CHS Chico'S Fas, Inc. - 10-K

ITEM 1A.

RISK FACTORS

An investment in our common stock involves certain risks. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company, and the risks described herein are not listed in order of their potential occurrence or severity. If any of the following risks actually occur, our business, consolidated financial condition or results of operations could be negatively affected, and the market price for our shares could decline. There is no assurance that we have identified, assessed and appropriately addressed all risks affecting our business operations. Moreover, additional risks and uncertainties not identified herein could adversely affect our business, consolidated financial condition and/or results of operations. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below are cautionary statements, identifying important factors that could cause the Company’s actual results to differ materially from those expressed in or implied by any forward-looking statements made by or on behalf of the Company. There can also be no assurance that the actual future results, performance, benefits or achievements that we expect from our strategies, systems, initiatives or products will occur. Additionally, investors should not interpret the disclosure of a risk to imply a lack of materialization of that risk to date.

Risks Related to Business Strategy and Operations

If we cannot successfully execute our business strategy, our consolidated financial condition and results of operations could be materially adversely impacted. There are numerous risks associated with this strategy including, but not limited to, the following:

Risk

Description

1. Our inability to achieve the results of our strategic initiatives

We have launched significant initiatives, including digital initiatives, designed to reposition our brands, drive sales, acquire new customers, establish new channels of distribution, achieve organizational efficiency and further align the organizational structure for long-term growth. These initiatives require substantial internal change and effort, including reductions and changes in vendors and personnel, reductions in store locations and significant adjustments in how we design and source product and how we ultimately present and sell it to our customers. These initiatives may not deliver all of the results we expect. Moreover, the process of implementing these initiatives places significant stress on the Company and could result in unexpected short-term interruptions or negative impacts to our business, such as disruptions to our current business processes as we migrate to the new processes, or failure to successfully migrate to those new processes, which could negatively impact product flow, product quality or inventory levels, or result in additional impairment of long-lived assets.

Further, digital operations are subject to numerous risks, including reliance on third-party computer hardware/software and service providers, data breaches, violations of state, federal or international laws, including those relating to online privacy, credit card fraud, telecommunication failures and electronic break-ins and similar disruptions, and disruption of internet service.

In addition, there is no assurance that we can complete the implementation of all of these initiatives in the manner or in the time-frame planned, or that, once implemented, they will result in the expected increases in the efficiency or productivity of our business.

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2. Failure to identify and respond to fashion trends that appeal to our customer and implement and manage our business strategy may adversely impact sales and profitability

Our future success depends, in part, upon our ability to identify and respond to fashion trends in a timely manner and develop innovative, high-quality merchandise in styles that appeal to our consumers and in ways that favorably distinguish us from our competitors. The specialty retail apparel business fluctuates according to changes in the economy and customer preferences, influenced by fashion and season as well as current events and social issues. These fluctuations affect the inventory sourced by our brands as merchandise typically must be ordered well in advance of the selling season. There can be no assurance that we will appropriately anticipate consumer demands and accurately plan brand-right inventory in the future.

Our long-term omnichannel business strategy is dependent upon a number of other factors, including, but not limited to, customer shopping habits (such as online versus in-store) and discretionary income; identifying and developing new brand extensions, markets and channels of distribution; effectively using and evolving our marketing resources and programs to communicate with existing and potential customers; maintaining favorable brand recognition, effectively managing our store base; including management of store productivity and negotiating acceptable lease terms; effectively managing our franchise; creating and maintaining wholesale and licensing relationships to optimize sales and margin and to protect our brands; having the appropriate corporate resources to support our business strategies; sourcing appropriate levels of inventory in line with sales expectations and then managing its disposition; hiring, training and retention of qualified employees; generating sufficient operating cash flows to fund our business strategies; maintaining brand-specific websites that offer the system functionality, service and security customers expect; and correctly identifying, implementing and maintaining appropriate technology to support our business strategies.

3. Competition

The women's specialty retail industry is highly competitive. We compete with local, national and international department stores; specialty and discount stores; catalogs; and internet businesses offering similar categories of merchandise. Many of our competitors have advantages over us, including substantially greater financial, marketing, distribution and other resources. Increased levels of online and in-store promotional activity by our competitors, some of whom may be able to adopt more aggressive pricing policies than we can, may negatively impact our sales and profitability. There is no assurance that we can compete successfully with these companies in the future. In addition to competing for sales, we compete for store and online traffic, for favorable store locations and lease terms and for qualified associates. The growth of fast fashion, value fashion retailers and expansion of off-price retailers has shifted shopper expectations to more affordable pricing of well-known brands and has contributed to continued promotional pressure as well as a shift in customers’ expectations with regard to the timing and costs of product deliveries and returns. If we do not identify and respond to these emerging trends in consumer spending as well as the growing preference of many customers for online e-commerce options, we may not be able to retain our existing customers or attract new customers. Increased competition in any of these areas may result in higher costs or otherwise reduce our sales or operating margins.

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4. COVID-19 pandemic

The COVID-19 pandemic has resulted in significant challenges across our business since March 2020, and potential uncertainty and volatility remains in our business operations (including with respect to the suppliers on whom we depend), operating results and operating cash flows as the ongoing economic impacts and health concerns associated with the pandemic could continue to affect consumer behavior, spending levels and shopping preferences as well as our operational logistics. Our industry has been experiencing supply chain inflation and disruptions due to in part due to the pandemic. The inability of our third-party business partners, including our suppliers, logistics providers and vendors, to meet their obligations to us in light of financial stress, labor shortages, liquidity challenges, bankruptcy filings by other industry participants and supply chain and other disruptions due to the pandemic could adversely impact our business operations, consolidated financial performance and liquidity. In particular, we have incurred higher shipping costs due to sourcing new transportation methods to offset vendor capacity constraints and related surcharges, as well as product supplier handover delays and extended inbound transit times due to labor shortages. Higher shipping costs and constraints on our shipping capacity and longer delivery times may result in higher expenses, delayed shipments and inventory delays or product shortages that result in lost sales, all of which could adversely impact our business operations, consolidated financial performance and liquidity.

The pandemic has also resulted in periods of significant disruption and volatility in the global capital markets, which could adversely affect our ability to access the capital or financing markets, if needed, and our ability to meet our liquidity needs.

The full extent of the impact that the pandemic will have on our business remains to be seen, and such impact will depend on many factors including, but not limited to, the impact of the pandemic on consumer spending, and how quickly and to what extent normal economic conditions resume. New variants of COVID-19 may emerge or increase the spread or severity of COVID-19 and previously developed vaccines and therapies may not be as effective against new COVID-19 variants. If the duration or severity of the pandemic continues, worsens, reoccurs it may amplify or heighten the negative impacts on our business, financial condition, consolidated results of operations and liquidity and many of the other risks described in this Annual Report on Form 10-K.

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Risks Related to General Economic Conditions

Numerous economic conditions, all of which are outside of our control, could negatively affect the level of our customers' spending or our costs of operations. If these economic conditions persist for a sustained period, our consolidated financial condition and results of operations could be materially adversely impacted. These economic conditions include, but are not limited to, the following:

Risk

Description

5. Declines in consumer spending and customer traffic

Consumer spending in our sector may decline as a result of: threatened or actual government shut downs, high unemployment levels, low levels of consumer credit, declines in consumer confidence, inflation, increases in interest rates, recessionary pressures, increasing gas and other energy costs, increased taxes, increases in housing prices, higher durable goods or other consumer spending, volatility in the financial markets, uncertainty regarding the political or socio-economic environment and concerns regarding public health crises, such as the COVID-19 pandemic. Any one of these factors, or a combination thereof, may reduce our customers’ spending and purchases due to, for example, job loss or fear of job loss, foreclosures, bankruptcies, higher consumer debt and interest rates, reduced access to credit, falling home prices, increased taxes and/or decline in consumer confidence. Further, a significant number of our stores are located in malls and other shopping centers and many of these malls and shopping centers have been experiencing declines in customer traffic. Our sales at these stores are dependent, to a significant degree, upon the volume of traffic in those shopping centers and the surrounding area; however, our costs associated with these stores are essentially fixed. In times of declining traffic and sales, our ability to leverage these costs and our profitability are negatively impacted. Our stores benefit from the ability of a shopping center's other tenants to generate consumer traffic in the vicinity of our stores and the continuing popularity of the shopping center as a shopping destination. Our sales volume and traffic have been, and we expect will continue to be, adversely affected by, among other things, concerns regarding public health crises, the decrease in popularity of malls or other shopping centers in which our stores are located, the closing of anchor stores important to our business, and declines in popularity of other stores in the malls or shopping centers in which our stores are located. Furthermore, a deterioration in the financial condition of shopping center operators or developers could, for example, limit their ability to invest in improvements and finance tenant improvements for us and other retailers and lead consumers to view these locations as less desirable. Lastly, growth in our digital business relative to in-store sales may result in dilution of operating margin and profit due to higher delivery expenses incurred in connection with digital sales. Furthermore, if our digital businesses continue to successfully grow, they may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us online through our websites rather than from our physical stores, thereby reducing the financial performance of our store fleet. Further reduction in consumer traffic as a result of these or any other factors could have a material adverse effect on our business, consolidated financial condition or results of operations.

