OLLIE’S BARGAIN OUTLET HOLDINGS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

You should read the following discussion together with the financial statementsand related notes included elsewhere in this Annual Report on Form 10-K. Thestatements in this discussion regarding expectations of our future performance,liquidity and capital resources and other non-historical statements areforward-looking statements. These forward-looking statements are subject tonumerous risks and uncertainties, including, but not limited to, the risks anduncertainties described in “Item 1A, Risk Factors” and “Cautionary noteregarding forward-looking statements.” Our actual results may differ materiallyfrom those contained in or implied by any forward-looking statements.We operate on a fiscal calendar widely used by the retail industry that resultsin a given fiscal year consisting of a 52- or 53-week period ending on theSaturday nearer January 31 of the following year.

References to “2022” refer tothe fiscal year ended January 28, 2023 and references to”2021″ refer to thefiscal year ended January 29, 2022.

2022 and 2021 each consisted of 52 weeks.References to “2023” refer to the 53-week fiscal year ending February 3, 2024.OverviewOllie’s is a highly differentiated and fast-growing, extreme value retailer ofbrand name merchandise at drastically reduced prices. Known for our assortmentof “Good Stuff Cheap(R),” we offer customers a broad selection of brand nameproducts, including housewares, bed and bath, food, floor coverings, health andbeauty aids, books and stationery, toys, and electronics. Our differentiatedgo-to market strategy is characterized by a unique, fun and engaging treasurehunt shopping experience, compelling customer value proposition and witty,humorous in-store signage and advertising campaigns.

These attributes havedriven our rapid growth and strong store performance as evidenced by our storebase expansion from 303 stores to 468 stores and net sales growth from £1.241billion to £1.827 billion from 2018 to 2022 and average annual net sales perstore of £4.3 million for the five-year period.Our Growth StrategySince the founding of Ollie’s in 1982, we have grown organically by backfilling existing markets and leveraging our brand awareness, marketing, and infrastructure to expand into new markets in contiguous states. We have expanded to 468 stores located in 29 states as of January 28, 2023.Our stores are supported by three distribution centers, one each in York, PA,Commerce, GA, and Lancaster, TX. We are in the process of expanding our York, PAdistribution center, which will provide an additional 201,000 square feet ofdistribution capacity and is expected to be completed in the first half of 2023.On October 17, 2022, the Company entered into a purchase agreement to acquire aparcel of land in Princeton, IL for the construction of its fourth distributioncenter.

The purchase agreement is subject to customary post-execution,pre-closing activities with an anticipated closing date in the first quarter offiscal 2023. With the expansion of our York, PA distribution center and theaddition of our fourth distribution center, we believe our distributioncapabilities will support over 700 stores.We have invested in our associates, infrastructure, distribution network, andinformation systems to allow us to continue to rapidly grow our store footprint,including:o growing our merchant buying team to increase our access to brand name/closeout merchandise;o adding members to our senior management team;o expanding the capacity of our distribution centers to their current 2.2 million square feet; ando investing in information technology, accounting, and warehouse management systems.

35——————————————————————————–IndexOur business model has produced consistent and predictable store growth over thepast several years, during both strong and weaker economic cycles. We plan tocontinue to enhance our competitive positioning and drive growth in sales andprofitability by executing on the following strategies:o growing our store base;o increasing our offerings of great bargains; ando leveraging and expanding Ollie’s Army.We have a proven portable, flexible, and highly profitable store model that hasproduced consistent financial results and returns.

Our new store model targetsa store size between 20,000 to 35,000 square feet and an average initial cashinvestment of approximately £1.0 million, which includes store fixtures andequipment, store-level and distribution center inventory (net of payables) andpre-opening expenses. We target new store sales of approximately £4.0 millionin their first full year of operations.While we are focused on driving comparable store sales and managing ourexpenses, our revenue and profitability growth will primarily come from openingnew stores. The core elements of our business model are procuring great deals,offering extreme values to our customers and creating consistent, predictablestore growth and margins.

In addition, our new stores generally open strong,contributing to the growth in net sales and profitability of our business. From2018 to 2022, net sales grew at a CAGR of 10.2%. We plan to achieve continuednet sales growth, including comparable stores sales, by adding stores to ourstore base and by continuing to provide quality merchandise at a value for ourcustomers as we scale and gain more access to purchase directly from majormanufacturers.

