Zumiez(ZUMZ) - 2023 Q3 - Quarterly Report

Part I. Financial Information Condensed Consolidated Balance Sheets The company's condensed consolidated balance sheets show a decrease in total assets and shareholders' equity, primarily driven by reductions in cash, marketable securities, and retained earnings, while inventories increased significantly from January 29, 2022, to October 29, 2022 | Metric | October 29, 2022 (in thousands) | January 29, 2022 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :------------------------------ | :------------------------------ | :-------------------- | :------- | | Cash and cash equivalents | $49,336 | $117,223 | $(67,887) | -57.9% | | Marketable securities | $91,776 | $177,260 | $(85,484) | -48.2% | | Inventories | $177,205 | $128,728 | $48,477 | 37.7% | | Total current assets | $353,307 | $447,649 | $(94,342) | -21.1% | | Total assets | $749,807 | $862,012 | $(112,205) | -13.0% | | Total liabilities | $369,137 | $393,694 | $(24,557) | -6.2% | | Total shareholders' equity | $380,670 | $468,318 | $(87,648) | -18.7% | Unaudited Condensed Consolidated Statements of Operations The company experienced significant declines in net sales, gross profit, operating profit, and net income for both the three and nine months ended October 29, 2022, compared to the prior year, leading to a substantial decrease in diluted earnings per share | Metric (in thousands, except per share) | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | % Change (3M) | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | % Change (9M) | | :-------------------------------------- | :------------------------------ | :------------------------------ | :------------ | :----------------------------- | :----------------------------- | :------------ | | Net sales | $237,591 | $289,455 | -17.9% | $678,270 | $837,190 | -19.0% | | Gross profit | $81,983 | $114,664 | -28.5% | $229,409 | $322,797 | -28.9% | | Operating profit | $10,439 | $39,842 | -73.8% | $15,890 | $106,075 | -85.0% | | Net income | $6,932 | $30,702 | -77.4% | $9,602 | $81,085 | -88.2% | | Diluted earnings per share | $0.36 | $1.25 | -71.2% | $0.49 | $3.20 | -84.7% | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a significant decrease in comprehensive income for the three months ended October 29, 2022, and a comprehensive loss for the nine months ended October 29, 2022, primarily due to increased foreign currency translation losses and net unrealized losses on available-for-sale debt securities | Metric (in thousands) | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | | :------------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $6,932 | $30,702 | $9,602 | $81,085 | | Foreign currency translation | $(4,476) | $(2,340) | $(14,622) | $(4,766) | | Net change in unrealized loss on available-for-sale debt securities | $(2,147) | $(1,383) | $(5,200) | $(2,040) | | Other comprehensive loss, net | $(6,623) | $(3,723) | $(19,822) | $(6,806) | | Comprehensive income (loss) | $309 | $26,979 | $(10,220) | $74,279 | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased significantly from January 29, 2022, to October 29, 2022, primarily due to common stock repurchases and accumulated other comprehensive losses, despite net income contributions | Metric (in thousands) | Balance at Jan 29, 2022 | Balance at Oct 29, 2022 | Change (9M) | | :-------------------------------- | :---------------------- | :---------------------- | :---------- | | Common Stock Amount | $180,824 | $186,684 | $5,860 | | Accumulated Other Comprehensive Loss | $(13,463) | $(33,285) | $(19,822) | | Retained Earnings | $300,957 | $227,271 | $(73,686) | | Total Shareholders' Equity | $468,318 | $380,670 | $(87,648) | - Common stock repurchases for the nine months ended October 29, 2022, totaled $83.3 million, contributing to the decrease in shareholders' equity[12] Unaudited Condensed Consolidated Statements of Cash Flows The company experienced a significant shift from cash provided by operating activities in the prior year to cash used in operating activities for the nine months ended October 29, 2022, while cash provided by investing activities increased, and cash used in financing activities remained substantial due to common stock repurchases | Cash Flow Activity (in thousands) | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net cash (used in) provided by operating activities | $(36,412) | $71,936 | $(108,348) | | Net cash provided by investing activities | $60,417 | $26,219 | $34,198 | | Net cash used in financing activities | $(87,249) | $96,217 | $8,968 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(68,222) | $1,872 | $(70,094) | | Cash, cash equivalents, and restricted cash, end of period | $55,830 | $82,562 | $(26,732) | - The decrease in operating cash flow was primarily driven by lower net income and changes in working capital, including a significant increase in inventories[14] - Investing activities were positively impacted by net sales of marketable securities, while financing activities continued to be dominated by common stock repurchases[14] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies and specific financial line items 1. Nature of Business and Basis of Presentation Zumiez Inc. is a specialty retailer of apparel, footwear, accessories, and hardgoods, operating 760 stores globally and e-commerce websites. The financial statements are unaudited and prepared in accordance with U.S. GAAP, reflecting the impact of COVID-19, including a $3.2 million Euro subsidy received from the German government - Zumiez Inc. operates as a specialty retailer under the names Zumiez, Blue Tomato, and Fast Times, with 760 stores globally (614 in U.S., 73 in Europe, 52 in Canada, 21 in Australia) as of October 29, 2022[16] - The company received a 3.2 million Euro ($3.6 million) taxable subsidy from the German government in April 2022 for COVID-19 related costs incurred in fiscal 2020 and 2021, recorded in selling, general and administrative expenses[18] | Cash Component | October 29, 2022 (in thousands) | January 