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Home E-Commerce Marketing

TILLY’S, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

Admin by Admin
September 8, 2022
in E-Commerce Marketing
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LEE ENTERPRISES, INC Management’s Discussion and Analysis of Financial Condition and
Results of Operations (form 10-Q)
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The following discussion and analysis of the financial condition and results of
our operations should be read together with the financial statements and related
notes of Tilly's, Inc. included in Part I Item 1 of this Quarterly Report on
Form 10-Q (this "Report") and with our audited consolidated financial statements
and the related notes included in our Annual Report on Form 10-K for the fiscal
year ended January 29, 2022. As used in this Quarterly Report on Form 10-Q,
except where the context otherwise requires or where otherwise indicated, the
terms "the Company", "World of Jeans & Tops", "we", "our", "us", "Tillys" and
"Tilly's" refer to Tilly's, Inc. and its subsidiary.

Overview


Tillys is a destination specialty retailer of casual apparel, footwear,
accessories and hardgoods for men, women, boys and girls. We believe we bring
together an unparalleled selection of iconic global, emerging, and proprietary
brands rooted in an active and outdoor lifestyle. The Tillys concept began in
1982, when our co-founders, Hezy Shaked and Tilly Levine, opened our first store
in Orange County, California. As of July 30, 2022, we operated 242 stores in 33
states, averaging approximately 7,301 square feet per store, compared to 244
total stores last year at this time. We also sell our products through our
e-commerce website, www.tillys.com.

Known or Anticipated Trends

Ongoing Impacts of the COVID-19 Pandemic


Economic Impacts. The impacts of the COVID-19 pandemic (the "pandemic") have
had, and continue to have, a material effect on our business, financial
condition and results of operations, as well as on the market generally. The
scope and nature of these impacts continue to evolve. We may experience adverse
impacts in the future, particularly related to broader economic conditions that
result in significant part from the pandemic. Further, we believe our operating
results for fiscal 2021 were significantly aided by the considerable pent-up
consumer demand exiting 2020 pandemic restrictions and the impact of federal
stimulus payments. Additionally, the factors noted below have had, and are
expected to continue to have, an adverse impact on our operating results during
fiscal 2022. As a result, we expect our operating results for fiscal 2022 will
remain below fiscal 2021 levels for each quarter of the fiscal year.

Inflationary Cost Pressures. As of the date of this filing, the pandemic and
resulting supply chain disruptions, as well as certain geo-political matters,
have resulted in significant price increases for the merchandise we purchase for
sale to our customers as well as for gasoline, food and other consumables across
the economy. We believe that these price increases have had, and will likely
continue to have, a negative impact on consumer behavior and, by extension, our
results of operations and financial condition during fiscal 2022.

Supply Chain Disruptions. We source a significant portion of our merchandise
assortment from third parties who manufacture their products in countries that
have experienced widespread issues with the pandemic, thereby significantly
impacting the global supply chain for merchandise inventories. Disruptions in
the global transportation network remain prevalent, particularly in certain
Southern California receiving ports which handle a significant portion of United
States merchandise imports. These issues are resulting in shipping delays and
increased shipping costs throughout the retail industry, including for us. Any
untimely delivery of merchandise could have a negative impact on our ability to
serve our customers with the specific merchandise they want in the quantities
they wish to purchase in a timely manner, thereby potentially resulting in lost
sales or increased markdowns to move through excess seasonal inventories that
were delivered late. These supply chain issues, and the media attention
surrounding them, had an impact on consumer shopping patterns during the fiscal
2021 holiday season and may do so again to some extent, and have caused us to
adjust our merchandise planning, allocation and pricing strategies from
historical practices, among other impacts. We have been monitoring the situation
very closely and have been in frequent contact with our key brand partners to
assess delivery delays on a continuous basis. However, we are unable to predict
the specific effects these factors will have on our fiscal 2022 net sales,
results of operations, and our inventory position at any point in time during
fiscal 2022.

