# GENESCO INC (GCO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GENESCO INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/18498/000095017022004397/gco-20220129.htm
Accession: 0000950170-22-004397
Filing date: 2022-03-23
Report date: 2022-01-29
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/GCO/
All MD&A years: /company/GCO/mda/
Next year: /company/GCO/mda/fy2023/ (FY 2023)

ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and related Notes and other financial information appearing elsewhere in this Annual Report on Form 10-K, and with Part II, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of our Annual Report on Form 10-K for the fiscal year ended January 30, 2021, filed with the SEC on March 31, 2021, which provides a discussion of our financial condition and results of operations for Fiscal 2021 compared to our Fiscal 2020.

Summary of Results of Operations

Our net sales increased 35.6% during Fiscal 2022 compared to Fiscal 2021. The sales increase was driven by increased store sales resulting from the reopening of stores that were closed in Fiscal 2021 due to the COVID-19 pandemic and increased wholesale sales, partially offset by a 2% decrease in digital comparable sales. Stores were open about 96% of possible days in Fiscal 2022 compared to 76% of possible days in Fiscal 2021. We have not disclosed comparable sales for Fiscal 2022 or Fiscal 2021 as we believe that overall sales are a more meaningful metric during these periods due to the impact of the COVID-19 pandemic. See below, under the heading "Comparable Sales", for our definition of comparable sales.

Journeys Group sales increased 28%, Schuh Group sales increased 38%, Johnston & Murphy Group sales increased 65% and Licensed Brands sales increased 70% during Fiscal 2022 compared to Fiscal 2021. Gross margin increased as a percentage of net sales from 45.0% in Fiscal 2021 to 48.8% in Fiscal 2022, reflecting gross margin increases as a percentage of net sales in all of our operating business units. The gross margin increase is primarily due to more full-price selling at Journeys Group, Schuh Group and Johnston & Murphy retail, decreased inventory reserves at Johnston & Murphy Group and lower shipping and warehouse expense in all of our retail divisions. The lower shipping and warehouse expense is a result of reduced e-commerce penetration in Fiscal 2022 as a larger percentage of retail stores were open in Fiscal 2022 compared to Fiscal 2021.

Selling and administrative expenses decreased as a percentage of net sales from 45.6% in Fiscal 2021 to 42.7% in Fiscal 2022, reflecting decreased expenses as a percentage of net sales in all of our operating business units. The decrease as a percentage of net sales in expenses in Fiscal 2022 was primarily due to greater leverage of fixed expenses as a result of the significant increase in revenue and to reduced occupancy expense as a percentage of sales, partially offset by increased performance-based compensation. In Fiscal 2021, we did not record any performance-based compensation expense. The reduction in occupancy expense as a percentage of sales is driven in part by benefits from our ongoing lease initiative and was partially offset by increased percentage rent as a result of increased sales.

Operating margin increased as a percentage of net sales from (6.0)% in Fiscal 2021 to 6.4% in Fiscal 2022, reflecting increased operating income in all of our operating business units.

Significant Developments

COVID-19

In March 2020, the World Health Organization categorized the outbreak of COVID-19 as a pandemic. As a result, and in consideration of the health and well-being of our employees, customers and communities, and in support of efforts to contain the spread of the virus, we have taken several precautionary measures and adjusted our operational needs, including:

•On March 18, 2020, we temporarily closed our North American retail stores.

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•On March 19, 2020, we borrowed $150.0 million under our Credit Facility as a precautionary measure to ensure funds were available to meet our obligations for a substantial period of time in response to the COVID-19 pandemic that caused public health officials to recommend precautions that would mitigate the spread of the virus, including “stay-at-home” orders and similar mandates and warning the public against congregating in heavily populated areas such as malls and shopping centers. We paid down the $150.0 million on September 10, 2020.

•On March 19, 2020, Schuh entered into an Amendment and Restatement Agreement (the “U.K. A&R Agreement”) with Lloyds Bank which amended and restated the Amendment and Restatement Agreement dated April 26, 2017. The U.K. A&R Agreement included only a Facility C revolving credit agreement of £19.0 million, bore interest at LIBOR plus 2.2% per annum and expired in September 2020. In March 2020, we borrowed £19.0 million as a precautionary measure in response to the COVID-19 pandemic. The U.K. A&R Agreement was replaced with the Facility Letter in October 2020 described below and the outstanding borrowings in the amount of £19.0 million were repaid.

•On March 23, 2020, we temporarily closed our stores in the U.K. and the ROI.

•On March 26, 2020, we temporarily closed our U.K. e-commerce business. Effective April 3, 2020, our U.K.-based Schuh business announced that it had reopened its e-commerce operations in compliance with government health and safety practices.

