-date 2022, compared to $1,473.5 million for the year-to-date 2021. The increase of $20.7 million in selling and administrative expenses was attributable to increases in store asset impairment charges of $45.8 million and distribution and transportation costs of $28.1 million, partially offset by decreases in accrued bonus expense of $25.3 million, share-based compensation expense of $20.2 million, and self-insurance expense of $10.6 million. The non-cash store asset impairment charges (see Note 1) were recorded as a result of a review of underperforming store locations. The increase in distribution and transportation costs was driven by increased fuel costs and outbound transportation rates, as well as the costs associated with the FDCs opened since the second half of 2021, partially offset by lower outbound and inbound carton volumes. The decrease in accrued bonus expense was due to lower operating performance in the year-to-date 2022 relative to our annual operating plans as compared to the year-to-date 2021. Our share-based compensation expense decreased primarily due to the 2019 PSUs (for which the grant date was established in the first quarter of 2021), which carried a higher grant date fair value and for which substantially more awards were granted than the 2022 TSR PSUs. Our share-based compensation expense also decreased due to forfeitures resulting from executive departures in the year-to-date 2022. The decrease in self-insurance expense was primarily driven by a net decrease in self-insurance claims, the balance of which led to lower incurred expense in the year-to-date 2022 compared to the year-to-date 2021.
As a percentage of net sales, selling and administrative expenses increased 480 basis points to 38.1% for the year-to-date 2022 compared to 33.3% for the year-to-date 2021.
Depreciation Expense
Depreciation expense increased $6.6 million to $111.8 million in the year-to-date 2022, compared to $105.2 million for the year-to-date 2021. The increase was driven by increased investments in our strategic initiatives, new stores, and supply chain improvements in the last 12 months.
Depreciation expense as a percentage of sales increased by 40 basis points compared to the year-to-date 2021.
Interest Expense
Interest expense was $12.9 million in the year-to-date 2022, compared to $7.1 million in the year-to-date 2021. The increase in interest expense was driven by higher total average borrowings (including finance leases and the sale and leaseback financing liability). We had total average borrowings of $392.9 million in the year-to-date 2022 compared to $153.7 million in the year-to-date 2021. The increase in total average borrowings was driven by greater borrowings under our credit agreements throughout the year-to-date 2022 compared to the average balance on our term note agreement, which was fully repaid in the second quarter of 2021, and under the 2021 Credit Agreement in the year-to-date 2021 (when we had no borrowings under the 2021 Credit Agreement).
Other Income (Expense)
Other income (expense) was $1.4 million in the year-to-date 2022, compared to $1.1 million in the year-to-date 2021. The change was primarily driven by a $0.5 million loss on debt extinguishment recognized in the year-to-date 2021 related to the prepayment of the term note secured by equipment at our California distribution center.
Income Taxes
The effective income tax rate for the year-to-date 2022 and the year-to-date 2021 was 25.2% and 23.0%, respectively. The increase in the effective income tax rate was primarily attributable to a net deficiency associated with vesting of share-based payment awards infrom 2022 compared to a net benefit in the year-to-date 2021, increased audit settlements and the effectfirst quarter of employment related tax credits, partially offset by lower non-deductible executive compensation.2023. Additionally, the increasedecrease in the effective income tax rate was impacted by the increase in loss before income taxes in the year-to-date 2022first quarter of 2023 compared to the incomeloss before income taxes in the year-to-date 2021.first quarter of 2022.
Known Trends and 20222023 Guidance
In the year-to-date 2022,fiscal 2023, the U.S. economy experienced its highest inflationary period in decades,has continued to face macro-economic challenges including high inflation, which has adversely impacted costs in our business, particularly freight and transportation-related expenses, and the buying power of our customers. We expect the inflationary environment will continue to negatively impact costs within our business and discretionary spending specifically high ticket products by our customers through at least the remaindersecond quarter of 2022.2023. At this time, the Company does not believe it has sufficient visibility to provide full year guidance for 2023.
Given the widea wider-than-usual range of potential outcomes, we are not currently providing earnings per share guidance for the fourthsecond quarter of 2022; however, excluding the impact of any potential real estate sales,2023. However, we do anticipate an operatinga loss in the fourthsecond quarter of 2022.2023. As of December 1, 2022,May 26, 2023, we expect the following in the fourthsecond quarter of 2022:2023:
•A comparable sales decrease in the low double digitshigh-teens range compared to the fourthsecond quarter of 2021;2022;
•Gross margin rate improvementslightly above the second quarter of 2022, in the low 30s, driven by significant markdowns on slow-moving Seasonal inventory; and
•Selling and administrative expenses slightly down compared to the thirdsecond quarter of 2022, but below the fourth quarter of 2021, with a rate in the mid 30s.
