Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis compares the change in the consolidated financial statements for years ended and January 31, 2026 and February 1, 2025 and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report. In particular, the risk factors contained in Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. For comparisons of years ended February 1, 2025 and February 3, 2024, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of our Annual Report on Form 10-K for the year ended February 1, 2025, filed with the SEC on March 13, 2025 and incorporated herein by reference.
This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled” Risk Factors” and in other parts of this Annual Report on Form 10-K. See also the section titled “Note Regarding Forward-Looking Statements” in this report.
For Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) related to the year ended February 3, 2024, refer to this same section in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 2024.
Fiscal 2025—A Review of This Past Year
Fiscal year 2025 maintained the positive growth trajectory established in early 2024, with the fourth quarter representing the seventh consecutive quarter of comparable sales increases. Strategic focus on developing trends within private label brands delivered favorable outcomes, as sales from these brands exceeded 30% of total revenue, setting a new fiscal-year record. All categories experienced positive comparable sales in 2025 with the exception of footwear. The Hardgoods category, which had experienced negative growth for several years, returned to positive growth in the second quarter and sustained that momentum through year-end. North America was the primary driver of sales growth, achieving eight consecutive quarters of positive comparable sales with product margin growth in each quarter. In Europe, efforts were redirected toward full-price selling, supported by reduced promotions and improved product assortments. Although these changes presented challenges for overall sales, product margins in Europe improved over 250 basis points year-over-year and as we moved through the year. sales trends during the fourth quarter, we saw bottom line growth with product margin and expense discipline.
Consolidated product margin improved 90 basis points year-over-year despite the global supply chain instability driven by tariffs. Product margin growth was possible during the year through shifting the geography of supply, working with our vendors on pricing and where necessary, adjusting retail prices. Gross margin improved by 170 basis points from 2024 with the product margin noted above being the main driver. Beyond product margin, we continue to try to leverage occupancy costs through comparable sales growth and closed 17 underperforming stores. We had outsized growth in our general and administrative expenses in 2025 primarily driven by $3.6 million in wage and hour litigation settlements in California and increased incentive compensation of $4.4 million due to North America achievement of target results. These items resulted in a 10 basis point increase in Selling General and Administrative expenses to 34.0% of sales. Overall earnings per share increased to $0.78 from a loss of $0.09 per share in 2024. The overall growth in earnings was driven primarily by better operating results but was also aided by our continued return of value to our shareholders through a share repurchase program, purchasing 2.7 million shares at an average price of $14.18 for $38.3 million during the year. The purchase of shares was worth $0.10 to earnings per share.
As a leading global lifestyle retailer, we continue to differentiate ourselves through our distinctive brand offering and diverse product selection, as well as the unique customer experience across all our platforms. We remained committed to serving our customers' desire for newness and discovery through launching well over 150 new brands in 2025. We made investments over several years to integrate the digital and physical channels creating a seamless shopping experience for our customers. We are continuing to deliver our online orders in North America from our stores, which provides substantial improvements in the speed of delivery to our customers, eliminates the need to manage two pools of inventory separately for digital and physical demand, and creates a single cost structure for execution of both physical and digital sales. Internationally we continue to see deeper penetration of localized fulfillment and are in various stages of roll-out in different countries. In-store fulfillment is a key part of strategy that we believe will drive long-term market share by leveraging the strengths of our store sales team, providing better and faster service to customers, improving product margins, maximizing the productivity of inventory, providing additional selling , and utilizing one cost structure to serve the customer.
The following table shows net sales, operating profit, operating margin and diluted earnings (loss) per share for fiscal 2025 compared to fiscal 2024:
Fiscal 2025
Fiscal 2024
% Change
Net sales (in thousands) (1)
Operating profit (in thousands)
Operating margin
Diluted earnings (loss) per share
(1) The increase in net sales was primarily driven by an increase in dollars per transaction, partially offset by a decrease in transactions. The increase in dollars per transaction was driven by an increase in average unit retail, and an increase in units per transaction. For the year, our largest growth in comparable sales was in our women’s category, followed by men’s, hardgoods and accessories. Footwear was the only category with a decrease in comparable sales.