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6. Fluctuating costs and inflation

Fluctuations in the price, availability and quality of fabrics and other raw materials used to manufacture our products, as well as the price for labor and transportation, may contribute to ongoing pricing pressures throughout our supply chain. The price and availability of such inputs to the manufacturing process may fluctuate significantly, depending on several factors, including commodity costs (such as higher cotton prices), energy costs (such as fuel), freight costs, inflationary pressures from emerging markets, concerns regarding public health crises, increased labor costs, weather conditions (including risks associated with climate change) and currency fluctuations.

Moreover, increasing costs of materials and labor due to recent heightened inflation may materially adversely impact our margins and results of operations. We have experienced significant inflation in labor, materials and shipping costs. The Russian invasion of Ukraine in 2022 has led to economic disruptions, including, but not limited to, increased inflationary pressures and supply chain constraints, which have negatively impacted the global economy. The cost of materials that are used to manufacture our products can fluctuate, and have fluctuated, because of inflation and other factors. Inflationary pressure may also result in decreased demand for our products, increases in our operating costs (including our labor costs), reduced liquidity, and limits on our ability to access credit or otherwise raise capital. In response to the concerns over inflation risk, the U.S. Federal Reserve raised interest rates multiple times in 2022 and may continue to do so in the future. Additionally, a majority of the merchandise we sell is manufactured and produced outside of the U.S. and declines in the value of the U.S. dollar may result in higher costs to manufacture and produce. Any sudden decreases in the costs for materials may result in the cost of inventory exceeding the cost of new production, which could result in lower profitability, particularly if these decreases cause existing inventory downward price pressures that we are not able to control. If, in the future, there is volatility in the costs for materials and labor that we are unable to offset through price adjustments or improved efficiencies, our business, results of operations, financial condition and cash flows may be adversely affected.

7. Impairment charges

Significant negative industry or general economic trends, changes in customer demand for our products, disruptions to our business and unexpected significant changes or planned changes in our operating results or use of long-lived assets (such as boutique relocations or discontinuing use of certain boutique fixtures) have resulted in and may in the future result in impairments to goodwill, intangible assets and other long-lived assets.

8. Fluctuating comparable sales and operating results

Our comparable sales and overall operating results have fluctuated in the past and are expected to continue to fluctuate in the future. In addition to other risk factors discussed in this “Risks Related to General Economic Conditions” section, a variety of factors affect comparable sales and operating results, including concerns regarding public health crises, changes in fashion trends, changes in our merchandise mix, customer acceptance or rejection of merchandise offerings, the timing of marketing activities, calendar shifts of holiday periods, the periodic impact of a fifty-three-week fiscal year, climate risks including weather conditions impacting our supply chain, political or social unrest and general economic conditions. In addition, our ability to address the current challenges of sustained declining store traffic combined with a highly promotional retail environment may impact our comparable sales, operating results and ability to maintain or gain market share. Past comparable sales or operating results are not an indicator of future results. For example, see above in “COVID-19 pandemic.”

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Risks Related to Omnichannel Operations

Our omnichannel operations (including our websites and catalogs) are a critical part of our customers’ overall experience with our brands and will be a significant contributor to our future business growth and profitability. Our inability or failure to successfully manage and maintain those operations could materially and adversely impact our results of operations. Specific risks include, but are not limited to, the following:

Risk

Description

9. Reliance on technology

Our brands’ websites and select systems, including our integrated inventory management system, are heavily dependent on technology, which creates numerous risks including unanticipated operating problems, system failures, rapid technological change, failure of technology to operate the websites and systems as anticipated, reliance on third-party computer hardware and software providers, computer viruses, telecommunication failures, liability for online content, systems and data breaches, denial of service attacks, spamming, phishing attacks, computer hackers and other similar disruptions. Our failure to successfully assess and respond to these risks could negatively impact sales, increase costs, inhibit our ability to acquire new customers and damage the reputation of our brands.

10. Reliance on the U.S. Postal Service and other shipping vendors

We utilize shipping vendors to support our operations and fulfillment. Any significant increase in shipping costs and delivery times, or reductions in service could impair our ability to deliver merchandise in a timely or economically efficient manner.

Postal rate increases or a delay or reduction in service could affect the cost or timeliness of our order fulfillment and catalog and promotional mailings. We use the U.S. Postal Service to mail millions of catalogs each year to educate our customers about our products, acquire new customers, drive customers to our boutiques and websites and promote catalog sales. We rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting. The Company experienced delays in U.S. Postal Service deliveries in recent years and expects such delays to persist.

Risks Related to Information Technology Systems

In addition to the dependence of our retail websites and other systems on technology as discussed above, we also rely on various information technology systems to manage our overall operations, and failure of those systems to operate as expected or a significant interruption in service could materially adversely impact our consolidated financial condition and results of operations. Risks include, but are not limited to, the following:

Risk

Description

11. Disruptions while maintaining current systems or difficulties in integrating new systems

We and third-party providers on whom we rely regularly maintain, upgrade, enhance or replace our websites and information technology systems to support our business strategies and provide business continuity. Replacing legacy systems with successor systems, making changes to existing systems, acquiring new systems with new functionalities, changing to multiple systems simultaneously, executing oversight of vendor issues and maintaining adequate internal staffing have inherent risks including disruptions, delays, gaps in functionality, user acceptance, adequate user training or other difficulties that may impair the effectiveness of our information technology systems. Additionally, if such information technology systems fail to operate or are unable to support our growth, our store operations and websites could be severely disrupted, and we could be required to make significant additional expenditures to remedy any such failure.

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12. Cybersecurity and Data Privacy

Our business involves the storage and/or transmission of customers’ personal information, shipping preferences and credit card information, as well as confidential information regarding our business, employees and third parties. In addition, as part of our acceptance of customers’ debit and credit cards as forms of payment, we are required to comply with the Payment Card Industry Data Security Standards (“PCI”).

Because we have access to, collect or maintain information about our customers, the protection of that data is critical to our business. The regulatory environment surrounding information security and privacy continues to evolve, can vary significantly by country and presents compliance challenges, all of which increase our costs, impact our competitiveness, and can expose us to substantial fines or other penalties. In addition, new laws increasingly are giving customers the right to control how their personal data is used. For example, our failure to comply with the obligations of the European Union's General Data Protection Regulation (“GDPR”) could result in significant penalties in the future, which could have a material adverse effect on our business and results of operations. In addition, the State of California adopted the California Consumer Privacy Act of 2018 (“CCPA”) and the California Privacy Rights Act of 2020 (“CPRA”), which regulates the collection and use of consumers' data. Complying with GDPR, CCPA, CPRA and similar U.S. federal and state laws, including state privacy laws and a potential federal privacy law, could also cause us to incur substantial costs, forego a substantial amount of revenue or be subject to business risks associated with system changes and new business processes.

We are also subject to cybersecurity risks, which we may not be able to anticipate or prevent because of the rapidly evolving types of cyber-attacks. Actual or anticipated attacks may cause us to incur increased costs including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants.

While we have implemented measures reasonably designed to prevent security breaches, cyber incidents and privacy violations, and while we have taken steps to comply with PCI, GDPR, CCPA, CPRA and other applicable laws, those measures may not be effective, and we may experience significant security breaches, cyber incidents and privacy violations in the future. A significant cyber breach or incident or privacy violation through any means, including indirectly through third-party service providers and vendors, could result in the loss or misuse of data and could result in significant fines and penalties(resulting from, among other things, regulatory action), damages, loss of business, legal expenses (resulting from, among other things, litigation), remediation costs, reputational damage or loss of our ability to accept debit and credit cards as forms for payment. A significant cyber breach or incident or a privacy violation could also result in other negative consequences related to our competitiveness or could lead to costs that are not covered by insurance. In addition, changes in laws or regulations, (including the finalization of proposed cybersecurity regulatory rules) the PCI standards or technology, could result in increased expenses due to system or administrative costs.