•Combined selling and administrative expenses and depreciation approximately in line with the fourth quarter of 2021.2022.
For 2022,2023, we expect capital expenditures of approximately $170$80 million.
Capital Resources and Capital ResourcesLiquidity
On September 21, 2022, we entered into a five-year asset-based revolving credit facility (“2022 Credit Agreement”) in an aggregate committed amount of up to $900 million (the “Commitments”) that expires on September 21, 2027. In connection with our entry into the 2022 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $3.4 million, which are being amortized over the term of the 2022 Credit Agreement.
The 2022 Credit Agreement replaced the $600 million five-year unsecured credit facility we entered into on September 22, 2021 (“2021 Credit Agreement”). The 2021 Credit Agreement was scheduled to expire on September 22, 2026, but was terminated concurrent with our entry into the 2022 Credit Agreement. We did not incur any material early termination penalties in connection with the termination of the 2021 Credit Agreement.
Revolving loans under the 2022 Credit Agreement are available in an aggregate amount equal to the lesser of (1) the aggregate Commitments and (2) a borrowing base consisting of eligible credit card receivables and eligible inventory (including in-transit inventory), subject to customary exceptions and reserves and a reserve for the then outstanding balance owing under the Synthetic Lease (as defined below).reserves. Under the 2022 Credit Agreement, we may obtain additional Commitments on no more than five occasions in an aggregate amount of up to $300 million, subject to agreement by the lenders to increase their respective Commitments and certain other conditions. The 2022 Credit Agreement includes a swing loan sublimit of 10% of the then applicable aggregate Commitments and a $90 million letter of credit sublimit. Loans made under the 2022 Credit Agreement may be prepaid without penalty. Borrowings under the 2022 Credit Agreement are available for general corporate purposes, working capital and to repay certain of our indebtedness. Our obligations under the 2022 Credit Agreement are secured by our working capital assets (including inventory, credit card receivables and other accounts receivable, deposit accounts, and cash), subject to customary exceptions. The pricing and certain fees under the 2022 Credit Agreement fluctuate based on our availability under the 2022 Credit Agreement. The 2022 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or one, three or six month adjusted Term SOFR. We will also pay an unused commitment fee of 0.20% per annum on the unused Commitments. The 2022 Credit Agreement contains an environmental, social and governance (“ESG”) provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the 2022 Credit Agreement.
The 2022 Credit Agreement contains customary affirmative and negative covenants (including, where applicable, restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, redeem or repurchase stock, prepay certain indebtedness, make certain loans and investments, dispose of assets, enter into restrictive agreements, engage in transactions with affiliates, modify organizational documents, incur liens and consummate mergers and other fundamental changes) and events of default. In addition, the 2022 Credit Agreement requires us to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million. Additionally, we are subject to cross-default provisions associated with the 2023 Synthetic Lease. A violation of these covenants could result in a default under the 2022 Credit Agreement which could permit the lenders to restrict our ability to further access the 2022 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2022 Credit Agreement. At OctoberApril 29, 2022,2023, we were in compliance with the covenants of the 2022 Credit Agreement.
SimultaneousOn March 15, 2023, the Company, Bankers Commercial Corporation (“Lessor”), the rent assignees parties thereto (“Rent Assignees” and, together with Lessor, “Participants”), MUFG Bank, Ltd., as collateral agent for the Rent Assignees (in such capacity, “Collateral Agent”), and MUFG Bank, Ltd., as administrative agent for the Participants, entered into a Participation Agreement (the “Participation Agreement”), pursuant to which the Participants funded $100 million to Wachovia Service Corporation (“Prior Lessor”) to finance Lessor’s purchase of the land and building related to our entry intoApple Valley, CA distribution center (“Leased Property”) from the 2022 Credit Agreement,Prior Lessor.
