424B4
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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-253121

 

10,937,500 Shares

 

 

LOGO

JOANN Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of JOANN Inc. We are offering 5,468,750 shares of our common stock, and the selling shareholders identified in this prospectus are offering 5,468,750 shares of our common stock. We will not receive any proceeds from the sale of the shares by the selling shareholders.

Prior to this offering, there has been no public market for the common stock. The initial public offering price is $12.00 per share. Our common stock has been approved for listing on the Nasdaq Global Market, or Nasdaq, under the symbol “JOAN.”

The underwriters have an option for a period of 30 days after the date of this prospectus to purchase from time to time, in whole or in part, up to 1,640,625 shares of our common stock from us.

After the consummation of this offering, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq.

Investing in our common stock involves risk. See “Risk Factors” beginning on page 30 to read about factors you should consider before buying shares of our common stock.

 

 

 

   

Price to
Public

    

Underwriting

Discounts (1)

    

Proceeds, before
expenses, to us

    

Proceeds, before
expenses, to the
selling
shareholders

 

Per Share

  $ 12.00    $ 0.80      $ 11.20      $ 11.20  

Total

  $ 131,250,000      $ 8,750,000      $ 61,250,000      $ 61,250,000  

 

  (1)

See “Underwriting” for additional information regarding underwriting compensation.

Neither the Securities and Exchange Commission, or the SEC, nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock will be made on or about March 16, 2021.

 

 

Joint Book-Running Managers

 

BofA Securities    

Credit Suisse

 

Guggenheim Securities   Barclays   Wells Fargo Securities   Piper Sandler   William Blair

Co-Managers

 

Houlihan Lokey   Telsey Advisory Group   Loop Capital Markets   Ramirez & Co., Inc.

 

 

The date of this prospectus is March 11, 2021.


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LOGO

 

JOANN

handmade happiness


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LOGO

 

We sew, quilt, knit, crochet, paint, cut, glue, and craft our way to our happy place.

We are people with lots of ideas.

We look for and find inspiration everywhere.

We make and mend things with our hands.

We respect and treasure all things handmade.

We know that busy hands can lift heavy hearts.

We can’t imagine a better purpose than carrying on the tradition of creating things with our minds, hands and hearts.

We cherish the things that were made for us.

We are hard-wired to create.

We are curious and creative.

We believe saying thank you means giving something we made with our hands.


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LOGO

 

What we make is an extension of who we are


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LOGO

 

every day we help our community find their happy place


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TABLE OF CONTENTS

 

     Page  

About this Prospectus

     ii  

Market and Industry Data

     ii  

Basis of Presentation

     ii  

Certain Trademarks

     iv  

Non-GAAP Financial Measures

     iv  

Letter from our President and Chief Executive Officer

     vii  

Prospectus Summary

     1  

Risk Factors

     30  

Cautionary Note Regarding Forward-Looking Statements

     56  

Use of Proceeds

     58  

Dividend Policy

     59  

Capitalization

     60  

Dilution

     62  

Selected Consolidated Financial Data

     64  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     68  

Business

     92  

Management

     115  

Executive Compensation

     122  

Principal and Selling Shareholders

     147  

Certain Relationships and Related Party Transactions

     149  

Description of Capital Stock

     152  

Description of Certain Indebtedness

     158  

Shares Eligible for Future Sale

     162  

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Our Common Stock

     164  

Certain ERISA Considerations

     168  

Underwriting

     169  

Legal Matters

     177  

Experts

     177  

Where You Can Find More Information

     177  

Index to Consolidated Financial Statements

     F-1  

 

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ABOUT THIS PROSPECTUS

You should rely only on the information included elsewhere in this prospectus and any free writing prospectus prepared by or on behalf of us that we have referred to you. Neither we, the Selling Shareholders nor the underwriters have authorized anyone to provide you with additional information or information different from that included elsewhere in this prospectus or in any free writing prospectus prepared by or on behalf of us that we have referred to you. If anyone provides you with additional, different or inconsistent information, you should not rely on it. Offers to sell, and solicitations of offers to buy, shares of our common stock are being made only in jurisdictions where offers and sales are permitted.

No action is being taken in any jurisdiction outside the United States to permit a public offering of common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data that we prepared based on our management’s knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information, industry reports and publications, surveys, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable.

In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for the products we distribute. Market share data is subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of market share. In addition, customer preferences are subject to change. Accordingly, you are cautioned not to place undue reliance on such market share data. References herein to “market share” as it relates to estimates of market share, are to management’s determination of the market share of the Creative Products industry as a whole and the various categories therein in the United States, based upon internal research, which primarily consists of an annual survey of Creative Products consumers as of July 31, 2020.

BASIS OF PRESENTATION

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to “fiscal year 2016” relate to the 52 weeks ended January 30, 2016, references herein to “fiscal year 2017” relate to the 52 weeks ended January 28, 2017, references herein to “fiscal year 2018” relate to the 53 weeks ended February 3, 2018, references herein to “fiscal year 2019” relate to the 52 weeks ended February 2, 2019, references herein to “fiscal year 2020” relate to the 52 weeks ended February 1, 2020, references herein to “fiscal year 2021” relate to the 52 weeks ended January 30, 2021 and references herein to “fiscal year 2022” relate to the 52 weeks ending January 29, 2022. The third quarter of fiscal year 2021 ended on October 31, 2020, and the third quarter of fiscal year 2020 ended on November 2, 2019, and both three-quarter periods include thirty-nine weeks. References herein to “third quarter of fiscal year 2021” relate to the thirteen weeks ended October 31, 2020, “second quarter of fiscal year 2021” relate to the thirteen weeks ended August 1, 2020, “third quarter of fiscal year 2020” relate to the thirteen weeks ended November 2, 2019 and “second quarter of fiscal year 2020” relate to the thirteen weeks ended August 3, 2019. In this prospectus, unless otherwise noted, when we compare a metric between one period and a “prior period” we are comparing it to the analogous period from the prior fiscal year.

 

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As used in this prospectus, unless the context otherwise requires, references to:

 

   

“2012 Plan” means the Stock Option Plan of JOANN Inc. dated October 16, 2012;

 

   

“2021 Plan” means the 2021 Equity Incentive Plan of JOANN Inc., which will become effective once the registration statement of which this prospectus forms a part is declared effective;

 

   

“ABL Facility” means our senior secured asset based revolving credit facility originally dated October 21, 2016, which provided senior secured financing of up to $400.0 million, as further amended and restated on November 25, 2020 to provide senior secured financing of up to $500.0 million;

 

   

“BOPIS” means our buy online pick-up in store program;

 

   

the “Company,” “JOANN,” “JSHI,” “we,” “us” and “our” mean JOANN Inc. (formerly known as Jo-Ann Stores Holdings Inc.) and, unless the context otherwise requires, its consolidated subsidiaries;

 

   

“Creative Products” means Sewing, arts and crafts and select home décor;

 

   

“Credit Facilities” means our ABL Facility, First Lien Facility and Second Lien Facility, collectively;

 

   

“CRM” means customer relationship management;

 

   

“DGCL” means the Delaware General Corporation Law;

 

   

“DIY” means do-it-yourself;

 

   

“ESPP” means the 2021 Employee Stock Purchase Plan, which will become effective once the registration statement of which this prospectus forms a part is declared effective;

 

   

“Exchange Act” means the Securities Exchange Act of 1934, as amended;

 

   

“First Lien Facility” means our senior secured first lien term loan facility in an initial principal amount of $725.0 million entered into on October 21, 2016, as amended by the incremental term loan facility in an initial amount of $180.0 million entered into on July 21, 2017;

 

   

“Four-Wall Cash Flow” means a location’s net sales less cost of sales and operating expenses directly attributable to that location plus depreciation also directly attributable to that location;

 

   

“GAAP” means U.S. generally accepted accounting principles;

 

   

“LGP” means investment funds affiliated with or advised by Leonard Green & Partners, L.P., which own a controlling interest in us;

 

   

“LIBOR” means the London Interbank Offered Rate;

 

   

“Second Lien Facility” means our senior secured second lien term loan facility in an initial principal amount of $225.0 million entered into on May 21, 2018;

 

   

“Securities Act” means the Securities Act of 1933, as amended;

 

   

“Selling Shareholders” means (i) Green Equity Investors V, L.P., Green Equity Investors Side V, L.P. and Needle Coinvest LLC, each of which are funds affiliated with or endorsed by LGP and (ii) TCW/Crescent Mezzanine Partners V, L.P., TCW/Crescent Mezzanine Partners VB, L.P., TCW/Crescent Mezzanine Partners VC, L.P., TCW Capital Trust and MAC Equity Holdings I, LLC;

 

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“Sewing” means sewing and fabrics;

 

   

“Shareholders Agreement” means the amended and restated shareholders agreement to be effective upon the consummation of this offering, by and among LGP, certain of our directors and executive officers, certain other existing shareholders and the Company;

 

   

“SKUs” means stock keeping units; and

 

   

“Term Loan Facilities” means our First Lien Facility and our Second Lien Facility, collectively.

CERTAIN TRADEMARKS

This prospectus includes trademarks and service marks owned by us, including Jo-Ann, JOANN, Joann.com, Jo-Ann Fabrics, Jo-Ann Fabrics and Crafts, Jo-Ann Fabrics & Crafts and Creativebug. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

NON-GAAP FINANCIAL MEASURES

Certain financial measures presented in this prospectus, such as Adjusted EBITDA and free cash flow, are not recognized under GAAP. We define “Adjusted EBITDA” as net income (loss) plus income tax provision (benefit), interest expense, net, debt related (gain) loss, other income and depreciation and amortization, as further adjusted to eliminate the impact of certain non-cash items and other items that we do not consider indicative of our ongoing operating performance, including costs related to strategic initiatives, COVID-19 costs, technology development expense, stock-based compensation expense, loss on disposal and impairment of fixed and operating lease assets, goodwill and trade name impairment, sponsor management fees and other one-time costs. We define “Credit Facility Adjusted EBITDA” as Adjusted EBITDA plus location pre-opening and closing costs excluding loss on disposal and impairment of fixed assets, which is calculated consistently with our calculation of Adjusted EBITDA under our Credit Facilities. We define “free cash flow” as net cash provided by operating activities less total capital expenditures, net of landlord contributions. We define “total capital expenditures, net of landlord contributions” as total capital expenditures, net of landlord contributions.

Adjusted EBITDA

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA following this offering, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic

 

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decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; to compare our performance against that of other peer companies using similar measures; and because our Credit Facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants.

Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;

 

   

Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;

 

   

Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do.

We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See “Prospectus Summary—Summary Consolidated Financial and Operating Data” for a reconciliation of net income (loss) to Adjusted EBITDA.

Credit Facility Adjusted EBITDA

We reference Credit Facility Adjusted EBITDA in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus because it is a measure that is calculated in accordance with our Credit Facilities and used to determine our compliance with certain ratios in our Credit Facilities, tested each quarter on the basis of the preceding four quarters. Accordingly, we believe that Credit Facility Adjusted EBITDA is material to an investor’s understanding of our financial condition and liquidity.

Total Capital Expenditures, Net of Landlord Contributions

We consider total capital expenditures, net of landlord contributions to be a useful non-GAAP measure as it most accurately reflects our actual total cash outlay for capital expenditures to open new locations and complete remodel and relocation projects for existing locations. We define “total capital expenditures, net of landlord contributions” as total capital expenditures, net of landlord contributions. See “Prospectus Summary—Summary Consolidated Financial and Operating Data” for a reconciliation of total capital expenditures, net of landlord contributions to total capital expenditures.

 

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Free Cash Flow

We present free cash flow because we believe it assists lenders, investors and analysts in evaluating our ability to maintain and generate incremental liquidity. Free cash flow should not be considered as an alternative to net cash provided by operating activities as a liquidity measure. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations or cash payments for business investments and acquisitions. Free cash flow is not a measurement of financial performance under GAAP, may have limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities or any other measure of performance derived in accordance with GAAP. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows. See “Prospectus Summary—Summary Consolidated Financial and Operating Data” for a reconciliation of net cash provided by operating activities to free cash flow.

 

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LETTER FROM OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER

Dear Potential Shareholders,

On behalf of more than 27,000 team members, we are excited to bring JOANN back to the public markets for the first time since 2011. As the nation’s category leader in sewing and one of the fastest growing players in the arts and crafts category with a robust omni-channel platform, we have evolved from the founding of our single location in Cleveland, Ohio nearly 75 years ago. We love all of our customers and believe we have the privilege of serving some of the most passionate and enthusiastic people, whose generosity helps drive our culture. We are a purpose-driven company with the mission of inspiring creativity in the hearts, hands and minds of our customers and team members, and a strategy that has equipped JOANN to thrive in an industry that is currently experiencing significant acceleration due to multiple secular themes, including heightened DIY customer behavior, amplified participation from both new and existing customers, and increased digital engagement.

The ethos of our company was called upon and answered during the COVID-19 outbreak. Our conscious, purpose-driven strategy focuses not only on the soundness of our business, but centers upon taking great care of our team members’ safety and financial well-being as well as our customers’ safety and product needs. Further, we wanted to do our part to help stem the pandemic and hence, JOANN established the “Make to Give” program, donating free mask-making materials to any customer or institution upon request. By our current estimate, JOANN has directly donated materials for over 20 million masks as well as scrubs and other personal protective equipment and our customers have purchased, made, and in many cases donated, more than 350 million additional masks. Nothing better exemplifies the relationship JOANN has with our passionate and generous customers than the scale of this nationwide effort. Our execution would not have been possible without our team members, with whom we have deepened our loyalty during the pandemic. We have provided premium pay for all hourly team members, ensuring no team members were furloughed, and added approximately 4,000 jobs to support the growth of our business. Additionally, our suppliers are key stakeholders, and despite the pandemic, we have not lengthened payment terms to our merchandise vendor partners. “Doing Good While Doing Good” is and has always been a part of the JOANN culture and a foundation for our customer and stakeholder loyalty.

We are proud of what we have accomplished this year, all of which has been driven by a strategy we have been executing since 2016 to transform JOANN and pivot to a fully-integrated, digitally-focused provider of Creative Products. We have successfully recruited talent at every level, enhanced our value proposition with a focus on reinvigorating our assortment, strengthened our omni-channel platform, acquired new customers and further built our digital and data capabilities to better serve our customers. This transformation enabled our significant sales and profitability growth.

Today, we are reaping the fruits of these efforts and our strategy is clear moving forward. We are enhancing and refreshing our existing locations with what we believe are exceptional assortments, service and experience. We are driving digital connectivity with our customers to increase engagement and accelerate omni-channel growth. We are expanding our digital presence into new markets and categories where we see tremendous share opportunity and we believe we have a compelling competitive advantage. In addition to driving growth, we remain focused on delivering cost and operational efficiencies across all major areas. The path to where we find ourselves now has not come without its challenges. For example, our momentum was temporarily interrupted in fiscal year 2020 by the unanticipated headwind of incremental U.S. tariffs on Chinese imports that we estimate, before mitigation, would have amounted to $75 million of additional annual costs. In addition, we had $1,363.5 million of total debt outstanding as of November 2, 2019, but were able to use internally generated cash flow to opportunistically retire and repay $433.8 million in principal amount in the year since then, resulting in a substantially reduced total debt balance of $929.7 million as of October 31, 2020. We also realize there will be continuous challenges, including the competitive industry in which we operate and the persistent uncertainty surrounding the ongoing COVID-19 pandemic. However, we believe that our growth strategies, along with the transformational investments and initiatives of the last five years, strategically position us to drive further long-term value creation.

Nothing of course can be done without an extremely capable and inspired organization led by our high-performing senior leadership team with deep industry experience. At JOANN, we work every day to build and nourish what we affectionately call our “Green Culture.” To us, being “Green” is about constant and relevant renewal of the business by putting the customer first, being highly accountable and collaborative, and always serving the best interests of the business. We like to say that it isn’t about any one person being right, it’s about getting it right.

I am incredibly proud of the progress we have made over the past few years. JOANN has been one of the fastest growing specialty retailers in the United States thus far in fiscal year 2021 and I believe we have a long runway for growth ahead of us. We would love for you to come along on that journey and find your “Happy Place” as a shareholder of JOANN.

Wade Miquelon

President and Chief Executive Officer

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus carefully, especially “Risk Factors” beginning on page 30 of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 68 of this prospectus, and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.

 

 

LOGO

JOANN Overview

JOANN is the nation’s category leader in Sewing and one of the fastest growing players in the arts and crafts category. The Creative Products industry is a large and growing market, which according to a 2017 Association for Creative Industries (AFCI) study is in excess of $40 billion. The industry is currently experiencing a significant acceleration for product demand in response to multiple secular themes that have been further solidified during the COVID-19 pandemic, such as heightened DIY customer behavior, amplified participation from both new and existing customers and increased digital engagement, of which we are a key beneficiary because we have positioned ourselves and our go-forward strategies to capitalize on increased demand for Creative Products. As a well-established and trusted brand for over 75 years, we believe we have a deep understanding of our customers, what inspires their creativity and what fuels their incredibly diverse projects. Since 2016, we have embarked on a strategy to transform JOANN, which has helped us pivot from a traditional retailer to a fully-integrated, digitally-connected provider of Creative Products.

 

 

LOGO

As the nation’s category leader in Sewing with approximately one-third market share, based on our internal research estimates of market share of the Creative Products industry that primarily consist of an annual survey of Creative Product consumers as of July 31, 2020, we believe we offer the broadest selection of products while being committed to providing the most inspiration, helpful service and education to our customers. While we continue to gain market share and solidify this leadership position in Sewing, which represented 49% of our total net sales in the last twelve months ended October 31, 2020, we have also been growing share and believe



 

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we have further significant share opportunity in the arts and crafts category. We are well-positioned in the marketplace and have multiple competitive advantages, including our broad assortment, established omni-channel platform, multi-faceted digital interface with customers and skilled and knowledgeable team members. We offer an extensive assortment, which at its peak, averages more than 95,000 SKUs in stores and over 245,000 SKUs online, across Creative Product categories. Over 50% of our in-store net sales cannot be directly comparison-shopped because of our strong and growing own-brand portfolio, including our copyrighted or proprietary fabric patterns and designs and factory direct relationships. We have expanded access to this broad assortment through e-commerce and digital capabilities that complement our physical network, drive customer engagement and deliver an exceptional customer experience while supporting consistently strong gross margins. Through our omni-channel platform, we serve our customers in a differentiated manner by offering several convenient fulfillment options, including BOPIS, curbside pick-up and ship-to-home offerings. Our omni-channel platform operates at a large scale, having generated $423 million in net sales in the twelve months ended October 31, 2020, including $377 million in net sales in the thirty-nine weeks ended October 31, 2020 and following $126 million, $103 million and $87 million in net sales in fiscal years 2020, 2019 and 2018, respectively. Our data-driven digital capabilities further reinforce our relationship with our customers. Customers connect with us through our newly re-designed mobile-first website, joann.com, and our widely-used mobile application with over 11.8 million downloads. As of the end of the third quarter of fiscal year 2021, we had over 69 million addressable customers in our vast database, over 16 million customers in our email database and 4.5 million customers in our SMS text database. These points of differentiation are reinforced by our knowledgeable, friendly and trusted team members, a significant number of whom are sewing and craft enthusiasts, who offer a service-oriented experience for our customers that we believe cannot be replicated by mass retailers or pure play online players.

We appeal to an expansive customer base ranging across all ages, demographics and skill levels. We serve the DIY customer, including those who make to give or donate their creations, and supply small business owners with components to create and sell their own merchandise. We estimate this group makes up approximately one-quarter of our customers and typically resells on online marketplaces such as Etsy, eBay, Shopify and other platforms, which have also experienced significant growth in 2020. Our customers are passionate and creative, using their hearts, hands and minds in their sewing, crafting and decorating activities. We believe our customers’ enthusiasm drives the JOANN culture, as exemplified by our “Make to Give” program. We strive to support our community of creators, and they create to support their communities by donating or gifting the items they make, which range from blankets for hospitalized children, homeless persons, and shelter pets, to masks for hospitals, schools and friends. We estimate that over 70% of JOANN customers make to give or donate their creations. Our loyal core customer base is key to our sales growth, and over the last twelve months ended October 31, 2020, our top three million customers averaged ten purchases each. Additionally, in fiscal year 2021, our new customer base has grown faster and is spending more than in prior years. Since February 1, 2020, we have acquired over eight million new customers, many who initially purchased fabric to make their own masks but have expanded their shopping behavior across our diversified merchandise categories in subsequent transactions. Customers typically purchase from JOANN with a project in mind that requires several component items. In that vein, we believe our physical footprint is an advantage, as most customers regularly want to explore what is new, see how various items and colors work together, see how a fabric drapes, feel the texture and seek help from our experienced team members.

In 2016, we accelerated our journey to transform JOANN by reinventing the in-store and digital customer experience. We recruited talent at every level of the company and across all key business areas to complement our existing expertise. This undertaking has resulted in significant enhancements to our value proposition, including reinvigorating our core merchandise assortment, refreshing our branding, developing a location refresh prototype and improving the customer experience. We improved our assortment by conducting a systematic review of all categories at a product-level and all layouts at a location-level in order to optimize sales and gross margin. We have also expanded our data-driven digital footprint, which includes our extensive digital



 

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marketing assets, CRM system, social media platforms and e-commerce capabilities. We better understand our customers through our centralized database that brings together how each customer interacts in our physical and digital properties and provides a holistic view of their behavior. We are able to utilize this data to drive engagement with our brand, create loyalty and inspire, educate and ensure we are increasing our share of customer spend through timely and relevant marketing. By using data and digital contact channels, including email and SMS digital display, and leveraging our mobile application, we are able to contact customers with personalized content and provide the convenience to shop wherever and however they choose. We believe that these core initiatives and transformational investments have driven our performance and increased customer engagement over the last several years and strategically position us to continue to create long-term value. This momentum was temporarily interrupted in fiscal year 2020 by the unanticipated headwind of incremental U.S. tariffs on Chinese imports that we estimate, before mitigation, would have amounted to $75 million of additional annual costs, as these tariffs applied to a broad range our products. However, after working to partially offset their effects and having incorporated the balance of these tariffs into our cost base, we are driving strong operating profit growth across both our locations and e-commerce platform as well as achieving margin expansion.

 

 

LOGO

Our momentum through the COVID-19 pandemic has been further supported by heightened DIY customer behavior, significant increases in the number of new and current customers participating in new categories and the continued rise of online marketplaces. As a result, according to Earnest Research, we and the other two largest specialty players in the Creative Products industry have seen on average 22% growth in year-over-year sales since May 3, 2020. Over the same period, we have experienced outsized growth, gained share and enhanced our strong foundation, increasing total comparable sales by 38% since May 3, 2020 while adding over eight million new customers to our marketing database since February 1, 2020. These new customers have already driven elevated repeat purchase levels both via our locations and e-commerce platform and represent further opportunities to cross-sell and become part of our ongoing customer base. For example, approximately 35% of first time purchasers made repeat purchases in the thirty-nine weeks ended October 31, 2020. These new customers tend to be younger and more affluent than existing customers in our database, and are large consumers of our rapidly growing sewing and craft technology categories which include machines and related supplies. These trends support our business, as we estimate that a typical customer who purchases a sewing or craft



 

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technology machine will purchase an average of over $500 of our products in the year following their machine purchase and over $330 in the subsequent year. We are further encouraged by the retention of these new customers and their migration to shopping outside of the Sewing category. These new customers are regularly shopping across our other categories, with the fastest-growing cohort being new customers shopping the arts and crafts category. We believe that these underlying trends, along with our transformational investments and initiatives executed since 2016, strategically position us well to continue to drive long-term value creation.

 

 

LOGO

Recent Financial Performance

We believe our strong financial results are a reflection of our consistent and disciplined culture of innovation and reinvestment, creating a differentiated business model in the Creative Products industry. Comparing fiscal year 2020, fiscal year 2019 and fiscal year 2018, we achieved the following results:

 

   

net sales of $2,241.2 million, $2,324.8 million and $2,314.3 million in fiscal year 2020, 2019, and 2018, respectively. Excluding the estimated impact of the 53rd week in fiscal year 2018, net sales were $2,277.2 million;

 

   

net (loss) income of $(546.6) million, $35.3 million and $96.5 million in fiscal year 2020, 2019, and 2018, respectively; and

 

   

Adjusted EBITDA of $153.4 million, $252.0 million and $257.4 million in fiscal year 2020, 2019, and 2018, respectively. Excluding the estimated impact of the 53rd week in fiscal year 2018, Adjusted EBITDA was $249.0 million.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of U.S. tariffs on Chinese imports in fiscal year 2020 and “—Summary Consolidated Financial and Operating Data” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss).

Through improvements in merchandising, marketing, supply chain, sourcing and customer experience, we have significantly increased our more recent financial results. Our success in the thirty-nine weeks ended October 31, 2020 has been broad-based across our geographic regions, merchandise categories, customers and channels. Comparing the thirty-nine weeks ended October 31, 2020 and November 2, 2019, we achieved the following results:

 

   

increase in net sales from $1,545.6 million to $1,921.5 million, representing period-over-period growth of 24.3%, and net sales in the twelve months ended October 31, 2020 of $2,617.1 million;

 

   

total comparable sales growth of 24.6%;



 

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increase in gross margin from $777.0 million to $971.7 million, representing period-over-period growth of 25.1% and gross margin rate expansion of 30 basis points, with gross margin in the twelve months ended October 31, 2020 of $1,300.0 million, and a 49.7% gross margin rate in the same time period;

 

   

increase in net (loss) income from $(188.5) million to $174.0 million, and net loss in the twelve months ended October 31, 2020 of $(184.1) million;

 

   

increase in Adjusted EBITDA from $72.8 million to $217.2 million, representing period-over-period growth of 198.4%, and Adjusted EBITDA in the twelve months ended October 31, 2020 of $297.8 million; and

 

   

retired and repaid $433.8 million in principal amount of debt from November 2, 2019 to October 31, 2020, resulting in us having $929.7 million in principal amount of debt as of October 31, 2020.

See “—Summary Consolidated Financial and Operating Data” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss) and for a discussion of how we calculate total comparable sales growth.

Our Opportunity

The Creative Products industry is a large and growing market, which according to a 2017 Association for Creative Industries (AFCI) study is in excess of $40 billion. The industry is currently experiencing a significant acceleration in response to multiple secular themes that have been further solidified during the COVID-19 pandemic, such as heightened DIY customer behavior, amplified participation from both new and existing customers, and increased digital engagement, of which we are a key beneficiary because we have positioned ourselves and our go-forward strategies to capitalize on increased demand for Creative Products. Participation includes a broad range of activities such as sewing, quilting, apparel making, crafting and home decorating. This historically stable industry has been growing over the past five years, as consumer demand in individual product categories shifts from time to time and as trends evolve. We maintain approximately one-third market share in Sewing, while being competitive as one of the fastest growing players in the more fragmented arts and crafts category.

The Creative Products industry spans a diverse set of merchandise, as customers search for a variety of supplies to support their projects. In addition, customers appreciate a specialty retail environment where they have the flexibility to leverage in-store service for instruction and inspiration and shop across channels at their convenience. As a result, the Creative Products industry is highly fragmented. However, there are a limited number of players that can meet the customers’ dynamic needs. For instance, based on our internal market research, we estimate pure play e-commerce players represent less than 10% market share of the Creative Products industry, while the remainder of the industry is covered by mass merchandisers, specialty retailers and independent retailers. We believe that we are the only specialty player that can serve customers holistically with an expansive Creative Products assortment, service-oriented experience and integrated omni-channel capabilities.

The Creative Products industry has historically demonstrated stable growth, and we aim to continue to benefit from the following sustainable tailwinds:

 

   

Heightened DIY Customer Behaviors. The industry benefits from the increasing participation in the DIY ethos across demographics. In recent years, especially during the COVID-19 pandemic, DIY customer behaviors have been heightened by the following long-term trends:



 

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Engaging Customers across Demographics. DIY activities appeal to a large and broad customer base and participation in DIY activities does not diminish as women age, creating more consistent demand throughout their lifetime. Customers across demographics choose to engage with retailers through different channels. We believe players in the Creative Products industry must have a robust omni-channel platform to attract and retain this diverse customer base.