In addition, having a portion of our workforce working remotely has amplified certain risks to our business, including increased demand on our information technology resources and systems, increased phishing, business email compromise and other cybersecurity attacks, including increased introduction of malware, and an increase in the number of points of potential attack, such as laptops and mobile devices to be secured (both of which are now being used in increased numbers). Any failure to effectively manage these risks, including to timely identify and appropriately respond to any cyberattacks or other disruption to our technology infrastructure, may adversely affect our business, consolidated financial performance and results of operations.

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Risks Related to Sourcing and Distribution Strategies

Our sourcing and distribution strategies are subject to numerous risks that could materially adversely impact our consolidated financial condition and results of operations. These risks include, but are not limited to, the following:

Risk

Description

13. Reliance on foreign sources of production

The majority of the merchandise we sell is produced outside the United States. As a result, our business remains subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as: geo-political instability, non-compliance with the Foreign Corrupt Practices Act and other anti-corruption laws and regulations, potential changes to the United States-Mexico-Canada Agreement and other international trade agreements, imposition of new legislation relating to import quotas, imposition of new or increased duties, taxes, or other charges on imports, foreign exchange rate challenges and pressures presented by implementation of monetary policy by the Federal Reserve and other international central banks, challenges from local business practices or political issues, manufacturing and transportation disruptions, our shift to a predominantly FOB (free on board) shipping structure rather than predominantly DDP (delivered duty paid), natural disasters and weather conditions due to the effect of climate change or other reasons, public health crises, customer activism related to our use of particular foreign markets, delays in the delivery of cargo due to port security considerations or government funding; seizure or detention of goods by U.S. Customs authorities, or a reduction in the availability of shipping sources caused by industry consolidation or other reasons. We source a substantial portion of our merchandise from Asia, including Vietnam and China. A reduction in the number of foreign suppliers, through bankruptcy or otherwise, or any change in exchange rates, labor laws or policies affecting the costs of goods in Asia could negatively impact our merchandise costs and the timely availability of the desired amount of merchandise. Furthermore, delays in production or shipping product, whether due to work slow-downs, work stoppages, strikes, port congestion, labor disputes, product regulations and customs inspections, public health crises or other factors, could also have a negative impact on our merchandise costs and the timely availability of the amount of merchandise we need.

Our supply chain could be disrupted or delayed by the impact of global health endemics or pandemics, such as has been the case during the COVID-19 pandemic, and the related government and private sector responsive actions thereto, including, but not limited to, border closures, restrictions on product shipments, and travel restrictions. During fiscal 2022, Vietnam and China sourced product accounted for approximately 36% and 30% of our merchandise cost. If we experience significant additional supply chain disruptions in China or other countries from which we source our products, we may not be able to develop alternate sourcing quickly and/or on favorable terms, if at all, which could result in increased costs, loss of sales and loss of customers, and adverse impacts on our margins and results of operation.

Further, there have been ongoing discussions, commentary and governmental actions regarding potentially significant changes to the United States trade policies, treaties, tariffs and taxes, including trade policies and tariffs regarding China. Tariffs imposed on Chinese origin goods under Section 301 in 2018 and 2019 largely continue to be in place today and range from 10% to 25% on certain Chinese-made imported products. While the Office of the United States Trade Representative (“USTR”) issued exclusions to Section 301 tariffs for certain products, most exclusions expired in December 2021, and have not been re-issued.

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These tariffs, as well as any additional tariffs, may result in lower gross margins on affected products or could require us to increase prices, which may impact customer demand for our products.

There is significant uncertainty about the future relationship between the United States, on the one hand, and China and other countries, on the other hand, with respect to the trade policies, treaties, taxes, government regulations and tariffs that would be applicable. It is unclear what changes might be considered or implemented and what response to any such changes may be by the governments of other countries. Significant tariffs or other restrictions placed on Chinese imports and any related counter-measures that are taken by China could have an adverse effect on our consolidated financial condition or results of operations. Other tariff risks include increased enforcement of intellectual property (IP) rights under Section 301 of the Trade Act of 1974 (the “Trade Act”). For example, the USTR conducts a review to identify countries that deny adequate and effective protection of IP or deny fair and equitable market access to U.S. persons who rely on IP protection and the U.S. Customs and Border Protection has increasingly been enforcing laws related to the prevention of forced labor in importers’ supply chains, with focus on certain commodities such as cotton. Even in the absence of further tariffs, the related uncertainty and the fear of an escalating trade war might create forecasting difficulties for us and cause our customers and business partners to place fewer orders for our products, which could have a material adverse effect on our business, liquidity, consolidated financial condition, and/or results of operations. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between these applicable nations and the United States. Any of these factors could depress economic activity, restrict our access to suppliers or customers and have a material adverse effect on our business, consolidated financial condition and results of operations and affect our international strategies.

Given the relatively fluid regulatory environment in China and the United States and relative uncertainty with respect to tariffs, international trade agreements and policies, a trade war, further governmental action related to tariffs or international trade policies, or additional tax or other regulatory changes in the future could directly and adversely impact our consolidated financial condition and results of operations.

14. Our suppliers’ inability to provide quality goods in a timely manner

We are subject to risk because we do not own or operate any manufacturing facilities and depend on independent third parties to manufacture our merchandise. A key supplier may become unable to address our manufacturing needs for a variety of reasons. If we were unexpectedly required to change suppliers or if a key supplier were unable to supply quality merchandise in sufficient quantities on acceptable terms, we could experience a significant impact to the supply or cost of merchandise. For example, see above in “COVID-19 pandemic.”

15. Reliance upon one supplier

Approximately 14% of total purchases in fiscal 2022 and 2021, respectively, were made from one supplier, and we cannot guarantee that this relationship will be maintained in the future or that the supplier will continue to be available to supply merchandise. Since we have no material long-term or exclusive contract with any apparel or accessory manufacturer or supplier, our business depends on our network of suppliers and our continued good relations with them. As a result, the sudden loss of this or another key supplier or any disruptions in their ability to supply us with merchandise could adversely impact our business, consolidated financial condition and results of operations. Moreover, we may not be able to find replacement suppliers in a timely fashion or on commercially reasonable terms, which may have an adverse impact on our consolidated financial condition and results of operations.

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16. Our suppliers’ failure to implement acceptable labor practices

We are committed to managing a responsible supply chain, and in support of such commitment have adopted our Global Vendor Code of Conduct, which is based on internationally-accepted labor standards and guidance, including the International Labour Organization’s fundamental conventions and The United Nations Guiding Principles on Business and Human Rights and reflects the minimum requirements our suppliers and each of the value chains partners (which includes without limitation, factories, mills, laundry facilities and raw materials providers) must meet in connection with the sourcing of raw materials and manufacture of our merchandise. To support supplier adherence to this commitment, we have an “Open Door and Ethics Hotline” for reporting suspected violations and have also engaged the services of third-party audit firms to monitor compliance with these requirements. Failure to adhere to our requirements or chronic noncompliance, may result in required remediation and/or termination of our relationship with a supplier or value chain partner, which in turn could have a material adverse impact on our operations, financial condition and results of operations.

With the recent developments associated with the Uyghur Forced Labor Prevention Act (“UFLPA”), US Customs and Border Protection has been tasked with reinforcing laws related to the prevention of forced labor associated with imported goods, especially in goods containing cotton, such as apparel. In doing so, expectations for our suppliers have increased and not all of our independent suppliers may be in complete compliance with our guidelines at all times. The violation of labor or other laws by any of our key independent suppliers or the divergence of an independent supplier’s labor practices from those generally accepted by us as ethical is not accepted and could interrupt or otherwise disrupt the shipment of finished merchandise or damage our reputation, which may also have a material adverse impact on our operations, financial condition and results of operations.

17. Reliance on one location to distribute goods for our brands

With minor exceptions, the distribution functions for all of our brands are handled from our DC in Winder, Georgia and a significant interruption in the operation of that facility due to public health crises, changes to existing systems, use of other facilities, natural disasters, severe weather, accidents, system failures, cybersecurity incidents, capacity constraints or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores and/or fulfill online or catalog orders.

