AT HOME GROUP INC. This discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes ofAt Home Group Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year endedJanuary 25, 2020 as filed with theSecurities and Exchange Commission ("SEC") onMay 19, 2020 (the "Annual Report"). You should review the disclosures under the heading "Item 1A. Risk Factors" in the Annual Report, as well as the disclosure under the heading "Item 1A. Risk Factors" and any cautionary language in this report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All expressions of the "Company", "us", "we", "our", and all similar expressions are references toAt Home Group Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the last Saturday in January. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to a fiscal year mean the year in which that fiscal year ends. References herein to "fiscal year 2021" relate to the 53 weeks endingJanuary 30, 2021 and references herein to "fiscal year 2020" relate to the 52 weeks endingJanuary 25, 2020 . References herein to "first fiscal quarter 2021" relate to the thirteen weeks endedApril 25, 2020 and references herein to "second fiscal quarter 2021" related to the thirteen weeks endedJuly 25, 2020 . References herein to "third fiscal quarter 2021" and "third fiscal quarter 2020" relate to the thirteen weeks endedOctober 24, 2020 andOctober 26, 2019 , respectively. References herein to "the nine months endedOctober 24, 2020 " and "the nine months endedOctober 26, 2019 " relate to the thirty-nine weeks endedOctober 24, 2020 andOctober 26, 2019 , respectively. Overview At Home is the leading home décor superstore based on the number of our locations, and we believe our large format stores dedicate more space per store to home décor than any other player in the industry. We are focused on providing the broadest assortment of products for any room, in any style, for any budget. We utilize our space advantage to out-assort our competition, offering over 50,000 SKUs throughout our stores. Our differentiated merchandising strategy allows us to identify on-trend products and then value engineer those products to provide desirable aesthetics at attractive price points for our customers. Over 70% of our products are unbranded, private label or specifically designed for us. We believe that our broad and comprehensive offering, coupled with our compelling value proposition, create a leading destination for home décor and the opportunity to continue taking market share in a highly fragmented and growing industry. As ofOctober 24, 2020 , our store base was comprised of 219 large format stores across 40 states, averaging approximately 105,000 square feet per store. Over the past five completed fiscal years we have opened 142 new stores and we believe there is significant whitespace opportunity to increase our store count in both existing and new markets. Recent Developments
The global COVID-19 pandemic has resulted in significant disruptions to the global economy, and substantially impacted our business, results of operations and financial condition.
Following government mandates in certain locations as well as advice from theCenters for Disease Control and Prevention for persons inthe United States to take extraordinary health precautions, onMarch 20, 2020 we announced that we would temporarily close all of our stores nationwide for one week, after which we began to reopen stores in regions that were not required to remain closed by state or local mandates. The COVID-19 pandemic and resulting store closures caused a decline in revenue and cash flow from operations while our stores were closed, adversely affected store traffic and caused some disruption to our supply chain and staffing levels that adversely affected our results of 19
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operations and financial condition during the nine months endedOctober 24, 2020 , primarily during the first fiscal quarter 2021. While we fully reopened our stores during the second fiscal quarter 2021, recurring COVID-19 outbreaks have led to the re-introduction of restrictions on retail operations in certain jurisdictions and such restrictions could be re-introduced more broadly. There can be no assurance that our stores will not be subject to modified hours and operations and/or reduced customer traffic in the coming months. See "Item 1A. Risk Factors - "The current global COVID-19 pandemic has substantially impacted and may continue to negatively affect our business, results of operations, financial condition and cash flows." Our customers may also be negatively affected by layoffs, work reductions or financial hardship as a result of the global outbreak of COVID-19, which could negatively impact demand for our products as customers delay or reduce discretionary purchases. Even though our stores are fully reopened as of the date of this report, health concerns could continue and could cause employees or customers to avoid gathering in public places, which could have an adverse effect on store traffic or the ability to adequately staff our stores. There can be no assurance that we will not be required by landlords or authorities at the local, state or federal level to reinstate store closures, or as to how long any such closure would continue. In general, during any such closure, we would still be obligated to make payments to landlords and for routine operating costs, such as utilities and insurance. Additionally, any significant reduction in customer visits to, and spending at, our stores caused directly or indirectly by COVID-19 could result in a loss of revenue and profits and could result in other material adverse effects. The negative impact of the outbreak of COVID-19 could result in an adverse impact to manufacturing activity and supply chains, including as a result of work stoppages, factory and other business closings, slowdowns or delays, or if we fail to make timely payments to our suppliers. In addition, there may be restrictions and limitations placed on workers and factories, including shelter-in-place and stay-at-home orders and other limitations on the ability to travel and return to work, which could result in shortages or delays in production or shipment of products. At the onset of the COVID-19 pandemic, we implemented a number of other measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing a significant number of employees; (ii) temporary tiered salary reductions for corporate employees, including executive officers; (iii) deferring annual merit increases and bonuses; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; (v) extending payment terms with our vendors; (vi) negotiating rent deferrals or rent abatements for a portion of our leases; and (vii) working to maximize our participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic. During the second fiscal quarter 2021, we were able to bring back our furloughed employees and restore salaries to pre-COVID-19 levels for the home office employees who took pay cuts. In addition, we were able to institute merit increases and lift the hiring freeze put in place due to COVID-19. Given recent trends in new cases of COVID-19 throughoutthe United States , we may be required to implement further protective measures, including the temporary closure of stores. To mitigate the decline in cash flows, onMarch 12, 2020 , as a precautionary measure to provide more financial flexibility and maintain liquidity in response to the COVID-19 pandemic, we elected to borrow an additional$55.0 million on our ABL Facility, which was repaid in full during the second fiscal quarter 2021. OnJune 12, 2020 , to continue to help provide additional financial flexibility, we entered into the Eighth Amendment to our ABL Agreement to provide for a new tranche of term loans in a principal amount of$35.0 million on a "first-in, last out" basis (the "FILO Loans"), subject to a borrowing base. The net proceeds of the FILO Loans were used to repay a portion of the outstanding revolving credit loans. OnAugust 20, 2020 ,At Home III Inc. (the "Issuer" or "At Home III") completed the offering (the "Notes Offering") of$275.0 million aggregate principal amount of its 8.750% Senior Secured Notes due 2025 (the "Notes"). The Notes Offering was conducted pursuant to Rule 144A and Regulation S promulgated under the Securities Act, and the Notes have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold inthe United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Notes are governed by the Indenture, by and among At Home III, the guarantors from time to time party thereto, andWells Fargo Bank, National Association , the Trustee and the Collateral Agent. Net proceeds of the issuance of the Notes were used, together with cash on our balance sheet, to repay 20
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all amounts outstanding under the Term Loan. The Notes bear interest at a fixed
rate of 8.750% per annum, payable semi-annually in arrears on
OnAugust 28, 2020 , the ABL Borrowers and the guarantors under the ABL Facility entered into the Ninth Amendment withBank of America, N.A ., which amended the ABL Agreement to, among other things, extend the maturity of revolving credit loans provided thereunder to the earlier of (i)August 28, 2025 and (ii) the date of termination of the commitments under such revolving credit facility pursuant to the terms of the ABL Agreement. The extent of the continuing impact of COVID-19 on our business, results of operations and financial results will depend largely on future developments, including the duration and spread of the outbreak withinthe United States and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted at this time. While we continue to explore all options for maintaining sources of liquidity, such as expense reduction initiatives and negotiation with counterparties such as landlords and suppliers to extend or otherwise revise payment terms, we do not expect that such efforts would fully offset the adverse impact on us of a prolonged disruption to our business. The ultimate extent to which the outbreak of COVID-19 may impact our business is uncertain and the full effect it may have on our financial performance cannot be quantified at this time. Accordingly, our historical financial information may not be indicative of our future performance, financial condition and results of operations.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
Overall economic trends. The overall economic environment and related changes in
consumer behavior have a significant impact on our business. In general,
positive conditions in the broader economy promote customer spending in our
stores, while economic weakness results in a reduction of customer spending.