 

 

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Increasing Desire for Personalization. Customers, especially Millennials and Generation Z, increasingly desire Creative Products that express their individuality and make a personal statement. Such growing demand for unique and personalized products has stimulated the demand for DIY supplies and customization services.

 

   

Growing Digital Presence and Engagement. Digital arts and crafts marketplaces, such as Etsy, eBay, Shopify and other platforms, are becoming increasingly popular among makers and customers who buy their finished designs. This burgeoning ecosystem creates a growing demand for Creative Product supplies. These marketplaces, combined with social media platforms, serve as a critical source for inspiration and instruction for customers. The growing presence of these platforms enables more engaged customer communities, serving as a connection point where they share their interests and creativity with a wider audience.

 

   

Accelerated Customer Participation Expected to Persist. According to our internal research, a survey published by Bloomberg and Morning Consult, and SVP Worldwide, the COVID-19 pandemic has accelerated participation in DIY activities, as customers have taken a more proactive role in homesteading-style and home improvement projects. Since May 3, 2020, over half of Creative Products industry participants have specifically taken on a new type of creative project and the industry has grown year-over-year sales by an average of 22%. With more free time, customers have also capitalized on the opportunity to learn new skills, creating elevated demand for supplies. This newfound self-reliance has helped build DIYers’ confidence, and they are recognizing the emotional and functional benefits of making, driving continued interest far beyond the pandemic.

 

   

Consistent and Recession Resilient Customer Demand. We estimate that the Creative Products industry has experienced growth of over 4% in the last five years according to our internal research as of July 31, 2020. It offers versatile products at attainable price points that create fun, engaging and affordable activities for customers, who become habitual and dedicated to their own creative projects over time. The affordable nature of the Creative Products industry provides resilience in recessions as customers become more value conscious and self-sufficient. According to the



 

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Bloomberg and Morning Consult survey, approximately 30% of Americans participated in sewing or clothing repairs during the COVID-19 pandemic. We also believe the emotional benefits customers receive from making, such as empowerment upon finishing a project, a connection with their communities through making to give or donate and improved mental health as a result of doing something they are passionate about, will continue to drive demand.

We believe that Sewing, in particular, will sustain its growing momentum. According to SVP Worldwide, sewists are typically more passionate about their hobby than other enthusiasts. In addition, the number of sewists has increased significantly driven by the entrance of Millennials, having grown at a CAGR of 7.4% since 2012. As of September 2020, 65 million people in the United States can sew or participate in sewing without instruction, and over half of these participants own a sewing machine. We believe that growth in this category, like the broader Creative Products industry, has been supported by changing consumer demographics. SVP Worldwide estimates that sewists are getting younger, with 65% being 30 years old or younger with an average age decreasing from 48 in 2004 to 37 in 2020.

 

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We believe the existing and sustained growth of the sewist population will drive sales in the category. According to SVP Worldwide, the average sewist owns at least three sewing machines and plans to buy a new machine every two to five years. When customers buy sewing machines, they tend to purchase complementary consumable items, which drives potential recurring purchases. In addition, according to SVP Worldwide, 20% of consumers who purchased a sewing machine in 2020 were first time purchasers, further building upon the base of potential future demand from sewists. This population of sewists is also highly engaged in the craft and spends a significant amount of time sewing, with approximately half of U.S. sewists spending between 5 to 19 hours a week on projects. While the Sewing category was stable and growing before the COVID-19 pandemic, 92% of consumers who purchased a sewing



 

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machine in 2020 expect to sew as much as they had in the past or more in the future. We believe these tailwinds and increased engagement will sustain participation and accelerate category and Creative Products industry growth.

 

 

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Our Competitive Strengths

We believe our proven merchandising, marketing and customer experience capabilities combined with our sourcing and supply chain expertise have enabled, and will continue to support, our strong and profitable growth. Our business model has multiple competitive strengths including:

Category Leader in an Attractive Market with a Large, Growing and Wide-Ranging Customer Base

We are the nation’s category leader in Sewing with approximately one-third market share, and one of the fastest-growing players in the arts and crafts category. Based on our estimates of market share of the Creative Products industry that primarily consist of an annual survey of Creative Product consumers as of July 31, 2020, our market share in the highly fragmented arts and crafts category has grown by approximately 50 basis points over the past five years. Approximately 70% of Sewing industry shoppers rank us ahead of our competitors on availability of the products they need, selection and quality, according to our internal research. Similarly, in arts and crafts, industry customers’ ratings for our quality, selection, availability and price double once they shop our locations and e-commerce platform.

In contrast to other leisure activities, our customers’ engagement in sewing and crafting projects represents a recurring activity that is vibrant across all ages and demographics. Our core customer is an upper forties, college-educated woman with a higher-than-average household income (median household income of over $62,000) and who is a reliable enthusiast for many of our key categories. We believe our core customer’s higher discretionary income and favorable demographic trends, as the number of women aged between 45 and 79 is expected to grow faster than the overall population over the next five years according to 2017 U.S. Census data estimates, will continue to build our loyal customer base. Our appeal to Millennial and Generation Z customers has also increased. Females in the younger than 35 years old age group are the fastest growing demographic in our industry today, representing a 400 basis point increase in demographic share over the past year from 40% to 44% based on internal research. Customers of all ages, demographics and skill levels have demonstrated their enthusiasm for Creative Products by actively exchanging project ideas, tips and techniques though our online community on joann.com. With nearly four million combined followers across social media applications, including Facebook, Instagram, Twitter, Pinterest and YouTube, we are connecting with new customers and bolstering our interaction with existing customers.

Finally, we are also a go-to source for small business owners who rely on our products to create, donate or sell their own merchandise. We believe that the growth of online marketplaces, such as Etsy, eBay, Shopify



 

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and other platforms, is driving the expansion of our customer base, and the success of online marketplaces is directly linked to our growth, with approximately one-quarter of our customers using our products for their online marketplace-based businesses. These customers often buy in bulk and benefit from being a part of the JOANN community through access to our helpful educational content, project inspiration and our knowledgeable team members and customers. These customers span all ages and demographics and sell products through various channels such as retail stores, trade fairs, entertainment venues and online, including participating in the growing digital marketplaces.

Differentiated Value Proposition

Our customer value proposition is a critical driver of our business. The key components include:

Broad Assortment across a Wide Variety of Categories. We believe we have the most comprehensive, innovative product assortment available in our industry, especially within Sewing. This breadth of assortment across our various categories is a key competitive advantage given that our customers’ interests and projects are often widely varied and not confined solely to one activity. As of October 31, 2020, we had 857 locations, which we believe are also critical to success in the Creative Products category and a key enabler to our omni-channel growth. In an industry that requires high SKU intensity to be successful, we carry one of the industry’s broadest selections of Creative Products, which at its peak, averages more than 95,000 SKUs in stores and over 245,000 SKUs online. We believe this dynamic is analogous to hardware and home improvement concepts, in that customers are project-focused and require all component supplies and prefer knowledgeable assistance in order to successfully complete their shopping mission. We also believe this is why we have an advantage versus solely online players in addressing a customer base that prioritizes variety, customization and customer support. We continue to improve our assortment by conducting systematic reviews of all categories at a product-level and all layouts at a location-level in order to optimize sales and gross margins. We consistently innovate with proprietary brands and products that appeal to our customers by working with our suppliers to introduce new items and styles to our assortments. As of October 31, 2020, over 50% of net sales related to items that are non-comparative or exclusive to JOANN and cannot be directly cross-shopped with our direct competitors and mass retailers. We believe that we strike a customer-focused balance between our proprietary products and the well-known national brands that our customers have also come to know and love.

 

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Unique and Inspiring Shopping Environment. We provide our customers with an engaging and exciting shopping experience that spurs inspiration and creativity. We encourage customers to interact with our merchandise, to experiment with potential designs and to see the actual product they will purchase. In many locations, we also offer differentiated in-store services such as digital printing, laser-cutting and engraving and educational programs in dedicated classrooms to further inspire and enable our customers. In select locations, our customers can rent sewing and crafting technology such as a quilting long-arm or a Glowforge laser-cutting



 

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machine. To support our growing group of seller customers, in 2018 we launched JOANN+, a digital program providing devoted service for small-to-medium sized businesses and high volume makers. With this program, our customers are able to enjoy volume discount pricing, dedicated customer service contacts and a streamlined shipping and return experience. We continue to explore a variety of other ways to engage these makers and build loyalty including through our small maker forums, maker grant programs, and showcasing across any number of our digital marketing and social media assets.

Helpful and Knowledgeable Team Members. Our team members, who we refer to as “Friendly Clever Allies,” are knowledgeable, friendly and trusted and offer a service-oriented experience for our customers. According to our internal research, JOANN leads all competitors on “knowledgeable staff” and “can get the help I need” ratings. A significant number of our team members are enthusiastic sewists and crafters themselves and bring first-hand knowledge and experience with our products which we believe are difficult to replicate. These team members live by the “No Quit” mantra, “We Got This,” and this helpful and resourceful attitude resonates with our customers. Our team members are encouraged to advise customers in creating and completing creative projects, which offers a service-focused experience that we believe allows our customers to be more informed and engaged in projects.

Combining a Robust Digital Platform and Strategic Physical Network

Since early 2017, we have built a large, growing, profitable and well-connected omni-channel platform comprised of robust digital capabilities and a nationwide physical network. From fiscal year 2018 to fiscal year 2020, we increased our omni-channel net sales by a CAGR of 20% and by 369% in the thirty-nine weeks ended October 31, 2020 compared to the same period in fiscal year 2020. As a result of our investments and our ability to be nimble, we doubled the number of locations with ship-to-home capabilities and were able to continue serving our customers on our established platforms during the COVID-19 pandemic. Our physical network is critical to being able to execute on digital opportunities in the Creative Products space given its visual, tactile and project-based nature. We strive to make every customer’s trip to JOANN a trip to their “Happy Place.” We believe that the enthusiastic and highly engaged nature of our customer is why we have seen sales lifts as high as 24% in our refresh prototypes that elevate assortments, service and in-store experience. Our strong performance is also driven by our ability to engage customers through our robust omni-channel capabilities as they become cross-category repeat purchasers during their in-person trips to our locations and visits to our e-commerce platform.

Our recently upgraded e-commerce mobile first platform, driven by Salesforce Commerce Cloud, as well as our custom mobile application, provide exceptional functionality and user experience, offering premier digital navigation, speed, assortment, content, and personalization features. Our website traffic has increased by 125% through the thirty-nine weeks ended October 31, 2020, with site conversion increasing by 300 basis points compared to the same period in fiscal year 2020. Our website traffic and conversion has remained strong, with increases in traffic and conversion from December 2019 to December 2020 of 89% and 118 basis points, respectively. Through the thirty-nine weeks ended October 31, 2020, our mobile application has been



 

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downloaded approximately two million times. We currently have 11.8 million downloads of the application and more than 25% of omni-channel sales were generated through purchases made within our mobile application.

 

 

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Through our physical network, we have the ability to consistently fulfill and deliver a growing assortment of products directly to consumers, in addition to convenient services such as BOPIS, curbside pick-up and ship-to-home. For the last twelve months and the thirty-nine weeks ended October 31, 2020, over 70% and approximately 79% of joann.com orders, respectively, were fulfilled by our locations, either as BOPIS, curbside pick-up or ship-to-home. In addition, in the thirty-nine weeks ended October 31, 2020, approximately 40% of online demand sales were generated via BOPIS. Since the time that the majority of COVID-19 restrictions on in-store traffic were lifted through October 31, 2020, approximately 25% of our BOPIS program customers have made an additional purchase upon pick-up, resulting in an average increase to their orders of $28 or approximately 100%. We believe our locations, which are in close proximity to our customers, provides us a significant last-mile cost advantage. Unlike internet pure play and regional competitors, we can route e-commerce orders to a local store, significantly reducing the overall cost and time to service orders. During the thirty-nine weeks ended October 31, 2020, omni-channel sales accounted for 20% of our total net sales compared to 4% for fiscal year 2018.

Digital Platform and Digital Assets Enable Scalable Profitable Growth

As of October 31, 2020, our total customer database included 69 million unique customers, which represents an overall growth of 43% since the end of fiscal year 2018, including 13% growth in fiscal year 2019, 11% growth in fiscal year 2020 and 15% growth in the first three quarters of fiscal year 2021. Within that database, we maintain an active email file of over 16 million customers, which has grown by 32% in the first three quarters of fiscal year 2021 and 76% since the end of fiscal year 2018. Customers receiving email marketing have historically been our highest value customers in terms of net sales, with the average email customer generating over 40% more in net sales as compared to our non-email customers. In 2019, we significantly upgraded our capabilities to better target and engage customers with personalized offers. We have developed a robust CRM platform creating a holistic view of customer behavior, which helps drive recurring purchases. We currently run over 40,000 product and customer journey campaigns with defined, tailored content to each individual customer based on purchase history. Due to the success of the initiative, we can identify specific database customers for more than 70% of our net sales, without the burden of a costly loyalty program.



 

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Our highly effective, performance-based marketing team leverages this information to profitably acquire new customers, drive repeat purchases and grow lifetime value across channels.

This customer engagement is reinforced by our strong presence on social media, with nearly four million total followers across social media platforms, including our fastest-growing channel, YouTube, which has increased followers by 171% for fiscal year 2021. We further use digital education and inspiration to engage customers on new projects and inspire creative activities. We augment customer engagement through social media and our e-commerce platform by also leveraging our wholly-owned subsidiary, Creativebug, a large craft subscription learning platform with approximately 150,000 paid monthly users. Our customers have access to thousands of projects and videos that can take them from a skill-building novice to an expert sewist or maker. When a creative customer is seeking advice, education or inspiration, we are there for them.

We have multiple techniques to convert new customers into long-term, repeat customers across their current Creative Products activities and encourage them to enter new categories or advance in their existing category. We not only do this through social media and digital education, but also through proprietary and targeted journey mapping, exciting and compelling digital marketing offers, as well as leveraging multiple inspirational and educational digital assets. We believe this integrated, multi-channel approach resonates with our customers, as omni-channel represents 20% of our net sales for the thirty-nine weeks ended October 31, 2020 versus 4% for fiscal year 2018.

Strong Cash Flow Generation and Solid Balance Sheet

We have demonstrated an ability to generate significant free cash flow due to our high gross margins, controlled operating expenses, moderate working capital requirements and low annual maintenance capital expenditures. We have used a portion of our free cash flow to build a strong balance sheet by consistently reducing net leverage. We retired and repaid $433.8 million in principal amount of debt from November 2, 2019 to October 31, 2020, resulting in us having outstanding debt of $929.7 million as of October 31, 2020. In addition to deleveraging, we have continued to make a number of investments in our information technology systems which, coupled with the continued disciplined management of inventory and costs, promote additional operating efficiencies. We anticipate that these efficiencies will allow for continued investment in the business while improving our net leverage moving forward.

Our operating model is highly scalable and enables capital efficient growth. For the five fiscal years ended February 1, 2020, our gross margin rate was 50.2% and selling, general and administrative expenses were held to minimal growth with a CAGR of less than 1%. Those strong operating metrics combined with low maintenance capital spending and a focus on working capital efficiencies have driven the generation of $494.9 million in net cash provided by operating activities from the beginning of fiscal year 2016 through October 31, 2020, and $265.9 million of free cash flow during the same time period. These results are sustained by a cash-generative and convenient real estate portfolio that stretches over 49 states, with 98-99+% of all locations having consistently delivered positive Four-Wall Cash Flow over the same period.

See “—Summary Consolidated Financial and Operating Data” for the definition of free cash flow, and a reconciliation of free cash flow to net cash provided by operating activities.

Proven Leadership Team and Passionate, Performance-Driven Culture

We are a purpose-driven company dedicated to inspiring the creative spirit in each of us—our customers and ourselves. Our company is led by an accomplished and experienced senior management team with significant public market experience and a proven track record in our industry. Our senior management team has an average of 18 years of retail experience, and their understanding of the intricacies of selling SKU-intensive, lower-ticket merchandise facilitates the execution of our growth strategies. Our President and CEO, Wade



 

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Miquelon, who has been with JOANN for almost five years, brings 30 years of experience including CFO and President of International for Walgreens, CFO and EVP for Tyson Foods and as CFO for Procter and Gamble’s Western European and AAI regions (ASEAN/Australasia/India). Our CFO, Matt Susz, has 30 years of experience including 24 years at JOANN, with leadership roles in accounting, financial and strategic planning, internal audit, treasury, IT and operations. Other members of the executive team bring substantial experience and skills in operations (retail and e-commerce), marketing, merchandising, product development, supply chain, legal, human resources and information technology. We have a high-performing and customer-centric culture and our team members tend to be very loyal, a loyalty born out of a true passion for the industry we operate in and the kinds of customers that we serve.

Our Growth Strategies

We believe we are well positioned to drive sustainable growth and profitability over the long term by executing on the following strategies:

Refreshing Our Locations with Enhanced Customer Experience

We have successfully developed and launched a range of refresh options for our locations over the past three years. Our design process is structured and tailored to the needs of our new and existing customers to ensure all elements are appealing to them. Our options span across three core areas:

 

   

Experiential Design Elements—More engaging graphics, lighting, signage, customer work-spaces and merchandise fixtures

 

   

Content Improvements—Merchandising assortments and service offerings optimized for each location

 

   

Service Enhancements—Team member training and engagement, technology-supported management of service wait times and ease of check-out

 

 

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The investment for each refresh project is tailored to each location’s needs and unit economics. We have four general levels of investment and project scope tailored to what would benefit each location, with future investment expected to range from $150,000 for the lightest-touch refreshes to $3 million for the relatively few but most-extensive refreshes. Refinement of our prototype location refresh program has been achieved through the 24 pilot projects completed to date.

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where we refresh an existing location. We have identified just over 50% of our existing locations that are targets over the next seven to ten years for refresh projects at varying levels of scope.

In over half of the refresh projects completed to date, we have also relocated to an improved site within the trade area. Those relocations deliver our higher end of scope for experiential design elements, as those are more efficient to provide in a new building. We also typically increase the size of the location to an average of 25,000 square feet, and therefore expand the assortment breadth we can offer the customer. We have identified 20% of our current locations that are targets for relocation that we believe will result in net sales uplifts ranging from 15% to 75% compared to the current location. We will execute on these opportunities as leases expire on the current locations over the next seven to ten years.

During the COVID-19 pandemic, we were required to limit the presence of external contractors in most of the United States. As a result, we have been focused on scope refinement and project cost engineering of our prototype to optimize our expected return on investment. We expect to complete 10 to 15 projects over the second and third quarters of fiscal year 2022, with a more robust number of projects to be completed annually in fiscal year 2023 and beyond.

Driving Ubiquitous Customer Engagement that Offers Exceptional Experience and Accelerated Omni-Channel Growth

We have extended the JOANN brand beyond our locations and actively engage with our customers across various digital touch-points to wherever and however they choose. Our customers want options, and our robust omni-channel solutions provide a seamless e-commerce shopping experience. We have heavily invested in, and successfully built, our valuable digital assets in the past years, including our large email and SMS text databases and established social media presence. We have successfully leveraged these digital assets with our strong CRM capabilities to further accelerate our digital customer engagement. We have added more new customers to our digital databases in the thirty-nine weeks ended October 31, 2020 than in any prior full year. We plan to continue our customer acquisition momentum with several digital initiatives, from driving traffic to joann.com to expanding our presence in social media platforms. For example, YouTube has been a popular digital platform for our customers when they search for instructions and project inspiration. We have grown our subscriber base on YouTube by 171% for fiscal year 2021. Videos on our YouTube channel have been viewed nearly 67 million times in that span, or more than a 1,200% increase compared to fiscal year 2020.

We will also continue to enhance our omni-channel shopping experience. We successfully upgraded our e-commerce platform in 2020, including improved search engine optimization and user experience, particularly on mobile devices. Today, our customers can easily shop over 245,000 SKUs available as of December 2, 2020 on our e-commerce platform with convenient fulfillment services such as BOPIS, curbside pick-up and ship-to-home. We believe that a broad online product assortment is critical to customer experience as it provides the ability to complete a consolidated purchase across multiple Creative Products categories. We intend to further expand our assortment across various product categories. We plan to improve our supply chain capabilities to provide our customers with a streamlined, worry-free omni-channel shopping experience. We have launched several initiatives to actively increase our fulfillment rate and optimize the cost structure for our omni-channel service offering, which are aimed at improving customer satisfaction.

We strive to provide a seamless transition when our customers engage across our locations and digital platform. Our mobile application has various functions that improve our customers’ shopping experience, no matter where they are. For example, we have recently launched a new digital initiative, “We Got This,” where our team members can assist our customers, in-aisle at our locations, to order additional items and make bulk purchases on our mobile application. We are also adding QR codes across our locations to efficiently connect our



 

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customers to our vast digital library of projects, sources of inspiration and assortments. By scanning QR codes on their mobile devices, our customers can more easily access our digital content while they are shopping in-person.

We intend to further deepen our customer engagement with digital education and learning services, as our customers constantly search for project inspiration and instructions online. For example, we plan to continue to grow our YouTube channel to provide rich content for customers searching for quick tips and short tutorials. We also expect to expand our high quality education offering to customers who are interested in skill building and learning. We intend to offer more affordable and innovative digital creative education across multiple platforms, including Creativebug, to offer subscription-based access to thousands of arts and crafts classes.

Expanding Our Digital Presence into New Markets and Categories with Substantial Share Opportunity

Our customers can shop over 245,000 SKUs available as of December 2, 2020 on our e-commerce platform. By enhancing our central fulfillment capabilities, we intend to further broaden our assortment in product categories that offer substantial share opportunity and also improve our fulfillment rates.

We believe there is significant demand from customers outside the United States. For example, according to SVP Worldwide, approximately 77% of all sewing machine sales globally take place outside of the United States. To capture this opportunity, we intend to expand our robust e-commerce platform to multiple international countries. We receive numerous inquiries every year from international customers hoping to purchase from us, and approximately five million international visitors actively engage our website annually without any marketing initiatives. We have engaged an experienced external provider to launch multi-country international sales. They will support us in managing both the consumer-facing and back-office aspects of this initiative. We believe the breadth of our assortment, purchasing power and pricing levels will allow us to provide a strong value proposition to our customers in many other countries.

We have an innovative management team that has helped develop a robust pipeline of digitally-led initiatives that we believe will strengthen and expand the JOANN brand both domestically and internationally.

 

 

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We believe digital printing is a rapidly-growing technology that provides unlimited design and color options, no minimum quantities and a much more environmentally-friendly production process. We intend to deepen our penetration in digital printing by providing our customers with easy-to-use and innovative technology that significantly enhances the current creative process. In November 2020, we re-launched Customizable Fabric as a digital printing platform through our proprietary partnership with WeaveUp, a technology company offering cutting-edge digital printing solutions for fabric and other customization tools. Customers around the world can also easily make alterations to the designs on the platform, which can be printed on a wide range of fabrics using



 

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high-quality reactive dye digital printing machines. Through our partnership with, and investment in, WeaveUp, we also expect to accelerate new product development and supply chain savings in the Sewing category.

We intend to create a more convenient experience for our sewists with innovative digital solutions. We have developed and patented a proprietary technology named Ditto that we believe could revolutionize the sewing process. The technology is expected to solve the most common pain point reported by our customers: the pinning and cutting of sewing patterns on fabric. Our research has shown that by changing the current cumbersome fabric cutting process, it is likely that sewists will increase their overall sewing activity. We expect the commercial launch of this technology to be in late calendar year 2021.

Delivering Operational Excellence and Margin Improvement

We work to build operational efficiencies to consistently improve our customer value proposition and financial operating margins. We will continue to focus on three core competencies that we have continuously refined with experience that drive sustained operational excellence.

Product Sourcing. Our most significant cost saving initiative is product sourcing. Through the leadership of our U.S.-based sourcing and product development team as well as our Shanghai sourcing office that was established in 2018, we have accelerated our ability to migrate product assortments to factory direct sourcing. This expands our ability to lower costs while delivering new and innovative products to our customers, and we estimate that we have achieved more than $60 million in cost savings through this process from fiscal year 2018 to fiscal year 2020. As our penetration of direct sourcing will still be below 50% of our total merchandise receipts in fiscal year 2021, there is substantial opportunity to generate additional savings through this program.

Indirect Procurement. Over the past two years, we have taken a more strategic approach, including investment in leadership and supporting talent, for our indirect procurement. This team is charged with managing supplier negotiations as well as eliminating waste and inefficiencies across approximately $250 million of annual addressable indirect spend from operating supplies to merchandise fixtures, facilities services, printing and technology costs. Through fiscal year 2022, this team will be focused on 66 separate sourcing efforts, contract negotiations and process improvement projects across nearly all of our business disciplines that represent $70 million to $80 million in current annual spend. Our goal is to generate reductions in the range of 8% to 12% of such current annual spending levels.

Supply Chain. We have a series of supply chain initiatives that we believe will support our continued e-commerce growth and reduce fulfillment costs for customer orders, while significantly reducing our supply chain costs and improving customer and team member satisfaction. Many of these initiatives will simplify and streamline processes and systems that impact the team members that serve customers in our locations. We believe this will ultimately provide more time to engage with our customers in-store, shorten customer online order fulfillment times, and reduce overall labor costs.

The Impact of COVID-19 on our Business

As a result of initial COVID-19 restrictions, approximately half of our locations were temporarily closed, either completely or to in-store traffic, from mid-March 2020 through mid-June 2020. By mid-June 2020, all locations were fully operational and open to walk-in traffic. Throughout the entirety of the third quarter of fiscal year 2021, all locations remained opened other than for temporary deep cleanings required to maintain sanitation protocols or for weather and other related hazards. Since that time, certain state and local governments continue to impose retail closure orders and capacity restrictions, impacting some of our locations. In addition, during the pandemic, we negotiated the deferral of certain cash payments with our landlords; however, the majority of these deferred payments will be remitted over the course of fiscal year 2022. Our COVID-19 related costs for the thirty-nine weeks ended October 31, 2020 were $48.4 million.



 

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Further, certain trends relating to the COVID-19 pandemic have meaningfully benefited the Sewing industry, which in many cases has been deemed essential by federal, state and local authorities. Broader Creative Product sales have accelerated meaningfully as customers spend more time doing DIY activities at home, have an increased desire to learn new skills and take on projects, and engage in personal protective equipment-making activities for personal use, to sell or to share with the community. While it is difficult to estimate the sales to date that have been attributable to PPE-making with precision, we have been able to note significant changes in normal sales trends in categories that support that effort. These categories include cotton fabric, certain sewing supplies such as elastic, and sewing machines. Those favorable impacts to our sales were partially offset by mandated store closures and reduced sales in categories such as special occasion fabrics and seasonal décor and entertaining, which have been negatively impacted by broad restrictions on customer gatherings and celebrations. We estimate the net result of those impacts amounted to a one-time annualized benefit to our sales of 8% to 9% for fiscal year 2021. However, we view the significant number of new customers and increased engagement by new and current customers as a very encouraging signal for the future of our business. We also believe the rapid adoption by customers of our digital and omni-channel offerings is a highly scalable platform we can leverage to both increase sales and reduce costs in the coming years. Still, we remain cautious and vigilant to the extent that the possible sustained spread or resurgence of the pandemic, and any government response thereto, increases the uncertainty regarding future economic conditions that could impact our business in the future. For the duration of the pandemic and beyond, we remain committed to executing on a mission-driven purpose and delivering industry leading growth. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors—Risks Related to our Business—Our business is subject to continued uncertainty with respect to the ongoing COVID-19 pandemic.”

Recent Developments

Preliminary Results as of January 30, 2021

and for the Fourth Quarter of Fiscal Year 2021 and Fiscal Year 2021

We have not yet completed our closing procedures for fiscal year 2021. Presented below are certain estimated preliminary financial results and key operating metrics as of January 30, 2021 and for the fourth quarter of fiscal year 2021 and for fiscal year 2021. These amounts are based on the information available to us at this time. For certain of these results and metrics, we have provided estimated ranges, rather than specific amounts, because these results are preliminary and subject to change. As such, our actual results may differ from the estimated preliminary results presented in this prospectus and will not be finalized until after we complete our normal quarter-end and year-end accounting procedures, including the execution of our internal control over financial reporting, which may occur after the consummation of this offering. Our preliminary results set forth below reflect our management’s best estimate of the impact of events during the quarter.

