Sportsman'S Warehouse Holdings, Inc.: Form 10-Q for the period ended May 3, 2025

The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the “Risk Factors” section in Part I., Item 1A. of our Fiscal 2024 Form 10-K. Also see “Special Note Regarding Forward-Looking Statements” preceding Part I. of this 10-Q. Additionally, our historical results are not necessarily indicative of the results that may be expected or achieved for any future period.

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited condensed consolidated financial statements and the notes thereto included in this 10-Q.

Overview

We are an outdoor sporting goods retailer focused on meeting the everyday needs of the seasoned outdoor veteran, the first-time participant and everyone in between. Our mission is to provide outstanding gear and exceptional service to inspire outdoor memories.

Our business was founded in 1986 as a single retail store in Midvale, Utah. Today, we operate 146 stores in 32 states, totaling approximately 5.4 million gross square feet. We also operate an e-commerce platform at www.sportsmans.com (http://www.sportsmans.com). We do not incorporate the information on or accessible through our website into this 10-Q, and you should not consider any information on, or that can be accessed through, our website as part of this 10-Q.

Our stores and our e-commerce platform are aggregated into one operating and reportable segment.

Impact of Macroeconomic Conditions

Our financial results and operations have been, and will continue to be, impacted by events outside of our control. Global economic and business activities continue to face widespread macroeconomic uncertainties, including the impact of international trade policies and increased tariff rates, inflation, elevated interest rates, recession risks and rising global political tensions.

Recent changes in international trade policy and the implementation of increased tariff rates have caused substantial uncertainty with respect to our inventory cost. If some of the proposed and current changes to international trade and tariff policy are implemented or continue for a significant length of time, we will experience a material increase in our inventory costs, especially in our Hunting and Shooting and Optics, Electronics, Accessories and Other departments. We cannot predict the ultimate impact of such changes on our financial results for the remainder of fiscal year 2025 and beyond since such policies remain highly dynamic and evolving. In the first quarter of fiscal year 2025, we purchased additional inventory in anticipation of increased tariff rates and we expect to purchase additional strategic inventory in the second quarter of fiscal year 2025 in anticipation of further tariff rate increases to be prepared for the hunting and holiday seasons. We will continue to consider other means to mitigate the impact of increased tariff rates, including by seeking alternative sourcing of our products and by negotiating with our suppliers to absorb a portion of increased costs due to changes in tariff rates and trade policy; however, we cannot provide any assurances that we will be successful in such efforts.

In addition, since the beginning of fiscal year 2023, our business has been and continues to be impacted by consumer inflationary pressures and recession concerns. As a result, we have implemented cost reduction measures and reduced investments in future new store openings to reflect current sales trends. We did not open any new stores in fiscal year 2024 and we plan to open one new store in fiscal year 2025.

We continue to actively monitor the impact of these macroeconomic factors on our financial condition, liquidity, operations, suppliers, industry and workforce. The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected timeframe, will depend on future developments, and the impact on our customers, partners and outfitters, all of which are uncertain and cannot be predicted; however, any continued or renewed disruption resulting from these factors could negatively impact our business.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, same store sales, gross margin, selling, general and administrative expenses, income from operations and Adjusted EBITDA, which we define as net loss plus interest expense, income tax benefit, depreciation and amortization, stock-based compensation expense, transition and severance costs related to director and officer transitions, and expenses that we do not believe are indicative of our ongoing expenses.

Net Sales and Same Store Sales

Our net sales are primarily received from revenue generated in our stores and also include sales generated through our e-commerce platform. When measuring revenue generated from our stores, we review our same store sales as well as the performance of our stores that have not operated for a sufficient amount of time and include each in same store sales. We include net sales from a store in same store sales on the first day of the 13th full fiscal month following the store’s grand opening or acquisition by us. We exclude sales from stores that were closed during the period from our same store sales calculation. We include net sales from e-commerce in our calculation of same store sales. For fiscal years consisting of 53 weeks, we exclude net sales during the 53rd week from our calculation of same store sales. Some of our competitors and other retailers may calculate same store sales differently than we do. As a result, data regarding our same store sales may not be comparable to similar data made available by other retailers.

