GRAND PRIZES: Management’s discussion and analysis of the financial position and operating results (Form 10-Q)
CAUTION REGARDING FORWARD-LOOKING STATEMENTS FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT of 1995
The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe
harbor for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the statements. We wish to take advantage of
the "safe harbor" provisions of the Act.
Certain statements in this report are forward-looking statements within the
meaning of the Act, and such statements are intended to qualify for the
protection of the safe harbor provided by the Act. The words "anticipate,"
"estimate," "approximate," "expect," "objective," "goal," "project," "intend,"
"plan," "believe," "will," "should," "may," "target," "forecast," "guidance,"
"outlook," and similar expressions generally identify forward-looking
statements. Similarly, descriptions of our objectives, strategies, plans, goals
or targets are also forward-looking statements. Forward-looking statements
relate to the expectations of management as to future occurrences and trends,
including statements expressing optimism or pessimism about future operating
results or events and projected sales, earnings, capital expenditures and
business strategy. Forward-looking statements are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Forward-looking statements are and will be based upon management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements.
Although we believe the expectations expressed in forward-looking statements are
based on reasonable assumptions within the bounds of our knowledge,
forward-looking statements, by their nature, involve risks, uncertainties and
other factors, any one or a combination of which could materially affect our
business, financial condition, results of operations or liquidity.
Forward-looking statements that we make herein and in other reports and releases
are not guarantees of future performance and actual results may differ
materially from those discussed in such forward-looking statements as a result
of various factors, including, but not limited to, developments related to the
COVID-19 pandemic, the current economic and credit conditions, the cost of
goods, our inability to successfully execute strategic initiatives, competitive
pressures, economic pressures on our customers and us, the availability of brand
name closeout merchandise, trade restrictions, freight costs, the risks
discussed in the Risk Factors section of our most recent Annual Report on Form
10-K, and other factors discussed from time to time in our other filings with
the SEC , including Quarterly Reports on Form 10-Q and Current Reports on Form
8-K. This report should be read in conjunction with such filings, and you should
consider all of these risks, uncertainties and other factors carefully in
evaluating forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date they are made. We undertake no obligation to
publicly update forward-looking statements whether as a result of new
information, future events or otherwise. Readers are advised, however, to
consult any further disclosures we make on related subjects in our public
announcements and SEC filings.
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Table of Contents
OVERVIEW
The discussion and analysis presented below should be read in conjunction with
the accompanying consolidated financial statements and related notes. Each term
defined in the notes has the same meaning in this item and the balance of this
report.
The following are the results from the second quarter of 2021 that we believe
are key indicators of our operating performance when compared to our operating
performance from the second quarter of 2020:
•Net sales decreased $186.8 million , or 11.4%.
•Comparable sales for stores open at least fifteen months, plus our e-commerce
operations, decreased $211.3 million , or 13.2%.
•Gross margin dollars decreased $105.8 million , while gross margin rate
decreased 200 basis points to 39.6% of net sales.
•Selling and administrative expenses decreased $15.3 million . As a percentage of
net sales, selling and administrative expenses increased 280 basis points to
33.5% of net sales.
•Operating profit decreased to $53.9 million from $608.6 million and diluted
earnings per share decreased to $1.09 per share from $11.29 per share.
•In the second quarter of 2020, we recorded a pre-tax gain on sale of
distribution centers of $463.1 million and consulting and other expenses of $4.0
million related to the sale and leaseback of our four owned distribution
centers. The combined gain on sale of distribution centers and associated
consulting and other expenses increased our operating profit in the second
quarter of 2020 by $459.1 million and increased our diluted earnings per share
by approximately $8.54 per share.
•Cash and cash equivalents decreased by $605.2 million to $293.3 million from
the second quarter of 2020.
•Inventory increased by 32.3%, or $230.3 million , to $943.8 million from the
second quarter of 2020.
•Long-term debt decreased $43.1 million following the prepayment of the 2019
Term Note in the second quarter of 2021. We ended the second quarter of 2021
with no long-term debt.
