Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes, may not sum due to the effects of rounding.
Company Overview
We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of March 31, 2020, we operated 157 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.
We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000 selling square feet.
The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2019, we increased our store count at a compound annual growth rate of 12%. In fiscal year 2019, we opened six new stores. We plan to open six to seven new stores in fiscal year 2020, four of which opened during the six months ended March 31, 2020. No new stores were opened between March 31, 2020 and the date of this Form 10-Q. As of the date of this report, we have signed leases for an additional three new stores that we plan to open in fiscal years 2020 and beyond. We have also purchased the property for one additional new store. We plan to relocate one store in fiscal year 2020. We have not relocated any stores so far in fiscal year 2020.
Performance Highlights
Key highlights of our performance for the three and six months ended March 31, 2020 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, comparable store sales, daily average comparable store sales, mature store sales and daily average mature store sales are defined under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.
|
●
|
Net sales. Net sales were $277.5 million for the three months ended March 31, 2020, an increase of $47.1 million, or 20.4%, compared to net sales of $230.4 million for the three months ended March 31, 2019. Net sales were $507.6 million for the six months ended March 31, 2020, an increase of $55.6 million, or 12.3%, compared to net sales of $452.0 million for the six months ended March 31, 2019.
|
|
●
|
Comparable store sales and daily average comparable store sales. Comparable store sales and daily average comparable store sales for the three months ended March 31, 2020 increased 18.4% and 17.0%, respectively, compared to the three months ended March 31, 2019. Comparable store sales and daily average comparable store sales for the six months ended March 31, 2020 increased 10.3% and 9.7%, respectively, compared to the six months ended March 31, 2019.
|
|
●
|
Mature store sales and daily average mature store sales. Mature store sales and daily average mature store sales for the three months ended March 31, 2020 increased 16.7% and 15.4%, respectively, compared to the three months ended March 31, 2019. Mature store sales and daily average mature store sales for the six months ended March 31, 2020 increased 8.8% and 8.2%, respectively, compared to the six months ended March 31, 2019.
|
|
●
|
Net income. Net income was $9.7 million for the three months ended March 31, 2020, an increase of $5.9 million, or 151.8%, compared to net income of $3.9 million for the three months ended March 31, 2019. Net income was $11.6 million for the six months ended March 31, 2020, an increase of $5.5 million, or 91.3%, compared to net income of $6.1 million for the six months ended March 31, 2019.
|
|
●
|
EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $21.1 million for the three months ended March 31, 2020, an increase of $7.7 million, or 57.7%, compared to $13.4 million for the three months ended March 31, 2019. EBITDA was $31.7 million for the six months ended March 31, 2020, an increase of $7.0 million, or 28.2%, compared to $24.7 million for the six months ended March 31, 2019. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.
|
|
●
|
Liquidity. As of March 31, 2020, cash and cash equivalents was $29.4 million, and there was $49.0 million available for borrowing under our Credit Facility, net of undrawn, issued and outstanding letters of credit of $1.0 million.
|
|
●
|
New store growth. We opened two new stores during the three months ended March 31, 2020. We opened four new stores during the six months ended March 31, 2020. We operated a total of 157 stores as of March 31, 2020. We plan to open a total of six to seven new stores in fiscal year 2020, which would result in an annual new store growth rate of 3.9% to 4.6% for fiscal year 2020.
|
|
|
|
|
●
|
Store Relocations and Remodels. We did not relocate or remodel any stores during the six months ended March 31, 2020.
|
Industry Trends and Economics
We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:
|
●
|
Impact of broader economic trends. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, the price of commodities (including oil prices), the political environment and consumer confidence. See “COVID-19 Pandemic” below for a discussion of the impact of the COVID-19 pandemic on the U.S. economy and our business.
|
|
●
|
Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. As we open new stores, our results of operations have been and may continue to be materially adversely affected based on the timing and number of new stores we open, their initial sales and new lease costs. The length of time it takes for a new store to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market, the strength of store management and general economic conditions. Once a new store is open, it typically grows at a faster rate than mature stores for several years. Mature stores are defined as stores that have been open for any part of five fiscal years or longer.