29, 2022 (in thousands) | | :--------------- | :------------------------------ | :------------------------------ | | Cash and cash equivalents | $49,336 | $117,223 | | Restricted cash | $6,494 | $6,829 | | Total cash, cash equivalents, and restricted cash | $55,830 | $124,052 | 2. Revenue Net sales decreased significantly for both the three and nine months ended October 29, 2022, primarily in North America, with foreign exchange rates negatively impacting sales. Contract liabilities include deferred revenue from loyalty programs and gift cards | Geographic Region | Three Months Ended Oct 29, 2022 (in thousands) | Three Months Ended Oct 30, 2021 (in thousands) | Nine Months Ended Oct 29, 2022 (in thousands) | Nine Months Ended Oct 30, 2021 (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | United States | $192,743 | $242,238 | $547,437 | $707,070 | | Canada | $13,578 | $15,220 | $35,121 | $36,577 | | Europe | $26,006 | $28,924 | $80,217 | $82,192 | | Australia | $5,264 | $3,073 | $15,495 | $11,351 | | Net sales | $237,591 | $289,455 | $678,270 | $837,190 | - Net sales for the three months ended October 29, 2022, decreased by $5.8 million due to foreign exchange rate changes ($4.6 million in Europe, $0.7 million in Canada, $0.5 million in Australia)[27] - For the nine months, the decrease was $13.3 million ($10.7 million in Europe, $1.3 million in Canada, $1.3 million in Australia)[27] - Current liability for gift cards was $3.4 million at October 29, 2022, down from $5.6 million at January 29, 2022[27] - Deferred revenue for the STASH loyalty program was $1.2 million at October 29, 2022, up from $1.0 million at January 29, 2022[27] 3. Cash, Cash Equivalents and Marketable Securities The company's cash, cash equivalents, and marketable securities significantly decreased from January 29, 2022, to October 29, 2022, with marketable securities experiencing substantial gross unrealized losses, particularly in U.S. treasury, corporate debt, and state/local government securities | Category (in thousands) | October 29, 2022 Fair Value | January 29, 2022 Fair Value | Gross Unrealized Losses (Oct 29, 2022) | | :---------------------- | :-------------------------- | :-------------------------- | :------------------------------------- | | Cash and cash equivalents | $49,336 | $117,223 | $0 | | Marketable securities | $91,776 | $177,260 | $(8,280) | | U.S. treasury and government agency securities | $18,275 | $28,432 | $(3,745) | | Corporate debt securities | $57,763 | $123,196 | $(3,775) | | State and local government securities | $15,738 | $25,632 | $(760) | - All marketable securities have an effective maturity date of five years or less and may be liquidated prior to maturity[29] 4. Leases The company holds operating leases for retail stores, distribution facilities, vehicles, and equipment, with total lease expense remaining relatively stable. Cash paid for operating leases decreased slightly, and the weighted-average remaining lease term is 5.0 years with a 2.5% discount rate | Lease Metric (in thousands) | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating lease expense | $18,591 | $17,727 | $55,349 | $55,114 | | Variable lease expense | $1,905 | $2,467 | $5,680 | $6,235 | | Total lease expense | $20,496 | $20,194 | $61,029 | $61,349 | | Lease Cash Flow (in thousands) | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | | :----------------------------- | :----------------------------- | :----------------------------- | | Operating cash flows from operating leases | $(56,796) | $(59,099) | | Right-of-use assets obtained in exchange for new operating lease liabilities | $49,331 | $31,458 | - As of October 29, 2022, the weighted-average remaining lease term is 5.0 years and the weighted-average discount rate is 2.5%[33] - Total minimum lease payments are $268.8 million, with a present value of lease obligations of $254.1 million[33] 5. Commitments and Contingencies The company has $181.1 million in outstanding purchase commitments for merchandise. A class action lawsuit settlement of $2.8 million was finalized and paid in August 2022, and a new PAGA lawsuit was filed in October 2022. Self-insurance reserves remain stable at approximately $2.1 million - Outstanding purchase orders for merchandise from vendors totaled $181.1 million at October 29, 2022[35] - The $2.8 million settlement for the Alexia Herrera class action lawsuit was granted final approval and paid in August 2022[37] - A new representative action under California's PAGA was filed on October 14, 2022, alleging wage and hour violations, which the company intends to vigorously defend[38] - Self-insurance reserves for workers' compensation, general liability, and employee health care benefits were $2.1 million at October 29, 2022, and $2.0 million at January 29, 2022[39] 6. Revolving Credit Facilities and Debt The company maintains two credit facilities: a senior secured credit facility with Wells Fargo Bank, N.A. of up to $25.0 million (increasing to $35.0 million after December 1, 2023) and a credit facility with UBS Switzerland AG of up to 15.0 million Euro. There were no borrowings outstanding under either facility as of October 29, 2022 - The Wells Fargo credit facility provides up to $25.0 million through December 1, 2023, and up to $35.0 million thereafter until maturity on December 1, 2024, secured by personal property and bearing interest at SOFR plus 1.35% per annum[40] - The Wells Fargo facility includes financial maintenance covenants requiring net income after taxes of at least $5.0 million on a trailing four-quarter basis and a quick ratio of 1.25:1.0[42] - A credit facility with UBS Switzerland AG provides up to 15.0 million Euro ($14.9 million as of October 29, 2022) at 1.25% interest[44] - No borrowings were outstanding under either credit facility at October 29, 2022, or January 29, 2022[43][44] 7. Fair Value Measurements The company measures assets at fair value using a three-level hierarchy, with most cash equivalents classified as Level 1 and marketable securities as Level 