7. Stock-BasedRepurchases of Common Stock
SELECT COMFORTSLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
10.11. Net Income (Loss) per Common Share
The components of basic and diluted net income (loss) per share were as follows (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Net income (loss) | $ | 22,250 | | | $ | (12,630) | | | $ | 88,884 | | | $ | 26,510 | |
| Reconciliation of weighted-average shares outstanding: | | | | | | | |
| Basic weighted-average shares outstanding | 24,371 | | | 27,923 | | | 24,874 | | | 27,890 | |
| Dilutive effect of stock-based awards | 823 | | | 0 | | | 995 | | | 633 | |
| Diluted weighted-average shares outstanding | 25,194 | | | 27,923 | | | 25,869 | | | 28,523 | |
| Net income (loss) per share – basic | $ | 0.91 | | | $ | (0.45) | | | $ | 3.57 | | | $ | 0.95 | |
| Net income (loss) per share – diluted | $ | 0.88 | | | $ | (0.45) | | | $ | 3.44 | | | $ | 0.93 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Net income | $ | 25,603 |
| | $ | 25,745 |
| | $ | 49,286 |
| | $ | 40,130 |
|
| | | | | | | | |
| Reconciliation of weighted-average shares outstanding: | | | |
| | | | |
| Basic weighted-average shares outstanding | 40,755 |
| | 45,621 |
| | 41,740 |
| | 46,705 |
|
| Dilutive effect of stock-based awards | 760 |
| | 729 |
| | 819 |
| | 708 |
|
| Diluted weighted-average shares outstanding | 41,515 |
| | 46,350 |
| | 42,559 |
| | 47,413 |
|
| | | | | | | | |
| Net income per share – basic | $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.18 |
| | $ | 0.86 |
|
| Net income per share – diluted | $ | 0.62 |
| | $ | 0.56 |
| | $ | 1.16 |
| | $ | 0.85 |
|
For the three and ninesix months ended September 30, 2017July 3, 2021 and October 1, 2016,the six months ended June 27, 2020, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial. For the three months ended June 27, 2020, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.
11.12. Commitments and Contingencies
Sales Returns
The activity in the sales returns liability account was as follows (in thousands): |
| | | | | | | |
| | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 |
| Balance at beginning of year | $ | 15,222 |
| | $ | 20,562 |
|
| Additions that reduce net sales | 55,720 |
| | 54,588 |
|
| Deductions from reserves | (52,494 | ) | | (57,112 | ) |
| Balance at end of period | $ | 18,448 |
| | $ | 18,038 |
|
Warranty Liabilities
The activity in the accrued warranty liabilities account was as follows (in thousands): | | | | | | | | | | | |
| Six Months Ended |
| July 3,
2021 | | June 27,
2020 |
| Balance at beginning of year | $ | 12,152 | | | $ | 11,345 | |
| Additions charged to costs and expenses for current-year sales | 7,863 | | | 4,965 | |
| Deductions from reserves | (9,235) | | | (4,789) | |
| Changes in liability for pre-existing warranties during the current year, including expirations | (237) | | | (89) | |
| Balance at end of period | $ | 10,543 | | | $ | 11,432 | |
|
| | | | | | | |
| | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 |
| Balance at beginning of year | $ | 8,633 |
| | $ | 10,028 |
|
| Additions charged to costs and expenses for current-year sales | 8,627 |
| | 7,014 |
|
| Deductions from reserves | (6,625 | ) | | (7,976 | ) |
| Changes in liability for pre-existing warranties during the current year, including expirations | (708 | ) | | (976 | ) |
| Balance at end of period | $ | 9,927 |
| | $ | 8,090 |
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Legal Proceedings
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additionalmaterial losses either because we believe that we have valid defenses to claims asserted against us, or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate.estimate, or the potential loss is not material. We currently do not expect the outcome of these matterspending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.
On January 12, 2015, Plaintiffs David and Katina Spade commencedMarch 27, 2018, Level Sleep, LLC (Level Sleep) filed a purported class actionpatent infringement lawsuit against Sleep Number in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United StatesFederal District Court for the Eastern District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed toTexas. In its Complaint, Level Sleep claims that Sleep Number infringed two patents owned by Level Sleep, U.S. Patent Nos. 6,807,698 and 7,036,172 (the Patents), by, among other things, making, using, offering for sale, or selling within the United States, and/or importing into the United States, beds with sleep surfaces having foam with multiple zones in the longitudinal direction. Level Sleep has asserted that five non-360® beds no longer sold and two current non-360 beds infringe the
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Patents. Level Sleep seeks damages in the form of a reasonable royalty. Sleep Number has asserted that the Patents are invalid and that our products do not infringe the Patents. On January 14, 2020, the Court granted summary judgment in favor of Sleep Number, finding that Sleep Number’s products do not infringe the Patents. Level Sleep filed an appeal of the Court’s summary judgment order to the Federal Circuit Court of Appeals which issued a decision on July 13, 2021, affirming the Court's summary judgment order and dismissal of Level Sleep's claims.
13. COVID-19 Pandemic
At the onset of the COVID-19 pandemic in mid-March 2020, government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.
The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong financial performance during the full-year of 2020 and the first six months of 2021. However, the pandemic's future effect on consumer demand and our ongoing financial performance remains uncertain. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operationsof this Quarterly Report on Form 10-Qand Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the Third Circuit, which has certified two questions of law tofiscal year ended January 2, 2021, for additional discussion on the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has accepted the certified questions and oral arguments are expected to be heard in the near future. As the United States District Court for the District of New Jersey determined, we believe that the case is without meritCOVID-19 pandemic and the order of dismissal should be affirmed.impact on our business.
|
| |
ITEM 2. | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our condensed consolidated financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seveneight sections:
•Forward-Looking Statements and Risk Factors
Company•Business Overview
•COVID-19 Pandemic - Impact on our Business
•Results of Operations
•Liquidity and Capital Resources
•Non-GAAP Data Reconciliations
•Off-Balance-Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies
Forward-Looking Statements and Risk Factors
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included herein. This quarterly report on Form 10-Qthis Quarterly Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.
