GROCERY OUTLET HOLDING CORP. You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , as amended ("2020 Form 10-K"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other sections of this report. We operate on a fiscal year that ends on the Saturday closest toDecember 31st each year. References to the third quarter of fiscal 2021 and the third quarter of fiscal 2020 refer to the 13 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively. As used in this report, references to "Grocery Outlet ," "the Company," "the registrant," "we," "us" and "our," refer toGrocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise. Overview We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product offering. As ofOctober 2, 2021 , we had 407 stores inCalifornia ,Washington ,Oregon, Pennsylvania ,Idaho andNevada . Secondary Public Offerings OnFebruary 3, 2020 , certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of$1.1 million which we recognized in selling, general and administrative expenses during the first quarter of fiscal 2020. We received$1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering. OnApril 27, 2020 , certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of$1.0 million which we recognized in selling, general and administrative expenses during the second quarter of fiscal 2020. We received$1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering. OnMay 28, 2020 , the stockholder affiliated with our former private equity sponsor,Hellman and Friedman LLC , distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders. We did not receive any proceeds or incur any material costs related to this distribution. COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. As a result, many states, including states where we have significant operations, declared a state of emergency, closed schools and non-essential businesses and enacted limitations on the number of people allowed to gather at one time in the same space. As of the date of this filing, the states in which we operate have "re-opened" but states and counties maintain differing and evolving requirements related to COVID-19. As we compare fiscal 2021 financial performance with the comparable period in fiscal 2020 that included elevated COVID-related demand, we are reporting declines in year-over-year net sales and comparable store sales growth on a year-to-date basis. In addition, consumer behavior continues to be impacted by a variety of factors including, in part, increased consumer mobility and travel, higher food-away-from-home spend, continued consolidation of grocery store visits, elevated grocery e-commerce usage and higher levels of government stimulus, leading to consumers prioritizing convenience over value. There was also a surge of positive COVID-19 cases related to the Delta variant around the country during the third quarter, including states in which we operate, creating additional uncertainty and having a negative impact on staffing. As a result of those factors and the possibility of different variants, it is difficult to predict near term consumer behavior and resulting sales trends for our business. 19
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We and our IOs currently face and will continue to face staffing challenges including overtime pay, increased payroll attributable to employeeswho are compensated for their time to receive vaccines, and staffing shortages for a variety of reasons that are attributable to the COVID-19 pandemic. In early 2021, many counties inCalifornia andWashington enacted ordinances mandating "hazard pay" for grocery workers. While most of those ordinances have applied to large companies with more than 300 employees and have not applied to smaller businesses operated by a single employer (such as an Independent Operator), these ordinances do create staffing issues as many competitors are subject to those ordinances and accordingly may offer more competitive compensation. While most of the hazard pay ordinances have expired, if there is another COVID surge, counties may try to implement new ordinances. In addition, federal and state governments have enacted legislation to provide additional company paid benefits for employees and former employees impacted by the COVID-19 pandemic. Also, in the event that a Company employee, an IO, or IO employee tests positive for COVID-19, we may have to temporarily close a store, office or distribution center for cleaning and/or quarantine one or more employees which could negatively impact our financial results. We have incurred, and expect to continue to incur, cleaning and safety costs, supplies, and higher personnel expenses. In addition, since the start of the pandemic certain inventory items have at times been, and may in the future again be, in short supply. Recently, COVID-19-related supply chain disruptions have caused logistical challenges for us and many other businesses in the retail industry, causing delay in product delivery to our distribution centers, stores and customers. These logistical challenges have also caused increased costs to deliver goods to our stores resulting from increased fuel costs, increased carrier rates and driver wages as a result of driver shortages, a decrease in transportation capacity, and slowdowns. Additionally, certain fixture upgrades and new refrigeration units now have longer lead times. All of these factors could impact the ability of stores to operate normal hours of operation or have sufficient inventory at all times which may disrupt our business and negatively impact our financial results. Further, planned construction and opening of new stores have been and may continue to be negatively impacted due to increased time periods to get materials such as steel, obtain permits and licenses and set up utilities. Finally, we have incurred, and expect to