•On March 27, 2020, we announced that we were adjusting our operational needs, including a significant reduction of expenses, capital and planned inventory receipts. As part of these measures, we made the decision to temporarily reduce compensation for the executive team and select employees and reduced the cash compensation for our Board of Directors. In addition, we furloughed all of our full-time store employees in North America and our store and distribution center employees in the U.K. We also furloughed employees and reduced headcount in our corporate offices, call centers and distribution centers. In the aggregate, these actions resulted in a temporary reduction of our workforce by 90%.

•During a portion of the first and second quarters of Fiscal 2021, we extended payment terms with suppliers, managed inventory by reducing future receipts and reduced planned capital expenditures by over 50%. For new receipts as of August 1, 2020, we have restored contractual payment terms with suppliers.

•On June 5, 2020, we entered into a Second Amendment to our Credit Facility to, among other things, increase the Total Commitments (as defined in the Credit Agreement) for the revolving loans from $275.0 million to $332.5 million, establish a First-in, Last-out (“FILO”) tranche of indebtedness of $17.5 million, for $350.0 million of total capacity. On June 7, 2021, we paid off the $17.5 million FILO loan.

•On June 25, 2020, our Board of Directors considered the Company’s financial results to date and that more than 90% of the Company’s stores were expected to be reopened by June 30, 2020, and decided to restore going forward a portion of the compensation of the executive team and select employees whose compensation had been reduced on March 27, 2020. In addition, the cash compensation of our Board of Directors, which had also been reduced on March 27, 2020, was partially restored.

•In October 2020, our Board of Directors restored going forward the remaining portion of the compensation of the executive team and select employees whose compensation had been reduced on March 27, 2020 as well as the compensation of the Board of Directors.

•On October 9, 2020, Schuh entered into the Facility Letter with Lloyds under the U.K.'s Coronavirus Large Business Interruption Loan Scheme pursuant to which Lloyds made available a revolving credit facility ("RCF") of £19.0 million for the purpose of refinancing Schuh's existing indebtedness with Lloyds. The RCF expires in October 2023 and bears interest at 2.5% over the Bank of England Base Rate. As of January 29, 2022, we have no borrowings under the Facility Letter.

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•During the fourth quarter of Fiscal 2021, another lockdown in the U.K. and the ROI disrupted the Schuh Group business with stores closed for approximately 80% of possible days in the first quarter of Fiscal 2022. All Schuh Group stores had re-opened as of the end of the second quarter of Fiscal 2022.

•During the fourth quarter of Fiscal 2021, a second lockdown in several provinces in Canada disrupted business in some of the Journeys, Little Burgundy and Johnston & Murphy stores. All impacted stores in Canada had re-opened as of the end of the second quarter of Fiscal 2022.

•In December 2020, the Company returned the compensation to select employees other than executive team whose compensation had been reduced on March 27, 2020.

We are operating substantially all retail locations. All store locations are operating under enhanced measures to ensure the health and safety of employees and customers, including providing hand sanitizer in multiple locations throughout each store for customer and employee use, enhanced cleaning and sanitation protocols, reconfigured sales floors to promote physical distancing and modified employee and customer interactions to limit contact. In most of our Journeys, Schuh and Johnston & Murphy stores, it is no longer required for employees to wear masks unless mandated by local government where the store is located.

As a result of the economic and business impact of the COVID-19 pandemic, we revised certain accounting estimates and judgments. Given the ongoing and evolving economic and business impact of the COVID-19 pandemic, we may be required to further revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of inventory, goodwill, long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.

During Fiscal 2021 and the first half of Fiscal 2022, we withheld certain contractual rent payments generally correlating with time periods when our stores were closed and/or correlating with sales declines from Fiscal 2020. We continue to recognize rent expense in accordance with the contractual terms. We worked with landlords in various markets to seek commercially reasonable lease concessions given the impact of COVID-19. In cases where the agreements did not result in a substantial increase in the rights of the lessor or the obligation of the lessee such that the total cash flows of the modified lease were substantially the same or less than the total cash flows of the existing lease, we did not reevaluate the contract terms. For these lease agreements, we have recognized a reduction in variable rent expense in the period that the concession was granted. During Fiscal 2022 and Fiscal 2021, we have recognized approximately $17 million and $34 million, respectively, in rent savings which are related to abatements and temporary rent relief.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits as well as the deferral of payroll and other tax payments in the future, which were treated as government subsidies to offset related operating expenses. During Fiscal 2022 and Fiscal 2021, qualified payroll tax credits under the CARES Act and other foreign subsidy programs reduced our selling and administrative expenses by approximately $7.8 million and $13.8 million, respectively, on our Consolidated Statements of Operations.