These risks and uncertainties include, among others:
•Current and future general and industry economic trends and consumer confidence;
•Risks inherent in outbreaks of pandemics or contagious disease, including the COVID-19 pandemic;
•The effectiveness of our marketing messages;
•The efficiency of our advertising and promotional efforts;
•Our ability to execute our Company-ControlledTotal Retail distribution strategy;
•Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;
•Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;
•Industry competition, the emergence of additional competitive products and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;
The potential for claims•Claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others;
•Availability of attractive and cost-effective consumer credit options;
•Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
•Our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third-parties, including several sole-source suppliers;suppliers or providers of services;
•Rising commodity costs and other inflationary pressures;
•Risks inherent in global sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, strikes and the potential for shortages in supply;
•Risks of disruption in the operation of eitherany of our two main manufacturing facilities or assembly facilities;
•Increasing government regulation;
•Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;
•The adequacy of our managementand third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and security;
•The costs and potential disruptions to our business related to upgrading our management information systems;
•The vulnerability of our managementand third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business; and
•Our ability to attract, retain and motivate qualified management, executive and other key employees,team members, including qualified retail sales professionals and managers; and
Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.
managers.
Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” below in Part II: Item 1A of this Quarterly Report on Form 10-Q and under the same caption in our Annual Report on Form 10-K.
We have no obligation to publicly update or revise any of the forward-looking statements contained in this quarterly reportQuarterly Report on Form 10-Q.
CompanyBusiness Overview
We are executing a consumer innovation strategy with three significant competitive advantages as we work toward our ambitious visionIndividuality is core to become one of the world's most beloved brands by delivering an unparalleled sleep experience. We offer consumers high-quality, individualized sleep solutions and services, which include a complete line of Sleep Number® beds, bases and bedding accessories.Number. Our competitive advantages are: proprietary sleep innovations, exclusive distribution and lifelong customer relationships.
We are a vertically integrated brand and the developer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds and related technology. We are also the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ® technology - proprietary sensor technology that works directly with the bed’s DualAir™ system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Our bed assortmentpurpose driven Company is complemented with proprietary FlextFit™ adjustable bases, and Sleep Number® pillows, sheets and other bedding products. In May 2017, we began selling certain models of our Sleep Number 360™ smart bed line.
Our differentiated products are sold exclusively at more than 550 Sleep Number® stores located in 49 states, online at SleepNumber.com or via phone. We offer consumers a unique, value-added store and digital experience through our teamcomprised of over 3,800 individuals5,000 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. This experience, combinedOur award-winning 360 smart beds provide each sleeper with effortlessly adjustable, individualized comfort for proven-quality sleep. With a purpose of improving the advantageshealth and wellbeing of society through higher-quality sleep, we have already improved over 13 million lives.
Sleep science and data are the foundation of our verticalinnovations. Our 360smart beds benefit from our proprietary SleepIQ technology, which leverages and learns from nearly 11 billion hours' worth of highly-accurate sleep data. This enables our 360 smart beds to provide effortless comfort and sleep health insights for each sleeper, including their daily SleepIQ score.
Sleep Number is a leader in sleep innovation. By pairing our data and innovations with meaningful collaborations including world-leading partners in sleep, we are leveraging the potential of our research and technology to advance sleep health and sleep science, develop new products, services and synergistic interactions. Our vertically integrated business model and SleepIQ technology, enable a lifelong relationship with our customers. role as the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number beds allows us to offer consumers high-quality, individualized sleep solutions and services.
We generate revenue by marketing and selling productsour innovations directly to new and existing customers.customers, and selling products through our Stores, Online, Phone and Chat (Total Retail).
We expect our business transformation over the past five years to result in improved profitability through the productivity and service advancements associated with our integrated ERP platform, smart bed design, more efficient manufacturing and supply chain network. In 2017, we began evolving our supply chain including the transition of more than 20 suppliers with whom we are partnering with to support our innovations and profitability goals. Changes to the supply chain also include in-hub assembly of our new 360 smart beds and optimization of our outbound logistics network. These multi-year initiatives, coupled with our innovations, are expected to drive accelerated profits and cash flows over time.
We are committed to delivering superior shareholder value through three primary drivers of earnings per share growth:by: (1) increasing consumer demand,demand; (2) leveraging theour business modelmodel; and (3) deploying capital efficiently.
COVID-19 Pandemic - Impact on our Business
At the onset of the COVID-19 pandemic in mid-March 2020, government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.
The investmentsCOVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we have made in R&D, technology, digitalgenerated strong financial performance during the full-year of 2020 and the first six months of 2021. However, the pandemic's future effects on consumer demand and our store experience have strengthened ongoing financial performance remains uncertain. See Part I: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operationsof this Quarterly Report on Form 10-Qand Part I: Item 1A. Risk Factors in our competitive advantagesAnnual Report on Form 10-K for the fiscal year ended January 2, 2021, for additional discussion on the COVID-19 pandemic and establishedthe impact on our innovation leadership. We have a long-term orientation and are focused on delivering sustainable, profitable growth.business.
Results of Operations
Quarterly and Year-to-Date Results
Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, the timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of new product introductions theand related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the extent to which our business and our condensed consolidated financial results are impacted will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.
Highlights
Financial highlights for the periodthree months ended September 30, 2017July 3, 2021 were as follows:
•Net sales for the three months ended September 30, 2017July 3, 2021 increased 9%70% to $403$484 million, compared with $368$285 million for the COVID-19 affected period in 2020. Net sales for the current quarter increased 36% compared with $356 million for the three months ended June 29, 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the three months ended July 3, 2021.
•The 70% net sales increase consisted of a 65% comparable sales increase in Total Retail and sales from 23 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.
•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-months basis for the period ended July 3, 2021 totaled $3.5 million, 25% higher than the same period last year.
•Operating income for the three months ended July 3, 2021 was $30 million, an increase of $42 million, compared with the $12 million operating loss in the prior-year period. The $42 million increase in operating income was driven by the 70% increase in net sales, a 3.3 ppt. improvement in the gross profit rate and a 7.2 ppt. reduction in our operating expenses rate. Operating income for the current quarter increased 310% compared with $7 million for the same period of 2019.
•The 3.3 ppt. gross profit rate improvement primarily resulted from the leveraging impact of the 70% net sales increase and a more favorable sales mix of higher-margin products, partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs. See the Gross profit discussion on page 17 for additional details.
•The 7.2 ppt. reduction in our operating expenses rate was mainly due to the leveraging impact of the 70% net sales increase and digitally-led operating efficiencies. During the three months ended July 3, 2021, we continued to prioritize investments in near- and long-term growth drivers, including $16 million of R&D expenses, 93% more than the same period one year ago.