2. Impairment losses of $0.1 million for operating lease right-of-use assets and $0.2 million for fixed assets were recognized during the three months ended October 29, 2022 | Asset Category (in thousands) | October 29, 2022 Level 1 | October 29, 2022 Level 2 | January 29, 2022 Level 1 | January 29, 2022 Level 2 | | :---------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Money market funds | $5,729 | $0 | $17,890 | $0 | | U.S. treasury and government agency securities | $0 | $18,275 | $0 | $28,432 | | Corporate debt securities | $0 | $57,763 | $0 | $123,196 | | State and local government securities | $0 | $15,738 | $0 | $25,632 | | Other long-term assets (Money market funds) | $6,494 | $0 | $6,829 | $0 | | Total | $12,223 | $91,776 | $24,719 | $177,260 | - Impairment losses recognized for the three months ended October 29, 2022, included $0.1 million for operating lease right-of-use assets and $0.2 million for fixed assets[47] 8. Stockholders' Equity The company completed its $150 million common stock repurchase program in March 2022, with no repurchases during the three months ended October 29, 2022. Accumulated other comprehensive loss significantly increased due to foreign currency translation adjustments and net unrealized losses on available-for-sale debt securities - The $150 million common stock repurchase program approved in December 2021 was completed in March 2022, with no repurchases during the three months ended October 29, 2022[48] | Component of Accumulated Other Comprehensive Loss (in thousands) | Balance at Jan 29, 2022 | Balance at Oct 29, 2022 | Change (9M) | | :------------------------------------------------------------- | :---------------------- | :---------------------- | :---------- | | Foreign currency translation adjustments | $(12,505) | $(27,127) | $(14,622) | | Net unrealized (losses) gains on available-for-sale debt securities | $(958) | $(6,158) | $(5,200) | | Total Accumulated Other Comprehensive Loss | $(13,463) | $(33,285) | $(19,822) | 9. Equity Awards Total stock-based compensation expense for the nine months ended October 29, 2022, was $5.2 million, with $10.5 million in unrecognized compensation cost remaining. The company had 0.4 million restricted equity awards outstanding and 0.3 million stock options outstanding as of October 29, 2022 | Expense Category (in thousands) | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | | :------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of goods sold | $364 | $358 | $1,099 | $1,085 | | Selling, general and administrative expenses | $1,372 | $1,329 | $4,150 | $4,033 | | Total stock-based compensation expense | $1,736 | $1,687 | $5,249 | $5,118 | - As of October 29, 2022, there was $10.5 million of total unrecognized compensation cost related to unvested stock options, restricted stock awards, and restricted stock units, with a weighted-average remaining recognition period of 1.2 years[53] - The company had 400 thousand restricted equity awards outstanding at October 29, 2022, with a weighted-average fair value of $33.38, and 0.3 million stock options outstanding with a weighted average exercise price of $29.30[54] 10. Earnings per Share, Basic and Diluted Basic and diluted earnings per share significantly decreased for both the three and nine months ended October 29, 2022, compared to the prior year, reflecting the decline in net income | EPS Metric (except per share amounts) | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (in thousands) | $6,932 | $30,702 | $9,602 | $81,085 | | Weighted average common shares for basic EPS | 19,101 | 24,284 | 19,239 | 24,905 | | Basic earnings per share | $0.36 | $1.26 | $0.50 | $3.26 | | Weighted average common shares for diluted EPS | 19,248 | 24,629 | 19,490 | 25,325 | | Diluted earnings per share | $0.36 | $1.25 | $0.49 | $3.20 | - There were 0.1 million anti-dilutive common shares related to stock-based awards for both the three and nine months ended October 29, 2022, and October 30, 2021[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition, changes in financial condition, and results of operations, discussing key performance indicators and trends General This section provides definitions for key financial terms such as net sales, comparable sales, cost of goods sold, and selling, general and administrative expenses, emphasizing the integrated sales strategy and the impact of various factors on these metrics - Net sales include gross sales (net of returns and promotions) and shipping revenue, encompassing both store and e-commerce sales[61] - Comparable sales include net sales from store and e-commerce businesses in operation for comparable periods, with current year foreign exchange rates applied for consistent comparison[62] - Cost of goods sold includes branded and private label merchandise costs, shrinkage, buying, occupancy, distribution, warehousing, and freight costs for store transfers[63] - Selling, general and administrative expenses primarily consist of store and administrative personnel wages and benefits, freight, store supplies, depreciation, facility expenses, training, advertising, credit card fees, insurance, public company expenses, legal expenses, and stock-based compensation[65] Key Performance Indicators Management evaluates net sales, gross profit, operating profit, and diluted earnings per share as key performance indicators to assess the company's financial success and operational efficiency - Key performance indicators include Net sales (important for leveraging costs and impacting operating profit), Gross profit (measures optimization of price and inventory levels), Operating profit (key indicator of success, driven by net sales, gross profit, and SG&A control), and Diluted earnings per share (key indicator of increasing shareholder value)[66][67][68][69] Trends and Uncertainties Affecting Our Results and Comparability The company's results are affected by the ongoing COVID-19 pandemic, foreign currency fluctuations, changes in laws, variable costs, and general economic conditions, particularly