Fiscal 2026—A Look At the Upcoming Year
In fiscal 2026, our focus will continue to be serving the customer by bringing differentiated products in a unique sales experience along with strategic investments focused on enhancing the customer experience while increasing market share and creating operational efficiencies to drive long-term operating margin expansion. After a difficult period through COVID and the related aftermath marked by stimulus, tariffs, inflation and strained discretionary income, the business began recovering in 2024 and returned profitability in 2025. The balance sheet remains strong with $160.6 million in cash and marketable securities at the end of fiscal 2025 with no debt. We are in a solid financial position providing the security to manage through potential difficulties, while also investing strategically in important long-term initiatives and returning value to our shareholders.
While our growth and return to positive earnings per share in fiscal 2025 have us optimistic, the macro-economic environment in 2026 remains unclear. The impact of multiple years of compounding growth in the cost of consumer goods continues to put pressure on the discretionary income of our customer base as consumer savings balances decrease and consumer debt grows. The impact of global events and regulation change could also continue to make things less clear on the consumer and potentially result in a pullback of spending. However, with sales momentum as we exit fiscal 2025, our focus will be to further capitalize on the positive trends in the business and provide the newness that our customers expect from Zumiez. Trend cycles continue to move quickly, and we will invest in our ability to better understand our customers, communicate with them and serve their needs to drive market share gains.
General
Net sales constitute gross sales, net of actual and estimated returns and deductions for promotions, and shipping revenue. Net sales include our store sales and our ecommerce sales. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards
that will not be redeemed (“gift card breakage”) is recognized based on our historical redemption rate in proportion to the pattern of rights exercised by the customer.
We report “comparable sales” based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable sales also include our ecommerce sales. Changes in our comparable sales between two periods are based on net sales of store or ecommerce business which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any increase or decrease less than 25% in square footage of an existing comparable store, including remodels and relocations within the same mall, or temporary closures less than seven days does not eliminate that store from inclusion in the calculation of comparable sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers.
Cost of goods sold ("COGS") consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, ecommerce fulfillment, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products.
With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold.
Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and information technology expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, amortization of intangibles, and other miscellaneous operating costs are also included in selling, general and administrative expenses. This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.
Key Performance Indicators
Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:
Net sales. Net sales constitute gross sales, net of sales returns and deductions for promotions, and shipping revenue. Net sales includes comparable sales and new store sales for all our store and ecommerce businesses. We consider net sales to be an important indicator of our current performance. Net sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Net sales also have a direct impact on our operating profit, cash and working capital.
Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.
Operating profit. We view operating profit as a key indicator of our success. Operating profit is the difference between gross profit and selling, general and administrative expenses. The key drivers of operating profit are net sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.
Diluted earnings per share. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period. We view diluted earnings per share as a key indicator of our success in increasing shareholder value.
Results of Operations
The following table presents selected items on the consolidated statements of income (loss) as a percent of net sales:
Fiscal 2025
Fiscal 2024
Fiscal 2023
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating profit (loss)
Interest and other income, net
Earnings (loss) before income taxes
Provision for income taxes
Net income (loss)
Fiscal 2025 Results Compared With Fiscal 2024
Net Sales
Net sales were $929.1 million for fiscal 2025 compared to $889.2 million for fiscal 2024, an increase of $39.9 million or 4.5%. The increase in sales was primarily driven by a 4.3% increase in comparable sales, reflecting strength in key brands and fashion trends in the market, and was partially offset by the net closure of 11 stores subsequent to fiscal 2024.
Comparable sales increased 4.3% driven by an increase in dollars per transaction and partially offset by a decrease in transactions. The increase in dollars per transaction was driven by an increase in average unit retail, and an increase in units per transaction. For the year, our largest growth in comparable sales was in our women’s category, followed by men’s, hardgoods, and accessories. Footwear was the only category with a decrease in comparable sales.