Labor Challenges and Wage Inflation. The pandemic and the resulting factors
above have also created challenges related to the availability of sufficient
labor from time to time, and have caused a significant increase in the
competition for labor among consumer facing companies. This competition for
labor has driven significant increases in wages beyond government-mandated
increases in minimum wages in order to compete for sufficient labor availability
and/or to prevent the loss of existing workforce in our stores, distribution
centers and corporate offices. We expect these pressures to continue throughout
fiscal 2022.

Operational Impacts. As of the date of filing this Report, there remain many
uncertainties regarding the ongoing pandemic, including its anticipated duration
and severity. In addition to the economic impacts on the Company, the pandemic
has had far-reaching impacts on many aspects of the operations of the Company,
directly and indirectly, including on consumer behavior, store traffic,
operational capabilities and our corporate, distribution center and store
operations generally, timing of deliveries, demands on our information
technology and e-commerce capabilities, inventory and expense management,
managing our


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workforce, and our people, which have materially disrupted our business. With
the continued challenges posed by the pandemic, we may experience adverse
impacts in the future, including similar impacts to those we have previously
experienced during the pandemic, such as regional quarantines, changes in
consumer purchasing patterns, mandatory or elective shut-downs of retail
locations, and operational challenges posted by the inability of our suppliers
and service providers to deliver materials and services on a timely basis,
which, in many cases, had, and may in the future continue to have, material
adverse impacts on our business. This situation is continually evolving, and
additional impacts may arise that we are not aware of currently, or current
impacts may become magnified.

Fiscal 2022 New Store Openings and Capital Expenditure Plans


During fiscal 2022, we currently expect to open a total of 11 new stores within
existing markets, primarily in California, Texas and the Northeast, four of
which have been opened as of the date of this Report. We expect our total
capital expenditures for fiscal 2022 to be in the range of approximately $22
million to $24 million, inclusive of our new store plans, investments in website
and mobile app upgrades, distribution efficiencies, and other information
technology infrastructure investments.

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 indicators of the financial
condition and operating performance of our business are net sales, comparable
store sales, gross profit, selling, general and administrative ("SG&A") expenses
and operating income.

Net Sales

Net sales reflect revenue from the sale of our merchandise at store locations
and through e-commerce, net of sales taxes. Store sales are reflected in sales
when the merchandise is received by the customer. For e-commerce sales, we
recognize revenue, and the related cost of goods sold at the time the
merchandise is shipped to the customer. Net sales also include shipping and
handling fees for e-commerce shipments that have been shipped to the customer.
Net sales are net of returns on sales during the period as well as an estimate
of returns expected in the future stemming from current period sales. We
recognize revenue from gift cards as they are redeemed for merchandise. Prior to
redemption, we maintain a current liability for unredeemed gift card balances.
Our gift cards do not have expiration dates and in most cases there is no legal
obligation to remit unredeemed gift cards to relevant jurisdictions. Based on
actual historical redemption patterns, we determined that a small percentage of
gift cards are unlikely to be redeemed (which we refer to as gift card
"breakage"). Based on our historical gift card breakage rate, we recognize
breakage revenue over the redemption period in proportion to actual gift card
redemptions.

Our business is seasonal and as a result our revenues fluctuate from quarter to
quarter. In addition, our revenues in any given quarter can be affected by a
number of factors including the timing of holidays and weather patterns. The
third and fourth quarters of the fiscal year, which include the back-to-school
and holiday sales seasons, have historically produced stronger sales and
disproportionately stronger operating results than have the first two quarters
of the fiscal year.

Comparable Store Net Sales


Comparable store net sales is a measure that indicates the change in
year-over-year comparable store net sales which allows us to evaluate how our
store base (including our e-commerce platform) is performing. Numerous factors
affect our comparable store sales, including:

•overall economic trends;
•our ability to attract traffic to our stores and online platform;
•our ability to identify and respond effectively to consumer preferences and
fashion trends;
•competition;
•the timing of our releases of new and seasonal styles;
•changes in our product mix;
•pricing;
•the level of customer service that we provide in stores;
•our ability to source and distribute products efficiently;
•calendar shifts of holiday or seasonal periods;
•the number and timing of store openings and the relative proportion of new
stores to mature stores; and
•the timing and success of promotional and advertising efforts.