Macroeconomic factors that can affect customer spending patterns, and thereby
our results of operations, include employment rates, business conditions,
changes in the housing market, the availability of credit, interest rates, tax
rates and fuel and energy costs, and localized or global events such as the
outbreak of epidemic or pandemic disease. Due to the COVID-19 pandemic, the
economic environment has undergone dramatic shifts. The second fiscal quarter
2021 and third fiscal quarter 2021 saw a number of macroeconomic and consumer
oriented trends that contributed to our positive performance, such as pent up
demand, both in general and for home décor products in particular, in response
to the COVID-19 pandemic.
Consumer preferences and demand. Our ability to maintain our appeal to existing
customers and attract new customers depends on our ability to originate, develop
and offer a compelling product assortment responsive to customer preferences and
design trends. If we misjudge the market for our products, we may be faced with
excess inventories for some products and may be required to become more
promotional in our selling activities, which would impact our net sales and
gross profit. During 2021, we have begun undertaking efforts to rationalize
SKUs, in order to ensure our continuing competitiveness without sacrificing our
wide and deep product assortment.
New store openings. We expect new stores will be a key driver of the growth in
our sales and operating profit in the future. Our results of operations have
been and will continue to be materially affected by the timing and number of new
store openings. As we continue to open new stores, competition among our stores
within the same or adjacent geographic regions may impact the performance of our
comparable store base. The performance of new stores may vary depending on
various factors such as the store opening date, the time of year of a particular
opening, the amount of store opening costs, the amount of store occupancy costs
and the location of the new store, including whether it is located in a new or
existing market. For example, we typically incur higher than normal employee
costs at the time of a new store opening associated with set-up and other
opening costs. In addition, in response to the interest and excitement generated
when we open a new store, the new stores generally experience higher net sales
during the initial period of one to three months after which the new store's net
sales will begin to normalize as it reaches maturity within six months of
opening, as further discussed below.
Our planned store expansion will place increased demands on our operational,
managerial, administrative and other resources. Managing our growth effectively
will require us to continue to enhance our inventory management and
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distribution systems, financial and management controls and information systems. We will also be required to hire, train and retain store management and store personnel, which, together with increased marketing costs, can affect our operating margins. A new store typically reaches maturity, meaning the store's annualized targeted sales volume has been reached within six months of opening. New stores are included in the comparable store base during the sixteenth full fiscal month following the store's opening, which we believe represents the most appropriate comparison. We also periodically explore opportunities to relocate a limited number of existing stores to improve location, lease terms, store layout or customer experience. Relocated stores typically achieve a level of operating profitability comparable to our company-wide average for existing stores more quickly than new stores. During the first quarter of fiscal year 2021, we suspended all new store openings and remodeling projects in response to the COVID-19 pandemic with the exception of seven stores that were at or near completion. We intend to resume opening new stores in the first quarter of fiscal year 2022. Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. In the past seven fiscal years, we have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that our strong management team, brand identity, upgraded distribution centers and enhanced information systems, including our warehouse and order management, e-commerce, POS, merchandise planning and inventory allocation systems, have enabled us to replicate our profitable store format and differentiated shopping experience. We have made investments relating to our second distribution center inPennsylvania , which opened in the beginning of fiscal year 2020 and have incurred net operating costs in connection therewith during fiscal year 2020 that have impacted our operating margins. We have made significant investments in our omnichannel capabilities during the thirty-nine weeks endedOctober 24, 2020 that have allowed us to provide our customers with additional options for purchasing our products. We expect to make additions and upgrades to these infrastructure investments in the future to continue to support our successful operating model over a significantly expanded store base. Pricing strategy. We are committed to providing our products at everyday low prices. We value engineer products in collaboration with our suppliers to recreate the "look" that we believe our customer wants while eliminating the costly construction elements that our customer does not value. We believe our customer views shopping At Home as an in-person experience through which our customer can see and feel the quality of our products and physically assemble a desired aesthetic. This design approach allows us to deliver an attractive value to our customer, as our products are typically less expensive than other branded products with a similar look. We employ a simple everyday low pricing strategy that consistently delivers savings to our customer without the need for extensive promotions, as evidenced by over 80% of our net sales occurring at full price. Our ability to source and distribute products effectively. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales. Tariffs could also impact our or our vendors' ability to source product efficiently or create other supply chain disruptions. The tariffs enacted in fiscal year 2019 did not have a material impact on our gross margin due to a combination of supplier negotiations, direct sourcing and strategic price increases. However, the additional tariffs enacted in fiscal year 2020 led us to institute strategic price increases, which had a direct negative impact on comparable store sales. In addition, future supply chain disruption for reasons such as the outbreak or persistence of epidemic or pandemic disease, such as the ongoing global COVID-19 pandemic, could lead to inventory constraints in certain product categories, which could have a negative impact on our results of operations. Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, store openings and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year. 22 Table of Contents
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, including with respect to freight costs, which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. We have faced inflationary pressure on freight costs, which were heightened by tariff-related shipment surges and port congestion, and have also experienced supply chain disruptions relating to the global outbreak of COVID-19. In response to increasing commodity prices, freight costs or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing
our pricing when necessary.
Other trends. In response to the COVID-19 pandemic, we began renegotiating certain store lease agreements in the first and second fiscal quarters 2021 to obtain rent relief in an effort to partially offset the negative financial impacts. We expect that over the remainder of fiscal year 2021, the reversal of such rent relief could have a negative impact on our cash position. In addition, due to the higher interest rate on our Notes compared to our Term Loan, annual interest expense may rise moderately compared to prior fiscal years to the extent that we increase the amount of borrowings under the revolving portion of our ABL Facility.