By region, North America sales increased $37.1 million or 5.1% and other international sales increased $2.8 million or 1.7% during fiscal 2025 compared to fiscal 2024. Net sales for the year ended January 31, 2026, included a $9.6 million increase due to the change in foreign exchange rates, which consisted of a $10.0 million increase in Europe, partially offset by a decrease of $0.3 million in Canada, and a decrease of $0.1 million in Australia. Excluding the impact of changes in foreign exchange rates, North America sales increased $37.4 million or 5.2% and other international sales decreased $7.1 million or 4.2% during fiscal 2025 compared to fiscal 2024.
Gross Profit
Gross profit was $332.5 million for fiscal 2025 compared to $303.0 million for fiscal 2024, an increase of $29.5 million, or 9.7%. As a percentage of net sales, gross profit increased 170 basis points in fiscal 2025 to 35.8%. The increase was primarily driven by a 90 basis point improvement in product margin (defined as net sales minus cost of goods sold excluding shrinkage, buying, occupancy, distribution and warehousing costs and freight costs for store merchandise transfers), 70 basis points of leverage in store occupancy costs related to both higher sales and closure of underperforming stores.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $315.5 million for fiscal 2025 compared to $301.1 million for fiscal 2024, an increase of $14.4 million, or 4.8%. SG&A expenses as a percent of net sales increased 10 basis points in fiscal 2025 to 34.0%. The increase was primarily driven by 50 basis point increase in annual incentive compensation due to improved operating results, 40 basis point increase due to $3.6 million of wage and hour litigation settlements in California, partially offset by 60 basis points in non-wage store operating costs related to closure of store year over year, and 30 basis points of efficiencies in store wages due to higher sales and closure of low performing stores at the end of fiscal 2024.
Net Income (Loss)
Net income for fiscal 2025 was $13.4 million, or $0.78 per diluted share, compared with net loss of $1.7 million, or $0.09 per diluted share, for fiscal 2024. Our effective income tax rate for fiscal 2025 was 44.4% compared to 142.0% for fiscal 2024. The change in effective income tax rate for fiscal 2025 compared to fiscal 2024 was primarily driven by improved operating results and the allocation of foreign losses in certain jurisdictions, which are subject to a valuation allowance. The introduction of new valuation allowances in certain jurisdictions contributed $4.2 million of income tax expense, while continued losses in jurisdictions with established valuation allowances added $5.0 million, resulting in a $9.2 million total income tax expense for fiscal 2025 compared to $5.1 million in fiscal 2024.
Liquidity and Capital Resources
Our cash requirements are subject to change as business conditions warrant and opportunities arise. Our primary uses of cash are for operational expenditures, inventory purchases, common stock repurchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Historically, our main source of liquidity has been cash flows from operations.
The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.
At January 31, 2026 and February 1, 2025, cash, cash equivalents, and current marketable securities were $160.6 million and $147.6 million, respectively. Working capital, the excess of current assets over current liabilities, was $168.5 million at the end of fiscal 2025, an increase of 0.9% from $166.9 million at the end of fiscal 2024. The increase in cash, cash equivalents, and current marketable securities in fiscal 2025 was primarily due to cash provided by operating activities of $53.5 million, net proceeds from sale of marketable securities amounting to $4.7 million, partially offset by the $38.3 million repurchase of common stock, and capital expenditures of $11.1 million related to the opening of 6 new stores, 3 store remodels, website enhancements, and other improvements.
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Fiscal 2025
Fiscal 2024
Fiscal 2023
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net change in cash, cash equivalents, and restricted cash
Operating Activities
Net cash provided by operating activities increased by $32.8 million in fiscal 2025 to $53.5 million cash provided by operating activities from $20.7 million cash provided by operating activities in fiscal 2024. Net cash provided by operating activities increased by $5.9 million in fiscal 2024 to $20.7 million cash provided by operating activities from $14.8 million cash provided by operating activities in fiscal 2023. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit and debit cards or cash to buy from us, our receivables from customers settle quickly. Changes to our operating cash flows have historically been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, impairment, amortization and accretion, deferred taxes, and changes to the components of working capital.