Savings from a government program in the U.K. have provided property tax relief of approximately $9.7 million and $13.3 million, respectively, for Fiscal 2022 and Fiscal 2021. Other government relief programs in the U.K., the ROI and Canada provided aggregate savings of approximately $5.2 million in Fiscal 2022.

During the second half of Fiscal 2022, supply chain challenges caused increased freight and logistics costs related to inventory purchases from suppliers. We have estimated that these costs increased our cost of sales by approximately $12.7 million on our Consolidated Statements of Operations for Fiscal 2022.

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Asset Impairment and Other Charges

We recorded a pretax gain to earnings of $8.1 million in Fiscal 2022, including an $18.1 million gain on the sale of a distribution warehouse and a $0.6 million insurance gain, partially offset by $8.6 million for professional fees related to the actions of a shareholder activist and $2.0 million for retail store asset impairments which is included in asset impairments and other, net on the Consolidated Statements of Operations for Fiscal 2022.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of performance and financial measures. The key performance indicators we use to evaluate the financial condition and operating performance of our business are comparable sales, net sales, gross margin, operating income (loss) and operating margin. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the U.S. GAAP financial measures presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.

Comparable Sales

We consider comparable sales to be an important indicator of our current performance, and investors may find it useful as such. Comparable sales results are important to achieve leveraging of our costs, including occupancy, selling salaries, depreciation, etc. Comparable sales also have a direct impact on our total net revenue, cash and working capital. We define "comparable sales" as sales from stores open longer than one year, beginning with the first day a store has comparable sales (which we refer to in this report as "same store sales"), and sales from websites operated longer than one year and direct mail catalog sales (which we refer to in this report as "comparable direct sales"). Temporarily closed stores are excluded from the comparable sales calculation if closed for more than seven days. Expanded stores are excluded from the comparable sales calculation until the first day an expanded store has comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. We have not disclosed comparable sales for Fiscal 2022 or Fiscal 2021, as we believe that overall sales are a more meaningful metric during these periods due to the impact of the COVID-19 pandemic and related extended store closures.

Results of Operations—Fiscal 2022 Compared to Fiscal 2021

Our net sales for Fiscal 2022 increased 35.6% to $2.4 billion from $1.8 billion in Fiscal 2021. The increase in net sales was driven by increased store sales resulting from the reopening of stores that were closed at times in Fiscal 2021 due to the COVID-19 pandemic and increased wholesale sales, partially offset by a 2% decrease in digital comparable sales. Stores were open about 96% of possible days in Fiscal 2022 compared to 76% of possible days in Fiscal 2021.

Gross margin increased 46.8% to $1.2 billion in Fiscal 2022 from $804.5 million in Fiscal 2021, and increased as a percentage of net sales from 45.0% in Fiscal 2021 to 48.8% in Fiscal 2022, reflecting gross margin increases as a percentage of net sales in all of our operating business units. The gross margin increase is primarily due to more full-price selling at Journeys Group, Schuh Group and Johnston & Murphy retail, decreased inventory reserves at Johnston & Murphy Group and lower shipping and warehouse expense in all of our retail divisions. The lower shipping and warehouse expense is a result of reduced e-commerce penetration in Fiscal 2022 as a larger percentage of retail stores were open in Fiscal 2022 compared to Fiscal 2021.

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Selling and administrative expenses decreased as a percentage of net sales from 45.6% in Fiscal 2021 to 42.7% in Fiscal 2022, reflecting decreased expenses as a percentage of net sales in all of our operating business units. The decrease as a percentage of net sales in expenses in Fiscal 2022 was primarily due to greater leverage of fixed expenses as a result of the significant increase in revenue and to reduced occupancy expense as a percentage of sales, partially offset by increased performance-based compensation. The reduction in occupancy expense as a percentage of sales is driven in part by benefits from our ongoing lease initiative and was partially offset by increased percentage rent as a result of increased sales. Our annual performance-based economic value added (EVA) compensation plan, which is for essentially all corporate and non-store division employees, is designed to be self-funded by improved earnings and capital efficiency on a year-over-year basis. The plan is designed to reward increasing net operating earnings after taxes minus a charge for capital on a year-over-year basis. As a result of the significant improvement in our earnings on a more efficient capital base in Fiscal 2022, we accrued performance-based compensation expense of $54 million in Fiscal 2022, of which $48 million will be paid in the first quarter of Fiscal 2023. The remaining amount, which is subject to a service requirement, is an estimate that is expected to be paid in Fiscal 2024, Fiscal 2025 and Fiscal 2026 and could increase or decrease according to our future performance. We did not accrue performance-based incentive compensation in Fiscal 2021, as we experienced a significant decline in earnings compared to Fiscal 2020 as a result of the COVID-19 pandemic. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.

