The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "plans," "estimates," "targets," "strategies," or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon our historical performance and on current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, targets, strategies, or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties, which include, without limitation:
changes in the overall level of consumer spending and the volatility of the
? economic, in particular due to the COVID-19 pandemic and the geopolitical situation
? the impact of current cost inflationary pressures on payroll, benefits, supply
line and other operating costs;
? our ability to support our growth plans and successfully implement our
long-term strategic and financial plan;
the ability to execute our operational excellence priorities, including
? continuous improvement, Project SOAR (our corporate replacement resource
planning platform) and supply chain optimization;
? epidemics, pandemics or natural disasters that have and may continue to
have a negative impact on sales;
? our ability to assess beauty trends and respond to changing consumer preferences
in right time;
? the possibility that we may not be able to compete effectively in our
the possibility that cybersecurity or information security and other
? disruptions could compromise our information or result in the
disclosure of confidential information;
? the possibility of material disruptions to our information systems;
? failure to maintain satisfactory compliance with applicable confidentiality and
data protection laws and regulations;
the possibility that the ability of our distribution and order fulfillment
? infrastructure and performance of our distribution centers and speed
distribution centers may not be adequate to support our expected future growth
? changes in the wholesale price of our products;
? a decline in operating results which has caused and may continue to cause
impairment charges and store closures;
? the possibility that new store openings and existing locations will be affected
by promoter or roommate problems;
? our ability to attract and retain key executives;
? the impact of climate change on our business operations and/or our supply chain;
? our ability to successfully execute our common share repurchase program or
implement future common share buyback programs; and
other risk factors detailed in our public securities filings and
? “Risk Factors” of our Annual Report on Form 10-K for the year ended
2022, as such may be amended or supplemented in our subsequent filings
Quarterly reports on Form 10-Q (including this report).
Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. References in the following discussion to "we," "us," "our," "
Ulta Beauty," the "Company," and similar references mean Ulta Beauty, Inc.and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
We were founded in 1990 as a beauty retailer at a time when prestige, mass, and salon products were sold through distinct channels - department stores for prestige products; drug stores and mass merchandisers for mass products; and salons and authorized retail outlets for professional hair care products. We developed a unique specialty retail concept that offers a broad range of brands and price points, select beauty services, and a convenient and welcoming shopping 15 Table of Contents environment. We define our target consumer as a beauty enthusiast, a consumer who is passionate about the beauty category, uses beauty for self-expression, experimentation and self-investment, and has high expectations for the shopping experience. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance. Today, we are the largest beauty retailer in
the United Statesand the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services. Key aspects of our business include: a differentiated assortment of more than 25,000 beauty products across a variety of categories and price points as well as a variety of beauty services, including salon services, in more than 1,300 stores predominantly located in convenient, high-traffic locations; engaging digital experiences delivered through our website, Ulta.com, and our mobile applications; our best-in-class loyalty program that enables members to earn points for every dollar spent on products and beauty services and provides us with deep, proprietary customer insights; and our ability to cultivate human connection with warm and welcoming guest experiences across all of our channels. The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic priorities: 1) drive breakthrough and disruptive growth through an expanded definition of All Things Beauty, 2) evolve the omnichannel experience through connected physical and digital ecosystems, All In Your World, 3) expand and deepen our presence across the beauty journey, solidifying Ulta Beautyat the Heart of the Beauty Community, 4) drive operational excellence and optimization, 5) protect and cultivate our world-class culture and talent and 6) expand our environmental and social impact. We believe that the attractive and growing U.S.beauty products and salon services industry, the expanding definition of beauty and the role that omnichannel capabilities play in consumers' lives, coupled with Ulta Beauty'scompetitive strengths, position us to capture additional market share in the industry. Comparable sales is a key metric that is monitored closely within the retail industry. Our comparable sales have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable sales, including general U.S.economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others. Over the long term, our growth strategy is to increase total net sales through growing our comparable sales, expanding omnichannel capabilities, and opening new stores. Long-term operating profit is expected to increase as a result of our efforts to optimize our real estate portfolio, expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies, partially offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S.with successful e-commerce and competitive omnichannel capabilities.
