CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the "safe harbor" provisions of the Act. Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words "anticipate," "estimate," "approximate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "will," "should," "may," "target," "forecast," "guidance," "outlook," and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity. Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, developments related to the COVID-19 pandemic, the current economic and credit conditions, the cost of goods, our inability to successfully execute strategic initiatives, competitive pressures, economic pressures on our customers and us, the availability of brand name closeout merchandise, trade restrictions, freight costs, the risks discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, and other factors discussed from time to time in our other filings with theSEC , including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report should be read in conjunction with such filings, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements andSEC filings. 15 -------------------------------------------------------------------------------- Table of Contents OVERVIEW The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes. Each term defined in the notes has the same meaning in this item and the balance of this report.
The following are the results from the third quarter of 2021 that we believe are key indicators of our operating performance when compared to our operating performance from the third quarter of 2020:
•Net sales decreased$42.3 million , or 3.1%. •Comparable sales for stores open at least fifteen months, plus our e-commerce operations, decreased$62.2 million , or 4.7%. •Gross margin dollars decreased$38.7 million , while gross margin rate decreased 160 basis points to 38.9% of net sales. •Selling and administrative expenses increased$5.1 million . As a percentage of net sales, selling and administrative expenses increased 150 basis points to 36.5% of net sales. •Operating (loss) profit decreased to an operating loss of$4.1 million from an operating profit of$42.5 million . •Inventory increased by 17.3%, or$188.2 million , to$1,277.2 million from the third quarter of 2020. •We declared and paid a quarterly cash dividend in the amount of$0.30 per common share in the third quarter of 2021 consistent with the quarterly cash dividend of$0.30 per common share paid in the third quarter of 2020. •We acquired 2.0 million of our outstanding common shares for$96.8 million under the 2020 Repurchase Authorization in the third quarter of 2021.
See the discussion and analysis below for additional details regarding our operating results.
STORES
The following table presents stores opened and closed during the year-to-date 2021 and the year-to-date 2020:
2021
2020
Stores open at the beginning of the fiscal year 1,408
1,404
Stores opened during the period 34
24
Stores closed during the period (18) (17) Stores open at the end of the period 1,424 1,411
We expect our store count at the end of 2021 to increase by approximately 20 stores compared to our store count at the end of 2020.
16 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table compares components of our consolidated statements of operations and comprehensive income as a percentage of net sales at the end of each period: Third Quarter Year-to-Date 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (exclusive of depreciation expense shown separately below) 61.1 59.5 60.4 59.4 Gross margin 38.9 40.5 39.6 40.6 Selling and administrative expenses 36.5 35.0 33.3 32.4 Depreciation expense 2.7 2.4 2.4 2.3 Gain on sale of distribution centers 0.0 0.0 0.0 (10.4) Operating (loss) profit (0.3) 3.1 3.9 16.3 Interest expense (0.2) (0.2) (0.2) (0.2) Other income (expense) 0.0 (0.0) 0.0 (0.1) (Loss) income before income taxes (0.5) 2.9 3.8 16.0 Income tax (benefit) expense (0.1) 0.7 0.9 4.1 Net (loss) income and comprehensive (loss) income (0.3) % 2.2 % 2.9 % 11.9 %
THIRD QUARTER OF 2021 COMPARED TO THIRD QUARTER OF 2020
Net Sales Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comparable sales ("comp" or "comps") in the third quarter of 2021 compared to the third quarter of 2020 were as follows: Third Quarter ($ in thousands) 2021 2020 Change Comps Furniture$ 401,256 30.1 %$ 429,305 31.2 %$ (28,049) (6.5) % (8.6) % Soft Home 194,217 14.5 215,253 15.6 (21,036) (9.8) (11.3) Food 182,936 13.7 194,713 14.1 (11,777) (6.0) (7.0) Consumables 163,350 12.2 169,584 12.3 (6,234) (3.7) (4.8) Hard Home 141,905 10.6 160,238 11.6 (18,333) (11.4) (12.3) Apparel, Electronics, & Other 126,845 9.5 108,003 7.9 18,842 17.4 15.0 Seasonal 125,147 9.4 100,829 7.3 24,318 24.1 22.6 Net sales$ 1,335,656 100.0 %$ 1,377,925 100.0 %$ (42,269) (3.1) % (4.7) % In the year-to-date 2021, we realigned our merchandise categories and renamed our Electronics, Toys, & Accessories merchandise category as Apparel, Electronics, & Other. See