Measuring the change in year-over-year same store sales allows us to evaluate how our retail store base is performing. Various factors affect same store sales, including:

• macroeconomic factors, political trends, social unrest, inflationary pressures, recessionary trends, labor shortages, monetary supply shifts, elevated interest rates, tightening of credit markets, and potential disruptions from the ongoing Russia-Ukraine conflict and rising global political tensions;
• consumer preferences, buying trends and overall economic trends;
• changes or anticipated changes to laws and government regulations related to some of the products we sell, in particular regulations relating to the sale of firearms and ammunition;
• our ability to identify and respond effectively to local and regional trends and customer preferences;
• our ability to provide quality customer service that will increase our conversion of shoppers into paying customers;
• the success of our omni-channel strategy and our e-commerce platform;
• competition in the regional market of a store;
• atypical weather;
• new product introductions and changes in our product mix; and
• changes in pricing and average ticket sales.

We operate in a complex regulatory and legal environment that could negatively impact the demand for our products, which could significantly affect our operations and financial results. State, local, and federal laws and regulations relating to products that we sell may change, sometimes significantly, as a result of political, economic or social events.

For instance, in November 2022, Oregon passed a ballot measure that amended Oregon law to prohibit private citizens from manufacturing, importing, possessing, using, purchasing, selling or transferring a magazine capable of holding (or being readily converted to hold) over ten rounds of ammunition. Additionally, this ballot measure also imposed complex permitting and training requirements for the purchase and sale of firearms. On December 6, 2022, a state Circuit Court judge in Oregon preliminarily enjoined the implementation of the ballot measure. On November 21, 2023, the Circuit Court judge permanently enjoined implementation of the ballot measure upon a determination that the ballot measure was facially unconstitutional under Oregon's state constitution. On March 12, 2025, the Oregon Court of Appeals reversed the state Circuit Court judge's permanent injunction, holding that the ballot measure was in fact facially constitutional under Oregon's state constitution. The Oregon Court of Appeals ordered the Circuit Court judge to enter a declaratory judgment consistent with the Court of Appeals’ decision. On April 14, 2025, the plaintiffs filed a petition for review before the Oregon Supreme Court.

We believe the injunction of the Oregon ballot measure remains temporarily in effect pending a determination on the plaintiff’s petition for review before the Oregon Supreme Court. There is also a pending bill in the Oregon House (HB 3075) that seeks to delay and modify the implementation of the ballot measure’s permitting requirement and establish certain exemptions. This ballot measure is also being challenged in a related case in federal court that is presently on appeal before the U.S. Court of Appeals for the Ninth Circuit. However, due to a recent ruling upholding a similar magazine capacity restriction case in California (Virginia Duncan, et al. v. Rob Bonta, No. 23-55805 (9th Cir. 2023)), we believe it is unlikely that the ballot measure will be struck down by the U.S. Court of Appeals for the Ninth Circuit.

While we believe the injunction of the Oregon ballot measure remains in effect until the Oregon Supreme Court decides on the plaintiff’s petition for review, the ballot measure could still be found constitutional and implemented in its current form. We currently operate eight stores in the State of Oregon. If the ballot measure is allowed to take effect, whether because the Oregon Supreme Court denies the petition for review or ultimately upholds the Oregon Court of Appeals March 12, 2025 order, sales of firearms in Oregon may be halted or substantially diminished unless all permitting and training programs are fully developed by the state and/or law enforcement agencies at the time the ballot measure takes effect. If delays in establishing such permitting and training programs occur, it could result in a substantial decline in our sales of firearms and related products and reduce traffic to our stores in Oregon, which would significantly impact on our sales and gross margin.

Opening new stores and acquiring store locations is also an important part of our long-term growth strategy. During fiscal year 2024, we did not open any new stores. We plan to open one new store in fiscal year 2025. We may deviate from this target if attractive opportunities are presented to open stores or acquire new store locations outside of our target growth rate.