|
|
|
|
|
|
As we expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue into the foreseeable future. Our financial results for the three and six months ended March 31, 2020 reflect the effects of these factors, and we anticipate future periods will be similarly impacted.
|
|
|
|
|
|
Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.
|
|
●
|
Increased Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway; mass or discount retailers such as Wal-Mart and Target; natural and gourmet markets such as Whole Foods and The Fresh Market; foreign-based discount retailers such as Aldi and Lidl; specialty food retailers such as Sprouts and Trader Joe’s; warehouse clubs such as Sam’s Club and Costco; dietary supplement retailers such as GNC and The Vitamin Shoppe; online retailers such as Amazon; meal delivery services; independent health food stores; drug stores; farmers’ markets; food co-ops; and multi-level marketers. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.
|
COVID-19 Pandemic
On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. National, state and local authorities have recommended social distancing and imposed or recommended quarantine, isolation and “stay-at-home” measures on large portions of the population, including mandatory business closures. These measures are expected to have a serious adverse impact on the U.S. economy. Many economists expect the United States to enter a recession as a result of the pandemic. The duration and severity of such recession are unknown at this time. The effectiveness of the U.S government’s economic stabilization efforts in response to the pandemic, including proposed government payments to affected citizens and industries, is uncertain.
To date, all of our stores have been deemed an “essential business” by relevant government authorities and have continued operating since the start of the COVID-19 pandemic. We believe we have acted proactively in response to the COVID-19 pandemic. The steps we have taken to protect the health and wellbeing of our customers and employees (whom we refer to as the “good4u Crew” or “Crew”) as a result of the pandemic include:
|
●
|
Enforcing social distancing in all parts of our stores, including in checkout lines;
|
|
●
|
Sourcing and repackaging bulk hand sanitizer for use by Crew members in our stores;
|
|
●
|
Hiring approximately 650 temporary Crew members to handle increased customer traffic and operational demands at our stores and to assist with cleaning and stocking our stores;
|
|
●
|
Paying higher wages and bonuses to our Crew members;
|
|
●
|
Expanding the healthcare coverage and leave and paid time off options made available to our Crew members;
|
|
●
|
Providing daily immune and stress support supplements to our Crew members at no cost;
|
|
●
|
Assigning a store Crew member to clean and sanitize shopping carts at the entrance to our stores;
|
|
●
|
Producing more than 6,000 face masks and requiring store Crew members to wear them while working;
|
|
●
|
Providing disposable gloves to our store Crew members;
|
|
●
|
Installing plexiglass shields at substantially all checkout registers;
|
|
●
|
Frequently cleaning the most touched surfaces in all stores, including the checkout areas and payment keypads;
|
|
●
|
Limiting the number of customers allowed in the company’s stores at one time;
|
|
●
|
Requiring customers to bag their own purchases;
|
|
●
|
Closing all stores early so they can be restocked and thoroughly cleaned;
|
|
●
|
Designating specific shopping hours for higher risk individuals twice a week; and
|
|
●
|
Establishing guidelines and practices to protect our corporate office Crew members.
|
Starting in late February 2020 through March 31, 2020, we experienced unprecedented levels of net sales due to the COVID-19 outbreak as stay-at-home measures were implemented by states across our footprint, customers stocked-up on essential items and dining out options were constrained or eliminated. During the three months ended March 31, 2020, the COVID-19 pandemic also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party.
Although net sales in April 2020 moderated from the peak levels experienced in March 2020, comparable store sales for April 2020 were significantly higher than in the same period in fiscal year 2019. During April 2020, average transaction count declined compared to April 2019, as stay-at-home directives generally remained in place in our markets, resulting in less frequent customer shopping trips. However, the decline in average transaction count during April 2020 was more than offset by an increase in average transaction size.
Since the COVID-19 outbreak, we have experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain and such disruptions have moderated, although certain products remain in relatively short supply or are unavailable.
While we are closely monitoring the economic impact of the COVID-19 pandemic on our business, the long-term impact of the pandemic is unknown at this time. We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic makes it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.-Risk Factors.”
Additional information regarding the impact of the COVID-19 pandemic on our business and results of operations is provided below in this MD&A.