higher consumer price inflation leading to reduced consumer confidence and spending - Factors affecting results include the impact of the COVID-19 pandemic, foreign currency rates, changes in laws (e.g., U.S. tax law), fluctuations in variable costs, and general economic conditions[70] - Increased costs in 2021 and 2022 are expected to continue, and the ability to raise selling prices depends on market conditions[70] - Higher consumer price inflation has led to reduced consumer confidence and spending, negatively impacting sales during the three and nine months ended October 29, 2022[70] Results of Operations This section provides a comparative analysis of the company's financial performance for the three and nine months ended October 29, 2022, against the prior year Three Months Ended October 29, 2022 Compared With Three Months Ended October 30, 2021 For the three months ended October 29, 2022, net sales decreased by 17.9% due to inflationary pressures and prior-year stimulus benefits. Gross profit declined by 28.5% (510 basis points) due to deleverage on fixed costs and increased web shipping and distribution center costs. SG&A expenses decreased by 4.4% but increased as a percentage of net sales by 430 basis points due to deleverage on lower sales and higher store wages. Net income fell by 77.4%, and diluted EPS decreased by 71.2% | Metric (in thousands, except per share) | Oct 29, 2022 | Oct 30, 2021 | Change (YoY) | % of Net Sales (2022) | % of Net Sales (2021) | | :-------------------------------------- | :----------- | :----------- | :----------- | :-------------------- | :-------------------- | | Net sales | $237,591 | $289,455 | $(51,864) | 100.0% | 100.0% | | Gross profit | $81,983 | $114,664 | $(32,681) | 34.5% | 39.6% | | Selling, general and administrative expenses | $71,544 | $74,822 | $(3,278) | 30.1% | 25.8% | | Operating profit | $10,439 | $39,842 | $(29,403) | 4.4% | 13.8% | | Net income | $6,932 | $30,702 | $(23,770) | 2.9% | 10.6% | | Diluted earnings per share | $0.36 | $1.25 | $(0.89) | | | - North America sales decreased by 19.9% (19.6% excluding foreign exchange), while other international sales decreased by 2.3% (increased by 13.8% excluding foreign exchange)[73] - Gross profit margin decreased by 510 basis points, primarily due to 250 bps deleverage in store occupancy, 100 bps increase in web shipping, 70 bps deleverage in distribution center costs, 40 bps deleverage in buying/private label, 40 bps decrease in product margin, and 30 bps increase in inventory shrinkage[75] - SG&A as a percent of net sales increased by 430 basis points, driven by 220 bps from store wages (deleverage and rate increase), 120 bps from non-wage store costs, 90 bps from non-store wages, and 30 bps from corporate costs, partially offset by a 70 bps decrease in annual incentive compensation[76] Nine Months Ended October 29, 2022 Compared With Nine Months Ended October 30, 2021 For the nine months ended October 29, 2022, net sales decreased by 19.0% due to inflationary pressures and prior-year stimulus. Gross profit declined by 28.9% (480 basis points) primarily from deleverage on fixed costs and increased web shipping. SG&A expenses decreased by 1.5% but increased as a percentage of net sales by 560 basis points due to deleverage on lower sales and higher wages. Net income plummeted by 88.2%, and diluted EPS decreased by 84.7% | Metric (in thousands, except per share) | Oct 29, 2022 | Oct 30, 2021 | Change (YoY) | % of Net Sales (2022) | % of Net Sales (2021) | | :-------------------------------------- | :----------- | :----------- | :----------- | :-------------------- | :-------------------- | | Net sales | $678,270 | $837,190 | $(158,920) | 100.0% | 100.0% |\ | Gross profit | $229,409 | $322,797 | $(93,388) | 33.8% | 38.6% |\ | Selling, general and administrative expenses | $213,519 | $216,722 | $(3,203) | 31.5% | 25.9% |\ | Operating profit | $15,890 | $106,075 | $(90,185) | 2.3% | 12.7% |\ | Net income | $9,602 | $81,085 | $(71,483) | 1.4% | 9.7% |\ | Diluted earnings per share | $0.49 | $3.20 | $(2.71) | | | - North America sales decreased by 21.7% (21.5% excluding foreign exchange), while other international sales increased by 2.3% (15.1% excluding foreign exchange)[78] - Gross profit margin decreased by 480 basis points, primarily due to 260 bps deleverage in store occupancy, 90 bps increase in web shipping, 70 bps deleverage in distribution center costs, 50 bps increase in inventory shrinkage, and 40 bps deleverage in buying/private label costs[80] - SG&A as a percent of net sales increased by 560 basis points, driven by 300 bps from store wages, 140 bps from non-wage store costs, 100 bps from non-store wages, 80 bps from corporate costs, and 70 bps from Events, partially offset by a 70 bps decrease in annual incentive compensation, 40 bps from government subsidies, and 30 bps from legal settlement costs[81] Liquidity and Capital Resources The company's primary liquidity sources are operating cash flows, cash, cash equivalents, and marketable securities, which are expected to cover foreseeable needs for the next twelve months. Capital expenditures for fiscal 2022 are projected at $27 million to $29 million, mainly for new stores and remodels. Operating cash flows significantly decreased, while investing cash flows increased due to marketable securities sales, and financing cash flows were primarily used for common stock repurchases - Primary uses of cash include operational expenditures, inventory purchases, and capital investments (new stores, remodels, infrastructure improvements), with potential for common stock repurchases[83] - Fiscal 2022 capital expenditures are projected to be $27 million to $29 million, primarily for 33 new stores and existing store remodels/relocations[86] | Cash Flow Activity (in thousands) | Nine Months Ended Oct 29, 2022 | Nine Months Ended Oct 30, 2021 | Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net cash (used in) provided by operating activities | $(36,412) | $71,936 | $(108,348) | | Net cash provided by investing