Our comparable store sales are defined as sales from our e-commerce platform and
stores open on a daily basis compared to the same respective fiscal dates of the
prior year. A remodeled, relocated or refreshed store is included in comparable
store sales, both during and after construction, if the square footage of the
store used to sell merchandise was not changed by more than 20% in any fiscal
month. We include sales from our e-commerce platform as part of comparable store
sales as we manage and analyze our business on a single omni-channel basis and
have substantially integrated our investments and operations for our stores and
e-commerce platform to give our customers seamless access and increased ease of
shopping. Comparable store sales


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exclude gift card breakage income and e-commerce shipping and handling fee
revenue. Some of our competitors and other retailers may calculate comparable or
"same store" sales differently than we do. As a result, data in this Report
regarding our comparable store sales may not be comparable to similar data made
available by other retailers.

Gross Profit


Gross profit is equal to our net sales less our cost of goods sold. Cost of
goods sold reflects the direct cost of purchased merchandise as well as buying,
distribution and occupancy costs. Buying costs include compensation and benefit
expense for our internal buying organization. Distribution costs include costs
for receiving, processing and warehousing our store merchandise, and shipping of
merchandise to or from our distribution and e-commerce fulfillment centers and
to our e-commerce customers and between store locations. Occupancy costs include
the rent, common area maintenance, utilities, property taxes, security and
depreciation costs of all store locations. These costs are significant and can
be expected to continue to increase as our company grows. The components of our
reported cost of goods sold may not be comparable to those of other retail
companies.

We regularly analyze the components of gross profit as well as gross profit as a
percentage of net sales. Specifically we look at the initial markup on
purchases, markdowns and reserves, shrinkage, buying costs, distribution costs
and occupancy costs. Any inability to obtain acceptable levels of initial
markups, a significant increase in our use of markdowns or a significant
increase in inventory shrinkage or inability to generate sufficient sales
leverage on the buying, distribution and occupancy components of cost of goods
sold could have an adverse impact on our gross profit and results of operations.

Gross profit is also impacted by shifts in the proportion of sales of
proprietary branded products compared to third-party branded products, as well
as by sales mix shifts within and between brands and between major product
departments such as young men's and women's apparel, footwear or accessories. A
substantial shift in the mix of products could have a material impact on our
results of operations. In addition, gross profit and gross profit as a percent
of sales have historically been higher in the third and fourth quarters of the
fiscal year, as these periods include the back-to-school and winter holiday
selling seasons. This reflects that various costs, including occupancy costs,
generally do not increase in proportion to the seasonal sales increase.

Selling, General and Administrative Expenses


Our selling, general and administrative, or SG&A, expenses are comprised of
store selling expenses and corporate-level general and administrative expenses.
Store selling expenses include store and regional support costs, including
personnel, advertising and debit and credit card processing costs, e-commerce
receiving and processing costs and store supplies costs. General and
administrative expenses include the payroll and support costs of corporate
functions such as executive management, legal, accounting, information systems,
human resources, impairment charges and other centralized services. Store
selling expenses generally vary proportionately with net sales and store growth.
In contrast, general and administrative expenses are generally not directly
proportional to net sales and store growth, but will be expected to increase
over time to support the needs of our growing company. SG&A expenses as a
percentage of net sales are usually higher in lower volume periods and lower in
higher volume periods.

Operating Income

Operating income equals gross profit less SG&A expenses. Operating income
excludes interest income, interest expense and income taxes. Operating income
percentage measures operating income as a percentage of our net sales.