How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures include net sales, gross profit and gross margin, and selling, general and administrative expenses. In addition, we also review other important metrics such as Adjusted EBITDA, Store-level Adjusted EBITDA and
Adjusted Net Income.Net Sales
Net sales are derived from direct retail sales to customers in our stores, net of merchandise returns and discounts. Growth in net sales is impacted by opening new stores and increases and decreases in comparable store sales. New store openings The number of new store openings reflects the new stores opened during a particular reporting period, including any relocations of existing stores during such period. Before we open new stores, we incur pre-opening costs, as described below. The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results as described above in "-Trends and Other Factors Affecting Our Business". Comparable store sales
A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. When a store is being relocated or remodeled, we exclude sales from that store in the calculation of comparable store sales until the first day of the sixteenth full fiscal month after it reopens. In addition, when applicable, we adjust for the effect of the 53rd week. We have not excluded stores from the comparable store sales calculation that were impacted by the COVID-19 pandemic. Sales resulting from our omnichannel initiatives occur at the store level and are included in the calculation of comparable store sales. There may be variations in the way in which some of our competitors and other retailers calculate comparable or "same store" sales. As a result, data in this report regarding our comparable store sales may not be comparable to similar data made available by other retailers. Comparable store sales allow us to evaluate how our store base is performing by measuring the change in period-over-period net sales in stores that have been open for the applicable period. Various factors affect comparable store sales, including:
consumer preferences (including changing consumer preferences in response to
? unforeseen events such as the global COVID-19 pandemic), buying trends and
overall economic trends;
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? our ability to identify and respond effectively to customer preferences and
trends;
? our ability to provide an assortment of high quality and trend-right product
offerings that generate new and repeat visits to our stores;
? the customer experience we provide in our stores;
? our ability to source and receive products accurately and timely;
? changes in product pricing, including promotional activities;
? the number of items purchased per store visit;
? weather;
? competition, including among our own stores within the same or adjacent
geographic region; and
? timing and length of holiday shopping periods.
As we continue to execute our growth strategy, we anticipate that a portion of our net sales will come from stores not included in our comparable store sales calculation. However, comparable store sales are only one measure we use to assess the success of our growth strategy.
Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of sales from our net sales. Gross margin measures gross profit as a percentage of net sales.
Cost of sales consists of various expenses related to the cost of selling our merchandise. Cost of sales consists of the following: (1) cost of merchandise, net of inventory shrinkage, damages and vendor allowances; (2) inbound freight and internal transportation costs such as distribution center-to-store freight costs; (3) costs of operating our distribution centers, including labor, occupancy costs, supplies, and depreciation; and (4) store occupancy costs including rent, insurance, taxes, common area maintenance, utilities, repairs and maintenance and depreciation. The components of our cost of sales expenses may not be comparable to other retailers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") consist of various
expenses related to supporting and facilitating the sale of merchandise in our
stores. These costs include payroll, benefits and other personnel expenses for
corporate and store employees, including stock-based compensation expense,
consulting, legal and other professional services expenses, marketing and
advertising expenses, occupancy costs for our corporate headquarters and various
other expenses.
SG&A includes both fixed and variable components and, therefore, is not directly
correlated with net sales. In addition, the components of our SG&A expenses may
not be comparable to those of other retailers. We expect that our SG&A expenses
will increase in future periods due to our continuing store growth. In
particular, we have expanded our marketing and advertising spend as a percentage
of net sales in each of the fiscal years since our initial public offering and
expect that we will continue to make investments in marketing and advertising
spend in future fiscal years.
In addition, any increase in future stock option or other stock-based grants or
modifications will increase our stock-based compensation expense included in
SG&A.
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Adjusted EBITDA
Adjusted EBITDA is a key metric used by management and our board of directors to
assess our financial performance. In addition, Adjusted EBITDA is frequently
used by analysts, investors and other interested parties to evaluate companies
in our industry. In addition to covenant compliance, we use Adjusted EBITDA to
supplement generally accepted accounting principles in the United States of
America ("GAAP") measures of performance to evaluate the effectiveness of our
business strategies, to make budgeting decisions and to compare our performance
against that of other peer companies using similar measures.
Adjusted EBITDA is defined as net income (loss) before net interest expense,
income tax provision and depreciation and amortization, adjusted for the impact
of certain other items as defined in our debt agreements, including certain
legal settlements and consulting and other professional fees, stock-based
compensation expense, impairment charges, loss on extinguishment of debt, loss
(gain) on sale-leaseback, non-cash rent and other adjustments. For a
reconciliation of Adjusted EBITDA to net income (loss), the most directly
comparable GAAP measure, see "-Results of Operations".
Store-level Adjusted EBITDA
We use Store-level Adjusted EBITDA as a supplemental measure of our performance,
which represents our Adjusted EBITDA excluding the impact of costs associated
with new store openings and certain corporate overhead expenses that we do not
consider in our evaluation of the ongoing operating performance of our stores
from period to period. Our calculation of Store-level Adjusted EBITDA is a
supplemental measure of operating performance of our stores and may not be
comparable to similar measures reported by other companies. We believe that
Store-level Adjusted EBITDA is an important measure to evaluate the performance
and profitability of each of our stores, individually and in the aggregate,
especially given the level of investments we have made in our home office and
infrastructure over the past seven years to support future growth. We also
believe that Store-level Adjusted EBITDA is a useful measure in evaluating our
operating performance because it removes the impact of general and
administrative expenses, which are not incurred at the store level, and the
costs of opening new stores, which are non-recurring at the store level, and
thereby enables the comparability of the operating performance of our stores
during the period. We use Store-level Adjusted EBITDA information to benchmark
our performance versus competitors. Store-level Adjusted EBITDA should not be
used as a substitute for consolidated measures of profitability of performance
because it does not reflect corporate overhead expenses that are necessary to
allow us to effectively operate our stores and generate Store-level Adjusted
EBITDA. For a reconciliation of Store-level Adjusted EBITDA to net income
(loss), the most directly comparable GAAP measure, see "-Results of Operations".
Adjusted Net Income
Adjusted Net Income represents our net income (loss), adjusted for impairment
charges, loss (gain) on sale-leaseback, loss on extinguishment of debt, payroll
tax expenses related to initial public offering non-cash stock-based
compensation expense, costs associated with the restructuring of our
merchandising department, the deferred tax expense related to the cancellation
of the one-time CEO grant, the income tax impact associated with the special
one-time initial public offering bonus stock option exercises and other
adjustments. We present Adjusted Net Income because we believe it assists
investors and analysts in comparing our performance across reporting periods on
a consistent basis by excluding items that we do not believe are indicative of
our core operating performance. For a reconciliation of Adjusted Net Income to
net income (loss), the most directly comparable GAAP measure, see "-Results
of
Operations".