continue to incur, additional expenses as a result of certain increased costs related to our IOs. For example, we are paying a portion of the costs of personal protective equipment ("PPE") and cleaning supplies for our IOs as well as reducing interest rates on outstanding IO notes. We cannot reasonably estimate the length or severity of this pandemic, but it could have a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2021. See "Risk Factors-Major health epidemics, such as the outbreak caused by COVID-19 and its variants, and other outbreaks could continue to disrupt and adversely affect our operations, financial condition and business" in Part II of this Report for additional information. Key Factors and Measures We Use to Evaluate Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A") and operating income. The key operational metrics and non-GAAP measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share. Third Quarter of Fiscal 2021 Overview Key financial and operating performance results for the third quarter of fiscal 2021 were as follows: •Net sales increased by 0.6% to$768.9 million from$764.1 million in the third quarter of fiscal 2020; comparable store sales decreased by 4.3% compared to a 9.1% increase in the same period last year. •We opened 7 new stores, ending the third quarter of fiscal 2021 with 407 stores in six states. •Net income decreased 57.7% to$17.1 million , or$0.17 per diluted share, compared to net income of$40.5 million , or$0.41 per diluted share, in the third quarter of fiscal 2020. •Adjusted EBITDA(1) decreased 6.2% to$51.4 million compared to$54.8 million in the third quarter of fiscal 2020. •Adjusted net income(1) decreased 15.3% to$23.4 million , or$0.24 per adjusted diluted share(1), compared to$27.7 million , or$0.28 per adjusted diluted share, in the third quarter of fiscal 2020. _______________________ (1)Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. The presentations for adjusted EBITDA, adjusted net income and adjusted diluted earnings per share for fiscal 2020 have been recast to reflect these changes. See GAAP to non-GAAP reconciliations in the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information. 20
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Key Components of Results of OperationsNet Sales We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. Discounts provided to customers by us are recognized at the time of sale as a reduction in sales as the products are sold. Discounts that are funded solely by IOs are not recognized as a reduction in sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Sales consist of sales from comparable stores and non-comparable stores, described below under "Comparable Store Sales." Growth of our sales is generally driven by expansion of our store base in existing and new markets as well as comparable store sales growth. Sales are impacted by the spending habits of our customers, product mix and availability, as well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories supports growth in sales by attracting new customers and encouraging repeat visits from our existing customers. The spending habits of our customers are affected by changes in macroeconomic conditions, such as those experienced due to the COVID-19 pandemic, and changes in discretionary income. As another example, we believe the re-opening of businesses led to a decrease in our customer count as customers are again traveling and eating out at restaurants. Our customers' discretionary income is primarily impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment. Because we offer a broad selection of merchandise at extreme values, historically we have benefited from periods of economic uncertainty. Cost of Sales, Gross Profit and Gross Margin Cost of sales includes, among other things, merchandise costs, inventory markdowns, inventory losses and transportation, distribution and warehousing costs, including depreciation. Gross profit is equal to our sales less our cost of sales. Gross margin is gross profit as a percentage of our sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can vary. Our gross profit is variable in nature and generally follows changes in sales. While our disciplined buying approach has produced consistent gross margins throughout economic cycles which we believe has helped to mitigate adverse impacts on gross profit and results of operations, changes in consumer demand like we experienced at the beginning of the COVID-19 pandemic, changes in supply chain costs and changes in discretionary income has resulted and could continue to result in unexpected changes to our gross margins. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers. As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers. Selling, General and Administrative Expenses SG&A expenses are comprised of both store-related expenses and corporate expenses. Store-related expenses include commissions paid to IOs, occupancy and shared maintenance costs, the cost of opening new IO stores, and Company-operated store expenses, including payroll, benefits, supplies and utilities. In addition, beginning in fiscal 2020, SG&A included incremental costs associated with COVID-19, such as cleaning and safety costs, costs for PPE and supplies. Corporate expenses include payroll and benefits for corporate and field support, marketing and advertising, insurance and professional services and operator recruiting and training costs. SG&A generally increases as we grow our store base and invest in our corporate infrastructure. SG&A expenses related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as gross profits decline. The remainder of our expenses are primarily fixed in nature. We continue to closely manage our expenses and monitor SG&A as a percentage of sales. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers. We expect that our SG&A will continue to increase in future periods as we continue to grow our sales revenue. Operating Income Operating income is gross profit less SG&A, depreciation and amortization and share-based compensation. Operating income excludes interest expense, net, gain on insurance recoveries, debt extinguishment and modification costs and income tax expense (benefit). We use operating income as an indicator of the productivity of our business and our ability to manage expenses. 21
