Throughout this section, the
Our fiscal year ends on the Sunday nearest
Impact of Global Events
Recent global events, including the novel coronavirus ("COVID-19") and the
ongoing conflict in
Disruptions related to COVID-19 negatively impacted our financial results in the first half of fiscal 2020 when we temporarily closed more than one-half of our retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. As our stores reopened and COVID-19 restrictions began easing, we experienced unprecedented consumer demand for our products and our financial results improved during the second half of fiscal 2020 and throughout fiscal 2021. In response to COVID-19 during fiscal 2020, measures we took to reduce expense, preserve capital and enhance our liquidity benefited our financial performance in the second half of fiscal 2020 and throughout fiscal 2021. Certain of those measures, such as reductions to advertising expense in comparison with historical levels, continued to benefit fiscal 2022 and we expect to maintain our advertising expense below pre-pandemic levels in the foreseeable future.
Disruptions related to the ongoing conflict in
We will continue to monitor these events and take appropriate actions intended to mitigate the risk of these global events, or any other global events that arise, as necessary.
Overview
We are a leading sporting goods retailer in the western
We believe that over our 68-year history we have developed a reputation with the competitive and recreational sporting goods customer as a convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise. Our stores carry a wide range of products at competitive prices from well-known brand name manufacturers, including adidas, Coleman, Columbia, Everlast, New Balance, Nike, Rawlings, Skechers, Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through digital marketing and print advertising in major and local newspapers and direct mailers, in an effort to generate customer traffic, drive sales and build brand awareness. Over the last several years we have been reducing our overall advertising spend and also shifting our advertising spend away from print media towards digital advertising, which we believe allows us to more effectively manage our advertising expense. We also maintain social media sites to enhance distribution capabilities for our promotional offers and to enable communication with our customers.
26
--------------------------------------------------------------------------------
Throughout our history, we have emphasized controlled growth. Our store openings during recent years reflect our cautious approach toward store expansion in the current retail environment, which includes increasing e-commerce competition, especially in response to changing consumer buying habits resulting from concerns surrounding the COVID-19 pandemic. The following table summarizes our store count for the periods presented:
Fiscal Year 2022 2021 2020 Beginning of period 431 430 434 New stores 3 5 - Stores relocated (1 ) (2 ) - Stores closed (1 ) (2 ) (4 ) End of period 432 431 430
Stores opened (closed) per year, net 1 1 (4 )
(1)
Stores that are relocated are classified as new stores. Sales from the prior location are treated as sales from a closed store and thus are excluded from same store sales calculations.
For fiscal 2023, we anticipate opening approximately six new stores and closing approximately five stores.
Executive Summary
Our decreased net income for fiscal 2022 compared to fiscal 2021 was mainly attributable to reduced net sales, lower merchandise margins and higher selling and administrative expense year over year. Reduced net sales in fiscal 2022 primarily reflected comparisons to fiscal 2021 in which strong consumer demand for various sporting goods products resulted from the easing of COVID-19 pandemic restrictions and consumers' desire to recreate and stay active. Decreases in net sales in fiscal 2022 in part reflected increased inflationary pressures which dampened consumer sentiment and impacted discretionary spending. Worsening inflation and higher labor costs also resulted in higher operational expense which had an unfavorable impact on our earnings.
•
Net sales for fiscal 2022 decreased 14.3% to
•
Gross profit for fiscal 2022 represented 34.3% of net sales, compared with 37.5% in the prior year. Merchandise margins were an unfavorable 63 basis points lower than the prior year, while store occupancy expense and distribution expense, including costs capitalized into inventory, as a percentage of net sales were higher compared with fiscal 2021. While merchandise margins were down year over year they remained healthy and continued to compare favorably to pre-pandemic levels.
•
Selling and administrative expense for fiscal 2022 increased 2.6% to
•
Net income for fiscal 2022 was
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash and cash equivalents, cash flows from operations and borrowings from our revolving credit facility.