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Results of Operations
The following tables summarize key components of our results of operations for the periods indicated in dollars (in thousands), as a percentage of our net sales and other operational data:
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 24, 2020 October 26, 2019
(in thousands, except percentages and operational data)
Statement of Operations
Data:
Net sales $ 469,986 $ 318,734 $ 1,175,076 $ 967,319
Cost of sales 299,278 233,321 791,891 693,457
Gross profit 170,708 85,413 383,185 273,862
Operating expenses
Selling, general and
administrative expenses 97,231 74,809 232,303 228,454
Impairment charges - 5,230 319,732 5,230
Depreciation and
amortization 2,158 1,950 6,530 5,580
Total operating expenses 99,389 81,989 558,565 239,264
(Loss) gain on
sale-leaseback - (1,438) (115) 15,090
Operating income (loss) 71,319 1,986 (175,495) 49,688
Interest expense, net 7,789 8,496 20,932 24,500
Loss on extinguishment of
debt 3,179 - 3,179 -
Income (loss) before income
taxes 60,351 (6,510) (199,606) 25,188
Income tax provision 13,274 8,137 22,836 15,570
Net income (loss) $ 47,077 $ (14,647) $ (222,442) $ 9,618
Percentage of Net Sales :
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 63.7 % 73.2 % 67.4 % 71.7 %
Gross profit 36.3 % 26.8 % 32.6 % 28.3 %
Operating expenses
Selling, general and
administrative expenses 20.7 % 23.5 % 19.8 % 23.6 %
Impairment charges - % 1.6 % 27.2 % 0.5 %
Depreciation and
amortization 0.5 % 0.6 % 0.6 % 0.6 %
Total operating expenses 21.1 % 25.7 % 47.5 % 24.7 %
(Loss) gain on
sale-leaseback - % (0.5)% (0.0)% 1.6 %
Operating income (loss) 15.2 % 0.6 % (14.9)% 5.1 %
Interest expense, net 1.7 % 2.7 % 1.8 % 2.5 %
Loss on extinguishment of
debt 0.7 % - % 0.3 % - %
Income (loss) before income
taxes 12.8 % (2.0)% (17.0)% 2.6 %
Income tax provision 2.8 % 2.6 % 1.9 % 1.6 %
Net income (loss) 10.0 % (4.6)% (18.9)% 1.0 %
Operational Data:
Total stores at end of
period 219 213 219 213
New stores opened - 12 7 36
Comparable store sales 44.1 % (2.0)% 14.6 % (1.1)%
Non-GAAP Measures(1):
Store-level Adjusted
EBITDA(2) $ 131,616 $ 64,825 $ 330,876 $ 208,305
Store-level Adjusted EBITDA
margin(2) 28.0 % 20.3% 28.2% 21.5%
Adjusted EBITDA(2) $ 93,764 $ 32,915 $ 238,806 $ 113,813
Adjusted EBITDA margin(2) 20.0 % 10.3% 20.3% 11.8%
Adjusted Net Income(3) $ 49,595 $ (299) $ 100,941 $ 13,018
We present Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted
EBITDA, Store-level Adjusted EBITDA margin and Adjusted Net Income, which are
not recognized financial measures under GAAP, because we believe they assist
investors and analysts in comparing our operating performance across (1) reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance, such as interest,
depreciation, amortization, loss on extinguishment of debt, impairment
charges and taxes. You are encouraged to evaluate these adjustments and the
reasons we
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consider them appropriate for supplemental analysis. In evaluating Adjusted
EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income, you should be aware
that in the future we may incur expenses that are the same as or similar to some
of the adjustments in our presentation of Adjusted EBITDA, Store-level Adjusted
EBITDA and Adjusted Net Income. In particular, Store-level Adjusted EBITDA does
not reflect costs associated with new store openings, which are incurred on a
limited basis with respect to any particular store when opened and are not
indicative of ongoing core operating performance, and corporate overhead
expenses that are necessary to allow us to effectively operate our stores and
generate Store-level Adjusted EBITDA. Our presentation of Adjusted EBITDA,
Store-level Adjusted EBITDA and Adjusted Net Income should not be construed as
an inference that our future results will be unaffected by unusual or
non-recurring items. There can be no assurance that we will not modify the
presentation of Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net
Income in the future, and any such modification may be material. In addition,
Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted EBITDA,
Store-level Adjusted EBITDA margin and Adjusted Net Income may not be comparable
to similarly titled measures used by other companies in our industry or across
different industries. Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with performance evaluations for our executives; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and to compare our performance against that of other peer companies using similar measures. In addition, we utilize a further adjusted metric based on Adjusted EBITDA in certain calculations under our senior secured asset-based lending credit facility (the "ABL Facility") (defined therein as "Consolidated Cash EBITDA") and the Indenture (defined therein as "EBITDA"). Management believes Store-level Adjusted EBITDA is helpful in highlighting trends because it facilitates comparisons of store operating performance from period to period by excluding the impact of costs associated with new store openings and certain corporate overhead expenses, such as certain costs associated with management, finance, accounting, legal and other centralized corporate functions. Management believes that Adjusted Net Income assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items we do not believe are indicative of our core operating performance.
The following table reconciles our net income (loss) to EBITDA (excluding (2) loss on extinguishment of debt), Adjusted EBITDA and Store-level Adjusted
EBITDA for the periods presented (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 24, 2020 October 26, 2019 October 24, 2020 October 26, 2019
Net income (loss), as reported $ 47,077 $ (14,647)
$ (222,442) $ 9,618 Interest expense, net 7,789 8,496 20,932 24,500 Income tax provision 13,274 8,137 22,836 15,570 Depreciation and amortization(a) 17,570 17,570 53,626 51,401 EBITDA $ 85,710 $ 19,556$ (125,048) $ 101,089 Impairment charges(b) - 5,230 319,732 5,230
Loss (gain) on sale-leaseback - 1,438 115 (15,090) Loss on extinguishment of debt 3,179 -
3,179 -
Consulting and other
professional services(c) 287 235 917 2,535
Stock-based compensation
expense(d) 3,765 2,046 8,144 5,531
Non-cash rent(e) 448 4,386 30,512 13,019
Other(f) 375 24 1,255 1,499
Adjusted EBITDA $ 93,764 $ 32,915 $ 238,806 $ 113,813
Costs associated with new store
openings(g) 3,536 6,740 9,214 21,339
Corporate overhead expenses(h) 34,316 25,170
82,856 73,153
Store-level Adjusted EBITDA $ 131,616 $ 64,825 $ 330,876 $ 208,305
Includes the portion of depreciation and amortization expenses that are (a) classified as cost of sales in our condensed consolidated statements of
operations.
For the thirty-nine weeks ended October 24, 2020 , represents a non-cash
impairment charge of
non-cash impairment charge of
and relocation decisions.
Primarily consists of (i) consulting and other professional fees with respect (c) to projects to enhance our merchandising and human resource capabilities and
other company initiatives; and (ii) other transaction costs.
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Non-cash stock-based compensation expense related to the ongoing equity (d) incentive program that we have in place to incentivize, retain and motivate
our employees, officers and non-employee directors.
Consists of the non-cash portion of rent, which reflects the extent to which
our GAAP straight-line rent expense recognized exceeds or is less than our
cash rent payments. The GAAP straight-line rent expense adjustment can vary
depending on the average age of our lease portfolio, which has been impacted (e) by our significant growth. For newer leases, our rent expense recognized
typically exceeds our cash rent payments while for more mature leases, rent
expense recognized is typically less than our cash rent payments. In fiscal
year 2021, due to the COVID-19 pandemic, we have renegotiated leases to
include significant deferrals which has resulted in higher non-cash rent
expense.
(f) Other adjustments include amounts our management believes are not
representative of our ongoing operations, including:
for the thirty-nine weeks ended
? write-off of certain site selection costs that occurred as a result of the
COVID-19 pandemic; and
? for the thirty-nine weeks ended
million related to the restructuring of our merchandising department.
Reflects non-capital expenditures associated with opening new stores,
including marketing and advertising, labor and cash occupancy expenses. Costs
related to new store openings represent cash costs, and you should be aware
that in the future we may incur expenses that are similar to these costs. We
anticipate that we will continue to incur cash costs as we open new stores in
(g) the future. For the thirteen weeks ended
related to stores planned to open in fiscal year 2022. We opened no new
stores during the thirteen weeks ended
during the thirteen weeks ended
stores during the thirty-nine weeks ended
2019, respectively.