Investing Activities
Net cash used in investing activities was $6.4 million in fiscal 2025 related to $11.1 million of capital expenditures primarily for new stores openings and existing store remodels or relocations, partially offset by $4.7 million in net proceeds from sale of marketable securities. Net cash provided by investing activities was $32.6 million in fiscal 2024 related to $15.0 million of capital expenditures primarily for new stores openings and existing store remodels or relocations, partially offset by $47.6 million in net proceeds from sale of marketable securities. Net cash used in investing activities was $8.5 million in fiscal 2023 related to $20.4 million of capital expenditures primarily for new store openings and existing store remodels or relocations partially offset by $11.7 million in net sales of marketable securities.
Financing Activities
Net cash used in financing activities in fiscal 2025 was $37.3 million, related to $38.3 million used in the repurchase of common stock, partially offset by $0.9 million in net proceeds from the issuance and exercise of stock-based awards. Net cash used in financing activities in fiscal 2024 was $24.6 million, related $25.2 million used in the repurchase of common stock partially offset by $0.6 million in proceeds from the issuance and exercise of stock-based awards. Net cash provided by financing activities in fiscal 2023 was $0.7 million related to proceeds from the issuance and exercise of stock-based awards.
Capital Expenditures
Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. In that regard, our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future.
During fiscal 2025, we spent $11.1 million on capital expenditures which consisted of $5.2 million of costs related to investment in 6 new stores and 3 remodeled or relocated stores, $1.5 million associated with improvements to our websites and $4.4 million in other improvements.
During fiscal 2024, we spent $15.0 million on capital expenditures which consisted of $8.2 million of costs related to investment in 7 new stores and 6 remodeled or relocated stores, $2.8 million associated with improvements to our websites and $4.0 million in other improvements.
During fiscal 2023, we spent $20.4 million on capital expenditures which consisted of $8.1 million of costs related to investment in 19 new stores and 4 remodeled or relocated stores, $6.3 million associated with improvements to our websites and $6.0 million in other improvements.
In fiscal 2026, we expect to spend approximately $14.0 million to $16.0 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 5 new stores we plan to open in fiscal 2026 and 8 remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2026 will not be different from the number of stores we plan to open, or that actual fiscal 2026 capital expenditures will not differ from this expected amount.
Other Material Cash Requirements
Our material cash requirements include the following contractual and other obligations: (1) purchase obligations (for additional information, see Note 11 to the Consolidated Financial Statements); (2) supply and service arrangements entered in the normal course of business; (3) operating lease payments (for additional information, see Note 10 to the Consolidated Financial Statements); and (4) employee wages, benefits, and incentives; (5) commitments for capital expenditures; and (6) tax payables. Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions, and other matters.
At January 31, 2026, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Sources of Liquidity
Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities. We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months. Beyond this time frame, if cash flows from operations are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. However, there can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.
As of January 31, 2026, we maintain a secured credit agreement with PNC Bank, National Association (the “bank”) which is scheduled to mature on December 23, 2027. The credit agreement provides for a revolving credit facility of up to $25 million (the “credit facility”) and is available for general corporate purpose. This credit facility also provides for the issuances of standby letters of credit in an amount not to exceed $17.5 million, commercial letters of credit in an amount not to exceed $10 million and borrowings in foreign currency with a borrowing sublimit not to exceed $15 million in equivalent U.S. dollars. The amount of borrowing available at any time under the credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. This credit facility replaced our previously maintained agreement with Wells Fargo Bank, N.A. which we terminated on May 3, 2024.
The credit facility is secured by cash and marketable securities that are in an account held and monitored by the Bank. The value of this collateral must always be greater than or equal to the new credit facility commitment amount of $25 million. Amounts borrowed under the credit facility bear interest at the rate of SOFR plus 1.00% per annum. The Credit Agreement does not provide for any financial covenants but does include standard and customary covenants consistent with credit facilities of this nature. The credit facility does not carry any ongoing or unused balance fees.
There were no borrowings or open commercial letters of credit outstanding under the secured credit facility at January 31, 2026 and February 1, 2025. We had $3.2 million and $2.7 million in issued, but undrawn, standby letters of credit at January 31, 2026 and February 1, 2025, respectively.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K. We believe that the following accounting estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements.