the reclassifications discussion in note 1 to the consolidated financial statements for additional information. In order to provide comparative information, we have reclassified our results into the revised merchandise category alignment for both periods presented. Net sales decreased$42.3 million , or 3.1%, to$1,335.7 million in the third quarter of 2021, compared to$1,377.9 million in the third quarter of 2020. The decrease in net sales was primarily driven by a 4.7% decrease in our comps, which decreased net sales by$62.2 million . This decrease was partially offset by our non-comparable sales, which increased net sales by$19.9 million , driven by increased sales in our new and relocated stores compared to closed stores, and a higher store count compared to the third quarter of 2020. Our comps are calculated based on the results of all stores that were open at least fifteen months plus our e-commerce net sales. Our comps and net sales declined during the third quarter of 2021 in comparison to the third quarter of 2020 primarily due to the larger impact of nesting trends on consumer behavior as a result of the COVID-19 pandemic in the third quarter of 2020. 17 -------------------------------------------------------------------------------- Table of Contents Comps and net sales in our home products categories, including our Furniture, Soft Home, andHard Home categories, decreased in the third quarter of 2021 compared to the third quarter of 2020. We believe this decrease was primarily attributable to the easing of nesting trends in the third quarter of 2021 compared to the third quarter of 2020. In the third quarter of 2020, we saw many of our customers choosing to invest more in their home as a result of staying home during the COVID-19 pandemic. We believe our customers spent less of their discretionary funds investing in their homes in the third quarter of 2021 because they were able to spend more time outside their homes due to lifted COVID-19-related restrictions. Our comps and net sales in our home products categories were also negatively impacted during the third quarter of 2021 by global and domestic supply chain constraints. While we maintained healthy overall inventory levels in our home products categories during the third quarter of 2021, shortages in certain historically popular SKUs caused by temporary factory and port shutdowns overseas contributed to the decreased comps and net sales compared to the third quarter of 2020. These global supply chain challenges have impacted both imported home products and domestically-sourced home products, as our domestic vendors have faced similar supply chain challenges with sourcing raw materials. Domestically, our supply chain has been impacted by labor challenges in certain of our distribution centers, with the majority of the impact in the northeastU.S. In response to labor challenges in our distribution centers, we have increased wages and implemented attendance and retention programs to improve overall productivity. In the third quarter of 2021, we also launched two forward distribution centers ("FDCs"), small-format distribution centers designed to process bulky and full-pallet shipments, which have begun to relieve pressure from our distribution centers most impacted by labor challenges. Despite these challenges, our home products categories performed in line with our expectations in the third quarter of 2021 and we believe that our customers continued to respond positively to our trend-right home offerings and the Broyhill® brand. Comps and net sales in our Food and Consumables merchandise categories also decreased during the third quarter of 2021 compared to the third quarter of 2020. Similar to our home products categories above, comps and net sales in our Food and Consumables categories were also negatively impacted by supply chain constraints and labor challenges in our distribution centers. The third quarter of 2021 also marks the first anniversary of the implementation of our Pantry Optimization initiative, which reallocated linear square footage from our Food category to our Consumables category. The Food and Consumables categories performed in line with our expectations considering the supply chain challenges experienced in the third quarter of 2021. Partially offsetting our decreased comps and net sales in the third quarter of 2021 was an increase in comps and net sales in our Seasonal and our Apparel, Electronics, & Other categories. The increased net sales and positive comps in our Seasonal category was primarily driven by increased sales in our lawn & garden, summer,Halloween , and harvest departments compared to the third quarter of 2020. These departments benefited from increased inventory levels in the third quarter of 2021 as we purchased more Seasonal inventory in anticipation of higher demand for these products. Net sales and comps decreased in our Christmas department in the third quarter