Reflects corporate overhead expenses, which are not directly related to the
profitability of our stores, to facilitate comparisons of store operating
performance as we do not consider these corporate overhead expenses when
evaluating the ongoing performance of our stores from period to period.
Corporate overhead expenses, which are a component of selling, general and
administrative expenses, are comprised of various home office general and
administrative expenses such as payroll expenses, occupancy costs, marketing (h) and advertising, and consulting and professional fees. See our discussion of
the changes in selling, general and administrative expenses presented in
"-Results of Operations". Store-level Adjusted EBITDA should not be used as a
substitute for consolidated measures of profitability or performance because
it does not reflect corporate overhead expenses that are necessary to allow
us to effectively operate our stores and generate Store-level Adjusted
EBITDA. We anticipate that we will continue to incur corporate overhead
expenses in future periods.
(3) The following table reconciles our net income (loss) to Adjusted Net Income
for the periods presented (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 24, 2020 October 26, 2019 October 24, 2020 October 26, 2019
Net income (loss), as reported $ 47,077 $ (14,647)$ (222,442) $ 9,618
Adjustments:
Impairment charges(a) - 5,230 319,732 5,230
Loss (gain) on sale-leaseback - 1,438 115 (15,090)
Loss on extinguishment of debt 3,179 - 3,179 -
Payroll tax expense related to
special one-time IPO bonus
stock option exercises(b) 17 - 17 46
Merchandising department
restructuring(c) - - - 870
Other(d) - (115) 1,375 1,258
Tax impact of adjustments to
net income (loss)(e) (726) (1,511) (1,083) 1,793
Tax impact related to the
cancellation of the one-time
CEO grant(f) - 9,306 - 9,306
Tax benefit related to special
one-time IPO bonus stock
option exercises(g) 48 - 48 (13)
Adjusted Net Income $ 49,595 $ (299) $ 100,941 $ 13,018
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For the thirty-nine weeks ended
impairment charge of
non-cash impairment charge of
and relocation decisions.
Payroll tax expense related to stock option exercises associated with a (b) special one-time initial public offering bonus grant to certain members of
senior management (the "IPO grant"), which we do not consider in our
evaluation of our ongoing performance.
(c) Includes certain employee related costs incurred as part of restructuring our
merchandising department.
(d) Other adjustments include amounts our management believes are not
representative of our ongoing operations, including:
for the thirty-nine weeks ended
? write-off of certain site selection costs that occurred as a result of the
COVID-19 pandemic.
Represents the income tax impact of the adjusted expenses using the annual
effective tax rate excluding discrete items. After giving effect to the (e) adjustments to net income (loss), the adjusted effective tax rate for the
thirteen and thirty-nine weeks ended
respectively. The adjusted effective tax rate for the thirteen and
thirty-nine weeks ended
During the thirteen and thirty-nine weeks ended
cancelled for no consideration resulting in the recognition of
of deferred tax expense.
(g) Represents the income tax benefit related to stock option exercises
associated with the IPO grant.
Matters Affecting Comparability
As a result of the COVID-19 pandemic, our stores and distribution centers were closed or operated in a limited capacity during the first fiscal quarter and into the beginning of the second fiscal quarter 2021. In addition to lost revenues, we continued to incur expenses relating to our stores, distribution centers and home office. Once our stores reopened, we experienced a significant increase in foot traffic and sales that we believe was impacted by pent-up demand and stimulus spending. As a result, comparisons as a percentage of sales and year-over-year trends may not be meaningful for certain financial statement items for the thirteen and thirty-nine week comparative periods.
Thirteen Weeks Ended
Net Sales Net sales increased$151.3 million , or 47.5%, to$470.0 million for the thirteen weeks endedOctober 24, 2020 from$318.7 million for the thirteen weeks endedOctober 26, 2019 . Comparable store sales increased$126.4 million , or 44.1%, during the thirteen weeks endedOctober 24, 2020 . The increase was primarily driven by increased demand as a result of continuing macroeconomic trends as well as our successful execution of several internal initiatives, including the continued roll-out of our omnichannel offering. Cost of Sales
Cost of sales increased$66.0 million , or 28.3%, to$299.3 million for the thirteen weeks endedOctober 24, 2020 from$233.3 million for the thirteen weeks endedOctober 26, 2019 . This increase was primarily driven by the 47.5% increase in net sales during the thirteen weeks endedOctober 24, 2020 compared to the thirteen weeks endedOctober 26, 2019 , which resulted in a$56.8 million increase in merchandise costs. In addition, during the thirteen weeks endedOctober 24, 2020 , we recognized a$4.5 million increase in store occupancy costs as a result of new store openings and sale-leaseback transactions sinceOctober 26, 2019 and a$2.8 million increase in distribution center costs related to increased labor hours. 29 Table of Contents Gross Profit and Gross Margin Gross profit was$170.7 million for the thirteen weeks endedOctober 24, 2020 , an increase of$85.3 million from$85.4 million for the thirteen weeks endedOctober 26, 2019 . The increase in gross profit was driven by the increase in sales during the thirteen weeks endedOctober 24, 2020 . Gross margin increased 950 basis points to 36.3% of net sales for the thirteen weeks endedOctober 24, 2020 from 26.8% of net sales for the thirteen weeks endedOctober 26, 2019 . The increase was primarily driven by leverage on occupancy costs and depreciation expense as a result of increased sales, product margin expansion and lower freight expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$97.2 million for the thirteen weeks endedOctober 24, 2020 compared to$74.8 million for the thirteen weeks endedOctober 26, 2019 , an increase of$22.4 million or 30.0%. As a percentage of sales, SG&A decreased 280 basis points for the thirteen weeks endedOctober 24, 2020 to 20.7% from 23.5% for the thirteen weeks endedOctober 26, 2019 , primarily due to the increase in sales. Selling, general and administrative expenses include expenses related to corporate overhead, which increased by$11.0 million , primarily driven by increases in incentive and equity-based compensation and labor costs. Selling, general and administrative expenses also include expenses related to store operations, which increased by$10.0 million , primarily driven by increases in store labor, incentive compensation and other administrative costs, partially offset by a reduction in pre-opening costs. The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were$11.2 million for the thirteen weeks endedOctober 24, 2020 compared to$9.8 million for the thirteen weeks endedOctober 26, 2019 , an increase of$1.4 million or 14.0%. The increase was driven by our efforts to increase traffic and build brand awareness. Impairment Charges During the thirteen weeks endedOctober 26, 2019 , we made a strategic decision to close or relocate three stores. As a result, we recognized a non-cash impairment charge of$5.2 million in connection with these properties. No impairment charges were incurred during the thirteen weeks endedOctober 24, 2020 . Interest Expense, Net Interest expense, net decreased to$7.8 million for the thirteen weeks endedOctober 24, 2020 from$8.5 million for the thirteen weeks endedOctober 26, 2019 , a decrease of$0.7 million . The decrease in interest expense was primarily due to the repayment of our Term Loan in full and nominal revolving credit loan borrowings under our ABL Facility during the thirteen weeks endedOctober 24, 2020 , which was partially offset by interest incurred on our Notes and FILO Loans.
