# Burlington Stores, Inc.: Form 10-Q for the period ended Apr 29, 2023

- Company: [Burlington Stores, Inc.](/companies/burl.md) (CIK 1579298)
- Form: 10-Q
- Filed: 2023-05-25
- Accepted by EDGAR: May 25, 2023, 20:16 ET
- Period: 2023-04-29
- Accession: 0000950170-23-024237
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1579298/000095017023024237/burl-20230429.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1579298/000095017023024237/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-04-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-29 to 2023-04-29 | $2.13bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-29 to 2023-04-29 | $1.23bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2023-01-29 to 2023-04-29 | $755.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2023-01-29 to 2023-04-29 | $10.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-29 to 2023-04-29 | $32.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-29 to 2023-04-29 | $0.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-29 to 2023-04-29 | $0.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-29 to 2023-04-29 | 65,291,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-29 to 2023-04-29 | −$78.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-29 to 2023-04-29 | $95.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2023-01-29 to 2023-04-29 | $53.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-04-29 | $532.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-04-29 | $1.99bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-04-29 | $7.00bn | us-gaap:Assets |
| Current liabilities | at 2023-04-29 | $1.72bn | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-04-29 | $801.5m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2023-04-29 | 64,884,349 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 54,866 characters.

*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 933 stores as of April 29, 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 three month period ended April 29, 2023, we opened 13 new stores, inclusive of four relocations, and permanently closed three stores, exclusive of the aforementioned relocations, bringing our store count as of April 29, 2023 to 933 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:

- **Driving Comparable Store Sales Growth.**

We intend to continue to increase comparable store sales through the following initiatives:

- *More Effectively Chasing the Sales Trend.* We plan sales using conservative comparable store sales growth, holding and controlling liquidity, closely analyzing the sales trend by business, and remaining ready to chase that trend. We believe that these actions will also allow us to take more advantage of great opportunistic buys.
- *Operating with Leaner Inventories.* We are planning to carry less inventory in our stores going forward compared to historical levels, which we believe should result in the customer finding a higher mix of fresh receipts and great merchandise values. We believe that this should drive faster turns and lower markdowns, while simultaneously improving our customers’ shopping experience.
- *Investment in Merchandising Capabilities.* We plan to continue investing in training and coaching, improved tools and reporting, incremental headcount, especially in growing or under-developed businesses, and other forms of

merchant support. We believe that these investments should improve our ability to strengthen vendor relationships, source great merchandise buys, more accurately assess value, and better forecast and chase the sales trend.

- *Enhancing Existing Categories and Introducing New Categories.* We have opportunities to expand our offerings in certain existing categories, such as ladies’ apparel, bath and cosmetic merchandise, housewares, and décor for the home, and maintain the flexibility to introduce new categories as we expand our merchandising capabilities.
- **Expanding and Enhancing Our Retail Store Base.**

We intend to expand and enhance our retail store base through the following initiatives:

- *Adhering to a Market-Focused and Financially Disciplined Real Estate Strategy.* We have grown our store base consistently since our founding in 1972, developing more than 99% of our stores organically. We believe there is significant opportunity to expand our retail store base in the United States. As a result of our smaller store prototype, we have identified numerous market opportunities that we believe will allow us to operate 2,000 stores over the long term.
- *Maintaining Focus on Unit Economics and Returns.* We have adopted a market-focused approach to new store openings in more productive retail locations, with a specific focus on maximizing sales while achieving attractive unit economics and returns. Additionally, as we continue to execute our smaller store prototype, we believe we can reduce occupancy and operating expenses.
- *Enhancing the Store Experience.* We continue to invest in select store relocations and downsizes to improve the customer experience, taking into consideration the age, size, sales, and location of a store. Relocations provide an opportunity, upon lease expirations, to right-size our stores, improve our competitive positioning, incorporate our new prototype store designs and reduce occupancy costs. Downsizes provide an opportunity to right-size our stores, within our existing space, improve co-tenancy, incorporate our new store designs and reduce occupancy costs.
- **Enhancing Operating Margins.**

We intend to increase our operating margins through the following initiatives:

- *Improving Operational Flexibility.* Our store and supply chain teams must continue to respond to the challenge of becoming more responsive to the sales chase, enhancing their ability at flexing up and down based on trends. Their ability to appropriately flex based on the ongoing trends allows us to maximize leverage on sales.
- *Optimizing Markdowns.* We believe that our markdown system allows us to maximize sales and gross margin dollars based on forward-looking sales forecasts, sell-through targets and exit dates. Additionally, as we plan to carry less inventory in our stores compared to historical levels, we expect to drive faster turns, which in turn should reduce the amount of markdowns taken compared to historical levels.
- *Enhancing Purchasing Power.* We believe that increasing our store footprint and expanding our east and west coast buying offices provides us with the opportunity to capture incremental buying opportunities and realize economies of scale in our merchandising and non-merchandising purchasing activities.
- *Challenging Expenses to Drive Operating Leverage.* We believe that we will be able to leverage our growing sales over the fixed costs of our business. In addition, by more conservatively planning our comparable store sales growth, we are forcing even tighter expense control throughout all areas of our business. We believe that this should put us in a strong position to drive operating leverage on any sales ahead of the plan. Additionally, we plan to continue challenging the processes and operating norms throughout the organization with the belief that this will lead to incremental efficiency improvements and savings.

### 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.* Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing global economic conditions, inflation, including the costs of basic necessities and other goods, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy costs, commodities pricing, income tax rates and policies, consumer confidence and consumer perception of economic conditions. In addition, consumer purchasing patterns may be 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. 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, including the continuing COVID-19 pandemic, 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 war in Ukraine, 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. This enables us to obtain better terms with our suppliers, which we expect to help offset any rising costs of goods.

Industry-wide supply chain issues have led to increased freight and labor costs compared to historical levels. There remains significant uncertainty around the impact of these costs going forward.

We have also 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.

### 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 $32.7 million during the three month period ended April 29, 2023 compared with net income of $16.2 million during the three month period ended April 30, 2022. This increase was 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) impairment charges; (iv) amounts related to certain litigation matters; and (v) 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) income tax expense; (v) depreciation and amortization; (vi) net favorable lease costs; (vii) impairment charges; (viii) amounts related to certain litigation matters; and (ix) 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) income tax expense; (v) impairment charges; (vi) net favorable lease costs; (vii) amounts related to certain litigation matters; and (viii) 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:

- net favorable lease costs;
- losses on extinguishment of debt;
- impairment charges on long-lived assets;
- amounts charged for certain litigation matters; and
- other unusual, non-recurring or extraordinary expenses, losses, charges or gains.

During the three months ended April 29, 2023, Adjusted Net Income increased $18.9 million to $55.0 million compared to the same period in the prior year. This increase was 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 Net Income for the three months ended April 29, 2023 compared with the three months ended April 30, 2022:

*(unaudited)*

*(in thousands)*

| Reconciliation of net income to Adjusted Net Income: | Three Months Ended April 29, 2023 | April 30, 2022 |
| --- | ---: | ---: |
| Net income | $32,748 | $16,174 |
| Net favorable lease costs (a) | 4,064 | 4,702 |
| Loss on extinguishment of debt (b) | 24,644 | 14,657 |
| Impairment charges - long-lived assets | 844 | 2,543 |
| Litigation matters (c) | — | 5,000 |
| Tax effect (d) | (7,302) | (7,017) |
| **Adjusted Net Income** | $54,998 | $36,059 |

(a) Net favorable lease costs represent the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of purchase accounting related to the April 13, 2006 Bain Capital acquisition of Burlington Coat Factory Warehouse Corporation (the Merger Transaction). These expenses are recorded in the line item “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Income.

(b) Amounts relate to the partial repurchases of the $805.0 million, 2.25% Convertible Senior Notes due 2025 (Convertible Notes).

(c) Represents amounts charged for certain litigation matters.

(d) Tax effect is calculated based on the effective tax rates (before discrete items) for the respective periods, adjusted for the tax effect for the impact of items (a) through (c).

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:

- interest expense on our debt;
- interest income;
- net favorable lease costs;
- losses on the extinguishment of debt;
- impairment charges on long-lived assets;
- amounts charged for certain litigation matters;
- cash requirements for replacement of assets. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will likely have to be replaced in the future;
- income tax expense; and
- other unusual, non-recurring or extraordinary expenses, losses, charges or gains.