Other Risks Factors

Our business is subject to numerous other risks that could materially adversely impact our consolidated financial condition and results of operations. These risks include, but are not limited to, the following:

Risk

Description

18. The terms of our Credit Agreement may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business or manage our operations, and it may be difficult to replace our credit facility

Our Credit Agreement, as amended and extended in February 2022, contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Credit Agreement and the borrowing base (the “Loan Cap”), determined after giving effect to any such transaction or payment, on a pro forma basis. The ability of the Company to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default which, if not cured or waived, could accelerate the Company's repayment obligations. Also, the inability to obtain new credit on commercially reasonable terms in the future when this facility expires could adversely impact our liquidity and results of operations. In addition, market conditions could potentially impact the size and terms of a replacement facility or facilities.

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19. War, terrorism, public health crises or other catastrophes

In the event of war (such as the military conflict between Russia and Ukraine), acts of terrorism or the threat of terrorist attacks, public health crises, climate risks and weather catastrophes or other events outside of our control, consumer spending could significantly decrease for a sustained period. In addition, local authorities or shopping center management could close stores in response to any immediate security concern, public health concern or weather catastrophe such as hurricanes, earthquakes or tornadoes. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results.

Similarly, war, acts of terrorism, threats of terrorist attacks, public health crises or a weather catastrophe, including those caused by climate change, could severely and adversely affect our Fort Myers campus, our DC, or our entire supply chain. If any of our facilities, including our DC, our Company-operated or franchised stores or the facilities of our suppliers or third-party service providers are affected by a natural disaster, public health crisis (such as a pandemic and epidemic), terrorism, war, political instability or other conflict, or other events outside of our control, our business and operating results could be negatively impacted. For example, see above in “COVID-19 pandemic.”

20.Our inability to protect our brands’ reputation

Our ability to protect our brands’ reputations is an integral part of our general success strategy and is critical to the overall value of the brands. If we fail to maintain high standards for merchandise quality and integrity in our business conduct or fail to address other risk factors, including threats to data, privacy and cybersecurity, such failures could jeopardize our brands' reputations. Consumers value readily available information from social media and other sources concerning retailers and their goods and services and many times act on such information without further investigation into its accuracy. Any negative publicity or claims, whether true or not, may affect our reputation and brand and, consequently, reduce demand for our merchandise, decrease customer and investor loyalty and affect our vendor relationships, which would have an adverse impact on our business, consolidated financial condition and results of operations.

The way we address ESG matters and the perceived success of our ESG actions may impact the value of our brands. There has been increasing stakeholder and regulatory focus on ESG matters affecting public companies, including ours. Expectations regarding ESG disclosures, setting and executing ESG-related goals and timely achieving measurable progress in these areas could expose us to market, operational and execution costs or risks. We expect that stakeholder expectations, as well as laws, rules and regulations, in these areas will continue to evolve quickly, which may result in the need for increased resources for ESG monitoring and reporting and adjustments to our operations may be necessary. Additionally, the goals we set, and the data we disclose, may influence the value of our brands. By electing to publicly share our metrics and expand our disclosures, our ESG activities may face increased scrutiny. We have committed to certain ESG initiatives and goals, which may be difficult and expensive to implement, and the technologies needed to implement them may not be cost effective and may not advance at a sufficient pace. In addition we could face scrutiny with respect to the accuracy, adequacy or completeness of our ESG related disclosures. Moreover, disclosures about our ESG-related initiatives or goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions or third-party information that we believe to be reasonably but are subject to change in the future. We could also be subject to scrutiny with respect to the scope or nature of our ESG-related initiatives or goals, or for any revisions to those goals. If our ESG-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to these initiatives or goals on a timely basis, or at all, our reputation and the value of our brands could be adversely affected. Any harm to our reputation resulting from setting ESG-related metrics, expanding our disclosures on these subjects or our failure or perceived failure to meet such metrics or disclosures could adversely affect our business, financial performance, and growth.

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21. Our business could be impacted as a result of actions by activist shareholders or others

From time to time, we may be subject to legal and business challenges in the operation of our Company due to proxy contests, consent solicitations, shareholder proposals, media campaigns and other such actions instituted by activist shareholders or others. In the event of shareholder activism, particularly with respect to matters which the Board, in exercising its fiduciary duties, disagree with or have determined not to pursue, our business could be adversely affected because responding to such actions is costly and time-consuming, disruptive to our operations, may not align with our business strategies and may divert the attention of our Board and management from the pursuit of current business strategies. Perceived uncertainties as to our future direction or changes to the composition of our Board as a result of shareholder activism may lead to the perception of instability in the organization and its future and may make it more difficult to attract and retain qualified personnel, business partners and customers.

22. Disadvantageous lease obligations and commercial retail consolidation

We have, and will continue to have, significant lease obligations. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to fulfill our obligations under the applicable lease including paying the base rent for the balance of the lease term. Additionally, continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future and could concentrate our leases with fewer landlords who may then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to enter into new leases or renew or renegotiate existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close, this could affect our ability to profitably operate our stores. Any dispute regarding our leases may result in litigation with the respective landlord, and any such dispute could be costly and have an uncertain outcome.

23. Changes to accounting rules and regulations may adversely affect our financial results, consolidated financial position and cash flows

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations that are relevant to our business, including but not limited to revenue recognition, leases, impairment of goodwill, intangible and long-lived assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change or increase volatility of our reported or expected financial performance or consolidated financial condition. See Note 1, to our consolidated financial statements under the heading “Recently Issued Accounting Pronouncements” for a description of recently issued accounting pronouncements, and “Critical Accounting Estimates,” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of accounting policies considered to be important to our operational results and consolidated financial condition. These and other future changes to accounting rules or regulations could have an adverse impact on our business, operational results, consolidated financial position and cash flow presentation.

24. The Company cannot provide any assurance that in the future the Company will pay dividends or repurchase stock pursuant to its share repurchase

program

All decisions regarding authorization to pay a dividend on the Company’s common stock or approve a share repurchase program will be made by the Board from time to time based on the Board’s evaluation of the best interests of the Company and its shareholders. The Board will complete each evaluation based on a review of the Company’s stock price, future earnings, consolidated financial condition and other factors deemed relevant. There is no assurance that the Board will declare dividends on the Company’s common stock in the future. The Company’s current share repurchase program authorizes $300 million in share repurchases of the Company’s common stock, of which $55.2 million remained authorized for repurchase under the program as of January 28, 2023. However, the Company is not obligated to make any purchases under the share repurchase program and the program may be discontinued at any time.

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General Risks Factors

Our business is subject to numerous general risks that could materially adversely impact our consolidated financial condition and results of operations. These risks include, but are not limited to, the following:

Risk

Description

25. Our ability to retain or recruit qualified key personnel

Our success and ability to properly manage our business depends to a significant extent upon our ability to attract, develop and retain qualified employees, including executive and senior management and talented merchants. Competition for talented employees within our industry is intense. In recent years, we experienced staffing shortages, higher turnover rates compared with prior years and challenges in recruiting and retaining qualified employees at all levels of our organization, including senior management and merchants at our Fort Myers campus and employees at our DC and throughout our store fleet. Existing labor shortages and our inability or failure to recruit and retain such personnel as well as our inability to implement appropriate succession planning, including the transition of new executives, particularly at the senior executive level, could adversely impact our business, financial performance, reputation, our ability to keep up with the needs of our customers, ability to compete and overall customer satisfaction.

26. Our inability to protect our intellectual property

Although we devote resources to protect our intellectual property, others may still attempt to imitate our products or infringe upon our intellectual property rights. Other parties may also claim that some of our products infringe on their trademarks, copyrights or other intellectual property rights.

In addition, the intellectual property laws and enforcement practices in many foreign countries can be substantially different from those in the U.S. There are also inherent challenges with enforcing intellectual property rights on third party e-commerce websites, especially those based in foreign jurisdictions. We cannot guarantee that such rights are not, or will not be, infringed.

27. Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations

We are subject to income and other taxes in local, national and international jurisdictions. Our tax returns and other tax matters are also subject to examination by the Internal Revenue Service and other tax authorities and governmental bodies. These examinations may challenge certain of our tax positions, such as the timing and amount of deductions and allocations of taxable income to various jurisdictions. The results of any tax audits could adversely affect our consolidated financial results. Furthermore, our effective tax rate in a given period may be materially impacted by changes in the mix and level of earnings by taxing jurisdiction and deductibility of excess share-based compensation.

28. Stock price volatility

The market price of our common stock has fluctuated substantially in the past and may continue to do so in the future. Future announcements or management discussions concerning us or our competitors, sales and profitability results, quarterly variations in operating results or comparable sales, updates on our strategic initiatives, changes in earnings estimates by analysts or the failure of investors or analysts to understand our business strategies or fundamental changes in our business or sector, among other factors, could cause the market price of our common stock to fluctuate substantially. In addition, stock markets have experienced periods of significant price or volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies.