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Results of Operations

The following tables summarize key components of our unaudited results of
operations for the periods indicated, both in dollars (in thousands) and as a
percentage of our net sales:

                                                 Thirteen Weeks Ended                      Twenty-Six Weeks Ended
                                             July 30,             July 31,             July 30,              July 31,
                                               2022                 2021                 2022                  2021
Statements of Income Data:
Net sales                                 $   168,308$   201,952$    314,083$   365,109
Cost of goods sold                            115,424              126,523               216,524              234,139
Rent expense, related party                       902                  702                 1,762                1,404
Total cost of goods sold                      116,326              127,225               218,286              235,543
Gross profit                                   51,982               74,727                95,797              129,566
Selling, general and administrative
expenses                                          46,697            48,167                89,271               87,998
Rent expense, related party                          133                  133                266                  267
Total selling, general and administrative
expenses                                       46,830               48,300                89,537               88,265
Operating income                                5,152               26,427                 6,260               41,301
Other income (expense), net                       183                 (102)                  187                 (218)
Income before income taxes                      5,335               26,325                 6,447               41,083
Income tax expense                              1,516                5,927                 1,815                9,726
Net income                                $     3,819$    20,398$      4,632$    31,357

Percentage of Net Sales:
Net sales                                       100.0  %             100.0  %              100.0  %             100.0  %
Cost of goods sold                               68.6  %              62.7  %               68.9  %              64.1  %
Rent expense, related party                       0.5  %               0.3  %                0.6  %               0.4  %
Total cost of goods sold                         69.1  %              63.0  %               69.5  %              64.5  %
Gross profit                                     30.9  %              37.0  %               30.5  %              35.5  %
Selling, general and administrative
expenses                                         27.7  %              23.9  %               28.4  %              24.1  %
Rent expense, related party                       0.1  %               0.1  %                0.1  %               0.1  %
Total selling, general and administrative
expenses                                         27.8  %              23.9  %               28.5  %              24.2  %
Operating income                                  3.1  %              13.1  %                2.0  %              11.3  %
Other income (expense), net                       0.1  %              (0.1) %                0.1  %              (0.1) %
Income before income taxes                        3.2  %              13.0  %                2.1  %              11.3  %
Income tax expense                                0.9  %               2.9  %                0.6  %               2.7  %
Net income                                        2.3  %              10.1  %                1.5  %               8.6  %


The following table presents store operating data for the periods indicated:

                                                  Thirteen Weeks Ended                   Twenty-Six Weeks Ended
                                              July 30,            July 31,            July 30,             July 31,
                                                2022                2021                2022                 2021
Operating Data:
Stores operating at end of period                  242                244                  242                  244
Comparable store net sales change (1)            (16.4) %            10.6  %             (14.9)  %              9.5  %
Total square feet at end of period (in
'000s)                                           1,767              1,788                1,767                1,788
Average net sales per physical store (in
'000s) (2)                                  $      570$     676$     1,056$    1,213

Average net sales per square foot (2) $ 78$ 92

        $       144$      165

E-commerce net sales (in ‘000s) (3) $ 31,220$ 37,326

        $    59,512$   72,807
E-commerce net sales as a percentage of net
sales                                             18.5  %            18.5  %              18.9   %             19.9  %


(1)Our comparable store net sales are defined as sales from our e-commerce
platform and stores open on a daily basis compared to the same respective fiscal
dates of the prior year. A remodeled or relocated store is included in
comparable store net sales, both during and after construction, if the square
footage of the store used to sell merchandise was not changed by more than 20%
in any fiscal month. We include sales from our e-commerce platform as part of
our comparable store net sales as we manage and analyze our business on an
omni-channel basis and have substantially integrated our investments and


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operations for our stores and e-commerce platform to give our customers seamless
access and increased ease of shopping. Comparable store net sales exclude gift
card breakage income, and e-commerce shipping and handling fee revenue.
(2)The number of stores and the amount of square footage reflect the number of
days during the period that stores were open. E-commerce sales, e-commerce
shipping and handling fee revenue and gift card breakage income are excluded
from net sales in deriving average net sales per retail store and average net
sales per square foot.
(3)E-commerce net sales include e-commerce sales and e-commerce shipping and
handling fee revenue.

Second Quarter (13 Weeks) Ended July 30, 2022 Compared to Second Quarter (13
Weeks) Ended July 31, 2021


Net Sales

Total net sales were $168.3 million, a decrease of $33.6 million, or 16.7%,
compared to $202.0 million last year, primarily due to the impacts of last
year’s pent-up consumer demand and stimulus payments resulting from the
pandemic.