During the three months ended April 29, 2023, Adjusted EBITDA increased $31.9 million to $157.3 million compared to the same period in the prior year. This increase was 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 EBITDA for the three months ended April 29, 2023 compared with the three months ended April 30, 2022:

*(unaudited)*

*(in thousands)*

| Reconciliation of net income to Adjusted EBITDA: | Three Months Ended April 29, 2023 | April 30, 2022 |
| --- | ---: | ---: |
| Net income | $32,748 | $16,174 |
| Interest expense | 19,345 | 14,606 |
| Interest income | (5,459) | (119) |
| Net favorable lease costs (a) | 4,064 | 4,702 |
| Loss on extinguishment of debt (b) | 24,644 | 14,657 |
| Impairment charges - long-lived assets | 844 | 2,543 |
| Litigation matters (c) | — | 5,000 |
| Depreciation and amortization | 70,529 | 66,304 |
| Income tax expense | 10,570 | 1,533 |
| **Adjusted EBITDA** | $157,285 | $125,400 |

(a) Net favorable lease costs represent the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. These expenses are recorded in the line item “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Income.

(b) Amounts relate to the partial repurchases of the Convertible Notes.

(c) Represents amounts charged for certain litigation matters.

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:

- interest expense on our debt;
- interest income;
- net favorable lease costs;
- losses on the extinguishment of debt;
- impairment charges on long-lived assets;
- amounts charged for certain litigation matters;
- income tax expense; and
- other unusual, non-recurring or extraordinary expenses, losses, charges or gains.

During the three months ended April 29, 2023, Adjusted EBIT increased $27.7 million to $86.8 million compared to the same period in the prior year. This increase was 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 months ended April 29, 2023 compared with the three months ended April 30, 2022:

*(unaudited)*

*(in thousands)*

| Reconciliation of net income to Adjusted EBIT: | Three Months Ended April 29, 2023 | April 30, 2022 |
| --- | ---: | ---: |
| Net income | $32,748 | $16,174 |
| Interest expense | 19,345 | 14,606 |
| Interest income | (5,459) | (119) |
| Net favorable lease costs (a) | 4,064 | 4,702 |
| Loss on extinguishment of debt (b) | 24,644 | 14,657 |
| Impairment charges - long-lived assets | 844 | 2,543 |
| Litigation matters (c) | — | 5,000 |
| Income tax expense | 10,570 | 1,533 |
| **Adjusted EBIT** | $86,756 | $59,096 |

(a) Net favorable lease costs represent the non-cash expense associated with favorable and unfavorable leases that were recorded as a result of the Merger Transaction. These expenses are recorded in the line item “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Income.

(b) Amounts relate to the partial repurchases of the Convertible Notes.

(c) Represents amounts charged for certain litigation matters.

*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 |
| --- | ---: |
| April 29, 2023 | 4% |
| April 30, 2022 | -18% |

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 42.3% during the three month period ended April 29, 2023, compared with 41.0% during the three month period ended April 30, 2022, driven primarily by decreased freight, partially offset by lower merchandise margins, which was primarily due to higher markdowns. Product sourcing costs, which are included in selling, general and administrative expenses, increased approximately 60 basis points as a percentage of net sales.

*Inventory.* Inventory at April 29, 2023 decreased to $1,231.1 million compared with $1,257.1 million at April 30, 2022. The decrease was attributable primarily to decreased reserve inventory, which was 44% of total inventory as of April 29, 2023, compared with 50% as of April 30, 2022, partially offset by a 10% increase in comparable store inventory and 67 net new stores opened since the end of the first 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 reflects the seasonality of our business, as well as the inventory required for our 6 net new stores opened during the three month period ended April 29, 2023.

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 8.1% during the three month period ended April 29, 2023, compared with 8.1% during the three month period ended April 30, 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 $340.2 million during the three months ended April 29, 2023, compared with a decrease of $464.0 million during the three months ended April 30, 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 months ended April 29, 2023 and the three months ended April 30, 2022.

|  | Percentage of Net Sales Three Months Ended April 29, 2023 | April 30, 2022 |
| --- | ---: | ---: |
| Net sales | 100.0% | 100.0% |
| Other revenue | 0.2 | 0.2 |
| Total revenue | 100.2 | 100.2 |
| Cost of sales | 57.7 | 59.0 |
| Selling, general and administrative expenses | 35.4 | 35.3 |
| Depreciation and amortization | 3.3 | 3.4 |
| Impairment charges - long-lived assets | 0.0 | 0.1 |
| Other income - net | (0.4) | (0.2) |
| Loss on extinguishment of debt | 1.2 | 0.8 |
| Interest expense | 0.9 | 0.8 |
| Total costs and expenses | 98.1 | 99.2 |
| Income before income tax expense | 2.1 | 1.0 |
| Income tax expense | 0.5 | 0.1 |
| Net income | 1.6% | 0.9% |

### Three Month Period Ended April 29, 2023 Compared With the Three Month Period Ended April 30, 2022

### Net sales

Net sales improved approximately $207.2 million, or 10.8%, to $2,132.8 million during the first quarter of Fiscal 2023, primarily driven by an increase in incremental sales from new stores and a 4% increase in comparable stores sales during the first quarter of Fiscal 2023.