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29. Global macro-environment

Our growth is subject to global economic, political, and geopolitical risks. Our operations and the execution of our business plans and strategies are subject to the effects of global economic trends, geopolitical risks and demand or supply shocks from events such as war or international conflict, a major terrorist attack, natural disasters or actual or threatened public health emergencies (such as COVID-19, including virus variants and resurgences and responses to those). They are also affected by local and regional economic environments, supply chain constraints and policies in the United States and other markets that we serve, including factors such as continued inflationary pressures in many markets or continued increases in interest rates from recent historic lows. We could face difficulty in paying off long-term debt, stagnant economic growth rates, issues regarding the availability of skilled labor, a constrained monetary policy, unfavorable exchange rates, and currency volatility. For example, ongoing inflationary pressures have caused, and may continue to cause, many of our material and labor costs to increase, which can adversely affect our profitability and cash flows, particularly when we are unable to increase customer pricing to offset such pressures. At the same time, Russia’s invasion of Ukraine and the related political and economic consequences, such as sanctions and other measures imposed by the European Union, the United States and other countries and organizations related to Russia in response, have also caused, and may continue to cause, disruption and instability in global markets, in supply chains, and in industries that may negatively impact our business, our financial condition, and our results of operations. Further deterioration of economic conditions or outlooks, such as lower economic growth, recession or fears of recession in the United States, China, Europe, or other key markets, may adversely affect the demand for, or profitability, of our products. In addition, political changes and trends, such as protectionism, as well as tariffs, export controls, restrictions on trade barriers, sanctions, or changes to tax or other laws and policies, may be disruptive and costly to our business; such can interfere with our global operating model, supply chain, production costs, customer relationships, and competitive position. Further escalation of any specific trade tensions could be harmful to our global economic growth or to our business in or with other customers in other countries.

30. Subject to laws, regulation and government policies

We are subject to a wide variety of laws, regulations, and government policies (including those of U.S. federal and state governments, as well as of non-U.S. entities) that may change in significant ways. There can be no assurance that these laws, regulations, and policies will not be changed, interpreted, or enforced in ways that will require us to modify our business and objectives relating to our business operations. In particular, recent trends globally toward increased protectionism, import and export controls, required licenses or authorizations to engage in business dealings with certain countries or entities, and the use of tariffs and trade barriers can result in actions by governments around the world that have been, and that may continue to be, disruptive and costly to our businesses, and that can interfere with our operations model and thereby weaken our competitive position. In addition, changes in environmental and climate change laws, regulations or policies (including, for example, emission standards) could impact us and could lead to additional costs, compliance requirements, or otherwise negatively impact our business or competitive position. Other legislative and regulatory areas of significance for our businesses on which U.S. and non-U.S. governments have focused, and continue to focus, include cybersecurity, data privacy, anti-corruption, competition law, compliance with trade controls, and economic sanctions laws. Significant challenges and changes in these areas could adversely affect our results of operations, consolidated financial position, and cash flow presentation.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto. References herein to “Notes” refer to the Notes to our consolidated financial statements. Each of the periods presented had fifty-two weeks.

Executive Overview

Chico’s FAS is a Florida-based fashion company founded in 1983 on Sanibel Island, Florida. The Company reinvented the fashion retail experience by creating fashion communities anchored by service, which put the customer at the center of everything we do. As one of the leading fashion retailers in North America, Chico’s FAS is a company of three unique brands operating under the Chico's, White House Black Market (“WHBM”) and Soma brand names - each thriving in their own white space, founded by women, led by women, providing solutions that millions of women say give them confidence and joy. We sometimes refer to our Chico's and WHBM brands collectively as our “Apparel Group.” Our distinct lifestyle brands typically serve the needs of fashion-savvy women with household incomes in the moderate-to-high income level. We strive to deliver outstanding and personalized service to our customers through our trademark “Most Amazing Personal Service” standard. We earn revenue and generate cash through the sale of merchandise in our domestic retail stores, our various Company-operated e-commerce websites, our call center (which takes orders for all of our brands), through unaffiliated franchise partners and through third-party channels. As of January 28, 2023, we operated 1,269 stores across 46 states, Puerto Rico and the United States (“U.S.”) Virgin Islands, and sold merchandise through 58 international franchise locations in Mexico and 2 domestic airport locations.

We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various retail channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return or exchange our merchandise through whatever sales channel and at whatever time is most convenient. As a result, we track total sales and comparable sales on a combined basis.

Business Highlights

The Company’s fiscal 2022 business highlights include:

• Consistent strong results : Chico's FAS posted $0.88 net income per diluted share for fiscal 2022, an increase of 138% over last year, driven by strong comparable sales growth, significant gross margin expansion and diligent expense control.

• Powerful portfolio performance: For fiscal 2022, total Chico’s FAS net sales grew 18.3% and comparable sales increased 19.6% versus last year, led by the Company’s Apparel Group. Chico’s and WHBM comparable sales grew 30.8% and 25.7%, respectively, in fiscal 2022 versus last year.

• Continued customer growth : Elevated products, strategic marketing efforts, and our relaunched loyalty programs continued to drive more customers to the Company’s brands, with total year-over-year customer count up mid-single digits, spend per customer up over last year and the average age of new customers continuing to trend younger.

• Meaningful gross margin improvement : Occupancy leverage, higher average unit retail and lower inbound air freight drove 240 basis points of gross margin improvement during the year.

• Diligent expense management: Continued disciplined expense control and a lean cost structure led to 50 basis points of selling, general and administrative expense (“SG&A”) leverage in fiscal 2022.

• Solid operating income : Fiscal 2022 income from operations was $142 million, or 6.6% of net sales, compared to $67 million, or 3.7% of net sales, in the prior year. Year-over-year operating income more than doubled, driven by strong sales and gross margin performance and expense control.

• Strong balance sheet: The Company ended the fourth quarter with $178 million in cash and marketable securities, after repaying $50 million of long-term debt during the year.

Financial Results

Income per diluted share for fiscal 2022 was $0.88 compared to $0.37 in fiscal 2021 and a loss per diluted share of $3.11 in fiscal 2020.

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Current Trends

Retail is an inherently volatile business, subject to the ups and downs in the economic landscape. We continually monitor that landscape and work to assure we are meeting our customers’ demands with the right balance and styles of inventory and accommodating their evolving shopping preferences. Over the last several years, we have made meaningful investments to transform our Company into a digital-first enterprise, fast-tracking numerous innovation and technology investments across all three brands. We offer our customers the ability to shop through three powerful platforms – digital, stores, and our social stylists. Our customers have proven to be resilient, and our multi-channel customers are especially valuable to us, spending three times more than single-channel customers.

The Company remains confident that it currently has sufficient liquidity to repay its obligations as they become due for the foreseeable future as the Company continues to drive operational efficiency and effectiveness and maintains a lean cost structure. As our cash flow continues to grow, we expect our financial position to strengthen. In addition to funding strategic investments, we believe our cash flow will allow us to navigate during an uncertain macroeconomic environment. We believe growing our cash flow base will continue to permit us to invest in our long-term strategic plan and, although we are seeing some pressure on SG&A, we expect ongoing investment to support profitable future growth.

Fiscal 2023 Outlook

For the fiscal 2023 first quarter the Company currently expects:

• Consolidated net sales of $535 million to $550 million;

• Gross margin rate as a percent of net sales of 41.3% to 41.8%;

• SG&A as a percent of net sales of 32.8% to 33.3%;

• Effective income tax rate of 25%; and

• Earnings per diluted share of $0.26 to $0.30.

For the fiscal 2023 full year the Company currently expects:

• Consolidated net sales of $2,220 million to $2,250 million;

• Gross margin rate as a percent of net sales of 39.4% to 39.8%;

• SG&A as a percent of net sales of 33.0% to 33.4%;

• Effective income tax rate of 26%;

• Earnings per diluted share of $0.79 to $0.91; and

• Capital and cloud-based expenditures of approximately $80 million to $90 million.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of key performance and financial measures to evaluate our business, develop financial forecasts and make strategic decisions. These key measures include liquidity, comparable sales, gross margin as a percent of sales, operating income as a percent of sales, diluted income (loss) per share and return on net assets (“RONA”). The following describes these measures.

Liquidity

Liquidity is measured through cash flow, which is the measure of cash provided by or used in operating, investing and financing activities. Through strong sales performance, cost control, appropriate inventory management, and other actions, our cash position, total liquidity and operating cash flow remain strong, providing us with flexibility to manage the business and make investments to further propel our growth.