Outlook
We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store sales and continue to profitably expand. These factors include a loyal customer base, increasing basket size, reputation for cleanliness, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education and a convenient and efficient shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.
We currently expect the rate of new store unit growth in the foreseeable future to depend on economic and business conditions and other factors, including the impact of the COVID-19 pandemic. During the past few years, we have enhanced our infrastructure to enable us to support growth. In addition, in recent years we believe we have enhanced customer loyalty through our {N}power® customer loyalty program.
Over the long term, we believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. In the future, we believe there are opportunities for increased leverage in costs, such as administrative expenses, as well as increased economies of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy expenses), our ability to leverage costs may be limited.
Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form 10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.
Key Financial Metrics in Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:
Net sales
Our net sales are comprised of gross sales net of discounts, in-house coupons and returns and allowances. In comparing net sales between periods, we monitor the following:
|
●
|
Change in comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months.
|
|
●
|
Change in daily average comparable store sales. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).
|
|
●
|
Change in mature store sales. We begin to include sales from a store in mature store sales after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2020 are stores that opened during or before fiscal year 2015). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.
|
|
●
|
Change in daily average mature store sales. Daily average mature store sales are mature store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).
|
|
●
|
Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, return transactions and exchange transactions.
|
|
●
|
Average transaction size. Average transaction size, or basket size, is calculated by dividing net sales by transaction count for a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction.
|
Cost of goods sold and occupancy costs
Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of sales typically decrease as new stores mature and increase sales. Rent payments for leases classified as finance lease obligations (previously classified as capital and financing lease obligations) are not recorded in cost of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense.
Gross profit and gross margin
Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.
Store expenses
Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, generally related to store relocations. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of sales typically decrease.
Administrative expenses
Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of Sarbanes-Oxley, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.
Pre-opening and relocation expenses
Pre-opening and relocation expenses may include rent expense, salaries, advertising, supplies and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as capital or financing leases, no pre-opening rent expense is recognized. Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening and relocation costs are expensed as incurred.
Interest expense, net
Interest expense consists of the interest associated with finance lease obligations (previously classified as capital and financing lease obligations) and our Credit Facility, net of capitalized interest and interest income.
Results of Operations
The following table presents key components of our results of operations expressed as a percentage of net sales for the periods presented:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Statements of Income Data:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of goods sold and occupancy costs
|
|
|
72.0
|
|
|
|
73.0
|
|
|
|
72.7
|
|
|
|
73.1
|
|
Gross profit
|
|
|
28.0
|
|
|
|
27.0
|
|
|
|
27.3
|
|
|
|
26.9
|
|
Store expenses
|
|
20.5
|
|
|
|
21.8
|
|
|
|
21.3
|
|
|
|
22.0
|
|
Administrative expenses
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
2.5
|
|
Pre-opening and relocation expenses
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Operating income
|
|
|
4.8
|
|
|
|
2.7
|
|
|
|
3.2
|
|
|
|
2.2
|
|
Interest expense, net
|
|
|
(0.2
|
)
|
|
|
(0.6
|
)
|
|
|
(0.2
|
)
|
|
|
(0.6
|
)
|
Income before income taxes
|
|
|
4.6
|
|
|
|
2.1
|
|
|
|
3.0
|
|
|
|
1.7
|
|
Provision for income taxes
|
|
|
(1.1
|
)
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