### Cost of sales

Cost of sales as a percentage of net sales decreased to 57.7% during the first quarter of Fiscal 2023, compared to 59.0% during the first quarter of Fiscal 2022. This decrease is driven by decreased freight, partially offset by a decrease in merchandise margins. On a dollar basis, cost of sales increased $94.7 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 60 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 April 29, 2023 compared with the three month period ended April 30, 2022. Prior year amounts have been reclassified to conform to the current period presentation.

*(in millions)*

|  | Three Months Ended April 29, 2023 | Percentage of Net Sales | April 30, 2022 | Percentage of Net Sales | $ Variance | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Store related costs | $446.3 | 20.9% | $407.6 | 21.2% | $38.7 | 9.5% |
| Product sourcing costs | 186.9 | 8.8 | 156.8 | 8.2 | 30.1 | 19.2 |
| Corporate costs | 80.7 | 3.8 | 78.0 | 4.0 | 2.7 | 3.5 |
| Marketing and strategy costs | 14.5 | 0.7 | 14.0 | 0.7 | 0.5 | 3.6 |
| Other selling, general and administrative expenses | 27.2 | 1.2 | 23.9 | 1.2 | 3.3 | 13.8 |
| **Selling, general and administrative expenses** | $755.6 | 35.4% | $680.3 | 35.3% | $75.3 | 11.1% |

The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by increased product sourcing costs, mostly offset by leverage in occupancy and litigation costs in the prior year that did not repeat. On a dollar basis, the increase in selling, general and administrative expenses was primarily driven by increases in product sourcing costs, store payroll, and occupancy costs.

### Depreciation and amortization

Depreciation and amortization expense amounted to $70.5 million during the first quarter of Fiscal 2023 compared with $66.3 million during the first 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 first quarter of Fiscal 2023, related to store-level assets at seven stores. Impairment charges on long-lived assets were $2.5 million during the first quarter of Fiscal 2022, related to one owned store selling below carrying value and two additional store relocations.

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.

### Other income - net

Other income - net improved $5.6 million to $9.0 million during the first quarter of Fiscal 2023. The improvement in other income was primarily driven by increased interest income as well as the gain on sale of real estate related assets.

### Loss on extinguishment of debt

During the first quarter of Fiscal 2023 we entered into separate, privately negotiated exchange agreements with certain holders of the Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $110.3 million in aggregate principal amount of 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.

During the first quarter of Fiscal 2022, we entered into separate, privately negotiated exchange agreements with certain holders of the Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $64.6 million in aggregate principal amount of 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.

### Interest expense

Interest expense increased $4.7 million during the first quarter of Fiscal 2023 to $19.3 million, compared to the same period in the prior year. The increase was driven by the increase in LIBOR rates on our Term Loan Facility, partially offset by the partial repurchase of the Convertible Notes.

The average interest rates and average balances related to our variable rate debt for the first quarter of Fiscal 2023 compared with the first quarter of Fiscal 2022, are summarized in the table below:

|  | Three Months Ended April 29, 2023 | April 30, 2022 |
| --- | ---: | ---: |
| Average balance – ABL Line of Credit (in millions) | $— | $— |
| Average interest rate – ABL Line of Credit | — | — |
| Average balance – Term Loan Facility (in millions) (a) | $946.2 | $955.8 |
| Average interest rate – Term Loan Facility | 6.7% | 2.3% |

(a) Excludes original issue discount.

### Income tax expense

Income tax expense was $10.6 million during the first quarter of Fiscal 2023 compared with $1.5 million during the first quarter of Fiscal 2022. The effective tax rate for the first quarter of Fiscal 2023 was 24.4% compared with 8.7% during the first quarter of Fiscal 2022. The increase in income tax expense in the current year was a result of higher pre-tax income. The lower effective tax rate in the prior period is due to favorable permanent items having a greater impact as a result of lower pretax income.

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 first quarter of Fiscal 2023 resulted in an annual effective income tax rate of approximately 28% (before discrete items) as our best estimate.

### Net income

We earned net income of $32.7 million for the first quarter of Fiscal 2023 compared with $16.2 million for the first quarter of Fiscal 2022. This increase was primarily driven by higher sales, as well as increased gross margin rate.