Earnings from continuing operations before income taxes (“pretax earnings") for Fiscal 2022 were $153.0 million, compared to a pretax loss of $111.7 million for Fiscal 2021. Pretax earnings for Fiscal 2022 included an asset impairment and other gain of $8.1 million which included an $18.1 million gain on the sale of a distribution warehouse and a $0.6 million insurance gain, partially offset by $8.6 million for professional fees related to the actions of a shareholder activist and $2.0 million for retail store asset impairments. The pretax loss for Fiscal 2021 included a goodwill impairment charge of $79.3 million and an asset impairment and other charge of $18.7 million which included $13.8 million for retail store asset impairments and $5.3 million for a trademark impairment, partially offset by a $0.4 million gain for the release of an earnout related to the Togast acquisition.

Net earnings for Fiscal 2022 were $114.9 million, or $7.92 diluted earnings per share compared to a net loss of $56.4 million, or $3.97 diluted loss per share for Fiscal 2021. The effective income tax rate was 24.9% for Fiscal 2022 compared to 49.8% for Fiscal 2021. The effective tax rate for Fiscal 2022 was lower compared to Fiscal 2021 as the one-time tax benefits from initiatives under the CARES Act were partially offset by the non-deductibility of the goodwill impairment charge in Fiscal 2021, did not apply to Fiscal 2022. See Item 8, Note 12, "Income Taxes", to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

During Fiscal 2022, we benefitted from government stimulus which we don’t expect to recur going forward. We expect a more normalized promotional environment in Fiscal 2023, thereby reducing gross margins. We expect lower performance-based compensation expense and higher occupancy expense next year as Fiscal 2022 benefitted from leverage in occupancy expense as a result of the significant increase in revenue as well as rent abatements and government relief in Fiscal 2022 which is not expected to recur going forward in Fiscal 2023. In addition, we expect increased freight and logistics costs with a more normalized supply chain and inventory levels in the back half of Fiscal 2023.

Journeys Group

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[[/GREPCENT_TABLE]]

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Net sales from Journeys Group increased 28.4% to $1.58 billion for Fiscal 2022 compared to $1.23 billion for Fiscal 2021, primarily due to increased store sales, resulting from the reopening of stores that were closed during Fiscal 2021 due to the COVID-19 pandemic, partially offset by decreased digital comparable sales. The store count for Journeys Group was 1,135 stores at the end of Fiscal 2022, including 229 Journeys Kidz stores, 47 Journeys stores in Canada and 37 Little Burgundy stores in Canada, compared to 1,159 stores at the end of Fiscal 2021, including 233 Journeys Kidz stores, 47 Journeys stores in Canada and 38 Little Burgundy stores in Canada.

Journeys Group operating income for Fiscal 2022 increased 115.0% to $165.3 million, compared to $76.9 million for Fiscal 2021. The increase in operating income was primarily due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales, primarily reflecting decreased markdowns, improved initial margins and decreased shipping and warehouse expenses and (iii) decreased selling and administrative expenses as a percentage of net sales due to greater leverage of fixed expenses as a result of revenue growth, and to decreased occupancy expense as a percentage of sales, partially offset by increased performance-based compensation.

Schuh Group

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[[/GREPCENT_TABLE]]

Net sales from the Schuh Group increased 38.4% to $423.6 million for Fiscal 2022, compared to $305.9 million for Fiscal 2021, primarily due to increased store sales, resulting from the reopening of stores that were closed during Fiscal 2021 due to the COVID-19 pandemic, the favorable impact of $22.6 million due to changes in foreign exchange rates and increased digital comparable sales. Stores were open almost 80% of possible operating days in Fiscal 2022 compared to 58% of possible operating days in Fiscal 2021. Schuh Group operated 123 stores at the end of Fiscal 2022 and Fiscal 2021.

Schuh Group operating income for Fiscal 2022 was $19.3 million compared to an operating loss of $11.6 million for Fiscal 2021. The increase in earnings this year reflects (i) increased net sales, (ii) increased gross margin as a percentage of net sales, reflecting more full-price selling and decreased shipping and warehouse expense and (iii) decreased selling and administrative expenses as a percentage of net sales, reflecting decreased occupancy expense as a percentage of sales, grant income from the U.K. and ROI governments, and greater leverage of fixed expenses as a result of revenue growth, partially offset by increased performance-based compensation and marketing expenses. In addition, Schuh Group's operating income included a favorable impact of $0.4 million for Fiscal 2022 due to changes in foreign exchange rates.