|
|
(0.3
|
)
|
Net income
|
|
|
3.5
|
%
|
|
|
1.7
|
|
|
|
2.3
|
|
|
|
1.3
|
|
__________________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Figures may not sum due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end of period
|
|
|
157
|
|
|
|
152
|
|
|
|
157
|
|
|
|
152
|
|
Number of new stores opened during the period
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
Number of stores relocated or remodeled during the period
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
|
2
|
|
Number of stores closed during the period
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
Twelve-month store unit growth rate
|
|
|
3.3
|
%
|
|
|
4.8
|
|
|
|
3.3
|
|
|
|
4.8
|
|
Change in comparable store sales
|
|
|
18.4
|
|
|
|
2.9
|
|
|
|
10.3
|
|
|
|
4.2
|
|
Change in daily average comparable store sales
|
|
|
17.0
|
|
|
|
2.9
|
|
|
|
9.7
|
|
|
|
4.2
|
|
Change in mature store sales
|
|
|
16.7
|
|
|
|
1.8
|
|
|
|
8.8
|
|
|
|
2.7
|
|
Change in daily average mature store sales
|
|
|
15.4
|
|
|
|
1.8
|
|
|
|
8.2
|
|
|
|
2.7
|
|
Three months ended March 31, 2020 compared to the three months ended March 31, 2019
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
|
|
Three months ended
March 31,
|
|
|
Change In
|
|
|
|
2020
|
|
|
2019
|
|
|
Dollars
|
|
|
Percent
|
|
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
277,524
|
|
|
|
230,447
|
|
|
|
47,077
|
|
|
|
20.4
|
%
|
Cost of goods sold and occupancy costs
|
|
|
199,701
|
|
|
|
168,233
|
|
|
|
31,468
|
|
|
|
18.7
|
|
Gross profit
|
|
|
77,823
|
|
|
|
62,214
|
|
|
|
15,609
|
|
|
|
25.1
|
|
Store expenses
|
|
|
56,878
|
|
|
|
50,175
|
|
|
|
6,703
|
|
|
|
13.4
|
|
Administrative expenses
|
|
|
7,038
|
|
|
|
5,761
|
|
|
|
1,277
|
|
|
|
22.2
|
|
Pre-opening and relocation expenses
|
|
|
650
|
|
|
|
157
|
|
|
|
493
|
|
|
|
314.0
|
|
Operating income
|
|
|
13,257
|
|
|
|
6,121
|
|
|
|
7,136
|
|
|
|
116.6
|
|
Interest expense, net
|
|
|
(516
|
)
|
|
|
(1,280
|
)
|
|
|
764
|
|
|
|
(59.7
|
)
|
Income before income taxes
|
|
|
12,741
|
|
|
|
4,841
|
|
|
|
7,900
|
|
|
|
163.2
|
|
Provision for income taxes
|
|
|
(3,023
|
)
|
|
|
(981
|
)
|
|
|
(2,042
|
)
|
|
|
208.2
|
|
Net income
|
|
$
|
9,718
|
|
|
|
3,860
|
|
|
|
5,858
|
|
|
|
151.8
|
|
Net sales
Net sales increased $47.1 million, or 20.4%, to $277.5 million for the three months ended March 31, 2020 compared to $230.4 million for the three months ended March 31, 2019, primarily due to a $42.3 million increase in comparable store sales and a $4.8 million increase in new store sales. Daily average comparable store sales increased 17.0% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The daily average comparable store sales increase resulted from a 13.1% increase in daily average transaction size and a 3.5% increase in average transaction count. Comparable store average transaction size was $41.60 for the three months ended March 31, 2020. Daily average mature store sales increased 15.4% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in comparable store sales during the three months ended March 31, 2020 was primarily driven by significantly increased net sales starting in late February 2020 as a result of the COVID-19 outbreak. Prior to late February 2020, comparable store sales for the second quarter were generally consistent with the prior fiscal quarter. During March 2020, our comparable store sales increased by approximately 40% compared to March 2019, driven by our customers’ response to the COVID-19 outbreak. Also contributing to the increase in comparable store sales during the three months ended March 31, 2020 were marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.
Gross profit
Gross profit increased $15.6 million, or 25.1%, to $77.8 million for the three months ended March 31, 2020 compared to $62.2 million for the three months ended March 31, 2019, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic. To a lesser extent, the increase in gross profit reflected an increase in the number of stores. Gross margin increased to 28.0% for the three months ended March 31, 2020 compared to 27.0% for the three months ended March 31, 2019. The increase in gross margin during the three months ended March 31, 2020 was primarily driven by a decrease in store occupancy and shrink expenses, both as a percentage of sales, and a shift in sales mix to higher margin products.
We had 21 store leases that were classified as capital and financing lease obligations for the three months ended March 31, 2019. As of September 30, 2019, 23 leases were classified as capital and financing lease obligations. As a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and (iii) six previous capital lease obligations were classified as finance leases. As of March 31, 2020, we had 17 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as interest expense.