•Net income for the three months ended July 3, 2021 increased to $22 million, compared with a net loss of $13 million for the same period one year ago. Net sales for the three months ended September 30, 2017 were affected by: (i) an approximately $25 million shift in sales from our second quarter to our third quarter asincome per diluted share was $0.88, compared with a resultnet loss per diluted share of $0.45 last year.
•We achieved a delay in deliveries and shipments related to an inventory shortage from onereturn on invested capital (ROIC) of our new suppliers (this delay has been resolved and we don't expect a shortage in the future), and (ii) temporary disruptions from hurricanes during our Labor Day sales event that reduced third quarter net sales by an estimated $12 to $15 million.
The 9% sales increase was driven by 6 percentage points (ppt.) of growth from sales generated by 26 net new stores opened in the past 12 months and a 5% comparable sales increase in our Company-Controlled channel, partially offset by a decrease in our Wholesale/Other channel sales.
Sales per store (for stores open at least one year)33% on a trailing twelve-month basis for the period ended September 30, 2017 were $2.4 million, up 5% from $2.2 million in the prior-year comparable period.
In May 2017, we began selling our Sleep Number 360™ i7 and i10 smart beds. The Sleep Number 360 smart bed won 13 awards at CES, including being named the Best of Innovation Honoree in the Home Appliance category. We plan to launch a third smart bed model (the p6) in the fourth quarter, and remain on track to complete the phased implementation of our 360 smart bed line by the first half of next year.
Operating incomeJuly 3, 2021, compared with 17% for the quarter totaled $39 million, consistent with the samecomparable period one year ago. Our operating income rate decreased to 9.7% of net sales, compared with 10.6% of net sales for the same period last year. The decrease in operating income rate primarily resulted from transition costs associated with the launch of our Sleep Number 360 smart beds and the evolution of our supply chain.
Net income for the quarter was $25.6 million, or $0.62 per diluted share, compared with $25.7 million, or $0.56 per diluted share, for the same period one year ago.
•Cash provided by operating activities totaled $176 million for the ninesix months ended September 30, 2017,July 3, 2021 increased by $74 million, or 86%, to $161 million, compared with $145$87 million for the same period one year ago. Investing activities for the current-year period included $38
•At July 3, 2021, we had $382 million of property and equipment purchases, compared with $39 million for the same period last year.
At September 30, 2017, cash and cash equivalents totaled $30 million and we ended the quarter with no borrowings under our $153 million revolving credit facility. We utilizeNet liquidity available under our revolving credit facility was $214 million at July 3, 2021.
•On April 21, 2021, we amended our revolving credit facility to meetexpand the aggregate availability from $450 million to $600 million. We also replenished our seasonal working capital requirements.
In the third quarter of 2017, we repurchased 1.3 million shares of our common stock under our Board-approved share repurchase program at a cost of $40 million (an average of $31.18 per share). Effective as of October 1, 2017, our Board approved an increase in our total remainingoutstanding share repurchase authorization to $500 million.$600 million effective at the beginning of the fiscal second quarter, April 4, 2021. We remain committed to our capital deployment priorities focused on performance drivers.
The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Net sales | $ | 484.3 | | | 100.0 | % | | $ | 284.9 | | | 100.0 | % | | $ | 1,052.6 | | | 100.0 | % | | $ | 757.5 | | | 100.0 | % |
| Cost of sales | 191.5 | | | 39.5 | % | | 121.9 | | | 42.8 | % | | 403.8 | | | 38.4 | % | | 292.4 | | | 38.6 | % |
| Gross profit | 292.9 | | | 60.5 | % | | 163.0 | | | 57.2 | % | | 648.8 | | | 61.6 | % | | 465.1 | | | 61.4 | % |
| Operating expenses: | | | | | | | | | | | | | | | |
| Sales and marketing | 206.0 | | | 42.5 | % | | 130.2 | | | 45.7 | % | | 429.6 | | | 40.8 | % | | 337.9 | | | 44.6 | % |
| General and administrative | 41.2 | | | 8.5 | % | | 36.7 | | | 12.9 | % | | 83.8 | | | 8.0 | % | | 67.8 | | | 8.9 | % |
| Research and development | 15.9 | | | 3.3 | % | | 8.3 | | | 2.9 | % | | 29.2 | | | 2.8 | % | | 18.8 | | | 2.5 | % |
| Total operating expenses | 263.1 | | | 54.3 | % | | 175.1 | | | 61.5 | % | | 542.6 | | | 51.6 | % | | 424.5 | | | 56.0 | % |
| Operating income (loss) | 29.7 | | | 6.1 | % | | (12.1) | | | (4.3 | %) | | 106.1 | | | 10.1 | % | | 40.7 | | | 5.4 | % |
| Interest expense, net | 1.6 | | | 0.3 | % | | 3.9 | | | 1.4 | % | | 2.6 | | | 0.2 | % | | 6.3 | | | 0.8 | % |
| Income (loss) before income taxes | 28.1 | | | 5.8 | % | | (16.1) | | | (5.6 | %) | | 103.6 | | | 9.8 | % | | 34.4 | | | 4.5 | % |
| Income tax expense (benefit) | 5.9 | | | 1.2 | % | | (3.4) | | | (1.2 | %) | | 14.7 | | | 1.4 | % | | 7.9 | | | 1.0 | % |
| Net income (loss) | $ | 22.3 | | | 4.6 | % | | $ | (12.6) | | | (4.4 | %) | | $ | 88.9 | | | 8.4 | % | | $ | 26.5 | | | 3.5 | % |
| | | | | | | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | | | | | | |
| Basic | $ | 0.91 | | | | | $ | (0.45) | | | | | $ | 3.57 | | | | | $ | 0.95 | | | |