We also have been scaling our e-commerce platform and increasing sales through our website, www.sportsmans.com (http://www.sportsmans.com).

We believe the key drivers to increasing our total net sales include:

• increasing and improving same store sales in our existing markets;
• increasing customer visits to our stores and improving our conversion rate through focused marketing efforts and continually high standards of customer service;
• expanding our omni-channel capabilities through refined product assortment, expanded content and expertise and better user experience;
• build strong community connections and be the local choice for hunting and fishing solutions;
• increasing our total gross square footage by opening new stores; and
• growing our loyalty and credit card programs.

Gross Margin

Gross profit consists of our net sales less cost of goods sold. Gross margin measures our gross profit as a percentage of net sales. Our cost of goods sold primarily consists of merchandise acquisition costs, including freight-in costs, shipping costs, payment term discounts received from the vendor and vendor allowances and rebates associated directly with merchandise and shipping costs related to e-commerce sales.

We believe the key drivers to improving our gross margin are increasing the product mix to higher margin products, particularly apparel and footwear, increasing foot traffic within our stores and traffic to our website, improving buying opportunities with our vendor partners and coordinating pricing strategies among our stores and our merchandise group. Our ability to properly manage our inventory can also impact our gross margin. We focus our buying on core items, high-turning products and seasonally relevant merchandise, particularly in ammunition, fishing, camping and personal protection, as these are areas where customer demand is more predictable and where having products in stock matters most to our customers. Successful inventory management ensures we have sufficient high margin products in stock to meet customer demand, while overstocking of items can lead to markdowns in order to help a product sell. This is especially true with respect to our more in demand inventory, with approximately 20% of our products accounting for approximately 80% of our net sales. Despite our decision to pull forward inventory purchases, we anticipate ending fiscal year 2025 with lower total inventory than fiscal year 2024.

During fiscal year 2024 and continuing into the first quarter of fiscal year 2025, elevated inflation has adversely impacted our gross margins. In fiscal year 2025, we anticipate modest improvements in our gross margins, driven by continued careful management of variable expenses. However, during the first quarter of fiscal year 2025, these improvements were negatively impacted by our decision to pull forward inventory purchases in anticipation of increased tariffs.

Gross margins may continue to be affected by the evolving implementation of these higher tariff rates. We believe that the overall growth of our business can also help improve our gross margins, because increased merchandise volumes will enable us to maintain our strong relationships with our vendors. If we see significant declines in sales or increases in overstocked inventory, we may experience a decline in gross margins as we use promotions to drive traffic and reduce inventory.

Selling, General, and Administrative Expenses

We closely manage our selling, general, and administrative expenses. Our selling, general, and administrative expenses are comprised of payroll, rent and occupancy, depreciation and amortization, acquisition expenses, pre-opening expenses and other operating expenses, including stock-based compensation expense. Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.

Our selling, general, and administrative expenses are primarily influenced by the volume of net sales of our locations, except for our corporate payroll, rent and occupancy and depreciation and amortization, which are generally fixed in nature. We control our selling, general, and administrative expenses through a budgeting and reporting process that allows our personnel to adjust our expenses as trends in net sales activity are identified.

Income from Operations

Income from operations is gross profit less selling, general, and administrative expenses. We use income from operations as an indicator of the productivity of our business and our ability to manage selling, general, and administrative expenses.

Adjusted EBITDA

We define Adjusted EBITDA as net loss plus interest expense, income tax benefit, depreciation and amortization, stock-based compensation expense, transition and severance costs related to director and officer transitions, and expenses that we do not believe are indicative of our ongoing expenses. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. In evaluating our business, we use Adjusted EBITDA and Adjusted

EBITDA margin as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. See “—Non-GAAP Financial Measures.”

