BURL 10-Q
Burlington Stores, Inc. (BURL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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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Accelerated filer |
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Non-Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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 ☐ No
The registrant had
BURLINGTON STORES, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BURLINGTON STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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October 28, |
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October 29, |
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October 28, |
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October 29, |
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2023 |
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2022 |
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2023 |
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2022 |
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REVENUES: |
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$ |
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$ |
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$ |
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$ |
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Other revenue |
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Total revenue |
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COSTS AND EXPENSES: |
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Cost of sales |
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Selling, general and administrative expenses |
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Costs related to debt amendments |
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— |
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— |
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— |
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Depreciation and amortization |
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Impairment charges - long-lived assets |
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Other income - net |
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Loss on extinguishment of debt |
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— |
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Interest expense |
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Total costs and expenses |
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Income before income tax expense |
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Income tax expense |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income per common share: |
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Common stock - basic |
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$ |
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$ |
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$ |
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$ |
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Common stock - diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares: |
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Common stock - basic |
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Common stock - diluted |
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See Notes to Condensed Consolidated Financial Statements.
3
BURLINGTON STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(All amounts in thousands)
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Three Months Ended |
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Nine Months Ended |
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October 28, |
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October 29, |
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October 28, |
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October 29, |
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2023 |
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2022 |
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2023 |
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2022 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income, net of tax: |
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Interest rate derivative contracts: |
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Net unrealized gain arising during the period |
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Net reclassification into earnings during the period |
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Other comprehensive income, net of tax |
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Total comprehensive income |
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$ |
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$ |
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$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
4
BURLINGTON STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(All amounts in thousands, except share and per share data)
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October 28, |
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January 28, |
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October 29, |
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2023 |
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2023 |
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2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Restricted cash and cash equivalents |
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— |
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Accounts receivable—net |
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Merchandise inventories |
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Assets held for disposal |
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Prepaid and other current assets |
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Total current assets |
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Property and equipment—net |
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Operating lease assets |
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Tradenames |
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Goodwill |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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$ |
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Current operating lease liabilities |
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Other current liabilities |
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Current maturities of long term debt |
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Total current liabilities |
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Long term debt |
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Long term operating lease liabilities |
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Other liabilities |
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Deferred tax liabilities |
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(Note 11) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Authorized: |
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Issued: |
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Outstanding: |
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Additional paid-in-capital |
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Accumulated earnings |
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Accumulated other comprehensive income |
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Treasury stock, at cost |
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( |
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( |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
5
BURLINGTON STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
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Nine Months Ended |
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October 28, |
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October 29, |
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2023 |
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2022 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation and amortization |
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Impairment charges—long-lived assets |
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Amortization of deferred financing costs |
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Accretion of long term debt instruments |
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Deferred income taxes |
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( |
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Loss on extinguishment of debt |
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Non-cash stock compensation expense |
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Non-cash lease expense |
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( |
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Cash received from landlord allowances |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Merchandise inventories |
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( |
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( |
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Prepaid and other current assets |
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( |
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Accounts payable |
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( |
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( |
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Other current liabilities |
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Other long term assets and long term liabilities |
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( |
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Other operating activities |
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( |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Cash paid for property and equipment |
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( |
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( |
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Lease acquisition costs |
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( |
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( |
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Proceeds from sale of property and equipment and assets held for sale |
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Net cash used in investing activities |
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( |
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( |
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FINANCING ACTIVITIES |
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Principal payments on long term debt—Term B-6 Loans |
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( |
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( |
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Proceeds from long term debt— 2027 Convertible Notes |
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— |
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Principal payment on long term debt— 2025 Convertible Notes |
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( |
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( |
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Purchase of treasury shares |
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( |
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( |
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Proceeds from stock option exercises |
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Other financing activities |
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( |
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Net cash used in financing activities |
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( |
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( |
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Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents |
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( |
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( |
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Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period |
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Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
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$ |
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Income tax payments (refund) - net |
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$ |
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$ |
( |
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Non-cash investing and financing activities: |
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Finance lease modification |
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$ |
— |
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$ |
( |
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Accrued purchases of property and equipment |
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$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
BURLINGTON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 28, 2023
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
As of October 28, 2023, Burlington Stores, Inc., a Delaware corporation (collectively with its subsidiaries, the Company), through its indirect subsidiary Burlington Coat Factory Warehouse Corporation (BCFWC), operated
6
These unaudited Condensed Consolidated Financial Statements include the accounts of Burlington Stores, Inc. and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The Condensed Consolidated Financial Statements are unaudited, but in the opinion of management reflect all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of operations for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (Fiscal 2022 10-K). The balance sheet at January 28, 2023 presented herein has been derived from the audited Consolidated Financial Statements contained in the Fiscal 2022 10-K. Because the Company’s business is seasonal in nature, the operating results for the three and nine month periods ended October 28, 2023 are not necessarily indicative of results for the fiscal year.
Accounting policies followed by the Company are described in Note 1, “Summary of Significant Accounting Policies,” included in Part II, Item 8 of the Fiscal 2022 10-K.
Fiscal Year
The Company defines its fiscal year as the 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2023 is defined as the 53-week year ending February 3, 2024 and Fiscal 2022 is defined as the 52-week year ended January 28, 2023. The first, second and third quarters of Fiscal 2023 and Fiscal 2022 each consist of 13 weeks.
Recently Adopted Accounting Standards
There were no new accounting standards that had a material impact on the Company’s Condensed Consolidated Financial Statements and notes thereto during the three and nine month periods ended October 28, 2023, and there were no new accounting
7
standards or pronouncements that were issued but not yet effective as of October 28, 2023 that the Company expects to have a material impact on its financial position or results of operations upon becoming effective.
2. Stockholders’ Equity
Activity for the three and nine month periods ended October 28, 2023 and October 29, 2022 in the Company’s stockholders’ equity is summarized below:
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(in thousands, except share data) |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Treasury Stock |
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Shares |
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Amount |
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Capital |
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Earnings |
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(Loss) Income |
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Shares |
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Amount |
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Total |
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Balance at January 28, 2023 |
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$ |
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$ |
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$ |
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$ |
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( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock options exercised |
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— |
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— |
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— |
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— |
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— |
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Shares used for tax withholding |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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Shares purchased as part of publicly announced program, inclusive of $ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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( |
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Vesting of restricted shares |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Unrealized gains on interest rate derivative contracts, net of related taxes of $ |
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— |
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— |
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— |
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— |
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— |
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— |
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Amount reclassified from accumulated other comprehensive income into earnings, net of related taxes of $ |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Balance at April 29, 2023 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock options exercised |
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|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Shares used for tax withholding |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Shares purchased as part of publicly announced program, inclusive of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Vesting of restricted shares |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized gains on interest rate derivative contracts, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Amount reclassified from accumulated other comprehensive income into earnings, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at July 29, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Stock options exercised |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Shares used for tax withholding |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Shares purchased as part of publicly announced program, inclusive of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Vesting of restricted shares |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized gains on interest rate derivative contracts, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Amount reclassified from accumulated other comprehensive income into earnings, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at October 28, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
8
|
|
(in thousands, except share data) |
|
|||||||||||||||||||||||||||||
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated (Deficit) |
|
|
Accumulated |
|
|
Treasury Stock |
|
|
|
|
||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
||||||||
Balance at January 29, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Stock options exercised |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Shares used for tax withholding |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Shares purchased as part of publicly announced program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Vesting of restricted shares, net of forfeitures of |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized gains on interest rate derivative contracts, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Amount reclassified from accumulated other comprehensive income into earnings, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at April 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Stock options exercised |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Shares used for tax withholding |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Shares purchased as part of publicly announced program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Vesting of restricted shares |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized losses on interest rate derivative contracts, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Amount reclassified from accumulated other comprehensive loss into earnings, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at July 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Stock options exercised |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Shares used for tax withholding |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Shares purchased as part of publicly announced program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Vesting of restricted shares |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized gains on interest rate derivative contracts, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Amount reclassified from accumulated other comprehensive loss into earnings, net of related taxes of $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at October 29, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
3. Lease Commitments
The Company’s leases primarily consist of stores, distribution facilities and office space under operating and finance leases that will expire principally during the next 30 years. The leases typically include renewal options at five-year intervals and escalation clauses. Lease renewals are only included in the lease liability to the extent that they are reasonably assured of being exercised. The Company’s leases typically provide for contingent rentals based on a percentage of gross sales. Contingent rentals are not included in the lease liability, and they are recognized as variable lease cost when incurred.
9
The following is a schedule of the Company’s future lease payments:
|
|
(in thousands) |
|
|||||
Fiscal Year |
|
Operating |
|
|
Finance |
|
||
2023 (remainder) |
|
$ |
124,260 |
|
|
$ |
1,485 |
|
2024 |
|
|
612,850 |
|
|
|
5,733 |
|
2025 |
|
|
575,288 |
|
|
|
3,604 |
|
2026 |
|
|
535,851 |
|
|
|
3,640 |
|
2027 |
|
|
494,978 |
|
|
|
3,640 |
|
2028 |
|
|
446,644 |
|
|
|
3,447 |
|
Thereafter |
|
|
1,431,867 |
|
|
|
20,786 |
|
Total future minimum lease payments |
|
|
4,221,738 |
|
|
|
42,335 |
|
Amount representing interest |
|
|
( |
) |
|
|
( |
) |
Total lease liabilities |
|
|
|
|
|
|
||
Less: current portion of lease liabilities |
|
|
( |
) |
|
|
(4,356 |
) |
Total long term lease liabilities |
|
$ |
|
|
$ |
26,115 |
|
|
|
|
|
|
|
|
|
||
Weighted average discount rate |
|
5.5% |
|
|
5.9% |
|
||
Weighted average remaining lease term (years) |
|
|
8.0 |
|
|
|
11.8 |
|
The above schedule excludes approximately $605.8 million for 61 stores and one warehouse that the Company has committed to open or relocate but has not yet taken possession of the space. The discount rates used in valuing the Company’s leases are not readily determinable, and are based on the Company’s incremental borrowing rate on a fully collateralized basis.