•
Operating cash flow for fiscal 2022 was a negative
•
Capital expenditures for fiscal 2022 increased to
27
--------------------------------------------------------------------------------
•
We had cash of
•
We paid cash dividends in fiscal 2022 of
•
We repurchased 295,719 shares of common stock for
Results of Operations
The following table sets forth selected items from our consolidated statements of operations by dollar and as a percentage of our net sales, and other financial data, for the periods indicated:
Fiscal Year (1) 2022 2021 2020 (Dollars in thousands) Statement of Operations Data: Net sales$995,538 100.0%$1,161,820 100.0%$1,041,212 100.0% Cost of sales (2) 654,323 65.7 725,991 62.5 692,041 66.5 Gross profit 341,215 34.3 435,829 37.5 349,171 33.5 Selling and administrative expense (3) 307,700 30.9 299,812 25.8 275,406 26.5 Other income - - - - (2,500) (0.2) Operating income 33,515 3.4 136,017 11.7 76,265 7.2 Interest expense 572 0.1 893 0.1 1,880 0.2 Income before income taxes 32,943 3.3 135,124 11.6 74,385 7.0 Income tax expense 6,809 0.7 32,738 2.8 18,445 1.8 Net income$26,134 2.6%$102,386 8.8%$55,940 5.2% Other Financial Data: Net sales change (14.3)% 11.6% 4.5% Same store sales change (4) (14.5)% 13.9% 3.0% (1) Fiscal 2022 and 2021 each included 52 weeks, and fiscal 2020 included 53 weeks. (2) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation, and store occupancy expense. Store occupancy expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance. (3) Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising, depreciation and amortization, expense associated with operating our corporate headquarters and impairment charges, if any. (4) Same store sales for a period reflect net sales from stores that operated throughout the period as well as the full corresponding prior-year period and sales from e-commerce. For purposes of reporting same store sales comparisons to the prior year for fiscal 2022 and 2021, we used comparable 52-week periods. For purposes of reporting same store sales comparisons to the prior year for fiscal 2020, we used comparable 53-week periods. 28
--------------------------------------------------------------------------------
A discussion regarding our financial condition and results of operations for
fiscal 2022 compared to fiscal 2021 is presented below. A discussion regarding
our financial condition and results of operations for fiscal 2021 compared to
fiscal 2020 is incorporated herein by reference and can be found under Item 7 of
Part II of our Annual Report on Form 10-K for fiscal 2021, filed with the
Fiscal 2022 Compared to Fiscal 2021
•
Same store sales decreased by
o
The decrease in same store sales in fiscal 2022 followed a 13.9% increase in same store sales for fiscal 2021 that reflected strong consumer demand as COVID-19 restrictions eased. Sales in fiscal 2022 were impacted in part by significant inflationary pressures and heightened recessionary concerns that negatively impacted consumer sentiment and discretionary spending, as well as unfavorable warm and dry winter weather conditions in our markets in the first quarter of fiscal 2022 that resulted in lower sales of winter-related products.
o
The increase in our same store sales achieved in fiscal 2021 resulted from strong demand for many categories of sporting goods products as certain COVID-19 pandemic restrictions were lifted, and also reflected favorable comparisons against temporary store closures related to COVID-19 during fiscal 2020.
o
Our lower same store sales in fiscal 2022 reflected a decrease in each of our major merchandise categories of hardgoods, apparel and footwear.
o
Same store sales are made on a comparable-week basis. Same store sales for a period normally consist of sales for stores that operated throughout the period and the full corresponding prior-year period, along with sales from e-commerce. Same store sales comparisons exclude sales from stores permanently closed, or stores in the process of permanently closing, during the comparable periods. Sales from e-commerce in fiscal 2022 and 2021 were not material.
•
We experienced decreased customer transactions of 11.2% and a lower average sale per transaction of 3.3% in fiscal 2022 compared to the prior year.
Gross Profit. Gross profit decreased by
•
Net sales decreased by
•
Merchandise margins, which exclude buying, occupancy and distribution expense, decreased by an unfavorable 63 basis points compared with fiscal 2021, when merchandise margins increased by a favorable 250 basis points over the prior year. Our lower merchandise margins primarily reflect an unfavorable shift in our product sales mix, increased promotional pricing and increases in product purchase costs. The higher product purchase costs we experienced reflected increased raw material, labor, freight and fuel costs initially resulting from shortages related to COVID-19, and were worsened by current inflationary pressures. While merchandise margins were down year over year they remained healthy and continued to compare favorably to pre-pandemic levels.