These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with GAAP. Accordingly, you should not place undue reliance on these preliminary financial results. These estimated preliminary results should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

Additionally, the estimates reported below include Adjusted EBITDA, which is not a recognized financial measure under GAAP. Our management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. Adjusted EBITDA may not



 

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be comparable to similarly titled measures used by other companies in our industry or across different industries. We also reference Credit Facility Adjusted EBITDA because it is a measure that is calculated in accordance with our Credit Facilities and used to determine our compliance with certain ratios in our Credit Facilities, tested each quarter on the basis of the preceding four quarters. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The preliminary financial results included in this prospectus have been prepared by, and are the responsibility of, our management. Ernst & Young LLP has not audited, reviewed, compiled, or applied agreed-upon procedures with respect to the preliminary financial results and key operating metrics. Accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto.

The following are our estimated preliminary financial results for the 13 weeks ended January 30, 2021:

 

   

Net sales are estimated to be $840.8 million, an increase of $145.2 million or 20.9% as compared to our net sales of $695.6 million for the fourth quarter of fiscal year 2020. Total comparable sales grew by 21.2% in the fourth quarter of fiscal year 2021;

 

   

Gross margin rate is estimated to be 46.9%, compared to 47.2% for the fourth quarter of fiscal year 2020;

 

   

Net income (loss) is estimated to be between $36.9 million and $38.9 million compared to $(358.1) million for the fourth quarter of fiscal year 2020; and

 

   

Adjusted EBITDA is estimated to be between $104.7 million and $106.7 million compared to $80.6 million for the fourth quarter of fiscal year 2020.

Our total comparable sales growth of 21.2% for the quarter resulted from a 13% increase in average transaction value and a 6% increase in transactions in our locations along with increases in third party fulfilled e-commerce sales and freight revenue on e-commerce orders. Increases in average transaction value were primarily driven by higher average unit retail values as sales of higher ticket items in our sewing and craft technology categories remained very strong. Omni-channel net sales grew by 194% in the fourth quarter as compared to the same period in the prior year and represented 16% of total sales. The decline in gross margin rate was primarily driven by higher freight expense associated with the increased volume of e-commerce orders, higher import costs due to the recent rise in container fees and the expedited delivery of critical merchandise, as well as additional shrink and clearance activity. These increases were partially offset by the reduction of our promotional offers and lower product costs obtained through our strategic sourcing efforts.

The change in net income was primarily attributable to a $351.4 million impairment of goodwill recorded in the fourth quarter of fiscal year 2020, which were driven primarily by the incremental tariffs on Chinese imports, for which there was no comparable impairment in the fourth quarter of fiscal year 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of U.S. tariffs on Chinese imports in fiscal year 2020.

Our increase in Adjusted EBITDA was primarily driven by our growth in total comparable sales and our ability to leverage costs against that higher sales volume.

The following are our preliminary estimated financial results and key operating metrics for the fiscal year ended January 30, 2021:

 

   

Net sales are estimated to be $2,762.3 million, an increase of $521.1 million, or 23.3%, as compared to our net sales of $2,241.2 million for fiscal year 2020. Total comparable sales grew by 23.5% in fiscal year 2021;



 

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Gross margin rate is estimated to be 49.5%, compared to 49.3% for fiscal year 2020;

 

   

Net income (loss) is estimated to be between $210.9 million and $212.9 million, compared to $(546.6) million for fiscal year 2020; and

 

   

Adjusted EBITDA is estimated to be between $321.9 million and $323.9 million, compared to $153.4 million for fiscal year 2020.

Our total comparable sales growth of 23.5% for the fiscal year resulted from an 18% increase in average transaction value and a 4% increase in transactions in our locations along with increases in third party fulfilled e-commerce sales and freight revenue on e-commerce orders. Increases in average transaction value were primarily driven by higher average unit retail values as well as increases in the average number of items purchased per transaction. Omni-channel net sales grew by 305% in fiscal year 2021 as compared to fiscal year 2020 and represented 19% of total sales. The improvement in gross margin rate was primarily driven by the reduced depth of our promotional offers and the lower product costs obtained through our strategic sourcing efforts, which were partially offset by incremental U.S. tariffs on Chinese imports, higher freight expense associated with the increased volume of e-commerce orders and increases in clearance activity and shrink. We also experienced increases in costs related to the COVID-19 pandemic, including import costs to expedite delivery of critical merchandise and costs of donated products related to our community support efforts.

Additional improvement in net income was further impacted by $481.8 million of goodwill impairment charges recorded in fiscal year 2020, as described above, for which there was no comparable impairment in fiscal year 2021.

Our increase in Adjusted EBITDA was primarily driven by our growth in total comparable sales and our ability to leverage costs against that higher sales volume.

Our cash and cash equivalents as of January 30, 2021 were $27.4 million, an increase of $3.0 million as compared to $24.4 million as of February 1, 2020. Long-term debt, net as of January 30, 2021 was $786.3 million, a decrease of $423.9 million as compared to $1,210.2 million as of February 1, 2020. For the four quarters ended January 30, 2021, our net cash provided by operating activities was $327.1 million and our Credit Facility Adjusted EBITDA for the four quarters ended January 30, 2021 was between $327.4 million and $329.4 million. As of January 30, 2021, our ratio of consolidated net debt to Credit Facility Adjusted EBITDA was 3.0 to 1.0, and of consolidated senior secured debt to Credit Facility Adjusted EBITDA was 2.7 to 1.0. For more information regarding why we believe Credit Facility Adjusted EBITDA is material to an investor’s understanding of our financial condition and liquidity, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We had 855 locations as of January 30, 2021 and 867 locations as of February 1, 2020.



 

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The following tables provide a preliminary reconciliation of Adjusted EBITDA and Credit Facility Adjusted EBITDA for the periods presented:

 

     13-Weeks Ended
January 30, 2021
    13-Weeks
Ended
February 1,
2020
    Fiscal Year Ended
January 30, 2021
    Fiscal Year
Ended
February 1,
2020
 
     Low     High           Low     High        
(in millions)    (estimated)     (actual)     (estimated)     (actual)  

Net cash provided by operating activities

         $ 327.1     $ 327.1    

Non-cash operating lease expense

           (152.4     (152.4  

Depreciation and amortization excluding content cost amortization (2)

           (80.0     (80.0  

Deferred income taxes

           3.9       3.9    

Stock-based compensation expense

           (1.5     (1.5  

Amortization of deferred financing costs and original issue discount

           (3.7     (3.7  

Debt related gain (1)

           155.1       155.1    

Loss on disposal and impairment of fixed assets

           (3.4     (3.4  

Goodwill and trade name impairment (6)

                    

Change in operating assets and liabilities

           (34.2     (32.2  

Net income (loss)

   $ 36.9     $ 38.9     $ (358.1   $ 210.9     $ 212.9     $ (546.6

Income tax provision

     10.4       10.4       34.9       28.0       28.0       12.1  

Interest expense, net

     14.0       14.0       24.3       69.0       69.0       101.9  

Debt related gain (1)

     (2.2     (2.2     (3.8     (155.1     (155.1     (3.8

Depreciation and amortization (2)

     20.4       20.4       20.3       80.6       80.6       78.0  

Strategic initiatives (3)

     2.1       2.1       1.2       6.2       6.2       9.0  

COVID-19 costs (4)

     16.6       16.6             65.0       65.0        

Technology development expense (5)

     2.2       2.2       2.7       5.8       5.8       6.4  

Stock-based compensation expense

     0.4       0.4       0.3       1.5       1.5       1.2  

Loss on disposal and impairment of fixed and operating lease assets

     2.0       2.0       0.6       5.6       5.6       1.0  

Goodwill and trade name impairment (6)

                 356.4                   486.8  

Sponsor management fee (7)

     0.5       0.5       1.2       1.3       1.3       5.0  

Other (8)

     1.4       1.4       0.6       3.1       3.1       2.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 104.7     $ 106.7     $ 80.6     $ 321.9     $ 323.9     $ 153.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Location pre-opening and closing costs excluding loss on disposal of fixed assets

   $ 0.5     $ 0.5     $ 2.4     $ 5.5     $ 5.5     $ 9.2  

Credit Facility Adjusted EBITDA

         $ 327.4     $ 329.4    

 

(1)

“Debt related (gain) loss” represents gains associated with debt repurchases below par and write off of unamortized fees and original issue discount associated with debt refinancing.

(2)

“Depreciation and amortization” represents depreciation, amortization of intangible assets, amortization of favorable and unfavorable lease rights, and amortization of content costs.

(3)

“Strategic initiatives” represents non-recurring costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives, including costs (i) to design a new prototype and assortment optimization process for locations, (ii) related to our efforts to initially evaluate and implement opportunities to offset the significant costs incurred due to the new U.S. tariffs on merchandise produced in China, (iii) to start up a new technology product that would traditionally be incurred by our vendors, (iv) to evaluate our opportunity in



 

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  new potential lines of business, (v) to analyze improved supply chain capabilities, (vi) related to one-time legal and accounting fees associated with our planned initial public offering and (vii) to establish our foreign sourcing office.
(4)

“COVID-19 costs” represents premium pay for location team members (including cleaning and location capacity management labor), incremental seasonal clearance associated with location closures, donations for our mask making initiative and additional location cleaning supplies.

(5)

“Technology development expense” represents one-time IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.

(6)

Based on our evaluation for impairment of the carrying amount of goodwill and trade name on our balance sheet. Impairment recorded was driven predominantly by the result of negative total comparable sales and declining margins, primarily resulting from the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See Note 6—Goodwill and Other Intangible Assets to our unaudited financial statements included elsewhere in this prospectus for further details.

(7)

“Sponsor management fee” represents management fees paid to our sponsor, LGP (or advisory affiliates thereof), in accordance with our management services agreement, which will terminate upon the consummation of this offering. Following the consummation of this offering, LGP will not provide managerial services to us in any form.

(8)

“Other” represents one-time severance, certain legal, executive leadership transition and business transition expenses.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition and results of operations. You should carefully consider the risks discussed in the section titled “Risk Factors,” including the following risks, before investing in our common stock:

 

   

evolving U.S. trade regulations and policies, including with China and other Asian countries, have in the past and may in the future have a material and adverse effect on our business, financial condition and results of operations;

 

   

our inability to respond effectively to competitive pressures, changes in the retail markets and customer expectations could result in lost market share, which could have a material and adverse effect on our business, financial condition and results of operations;

 

   

our business is subject to continued uncertainty with respect to the ongoing COVID-19 pandemic;

 

   

failure to attract, develop, motivate and retain qualified team members and effectively manage overall labor costs, including potential increases in minimum wages, could limit our growth and materially and adversely affect our business, financial condition and results of operations;

 

   

failure to manage inventory effectively, predict new consumer trends or effectively react to changes in consumer buying habits could materially and adversely affect our business, financial condition and results of operations;

 

   

we increasingly depend on e-commerce, and our failure to successfully manage this channel and deliver a convenient omni-channel shopping experience to our customers could have a material and adverse effect on our business, financial condition and results of operations;



 

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increased costs related to the production of our merchandise or disruptions in our distribution network could materially and adversely affect our business, financial condition and results of operations;

 

   

our reliance on foreign suppliers increases our risks of not obtaining adequate, timely and cost effective merchandise, as well as risks involved in foreign operations and foreign currency translation;

 

   

the seasonality of our sales may negatively impact our operating results;

 

   

we may face risks related to our indebtedness, which included $929.7 million of outstanding debt as of October 31, 2020;

 

   

failure to adequately maintain the security of and prevent unauthorized access to our electronic and other confidential information, including customer and team member personal information, could materially and adversely affect our business, financial condition and results of operations;

 

   

intentional or accidental disruptions to our information systems, including our mobile application and primary e-commerce website, or our failure to adequately support, maintain, secure and upgrade these systems could materially and adversely affect our business, financial condition and results of operations; and

 

   

because LGP owns a significant percentage of our common stock, it may control all major corporate decisions and its interests may conflict with your interests as an owner of our common stock and our interests.

Our business also faces a number of other challenges and risks discussed throughout this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” beginning on page 30 of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 68 of this prospectus, and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.

Our Corporate Information

JOANN Inc. (formerly known as Jo-Ann Stores Holdings Inc.) is the issuer in this offering. Our principal operating subsidiary is Jo-Ann Stores, LLC (formerly Jo-Ann Stores, Inc.), which was previously an independent publicly traded corporation until its acquisition on March 18, 2011 by a subsidiary of Needle Holdings LLC (formerly known as Needle Holdings, Inc.), a company incorporated on December 16, 2010 by LGP for the purpose of the acquisition. On September 19, 2012, Jo-Ann Stores Holdings Inc. was formed solely for the purpose of reorganizing the corporate structure of Needle Holdings LLC and its wholly owned subsidiary Jo-Ann Stores, LLC, and on October 16, 2012, Needle Holdings LLC became our wholly owned subsidiary. Upon consummation of this offering, after giving effect to the sale of 5,468,750 shares in this offering by the Selling Shareholders and 5,468,750 shares by us, LGP will own approximately 69% of our shares of common stock. See “Principal and Selling Shareholders.”

Our principal executive office is located at 5555 Darrow Road, Hudson, Ohio 44236 and our telephone number at that address is (330) 656-2600. We maintain a website at www.joann.com. We have included our website address in this prospectus as an inactive textual reference only. The information contained on, or that can be accessed through, our website is not a part of, and should not be considered as being incorporated by reference into, this prospectus.



 

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THE OFFERING

 

Common stock offered by us

5,468,750 shares.

 

Common stock offered by the Selling Shareholders

5,468,750 shares.

 

Common stock to be outstanding after this offering

40,371,130 shares (or 42,011,755 shares, if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Option to purchase additional shares from us

1,640,625 shares.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $57.8 million. We intend to use the net proceeds from this offering, including any net proceeds from the underwriters’ exercise of the over-allotment option to purchase additional shares from us, to pay down outstanding borrowings on our Second Lien Facility and the remainder, if any, to pay down outstanding borrowings on our ABL Facility. See “Use of Proceeds.” We will not receive any of the proceeds from the sale of shares of common stock by the Selling Shareholders.

 

Dividend policy

As a public company we anticipate paying a quarterly dividend at a rate initially equal to $0.40 per share per annum on our common stock to holders of our common stock. Our ability to pay dividends on our common stock is limited by the agreements governing our Credit Facilities. See “Dividend Policy.”

 

Proposed Nasdaq symbol

“JOAN.”

 

Controlled company

Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of Nasdaq. See “Management—Director Independence and Controlled Company Exception.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 30 of this prospectus for a discussion of factors you should carefully consider before investing in our common stock.

 

Reserved share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 6% of the shares offered by this prospectus for sale to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.


 

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The number of shares of common stock to be outstanding after this offering excludes:

 

   

3,086,467 shares of common stock issuable upon the exercise of options outstanding under the 2012 Plan, as of October 31, 2020 at a weighted average exercise price of $6.11 per share;

 

   

1,187,035 additional shares of common stock reserved for future issuance under our 2021 Plan, which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the 2021 Plan that automatically increase the share reserve under our 2021 Plan, as described in “Executive Compensation—Equity Plans;” such amount excludes the IPO Option Grants and IPO RSU Grants described below;

 

   

656,656 shares of common stock issuable upon the exercise of stock options granted under the 2021 Plan upon the pricing of this offering with an exercise price per share equal to the initial public offering price per share, which we refer to as the IPO Option Grants;

 

   

156,309 shares of our common stock issuable as restricted stock units to be granted under our 2021 Plan immediately following the effectiveness of the applicable Form S-8 registration statement, which we refer to as the IPO RSU Grants; and

 

   

400,000 additional shares of common stock reserved for future issuance under our ESPP, which will become effective once the registration statement of which this prospectus forms a part is declared effective as well as any shares common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under our ESPP, as described in “Executive Compensation—Equity Plans.”

Unless otherwise indicated, all information contained in this prospectus:

 

   

assumes the underwriters’ option to purchase additional shares will not be exercised;

 

   

gives effect to a 85.8808880756715-for-1.00 stock split effected on March 3, 2021; and

 

   

gives effect to our amended and restated certificate of incorporation and our amended and restated bylaws.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

We present below our summary consolidated statements of operations and of cash flow data for the fiscal years ended February 1, 2020, February 2, 2019, and February 3, 2018, and our consolidated balance sheet data as of February 1, 2020 and February 2, 2019. We have derived this information from our audited consolidated financial statements included elsewhere in this prospectus. We also present our consolidated balance sheet data as of February 3, 2018. We have derived this information from our audited consolidated financial statements not included in this prospectus.

We also present below our summary consolidated statements of operations and of cash flow data for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, and our consolidated balance sheet data as of October 31, 2020 and November 2, 2019. We have derived this information from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to fairly state the financial information set forth in those statements.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read the summary consolidated financial and operating data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

   

Thirty-Nine Weeks  Ended

   

Fiscal Year-Ended (a)

 

(In millions)

 

October 31,

2020

   

November 2,

2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

 
    (unaudited)     (unaudited)        

Statements of consolidated income data:

         

Net sales

  $ 1,921.5     $ 1,545.6     $ 2,241.2     $ 2,324.8     $ 2,314.3  

Cost of sales

    949.8       768.6       1,135.9       1,148.3       1,130.3  

Selling, general and administrative expenses

    818.2       723.0       977.4       951.4       943.4  

Depreciation and amortization

    59.8       57.3       77.5       76.0       78.8  

Goodwill and trade name impairment

    —         130.4       486.8       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    93.7       (133.7     (436.4     149.1       161.8  

Interest expense, net

    55.0       77.6       101.9       101.1       95.4  

Debt related (gain) loss

    (152.9     —         (3.8     2.4       0.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    191.6       (211.3     (534.5     45.6       65.5  

Income tax provision (benefit)

    17.6       (22.8     12.1       10.3       (31.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 174.0     $ (188.5   $ (546.6   $ 35.3     $ 96.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated statements of cash flows data:

         

Net cash provided by (used for) operating activities

  $ 185.8     $ (170.4   $ (33.9   $ 99.0     $ 97.7  

Net cash used for investing activities

    (28.2     (64.8     (79.5     (49.7     (50.8

Net cash (used for) provided by financing activities

    (148.8     210.5       86.3       (25.1     (42.3

Balance sheets data:

         

Cash and cash equivalents

  $ 33.2     $ 26.8     $ 24.4     $ 51.5     $ 27.3  

Total current assets

    799.6       877.7       719.8       710.0       642.1  

Goodwill

    162.0       513.4       162.0       643.8       643.8  

Total assets

    2,519.6       2,830.6       2,301.3       2,070.8       2,035.6  

Total current liabilities

    651.4       541.4       498.2       394.9       347.2  

Long-term debt, net

    921.6       1,337.2       1,210.2       1,106.3       1,123.0  

Total shareholders’ equity (deficit)

    3.5       185.6       (172.0     373.2       338.6  


 

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Thirty-Nine Weeks  Ended

   

Fiscal Year-Ended (a)

 

(In millions)

 

October 31,

2020

   

November 2,

2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

 
    (unaudited)     (unaudited)        

Other financial and operating data:

         

Total comparable sales versus prior year (b)

    24.6     (3.3 )%      (3.6 )%      1.9     (1.4 )% 

Adjusted EBITDA (c)

  $ 217.2     $ 72.8     $ 153.4     $ 252.0     $ 257.4  

Location pre-opening and closing costs excluding loss on disposal of fixed assets

    5.0       6.8       9.2       6.0       4.4  

Free cash flow (d)

    160.5       (230.1     (103.4     58.0       59.2  

Total capital expenditures, net of landlord contributions (e)

    25.3       59.7       69.5       41.0       38.5  

Gross margin rate

    50.6     50.3     49.3     50.6     51.2

Adjusted EBITDA as a percentage of net sales (c)

    11.3     4.7     6.8     10.8     11.1

Total retail locations

    857       867       867       869       865  

Total retail location square footage

    18,823       18,963       18,963       18,956       18,870  

 

(a)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks. See “Basis of Presentation.”

(b)

We define total comparable sales as net sales for locations that have been open for at least 13 months as well as net sales for locations that have not been remodeled, expanded or downsized in the last 13 months. In addition, total comparable sales include our e-commerce sales generated via joann.com (online sales for all products) and creativebug.com (online sales of digital videos for crafting projects). Further, in a 53-week year, net sales of the first 52 weeks are compared to the comparable 52 weeks of the prior period.

(c)

We define Adjusted EBITDA as net income (loss) plus income tax provision (benefit), interest expense, net, debt related (gain) loss, other income and depreciation and amortization, as further adjusted to eliminate the impact of certain non-cash items and other items that we do not consider indicative of our ongoing operating performance, including costs related to strategic initiatives, COVID-19 costs, technology development expense, stock-based compensation expense, loss on disposal and impairment of fixed and operating lease assets, goodwill and trade name impairment, sponsor management fees and other one-time costs. We describe these adjustments reconciling net income (loss) to Adjusted EBITDA in the applicable table below.

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA following this offering, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; to compare our performance against that of other peer companies using similar measures; and because our Credit Facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants.



 

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Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;

 

   

Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;

 

   

Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do.

The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented:

 

    

Thirty-Nine Weeks Ended

   

Fiscal Year Ended (1)

 

(In millions)

  

October 31,

2020

   

November 2,

2019

   

February 1,
2020

   

February 2,
2019

    

February 3,

2018

 

Net income (loss)

   $ 174.0     $ (188.5   $ (546.6   $ 35.3      $ 96.5  

Income tax provision (benefit)

     17.6       (22.8     12.1       10.3        (31.0

Interest expense, net

     55.0       77.6       101.9       101.1        95.4  

Debt related (gain) loss (2)

     (152.9     —         (3.8     2.4        0.9  

Other income

     —         —         —         —          —    

Depreciation and amortization (3)

     60.2       57.7       78.0       76.2        78.6  

Strategic initiatives (4)

     4.1       7.8       9.0       7.3        3.4  

COVID-19 costs (5)

     48.4       —         —         —          —    

Technology development expense (6)

     3.6       3.7       6.4       3.9        3.5  

Stock-based compensation expense

     1.1       0.9       1.2       0.6        1.0  

Loss on disposal and impairment of fixed and operating lease assets

     3.6       0.4       1.0       3.2        1.4  

Goodwill and trade name impairment (7)

     —         130.4       486.8       —          —    

Sponsor management fee (8)

     0.8       3.8       5.0       5.0        5.0  

Other (9)

     1.7       1.8       2.4       6.7        2.7  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 217.2     $ 72.8     $ 153.4     $ 252.0      $ 257.4  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

  (1)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks. See “Basis of Presentation.”

  (2)

“Debt related (gain) loss” represents gains associated with debt repurchases below par and write off of unamortized fees and original issue discount associated with debt refinancings.

  (3)

“Depreciation and amortization” represents depreciation, amortization of intangible assets, amortization of favorable and unfavorable lease rights, and amortization of content costs.

  (4)

“Strategic initiatives” represents non-recurring costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives, including costs (i) to design a new prototype and assortment



 

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  optimization process for locations, (ii) related to our efforts to initially evaluate and implement opportunities to offset the significant costs incurred due to the new U.S. tariffs on merchandise produced in China, (iii) to start up a new technology product that would traditionally be incurred by our vendors, (iv) to evaluate our opportunity in new potential lines of business, (v) to analyze improved supply chain capabilities, (vi) related to one-time legal and accounting fees associated with our planned initial public offering and (vii) to establish our foreign sourcing office.
  (5)

“COVID-19 costs” represents premium pay for location team members (including cleaning and location capacity management labor), incremental seasonal clearance associated with location closures, donations for our mask making initiative and additional location cleaning supplies.

  (6)

“Technology development expense” represents one-time IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.

  (7)

Based on our evaluation for impairment of the carrying amount of goodwill and trade name on our balance sheet. Impairment recorded was driven predominantly by the result of negative total comparable sales and declining margins, primarily resulting from the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See Note 6 —Goodwill and Other Intangible Assets to our unaudited financial statements included elsewhere in this prospectus for further details.

  (8)

“Sponsor management fee” represents management fees paid to our sponsor, LGP (or advisory affiliates thereof), in accordance with our management services agreement, which will terminate upon the consummation of this offering. Following the consummation of this offering, LGP will not provide managerial services to us in any form.

  (9)

“Other” represents one-time severance, certain legal, executive leadership transition and business transition expenses.

(d)

We present free cash flow because we believe it assists lenders, investors and analysts in evaluating our ability to maintain and generate incremental liquidity. Free cash flow should not be considered as an alternative to net cash provided by operating activities as a liquidity measure. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations or cash payments for business investments and acquisitions. Free cash flow is not a measurement of financial performance under GAAP, may have limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities or any other measure of performance derived in accordance with GAAP. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.



 

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The following is a reconciliation of our net cash provided by operating activities to free cash flow for the periods presented:

 

   

Thirty-Nine Weeks  Ended

   

Fiscal Year-Ended (1)

 

(Dollars in millions)

 

October 31,

2020

   

November 2,

2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

   

January 28,

2017

   

January 30,
2016

 
    (unaudited)     (unaudited)        

Net cash provided by operating activities

  $ 185.8     $ (170.4     $(33.9     $99.0       $97.7       $90.2       $56.1  

Less: total capital expenditures

    28.7       64.8       78.6       48.4       44.0       30.1       40.6  

Plus: landlord contributions

    3.4       5.1       9.1       7.4       5.5       6.7       9.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

  $ 160.5     $ (230.1   $ (103.4     $58.0       $59.2       $66.8       $24.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks. See “Basis of Presentation.”

 

(e)

We consider total capital expenditures, net of landlord contributions to be a useful non-GAAP measure as it most accurately reflects our actual total cash outlay for capital expenditures to open new locations and complete remodel and relocation projects for existing locations.

The following is a reconciliation of our total capital expenditures to our total capital expenditures, net landlord contributions for the periods presented:

 

    

Thirty-Nine Weeks Ended

    

Fiscal Year-Ended

 

(In millions)

  

October 31,

2020

    

November 2,
2019

    

February 1,

2020

    

February 2,

2019

    

February 3,

2018

 

Total capital expenditures

   $ 28.7      $ 64.8      $ 78.6      $ 48.4      $ 44.0  

Less: landlord contributions

     3.4        5.1        9.1        7.4        5.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures, net of landlord contributions

   $ 25.3      $ 59.7      $ 69.5      $ 41.0      $ 38.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


 

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RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks described below.

Risks Related to Our Business

Evolving U.S. trade regulations and policies, including with China and other Asian countries, have in the past and may in the future have a material and adverse effect on our business, financial condition and results of operations.

Our products are sourced from a wide variety of suppliers, including from suppliers overseas, particularly in China and other Asian countries. In addition, some of the products that we purchase from vendors in the United States also depend, in whole or in part, on suppliers located outside the United States. Any restrictions or tariffs imposed on products that we or our suppliers import for sale in the United States would adversely and directly impact our cost of goods sold. In addition, changes in U.S. trade regulations and policies could have an adverse impact on trade relations between the United States and certain foreign countries, which could materially and adversely affect our relationships with our international suppliers and reduce the supply of goods available to us. Further, we cannot predict the extent to which the United States will adopt changes to existing trade regulations and policies, which creates uncertainties in planning our sourcing strategies and forecasting our margins. For example, in 2018 and 2019, the United States imposed significant tariffs on various products imported from China, including certain products we source from China. The United States has also stated that further tariffs may be imposed on additional products imported from China if a trade agreement is not reached. On January 15, 2020, a “phase one” trade deal was signed between the United States and China and was accompanied by a decision from the United States to cancel a plan to increase tariffs on an additional list of products from China. However, given the limited scope of the phase one agreement, concerns over the stability of bilateral trade relations remain. In addition, the 2020 U.S. presidential election and the resulting transition in the administration has resulted in additional uncertainty regarding the future of U.S. trade relations. At this time, there is no assurance that a broader trade agreement will be successfully negotiated between the United States and China to reduce or eliminate the existing tariffs.