| Diluted | $ | 0.88 | | | | | $ | (0.45) | | | | | $ | 3.44 | | | | | $ | 0.93 | | | |
| | | | | | | | | | | | | | | |
| Weighted-average number of common shares: | | | | | | | | | | | | |
| Basic | 24.4 | | | | | 27.9 | | | | | 24.9 | | | | | 27.9 | | | |
| Diluted | 25.2 | | | | | 27.9 | | | | | 25.9 | | | | | 28.5 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Net sales | | $ | 402.6 |
| | 100.0 | % | | $ | 368.0 |
| | 100.0 | % | | $ | 1,081.2 |
| | 100.0 | % | | $ | 997.8 |
| | 100.0 | % |
| Cost of sales | | 149.2 |
| | 37.1 | % | | 135.6 |
| | 36.9 | % | | 404.7 |
| | 37.4 | % | | 385.2 |
| | 38.6 | % |
| Gross profit | | 253.5 |
| | 62.9 | % | | 232.3 |
| | 63.1 | % | | 676.5 |
| | 62.6 | % | | 612.7 |
| | 61.4 | % |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Sales and marketing | | 174.8 |
| | 43.4 | % | | 158.0 |
| | 42.9 | % | | 488.6 |
| | 45.2 | % | | 443.5 |
| | 44.4 | % |
| General and administrative | | 32.6 |
| | 8.1 | % | | 28.3 |
| | 7.7 | % | | 95.2 |
| | 8.8 | % | | 86.2 |
| | 8.6 | % |
| Research and development | | 7.0 |
| | 1.7 | % | | 7.0 |
| | 1.9 | % | | 21.0 |
| | 1.9 | % | | 21.7 |
| | 2.2 | % |
| Total operating expenses | | 214.4 |
| | 53.3 | % | | 193.3 |
| | 52.5 | % | | 604.7 |
| | 55.9 | % | | 551.3 |
| | 55.3 | % |
| Operating income | | 39.0 |
| | 9.7 | % | | 39.0 |
| | 10.6 | % | | 71.8 |
| | 6.6 | % | | 61.3 |
| | 6.1 | % |
| Other expense, net | | (0.2 | ) | | (0.1 | %) | | (0.3 | ) | | (0.1 | %) | | (0.7 | ) | | (0.1 | %) | | (0.6 | ) | | (0.1 | %) |
| Income before income taxes | | 38.8 |
| | 9.6 | % | | 38.8 |
| | 10.5 | % | | 71.1 |
| | 6.6 | % | | 60.8 |
| | 6.1 | % |
| Income tax expense | | 13.2 |
| | 3.3 | % | | 13.0 |
| | 3.5 | % | | 21.8 |
| | 2.0 | % | | 20.6 |
| | 2.1 | % |
| Net income | | $ | 25.6 |
| | 6.4 | % | | $ | 25.7 |
| | 7.0 | % | | $ | 49.3 |
| | 4.6 | % | | $ | 40.1 |
| | 4.0 | % |
| | | | | | | | | | | | | | | | | |
| Net income per share: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Basic | | $ | 0.63 |
| | |
| | $ | 0.56 |
| | | | $ | 1.18 |
| | | | $ | 0.86 |
| | |
|
| Diluted | | $ | 0.62 |
| | |
| | $ | 0.56 |
| | | | $ | 1.16 |
| | | | $ | 0.85 |
| | |
|
| | | | | | | | | | | | | | | | | |
| Weighted-average number of common shares: | | |
| | | | | | | | | | | | |
|
| Basic | | 40.8 |
| | |
| | 45.6 |
| | | | 41.7 |
| | | | 46.7 |
| | |
|
| Diluted | | 41.5 |
| | |
| | 46.4 |
| | | | 42.6 |
| | | | 47.4 |
| | |
|
The percentage of our total net sales, by dollar volume, from each of our channels was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Retail stores | 88.1 | % | | 72.2 | % | | 87.0 | % | | 84.6 | % |
| Online, phone, chat and other | 11.9 | % | | 27.8 | % | | 13.0 | % | | 15.4 | % |
| Total Company | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Company-Controlled channel | | 99.3 | % | | 97.8 | % | | 98.5 | % | | 97.3 | % |
| Wholesale/Other channel | | 0.7 | % | | 2.2 | % | | 1.5 | % | | 2.7 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The components of total net sales change, including comparable net sales changes, were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Sales change rates: | | | | | | | |
Retail comparable-store sales (1) | 102 | % | | (40 | %) | | 41 | % | | (14 | %) |
| Online, phone and chat | (28 | %) | | 209 | % | | 17 | % | | 107 | % |
Total Retail comparable sales change (1) | 65 | % | | (21 | %) | | 37 | % | | (5 | %) |
| Net opened/closed stores and other | 5 | % | | 1 | % | | 2 | % | | 2 | % |
| Total Company | 70 | % | | (20 | %) | | 39 | % | | (3 | %) |
___________________________ |
| | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Sales change rates: | | | | | | |
| | |
|
Retail comparable-store sales(1) | | 5 | % | | (10 | %) | | 1 | % | | (7 | %) |
| Online and phone | | 9 | % | | 23 | % | | 17 | % | | 10 | % |
| Company-Controlled comparable sales change | | 5 | % | | (8 | %) | | 2 | % | | (6 | %) |
| Net opened/closed stores | | 6 | % | | 7 | % | | 8 | % | | 6 | % |
| Total Company-Controlled channel | | 11 | % | | (1 | %) | | 10 | % | | 0 | % |
| Wholesale/Other channel | | (65 | %) | | (19 | %) | | (38 | %) | | 3 | % |
| Total net sales change | | 9 | % | | (2 | %) | | 8 | % | | 0 | % |
(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.
Other sales metrics were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
Average sales per store (1)(4) ($ in thousands) | $ | 3,542 | | | $ | 2,830 | | | | | |
Average sales per square foot (1)(4) | $ | 1,203 | | | $ | 988 | | | | | |
Stores > $2 million in net sales (2)(4) | 82 | % | | 63 | % | | | | |
Stores > $3 million in net sales (2)(4) | 47 | % | | 25 | % | | | | |
Average revenue per mattress unit (3) | $ | 5,094 | | | $ | 4,767 | | | $ | 5,059 | | | $ | 4,839 | |
___________________________ |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
Average sales per store(1) ($ in thousands) | | $ | 2,369 |
| | $ | 2,248 |
| | | | |
Average sales per square foot(1) | | $ | 909 |
| | $ | 895 |
| | | | |
Stores > $1 million in net sales(1) | | 98 | % | | 98 | % | | | | |
Stores > $2 million in net sales(1) | | 59 | % | | 54 | % | | | | |
Average revenue per mattress unit – Company-Controlled channel(2) | | $ | 4,385 |
| | $ | 3,959 |
| | $ | 4,239 |
| | $ | 4,031 |
|
(1)(2)Trailing-twelve months for stores included in our comparable-store sales calculation.open at least one year (excludes online, phone and chat sales).