Also on March 15, 2023, we entered into a Lease Agreement and supplement to the Lease Agreement (collectively, the “Lease” and together with the Participation Agreement and related agreements, the “2023 Synthetic Lease”) pursuant to which the Lessor will lease the Leased Property to the Company for an amendment (the “Syntheticinitial term of 60 months. The Lease Amendment”)may be extended for up to an additional five years, in one-year or longer annual periods, with each renewal subject to approval by the Participants. The 2023 Synthetic Lease requires the Company to pay basic rent on the scheduled payment dates in arrears in an amount equal to (a) a per annum rate equal to Term SOFR for the applicable payment period plus a 10 basis point spread adjustment plus an applicable margin equal to 250 basis points multiplied by (b) the portion of the lease balance not constituting the investment by Lessor in the Leased Property. In addition to basic rent, the Company must pay all costs and expenses associated with the use or occupancy of the Leased Property, including without limitation, maintenance, insurance and certain indemnity payments. The Company will also be responsible for break-funding costs, annual lease administration fees and increased costs. GAAP treatment of the synthetic lease refinancing transaction requires us to treat the assignment of the purchase option from Prior Lessor to Lessor as a deemed acquisition of the Leased Property due to the Company’s control of the Leased Property under GAAP at the time the assigned purchase option was exercised. Accordingly, the Company applied sale and leaseback accounting to the transfer of the property from the Prior Lessor to the Lessor. The transaction met the criteria of a “failed sale-leaseback” under GAAP, which required us to record an asset for the deemed acquisition and an equivalent financing liability that represents the cost to acquire the Leased Property. The asset of $100.0 million was recorded in property and equipment –
net in the consolidated balance sheets. The financing liability of $100.0 million was recorded in accrued operating expenses (current) and other liabilities (noncurrent) in the consolidated balance sheets.
Concurrently with Lessor’s purchase of the Leased Property from Prior Lessor, the participation agreement and lease agreement associated with our distribution centerformer synthetic lease arrangement, in Apple Valley, CAeach case entered into on November 30, 2017 and most recently amended on September 21, 2022 (the “Synthetic“Prior Synthetic Lease”). The, were terminated effective on March 15, 2023. In connection with the termination of the Prior Synthetic Lease, Amendment amended the Synthetic LeaseCompany paid a termination fee of approximately $53.4 million to among other things, (1) amend the lessor yield payable thereunder from a LIBOR-based rate to a SOFR-based rate, and to fix the SOFR margin paid on the lessor yield at 2.60%, (2) remove the financial covenants thereunder, (3) change the maturity date of the Synthetic Lease from May 30, 2024 to June 1, 2023, (4) permit the liens and indebtednessPrior Lessor using borrowings under the 2022 Credit Agreement, and (5) restrict our ability to amend the 2022 Credit Agreement, without the consent of allAgreement. As a result of the termination of the Prior Synthetic Lease, participants, to (a) increase the Commitments under the 2022 Credit Agreement to an amount in excess of $900 million, (b) remove or reduce the reserve for the then outstanding balance under the Synthetic Lease from the borrowing base under the 2022 Credit Agreement is no longer subject to a reserve for the outstanding balance under the Prior Synthetic Lease.
The Company, together with all of its direct and (c) revise the maturity dateindirect subsidiaries that serve as guarantors under the 2022 Credit Agreement guarantee the payment and performance obligations under the 2023 Synthetic Lease. The obligations under the 2023 Synthetic Lease are also secured by a pledge of the Company’s interest in the Leased Property. In addition, the Company, no less frequently than annually, will be subject to a test (the “LTV Test”) that requires the ratio of (a) the adjusted lease balance minus any Lessee Letter of Credit (as defined below) to (b) the Leased Property’s fair market value to not be greater than 60 percent. If the Company does not comply with the LTV Test, the Company must deliver or adjust a letter of credit in favor of the Collateral Agent (“Lessee Letter of Credit”) in an earlier date.amount necessary to comply with the LTV Test. The 2023 Synthetic Lease also contains customary representations and warranties, covenants and events of default.
The Participation Agreement also requires us to maintain a fixed charge coverage ratio of not less than 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million, which is consistent with the terms of the 2022 Credit Agreement.
If an event of default occurs under the Lease, Lessor generally has the right to recover the adjusted lease balance and certain other costs and amounts payable under the 2023 Synthetic Lease and, following such payment, the Company would be entitled to receive ownership in the Leased Property from Lessor.