If additional tariffs are imposed on our products, or other retaliatory trade measures are taken, our costs could increase and we may be required to raise our prices, which could materially and adversely affect our results. For example, in fiscal year 2020, we raised our prices on certain products primarily in response to increased incremental U.S. tariffs on Chinese imports and subsequently experienced reduced demand for such products and traffic to our locations. Before mitigation, we estimate that incremental U.S. tariffs on Chinese imports in fiscal year 2020 would have amounted to $75 million of additional annual costs, as these tariffs applied to a broad range of our products. Primarily, as a result of the actual and threatened U.S. tariffs on Chinese imports which led to our negative total comparable sales and declining margins, we impaired our recorded goodwill by $481.8 million in fiscal year 2020. Although we have undertaken efforts, including shifting sourcing of programs where appropriate to suppliers outside of China, negotiating with domestic suppliers paying the incremental tariffs on our behalf to absorb a portion of those costs and where possible adjusting materials used to construct our products to qualify for a Harmonized Tariff Code where the Section 301 tariffs do not apply, to mitigate the negative impact of tariff-related cost increases, these efforts may be unsuccessful and/or their implementation could result in further increased costs and disruptions to our operations, further impairment charges and a loss of customers and/or suppliers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

 

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Our inability to respond effectively to competitive pressures, changes in the retail markets and customer expectations could result in lost market share, which could have a material and adverse effect on our business, financial condition and results of operations.

Our inability to respond effectively to competitive pressures, changes in the retail markets and customer expectations could result in lost market share, which could have a material and adverse effect on our business, financial condition and results of operations. Competition is intense in the Creative Products industry. We compete with all of these players for customer attention, shopping visits, exclusive vendor relationships, leadership talent and in some cases front line employees and retail locations. In order to retain and grow our market share, we must remain competitive in the areas of product assortment, price, convenience and customer service. In addition, the retail industry in general is subject to rapid technological change, which may increase the amount of capital we spend in the future as we work to sustain and grow our technological infrastructure and digital commerce capabilities in order to remain competitive. Moreover, we ultimately compete against alternative sources of entertainment and leisure activities for our customers that are unrelated to the Creative Product industry.

We compete with select mass merchants, including Walmart, Inc. and Target Corporation, which dedicate a portion of their selling space to selling Creative Products items. We also compete with specialty retailers in the Creative Products industry, such as The Michaels Companies, Inc. and Hobby Lobby Stores, Inc., as well as smaller regional and local operators. In addition to e-commerce options offered by the retailers mentioned above, we compete with companies that sell fabrics and crafts only over the internet, such as Amazon.com or its subsidiary Fabric.com. Some of our competitors may be larger, more experienced and offer additional products that we cannot offer economically. For example, some of our competitors may offer more options for free and/or expedited shipping for e-commerce sales than we offer. Some competitors have greater financial resources and technology capabilities, better access to merchandise, access to capital markets and debt financing and greater market penetration than we do.

The performance of our competitors as well as changes in their pricing and promotional policies, marketing activities, new location openings, merchandising and operational strategies could impact our sales and profitability. Additionally, as our competitors continue to offer online ordering, ship to home and pickup in-store fulfillment, there is risk that we could lose market share, which could have a material and adverse effect on our business, financial condition and results of operations.

Our business is subject to continued uncertainty with respect to the ongoing COVID-19 pandemic.

In an effort to mitigate the continued spread of the strain of coronavirus disease known as COVID-19, federal, state and local governments, as well as certain private entities, mandated various restrictions, including shelter-in-place orders, stay-at-home orders, travel restrictions, as well as capacity restrictions in our locations and required enhanced cleaning protocols. As a result of these restrictions, approximately half of our locations were temporarily closed, either completely or to in-store traffic, from mid-March 2020 through mid-June 2020. Since that time, certain state and local governments continue to impose retail closure orders and capacity restrictions, impacting some of our locations. In addition, during the pandemic, we negotiated the deferral of certain cash payments with our landlords; however, the majority of these deferred payments will be remitted over the course of fiscal year 2022. Our COVID-19 related costs for the thirty-nine weeks ended October 31, 2020 were $48.4 million. There remains significant uncertainty surrounding the overall impact of the COVID-19 pandemic on our business, including the risk of required capacity restrictions or closing of our locations if certain restrictions are reinstated by state and local authorities. There is no assurance that we will be deemed an essential business or otherwise receive an exemption to the restrictions. As such, we are unable to accurately predict the future impact that the pandemic will have on our business, financial condition and results of operations. Additional potential future impacts include those related to:

 

   

our ability to meet obligations to our business partners, including under our Credit Facilities and lease obligations;

 

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interruption and delays in our supply chain for key merchandise and operating supplies;

 

   

the failure of third parties on which we rely, including our suppliers, to meet their obligations to us, which may be caused by their own financial or operational difficulties, travel restrictions and border closures, or disruptions with sourcing raw materials, manufacturing, delivery, shipping, exports or imports;

 

   

the impact on future consumer demand for our products and services through the remainder of the pandemic or in subsequent periods;

 

   

the impact on our workforce, including limitations on travel and work locations, quarantines, implementing a smaller workforce, changes in pay and temporary leaves of absence;

 

   

increased operating costs to execute on our commitment to provide a safe operating environment in our locations, distribution centers and corporate offices;

 

   

the continued cancellation of in-person group events such as educational classes;

 

   

any additional government and regulatory restrictions that limit or close operating facilities, such as temporary closures of our locations, the limitation of operating hours and number of customers permitted to shop at one time, or restrict operations of our business partners, suppliers or customers; and

 

   

credit availability and cost due to disruptions and volatility in the financial markets.

The ultimate impact of the COVID-19 pandemic on our business will be dependent on, among other things, the duration of quarantines and other global travel restrictions, the severity of the virus, the duration of the outbreak and the public’s response to the outbreak. The COVID-19 pandemic may also have the effect of heightening other risks disclosed in this “Risk Factors” section.

Certain trends relating to the COVID-19 pandemic have positively impacted our business, but there can be no assurances that these impacts will be sustained through the remainder of the pandemic or in subsequent periods.

Certain trends relating to the COVID-19 pandemic have positively impacted certain of our merchandise categories and consumer demand for our products and services. As a result of the COVID-19 pandemic and the related stay-at-home orders, we have experienced a significant increase in e-commerce demand and consumer demand for certain products, such as mask-making. While we expect our customers’ purchases for projects that were in direct response to the pandemic to decline following the pandemic, it is difficult to ascertain with precision our sales attributable to mask-making and other such projects, and there can be no assurances that these positive trends during the COVID-19 pandemic will be sustained through the remainder of the pandemic or in subsequent periods. We estimate, however, that the net result of COVID-19 impacts on our business to have been a one-time annualized benefit to our sales of 8% to 9% for fiscal year 2021. If the one-time net positive impacts on our business related to COVID-19 are not sustained through the remainder of the pandemic or in subsequent periods, and if customers’ purchases for projects in direct response to the pandemic decline more than expected, our total comparable sales growth and results of operations could be adversely impacted.

Failure to attract, develop, motivate and retain qualified team members and effectively manage overall labor costs, including potential increases in minimum wages, could limit our growth and materially and adversely affect our business, financial condition and results of operations.

Our success depends in part upon our ability to attract, develop, motivate and retain large numbers of qualified store support center, distribution center and retail location support personnel who understand and appreciate our culture and are able to adequately represent our brand. The majority of our team members are in entry-level and part-time positions in our locations with historically high rates of turnover. In order to successfully operate our physical network, we are reliant on the ability to recruit, develop, motivate and retain significant numbers of location managers and location team members who are capable of consistently providing

 

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a high level of customer service, as demonstrated by their enthusiasm for our brand, knowledge of our merchandise and the creative projects they support. Our operations and prospects could be adversely affected if we cannot attract and retain qualified management and team members.

Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, prevailing wage rates, rising health care and other insurance costs, uncertainty about federal health care policies, minimum wage legislation, unionization of our workers, changes in employment legislation and regulations and changing demographics. As of October 31, 2020, 1.3% of our team members were unionized, all of which work at our Hudson, Ohio distribution center. Our team members’ participation in labor unions could put us at increased risk of labor strikes and disruptions of our operations. In addition, changes in minimum wage laws and other employment laws can have a significant impact on our costs and customer experience if we fail to increase our wages competitively. In particular, in recent years, there have been significant increases in minimum wages in many jurisdictions, with more increases already anticipated in future years. As of October 31, 2020, we employed approximately 27,700 team members, approximately 80% of whom are part-time and paid at or above, but near, applicable minimum wages. Additionally, many of our salaried team members are paid at rates that could be impacted by changes to minimum pay levels for exempt roles. Any increases at the federal, state or municipal level to the minimum pay rate required to remain exempt from overtime pay may adversely affect our business or results of operations. Furthermore, market competition may create further pressure for us to increase the wages paid to our team members or the benefits packages that they receive. If we experience market-driven increases in wage rates or in benefits or if we fail to increase our wages or benefits packages competitively, our ability to attract and retain team members could suffer. Consistently low unemployment rates may increase the likelihood or impact of such market pressures. Any failure to meet our staffing needs, any material increases in team member turnover rates or any increases in overall labor and health care costs could have a material and adverse effect on our business, financial condition and results of operations.

Failure to manage inventory effectively, predict new consumer trends or effectively react to changes in consumer buying habits could materially and adversely affect our business, financial condition and results of operations.

Due to the nature of our business, we purchase much of our inventory well in advance of each selling season. Therefore, our success depends in part on our ability to anticipate and respond in a timely manner to changing customer demands, preferences and buying habits. If we misjudge consumer preferences or demands or fail to timely and effectively react to changes in trends or overall consumer demand, we could have excess inventory that may need to be held for a long period of time, written down, sold at prices lower than expected or discarded in order to clear excess inventory at the end of a selling season. Conversely, if we underestimate consumer demand, we may experience shortages of key items and may not be able to provide products to our customers to meet their demand. Given the project and component nature of our business, these shortages could materially and adversely affect sales of other related products and even conversion of traffic to sales within our locations and on our mobile application and website. We also sometimes experience long lead times for manufacturing and delivery of our products, particularly those that we source directly from foreign suppliers, which further increases inventory carrying costs. A failure to manage our inventory effectively, including a failure to manage inventory theft or loss rates, could have a material and adverse effect on our business, financial condition and results of operations. Additionally, any failure to identify and act upon new Creative Products trends prior to our competitors could provide a competitive advantage to our competitors and have a material and adverse effect on our business, financial condition and results of operations.

In addition, our locations are generally located in strip and “big box” shopping centers, providing us with additional traffic beyond marketing efforts. Shopping center traffic may be adversely affected by, among other things, economic downturns, rising fuel costs, gasoline shortages, the closing of anchor locations, shopping center occupancy rates and mix, new shopping centers and other retail developments, perceived safety of particular shopping centers or changes in customer shopping preferences. A decline in the popularity of visiting shopping centers among our target customers could have a material and adverse effect on customer traffic and our business in general. Additionally, in response to the COVID-19 pandemic, we, or in some cases, key anchor tenants, have experienced mandatory and elective temporary closures in certain shopping centers where our locations are. A continuing reduction in traffic to shopping centers may likely lead to a decrease in our net sales and results of operations, which could have a material and adverse effect on our financial condition and results of operations.

 

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The seasonality of our sales may negatively impact our operating results.

Our business is highly seasonal, with a significant amount of sales and earnings occurring in the third and, in particular, the fourth fiscal quarters. Our inventory levels and related short-term financing needs also are seasonal, with the greatest requirements occurring during our second and third fiscal quarters as we increase our inventory in preparation for our peak selling season. Our peak selling season generally runs from September through December. Accordingly, the results of a single fiscal quarter, particularly the third and fourth fiscal quarters, should not be relied on as an indication of our annual results or future performance. In addition, any factors that impact our third and fourth fiscal quarter operating results could have a disproportionate effect on our results of operations for the entire fiscal year. If for any reason our third and fourth fiscal quarter results were substantially below expectations, our operating results for the full year would be materially and adversely affected, and we could have substantial excess inventory, including seasonal merchandise, that we would have limited time to liquidate.

We increasingly depend on e-commerce, and our failure to successfully manage this channel and deliver a convenient omni-channel shopping experience to our customers could have a material and adverse effect on our business, financial condition and results of operations.

Expanding e-commerce is an important part of our strategy to grow our omni-channel operations and to potentially access international markets. See “—Certain trends relating to the COVID-19 pandemic have positively impacted our business, but there can be no assurances that these impacts will be sustained through the remainder of the pandemic or in subsequent periods.” Omni-channel retailing is rapidly evolving and we must keep pace with customer preferences and expectations. In addition, dependence on e-commerce and omni-channel fulfillment subjects us to certain other risks, including:

 

   

the failure to successfully implement new systems, system enhancements and internet platforms and keep pace with frequent changes to technology requirements;

 

   

the failure of our technology infrastructure or the computer systems that operate our mobile application and website, causing, among other things, application and website downtimes, telecommunications issues or other technical failures;

 

   

inefficiencies or disruptions that prevent us from efficiently and affordably delivering products to our customers;

 

   

increased competition; and

 

   

our third party service providers’ ability to protect customer data required to transact business on our digital platforms.

Our customers are increasingly using mobile devices, computers and other devices to shop online for products that we carry. Omni-channel retailing is rapidly evolving and we must keep pace with customer preferences and expectations. There are various risks associated with omni-channel retailing, including the need to keep pace with frequent technology changes, internet security risks and an increased level of competition. Failure to identify and effectively respond to changing consumer tastes, preferences and spending patterns on a timely basis could materially and adversely affect our relationship with our customers and the demand for our products.

Our failure to successfully address and respond to these risks and uncertainties could materially and adversely affect sales, increase costs, diminish our growth prospects and damage the reputation of our brand, each of which could have a material and adverse effect on our business, financial condition and results of operations.

 

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General economic factors may materially and adversely affect our business, financial condition and results of operations.

General economic conditions may adversely affect our business, financial performance and results of operations. Consumer demand for the products that we sell, as well as our overall cost structure, could be adversely affected by higher interest rates, higher fuel and other energy costs, inflation, deflation, recession, competitive labor markets, lack of available consumer credit, higher consumer debt levels, lack of consumer confidence in future economic conditions, changes in tax laws, overall economic slowdown and/or other economic factors. Our sales generally represent discretionary spending by our customers and thus we may be more susceptible to factors negatively affecting consumer demand than others selling less discretionary products. Lower consumer demand for our products would cause our revenues, and possibly our profitability, to decline, while a prolonged economic downturn could have a material and adverse effect on our business, financial condition and results of operations.

We may not be able to maintain or negotiate favorable lease terms.

We lease substantially all of our locations. If lower cost commercial strip shopping center locations are unavailable, whether due to large scale redevelopment of shopping centers or otherwise, we may experience difficulties entering into new leases on favorable terms. In addition, we lease substantially all of our locations generally for extended terms with a typical initial term of 10 years, and we had an average remaining term of obligation of 4.5 years as of October 31, 2020. The majority of our leases contain provisions for base rent and a small number of our leases contain provisions for base rent plus percentage rent based on sales in excess of an agreed upon minimum annual sales level. Although we have the right to terminate some of our leases under specified conditions by making specified payments, we may not be able to terminate a particular lease if or when we would like to do so, which could prevent us from closing or relocating certain underperforming locations. If we decide to close locations, we generally are required to continue paying rent and operating expenses for the balance of the lease term, or to pay to exercise rights to terminate, and the performance of any of these obligations may be expensive. When we assign or sublease vacated locations, we may remain liable on the lease obligations if the assignee or sub-lessee does not perform. Accordingly, we are subject to the risks associated with leasing locations, which can have a material and adverse effect on us.

If we are unable to renew, renegotiate or replace our leases or enter into leases for new locations on favorable terms, our growth and profitability could be harmed, which could have a material and adverse effect on our business, financial condition and results of operations.

We are required to make significant lease payments for our leases, which may strain our cash flow.

We depend on net cash provided by operating activities to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash provided by operating activities, and sufficient funds are not otherwise available to us from borrowings under our Credit Facilities or from other sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would harm our business.

Increased costs related to the production of our merchandise or disruptions in our distribution network could materially and adversely affect our business, financial condition and results of operations.

There are various costs related to the production of our merchandise. Any increase in such costs could have a negative impact on our business. For example, fluctuations in the prices of raw materials or other costs related to the production of our merchandise could cause our product costs to increase. Increases in our merchandise costs or in the prices of the raw materials used to create our merchandise, such as cotton, petroleum or wool used in the production of fabric and other products, could result in significant cost increases for those products. In addition, significant increases in energy costs or wages used in the production of our merchandise

 

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may cause our suppliers to increase the merchandise cost to us, which could have a material and adverse effect on our business, financial condition and results of operations.

Similarly, disruptions in our distribution network could negatively affect our ability to meet customer demand both in our locations and through our e-commerce business. We operate three distribution centers to support our business. The majority of our inventory is shipped directly from suppliers to our distribution centers where the inventory is then processed, sorted, picked and shipped to our locations. We rely in large part on the orderly operation of this receiving and distribution process, which depends on adherence to shipping schedules and effective management of our distribution network. If any facility is severely damaged or experiences disruptions in operations due to natural disasters or other catastrophic events, labor disagreements, information system issues, shipping problems or any other reasons, our other distribution centers would likely not be able to support the resulting additional distribution demands. In addition, we utilize a variety of fulfillment sources to deliver our e-commerce orders. We rely heavily on the orderly operations of each fulfillment source to receive and manage our inventory, process online orders and deliver directly to customers on a timely basis. Any disruptions in operations whether due to natural disasters, public health epidemics or pandemics, including the ongoing COVID-19 pandemic, catastrophic events, receiving issues, shipping problems, transitioning between fulfillment sources, other operational problems or inefficiencies or any other reasons could have a direct material and adverse effect on our business, financial condition and results of operations, in addition to potentially creating a customer perception issue that could independently have a material and adverse effect on our business, financial condition and results of operations.

We also rely upon various means of transportation, including shipments by air, sea, rail and truck, to deliver products to our distribution centers from vendors, from our distribution centers to our locations, for direct shipments from vendors to locations and to fulfill our customers’ online orders. Any disruptions to the transportation system or increases in transportation costs, for example, due to labor shortages or capacity constraints in the transportation industry, disruptions to the national and international transportation infrastructure, strikes or slow-downs by port or transportation company employees, fuel shortages or transportation cost increases (such as increases in ocean shipping, trucking, or consumer package delivery rates; fuel costs or port fees) could have a material and adverse effect on our business, financial condition and results of operations. Our results of operations may also be adversely affected if we are unable to secure, or are able to secure only at significantly higher costs, adequate transportation resources to meet our needs.

Our ability to meet our strategic goals depends on our ability to identify and implement improvements to our supply chain, including merchandise ordering, transportation, direct sourcing initiatives, distribution center capacity and efficiency and receipt processing, as well as the expansion of our international distribution network. If we are unable to successfully implement enhancements to our distribution systems and processes and fail to achieve the efficiencies required for us to meet our strategic goals, including by increasing our penetration of direct to factory buying relationships to reduce cost and improve product innovation, this could disrupt our supply chain, which could have a material and adverse effect on our business, financial condition and results of operations.

Our reliance on foreign suppliers increases our risks of not obtaining adequate, timely and cost effective merchandise, as well as risks involved in foreign operations and foreign currency translation.

We are heavily dependent on foreign suppliers, particularly manufacturers located in China and other Asian countries. For example, during fiscal year 2020, we purchased approximately 38% of our products directly from manufacturers located in foreign countries and we anticipate that this percentage may increase in coming years. In addition, many of our domestic suppliers purchase most of their products from foreign suppliers. This reliance increases the risk that we will not have adequate and timely supplies of various products due to local political, economic, social or environmental conditions (including acts of terrorism, the outbreak of war or the occurrence of a natural disaster, public health epidemic or pandemic, like the ongoing COVID-19 pandemic), transportation delays (including dock strikes and other work stoppages), restrictive actions by foreign

 

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governments, or changes in U.S. laws and regulations affecting imports or domestic distribution. Reliance on foreign manufacturers also increases our exposure to trade infringement claims. In addition, as part of our global sourcing strategy, we have undertaken efforts to diversify the countries from where we source products, which exposes us to increased risks associated with sourcing products from countries where we have limited or no prior operating experience, such as risks associated with complying with unfamiliar laws and regulations (including uncertainty regarding the interpretation, application and enforceability of laws and regulations relating to contract and intellectual property rights), ensuring that our suppliers comply with fair labor practices and human rights laws, ensuring that we comply with the Foreign Corrupt Practices Act and other anti-corruption laws and regulations, adapting to local cultures, standards and practices and overcoming limited personnel and lack of resources in foreign countries. Any of these risks could cause us to materially alter our business practices related to sourcing and/or impact our profitability resulting in a material and adverse effect on our business, financial condition and results of operations.

If any of our suppliers have practices that are not legal or accepted in the United States, consumers may develop a negative view of us, our brand image could be damaged, and we could become the subject of boycotts by our customers and/or interest groups. Further, if our suppliers violate labor or other laws of their own country, these violations could cause disruptions or delays in their shipments of merchandise. We conduct periodic audits at various suppliers and have terminated relationships with suppliers from time to time based on the results of those audits. However, there is no guarantee that we can identify all issues from such audits and therefore we rely in part on suppliers’ representations certifying their compliance with applicable laws. If our goods are manufactured using illegal or unacceptable labor practices in these countries, or other countries from which our suppliers source the product we purchase, our ability to supply merchandise for our locations without interruption, our brand image and, consequently, our sales may be materially and adversely affected.

Additionally, reductions in the value of the U.S. dollar or revaluation of the Chinese currency, or other foreign currencies, could ultimately increase the prices that we pay for our products. Further, all of our products manufactured overseas and imported into the United States are subject to duties collected by the U.S. Customs Service. We may be subjected to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import or the loss of import privileges if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of our products. If duties were to be significantly increased, it could have a material and adverse effect on our business, financial condition and results of operations.

We may not be able to achieve the expected benefits from the implementation of marketing initiatives.

We may not be able to successfully execute our marketing initiatives, such as changes in the appearance, content and distribution of our advertising, our continued focus on digital marketing (including social media, mobile applications and web tactics such as display marketing, brand partnerships and digital video), new vendor programs and improved merchandising processes, and may fail to realize the intended benefits and growth prospects associated with these initiatives. For example, we may be unable to leverage and grow our digital customer database and social media marketing due to lack of engagement or technology challenges.

Product assortment, price, convenience and customer service have a significant influence on consumers’ choices among competing products and brands. We may fail to meet assumptions underlying estimates of expected revenue growth or overall cost savings from marketing initiatives or renovations of our locations, particularly if economic conditions deteriorate. If we misjudge consumer response to our existing or future promotional activities, our business, results of operations and financial condition could suffer, which could have a material and adverse effect on our business, financial condition and results of operations.

 

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Our continued growth depends on our ability to successfully implement our strategic initiatives, which are subject to a variety of risks and uncertainties.

We are in the process of implementing a location refresh initiative focused on improving the profitability of our existing locations by renovating those locations and enhancing the product offerings within those locations. This initiative has required and will continue to require significant incremental capital expenditures, and the capital required to implement the initiative across our remaining locations may be more than we expect. Additionally, the success of our location refresh initiative depends on the availability of enhanced locations, our ability to grow market share relative to our direct competitors in the same area as our refreshed locations, cost of materials or labor required to execute our refresh projects and ongoing economic viability of the areas where our refreshed locations operate, many of which are outside of our control. Further, as a result of the COVID-19 pandemic, we delayed several of our location refresh projects and may continue to experience additional costs and delays.

We have also implemented a number of cost savings initiatives, including investing in product sourcing initiatives, talent for our indirect spend procurement function and supply chain initiatives to support our e-commerce growth. There can be no assurance that our location refresh initiative, our cost savings initiatives or any future strategic initiatives will be successful, will result in the expected benefits or will be achieved on the anticipated timeframe, or at all. If we are unable to successfully implement our strategic initiative on favorable terms or at all, or if our initiatives are unsuccessful, our business, financial condition and results of operations could be materially and adversely affected.

Any inability to balance merchandise bearing our proprietary brands with the third-party branded merchandise we sell may have an adverse effect on our sales and gross margin.

Our proprietary branded merchandise represents a significant portion of our net sales. Our proprietary branded merchandise generally has a higher gross margin than the comparable third-party branded merchandise we offer. As a result, we may determine that it is best for us to continue to hold or increase the penetration of our proprietary brands in the future. However, carrying our proprietary brands may limit the amount of third-party branded merchandise we can carry and, therefore, there is a risk that the customers’ perception that we offer the appropriate breadth of assortment for many major brands could decline. By maintaining or increasing the amount of our proprietary branded merchandise, we are also exposed to greater risk, as we may fail to anticipate trends correctly. In addition, to the extent our proprietary brands underperform, our overall brand and reputation may be harmed. These risks, if they occur, could have a material and adverse effect on our business, financial condition and results of operations.

Any difficulty executing or integrating an acquisition, business combination or other strategic transaction could materially and adversely affect our business, financial condition and results of operations.

We have made strategic acquisitions and investments in the past to help drive our growth and pursue strategic initiatives, and we intend to pursue similar opportunities in the future. Any difficulty in executing or integrating an acquisition, business combination or other strategic transaction may result in our inability to achieve anticipated benefits from these transactions in the time frame that we anticipate, or at all, which could adversely affect our business or results of operations. Such transactions may also disrupt the operation of our current activities and divert management’s attention from other business matters. In addition, our Credit Facilities place certain limited constraints on our ability to make an acquisition or enter into a business combination, and future borrowing agreements could place tighter constraints on such actions.

Loss of key senior management executives could have a material and adverse effect on our business, financial condition and results of operations.

We are dependent on the services, abilities and experiences of our key senior management team to execute on our business and operating strategies. The loss of one or more key senior executives could hinder our

 

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ability to implement our strategic and operational plans and may have a material effect on us. If we found it necessary to replace one or more key senior executives, delays in hiring the new executive(s) or our inability to effectively integrate the newly-hired executive(s) into our business processes, controls, systems and culture may also have a material and adverse effect on our business, financial condition and results of operations.

Our total assets include intangible assets, goodwill and substantial amounts of property and equipment. Changes in estimates or projections used to assess the fair value of these assets, the ongoing effective use of those assets in our business or operating results underlying those assets that do not fully support their value, may cause us to incur impairment charges that could materially and adversely affect our business, financial condition and results of operations.

Our total assets include intangible assets, goodwill and substantial amounts of property and equipment. Under current accounting guidelines, we must assess, at least annually, whether the value of goodwill and other intangible assets has been impaired. For example, during fiscal year 2020 and in connection with our annual impairment assessment of goodwill and trade name impairment, we recognized a non-cash goodwill impairment charge of $481.8 million and a non-cash trade name impairment charge of $5.0 million, which were driven primarily by the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See “Risk Factors—Risks Related to our Business—Evolving U.S. trade regulations and policies, including with China and other Asian countries, have in the past and may in the future have a material and adverse effect on our business, financial condition and results of operations” for further discussion regarding tariffs.

We can make no assurances that we will not record any additional impairment charges in the future. Any future reduction or impairment of the value of tangible assets, goodwill, our trade name or other intangible assets will similarly result in charges against earnings, which could materially and adversely affect our reported business, financial condition and results of operations in future periods.

Failure to comply with various regulations may result in damage to our business.

Various federal and state laws govern our relationship with, and other matters pertaining to, our team members, including wage and hour laws, laws governing independent contractor classifications, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules and anti-discrimination laws. Any claim that alleges a failure by us to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions, litigation and/or potential criminal violations, which could adversely affect our reputation, business, financial condition and operating results. We have been party to such lawsuits in the past, including in class action lawsuits, and may be subjected to similar suits in the future. In addition, any changes to existing employment laws or regulations or any new employment laws or regulations that are adopted may make it more difficult and costly for us to operate our business and in turn adversely affect our operating results.

Our global operations also expose us to risks and challenges associated with conducting business internationally, including with our foreign suppliers, and our results of operations may be adversely affected by our efforts to comply with U.S. laws which apply to international operations, such as the Foreign Corrupt Practices Act, U.S. economic sanctions laws and U.S. export control laws, as well as the laws of other countries, including laws related to product safety and consumer protection, privacy and taxation. Economic sanctions laws in the United States may prohibit us from transacting with or in certain countries and with certain individuals or companies. In the United States, the U.S. Department of the Treasury’s Office of Foreign Assets Control administers and enforces laws, Executive Orders and regulations establishing certain U.S. economic and trade sanctions. As we expand our global presence, we expect our exposure to these risks and challenges to increase, such as with respect to compliance with foreign data privacy laws and tax laws.