We also plan to leverage and expand our Ollie’s Army databasemarketing strategies. In addition, we plan to continue to manage our selling,general, and administrative expenses (“SG&A”) by continuing to make processimprovements and by maintaining our standard policy of reviewing our operatingcosts.Our ability to grow and our results of operations may be impacted by additionalfactors and uncertainties, such as consumer spending habits, which are subjectto macroeconomic conditions and changes in discretionary income. Our customers’discretionary income is primarily impacted by gas prices, wages, rising interestrates, and consumer trends and preferences, which fluctuate depending on theenvironment.

The potential consolidation of our competitors or other changes inour competitive landscape could also impact our results of operations or ourability to grow, even though we compete with a broad range of retailers.Our key competitive advantage is our direct buying relationships with many majormanufacturers, wholesalers, distributors, brokers, and retailers for our brandname and closeout products and unbranded goods. We also augment our product mixwith private label brands. As we continue to grow, we believe our increasedscale will provide us with even greater access to brand name and closeoutproducts as major manufacturers seek a single buyer to acquire an entire deal.How We Assess the Performance of Our Business and Key Line ItemsWe consider a variety of financial and operating measures in assessing the performance of our business.

The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.Number of New StoresThe number of new stores reflects the number of stores opened during aparticular reporting period. Before we open new stores, we incur pre-openingexpenses described below under “Pre-Opening Expenses” and we make an initialinvestment in inventory. We also make initial capital investments in fixturesand equipment, which we amortize over time.We opened 40 new stores in 2022.

We expect new store growth to be the primarydriver of our sales growth. Our initial lease terms are approximately sevenyears with options to renew for three to five successive five-year periods. Ourportable and predictable real estate model focuses on backfilling existingmarkets and entering new markets in contiguous states.

Our new stores often openwith higher sales levels as a result of greater advertising and promotionalspend in connection with grand opening events, but decline shortly thereafter toour new store model levels.

36——————————————————————————–IndexNet SalesWe recognize retail sales in our stores when merchandise is sold and thecustomer takes possession of the merchandise. Also included in net sales isrevenue allocated to certain redeemed discounts earned via the Ollie’s Armyloyalty program and gift card breakage. Net sales are presented net of returnsand sales tax.

Net sales consist of sales from comparable stores andnon-comparable stores, described below under “Comparable Store Sales.” Growthof our net sales is primarily driven by the expansion of our store base inexisting and new markets. As we continue to grow, we believe we will havegreater access to brand name and closeout merchandise and an increased dealselection, resulting in more potential offerings for our customers. Net salesare impacted by product mix, merchandise mix and availability, as well aspromotional activities and the spending habits of our customers.

Our broadselection of offerings across diverse product categories supports growth in netsales by attracting new customers, which results in higher spending levels andfrequency of shopping visits from our customers, including Ollie’s Army members.The spending habits of our customers are subject to macroeconomic conditions andchanges in discretionary income. Our customers’ discretionary income isprimarily impacted by gas prices, wages and consumer trends and preferences,which fluctuate depending on the environment. However, because we offer a broadselection of merchandise at extreme values, we believe we are generally lessimpacted than other retailers by economic cycles that correspond with declinesin general consumer spending habits.

We believe we also benefit from periods ofincreased consumer spending.Comparable Store SalesComparable store sales measure performance of a store during the currentreporting period against the performance of the same store in the correspondingperiod of the previous year. Comparable store sales consist of net sales fromour stores beginning on the first day of the sixteenth full fiscal monthfollowing the store’s opening, which is when we believe comparability isachieved. Comparable store sales are impacted by the same factors that impactnet sales.We define comparable stores to be stores that:o have been remodeled while remaining open;o are closed for five or fewer days in any fiscal month;o are closed temporarily and relocated within their respective trade areas; ando have expanded, but are not significantly different in size, within their current locations.Non-comparable store sales consist of new store sales and sales for stores notopen for a full 15 months.

Stores which are closed temporarily, but for morethan five days in any fiscal month, are included in non-comparable store salesbeginning in the fiscal month in which the temporary closure begins until thefirst full month of operation once the store re-opens, at which time they areincluded in comparable store sales.Opening new stores is the primary component of our growth strategy and as wecontinue to execute on our growth strategy, we expect a significant portion ofour sales growth will be attributable to non-comparable store sales.Accordingly, comparable store sales are only one measure we use to assess thesuccess of our growth strategy.