activities | $60,417 | $26,219 | $34,198 | | Net cash used in financing activities | $(87,249) | $96,217 | $8,968 | - The company maintains a secured credit facility with Wells Fargo Bank, N.A. of up to $25.0 million (increasing to $35.0 million after December 1, 2023) and a credit facility with UBS Switzerland AG of up to 15.0 million Euro, with no outstanding borrowings as of October 29, 2022[91][93] Critical Accounting Estimates The company's condensed consolidated financial statements rely on assumptions and estimates in accordance with U.S. GAAP. There have been no significant changes to critical accounting estimates since the Annual Report on Form 10-K for the fiscal year ended January 29, 2022 - The preparation of financial statements requires estimates and assumptions that affect reported amounts of assets, liabilities, revenue, and expenses[95] - No significant changes to critical accounting estimates have occurred since the Annual Report on Form 10-K for the fiscal year ended January 29, 2022[96] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk profile has not significantly changed since January 29, 2022, as disclosed in its Annual Report on Form 10-K - The market risk profile at October 29, 2022, has not significantly changed since January 29, 2022[148] Item 4. Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of October 29, 2022, and there have been no material changes in internal control over financial reporting during the three months ended October 29, 2022 - The CEO and CFO concluded that disclosure controls and procedures were effective as of October 29, 2022[149] - No material changes in internal control over financial reporting occurred during the three months ended October 29, 2022[150] Part II. Other Information Item 1. Legal Proceedings The company is involved in various litigation matters incidental to its business, with potential for significant liability, and refers to Note 5 for further details on specific legal proceedings - The company is involved in litigation incidental to its business, and a court determination could result in significant liability[151] - Further details on legal proceedings are provided in Note 5 to the Condensed Consolidated Financial Statements[152] Item 1A. Risk Factors The company reiterates that investing in its securities involves a high degree of risk, referencing the comprehensive risk factors detailed in Item 2 of Part I of this Form 10-Q and its Annual Report on Form 10-K, with no material changes noted since the previous filing - Investing in the company's securities involves a high degree of risk, and readers should consider the risk factors when evaluating future prospects[98] - There have been no material changes in the risk factors set forth in the Annual Report on Form 10-K for the year ended January 29, 2022[153] U.S. and global economic and political uncertainty The retail market's cyclicality and unpredictable discretionary consumer spending, influenced by economic and political uncertainty, housing prices, unemployment, and inflation, could materially adversely affect the company's operations, especially as a retailer of branded merchandise facing increased consumer focus on 'value' - The retail market is subject to substantial cyclicality, making discretionary consumer spending unpredictable due to economic and political uncertainty, housing prices, unemployment rates, and inflation[99] - A decline in disposable income and consumer confidence, coupled with an increased focus on 'value', may negatively affect the company's business, potentially forcing reliance on promotional sales[100] COVID-19 global pandemic impact The COVID-19 pandemic continues to pose material risks, including potential store closures, reduced consumer traffic and spending, supply chain disruptions, and adverse macroeconomic effects like high inflation and recessionary pressures, with the full extent of its impact remaining uncertain - The COVID-19 pandemic has negatively impacted global economies, consumer spending, supply chains, and financial markets, with its duration and severity determining ongoing business impact[101] - Potential risks include forced closure of retail stores, reduced consumer traffic due to health fears, negative impact on sales from decreased consumer confidence, and significant disruptions to the supply chain[102][103][104] - Macroeconomic conditions post-pandemic, such as general economic uncertainty, unemployment, high inflation, and recessionary pressures, could continue to adversely affect the business[106] Failure to anticipate fashion trends The company's success is highly dependent on its ability to anticipate and respond to rapidly changing fashion trends and consumer preferences. Misjudging these trends could lead to lower sales, substantial unsold inventory, and reliance on markdowns, materially affecting results - Customer tastes and fashion trends are volatile and change rapidly, requiring the company to effectively anticipate and respond to these changes[108] - Failure to anticipate trends or misjudging the market could result in lower sales, substantial unsold inventory, and reliance on markdowns or promotional sales, adversely affecting results of operations[108] Inability to compete favorably The highly competitive retail industry, particularly for teenage and young adult apparel, poses a risk to the company's sales. Competition for vendors, customers, locations, and personnel, especially from larger competitors with greater resources and advanced e-commerce capabilities, could necessitate price reductions and lead to customer loss - The teenage and young adult retail industry is highly competitive, with competition for vendors, customers, store locations, qualified associates, management, online marketing, social media engagement, and e-commerce traffic[109] - Larger competitors with greater financial and marketing resources, including advanced e-commerce capabilities, could force the company to lower prices and potentially result in customer loss[109] Risks associated