Store expenses
Store expenses increased $6.7 million, or 13.4%, to $56.9 million for the three months ended March 31, 2020 compared to $50.2 million for the three months ended March 31, 2019. The increase in store expenses during the three months ended March 31, 2020 was primarily driven by our hiring of approximately 650 temporary Crew members to support operational demands and wage increases and bonuses for our store Crew members, all related to the COVID-19 pandemic. Store expenses as a percentage of sales were 20.5% and 21.8% for the three months ended March 31, 2020 and 2019, respectively. The decrease in store expenses as a percentage of sales was primarily attributable to enhanced leverage of store expenses due to the increased sales volumes resulting from the COVID-19 pandemic, partially offset by the adoption of ASC 842.
Administrative expenses
Administrative expenses increased $1.3 million, or 22.2%, to $7.0 million for the three months ended March 31, 2020 compared to $5.8 million for the three months ended March 31, 2019. The increase in administrative expenses during the three months ended March 31, 2020 was primarily driven by higher compensation, including bonus expense, and an increase in hardware, software and communications expenses. Administrative expenses as a percentage of sales were 2.5% for each of the three months ended March 31, 2020 and 2019.
Pre-opening and relocation expenses
Pre-opening and relocation expenses increased $0.5 million, or 314.0%, to $0.7 million for the three months ended March 31, 2020 compared to $0.2 million for the three months ended March 31, 2019, due to the impact of the number and timing of new store openings and relocations. We opened two new stores during the three months ended March 31, 2020 compared to opening one new store and relocating one store during the three months ended March 31, 2019. Pre-opening and relocation expenses as a percentage of sales were 0.2% and 0.1% for the three months ended March 31, 2020 and 2019, respectively.
Interest expense, net
Interest expense, net of capitalized interest, decreased $0.8 million, or 59.7%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the three months ended March 31, 2020 as well as a decrease in the average outstanding balance owing under our Credit Facility. The decrease in interest expense attributable to the lower number of finance leases is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.
Income taxes
Income tax expense increased $2.0 million for the three months ended March 31, 2020 to $3.0 million compared to $1.0 million for the three months ended March 31, 2019. The Company’s effective income tax rate was approximately 23.7% and 20.3% for the three months ended March 31, 2020 and 2019, respectively.
Net income
Net income was $9.7 million, or $0.43 diluted earnings per share, for the three months ended March 31, 2020 compared to $3.9 million, or $0.17 diluted earnings per share, for the three months ended March 31, 2019. The increase in net income during the three months ended March 31, 2020 was primarily attributable to the significant growth in net sales and margin improvement as a result of the impact of the COVID-19 outbreak.
Six months ended March 31, 2020 compared to the six months ended March 31, 2019
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
|
|
Six months ended
March 31,
|
|
|
Change In
|
|
|
|
2020
|
|
|
2019
|
|
|
Dollars
|
|
|
Percent
|
|
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
507,554
|
|
|
|
451,962
|
|
|
|
55,592
|
|
|
|
12.3
|
%
|
Cost of goods sold and occupancy costs
|
|
|
369,207
|
|
|
|
330,602
|
|
|
|
38,605
|
|
|
|
11.7
|
|
Gross profit
|
|
|
138,347
|
|
|
|
121,360
|
|
|
|
16,987
|
|
|
|
14.0
|
|
Store expenses
|
|
|
108,305
|
|
|
|
99,298
|
|
|
|
9,007
|
|
|
|
9.1
|
|
Administrative expenses
|
|
|
12,857
|
|
|
|
11,076
|
|
|
|
1,781
|
|
|
|
16.1
|
|
Pre-opening and relocation expenses
|
|
|
1,080
|
|
|
|
829
|
|
|
|
251
|
|
|
|
30.3
|
|
Operating income
|
|
|
16,105
|
|
|
|
10,157
|
|
|
|
5,948
|
|
|
|
58.6
|
|
Interest expense, net
|
|
|
(1,052
|
)
|
|
|
(2,535
|
)
|
|
|
1,483
|
|
|
|
(58.5
|
)
|
Income before income taxes
|
|
|
15,053
|
|
|
|
7,622
|
|
|
|
7,431
|
|
|
|
97.5
|
|
Provision for income taxes
|
|
|
(3,467
|
)
|
|
|
(1,565
|
)
|
|
|
(1,902
|
)
|
|
|
121.5
|
|
Net income
|
|
$
|
11,586
|
|
|
|
6,057
|
|
|
|
5,529
|
|
|
|
91.3
|
|
Net sales
Net sales increased $55.6 million, or 12.3%, to $507.6 million for the six months ended March 31, 2020 compared to $452.0 million for the six months ended March 31, 2019, primarily due to a $46.4 million increase in comparable store sales and a $9.4 million increase in new store sales, partially offset by a $0.2 million decrease in sales from one store that closed during the first quarter of fiscal 2019. Daily average comparable store sales increased 9.7% for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The daily average comparable store sales increase resulted from a 8.1% increase in average transaction size and a 1.5% increase in daily average transaction count. Comparable store average transaction size was $39.50 for the six months ended March 31, 2020. Daily average mature store sales increased 8.2% for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The increase in comparable store sales during the six months ended March 31, 2020 was primarily driven by significantly increased net sales starting in late February 2020 as a result of the COVID-19 outbreak. Also contributing to the increase in comparable store sales during the six months ended March 31, 2020 were marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.