Impact of COVID-19
We closely monitor the continuing impact of COVID-19 on all facets of our business. During the first half of fiscal 2022, we experienced an increase in sales driven primarily by the favorable impact from the easing of COVID-19 restrictions. While operations during the first half of fiscal 2022 did not appear to be negatively impacted, the continuing COVID-19 pandemic could have negative impacts in the future. The extent of the impact of the pandemic on our future business and financial results will depend on, among other things, the potential temporary reclosing of certain stores, the potential temporary restrictions on certain store operating hours and/or in-store capacity, supply chain disruptions, increased freight costs and higher wholesale costs, the continued duration of the pandemic and any variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, vaccination rates, and how quickly and to what extent normal economic and operating conditions can resume.
Our research indicates that
Ulta Beautyhas captured meaningful market share across all categories over the last several years. However, the COVID-19 pandemic and its various impacts have changed consumer behavior and consumption of beauty products due to the closures of offices, retail stores and other businesses and the significant decline in travel, 16
entertainment and social gatherings. The overall beauty market declined in 2020 but stabilized in 2021 as consumers began to recover from the effects of COVID-19. We remain confident that our differentiated and diversified business model, our commitment to strategic investments and our highly engaged associates will continue to drive market share gains over the long term.
Impact of inflation and price changes
Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, continued pressure from inflation could have an adverse impact on consumer spending and sales and could lead to a recession. Furthermore, inflation pressure could negatively impact our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with higher costs. In addition, inflation could materially increase the interest rates on any future debt.
The Company has a reportable segment, which includes retail stores, salon services and e-commerce.
We recognize merchandise revenue at the point of sale in our retail stores. E-commerce sales are recognized upon shipment or guest pickup of the merchandise based on meeting the transfer of control criteria. Retail store and e-commerce sales are recorded net of estimated returns. Shipping and handling are treated as costs to fulfill the contract and not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is at the time of shipment or guest pickup. We provide refunds for merchandise returns within 60 days from the original purchase date. State sales taxes are presented on a net basis as we consider our self a pass-through conduit for collecting and remitting state sales tax. Salon service revenue is recognized at the time the service is provided to the guest. Gift card sales revenue is deferred until the guest redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Other revenue includes the private label and co-branded credit card programs, royalties derived from the partnership with Target, and deferred revenue related to the loyalty program and gift card breakage. Comparable sales reflect sales for stores beginning on the first day of the 14th month of operation. Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one-month grand opening period. Non-comparable store sales include sales from new stores that have not yet completed their 13th month of operation and stores that were closed for part or all of the period in either year. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period. Comparable sales include retail sales, salon services, and e-commerce. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales. Measuring comparable sales allows us to evaluate the performance of our store base as well as several other aspects of our overall strategy. Several factors could positively or negatively impact our comparable sales results:
? general national, regional and local economic conditions and
impact on customer spending levels;
? the introduction of new products or brands;
? the location of new stores in existing store markets;
? our ability to respond in a timely manner to changes in consumer preferences;
? the effectiveness of our various merchandising and marketing activities; and
? the number of new stores opened and the impact on the average age of all of our
comparable stores. Cost of sales includes:
? the cost of goods sold, offset by the income of the seller who is not a
reimbursement of specific, additional and identifiable costs;
? distribution costs, including labor and related benefits, freight, rent,
depreciation and amortization, property taxes, utilities and insurance;
17 Table of Contents
? shipping and handling charges;
? retail store occupancy costs, including rent, depreciation and amortization,
property taxes, utilities, repairs and maintenance, insurance and licensing;
? salon services salaries and benefits; and
? shrinkage reserves and inventory valuation.
Our cost of sales may be negatively impacted as we open new stores. Changes in our merchandise or channel mix may also have an impact on cost of sales. This presentation of items included in cost of sales may not be comparable to the way in which our competitors or other retailers compute their cost of sales.
Selling, general and administrative expenses include:
? payroll costs, bonuses and employee benefits for retail stores and businesses;
? advertising and marketing costs, offset by supplier revenues which
reimbursement of specific, additional and identifiable costs;
? occupancy costs related to our head office facilities;
? stock-based compensation expense;
depreciation and amortization for all assets except those related to our
? retail stores and distribution operations, which are included in the cost of
? legal, financial, information systems and other corporate overhead costs.
This presentation of items in selling, general and administrative expenses may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses. Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent during the construction period for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising. Interest expense, net includes both interest expense and income. Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates. Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.
Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which we operate stores.