with international trade and conditions The company's reliance on foreign manufacturers exposes it to risks from international trade conditions, including natural disasters, public health concerns, political instability, and trade restrictions like tariffs or quotas, which could increase merchandise costs or reduce supply, adversely affecting operations - Most merchandise is produced by foreign manufacturers, exposing the company to risks from natural disasters, public health concerns, political instability, and trade disruptions[110] - Trade restrictions (e.g., tariffs, quotas) could increase costs and reduce merchandise supply, materially affecting results of operations[110] - Disruptions in the supply chain, such as strikes or port closures, could adversely affect the business[110] Decrease in consumer traffic The company's sales depend heavily on customer traffic to its stores and websites. Factors such as declining mall popularity, economic downturns, increased gasoline prices, exchange rate fluctuations, geopolitical events, or widespread health emergencies could reduce traffic, leading to decreased sales and adverse impacts on financial condition - Sales are highly dependent on customer traffic to stores (often in malls) and websites[111] - Factors that could adversely affect traffic include declining mall popularity, economic downturns, competition from other retailers, increased gasoline prices, exchange rate fluctuations, geopolitical events, and widespread health emergencies[111] - A reduction in consumer traffic could materially adversely affect business, results of operations, and financial condition[112] Growth strategy and international expansion risks The company's growth strategy, including expanding into new domestic and international markets, carries risks such as competitive challenges, difficulties in securing desirable lease space, and increased demands on operational and managerial resources. International expansion specifically introduces unfamiliar competitive conditions, consumer tastes, and regulatory environments, potentially negatively impacting results - Growth depends on optimizing customer engagement in current markets and successful expansion into new geographic markets, including international locations[113] - Expansion into new markets presents competitive, merchandising, hiring, and distribution challenges, and places increased demands on operational, managerial, and administrative resources[113] - International markets may have different competitive conditions, consumer tastes, and regulatory environments, potentially leading to less successful operations and additional compliance costs[115] Seasonal fluctuations and volatility The company's sales and profitability are highly seasonal, with disproportionately higher results in the third and fourth fiscal quarters due to back-to-school and holiday shopping. Negative factors during these peak seasons, or unanticipated decreases in demand, could lead to excess inventory and substantial markdowns, materially affecting annual financial results - Sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters due to back-to-school and winter holiday shopping seasons[116] - Any negative factors during the last half of the year, including unfavorable economic conditions or adverse weather, could materially adversely affect financial condition and results for the entire year[116] - Unanticipated decreases in demand during peak seasons could require selling excess inventory at substantial markdowns, negatively impacting business and financial condition[116] Information systems and cybersecurity risks Failures in information systems or inadequate cybersecurity measures could disrupt operations, compromise confidential data, and lead to adverse publicity, litigation, and significant expenses. The evolving regulatory environment for information security also poses compliance risks and potential fines - Ineffective information systems could adversely impact transaction processing, financial accounting, reporting, and business management[118] - Failure to maintain adequate security systems against cybersecurity risks could lead to unauthorized access, data theft, adverse publicity, litigation, and regulatory actions[119] - Non-compliance with new and changing security standards could result in fines, restrictions, and financial exposure, adversely affecting retail operations[119] Fluctuations in merchandise production costs Significant fluctuations in the cost of raw materials, global labor, shipping, and other production-related expenses can lead to higher merchandise costs. If selling prices do not increase proportionately, gross profit and results of operations could be adversely affected - Increases in raw material, global labor, freight, and other shipping costs can lead to higher merchandise costs[120] - Gross profit and results of operations could be adversely affected if selling prices do not increase proportionately with rising costs[120] - Significant changes in carrier capacity and shipper demand could also increase transportation costs, impacting gross profit[120] Increased labor costs Increased labor costs, driven by competition, unionization, minimum wage hikes, or rising healthcare benefits, could adversely impact the company's operating profit. Inconsistent minimum wage increases across jurisdictions limit pricing flexibility, and future healthcare legislation could also negatively affect results - Labor is a primary component of operating costs, and increases due to competition, unionization, minimum wage, state unemployment rates, healthcare, or other benefits could adversely impact operating profit[122] - Inconsistent increases in state/city minimum wage requirements limit the ability to increase prices across all markets and channels[122] - As a self-insured entity for U.S. healthcare, future healthcare legislation could adversely impact results of operations[122] Manufacturer labor and environmental practices The company's business could suffer if its vendors or manufacturers