Gross profit
Gross profit increased $17.0 million, or 14.0%, to $138.3 million for the six months ended March 31, 2020 compared to $121.4 million for the six months ended March 31, 2019, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic. To a lesser extent, the increased in gross profit reflected an increase in the number of stores. Gross margin increased to 27.3% for the six months ended March 31, 2020 from 26.9% for the six months ended March 31, 2019. The increase in gross margin during the six months ended March 31, 2020 was primarily driven by a decrease in store occupancy and shrink expenses, both as a percentage of sales, and a shift in sales mix to higher margin products.
We had 21 store leases that were classified as capital and financing lease obligations for the six months ended March 31, 2019. As of September 30, 2019, 23 leases were classified as capital and financing lease obligations. As a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and (iii) six previous capital lease obligations were classified as finance leases. As of March 31, 2020, we had 17 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as interest expense.
Store expenses
Store expenses increased $9.0 million, or 9.1%, to $108.3 million for the six months ended March 31, 2020 compared to $99.3 million for the six months ended March 31, 2019. The increase in store expenses during the six months ended March 31, 2020 was primarily driven by our hiring of approximately 650 temporary Crew members to support operational demands and wage increases and bonuses for our store Crew members, all related to the COVID-19 pandemic. Store expenses as a percentage of sales were 21.3% and 22.0% for the six months ended March 31, 2020 and 2019, respectively. The decrease in store expenses as a percentage of sales was primarily attributable to enhanced leverage of store expenses due to the increased sales volumes resulting from the COVID-19 pandemic, partially offset by the adoption of ASC 842.
Administrative expenses
Administrative expenses increased $1.8 million, or 16.1%, to $12.9 million for the six months ended March 31, 2020 compared to $11.1 million for the six months ended March 31, 2019. The increase in administrative expenses during the six months ended March 31, 2020 was primarily driven by higher compensation, including bonus expense, and an increase in hardware, software and communication expenses. Administrative expenses as a percentage of sales were 2.5% for each of the six months ended March 31, 2020 and 2019.
Pre-opening and relocation expenses
Pre-opening and relocation expenses increased $0.3 million, or 30.3%, to $1.1 million for the six months ended March 31, 2020 compared to $0.8 million for the six months ended March 31, 2019, due to the impact of the number and timing of new store openings and relocations. We opened four new stores during the six months ended March 31, 2020 compared to opening five new stores and relocating two stores during the six months ended March 31, 2019. Pre-opening and relocation expenses as a percentage of sales were 0.2% for each of the six months ended March 31, 2020 and 2019.
Interest expense
Interest expense, net of capitalized interest, decreased $1.5 million, or 58.5%, for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the six months ended March 31, 2020 as well as a decrease in the average outstanding balance owing under our Credit Facility. The decrease in interest expense attributable to the lower number of finance leases is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.