Results of Operations

The following table summarizes key components of our results of operations as a percentage of net sales during the periods presented:

The following table shows our percentage of net sales by department during the periods presented:

Thirteen Weeks Ended May 3, 2025 Compared to Thirteen Weeks Ended May 4, 2024

Net Sales and Same Store Sales. Net sales increased by $4.9 million, or 2.0%, to $249.1 million during the 13 weeks ended May 3, 2025 compared to $244.2 million in the corresponding period of fiscal year 2024. Our net sales increased primarily due to increased sales in our Fishing and Hunting and Shooting departments as we continue to emphasize inventory in-stocks to ensure we have the right inventory at the right location at the right time.

E-commerce driven sales comprised more than 20% of total sales for the 13 weeks ended May 3, 2025 and increased by approximately 8% compared to the corresponding period in fiscal year 2024. Same store sales increased by 2.0% during the 13 weeks ended May 3, 2025 compared to the corresponding 13-week period of fiscal year 2024, primarily as a result of our inventory management efforts.

Our Fishing, Hunting and Shooting, Apparel and Footwear departments saw net sales increases of $3.0 million, $2.4 million, $0.8 million and $0.2 million, respectively, during the 13 weeks ended May 3, 2025 compared to the corresponding period of fiscal year 2024 primarily driven by increased unit sales due to our continued emphasis on maintaining sufficient inventory in-stocks of core items. Our Camping and Optics, Electronics, Accessories and Other departments saw net sales decreases of $1.3 million and $0.2 million, respectively, during the 13 weeks ended May 3, 2025 compared to the corresponding period of fiscal year 2024. We believe these decreases reflected the impact of broader macroeconomic conditions discussed above. We also believe our Camping department was impacted by the later spring and the timing of the Easter holiday. Within our Hunting and Shooting department, our ammunition category saw an increase of $0.5 million or 1.3% and our firearm category saw a decrease of $0.1 million or 0.1% during the 13 weeks ended May 3, 2025 compared to the corresponding period of fiscal year 2024. The increase in the ammunition category was primarily due to our efforts to ensure every day low pricing in key ammunition groups. The decrease in our firearms category was primarily driven by a shift in consumer behavior to lower cost firearms, however, we continued to consistently outpace the adjusted NICS background check data and gain market share within the firearm space.

With respect to same store sales, during the 13 weeks ended May 3, 2025, our Fishing, Apparel, Hunting and Shooting and Footwear departments saw increases of 11.0%, 5.6%, 1.5% and 1.4%, respectively, compared to the corresponding period of fiscal year 2024. Our Camping and Optics, Electronics, Accessories and Other departments saw same store sales decreases of 5.8% and 1.3%, respectively, during the 13 weeks ended May 3, 2025 compared to the corresponding period of fiscal year 2024. These changes were primarily driven by the items noted above for net sales. As of May 3, 2025, 146 stores were included in our same store sales calculation.

Gross Profit. Gross profit increased by $1.9 million, or 2.5%, to $75.6 million during the 13 weeks ended May 3, 2025 compared to $73.8 million for the corresponding period of fiscal year 2024. As a percentage of net sales, gross profit increased to 30.4% during the 13 weeks ended May 3, 2025, compared to 30.2% for the corresponding period of fiscal year 2024, primarily driven by favorable mix and rate improvements in our fishing business, which carries a higher gross margin rate profile. This gain was partially offset by increased freight expense tied to our strategic inventory pull-forward in anticipation of higher tariffs and changes to international trade policy.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased by $0.8 million, or 0.9%, to $95.3 million during the 13 weeks ended May 3, 2025, compared to $94.4 million for the corresponding period of fiscal year 2024. This increase was primarily the result of increased payroll and rent expenses of $2.4 million and $0.5 million, respectively, during the 13 weeks ended May 3, 2025. These increases were partially offset by decreases of $1.2 million and $0.5 million in other operating and depreciation expenses, respectively. As a percentage of net sales, selling, general, and administrative expenses decreased to 38.2% of net sales in the first quarter of fiscal year 2025, compared to 38.6% of net sales in the first quarter of fiscal year 2024, reflecting our continued focus on expense management and fixed cost leverage gained from higher sales.