(2)(3)Represents Company-Controlled channel totalTotal Retail (stores, online, phone and chat) net sales divided by Company-Controlled channelTotal Retail mattress units.
(4)Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 2021 and 2019. The additional week in 2020 was in the fiscal fourth quarter. Total Retail comparable sales have been adjusted to remove the estimated impact of the additional week on those metrics.
The number of retail stores operating was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Beginning of period | 607 | | | 611 | | | 602 | | | 611 | |
| Opened | 26 | | | 6 | | | 37 | | | 14 | |
| Closed | (12) | | | (19) | | | (18) | | | (27) | |
| End of period | 621 | | | 598 | | | 621 | | | 598 | |
|
| | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Beginning of period | | 549 |
| | 506 |
| | 540 |
| | 488 |
|
| Opened | | 6 |
| | 24 |
| | 30 |
| | 57 |
|
| Closed | | (2 | ) | | (3 | ) | | (17 | ) | | (18 | ) |
| End of period | | 553 |
| | 527 |
| | 553 |
| | 527 |
|
Comparison of Three Months Ended September 30, 2017July 3, 2021 with Three Months Ended October 1, 2016June 27, 2020
Net sales
Net sales increased 9% to $403 million for the three months ended September 30, 2017,July 3, 2021 increased by $199 million, or 70%, to $484 million, compared with $368$285 million for the same period one year ago.ago, which was impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on average. Net sales for the current quarter increased 36% compared with $356 million for the three months ended June 29, 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the three months ended September 30, 2017 were affected by: (i) an approximately $25 million shiftJuly 3, 2021.
The 70% net sales increase consisted primarily of a 65% comparable sales increase in Total Retail and sales from our second quarter to our third quarter as a result of a delay in deliveries and shipments related to an inventory shortage from one of our new suppliers (this delay has been resolved and we don't expect a shortage in the future); and (ii) temporary disruptions from hurricanes during our Labor Day sales event that reduced third quarter net sales by an estimated $12 to $15 million. The 9% sales increase was driven by 6 percentage points (ppt.) of growth from sales generated by 2623 net new stores opened in the past 12 months and a 5% comparablethat added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales increase in our Company-Controlled channel; partially offset by a decrease in our Wholesale/Other channel sales.change on page 15.
The $35$199 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $23$178 million increase resultingin our Total Retail comparable net sales; and (ii) a $21 million increase from net store openings; and (ii) a $17 million increase in sales from our Company-Controlled comparable sales; partially offset by (iii) a $5 million decrease in Wholesale/Other channel sales. Company-Controlledopenings. Total Retail mattress unit sales were in lineincreased 59% compared with the prior year. AverageTotal Retail average revenue per mattress unit in our Company-Controlled channel increased by 11%7% to $4,385.$5,094, compared with $4,767 in the prior-year period.
Gross profit
Gross profit of $253$293 million increased by $21$130 million, or 9%80%, compared with $232$163 million for the same period one year ago. The gross profit rate was 62.9%improved to 60.5% of net sales for the three months ended September 30, 2017,July 3, 2021, compared with 63.1%57.2% for the prior-year comparable period.
The current-year gross profit rate declineimprovement of 0.23.3 ppt. was primarilymainly due to margin pressuresto: (i) leverage from weather-related excess freight and handling costs, and supplier transition costs,the 70% net sales increase, combined with a more favorable sales mix of higher-margin products (3.8 ppt.), partially offset by a favorable product$13 million of incremental costs from labor and material inflation, and expediting costs. The prior-year's gross profit rate was impacted by COVID-19 related inefficiencies, including the lower sales volumes. Our prior-year's sales mix of Sleep Number 360™ smart bedswas negatively impacted by temporary store closures due to the pandemic; partially offset by (ii) inflationary cost pressures and operating lean initiatives.higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.). In addition, our gross profit rate canwill fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, return and exchange costs, and changes in performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the three months ended September 30, 2017 increased to $175July 3, 2021 were $206 million, or 43.4%42.5% of net sales, compared with $158$130 million, or 42.9%45.7% of net sales, for the same period one year ago. The 0.5 ppt. increase in thecurrent-year sales and marketing expenseexpenses rate decrease of 3.2 ppt. was mainlyprimarily due to an increase in customer financing expenses, as a larger percentageto: (i) the leveraging impact of our customers took advantage of promotional financing offers, partially offset by 0.6 ppt. of leverage from media spending, which increased by 5% compared with the prior year, while70% net sales increased by 9%.increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.
General and administrative expenses
General and administrative (G&A) expenses totaled $33$41 million, or 8.1%8.5% of net sales, for the three months ended September 30, 2017,July 3, 2021, compared with $28$37 million, or 7.7%12.9% of net sales, in the prior-year period. The $4.4$4.5 million increase in G&A expenses consisted primarily of the following:of: (i) a $3.1$2.2 million increase in employee compensation includingprimarily resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); (ii) a year-over-year$1.8 million increase in performance-based incentive compensation, enhanced digital marketing capabilities,professional and salaryconsulting expenses; and wage rate increases that were in line with inflation; and (ii)(iii) a $1.3$0.5 million net increase in other miscellaneous other expenses. The G&A expenseexpenses rate increaseddecreased by 0.44.4 ppt. in the current-year period, compared with the same period one year ago due to leveraging impact of the 70% net sales increase, in expenses discussed above, partially offset by the leveraging impact of the 9% sales increase.items discussed above.
Research and development expenses
Research and development (R&D) expenses increased by 93% to $16 million for the three months ended September 30, 2017 were $7July 3, 2021, compared with $8 million consistent with the same period one year ago, but decreased to 1.7% of net sales from 1.9% of net sales, for the same period onelast year ago dueas we continued to the leveraging effect of the 9%prioritize our long-term innovation initiatives.
Interest expense, net sales increase. For
Interest expense, net decreased to $1.6 million for the three months ended September 30, 2017, the investment in product innovations is consistent with our current-year and long-term consumer innovation strategy.
Comparison of Nine Months Ended September 30, 2017 with Nine Months Ended October 1, 2016
Net sales
Net sales increased 8% to $1.08 billion for the nine months ended September 30, 2017,July 3, 2021, compared with $998$3.9 million for the same period one year ago. The $2.3 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the three months ended July 3, 2021, compared with the same period one year ago. In March 2020, we fully drew down our credit line and secured a $75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.