 

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Federal, state and foreign governments have enacted or may enact laws or regulations regarding privacy and data security and the collection and use of personal information. We strive to comply with all such laws and regulations; it is possible, however, that these requirements may change, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with our practices. Further, security breaches in our information systems could result in a violation of applicable U.S., state and/or international privacy and other laws, and subject us to private litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. Compliance with current and future applicable U.S., state and international privacy, cybersecurity and related laws can be costly and time-consuming. Significant capital investments and other expenditures could also be required to remedy cybersecurity incidents and prevent future breaches, including costs associated with additional security technologies, personnel, experts and call centers and credit monitoring services for those whose data has been breached. Our cyber insurance coverage may not be sufficient to cover such costs. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems. Our failure, or our vendors’ failure, to comply with the regulatory requirements concerning privacy and enhanced regulatory and litigation activity focused on privacy and data security issues could also have a material and adverse effect on our business, financial condition and results of operations.

Additionally, we are regularly involved in various litigation matters that arise in the ordinary course of our business, including liability claims, employment-related claims, contract disputes, claims arising under consumer protection laws and regulations and allegations that we have infringed third party intellectual property rights.

Our marketing programs, e-commerce initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could materially and adversely affect our business, financial condition and results of operations.

The success of our marketing and e-commerce initiatives are dependent on our ability to collect, maintain, process and use data obtained through our interactions with customers online. Our use of this information is subject to evolving federal, state and foreign laws and enforcement trends. Failure to comply with existing and future laws and other legal obligations relating to privacy, data protection and customer protection, including those relating to the use of data for marketing purposes, may impede our ability to effectively engage customers via personalized marketing tactics, increase our potential monetary liability, damage our reputation and adversely affect our business and operating results. We are impacted, in particular, by the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020 and is intended to enhance privacy rights and consumer protection for residents of California. Furthermore, in November 2020, California voters passed the California Privacy Rights and Enforcement Act of 2020, which amends and expands the CCPA with additional data privacy compliance requirements that may adversely impact our business, and establishes a regulatory agency dedicated to enforcing these requirements. In the event that we are unable to timely comply with the new compliance demands, or new compliance regimes as a result of expanding our business, significant fines or penalties could result and could adversely affect our reputation and have a material and adverse effect on our business, financial condition and results of operations.

As we are subject to U.S. federal, state, and local income taxation, and, to a much lesser extent, Chinese taxation, any adverse developments in applicable tax laws could have a material and adverse effect on our business, financial condition and results of operations. Our effective tax rate could also change materially as a result of various evolving factors, including changes in income tax law resulting from the recent presidential and congressional elections in the United States.

We are subject to income taxation at the federal level and by most states and certain municipalities because of the scope of our retail operations and our corporate and financing structure. In addition, income earned by our foreign sourcing office in Shanghai is subject to Chinese taxation. In determining our income tax

 

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liability for these jurisdictions, we must monitor changes to the applicable tax laws and related regulations. While our existing corporate and financing structure have been implemented in a manner we believe is in compliance with current prevailing laws, one or more U.S. states or foreign jurisdictions could also seek to impose incremental or new taxes on us. In addition, as a result of the recent presidential and congressional elections in the United States, there could be significant changes in tax law and regulations that could result in additional federal income taxes being imposed on us. No specific tax legislation or regulations have yet been proposed and the likelihood and nature of any such legislation or regulations is uncertain. Any adverse developments in these laws or regulations, including legislative changes, judicial holdings or administrative interpretations, could have a material and adverse effect on our business, financial condition and results of operations.

Risks Related to Our Reliance on Third Parties

A disruption in relationships with third parties could materially and adversely affect our business, financial condition and results of operations.

We rely on third parties to support our business, including, among other things, portions of our technology development and support and certain payment processing services. If we are unable to contract with third parties having the specialized skills needed to support those strategies or integrate their products and services with our business, if we fail to properly manage those third parties, or if they fail to meet our performance standards and expectations, including with respect to data security, then our reputation, sales, and results of operations could be adversely affected. In addition, we could face increased costs or be limited in finding replacement providers or hiring and retaining team members to provide these services in-house.

Significant failures by suppliers from whom our products are sourced and the need to transition to other qualified suppliers could materially and adversely affect our business, financial condition and results of operations.

Our business success is highly dependent on our ability to find qualified suppliers who can deliver products and services in a timely and efficient manner and in compliance with our vendor standards and all applicable laws and regulations. Many of our suppliers are small companies with limited resources that lack financial flexibility. Some of our suppliers are susceptible to cash flow issues, production difficulties, quality control issues and problems in delivering agreed-upon quantities of products or services meeting the contractual requirements, on schedule and in compliance with regulatory requirements, including those of the Consumer Product Safety Improvement Act of 2008 and state product safety laws. We may be unable, if necessary, to return products to these suppliers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products or services prove defective, not in compliance with contractual or regulatory requirements or in violation of third party intellectual property rights. In addition, many of our product suppliers require extensive advance notice of our requirements in order to supply products in the quantities we desire. This long lead time requires us to place orders far in advance of the time when certain products will be offered for sale, exposing us to shifts in demand. In addition, some of our suppliers may be unable to withstand a downturn in economic conditions. The inability of key suppliers to access financing, or their insolvency, could lead to their failure to deliver merchandise or services. If we are unable to procure products and services when needed, our sales and cash flows could be negatively impacted. Significant failures on the part of our key suppliers could have a material and adverse effect on our business, financial condition and results of operations.

The products we sell are sourced from a wide variety of domestic and international vendors. Global sourcing has become an increasingly important part of our business, as we have undertaken efforts to increase the amount of product we source directly from overseas manufacturers who may be new to our supplier network. Our ability to find qualified suppliers who meet our standards and supply products in a timely and efficient manner could be a significant challenge, especially with respect to goods sourced from outside the United States. Any issues related to transitioning suppliers or delays in identifying suppliers from additional countries to execute our global sourcing strategy could materially and adversely affect our revenue and gross profit.

 

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Product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may materially and adversely affect our business, financial condition and results of operations.

We are subject to regulations by a variety of federal, state and international regulatory authorities, including the Consumer Product Safety Commission. As of October 31, 2020, we were utilizing approximately 680 merchandise suppliers. Since a majority of our merchandise is manufactured in foreign countries, one or more of our vendors may not adhere to product safety requirements or our quality control standards, and we may not identify the deficiency before merchandise ships to our locations. Any issues of product safety, including but not limited to those manufactured in foreign countries, could cause us to recall some of those products. If our vendors fail to manufacture or import merchandise that adheres to our quality control standards, our reputation and brands could be damaged, potentially leading to increases in customer litigation against us. Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce our merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near or during a seasonal period. If our vendors are unable or unwilling to recall products failing to meet our quality standards, we may be required to recall those products at a substantial cost to us. Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. Long lead times on merchandise ordering cycles increase the difficulty for us to plan and prepare for potential changes to applicable laws.

Risks Related to Our Capital Structure, Indebtedness and Capital Requirements

We may face risks related to our indebtedness, which included $929.7 million of outstanding debt as of October 31, 2020.

Our indebtedness and lease obligations could adversely affect our ability to raise additional capital to fund our operations, limit our flexibility in operating our business, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the debt instruments. We had $929.7 million in debt outstanding as of October 31, 2020. We also had $159.4 million available for borrowing under our ABL Facility, before giving effect to the amendment and restatement of our ABL Facility on November 25, 2020. In addition, in July 2018, we executed an interest rate cap agreement, which, as of October 31, 2020, applied to an aggregate notional value of $682.9 million of our term debt, which is intended to mitigate interest rate risk associated with future changes in interest rates for borrowings on our term loans. Regardless of our attempts to mitigate our exposure to interest rate fluctuations through the interest rate cap agreement, we still have exposure for the uncapped amounts under the term loans, which remain subject to a variable interest rate. As a result, an increase in interest rates could result in a substantial increase in interest expense. In fiscal year 2020, our total interest expense was $101.9 million and in the thirty-nine weeks ended October 31, 2020, our total interest expense was $55.0 million.

Our indebtedness and lease obligations could have important consequences to us, including:

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, investments and general corporate or other purposes;

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors that are less leveraged;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

exposing us to the risk of increased interest rates as the borrowings under our Credit Facilities are at variable rates of interest;

 

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requiring a portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; and

 

   

making it more difficult for us to satisfy our obligations with respect to our debt, and any failure to comply with the obligations under our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing our indebtedness.

The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations and ability to satisfy our obligations under our indebtedness. In addition, we may incur additional indebtedness in the future, subject to the terms of our Credit Facilities, which could magnify the risks that we currently face.

The terms of our Credit Facilities impose operating and financial restrictions on us that may impair our ability to respond to changing barriers and economic conditions.

The agreements governing our Credit Facilities contain a number of restrictive covenants imposing significant operating and financial restrictions on us, including restrictions that may limit our ability to:

 

   

pay dividends on, repurchase, or make distributions in respect of our capital stock or make other restricted payments;

 

   

incur additional indebtedness or issue certain disqualified stock and preferred stock;

 

   

create liens;

 

   

make investments, loans and advances;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates;

 

   

prepay certain junior indebtedness;

 

   

make certain changes to our lines of business; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

In addition, the credit agreement governing our ABL Facility requires that we maintain a minimum fixed charge coverage ratio if excess availability is less than a specified percentage of the lesser of (i) the borrowing base and (ii) our maximum revolving commitments at any time. Our ability to meet this requirement can be affected by events beyond our control, and we may not be able to meet this ratio. A breach of any of these covenants could result in an event of default under our Credit Facilities and/or other agreements containing cross-default provisions, which could result in our lenders accelerating our debt by declaring amounts outstanding under our debt instruments, including accrued interest, to be immediately due and payable. If we are unable to pay those amounts, the lenders under our Credit Facilities could proceed against the collateral granted to them to the extent such collateral secures such indebtedness. We may not be able to generate sufficient cash to service our indebtedness or satisfy our obligations upon an event of default, and may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

In addition, our variable rate indebtedness may use LIBOR as a benchmark for establishing the interest rate applicable to the indebtedness. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it

 

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continues to exist after 2021. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate, or SOFR, as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. It is unknown whether SOFR or any potential alternative reference rate will attain market acceptance as replacements for LIBOR and, as such, the potential effect on our results from operations is unknown.

We may require additional capital to meet our financial obligations and support business growth, and this capital may not be available on acceptable terms or at all.

Based on our current plans and market conditions, we believe that cash flows generated from our operations and borrowing capacity under our Credit Facilities will be sufficient to satisfy our anticipated cash requirements in the ordinary course of business for the foreseeable future. However, we intend to continue to make significant investments to support our business growth and may require additional funds to respond to business challenges. Accordingly, we may need to engage in equity or debt financings in addition to our Credit Facilities to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could include restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends, if any, is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our debt obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control.

Risks Related to Intellectual Property, Information Technology and Data Privacy

If we are unable to adequately protect our intellectual property rights, our business, financial condition and results of operations may be materially and adversely affected.

Our success depends in large part on our brand image and our ability to build and maintain brand loyalty. Our company’s name, logo, domain name and our proprietary brands and our registered and unregistered trademarks are valuable assets that serve to differentiate us from our competitors. We currently rely on a combination of trademark, trade dress, patent, copyright and unfair competition laws to establish and protect our intellectual property rights. We cannot assure you that the steps taken by us to protect our proprietary rights will be adequate to prevent infringement of our trademarks and other proprietary rights by others, including imitation and misappropriation of our brand. We cannot assure you that obstacles related to securing additional intellectual property rights will not arise as we expand our products and geographic scope. The unauthorized use or misappropriation of our intellectual property could damage our brand identity and the goodwill we have created for our company, which could cause our sales to decline. We cannot guarantee that the operation of our business does not, and will not in the future, infringe or violate the rights of third parties. Litigation may be necessary to protect or enforce our intellectual property rights, or to defend against third party claims. Any such litigation, regardless of merit, is inherently uncertain and could be time-consuming and result in substantial costs and

 

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diversion of our resources, causing a material and adverse effect on our business, financial condition and results of operations. If we cannot protect our intellectual property rights, our brand identity and the goodwill we created for our company may diminish, causing our sales to decline. If we are found to infringe or violate the rights of a third party, we may be forced to stop offering, or to redesign, certain products or services, to pay damages or royalties, and to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.

Most of our intellectual property has not been registered outside of the United States and we cannot always prohibit other companies from using our unregistered trademarks in foreign countries. Use of our trademarks in foreign countries by others could materially and adversely affect our identity in the United States and cause our sales to decline.

Failure to adequately maintain the security of and prevent unauthorized access to our electronic and other confidential information, including customer and team member personal information, could materially and adversely affect our business, financial condition and results of operations.

We are dependent upon automated information technology processes, and a large portion of our business operations is conducted electronically, increasing the risk of interception or attack that could cause loss or misuses of data, system failure or disruption of operations. As part of our normal business activities, we collect and store certain confidential information, including personal information with respect to customers and team members. We share some of this information with vendors who assist us with certain aspects of our business. Moreover, the success of our e-commerce operations depends upon the secure transmission of confidential and personal data over public networks, including the use of cashless payments. We and/or our third-party vendors, some of our competitors and other companies have in the past experienced data security breaches involving team member and customer personal and financial information, including fraudulent activity on payment cards, and we could suffer a similar attack in the future. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Improper activities by unauthorized third parties, unidentified security vulnerabilities within applications or platforms we utilize, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in a future compromise or breach of our networks, or those of third parties with whom we do business, payment card terminals or other payment systems. The techniques used by criminals to obtain unauthorized access to systems or sensitive data change frequently and often are not recognized until after being launched against a target, and accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures and there may be a significant delay between the initiation of an attack on our systems and our recognition of the attack. New or changing risk profiles related to data security could require that we expend significant additional resources to enhance our information security systems.

Any failure on the part of us or our vendors to maintain the security of our confidential data and our team members’ and customers’ personal information, including via the penetration of our network and the misappropriation of confidential and personal information, could result in business disruption, theft of funds and other monetary loss, weaker than expected sales, significant negative media attention, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also could result in deterioration in our team members’ and customers’ trust and confidence in us and other competitive disadvantages, and thus have a material and adverse impact on us. Investigations into a data breach, including how it occurred, its consequences and our responses, by state and federal agencies would possibly lead to fines, other monetary relief and/or injunctive relief that could materially increase our data security costs, adversely impact how we operate our information systems and collect and use customer information, and put us at a competitive disadvantage with other retailers. Furthermore, payment card networks with payment cards impacted by a data breach may pursue claims against us, either directly or through our acquiring banks.

 

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In addition, while we currently qualify for self-assessment of compliance with the Payment Card Industry Data Security Standard, or PCI DSS, a failure to maintain our PCI DSS certification could result in our inability to accept credit and debit card payments or subject us to penalties and thus could have a material and adverse effect on our business, financial condition and results of operations.

Intentional or accidental disruptions to our information systems, including our mobile application and primary e-commerce website, or our failure to adequately support, maintain, secure and upgrade these systems could materially and adversely affect our business, financial condition and results of operations.

We depend on a variety of information systems for the efficient functioning of our business and rely on continued and unimpeded access to the internet and we have in the past experienced disruptions of these information systems, resulting in disruptions to our business including the ability for customers to transact on our website and in our locations. We are heavily dependent upon our mobile application as a means of generating online and in-store sales, along with growing customer engagement and perception of our brand. Our mobile application is hosted by a third party and supported by another outside development firm. In addition, joann.com, our website platform, is operated using a software-as-a-service, or SaaS, model provided to us by an independent third party. We also rely on our order management system, which is provided by a third party, to route all of our e-commerce orders for proper fulfillment. Any failures or interruption of our mobile application, website or order management system, or incidents or failures experienced by our third party service providers, could harm our ability to serve our customers through these channels, which could adversely affect our business and operating results.

In addition, we rely on our information systems to effectively process transactions, manage inventory and purchase, sell and ship goods on a timely basis. We also rely on measures designed into these systems to manage and maintain the privacy of customer, vendor and other third party data, summarize and analyze results and maintain cost-efficient operations. Intentional or accidental disruptions to our information systems or our failure to adequately support, maintain and upgrade these systems could harm sales and have a material and adverse impact on us. To the extent we have implemented and continue to implement SaaS solutions and run applications on infrastructure hosted by third parties in the future, we will be subject to increased reliance on external partners and unique risks related to change management and loss of data.

Any material disruption or slowdown of our systems could, among other things, cause information to become lost or inaccurate, cause delays or other problems for our internal operations and customers and generate negative publicity. We may experience operational problems with our information systems as a result of power outages, computer and telecommunication failures, database corruption, denial-of-service attacks, viruses and other malicious software programs, security breaches, natural disasters, cyber-attacks, acts of war and terrorist and criminal activities, employee usage errors or other causes. Cyber incidents may result in loss of sensitive data, intellectual property or funds. Techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, therefore, we may be unable to implement adequate preventive measures. If our computer systems are damaged or cease to function properly, we may have to make a significant investment to recover, fix or replace them or to increase our cyber security protections, and we may suffer interruptions in our operations in the interim, damage to our reputation, legal and financial exposure and potentially a material and adverse effect on us. In addition, such interruptions could negatively impact customer experience and customer confidence. We also rely heavily on our information technology staff. Our inability to meet staffing needs could adversely impact our technology and business initiatives and maintenance on existing systems, which could have a material and adverse effect on our business, financial condition and results of operations.

We are subject to payment-related risks.

We accept payments using a variety of methods, including cash, check, credit card, debit card, gift cards and direct debit from a customer’s bank account. For existing and future payment options that we offer to our

 

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customers, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payment options), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain payment processing services, including the processing of credit cards, debit cards, electronic checks and gift cards. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us. We also are subject to payment card association operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card-issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers or facilitate other types of online payments and our business, financial condition and operating results could be materially and adversely affected.

Risks Related to Our Common Stock and This Offering

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market on Nasdaq, or otherwise or how active and liquid that market may come to be. If an active trading market does not develop, you may have difficulty selling any of the common stock that you buy.

Negotiations between us, the Selling Shareholders and the underwriters have determined the initial public offering price for our common stock, which may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering. The market price of our common stock may be influenced by many factors including:

 

   

variations in our operating results compared to market expectations or any guidance given by us, or changes in our guidance or guidance practices;

 

   

changes in the preferences of our customers;

 

   

low total comparable sales growth and gross margins compared to market expectations;

 

   

delays in the planned execution of our refresh and assortment optimization projects and other key strategic initiatives;

 

   

the failure of securities analysts to cover us after this offering or changes in financial estimates by the analysts who cover us, our competitors or the retail industry in general;

 

   

economic, legal and regulatory factors unrelated to our performance;

 

   

changes in consumer spending or the economy;

 

   

increased competition or stock price performance of our competitors;

 

   

announcements by us or our competitors of new locations, capacity changes, strategic investments or acquisitions;

 

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actual or anticipated variations in our or our competitors’ operating results, and our competitors’ growth rates;

 

   

future sales of our common stock or the perception that such sales may occur;

 

   

changes in senior management or key personnel;

 

   

changes in laws or regulations, or new interpretations or applications of laws and regulations that are applicable to our business;

 

   

lawsuits, enforcement actions and other claims by third parties or governmental authorities;

 

   

action by institutional shareholders or other large shareholders;

 

   

events beyond our control, such as war, terrorist attacks, transportation and fuel prices, natural disasters, severe weather and widespread illness or pandemics, including developments relating to the COVID-19 pandemic; and

 

   

the other factors listed in this “Risk Factors” section.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. In addition, our stock price may be volatile. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. Accordingly, these broad market fluctuations, as well as general economic, political and market conditions, such as recessions or interest rate changes, may significantly reduce the market price of the common stock, regardless of our operating performance. In the past, following periods of market volatility, shareholders have instituted securities class action litigation. If we were to become involved in securities litigation, it could result in substantial costs and divert resources and our management’s attention from other business concerns, regardless of the outcome of such litigation.

Because LGP owns a significant percentage of our common stock, it may control all major corporate decisions and its interests may conflict with your interests as an owner of our common stock and our interests.

We are controlled by LGP, which currently owns approximately 95% of our common stock and will own approximately 69% after the consummation of this offering. Accordingly, LGP currently controls the election of our directors and could exercise a controlling interest over our business, affairs and policies, including the appointment of our management and the entering into of business combinations or dispositions and other corporate transactions. Pursuant to the Shareholders Agreement, LGP will be entitled to designate individuals to be included in the slate of nominees recommended by our board of directors for election to our board of directors. So long as LGP owns, in the aggregate, (i) at least 50% of the total outstanding shares of our common stock owned by it immediately following the consummation of this offering, LGP will be entitled to nominate five directors, (ii) less than 50%, but at least 40% of the total outstanding shares of our common stock owned by it immediately following the consummation of this offering, it will be entitled to nominate four directors, (iii) less than 40% but at least 30% of the total outstanding shares of our common stock owned by it immediately following the consummation of this offering, it will be entitled to nominate three directors, (iv) less than 30%, but at least 20% of the total outstanding shares of our common stock owned by it immediately following the consummation of this offering, it will be entitled to nominate two directors, (v) less than 20%, but at least 10% of the total outstanding shares of our common stock owned by it immediately following the consummation of this offering, it will be entitled to nominate one directors and (vi) less than 10% of the total outstanding shares of our common stock owned by it immediately following the consummation of this offering, it will not be entitled to nominate a director. See “Certain Relationships and Related Party Transactions—Shareholders Agreement.” The directors LGP elects have the authority to incur additional debt, issue or repurchase stock, declare dividends and

 

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make other decisions that could be detrimental to shareholders. Even if LGP were to own or control less than a majority of our total outstanding shares of common stock, it will be able to influence the outcome of corporate actions so long as it owns a significant portion of our total outstanding shares of common stock.

LGP may have interests that are different from yours and may vote in a way with which you disagree and that may be adverse to your interests. In addition, LGP’s concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our shareholders from realizing a premium over the market price for their common stock.

Additionally, LGP is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or supply us with goods and services. LGP may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Shareholders should consider that the interests of LGP may differ from their interests in material respects.

We are a “controlled company” within the meaning of Nasdaq’s rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

Following the consummation of this offering, LGP will continue to control a majority of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of Nasdaq’s corporate governance standards. A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of Nasdaq’s rules and may elect not to comply with certain corporate governance requirements of Nasdaq, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to rely on all of the exemptions listed above. For at least a period following this offering, we intend to utilize all of these exemptions. As a result, we will not have a majority of independent directors and our nominating and corporate governance and compensation committees will not consist entirely of independent directors. As a result, our board of directors and those committees may have more directors who do not meet Nasdaq’s independence standards than they would if those standards were to apply. The independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

Sales of a substantial number of shares of our common stock in the public market by our existing shareholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Substantially all of our existing shareholders are subject to lock-up agreements with the underwriters of this offering that restrict the shareholders’ ability to transfer shares of our common stock for 180 days from the date of this prospectus, subject to certain exceptions. The lock-up

 

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agreements limit the number of shares of common stock that may be sold immediately following the public offering. After this offering, we will have 40,371,130 outstanding shares of common stock based on the number of shares outstanding as of October 31, 2020. Subject to limitations, 29,433,630 shares will become eligible for sale upon expiration of the lock-up period, as calculated and described in more detail in the section entitled “Shares Eligible for Future Sale.” In addition, 1,553,328 shares issued or issuable upon exercise of options vested as of the expiration of the lock-up period will be eligible for sale at that time. Further, the representatives of the underwriters may, in their sole discretion, release all or some portion of the shares subject to the lock-up agreements at any time and for any reason. See “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could have a material and adverse effect on the trading price of our common stock.

Moreover, after this offering, holders of approximately 69% of our outstanding common stock will have rights, subject to certain conditions such as the 180-day lock-up arrangement described above, to require us to file registration statements for the public sale of their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. Registration of these shares under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these shareholders could have a material and adverse effect on the trading price of our common stock.

You will incur immediate dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing shareholders for their shares. As a result, you will incur immediate dilution of $23.88 per share, representing the difference between the initial public offering price of $12.00 per share and our as adjusted net tangible book value (deficit) per share after giving effect to this offering. See “Dilution.”

Because our executive officers hold or may hold restricted shares or option awards that will vest upon a change of control, these officers may have interests in us that conflict with yours.

Our executive officers hold or may hold restricted shares and options to purchase shares that would automatically vest upon a change of control. As a result, these officers may view certain change of control transactions more favorably than an investor due to the vesting opportunities available to them and, as a result, may have an economic incentive to support a transaction that may not be viewed as favorable by other shareholders.

We may change our dividend policy at any time.

Although following this offering we initially expect to pay quarterly dividends at a rate initially equal to $0.40 per share per annum on our common stock to holders of our common stock, we have no obligation to pay any dividend, and our dividend policy may change at any time without notice. The declaration and amount of any future dividends is subject to the discretion of our board of directors in determining whether dividends are in the best interest of our shareholders based on our financial performance and other factors and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. In addition, our ability to pay dividends on our common stock is currently limited by the covenants of our Credit Facilities and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy” and Note 2 to our audited financial statements and Note 2 to our unaudited financial statements included elsewhere in this prospectus. Future dividends may also be affected by factors that our board of directors deems relevant, including our potential future capital requirements for investments, legal risks, changes in federal and state income tax laws or corporate laws and contractual restrictions such as financial or operating covenants in our debt arrangements. As a result, there can be no assurance that we will not need to reduce or eliminate the payment of dividends on our common stock in the future, and any return on investment in our common stock

 

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may be solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders, and may prevent attempts by our shareholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of the DGCL could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, including transactions in which shareholders might otherwise receive a premium for their shares. These provisions include:

 

   

establishing a classified board of directors such that not all members of the board are elected at one time;

 

   

allowing the total number of directors to be determined exclusively (subject to the rights of holders of any series of preferred stock to elect additional directors) by resolution of our board of directors and granting to our board the sole power (subject to the rights of holders of any series of preferred stock or rights granted pursuant to the shareholders’ agreement) to fill any vacancy on the board;

 

   

providing that our stockholders may remove members of our board of directors only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of our then-outstanding stock, following such time as LGP ceases to own, or no longer has the right to direct the vote of, at least 50% of the voting power of our common stock;

 

   

authorizing the issuance of “blank check” preferred stock by our board of directors, without further shareholder approval, to thwart a takeover attempt;

 

   

prohibiting shareholder action by written consent (and, thus, requiring that all shareholder actions be taken at a meeting of our shareholders), if LGP ceases to own, or no longer has the right to direct the vote of, at least 50% of the voting power of our common stock;

 

   

eliminating the ability of shareholders to call a special meeting of shareholders, except for LGP, so long as LGP owns, or has the right to direct the vote of, at least 50% of the voting power of our common stock;

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at annual shareholder meetings; and

 

   

requiring the approval of the holders of at least two-thirds of the voting power of all outstanding stock entitled to vote thereon, voting together as a single class, to amend or repeal our certificate of incorporation or bylaws if LGP ceases to own, or no longer has the right to direct the vote of, at least 50% of the voting power of our common stock.

In addition, while we have opted out of Section 203 of the DGCL, our amended and restated certificate of incorporation contains similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the shareholder became an interested stockholder, unless:

 

   

prior to such time, our board of directors approved either the business combination or the transaction that resulted in the shareholder becoming an interested stockholder;

 

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upon consummation of the transaction that resulted in the shareholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or

 

   

at or subsequent to that time, the business combination is approved by our board of directors and by the affirmative vote of holders of at least two-thirds of our outstanding voting stock that is not owned by the interested stockholder.

Generally, a “business combination” includes a merger, asset or stock sale or other transaction provided for or through us resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who owns 15% or more of our outstanding voting stock and the affiliates and associates of such person. For purposes of this provision, “voting stock” means any class or series of stock entitled to vote generally in the election of directors. Our amended and restated certificate of incorporation will provide that LGP, its affiliates and any of its direct or indirect designated transferees (other than in certain market transfers and gifts) and any group of which such persons are a party do not constitute “interested stockholders” for purposes of this provision.

Under certain circumstances, this provision will make it more difficult for a person who qualifies as an “interested stockholder” to effect certain business combinations with us for a three-year period. This provision may encourage companies interested in acquiring us to negotiate in advance with our board of directors in order to avoid the shareholder approval requirement if our board of directors approves either the business combination or the transaction that results in the shareholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions that our shareholders may otherwise deem to be in their best interests. See “Description of Capital Stock.”