Johnston & Murphy Group

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[[/GREPCENT_TABLE]]

Johnston & Murphy Group net sales increased 65.3% to $252.9 million for Fiscal 2022 from $152.9 million for Fiscal 2021 primarily due to increased store sales, resulting from the reopening of stores closed during Fiscal 2021 due to the COVID-19 pandemic, and increased wholesale sales and digital comparable sales. Retail operations accounted for 78.5% of Johnston & Murphy Group's sales in Fiscal 2022, up from 77.6% in Fiscal 2021. The store count for Johnston & Murphy retail operations at

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the end of Fiscal 2022 included 167 Johnston & Murphy shops and factory stores, including eight stores in Canada, compared to 178 Johnston & Murphy shops and factory stores, including eight stores in Canada, at the end of Fiscal 2021.

Johnston & Murphy Group operating income for Fiscal 2022 was $7.0 million compared to an operating loss of $47.6 million in Fiscal 2021. The increase was primarily due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales, reflecting decreased retail markdowns, decreased inventory reserves, decreased shipping and warehouse expense and a higher mix of retail product and (iii) decreased selling and administrative expenses as a percentage of net sales due to greater leverage of fixed expenses as a result of revenue growth, especially occupancy and compensation expenses, partially offset by increased performance-based compensation expense.

Licensed Brands

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[[/GREPCENT_TABLE]]

Licensed Brands’ net sales increased 69.7% to $169.2 million for Fiscal 2022 from $99.7 million for Fiscal 2021, reflecting primarily the growth of our Levi's footwear business as well as increased sales in our other licensed brands as customers began to recover from the COVID-19 pandemic and order volumes from our wholesale customers improved.

Licensed Brands’ operating income increased from a loss of $5.4 million for Fiscal 2021 to income of $6.6 million for Fiscal 2022. The $12.0 million increase in operating income was primarily due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales as the prior year gross margin was impacted by pre-Togast acquisition royalty and commission cost and (iii) decreased selling and administrative expenses as a percentage of net sales reflecting decreased bad debt expense and shipping and compensation expenses, partially offset by increased royalty and performance-based compensation expense. While gross margin increased for Fiscal 2022, excess freight and logistics costs related to supply chain challenges negatively impacted gross margin.

Corporate, Interest Expenses and Other Charges

Corporate and other expense for Fiscal 2022 was $42.6 million compared to $119.5 million for Fiscal 2021. Corporate expense in Fiscal 2022 included an $18.1 million gain on the sale of a distribution warehouse and a $0.6 million insurance gain, partially offset by $8.6 million for professional fees related to the actions of a shareholder activist and $2.0 million for retail store asset impairments. Corporate expense in Fiscal 2021 included non-cash impairment charges of $79.3 million related to goodwill, $13.8 million related to retail store assets and $5.3 million for trademarks, partially offset by a $0.4 million gain for the release of an earnout related to the Togast acquisition. Corporate and other expense, excluding asset impairment and other charges, increased $29.1 million reflecting increased performance-based compensation expense and rent expense on our new headquarters building. In Fiscal 2021, we did not record any performance-based compensation expense.

Net interest expense decreased to $2.4 million in Fiscal 2022 from $5.1 million in Fiscal 2021 primarily due to decreased average borrowings in Fiscal 2022.

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Liquidity and Capital Resources

Working Capital

Our business is seasonal, with our investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year. Historically, cash flow from operations has been generated principally in the fourth quarter of each fiscal year.

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[[/GREPCENT_TABLE]]

Reasons for the major variances in cash provided by (used in) the table above are as follows:

Cash provided by operating activities was $82.1 million higher for Fiscal 2022 compared to Fiscal 2021, reflecting primarily the following factors:

•
A $156.2 million increase in cash flow from changes in prepaids and other current assets, primarily reflecting decreased prepaid income taxes, in part due to the receipt of an income tax refund;

•
A $58.7 million increase in cash flow from changes in other accrued liabilities, primarily reflecting increased performance-based compensation accruals in Fiscal 2022 compared to payments of Fiscal 2020 performance-based compensation accruals in Fiscal 2021; and

•
A $28.9 million increase in cash flow from increased earnings in Fiscal 2022, net of intangible impairment in the first quarter of Fiscal 2021 and deferred income taxes; partially offset by

•
A $65.7 million decrease in cash flow from changes in inventory, reflecting a $10.8 million decrease in inventory in Fiscal 2022 versus Fiscal 2021 compared to a $76.5 million decrease in inventory in Fiscal 2021 versus Fiscal 2020;

•
A $28.8 million decrease in cash flow from changes in other assets and liabilities, primarily reflecting rent payments made in Fiscal 2022 versus rent payments held in Fiscal 2021; and

•
A $25.9 million decrease in cash flow from changes in accounts payable reflecting changes in buying patterns.

