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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