•We declared and paid a quarterly cash dividend in the amount of $0.30 per
common share in the second quarter of 2021 consistent with the quarterly cash
dividend of $0.30 per common share paid in the second quarter of 2020.
•We acquired 2.4 million of our outstanding common shares for $152.9 million
under our 2020 Repurchase Authorization.
See the discussion and analysis below for more details regarding our operating results.
STORES
The following table shows the stores open and closed during the 2021 cumulative and the 2020 cumulative:
2021
2020
Stores open at the beginning of the fiscal year 1,408
1,404
Stores opened during the period 25
11
Stores closed during the period (15) (11)
Stores open at the end of the period 1,418 1,404
We expect our store count at the end of 2021 to increase by approximately 20 stores compared to our store count at the end of 2020.
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Table of Contents
RESULTS OF OPERATIONS
The following table compares components of our consolidated statements of
operations and comprehensive income as a percentage of net sales at the end of
each period:
Second Quarter Year-to-Date
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (exclusive of depreciation
expense shown separately below) 60.4 58.4 60.0 59.3
Gross margin 39.6 41.6 40.0 40.7
Selling and administrative expenses 33.5 30.7 32.0 31.2
Depreciation expense 2.4 2.1 2.2 2.3
Gain on sale of distribution centers 0.0 (28.2) 0.0 (15.0)
Operating profit 3.7 37.0 5.7 22.2
Interest expense (0.2) (0.2) (0.2) (0.2)
Other income (expense) (0.0) 0.1 0.0 (0.1)
Income before income taxes 3.5 36.9 5.6 21.9
Income tax expense 0.9 9.5 1.3 5.6
Net income 2.6 % 27.5 % 4.3 % 16.3 %
SECOND QUARTER 2021 COMPARED TO SECOND QUARTER 2020
Net Sales Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comparable sales ("comp" or "comps") in the second quarter of 2021 compared to the second quarter of 2020 were as follows: Second Quarter ($ in thousands) 2021 2020 Change Comps Furniture$ 409,078 28.1 %$ 439,737 26.7 %$ (30,659) (7.0) % (9.5) % Seasonal 259,682 17.8 299,700 18.2 (40,018) (13.4) (14.6) Soft Home 183,249 12.6 242,664 14.8 (59,415) (24.5) (26.1) Food 178,167 12.2 205,797 12.5 (27,630) (13.4) (14.9) Consumables 159,301 10.9 177,236 10.8 (17,935) (10.1) (11.4) Hard Home 145,241 10.0 174,291 10.6 (29,050) (16.7) (18.0) Apparel, Electronics, & Other 122,656 8.4 104,772 6.4 17,884 17.1 15.2 Net sales$ 1,457,374 100.0 %$ 1,644,197 100.0 %$ (186,823) (11.4) % (13.2) % In the year-to-date 2021, we realigned our merchandise categories and renamed our Electronics, Toys, & Accessories merchandise category as Apparel, Electronics, & Other. See the reclassifications discussion in note 1 to the consolidated financial statements for additional information. In order to provide comparative information, we have reclassified our results into the revised merchandise category alignment for both periods presented. Net sales decreased$186.8 million , or 11.4%, to$1,457.4 million in the second quarter of 2021, compared to$1,644.2 million in the second quarter of 2020. The decrease in net sales was primarily driven by a 13.2% decrease in our comps, which decreased net sales by$211.3 million . This decrease was partially offset by our non-comparable sales, which increased net sales by$24.5 million , driven by increased sales in our new and relocated stores compared to closed stores, and a higher store count compared to the second quarter of 2020. Our comps are calculated based on the results of all stores that were open at least fifteen months plus our e-commerce net sales. Our comps and net sales declined during the second quarter of 2021 in comparison to the second quarter of 2020 primarily due to the relatively larger impact of government stimulus on consumer behavior during the height of quarantining in the second quarter of 2020. 16 -------------------------------------------------------------------------------- Table of Contents Comps and net sales in our home products categories, which include our Furniture, Seasonal, Soft Home, andHard Home categories, decreased in the second quarter of 2021 compared to the second quarter of 2020. We believe this decrease was primarily attributable to a relatively larger impact of government-sponsored relief funding on consumer behavior in the first half of 2020 and the easing of nesting trends driven by the COVID-19 pandemic in the second quarter of 2021 compared to the second quarter of 2020. Additionally, we believe our comps and net sales in our home products categories were negatively impacted by supply chain