Interest Expense. Interest expense increased by $0.1 million, or 3.4%, to $3 million during the 13 weeks ended May 3, 2025, compared to $2.9 million for the corresponding period of fiscal year 2024. The increase in interest expense was primarily driven by increased amortization of outstanding deferred financing fees and discounts related to the term loan facility during the first quarter of fiscal year 2025 compared to the corresponding period of fiscal year 2024.

Income Taxes. We recognized income tax benefit of $1.3 million during the 13 weeks ended May 3, 2025 compared to an income tax benefit of $5.5 million during the corresponding period of fiscal year 2024. Our effective tax rates during the 13 weeks ended May 3, 2025 and May 4, 2024 were 5.9% and 23.2%, respectively. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 21.0%, due to state taxes, permanent items, and discrete items relating to stock award deductions.

Seasonality

Net sales are typically higher in our third and fourth fiscal quarters than in our first and second fiscal quarters because of the openings of hunting seasons across the country and consumer holiday buying patterns. We also incur additional expenses in our third and fourth fiscal quarters due to higher sales volume and increased staffing in our stores. We anticipate our net sales will continue to reflect this seasonal pattern. On average, over the last three fiscal years, we have generated approximately 26.4% and 28.0% of our net sales in the third and fourth fiscal quarters, respectively, which includes the holiday selling season as well as the opening of the Fall hunting season. We anticipate our net sales will continue to reflect this seasonal pattern. However, Spring hunting, Father’s Day and the availability of hunting and fishing throughout the year in many of our markets counterbalance this seasonality to a certain degree.

The timing of our new retail store openings also may have an impact on our quarterly results. First, we incur certain non-recurring expenses related to opening each new retail store, which are expensed as they are incurred. Second, most store expenses generally vary proportionately with net sales, but there is also a fixed cost component, which includes occupancy costs. These fixed costs typically result in lower store profitability during the initial period after a new retail store opens. Due to both of these factors, new retail store openings may result in a temporary decline in operating profit, in dollars and/or as a percentage of net sales.

Weather conditions affect outdoor activities and the demand for related apparel and equipment. Customers’ demand for our products, and, therefore, our net sales, can be significantly impacted by weather patterns on a local, regional and national basis.

Liquidity and Capital Resources

Overview; Uses and Sources of Cash

As of May 3, 2025, we had cash and cash equivalents of $3.6 million and working capital, consisting of current assets less current liabilities, of $62.9 million. We also had $118.5 million available for borrowing under our senior secured revolving credit facility and our term loan facility as of May 3, 2025, calculated based upon certain borrowing base restrictions for each of the revolving credit facility and term loan facility.

Our primary cash requirements are for seasonal working capital needs and capital expenditures related to ongoing operational needs and new system investments. For both the short-term and the long-term, our primary sources of cash are borrowings under our senior secured revolving credit facility, our term loan facility and operating cash flows. We believe that our cash on hand, cash generated by operating activities and funds available under our revolving credit facility and term loan facility will be sufficient to finance our operating activities and meet our cash requirements for at least the next twelve months and beyond. With only one new store planned for fiscal year 2025, we intend to prioritize the repayment of outstanding debt with any excess cash flow.

Material Cash Requirements

Our material cash requirements from known contractual and other obligations are primarily for general operating expenses and other expenses discussed below.

Purchase Obligations. In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. We or the vendor can generally terminate the purchase orders at any time. These purchase orders do not contain any termination payments or other penalties if cancelled.

Operating Lease Obligations. Operating lease commitments consist principally of leases for our retail stores, corporate office and distribution center. Our leases often include options which allow us to extend the terms beyond the initial lease term. As of May 3, 2025, our expected operating lease payments for the remainder of fiscal year 2025 and fiscal year 2026 are $55.9 million and $74.2 million, respectively. Our total committed operating lease payments are $465.2 million. Other operating lease obligations consist of distribution center equipment. See Note 6, “Leases” to our unaudited condensed consolidated financial statements included in this 10-Q.