As of OctoberApril 29, 2022,2023, we had a Borrowing Base (as defined under the 2022 Credit Agreement) of $876.5$900.0 million under the 2022 Credit Agreement. At OctoberApril 29, 2022,2023, we had $459.9$501.6 million in borrowings outstanding under the 2022 Credit Agreement and $35.3$31.7 million committed to outstanding letters of credit, leaving $381.3$366.7 million available under the 2022 Credit Agreement, subject to certainthe borrowing base limitations as furtherdiscussed above. At April 29, 2023, we had $276.7 million available under the 2022 Credit Agreement, net of the borrowing base limitations discussed above.
The primary source of our liquidity is cash flows from operations and borrowings under our credit facility as necessary. Our net income (loss)loss and, consequently, our cash provided by (used in)used in operations are impacted by net sales volume, seasonal sales patterns, and operating profit (loss) margins. OurHistorically, our cash provided by operations typically peaks in the fourth quarter of each fiscal year due to net sales generated during the holiday selling season. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter as we build our inventory levels prior to the holiday selling season. We have historically funded those requirements with cash provided by operations and borrowings under our credit facility. We currently expect to decrease our borrowings under our credit facility at the end of fiscal 2022 compared to the third quarter of 2022. Cash requirements include, among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments. Given our anticipated cash needs, we expect to utilize borrowings under the 2022 Credit Agreement throughout the remainder of 2023 to fund our cash requirements. To generate additional liquidity, the Company has also engaged external partners to monetize assets, primarily consisting of its remaining owned real estate properties, and to identify savings opportunities of up to $200 million which are expected to be realized within cost of goods sold, advertising expense and other selling and administrative expenses.
InBased on historical and expected financial results, we believe that we have or have the third quarter of 2022,ability to obtain adequate resources to fund our cash requirements for the Company entered into multiple purchaseforeseeable future, including ongoing and sale agreements to sell landseasonal working capital requirements, proposed capital expenditures, new projects, and building-related assets for 25 owned store locations and one unoccupied land parcel. The Company expects to complete the majority of these sales during the fourth quarter of 2022 and the remainder in fiscal 2023, subject to customary closing conditions. We expect these sales of property to generate significant liquidity. The Company is also exploring other asset monetization opportunities with its remaining owned properties to generate additional liquidity.currently maturing obligations.
On December 1, 2021, our Board of Directors authorized the repurchase of up to $250 million of our common shares under the 2021 Repurchase Authorization. Pursuant to the 2021 Repurchase Authorization, we may repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions our compliance with the terms of the 2022 Credit Agreement, and other factors. The 2021 Repurchase Authorization has no scheduled termination date. In the thirdfirst quarter of 2022,2023, we did not purchaserepurchase shares under the 2021 Repurchase Authorization. As of OctoberApril 29, 2022,2023, we had $159.4 million available for future repurchases under the 2021 Repurchase Authorization.
In August 2022,March 2023, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on September 23, 2022March 31, 2023 to shareholders of record as of the close of business on September 9, 2022.March 17, 2023. The cash dividend of $0.30 per common share is consistent with our quarterly dividends declared in 2021.2022. In the year-to-datefirst quarter of 2022,2023, we paid approximately $28.3$9.6 million in dividends, compared to $32.6the dividends paid of $10.7 million in the year-to-datefirst quarter of 2021.2022.
In November 2022,On May 23, 2023, our Board of Directors declared asuspended the Company’s quarterly cash dividenddividend. The declaration of $0.30 per common share payableany future dividends will be at the discretion of our Board of Directors and will depend on December 28, 2022 to shareholdersour financial condition, results of record as of the close of business on December 14, 2022.
Based on historical and expected financial results, we believe that we have or, if necessary, have the ability to obtain, adequate resources to fund our cash requirements, including ongoing and seasonal workingoperations, capital requirements, proposed capital expenditures, new projects,compliance with applicable laws and currently maturing obligations.
agreements and any other factors deemed relevant by our Board of Directors.