The following is a schedule of net lease costs for the periods indicated:
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
October 28, 2023 |
|
|
October 29, 2022 |
|
|
October 28, 2023 |
|
|
October 29, 2022 |
|
||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of finance lease asset (a) |
|
$ |
877 |
|
|
$ |
|
|
$ |
2,630 |
|
|
$ |
|
||
Interest on lease liabilities (b) |
|
|
454 |
|
|
|
|
|
|
1,425 |
|
|
|
|
||
Operating lease cost (c) |
|
|
147,270 |
|
|
|
|
|
|
427,072 |
|
|
|
|
||
Variable lease cost (c) |
|
|
58,915 |
|
|
|
|
|
|
168,864 |
|
|
|
|
||
Total lease cost |
|
|
207,516 |
|
|
|
|
|
|
599,991 |
|
|
|
|
||
Less all rental income (d) |
|
|
(1,383 |
) |
|
|
( |
) |
|
|
(4,224 |
) |
|
|
( |
) |
Total net rent expense (e) |
|
$ |
206,133 |
|
|
$ |
|
|
$ |
595,767 |
|
|
$ |
|
||
(a) |
|
(b) |
|
(c) |
Includes real estate taxes, common area maintenance, insurance and percentage rent. Included in the line item “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income. |
(d) |
Included in the line item “Other revenue” in the Company’s Condensed Consolidated Statements of Income. |
(e) |
Excludes an immaterial amount of short-term lease cost. |
Supplemental cash flow disclosures related to leases are as follows:
|
|
(in thousands) |
|
|||||
|
|
Nine Months Ended |
|
|||||
|
|
October 28, 2023 |
|
|
October 29, 2022 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Cash payments arising from operating lease liabilities (a) |
|
$ |
431,200 |
|
|
$ |
|
|
Cash payments for the principal portion of finance lease liabilities (b) |
|
$ |
2,975 |
|
|
$ |
|
|
Cash payments for the interest portion of finance lease liabilities (a) |
|
$ |
1,425 |
|
|
$ |
|
|
Supplemental non-cash information: |
|
|
|
|
|
|
||
Operating lease liabilities arising from obtaining right-of-use assets |
|
$ |
494,327 |
|
|
$ |
|
|
(a) |
|
(b) |
Included within financing activities in the Company’s Condensed Consolidated Statements of Cash Flows. |
10
4. Long Term Debt
Long term debt consists of:
|
|
(in thousands) |
|
|||||||||
|
|
October 28, |
|
|
January 28, |
|
|
October 29, |
|
|||
|
|
2023 |
|
|
2023 |
|
|
2022 |
|
|||
Senior secured term loan facility (Term B-6 Loans), adjusted SOFR (with a floor of |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Convertible senior notes, |
|
|
|
|
|
|
|
|
|
|||
Convertible senior notes, |
|
|
|
|
|
— |
|
|
|
— |
|
|
ABL senior secured revolving facility, SOFR plus spread based on average outstanding balance, matures on |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||
Unamortized deferred financing costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total debt |
|
|
|
|
|
|
|
|
|
|||
Less: current maturities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Long term debt, net of current maturities |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Term Loan Facility
The Term Loan Facility is collateralized by a first lien on the Company's favorable leases, real estate and property & equipment and a second lien on the Company's inventory and receivables. On May 11, 2023, the Company amended the Term Loan Credit Agreement to, effective as of June 30, 2023, change one of the reference interest rates for borrowings under the Term Loan Facility from the Term Loan Adjusted LIBOR Rate to the Adjusted Term SOFR Rate (as defined in the Term Loan Credit Agreement). The Adjusted Term SOFR Rate includes a credit spread adjustment of
Interest rates for the Term Loan Facility are based on: (i) for SOFR rate loans, a rate per annum equal to the Adjusted Term SOFR Rate for the applicable interest period, plus an applicable margin; and (ii) for prime rate loans, a rate per annum equal to the highest of (a) the variable annual rate of interest then announced by JPMorgan Chase Bank, N.A. at its head office as its “prime rate,” (b) the federal reserve bank of New York rate in effect on such date plus
At October 28, 2023 and October 29, 2022, the interest rate related to the Term Loan Facility was
2025 Convertible Notes
On April 16, 2020, the Company issued $
During the first quarter of Fiscal 2022, the Company entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $
During the first quarter of Fiscal 2023, the Company entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $
Prior to the close of business on the business day immediately preceding January 15, 2025, the 2025 Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the 2025 Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The 2025 Convertible Notes have an initial conversion rate of 4.5418 shares per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $220.18 per share of
11
the Company’s common stock), subject to adjustment if certain events occur. The initial conversion price represents a conversion premium of approximately 32.50% over $166.17 per share, the last reported sale price of the Company’s common stock on April 13, 2020 (the pricing date of the offering) on the New York Stock Exchange. During the first quarter of Fiscal 2021, the Company made an irrevocable settlement election for any conversions of the 2025 Convertible Notes. Upon conversion, the Company will pay cash for the principal amount. For any excess above principal, the Company will deliver shares of its common stock. The Company was not permitted to redeem the 2025 Convertible Notes prior to April 15, 2023. From and after April 15, 2023, the Company is able to redeem for cash all or any portion of the 2025 Convertible Notes, at its option, if the last reported sale price of the Company’s common stock is equal to or greater than 130% of the conversion price for a specified period of time, at a redemption price equal to 100% of the principal aggregate amount of the 2025 Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Holders of the 2025 Convertible Notes may require the Company to repurchase their 2025 Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the 2025 Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their 2025 Convertible Notes in connection with such corporate event or during the relevant redemption period for such 2025 Convertible Notes. The effective interest rate is 2.8%.
2027 Convertible Notes
On September 12, 2023, the Company closed the issuance of approximately $
The 2027 Convertible Notes will bear interest at a rate of 1.25% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2023. The 2027 Convertible Notes will mature on December 15, 2027, unless earlier converted, redeemed or repurchased.
Prior to the close of business on the business day immediately preceding September 15, 2027, the 2027 Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the 2027 Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The 2027 Convertible Notes have an initial conversion rate of
If the Company undergoes a fundamental change, subject to certain conditions, holders of the 2027 Convertible Notes may require the Company to repurchase for cash all or any portion of their 2027 New Convertible Notes. The fundamental change repurchase price will be 100% of the aggregate principal amount of the 2027 Convertible Notes to be repurchased plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The effective interest rate is 1.7%.
12
ABL Line of Credit
On July 20, 2022, BCFWC entered into a Fourth Amendment to the Second Amended and Restated Credit Agreement (the Amendment).
On June 26, 2023, BCFWC entered into a Fifth Amendment to the Second Amended and Restated Credit Agreement, which increased the sublimit for letters of credit thereunder from $
At October 28, 2023, the Company had $
At October 29, 2022, the Company had $
5. Derivative Instruments and Hedging Activities
The Company accounts for derivatives and hedging activities in accordance with ASC 815, “Derivatives and Hedging” (ASC 815). As required by ASC 815, the Company records all derivatives on the balance sheet at fair value and adjusts to market on a quarterly basis. In addition, to comply with the provisions of ASC 820, “Fair Value Measurements” (ASC 820), credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In accordance with ASC 820, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. There is no impact of netting, because the Company has only
On December 17, 2018, the Company entered into an interest rate swap, which hedged $
During the second quarter of Fiscal 2023, the Company amended its interest rate swap to be based on SOFR rather than LIBOR, which resulted in an updated swap rate of
The amount of loss deferred for the previous interest rate swap was $
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
13
As of October 28, 2023, the Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk:
Interest Rate Derivative |
|
Number of |
|
Notional Aggregate |
|
Interest Swap Rate |
|
Maturity Date |
Interest rate swap contract |
|
|
$ |
|
|
Tabular Disclosure
The table below presents the fair value of the Company’s derivative financial instruments on a gross basis as well as their classification on the Company’s Condensed Consolidated Balance Sheets:
|
|
(in thousands) |
|
|||||||||||||||
|
|
Fair Values of Derivative Instruments |
|
|||||||||||||||
|
|
October 28, 2023 |
|
|
January 28, 2023 |
|
|
October 29, 2022 |
|
|||||||||
Derivatives Designated as Hedging Instruments |
|
Balance |
|
Fair |
|
|
Balance |
|
Fair |
|
|
Balance |
|
Fair |
|
|||
Interest rate swap contracts |
|
Other assets |
|
$ |
|
|
Other assets |
|
$ |
|
|
Other assets |
|
$ |
|
|||
The following table presents the unrealized gains and losses deferred to accumulated other comprehensive income resulting from the Company’s derivative financial instruments for each of the reporting periods.
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Interest Rate Derivatives: |
|
October 28, 2023 |
|
|
October 29, 2022 |
|
|
October 28, 2023 |
|
|
October 29, 2022 |
|
||||
Unrealized gains (losses), before taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income tax (expense) benefit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Unrealized gains (losses), net of taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table presents information about the reclassification of gains and losses from accumulated other comprehensive income into earnings related to the Company’s derivative instruments for each of the reporting periods.
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Component of Earnings: |
|
October 28, 2023 |
|
|
October 29, 2022 |
|
|
October 28, 2023 |
|
|
October 29, 2022 |
|
||||
Interest (benefit) expense |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Income tax expense (benefit) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net reclassification into earnings |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The Company estimates that approximately $
6. Fair Value Measurements
The Company accounts for fair value measurements in accordance with ASC 820, which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price), and classifies the inputs used to measure fair value into the following hierarchy:
Level 1: Quoted prices for identical assets or liabilities in active markets.
Level 2: Quoted market prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Pricing inputs that are unobservable for the assets and liabilities and include situations where there is little, if any, market activity for the assets and liabilities.
The inputs into the determination of fair value require significant management judgment or estimation.
14
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments.
Refer to Note 5, “Derivative Instruments and Hedging Activities,” for further discussion regarding the fair value of the Company’s interest rate swap contract.