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Results of Operations
The following tables summarize key components of our results of operations both
in dollars and as a percentage of net sales (amounts in thousands, except for
percentages):
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 2021 2020
Net sales $ 768,880 $ 764,082 $ 2,296,881 $ 2,327,819
Cost of sales 531,768 525,899 1,590,044 1,598,859
Gross profit 237,112 238,183 706,837 728,960
Operating expenses:
Selling, general and administrative 191,572 189,880 573,125 574,813
Depreciation and amortization 17,495 14,131 49,997 40,291
Share-based compensation 1,902 3,857 10,051 34,309
Total operating expenses 210,969 207,868 633,173 649,413
Income from operations 26,143 30,315 73,664 79,547
Other expenses (income):
Interest expense, net 3,950 4,833 11,778 15,937
Gain on insurance recoveries - - (3,970) -
Debt extinguishment and modification costs - - - 198
Total other expenses (income) 3,950 4,833 7,808 16,135
Income before income taxes 22,193 25,482 65,856 63,412
Income tax expense (benefit) 5,054 (14,992) 10,185 (19,037)
Net income and comprehensive income $ 17,139 $ 40,474 $ 55,671 $ 82,449
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 2021 2020Percentage of net sales (1) Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 69.2 % 68.8 % 69.2 % 68.7 % Gross profit 30.8 % 31.2 % 30.8 % 31.3 % Operating expenses: Selling, general and administrative 24.9 % 24.9 % 25.0 % 24.7 % Depreciation and amortization 2.3 % 1.8 % 2.2 % 1.7 % Share-based compensation 0.2 % 0.5 % 0.4 % 1.5 % Total operating expenses 27.4 % 27.2 % 27.6 % 27.9 % Income from operations 3.4 % 4.0 % 3.2 % 3.4 % Other expenses (income): Interest expense, net 0.5 % 0.6 % 0.5 % 0.7 % Gain on insurance recoveries - % - % (0.2) % - % Debt extinguishment and modification costs - % - % - % - % Total other expenses (income) 0.5 % 0.6 % 0.3 % 0.7 % Income before income taxes 2.9 % 3.3 % 2.9 % 2.7 % Income tax expense (benefit) 0.7 % (2.0) % 0.4 % (0.8) % Net income and comprehensive income 2.2 % 5.3 % 2.4 % 3.5 %
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(1)Components may not sum to totals due to rounding.
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Operating Metrics and Non-GAAP Financial Measures
Number of New Stores
The number of new stores reflects the number of stores opened during a
particular reporting period. New stores require an initial capital investment in
the store build-outs, fixtures and equipment which we amortize over time as well
as cash required for inventory and pre-opening expenses.
We expect new store growth to be the primary driver of our sales growth over the
long term. We lease substantially all of our store locations. Our initial lease
terms on stores are typically ten years with options to renew for two or three
successive five-year periods.
Comparable Store Sales
We use comparable store sales as an operating metric to measure performance of a
store during the current reporting period against the performance of the same
store in the corresponding period of the previous year. Comparable store sales
are impacted by the same factors that impact net sales.
Comparable store sales consists of net sales from our stores beginning on the
first day of the fourteenth full fiscal month following the store's opening,
which is when we believe comparability is achieved. Included in our comparable
store definition are those stores that have been remodeled, expanded, or
relocated in their existing location or respective trade areas. Excluded from
our comparable store definition are those stores that have been closed for an
extended period as well as any planned store closures or dispositions. When
applicable, as was the case with fiscal 2020, we exclude the net sales in the
non-comparable week of a 53-week year from the same store sales calculation.
Opening new stores is a primary component of our growth strategy and, as we
continue to execute on our growth strategy, we expect a significant portion of
our sales growth will be attributable to non-comparable store sales.
Accordingly, comparable store sales is only one measure we use to assess the
success of our growth strategy.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are
key metrics used by management and our board of directors to assess our
financial performance. EBITDA, adjusted EBITDA, adjusted net income and adjusted
earnings per share are also frequently used by analysts, investors and other
interested parties to evaluate us and other companies in our industry. We use
EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share to
supplement 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. In addition, we use
adjusted EBITDA to supplement GAAP measures of performance to evaluate our
performance in connection with compensation decisions. Management believes it is
useful to investors and analysts to evaluate these non-GAAP measures on the same
basis as management uses to evaluate our operating results. We believe that
excluding items from operating income, net income and net income per diluted
share that may not be indicative of, or are unrelated to, our core operating
results, and that may vary in frequency or magnitude, enhances the comparability
of our results and provides additional information for analyzing trends in our
business.