of 2021, which was principally driven by lower inventory levels resulting from delayed receipts due to global supply chain issues. Shortly after the end of the third quarter of 2021, the vast majority of our Christmas merchandise was delivered to our stores. Increased net sales and positive comps in our Apparel, Electronics, & Other category was driven by the product assortments found in The Lot and Queue Line. The Lot is a cross-category presentation solution with a curated assortment to promote life's occasions. Queue Line offers our customers a streamlined checkout experience with a new and expanded convenience assortment and a smaller footprint that provides additional floor space to other categories. We believe the product assortment offered by The Lot and Queue Line is aligned with customer demand and leading to increased net sales and positive comps in our Apparel, Electronics, & Other category. At the end of the third quarter of 2021, The Lot and Queue Line had each been rolled out to approximately 1,320 stores, compared to approximately 750 stores at the end of the third quarter of 2020. Gross Margin Gross margin dollars decreased$38.7 million , or 6.9%, to$519.2 million for the third quarter of 2021, compared to$557.9 million for the third quarter of 2020. The decrease in gross margin dollars was due to the decrease in net sales, which decreased gross margin dollars by$17.1 million , and the decrease in gross margin rate, which decreased gross margin dollars by$21.6 million . Gross margin as a percentage of net sales decreased 160 basis points to 38.9% in the third quarter of 2021 as compared to 40.5% in the third quarter of 2020. The gross margin rate decrease was primarily a result of higher inbound freight costs driven by increased ocean carriage rates as demand for ocean carriage has outpaced container and carrier supply. The ocean carriage demand and supply imbalance was exacerbated by temporary COVID-19-related port shutdowns during the second quarter of 2021, which further increased shipping costs during the third quarter of 2021. The higher inbound freight costs were also driven by higher domestic transportation rates and increased fuel costs compared to the third quarter of 2020. The gross margin rate also decreased due to a slightly higher markdown rate in the third quarter of 2021 compared to the third quarter of 2020. The decrease in gross margin rate was partially offset by moderate price increases implemented in the third quarter of 2021 to mitigate rising costs, particularly freight. 18 -------------------------------------------------------------------------------- Table of Contents Selling and Administrative Expenses Selling and administrative expenses were$487.4 million for the third quarter of 2021, compared to$482.3 million for the third quarter of 2020. The increase of$5.1 million in selling and administrative expenses was driven by an increase in distribution and transportation costs of$13.3 million , health benefits expense of$5.8 million , and$2.5 million of store occupancy expense, partially offset by a decrease in accrued bonus expense of$10.8 million , and$6.1 million of advertising expense. The increase in distribution and transportation costs was driven by higher outbound volume, increased labor costs, and higher transportation rates, as well as the incremental costs associated with our two FDCs that opened in the third quarter of 2021. The increase in health benefits expense was due to a higher volume of claims in the third quarter of 2021 compared to the third quarter of 2020, as many medical providers were not offering elective care and fewer associates were seeking elective care in the third quarter of 2020. The increase in store occupancy expense was due to an increase in net store count since the third quarter of 2020, relocated stores which have higher rents than the stores closed, and normal rent increases resulting from lease renewals. The decrease in accrued bonus expense was driven by decreased performance in the third quarter of 2021 relative to our bonus targets as compared to our performance in the third quarter of 2020 relative to our bonus targets. The decrease in advertising expense was primarily driven by lower spend on video media as we have increased the efficiency of our spend through a more targeted approach to advertising investments, particularly through use of digital channels. As a percentage of net sales, selling and administrative expenses increased 150 basis points to 36.5% for the third quarter of 2021 compared to 35.0% for the third quarter of 2020. Depreciation Expense Depreciation expense increased$2.8 million to$35.9 million in the third quarter of 2021, compared to$33.1 million for the third quarter of 2020. The increase in depreciation expense was driven by investments in our strategic initiatives, such as The Lot and Queue Line, new stores, and supply chain improvements in the last twelve months.