Capital Expenditures. During the 13 weeks ended May 3, 2025, we incurred approximately $3.8 million in capital expenditures primarily related to strategic technological investments and general store maintenance. We expect capital expenditures between $20 million and $25 million for fiscal year 2025 (inclusive of amounts spent during the 13 weeks ended May 3, 2025) primarily related to strategic technological investments, such as planogramming, merchandising and replenishment and store scheduling tools, and general store fleet maintenance. We intend to fund these capital expenditures with our operating cash flows, cash on hand and funds available under our revolving credit facility. Other investment opportunities, such as potential strategic acquisitions or store expansion rates in excess of those presently planned, may require additional funding.

Principal and Interest Payments. We maintain a $350.0 million revolving credit facility and a $45.0 million term loan facility. As of May 3, 2025, $155.5 million was outstanding under the revolving credit facility and $25.0 million was outstanding under the term loan facility. Assuming no additional repayments or borrowings on our revolving credit facility and our term loan facility after May 3, 2025, our interest payments would be approximately $8.9 million for the remainder of fiscal year 2025 and approximately $11.9 million for fiscal year 2026, in each case, based on the interest rate as of May 3, 2025. As of May 3, 2025, our weighted average interest rate on the amounts outstanding under our revolving credit facility and term loan facility was 6.59%. See below under “Indebtedness” for additional information regarding our revolving credit facility and term loan facility, including the interest rates applicable to any borrowing under such facilities.

Cash Flows

Cash flows provided by (used in) operating, investing and financing activities are shown in the following table:

(in thousands)

Net cash used in operating activities was $60.2 million for the 13 weeks ended May 3, 2025, compared to net cash used in operating activities was $34.7 million for the corresponding period of fiscal year 2024, an increase of approximately $25.5 million. The increase in our cash flows used in operating activities was primarily driven by increased inventory purchases during the 13 weeks ended May 3, 2025 compared to the corresponding period of fiscal year 2024 done in an attempt to reduce our exposure to tariffs.

Net cash used in investing activities was $3.8 million for the 13 weeks ended May 3, 2025, compared to net cash used in investing activities was $3.3 million for the corresponding period of fiscal year 2024, an increase of approximately $0.5 million, which was primarily driven by increased capital expenditures related to the construction of a new store and timing of technical investments during the 13 weeks ended May 3, 2025 compared to the corresponding period of fiscal year 2024.

Net cash provided by financing activities was $64.8 million for the 13 weeks ended May 3, 2025, compared to net cash provided by financing activities was $37.0 million for the corresponding period of fiscal year 2024, an increase of approximately $27.8 million. The increase in cash provided by financing activities was primarily the result of increased incremental borrowings under our revolving credit facility.

Indebtedness

We maintain a $350.0 million revolving credit facility, with $155.5 million outstanding as of May 3, 2025. Our revolving credit facility is governed by an amended and restated credit agreement with a consortium of banks led by Wells Fargo Bank, National Association (“Wells Fargo”). We additionally entered into a term loan credit facility on July 30, 2024 with an aggregate principal amount available of $45.0 million, with $25.0 million outstanding as of May 3, 2025. Borrowings under our revolving credit facility and term loan facility are subject to a borrowing base calculation. As of May 3, 2025, we had an aggregate amount of $118.5 million available for borrowing under our revolving credit facility and our term loan facility, calculated based upon certain borrowing base restrictions, and $2.3 million in stand-by commercial letters of credit. Our $20 million availability under our term loan was scheduled to expire on April 30, 2025 and we recently extended the expiration to July 31, 2025.

Borrowings under the revolving credit facility bear interest based on either the base rate or Term SOFR (as defined by the credit agreement governing the revolving credit facility), at our option, in each case plus an applicable margin. The base rate is the greatest of (1) the floor rate (as defined in the credit agreement as a rate of interest equal to 0.0%) (2) Wells Fargo’s prime rate, (3) the federal funds rate (as defined in the applicable credit agreement) plus 0.50% or (4) the one-month Term SOFR (as defined in the applicable credit agreement) plus 1.00%. The applicable margin for loans under the revolving credit facility, which varies based on the average daily availability, ranges from 0.25% to 0.50% per year for base rate loans and from 1.35% to 1.60% per year for Term SOFR loans. We are required to pay a commitment fee for the unused portion of the revolving credit facility, which will range from 0.20% to 0.225% per annum, depending on the average daily availability under the revolving credit facility.