We define EBITDA as net income before net interest expense, income taxes and
depreciation and amortization expenses. Adjusted EBITDA represents EBITDA
adjusted to exclude share-based compensation expense, non-cash rent, asset
impairment and gain or loss on disposition, provision for accounts receivable
reserves and certain other expenses that may not be indicative of, or are
unrelated to, our core operating results, and that may vary in frequency or
magnitude. Adjusted net income represents net income adjusted for the previously
mentioned adjusted EBITDA adjustments, further adjusted for costs related to
amortization of purchase accounting assets and deferred financing costs, tax
impact of option exercises and vesting of RSUs, and tax effect of total
adjustments. Basic adjusted earnings per share is calculated using adjusted net
income, as defined above, and basic weighted average shares outstanding. Diluted
adjusted earnings per share is calculated using adjusted net income, as defined
above, and diluted weighted average shares outstanding. EBITDA, adjusted EBITDA,
adjusted net income and adjusted earnings per share are non-GAAP measures and
may not be comparable to similar measures reported by other companies. EBITDA,
adjusted EBITDA, adjusted net income and adjusted earnings per share have
limitations as analytical tools, and you should not consider them in isolation
or as a substitute for analysis of our results as reported under GAAP. We
address the limitations of the non-GAAP measures through the use of various GAAP
measures. In the future we will incur expenses or charges such as those added
back to calculate adjusted EBITDA or adjusted net income. Our presentation of
EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share
should not be construed as an inference that our future results will be
unaffected by the adjustments we have used to derive our non-GAAP measures.
Beginning with the fourth quarter of fiscal 2020, we updated our definitions of
adjusted EBITDA and adjusted net income to simplify our presentation and enhance
comparability between periods. We no longer exclude new store pre-opening
expenses from our presentation of adjusted EBITDA and adjusted net income. We
also updated our definition of
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adjusted net income to exclude the tax impact of options exercises and vesting of RSUs. Lastly, debt extinguishment and modification costs were reclassified to the other adjustments line item within the presentation of both adjusted EBITDA and adjusted net income. The presentations for adjusted EBITDA and adjusted net income for the 13 and 39 weeks endedSeptember 26, 2020 have been recast to reflect these changes and reconciliations between the revised and previous definitions of adjusted EBITDA and adjusted net income for each quarter of fiscal years 2020 and 2019 were provided in our Form 8-K filed with theSEC onMarch 2, 2021 . The following table summarizes key operating metrics and non-GAAP components of our results of operations for the periods presented (amounts in thousands, except for percentages and store counts): 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 2021 2020 Other Financial and Operations Data Number of new stores 7 10 28 27 Number of stores open at end of period 407 372 407 372 Comparable store sales increase (decrease) (1) (4.3) % 9.1 % (7.6) % 14.3 % EBITDA (2)$ 44,377 $ 45,111 $ 129,679 $ 121,602 Adjusted EBITDA (2)$ 51,389 $ 54,775 $ 151,062 $ 171,703 Adjusted net income (2)$ 23,440 $ 27,671 $ 69,899 $ 88,417 _______________________ (1)Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. (2)See "GAAP to Non-GAAP Reconciliations" section below for a reconciliation from our net income to EBITDA and adjusted EBITDA, net income to adjusted net income, and GAAP earnings per share to adjusted earnings per share for the periods presented. Beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. 24
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GAAP to Non-GAAP Reconciliations
The following tables provide a reconciliation from our GAAP net income to EBITDA
and adjusted EBITDA, GAAP net income to adjusted net income, and our GAAP
earnings per share to adjusted earnings per share for the periods presented
(amounts in thousands, except per share data):
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 2021 2020
Net income $ 17,139 $ 40,474 $ 55,671 $ 82,449
Interest expense, net 3,950 4,833 11,778 15,937
Income tax expense (benefit) 5,054 (14,992) 10,185 (19,037)
Depreciation and amortization expenses (1) 18,234 14,796 52,045 42,253
EBITDA 44,377 45,111 129,679 121,602
Share-based compensation expenses (2) 1,902 3,857 10,051 34,309
Non-cash rent (3) 2,391 2,675 8,360 7,648
Asset impairment and gain or loss on
disposition (4) 186 205 943 1,158