Cash used in investing activities was $9.9 million higher for Fiscal 2022 compared to Fiscal 2021 reflecting increased capital expenditures primarily related to our new headquarters building and digital and omni-channel initiatives, partially offset by the proceeds from the sale of a distribution warehouse.

Cash used in financing activities was $98.0 million higher in Fiscal 2022 as compared to Fiscal 2021 reflecting share repurchases in Fiscal 2022.

Sources of Liquidity and Future Capital Needs

We have three principal sources of liquidity: cash flow from operations, cash and cash equivalents on hand and our credit facilities discussed in Item 8, Note 9, "Long-Term Debt", to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

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On January 28, 2022, we entered into a Third Amendment to our Credit Facility to, among other things, extend the maturity date to January 28, 2027 and remove the first in-last out term loan that was in an amount equal to $17.5 million. The Total Commitments (as defined in the Credit Agreement) for the revolving loans remains at $332.5 million. As of January 29, 2022, we have borrowed $15.7 million under our Credit Facility.

On October 9, 2020, Schuh entered into a Facility Letter with Lloyds under the U.K.'s Coronavirus Large Business Interruption Loan Scheme pursuant to which Lloyds made available a RCF of £19.0 million for the purpose of refinancing Schuh's existing indebtedness with Lloyds. The RCF expires in October 2023. As of January 29, 2022, we have not borrowed under the Schuh Facility Letter.

We were in compliance with all the relevant terms and conditions of the Credit Facility and Facility Letter as of January 29, 2022.

We believe that cash on hand, cash provided by operations and borrowings under our amended Credit Facility and the Schuh Facility Letter will be sufficient to support our liquidity needs in Fiscal 2023 and the foreseeable future.

Our Fiscal 2022 year end cash benefitted from lower inventory levels resulting from supply chain disruptions. During Fiscal 2023, we expect our primary cash requirements to be directed towards funding operating activities, including the acquisition of inventory, and other working capital obligations including those related to taxes, as well as employee compensation, which includes payment of the current portion of the Fiscal 2022 performance-based compensation accrual of approximately $48 million. Given the continued uncertainty and the potential impact on consumer spending from the COVID-19 pandemic and recent geopolitical events, we believe it is prudent to maintain higher than usual cash balances to support potential disruptions in cash flow. While the timing and amount of any common stock repurchases will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions, we will also consider returning cash to our shareholders through opportunistic share repurchases pursuant to our repurchase authorization described in more detail below.

In the fourth quarter of Fiscal 2021, we implemented tax strategies allowed under the 5-year carryback provisions in the CARES Act which we believed would generate approximately $55 million of net tax refunds. During Fiscal 2022, we have received approximately $26 million of such refunds and expect to receive the balance in Fiscal 2023.

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Contractual Obligations

The following table sets forth aggregate contractual obligations as of January 29, 2022.

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[[/GREPCENT_TABLE]]

(1) Operating lease obligations excludes $10.9 million for leases signed but not yet commenced.

(2) As a result of the Togast acquisition, we also have a commitment to Samsung C&T America, Inc. (“Samsung”) related to the ultimate sale and valuation of related inventories owned by Samsung. If the product is sold below Samsung’s cost, we are committed to Samsung for the difference between the sales price and its cost.

We issue inventory purchase orders in the ordinary course of business, which represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation.

Capital Expenditures

Capital expenditures were $53.9 million and $24.1 million for Fiscal 2022 and 2021, respectively. The $29.8 million increase in Fiscal 2022 capital expenditures as compared to Fiscal 2021 is primarily related to the Company's new headquarters building and digital and omni-channel initiatives.

We expect total capital expenditures for Fiscal 2023 to be approximately $55 million of which approximately 55% is for new stores and renovations and 45% is for computer hardware, software and warehouse enhancements for initiatives to drive traffic and omni-channel initiatives and other. Planned capital expenditures excludes approximately $11 million for our new corporate headquarters building. We do not currently have any longer term capital expenditures or other cash requirements other than as set forth in the contractual obligations table. We also do not currently have any off-balance sheet arrangements.