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Comparable Sales

Comparable sales is an omnichannel measure of the amount of sales generated from products the Company sells directly to the consumer relative to the amount of sales generated in the comparable prior-year period. Comparable sales is defined as sales from stores open for the preceding twelve months, including stores that have been expanded, remodeled or relocated within the same general market and includes online, catalog and international sales. The comparable sales calculation excludes the negative impact of stores closed four or more days. The Company has historically viewed comparable sales as a key performance indicator to measure the performance of our business, however, we are not providing full year comparable sales figures for fiscal 2021 compared to fiscal 2020 and fiscal 2020 compared to fiscal 2019 as we believe it is not a meaningful measure due to varying degrees of business disruptions and periods of store closures and/or stores operating at reduced hours as a result of the pandemic during fiscal 2020.

Gross Margin as a Percentage of Net Sales

Gross margin as a percentage of net sales is computed as gross margin divided by net sales. We believe gross margin as a percentage of net sales is a primary metric to measure the performance of our business as it is used to determine the value of incremental sales, and to guide pricing and promotion decisions.

Operating Income as a Percentage of Net Sales

Operating income as a percentage of net sales is computed as operating income divided by net sales. We believe operating income is the primary metric to measure the overall health of our business and how efficiently the company can generate cash from our business operations.

Diluted Income (Loss) per Share

Income (loss) per share is determined using the two-class method when it is more dilutive than the treasury stock method. Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted income (loss) per share reflects the dilutive effect of potential common shares from non-participating securities such as stock options, performance stock units and restricted stock units. Whereas basic income (loss) per share serves as an indicator of the Company's profitability, we believe diluted income (loss) per share is a primary metric provided it gauges the Company's quality of income (loss) per share assuming all potential common shares from non-participating securities are exercised.

Return on Net Assets

RONA is defined as (a) net income (loss) divided by (b) the “five-point average” (based on balances at the beginning of the first quarter plus the final balances for each quarter of the fiscal year) of net working capital less cash and marketable securities plus fixed assets. We believe RONA is a primary metric as it helps to determine how well the Company is utilizing its assets. As such, a higher RONA could indicate that the Company is using its assets and working capital efficiently and effectively.

Exit of Canada Frontline Operations

On July 30, 2020, Chico’s FAS Canada, Co., an immaterial subsidiary of the Company, filed for bankruptcy with the Ontario, Canada office of the Superintendent in Bankruptcy. This action resulted in the permanent closure of four Chico’s and six WHBM boutiques in Ontario, Canada. In the second quarter of fiscal 2020, we exited our Canada frontline operations and recorded on a net basis a non-material charge, including the realization of a cumulative foreign currency translation adjustment.

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RESULTS OF OPERATIONS

Net Income (Loss) and Net Income (Loss) Per Diluted Share

For fiscal 2022, the Company reported net income of $109 million, or $0.88 per diluted share, compared to net income of $46 million, or $0.37 per diluted share for fiscal 2021. Results for fiscal 2021 reflect the legal settlement charges of $4 million impact on SG&A.

Net income for fiscal 2021 was $46 million, or $0.37 per diluted share, compared to a net loss for fiscal 2020 of $360 million, or $3.11 per diluted share. The fiscal 2020 net loss includes approximately $200 million in significant after-tax non-cash charges as a result of the pandemic. The fiscal 2020 net loss includes the unfavorable impact of accelerated depreciation charges of approximately $8 million, after-tax, related to our prior retail fleet optimization plan and Severance Charges of approximately $2 million, after-tax, related to our then revised organizational structure.

Summary of Significant Non-Cash Charges (1)

Fiscal 2020

Amount (2)

% of Net Sales

(dollars in millions) (2)

Gross margin:

Inventory write-offs (3)

Long-lived store asset impairment (3)(4)

Right of use store asset impairment (3)

Total significant charges impacting gross margin

Selling, general and administrative expenses:

Other long-lived asset impairment (3)(5)

Other right of use asset impairment (3)

Total charges impacting selling, general and administrative expenses

Goodwill and intangible impairment charges:

Goodwill impairment (3)

Indefinite-lived asset impairment (3)

Total goodwill and intangible impairment charges

Income tax benefit:

Deferred tax asset valuation allowance

Total charges impacting income tax benefit

Total significant non-cash charges

(1) All significant charges relate to the impact of the pandemic. Less significant charges that may have been incurred are not reflected in the table above.

(2) May not foot due to rounding.

(3) Presented pre-tax.

(4) Primarily includes impairment on leasehold improvements at certain underperforming stores.

(5) Includes impairment on capitalized implementation costs related to our cloud computing arrangements and other technology-related assets.

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Net Sales

The following table depicts net sales by Chico’s, WHBM and Soma in dollars and as a percentage of total net sales for fiscal 2022, 2021 and 2020:

Fiscal 2022

Fiscal 2021

Fiscal 2020

(dollars in millions) (1)

Chico’s

WHBM

Soma

Total net sales

(1) May not foot due to rounding.

Net sales for fiscal 2022 increased to $2,142 million from $1,810 million in fiscal 2021. The 18.3% increase reflects a comparable sales increase of 19.6%, partially offset by the impact of the net 1% decrease in selling square footage. The 19.6% comparable sales increase was driven by an increase in transaction count and average dollar sale.

Net sales for fiscal 2021 increased to $1,810 million from $1,324 million in fiscal 2020. This 36.7% increase primarily reflects fiscal 2020 disruptions related to the pandemic, including temporary store closures and limited hours, partially offset by 36 permanent store closures since fiscal 2020.

The Company is not providing comparable sales figures for the fiscal 2021 compared to the fiscal 2020, as we do not believe it is a meaningful measure due to the significant impacts of the pandemic during fiscal 2020.

Cost of Goods Sold/Gross Margin

The following table depicts cost of goods sold and gross margin in dollars and gross margin as a percentage of total net sales for fiscal 2022, 2021 and 2020:

Fiscal 2022

Fiscal 2021

Fiscal 2020

(dollars in millions)

Cost of goods sold

Gross margin

Gross margin percentage

For fiscal 2022, gross margin was $838 million, or 39.1% of net sales, compared to $664 million, or 36.7% of net sales in the prior year. The 240 basis point increase in gross margin rate primarily reflects occupancy leverage, higher average unit retail and lower utilization of inbound air freight, partially offset by higher raw material costs.

For fiscal 2021, gross margin was $664 million, or 36.7% of net sales, compared to $184 million, or 13.9% of net sales, in fiscal 2020. The year-over-year improvement in gross margin rate primarily reflects improved leverage of occupancy costs with rising sales, the impact of inventory write-offs and store impairments as a result of the pandemic in fiscal 2020 as reflected

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in the Summary of Significant Non-Cash Charges table herein, and margin expansion as a result of higher full-price sales and less promotional activity, partially offset by increases in raw materials and freight costs.

Selling, General and Administrative Expenses

The following table depicts SG&A, which includes store and direct operating expenses, marketing expenses and National Store Support Center expenses, in dollars and as a percentage of total net sales for fiscal 2022, 2021 and 2020:

Fiscal 2022

Fiscal 2021

Fiscal 2020

(dollars in millions)

Selling, general and administrative expenses

Percentage of total net sales

For fiscal 2022, SG&A was $696 million, or 32.5% of net sales, compared to $597 million, or 33.0% of net sales during the prior year, primarily reflecting ongoing expense management and the impact of $4 million in pre-tax legal settlement charges in last year's third quarter.

For fiscal 2021, SG&A was $597 million, or 33.0%, compared to $527 million, or 39.8%, in fiscal 2020. The decrease in SG&A as a percent of net sales primarily reflects sales leverage and the benefit of cost savings initiatives.

Income Taxes

The effective tax rate for fiscal 2022, 2021, and 2020 was 21.1%, 23.0% and 21.7%, respectively. The fiscal 2022 effective tax rate primarily reflects a reduction in the valuation allowance due to a decrease in deferred tax assets and favorable share-based compensation benefit. The fiscal 2021 effective tax rate primarily reflects a rate differential due to benefits provided under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The fiscal 2020 effective tax rate primarily reflects a rate differential due to the benefits provided under the CARES Act, partially offset by the unfavorable impact of the Company’s book goodwill impairment charge and the valuation allowance against the Company’s deferred tax assets.