Provision for accounts receivable reserves
(5) 1,240 372 3,529 321
Other (6) 1,293 2,555 (1,500) 6,665
Adjusted EBITDA $ 51,389 $ 54,775 $ 151,062 $ 171,703
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 2021 2020
Net income $ 17,139 $
40,474
1,902 3,857 10,051 34,309
Non-cash rent (3) 2,391 2,675 8,360 7,648
Asset impairment and gain or loss on
disposition (4) 186 205 943 1,158
Provision for accounts receivable reserves
(5) 1,240 372 3,529 321
Other (6) 1,293 2,555 (1,500) 6,665
Amortization of purchase accounting assets
and deferred financing costs (7) 2,943 2,943 8,829 8,823
Tax impact of stock option exercises and
vesting of restricted stock units (8) (867) (21,880) (7,525) (36,458)
Tax effect of total adjustments (9) (2,787) (3,530) (8,459) (16,498)
Adjusted net income $ 23,440 $ 27,671 $ 69,899 $ 88,417
GAAP earnings per share
Basic $ 0.18 $ 0.44 $ 0.58 $ 0.91
Diluted $ 0.17 $ 0.41 $ 0.56 $ 0.84
Adjusted earnings per share
Basic $ 0.24 $ 0.30 $ 0.73 $ 0.97
Diluted $ 0.24 $ 0.28 $ 0.70 $ 0.90
Weighted average shares outstanding
Basic 95,955 92,489 95,610 90,929
Diluted 99,169 99,266 99,477 98,033
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(1)Includes depreciation related to our distribution centers which is included
within the cost of sales line item in our condensed consolidated statements of
operations and comprehensive income. See Note 1 to the condensed consolidated
financial statements for additional information about the components of cost of
sales.
(2)Includes non-cash share-based compensation expense and cash dividends paid on
vested share-based awards as a result of dividends declared in connection with
recapitalizations that occurred in fiscal 2018 and 2016. See "Share-based
Compensation
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Expense" in the "Comparison of the 13 and 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 " section below for additional information. (3)Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments. The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant store growth in recent years. (4)Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs. (5)Represents non-cash changes in reserves related to our IO notes and accounts receivable. See Note 2 to the condensed consolidated financial statements for additional information. (6)Represents other non-recurring, non-cash or non-operational items, such as gain on insurance recoveries, technology upgrade implementation costs, costs related to employer payroll taxes associated with equity awards, personnel-related costs, store closing costs, legal expenses, secondary equity offering transaction costs, debt extinguishment and modification costs, strategic project costs and miscellaneous costs. (7)Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated withHellman & Friedman LLC , which included trademarks, customer lists, and below-market leases. (8)Represents excess tax benefits related to stock option exercises and vesting of RSUs that are recorded in earnings as discrete items in the reporting period in which they occur. (9)Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items. Comparison of the 13 and 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 (amounts in thousands, except percentages)Net Sales 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $
Change % Change Net sales$ 768,880 $ 764,082 $ 4,798 0.6 %$ 2,296,881 $ 2,327,819 $ (30,938) (1.3) % The increase in net sales for the 13 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily attributable to non-comparable store sales growth attributable to the net 35 new stores opened over the last 12 months, partially offset by a decrease in comparable store sales. The decrease in net sales for the 39 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily attributable to a decrease in comparable store sales, partially offset by the above mentioned net 35 new stores opened over the last 12 months. Comparable store sales decreased 4.3% for the 13 weeks endedOctober 2, 2021 and 7.6% for the 39 weeks endedOctober 2, 2021 compared to the same periods in fiscal 2020. As we continue to cycle periods of 2020 that included elevated COVID-related demand starting inMarch 2020 , the decrease in comparable store sales for the 13 weeks endedOctober 2, 2021 was due to a decrease in customer traffic, while the decrease in comparable store sales for the 39 weeks endedOctober 2, 2021 was primarily attributable to a decrease in customer traffic, partially offset by an increase in average transaction size. Cost of Sales 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Cost of sales