Financial Assets
The fair values of the Company’s financial assets and the hierarchy of the level of inputs as of October 28, 2023, January 28, 2023 and October 29, 2022 are summarized below:
|
|
(in thousands) |
|
|||||||||
|
|
Fair Value Measurements at |
|
|||||||||
|
|
October 28, |
|
|
January 28, |
|
|
October 29, |
|
|||
|
|
2023 |
|
|
2023 |
|
|
2022 |
|
|||
Level 1 |
|
|
|
|
|
|
|
|
|
|||
Cash equivalents (including restricted cash equivalents) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Long-lived assets are measured at fair value on a non-recurring basis for purposes of calculating impairment using the fair value hierarchy of ASC 820. The fair value of the Company’s long-lived assets is calculated using a discounted cash-flow model that used level 3 inputs. In calculating future cash flows, the Company makes estimates regarding future operating results and market rent rates, based on its experience and knowledge of market factors in which the retail location is located.
Impairment charges on long-lived assets were $
Impairment charges on long-lived assets were $
Financial Liabilities
The fair values of the Company’s financial liabilities are summarized below:
|
|
(in thousands) |
|
|||||||||||||||||||||
|
|
October 28, 2023 |
|
|
January 28, 2023 |
|
|
October 29, 2022 |
|
|||||||||||||||
|
|
Principal |
|
|
Fair |
|
|
Principal |
|
|
Fair |
|
|
Principal |
|
|
Fair |
|
||||||
Term B-6 Loans |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
2025 Convertible Notes |
|
|
156,155 |
|
|
|
150,519 |
|
|
|
507,687 |
|
|
|
619,409 |
|
|
|
507,687 |
|
|
|
513,982 |
|
2027 Convertible Notes |
|
|
297,069 |
|
|
|
262,202 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
ABL Line of Credit (a) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total debt (b) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The fair values presented herein are based on pertinent information available to management as of the respective period end dates. The estimated fair values of the Company’s debt are classified as Level 2 in the fair value hierarchy, and are based on current market quotes received from inactive markets.
7. Income Taxes
Income tax expense was $
15
debt extinguishment costs related to partial repurchase of the 2025 Convertible Notes during the third quarter of Fiscal 2023, respectively.
Income tax expense was $40.0 million during the nine month period ended October 28, 2023 compared with $11.6 million during the nine month period ended October 29, 2022. The effective tax rate for the nine month period ended October 28, 2023 was 26.3% compared with 20.5% during the nine month period ended October 29, 2022. The increase in income tax expense and tax rate is due to higher pre-tax income, higher tax expense from stock based compensation and the disallowance of certain debt extinguishment costs related to partial repurchase of the 2025 Convertible Notes, respectively.
Net deferred taxes are as follows:
|
|
(in thousands) |
|
|||||||||
|
|
October 28, |
|
|
January 28, |
|
|
October 29, |
|
|||
|
|
2023 |
|
|
2023 |
|
|
2022 |
|
|||
Deferred tax asset |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Deferred tax liability |
|
|
|
|
|
|
|
|
|
|||
Net deferred tax liability |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net deferred tax assets relate to Puerto Rico deferred balances that have a future net benefit for tax purposes. Net deferred tax liabilities primarily relate to intangible assets and depreciation expense where the Company has a future obligation for tax purposes.
As of October 28, 2023, the Company had a deferred tax asset related to net operating losses of $7.5 million, inclusive of $7.2 million related to state net operating losses that expire at various dates between 2024 and 2041, as well as $0.3 million related to Puerto Rico net operating losses that will expire in 2025.
As of October 28, 2023, the Company had a deferred tax asset related to tax credit carry-forwards of $9.9 million, inclusive of $9.5 million of state tax credit carry-forwards, which will begin to expire in 2024, and $0.4 million of deferred tax assets recorded for Puerto Rico alternative minimum tax credits that have an indefinite life.
As of October 28, 2023, January 28, 2023 and October 29, 2022, valuation allowances amounted to $10.7 million, $13.1 million and $10.6 million, respectively, related to state and Puerto Rico net operating losses and state tax credit carry-forwards. The Company believes that it is more likely than not that this portion of state and Puerto Rico net operating losses and state tax credit carry-forwards will not be realized.
8. Capital Stock
Treasury Stock
The Company accounts for treasury stock under the cost method.
Shares Used to Satisfy Tax Withholding
During the nine month period ended October 28, 2023, the Company acquired
Share Repurchase Program
On February 16, 2022, the Company's Board of Directors authorized the repurchase of up to $
On August 15, 2023, the Company's Board of Directors authorized the repurchase of up to an additional $
16
During the nine month period ended October 28, 2023, the Company repurchased
9. Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method for the Company’s stock-based compensation grants and the if-converted method for the 2025 Convertible Notes and the 2027 Convertible Notes.
|
|
(in thousands, except per share data) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Basic net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Weighted average number of common shares – basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common share – basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Shares for basic and diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares – basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assumed exercise of stock options and vesting of restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assumed conversion of convertible debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted average number of common shares – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common share – diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Approximately
Approximately
During the three and nine months ended October 28, 2023, respectively, shares of common stock issuable upon conversion of the 2025 Convertible Notes and 2027 Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive, since the conversion prices of $
10. Stock Based Compensation
As of October 28, 2023, there were
17
Non-cash stock compensation expense is as follows:
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
||||
Type of Non-Cash Stock Compensation |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Restricted stock unit grants (a) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Stock option grants (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Performance stock unit grants (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total (b) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Stock Options
Stock option transactions during the nine month period ended October 28, 2023 are summarized as follows:
|
|
Number of |
|
|
Weighted |
|
||
Options outstanding, January 28, 2023 |
|
|
|
|
$ |
|
||
Options granted |
|
|
|
|
|
|
||
Options exercised (a) |
|
|
( |
) |
|
|
|
|
Options forfeited |
|
|
( |
) |
|
|
|
|
Options outstanding, October 28, 2023 |
|
|
|
|
$ |
|
||
The following table summarizes information about the stock options vested and expected to vest during the contractual term of such options as of October 28, 2023:
|
|
Options |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
Options vested and expected to vest |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
Options exercisable |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
The fair value of each stock option granted during the nine month period ended October 28, 2023 was estimated using the Black Scholes option pricing model using the following assumptions on a weighted average basis:
|
|
|
Nine Months Ended |
|
|
|
October 28, |
|
|
|
2023 |
Risk-free interest rate |
|
|
|
Expected volatility |
|
|
|
Expected life (years) |
|
|
|
Contractual life (years) |
|
|
|
Expected dividend yield |
|
|
|
Grant date fair value of options issued |
|
$ |
18
The expected dividend yield was based on the Company’s expectation of not paying dividends in the near term. To evaluate its volatility factor, the Company uses the historical volatility of its stock price over the expected life of the options. The risk free interest rate was based on the U.S. Treasury rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the awards being valued. The expected life of the options was estimated using historical exercise rates.
Restricted Stock
Restricted stock transactions during the nine month period ended October 28, 2023 are summarized as follows:
|
|
Number of |
|
|
Weighted |
|
||
Non-vested awards outstanding, January 28, 2023 |
|
|
|
|
$ |
|
||
Awards granted |
|
|
|
|
|
|
||
Awards vested (a) |
|
|
( |
) |
|
|
|
|
Awards forfeited |
|
|
( |
) |
|
|
|
|
Non-vested awards outstanding, October 28, 2023 |
|
|
|
|
$ |
|
||
The fair value of each share of restricted stock granted during the nine month period ended October 28, 2023 was based upon the closing price of the Company’s common stock on the grant date.
Performance Stock Units
The Company grants performance-based restricted stock units to its senior executives. Vesting of the performance stock units granted in Fiscal 2020 and Fiscal 2021 is based on continued service and the achievement of pre-established adjusted EBIT margin expansion and sales compounded annual growth rate (CAGR) goals (each weighted equally) over a
Performance stock unit transactions during the nine month period ended October 28, 2023 are summarized as follows:
|
|
Number of |
|
|
Weighted |
|
||
Non-vested awards outstanding, January 28, 2023 |
|
|
|
|
$ |
|
||
Awards granted |
|
|
|
|
|
|
||
Awards vested (a) |
|
|
( |
) |
|
|
|
|
Awards forfeited |
|
|
( |
) |
|
|
|
|
Non-vested awards outstanding, October 28, 2023 |
|
|
|
|
$ |
|
||
11. Commitments and Contingencies
Legal
In the course of business, the Company is party to class or collective actions alleging violations of federal and state wage and hour and other labor statutes, representative claims under the California Private Attorneys’ General Act and various other lawsuits and
19
regulatory proceedings from time to time including, among others, commercial, product, employee, customer, intellectual property and other claims. Actions against us are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties. While no assurance can be given as to the ultimate outcome of these matters, the Company believes that the final resolution of these actions will not have a material adverse effect on the Company’s results of operations, financial position, liquidity or capital resources.
Letters of Credit
The Company had letters of credit arrangements with various banks in the aggregate amount of $
Purchase Commitments
The Company had $
20
fBURLINGTON STORES, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (Fiscal 2022 10-K).
In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Our actual results or other events may differ materially from those anticipated in these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled “Safe Harbor Statement.”
Executive Summary
Introduction
We are a nationally recognized off-price retailer of high-quality, branded merchandise at everyday low prices. We opened our first store in Burlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 977 stores as of October 28, 2023 in 46 states and Puerto Rico. We have diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise at up to 60% off other retailers’ prices, including: women’s ready-to-wear apparel, menswear, youth apparel, baby, beauty, footwear, accessories, home, toys, gifts and coats. We sell a broad selection of desirable, first-quality, current-brand, labeled merchandise acquired directly from nationally-recognized manufacturers and other suppliers.
Fiscal Year
Fiscal 2023 is defined as the 53-week year ending February 3, 2024. Fiscal 2022 is defined as the 52-week year ended January 28, 2023.