•
Store occupancy expense increased by
•
Distribution expense, including costs capitalized into inventory, decreased by
29
--------------------------------------------------------------------------------
Selling and Administrative Expense. Selling and administrative expense increased
by
•
Store-related expense, excluding occupancy, increased by
•
Advertising expense increased by
•
Administrative expense decreased by
Interest Expense. Interest expense decreased to
Income Taxes. The provision for income taxes decreased to
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash and cash equivalents, cash flows from operations and borrowings from our revolving credit facility. We believe our cash and cash equivalents, future cash flows from operations and borrowings from our revolving credit facility will be sufficient to fund our cash requirements for at least the next 12 months.
We ended fiscal 2022 and 2021 with$25.6 million of cash and$97.4 million of cash and cash equivalents, respectively, and no revolving credit borrowings. The following table summarizes our cash flows from operating, investing and financing activities: Fiscal Year 2022 2021 2020 (In thousands) Total cash (used in) provided by: Operating activities$ (28,440 ) $ 115,528 $ 148,743 Investing activities (13,180 ) (10,615 ) (5,360 ) Financing activities (30,235 ) (72,147 ) (86,952 ) Net (decrease) increase in cash and cash equivalents$ (71,855 ) $ 32,766 $ 56,431
The seasonality of our business generally provides greater cash flows from operations during the holiday and winter selling season. We use operating cash flows and borrowings under our revolving credit facility, if necessary, to fund inventory increases in anticipation of the holidays and our inventory levels are normally at their highest in the months leading up to Christmas. As holiday sales typically reduce inventory levels, this reduction, combined with net income, historically provides us with strong cash flows from operations at the end of our fiscal year.
30
--------------------------------------------------------------------------------
For fiscal 2022, we experienced weaker consumer demand that reflected in part significant inflationary pressures and heightened recessionary concerns that negatively impacted consumer sentiment. The higher inflation and softening consumer demand led to lower sales and higher expenses which contributed to decreased net income year over year. Funding for merchandise inventory increased in fiscal 2022 as we continued to replenish depleted inventory levels resulting from strong consumer demand and supply chain challenges in fiscal 2021. The decrease in our operating cash flow for fiscal 2022 compared to the prior year primarily reflects our lower earnings and increased funding of merchandise inventory.
For fiscal 2021, as COVID-19 restrictions continued easing in many of our markets, we experienced strong consumer demand across a broad assortment of product categories, including increased consumer demand for team sports products, which was weak in fiscal 2020 due to the COVID-19 pandemic. This strong consumer demand for fiscal 2021 contributed to higher sales and margins and increased net income year-over-year. After reducing merchandise inventory in fiscal 2020 in response to COVID-19, we increased purchases of merchandise inventory in fiscal 2021 to support the strong consumer demand. Although our operating cash flow for fiscal 2021 was healthy, reflecting our higher earnings, the increased funding of merchandise inventory for the year contributed to reduced operating cash flow compared to fiscal 2020.
Operating Activities. Operating cash flows for fiscal 2022 and 2021 were a
negative
Investing Activities. Net cash used in investing activities for fiscal 2022 and
2021 was
Fiscal Year 2022 2021 2020 (In thousands) Store-related remodels$ 7,805 $ 5,381 $ 4,849 New stores 3,577 2,727 169 Distribution center 1,212 1,177 840
Computer hardware, software and other 599 1,579 1,489 Total
$ 13,193 $ 10,864 $ 7,347
Capital expenditures in the fiscal years presented included investment in existing store remodeling to support our merchandising initiatives and enhancement of information security measures to support our infrastructure. Our capital expenditures included three new stores, including relocations, in fiscal 2022 and five new stores, including relocations, in fiscal 2021.