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware or federal district courts of the United States will be the sole and exclusive forum for certain types of lawsuits, which could limit our shareholders’ abilities to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation and amended and restated bylaws will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our shareholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or the amended and restated certificate of incorporation or the proposed bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware (or the federal district court for the District of Delaware or other state courts of the State of Delaware if the Court of Chancery in the State of Delaware does not have jurisdiction). The amended and restated certificate of incorporation and amended and restated bylaws will also require that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act; however, there is uncertainty as to whether a court would enforce such provision, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder. Although we believe these provisions benefit us by providing increased consistency in the application of applicable law in the types of lawsuits to which they apply, the provisions may have the effect of discouraging lawsuits against our directors and officers. These provisions would not apply to any suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.

 

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General Risks

Our business, financial condition and results of operations may be materially and adversely affected by various litigation and regulatory proceedings.

We are subject to litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future. These proceedings have included, and in the future may include, matters involving personnel and employment issues, workers’ compensation, personal and property injury, disputes relating to acquisitions, governmental investigations and other proceedings. Some historical and current legal proceedings and future legal proceedings may purport to be brought as class actions on behalf of similarly situated parties including with respect to employment-related matters. We cannot be certain of the ultimate outcomes of any such claims, and resolution of these types of matters against us may result in significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could materially and adversely affect our business, financial condition and results of operations.

Inadequacy of our insurance coverage could have a material and adverse effect on our business, financial condition and results of operations.

We maintain third party insurance coverage against various liability risks and risks of property loss, including data security breach and directors’ and officers’ liability insurance coverage. Potential liabilities associated with those risks or other events could exceed the coverage provided by such arrangements resulting in significant uninsured liabilities, which could have a material and adverse effect on our business, financial condition and results of operations.

If securities or industry analysts do not publish or cease publishing research or reports about us, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will depend in part on the research and reports that third-party securities analysts publish about us and our industry. One or more analysts could downgrade our common stock or issue other negative commentary about us or our industry. In addition, we may be unable or slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of us, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.

Becoming a public company will increase our compliance costs significantly and require the expansion and enhancement of a variety of financial and management control systems and infrastructure and the hiring of significant additional qualified personnel.

Prior to this offering, we have not been subject to the reporting requirements of the Exchange Act, or the other rules and regulations of the SEC, or any securities exchange relating to public companies. We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include financial planning and analysis, tax, corporate governance, accounting policies and procedures, internal controls, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, significant changes in these and other areas. However, the expenses that will be required in order to adequately prepare for being a public company could be material. Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management and will also require us to successfully hire and integrate a significant number of additional qualified personnel into our existing finance, legal, human resources and operations departments.

 

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We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent registered public accounting firm to audit, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and, if required, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We will be required to comply with Section 404 in full (including an auditor attestation on management’s internal controls report) in our annual report on Form 10-K for the year following our first annual report required to be filed with the SEC (subject to any change in applicable SEC rules). Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and PCAOB rules and regulations that require remediation. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing and enhancing our internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, if we are required to make restatements of our financial statements, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy, completeness or reliability of our financial reports and the trading price of our common stock may be adversely affected, and we could become subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if we fail to remedy any material weakness, our financial statements could be inaccurate and we could face restricted access to the capital markets.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. If our assumptions change or if actual circumstances differ from our assumptions, our results of operations may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

 

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Natural disasters, geo-political events and other highly disruptive events could materially and adversely affect our business, financial condition and results of operations.

The occurrence of one or more natural disasters, such as fires, hurricanes, tornados, tsunamis, floods and earthquakes, geo-political events, such as civil unrest in a country in which our suppliers are located or terrorist or military activities disrupting transportation, communication or utility systems or other highly disruptive events, such as nuclear accidents, public health epidemics or pandemics (such as the ongoing COVID-19 outbreak), unusual weather conditions or cyberattacks, could adversely affect our operations and financial performance. Such events could result in physical damage to or destruction or disruption of one or more of our properties (including our corporate offices, distribution centers and locations) or properties used by third parties in connection with the supply of products or services to us, the lack of an adequate workforce in parts or all of our operations, supply chain disruptions, data, utility and communications disruptions, fewer customers visiting our locations, including due to quarantines or public health crises, the inability of our customers to reach or have transportation to our locations directly affected by such events and the inability to operate our e-commerce business. In addition, these events could cause a temporary reduction in consumer sales or the ability to sell our products or could indirectly result in increases in the costs of our insurance if they result in significant loss of property or other insurable damage. These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and global financial markets and economies. Any of these developments could have a material and adverse effect on our business, financial condition and results of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements include those we make regarding the following matters:

 

   

the effects of potential changes to U.S. trade regulations and policies, including tariffs, on our business;

 

   

developments involving our competitors and our industry;

 

   

potential future impacts of the COVID-19 pandemic;

 

   

our ability to timely identify or effectively respond to consumer trends, and the potential effects of that ability on our relationship with our customers, the demand for our products and our market share;

 

   

our expectations regarding the seasonality of our business;

 

   

our ability to manage the distinct risks facing our e-commerce business and maintain a relevant omni-channel experience for our customers;

 

   

our ability to maintain or negotiate favorable lease terms;

 

   

our ability to anticipate and effectively respond to disruptions or inefficiencies in our distribution network, e-commerce fulfillment function and transportation system;

 

   

our ability to execute on our growth strategy to renovate and improve the performance of our existing locations;

 

   

our ability to execute on our cost-saving initiatives;

 

   

our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

 

   

the impact of our debt and lease obligations on our ability to raise additional capital to fund our operations and maintain flexibility in operating our business;

 

   

our reliance on and relationships with third party service providers;

 

   

our reliance on and relationships with foreign suppliers and their ability to supply us with adequate, timely, and cost-effective product supplies;

 

   

our ability to maintain security and prevent unauthorized access to electronic and other confidential information;

 

   

the impacts of potential disruptions to our information systems, including our websites and mobile applications;

 

   

our ability to respond to risks associated with existing and future payment options;

 

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our ability to maintain and enhance a strong brand image;

 

   

our ability to maintain adequate insurance coverage;

 

   

our status as a “controlled company” and LGP’s control of us as a public company; and

 

   

the impact of evolving governmental laws and regulations and the outcomes of legal proceedings.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this prospectus are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this prospectus, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of shares in this offering will be approximately $57.8 million, based on the initial public offering price of $12.00 per share, and after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds from this offering, including any net proceeds from the underwriters’ exercise of the over-allotment option to purchase additional shares from us, to pay down outstanding borrowings on our Second Lien Facility and the remainder, if any, to pay down outstanding borrowings on our ABL Facility. As of January 30, 2021, there was $72.8 million in outstanding borrowings under our Second Lien Facility. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds to be received by us will be approximately $76.1 million, after deducting underwriting discounts and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock in this offering by the Selling Shareholders. We have agreed to pay the expenses of the Selling Shareholders related to this offering other than the underwriting discounts and commissions.

Loans under the Second Lien Facility bear interest at a per annum rate equal to LIBOR plus a margin of 9.25% for Euro Rate Loans (as defined in the Second Lien Facility) and LIBOR plus a margin of 8.25% for the Base Rate Loans (as defined in the Second Lien Facility), maturing on May 21, 2024. Loans under the ABL Facility bear interest at a per annum rate of LIBOR plus 1.75%-2.25%, based on availability under the ABL Facility, maturing on the earliest of (x) five years after the First Amendment Effective Date (as defined in the ABL Facility), (y) 91 days prior to the scheduled maturity of the First Lien Term Facility (as defined in the ABL Facility) or (z) 91 days prior to the scheduled maturity of the Second Lien Term Facility (as defined in the ABL Facility).

Certain of the underwriters and/or their respective affiliates are lenders under the Second Lien Credit Facility and/or the ABL Facility and, as a result, will receive a portion of the net proceeds from this offering. See “Underwriting.”

 

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DIVIDEND POLICY

As a public company we anticipate paying a quarterly dividend at a rate initially equal to $0.40 per share per annum on our common stock to holders of our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors may deem relevant. Our business is conducted through our subsidiaries. Dividends, distributions and other payments from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our shareholders is dependent on the earnings and distributions of funds from our subsidiaries. In addition, the covenants in the agreements governing our existing indebtedness, including the Credit Facilities, significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us, which in turn limits our ability to pay dividends on our common stock. Based on the status of the factors listed above, the anticipated size of our intended quarterly dividend, the current relationships with our operating subsidiaries and the status of our various operating and debt agreements, we believe that we have sufficient liquidity and authorization to be able to pay our intended dividend. See Note 2 to our audited and unaudited financial statements and “Description of Certain Indebtedness” appearing elsewhere in this prospectus, for descriptions of restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of October 31, 2020:

 

   

on an actual basis;

 

   

on an as adjusted basis, to give effect to: (i) the filing and effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws, (ii) the issuance and sale by us of 5,468,750 shares of our common stock in this offering at the initial public offering price of $12.00 per share, after deducting underwriting discounts and estimated offering expenses payable by us and (iii) the application of the net proceeds from this offering as described in “Use of Proceeds.”

You should read the data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” “Description of Certain Indebtedness” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

(In millions, except per share data)

  

Actual

    

As Adjusted (1)(2)

 

Cash and cash equivalents

   $ 33.2      $ 33.2  
  

 

 

    

 

 

 

Long-term debt, including current maturities:

     

ABL Facility (3)

     217.0        217.0  

First Lien Facility

     635.4        635.4  

Second Lien Facility (4)

     77.3        19.5  
  

 

 

    

 

 

 

Total debt

     929.7        871.9  

Shareholders’ equity (deficit):

     

Preferred stock; $0.01 par value per share; no shares authorized, issued and outstanding, actual; 5,000,000 shares authorized and no shares issued and outstanding as adjusted

     —          —    

Common stock; $0.01 par value per share; 200,000,000 shares authorized, 36,822,658 shares issued and 34,902,380 shares outstanding, actual; 200,000,000 shares authorized, 42,291,408 shares issued and 40,371,130 shares outstanding as adjusted

     0.3        0.4  

Additional paid-in capital

     124.3        182.0  

Retained (deficit)

     (107.3      (107.3

Accumulated other comprehensive loss

     (0.5      (0.5

Treasury stock at cost; 1,920,278 shares outstanding actual, 1,920,278 shares outstanding as adjusted

     (13.3      (13.3
  

 

 

    

 

 

 

Total shareholders’ equity

     3.5        61.3  
  

 

 

    

 

 

 

Total capitalization

   $ 933.2      $ 933.2  
  

 

 

    

 

 

 

 

(1)

Our estimate of the net proceeds that we will receive from this offering reflects the deduction of an estimated $3.5 million of expenses relating to the offering; however, as of March 10, 2021, we had already paid approximately $1.7 million of such expenses.

 

(2)

We intend to use the net proceeds from this offering, including any net proceeds from the underwriters’ exercise of the over-allotment option to purchase additional shares from us, to pay down outstanding borrowings on our Second Lien Facility and the remainder, if any, to pay down outstanding borrowings on our ABL Facility. See “Use of Proceeds.”

 

(3)

Subsequent to October 31, 2020, we entered into an amendment and extended the maturity date and increased our borrowing capacity under the ABL Facility to up to $500.0 million.

 

(4)

As of January 30, 2021, there was $72.8 million outstanding under our Second Lien Facility.

 

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The number of shares of common stock to be outstanding after this offering excludes:

 

   

3,086,467 shares of common stock issuable upon the exercise of options outstanding under the 2012 Plan as of October 31, 2020 at a weighted average exercise price of $6.11 per share;

 

   

1,187,035 additional shares of common stock reserved for future issuance under our 2021 Plan, which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the 2021 Plan that automatically increase the share reserve under our 2021 Plan, as described in “Executive Compensation—Equity Plans;” which amount excludes the IPO Option Grants and IPO RSU Grants described below;

 

   

656,656 shares of common stock issuable upon the exercise of the IPO Option Grants granted under the 2021 Plan upon the pricing of this offering with an exercise price per share equal to the initial public offering price per share;

 

   

156,309 shares of our common stock underlying the IPO RSU Grants to be granted under the 2021 Plan immediately following the effectiveness of the applicable Form S-8 registration statement; and

 

   

400,000 additional shares of common stock reserved for future issuance under our ESPP, which will become effective once the registration statement of which this prospectus forms a part is declared effective as well as any shares of common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under our ESPP, as described in “Executive Compensation—Equity Plans.”

 

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DILUTION

If you purchase any of the shares offered by this prospectus, you will experience dilution to the extent of the difference between the offering price per share that you pay in this offering and our as adjusted net tangible book value (deficit) per share of our common stock immediately after this offering.

Net tangible book value (deficit) is total tangible assets less total liabilities, which is not included within shareholders’ equity. Tangible assets represent total assets excluding goodwill and other intangible assets. Net tangible book value (deficit) per share is determined by dividing our net tangible book value (deficit) by the aggregate number of shares of common stock outstanding.

Our net tangible book value (deficit) as of October 31, 2020 was $(537.4) million, or $(15.40) per share of common stock.

After giving further effect to (i) our sale of shares of common stock in this offering at the initial public offering price of $12.00 per share, and (ii) the application of the net proceeds from this offering as described in “Use of Proceeds,” our as adjusted net tangible book value as of October 31, 2020 would have been $(479.6) million, or $(11.88) per share. This represents an immediate increase in as adjusted net tangible book value of $3.52 per share to our existing shareholders and an immediate dilution of $23.88 per share to new investors purchasing shares of common stock in this offering. Dilution in as adjusted net tangible book value (deficit) represents the difference between the price per share paid by investors in this offering and our net tangible book value per share of immediately after the offering.

The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

                       $ 12.00  

Net tangible book value (deficit) per share as of October 31, 2020 before this offering

   $ (15.40                    

Increase in as adjusted net tangible book value per share attributable to new investors purchasing common stock in this offering

     3.52     

As adjusted net tangible book value per share after this offering

     (11.88   
  

 

 

    

Dilution per share to new investors purchasing common stock in this offering

      $ 23.88  
     

 

 

 

Sales by the Selling Shareholders in this offering will reduce the number of shares held by existing shareholders to 29,433,630, or approximately 73% of the total shares of common stock outstanding after this offering, which will increase the number of shares held by new investors to 10,937,500, or approximately 27% of the total shares of common stock outstanding after this offering.

The following table summarizes, as of October 31, 2020, on an as adjusted basis, the number of shares of common stock purchased or to be purchased from us, the total consideration paid or to be paid to us and the average price per share paid by existing shareholders or to be paid by new investors purchasing shares of common stock in this offering at the initial public offering price of $12.00 per share, before deducting the underwriting discounts and estimated offering expenses payable by us.

 

    

Shares Purchased

   

Total Consideration

   

Average
Price
Per Share

 
    

Number

    

Percent

   

Amount

    

Percent

 

Existing shareholders

     34,902,380        86   $ 404,622,844        86   $ 11.59  
  

 

 

    

 

 

   

 

 

    

 

 

   

New investors

     5,468,750        14   $ 65,625,000        14   $ 12.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     40,371,130        100   $ 470,247,844        100   $ 11.65  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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Except as otherwise indicated, the above discussion and tables assume the underwriters do not exercise their option to purchase additional shares in this offering. If the underwriters fully exercise their option to purchase 1,640,625 additional shares of our common stock from us in this offering, the as adjusted net tangible book value (deficit) per share would be $(10.98) per share and the dilution to new investors in this offering would be $22.98 per share. If the underwriters fully exercise their option, the number of shares held by new investors will increase to 12,578,125 shares of our common stock, or approximately 30% of the total number of shares of our common stock outstanding after this offering, including the shares to be sold by the Selling Shareholders.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

3,086,467 shares of common stock issuable upon the exercise of options outstanding under the 2012 Plan as of October 31, 2020 at a weighted average exercise price of $6.11 per share;

 

   

1,187,035 additional shares of common stock reserved for future issuance under our 2021 Plan, which will become effective once the registration statement of which this prospectus forms a part is declared effective as well as any shares of common stock that become available pursuant to provisions in the 2021 Plan that automatically increase the share reserve under our 2021 Plan, as described in “Executive Compensation—Equity Plans;” such amount excludes the IPO Option Grants and IPO RSU Grants described below;

 

   

656,656 shares of common stock issuable upon the exercise of the IPO Option Grants granted under the 2021 Plan upon the pricing of this offering with an exercise price per share equal to the initial public offering price per share;

 

   

156,309 shares of our common stock underlying the IPO RSU Grants to be granted under the 2021 Plan immediately following the effectiveness of the applicable Form S-8 registration statement; and

 

   

400,000 additional shares of common stock reserved for future issuance under our ESPP, which will become effective once the registration statement of which this prospectus forms a part is declared effective as well as any shares of common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under our ESPP, as described in “Executive Compensation—Equity Plans.”

To the extent any options are granted and exercised in the future, there may be additional economic dilution to new investors.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the following selected consolidated statements of operations and cash flow data for the fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018 and the consolidated balance sheet data for the fiscal years ended February 1, 2020 and February 2, 2019 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following selected consolidated statements of operations and cash flow data for the fiscal years ended January, 28, 2017 and January 30, 2016 and the consolidated balance sheet data as of February 3, 2018, January 28, 2017 and January 30, 2016 from our audited consolidated financial statements not included in this prospectus.

We have derived the following selected consolidated statements of operations and of cash flow data for the thirty-nine weeks ended October 31, 2020 and November 2, 2019 and our consolidated balance sheet data as of October 31, 2020 and November 2, 2019 from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion are necessary to fairly state the financial information set forth in those statements.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read the selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

   

Thirty-Nine Weeks  Ended

   

Fiscal Year Ended (a)

 

(In millions, except for share data)

 

October 31,

2020

   

November 2,

2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

   

January 28,

2017

   

January 30,
2016

 

Statements of consolidated income (loss) data:

             

Net sales

  $ 1,921.5     $ 1,545.6     $ 2,241.2     $ 2,324.8     $ 2,314.3     $ 2,284.8     $ 2,358.7  

Cost of sales

    949.8       768.6       1,135.9       1,148.3       1,130.3       1,124.9       1,195.4  

Selling, general and administrative expenses

    818.2       723.0       977.4       951.4       943.4       924.5       944.5  

Depreciation and amortization

    59.8       57.3       77.5       76.0       78.8       80.2       87.7  

Goodwill and trade name impairment

    —         130.4       486.8       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    93.7       (133.7     (436.4     149.1       161.8       155.2       131.1  

Interest expense, net

    55.0       77.6       101.9       101.1       95.4       97.9       100.1  

Debt related (gain) loss

    (152.9     —         (3.8     2.4       0.9       6.8       (19.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income

    —         —         —         —         —         —         (0.7

Income (loss) before income taxes

    191.6       (211.3     (534.5     45.6       65.5       50.5       51.4  

Income tax provision (benefit)

    17.6       (22.8     12.1       10.3       (31.0     18.7       18.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 174.0     $ (188.5   $ (546.6   $ 35.3     $ 96.5     $ 31.8     $ 33.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

             

Basic

  $ 4.99     $ (5.40   $ (15.67   $ 1.01     $ 2.77     $ 0.91     $ 0.95  

Diluted

  $ 4.88     $ (5.40   $ (15.67   $ 1.00     $ 2.74     $ 0.91     $ 0.94  

Weighted-average common shares outstanding:

             

Basic

    34,902,380       34,877,288       34,882,306       34,852,196       34,857,305       34,901,407       34,761,945  

Diluted

    35,666,429       34,877,288       34,882,306       35,297,708       35,188,523       35,158,948       35,238,577  

 

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Thirty-Nine Weeks  Ended

   

Fiscal Year Ended (a)

 

(In millions, except for share data)

 

October 31,

2020

   

November 2,

2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

   

January 28,

2017

   

January 30,
2016

 

Consolidated statements of cash flows data:

             

Net cash provided by (used for) operating activities

  $ 185.8     $ (170.4   $ (33.9   $ 99.0     $ 97.7     $ 90.2     $ 56.1  

Net cash used for investing activities

    (28.2     (64.8     (79.5     (49.7     (50.8     (30.1     (39.9

Net cash (used for) provided by financing activities

    (148.8     210.5       86.3       (25.1     (42.3     (125.5     (58.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance sheets data:

             

Cash and cash equivalents

  $ 33.2       26.8     $ 24.4     $ 51.5     $ 27.3     $ 22.7     $ 88.1  

Total current assets

    799.6       877.7       719.8       710.0       642.1       605.1       646.5  

Goodwill

    162.0       513.4       162.0       643.8       643.8       640.0       640.0  

Total assets

    2,519.6       2,830.6       2,301.3       2,070.8       2,035.6       2,029.0       2,123.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    651.4       541.4       498.2       394.9       347.2       312.3       296.0  

Long-term debt, net

    921.6       1,337.2       1,210.2       1,106.3       1,123.0       1,178.6       1,289.4  

Total shareholders’ equity (deficit)

    3.5       185.6       (172.0     373.2       338.6       241.6       208.7  

Other financial and operating data:

             

Adjusted EBITDA (b)

  $ 217.2     $ 72.8     $ 153.4     $ 252.0     $ 257.4     $ 247.4     $ 234.9  

Location pre-opening and closing costs excluding loss on disposal of fixed assets

    5.0       6.8       9.2       6.0       4.4       5.5       5.7  

Adjusted EBITDA as a percentage of net sales (b)

    11.3     4.7     6.8     10.8     11.1     10.8     10.0

 

(a)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks. See “Basis of Presentation.”

(b)

We define Adjusted EBITDA as net income (loss) plus income tax provision (benefit), interest expense, net, debt related (gain) loss, other income and depreciation and amortization, as further adjusted to eliminate the impact of certain non-cash items and other items that we do not consider indicative of our ongoing operating performance, including costs related to strategic initiatives, COVID-19 costs, technology development expense, stock-based compensation expense, loss on disposal and impairment of fixed and operating lease assets, goodwill and trade name impairment, sponsor management fees and other one-time costs. We describe these adjustments reconciling net income (loss) to Adjusted EBITDA in the applicable table below.

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA following this offering, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

 

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Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; to compare our performance against that of other peer companies using similar measures; and because our Credit Facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants.

Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;

 

   

Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;

 

   

Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do.

The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented:

 

   

Thirty-Nine Weeks
Ended

   

Fiscal Year Ended (1)

 

(In millions)

 

October 31,
2020

   

November 2,
2019

   

February 1,
2020

   

February 2,
2019

   

February 3,
2018

   

January 28,

2017

   

January 30,

2016

 

Net income (loss)

  $ 174.0     $ (188.5   $ (546.6   $ 35.3     $ 96.5     $ 31.8     $ 33.1  

Income tax provision (benefit)

    17.6       (22.8     12.1       10.3       (31.0     18.7       18.3  

Interest expense, net

    55.0       77.6       101.9       101.1       95.4       97.9       100.1  

Debt related (gain) loss (2)

    (152.9     —         (3.8     2.4       0.9       6.8       (19.7

Other income

    —         —         —         —         —         —         (0.7

Depreciation and amortization (3)

    60.2       57.7       78.0       76.2       78.6       79.3       86.2  

Strategic initiatives (4)

    4.1       7.8       9.0       7.3       3.4       0.6       1.4  

COVID-19 costs (5)

    48.4       —         —         —         —         —         —    

Technology development expense (6)

    3.6       3.7       6.4       3.9       3.5       1.1       —    

Stock-based compensation expense

    1.1       0.9       1.2       0.6       1.0       1.1       1.1  

Loss on disposal and impairment of fixed and operating lease assets

    3.6       0.4       1.0       3.2       1.4       2.0       6.4  

Goodwill and trade name impairment (7)

    —         130.4       486.8       —         —         —         —    

Sponsor management fee (8)

    0.8       3.8       5.0       5.0       5.0       5.0       5.0  

Other (9)

    1.7       1.8       2.4       6.7       2.7       3.1       3.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 217.2     $ 72.8     $ 153.4     $ 252.0     $ 257.4     $ 247.4     $ 234.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks. See “Basis of Presentation.”

 

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(2)

“Debt related (gain) loss” represents gains associated with debt repurchases below par and write off of unamortized fees and original issue discount associated with debt refinancings.

(3)

“Depreciation and amortization” represents depreciation, amortization of intangible assets, amortization of favorable and unfavorable lease rights, and amortization of content costs.

(4)

“Strategic initiatives” represents non-recurring costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives, including costs (i) to design a new prototype and assortment optimization process for locations, (ii) related to our efforts to initially evaluate and implement opportunities to offset the significant costs incurred due to the new U.S. tariffs on merchandise produced in China, (iii) to start up a new technology product that would traditionally be incurred by our vendors, (iv) to evaluate our opportunity in new potential lines of business, (v) to analyze improved supply chain capabilities, (vi) related to one-time legal and accounting fees associated with our planned initial public offering and (vii) to establish our foreign sourcing office.

(5)

“COVID-19 costs” represents premium pay for location team members (including cleaning and location capacity management labor), incremental seasonal clearance associated with location closures, donations for our mask making initiative and additional location cleaning supplies.

(6)

“Technology development expense” represents one-time IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.

(7)

Based on our evaluation for impairment of the carrying amount of goodwill and trade name on our balance sheet. Impairment recorded was driven predominantly by the result of negative total comparable sales and declining margins, primarily resulting from the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See Note 6—Goodwill and Other Intangible Assets to our unaudited financial statements included elsewhere in this prospectus for further details.

(8)

“Sponsor management fee” represents management fees paid to our sponsor, LGP (or advisory affiliates thereof), in accordance with our management services agreement, which will terminate upon the consummation of this offering. Following the consummation of this offering, LGP will not provide managerial services to us in any form.

(9)

“Other” represents one-time severance, certain legal, executive leadership transition and business transition expenses.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information included in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to references herein to “fiscal year 2018” relate to the 53 weeks ended February 3, 2018, references herein to “fiscal year 2019” relate to the 52 weeks ended February 2, 2019 and references herein to “fiscal year 2020” relate the 52 weeks ended February 1, 2020. The third quarter of fiscal year 2021 ended on October 31, 2020, and the third quarter of fiscal year 2020 ended on November 2, 2019, and both three-quarter periods include thirty-nine weeks. References herein to “third quarter of fiscal year 2021” relate to the thirteen weeks ended October 31, 2020, “second quarter of fiscal year 2021” relate to the thirteen weeks ended August 1, 2020, “third quarter of fiscal year 2020” relate to the thirteen weeks ended November 2, 2019 and “second quarter of fiscal year 2020” relate to the thirteen weeks ended August 3, 2019.

JOANN Overview

JOANN is the nation’s category leader in Sewing and one of the fastest growing players in the arts and crafts category. The Creative Products industry is a large and growing market, which according to a 2017 Association for Creative Industries (AFCI) study is in excess of $40 billion. The industry is currently experiencing a significant acceleration for product demand in response to multiple secular themes that have been further solidified during the COVID-19 pandemic, such as heightened DIY customer behavior, amplified participation from both new and existing customers and increased digital engagement, of which we are a key beneficiary because we have positioned ourselves and our go-forward strategies to capitalize on increased demand for Creative Products. As a well-established and trusted brand for over 75 years, we believe we have a deep understanding of our customers, what inspires their creativity and what fuels their incredibly diverse projects. Since 2016, we have embarked on a strategy to transform JOANN, which has helped us pivot from a traditional retailer to a fully-integrated, digitally-connected provider of Creative Products.

As the nation’s category leader in Sewing with approximately one-third market share, based on our internal research estimates of market share of the Creative Products industry that primarily consist of an annual survey of Creative Product consumers as of July 31, 2020, we believe we offer the broadest selection of products while being committed to providing the most inspiration, helpful service and education to our customers. While we continue to gain market share and solidify this leadership position in Sewing, which represented 49% of our total net sales in the last twelve months ended October 31, 2020, we have also been growing share and believe we have further significant share opportunity in the arts and crafts category. We are well-positioned in the marketplace and have multiple competitive advantages, including our broad assortment, established omni-channel platform, multi-faceted digital interface with customers and skilled and knowledgeable team members. We offer an extensive assortment, which at its peak, averages more than 95,000 SKUs in stores and over 245,000 SKUs online, across Creative Product categories. Over 50% of our in-store net sales cannot be directly comparison-shopped because of our strong and growing own-brand portfolio, including our copyrighted or proprietary fabric patterns and designs and factory direct relationships. We have expanded access to this broad assortment through e-commerce and digital capabilities that complement our physical network, drive customer engagement and deliver an exceptional customer experience while supporting consistently strong gross margins. Through our omni-channel platform, we serve our

 

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customers in a differentiated manner by offering several convenient fulfillment options, including BOPIS, curbside pick-up and ship-to-home offerings. Our omni-channel platform operates at a large scale, having generated $423 million in net sales in the twelve months ended October 31, 2020, including $377 million in net sales in the thirty-nine weeks ended October 31, 2020 and following $126 million, $103 million and $87 million in net sales in fiscal years 2020, 2019 and 2018, respectively. Our data-driven digital capabilities further reinforce our relationship with our customers. Customers connect with us through our newly re-designed mobile-first website, joann.com, and our widely-used mobile application with over 11.8 million downloads. As of the end of the third quarter of fiscal year 2021, we had over 69 million addressable customers in our vast database, over 16 million customers in our email database and 4.5 million customers in our SMS text database. These points of differentiation are reinforced by our knowledgeable, friendly and trusted team members, a significant number of whom are sewing and craft enthusiasts, who offer a service-oriented experience for our customers that we believe cannot be replicated by mass retailers or pure play online players.