Description
Judgments and Uncertainties
Effect If Actual Results Differ
From Assumptions
Valuation of Merchandise Inventories
We value our inventory at the lower of average cost or net realizable value through the establishment of write-down and inventory loss reserves.
Our write-down reserve represents the excess of the carrying value over the amount we expect to realize from the ultimate sales or other disposal of the inventory. Write-downs establish a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded write-downs or an increase in that newly established cost basis.
Our inventory loss reserve represents anticipated physical inventory losses (“shrinkage reserve”) that have occurred since the last physical inventory.
Our write-down reserve contains uncertainties because the calculation requires management to make assumptions based on the current rate of sales, the age and profitability of inventory and other factors.
Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including historical percentages that can be affected by changes in merchandise mix and changes in actual shrinkage trends.
We have not made any material changes in the accounting methodology used to calculate our write-down and shrinkage reserves in the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates we use to calculate our inventory reserves. However, if actual results are not consistent with our estimates, we may be exposed to losses or gains that could be material. Our inventory reserves were $3.7 million at January 31, 2026 compared to $3.2 million at February 1, 2025, representing an increase of $0.5 in fiscal 2025.
A 10% decrease in the sales price of our inventory at January 31, 2026 would have decreased net income by $0.6 million in fiscal 2025.
A 10% increase in actual physical inventory shrinkage rate at January 31, 2026 would have decreased net income by less than $0.1 million in fiscal 2025.
Description
Judgments and Uncertainties
Effect If Actual Results Differ
From Assumptions
Valuation of Long-Lived Assets
We review the carrying value of our long-lived assets, including fixed assets and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of such asset or asset group may not be recoverable.
Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by comparing the fair value of the asset to the asset carrying value.
Events that may result in an impairment include the decision to close a store or facility or a significant decrease in the operating performance of a long-lived asset group. Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting future sales, gross profit, operating expenses, or sub-lease income. In addition to historical results, current trends and initiatives, and long-term macro-economic and industry factors are qualitatively considered. Additionally, management seeks input from store operations related to local economic conditions, including the impact of closures of selected co-tenants who occupy the mall.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions, our operating results could be adversely affected. Declines in projected cash flow of the assets could result in impairment. We recognized impairment losses of $1.8 million related to long-lived assets in fiscal 2025.
A 10 basis point decrease in forecasted sales assumptions would have resulted in an additional impairment charge of $0.3 million in fiscal 2025.
Right-of-use Assets and Lease Liabilities
We determine if a contract contains a lease at inception. Our operating leases primarily consist of retail store locations, distribution centers and corporate office space. We do not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.
Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, net of lease incentives received and initial direct costs paid. Our retail store leases are generally for an initial period of 5-10 years, with some of our international leases structured to include renewal options at our election. We include renewal options that we are reasonably certain to exercise in the measurement of our lease liabilities and right-of-use assets.
Significant judgment is required in determining our incremental borrowing rate and the expected lease term, both of which impact the determination of lease classification and the present value of lease payments. Generally, our lease contracts do not provide a readily determinable implicit rate and, therefore, we use an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments. The estimated incremental borrowing rate reflects considerations such as market rates for our outstanding collateralized debt and interpolations of rates for leases with terms that differ from our outstanding debt.
Our lease terms include option periods to extend or terminate the lease when it is reasonably certain that those options will be exercised, which is generally through an initial period of 5-10 years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate right-of-use assets and lease liabilities. Given the significant operating lease assets and liabilities recorded, changes in the estimates made by management or the underlying assumptions could have a material impact on our consolidated financial statements.
Total undiscounted future payments for lease liabilities were $229.3 million at January 31, 2026. If the incremental borrowing rate increased 10 basis points from the rate in effect at January 31, 2026, the lease liability balance would decrease by $0.2 million.
Description
Judgments and Uncertainties
Effect If Actual Results Differ
From Assumptions
Revenue Recognition
Revenue is recognized upon purchase at our retail store locations. For our ecommerce sales, revenue is recognized upon shipment to the customer. Revenue is recorded net of sales returns and deductions for promotions.