Common Stock Repurchases

We repurchased 1,360,909 shares during Fiscal 2022 at a cost of $82.8 million or an average of $60.88 per share. As of January 29, 2022, we accrued $4.8 million for share repurchases that will settle in Fiscal 2023 which is included in other accrued liabilities on the Consolidated Balance Sheets. We were operating under a $100.0 million repurchase authorization from September 2019. In February 2022, we announced a $100.0 million increase to the existing $100.0 million share repurchase authorization. As of March 23, 2022, we have $100.3 million remaining under the expanded share repurchase authorization. We did not repurchase any shares in Fiscal 2021. We repurchased 4,570,015 shares during Fiscal 2020 at a cost of $189.4 million or an average of $41.44 per share.

Environmental and Other Contingencies

We are subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Item 8, Note 16, "Legal Proceedings", to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

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Financial Market Risk

The following discusses our exposure to financial market risk.

Outstanding Debt – We have $15.7 million (£11.7 million) of outstanding U.S. revolver borrowings at a weighted average interest rate of 1.48% as of January 29, 2022. A 100 basis point increase in interest rates would increase annual interest expense by $0.2 million on the $15.7 million revolver borrowings.

Cash and Cash Equivalents – Our cash and cash equivalent balances are held in our bank accounts and not invested at this time. We did not have significant exposure to changing interest rates on invested cash at January 29, 2022. As a result, we consider the interest rate risk implicit in these investments at January 29, 2022 to be low.

Summary – Based on our overall market interest rate exposure at January 29, 2022, we believe that the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations or cash flows for Fiscal 2023 would not be material.

Accounts Receivable – Our accounts receivable balance at January 29, 2022 is concentrated in our wholesale businesses, which sell primarily to department stores and independent retailers across the United States. In the wholesale businesses, one customer accounted for 38%, one customer accounted for 13% and one customer accounted for 7% of our total trade receivables balance, while no other customer accounted for more than 6% of our total trade receivables balance as of January 29, 2022. We monitor the credit quality of our customers and establish an allowance for doubtful accounts based upon factors surrounding credit risk of specific customers, historical trends and other information, as well as customer specific factors; however, credit risk is affected by conditions or occurrences within the economy and the retail industry, as well as company-specific information.

Foreign Currency Exchange Risk – We are exposed to translation risk because certain of our foreign operations utilize the local currency as their functional currency and those financial results must be translated into United States dollars. As currency exchange rates fluctuate, translation of our financial statements of foreign businesses into United States dollars affects the comparability of financial results between years. Schuh Group's net sales and operating income for Fiscal 2022 were positively impacted by $22.6 million and $0.4 million, respectively, due to the change in foreign exchange rates.

New Accounting Principles

Descriptions of recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by us during Fiscal 2022 are included in Note 2, "New Accounting Pronouncements", to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data".

Critical Accounting Estimates

As a result of the continuing economic and business impact of COVID-19, we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of inventory, goodwill, long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.

Inventory Valuation

In our footwear wholesale operations and our Schuh Group segment, cost for inventory that we own is determined using the first-in, first-out ("FIFO") method. Net realizable value is determined using a system of analysis which evaluates inventory at the stock number level based on factors such as inventory turn, average selling price, inventory level, and selling prices reflected in future orders for footwear wholesale. We provide a valuation allowance when the inventory has not been marked down to net realizable value based on current selling prices or when the inventory is not turning and is not expected to turn at satisfactory levels.

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In our retail operations, other than the Schuh Group segment, we employ the retail inventory method, applying average cost-to-retail ratios to the retail value of inventories. Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as markdowns are taken or accrued as a reduction of the retail value of inventories.

Inherent in the retail inventory method are subjective judgments and estimates, including merchandise mark-on, markups, markdowns and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, we employ the retail inventory method in multiple subclasses of inventory with similar gross margins, and analyze markdown requirements at the stock number level based on factors such as inventory turn, average selling price and inventory age. In addition, we accrue markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown allowances, we maintain reserves for shrinkage and damaged goods based on historical rates.

Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments about current market conditions, fashion trends and overall economic conditions. Failure to make appropriate conclusions regarding these factors may result in an overstatement or understatement of inventory value. A change of 10% from the recorded amounts for markdowns, shrinkage and damaged goods would have changed inventory by $0.4 million at January 29, 2022.

Impairment of Long-Lived Assets

We periodically assess the realizability of our long-lived assets, other than goodwill, and evaluate such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. Inherent in the analysis of impairment are subjective judgments about future cash flows. Failure to make appropriate conclusions regarding these judgments may result in an overstatement or understatement of the value of long-lived assets.

We annually assess our goodwill and indefinite lived trademarks for impairment and on an interim basis if indicators of impairment are present. Our annual assessment date of goodwill and indefinite lived trade names is the first day of the fourth quarter.