In 2016, we accelerated our journey to transform JOANN by reinventing the in-store and digital customer experience. We recruited talent at every level of the company and across all key business areas to complement our existing expertise. This undertaking has resulted in significant enhancements to our value proposition, including reinvigorating our core merchandise assortment, refreshing our branding, developing a location refresh prototype and improving the customer experience. We improved our assortment by conducting a systematic review of all categories at a product-level and all layouts at a location-level in order to optimize sales and gross margin. We have also expanded our data-driven digital footprint, which includes our extensive digital marketing assets, CRM system, social media platforms and e-commerce capabilities. We better understand our customers through our centralized database that brings together how each customer interacts in our physical and digital properties and provides a holistic view of their behavior. We are able to utilize this data to drive engagement with our brand, create loyalty and inspire, educate and ensure we are increasing our share of customer spend through timely and relevant marketing. By using data and digital contact channels, including email and SMS digital display, and leveraging our mobile application, we are able to contact customers with personalized content and provide the convenience to shop wherever and however they choose. We believe that these core initiatives and transformational investments have driven our performance and increased customer engagement over the last several years and strategically position us to continue to create long-term value. This momentum was temporarily interrupted in fiscal year 2020 by the unanticipated headwind of incremental U.S. tariffs on Chinese imports that we estimate, before mitigation, would have amounted to $75 million of additional annual costs, as these tariffs applied to a broad range our products. However, after working to partially offset their effects and having incorporated the balance of these tariffs into our cost base, we are driving strong operating profit growth across both our locations and e-commerce platform as well as achieving margin expansion.

Factors Affecting Our Business

Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. Spending by customers on our products and services is primarily discretionary, and as a result generally positive economic conditions create increased discretionary household income that promotes higher levels of spending across our business. However, the creative activities we support tend to be lower cost than other leisure activities, which could protect us to a certain degree from economic downturns. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, availability of consumer credit, interest rates, tax rates and inflation, and fuel and energy costs. Macroeconomic factors can also affect our input and labor costs, notably inflation, as our financial results and ability to invest in the business are directly impacted by increases or decreases in the cost of goods and services required in our operations and initiatives. In addition to inflation, our input and labor costs are impacted by mandated costs such as minimum wages and trade policies, most significantly tariffs and duties on our products imported from foreign countries. The implementation of incremental U.S. tariffs on Chinese imports in particular has had a significant impact on our cost of goods sold, product demand and sourcing strategies. Before mitigation, we estimate that incremental U.S. tariffs on Chinese imports in fiscal year 2020 would have amounted to $75 million of additional annual costs, as these tariffs applied to a broad range of our products.

 

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The COVID-19 pandemic. As described below, the COVID-19 pandemic has had and is expected to continue to have a substantial impact on our business.

Consumer demand for our products and services. Our industry supports activities that are discretionary in nature and can be highly influenced by consumer trends. Our ability to achieve our desired results, including attracting new customers and growing share of spend with existing customers, depends on our ability to develop compelling product assortments and services delivered within a convenient and engaging shopping experience. Moreover, due to the nature of our business, we purchase much of our inventory well in advance of each selling season. If we misjudge consumer preferences and demand for certain products, we could be faced with excess inventories that would impact our net sales and profits.

Size and loyalty of our customer database. Our ability to effectively market to our customers is a critical component of our business success. We tier our customers based on total sales volume and frequency of purchase. For the thirty-nine weeks ended October 31, 2020, 30% of our net sales were generated by our top three million customers. Our recent success is also being largely driven by new customers added to our database, as 14% of our net sales for the thirty-nine weeks ended October 31, 2020 were generated by new customers added to our database over that same time period.

Competition. The Creative Products industry includes national players and mass merchandisers that provide assortments in many of our categories albeit typically with more limited breadth, local shops that tend to feature select categories (e.g. quilting and yarn shops) and pure play e-commerce providers. We compete with all of these players for customer attention, shopping visits, exclusive vendor relationships, leadership talent and in some cases front line employees and retail locations. Our ability to be effective across all of those points of competition has a significant effect on our results of operations.

Effective development and sourcing of products. Our business success requires that we provide relevant and innovative products to our customers at competitive prices. Development of those products is dependent on effective relationships with key suppliers and in many cases internal development of new products or application of current consumer trends to existing product lines. Our ability to develop, promote and apply our exclusive brands to new products is a critical component of building competitive assortments that drive our sales. Our ability to effectively source products, including through factory direct relationships, allows us to offer assortments a competitive prices while maintaining profitable product margins.

Management of inventory and our supply chain. We offer an extensive assortment, which at its peak, averages more than 95,000 SKUs in stores and over 245,000 SKUs through our e-commerce platforms, across Creative Product categories. The high number of SKUs required to support our business as well as the need to introduce new products and manage seasonality create complexity in our operations. We also sometimes experience long lead times for manufacture and delivery of our products, particularly those that we source directly from foreign suppliers, which further increases inventory carrying costs. The ability to effectively forecast product demand, maintain a high number of vendor relationships and order volume, replenish and allocate product and manage distribution and logistics are all critical to our success. Issues with any of these processes could result in lost sales or excess inventories which would have a negative impact on our results of operations.

Investments in our locations, technology, infrastructure, team members and new business opportunities. We have made, and will continue to make, significant investments in our business and operations. We believe these investments have laid the foundation for our results of operations and continued profitable growth. Refreshing our locations, enhancing our omni-channel and other customer-facing and supporting technologies, strengthening our core business processes, adding talent while developing our current team and making investments in ventures that augment our current business are critical to sustaining a vibrant enterprise that will drive strong financial results.

Seasonality in quarterly results. Historically, our net sales and operating profits have been materially higher in our third and fourth fiscal quarters, particularly in the months of September through December,

 

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coinciding with fall and holiday selling seasons. We incur significantly higher expenses and working capital needs in April through August in order to procure inventory to support higher levels of sales activity later in the year. Our ability to generate cash flow or otherwise finance increased costs in the earlier portion of our fiscal year is critical to achieving strong net sales and operating profit in our historically busier fall and holiday seasons.

53rd week. Our fiscal year ends on the Saturday closest to January 31 (for example, fiscal year 2018 ended on February 3, 2018). Fiscal year 2018 consisted of 53 weeks and our fiscal year 2019 and fiscal year 2020 each consisted of 52 weeks. Fiscal years in which there are 53 weeks will see increased net sales and expenses from the additional week.

Effects of COVID-19 on Our Business

We continue to closely monitor the impact of the COVID-19 outbreak on all facets of our business. We have taken actions to protect the safety of our team members and customers and to manage the business through the resulting fluid and challenging environment.

In late 2019, an outbreak of COVID-19 emerged and by March 11, 2020 was declared a global pandemic by The World Health Organization. Federal, state, and local governments have since implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations. In response to government closure orders, we were forced to close hundreds of our locations. During the second half of March 2020 and the beginning of April 2020, approximately half of our locations were closed, either completely or to in-store traffic. However, we immediately began working diligently with local and national government officials in advocating that our business and the products we sell were essential in the fight against COVID-19, and therefore exempt from shelter-in-place and stay-at-home orders. Over the ensuing weeks, we began to re-open many of our locations across the country. Initially, many of these locations were re-opened for curbside pick-up only via our BOPIS ordering process. At the beginning of the second quarter of fiscal year 2021, we had fewer than 30 locations fully closed and roughly 400 locations open for curbside pick-up only, and by mid-June 2020, all locations were fully operational and open to walk-in traffic. Throughout the entirety of the third quarter of fiscal year 2021, all locations remained opened other than for temporary deep cleanings required to maintain sanitation protocols or for weather and other related hazards. Since that time, certain state and local governments have continued to impose retail closure orders and capacity restrictions, impacting some of our locations. During this time, our ability to fulfill e-commerce orders via both our BOPIS and ship-to-home programs without interruption has had a significant positive impact on our financial performance. We have also experienced an increase in sales in certain merchandise categories due to the effects of the pandemic, as consumers created personal protective equipment, or PPE, such as face masks, and engaged in more DIY projects due to additional time spent at home. This increase in activity has led to significant additions to our marketing database, which has grown by over eight million customers in the thirty-nine weeks ended October 31, 2020. Our ability to directly market to these new customers through our robust and efficient digital channels has led to repeat purchases across a broad array of our merchandise assortments. We have also experienced declines in sales of a limited number of categories that are tied to activities that are restricted due to the pandemic such as special occasion fabrics used by customers that plan a wedding or that make their own Halloween costumes. In addition, we incurred additional supply chain expenses to ensure we were adequately stocked on key merchandise and to mitigate supply interruptions that the pandemic caused. Our COVID-19 related costs for the thirty-nine weeks ended October 31, 2020 were $48.4 million. Throughout the pandemic, we have worked closely with our suppliers to manage flow of inventory and prioritize our most urgently required merchandise, as in many cases our needs have varied from earlier expectations and our suppliers have often needed to react to their own challenges presented by COVID-19. While it is difficult to estimate the sales to date that have been attributable to PPE-making with precision, we have been able to note significant changes in normal sales trends in categories that support that effort. These categories include cotton fabric, certain sewing supplies such as elastic, and sewing machines. Those favorable impacts to our sales were partially offset by mandated store closures and reduced sales in categories such as special occasion fabrics and seasonal décor and entertaining,

 

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which have been negatively impacted by broad restrictions on customer gatherings and celebrations. We estimate the net result of those impacts amount to a one-time annualized benefit to our sales of 8% to 9% for fiscal year 2021. However, we view the significant number of new customers and increased engagement by new and current customers as an encouraging signal for the future of our business. We also believe the rapid adoption by customers of our digital and omni-channel offerings is a highly scalable platform that we can leverage to increase sales and reduce costs.

In response to the pandemic, we have instituted modified or reduced hours, as well as reduced occupancy limits, for all of our locations. In certain jurisdictions, our occupancy is further limited by the relevant government authority. We have also implemented, and may need to take further steps to, make adjustments to staffing levels and location configurations to reflect not only applicable restrictions and guidelines but also potential levels of consumer engagement. We are prioritizing the health and safety of our team members and customers and, to that end, we have instituted the following guidelines within all locations:

 

   

requiring all team members in our locations to perform a health screening before each shift, which includes temperature checks, and instructing team members to stay home if they exhibit any COVID-19 symptoms;

 

   

putting up signs and other indicators to promote social distancing while shopping and standing in line;

 

   

implementing increased cleaning and sanitization practices throughout the location, with additional focus on high-traffic and high-touch areas such as carts, cutting counters and checkout counters;

 

   

wearing a face mask or face shield; and

 

   

conducting a pre-opening checklist in each location each day.

Our steps to manage operation of our locations during the pandemic have added costs to our business, some of which are non-recurring in nature, including, but not limited to premium pay for our hourly employees as well as incremental labor hours and supplies to maintain sanitation and social distancing protocols. These precautions may change from time to time as local conditions and applicable health mandates change, and therefore, it is possible we may be required to temporarily close locations or limit our operations. See “Risk Factors—Risks Relating to our Business—Our business is subject to continued uncertainty with respect to the ongoing COVID-19 pandemic.”

How We Assess the Performance of Our Business

In assessing our performance, we consider a variety of performance and financial measures. The key GAAP measures include net sales, cost of sales, selling, general and administrative expenses and operating profit. In addition, we also review other important non-GAAP metrics such as Adjusted EBITDA and other performance indicators such as total comparable sales.

Net Sales

Net sales are derived from direct retail sales to customers in our locations and online, net of merchandise returns, discounts and coupons, and excluding sales tax. Growth in net sales is impacted by total comparable sales, new location openings, location refreshes and closures.

Total Comparable Sales

Total comparable sales are an important measure throughout the retail industry. This measure allows us to evaluate how our location base and e-commerce business are performing by measuring the change in

 

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period-over-period net sales in locations that have been open for the applicable period. We define total comparable sales as net sales for locations that have been open for at least 13 months as well as net sales for locations that have not been remodeled, expanded or downsized in the last 13 months. In addition, total comparable sales include our e-commerce sales generated via joann.com (online sales for all products) and creativebug.com (online sales of digital videos for crafting projects). There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this prospectus regarding our total comparable sales may not be comparable to similar data made available by other retailers.

Gross Margin

Gross margin is calculated as net sales less cost of sales. Cost of sales consists primarily of the direct cost of merchandise sold at our locations and through our e-commerce platforms, along with several other costs including freight expense, vendor allowances and cash discounts, inventory shrink and clearance activity. We define gross margin rate as gross margin divided by net sales.

Our calculations of gross margins may not be directly comparable to those of our competitors. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude the indirect portion from gross margin and include it within selling, general and administrative expenses, or SG&A expenses. We include distribution costs that are directly associated with the acquisition of our merchandise and delivery to our locations in cost of sales. These costs are primarily freight incurred when we receive merchandise shipments from the vendor to our distribution centers or directly to our locations and also when we ship merchandise from our distribution centers to our locations. Freight incurred to ship e-commerce orders to our customers is also included in our cost of sales. These freight costs as well as duties, including tariffs, related to import purchases and internal transfer costs are considered to be direct costs of our merchandise and, accordingly, are recognized as cost of sales when the related merchandise is sold.

Purchasing, receiving, warehousing, fulfillment of e-commerce orders (excluding shipping costs) and other costs of our distribution network (including depreciation) and location occupancy costs are considered to be period costs not directly attributable to the value of merchandise and, accordingly, are expensed as incurred as SG&A expenses.

Selling, General and Administrative Expenses

SG&A expenses consist of various costs related to supporting and facilitating the sale of merchandise in our locations and via our e-commerce platforms. These costs include but are not limited to location, distribution center and administrative payroll, employee benefits, stock-based compensation, occupancy, facility and operating costs for our locations, distribution centers and corporate office, advertising expenses, payment card acceptance and interchange fees, location pre-opening and closing costs and other administrative expenses.

Non-GAAP Financial Measures

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; to compare our performance against that of other peer companies using similar measures; and because our Credit Facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants.

 

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We define Adjusted EBITDA as net income (loss) plus income tax provision (benefit), interest expense, net, debt related (gain) loss, other income and depreciation and amortization, as further adjusted to eliminate the impact of certain non-cash items and other items that we do not consider indicative of our ongoing operating performance, including costs related to strategic initiatives, COVID-19 costs, technology development expense, stock-based compensation expense, loss on disposal and impairment of fixed and operating lease assets, goodwill and trade name impairment, sponsor management fees and other one-time costs. The further adjustments are itemized in the table below.

Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;

 

   

Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;

 

   

Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do.

We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.

The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented:

 

    

Thirty-Nine Weeks Ended

   

Fiscal Year Ended (1)

 

(In millions)

  

October 31,

2020

   

November 2,

2019

   

February 1,
2020

   

February 2,
2019

    

February 3,

2018

 

Net income (loss)

   $ 174.0     $ (188.5   $ (546.6   $ 35.3      $ 96.5  

Income tax provision (benefit)

     17.6       (22.8     12.1       10.3        (31.0

Interest expense, net

     55.0       77.6       101.9       101.1        95.4  

Debt related (gain) loss (2)

     (152.9     —         (3.8     2.4        0.9  

Other income

     —         —         —         —          —    

Depreciation and amortization (3)

     60.2       57.7       78.0       76.2        78.6  

Strategic initiatives (4)

     4.1       7.8       9.0       7.3        3.4  

COVID-19 costs (5)

     48.4       —         —         —          —    

Technology development expense (6)

     3.6       3.7       6.4       3.9        3.5  

Stock-based compensation expense

     1.1       0.9       1.2       0.6        1.0  

Loss on disposal and impairment of fixed and operating lease assets

     3.6       0.4       1.0       3.2        1.4  

Goodwill and trade name impairment (7)

     —         130.4       486.8       —          —    

Sponsor management fee (8)

     0.8       3.8       5.0       5.0        5.0  

Other (9)

     1.7       1.8       2.4       6.7        2.7  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 217.2     $ 72.8     $ 153.4     $ 252.0      $ 257.4  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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(1)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks.

(2)

“Debt related (gain) loss” represents gains associated with debt repurchases below par and write off of unamortized fees and original issue discount associated with debt refinancings.

(3)

“Depreciation and amortization” represents depreciation, amortization of intangible assets, amortization of favorable and unfavorable lease rights, and amortization of content costs.

(4)

“Strategic initiatives” represents non-recurring costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives, including costs (i) to design a new prototype and assortment optimization process for locations, (ii) related to our efforts to initially evaluate and implement opportunities to offset the significant costs incurred due to the new U.S. tariffs on merchandise produced in China, (iii) to start up a new technology product that would traditionally be incurred by our vendors, (iv) to evaluate our opportunity in new potential lines of business, (v) to analyze improved supply chain capabilities, (vi) related to one-time legal and accounting fees associated with our planned initial public offering and (vii) to establish our foreign sourcing office.

(5)

“COVID-19 costs” represents premium pay for location team members (including cleaning and location capacity management labor), incremental seasonal clearance associated with location closures, donations for our mask making initiative and additional location cleaning supplies.

(6)

“Technology development expense” represents one-time IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.

(7)

Based on our evaluation for impairment of the carrying amount of goodwill and trade name on our balance sheet. Impairment recorded was driven predominantly by the result of negative total comparable sales and declining margins, primarily resulting from the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See Note 6—Goodwill and Other Intangible Assets to our unaudited financial statements included elsewhere in this prospectus for further details.

(8)

“Sponsor management fee” represents management fees paid to our sponsor, LGP (or advisory affiliates thereof), in accordance with our management services agreement, which will terminate upon the consummation of this offering. Following the consummation of this offering, LGP will not provide managerial services to us in any form.

(9)

“Other” represents one-time severance, certain legal, executive leadership transition and business transition expenses.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our consolidated financial statements and related notes.

Statement of Consolidated Income Data:

 

    

Thirty-Nine Weeks Ended

   

Fiscal Year-Ended (1)

 

(In millions)

  

October 31,
2020

    

November 2,
2019

   

February 1,

2020

   

February 2,

2019

    

February 3,

2018

 

Net sales

   $ 1,921.5      $ 1,545.6     $ 2,241.2     $ 2,324.8      $ 2,314.3  

Gross margin

     971.7        777.0       1,105.3       1,176.5        1,184.0  

SG&A expenses

     818.2        723.0       977.4       951.4        943.4  

Depreciation and amortization

     59.8        57.3       77.5       76.0        78.8  

Goodwill and trade name impairment

     —          130.4       486.8       —          —    

Operating profit (loss)

     93.7        (133.7     (436.4     149.1        161.8  

 

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Other Operational Data:

 

    

Thirty-Nine Weeks Ended

   

Fiscal Year-Ended (1)

 

(Dollars in millions)

  

October 31,
2020

   

November 2,
2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

 

Total comparable sales vs. prior year

     24.6     (3.3 )%      (3.6 )%      1.9     (1.4 )% 

Gross margin rate

     50.6     50.3     49.3     50.6     51.2

SG&A expenses as a % of net sales

     42.6     46.8     43.6     40.9     40.8

Operating profit (loss) as a % of net sales

     4.9     (8.7 )%      (19.5 )%      6.4     7.0

Adjusted EBITDA (2)

   $ 217.2     $ 72.8     $ 153.4     $ 252.0     $ 257.4  

Location pre-opening and closing costs excluding loss on disposal of fixed assets

     5.0       6.8       9.2       6.0       4.4  

Adjusted EBITDA as a % of net sales

     11.3     4.7     6.8     10.8     11.1

Total retail location count at end of period

     857       867       867       869       865  

 

(1)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks.

(2)

See “—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss).

Comparison of the 39 Weeks Ended October 31, 2020 and November 2, 2019

Net Sales

Net sales were $1,921.5 million for the thirty-nine weeks ended October 31, 2020, an increase of $375.9 million or 24.3% compared to the same period in fiscal year 2020. Total comparable sales for the thirty-nine weeks ended October 31, 2020 increased 24.6% compared with a total comparable sales decrease of (3.3)% in the same period in fiscal year 2020. The total comparable sales increase resulted from a 17% increase in average transaction value driven by both a higher number of items purchased per transaction and average unit retail value, along with a 4% increase in transactions as well as increases in freight revenue on e-commerce orders and growth in subscription and other services revenue. Our total comparable sales also grew as a result of increasing customer demand in our digital and omni-channel offerings. We saw strong positive results across most products in our Sewing, arts and crafts and home décor categories.

Gross Margin

Gross margin was $971.7 million for the thirty-nine weeks ended October 31, 2020, an increase of $194.7 million or 25.1% compared to the same period in fiscal year 2020. That increase was primarily driven by an increase in net sales and further supported by an increase in our gross margin rate. Gross margin rate was 50.6% for the thirty-nine weeks ended October 31, 2020, an increase of 30 basis points compared to the thirty-nine weeks ended November 2, 2019. Improvements in product costs obtained through our strategic sourcing efforts and optimization of our promotional discounts were partially offset by incremental U.S. tariffs on Chinese imports, which were not fully reflected in our annual gross margin rates until mid-third quarter of fiscal year 2021, and increases in theft, loss and damage of merchandise inventory, which we refer to as inventory shrink.

We also experienced increases in several costs related to the COVID-19 pandemic, including import costs to expedite delivery of critical merchandise, incremental clearance activity in our spring holiday businesses and cost of donated product related to our community support efforts.

Selling, General and Administrative Expenses

SG&A expenses were $818.2 million for the thirty-nine weeks ended October 31, 2020, an increase of $95.2 million or 13.2% compared to the same period in fiscal year 2020. This increase was primarily driven by $34.6 million of incremental one-time expenses throughout the COVID-19 pandemic, which included

 

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maintaining protocols to ensure a safe environment for our customers and team members through intensified cleaning and stronger focus on capacity management, along with additional labor costs associated with premium pay provided from April through October to all of our essential hourly team members. In addition, we provided for increases in expected payments under our incentive compensation plans of $27.6 million which was driven by our favorable financial performance year to date compared to our expectations. Finally, we experienced higher location labor of $25.2 million along with payment card interchange fees and other variable expenses of $7.4 million due to our higher total comparable sales.

As a percentage of net sales, SG&A expenses for the thirty-nine weeks ended October 31, 2020 were 42.6%, a decrease of 420 basis points compared to the same period in fiscal year 2020. This improvement was driven by our ability to leverage our net sales increase against expenses that have grown more slowly, even after absorbing incremental expenses to manage through the COVID-19 pandemic.

Depreciation and Amortization

Depreciation and amortization expense was $59.8 million in the thirty-nine weeks ended October 31, 2020, an increase of $2.5 million compared to the same period in fiscal year 2020. This increase was driven primarily by investments in location refresh and technology projects in fiscal year 2020.

Goodwill Impairment

There were no goodwill impairment losses recorded in the thirty-nine weeks ended October 31, 2020 due to no indication of impairment. We did record an impairment charge of $130.4 million in the thirty-nine weeks ended November 2, 2019, which were predominantly the result of negative total comparable sales and declining margins, driven primarily by the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See Note 6—Goodwill and Other Intangible Assets to our unaudited financial statements included elsewhere in this prospectus for further details.

Interest Expense

Interest expense for the thirty-nine weeks ended October 31, 2020 was $55.0 million, a decrease of $22.6 million compared to the same period in fiscal year 2020. This decrease in interest expense was due to lower average borrowings and lower interest rates as a result of decreases in LIBOR rates. The average debt level in the thirty-nine weeks ended October 31, 2020 was $1,122.2 million compared to $1,246.8 million in the thirty-nine weeks ended November 2, 2019.

We had $929.7 million of debt outstanding (face value) as of October 31, 2020 versus $1,363.5 million as of November 2, 2019.

Debt Related Gain

During the thirty-nine weeks ended October 31, 2020, we repurchased $347.1 million in face value of the term loans provided pursuant to our Term Loan Facilities, at an average of 54% of par, resulting in a $152.9 million gain, which is included in debt related gain within the accompanying consolidated statements of comprehensive income (loss) and the accompanying consolidated statements of cash flows included elsewhere in this prospectus. The term loan repurchases were executed, following a competitive market bidding process, through several open market purchases on arm’s length terms and in compliance with the terms of the underlying credit agreements. A write-off of the deferred charges and original issue discount, totaling $5.9 million, associated with the original debt issuance was recognized as an offset to the gain recognized.

Income Taxes

Our effective income tax rate for the thirty-nine weeks ended October 31, 2020 was a 9.2% provision compared to a 10.8% (benefit) for the thirty-nine weeks ended November 2, 2019. During the third quarter of

 

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fiscal year 2021, the release of the valuation allowance for the deferred tax asset relating to interest expense carryover based on the income tax return filed for fiscal year 2020 was adjusted to actual, receivables were recorded for a net operating loss carryback from fiscal year 2020 and a settlement was reached during the third quarter of fiscal year 2021, with the IRS sustaining a favorable position taken on an amended tax return, resulting in an effective tax rate which is lower than the statutory rate for the thirty-nine weeks ended October 31, 2020. For the thirty-nine weeks ended November 2, 2019, there was a permanent book-tax difference resulting from the $130.4 million non-deductible goodwill impairment recorded in the second quarter of fiscal year 2020.

Net Income (Loss)

Net income was $174.0 million for the thirty-nine weeks ended October 31, 2020, an increase of $362.5 million compared to the same period in fiscal year 2020. The increase was driven by the factors described above.

Adjusted EBITDA

Adjusted EBITDA increased 198.4% to $217.2 million or 11.3% of net sales for the thirty-nine weeks ended October 31, 2020 compared to $72.8 million or 4.7% of sales for the same period in fiscal year 2020. Our growth in Adjusted EBITDA of $144.4 million and expansion of Adjusted EBITDA as a percentage of net sales of 659 basis points was driven primarily by growth in total comparable sales that exceeded our rate of growth in SG&A expenses, as well as improvements in our gross margin rate.

Comparison of the 52 Weeks Ended February 1, 2020 and February 2, 2019

Net Sales

Net sales were $2,241.2 million in fiscal year 2020, a decrease of $83.6 million or 3.6% compared to fiscal year 2019. Total comparable sales also decreased by 3.6% compared with a total comparable sales increase of 1.9% in fiscal year 2019. This decrease in total comparable sales was driven by a decrease in transactions in part caused by actions taken by us in response to the incremental U.S. tariffs on Chinese imports.

Gross Margin

Gross margin was $1,105.3 million in fiscal year 2020, a decrease of $71.2 million or 6.1% compared to fiscal year 2019. That decrease was driven by both a decrease in net sales and a decrease in our gross margin rate. Gross margin rate was 49.3% or a decrease of 129 basis points compared to fiscal year 2019. Improvements in product costs obtained through our strategic sourcing efforts were more than offset by significant cost increases driven by the incremental U.S. tariffs on Chinese imports. We also experienced increases in freight expenses and inventory shrink, which were partially offset by reduced clearance activity in fiscal year 2020 compared to fiscal year 2019.

Selling, General and Administrative Expenses

SG&A expenses were $977.4 million in fiscal year 2020, an increase of $26.0 million or 2.7% compared to fiscal year 2019. This increase was driven by several factors including general inflation and wage increases of $15.7 million and the reclassification of sublease income of $7.1 million from an offset to SG&A to an increase in revenue which was done in association with the adoption of Accounting Standards Codification, or ASC, 842 in fiscal 2020. In addition, we experienced increases in our location occupancy costs of $6.8 million, a growth in insurance premiums and self-insured claims of $4.1 million and increases in our distribution center expenses of $4.1 million. Those factors were partially offset by a decrease in certain variable costs related to our decline in total comparable sales of $9.5 million and reduced incentive compensation during fiscal year 2020 compared to fiscal year 2019 of $5.8 million. As a percentage of net sales, SG&A expenses for fiscal year 2020 were 43.6%, an increase of 269 basis points compared to fiscal year 2019.