Depreciation expense as a percentage of sales increased 30 basis points compared to the third quarter of 2020.
Interest Expense Interest expense was$2.3 million in the third quarter of 2021, compared to$2.6 million in the third quarter of 2020. The decrease in interest expense was primarily driven by a decrease in total average borrowings. We had total average borrowings (including finance leases and the sale and leaseback financing liability) of$132.2 million in the third quarter of 2021 compared to total average borrowings of$185.9 million in the third quarter of 2020. The decrease in total average borrowings was driven by the repayment of all borrowings under the 2019 Term Note in the second quarter of 2021. Other Income (Expense) Other income (expense) was$0.3 million in the third quarter of 2021, compared to$(0.5) million in the third quarter of 2020. The change was driven by gains on our diesel fuel derivatives in the third quarter of 2021 compared to the losses on diesel fuel derivatives during the third quarter of 2020. Income Taxes The effective income tax rate for the third quarter of 2021 was 29.3% compared to 24.1% in the third quarter of 2020. The change in the effective income tax rate in the third quarter of 2021 compared to the third quarter of 2020 was primarily attributable to a reduction in nondeductible executive compensation and the absence of an audit-related reserve release in the prior year, partially offset by a change in employment-related tax credits compared to the third quarter of 2020. 19
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YEAR-TO-DATE 2021 COMPARED TO YEAR-TO-DATE 2020
Net Sales Net sales by merchandise category (in dollars and as a percentage of total net sales) in the year-to-date 2021 and the year-to-date 2020, and the change in net sales (in dollars and percentage) and the change in comps (in percentage) from the year-to-date 2021 compared to the year-to-date 2020 were as follows: Year-to-Date ($ in thousands) 2021 2020 Change Comps Furniture$ 1,291,765 29.2 %$ 1,284,743 28.8 %$ 7,022 0.5 % (1.7) % Seasonal 688,747 15.6 596,850 13.4 91,897 15.4 13.9 Soft Home 601,320 13.6 654,669 14.7 (53,349) (8.1) (9.7) Food 541,400 12.3 615,624 13.8 (74,224) (12.1) (13.2) Consumables 485,039 11.0 542,515 12.2 (57,476) (10.6) (11.7) Hard Home 439,805 9.9 465,936 10.4 (26,131) (5.6) (6.8) Apparel, Electronics, & Other 370,506 8.4 300,934 6.7 69,572 23.1 21.1 Net sales$ 4,418,582 100.0 %$ 4,461,271 100.0 %$ (42,689) (1.0) % (2.6) % Net sales decreased$42.7 million , or 1.0%, to$4,418.6 million in the year-to-date 2021, compared to$4,461.3 million in the year-to-date 2020. The decrease in net sales was driven by a comp decrease of 2.6%, which decreased net sales by$114.1 million , partially offset by our non-comparable sales which increased net sales by$71.4 million as a result of increased net sales in our new and relocated stores compared to closed stores, and an increase in net store count compared to the year-to-date 2020. Our comps and net sales decreased in the year-to-date 2021 primarily due to the larger impact that government stimulus, unemployment funds, and nesting trends had on consumer behaviors in the year-to-date 2020. In the year-to-date 2021, we experienced an increase in demand for our Furniture and Seasonal categories which we believe was initially driven by government stimulus and unemployment funds in the first quarter of 2021, together with the continuation of nesting trends we experienced in 2020 due to customers investing more time and discretionary funds in their home. In the first quarter of 2021, nesting trends shifted toward patio furniture and other outdoor products which drove increased net sales and comps in the lawn & garden and summer departments of our Seasonal merchandise category. Nesting trends abated in the second quarter of 2021 as COVID-19 vaccines became widely available and consumers began spending more time outside their homes. In the second and third quarter of 2021, we experienced supply chain constraints that negatively impacted our inventory levels of home product categories, particularly Furniture, leading to low inventory levels in certain popular product lines. In the third quarter of 2021, our Seasonal category benefited from higher inventory levels in the lawn & garden, summer,Halloween , and harvest departments as we experienced increased demand for outdoor furniture and decor late into the summer season and fall. Our Soft Home andHard Home categories each experienced a decrease in comps and net sales in the year-to-date 2021 compared to the year-to-date 2020, primarily due to lower on-hand product availability in the year-to-date 2021, which was primarily driven by global supply chain challenges. Despite the decrease in net sales and comps in the year-to-date 2021, both categories performed in line with our expectations. Our Apparel, Electronics, & Other category experienced increased comps and net sales in the year-to-date 2021 driven by our strategic initiatives - including