### 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 Three Month Period Ended April 29, 2023 Compared With the Three Month Period Ended April 30, 2022

We used $340.2 million of cash during the three month period ended April 29, 2023 compared with a use of $464.0 million during the three month period ended April 30, 2022.

Net cash used in operating activities amounted to $78.0 million during the three month period ended April 29, 2023, compared with $172.3 million during the three month period ended April 30, 2022. The improvement in our operating cash flows was primarily driven by improved sales and margin in Fiscal 2023 and changes in working capital.

Net cash used in investing activities was $86.2 million during the three month period ended April 29, 2023 compared with $107.0 million during the three month period ended April 30, 2022. This change was primarily the result of proceeds from the sale of one owned store as well as a decrease in capital expenditures related to our stores (new stores, remodels and other store expenditures).

Net cash used in financing activities was $176.1 million during the three month period ended April 29, 2023 compared with $184.8 million during the three month period ended April 30, 2022. This change was primarily driven by fewer share repurchases, partially offset by increased debt repayments.

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 April 29, 2023 of $265.4 million compared with $445.2 million at April 30, 2022. The decrease in working capital was primarily due to a decrease in cash and cash equivalents due to payments on the Convertible Notes and share repurchases, as well as decreased tax receivables, an increase in other current liabilities and decreased inventory. These decreases to working capital were partially offset by decreased payables. We had working capital at January 28, 2023 of $365.3 million.

### Capital Expenditures

For the three month period ended April 29, 2023, cash spend for capital expenditures, net of $4.3 million of landlord allowances, amounted to $95.9 million.

We estimate that we will spend approximately $560 million, net of approximately $15 million of landlord allowances, in capital expenditures during Fiscal 2023, including approximately $285 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 $120 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 $500.0 million of common stock, which is authorized to be executed through February 2024.

During the first quarter of Fiscal 2023, we repurchased 245,414 shares of common stock for $51.4 million under this repurchase program. As of April 29, 2023, we had $295.9 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 three month period ended April 29, 2023, we opened 13 new stores, inclusive of four relocations, and closed three stores, exclusive of the aforementioned relocations, bringing our store count as of April 29, 2023 to 933 stores. During Fiscal 2023, we plan to open approximately 70-80 net new stores, which includes approximately 90-100 gross new stores.

### Debt and Hedging

As of April 29, 2023, our obligations, inclusive of original issue discount, include $939.8 million under our Term Loan Facility, $397.4 million of Convertible Notes and no outstanding borrowings on our ABL Line of Credit. Our debt obligations also include $32.5 million of finance lease obligations as of April 29, 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 April 29, 2023, our borrowing rate related to the Term Loan Facility was 7.0%.

#### ABL Line of Credit

At April 29, 2023, we had $839.8 million available under the ABL Line of Credit. There were no borrowings on the ABL Line of Credit during the three month period ended April 29, 2023.

#### Convertible Notes

On April 16, 2020, we issued $805.0 million of Convertible Notes. The Convertible Notes have an initial conversion rate of 4.5418 shares per $1,000 principal amount of 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 Convertible Notes are general unsecured obligations of the Company. The 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 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 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $64.6 million in aggregate principal amount of 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 Convertible Notes. Under the terms of the exchange agreements, the holders exchanged $110.3 million in aggregate principal amount of 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.

#### Hedging

On June 24, 2021, the Company terminated its previous interest rate swap and entered into a new interest rate swap. The new interest rate swap, which hedges $450 million of variable rate exposure under our Term Loan Facility, 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 $1,341.2 million of purchase commitments related to goods that were not received as of April 29, 2023, and had $3,965.1 million of future minimum lease payments under operating leases as of April 29, 2023. Additionally, during the first quarter of Fiscal 2023, we repurchased $110.3 million in aggregate principal amount of the Convertible Notes. See Note 4, “Long Term

Debt,” for additional information related to our debt transactions. 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,” “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 impact of the COVID-19 pandemic and actions taken to slow its spread and the related impacts on 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 2.25% Convertible Notes due 2025; 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.

## Market risk

As filed, 141 characters.

There were no material changes to our quantitative and qualitative disclosures about market risk from those included in the Fiscal 2022 10-K.

## Controls and procedures

As filed, 1,600 characters.

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, April 29, 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 April 29, 2023.

During the quarter ended April 29, 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.

## Risk factors

As filed, 120 characters.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Fiscal 2022 10-K.

Filed May 25, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-024237. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.