Income tax expense
Income tax expense totaled $5.9 million for the three months ended July 3, 2021, compared with a $3.4 million tax benefit last year. The effective income tax rate for the three months ended July 3, 2021 decreased to 20.9%, compared with 21.4% for the comparable period last year, reflecting greater stock-based compensation excess tax benefits in the current-year three-month period.
Comparison of Six Months Ended July 3, 2021 with Six Months Ended June 27, 2020
Net sales
Net sales change was comprisedfor the six months ended July 3, 2021 increased by $295 million, or 39%, to $1.1 billion, compared with $758 million for the same period one year ago, which were impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 847% of our retail stores on average. Net sales for the current year-to-date period increased 35% compared with $782 million for the same period of 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the six months ended July 3, 2021.
The 39% net sales increase consisted of a 37% comparable sales increase in Total Retail in addition to 2 percentage points (ppt.) of sales growth from sales generated by 26 net new stores opened in the past 12 months and a 2% comparablemonths. For additional details, see the components of total net sales increase in our Company-Controlled channel, partially offset by a decrease in Wholesale/Other channel sales.change on page 15.
The $83$295 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $76$249 million increase in our Total Retail comparable net sales; (ii) a $26 million increase resulting from net store openings; and (ii)(iii) a $17$20 million increase in phone, online, chat and other sales. Total Retail mattress unit sales from our Company-Controlled comparable sales; partially offset by (iii) a $10 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 4%33%, compared towith the prior-year period.prior year. Average revenue per mattress unit in our Company-Controlled channelTotal Retail increased by 5%. to $5,059, compared with $4,839 in the prior-year period.
Gross profit
Gross profit of $677$649 million for the nine months ended September 30, 2017 increased by $64$184 million, or 10%39%, compared with $465 million for the same period one year ago. The gross profit rate increasedimproved to 62.6%61.6% of net sales for the first ninesix months of 2017,ended July 3, 2021, compared with 61.4% for the prior-year comparable period. The prior-year gross profit rate was negatively impacted by actions taken to manage operating issues associated with our ERP implementation during the first six months of 2016. The current-year gross profit rate improvement of 1.20.2 ppt. was primarilymainly due to: (i) leverage from the 39% net sales increase combined with a more favorable sales mix of higher-margin products (1.1 ppt.), partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs in the second quarter. Our prior-year's sales mix was negatively impacted by temporary store closures due to manufacturingthe pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain efficiencies, including lean initiatives, and lower sales return and exchange costs comparedassociated with the same period one year ago.current-year temporary supply constraints (0.7 ppt.). In addition, our gross profit rate canwill fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, product mixreturn and exchange costs, and changes andin performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the ninesix months ended September 30, 2017 increased to $489July 3, 2021 were $430 million, or 40.8% of net sales, compared with $443$338 million, or 44.6% of net sales, for the same period one year ago, and increased to 45.2% of net sales compared with 44.4% of net sales last year.ago. The 0.8 ppt. increase in thecurrent-year sales and marketing expenseexpenses rate decrease of 3.8 ppt. was mainlyprimarily due to an increase in customer financing expenses, as a larger percentageto: (i) the leveraging impact of our customers took advantage of promotional financing offers, and an increase in selling compensation expense, including performance-based incentive compensation. These increases were partially offset by leverage from media spending, which increased by 4% compared with the prior year, while39% net sales increased by 8%.increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.
General and administrative expenses
General and administrative (G&A) expenses totaled $95$84 million, or 8.8%8.0% of net sales, for the ninesix months ended September 30, 2017,July 3, 2021, compared with $86$68 million, or 8.6%8.9% of net sales, in the prior-year period. The $9$16 million increase in G&A expenses consisted primarily of the following:of: (i) a $4.0$9 million increase in employee compensation, including a year-over-year increase in company-wide performance-based incentive compensation; (ii) a $7 million increase in employee compensation enhanced digital marketing capabilities, and salary and wage rate increases that were in line with inflation; (ii) $2.3 million of additional depreciation and amortization expense, including incremental depreciation expenseresulting from capital expenditures that support the growth of our business;business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); and (iii) $2 million of higher professional and consulting fees; partially offset by (iv) a $2.7$2 million net increasereduction in travel expenses and other miscellaneous other expenses. The G&A expense expenses
rate increaseddecreased by 0.20.9 ppt. in the current-year period, compared with the same period one year ago due to the leveraging impact of the 39% net sales increase, in expenses discussed above, partially offset by the leveraging impact of the 8% sales increase.items discussed above.
Research and development expenses
Research and development (R&D) expenses for the nine months ended September 30, 2017 were $21 million, or 1.9% of net sales, compared with $22 million, or 2.2% of net sales, for the same period one year ago. The $1 million decrease in R&D expenses was dueincreased by 56% to the timing of our investments to support product innovations. The investment spending year-to-date is consistent with our current-year and long-term consumer innovation strategy.
Income tax expense
Income tax expense was $22$29 million for the ninesix months ended September 30, 2017,July 3, 2021, compared with $21$19 million for the same period one year ago. The R&D expense rate for the six months ended July 3, 2021 increased to 2.8% of net sales, compared with 2.5% of net sales for the prior year. The spending level increase supports our ongoing consumer innovation strategy.
Interest expense, net
Interest expense, net decreased to $2.6 million for the six months ended July 3, 2021, compared with $6.3 million for the same period one year ago. The $3.7 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the six months ended July 3, 2021, compared with the same period one year ago. In March 2020, we fully drew down our credit line and secured a $75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.
Income tax expense
Income tax expense totaled $15 million for the six months ended July 3, 2021, compared with $8 million last year. The effective income tax rate for the ninesix months ended September 30, 2017 was 30.7%July 3, 2021 decreased to 14.2%, compared with 33.9%22.9% for the prior-year period. The effective tax rate for the current-yearcomparable period benefited from: (i)last year, reflecting higher stock-based compensation excess tax benefits in accordance with new Financial Accounting Standards Board (FASB) guidance effective for us beginning in 2017; and (ii) the recognition of additional tax credits. Under previous FASB guidance, excess tax benefits or deficiencies were recognized in additional paid-in capital in our consolidated balance sheet. See Note 1, New Accounting Pronouncements, in the Notes to the Condensed Consolidated Financial Statements for additional details.current-year six-month period.