The following table compares the primary components of our cash flows from the year-to-date 2022first quarter 2023 compared to the year-to-date 2021:first quarter 2022:
| (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
Net cash (used in) provided by operating activities | $ | (279,039) | | | $ | 75,706 | | | $ | (354,745) | | |
Net cash used in operating activities | | Net cash used in operating activities | $ | (168,938) | | | $ | (196,233) | | | $ | 27,295 | |
Net cash used in investing activities | Net cash used in investing activities | (124,851) | | | (122,545) | | | (2,306) | | Net cash used in investing activities | (12,481) | | | (41,241) | | | 28,760 | |
Net cash provided by (used in) financing activities | $ | 412,306 | | | $ | (442,121) | | | $ | 854,427 | | |
Net cash provided by financing activities | | Net cash provided by financing activities | $ | 188,009 | | | $ | 245,459 | | | $ | (57,450) | |
Cash (used in) provided by operating activities decreased $354.7 million to cash used in operating activities of $279.0decreased by $27.3 million to $168.9 million in the year-to-date 2022first quarter of 2023 compared to cash provided by operating activities of $75.7$196.2 million in the year-to-date 2021.first quarter of 2022. The decrease was primarily due to a decrease in net (loss) incomeloss after adjusting for non-cash activities such as a non-cash impairment charge non-cash share-based compensation expense, and a non-cash lease expense, and cash outflows related to a reductiondecrease from inventories, which was driven by decreased inventory purchases at the end of accounts payable on an increased inventory position.the first quarter of 2023. Partially offsetting this decrease was an increasewere increases in the change in currentdeferred income taxes,tax benefit, which was driven by a change from generating income before income taxes in the year-to-date 2021 to aincreased loss before income taxes, and operating lease liabilities related to the refinance of the Apple Valley, CA distribution center, and the gain on disposition of equipment and property related to the sale of an owned store location in the year-to-date 2022.first quarter of 2023.
Cash used in investing activities increaseddecreased by $2.3$28.8 million to $124.9$12.5 million in the year-to-date 2022first quarter of 2023 compared to $122.5$41.2 million in the year-to-date 2021.first quarter of 2022. The increasedecrease was principally driven by an increasea decrease in capital expenditures, which was primarily due to increasedfewer investments in new stores and other strategic initiatives.stores.
Cash provided by (used in) financing activities increaseddecreased by $854.4$57.5 million to cash provided by financing activities of $412.3$188.0 million in the year-to-date 2022first quarter of 2023 compared to cash used in financing activities of $442.1$245.5 million in the year-to-date 2021.first quarter of 2022. The increasedecrease was driven by lower net proceeds from long-term debt, due to borrowings under the 2022 Credit Agreement to fund working capital requirements, andpartially offset by a decrease in payment for treasury shares acquired. The decrease in payment for treasury shares acquired was due to a decrease in shares repurchased under a share repurchase authorization in the year-to-date 2021, whereas there were no shares repurchased in the year-to-date 2022 under the 2021 Repurchase Authorization.
withheld for income taxes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, and bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. See NoteNote 1 to our consolidated financial statements included in our 20212022 Form 10-K for additional information about our accounting policies. Except as set forth below, there have been no material changes to our accounting policies disclosed in Note 1 of our 2021 Form 10-K.
The estimates, judgments, and assumptions that have a higher degree of inherent uncertainty and require the most significant judgments are outlined in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20212022 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 20212022 Form 10-K, our financial condition, results of operations, and liquidity for the current period could have been materially different from those presented.
Long-lived assets21
Our long-lived assets primarily consist of property and equipment - net and operating lease right-of-use assets. If the net book value of a store’s long-lived assets is not recoverable by the expected undiscounted future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. The Company uses judgment in its determination of the existence of impairment indicators at a store level, which is primarily based on operating performance.
We assess the impairment of long-lived assets, primarily property and equipment and operating lease assets, annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our assessment of changes in circumstances requires significant judgment. Factors we consider important which could trigger an impairment review include the following:
•Significant changes in the manner of our use of assets or the strategy for the overall business;
•Significant negative industry or economic trends; and
•An unusual current-period operating loss or cash flow loss in comparison to historical operating or cash flow losses
See Note 1 to the accompanying consolidated financial statements for additional information regarding this critical accounting policy.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk from exposure to changes in interest rates on investments that we make from time to time and on borrowings under the 2022 Credit Agreement. We had $459.9$501.6 million ofin borrowings under the 2022 Credit Agreement at OctoberApril 29, 2022.2023. An increase of 1% in our variable interest rate on our expected future borrowings could affect our financial condition, results of operations, or liquidity through higher interest expense by approximately $4.6$5.0 million.
We are subject to market risk from exposure to changes in our derivative instruments associated with diesel fuel. At October 29, 2022, we had outstanding derivative instruments, in the form of collars, covering 0.3 million gallons of diesel fuel. The following table provides additional detail related to our current derivative instruments, associated with diesel fuel.
| | | | | | | | | | | | | | | | | | | | |
Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value |
| Puts | | Calls | | Asset (Liability) |
| | (Gallons, in thousands) | | (In thousands) |
2022 | | 300 | | | 300 | | | 571 | |
Total | | 300 | | | 300 | | | $ | 571 | |
At October 29, 2022, a 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $0.2 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Overover Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
For information regarding certain legal proceedings to which we have been named a party or are subject, see Note 6Note 7 to the accompanying consolidated financial statements.