37——————————————————————————–IndexGross Profit and Gross MarginGross profit is equal to our net sales less our cost of sales. Cost of salesincludes merchandise costs, inventory markdowns, shrinkage and transportation,distribution, and warehousing costs, including depreciation and amortization.Gross margin is gross profit as a percentage of our net sales. Gross margin is ameasure used by management to indicate whether we are selling merchandise at anappropriate gross profit.In addition, our gross margin is impacted by product mix, as some products generally provide higher gross margins, by our merchandise mix and availability, and by our merchandise cost, which can vary.Our gross profit is variable in nature and generally follows changes in netsales.

We regularly analyze the components of gross profit, as well as grossmargin. Specifically, our product margin and merchandise mix is reviewed by ourmerchant team and senior management, ensuring strict adherence to internalmargin goals. Our disciplined buying approach has produced consistent grossmargins and we believe helps to mitigate adverse impacts on gross profit andresults of operations.The components of our cost of sales may not be comparable to the components ofcost of sales or similar measures of our competitors and other retailers.

As aresult, our gross profit and gross margin may not be comparable to similar datamade available by our competitors and other retailers.Selling, General, and Administrative ExpensesSG&A are comprised of payroll and benefits for store, field support, and supportcenter associates. SG&A also include marketing and advertising expense,occupancy costs for stores and the store support center, insurance, corporateinfrastructure, and other general expenses. The components of our SG&A remainrelatively consistent per store and for each new store opening.

SG&A generallyincrease as we grow our store base and as our net sales increase. A significantportion of our expenses is primarily fixed in nature, and we expect to continueto maintain strict discipline while carefully monitoring SG&A as a percentage ofnet sales. We expect that our SG&A will continue to increase in future periodswith future growth.The components of our SG&A may not be comparable to the components of SG&A orsimilar measures of our competitors and other retailers.

As a result, our SG&Amay not be comparable to similar data made available by our competitors andother retailers.Depreciation and Amortization ExpensesProperty and equipment are stated at original cost less accumulated depreciationand amortization. Depreciation and amortization expenses are calculated over theestimated useful lives of the related assets, or in the case of leaseholdimprovements, the lesser of the useful lives or the remaining term of the lease.Expenditures for additions, renewals, and betterments are capitalized;expenditures for maintenance and repairs are charged to expense as incurred.Depreciation and amortization are computed on the straight-line method forfinancial reporting purposes. Depreciation and amortization as it relates to ourdistribution centers is included within cost of sales on the consolidatedstatements of income.

38——————————————————————————–IndexPre-Opening ExpensesPre-opening expenses consist of expenses of opening new stores and distributioncenters, as well as store closing costs. For opening new stores, pre-openingexpenses include grand opening advertising costs, payroll expenses, travelexpenses, employee training costs, rent expenses, and store setup costs.Pre-opening expenses for new stores are expensed as they are incurred, which istypically within 30 to 45 days of opening a new store. For opening distributioncenters, pre-opening expenses primarily include inventory transportation costs,employee travel expenses, and occupancy costs.

Store closing costs primarilyconsist of insurance deductibles, rent, and store payroll.Operating IncomeOperating income is gross profit less SG&A, depreciation and amortization, andpre-opening expenses. Operating income excludes net interest income or expense,and income tax expense. We use operating income as an indicator of theproductivity of our business and our ability to manage expenses.EBITDA and Adjusted EBITDAEBITDA and Adjusted EBITDA are key metrics used by management and our Board toassess our financial performance.

EBITDA and Adjusted EBITDA are alsofrequently used by analysts, investors, and other interested parties to evaluatecompanies in our industry. We use Adjusted EBITDA to supplement U.S. GenerallyAccepted Accounting Principles (“GAAP”) measures of performance to evaluate theeffectiveness of our business strategies, to make budgeting decisions, toevaluate our performance in connection with compensation decisions and tocompare our performance against that of other peer companies using similarmeasures.

Management believes it is useful to investors and analysts toevaluate these non-GAAP measures on the same basis as management uses toevaluate the Company’s operating results. We believe that excluding items fromoperating income, net income, and net income per diluted share that may not beindicative of, or are unrelated to, our core operating results, and that mayvary in frequency or magnitude, enhances the comparability of our results andprovides a better baseline for analyzing trends in our business.We define EBITDA as net income before net interest income or expense,depreciation and amortization expenses, and income taxes. Adjusted EBITDArepresents EBITDA as further adjusted for non-cash stock-based compensationexpense and gains on insurance settlements.

EBITDA and Adjusted EBITDA arenon-GAAP measures and may not be comparable to similar measures reported byother companies. EBITDA and Adjusted EBITDA have limitations as analyticaltools, and you should not consider them in isolation or as a substitute foranalysis of our results as reported under GAAP. In the future we may incurexpenses or charges such as those added back to calculate Adjusted EBITDA.