Store Openings, Closings, and Relocations
During the nine month period ended October 28, 2023, we opened 65 new stores, inclusive of 9 relocations, and permanently closed six stores, exclusive of the aforementioned relocations, bringing our store count as of October 28, 2023 to 977 stores.
Ongoing Initiatives for Fiscal 2023
We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability. These initiatives include, but are not limited to:
We strive to increase comparable store sales through the following initiatives:
21
We intend to expand and enhance our retail store base through the following initiatives:
We intend to increase our operating margins through the following initiatives:
Uncertainties and Challenges
As we strive to increase profitability, there are uncertainties and challenges that we face that could have a material impact on our revenues or income. Some of these uncertainties and challenges are summarized below. For a further discussion, please refer to the description under the heading “Risk Factors” in the Fiscal 2022 10-K.
General Economic Conditions. There remains a high level of uncertainty in the current macroeconomic and geopolitical environments, and prolonged inflationary pressures continue to negatively impact the discretionary spending of the low-income shopper, our core customer. In addition to inflation, consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing global economic conditions, the costs of basic necessities and other goods, levels of employment, salaries and wage rates, prevailing interest rates, reductions in government benefits and lower tax refunds, housing costs, energy costs, commodities pricing, income tax rates and policies, consumer confidence and consumer perception of economic
22
conditions. In addition, consumer purchasing patterns are generally influenced by consumers’ disposable income, credit availability and debt levels.
A broad, protracted slowdown or downturn in the U.S. economy, an extended period of high unemployment or inflation rates, an uncertain domestic or global economic outlook or a financial crisis could adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis. Conversely, if inflation continues to decline next year, it could benefit our core customers who have been impacted by the higher cost of living since early 2022, and if economic growth slows, it could cause moderate and higher-income shoppers to become more value conscious. Both of these developments, if they occur, would be expected to improve our business. Consumer confidence is also affected by the domestic and international political situation. Our financial condition and operations could be impacted by changes in government regulations in areas including, but not limited to, taxes and healthcare. Ongoing international trade and tariff negotiations could have a direct impact on our income and an indirect impact on consumer prices. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the U.S., or public health issues such as pandemics or epidemics, could lead to a decrease in spending by consumers. In addition, natural disasters, public health issues, industrial accidents and acts of war in various parts of the world, such as the current wars in Ukraine and Gaza, could have the effect of disrupting supplies and raising prices globally which, in turn, may have adverse effects on the world and U.S. economies and lead to a downturn in consumer confidence and spending.
We closely monitor our net sales, gross margin and expenses. We have performed scenario planning such that if our net sales decline for an extended period of time, we have identified variable costs that could be reduced to partially mitigate the impact of these declines. If we were to experience adverse economic trends and/or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods.
Seasonality of Sales and Weather Conditions. Our business, like that of most retailers, is subject to seasonal influences. In the second half of the year, which includes the back-to-school and holiday seasons, we generally realize a higher level of sales and net income.
Weather continues to be a contributing factor to the sale of our merchandise. Generally, our sales are higher if the weather is cold during the Fall and warm during the early Spring. Sales of cold weather clothing are increased by early cold weather during the Fall, while sales of warm weather clothing are improved by early warm weather conditions in the Spring. Although we have diversified our product offerings, we believe traffic to our stores is still driven, in part, by weather patterns.
Competition and Margin Pressure. We believe that in order to remain competitive with retailers, including off-price retailers and discount stores, we must continue to offer brand-name merchandise at a discount to prices offered by other retailers as well as an assortment of merchandise that is appealing to our customers.
The U.S. retail apparel and home furnishings markets are highly fragmented and competitive. We compete for business with department stores, off-price retailers, internet retailers, specialty stores, discount stores, wholesale clubs, and outlet stores as well as with certain traditional, full-price retail chains that have developed off-price concepts. At various times throughout the year, traditional full-price department store chains and specialty shops offer brand-name merchandise at substantial markdowns, which can result in prices approximating those offered by us at our Burlington Stores. We anticipate that competition will increase in the future. Therefore, we will continue to look for ways to differentiate our stores from those of our competitors.
The U.S. retail industry continues to face increased pressure on margins as overall challenging retail conditions have led consumers to be more value conscious. Additionally, lower-to-moderate income shoppers continue to face economic pressure due to higher cost of living. Our strategy to chase the sales trend allows us the flexibility to purchase less pre-season merchandise with the balance purchased in-season and opportunistically. It also provides us with the flexibility to shift purchases between suppliers and categories. We believe that this enables us to obtain better terms with our suppliers, which we expect to help offset any rising costs of goods.
While freight rates are now moderating, we have experienced inflationary pressure in our supply chain and with respect to raw materials and finished goods, as well as in occupancy and other operating costs. There can be no assurance that we will be able to offset inflationary pressure in the future by increasing prices or through other means, or that our business will not be negatively affected by continued inflation in the future.
23
Key Performance and Non-GAAP Measures
We consider numerous factors in assessing our performance. Key performance and non-GAAP measures used by management include net income, Adjusted Net Income, Adjusted EBITDA, Adjusted EBIT, comparable store sales, gross margin, inventory, store payroll and liquidity.
Net income. We earned net income of $48.6 million during the three month period ended October 28, 2023 compared with $16.8 million during the three month period ended October 29, 2022. We earned net income of $112.2 million during the nine month period ended October 28, 2023 compared with $44.9 million during the nine month period ended October 29, 2022.These increases were primarily driven by higher sales, as well as increased gross margin rate. Refer to the section below entitled “Results of Operations” for further explanation.
Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT: Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT are non-GAAP financial measures of our performance.
We define Adjusted Net Income as net income, exclusive of the following items, if applicable: (i) net favorable lease costs; (ii) loss on extinguishment of debt; (iii) costs related to debt amendments; (iv) impairment charges; (v) amounts related to certain litigation matters; and (vi) other unusual, non-recurring or extraordinary expenses, losses, charges or gains, all of which are tax effected to arrive at Adjusted Net Income.
We define Adjusted EBITDA as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) costs related to debt amendments; (v) income tax expense; (vi) depreciation and amortization; (vii) net favorable lease costs; (viii) impairment charges; (ix) amounts related to certain litigation matters; and (x) other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
We define Adjusted EBIT as net income, exclusive of the following items, if applicable: (i) interest expense; (ii) interest income; (iii) loss on extinguishment of debt; (iv) costs related to debt amendments; (v) income tax expense; (vi) impairment charges; (vii) net favorable lease costs; (viii) amounts related to certain litigation matters; and (ix) other unusual, non-recurring or extraordinary expenses, losses, charges or gains.
We present Adjusted Net Income, Adjusted EBITDA and Adjusted EBIT because we believe they are useful supplemental measures in evaluating the performance of our business and provide greater transparency into our results of operations. In particular, we believe that excluding certain items that may vary substantially in frequency and magnitude from what we consider to be our core operating results are useful supplemental measures that assist investors and management in evaluating our ability to generate earnings and leverage sales, and to more readily compare core operating results between past and future periods.
We believe that these non-GAAP measures provide investors helpful information with respect to our operations and financial condition. Other companies in the retail industry may calculate these non-GAAP measures differently such that our calculation may not be directly comparable.
Adjusted Net Income has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted Net Income does not reflect the following items, net of their tax effect:
During the three and nine months ended October 28, 2023, Adjusted Net Income increased $35.8 million to $63.8 million and increased $70.7 million to $157.7 million, respectively, compared to the same periods in the prior year. These increases were primarily driven by higher sales, as well as increased gross margin rate. Refer to the section below entitled “Results of Operations” for further explanation.
24
The following table shows our reconciliation of net income to Adjusted Net Income for the three and nine months ended October 28, 2023 compared with the three and nine months ended October 29, 2022:
|
|
(unaudited) |
|
|||||||||||||
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Reconciliation of net income to Adjusted Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
48,551 |
|
|
$ |
16,783 |
|
|
$ |
112,191 |
|
|
$ |
44,923 |
|
Net favorable lease costs (a) |
|
|
3,788 |
|
|
|
4,791 |
|
|
|
11,830 |
|
|
|
14,262 |
|
Loss on extinguishment of debt (b) |
|
|
13,630 |
|
|
|
— |
|
|
|
38,274 |
|
|
|
14,657 |
|
Costs related to debt amendments (c) |
|
|
— |
|
|
|
— |
|
|
|
97 |
|
|
|
— |
|
Impairment charges - long-lived assets |
|
|
814 |
|
|
|
10,599 |
|
|
|
6,367 |
|
|
|
17,556 |
|
Litigation matters (d) |
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
|
|
10,500 |
|
Tax effect (e) |
|
|
(2,955 |
) |
|
|
(4,148 |
) |
|
|
(12,561 |
) |
|
|
(14,867 |
) |
Adjusted Net Income |
|
$ |
63,828 |
|
|
$ |
28,025 |
|
|
$ |
157,698 |
|
|
$ |
87,031 |
|
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBITDA does not reflect:
During the three and nine months ended October 28, 2023, Adjusted EBITDA increased $53.0 million to $175.6 million and increased $115.1 million to $473.7 million, respectively, compared to the same periods in the prior year. These increases were primarily driven by higher sales, as well as increased gross margin rate. Refer to the section below entitled “Results of Operations” for further explanation.