constraints which reduced inventory availability in the second quarter of 2021, and by the impact of labor challenges in our distribution centers, particularly those servicing our stores located on the east coast, which resulted in fewer shipments from our distribution centers to our stores. With the planned opening of our forward distribution centers, small-format distribution centers designed to process bulky and full-pallet shipments, in the third quarter of 2021 and our continuing sourcing efforts, we believe we will begin to mitigate the challenges we are encountering in our supply chain. Despite these challenges, our home products categories performed in line with our expectations in the second quarter of 2021 and we believe that our customers continued to respond positively to our trend-right home offerings and the Broyhill® brand. Comps and net sales in our Food and Consumables merchandise categories also decreased during the second quarter of 2021 compared to the second quarter of 2020. The decrease was partly driven by lower demand for essential products, which we define as food, consumables, health products, and pet supplies, compared to the second quarter of 2020. We experienced greater demand for these products in the early stages of the COVID-19 pandemic when customers were stocking up on these products. Similar to our home products categories above, comps and net sales in our Food and Consumables categories were also negatively impacted by supply chain constraints and labor challenges in our distribution centers. Partially offsetting our decreased comps and net sales in the second quarter of 2021 was an increase in comps and net sales in our Apparel, Electronics, & Other category driven by the product assortments found in The Lot and Queue Line. The Lot is a cross-category presentation solution with a curated assortment to promote life's occasions. Queue Line offers our customers a streamlined checkout experience with a new and expanded convenience assortment and a smaller footprint that provides additional floor space to other categories. Our customers have continued to respond positively to these strategic initiatives and we believe the product assortment offered by The Lot and Queue Line is aligned with customer demand and leading to increased net sales and positive comps in our Apparel, Electronics, & Other category. At the end of the second quarter of 2021, The Lot and Queue Line had each been rolled out to approximately 1,225 stores, compared to approximately 570 stores at the end of the second quarter of 2020. Gross Margin Gross margin dollars decreased$105.8 million , or 15.5%, to$577.8 million for the second quarter of 2021, compared to$683.6 million for the second quarter of 2020. The decrease in gross margin dollars was primarily due to a decrease in net sales, which decreased gross margin dollars by$77.7 million , and a decrease in gross margin rate, which decreased gross margin dollars by$28.1 million . Gross margin as a percentage of net sales decreased 200 basis points to 39.6% in the second quarter of 2021 as compared to 41.6% in the second quarter of 2020. The gross margin rate decrease was primarily a result of higher inbound freight costs driven by increased ocean carriage rates as demand outpaced container and carrier supply. The ocean carriage demand and supply imbalance was exacerbated by temporary COVID-19-related port shutdowns during the second quarter of 2021. Additionally, inbound freight costs increased due to higher domestic transportation rates, related to increased demand following the easing of COVID-19-related restrictions, and increased fuel costs compared to the second quarter of 2020. This increase was partially offset by a lower markdown rate compared to the second quarter of 2020. Selling and Administrative Expenses Selling and administrative expenses were$488.7 million for the second quarter of 2021, compared to$504.0 million for the second quarter of 2020. The decrease of$15.3 million in selling and administrative expenses was driven by a decrease in store-related payroll expense of$17.7 million , accrued bonus expense of$9.2 million , and the absence of sale and leaseback transaction-related expenses of$4.0 million , partially offset by an increase in distribution and transportation costs of$12.2 million , share-based compensation expense of$6.6 million , health benefit expense of$2.9 million , and$2.6 million of store occupancy expense. The decrease in store-related payroll expense was primarily due to the absence of a temporary$2 per hour wage increase that was in place during a