•Net sales from physical stores were $137.1 million, a decrease of $27.5 million
or 16.7%, compared to $164.6 million last year. Net sales from physical stores
represented 81.5% of total net sales both this year and last year. The Company
ended the second quarter with 242 total stores compared to 244 total stores at
the end of the second quarter last year.

•Net sales from e-commerce were $31.2 million, a decrease of $6.1 million or
16.4%, compared to $37.3 million last year. E-commerce net sales represented
18.5% of total net sales both this year and last year.

Gross Profit


Gross profit was $52.0 million, or 30.9% of net sales, compared to $74.7
million, or 37.0% of net sales, last year. Buying, distribution and occupancy
costs deleveraged by 330 basis points collectively, despite being reduced by
$0.9 million due to carrying these costs against a significantly lower level of
net sales this year. Product margins declined by 280 basis points primarily due
to an increased markdown rate compared to last year.

Selling, General and Administrative Expenses

SG&A expenses were $46.8 million or 27.8% of net sales, compared to
$48.3 million, or 23.9% of net sales, last year. The components of the SG&A
variances, both in terms of percentage of net sales and total dollars, were as
follows:


      %                  $ millions                           Primarily Attributable to
    (1.4)%                 $(2.8)       Decrease in corporate bonus expense

due to lack of a bonus accrual in

                                        fiscal 2022.
     0.1%                  (0.7)        Decrease in e-commerce marketing 

expenses.

     2.5%                   0.5         Increase in store payroll and 

related benefits primarily due to wage

                                        inflation.
     0.3%                   0.3         Increase in technology services 

costs.

     0.3%                               Increase in e-commerce fulfillment

costs primarily due to wage

                            0.3         inflation.
     0.3%                   0.3         Increase in insurance premiums.
     0.2%                   0.3         Increase in donations expense.
     1.6%                   0.3         Net change in all other SG&A expenses.
     3.9%                  $(1.5)       Total


Operating Income

Operating income was $5.2 million, or 3.1% of net sales, compared to
$26.4 million, or 13.1% of net sales, last year.

Income Tax Expense

Income tax expense was $1.5 million, or 28.4% of pre-tax income, compared to
$5.9 million, or 22.5% of pre-tax income, last year. The increase in the
effective income tax rate was primarily due to the discrete tax effects of
stock-based compensation.

Net Income and Income Per Diluted Share

Net income was $3.8 million, or $0.13 per diluted share, compared to
$20.4 million, or $0.66 per diluted share, last year.

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First Half (26 Weeks) Ended July 30, 2022 Compared to First Half (26 Weeks)
Ended July 31, 2021

Net Sales

Total net sales were $314.1 million, a decrease of $51.0 million or 14.0%,
compared to $365.1 million last year, primarily due to the impacts of last
year’s pent-up consumer demand and stimulus impacts resulting from the pandemic.


•Net sales from physical stores were $254.6 million, a decrease of $37.7 million
or 12.9%, compared to $292.3 million last year. Net sales from stores
represented 81.1% of total net sales compared to 80.1% of total net sales last
year.

•Net sales from e-commerce were $59.5 million, a decrease of $13.3 million or
18.3%, compared to $72.8 million last year. E-commerce net sales represented
18.9% of total net sales compared to 19.9% of total net sales last year.

Gross Profit

Gross profit was $95.8 million, or 30.5% of net sales, compared to
$129.6 million, or 35.5% of net sales, last year. Buying, distribution and
occupancy costs deleveraged by 270 basis points collectively, despite being
reduced by $1.9 million due to carrying these costs against a significantly
lower level of net sales this year. Product margins declined by 230 basis points
primarily due to an increased markdown rate compared to last year.