The Lot and Queue Line. We believe our product assortment is aligned with customer demand and that the Apparel, Electronics, & Other category is a growth opportunity for us. Our Food and Consumables categories each experienced a decrease in net sales and comps in the year-to-date 2021 compared to the year-to-date 2020, primarily due to a decrease in demand for essential products, which we define as food, consumables, health products, and pet supplies. In the year-to-date 2020, during the early stages of the COVID-19 pandemic, we experienced greater demand for these products which has since declined as customers are no longer stocking up on these products. Our Food and Consumables categories were also negatively impacted by supply chain constraints since the second quarter of 2021 and by labor challenges in our distribution centers. In the third quarter of 2021, we passed the first anniversary of the implementation of our Pantry Optimization initiative, which reallocated linear square footage from our Food category to our Consumables category. 20 -------------------------------------------------------------------------------- Table of Contents Gross Margin Gross margin dollars decreased$61.3 million , or 3.4%, to$1,750.9 million for the year-to-date 2021, compared to$1,812.2 million for the year-to-date 2020. The decrease in gross margin dollars was due to a decrease in net sales, which decreased gross margin by$17.3 million , and a decrease in gross margin rate, which decreased gross margin by$44.0 million . Gross margin as a percentage of net sales decreased 100 basis points to 39.6% in the year-to-date 2021, compared to 40.6% in the year-to-date 2020. The gross margin rate decrease was primarily due to higher inbound freight costs, partially offset by lower markdowns. Freight costs increased primarily due to higher ocean carriage rates, domestic transportation rates, and fuel costs, and detention and demurrage charges resulting from delayed receipt of inventory related to supply chain constraints. Selling and Administrative Expenses Selling and administrative expenses were$1,473.5 million for the year-to-date 2021, compared to$1,444.9 million for the year-to-date 2020. The increase of$28.6 million in selling and administrative expenses was attributable to increases in distribution and transportation costs of$39.4 million ,$13.3 million of share-based compensation expense, health benefit expense of$7.4 million , and$7.2 million of store occupancy costs, partially offset by decreases of$16.4 million in store-related payroll, accrued bonus expense of$11.1 million , and advertising expense of$7.1 million , the absence of$4.0 million of sale and leaseback transaction-related expenses, and the absence of proxy contest-related costs of$3.7 million . The increase in distribution and transportation costs was driven by rent on our leased distribution centers, four of which were sold and leased back in the second quarter of 2020, and higher outbound volume, transportation costs, and labor costs, partially offset by the absence of a$2 per hour wage increase that was implemented for most of our non-exempt workforce beginning inMarch 2020 throughJune 2020 in the early stages of the COVID-19 pandemic. The increase in share-based compensation expense was primarily due to a higher grant date fair value and higher estimated performance on the 2019 PSUs for which the grant date was established in 2021 compared to the 2018 PSUs for which the grant date was established in 2020 and PRSUs granted in 2020. Health benefit expense increased driven by an increase in health benefit claims in the year-to-date 2021 compared to the year-to-date 2020, as many medical providers postponed elective care procedures in the year-to-date 2020. Our store occupancy costs increased primarily due to an increased store count in the year-to-date 2021, new stores opened in the last twelve months, which have higher rents than the stores closed, and normal rent increases resulting from lease renewals. The decrease in store-related payroll was primarily due to the absence of the aforementioned$2 per hour wage increase. The decrease in accrued bonus expense was driven by decreased performance in the year-to-date 2021 relative to our bonus targets as compared to our performance in the year-to-date 2020 relative to our bonus targets, as well as the absence of a one-time discretionary bonus granted in the second quarter of 2020 to recognize our non-exempt associates in our stores and distribution centers. Advertising expense decreased due to decreased investments in video media as we have taken a more targeted approach to our advertising spend. The sale and leaseback transaction-related expenses, which included consulting costs, were incurred in completing the sale and leaseback of our distribution centers in the second quarter of 2020. The proxy contest-related costs were comprised of legal, public relations, and advisory fees, and settlement costs incurred to resolve a proxy contest in the first quarter of 2020.