fail to adhere to acceptable labor and environmental practices, or if product quality and safety standards are not met. Such failures could disrupt supply, damage reputation, lead to fines, and result in lost sales or product recalls - The company does not control vendors' or manufacturers' labor and environmental practices, and violations could disrupt shipments or damage reputation[123] - Most products are manufactured internationally, increasing the risk of differing labor and environmental practices[123] - Inability to comply with product quality and safety regulations could result in significant fines, penalties, damage to reputation, lost sales, or product recalls[124] Vendor relationships and supply Maintaining strong relationships with a large number of vendors is crucial for the company's extensive product selection. Deterioration of these relationships, vendors discontinuing supply, raising prices, or competing directly could adversely affect the company's ability to acquire desired merchandise and materially impact its business and financial performance - The business depends on developing and maintaining good relationships with a large number of vendors for an extensive selection of current and relevant brands[125] - Risks include vendors discontinuing sales, raising prices, selling through direct channels, or allowing merchandise to be discounted by other retailers[126] - Smaller, less capitalized vendors are more susceptible to economic downturns, potentially impacting their ability to supply products[127] Weather conditions The company's business is susceptible to unseasonable weather conditions, which can render inventory incompatible with current conditions. Prolonged unseasonable weather could materially adversely affect business and results of operations - The business is susceptible to unseasonable weather conditions, such as extended warm winters or cool summers[128] - Unseasonable weather could render a portion of inventory incompatible, materially adversely affecting business and results of operations[128] Omni-channel strategy risks The company's omni-channel strategy, requiring significant IT investments and operational changes, may not deliver anticipated returns or meet evolving customer expectations. Failure to effectively integrate store and e-commerce experiences, scale IT infrastructure, or compete with other retailers' strategies could adversely affect operating results - The omni-channel strategy requires significant investments in IT systems and changes in operational strategy[129] - Failure to effectively integrate store and e-commerce experiences, scale IT structure, or realize anticipated returns on investments could adversely affect operating results[129] - If the omni-channel strategy fails to meet customer expectations related to functionality, timely delivery, or customer experience, business and results of operations may be adversely affected[129] Key executive and talent retention The company's performance relies heavily on its key executives and its ability to attract, motivate, and retain qualified employees, including store managers, associates, and technical staff. Failure to meet staffing needs, high employee turnover, or increased labor costs could materially impact growth strategy and financial performance - Performance depends largely on the efforts and abilities of key executives; loss of one or more could impair business management and growth objectives[130] - Success depends on attracting, motivating, and retaining a sufficient number of qualified employees who understand the company's culture and brand[131] - Failure to meet staffing needs, material increases in employee turnover, increased labor costs, or work stoppages could materially adversely affect business or results of operations[133] Decline in cash flows from operations The company relies on cash flow from operations to fund its current operations and growth strategy. Insufficient operating cash flow, without alternative financing, could hinder the ability to pay expenses, grow the business, respond to competition, or meet other liquidity needs, materially adversely affecting the business - The company depends on cash flow from operations to fund current operations and growth strategy, including operating leases, wages, and capital needs[134] - Insufficient operating cash flow, without sufficient funds from credit facilities or other sources, could materially adversely affect the business by limiting the ability to pay expenses, grow, or respond to challenges[134] Credit agreement restrictions and financing risks The company's secured credit agreement imposes restrictive covenants and financial maintenance covenants that could limit its ability to respond to market conditions, meet capital needs, or engage in strategic activities. Additionally, there's a risk that lenders may not continue to support their commitments, potentially hindering the ability to secure alternative financing - The secured credit agreement contains various representations, warranties, and restrictive covenants that limit the company's ability to incur indebtedness, grant liens, make investments, pay dividends, or engage in mergers, among other things[135] - Financial maintenance covenants require net income after taxes of at least $5.0 million on a trailing four-quarter basis and a quick ratio of 1.25:1.0 at the end of each fiscal quarter[135] - There is no assurance that borrowing relationships with lenders will continue or that lenders will remain able to support commitments, potentially impacting the ability to secure alternative financing[136] Closure or disruption of home office or distribution centers The company relies on single distribution centers in the U.S., Europe, Canada, and Australia, and its home office in Washington. Unforeseen events like war, terrorism, natural disasters, or public health issues affecting these locations could significantly disrupt operations and materially adversely affect the business and financial condition - The company relies on single