25
The following table shows our reconciliation of net income to Adjusted EBITDA for the three and nine months ended October 28, 2023 compared with the three and nine months ended October 29, 2022:
|
|
(unaudited) |
|
|||||||||||||
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Reconciliation of net income to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
48,551 |
|
|
$ |
16,783 |
|
|
$ |
112,191 |
|
|
$ |
44,923 |
|
Interest expense |
|
|
19,680 |
|
|
|
17,412 |
|
|
|
58,570 |
|
|
|
47,454 |
|
Interest income |
|
|
(5,328 |
) |
|
|
(658 |
) |
|
|
(14,902 |
) |
|
|
(4,242 |
) |
Net favorable lease costs (a) |
|
|
3,788 |
|
|
|
4,791 |
|
|
|
11,830 |
|
|
|
14,262 |
|
Loss on extinguishment of debt (b) |
|
|
13,630 |
|
|
|
— |
|
|
|
38,274 |
|
|
|
14,657 |
|
Costs related to debt amendments (c) |
|
|
— |
|
|
|
— |
|
|
|
97 |
|
|
|
— |
|
Impairment charges - long-lived assets |
|
|
814 |
|
|
|
10,599 |
|
|
|
6,367 |
|
|
|
17,556 |
|
Litigation matters (d) |
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
|
|
10,500 |
|
Depreciation and amortization |
|
|
76,087 |
|
|
|
67,634 |
|
|
|
219,749 |
|
|
|
201,908 |
|
Income tax expense |
|
|
18,341 |
|
|
|
6,035 |
|
|
|
40,013 |
|
|
|
11,560 |
|
Adjusted EBITDA |
|
$ |
175,563 |
|
|
$ |
122,596 |
|
|
$ |
473,689 |
|
|
$ |
358,578 |
|
Adjusted EBIT has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. Among other limitations, Adjusted EBIT does not reflect:
During the three and nine months ended October 28, 2023, Adjusted EBIT increased $44.5 million to $99.5 million and increased $97.3 million to $253.9 million, respectively, compared to the same periods in the prior year. These increases were primarily driven by higher sales, as well as increased gross margin rate. Refer to the section below entitled “Results of Operations” for further explanation.
The following table shows our reconciliation of net income to Adjusted EBIT for the three and nine months ended October 28, 2023 compared with the three and nine months ended October 29, 2022:
26
|
|
(unaudited) |
|
|||||||||||||
|
|
(in thousands) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Reconciliation of net income to Adjusted EBIT: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
48,551 |
|
|
$ |
16,783 |
|
|
$ |
112,191 |
|
|
$ |
44,923 |
|
Interest expense |
|
|
19,680 |
|
|
|
17,412 |
|
|
|
58,570 |
|
|
|
47,454 |
|
Interest income |
|
|
(5,328 |
) |
|
|
(658 |
) |
|
|
(14,902 |
) |
|
|
(4,242 |
) |
Net favorable lease costs (a) |
|
|
3,788 |
|
|
|
4,791 |
|
|
|
11,830 |
|
|
|
14,262 |
|
Loss on extinguishment of debt (b) |
|
|
13,630 |
|
|
|
— |
|
|
|
38,274 |
|
|
|
14,657 |
|
Costs related to debt amendments (c) |
|
|
— |
|
|
|
— |
|
|
|
97 |
|
|
|
— |
|
Impairment charges - long-lived assets |
|
|
814 |
|
|
|
10,599 |
|
|
|
6,367 |
|
|
|
17,556 |
|
Litigation matters (d) |
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
|
|
10,500 |
|
Income tax expense |
|
|
18,341 |
|
|
|
6,035 |
|
|
|
40,013 |
|
|
|
11,560 |
|
Adjusted EBIT |
|
$ |
99,476 |
|
|
$ |
54,962 |
|
|
$ |
253,940 |
|
|
$ |
156,670 |
|
Comparable Store Sales. Comparable store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of a prior year. The method of calculating comparable store sales varies across the retail industry. As a result, our definition of comparable store sales may differ from other retailers.
We define comparable store sales as merchandise sales of those stores commencing on the first day of the fiscal month one year after the end of their grand opening activities, which normally conclude within the first two months of operations. If a store is closed for seven or more days during a month, our policy is to remove that store from our calculation of comparable stores sales for any such month, as well as during the month(s) of their grand re-opening activities. The change in our comparable store sales was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
October 28, 2023 |
|
6% |
|
5% |
October 29, 2022 |
|
-17% |
|
-17% |
Various factors affect comparable store sales, including, but not limited to, weather conditions, current economic conditions, the timing of our releases of new merchandise and promotional events, the general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, competition, and the success of marketing programs.
Gross Margin. Gross margin is the difference between net sales and the cost of sales. Our cost of sales and gross margin may not be comparable to those of other entities, since some entities may include all of the costs related to their buying and distribution functions, certain store-related costs and other costs, in cost of sales. We include certain of these costs in the line items “Selling, general and administrative expenses” and “Depreciation and amortization” in our Condensed Consolidated Statements of Income. We include in our “Cost of sales” line item all costs of merchandise (net of purchase discounts and certain vendor allowances), inbound freight, distribution center outbound freight and certain merchandise acquisition costs, primarily commissions and import fees.
Gross margin as a percentage of net sales increased to 43.2% during the three month period ended October 28, 2023, compared with 41.2% during three month period ended October 29, 2022, driven primarily by increased merchandise margins and decreased freight costs. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 10 basis points as a percentage of net sales.
Gross margin as a percentage of net sales increased to 42.4% during the nine months ended October 28, 2023, compared with 40.4% during nine months ended October 29, 2022, driven primarily by decreased freight costs and increased merchandise margins.
27
Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 40 basis points as a percentage of net sales.
Inventory. Inventory at October 28, 2023 decreased to $1,329.1 million compared with $1,445.1 million at October 29, 2022. The decrease was attributable primarily to decreased inventory in our distribution centers, including reserve inventory, partially offset by 84 net new stores opened since the end of the third quarter of Fiscal 2022.
Reserve inventory includes all inventory that is being stored for release either later in the season, or in a subsequent season. We intend to use our reserve merchandise to effectively chase sales trends.
Inventory at January 28, 2023 was $1,182.0 million. The increase in inventory from January 28, 2023 is primarily driven by the seasonality of our business and the 50 net new stores opened since the end of Fiscal 2022, partially offset by decreased inventory in our distribution centers, including reserve inventory.
In order to better serve our customers and maximize sales, we continue to refine our merchandising mix and inventory levels within our stores. By appropriately managing our inventories, we believe we will be better able to deliver a continual flow of fresh merchandise to our customers.
Store Payroll as a Percentage of Net Sales. Store payroll as a percentage of net sales measures our ability to manage our payroll in accordance with increases or decreases in net sales. The method of calculating store payroll varies across the retail industry. As a result, our store payroll as a percentage of net sales may differ from other retailers. We define store payroll as regular and overtime payroll for all store personnel as well as regional and territory personnel, exclusive of payroll charges related to corporate and warehouse employees. Store payroll as a percentage of net sales was 8.8% and 8.4% during the three and nine month periods ended October 28, 2023, respectively, compared with 8.1% during each of the three and nine month periods ended October 29, 2022.
Liquidity. Liquidity measures our ability to generate cash. Management measures liquidity through cash flow, which is the measure of cash generated from or used in operating, financing, and investing activities. Cash and cash equivalents, including restricted cash and cash equivalents, decreased $263.3 million during the nine months ended October 28, 2023, compared with a decrease of $662.5 million during the nine months ended October 29, 2022. Refer to the section below entitled “Liquidity and Capital Resources” for further explanation.
Results of Operations
The following table sets forth certain items in the Condensed Consolidated Statements of Income as a percentage of net sales for the three and nine months ended October 28, 2023 and the three and nine months ended October 29, 2022.
|
|
Percentage of Net Sales |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Other revenue |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Total revenue |
|
|
100.2 |
|
|
|
100.2 |
|
|
|
100.2 |
|
|
|
100.2 |
|
Cost of sales |
|
|
56.8 |
|
|
|
58.8 |
|
|
|
57.6 |
|
|
|
59.6 |
|
Selling, general and administrative expenses |
|
|
36.2 |
|
|
|
35.7 |
|
|
|
35.8 |
|
|
|
35.2 |
|
Costs related to debt amendments |
|
|
— |
|
|
|
— |
|
|
|
0.0 |
|
|
|
— |
|
Depreciation and amortization |
|
|
3.3 |
|
|
|
3.3 |
|
|
|
3.3 |
|
|
|
3.4 |
|
Impairment charges - long-lived assets |
|
|
0.0 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.3 |
|
Other income - net |
|
|
(0.5 |
) |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
Loss on extinguishment of debt |
|
|
0.6 |
|
|
|
— |
|
|
|
0.6 |
|
|
|
0.2 |
|
Interest expense |
|
|
0.9 |
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
0.8 |
|
Total costs and expenses |
|
|
97.3 |
|
|
|
99.1 |
|
|
|
97.9 |
|
|
|
99.2 |
|
Income before income tax expense |
|
|
2.9 |
|
|
|
1.1 |
|
|
|
2.3 |
|
|
|
1.0 |
|
Income tax expense |
|
|
0.8 |
|
|
|
0.3 |
|
|
|
0.6 |
|
|
|
0.2 |
|
Net income |
|
|
2.1 |
% |
|
|
0.8 |
% |
|
|
1.7 |
% |
|
|
0.8 |
% |
28
Three Month Period Ended October 28, 2023 Compared With the Three Month Period Ended October 29, 2022
Net sales
Net sales improved approximately $248.7 million, or 12.2%, to $2,284.7 million during the third quarter of Fiscal 2023, primarily driven by a 6% increase in comparable stores sales during the third quarter of Fiscal 2023, as well as net sales from our 84 net new stores opened since the end of the third quarter of Fiscal 2022.
Cost of sales
Cost of sales as a percentage of net sales decreased to 56.8% during the third quarter of Fiscal 2023, compared to 58.8% during the third quarter of Fiscal 2022. This decrease was primarily driven by increased merchandise margins and decreased freight costs. On a dollar basis, cost of sales increased $99.7 million, or 8.3%, primarily driven by our overall increase in sales. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 10 basis points as a percentage of net sales.