Ourpresentation of Adjusted EBITDA should not be construed as an inference that ourfuture results will be unaffected by these items. For further discussion ofEBITDA and Adjusted EBITDA and for reconciliations of net income, the mostdirectly comparable GAAP measure, to EBITDA and Adjusted EBITDA, see “Results ofOperations.” 39——————————————————————————–IndexResults of OperationsThis section includes comparisons of certain 2022 financial information to thesame information for 2021. Year-to-year comparisons of the 2021 financialinformation to the same information for fiscal 2020, the 52-week period endedJanuary 29, 2021 (“2020”), are contained in Item 7 of our Form 10-K for 2021filed with the SEC on March 25, 2022 and available through the SEC’s website athttps://www.sec.gov/edgar/searchedgar/companysearch.html.The following tables summarize key components of our results of operations for 2022 and 2021, both in dollars and as a percentage of our net sales.We derived the consolidated statements of income for 2022 and 2021 from ourconsolidated financial statements and related notes.

Our historical results arenot necessarily indicative of the results that may be expected in the future.

2022 2021 (dollars in thousands)Net sales £ 1,827,009 £ 1,752,995Cost of sales 1,170,915 1,071,749Gross profit 656,094 681,246Selling, general and administrative expenses 490,569 447,615 Depreciation and amortization expenses 22,907 19,364Pre-opening expenses 11,700 9,675Operating income 130,918 204,592Interest expense (income), net (2,965 ) 209Income before income taxes 133,883 204,383Income tax expense 31,093 46,928Net income £ 102,790 £ 157,455Percentage of net sales(1):Net sales 100.0 % 100.0 %Cost of sales 64.1 61.1Gross profit 35.9 38.9Selling, general and administrative expenses 26.9 25.5Depreciation and amortization expenses 1.3 1.1Pre-opening expenses 0.6 0.6Operating income 7.2 11.7Interest expense (income), net (0.2 ) -Income before income taxes 7.3 11.7Income tax expense 1.7 2.7Net income 5.6 % 9.0 %Select operating data:Number of new stores 40 46Number of store closings (3 ) (3 )Number of stores open at end of period 468 431Average net sales per store (2) £ 4,043 £ 4,254Comparable stores sales change (3.0 )% (11.1 )%——————————————————————————–(1) Components may not add to totals due to rounding.(2) Average net sales per store represents the weighted average of total netweekly sales divided by the number of stores open at the end of each week forthe respective periods presented.

40——————————————————————————–IndexThe following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented: 2022 2021 (dollars in thousands)Net income £ 102,790 £ 157,455Interest expense (income), net (2,965 ) 209Depreciation and amortization expenses (1) 28,903 25,114 Income tax expense 31,093 46,928EBITDA 159,821 229,706Gains from insurance settlements (897 ) (416 )Non-cash stock-based compensation expense 9,951 8,042Adjusted EBITDA £ 168,875 £ 237,332——————————————————————————–(1) Includes depreciation and amortization relating to our distribution centers, which is included within cost of sales on our consolidated statements of income.2022 Compared with 2021Net SalesNet sales increased to £1.827 billion in 2022 from £1.753 billion in 2021, anincrease of £74.0 million, or 4.2%. The increase was the result of anon-comparable store sales increase of £124.1 million, partially offset by acomparable store sales decrease of £50.1 million. The increase innon-comparable store sales was driven by sales from new stores that have notbeen open for a full 15 months during 2022.Comparable store sales decreased 3.0% in 2022 compared with 11.1% in 2021.

The decrease in comparable store sales consisted of a decrease in the number of transactions partially offset by an increase in average transaction size.Gross Profit and Gross MarginGross profit decreased to £656.1 million in 2022 from £681.2 million in 2021, adecrease of £25.1 million, or 3.7%. Gross margin decreased 300 basis points to35.9% in 2022 from 38.9% in 2021. The decrease in gross margin in fiscal 2022is due to increased supply chain costs, primarily the result of higher importand trucking costs and, to a lesser extent, higher wage rates in the Company’sdistribution centers.Selling, General and Administrative ExpensesSG&A increased to £490.6 million in 2022 from £447.6 million in 2021, anincrease of £43.0 million, or 9.6%.