Financing Activities. Financing cash flows for fiscal 2022 and 2021 were a
negative
As of
In fiscal 2022, 2021 and 2020 we paid cash dividends of
31
--------------------------------------------------------------------------------
Periodically, we repurchase our common stock in the open market pursuant to
programs approved by our Board of Directors. We may repurchase our common stock
for a variety of reasons, including, among other things, our alternative cash
requirements, existing business conditions and the current market price of our
stock. In fiscal 2016, our Board of Directors authorized a share repurchase
program for the purchase of up to
Loan Agreement. As of
On
Similar to the Prior Credit Agreement, we may borrow under the Loan Agreement
from time to time, provided the amounts outstanding will not exceed the lesser
of the then aggregate committed availability (as discussed above) and the
Borrowing Base (such lesser amount being referred to as the "Line Cap"). As
defined in the Loan Agreement, the "Borrowing Base" generally is comprised of
the sum, at the time of calculation, of (a) 90.00% of eligible credit card
receivables; plus (b) the cost of eligible inventory (other than eligible
in-transit inventory), net of inventory reserves, multiplied by 90.00% of the
appraised net orderly liquidation value of eligible inventory (expressed as a
percentage of the cost of eligible inventory); plus (c) the cost of eligible
in-transit inventory, net of inventory reserves, multiplied by 90.00% of the
appraised net orderly liquidation value of eligible in-transit inventory
(expressed as a percentage of the cost of eligible in-transit inventory), minus
(d) certain agreed-upon reserves as well as other reserves established by
Generally, we may designate specific borrowings under the Loan Agreement as
either base rate loans or Term SOFR rate loans. The applicable interest rate on
our borrowings is a function of the daily average, over the preceding fiscal
quarter, of the excess of the Line Cap over amounts borrowed (such amount being
referred to as the "Average Daily Availability"). Those loans designated as Term
SOFR rate loans bear interest at a rate equal to the then applicable secured
overnight financing rate as administered by the
SOFR Rate Base Rate Level Average Daily Availability Applicable Margin Applicable Margin I Greater than or equal to$70,000,000 1.375% 0.375% II Less than$70,000,000 1.500% 0.500%
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
32
--------------------------------------------------------------------------------
Obligations under the Loan Agreement are secured by a general lien on and
security interest in substantially all of our assets. The Loan Agreement
contains covenants that require us to maintain a fixed charge coverage ratio of
not less than 1.0:1.0 in certain circumstances, and limits our ability to, among
other things, incur liens, incur additional indebtedness, transfer or dispose of
assets, change the nature of the business, guarantee obligations, pay dividends
or make other distributions or repurchase stock, and make advances, loans or
investments. We may generally declare or pay cash dividends or repurchase stock
only if, among other things, no default or event of default then exists or would
arise from such dividend or repurchase of stock and, after giving effect to such
dividend or repurchase, certain availability and/or fixed charge coverage ratio
requirements are satisfied, although we are permitted to make up to
In the first quarter of fiscal 2021, we paid and capitalized
Future Capital Requirements. We had cash on hand of
Dividends are paid at the discretion of the Board of Directors. In fiscal 2022,
2021 and 2020 we paid annual cash dividends of
As of
We believe we will be able to fund our cash requirements from cash on hand, operating cash flows and borrowings from our credit facility, for at least the next 12 months.
Contractual Obligations. Our material contractual obligations include operating lease commitments associated with our leased properties and other occupancy expense, finance lease obligations, borrowings under our credit facility, if any, and other liabilities. Operating lease commitments consist principally of leases for our retail store facilities, distribution center and corporate offices. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term, and we intend to renegotiate most of these leases as they expire. Operating lease commitments also generally consist of information technology ("IT") systems hardware, distribution center delivery tractors and vehicle leases. Additional information regarding our operating leases is available in Item 2, Properties and Note 7, Lease Commitments, of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
As of the end of fiscal 2022 and 2021, we had no borrowings under our revolving credit facility. Our zero borrowings reflect improved profitability and positive operating cash flow from increased consumer demand related to the COVID-19 pandemic during fiscal 2020 and 2021.
In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not considered as outstanding contractual obligations.
33
--------------------------------------------------------------------------------
Critical Accounting Estimates
Our critical accounting estimates detailed below are included in our significant accounting policies as described in Note 2 of the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Those consolidated financial statements were prepared in accordance with GAAP. Critical accounting estimates are those that we believe are most important to the portrayal of our financial condition and results of operations. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense. Our estimates are evaluated on an ongoing basis and drawn from historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Actual results may differ from our estimates. Management believes that the following accounting estimates are critical and reflect the more significant judgments and estimates we use in preparing our consolidated financial statements.