Cash, Marketable Securities and Debt

At fiscal 2022 year end, cash and marketable securities totaled $178 million compared to $115 million at fiscal 2021 year end. Fiscal 2022 year end long-term debt totaled $49 million compared to $99 million at fiscal 2021 year end, reflecting principal reductions of $30 million and $20 million in the third and fourth quarters of fiscal 2022, respectively.

Inventories

At fiscal 2022 year end, inventories totaled $277 million compared to $323 million at fiscal 2021 year end, a $46 million, or 14.4%, decrease from the prior year, reflecting a decrease in on-hand inventory of 6.2% and in-transit inventory of 28.5% due to optimized inventory management and shorter goods in-transit times over the prior year.

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Income Tax Receivable

At the end of fiscal 2022, our consolidated balance sheet reflected a $8 million income tax receivable after collection of $4 million during fiscal 2022, related to the recovery of Federal income taxes paid in prior years and other tax law changes as a result of the CARES Act.

Liquidity and Capital Resources

Overview

The Company’s material cash requirements include amounts outstanding under operating leases, open purchase orders for inventory and other operating expenses in the normal course of business, contractual commitments for future capital expenditures, long-term debt obligations and interest payments on long-term debt. Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omnichannel capabilities, including investments in our stores, information technology and supply chain.

In response to the pandemic, the Company took actions to reinforce its financial position and liquidity. Specific actions include: significantly reducing capital and expense structures; centralizing key functions to create a nimbler organization to better align costs with expected sales; suspending the quarterly dividend commencing April 2020; aligning inventory receipts with expected demand; partnering with suppliers and vendors to reduce operating costs and extend payment terms; and reviewing real estate and actively negotiating with landlords to deliver rent relief in the form of reductions, abatements and other concessions. In October 2020 and February 2022, the Company also amended and extended its credit facility to strengthen its liquidity and enhance its financial stability. The Company anticipates satisfying its material cash requirements from its cash flows from operating activities, our cash and marketable securities on hand, capacity within our credit facility and other liquidity options.

The following table summarizes cash flows for fiscal 2022, 2021 and 2020:

Fiscal 2022

Fiscal 2021

Fiscal 2020

(dollars in millions) (1)

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Net increase in cash and cash equivalents

(1) May not foot due to rounding.

Operating Activities

Net cash provided by operating activities in fiscal 2022 was $162 million compared to net cash provided by operating activities of $63 million for fiscal 2021. The change in net cash provided by operating activities primarily reflects higher net income, reduced inventory levels and timing of payables.

Net cash provided by operating activities in fiscal 2021 was $63 million compared to net cash used in operating activities of $98 million for fiscal 2020. The change in net cash provided by operating activities primarily reflects higher net income and the timing of income taxes and payables, partially offset by elevated inventories and normalized rent payments and rent settlements.

Investing Activities

Net cash used by investing activities for fiscal 2022 was $64 million compared to net cash provided of $14 million for fiscal 2021, primarily reflecting a $43 million increase in cash used for transactions of marketable securities, $29 million increase in purchases of property and equipment, and a decrease in the proceeds from the sale of certain Corporate assets of $6 million compared to fiscal 2021.

Net cash provided by investing activities for fiscal 2021 was $14 million compared to $34 million for fiscal 2020, primarily reflecting a $27 million decrease in net proceeds from the transactions of marketable securities, partially offset by the sale of certain Corporate assets of $8 million.

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Financing Activities

Net cash used in financing activities for fiscal 2022 was $59 million compared to net cash provided by financing activities of $52 million in fiscal 2021, primarily reflecting a $50 million payment on borrowings in fiscal 2022. In fiscal 2022, we received approximately $0.3 million in proceeds from issuing approximately 4 million shares related to employee stock ownership plans.

Net cash used in financing activities for fiscal 2021 was $52 million compared to net cash provided by financing activities of $91 million in fiscal 2020, primarily reflecting a $50 million payment on borrowings in fiscal 2021 compared to $107 million in net proceeds from borrowings in fiscal 2020, partially offset by an $11 million dividend payment in fiscal 2020. In fiscal 2021, we received approximately $0.1 million in proceeds from issuing approximately 3 million shares related to employee stock ownership plans.

Store and Franchise Activity

During fiscal 2022, we had a net increase of three stores, consisting of 23 Soma net store openings, partially offset by the closure of 12 Chico's and eight WHBM stores. As of January 28, 2023, the Company's franchise operations consisted of 58 international retail locations in Mexico and two domestic airport locations.

Stores continue to be an important part of our omnichannel strategy, and digital sales are higher in markets where we have a retail presence, but we intend to optimize our real estate portfolio, reflecting our emphasis on digital and our priority for higher profitability standards. We will continue to adjust our store base to align with these standards, primarily as leases come due, lease kickouts are available, or buyouts make economic sense. We closed 24 underperforming locations during fiscal 2022 and ended fiscal 2022 with 1,269 boutiques. The Company anticipates closing approximately 20 stores in fiscal 2023, which primarily includes underperforming, mall-based Chico's and WHBM boutiques. We also plan to invest in refreshing 60 existing locations and opening up to 15 Soma stores in fiscal 2023. We will continue to evaluate our store base in light of economic conditions and our business strategy and may adjust the openings and closures as conditions require or as opportunities arise.

Credit Facility

On February 2, 2022, the Company and certain material domestic subsidiaries entered into Amendment No. 2 (the "Amendment") to its credit agreement (as amended, the "Credit Agreement") originally entered into on August 2, 2018 and amended October 30, 2020, by and among the Company, certain material domestic subsidiaries as co-borrowers and guarantors, Wells Fargo Bank, National Association ("Wells Fargo Bank"), as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Credit Agreement are guaranteed by the guarantors and are secured by a first priority lien on certain assets of the Company and certain material domestic subsidiaries, including inventory, accounts receivable, cash deposits, certain insurance proceeds, real estate, fixtures and certain intellectual property. The Credit Agreement provides for a five-year asset-based senior secured revolving loan ("ABL") and letter of credit facility of up to $285.0 million, maturing February 2, 2027. The interest rate applicable to Term Secured Overnight Financing Rate ("SOFR") Loans drawn under the ABL is equal to Term SOFR plus 1.60% (subject to a further decrease to Term SOFR plus 1.35% or an increase to Term SOFR plus 1.85% based upon average quarterly excess availability under the ABL). The Credit Agreement also provides for a $15.0 million first-in last-out ("FILO") loan. The interest rate applicable to the FILO is equal to Term SOFR plus 3.60% (subject to a further decrease to Term SOFR plus 3.35% or an increase to Term SOFR plus 3.85% based on average quarterly excess availability under the FILO). However, for any ABL or FILO with a SOFR interest rate period of six months, the interest rate applicable to the ABL and FILO is increased by 30 basis points.

The Credit Agreement contains customary representations, warranties and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Credit Agreement and the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis. In addition, the Company must pay a commitment fee per annum on the unused portion of the commitments under the Credit Agreement.

As of January 28, 2023, our outstanding debt consisted of $49 million in net borrowings were outstanding under the Credit Agreement. Availability under the Credit Agreement is determined based upon a monthly borrowing base calculation which includes eligible credit card receivables, real estate and inventory, less outstanding borrowings, letters of credit and certain designated reserves. As of January 28, 2023, the available additional borrowing capacity under the Credit Agreement was approximately $219 million, inclusive of the current loan cap of $28 million.

As of January 28, 2023, deferred financing costs of $3 million was outstanding related to the Credit Agreement, and is presented in other current assets in the accompanying consolidated balance sheets in this Annual Report on Form 10-K.

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Critical Accounting Estimates

The discussion and analysis of our consolidated financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making 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. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, and believes the following assumptions and estimates are significant to reporting our consolidated results of operations and financial position.

Inventory Valuation and Shrinkage

We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Further, inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We record excess and slow-moving inventories at net realizable value and may liquidate certain slow-moving inventory through third parties. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future.

We estimate our expected shrinkage of inventories between our physical inventory counts by using average store shrinkage experience rates, which are updated on a regular basis. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future.

Revenue Recognition

Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and company issued coupons, promotional discounts and employee discounts. For sales from our websites and catalogs, revenue is recognized at the point of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying consolidated statements of income (loss). Amounts paid by customers to cover shipping and handling costs are immaterial.

We sell gift cards in stores, on our Company-operated e-commerce websites and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved, and revenue is recognized, for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.

All three brands offer a points-based rewards program in which customers earn points based on purchases. Attaining specified rewards point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The liability is relieved and revenue is recognized for rewards point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to remit the point value. We determined the rewards point breakage rate based on historical and redemption patterns.

Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from net sales.

Evaluation of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible Assets

Long-lived assets, including definite-lived assets, are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If future undiscounted cash flows expected to be generated by the asset are less than its carrying amount, an asset is determined to be impaired, and a loss is recorded for the amount by which the carrying value of the asset exceeds its fair value. The Company uses market participant rents to calculate the fair value of right of use assets (“ROU”) and discounted future cash flows of the asset or asset group using projected financial information and a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level. The estimate of future cash flows requires management to make certain assumptions and to apply judgment, including forecasting future

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sales and the useful lives of the assets. We exercise our best judgment based on the most current facts and circumstances surrounding our business when applying these impairment rules. We establish our assumptions and arrive at the estimates used in these calculations based upon our historical experience, knowledge of the retail industry and by incorporating third-party data, which we believe results in a reasonably accurate approximation of fair value. Nevertheless, changes in the assumptions used could have an impact on our assessment of recoverability.

We review our goodwill for impairment at the reporting unit level on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will calculate the estimated fair value of the reporting unit. Fair value has historically been determined based on both an income approach and market approach. The income approach is based on estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant, while the market approach is based on sales and EBITDA multiples of similar companies and/or transactions, or other available indications of value. These approaches use significant estimates and assumptions, including projected future cash flows and the timing of those cash flows, discount rates reflecting risks inherent in future cash flows, perpetual growth rates and determination of appropriate market comparables. For fiscal 2020, we applied a 100% weighting to the income approach as we were able to provide detailed forecasts for the foreseeable future to perform a discounted cash flow analysis. We did not utilize a market approach in the fair value assessment of the reporting units for fiscal 2020 as the implied EBITDA multiples from the market approach did not yield reasonable fair values given the volatile market conditions at the time of the assessments. Estimating the fair value is judgmental in nature, which could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charges. Goodwill impairment charges are calculated as the amount by which a reporting unit's carrying amount exceeds its fair value up to the amount of reported goodwill.

We review our other indefinite-lived intangible assets for impairment on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we calculate the fair value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept.

Operating Leases

Rent expense under store operating leases is recognized on a straight-line basis over the term of the leases. Landlord incentives, “rent-free” periods, rent escalation clauses and other fixed rental expenses are also amortized on a straight-line basis over the term of the leases, including the construction period. This is generally 60–90 days prior to the store opening date, when we generally begin improvements in preparation for our intended use. Variable rental expenses are recognized as incurred. Tenant improvement allowances, fixed rent escalation clauses and impairments are included within right of use assets.

Income Taxes

Income taxes are accounted for in accordance with authoritative guidance, which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and interpretations of existing tax law and published guidance as applicable to our operations. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain. Our effective tax rate considers management’s judgment of expected tax liabilities within the various taxing jurisdictions in which we are subject to tax.

We record amounts for uncertain tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Consequently, changes in our assumptions and judgments could affect amounts recognized related to income tax uncertainties and may affect our consolidated results of operations or financial position. We believe our assumptions for estimates continue to be reasonable, although actual results may have a positive or negative material impact on the balances of such tax positions. Historically, the variation of estimates to actual results is immaterial and material variation is not expected in the future.

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Adoption of New Accounting Pronouncements

As discussed in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K, we adopted Accounting Standards Update ("ASU") 2019-12, Simplifying the Accounting for Income Taxes and ASU 2021-01, Reference Rate Reform (Topic 848) as of January 31, 2021. Adoption of ASU 2019-12 and ASU 2021-01 did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

See Note 1, “Business Organization and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for a description of certain newly issued accounting pronouncements which may impact our financial statements in future reporting periods.

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Forward-Looking Statements

This Annual Report on Form 10-K may contain statements concerning our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry and other statements that are not historical facts. These are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, words or phrases such as “anticipates,” “believes,” “confident,” “could,” “estimates,” “expects,” “intends,” “target,” “will,” “plans,” "path," “should,” “approximately,” “our planning assumptions,” “future outlook” and similar expressions identify forward-looking statements. These forward-looking statements are based largely on information currently available to our management and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those expressed or implied by such forward-looking statements. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance. There is no assurance that our expectations will occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, “Risk Factors” in this Annual Report on Form 10-K and the following:

• The ability of our suppliers, logistics providers, vendors and landlords, to meet their obligations to us in light of financial stress, labor shortages, liquidity challenges, bankruptcy filings by other industry participants, and supply chain and other disruptions;

• increases in unemployment rates and labor shortages;

• our ability to sufficiently staff our retail stores;

• changes in general economic conditions, including but not limited to, consumer confidence and spending patterns;

• the impacts of rising inflation, gasoline prices, and interest rates on consumer spending;

• market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (such as the war in Ukraine) or other major events, or the prospect of these events, including their impact on consumer spending, inflation and the global supply chain;

• domestic and global political and social conditions and the potential impacts of geopolitical turmoil or conflict;

• shifts in consumer behavior, and our ability to adapt, identify and respond to new and changing fashion trends and customer preferences, and to coordinate product development with buying and planning;

• changes in the general or specialty retail or apparel industries, including significant decreases in market demand and the overall level of spending for women’s private branded clothing and related accessories;

• our ability to secure and maintain customer acceptance of in-store and online concepts and styles;

• the effects of the pandemic, including uncertainties about its depth and duration, new variants of COVID-19 that have emerged, the speed, efficacy and availability of vaccines and treatments, its impact on general economic conditions, human capital management, consumer behavior and discretionary spending, the effectiveness of any actions taken in response to the pandemic, and the impact of the pandemic on our manufacturing operations, shipping costs and timelines and the global supply chain;

• our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retailer customers; increased competition in the markets in which we operate, including for, among other things, premium mall space;

• our ability to remain competitive with customer shipping terms and costs;

• decreases in customer traffic at malls, shopping centers and our stores;

• fluctuations in foreign currency exchange rates and commodity prices;

• significant increases in the costs of manufacturing, raw materials, transportation, importing, distribution, labor and advertising;

• decreases in the quality of merchandise received from suppliers and increases in delivery times for receiving such merchandise;

• our ability to appropriately manage our store fleet, including the closing of underperforming stores and opening of new stores, and our ability to achieve the expected results of any such store openings or store closings;

• our ability to appropriately manage inventory and allocation processes and leverage targeted promotions;

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• our ability to maintain cost saving discipline;

• our ability to operate our retail websites in a profitable manner;

• our ability to successfully identify and implement additional sales and distribution channels;

• our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs, and merchandising and marketing programs including, but not limited to, the Company’s three-year strategic growth plan, sales initiatives, multi-channel strategies and four strategic pillars which are: 1) customer led; 2) product obsessed; 3) digital first; and 4) operationally excellent;

• our ability to utilize our Fort Myers campus, DC and other support facilities in an efficient and effective manner;

• our reliance on sourcing from foreign suppliers and significant adverse economic, labor, political or other shifts (including adverse changes in tariffs, taxes or other import regulations, particularly with respect to China, or legislation prohibiting certain imports from China);

• U.S. and foreign governmental actions and policies and changes thereto;

• the continuing performance, implementation and integration of our management information systems;

• our ability to successfully update and maintain our information systems;

• the impact of any system failure, cyber security or other data security breaches, including any security breaches resulting in the theft, transfer, or unauthorized disclosure of customer, employee, or company information that we or our third-party vendors may experience;

• the risks that our share repurchase program may not successfully enhance shareholder value, or that share repurchases could be negatively perceived by investors;

• our ability to comply with applicable domestic and foreign information security and privacy laws, regulations and technology platform rules or other obligations related to data privacy and security;

• our ability to attract, hire, train, motivate and retain qualified employees in an inclusive environment;

• our ability to successfully recruit leadership or transition members of our senior management team;

• increased public focus and opinion on environmental, social and governance (“ESG”) initiatives and our ability to meet any announced ESG goals and initiatives;

• future unsolicited offers to buy the Company and actions of activist shareholders and others and our ability to respond effectively;

• our ability to secure and protect our trademark and other intellectual property rights; our ability to protect our reputation and brand images;

• unanticipated obligations or changes in estimates arising from new or existing litigation, income taxes and other regulatory proceedings;

• unanticipated adverse changes in legal, regulatory or tax laws, including the recently enacted Inflation Reduction Act of 2022; and

• our ability to comply with the terms of our credit agreement, including the restrictive provisions limiting our flexibility in operating our business and obtaining additional credit on commercially reasonable terms.

These factors should be considered in evaluating forward-looking statements contained herein. All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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