Our quarterly periods are the 13 weeks ending on the Saturday closest to
April 30, July 31, October 31, and January 31. The Company's second quarter in fiscal 2022 and 2021 ended on July 30, 2022and July 31, 2021, respectively. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our
future performance. 18 Table of Contents
The following tables present the components of our consolidated results of operations for the periods indicated:
13 Weeks Ended 26 Weeks Ended July 30, July 31, July 30, July 31, (Dollars in thousands) 2022 2021 2022 2021 Net sales
$ 2,297,113 $ 1,967,207 $ 4,643,014 $ 3,905,726Cost of sales 1,368,949 1,169,244 2,773,824 2,353,975 Gross profit 928,164 797,963 1,869,190 1,551,751
Selling, general and administrative expenses 534,459 464,299
1,035,429 908,174 Pre-opening expenses 2,277 1,357 4,625 5,946 Operating income 391,428 332,307 829,136 637,631
Interest expense (income), net (108) 425
293 783 Income before income taxes 391,536 331,882 828,843 636,848 Income tax expense 95,859 80,989 201,771 155,666 Net income
$ 295,677 $ 250,893 $ 627,072 $ 481,182Other operating data:
Number of stores end of period 1,325 1,296
1,325 1,296 Comparable sales 14.4% 56.3% 16.2% 60.9% 13 Weeks Ended 26 Weeks Ended July 30, July 31, July 30, July 31, (Percentage of net sales) 2022 2021 2022 2021 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 59.6% 59.4% 59.7% 60.3% Gross profit 40.4% 40.6% 40.3% 39.7%
Selling, general and administrative expenses 23.3% 23.6%
22.3% 23.3% Pre-opening expenses 0.1% 0.1% 0.1% 0.1% Operating income 17.0% 16.9% 17.9% 16.3%
Interest expense (income), net (0.0%) 0.0% 0.0% 0.0% Income before income taxes 17.0% 16.9%
17.9% 16.3% Income tax expense 4.2% 4.1% 4.3% 4.0% Net income 12.9% 12.8% 13.5% 12.3% 19 Table of Contents
Comparison of 13 weeks completed
Net sales increased
$329.9 millionor 16.8%, to $2.3 billionfor the 13 weeks ended July 30, 2022, compared to $2.0 billionfor the 13 weeks ended July 31, 2021. The net sales increase was primarily due to the favorable impact from the continued resilience of the beauty category, the impact of new brands and product innovation, the easing of COVID-19 restrictions and an increase of $19.0 millionin other revenue compared to the 13 weeks ended July 31, 2021. The total comparable sales increase of 14.4% during the 13 weeks ended July 30, 2022was driven by an 8.3% increase in transactions and a 5.6% increase in average ticket.
Gross profit increased
$130.2 millionor 16.3%, to $928.2 millionfor the 13 weeks ended July 30, 2022, compared to $798.0 millionfor the 13 weeks ended July 31, 2021. Gross profit as a percentage of net sales decreased to 40.4% for the 13 weeks ended July 30, 2022, compared to 40.6% for the 13 weeks ended July 31, 2021. The decrease in gross profit margin was primarily due to lower merchandise margin and higher inventory shrink, partially offset by leverage of fixed costs and strong growth in other revenue.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses increased
$70.2 millionor 15.1%, to $534.5 millionfor the 13 weeks ended July 30, 2022, compared to $464.3 millionfor the 13 weeks ended July 31, 2021. SG&A expenses as a percentage of net sales decreased to 23.3% for the 13 weeks ended July 30, 2022, compared to 23.6% for the 13 weeks ended July 31, 2021, primarily due to lower marketing expenses and leverage of store payroll and benefits and store expenses due to higher sales, partially offset by deleverage in corporate overhead primarily due to strategic investments and higher incentive compensation.
Pre-opening expenses increased
$0.9 millionto $2.3 millionfor the 13 weeks ended July 30, 2022compared to $1.4 millionfor the 13 weeks ended July 31, 2021.