Loss on Extinguishment of Debt
During the thirteen weeks endedOctober 24, 2020 , we recognized a loss on extinguishment of debt of$3.2 million resulting primarily from the write-off of unamortized deferred debt issuance costs in connection with the Term Loan repayment. We did not incur losses on extinguishment of debt during the thirteen weeks endedOctober 26, 2019 . 30 Table of Contents Income Tax Provision Income tax expense was$13.3 million for the thirteen weeks endedOctober 24, 2020 compared to$8.1 million for the thirteen weeks endedOctober 26, 2019 . The effective tax rate for the thirteen weeks endedOctober 24, 2020 was 22.0% compared to (125.0)% for the thirteen weeks endedOctober 26, 2019 . The effective tax rate for the thirteen weeks endedOctober 24, 2020 differs from the federal statutory rate primarily due to the impact of state and local income taxes. The effective tax rate for the thirteen weeks endedOctober 26, 2019 differs from the federal statutory rate primarily due to the recognition of$9.7 million of net tax deficiencies related to stock-based compensation, due in large part to the recognition of$9.3 million of deferred tax expense related to the cancellation of the one-time CEO grant previously granted toMr. Bird onJune 12, 2018 and, to a lesser extent, the impact of state and local income taxes.
Thirty-nine Weeks Ended
Net Sales Net sales increased$207.8 million , or 21.5%, to$1,175.1 million for the thirty-nine weeks endedOctober 24, 2020 from$967.3 million for the thirty-nine weeks endedOctober 26, 2019 . Comparable store sales increased$128.0 million , or 14.6%, during the thirty-nine weeks endedOctober 24, 2020 . The increase was primarily driven by increased demand as a result of continuing macroeconomic trends as well as our successful execution of several internal initiatives, including the continued roll-out of our omnichannel offering. The increase was partially offset by lost sales during the first fiscal quarter 2021 and into the beginning of the second fiscal quarter 2021 due to mandated store closures.
Cost of Sales
Cost of sales increased$98.4 million , or 14.2%, to$791.9 million for the thirty-nine weeks endedOctober 24, 2020 from$693.5 million for the thirty-nine weeks endedOctober 26, 2019 . This increase was primarily driven by the 21.5% increase in net sales during the thirty-nine weeks endedOctober 24, 2020 compared to the thirty-nine weeks endedOctober 26, 2019 , which resulted in an$83.3 million increase in merchandise costs. The increase was also due to a$16.1 million increase in store occupancy costs, net of abatements received from lessors of$2.3 million during the COVID-19 pandemic and a$1.3 million increase in depreciation and amortization, in each case as a result of new store openings and sale-leaseback transactions sinceOctober 26, 2019 . The increase was partially offset by a decrease in distribution center costs of$1.9 million as a result of the COVID-19 pandemic. Gross Profit and Gross Margin
Gross profit was$383.2 million for the thirty-nine weeks endedOctober 24, 2020 , an increase of$109.3 million from$273.9 million for the thirty-nine weeks endedOctober 26, 2019 . The increase in gross profit was driven by the increase in sales during the thirty-nine weeks endedOctober 24, 2020 . Gross margin increased 430 basis points to 32.6% of net sales for the thirty-nine weeks endedOctober 24, 2020 from 28.3% of net sales for the thirty-nine weeks endedOctober 26, 2019 . The increase was primarily driven by leverage on occupancy costs and depreciation expense as a result of increased sales, product margin expansion and a decrease in distribution center costs and freight expenses as a result of the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$232.3 million for the thirty-nine weeks endedOctober 24, 2020 compared to$228.5 million for the thirty-nine weeks endedOctober 26, 2019 , an increase of$3.8 million or 1.7%. As a percentage of sales, SG&A decreased 380 basis points for the thirty-nine weeks endedOctober 24, 2020 to 19.8% from 23.6% for the thirty-nine weeks endedOctober 26, 2019 , primarily due to the increase in sales and our efforts to curtail spending in the first and second quarters of fiscal year 2021 amid
the COVID-19 pandemic.
Selling, general and administrative expenses include expenses related to
corporate overhead, which increased by
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Selling, general and administrative expenses also include expenses related to store operations, which increased by$3.4 million , primarily driven by increases in store labor, incentive compensation and other administrative costs, partially offset by a reduction in pre-opening costs. The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were$24.1 million for the thirty-nine weeks endedOctober 24, 2020 compared to$32.8 million for the thirty-nine weeks endedOctober 26, 2019 , a decrease of$8.7 million or 26.7%. The decrease was driven by our efforts to curtail our advertising spend in the first and second quarters of fiscal year 2021 amid
the COVID-19 pandemic. Impairment Charges
During the first fiscal quarter 2021, because we continued to experience a decline in operating performance, substantially driven by the global outbreak of COVID-19 and a sustained decline in our market capitalization, coupled with a decision to further reduce our near-term growth model, we conducted an interim impairment testing of goodwill. Based on the test results, we concluded that goodwill was fully impaired and we recognized a non-cash impairment charge of$319.7 million during the thirty-nine weeks endedOctober 24, 2020 . During the thirty-nine weeks endedOctober 26, 2019 , we made a strategic decision to close or relocate three stores. As a result, we recognized a non-cash impairment charge of$5.2 million in connection with these properties. Interest Expense, Net
Interest expense, net decreased to$20.9 million for the thirty-nine weeks endedOctober 24, 2020 from$24.5 million for the thirty-nine weeks endedOctober 26, 2019 , a decrease of$3.6 million . The decrease in interest expense was primarily due to lower average borrowings under our ABL Facility and the repayment of our Term Loan in full, partially offset by interest incurred on our Notes and FILO Loans.
Loss on Extinguishment of Debt
During the thirty-nine weeks endedOctober 24, 2020 , we recognized a loss on extinguishment of debt of$3.2 million resulting primarily from the write-off of unamortized deferred debt issuance costs in connection with the Term Loan repayment. We did not incur losses on extinguishment of debt during the thirty-nine weeks endedOctober 26, 2019 . Income Tax Provision Income tax expense was$22.8 million for the thirty-nine weeks endedOctober 24, 2020 compared to$15.6 million for the thirty-nine weeks endedOctober 26, 2019 . The effective tax rate for the thirty-nine weeks endedOctober 24, 2020 was (11.4)% compared to 61.8% for the thirty-nine weeks endedOctober 26, 2019 . The effective tax rate for the thirty-nine weeks endedOctober 24, 2020 differs from the federal statutory rate primarily due to the goodwill impairment charge that was non-deductible for income tax purposes, the income tax benefit of$5.2 million from a tax loss carryback under the CARES Act and to a lesser extent the impact of state and local income taxes. The effective tax rate for the thirty-nine weeks endedOctober 26, 2019 differs from the federal statutory rate primarily due to the recognition of$9.8 million of net tax deficiencies related to stock-based compensation, due in large part to the recognition of$9.3 million of deferred tax expense related to the cancellation of the one-time CEO grant previously granted toMr. Bird onJune 12, 2018 and, to a lesser extent, the impact of state and local income taxes.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been our cash generated by operating activities, proceeds from sale-leaseback transactions and borrowings under our ABL Facility and Term Loan Facility (as described in "-Term Loan Facility"). Historically, we have financed our operations primarily from cash generated from operations and periodic borrowings under our ABL Facility. Our primary cash needs are for day-to-day operations, to provide for infrastructure investments in our stores, to invest in future projects such as e-commerce,
to
finance new store openings,
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to pay interest and principal on our indebtedness and to fund working capital requirements for seasonal inventory builds and new store inventory purchases.