As a percentage of net sales, selling and administrative expenses increased 90 basis points to 33.3% for the year-to-date 2021 compared to 32.4% for the year-to-date 2020.
Depreciation Expense Depreciation expense increased$0.4 million to$105.2 million in the year-to-date 2021, compared to$104.8 million for the year-to-date 2020. The increase was driven by the investments in our strategic initiatives, new stores, and supply chain improvements, partially offset by the sale of four distribution centers in the second quarter of 2020.
Depreciation expense as a percentage of sales increased by 10 basis points compared to the year-to-date 2020.
Gain on Sale of Distribution Centers Gain on sale of distribution centers decreased$463.1 million to$0 in the year-to-date 2021, compared to$463.1 million in the year-to-date 2020. The gain on sale of distribution centers in the year-to-date 2020 was attributable to the sale and leaseback of our distribution centers inDurant, OK ;Tremont, PA ;Montgomery, AL ; andColumbus, OH during the second quarter of 2020. Interest Expense Interest expense was$7.1 million in the year-to-date 2021, compared to$8.5 million in the year-to-date 2020. The decrease in interest expense was driven by lower total average borrowings (including finance leases and the sale and leaseback financing liability). We had total average borrowings of$153.7 million in the year-to-date 2021 compared to$282.3 million in the year-to-date 2020. The decrease in total average borrowings was driven by our repayment of all outstanding debt under the 2018 Credit Agreement following the sale and leaseback transaction completed in the second quarter of 2020, and our prepayment of the 2019 Term Note in the second quarter of 2021, partially offset by the establishment of the financing liability in connection with the sale and leaseback transactions in the second quarter of 2020. The decrease in total average borrowings was partially offset by a higher average interest rate on the sale and leaseback financing liability. 21
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Other Income (Expense) Other income (expense) was$1.1 million in the year-to-date 2021, compared to$(2.4) million in the year-to-date 2020. The change was primarily driven by gains on our diesel fuel derivatives in the year-to-date 2021 compared to losses on diesel fuel derivatives in the year-to-date 2020. The gains on diesel fuel derivatives in the year-to-date 2021 were partially offset by a$0.5 million loss on debt extinguishment recognized in the year-to-date 2021 related to the prepayment of the 2019 Term Note. Income Taxes The effective income tax rate for the year-to-date 2021 and the year-to-date 2020 were 23.0% and 25.7%, respectively. The decrease in the effective income tax rate was primarily attributable to the net tax benefit associated with settlement of share-based payment awards during the year-to-date 2021 and an increase in employment-related credits in the year-to-date 2021 compared to the year-to-date 2020, partially offset by an increase in nondeductible executive compensation compared to the year-to-date 2020. 2021 Guidance We continue to face significant supply chain challenges as a result of COVID-19-related shutdowns in factories and ports overseas, which we expect to adversely impact our net sales and gross margin in the fourth quarter of 2021. Additionally, we are facing a highly competitive domestic labor market, which we expect to result in increased payroll expenses for our stores and distribution centers in the fourth quarter of 2021. We have incorporated our current best estimate of the impacts of the supply chain and labor headwinds into the guidance below. As ofDecember 3, 2021 , we expect the following in the fourth quarter of 2021: •Comparable sales slightly above last year; •Gross margin rate down approximately 150 basis points compared to last year, driven by freight headwinds; •Selling and administrative expenses up compared to last year; and •Diluted earnings per share in the range of$2.05 to$2.20 .