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the three month period ended October 28, 2023 compared with the three month period ended October 29, 2022. Prior year amounts have been reclassified to conform to the current period presentation.
|
|
(in millions) |
|
|||||||||||||||||||||
|
|
Three Months Ended |
|
|||||||||||||||||||||
|
|
October 28, |
|
|
Percentage |
|
|
October 29, |
|
|
Percentage |
|
|
|
|
|
|
|
||||||
|
|
2023 |
|
|
Net Sales |
|
|
2022 |
|
|
Net Sales |
|
|
$ Variance |
|
|
% Change |
|
||||||
Store related costs |
|
$ |
496.3 |
|
|
|
21.7 |
% |
|
$ |
433.6 |
|
|
|
21.3 |
% |
|
$ |
62.7 |
|
|
|
14.5 |
% |
Product sourcing costs |
|
|
200.3 |
|
|
|
8.8 |
|
|
|
177.2 |
|
|
|
8.7 |
|
|
|
23.1 |
|
|
|
13.0 |
|
Corporate costs |
|
|
86.5 |
|
|
|
3.8 |
|
|
|
77.7 |
|
|
|
3.8 |
|
|
|
8.8 |
|
|
|
11.3 |
|
Marketing and strategy costs |
|
|
12.6 |
|
|
|
0.6 |
|
|
|
12.5 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.8 |
|
Other selling, general and administrative expenses |
|
|
31.1 |
|
|
|
1.3 |
|
|
|
25.9 |
|
|
|
1.3 |
|
|
|
5.2 |
|
|
|
20.1 |
|
Selling, general and administrative expenses |
|
$ |
826.8 |
|
|
|
36.2 |
% |
|
$ |
726.9 |
|
|
|
35.7 |
% |
|
$ |
99.9 |
|
|
|
13.7 |
% |
The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by increased store payroll costs and product sourcing costs, partially offset by an improvement in store occupancy costs. On a dollar basis, the increase in selling, general and administrative expenses was primarily driven by increases in store payroll and occupancy costs and product sourcing costs.
During the first three quarters of Fiscal 2023, we acquired 64 store leases directly from Bed Bath & Beyond. We started paying rent immediately upon acquisition of these stores even though the stores are not yet open. This transaction resulted in $9.6 million of selling, general and administrative expenses during the third quarter of Fiscal 2023.
Depreciation and amortization
Depreciation and amortization expense amounted to $76.1 million during the third quarter of Fiscal 2023 compared with $67.6 million during the third quarter of Fiscal 2022. The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our supply chain, as well as new and non-comparable stores.
Impairment charges – long-lived assets
Impairment charges on long-lived assets were $0.8 million during the third quarter of Fiscal 2023, related to unrecoverable fixed assets at eight underperforming stores. Impairment charges on long-lived assets were $10.6 million during the third quarter of Fiscal 2022, primarily related to two owned stores that were expected to be sold below net carrying value.
The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, “Fair Value Measurements,” for further discussion regarding impairment charges.
29
Loss on Extinguishment of Debt
During the third quarter of Fiscal 2023, we entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $241.2 million in aggregate principal amount of 2025 Convertible Notes held by them for $255.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due 2027 (2027 Convertible Notes). These exchanges resulted in aggregate pre-tax debt extinguishment charges of $13.6 million. There were no debt extinguishment charges during the third quarter of Fiscal 2022.
Other income - net
Other income - net improved $9.6 million to $12.4 million during the third quarter of Fiscal 2023, compared to the same period in the prior year. The increase was primarily driven by the sales of certain tax credits as well as interest income.
Interest expense
Interest expense increased $2.3 million during the third quarter of Fiscal 2023 to $19.7 million, compared to the same period in the prior year. The increase was driven by a higher interest rate on the unhedged portion of the term loan, partially offset by a lower average balance of 2025 Convertible Notes and a lower interest rate on the 2027 Convertible Notes compared to the 2025 Convertible Notes that were extinguished.
The average interest rates and average balances related to our variable rate debt for the third quarter of Fiscal 2023 compared with the third quarter of Fiscal 2022, are summarized in the table below:
|
|
|
Three Months Ended |
|
||||||
|
|
|
October 28, |
|
|
|
October 29, |
|
||
|
|
|
2023 |
|
|
|
2022 |
|
||
Average balance – ABL Line of Credit (in millions) |
|
$ |
|
— |
|
|
$ |
|
— |
|
Average interest rate – ABL Line of Credit |
|
|
|
— |
|
|
|
|
— |
|
Average balance – Term Loan Facility (in millions) (a) |
|
$ |
941.4 |
|
|
$ |
951.0 |
|
||
Average interest rate – Term Loan Facility |
|
|
7.4% |
|
|
|
4.7% |
|
||
(a) Excludes original issue discount.
Income tax expense
Income tax expense was $18.3 million during the third quarter of Fiscal 2023 compared with income tax expense of $6.0 million during the third quarter of Fiscal 2022. The effective tax rate for the third quarter of Fiscal 2023 was 27.4% compared with 26.4% during the third quarter of Fiscal 2022. The increase in income tax expense and tax rate is due to higher pre-tax income and the disallowance of certain debt extinguishment costs related to partial repurchase of the 2025 Convertible Notes during the third quarter of Fiscal 2023, respectively.
At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the third quarter of Fiscal 2023 resulted in an annual effective income tax rate of approximately 29% (before discrete items) as our best estimate.
Net income
We earned net income of $48.6 million for the third quarter of Fiscal 2023 compared with $16.8 million for the third quarter of Fiscal 2022. This increase was primarily driven by higher sales, as well as increased gross margin rate. Net income for the third quarter of Fiscal 2023 included $7.0 million of expense, net of income taxes, related to recently acquired leases from Bed Bath & Beyond, included in the line item “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.
30
Nine Month Period Ended October 28, 2023 Compared With the Nine Month Period Ended October 29, 2022
Net sales
Net sales improved approximately $642.5 million, or 10.8%, to $6,587.9 million during the first three quarters of Fiscal 2023, primarily driven by a 5% increase in comparable stores sales during that period, as well as net sales from our 84 net new stores opened since the end of the third quarter of Fiscal 2022.
Cost of sales
Cost of sales as a percentage of net sales decreased to 57.6% during the first three quarters of Fiscal 2023, compared to 59.6% during same period of Fiscal 2022. This decrease was primarily driven by decreased freight costs and higher merchandise margins. On a dollar basis, cost of sales increased $249.3 million, or 7.0%, primarily driven by our overall increase in sales. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 40 basis points as a percentage of net sales.
Selling, general and administrative expenses
The following table details selling, general and administrative expenses for the nine month period ended October 28, 2023 compared with the nine month period ended October 29, 2022. Prior year amounts have been reclassified to conform to the current period presentation.
|
|
(in millions) |
|
|||||||||||||||||||||
|
|
Nine Months Ended |
|
|||||||||||||||||||||
|
|
October 28, 2023 |
|
|
Percentage |
|
|
October 29, 2022 |
|
|
Percentage |
|
|
$ Variance |
|
|
% Change |
|
||||||
Store related costs |
|
$ |
1,404.6 |
|
|
|
21.3 |
% |
|
$ |
1,259.5 |
|
|
|
21.2 |
% |
|
$ |
145.1 |
|
|
|
11.5 |
% |
Product sourcing costs |
|
|
570.1 |
|
|
|
8.7 |
|
|
|
490.8 |
|
|
|
8.3 |
|
|
|
79.3 |
|
|
|
16.2 |
|
Corporate costs |
|
|
256.4 |
|
|
|
3.9 |
|
|
|
234.6 |
|
|
|
3.9 |
|
|
|
21.8 |
|
|
|
9.3 |
|
Marketing and strategy costs |
|
|
39.5 |
|
|
|
0.6 |
|
|
|
33.2 |
|
|
|
0.6 |
|
|
|
6.3 |
|
|
|
19.0 |
|
Other selling, general and administrative expenses |
|
|
87.1 |
|
|
|
1.3 |
|
|
|
74.7 |
|
|
|
1.2 |
|
|
|
12.4 |
|
|
|
16.6 |
|
Selling, general and administrative expenses |
|
$ |
2,357.7 |
|
|
|
35.8 |
% |
|
$ |
2,092.8 |
|
|
|
35.2 |
% |
|
$ |
264.9 |
|
|
|
12.7 |
% |
The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by increased product sourcing costs and store payroll costs. On a dollar basis, the increase in selling, general and administrative expenses was primarily driven by increases in product sourcing costs, occupancy costs, and store payroll costs.
During the first three quarters of Fiscal 2023, we acquired 64 store leases directly from Bed Bath & Beyond. We started paying rent immediately upon acquisition of these stores even though the stores are not yet open. This transaction resulted in $12.3 million of selling, general and administrative expenses during the first three quarters of Fiscal 2023.
Depreciation and amortization
Depreciation and amortization expense amounted to $219.7 million during the first nine months of Fiscal 2023 compared with $201.9 million during the first nine months of Fiscal 2022. The increase in depreciation and amortization expense was primarily driven by capital expenditures related to our supply chain, as well as new and non-comparable stores.
Impairment charges – long-lived assets
Impairment charges on long-lived assets were $6.4 million during the first three quarters of Fiscal 2023, related to unrecoverable fixed assets at eleven underperforming stores and unrecoverable lease assets at three of those stores. Impairment charges on long-lived assets were $17.6 million during the first three quarters of Fiscal 2022, related to three owned stores expected to be sold below net carrying value, declines in revenue and operating results for eight stores, and unrecoverable fixed assets at two relocating stores.
The recoverability assessment related to these store-level assets requires various judgments and estimates, including estimates related to future revenues, gross margin rates, store expenses and other assumptions. We base these estimates upon our past and
31
expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store. Refer to Note 6, “Fair Value Measurements,” for further discussion regarding impairment charges.
Loss on Extinguishment of Debt
During the first three quarters of Fiscal 2023, we entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes, whereby the holders exchanged $241.2 million in aggregate principal amount of 2025 Convertible Notes held by them for $255.0 million in aggregate principal amount of 2027 Convertible Notes, as well as $110.3 million in aggregate principal amount of 2025 Convertible Notes held by them for $133.3 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of $38.3 million.
During the first three quarters of Fiscal 2022, we entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes, whereby the holders exchanged $64.6 million in aggregate principal amount of 2025 Convertible Notes held by them for $78.2 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of $14.7 million.
Other income - net
Other income - net improved $8.7 million to $27.5 million during the nine months ended October 28, 2023, compared to the same period in the prior year. The increase was primarily driven by interest income as well as the sales of certain tax credits.