In response to the global COVID-19 pandemic, inMarch 2020 we temporarily closed all of our stores nationwide for one week, after which we began to reopen stores in regions that were not required to remain closed by state or local mandates. All of our stores were fully open to foot traffic as ofJune 19, 2020 . There can be no assurance that we will not be required by landlords or authorities at the local, state or federal level to reinstate store closures, or as to how long any such closure would continue. The extent and duration of any such closure reinstatements is inherently uncertain and could significantly adversely affect our cash flows from operations. In the event that our obligations exceed our cash generated from operations and currently available sources of liquidity, such as borrowings under our ABL Facility, our ability to meet our obligations when due could be adversely affected. The availability of liquidity from the sources described herein are subject to a range of risks and uncertainties, including those discussed under "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedJanuary 25, 2020 as filed with theSecurities and Exchange Commission ("SEC") onMay 19, 2020 as well as under "Item 1A. Risk Factors" included in this Quarterly Report. As ofOctober 24, 2020 , we had$33.9 million of cash and cash equivalents, no borrowings outstanding under the ABL Facility revolving credit loans and$326.5 million in borrowing availability under our ABL Facility. At that date, there were$1.0 million in face amount of letters of credit that had been issued under the ABL Facility. The agreement governing the ABL Facility (the "ABL Agreement"), as amended, currently provides for aggregate revolving commitments of$425.0 million , with a sublimit for the issuance of letters of credit of$50.0 million and a sublimit for the issuance of swingline loans of$20.0 million . The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them. OnJune 12, 2020 , the ABL Facility was amended to provide for a new tranche of term loans in a principal amount of$35.0 million on a "first-in, last out" basis. See "- Asset-Based Lending Credit Facility." Our capital expenditures can vary depending on the timing of new store openings and infrastructure-related investments. Capital expenditures for the fiscal year endedJanuary 25, 2020 were approximately$123.5 million and consisted primarily of expenses relating to new store openings and$5.5 million invested in the second distribution center, net of proceeds from the sale of property and equipment, which includes sale-leaseback proceeds, of approximately$123.3 million . We estimate that our capital expenditures for the fiscal year endingJanuary 30, 2021 will be in the range of$40.0 million to$50.0 million , net of proceeds from sale-leaseback transactions of$33.2 million . We plan to invest in the infrastructure necessary to support the further development of our business and continued growth. During fiscal year 2020, we opened 32 new stores, net of three relocated stores and one store closure. Net capital expenditures incurred to date have been substantially financed with cash from operating activities, sale-leaseback transactions and borrowings under our ABL Facility. In response to the COVID-19 pandemic, we took swift and decisive action to preserve liquidity, including temporarily suspending new store openings, collaborating with our vendors on payment terms and reducing non-essential expenses and inventory flows during the first and second fiscal quarters 2021. While we have resumed close to normal operations as of the third fiscal quarter 2021 and have plans to resume new store openings in the first fiscal quarter 2022, there can be no assurance that these efforts will not be impacted by the uncertainties surrounding the COVID-19 pandemic. Any further curtailment of our store operations or delays in store openings could have a material adverse effect on the execution of our growth strategy and our business, financial condition and results of operations. We believe that our current cash position, net cash provided by operating activities, borrowings under our ABL Facility and sale-leaseback transactions, taking into consideration our actions to preserve liquidity, will be adequate to finance our operations, planned capital expenditures, working capital requirements and debt service obligations over the next twelve months and for the foreseeable future thereafter. However, if cash flows from operations and borrowings under our ABL Facility are not sufficient or available to meet our operating requirements, including as a result of further restrictions on store operations in future periods, we could be required to obtain additional financing in the near future. We may not be able to obtain equity or additional debt financing in the future when we need it or, if available, the terms may not be satisfactory to us or could be dilutive to
our
shareholders.
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Our indebtedness could adversely affect our ability to raise additional capital,
limit our ability to react to changes in the economy or our industry, expose us
to interest rate risk and prevent us from meeting our obligations. Management
reacts strategically to changes in economic conditions and monitors compliance
with debt covenants to seek to mitigate any potential material impacts to our
financial condition and flexibility.
Sale-Leaseback Transactions
As part of our flexible real estate strategy, we utilize sale-leaseback
transactions to finance investments previously made for the purchase of
second-generation properties and the construction of new store locations. This
enhances our ability to access a range of locations and facilities efficiently.
We factor sale-leaseback transactions into our capital allocation decisions. In
order to support the execution of sale-leaseback transactions, we have
relationships with certain REITs and other lenders that have demonstrated
interest in our portfolio of assets.
In March 2019 , we sold five of our properties in Frederick, Maryland ; Live Oak,
Texas ; Mansfield, Texas ; Plano, Texas ; and Whitehall, Pennsylvania for a total
of $74.7 million . Contemporaneously with the closing of the sale, we entered
into a lease pursuant to which we leased back the properties for cumulative
initial annual rent of $5.0 million , subject to annual escalations.
In September 2019 , we sold four of our properties in Tempe, Arizona ; Avon,
Indiana ; Mount Juliet, Tennessee ; and Cypress, Texas for a total of $50.5
million . Contemporaneously with the closing of the sale, we entered into a lease
pursuant to which we leased back the properties for cumulative initial annual
rent of $3.7 million , subject to annual escalations.
In July 2020 , we sold three of our properties in Grand Chute, Wisconsin ;
Cincinnati, Ohio ; and Lutz, Florida for a total of $33.2 million .
Contemporaneously with the closing of the sales, we entered into leases pursuant
to which we leased back the properties for cumulative initial annual rent of
$2.9 million , subject to annual escalations.
Term Loan Facility
OnJune 5, 2015 , our indirect wholly owned subsidiary, At Home III, entered into the first lien credit agreement (as amended from time to time), by and among At Home III, At Home II, certain indirect subsidiaries of At Home II, various lenders andBank of America, N.A ., as administrative agent and collateral agent, which provided for a term loan in an aggregate principal amount of$350 million (the "Term Loan") maturing onJune 3, 2022 . OnAugust 20, 2020 , in connection with the issuance of the Notes, we used the net proceeds of the issuance of the Notes together with cash on our balance sheet to repay in full the principal amount of indebtedness outstanding under the Term Loan. The repayment resulted in a loss on extinguishment of debt in the amount of$3.2 million , which was recognized during the third fiscal quarter 2021.
Asset-Based Lending Credit Facility
InOctober 2011 , we entered into the ABL Facility, which originally provided for cash borrowings or issuances of letters of credit of up to$80.0 million based on defined percentages of eligible inventory and credit card receivable balances. We have subsequently amended the ABL Agreement from time to time to, among other things, increase the aggregate revolving commitments available thereunder. After giving effect to prior amendments to the ABL Agreement, the ABL Agreement currently provides for (i) aggregate revolving commitments of$425.0 million , with a sublimit for the issuance of letters of credit of$50.0 million and a sublimit for the issuance of swingline loans of$20.0 million and (ii) the FILO Loans. The ABL Agreement was recently further amended to extend the maturity date of the revolving credit loans under the ABL Facility as described below. For more information on the FILO Loans, see "Note 7 - Long-Term Debt". OnAugust 28, 2020 ,At Home Holding III Inc. ("At Home III" or the "Issuer"), andAt Home Stores LLC (collectively, the "ABL Borrowers") and the guarantors under the ABL Facility entered into an amendment to the ABL Agreement (the "Ninth Amendment") withBank of America, N.A ., which amended the ABL Agreement to, among other things, extend the maturity of revolving credit loans provided thereunder to the earlier of (i)August 28, 2025 and 34
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(ii) the date of termination of the commitments under such revolving credit facility pursuant to the terms of the ABL Agreement.