Income taxes
Income tax expense increased $1.9 million for the six months ended March 31, 2020 to $3.5 million compared to $1.6 million for the six months ended March 31, 2019. The Company’s effective income tax rate was approximately 23.0% and 20.5% for the six months ended March 31, 2020 and 2019, respectively.
Net income
Net income was $11.6 million, or $0.51 diluted earnings per share, for the six months ended March 31, 2020 compared to $6.1 million, or $0.27 diluted earnings per share, for the six months ended March 31, 2019. The increase in net income during the six months ended March 31, 2020 was primarily attributable to the significant growth in net sales and margin improvement as a result of the impact of the COVID-19 outbreak.
Non-GAAP financial measures
EBITDA
EBITDA is not a measure of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. The following table reconciles net income to EBITDA for the periods presented, dollars in thousands:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income
|
|
$
|
9,718
|
|
|
|
3,860
|
|
|
|
11,586
|
|
|
|
6,057
|
|
Interest expense, net
|
|
|
516
|
|
|
|
1,280
|
|
|
|
1,052
|
|
|
|
2,535
|
|
Provision for income taxes
|
|
|
3,023
|
|
|
|
981
|
|
|
|
3,467
|
|
|
|
1,565
|
|
Depreciation and amortization
|
|
|
7,888
|
|
|
|
7,290
|
|
|
|
15,595
|
|
|
|
14,576
|
|
EBITDA
|
|
$
|
21,145
|
|
|
|
13,411
|
|
|
|
31,700
|
|
|
|
24,733
|
|
EBITDA increased 57.7% to $21.1 million in the three months ended March 31, 2020 compared to $13.4 million for the three months ended March 31, 2019. EBITDA increased 28.2% to $31.7 million in the six months ended March 31, 2020 compared to $24.7 million for the six months ended March 31, 2019. The increase in EBITDA was primarily driven by the significant growth in net income resulting from the increase in net sales starting in late February 2020 as a result of the COVID-19 outbreak. EBITDA as a percentage of sales was 7.6% and 5.8% in the three months ended March 31, 2020 and 2019, respectively. EBITDA as a percentage of sales was 6.2% and 5.5% in the six months ended March 31, 2020 and 2019, respectively. The number of stores with finance leases (previously classified as capital and financing lease obligations) decreased from 21 as of March 31, 2019 to 17 as of March 31, 2020 as a result of our adoption of ASC 842 effective October 1, 2019. Finance leases have a positive impact on EBITDA because, as discussed above, they result in lower cost of goods sold and occupancy costs. Conversely, the greater number of stores with operating leases during the six months ended March 31, 2020, led to higher cost of goods sold and occupancy costs, which negatively impacted both EBITDA and EBITDA as a percentage of sales.
Management believes some investors’ understanding of our performance is enhanced by including EBITDA, a non-GAAP financial measure. We believe EBITDA provides additional information about: (i) our operating performance, because it assists us in comparing the operating performance of our stores on a consistent basis, as it removes the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility.
Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes some investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. By providing this non-GAAP financial measure, together with a reconciliation from net income, we believe we are enhancing analysts’ and investors’ understanding of our business and our results of operations, as well as assisting analysts and investors in evaluating how well we are executing our strategic initiatives.
Our competitors may define EBITDA differently, and as a result, our measure of EBITDA may not be directly comparable to those of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a supplemental measure of operating performance that does not represent, and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or as a substitute for, analysis of our results as reported under GAAP. Some of the limitations are:
|
●
|
EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
|
|
●
|
EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
●
|
EBITDA does not reflect any impact for straight-line rent expense for leases classified as capital and financing lease obligations;
|
|
●
|
EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
|
|
●
|
EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; and
|
|
●
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA does not reflect any cash requirements for such replacements.
|
Due to these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA as supplemental information.
Liquidity and Capital Resources
Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under the Credit Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service and corporate taxes. As of March 31, 2020, we had $29.4 million in cash and cash equivalents, as well as $49.0 million available for borrowing under our Credit Facility. We are not currently receiving, and do not currently intend to apply for, direct financial assistance under any federal or state programs implemented as a result of the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may expend up to $10.0 million to repurchase shares of the Company’s common stock. In May 2018, our Board authorized a two-year extension of the share repurchase program. On May 4, 2020, our Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022. We did not repurchase any shares during the three or six months ended March 31, 2020. Between April 1, 2020 and May 4, 2020 (the latest practicable date for making the determination), we did not repurchase any additional shares of our common stock. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million. We expect funding of share repurchases will come from operating cash flow, excess cash and/or borrowings under the Credit Facility. The timing and the number of shares repurchased will be dictated by our capital needs and stock market conditions.