As of
Capital Resources and Liquidity OnSeptember 22, 2021 , we entered into the 2021 Credit Agreement, which provides for a$600 million five-year unsecured credit facility. The 2021 Credit Agreement expires onSeptember 22, 2026 . The 2021 Credit Agreement replaced the 2018 Credit Agreement,$700 million five-year unsecured credit facility which we entered into onAugust 31, 2018 and was scheduled to expire onAugust 31, 2023 , but was terminated concurrent with our entry into the 2021 Credit Agreement. The 2021 Credit Agreement includes a$50 million swing loan sublimit, a$75 million letter of credit sublimit, a$75 million sublimit for loans to foreign borrowers, and a$200 million optional currency sublimit. The 2021 Credit Agreement also contains an environmental, social and governance ("ESG") provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the 2021 Credit Agreement. Under the 2021 Credit Agreement, we have the option to establish incremental term loans and/or increases in the revolving credit limits in an aggregate amount of up to$300 million , subject to the lenders agreeing to increase their commitments. Additionally, the 2021 Credit Agreement includes two options to extend the maturity date of the 2021 Credit Agreement by one year each, subject to each lender agreeing to extend the maturity date of its respective loans. The interest rates, pricing and fees under the 2021 Credit Agreement fluctuate based on our debt rating or leverage ratio, whichever results in more favorable pricing to us. The 2021 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. The 2021 Credit Agreement updated the LIBOR fallback language to implement fallback provisions, pursuant to which the interest rate on the loans will transition to an alternative rate upon the occurrence of certain LIBOR cessation events. Loans made under the 2021 Credit Agreement may be prepaid without penalty. The 2021 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios - a leverage ratio and a fixed charge coverage ratio. The covenants of the 2021 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with the synthetic lease for our distribution center inApple Valley, CA. A violation of any of the covenants could result in a default under the 2021 Credit Agreement that would permit the lenders to restrict our ability to further access the 2021 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2021 Credit Agreement. AtOctober 30, 2021 , we were in compliance with the covenants of the 2021 Credit Agreement. AtOctober 30, 2021 , we had no borrowings outstanding under the 2021 Credit 22 -------------------------------------------------------------------------------- Table of Contents Agreement, and the borrowings available under the 2021 Credit Agreement were$594.9 million , after taking into account the reduction in availability resulting from outstanding letters of credit totaling$5.1 million . OnAugust 7, 2019 , we entered into the 2019 Term Note, a$70 million term note agreement, which was secured by the equipment at ourApple Valley, CA distribution center and carried a fixed interest rate of 3.3%. In light of our strong liquidity and market conditions, we prepaid the remaining$44.3 million principal balance under the 2019 Term Note in the second quarter of 2021. In connection with the prepayment, we incurred a$0.4 million prepayment fee and recognized a$0.5 million loss on debt extinguishment in the second quarter of 2021. We have historically funded our working capital requirements with borrowings under our credit facility. Based on our current cash and cash equivalents position and projected cash flows from operations, we intend to fund our working capital requirements, along with capital expenditures, share repurchases, and other contractual commitments, for the upcoming quarter with limited borrowings under the 2021 Credit Agreement. While we expect to borrow under the 2021 Credit Agreement early in the fourth quarter of 2021, we expect to end the fourth quarter of 2021 with no outstanding debt. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments. InAugust 2020 , our Board of Directors authorized the repurchase of up to$500 million of our common shares. The 2020 Repurchase Authorization was exhausted in the third quarter of 2021. During the year-to-date 2021, we purchased 5.6 million of our common shares for$327.2 million under the 2020 Repurchase Authorization, at an average price of$58.48 . OnDecember 1, 2021 our Board of Directors authorized the 2021 Repurchase Authorization, which provides for the repurchase of$250 million of our common shares. Pursuant to the 2021 Repurchase Authorization, we are authorized to repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Common shares acquired through the 2021 Repurchase Authorization will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 2021 Repurchase Authorization has no scheduled termination date. InAugust 2021 , our Board of Directors declared a quarterly cash dividend of$0.30 per common share payable onSeptember 24, 2021 to shareholders of record as of the close of business onSeptember 10, 2021 . The cash dividend of$0.30 per common share is consistent with our quarterly dividends declared in 2020. In the year-to-date of 2021, we paid approximately$32.6 million in dividends compared to$35.8 million in the year-to-date of 2020. InDecember 2021 , our Board of Directors declared a quarterly cash dividend of$0.30 per common share payable onDecember 29, 2021 to shareholders of record as of the close of business onDecember 15, 2021 .
The following table compares the primary components of our cash flows from the year-to-date 2021 compared to the year-to-date 2020: (In thousands)
2021 2020 Change Net cash provided by operating activities$ 75,706 $ 267,410 $ (191,704) Net cash (used in) provided by investing activities (122,545) 485,209 (607,754)
Net cash used in financing activities
Cash provided by operating activities decreased$191.7 million to$75.7 million in the year-to-date 2021 compared to$267.4 million in the year-to-date 2020. The decrease was primarily driven by an increase in cash outflows from inventories, due to restoration of inventory levels in the third quarter of 2021 compared to the historically low inventory levels in the third quarter of 2020, and an increase in cash outflows from current income taxes, driven by the payment of taxes on the sale of our distribution centers since the third quarter of 2020. These decreases were partially offset by an increase in net income after adjusting for non-cash activities such as non-cash share-based compensation expense, non-cash lease expense, and the add-back for (loss) gain on disposition of equipment and property. Cash (used in) provided by investing activities decreased by$607.8 million to cash used in investing activities of$122.5 million in the year-to-date 2021 compared to cash provided by investing activities of$485.2 million in the year-to-date 2020. The decrease was driven by the decrease in cash proceeds from sale of property and equipment, due to the sale and leaseback transactions completed in the second quarter of 2020, as well as an increase in capital expenditures. Cash used in financing activities increased by$184.6 million to$442.1 million in the year-to-date 2021 compared to$257.5 million in the year-to-date 2020. The increase was primarily driven by the repurchase of$327.2 million of our common shares under the 2020 Repurchase Authorization in the year-to-date 2021 compared to$100.0 million of our common shares under the 23 -------------------------------------------------------------------------------- Table of Contents 2020 Repurchase Authorization in the year-to-date 2020. Additionally, the increase was driven by the absence of financing proceeds from sale and leaseback transactions completed in the second quarter of 2020. The increase was partially offset by a decrease in net repayments of long-term debt due to the repayment of all outstanding borrowings under the 2018 Credit Agreement in the year-to-date 2020 compared to repayment of all outstanding borrowings under the 2019 Term Note, which carried a lower balance at the time of repayment compared to the 2018 Credit Agreement at the time of repayment, in the year-to-date 2021. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, and bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. See note 1
to
our consolidated financial statements included in our 2020 Form 10-K for additional information about our accounting policies.
The estimates, judgments, and assumptions that have a higher degree of inherent uncertainty and require the most significant judgments are outlined in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2020 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 2020 Form 10-K, our financial condition, results of operations, and liquidity for the current period could have been materially different from those presented.
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