Selling, General and Administrative Expenses

SG&A expenses were $89.5 million or 28.5% of net sales, compared to
$88.3 million, or 24.2% of net sales, last year. The components of the SG&A
variances, both in terms of percentage of net sales and total dollars, were as
follows:


      %                  $ millions                           Primarily Attributable to
     2.6%                   $2.5        Increase in store payroll and 

related benefits primarily due to wage

                                        inflation.
     0.4%                   1.6         Credit from the reversal of a 

disputed California sales tax

                                        assessment in last year's first quarter.
     0.3%                   0.6         Increase in technology services costs.
     0.2%                   0.5         Increase in insurance premiums.
    (1.2)%                 (4.3)        Decrease in corporate bonus expense

due to lack of a bonus accrual in

                                        fiscal 2022.
     2.0%                   0.4         Net change in all other SG&A expenses.
     4.3%                   $1.3        Total


Operating Income

Operating income was $6.3 million, or 2.0% of net sales, compared to
$41.3 million, or 11.3% of net sales, last year.

Income Tax Expense

Income tax expense was $1.8 million, or 28.2% of pre-tax income, compared to
$9.7 million, or 23.7% of pre-tax income, last year. The increase in the
effective income tax rate was primarily due to the discrete tax effects of
stock-based compensation.

Net Income and Income Per Diluted Share

Net income was $4.6 million, or $0.15 per diluted share, compared to
$31.4 million, or $1.02 per diluted share, last year.

Liquidity and Capital Resources


Our business relies on cash flows from operating activities as well as cash on
hand as our primary sources of liquidity. We currently expect to finance company
operations, store growth and remodels, and all of our planned capital
expenditures with existing cash on hand, marketable securities and cash flows
from operations.

In addition to cash and cash equivalents and marketable securities, the most
significant components of our working capital are merchandise inventories,
accounts payable and accrued expenses. We believe that cash flows from operating
activities, our cash and marketable securities on hand, and credit facility
availability will be sufficient to cover our working capital requirements and
anticipated capital expenditures for the next 12 months from the filing of this
Report. If cash flows from operations are not sufficient or available to meet
our capital requirements, then we will be required to obtain additional equity
or debt financing in the future. There can be no assurance that equity or debt
financing will be available to us when we need it or, if available, that the
terms will be satisfactory to us and not dilutive to our stockholders.


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Working Capital

Working capital at July 30, 2022, was $86.4 million compared to $91.8 million at
January 29, 2022, a decrease of $5.4 million. The changes in our working capital
during the first half of fiscal 2022 were as follows:
    $ millions                                       Description
       $91.8        Working capital at January 29, 2022

       (9.0)        Repurchase of shares under our share repurchase program.

(4.4) Decrease primarily due to an increase in accrued expenses related to accrued

                    construction, returns reserves, and timing of sales tax 

payments.

7.9 Increase in receivables, primarily due to timing of credit and debit card

                    receivables.
        3.9         Increase in merchandise inventories, net of accounts payable.
       (3.8)        Other net decreases.
       $86.4        Working capital at July 30, 2022


Cash Flow Analysis

A summary of operating, investing and financing activities for the twenty-six
weeks ended July 30, 2022 compared to the twenty-six weeks ended July 31, 2021
is shown in the following table (in thousands):

                                                            Twenty-Six Weeks Ended
                                                            July 30,           July 31,
                                                              2022               2021

Net cash (used in) provided by operating activities $ (7,115)

   $ 37,442
Net cash provided by (used in) investing activities         59,399          

(10,097)

Net cash used in financing activities                       (8,975)         

(21,635)

Net increase in cash and cash equivalents             $     43,309

$ 5,710

Net Cash (Used in) Provided by Operating Activities


Operating activities consist primarily of net income adjusted for non-cash items
that include depreciation, asset impairment write-downs, deferred income taxes
and share-based expense, plus the effect on cash of changes during the period in
our assets and liabilities.

Net cash used in operating activities was $7.1 million this year compared to net
cash provided of $37.4 million last year. The $44.6 million decrease in cash
provided by operating activities was primarily due to lower net sales in fiscal
2022 compared to record net sales in fiscal 2021. The net sales decline was
primarily due to the impacts of pent-up customer demand following the winding
down of the 2020 pandemic restrictions and the pandemic-related federal stimulus
payments on fiscal 2021 operations, coupled with the negative impact of a highly
inflationary consumer environment in fiscal 2022.