Interest expense
Interest expense increased $11.1 million during the first nine months of Fiscal 2023 to $58.6 million, compared to the same period in the prior year. The increase was driven by a higher interest rate on the unhedged portion of the term loan, partially offset by a lower average balance of 2025 Convertible Notes and a lower interest rate on the 2027 Convertible Notes compared to the 2025 Convertible Notes that were extinguished.
The average interest rates and average balances related to our variable rate debt for the first three quarters of Fiscal 2023 compared with the same period of Fiscal 2022, are summarized in the table below:
|
|
|
Nine Months Ended |
|
||||||
|
|
|
October 28, |
|
|
|
October 29, |
|
||
|
|
|
2023 |
|
|
|
2022 |
|
||
Average balance – ABL Line of Credit (in millions) |
|
$ |
|
— |
|
|
$ |
|
— |
|
Average interest rate – ABL Line of Credit |
|
|
|
— |
|
|
|
|
— |
|
Average balance – Term Loan Facility (in millions) (a) |
|
$ |
943.8 |
|
|
$ |
953.4 |
|
||
Average interest rate – Term Loan Facility |
|
|
7.1% |
|
|
|
3.4% |
|
||
(a) Excludes original issue discount.
Income tax expense
Income tax expense was $40.0 million during the nine month period ended October 28. 2023 compared with income tax expense of $11.6 million during the nine month period ended October 29, 2022. The effective tax rate for the nine month period ended October 28, 2023 was 26.3% compared with 20.5% during the nine month period ended October 29, 2022. The increase in income tax expense and tax rate was due to higher pre-tax income, higher tax expense from stock-based compensation and the disallowance of certain debt extinguishment costs related to partial repurchase of the 2025 Convertible Notes, respectively.
At the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. Use of this methodology during the nine month period ended October 28, 2023 resulted in an annual effective income tax rate of approximately 29% (before discrete items) as our best estimate.
Net income
We earned net income of $112.2 million for the first three quarters of Fiscal 2023 compared with $44.9 million for the same period of Fiscal 2022. This increase was primarily driven by higher sales, as well as increased gross margin rate. Net income for the first nine months of Fiscal 2023 included $9.1 million of expense, net of income taxes, related to recently acquired leases from Bed
32
Bath & Beyond, included in the line item “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.
Liquidity and Capital Resources
Our ability to satisfy interest payment and future principal payment obligations on our outstanding debt will depend largely on our future performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service interest payment and future principal payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed on terms similar to our current financing agreements, or at all.
We believe that cash generated from operations, along with our existing cash and our ABL Line of Credit, will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future. However, there can be no assurance that we would be able to offset declines in our comparable store sales with savings initiatives in the event that the economy declines.
As market conditions warrant, we may, from time to time, repurchase our outstanding debt securities in the open market, in privately negotiated transactions, by tender offer, by exchange transaction or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity and other factors and may be commenced or suspended at any time. The amounts involved and total consideration paid may be material.
Cash Flow for the Nine Month Period Ended October 28, 2023 Compared With the Nine Month Period Ended October 29, 2022
We used $263.3 million of cash during the nine month period ended October 28, 2023 compared with a use of $662.5 million during the nine month period ended October 29, 2022.
Net cash provided by operating activities amounted to $270.2 million during the nine month period ended October 28, 2023, compared with net cash provided of $9.6 million during the nine month period ended October 29, 2022. The increase in our operating cash flows was primarily driven by improved sales and gross margin as well as the impact of changes in working capital.
Net cash used in investing activities was $311.3 million during the nine month period ended October 28, 2023 compared with $319.1 million during the nine month period ended October 29, 2022. This change was primarily the result of a decrease in capital expenditures related to our supply chain.
Net cash used in financing activities was $222.3 million during the nine month period ended October 28, 2023 compared with $353.0 million during the nine month period ended October 29, 2022. This change was primarily driven by less repurchases of shares of our common stock under our share repurchase program in Fiscal 2023.
Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash) minus current liabilities. We had working capital at October 28, 2023 of $260.3 million compared with $214.8 million at October 29, 2022. The increase in working capital was primarily due to an increased cash balance, partially offset by decreased inventory. We had working capital at January 28, 2023 of $365.3 million.
Capital Expenditures
For the nine month period ended October 28, 2023, cash spend for capital expenditures, net of $7.7 million of landlord allowances, amounted to $317.2 million.
We estimate that we will spend approximately $560 million, net of approximately $10 million of landlord allowances, in capital expenditures during Fiscal 2023, including approximately $345 million, net of the previously mentioned landlord allowances, for store expenditures (new stores, remodels and other store expenditures). In addition, we estimate that we will spend approximately $90 million to support our supply chain initiatives, with the remaining capital used to support our information technology and other business initiatives.
Share Repurchase Program
On February 16, 2022, our Board of Directors authorized the repurchase of up to $500 million of common stock, which is authorized to be executed through February 2024. On August 15, 2023, our Board of Directors authorized the repurchase of up to an additional $500 million of common stock, which is authorized to be executed through August 2025.
33
During the first three quarters of Fiscal 2023, we repurchased 748,720 shares of common stock for $129.3 million under these repurchase programs. As of October 28, 2023, we had $718.0 million remaining under our share repurchase authorization.
We are authorized to repurchase shares of our outstanding common stock from time to time on the open market or in privately negotiated transactions under our repurchase program. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. Our share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program.
Dividends
We currently do, and intend to continue to, retain all available funds and any future earnings to fund all of the Company's capital expenditures, business initiatives, and to support any potential opportunistic capital structure initiatives. Therefore, at this time, we do not anticipate paying cash dividends in the near term. Our ability to pay dividends on our common stock will be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions under the terms of current and any future agreements governing our indebtedness. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to compliance with covenants in our current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our Board of Directors deems relevant.
In addition, since we are a holding company, substantially all of the assets shown on our Condensed Consolidated Balance Sheets are held by our subsidiaries. Accordingly, our earnings, cash flow and ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends.
Operational Growth
During the nine month period ended October 28, 2023, we opened 65 new stores, inclusive of 9 relocations, and closed six stores, exclusive of the aforementioned relocations, bringing our store count as of October 28, 2023 to 977 stores. During Fiscal 2023, we plan to open approximately 80 net new stores.
Debt and Hedging
As of October 28, 2023, our obligations, inclusive of original issue discount, include $935.5 million under our Term Loan Facility, $453.2 million of 2025 Convertible Notes and 2027 Convertible Notes, and no outstanding borrowings on our ABL Line of Credit. Our debt obligations also include $30.5 million of finance lease obligations as of October 28, 2023.
Term Loan Facility
On May 11, 2023, we amended the Term Loan Credit Agreement to, effective as of July 1, 2023, change one of the reference interest rates for borrowings under the Term Loan Facility from the Term Loan Adjusted LIBOR Rate to the Adjusted Term SOFR Rate (as defined in the Term Loan Credit Agreement). The Adjusted Term SOFR Rate includes a credit spread adjustment of 0.11% for an interest period of one-month’s duration, 0.26% for an interest period of three-months’ duration and 0.43% for an interest period of six-months’ duration, with a floor of 0.00%.
At October 28, 2023, our borrowing rate related to the Term Loan Facility was 7.4%.
ABL Line of Credit
On June 26, 2023, we entered into an amendment to the credit agreement governing our ABL Line of Credit, which increased the sublimit for letters of credit thereunder from $150 million to $250 million. The letter of credit sublimit will automatically be reduced to (i) $237.5 million on April 1, 2024, (ii) $225 million on July 1, 2024, (iii) $212.5 million on October 1, 2024, and (iv) $200 million on January 1, 2025. BCFWC and the agent may extend the foregoing dates under clauses (i) through (iii), as long as the sublimit is reduced to $200 million no later than January 1, 2025.
At October 28, 2023, we had $824.0 million available under the ABL Line of Credit. There were no borrowings on the ABL Line of Credit during the nine month period ended October 28, 2023.
34
2025 Convertible Notes
On April 16, 2020, we issued $805.0 million of 2025 Convertible Notes. The 2025 Convertible Notes have an initial conversion rate of 4.5418 shares per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $220.18 per share of the Company’s common stock), subject to adjustment if certain events occur.
The 2025 Convertible Notes are general unsecured obligations of the Company. The 2025 Convertible Notes bear interest at a rate of 2.25% per year, payable semi-annually in cash, in arrears on April 15 and October 15 of each year, beginning on October 15, 2020. The 2025 Convertible Notes will mature on April 15, 2025, unless earlier converted, redeemed or repurchased.
During the first quarter of Fiscal 2022, we entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $64.6 million in aggregate principal amount of 2025 Convertible Notes held by them for $78.2 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of $14.7 million.
During the first quarter of Fiscal 2023, we entered into separate, privately negotiated exchange agreements with certain holders of the 2025 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $110.3 million in aggregate principal amount of 2025 Convertible Notes held by them for $133.3 million in cash. These exchanges resulted in aggregate pre-tax debt extinguishment charges of $24.6 million.
Prior to the close of business on the business day immediately preceding January 15, 2025, the 2025 Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the 2025 Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The 2025 Convertible Notes have an initial conversion rate of 4.5418 shares per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $220.18 per share of our common stock), subject to adjustment if certain events occur. The initial conversion price represents a conversion premium of approximately 32.50% over $166.17 per share, the last reported sale price of our common stock on April 13, 2020 (the pricing date of the offering) on the New York Stock Exchange. During the first quarter of Fiscal 2021, the Company made an irrevocable settlement election for any conversions of the 2025 Convertible Notes. Upon conversion, we will pay cash for the principal amount. For any excess above principal, we will deliver shares of its common stock. We were not permitted to redeem the 2025 Convertible Notes prior to April 15, 2023. From and after April 15, 2023, we are able to redeem for cash all or any portion of the 2025 Convertible Notes, at its option, if the last reported sale price of the Company’s common stock is equal to or greater than 130% of the conversion price for a specified period of time, at a redemption price equal to 100% of the principal aggregate amount of the 2025 Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Holders of the 2025 Convertible Notes may require us to repurchase their 2025 Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the 2025 Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if we issue a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their 2025 Convertible Notes in connection with such corporate event or during the relevant redemption period for such 2025 Convertible Notes.