 

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Distribution costs included within SG&A expenses amounted to $66.0 million in fiscal year 2020 and $62.0 million in fiscal year 2019. Location occupancy costs included within SG&A expenses amounted to $258.8 million in fiscal year 2020 and $252.0 million in fiscal year 2019.

Depreciation and Amortization

Depreciation and amortization expense increased $1.5 million to $77.5 million in fiscal year 2020 compared to $76.0 million in fiscal year 2019. This increase was driven primarily by investments in location refresh projects and technology.

Goodwill and Trade Name Impairment

During fiscal year 2020, goodwill and trade name impairment losses were $481.8 million and $5.0 million, respectively. The non-cash goodwill and trade name impairments were predominantly the result of negative total comparable sales and declining margins, driven primarily by the incremental U.S. tariffs on Chinese imports, along with a weaker than expected peak selling season. See Note 8—Goodwill and Other Intangible Assets to our audited financial statements included elsewhere in this prospectus for further details.

Interest Expense

Interest expense for fiscal year 2020 was $101.9 million, a $0.8 million increase from fiscal year 2019. This increase in interest expense was primarily due to higher average borrowings in fiscal year 2020 partially offset by a lower average interest rate as a result of decreases in LIBOR. Our average debt levels increased to $1,256.7 million in fiscal year 2020 compared to an average of $1,232.4 million in fiscal year 2019.

We had $1,235.5 million of debt outstanding (face value) as of February 1, 2020 versus $1,152.2 million as of February 2, 2019.

Debt Related Gain Loss

During fiscal year 2020, we repurchased $6.3 million in face value of the term loans provided pursuant to our Second Lien Facility at an average of 38% of par, resulting in a $3.8 million gain, which is included in debt related (gain) loss within the accompanying consolidated statements of comprehensive income and the accompanying consolidated statements of cash flows included elsewhere in this prospectus. The term loan repurchases were executed, following a competitive market bidding process, through several open market purchases on arm’s length terms and in compliance with the terms of the underlying credit agreements. A write-off of the deferred charges and original issue discount, totaling $0.1 million, associated with the original debt issuance was recognized as an offset to the debt related gain.

Income Taxes

Our effective income tax rate for fiscal year 2020 was a 2.3% provision compared to a 22.6% provision in fiscal year 2019. The change in the effective tax rate was primarily driven by a permanent book-tax difference resulting from the $481.8 million non-deductible goodwill impairment recorded during fiscal year 2020 and the recording of $27.9 million of valuation allowances related to limitations in the deductibility of interest expense. In fiscal year 2019, there were no book-tax differences relating to non-deductible goodwill impairment and no recording valuation allowances relating to the interest expense limitation. Our effective rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status or outcome of uncertain tax positions.

Net Income (Loss)

There was a net loss of $546.6 million in fiscal year 2020, as compared to net income of $35.3 million in the same period in fiscal year 2019. The decrease was driven by the factors described above.

 

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Adjusted EBITDA

Adjusted EBITDA decreased by 39.1% to $153.4 million in fiscal year 2020 or 6.8% of sales compared to $252.0 million or 10.8% of sales in fiscal year 2019. The decrease in Adjusted EBITDA was primarily due to our decline in total comparable sales and reduced gross margin rate that were driven by the incremental tariffs on Chinese imports.

Comparison of the 52 Weeks Ended February 2, 2019 and 53 Weeks Ended February 3, 2018

Net Sales

Net sales were $2,324.8 million in fiscal year 2019, an increase of $10.5 million or 0.5% compared to fiscal year 2018. This increase was primarily driven by an increase in total comparable sales partially offset by only fifty-two weeks of sales in fiscal year 2019 compared to fifty-three weeks in fiscal year 2018. Total comparable sales increased by 1.9% compared with a total comparable sales decrease of 1.4% for fiscal year 2018. The increase in comparable sales was driven by an increase in average transaction value, partially offset by a decrease in transactions.

Gross Margin

Gross margin was $1,176.5 million in fiscal year 2019, a decrease of $7.5 million or 0.6% compared to fiscal year 2018. This decrease was primarily driven by the fact that our fiscal year 2018 included 53 weeks compared to 52 weeks in fiscal year 2019. Gross margin rate for fiscal year 2019 was 50.6% or a decrease of 55 basis points compared to fiscal year 2018. This decrease in gross margin rate was driven by additional product clearance activity, freight expenses and inventory shrink, partially offset by improved optimization of our promotional discounts as well as product cost savings generated by our direct sourcing initiatives compared to fiscal year 2018.

Selling, General and Administrative Expenses

SG&A expenses were $951.4 million in fiscal year 2019, an increase of $8.0 million or 0.8% compared to fiscal year 2018. This increase was primarily driven by the incremental expenses associated with our strategic initiatives and other one-time expenses such as legal settlements, loss on disposals and severance costs of $9.1 million, an increase in location payroll to support higher sales of $7.8 million, higher distribution center expenses to support increased receipt and shipment volume of $6.7 million, and an increase in location occupancy costs needed to support new and relocated locations in fiscal year 2019 of $3.2 million. Those factors were partially offset by the fact that we incurred 52 weeks of certain expenses in fiscal year 2019 as compared to 53 weeks in fiscal year 2018 of $10.3 million, a decrease in advertising expense associated with migrating to more cost efficient digital media of $5.0 million, and a decrease in the number of self-insured medical claims of $1.5 million. As a percentage of net sales, SG&A expenses were 40.9%, an increase of 16 basis points compared to fiscal year 2018.

Distribution costs included within SG&A expenses amounted to $62.0 million in fiscal year 2019 and $56.2 million in fiscal year 2018. Location occupancy costs included within SG&A expenses amounted to $252.0 million in fiscal year 2019 and $248.8 million in fiscal year 2018.

Depreciation and Amortization

Depreciation and amortization expense decreased $2.8 million to $76.0 million in fiscal year 2019 compared to $78.8 million in fiscal year 2018. This decrease was driven by the assets that became fully depreciated in fiscal year 2019 and fiscal year 2018 and exceeded depreciation on new investments.

 

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Interest Expense

Interest expense for fiscal year 2019 was $101.1 million, a $5.7 million increase from fiscal year 2018. The increase in interest expense was primarily due to higher average interest rates in fiscal year 2019 as a result of increases in LIBOR. Our average debt levels also increased to $1,232.4 million in fiscal year 2019 compared to an average of $1,218.7 million in fiscal year 2018.

We had $1,152.2 million of debt outstanding (face value) as of February 2, 2019 and $1,169.1 million as of February 3, 2018.

Debt Related (Gain) Loss

During fiscal year 2019, the Company repurchased $274.5 million in face value of the 9.75% cash interest/10.50% PIK interest Senior PIK Toggle Notes due 2019, or the Holding Company Senior Notes, at par in conjunction with a refinancing of the Holding Company Senior Notes funded by proceeds from our Second Lien Facility, which resulted in $2.4 million of debt extinguishment costs that are included in debt related (gain) loss within the accompanying consolidated statements of comprehensive income (loss) and the accompanying consolidated statements of cash flows included elsewhere in this prospectus.

Income Taxes

Our effective income tax rate for fiscal year 2019 increased to a 22.6% provision compared to a 47.3% benefit in fiscal year 2018. The increase in the effective tax rate was primarily due to our recording of a tax benefit of $52.3 million for the impact of the Tax Cuts and Jobs Act, or the Tax Act, on our net deferred tax liability in fiscal year 2018.

Net Income

There was net income of $35.3 million in fiscal year 2019, as compared to net income of $96.5 million in the same period in fiscal year 2018, which represents a decrease of $61.2 million for the period ended. The decrease was driven by the factors described above.

Adjusted EBITDA

Adjusted EBITDA decreased by 2.1% to $252.0 million in fiscal year 2019 or 10.8% of sales compared to $257.4 million or 11.1% of sales in fiscal year 2018. The decrease in Adjusted EBITDA of $5.4 million or 28 basis points as a percentage of net sales was primarily driven by the fact that our fiscal year 2018 included 53 weeks compared to 52 weeks in our fiscal year 2019. We estimate that the 53rd week of fiscal year 2018 delivered an additional $37.1 million of net sales, $18.0 million of gross profit and $8.4 million of Adjusted EBITDA.

Liquidity and Capital Resources

We have three principal sources of liquidity: cash generated from operations, cash and cash equivalents on hand and available borrowings under our ABL Facility. We believe that our cash and cash equivalents on hand, cash from operations and availability under our ABL Facility will be sufficient to cover our working capital, capital expenditure and debt service requirement needs for the foreseeable future. Please refer to “Description of Certain Indebtedness” for a description of the material terms of our Credit Facilities. As of February 1, 2020 and October 31, 2020, we were in compliance with all covenants under our debt facilities and notes. For the four quarters ended October 31, 2020, our net cash provided by operating activities was $322.3 million and our Credit Facility Adjusted EBITDA was $305.2 million.

 

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We reference Credit Facility Adjusted EBITDA because it is a measure that is calculated in accordance with our Credit Facilities and used to determine our compliance with certain ratios in our Credit Facilities, tested each quarter on the basis of the preceding four quarters. For example, we are permitted to prepay debt and make distributions on account of equity up to a certain amount (i) under our First Lien Facility if our ratio of consolidated net debt to Credit Facility Adjusted EBITDA for the prior four quarters as of the quarterly test is not greater than 4.90 to 1.0 and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA for such period is not greater than 3.60 to 1.0 and (ii) under our Second Lien Facility if our ratio of consolidated net debt to Credit Facility Adjusted EBITDA for such period is not greater than 4.50 to 1.0. As of October 31, 2020, our ratio of consolidated net debt to Credit Facility Adjusted EBITDA was 3.0 to 1.0, and of consolidated senior secured net debt to Credit Facility Adjusted EBITDA was 2.7 to 1.0. Other provisions in our Credit Facilities utilize ratios including Credit Facility Adjusted EBITDA for calculating permitted limits for us to incur additional debt and make certain investments. Additionally, our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA is measured once per year following the completion of our annual audited financial statements and determines what percentage of our excess cash flow (as defined in our Term Loan Facilities) we are required to apply for the repayment of principal on our First Lien Facility (or if paid off or terminated, our Second Lien Facility), ranging from 50% of excess cash flow for ratios in excess of 2.50x to 0% of excess cash flow for ratios of less than 2.00x. For fiscal year 2020, (i) our excess cash flow was determined to be zero and (ii) our mandatory prepayment was determined to be 50% of excess cash flow since our ratio of senior secured debt to Credit Facility Adjusted EBITDA was greater than 2.50x, which resulted in a mandatory prepayment amount of $0. Accordingly, we believe that Credit Facility Adjusted EBITDA is material to an investor’s understanding of our financial condition and liquidity.

 

(in millions)    Four Quarters Ended
October 31, 2020
 

Net cash provided by operating activities

   $ 322.3  

Non-cash operating lease expense

     (148.2

Depreciation and amortization excluding content cost amortization

     (80.0

Deferred income taxes

     (8.5

Stock-based compensation expense

     (1.4

Amortization of deferred financing costs and original issue discount

     (3.9

Debt related gain

     156.7  

Loss on disposal and impairment of fixed assets

     (2.7

Goodwill and trade name impairment

     (356.4

Change in operating assets and liabilities

     (62.0
  

 

 

 

Net (loss) income

   $ (184.1

Income tax provision

     52.5  

Interest expense, net

     79.3  

Debt related gain

     (156.7

Depreciation and amortization

     80.5  

Strategic initiatives

     5.3  

COVID-19 costs

     48.4  

Technology development expense

     6.3  

Stock-based compensation expense

     1.4  

Loss on disposal and impairment of fixed and operating lease assets

     4.2  

Goodwill and trade name impairment

     356.4  

Sponsor management fee

     2.0  

Other

     2.3  
  

 

 

 

Adjusted EBITDA

   $ 297.8  
  

 

 

 

Location pre-opening and closing costs excluding loss on disposal of fixed assets

     7.4  
  

 

 

 

Credit Facility Adjusted EBITDA

   $ 305.2  

 

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Our capital requirements are primarily for capital expenditures in connection with new location openings, location remodels, investments in information technology, other infrastructure investments and working capital requirements for seasonal inventory build. These requirements fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season during the months of September through December and complete most of our capital spending projects.

The following table provides a summary of our cash provided by operating, investing and financing activities:

 

    

Thirty-Nine Weeks Ended

   

Fiscal Year-Ended (1)

 

(In millions)

  

October 31,

2020

   

November 2,
2019

   

February 1,

2020

   

February 2,

2019

   

February 3,

2018

 
        

Net cash provided by (used for) operating activities

   $ 185.8     $ (170.4   $ (33.9   $ 99.0     $ 97.7  

Net cash used for investing activities

     (28.2     (64.8     (79.5     (49.7     (50.8

Net cash (used for) provided by financing activities

     (148.8     210.5       86.3       (25.1     (42.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 8.8     $ (24.7   $ (27.1   $ 24.2     $ 4.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

All years include 52 weeks except for the fiscal year ended February 3, 2018, which includes 53 weeks.

Net Cash (used for) Provided by Operating Activities

Comparison of the 39 Weeks Ended October 31, 2020 and November 2, 2019

Net cash provided by operating activities was $185.8 million in the thirty-nine weeks ended October 31, 2020 compared with $(170.4) million of net cash used for operating activities in the thirty-nine weeks ended November 2, 2019. The increase in net cash provided by operating activities was primarily driven by our positive total comparable sales results, the significant improvement in working capital efficiency and the deferral of certain cash payments negotiated with our landlords and others allowed under the Coronavirus Aid, Relief, and Economic Security Act as a result of the COVID-19 pandemic. The majority of deferred payments will be remitted over the course of fiscal year 2022.

Comparison of the 52 Weeks Ended February 1, 2020 and February 2, 2019

Net cash used for operating activities was $(33.9) million in fiscal year 2020 compared to $99.0 million net cash provided by operating activities in fiscal year 2019. The increase in our net cash used for operating activities in fiscal year 2020 was primarily the result of our net loss in fiscal year 2020, excluding the non-cash impact of certain income tax items and goodwill and trade name impairment charges, compared to our net income in fiscal year 2019. In addition, increases in net working capital excluding cash and equivalents in fiscal year 2020 compared to fiscal year 2019 impacted our net cash used for operating activities in fiscal year 2020 in large part due to increases in our average unit cost of inventory driven by the incremental U.S. tariffs on Chinese imports.

Comparison of the 52 Weeks Ended February 2, 2019 and 53 Weeks Ended February 3, 2018

Net cash provided by operating activities was $99.0 million in fiscal year 2019 compared to $97.7 million in fiscal year 2018. Reduction in compensation related accrued expenses reduced net cash provided by operating activities in fiscal year 2018, partially offset by increases in inventory levels to support increased lead times necessitated by our direct sourcing and other merchandising initiatives in fiscal year 2019.

 

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Net Cash Used for Investing Activities

Cash used for investing activities consists primarily of capital expenditures, the majority of which are focused on strategic initiatives including: new location openings, location remodels and refreshes and information technology investments, particularly those supporting our omni-channel platforms and other customer facing systems. We also incur capital outlays for equipment and facility management in our distribution centers, locations and corporate offices.

Specifically, investment for each refresh project is tailored to each location’s needs and unit economics. We have four general levels of investment and project scope tailored to what would benefit each location, with future investment expected to range from $150,000 for the lightest-touch refreshes to $3 million for the relatively few but most-extensive refreshes. Over 50% of our existing locations are refresh project targets over the next seven to ten years and we expect investments in relation to these future refresh projects to remain consistent with our capital expenditures in connection with completed refresh projects.

Historical capital expenditures are summarized as follows:

 

    

Thirty-Nine Weeks Ended

    

Fiscal Year-Ended

 

(In millions)

  

October 31,

2020

    

November 2,
2019

    

February 1,

2020

    

February 2,

2019

    

February 3,

2018

 
        

Retail locations

   $ 17.7      $ 42.6      $ 52.1      $ 33.4      $ 32.1  

Information technology

     7.9        16.3        20.2        13.2        9.3  

Other

     3.1        5.9        6.3        1.8        2.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures

     28.7        64.8        78.6        48.4        44.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Landlord contributions

     3.4        5.1        9.1        7.4        5.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures, net of landlord contributions

   $ 25.3      $ 59.7      $ 69.5      $ 41.0      $ 38.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comparison of the 39 Weeks Ended October 31, 2020 and November 2, 2019

Total capital expenditures, net of landlord contributions decreased by $34.4 million during the thirty-nine weeks ended October 31, 2020 compared to the same period in the prior year. This decrease was related to specific actions taken to defer projects in an effort to preserve liquidity at the onset of the COVID-19 pandemic. Also, due to the need to maintain sanitation and social distancing protocols in our locations throughout the pandemic, execution of capital projects have often not been feasible.

Comparison of the 52 Weeks Ended February 1, 2020 and February 2, 2019

Total capital expenditures, net of landlord contributions increased by $28.5 million in fiscal year 2020 compared to fiscal year 2019. This increase was related to a higher number of location remodel and relocation projects, as we worked to further refine our new location prototype. Growth in information technology-related investments were primarily driven by enhancements to our omni-channel platforms focused on our mobile application as well as upgrades to our warehouse management and point of sale software applications.

Comparison of the 52 Weeks Ended February 2, 2019 and 53 Weeks Ended February 3, 2018

Total capital expenditures, net of landlord contributions increased by $2.5 million in fiscal year 2019 compared to fiscal year 2018. Project activity related to information technology development and our locations was relatively consistent year over year.

 

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Net Cash Provided by (Used for) Financing Activities

Comparison of the 39 Weeks Ended October 31, 2020 and November 2, 2019

Net cash used for financing activities was $(148.8) million during the thirty-nine weeks ended October 31, 2020 compared with $210.5 million of net cash provided by financing activities during the thirty-nine weeks ended November 2, 2019. The change in net cash (used for) provided by financing activities was primarily the result of the repurchase of portions of the Term Loans, as well as an increase in payments on the ABL Facility.

Comparison of the 52 Weeks Ended February 1, 2020 and February 2, 2019

Net cash provided by financing activities was $86.3 million in fiscal year 2020 compared to $25.1 million of net cash used for financing activities in fiscal year 2019, which was primarily driven by additional borrowings on our ABL Facility that were used to fund our increases in cash used for operating and investing activities.

Comparison of the 52 Weeks Ended February 2, 2019 and 53 Weeks Ended February 3, 2018

Net cash used for financing activities was $25.1 million in fiscal year 2019 compared to $42.3 million of net cash used for financing activities in fiscal year 2018. The decrease in net cash used for financing activities in fiscal year 2019 compared to fiscal year 2018 was due to the net borrowings on our ABL Facility in fiscal year 2019 compared to the net payment on our ABL Facility in fiscal year 2018, partially offset by a greater net amount used to repurchase Holding Company Senior Notes with proceeds from our Second Lien Facility in fiscal year 2019 compared to the net amount used to repurchase 8.125% senior notes due 2019 with proceeds from our First Lien Facility in fiscal year 2018. See Note 2—Financing to our audited financial statements included elsewhere in this prospectus for further details.

As of February 1, 2020 and October 31, 2020, we had the ability to borrow an additional $206.2 million and $159.4 million under our ABL Facility, respectively, subject to the facility’s borrowing base calculation.

Off-Balance Sheet Transactions

Our liquidity is currently not dependent on the use of off-balance sheet transactions other than letters of credit, which are typical in a retail environment.

 

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Contractual Obligations and Commitments

The following table summarizes our future cash outflows resulting from contractual obligations and commitments as of February 1, 2020(1):

 

    

Payments Due by Fiscal Year

 

(In millions)

  

Total

    

2021

    

2022-2023

    

2024-2025

    

Thereafter

 
        

Standby letters of credit

   $ 20.3      $ 20.3      $ —        $ —        $ —    

Purchase commitments(2)

     31.7        12.6        13.0        6.1        —    

Operating leases

     1,058.0        221.2        366.6        239.1        231.1  

Finance leases

     4.2        1.6        2.6        —          —    

ABL Facility(3)

     173.5        —          173.5        —          —    

ABL Facility interest(3)

     1.8        1.0        0.8        —          —    

First Lien Facility(4)

     844.5        9.1        15.9        819.5        —    

First Lien Facility interest(4)

     209.6        57.0        111.8        40.8        —    

Second Lien Facility(5)

     217.5        —          —          217.5        —    

Second Lien Facility interest(5)

     104.1        24.1        48.2        31.8        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 2,665.2      $ 346.9      $ 732.4      $ 1,354.8      $ 231.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts presented here do not reflect net repayment of $68.5 million on our ABL Facility since February 1, 2020 through December 17, 2020 as well as repayment of $209.1 million of our First Lien Facility and $140.2 million of our Second Lien Facility through open market purchases conducted from February through October of fiscal year 2021.

(2)

Purchase commitments include significant future inventory purchases as well as agreements for technology, in which minimum guaranteed payments are required.

(3)

We had $173.5 million in outstanding borrowings under our ABL Facility at February 1, 2020. Under our ABL Facility, we are required to pay a commitment fee of 0.25% per year on unutilized commitments. The amounts included in ABL Facility interest were based on these annual commitment fees. See “Description of Certain Indebtedness” for further details.

(4)

The First Lien Facility, which matures October 21, 2023, is with a syndicate of lenders and is secured by substantially all of our assets excluding the ABL Facility collateral and has a second priority security interest in the ABL Facility collateral. The First Lien Facility has mandatory quarterly repayments of $2.3 million on the last business day of each January, April, July and October. Interest payments are due either monthly or quarterly on approximately the 23rd day of the month depending on the underlying LIBOR and are subject to variable interest rates. The amounts included in the First Lien Facility interest were based on the interest rate effective as of February 1, 2020. The less than one year amount of $9.1 million includes four quarters of principal payments occurring within the next fiscal year. See “Description of Certain Indebtedness” for further details.

(5)

The Second Lien Facility, which matures May 21, 2024, is with a syndicate of lenders and is secured by a second priority security interest in all of our assets, excluding the ABL Facility collateral, and has a third priority security interest in the ABL Facility collateral. The Second Lien Facility does not require quarterly principal payments. Interest payments are due either monthly or quarterly on approximately the 23rd day of the month depending on the underlying LIBOR and are subject to variable interest rates. The amounts included in the Second Lien Facility interest were based on the interest rate effective as of February 1, 2020. See “Description of Certain Indebtedness” for further details.

Seasonality and Inflation

Our business exhibits seasonality, which is typical for most retail companies. Our net sales are stronger in the second half of the year than the first half of the year. Net income is highest during the months of September through December when sales volumes provide significant operating leverage. Working capital

 

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needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season. However, the COVID-19 pandemic may have an impact to consumer behaviors and customer traffic that result in changes in the seasonal fluctuations of our business. For example, our fiscal year 2021 second and third quarter results were positively impacted by the COVID-19 pandemic due to the demand for select merchandise categories.

We believe that inflation has not had a significant effect on net sales or our earnings performance. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

Summarized below are key line items by quarter from our consolidated statements of comprehensive income (loss) and reconciliations of Adjusted EBITDA to net (loss) income. See “—Non-GAAP Financial Measures” for further detail regarding certain of these expenses:

 

Fiscal year 2021

  

First
Quarter

   

Second
Quarter

   

Third
Quarter

 
     (Dollars in millions)  

Net sales

   $ 499.4     $ 708.0     $ 714.1  

Total comparable sales versus prior year

     (2.1 )%      53.7     25.2

Gross margin

   $ 245.8     $ 351.4     $ 374.5  

Operating (loss) profit

   $ (16.1   $ 48.2     $ 61.6  

Net (loss) income

   $ (23.6   $ 149.9     $ 47.7  

Adjusted EBITDA

   $ 21.7     $ 93.1     $ 102.4  

Location pre-opening costs and closing costs excluding loss on disposal of fixed assets

   $ 1.8     $ 2.0     $ 1.2  

Reconciliation of net (loss) income to Adjusted EBITDA:

      

Net (loss) income

   $ (23.6   $ 149.9     $ 47.7  

Income tax (benefit) provision

     (12.1     26.7       3.0  

Interest expense, net

     22.7       18.4       13.9  

Debt related gain

     (3.1     (146.8     (3.0

Depreciation and amortization

     19.9       19.7       20.6  

Strategic initiatives

     1.1       1.3       1.7  

COVID-19 costs

     10.7       21.1       16.6  

Technology development expense

     1.1       1.3       1.2  

Stock-based compensation expense

     0.4       0.4       0.3  

Loss on disposal and impairment of fixed and operating lease assets

     3.4       0.4       (0.2

Goodwill and trade name impairment

     —         —         —    

Sponsor management fee

     0.8       —         —    

Other

     0.4       0.7       0.6  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 21.7     $ 93.1     $ 102.4  
  

 

 

   

 

 

   

 

 

 

 

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Fiscal year 2020

  

First
Quarter

   

Second
Quarter

   

Third
Quarter

   

Fourth
Quarter

 
     (Dollars in millions)  

Net sales

   $ 515.4     $ 461.1     $ 569.1     $ 695.6  

Total comparable sales versus prior year

     (0.4 )%      (6.0 )%      (3.5 )%      (4.4 )% 

Gross margin

   $ 266.7     $ 226.4     $ 283.9     $ 328.3  

Operating profit (loss)

   $ 10.6     $ (158.4   $ 14.1     $ (302.7

Net loss

   $ (12.3   $ (167.8   $ (8.4   $ (358.1

Adjusted EBITDA

   $ 37.7     $ (4.3   $ 39.4     $ 80.6  

Location pre-opening costs and closing costs excluding loss on disposal of fixed assets

   $ 0.8     $ 1.7     $ 4.3     $ 2.4  

Reconciliation of net loss to Adjusted EBITDA:

        

Net loss

   $ (12.3   $ (167.8   $ (8.4   $ (358.1

Income tax (benefit) provision

     (3.2     (16.0     (3.6     34.9  

Interest expense, net

     26.1       25.4       26.1       24.3  

Debt related gain

     —         —         —         (3.8

Depreciation and amortization

     19.5       18.8       19.4       20.3  

Strategic initiatives

     4.1       1.8       1.9       1.2  

COVID-19 costs

     —         —         —         —    

Technology development expense

     1.2       1.1       1.4       2.7  

Stock-based compensation expense

     0.2       0.4       0.3       0.3  

Loss on disposal and impairment of fixed and operating lease assets

     —         0.1       0.3       0.6  

Goodwill and trade name impairment

     —         130.4       —         356.4  

Sponsor management fee

     1.3       1.3       1.2       1.2  

Other

     0.8       0.2       0.8       0.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 37.7     $ (4.3   $ 39.4     $ 80.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Fiscal year 2019

  

First
Quarter

   

Second
Quarter

   

Third
Quarter

   

Fourth
Quarter

 
     (Dollars in millions)  

Net sales

   $ 517.0     $ 490.0     $ 591.6     $ 726.2  

Total comparable sales versus prior year

     (3.4 )%      2.4     2.9     5.0

Gross margin

   $ 269.9     $ 253.0     $ 301.4     $ 352.2  

Operating profit

   $ 24.7     $ 3.0     $ 36.5     $ 84.9  

Net income (loss)

   $ 1.1     $ (19.4   $ 8.3     $ 45.3  

Adjusted EBITDA

   $ 48.5     $ 25.4     $ 64.7     $ 113.4  

Location pre-opening costs and closing costs excluding loss on disposal of fixed assets

   $ 1.8     $ 1.6     $ 1.2     $ 1.4  

Reconciliation of net income (loss) to Adjusted EBITDA:

        

Net income (loss)

   $ 1.1     $ (19.4   $ 8.3     $ 45.3  

Income tax provision (benefit)

     0.2       (5.6     2.0       13.7  

Interest expense, net

     23.4       25.6       26.2       25.9  

Debt related loss

     —         2.4       —         —    

Depreciation and amortization

     19.3       18.5       19.0       19.4  

Strategic initiatives

     0.3       0.9       2.5       3.6