portion of the second quarter of 2020 for most of our non-exempt workforce. The decrease in accrued bonus expense was driven by the absence of a one-time discretionary bonus granted in the second quarter of 2020 to recognize our non-exempt associates in our stores and distribution centers, as well as decreased performance in the second quarter of 2021 relative to our bonus targets as compared to our performance in the second quarter of 2020 relative to our bonus targets. The sale and leaseback transaction-related expenses, which included consulting costs, were incurred in completing the sale and leaseback of our distribution centers in the second quarter of 2020. The increase in distribution and transportation costs was driven by rent on our leased distribution centers, for which we recognized rent expense for the full second quarter of 2021 compared to approximately half of the second quarter of 2020. Additionally, our distribution and transportation costs increased due to higher volume, increased labor costs, and outbound transportation costs, partially offset by the absence of the aforementioned temporary$2 per hour wage increase in the second quarter of 2020. Our share-based compensation expense increased primarily due to the timing of the establishment of the grant date of our 2019 PSUs, for which 17 -------------------------------------------------------------------------------- Table of Contents the grant date was established in the first quarter of 2021, compared to our 2018 PSUs, for which the grant date was established in the third quarter of 2020. The increase in health benefit expense was due to a higher volume of claims in the second quarter of 2021 compared to the second quarter of 2020, as many medical providers halted elective care in the second quarter of 2020. The increase in store occupancy expense was due to an increase in net store count since the second quarter of 2020, relocated stores which have higher rents than the stores closed, and normal rent increases resulting from lease renewals. As a percentage of net sales, selling and administrative expenses increased 280 basis points to 33.5% for the second quarter of 2021 compared to 30.7% for the second quarter of 2020. Depreciation Expense Depreciation expense increased$1.3 million to$35.3 million in the second quarter of 2021, compared to$34.0 million for the second quarter of 2020. The increase in depreciation expense was driven by investments in our strategic initiatives, such as The Lot and Queue Line, new stores, and supply chain improvements in the last twelve months.
Depreciation and amortization as a percentage of sales increased by 30 basis points compared to the second quarter of 2020.
Gain on Sale of Distribution Centers Gain on sale of distribution centers decreased$463.1 million to$0 in the second quarter of 2021, compared to$463.1 million in the second quarter of 2020. The gain on sale of distribution centers in the second quarter of 2020 was attributable to the sale and leaseback of our distribution centers inDurant, OK ;Tremont, PA ;Montgomery, AL ; andColumbus, OH . Interest Expense Interest expense was$2.3 million in the second quarter of 2021, compared to$2.5 million in the second quarter of 2020. The decrease in interest expense was primarily driven by a decrease in total average borrowings, partially offset by an increase in our average interest rate. We had total average borrowings (including finance leases and the sale and leaseback financing liability) of$148.3 million in the second quarter of 2021 compared to total average borrowings of$249.4 million in the second quarter of 2020. The decrease in total average borrowings was driven by our repayment of all outstanding borrowings under the Credit Agreement late in the second quarter of 2020 and the repayment of all borrowings under the 2019 Term Note in the second quarter of 2021, partially offset by the establishment of a financing liability in connection with the sale and leaseback transactions for our distribution centers late in the second quarter of 2020. The increase in our average interest rate was driven by a higher average interest rate on the sale and leaseback financing liability compared to our other outstanding borrowings. Other Income (Expense) Other income (expense) was$(0.1) million in the second quarter of 2021, compared to$1.4 million in the second quarter of 2020. The change was driven by decreased gains on our diesel fuel derivatives in second quarter of 2021 compared to the gains on diesel fuel derivatives during the second quarter of 2020, as well as the$0.5 million loss on debt extinguishment recognized in connection with the prepayment of the 2019 Term Note in the second quarter of 2021. Income Taxes The effective income tax rate for the second quarter of 2021 was 26.7% compared to 25.6% in the second quarter of 2020. The increase in the effective income tax rate in the second quarter of 2021 compared to the second quarter of 2020 was primarily attributable to an increase in nondeductible executive compensation, partially offset by an increase in employment-related tax credits compared to the second quarter of 2020. 18