1.1 %$ 1,590,044 $ 1,598,859 $ (8,815) (0.6) % % of net sales 69.2 % 68.8 % 69.2 % 68.7 % The increase in cost of sales for the 13 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily the result of new store growth and higher costs as a percentage of net sales, partially offset by a decrease in comparable store sales (as discussed above). The decrease in cost of sales for the 39 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily the result of the comparable store sales decrease discussed above, partially offset by new store growth and higher costs as a percentage of net sales. 26
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Costs as a percentage of net sales increased for the 13 and 39 weeks ended
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Gross profit
(0.4) %$ 706,837 $ 728,960 $ (22,123) (3.0) % Gross margin 30.8 % 31.2 % 30.8 % 31.3 % The decrease in gross profit for the 13 and 39 weeks endedOctober 2, 2021 compared to the same periods in fiscal 2020 was primarily the result of a decrease in comparable store sales and higher costs as a percentage of net sales (as discussed above), partially offset by new store growth. Our gross margin decreased for the 13 and 39 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 primarily due to the higher cost of sales as a percentage of net sales. Selling, General and Administrative Expenses ("SG&A") 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $ Change % Change SG&A$ 191,572 $ 189,880 $ 1,692 0.9 %$ 573,125 $ 574,813 $ (1,688) (0.3) % % of net sales 24.9 % 24.9 % 25.0 % 24.7 % The increase in SG&A for the 13 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily driven by higher store occupancy and maintenance costs due to a higher store count, increases in commission payments to IOs and increased marketing expenses as a result of the Company's growth, partially offset by lower personnel costs driven by decreased incentive bonuses and lower expenses related to our profit sharing program under our 401(k) plan. The decrease in SG&A for the 39 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily driven by lower personnel costs as a result of decreased incentive bonuses and profit sharing expenses and decreased commission payments to IOs, partially offset by higher store occupancy and maintenance costs due to a higher store count and increased marketing expenses. As a percentage of net sales, SG&A increased slightly for the 39 weeks endedOctober 2, 2021 compared to the same periods in fiscal 2020 due to lower expense leverage as a result of reduced net sales. Depreciation and Amortization Expense 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Depreciation and amortization$ 17,495 $ 14,131 $ 3,364 23.8 %$ 49,997 $ 40,291 $ 9,706 24.1 % % of net sales 2.3 % 1.8 % 2.2 % 1.7 % The increase in depreciation and amortization expenses for the 13 and 39 weeks endedOctober 2, 2021 compared to the same periods in fiscal 2020 was primarily driven by new store growth and other capital investments. 27
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Share-based Compensation Expense
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Share-based compensation $ 1,902 $ 3,857 $ (1,955) (50.7) % $ 10,051 $ 34,309 $ (24,258) (70.7) %
% of net sales 0.2 % 0.5 % 0.4 % 1.5 %
The decrease in share-based compensation expenses for the 13 weeks ended
October 2, 2021 compared to the same period in fiscal 2020 was primarily driven
by adjustments to reflect current performance expectations related to previously
granted PSUs, partially offset by expenses related to RSUs and PSUs granted
during fiscal 2021.
The decrease in share-based compensation expenses for the 39 weeks ended
October 2, 2021 compared to the same period in fiscal 2020 was primarily due to
$26.1 million in share-based compensation expense we incurred related to 5.8
million performance-based stock options that vested in connection with
performance events achieved with the closing of our February and April 2020
secondary offerings. This decrease was partially offset by an increase in
expense related to RSUs and PSUs granted during fiscal 2021 and 2020. See Note 4
to the condensed consolidated financial statements for additional information.
Interest Expense, Net
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Interest expense, net
(18.3) % $ 11,778 $ 15,937 $ (4,159) (26.1) %
% of net sales 0.5 % 0.6 % 0.5 % 0.7 %
The decrease in net interest expense for the 13 and 39 weeks ended October 2,
2021 compared to the same periods in fiscal 2020 was primarily driven by lower
interest rates experienced under our First Lien Credit Agreement as a result of
decreases in the London Inter-bank Offered Rate. Furthermore, the 39 weeks ended
September 26, 2020 included interest expense from the $90.0 million borrowed
under the revolving credit facility of our First Lien Credit Agreement between
March and May of 2020. See Note 3 to the condensed consolidated financial
statements for additional information.