Net Cash Provided by (Used In) Investing Activities

Cash flows from investing activities consist primarily of capital expenditures
and maturities and purchases of marketable securities.


Net cash provided by investing activities was $59.4 million this year compared
to $10.1 million in net cash used last year. Net cash provided by investing
activities in the first half of fiscal 2022 consisted of maturities of
marketable securities of $96.2 million, partially offset by the purchases of
marketable securities of $29.9 million and capital expenditures totaling $6.9
million. Net cash used in investing activities during the first half of fiscal
2021 consisted of purchases of marketable securities of $66.6 million and
capital expenditures totaling $8.5 million, partially offset by proceeds from
the maturities of marketable securities of $65.0 million.

Net Cash Used in Financing Activities


Financing activities primarily consist of cash dividend payments, borrowings and
repayments of our line of credit, taxes paid in lieu of shares issued for share
based compensation, share repurchases, and proceeds from employee exercises of
stock options.

Net cash used in financing activities was $9.0 million this year compared to net
cash used of $21.6 million last year. Financing activities in the first half of
fiscal 2022 consisted of cash used to repurchase shares of our common stock of
$9.0 million, partially offset by proceeds from the exercise of stock options of
$40 thousand. Financing activities in the first half of fiscal 2021 consisted of
dividends paid of $30.7 million, partially offset by proceeds from the exercise
of stock options of $9.1 million.


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Credit Agreement

New Credit Agreement

On January 20, 2022, we entered into a senior secured credit agreement (the
"Credit Agreement") and revolving line of credit note (the "Note") with Wells
Fargo Bank, National Association (the "Bank"). The Credit Agreement provides for
a senior secured revolving credit facility ("Revolving Facility") of up to $25.0
million ("Revolving Commitment") consisting of revolving loans, letters of
credit and swing line loans, with a sub-limit on letters of credit outstanding
at any time of $15.0 million. The Revolving Facility matures on January 20,
2024. The payment and performance in full of the secured obligations under the
Revolving Facility are secured by a lien on and security interest in all of the
assets of our company.

The payment and performance in full of the obligations under the Credit
Agreement are guaranteed by the Company pursuant to a continuing guaranty (the
"Guaranty") granted by the Company in favor of the Bank. The payment and
performance of the Company's obligations under the Guaranty are secured by a
lien on, and pledge of, all of the equity interests owned by the Company.

Borrowings under the Revolving Facility bear interest at a rate per annum equal
to the daily simple Secured Overnight Financing Rate ("SOFR") plus 0.75%.
Amounts available to be drawn under outstanding letters of credit accrue fees in
an amount equal to 1.00% per annum. The unused portion of the Revolving
Commitment is not subject to a commitment fee.

Under the Credit Agreement, we are subject to a variety of affirmative and
negative covenants of types customary in a cash-flow-based lending facility,
including financial covenants that require maintenance of (1) a ratio of total
funded debt to earnings before interest, taxes, depreciation, amortization and
annual rent expenses no greater than 4.00 to 1.00 and (2) a fixed charge
coverage ratio of not less than 1.25 to 1.00 (calculation of which takes into
account dividends, distributions, redemptions and repurchases of the equity
interests of the Company only if the Company's cash on hand, net of any amounts
outstanding under the Credit Agreement, is less than $50.0 million after giving
effect to such dividends, distributions, redemptions or repurchases).

Events of default under the Credit Agreement include, among other things,
failure to pay principal, interest, fees or other amounts; covenant defaults;
material inaccuracy of representations and warranties; bankruptcy events with
respect to the Company; actual or asserted invalidity of any of the loan
documents; or a change of control of the Company.