As ofOctober 24, 2020 , we had no borrowings outstanding in respect of the revolving credit loans under the ABL Facility, approximately$1.0 million in face amount of letters of credit had been issued and we had availability of approximately$326.5 million . As ofOctober 24, 2020 , we were in compliance with all covenants prescribed in the ABL Facility. Revolving credit loans outstanding under the ABL Facility bear interest at a rate per annum equal to, at our option: (x) the higher of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the agent bank's prime rate and (iii) LIBOR plus 1.00% (the "Base Rate"), plus in each case, an applicable margin of 0.75% to 1.25% based on our average daily availability or (y) the agent bank's LIBOR plus an applicable margin of 1.75% to 2.25% based on our average daily availability; provided that a 1.00% interest rate floor is applicable to all revolving credit loans irrespective of rate used. The effective interest rate of borrowings under the ABL Facility was approximately 4.00% during the thirteen weeks endedOctober 26, 2019 , and approximately 2.60% and 4.10% during the thirty-nine weeks endedOctober 24, 2020 andOctober 26, 2019 , respectively. There were nominal borrowings under the ABL Facility during the thirteen weeks endedOctober 24, 2020 . The ABL Facility contains a number of covenants that, among other things, restrict the ability of the ABL Borrowers, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; make loans, advances or guarantees; pay dividends; engage in transactions with affiliates; and make investments. In addition, the ABL Agreement contains certain cross-default provisions. The ABL Agreement includes a minimum availability covenant whereby the ABL Borrowers and their restricted subsidiaries must maintain at all times availability (i.e., an amount equal to (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base minus (ii) the total revolving credit loans outstanding) in excess of the greater of (x)$35.0 million and 10.0% of the combined loan cap specified in the ABL Agreement (i.e., the sum of (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base and (ii) the total outstanding amount of FILO Loans). The ABL Agreement includes a mandatory prepayment provision requiring the ABL Borrowers to prepay any outstanding revolving credit loans to the extent the total amount of cash and cash equivalents ofAt Home Holding II Inc. ("At Home II"), the ABL Borrowers and their restricted subsidiaries (subject to certain exclusions) exceeds$35.0 million . The FILO Loans bear interest at the London Interbank Offered Rate ("LIBOR") offered for deposits for an interest period of 3 months (with a 1.00% LIBOR floor, the "FILO Rate") plus 9.00%, (with such interest rate switching to Base Rate plus 8.00% only if the FILO Rate cannot be determined) and amortizes at 10.00% per annum in equal quarterly installments of$875,000 commencing onSeptember 30, 2020 , with the remaining balance due at maturity. The FILO Loans will mature on the earlier of (i) the maturity date of the ABL Facility and (ii)July 27, 2022 (the "FILO Maturity Date"). The FILO Loans are prepayable at our option, in whole or in part, subject to a prepayment premium on the principal amount of the FILO Loans prepaid or required to be prepaid.
8.750% Senior Secured Notes due 2025
OnAugust 20, 2020 , At Home III completed the Notes Offering of$275.0 million aggregate principal amount of the Notes. The Notes Offering was conducted pursuant to Rule 144A and Regulation S promulgated under the Securities Act, and the Notes have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold inthe United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Notes are governed by the Indenture. Net proceeds of the issuance of the Notes were used, together with cash on our balance sheet, to repay all amounts outstanding under the Term Loan. The Notes bear interest at a fixed rate of 8.750% per annum, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, commencing onMarch 1, 2021 , and will mature onSeptember 1, 2025 . 35 Table of Contents
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantors, all of which also guarantee the ABL Facility.
The Notes are the senior secured obligations of the Issuer and the Guarantors. The Notes and the guarantees rank equal in right of payment with any of the existing and future senior indebtedness of the Issuer and the Guarantors and other obligations that are not, by their terms, expressly subordinated in right of payment to the Notes, including indebtedness under the ABL Facility. The Notes and the guarantees will rank senior in right of payment to any of the indebtedness of the Issuer and the Guarantors that is expressly subordinated to the Notes. The Notes and the guarantees will be effectively senior to any of the unsecured indebtedness of the Issuer and the Guarantors to the extent of the value of the Collateral (as defined below). With respect to the Collateral, the Notes and the guarantees will be (x) effectively junior to the obligations of the Issuer and the Guarantors under the ABL Facility to the extent of the value of the ABL Priority Collateral securing the Notes and (y) effectively senior to the obligations of the Issuer and the Guarantors under the ABL Facility to the extent of the value of the Notes Priority Collateral (as defined below) securing the ABL Facility. The Notes and the guarantees will be effectively subordinated to any indebtedness and other liabilities secured by any assets not constituting Notes Priority Collateral or ABL Priority Collateral, to the extent of the value of the assets subject to those liens. The Notes will be structurally subordinated to all indebtedness and other liabilities of the Issuer's existing and future subsidiaries that do not guarantee the Notes. The Issuer may redeem the Notes, in whole or in part, at any time prior toSeptember 1, 2022 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the redemption date plus a make-whole premium. In addition, at any time prior toSeptember 1, 2022 , but not more than once during each 12-month period commencing with the issue date of the Notes, the Issuer may redeem up to 10% of the aggregate original principal amount of the Notes at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. At any time prior toSeptember 1, 2022 , the Issuer may also redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings, at a redemption price equal to 108.750% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date. On or afterSeptember 1, 2022 , the Issuer may redeem all or part of the Notes at the following redemption prices, plus accrued and unpaid interest, if any, to, but not including, the redemption date, if redeemed during the 12-month period commencingSeptember 1 of the years set forth below: Period Redemption Price 2022 104.3750% 2023 102.1875%
2024 and thereafter 100.0000%
Collateral under the ABL Facility and the Notes
The ABL Facility is secured (a) on a first-priority basis by substantially all of the cash, cash equivalents, deposit accounts, accounts receivables, other receivables, inventory and certain related assets of the ABL Borrowers and the guarantors party to the ABL Agreement (collectively, the "ABL Priority Collateral") of the ABL Borrowers and the guarantors party to the ABL Facility and (b) on a second-priority basis by substantially all of the assets of the ABL Borrowers and the guarantors party to the ABL Agreement other than the ABL Priority Collateral (collectively, "Notes Priority Collateral"), in each case subject to certain exceptions (collectively, "Collateral"); provided, however, that since our amendment of the ABL Facility inJuly 2017 , real property that may secure the Notes from time to time does not form part of the collateral under the ABL Facility. The Notes are secured (a) on a first-priority basis by the Notes Priority Collateral and (b) on a second-priority basis by the ABL Priority Collateral, in each case subject to certain exceptions. 36 Table of Contents
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