Gain on Insurance Recoveries
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 $ Change % Change 2021 2020 $ Change % ChangeGain on insurance recoveries $ - $ - $ - - %$ (3,970) $ -$ (3,970) N/A % of net sales - % - % (0.2) % - % During the 39 weeks endedOctober 2, 2021 we recorded a$4.0 million gain on insurance recoveries related to the loss of ourParadise, California store in 2018 due to a wildfire. Debt Extinguishment and Modification Costs 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Debt extinguishment and modification costs $ - $ - $ - - % $ -$ 198 $ (198) (100.0) % % of net sales - % - % - % - % During the 39 weeks endedSeptember 26, 2020 we wrote off approximately$0.1 million of debt issuance costs and incurred$0.1 million of debt modification costs related to the repricing and amendment of our First Lien Credit Agreement. See Note 3 to the condensed consolidated financial statements for additional information. 28
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Income Tax Expense (Benefit)
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 $ Change % Change 2021 2020 $ Change % ChangeIncome tax expense (benefit)$ 5,054 $ (14,992) $ 20,046 133.7 %$ 10,185 $ (19,037) $ 29,222 153.5 % % of net sales 0.7 % (2.0) % 0.4 % (0.8) % Effective tax rate 22.8 % (58.8) % 15.5 % (30.0) % During the 13 weeks endedOctober 2, 2021 , we recorded an income tax expense of$5.1 million compared to an income tax benefit of$15.0 million for the 13 weeks endedSeptember 26, 2020 . This change was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs as compared to the same period in fiscal 2020. Such excess tax benefits totaled$0.9 million for the 13 weeks endedOctober 2, 2021 compared to$21.9 million for the 13 weeks endedSeptember 26, 2020 . During the 39 weeks endedOctober 2, 2021 , we recorded an income tax expense of$10.2 million compared to an income tax benefit of$19.0 million for the 39 weeks endedSeptember 26, 2020 . This increase was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs as compared to the same period in fiscal 2020. Such excess tax benefits totaled$7.5 million for the 39 weeks endedOctober 2, 2021 compared to$36.5 million for the 39 weeks endedSeptember 26, 2020 . Net Income 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Net income$ 17,139 $ 40,474 $ (23,335) (57.7) %$ 55,671 $ 82,449 $ (26,778) (32.5) % % of net sales 2.2 % 5.3 % 2.4 % 3.5 % As a result of the foregoing factors, net income decreased for the 13 and 39 weeks endedOctober 2, 2021 compared to the same periods in fiscal 2020. Adjusted EBITDA 13 Weeks Ended 39 Weeks Ended October 2, September 26, October 2, September 26, 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Adjusted EBITDA
(6.2) % $ 151,062 $ 171,703 $ (20,641) (12.0) %
The decrease in adjusted EBITDA for the 13 and 39 weeks ended October 2, 2021
compared to the same periods in fiscal 2020 was primarily due to a decrease in
gross profit, which was primarily driven by a decrease in comparable store sales
of 4.3% for the 13 weeks ended October 2, 2021 and 7.6% for the 39 weeks ended
October 2, 2021 , as well as increases in costs as a percentage of net sales,
each as discussed above.
Adjusted Net Income
13 Weeks Ended 39 Weeks Ended
October 2, September 26, October 2, September 26,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Adjusted net income $ 23,440 $ 27,671 $ (4,231) (15.3) % $ 69,899 $ 88,417 $ (18,518) (20.9) %
The decrease in adjusted net income for the 13 and 39 weeks ended October 2,
2021 compared to the same periods in fiscal 2020 was primarily due to a decrease
in gross profit, which was primarily driven by a decrease in comparable store
sales of 4.3% for the 13 weeks ended October 2, 2021 and 7.6% for the 39 weeks
ended October 2, 2021 , as well as increases in costs as a percentage of net
sales, each as discussed above.
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Liquidity and Capital Resources Sources of Liquidity As ofOctober 2, 2021 , we had cash and cash equivalents of$156.0 million , which consisted primarily of cash held in checking and money market accounts with financial institutions. Our liquidity requirements arise primarily from our working capital needs, capital expenditures and debt service requirements. We have funded our working capital and capital expenditures requirements with internally generated cash on hand and through proceeds from the initial public offering of our common stock inJune 2019 . Our current primary sources of liquidity are net cash provided by operating activities and borrowings under our First Lien Credit Agreement (as defined below). In addition, we have a revolving credit facility with$100.0 million in borrowing capacity under our First Lien Credit Agreement. As ofOctober 2, 2021 , we had$3.5 million of outstanding standby letters of credit and$96.5 million of remaining borrowing capacity available under this revolving credit facility. We have not borrowed under this revolving credit facility during fiscal 2021. Public Offerings OnFebruary 3, 2020 , certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred offering costs of$1.1 million , which we recognized in SG&A during the first quarter of fiscal 2020. We received$1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering. OnApril 27, 2020 , certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of$1.0 million , which we recognized in SG&A during the second quarter of fiscal 2020. We received$1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering. First Lien Credit Agreement Second Incremental Agreement - OnJanuary 24, 2020 , we entered into a second incremental agreement (the "Second Incremental Agreement") which amended a previous incremental agreement (the "First Incremental Agreement"). The Second Incremental Agreement refinanced a previous replacement term loan under the First Incremental Agreement with a replacement$460.0 million senior secured term loan credit facility (the "Second Replacement Term Loan") with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, and made certain other corresponding technical changes and updates to the previously amended First Lien Credit Agreement. The interest rate on the Second Replacement Term Loan was 2.88% as ofOctober 2, 2021 . The Second Replacement Term Loan matures onOctober 22, 2025 , which is the same maturity date as the prior term loans under the original First Lien Credit Agreement and First Incremental Agreement. Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement, including voluntary prepayment on borrowings without premium or penalty. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement. Revolving Credit Facility - OnMarch 19, 2020 , we borrowed$90.0 million under the revolving credit facility of our First Lien Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. OnMay 26, 2020 , we repaid the Revolving Credit Facility Loan in full. Liquidity Requirements Our primary working capital requirements are for the purchase of inventory, payroll, rent, issuance of IO notes, other store facilities costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by the timing of inventory fluctuations, new store openings and capital spending. Our capital expenditures are primarily related to new store openings, ongoing store maintenance and improvements, expenditures related to our distribution centers and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems and corporate offices. We expect to fund capital expenditures through cash generated from our operations. 30
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Based on our new store growth plans, we believe our existing cash and cash equivalents position, cash generated from our operations, and borrowings under our revolving credit facility will be adequate to finance our working capital requirements, planned capital expenditures and debt service over the next 12 months. If cash generated from our operations and borrowings under our revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time, in our sole discretion, purchase or retire all or a portion of our existing debt instruments through privately negotiated or open market transactions. Debt Covenant The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement restricts us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7:00 to 1:00. As ofOctober 2, 2021 , we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement. 31
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Cash Flows
The following table summarizes our cash flows for the periods presented (amounts
in thousands, except percentages):
39 Weeks Ended
October 2, September 26,
2021 2020 $ Change % Change
Net cash provided by operating activities
$ 42,504 42.8 %
Net cash used in investing activities
$ (3,376) 3.6 %
Net cash provided by financing activities
$ (19,459) (79.0) %
Net increase in cash and cash equivalents
$ 19,669 63.5 % Cash Provided by Operating Activities Net cash provided by operating activities was$141.8 million for the 39 weeks endedOctober 2, 2021 compared to$99.3 million for the same period in fiscal 2020. The increase in net cash provided by operating activities of$42.5 million for the 39 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily driven by a reduction in cash used for merchandise inventory and increases in trade accounts payable and accrued expenses. The increase in working capital was partially offset by lower net sales driven by a decrease in comparable store sales. Cash Used in Investing Activities Net cash used in investing activities was$96.3 million for the 39 weeks endedOctober 2, 2021 compared to$92.9 million for the same period in fiscal 2020. The increase in net cash used in investing activities of$3.4 million for the 39 weeks endedOctober 2, 2021 compared to the same period in fiscal 2020 was primarily related to capital expenditures including the construction of newly opened stores and stores under development as well as existing store capital investments. We had 28 new store openings and three store relocations during the 39 weeks endedOctober 2, 2021 compared to 27 new store openings and one store relocation for the same period of fiscal 2020. Cash Provided by Financing Activities Net cash provided by financing activities was$5.2 million for the 39 weeks endedOctober 2, 2021 compared to$24.6 million for the same period in fiscal 2020. The decrease in net cash provided by financing activities was primarily due to a decrease in proceeds received from the exercise of stock options. 32
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Off-Balance Sheet Arrangements As ofOctober 2, 2021 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Contractual Obligations There have been no material changes outside the ordinary course of business to our contractual obligations during the 39 weeks endedOctober 2, 2021 from those disclosed in our 2020 Form 10-K. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and the applicable rules and regulations of theSEC for interim reporting. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes to our critical accounting policies and estimates during the 39 weeks endedOctober 2, 2021 from those disclosed in our 2020 Form 10-K. Recent Accounting Pronouncements Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our operating results are subject to market risk from interest rate fluctuations on our credit facilities, which bear variable interest rates. As ofOctober 2, 2021 , our outstanding credit facilities included a$460.0 million term loan (the "Second Replacement Term Loan"). As ofOctober 2, 2021 , the interest rate on the Second Replacement Term Loan was 2.88%. See Note 3 to the condensed consolidated financial statements for additional information. Based on the outstanding balance and interest rate of our Second Replacement Term Loan as ofOctober 2, 2021 , a hypothetical 10% relative increase or decrease in the effective interest rate would cause an increase or decrease in interest expense of approximately$1.3 million over the next 12 months. We do not currently use derivative financial instruments for speculative or trading purposes. This practice does not preclude our adoption of specific hedging strategies in the future. 33
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