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Contents
YEAR TO DATE 2021 COMPARED TO YEAR TO DATE 2020
Net Sales Net sales by merchandise category (in dollars and as a percentage of total net sales) in the year-to-date 2021 and the year-to-date 2020, and the change in net sales (in dollars and percentage) and the change in comps (in percentage) from the year-to-date 2021 compared to the year-to-date 2020 were as follows: Year-to-Date ($ in thousands) 2021 2020 Change Comps Furniture$ 890,509 28.9 %$ 855,438 27.7 %$ 35,071 4.1 % 1.8 % Seasonal 563,600 18.4 496,021 16.1 67,579 13.6 12.2 Soft Home 407,103 13.2 439,416 14.3 (32,313) (7.4) (9.0) Food 358,464 11.6 420,911 13.6 (62,447) (14.8) (16.0) Consumables 321,689 10.4 372,931 12.1 (51,242) (13.7) (14.8) Hard Home 297,002 9.6 304,834 9.9 (7,832) (2.6) (4.0) Apparel, Electronics, & Other 244,559 7.9 193,795 6.3 50,764 26.2 24.4 Net sales$ 3,082,926 100.0 %$ 3,083,346 100.0 %$ (420) - % (1.7) % Net sales decreased$0.4 million , or 0%, to$3,082.9 million in the year-to-date 2021, compared to$3,083.3 million in the year-to-date 2020. The decrease in net sales was driven by a comp decrease of 1.7%, which decreased net sales by$52.0 million , partially offset by our non-comparable sales which increased net sales by$51.6 million as a result of increased net sales in our new and relocated stores compared to closed stores, and an increase in net store count compared to the second quarter of 2020. Our net sales in the year-to-date 2021 were in line with our net sales in the year-to-date 2020, despite a greater impact of government sponsored relief funds distributed in the year-to-date 2020 compared to the year-to-date 2021. In the year-to-date 2021, we experienced an increase in demand for our Furniture and Seasonal categories which we believe was bolstered by government stimulus and unemployment funds, particularly in the first quarter of 2021, together with the continuation of nesting trends we experienced in 2020 due to customers investing more time and discretionary funds in their home. In the first quarter of 2021, these nesting trends shifted toward patio furniture and other outdoor products which drove increased net sales and comps in the lawn & garden and summer departments of our Seasonal merchandise category. Nesting trends abated in the second quarter of 2021 as COVID-19 vaccines became widely available and many consumers began spending more time outside their homes. Despite the easing of the nesting trends and stimulus spending that were driven by the COVID-19 pandemic, we believe that our customers continued to respond positively to our product assortments and our Broyhill® brand in particular. While our Furniture and Seasonal comps and net sales were negatively impacted by supply chain constraints and labor challenges in our distribution centers in the second quarter of 2021, we were pleased with the performance of these categories in the year-to-date 2021 and we believe we can overcome the challenges we are encountering in our supply chain. Our Soft Home andHard Home categories each experienced a decrease in net sales and comps in the year-to-date 2021 compared to the year-to-date 2020, primarily due to lower on-hand product availability in the second quarter of 2021, which was primarily driven by global supply chain challenges. Despite the decrease in net sales and comps in the year-to-date 2021, both categories performed in line with our expectations. Our Apparel, Electronics, & Other category also experienced increased net sales and positive comps in the year-to-date 2021 driven by our customers responding positively to our strategic initiatives - including The Lot and Queue Line, which led to our increased net sales and positive comps in the year-to-date 2021. We believe our product assortment is strongly aligned with customer demand and that the Apparel, Electronics, & Other category is a significant growth opportunity for us. Our Food and Consumables categories each experienced a decrease in net sales and comps in the year-to-date 2021 compared to the year-to-date 2020, primarily due to a decrease in demand for essential products, which we define as food, consumables, health products, and pet supplies. We experienced greater demand for these products in the year-to-date 2020 during the early stages of the COVID-19 pandemic, which has since declined as customers are no longer stocking up on these products. Our Food and Consumables categories were also negatively impacted by supply chain constraints in the second quarter of 2021 and by labor challenges in our distribution centers. 