Valuation of Merchandise Inventories, Net
Our merchandise inventories are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out ("FIFO") method. Average cost consists of the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related costs and allocated overhead costs associated with our distribution center.
We record valuation reserves on a quarterly basis for merchandise items with
slow-moving or obsolescence exposure and merchandise that has a carrying value
that exceeds net realizable value. These reserves are estimates of a reduction
in value to reflect inventory valuation at the lower of cost or net realizable
value. Factors included in determining slow-moving or obsolescence reserve
estimates include recent customer demand, merchandise aging, seasonal trends and
decisions to discontinue certain products. Because of our merchandise mix, we
have not historically experienced significant occurrences of obsolescence. Our
inventory valuation reserves for damaged and defective merchandise, slow-moving
or obsolete merchandise and for lower of cost or net realizable value provisions
totaled
A 10% change in our inventory valuation reserves estimate in total as of
Valuation of Long-Lived Assets
In accordance with ASC 360, Property, Plant and Equipment, we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows ("asset group"), usually at the store level. The carrying amount of a store asset group includes stores' operating lease right-of-use ("ROU") assets and property and equipment, which consists primarily of leasehold improvements. Factors that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses, and a projection that demonstrates continuing losses or insufficient income over the remaining reasonably certain lease term associated with the use of a store asset group. Other factors may include an adverse change in the business climate or an adverse action or assessment by a regulator in the market of a store asset group.
We evaluate the store asset groups with indicators of impairment by estimating future undiscounted cash flows of a store asset group over its remaining reasonably certain lease term to determine whether the long-lived assets are recoverable. In situations where the carrying amount of the store asset group exceeds the undiscounted cash flows, a fair value of the store asset group is determined using discounted cash flow valuation techniques and impairment is recognized when the carrying amount exceeds the fair value.
We determine the sum of the undiscounted cash flows expected to result from the asset group by projecting future revenue, gross margin and operating expense for each store under evaluation for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, and include assumptions about sales growth rates, gross margins, operating expense in relation to the current economic environment and our future expectations, competitive factors in our various markets, inflation, sales trends and other relevant environmental factors that may impact the store under evaluation. The actual cash flows could differ from management's estimates due to changes in business conditions, operating performance and economic conditions.
34
--------------------------------------------------------------------------------
The resulting impairment charge, if any, is allocated to the property and equipment, primarily leasehold improvements, and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.
Our evaluation resulted in no impairment charges recognized in fiscal 2022, 2021 and 2020.
Seasonality and Impact of Inflation
We experience seasonal fluctuations in our net sales and operating results, which can suffer when weather does not conform to seasonal norms, such as the first quarter of fiscal 2022 when we experienced warm and dry winter-weather conditions across our markets that resulted in significant carryover of winter inventory. Seasonality in our net sales influences our buying patterns which directly impacts our merchandise and accounts payable levels and cash flows. We purchase merchandise for seasonal activities in advance of a season and supplement our merchandise assortment as necessary and when possible during the season. Our efforts to replenish products during a season are not always successful. In the fourth fiscal quarter, which includes the holiday selling season and the start of the winter selling season, we normally experience higher inventory purchase volumes and increased expense for staffing and advertising. If we miscalculate the consumer demand for our products generally or for our product mix in advance of a season, particularly the fourth quarter, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales, particularly during the fourth quarter, can negatively impact our annual operating results.
In fiscal 2021 and 2022, we experienced greater inflation in the cost of products that we purchase for resale as well as higher freight costs than in previous years. While our merchandise inventory costs have been impacted by these inflationary pressures, we have generally been able to adjust our selling prices in response to these higher product purchase costs. However, if we are unable to adjust our selling prices for product purchase cost increases that might occur in the future, then our merchandise margins could decline, which would adversely impact our operating results. In fiscal 2021 and 2022, we also experienced increased wage expense as a result of higher demand and intensifying competition for labor in many of our markets and we expect these dynamics to continue into fiscal 2023. Broad-based inflationary pressures adversely impacted many categories of costs and expenses during fiscal 2022 and this impact is expected to continue into fiscal 2023.
Recently Issued Accounting Updates
See Note 2 to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
© Edgar Online, source