Borrowings under the term loan facility bear interest at a rate equal to (i) a specified term secured overnight financing rate (SOFR), plus (ii) 0.10% as a SOFR adjustment, plus (iii) the applicable margin as specified in the Term Loan. The applicable margin means either 3.50% or 6.50% depending on the type of term loan. Under the Term Loan, loans may be required to be converted to base rate loans and in such case, the applicable margin rate will increase by 1.0%.

Each of the subsidiaries of Holdings is a borrower under the revolving credit facility and the term loan, and all obligations under the revolving credit facility and the term loan are guaranteed by Holdings. All of the obligations under the revolving credit facility and the term loan are secured by a lien on substantially all of Holdings’ assets and assets of all of Holdings’ subsidiaries, including a pledge of all capital stock of each of Holdings’ subsidiaries. The lien securing the obligations under the revolving credit facility is a first priority lien as to certain liquid assets, including cash, accounts receivable, deposit accounts and inventory. The lien securing the obligations under the term loan facility is a first priority lien as to equipment, fixtures, intellectual property and equity interests.

We may be required to make mandatory prepayments under the revolving credit facility and the term loan in the event of a disposition of certain property or assets, in the event of receipt of certain insurance or condemnation proceeds, upon the issuance of certain debt or equity securities, upon the incurrence of certain indebtedness for borrowed money or upon the receipt of certain payments not received in the ordinary course of business.

Our revolving credit facility and term loan facility each require us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base. In addition, the credit agreements governing each of our revolving credit facility and our term loan facility contain customary affirmative and negative covenants, including covenants that limit our ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. The revolving credit facility and term loan facility also contain customary events of default, including defaults triggered by defaults under the other facility. As of May 3, 2025, we were in compliance with all covenants under the credit agreements governing each of our revolving credit facility and our term loan facility.

Critical Accounting Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

There have been no significant changes to our critical accounting estimates as described in “Part II., Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Fiscal 2024 Form 10-K.

Non-GAAP Financial Measures

In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our operating performance. We define Adjusted EBITDA as net loss plus interest expense, income tax benefit, depreciation and amortization, stock-based compensation expense, transition and severance costs related to director and officer transitions, and expenses that we do not believe are indicative of our ongoing expenses. Net loss is the most comparable GAAP financial measure to Adjusted EBITDA. We define Adjusted EBITDA margin as, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. We consider Adjusted EBITDA and Adjusted EBITDA margin important supplemental measures of our operating performance and believe they are frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Other companies in our industry, however, may calculate Adjusted EBITDA and Adjusted EBITDA margin differently than we do. Management also uses Adjusted EBITDA and Adjusted EBITDA margin as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. Management believes Adjusted EBITDA and Adjusted EBITDA margin allow investors to evaluate our operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of our core operating performance.

Adjusted EBITDA is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net income or other condensed consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to:

• Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• Adjusted EBITDA may be defined differently by other companies, and, therefore, it may not be directly comparable to the results of other companies in our industry;
• Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
• Adjusted EBITDA does not reflect income taxes or the cash requirements for any tax payments.

A reconciliation of net loss, to Adjusted EBITDA and a calculation of Adjusted EBITDA margin is set forth below for the periods presented (amounts in thousands):

(dollars in thousands)

(1) Stock-based compensation expense represents non-cash expenses related to equity instruments granted to employees under our equity incentive plan and employee stock purchase plan.

(2) Expenses incurred relating to the departure of directors and officers and the recruitment of directors and key members of our senior management team.

(3) We calculate net income margin as net income divided by net sales and we define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales.

Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed 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 and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of May 3, 2025.

Inherent Limitations in Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) during the 13 weeks ended May 3, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. There have been no material changes in our risk factors from those set forth in our Fiscal 2024 Form 10-K.