19 -------------------------------------------------------------------------------- Table of Contents Gross Margin Gross margin dollars decreased$22.6 million , or 1.8%, to$1,231.7 million for the year-to-date 2021, compared to$1,254.3 million for the year-to-date 2020. The decrease in gross margin dollars was principally due to a decrease in gross margin rate, which decreased gross margin by$22.4 million . Gross margin as a percentage of net sales decreased 70 basis points to 40.0% in the year-to-date 2021, compared to 40.7% in the year-to-date 2020. The gross margin rate decrease was primarily due to higher inbound freight costs, partially offset by lower markdowns. Freight costs increased primarily due to higher ocean carriage rates, domestic transportation rates and fuel costs, and in the first quarter of 2021, detention and demurrage charges resulting from delayed receipt of inventory related to supply chain constraints. Selling and Administrative Expenses Selling and administrative expenses were$986.1 million for the year-to-date 2021, compared to$962.6 million for the year-to-date 2020. The increase of$23.5 million in selling and administrative expenses was attributable to increases in distribution and transportation costs of$26.1 million ,$15.5 million of share-based compensation expense, and$4.7 million of store occupancy costs, partially offset by a decrease of$15.8 million in store-related payroll, the absence of$4.0 million of sale and leaseback transaction-related expenses, the absence of proxy contest-related costs of$3.7 million , and$3.1 million in store supplies expense. The increase in distribution and transportation costs was driven by rent on our leased distribution centers, four of which were sold and leased back in the second quarter of 2020, and higher volume, transportation costs, and labor costs, partially offset by the absence of a$2 per hour wage increase that was implemented for most of our non-exempt workforce beginning inMarch 2020 throughJune 2020 at the height of the COVID-19 pandemic. The increase in share-based compensation expense was primarily due to timing of establishing the grant date of our 2019 PSUs, for which the grant date was established in the first quarter of 2021, compared to our 2018 PSUs, for which the grant date was established in the third quarter of 2020. Our store occupancy costs increased primarily due to an increased store count in the year-to-date 2021, new stores opened in the year-to-date 2021, which have higher rents than the stores closed, and normal rent increases resulting from lease renewals. The decrease in store-related payroll was primarily due the absence of the above-mentioned$2 per hour wage increase, partially offset by additional payroll hours to support our sales. The sale and leaseback transaction-related expenses, which included consulting costs, were incurred in completing the sale and leaseback of our distribution centers in the second quarter of 2020. The proxy contest-related costs were comprised of legal, public relations, and advisory fees, and settlement costs incurred to resolve a proxy contest in the first quarter of 2020. The decrease in store supplies was driven by a decrease in distribution of safety and cleaning supplies, such as personal protective equipment, hand sanitizer, and disinfectants, as the availability and adoption of COVID-19 vaccines continued in the year-to-date 2021.
As a percentage of net sales, SG&A increased 80 basis points to 32.0% for the year-to-date 2021, compared to 31.2% for the year-to-date 2020.
Depreciation Expense Depreciation expense decreased$2.4 million to$69.3 million in the year-to-date 2021, compared to$71.7 million for the year-to-date 2020. The decrease was driven by the sale of four distribution centers in the second quarter of 2020, partially offset by the investments in our strategic initiatives, new stores, and supply chain improvements.
Depreciation and amortization as a percentage of sales decreased by 10 basis points compared to the first half of 2020.