2027 Convertible Notes
On September 12, 2023, we closed the issuance of approximately $297.1 million aggregate principal amount of our 2027 Convertible Notes pursuant to separate, privately negotiated exchange and subscription agreements with a limited number of holders of our 2025 Convertible Notes and certain investors, in each case pursuant to exemptions from registration under the Securities Act of 1933. We exchanged approximately $241.2 million in aggregate principal amount of the 2025 Convertible Notes for approximately $255.0 million in aggregate principal amount of the 2027 Convertible Notes. We also issued approximately $42.1 million in aggregate principal amount of 2027 Convertible Notes in a private placement to certain investors. An aggregate of up to 1,422,568 shares of common stock may be issued upon conversion of the 2027 Convertible Notes, which number is subject to adjustment up to an aggregate of 1,911,372 shares following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption, and which is also subject to certain anti-dilution adjustments.
The 2027 Convertible Notes will bear interest at a rate of 1.25% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2023. The 2027 Convertible Notes will mature on December 15, 2027, unless earlier converted, redeemed or repurchased.
Prior to the close of business on the business day immediately preceding September 15, 2027, the 2027 Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the 2027
35
Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The 2027 Convertible Notes have an initial conversion rate of 4.8560 shares per $1,000 principal amount of 2027 Convertible Notes (equivalent to an initial conversion price of approximately $205.93 per share of our common stock), subject to adjustment if certain events occur. The initial conversion price represents a conversion premium of approximately 32.50% over $155.42 per share, the last reported sale price of our common stock on September 7, 2023 on The New York Stock Exchange. Upon conversion, we will pay cash up to the aggregate principal amount of 2027 Convertible Notes being converted, and pay (and deliver, if applicable) cash, shares of our common stock or a combination thereof, at its election, in respect of the remainder (if any) of our conversion obligation in excess of such aggregate principal amount. We will not be able to redeem the 2027 Convertible Notes prior to December 20, 2025. On or after December 20, 2025 and prior to the 21st scheduled trading day immediately preceding December 15, 2027, we will be able to redeem for cash all or any portion of the 2027 Convertible Notes, at its option, if the last reported sale price of our common stock is equal to or greater than 130% of the conversion price for a specified period of time, at a redemption price equal to 100% of the aggregate principal amount of the 2027 Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
If we undergo a fundamental change, subject to certain conditions, holders of the 2027 Convertible Notes may require us to repurchase for cash all or any portion of our 2027 New Convertible Notes. The fundamental change repurchase price will be 100% of the aggregate principal amount of the 2027 Convertible Notes to be repurchased plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Hedging
We have an interest rate swap which hedges $450 million of variable rate exposure under our Term Loan Facility. The interest rate swap is designated as a cash flow hedge and expires on June 24, 2028. Refer to Note 5, “Derivative Instruments and Hedging Activities,” for further discussion regarding our derivative transactions.
Certain Information Concerning Contractual Obligations
We had $1,306.3 million of purchase commitments related to goods that were not received as of October 28, 2023, and had $4,221.7 million of future minimum lease payments under operating leases as of October 28, 2023. See Note 4, “Long Term Debt" for additional information related to our debt transactions. Other than the items disclosed here, and in the "Debt and Hedging" section above, there were no other significant changes regarding our obligations to make future payments under current contracts from those included in our Fiscal 2022 10-K.
Critical Accounting Policies and Estimates
Our Condensed Financial Statements have been prepared in accordance with GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amounts of revenues and other significant areas that involve management’s judgments and estimates. The preparation of our Consolidated Financial Statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, long-lived assets, intangible assets, goodwill, insurance reserves and income taxes. Historical experience and various other factors that are believed to be reasonable under the circumstances form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters and (2) there would be a material effect on the Consolidated Financial Statements from either using a different, although reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate.
Our critical accounting policies and estimates are consistent with those disclosed in Note 1, “Summary of Significant Accounting Policies,” to the audited Consolidated Financial Statements, included in Part II, Item 8 of the Fiscal 2022 10-K.
Safe Harbor Statement
This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements regarding matters that are not historical facts. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,”
36
“plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Such statements may include, but are not limited to, future impacts of current macroeconomic conditions, proposed store openings and closings, proposed capital expenditures, ongoing strategic initiatives and the intended results of those initiatives, future performance or results, the effect of the adoption of recent accounting pronouncements on our consolidated financial position, results of operations and cash flows, and the outcome of contingencies such as legal proceedings. Our forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual events or results to differ materially from those we expected include: general economic conditions, such as inflation, and the domestic and international political situation and the related impact on consumer confidence and spending; the remaining impacts of the COVID-19 pandemic on our supply chain and economic activity, financial markets, labor markets and the global supply chain; competitive factors, including pricing and promotional activities of major competitors and an increase in competition within the markets in which we compete; seasonal fluctuations in our net sales, operating income and inventory levels; the reduction in traffic to, or the closing of, the other destination retailers in the shopping areas where our stores are located; our ability to identify changing consumer preferences and demand; unseasonable weather conditions caused by climate change or otherwise adversely impacting demand; natural and man-made disasters, including fire, snow and ice storms, flood, hail, hurricanes and earthquakes; our ability to successfully implement one or more of our strategic initiatives and growth plans; our ability to execute our opportunistic buying and inventory management process; the availability of desirable store locations on suitable terms; the availability, selection and purchasing of attractive merchandise on favorable terms; our ability to attract, train and retain quality employees and temporary personnel in appropriate numbers; labor costs and our ability to manage a large workforce; the solvency of parties with whom we do business and their willingness to perform their obligations to us; import risks, including tax and trade policies, tariffs and government regulations; domestic and international events affecting the delivery of merchandise to our stores; unforeseen cyber-related problems or attacks; payment-related risks; our ability to effectively generate sufficient levels of customer awareness and traffic through our advertising and marketing programs; damage to our corporate reputation or brand; issues with merchandise safety and shrinkage; lack of or insufficient insurance coverage; the impact of current and future laws and the interpretation of such laws; the impact of increasingly rigorous privacy and data security regulations; any unforeseen material loss or casualty or the existence of adverse litigation; use of social media in violation of applicable laws and regulations; our substantial level of indebtedness and related debt-service obligations; consequences of the failure to comply with covenants in our debt agreements; possible conversion of our 2025 Convertible Notes or 2027 Convertible Notes; the availability of adequate financing; and other risks discussed from time to time in our filings with the Securities and Exchange Commission (SEC), including those under the heading “Risk Factors” in the Fiscal 2022 10-K.
Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law, even if experience or future changes make it clear that any projected results expressed or implied in such statements will not be realized. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
Recent Accounting Pronouncements
Refer to Note 1, “Summary of Significant Accounting Policies,” to our Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recent accounting pronouncements and their impact on our Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to our quantitative and qualitative disclosures about market risk from those included in the Fiscal 2022 10-K.
37
Item 4. Controls and Procedures.
Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of the last day of the fiscal period covered by this report, October 28, 2023. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of October 28, 2023.
During the quarter ended October 28, 2023, there were no changes in our internal control over financial reporting 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.
In the course of business, the Company is party to class or collective actions alleging violations of federal and state wage and hour and other labor statutes, representative claims under the California Private Attorneys’ General Act and various other lawsuits and regulatory proceedings from time to time including, among others, commercial, product, employee, customer, intellectual property and other claims. Actions against us are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties. Refer to Note 11, "Commitments and Contingencies," to our Condensed Consolidated Financial Statements for further detail.
Item 1A. Risk Factors.
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Fiscal 2022 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the three fiscal months ended October 28, 2023 other than as reported in our Current Report on Form 8-K filed with the SEC on September 18, 2023 in connection with the offering of 2027 Convertible Notes and as described in Note 4, “Long Term Debt" of our Condensed Consolidated Financial Statements in this Form 10-Q.
The 2027 Convertible Notes were issued in a private placement in reliance on Section 4(a)(2) of the Securities Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding our purchases of common stock during the three fiscal months ended October 28, 2023:
Month |
|
Total Number |
|
|
Average Price |
|
|
Total Number |
|
|
Approximate |
|
||||
July 30, 2023 through August 26, 2023 |
|
|
63,779 |
|
|
$ |
170.47 |
|
|
|
63,779 |
|
|
$ |
758,985 |
|
August 27, 2023 through September 30, 2023 |
|
|
197,521 |
|
|
$ |
152.63 |
|
|
|
197,521 |
|
|
$ |
728,838 |
|
October 1, 2023 through October 28, 2023 |
|
|
87,648 |
|
|
$ |
124.00 |
|
|
|
87,648 |
|
|
$ |
717,970 |
|
Total |
|
|
348,948 |
|
|
|
|
|
|
348,948 |
|
|
|
|
||
38
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the three-month period ended October 28, 2023, no director or officer of the Company
39
Item 6. Exhibits.
Exhibit |
|
Incorporated by Reference |
|
Number |
Exhibit Description |
Form |
Filing Date |
4.1 |
Current Report on Form 8-K |
September 18, 2023 |
|
31.1† |
|
|
|
31.2† |
|
|
|
32.1† |
|
|
|
32.2† |
|
|
|
101.INS† |
Inline XBRL Instance Document – the instance document does not appear in Interactive Data File, because its XBRL tags are embedded within the Inline XBRL document. |
|
|
101.SCH† |
Inline XBRL Taxonomy Extension Schema Document |
|
|
101.CAL† |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
101.DEF† |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
101.LAB† |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE† |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
104† |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
|
|
† Filed or furnished herewith.
40
SIGNATURES
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.
BURLINGTON STORES, INC. |
|
/s/ Michael O’Sullivan |
Michael O’Sullivan Chief Executive Officer (Principal Executive Officer) |
|
/s/ Kristin Wolfe |
Kristin Wolfe Chief Financial Officer (Principal Financial Officer) |
Date: November 21, 2023
41