Item 1A. Risk Factors
Risk factors that affect our business and financial results are discussed within Part 1, Item 1A. of our 2021 Form 10-K. Except as set forth below, duringDuring the thirdfirst quarter of 2022,2023, there have beenwere no material changes to ourthe risk factors aspreviously disclosed in the 2021our 2022 Form 10-K and in our subsequent filings with the SEC.
If we are unable to comply with the terms of the 2022 Credit Agreement, our capital resources, financial condition, results of operations, and liquidity may be materially adversely effected.
We borrow funds under the 2022 Credit Agreement, a $900 million five-year asset-based revolving credit facility, from time to time depending on operating or other cash flow requirements. The 2022 Credit Agreement contains customary affirmative and negative covenants (including, where applicable, restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, redeem or repurchase stock, prepay certain indebtedness, make certain loans and investments, dispose of assets, enter into restrictive agreements, engage in transactions with affiliates, modify organizational documents, incur liens and consummate mergers and other fundamental changes) and events of default. In addition, the 2022 Credit Agreement requires us to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions that we believe are advisable or necessary for our business. Our ability to comply with these covenants and other provisions in the 2022 Credit Agreement may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. We are also subject to cross default provisions under the Synthetic Lease applicable to our distribution center in California. A violation of these covenants could result in a default under the 2022 Credit Agreement which would permit the lenders to restrict our ability to further access the 2022 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2022 Credit Agreement. Our failure to comply with these covenants may have a material adverse effect on our capital resources, financial condition, results of operations, and liquidity.
In addition, our ability to borrow under the 2022 Credit Agreement is limited by the amount of our borrowing base which consists of eligible credit card receivables and eligible inventory (including in-transit inventory), subject to customary exceptions and reserves and a reserve for the then outstanding balance owing under the Synthetic Lease. Any negative impact on the elements of our borrowing base, such as accounts receivable and inventory, could reduce our borrowing capacity under the 2022 Credit Agreement which could have a material adverse effect on our capital resources, financial condition, results of operations, and liquidity.10-K.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future and is subject to general economic, financial, competitive, legislative, regulatory, tax and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to fund our other liquidity needs, our business, financial condition and results of operations could be materially adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal and interest payments in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. The terms of the 2022 Credit Agreement or future debt agreements may also restrict us from effecting any of these alternatives. Further, changes in the credit and capital markets, including market disruptions and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to these sources of future liquidity. If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all or to effect any other action relating to our indebtedness on satisfactory terms or at all, it could have a material adverse effect on our business, financial condition and results of operations.
The recent cessation of operations by a key furniture supplier, United Furniture Industries, Inc., could materially adversely impact our results of operations.
United Furniture Industries, Inc. (“UFI”) unexpectedly and without notice to us ceased operations and terminated its employees on November 21, 2022. Furniture products supplied by UFI to the Company represented approximately 7% of our merchandise purchases in the year-to-date 2022. We are closely monitoring this developing situation, evaluating its potential impact on our business and reviewing our rights and legal and strategic options with respect to UFI. As part of this process, we are investigating our ability to acquire from UFI finished goods and work in process inventory that relate to outstanding and unpaid purchase orders that we currently have with UFI. In addition, we are identifying and believe that we have identified merchandise sourcing alternatives to fill near term gaps in our product offerings that may result from UFI’s cessation of operations, including, among other things, obtaining merchandise from other furniture vendors, pursuing closeout opportunities and acquiring additional non furniture merchandise. However, because our investigation is ongoing and given the inherent uncertainty in this fluid situation, we cannot determine at this time the ultimate impact of UFI’s cessation of operations on our results of operations. Over time, if we are unable to secure alternative sources of merchandise on acceptable terms to replace merchandise previously sourced from UFI, our results of operations could be materially adversely impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (In thousands, except price per share data) | (In thousands, except price per share data) | | (In thousands, except price per share data) | |
Period | Period | (a) Total Number of Shares Purchased (1)(2) | (b) Average Price Paid per Share (1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) | Period | (a) Total Number of Shares Purchased (1)(2) | (b) Average Price Paid per Share (1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
July 31, 2022 - August 27, 2022 | 2 | | $ | 21.07 | | — | | 159,425 | | |
August 28, 2022 - September 24, 2022 | 6 | | 20.85 | | — | | 159,425 | | |
September 25, 2022 - October 29, 2022 | 1 | | 16.33 | | — | | 159,425 | | |
January 29, 2023 - February 25, 2023 | | January 29, 2023 - February 25, 2023 | 2 | | $ | 16.55 | | — | | $ | 159,425 | |
February 26, 2023 - March 25, 2023 | | February 26, 2023 - March 25, 2023 | 46 | | 11.33 | | — | | 159,425 | |
March 26, 2023 - April 29, 2023 | | March 26, 2023 - April 29, 2023 | 80 | | 10.80 | | — | | 159,425 | |
Total | Total | 9 | | $ | 20.37 | | — | | 159,425 | | Total | 128 | | $ | 11.06 | | — | | $ | 159,425 | |
(1) In August, September,February, March, and October 2022,April 2023, in connection with the vesting of certain outstanding RSUs and PSUs, we acquired 2,257, 6,003,1,586, 45,997 and 1,11380,528 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings.