In connection with the entry into the Credit Agreement, on January 20, 2022, we
entered into certain ancillary agreements, including (i) a security agreement in
favor of the Bank (ii) a guaranty entered into by the Company, and (iii) a third
party pledge agreement entered into by the Company in favor of the Bank. The
security agreement, the guaranty and the pledge agreement replaced (i) the
guaranty by the Company in favor of the Bank, dated November 9, 2020, and (ii)
the security agreement dated as of November 9, 2020, among the Company and the
Bank, which were both terminated concurrently with the termination of the Prior
Credit Agreement.

As of July 30, 2022, we were in compliance with all of our covenants and had no
outstanding borrowings under the Credit Agreement.

Prior Credit Agreement


The Credit Agreement replaced our previously existing asset-backed credit
agreement (the "Prior Credit Agreement"), dated as of November 9, 2020, as
amended, with the Bank, which had revolving commitments of up to $65.0 million,
a sub-limit on letters of credit of $10.0 million and a sub-limit for swing-line
loans of $7.5 million.

The Prior Credit Agreement was terminated concurrently with the entry into the
Credit Agreement. The maximum borrowings permitted under the Prior Credit
Agreement was equal to the lesser of (x) the revolving commitment and (y) the
borrowing base. The borrowing base was equal to (a) 90% of the borrower's
eligible credit card receivables, plus (b) 90% of the cost of the borrower's
eligible inventory, less inventory reserves established by the agent, and
adjusted by the appraised value of such eligible inventory, plus (c) 90% of the
cost of the borrower's eligible in-transit inventory, less inventory reserves
established by the agent, and adjusted by the appraised value of such eligible
in-transit inventory (not to exceed 10% of the total amount of all eligible
inventory included in the borrowing base) less (d) reserves established by the
agent. As of the date the Prior Credit Agreement was terminated, we had no
outstanding borrowings under the Credit Agreement and the only utilization of
the letters of credit sub-limit under the Credit Agreement was a $2.025 million
irrevocable standby letter of credit, which was previously issued under the
Prior Credit Agreement and was transferred on such date to the Credit Agreement.

The unused portion of the revolving commitment under the Prior Credit Agreement
accrued a commitment fee, which ranged from 0.375% to 0.50% per annum, based on
the average daily borrowing capacity under the revolving facility over the
applicable fiscal quarter. Borrowings under the Prior Credit Agreement bear
interest at a rate per annum that ranged from the LIBOR rate plus 2.0% to the
LIBOR rate plus 2.25%, or the base rate plus 1.0% to the base rate plus 1.25%,
based on the average daily borrowing capacity under the Prior Credit Agreement
over the applicable fiscal quarter. We were allowed to elect to apply either the
LIBOR rate or base rate interest to borrowings at our discretion, other than in
the case of swing line loans, to which the base rate shall apply.


                                       31

——————————————————————————–

Table of Contents




Under the Prior Credit Agreement, we were subject to a variety of affirmative
and negative covenants of types customary in an asset-based lending facility,
including a financial covenant relating to availability, and customary events of
default. Prior to the first anniversary of the closing date, we were prohibited
from declaring or paying any cash dividends to our respective stockholders or
repurchasing of our own common stock. After the first anniversary of the closing
date, we were allowed to declare and pay cash dividends to our respective
stockholders and repurchase our own common stock, provided, among other things,
no default or event of default exists as of the date of any such payment and
after giving effect thereto and certain minimum availability and minimum
projected availability tests are satisfied.

Contractual Obligations

As of July 30, 2022, there were no material changes to our contractual
obligations as described in the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section of our Annual Report on
Form 10-K for the fiscal year ended January 29, 2022.

Critical Accounting Policies and Estimates


The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires the appropriate application of
certain accounting policies, some of which require us to make estimates and
assumptions about future events and their impact on amounts reported in our
consolidated financial statements. Since future events and their impact cannot
be determined with absolute certainty, the actual results will inevitably differ
from our estimates. As noted elsewhere in this Report, the COVID-19 pandemic has
had significant impacts on our business and the economy generally, making
estimates and assumptions about future events far more difficult, if not
impossible. A summary of our significant accounting policies is included in Note
2 to the consolidated financial statements in our Annual Report on Form 10-K for
the fiscal year ended January 29, 2022.

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