Interest expense (income), net
Interest income, net was
$0.1 millionfor the 13 weeks ended July 30, 2022compared to interest expense, net of $0.4 millionfor the 13 weeks ended July 31, 2021. Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. Interest expense represents interest on borrowings and fees related to the credit facility. We did not have any outstanding borrowings on our credit facility as of July 30, 2022, January 29, 2022, and July 31, 2021.
income tax expense
Income tax expense of
represents an effective tax rate of 24.5%, compared to
Net income Net income was
$295.7 millionfor the 13 weeks ended July 30, 2022, compared to $250.9 millionfor the 13 weeks ended July 31, 2021. The increase in net income is primarily due to the $130.2 millionincrease in gross profit, partially offset by the $70.2 millionincrease in SG&A expenses and the $14.9 million
increase in income taxes. 20 Table of Contents
Comparison of 26 weeks completed
Net sales increased
$737.3 millionor 18.9%, to $4.6 billionfor the 26 weeks ended July 30, 2022, compared to $3.9 billionfor the 26 weeks ended July 31, 2021. The net sales increase was primarily due to the favorable impact from the continued resilience of the beauty category, the impact of new brands and product innovation, the easing of COVID-19 restrictions and an increase of $39.4 millionin other revenue compared to the 26 weeks ended July 31, 2021. The total comparable sales increase of 16.2% during the 26 weeks ended July 30, 2022was driven by a 9.2% increase in transactions and a 6.4% increase in average ticket.
Gross profit increased
$317.4 millionor 20.5%, to $1.9 billionfor the 26 weeks ended July 30, 2022, compared to $1.6 billionfor the 26 weeks ended July 31, 2021. Gross profit as a percentage of net sales increased to 40.3% for the 26 weeks ended July 30, 2022, compared to 39.7% for the 26 weeks ended July 31, 2021. The increase in gross profit margin was primarily due to leverage of fixed costs, strong growth in other revenue, and favorable channel mix shifts, partially offset by lower merchandise margin and higher inventory shrink.
Selling, general and administrative expenses
SG&A expenses increased
$127.3 millionor 14.0%, to $1.0 billionfor the 26 weeks ended July 30, 2022, compared to $908.2 millionfor the 26 weeks ended July 31, 2021. SG&A expenses as a percentage of net sales decreased to 22.3% for the 26 weeks ended July 30, 2022, compared to 23.3% for the 26 weeks ended July 31, 2021, due to lower marketing expenses and leverage of store payroll and benefits due to higher sales, partially offset by deleverage in corporate overhead primarily due to strategic investments.
Pre-opening expenses decreased
$1.3 millionto $4.6 millionfor the 26 weeks ended July 30, 2022, compared to $5.9 millionfor the 26 weeks ended July 31, 2021. Interest expense, net
Interest expense, net was
$0.3 millionfor the 26 weeks ended July 30, 2022compared to $0.8 millionfor the 26 weeks ended July 31, 2021. Interest expense represents interest on borrowings and fees related to the credit facility. We did not have any outstanding borrowings on our credit facility as of July 30, 2022, January 29, 2022, and July 31, 2021.
income tax expense
Income tax expense of
$201.8 millionfor the 26 weeks ended July 30, 2022represents an effective tax rate of 24.3%, compared to $155.7 millionof tax expense representing an effective tax rate of 24.4% for the 26 weeks ended
July 31, 2021. Net income
Net income was
$627.1 millionfor the 26 weeks ended July 30, 2022compared to $481.2 millionfor the 26 weeks ended July 31, 2021. The increase in net income is primarily due to the $317.4 millionincrease in gross profit, partially offset by the $127.3 millionincrease in SG&A expenses and the $46.1 millionincrease in income taxes.
Cash and capital resources
Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, and borrowings under our credit facility. The most significant components of our working capital are merchandise inventories and cash and cash equivalents reduced by related accounts payable, accrued expenses and deferred revenue. As of
July 30, 2022, January 21
29 2022, and
Our primary cash needs are for rent, capital expenditures for new, remodeled, and relocated stores, increased merchandise inventories related to store expansion and new brand additions, supply chain improvements, share repurchases, and continued improvement in our information technology systems. Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for lease expenses, inventory, labor, distribution, advertising and marketing, and tax liabilities) as well as periodic spend for capital expenditures, investments, and share repurchases. Our working capital needs are greatest from August through November each year as a result of our inventory build-up during this period for the approaching holiday season.
Long-term cash requirements are mainly related to charges related to finance leases and other purchase commitments.
We generally fund short-term and long-term cash requirements with cash flow from operations. We believe that our primary sources of liquidity will meet our short-term (next 12 months) and long-term liquidity needs.