Revenue is not recorded on the sale of gift cards. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in proportion of the patterns used by the customer based on our historical redemption patterns.
Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions regarding future sales returns and the amount and timing of gift cards projected to be redeemed by gift card recipients. Our estimate of the amount and timing of sales returns and gift cards to be redeemed is based primarily on historical experience.
We have not made any material changes in the accounting methodology used to measure future sales returns or gift card breakage in the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to recognize revenue. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material .
Our sales return reserve decreased by $0.2 million in fiscal 2025. A 10% increase in our sales return reserve at January 31, 2026 would have decreased net income by $0.3 million in fiscal 2025.
Our gift card breakage reserve has increased by $2.3 million in fiscal 2025. A 1% increase in the estimated gift card redemption rate would have decreased net income by less than $0.1 million in fiscal 2025.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements, income taxes are estimated for each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included on the consolidated balance sheets. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available to us. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount that we believe is cumulatively greater than 50% likely to be realized.
Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates.
The assessment of whether we will realize the value of our deferred tax assets requires estimates and judgments related to amount and timing of future taxable income. Actual results may differ from those estimates.
Additionally, changes in the relevant tax, accounting and other laws, regulations, principles and interpretations may adversely affect financial results.
Although management believes that the income tax related judgments and estimates are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.
At January 31, 2026 and February 1, 2025, we had valuation allowances on our deferred tax assets of $42.6 million and $28.8 million, respectively. Significant changes in performance or estimated taxable income may result in a change in our assessment of the valuation allowance.
Upon income tax audit, any unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution.
Description
Judgments and Uncertainties
Effect If Actual Results Differ
From Assumptions
Accounting for Contingencies
We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, we provide disclosure of a material claim or contingency.
Significant judgment is required in evaluating our claims and contingencies, including determining the probability that a liability has been incurred and whether such liability is reasonably estimable. The estimated accruals for claims and contingencies are made based on the best information available, which can be highly subjective.
Although management believes that the contingency related judgments and estimates are reasonable, our accrual for claims and contingencies could fluctuate as additional information becomes known, thereby creating variability in our results of operations from period to period. Additionally, actual results could differ and we may be exposed to losses or gains that could be material. See Note 11, “Commitments and Contingencies,” in the Notes to the consolidated financial statements found in Part IV Item 15 of this Form 10-K.
Recent Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K.
Item 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our earnings are affected by changes in market interest rates as a result of our short-term and long-term marketable securities, which are primarily invested in state and local municipal securities and variable-rate demand notes, which have long-term nominal maturity dates but feature variable interest rates that reset at short-term intervals. If our current portfolio average yield rate decreased by 10% in fiscal 2025, our net income would have decreased by $0.4 million. This amount is determined by considering the impact of the hypothetical yield rates on our cash, cash equivalents, short-term marketable securities and assumes no changes in our investment structure.
During different times of the year, due to the seasonality of our business, we may borrow under our revolving credit facility. To the extent we borrow under this revolving credit facility, we are exposed to the market risk related to changes in interest rates.
At January 31, 2026, we had no borrowings outstanding under the secured revolving credit facility. See Note 9, Revolving Credit Facilities and Debt, for more details on our credit facility.
Foreign Exchange Rate Risk
Our international subsidiaries operate with functional currencies other than the U.S. Dollar, including the Canadian Dollar, Euro, Australian Dollar, Norwegian Krone, Swedish Krona, and Swiss Franc. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. As a result, the fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. Assuming a 10% decrease in foreign exchange rates in fiscal 2025 our net income would have decreased by $1.3 million. As we expand our international operations, our exposure to exchange rate fluctuations will continue to increase. To date, we have not used derivatives to manage foreign currency exchange risk.
We import merchandise from foreign countries. As a result, any significant or sudden change in the financial, banking or currency policies and practices of these countries could have a material adverse impact on our financial position, results of operations and cash flows.
Item 8. FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in “Index to the Consolidated Financial Statements,” found in Part IV Item 15 of this Form 10-K.