Liquidity and Capital Resources
Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value. Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth.value over time. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $153$600 million revolving credit facility.facility (increased from $450 million to $600 million as of April 21, 2021). The cash generated from ongoing operations and cash available under our revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion and strategic initiatives for the foreseeable future.
As of September 30, 2017,Changes in cash and cash equivalents totaled $30 million compared with $12 million asduring the six months ended July 3, 2021 primarily consisted of December 31, 2016. The $18 millionincrease was primarily due to $176$161 million of cash provided by operating activities which was partiallyand a $146 million net increase in short-term borrowings, offset by $38$32 million of cash used to purchase property and equipment, and $120$281 million of cash used to repurchase our common stock ($115(based on settlement, $264 million under our Board-approved share repurchase program and $5$17 million in connection with the vesting of employee restricted stock grants).
The following table summarizes our cash flows (dollars($ in millions). Amounts may not add due to rounding differences: | | | | | | | | | | | |
| Six Months Ended |
| July 3,
2021 | | June 27,
2020 |
| Total cash provided by (used in): | | | |
| Operating activities | $ | 161.4 | | | $ | 87.0 | |
| Investing activities | (32.0) | | | (22.6) | |
| Financing activities | (131.5) | | | (64.3) | |
| Net (decrease) increase in cash and cash equivalents | $ | (2.1) | | | $ | 0.1 | |
|
| | | | | | | | |
| | | Nine Months Ended |
| | | September 30,
2017 | | October 1,
2016 |
| Total cash provided by (used in): | | | | |
| Operating activities | | $ | 176.1 |
| | $ | 145.3 |
|
| Investing activities | | (34.4 | ) | | (29.6 | ) |
| Financing activities | | (123.3 | ) | | (91.3 | ) |
| Net increase in cash and cash equivalents | | $ | 18.3 |
| | $ | 24.4 |
|
Cash provided by operating activities for the ninesix months ended September 30, 2017July 3, 2021 was $176$161 million, compared with $145$87 million for the ninesix months ended October 1, 2016.June 27, 2020. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $9$62 million increase in net income for the ninesix months ended September 30, 2017,July 3, 2021, compared with the same period one year ago; (ii) a $37$38 million change in accounts payable due to higher business activity in the current-year period and timing of vendor payments; (iii) a $30 million fluctuation in customer prepayments resulting from higher than normaldue to strong customer prepayments at January 2, 2016 (due to ERP implementation issues); (iii)demand and temporary supply constraints which extended customer delivery timelines during the current-year period; (iv) a $31$20 million fluctuation in income taxes based onprepaid expenses and other assets due to both periods being impacted by the timing of rent payments and prior-year's reduction in business activities due to the pandemic; and (v) a $15 million income taxes receivable at January 2, 2016 (income taxes payable for comparable period);fluctuation in the amount of compensation and (iv)benefits accrued and timing of the ERP implementation issues we experiencedrelated payments resulting from year-over-year changes in our plants and supply chain during the fourth quarter of 2015 that resulted in increased accounts receivables, higher inventories, higher accounts payable, and lower other taxes and withholding at the end of 2015.Company-wide performance-based incentive compensation.
Net cash used in investing activities to purchase property and equipment was $34$32 million for the ninesix months ended September 30, 2017,July 3, 2021, compared with $30$22 million of net cash used in investing activities for the same period one year ago. Investing activities for the current-year period included $38 million ofThe year-over-year increase was due to higher property and equipment purchases comparedfor new and remodeled stores. Prior-year property and equipment purchases reflect actions taken to temporarily reduce capital spending based on the economic uncertainties associated with $39 million for the same period last year. We decreased our investments in marketable debt securities by $9 million during the nine months ended October 1, 2016. We did not hold any investments in marketable debt securities as of December 31, 2016 or during the nine months ended September 30, 2017.pandemic.
Net cash used in financing activities was $123$131 million for the ninesix months ended September 30, 2017,July 3, 2021, compared with $91$64 million for the same period one year ago.last year. During the ninesix months ended September 30, 2017,July 3, 2021, we repurchased $120$281 million of our stock ($115(based on settlement dates, $264 million under our Board-approved share repurchase program and $5$17 million in connection with the vesting of employee restricted stock awards), compared with $96$42 million ($95 million under our Board-approved share repurchase program and $1.4 million in connection with the vesting of employee restricted stock awards) during the same period one year ago. Based on the uncertainty surrounding the impact of COVID-19, in March 2020 we temporarily suspended share repurchases. Short-term borrowings declinedincreased by $6$146 million during the current-year period primarily due to a $138 million increase in borrowings under our revolving credit facility to $382 million and a $8 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings decreased by $26 million during the prior-year period due to a $4 million decrease in borrowings under our credit facility to $227 million and a decrease in book overdrafts which are included in the net change in short-term borrowings.
Under our Board-approved share repurchase program, we repurchased 4.32.1 million shares at a cost of $115$267 million (an(based on trade dates, an average of $26.52$125.86 per share) during the ninesix months ended September 30, 2017.July 3, 2021. During the ninesix months ended October 1, 2016,June 27, 2020, we repurchased 4.60.8 million shares at a cost of $95$38 million (an(based on trade dates, an average of $20.78$49.42 per share). There is no expiration date governing the period over which we can repurchase shares. Effective as of October 1, 2017,April 4, 2021, our Board approved an increase in our total remaining share repurchase authorization to $500$600 million. There is no expiration date governing the period over which
As of July 3, 2021, we can repurchase shares.
In March 2017, we amendedhad $382 million of borrowings under our revolving credit facility to increasefacility. We also had $4 million in outstanding letters of credit. Net liquidity available under our net aggregate availability from $150 million to $153 million. We maintained the accordion feature which allows us to increase the amount of the credit facility from $153was $214 million to $200 million, subject to lenders' approval. There were no other changes to the credit agreement's terms and conditions.
The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility matures in February 2021.at July 3, 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio. ratio (3.0x). Our leverage ratio as defined in our credit agreement was 2.2x as of July 3, 2021. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio.
The credit agreement is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. As of September 30, 2017, we had $3.15 million in outstanding letters of credit and noJuly 3, 2021, the weighted-average interest rate on borrowings under the credit facility. Our available borrowing capacityfacility was $150 million. We1.6% and we were in compliance with all financial covenants.