The dollar increase in SG&A was primarilydriven by higher selling expenses associated with a net increase of 37 stores,partially offset by tight expense controls throughout the organization. As apercentage of net sales, SG&A increased 140 basis points to 26.9% in 2022 from25.5% in 2021. This increase was primarily driven by higher selling expensesassociated with our new store unit growth, as well as investments in wages andhigher utility costs, partially offset by tight expense controls throughout theorganization.Included in SG&A in 2022 and 2021 is £0.9 million and £0.4 million,respectively, of income related to gains from insurance settlements.

Excludingthe gains in both years, SG&A increased 130 basis points as a percentage of netsales in 2022.

41——————————————————————————–IndexDepreciation and Amortization ExpensesDepreciation and amortization expenses increased to £22.9 million in 2022 from£19.4 million in 2021, an increase of £3.5 million, or 18.0%, the result of theincreased asset base due to new store growth.Pre-Opening ExpensesPre-opening expenses increased to £11.7 million in 2022 from £9.7 million in2021, an increase of £2.0 million, or 20.6%. The increase is primarily due tohigher costs and the timing of store openings. We opened 40 new stores andclosed three stores in 2022 compared with having opened 46 new stores and closedthree stores in 2021.

As a percentage of net sales, pre-opening expenses were0.6% in both 2022 and 2021.Interest (Income)Expense, NetNet interest income was £3.0 million in 2022 compared with net interest expenseof £0.2 million in 2021. Due to favorable interest rates and higher average cashbalance in 2022.Income Tax ExpenseIncome tax expense decreased to £31.1 million in 2022 from £46.9 million in2021, a decrease of £15.8 million, or 33.7%. The effective tax rates for 2022and 2021 were 23.2% and 23.0%, respectively.

The variance in the effective taxrates between the periods was primarily due to a decrease in the overall statetax rate, offset by a decrease in excess tax benefits related to stock-basedcompensation. Discrete tax benefits totaled £0.3 million and £4.2 million in2022 and 2021, respectively. For further information, see Note 8 under “Notes toConsolidated Financial Statements.”Net IncomeAs a result of the foregoing, net income decreased to £102.8 million in 2022 from £157.5 million in 2021, a decrease of £54.7 million, or 34.7%.Adjusted EBITDAAdjusted EBITDA decreased to £168.9 million in 2022 from £237.3 million in 2021, a decrease of £68.4 million, or 28.8%.Liquidity and Capital ResourcesOverviewOur primary sources of liquidity are net cash flows provided by operatingactivities and available borrowings under our £100.0 million Revolving CreditFacility.

As of January 28, 2023, we had £270.8 million of cash and cashequivalents and short-term investments on hand and £87.0 million available toborrow under our Revolving Credit Facility.Our primary cash needs are for capital expenditures and working capital. Additionally, we have made and may continue to make discretionary share repurchases (see ‘Share Repurchase Program’ below for further discussion).Our capital expenditures are primarily related to new store openings, storeresets, which consist of improvements to stores as they are needed, expendituresrelated to our distribution centers, and infrastructure-related investments,including investments related to upgrading and maintaining our informationtechnology systems. We spent £51.7 million and £35.0 million for capitalexpenditures in 2022 and 2021, respectively.

We opened 40 new stores and closedthree stores, two in connection with relocations during 2022.

42——————————————————————————–IndexCapital expenditures in 2023 are planned to be approximately £125 million,primarily for the construction of our fourth distribution center and theexpansion of the Company’s York, PA distribution center, as well as the openingof 45 new stores, store-level initiatives at our existing stores, as well asgeneral corporate capital expenditures, including information technology. Oncecomplete, the 201,000 square foot expansion of our York, PA distribution center,will provide us the capacity for an additional 50 stores upon completion. Wehave experienced, and may continue to experience, delays in construction andpermitting of new stores and other projects.Our primary working capital requirements are for the purchase of merchandiseinventories, payroll, store rent associated with our operating leases, otherstore operating costs, distribution costs, and general and administrativecosts.

Our working capital requirements fluctuate during the year, rising inour third fiscal quarter as we increase quantities of inventory in anticipationof our peak holiday sales season in our fourth fiscal quarter. Fluctuations inworking capital are also driven by the timing of new store openings.Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash flows from operations.A financial instrument which potentially subjects the Company to a concentrationof credit risk is cash. Ollie’s currently maintains its day-to-day operatingcash balances with major financial institutions.

The Company’s operating cashbalances are in excess of the Federal Deposit Insurance Corporation (“FDIC”)insurance limit. From time to time, Ollie’s invests temporary excess cash inovernight investments with expected minimal volatility, such as money marketfunds. Although the Company maintains balances which exceed the FDIC insuredlimit, it has not experienced any losses related to these balances.We believe our cash and cash equivalents and short-term investments position,net cash provided by operating activities and availability under our RevolvingCredit Facility will be adequate to finance our planned capital expenditures,working capital requirements, debt service, and other financing activities overthe next 12 months.