We paid a dividend of $0.07 per share of common stock in each of the first two quarters of fiscal year 2020. On May 6, 2020, our Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on June 16, 2020 to stockholders of record as of the close of business on June 1, 2020.
The opening of new stores may require us to borrow additional amounts under the Credit Facility. Subject to economic and business conditions, we plan to spend approximately $8 million to $13 million on capital expenditures during the remainder of fiscal year 2020 in connection with two to three new store openings and one store relocation. We are closely monitoring the impact of the COVID-19 pandemic on our liquidity and cash generated from operations. Currently, we believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Credit Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs for at least the next twelve months. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.
Typically, our new stores require an upfront capital investment of approximately $2.1 million per store consisting of capital expenditures of approximately $1.6 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.2 million.
Set out below is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:
|
|
Six months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash provided by operating activities
|
|
$
|
53,360
|
|
|
|
22,593
|
|
Net cash used in investing activities
|
|
|
(20,131
|
)
|
|
|
(17,081
|
)
|
Net cash used in financing activities
|
|
|
(10,069
|
)
|
|
|
(3,627
|
)
|
Net increase in cash and cash equivalents
|
|
|
23,160
|
|
|
|
1,885
|
|
Cash and cash equivalents, beginning of period
|
|
|
6,214
|
|
|
|
9,398
|
|
Cash and cash equivalents, end of period
|
|
$
|
29,374
|
|
|
|
11,283
|
|
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $30.8 million, or 136.2%, to $53.4 million for the six months ended March 31, 2020 compared to $22.6 million for the six months ended March 31, 2019. The increase in cash provided by operating activities was primarily due to an increase in cash provided by working capital, as well as an increase in net income adjusted for non-cash items. Our working capital requirements for inventory will likely increase as we continue to open new stores.
Investing Activities
Net cash used in investing activities increased $3.1 million, or 17.9%, to $20.1 million for the six months ended March 31, 2020 compared to $17.1 million for the six months ended March 31, 2019. This increase was primarily due to a $1.1 million increase in software investments for internal use and a $1.1 million increase in property and equipment acquisitions during the six months ended March 31, 2020 compared to the six months ended March 31, 2019.
Financing Activities
Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility. Cash used in financing activities was $10.1 million for the six months ended March 31, 2020 compared to $3.6 million of cash used in financing activities for the six months ended March 31, 2019. During the six months ended March 31, 2020, the Company used cash generated from operations to repay the outstanding balance owing under the Credit Facility. Notwithstanding our repayment of the outstanding balance owing under the Credit Facility as of March 31, 2020, the Credit Facility remains in full force and effect.
Credit Facility
The maximum amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The operating company is the borrower under the Credit Facility and its obligations thereunder are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on November 13, 2024.
For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.
The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.
We had $0 and $5.7 million outstanding under the Credit Facility as of March 31, 2020 and September 30, 2019, respectively. As of each of March 31, 2020 and September 30, 2019, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. We had $49.0 million and $43.3 million available for borrowing under the Credit Facility as of March 31, 2020 and September 30, 2019, respectively.
As of March 31, 2020 and September 30, 2019, the Company was in compliance with the debt covenants under the Credit Facility.
Share Repurchases
Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 6 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
As of March 31, 2020, our off-balance sheet arrangements consisted of: (i) the undrawn portion of our Credit Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of March 31, 2020, the Company had signed two leases whose terms have not yet commenced; such leases are for one new store and one relocated store in fiscal year 2020 and beyond. The contractual obligation related to these leases is $10.7 million (see Note 7). We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements included in this Form 10-Q.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to make adjustments we consider appropriate under the facts and circumstances.
Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements include accounting for income taxes, accounting for impairment of long-lived assets and accounting for leases, which are discussed in more detail under the caption “Critical Accounting Policies” under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K.