On April 21, 2021, we amended our revolving credit facility to increase our net aggregate availability from $450 million to $600 million. We maintain the accordion feature which allows us to increase the amount of the credit facility from $600 million to $800 million, subject to lenders’ approval. The amended credit facility matures in February 2024. There were no other significant changes to the credit facility’s terms and conditions.
We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio.ratio consistent with our credit agreement. As of September 30, 2017,July 3, 2021, we were in compliance with all financial covenants.
Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.
Non-GAAP Data
Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.
Our Adjusted EBITDA calculations are as follows (dollars in(in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three Months Ended | | Fifty-Three
Weeks Ended | | Fifty-Two
Weeks Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Net income (loss) | $ | 22,250 | | | $ | (12,630) | | | $ | 201,563 | | | $ | 78,657 | |
| Income tax expense (benefit) | 5,864 | | | (3,435) | | | 43,564 | | | 22,141 | |
| Interest expense | 1,607 | | | 4,022 | | | 5,227 | | | 12,131 | |
| Depreciation and amortization | 15,006 | | | 15,253 | | | 59,802 | | | 60,951 | |
| Stock-based compensation | 5,968 | | | 5,033 | | | 27,114 | | | 15,853 | |
| Asset impairments | — | | | 246 | | | 142 | | | 294 | |
| Adjusted EBITDA | $ | 50,695 | | | $ | 8,489 | | | $ | 337,412 | | | $ | 190,027 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Trailing-Twelve Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Net income | | $ | 25,603 |
| | $ | 25,745 |
| | $ | 60,573 |
| | $ | 18,958 |
|
| Income tax expense | | 13,178 |
| | 13,044 |
| | 25,731 |
| | 11,112 |
|
| Interest expense | | 278 |
| | 267 |
| | 935 |
| | 721 |
|
| Depreciation and amortization | | 14,770 |
| | 14,536 |
| | 60,404 |
| | 56,154 |
|
| Stock-based compensation | | 3,933 |
| | 1,666 |
| | 14,498 |
| | 10,609 |
|
| Asset impairments | | 222 |
| | 2 |
| | 267 |
| | 51 |
|
| Adjusted EBITDA | | $ | 57,984 |
| | $ | 55,260 |
| | $ | 162,408 |
| | $ | 97,605 |
|
Free Cash Flow
Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.
The following table summarizes our free cash flow calculations (dollars in(in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Six Months Ended | | Fifty-Three
Weeks Ended | | Fifty-Two
Weeks Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Net cash provided by operating activities | $ | 161,420 | | | $ | 87,001 | | | $ | 354,080 | | | $ | 205,814 | |
| Subtract: Purchases of property and equipment | 32,012 | | | 21,695 | | | 47,417 | | | 47,038 | |
| Free cash flow | $ | 129,408 | | | $ | 65,306 | | | $ | 306,663 | | | $ | 158,776 | |
|
| | | | | | | | | | | | | | | | |
| | | Nine Months Ended | | Trailing-Twelve Months Ended |
| | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Net cash provided by operating activities | | $ | 176,054 |
| | $ | 145,261 |
| | $ | 182,438 |
| | $ | 121,616 |
|
| Subtract: Purchases of property and equipment | | 37,613 |
| | 38,769 |
| | 56,696 |
| | 62,920 |
|
| Free cash flow | | $ | 138,441 |
| | $ | 106,492 |
| | $ | 125,742 |
| | $ | 58,696 |
|
Non-GAAP Data Reconciliations (continued)
Return on Invested Capital (ROIC)
(dollars in thousands)
ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures: | | | | | | | | | | | |
| Fifty-Three Weeks Ended | | Fifty-Two
Weeks Ended |
| July 3,
2021 | | June 27,
2020 |
| Net operating profit after taxes (NOPAT) | | | |
| Operating income | $ | 250,352 | | | $ | 112,831 | |
Add: Rent expense (1) | 95,226 | | | 90,349 | |
| Add: Interest income | 2 | | | 97 | |
Less: Depreciation on capitalized operating leases (2) | (24,577) | | | (23,331) | |
Less: Income taxes (3) | (76,939) | | | (42,735) | |
| NOPAT | $ | 244,064 | | | $ | 137,211 | |
| Average invested capital | | | |
| Total deficit | $ | (403,658) | | | $ | (163,018) | |
| | | |
Add: Long-term debt (4) | 382,794 | | | 227,944 | |
Add: Capitalized operating lease obligations (5) | 761,808 | | | 722,792 | |
| Total invested capital at end of period | $ | 740,944 | | | $ | 787,718 | |
Average invested capital (6) | $ | 733,151 | | | $ | 797,862 | |
Return on invested capital (ROIC) (7) | 33.3 | % | | 17.2 | % |
___________________________ |
| | | | | | | | |
| | | Trailing-Twelve Months Ended |
| | | September 30,
2017 | | October 1,
2016 |
| Net operating profit after taxes (NOPAT) | | | | |
| Operating income | | $ | 87,108 |
| | $ | 30,681 |
|
Add: Rent expense(1) | | 72,260 |
| | 64,994 |
|
| Add: Interest income | | 129 |
| | 109 |
|
Less: Depreciation on capitalized operating leases(2) | | (18,384 | ) | | (16,953 | ) |
Less: Income taxes(3) | | (46,004 | ) | | (29,805 | ) |
| NOPAT | | $ | 95,109 |
| | $ | 49,026 |
|
| | | | | |
| Average invested capital | | | | |
| Total equity | | $ | 104,297 |
| | $ | 176,512 |
|
Less: Cash greater than target(4) | | — |
| | — |
|
Add: Long-term debt(5) | | — |
| | — |
|
Add: Capitalized operating lease obligations(6) | | 578,080 |
| | 519,952 |
|
| Total invested capital at end of period | | $ | 682,377 |
| | $ | 696,464 |
|
Average invested capital(7) | | $ | 689,467 |
| | $ | 714,956 |
|
Return on invested capital (ROIC)(8) | | 13.8 | % | | 6.9 | % |
___________________
(1)Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.
(2)Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6)5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.
(3)Reflects annual effective income tax rates, before discrete adjustments, of 32.6%24.0% and 37.8%23.7% for 20172021 and 2016,2020, respectively.
(4) Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.
(5)Long-term debt includes existing capitalfinance lease obligations, if applicable.liabilities.
(6)(5)A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.
(7)(6)Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.
(8)(7)ROIC equals NOPAT divided by average invested capital.
Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.
GAAP - generally accepted accounting principles in the U.S.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