If cash provided by operating activities and borrowingsunder our Revolving Credit Facility are not sufficient or available to meet ourcapital requirements, we will be required to obtain additional equity or debtfinancing in the future. There can be no assurance equity or debt financingwill be available to us when needed or, if available, the terms will besatisfactory to us and not dilutive to our then-current stockholders.Share Repurchase ProgramOn December 15, 2020, the Board of Directors of the Company authorized therepurchase of up to £100.0 million of shares of the Company’s common stock. OnMarch 16, 2021, the Board of Directors of the Company authorized an increase of£100.0 million in the Company’s share repurchase program, resulting in £200.0million approved for share repurchases through January 13, 2023.

On November30, 2021, the Board authorized an additional £200.0 million to repurchase stockpursuant to the Company’s share repurchase program, expiring on December 15,2023. The shares to be repurchased may be purchased from time to time in openmarket conditions (including blocks), privately negotiated transactions,accelerated share repurchase programs or other derivative transactions, issuerself-tender offers or any combination of the foregoing. The timing ofrepurchases and the actual amount purchased will depend on a variety of factors,including the market price of our shares, general market, economic and businessconditions, and other corporate considerations.

Repurchases may be madepursuant to plans intended to comply with Rule 10b5-1 under the SecuritiesExchange Act of 1934, which could allow us to purchase our shares during periodswhen we otherwise might be prevented from doing so under insider trading laws orbecause of self-imposed trading blackout periods. Repurchases are expected tobe funded from cash on hand or through the utilization of our Revolving CreditFacility. The repurchase authorization does not require the purchase of aspecific number of shares and is subject to suspension or termination by ourBoard of Directors at any time.During 2022, we repurchased 848,133 shares of our common stock for £41.8million, inclusive of transaction costs, pursuant to our share repurchaseprogram, and during 2021, we repurchased 3,113,981 shares of our common stockfor £220.0 million, inclusive of transaction costs.

These expenditures werefunded by cash generated from operations. As of January 28, 2023, we hadapproximately £138.2 million remaining under our share repurchaseauthorization. There can be no assurances that any additional repurchases willbe completed, or as to the timing or amount of any repurchases.

43——————————————————————————–IndexSummary of Cash FlowsA summary of our cash flows from operating, investing, and financing activities is presented in the following table: 2022 2021 (in thousands)Net cash provided by operating activities £ 114,346 £ 45,033 Net cash used in investing activities (111,454 ) (31,830 ) Net cash used in financing activities (39,273 ) (213,352 )Net decrease in cash and cash equivalents £ (36,381 ) £ (200,149 )Cash Provided by Operating ActivitiesNet cash provided by operating activities in 2022 totaled £114.3 millioncompared with £45.0 million in 2021. The increase in net cash provided byoperating activities in 2022 was primarily due to decreased working capitalneeds, largely due to a substantial increase in capitalized costs in inventory,as well as the timing of inventory receipts and payments, partially offset adecrease in net income year over year.Cash Used in Investing ActivitiesNet cash used in investing activities totaled £111.5 million in 2022 comparedwith £31.8 million in 2021. The increase in cash used in investing activitiesis primarily due to purchases of short-term investments of £60.2 million inaddition to an increase in cash used for capital expenditures in the currentyear.Cash Used in Financing ActivitiesNet cash used in financing activities totaled £39.3 million in 2022 comparedwith £213.4 million in 2021.

The change in cash outflow in 2022 is primarilydue to £41.8 million paid for the repurchase of the Company’s shares in fiscal2022 as compared to share repurchases of £220.0 million in fiscal 2021.Credit FacilitiesThe Company’s credit facility (the “Credit Facility”) provides for a five-year£100.0 million revolving credit facility (the “Revolving Credit Facility”),which includes a £45.0 million sub-facility for letters of credit and a £25.0million sub-facility for swingline loans. The loans under the Revolving CreditFacility mature on May 22, 2024. In addition, we may at any time add term loanfacilities or additional revolving commitments up to £150.0 million pursuant toterms and conditions set out in the Credit Facility.As a result of the anticipated discontinuation of LIBOR in 2023, on January 24,2023, we amended our Credit Facility to replace the LIBOR-based interest ratesincluded therein with SOFR-based interest rates and to modify the provisions fordetermining an alternative rate of interest upon the occurrence of certainevents relating to the availability of interest rate benchmarks.