distribution centers in Corona, California (U.S.), Graz, Austria (Europe), Delta, British Columbia (Canada), and Melbourne, Australia, as well as its home office in Lynnwood, Washington[137] - Unforeseen events such as war, terrorism, political instability, public health issues, natural disasters, or other catastrophic events affecting these centers or the home office could significantly disrupt operations[137] - Such disruptions could have a material adverse effect on the business, results of operations, and financial condition[137] War, acts of terrorism, threat of terrorism, or other types of mall violence As most stores are in shopping malls, threats or actual events of terrorism or mall violence could lead to lower consumer traffic, mall closures, and decreased sales. Geopolitical conflicts could also diminish consumer spending, all of which could materially adversely affect the company's business and financial condition - Most stores are located in shopping malls, making them susceptible to lower consumer traffic due to threats or actual events of terrorism or mall violence[138] - Mall closures or decreased consumer traffic due to security concerns, or diminished consumer spending from war/armed conflict, could result in decreased sales[138] - Decreased sales could have a material adverse effect on the business, financial condition, and results of operations[138] Intellectual property protection and infringement The company's trademarks and domain names are critical assets, and their unauthorized use or misappropriation could diminish brand value and sales. Efforts to protect intellectual property may not be sufficient, and the company also faces the risk of infringing on third-party IP rights, potentially leading to costly litigation and product delays - Trademarks and domain names are valuable assets, and unauthorized use could diminish brand value and cause a decline in net sales[139] - Efforts to protect trademarks may not be sufficient or effective, especially outside the U.S[139] - The company is subject to the risk of infringing on third parties' intellectual property rights, which could result in costly litigation, product delays, or royalty payments[139] Litigation risk The company faces various litigation risks, including employment-related claims and class action lawsuits, which could lead to significant liability, substantial costs, and diversion of management's attention, potentially harming its business and financial results - The company is subject to federal, state, and foreign laws and regulations relating to employment, creating a risk of potential claims for discrimination, harassment, wage and hour violations, and personal injury[140] - Exposure to class action litigation carries greater defense costs and risk of loss, potentially disrupting business and impacting financial results[141] - Litigation, including investor complaints, can result in substantial costs and divert management's attention and resources[142] Compliance with laws and regulations The company operates under a wide array of domestic and foreign laws and regulations. Non-compliance or changes in these laws could adversely affect its reputation, results of operations, financial condition, and cash flows, particularly concerning employment, trade, consumer protection, and privacy - The business is subject to a wide array of laws and regulations, including those related to employment, trade, consumer protection, transportation, occupancy, healthcare, wage laws, and privacy[143] - Any violations of such laws or regulations, or changes in regulations, could have an adverse effect on reputation, results of operations, financial condition, and cash flows[143] Tax obligations and effective tax rate fluctuations Fluctuations in tax obligations and the effective tax rate may lead to volatility in operating results. The company is subject to income taxes in multiple jurisdictions and various audits, the outcomes of which are uncertain and could materially impact financial condition, results of operations, or cash flows - The company is subject to income taxes in many domestic and foreign jurisdictions, and products are subject to import, excise, sales, consumption, or value-added taxes[144] - The outcome of tax audits is uncertain and may have an adverse effect on the business[144] - The effective tax rate may be materially impacted by changes in tax rates, duties, the mix and level of earnings/losses by jurisdiction, or changes to accounting rules/regulations[144] Failure to meet analyst expectations If the company's operating results fall below the estimates or expectations of public market analysts and investors, its stock price could decline - If operating results are below the estimates or expectations of public market analysts and investors, the stock price could decline[145] Share repurchase program and controlling shareholder risk The execution of a share repurchase program, by reducing total outstanding shares, may increase the risk that a group of shareholders could form a controlling group, potentially influencing or controlling matters requiring shareholder approval and affecting the company's stock price - The reduction of total outstanding shares through a share repurchase program may increase the risk that a group of shareholders could form a controlling shareholder group[146] - A controlling shareholder would have significant influence over matters requiring shareholder approval, including director elections and mergers, potentially affecting the company's stock price[147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no issuer purchases of common stock during the thirteen weeks ended October 29, 2022 - No issuer purchases of common stock occurred during the thirteen weeks ended October 29, 2022[154] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities - No defaults upon senior securities[155] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[155] Item 5. Other Information There is no other information to report under this item - No other informatio