(2) The 2021 Repurchase Authorization is comprised of a December 1, 2021 authorization by our Board of Directors for the repurchase of up to $250.0 million of our common shares. During the thirdfirst quarter of 2022,2023, we had no repurchases under the 2021 Repurchase Authorization. At OctoberApril 29, 2022,2023, the 2021 Repurchase Authorization has $159.4 million of remaining authorization. The 2021 Repurchase Authorization has no scheduled termination date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits marked with an asterisk (*) are filed herewith.
| | | | | | | | | | | |
| Exhibit No. | | Document |
| | | Participation Agreement, dated March 15, 2023, by and among AVDC, LLC, the Lessee, and the Banks named therein. |
| | | Lease Agreement, dated March 15, 2023, by and among AVDC, LLC, the Lessee, and the Banks named therein. |
| | | Form of Big Lots 2020 Long-Term Incentive Plan Performance Share Units Award Agreement (incorporated herein by reference to Exhibit 10.1410.3 to our Form 10-K8-K dated March 29, 2022)16, 2023). |
| | | Big Lots, Inc. Executive Severance Agreement (incorporated herein by reference to Exhibit 10.2 to our Form 10-Q dated June 8, 2022). |
| | | Big Lots, Inc. Senior Executive Severance Agreement (incorporated herein by reference to Exhibit 10.3 to our Form 10-Q dated June 8, 2022). |
| | | Credit Facility Consent Letter (incorporated herein by reference to Exhibit 10.1 to our Form 8-K dated July 29, 2022). |
| | | Synthetic Lease Consent Letter (incorporated herein by reference to Exhibit 10.2 to our Form 8-K dated July 29, 2022). |
| | | Form of Big Lots 2020 Long-Term Incentive Plan Restricted StockPerformance Share Units Award Agreement (incorporated herein by reference to Exhibit 10.610.4 to our Form 10-Q8-K dated September 6, 2022)March 16, 2023). |
| | | Credit Agreement, dated September 21, 2022, by and among Big Lots, Inc. and the other Borrowers named therein, the Guarantors named therein, and the Banks named therein. |
| | | Fourth Amendment to Operative Documents, dated September 21, 2022, by and among AVDC, Inc., as lessee, the guarantors thereto, Wachovia Service Corporation, as lessor, Wells Fargo Bank, N.A., as agent, and the lease participants named therein. |
| | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | XBRL Taxonomy Definition Linkbase Document |
| | | XBRL Taxonomy Presentation Linkbase Document |
| | | XBRL Taxonomy Labels Linkbase Document |
| | | XBRL Taxonomy Calculation Linkbase Document |
| 101.Sch | | XBRL Taxonomy Schema Linkbase Document |
| 101.Ins | | XBRL Taxonomy Instance Document - the instance document does not appear in the Interactive DataDate File because its XBRL tags are embedded within the Inline XBRL document |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: DecemberJune 7, 20222023
| | | | | |
| BIG LOTS, INC. |
| |
| By: /s/ Jonathan E. Ramsden |
| |
| Jonathan E. Ramsden |
| Executive Vice President, Chief Financial and Administrative Officer |
| (Principal Financial Officer, Principal Accounting Officer and Duly Authorized Officer) |