The interestrates for the Credit Facility are calculated as follows: for ABR Loans, thehighest of the Prime Rate, the Federal Funds Effective Rate plus 0.50% and TermSOFR with a term of one-month in effect on such day plus the SOFR SpreadAdjustment plus 1.0%, plus the Applicable Margin, or, for SOFR Loans, the SOFRLoan Rate plus the Applicable Margin plus the SOFR Spread Adjustment. TheApplicable Margin will vary from 0.00% to 0.50% for an ABR Loan and 1.00% to1.50% for a SOFR Loan, based on availability under the Credit Facility. The SOFRLoan Rate is subject to a 0% floor.Under the terms of the Revolving Credit Facility, as of January 28, 2023, wecould borrow up to 90.0% of the most recent appraised value (valued at cost,discounted for the current net orderly liquidation value) of our eligibleinventory, as defined, up to £100.0 million.

44——————————————————————————–IndexAs of January 28, 2023, we had no outstanding borrowings under the RevolvingCredit Facility, with £87.0 million of borrowing availability, outstandingletters of credit commitments of £12.8 million and £0.2 million of rentreserves. The Revolving Credit Facility also contains a variable unused linefee ranging from 0.125% to 0.250% per annum. We incurred unused line fees of£0.1 million in each of 2022 and 2021.The Credit Facility is collateralized by the Company’s assets and equity andcontains a financial covenant, as well as certain business covenants, includingrestrictions on dividend payments, which we must comply with during the term ofthe agreement.

The financial covenant is a consolidated fixed charge coverageratio test of at least 1.0 to 1.0 applicable during a covenant period, based onreference to availability. We were in compliance with all terms of the CreditFacility during 2022.The provisions of the Credit Facility restrict all of the net assets of theCompany’s consolidated subsidiaries, which constitutes all of the net assets onour consolidated balance sheet as of January 28, 2023 from being used to pay anydividends or make other restricted payments to the Company without prior writtenconsent from the financial institutions that are a party to the Credit Facility,subject to material exceptions including proforma compliance with the applicableconditions described in the Credit Facility.Contractual ObligationsWe enter into long-term contractual obligations and commitments in the normalcourse of business, primarily operating leases. The following table summarizesour material cash requirements over the next several periods from knowncontractual obligations, including contractual lease obligations: Less than 1 1-3 Years 3-5 Years Thereafter Total year (in thousands)Operating leases (1) £ 94,286 £ 161,696 £ 118,844 £ 116,575 £ 491,401Finance leases 684 525 – – 1,209Purchase obligations (2) 4,300 – – – 4,300Total £ 99,270 £ 162,221 £ 118,844 £ 116,575 £ 496,910(1) Operating lease payments exclude £45.5 million of legally binding minimumlease payments for leases signed, but not yet commenced.(2) Purchase obligations represent £3.0 million associated with a constructionagreement for the expansion of our York, PA distribution center (entered intoon March 7, 2022) and £1.3 million associated with the purchase agreement forthe purchase of a parcel of land in Princeton, IL for our fourth distributioncenter (fully executed on October 17, 2022).We do not have any off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.SeasonalityOur business is seasonal in nature and demand is generally the highest in ourfourth fiscal quarter due to the holiday sales season.

To prepare for theholiday sales season, we must order and keep in stock more merchandise than wecarry during other times of the year and generally engage in additionalmarketing efforts. We expect inventory levels, along with accounts payable andaccrued expenses, to reach their highest levels in our third and fourth fiscalquarters in anticipation of increased net sales during the holiday salesseason. As a result of this seasonality, and generally because of variation inconsumer spending habits, we experience fluctuations in net sales and workingcapital requirements during the year.

Because we offer a broad selection ofmerchandise at extreme values, we believe we are generally less impacted thanother retailers by economic cycles which correspond with declines in generalconsumer spending habits and we believe we still benefit from periods ofincreased consumer spending.

45——————————————————————————–IndexCritical Accounting EstimatesOur consolidated financial statements have been prepared in accordance withGAAP. A summary of our significant accounting policies can be found in Note 1to our audited consolidated financial statements included elsewhere in thisAnnual Report on Form 10-K. The preparation of these consolidated financialstatements requires us to make judgments and estimates that affect the reportedamounts of assets, liabilities, revenues, expenses and related disclosures.These judgments and estimates are based on historical and other factors believedto be reasonable under the circumstances.