In accordance with ASC 350, we have the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If, after such assessment, we conclude that the asset is not impaired, no further action is required. However, if we conclude otherwise, we are required to determine the fair value of the asset using a quantitative impairment test. The quantitative impairment test for goodwill compares the fair value of each reporting unit with the carrying value of the reporting unit with which the goodwill is associated. If the fair value of the reporting unit is less than the carrying value of the reporting unit, an impairment charge would be recorded for the amount, if any, in which the carrying value exceeds the reporting unit's fair value. We estimate fair value using the best information available, and compute the fair value derived by a combination of the market and income approach. The market approach is based on observed market data of comparable companies to determine fair value. The income approach utilizes a projection of a reporting unit’s estimated operating results and cash flows that are discounted using a weighted-average cost of capital that reflects current market conditions. A key assumption in our fair value estimate is the weighted average cost of capital utilized for discounting our cash flow projections in our income approach. The projection uses our best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. For additional information regarding impairment of long-lived assets, see Item 8, Note 4, "Goodwill and Other Intangible Assets" and Note 5,"Asset Impairments and Other Charges" to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

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The quantitative impairment test for indefinite lived trademarks compares the fair value of the trademark with the carrying value of the related trademark. If the fair value of the trademark is less than the carrying value of the trademark, an impairment charge would be recorded for the amount, if any, in which the carrying value exceeds the trademark’s fair value. We estimate fair value using the best information available, and compute the fair value using an income approach that estimates the savings that the trademark owner would realize from owning that asset instead of having to pay rent or a royalty for the use of it. Key assumptions in our fair value estimate are the selected royalty rate and discount rate. Other significant estimates and assumptions include terminal value growth rates and future profitability expectations.

Revenue Recognition

In accordance with ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), revenue shall be recognized upon satisfaction of all contractual performance obligations and transfer of control to the customer. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for corresponding goods. The majority of our sales are single performance obligation arrangements for retail sale transactions for which the transaction price is equivalent to the stated price of the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product at the point of sale. Revenue from retail sales is recognized at the point of sale, is net of estimated returns, and excludes sales and value added taxes. Revenue from catalog and internet sales is recognized at estimated time of delivery to the customer, is net of estimated returns, and excludes sales and value added taxes. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Actual amounts of markdowns have not differed materially from estimates. Shipping and handling costs charged to customers are included in net sales. We elected the practical expedient within ASC 606 related to taxes that are assessed by a governmental authority, which allows for the exclusion of sales and value added tax from transaction price.

A provision for estimated returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. Estimated returns are based on historical returns and claims. Actual returns and claims in any future period may differ from historical experience. Revenue from gift cards is deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized in our Consolidated Statements of Operations within net sales in proportion to the pattern of rights exercised by the customer in future periods. We perform an evaluation of historical redemption patterns from the date of original issuance to estimate future period redemption activity.

Income Taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating actual current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent it is more likely than not that some portion or all of a deferred asset will not be realized, valuation allowances are established. To the extent valuation allowances are established or increased in a period, we include an expense within the tax provision in our Consolidated Statements of Operations. These deferred tax valuation allowances may be released in future years when we consider that it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, we will need to periodically evaluate whether or not all available evidence, such as future taxable income and reversal of temporary differences, tax planning strategies, and recent results of operations, provides sufficient positive evidence to offset any other negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, we would record an income tax benefit for a portion or all of the deferred tax valuation allowance released. At January 29, 2022, we had a deferred tax valuation allowance of $42.2 million.

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Income tax reserves for uncertain tax positions are determined using the methodology required by the Income Tax Topic of the Accounting Standards Codification (“Codification”). This methodology requires companies to assess each income tax position taken using a two-step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If our determinations and estimates prove to be inaccurate, the resulting adjustments could be material to our future financial results. See Item 8, Note 12, "Income Taxes", to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to income taxes.

Leases

We recognize lease assets and corresponding lease liabilities for all operating leases on the Consolidated Balance Sheets as described under ASU No. 2016-02, “Leases (Topic 842).” We evaluate renewal options and break options at lease inception and on an ongoing basis, and include renewal options and break options that we are reasonably certain to exercise in our expected lease terms for calculations of the right-of-use assets and liabilities. Approximately 2% of our leases contain renewal options. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As most of our leases do not provide a determinable implicit rate, we estimate our collateralized incremental borrowing rate based upon a synthetic credit rating and yield curve analysis at the lease commencement or modification date in determining the present value of lease payments. For lease payments in foreign currencies, the incremental borrowing rate is adjusted to be reflective of the risk associated with the respective currency. See Item 8, Note 10, "Leases", to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to leases.