We believe our ability to generate substantial cash from operating activities and readily secure financing at competitive rates are key strengths that give us significant flexibility to meet our short and long-term financial commitments.
The following table provides a summary of our cash flows for the 26 weeks ended
26 Weeks Ended July 30, July 31, (In thousands) 2022 2021
Net cash flow generated by operating activities
Net cash used in investing activities (121,749) (57,305) Net cash used in financing activities (416,252) (619,959)
Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes. The increase in net cash provided by operating activities in the first 26 weeks of fiscal 2022 is mainly due to the increase in net income and merchandise inventories, partially offset by timing of accounts payable and accrued liabilities and increase in deferred revenue compared to the first 26 weeks of fiscal 2021. The increase in net income was primarily due to an increase in gross profit resulting from higher sales, partially offset by an increase in SG&A expenses and income taxes. Merchandise inventories, net were
$1.67 billionat July 30, 2022, compared to $1.44 billionat July 31, 2021, representing an increase of $222.4 millionor 15.4%. The change in total inventory is primarily due to the following:
maintain strong in-stocks of key items to support expected demand. 22 Table of Contents Investing activities
In the past, we have primarily used cash for new, remodeled, relocated and refurbished stores, supply chain investments, short-term investments and investments in information technology systems. Investing activities for capital expenditures have been
During the 26 weeks ended
July 30, 2022, we opened 17 new stores and relocated 10 stores, compared to the 26 weeks ended July 31, 2021, when we opened 35 new stores, relocated two stores and remodeled five stores. The increase in net cash used in investing activities in the first 26 weeks of fiscal 2022 compared to the first 26 weeks of fiscal 2021 was primarily due to more capital expenditures. Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems, and supply chain investments we undertake and the timing of these expenditures. Based on past performance and current expectations, we believe our sources of liquidity will be sufficient to fund future capital expenditures.
Financing activities include share repurchases, borrowing and repayment of our revolving credit facility, and capital stock transactions. Purchases of treasury shares represent the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock. The decrease in net cash used in financing activities in the first 26 weeks of fiscal 2022 compared to the first 26 weeks of fiscal 2021 was primarily due to a decrease in share repurchases. We had no borrowings outstanding under the credit facility as of
July 30, 2022, January 29, 2022, and July 31, 2021. The zero outstanding borrowings position continues to be due to a combination of factors including sales demand, overall performance of management initiatives including expense control, and inventory and other working capital reductions. We may require borrowings under the facility from time to time in future periods for unexpected business disruptions, to support our new store program, seasonal inventory needs, or share repurchases.
Share buyback program
March 2020, the Board of Directors authorized a share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company could repurchase up to $1.6 billionof the Company's common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amount of $177.8 millionfrom the earlier share repurchase program. The 2020 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time. In March 2022, the Board of Directors authorized a new share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company may repurchase up to $2.0 billionof the Company's common stock. The 2022 Share Repurchase Program revokes the previously authorized but unused amounts from the 2020 Share Repurchase Program. The 2022 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. A summary of common stock repurchase activity is presented in the following table: 26 Weeks Ended July 30, July 31, (Dollars in millions) 2022 2021 Shares repurchased 1,129,828 1,989,576
Total cost of shares repurchased
23 Table of Contents Credit facility On
March 11, 2020, we entered into Amendment No. 1 to the Second Amended and Restated Loan Agreement (as so amended, the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder; Wells Fargo Bank, National Associationand JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners; JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender; PNC Bank, National Association, as Documentation Agent and a Lender; and the other lenders party thereto. The Loan Agreement matures on March 11, 2025, provides maximum revolving loans equal to the lesser of $1.0 billionor a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of qualified cash), contains a $50.0 millionsubfacility for letters of credit and allows the Company to increase the revolving facility by an additional $100.0 million, subject to the consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold. Substantially all of the Company's assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings bear interest, at the Company's election, at either a base rate plus a margin of 0% to 0.125% or the London Interbank Offered Rate plus a margin of 1.125% to 1.250%, with such margins based on the Company's borrowing availability, and the unused line fee is 0.20% per annum.
Seasonality Our business is subject to seasonal fluctuation. Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season. To a lesser extent, our business is also affected by
Mother's Dayand Valentine's Day. Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.
Significant Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with
U.S.generally accepted accounting principles. The preparation of these consolidated financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates. There have been no significant changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
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