We have identified the policies belowas critical to our business operations and understanding of our results ofoperations.InventoriesInventories are stated at the lower of cost or market determined using theretail inventory method on a first-in, first-out basis. The cost of inventoriesincludes the merchandise cost, transportation costs, and certain distributionand storage costs. Such costs are thereafter expensed as cost of sales upon thesale of the merchandise.Under the retail inventory method, which is widely used in the retail industry,inventory is segregated into departments of merchandise having similarcharacteristics.

The valuation of inventories and the resulting gross profit isderived by applying a calculated cost-to-retail ratio to the retail value ofinventories for each department.Inherent in the retail inventory method are certain management judgments andestimates including, among others, merchandise markups, the amount and timing ofpermanent markdowns, and shrinkage, which may significantly impact both theending inventory valuation and gross profit.Factors considered in the determination of permanent markdowns includeuncertainties related to inventory obsolescence, excess inventories, current andanticipated demand, age of the merchandise and customer preferences. Asignificant increase in the demand for merchandise could result in a short-termincrease in inventory purchases while a significant decrease in demand couldresult in an increase in the amount of excess inventory quantities on-hand. Ifour inventory is determined to be overvalued in the future, we would be requiredto recognize such costs in cost of sales and reduce operating income at the timeof such determination. Therefore, although every effort is made to ensure theaccuracy of forecasts of merchandise demand, any significant unanticipatedchanges in demand or in economic conditions within our markets could have asignificant impact on the value of our inventory and reported operatingresults.

Similarly, if higher than anticipated levels of shrinkage were tooccur, it could have a material effect on our results of operations.We have not made any material changes in the methodology used to recognizepermanent markdowns or inventory shrinkage in the financial periods presentednor do we anticipate material changes in assumptions we use for permanentmarkdowns or shrinkage. As previously stated, however, if our actual experiencedoes not accurately reflect our assumptions and forecasts, we may be exposed tolosses or gains that could be material. We believe a 10% change in ourassumptions as of January 28, 2023 would have impacted net income byapproximately £0.8 million in 2022.Goodwill/Intangible AssetsWe amortize intangible assets over their useful lives unless we determine suchlives to be indefinite.

Goodwill and intangible assets having indefinite usefullives are not amortized to earnings, but instead are subject to annualimpairment testing or more frequently if events or circumstances indicate thatthe value of goodwill or intangible assets having indefinite useful lives mightbe impaired.Goodwill and intangible assets having indefinite useful lives are tested forimpairment annually in the fiscal month of October. We have the option toevaluate qualitative factors to determine if it is more likely than not thatthe carrying amount of our sole reporting unit or our nonamortizing intangibleassets (consisting of a tradename) exceed their implied respective fair valueand whether it is necessary to perform a quantitative analysis to determineimpairment. As part of this qualitative assessment, we weigh the relative impactof factors that are specific to our sole reporting unit or our nonamortizingintangible assets as well as industry, regulatory and macroeconomic factors thatcould affect the inputs used to determine the fair value of the assets.

46——————————————————————————–IndexIf management determines a quantitative goodwill impairment test is required, orit elects to perform a quantitative test, the test is performed by determiningthe fair value of our sole reporting unit. Fair value is determined based on ourpublic market capitalization. The carrying value of goodwill is consideredimpaired when the reporting unit’s fair value is less than its carrying valueand the Company would record an impairment loss equal to the difference, not toexceed the total amount of goodwill allocated to the reporting unit.If management determines a quantitative analysis of intangible assets havingindefinite useful lives is required, the test is performed using the discountedcash flow method based on management’s projection of future revenues and anestimated royalty rate to determine the fair value of the asset, specifically,our tradename.

An impairment loss is recognized for any excess of the carryingamount of the asset over the implied fair value of that asset.Our impairment calculations contain uncertainties as they require management tomake assumptions and apply judgment to qualitative factors as well as estimatefuture cash flows by forecasting financial performance. Our policy is toconduct impairment testing based on our most current business plans, whichreflect anticipated changes in the economy and the retail industry. Shouldsignificant changes in our overall business strategy, future results or economicevents cause us to adjust our projected cash flows, future estimates of fairvalue may not support the carrying amount of these assets.

If actual resultsprove inconsistent with our assumptions and judgments, we could be exposed to animpairment charge.For 2022 and 2021, we completed an impairment test of our goodwill and determined that no impairment of goodwill existed.

Similarly, for 2022 and 2021, we completed an impairment test of our tradename and determined that no impairment of the asset existed.(C) Edgar Online, source Glimpses