Gain on Sale of Distribution Centers Gain on sale of distribution centers decreased$463.1 million to$0 in the year-to-date 2021, compared to$463.1 million in the year-to-date 2020. The gain on sale of distribution centers in the year-to-date 2020 was attributable to the sale and leaseback of our distribution centers inDurant, OK ;Tremont, PA ;Montgomery, AL ; andColumbus, OH during the second quarter of 2020. Interest Expense Interest expense was$4.9 million in the year-to-date 2021, compared to$5.9 million in the year-to-date 2020. The decrease in interest expense was driven by lower total average borrowings (including finance leases and the sale and leaseback financing liability). We had total average borrowings of$164.5 million in the year-to-date 2021 compared to$351.1 million in the year-to-date 2020. The decrease in total average borrowings was driven by our repayment of all outstanding debt under the Credit Agreement following the sale and leaseback transaction completed in the second quarter of 2020, and our prepayment of the 2019 Term Note in the second quarter of 2021, partially offset by the establishment of the financing liability in connection with the sale and leaseback transactions. The decrease in total average borrowings was partially offset by a higher average interest rate on the sale and leaseback financing liability. Other Income (Expense) Other income (expense) was$0.8 million in the year-to-date 2021, compared to$(2.0) million in the year-to-date 2020. The change was primarily driven by unrealized gains on our diesel fuel derivatives in the year-to-date 2021 compared to unrealized 20 -------------------------------------------------------------------------------- Table of Contents losses on diesel fuel derivatives in the year-to-date 2020. The gains on diesel fuel derivatives in the year-to-date 2021 were partially offset by a$0.5 million loss on debt extinguishment recognized in the year-to-date 2021 related to the prepayment of the 2019 Term Note. Income Taxes The effective income tax rate for the year-to-date 2021 and the year-to-date 2020 were 23.3% and 25.8%, respectively. The decrease in the effective income tax rate was primarily attributable to the net tax benefit associated with settlement of share-based payment awards during the year-to-date 2021 and an increase in employment-related credits in the year-to-date 2021 compared to the year-to-date 2020, partially offset by an increase in nondeductible executive compensation compared to the year-to-date 2020. 2021 Guidance As we enter the second half of 2021, we are facing significant supply chain challenges as a result of COVID-19-related shutdowns in Asian factories and ports, which we expect to adversely impact our net sales and gross margin in the third and fourth quarters of 2021. Additionally, we are facing a highly competitive domestic labor market, which we expect to result in increased payroll expenses for our stores and distribution centers in the third and fourth quarters of 2021. We have incorporated our current best estimate of the impacts of the supply chain and labor headwinds into the guidance below. As ofAugust 27, 2021 , and excluding consideration of potential share repurchase activity, we expect the following in the third quarter of 2021: •Comparable sales decline in the mid-single digits; •Gross margin rate down approximately 175 basis points compared to last year, driven by freight headwinds; •Selling and administrative expenses up slightly compared to last year; and •Diluted loss per share in the range of$0.10 to$0.20 . As ofAugust 27, 2021 , and excluding consideration of potential share repurchase activity, we expect the following in the full year 2021: •Comparable sales decline in the low single digits; •Gross margin rate down approximately 100 basis points compared to last year; •Selling and administrative expenses up compared to last year; and •Diluted earnings per share in the range of$5.90 to$6.05 . Capital Resources and Liquidity OnAugust 31, 2018 , we entered into the Credit Agreement, which provides for a$700 million five-year unsecured credit facility. The Credit Agreement expires onAugust 31, 2023 . Borrowings under the Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness. The Credit Agreement includes a$30 million swing loan sublimit, a$75 million letter of credit sublimit, a$75 million sublimit for loans to foreign borrowers, and a$200 million optional currency sublimit. The interest rates, pricing and fees under the Credit Agreement fluctuate based on our debt rating. The Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolving loans made under the Credit Agreement without penalty. The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios - a leverage ratio and a fixed charge coverage ratio. The covenants of the Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with the synthetic lease for our distribution center inApple Valley, CA. A violation of any of the covenants could result in a default under the Credit Agreement that would permit the lenders to restrict our ability to further access the Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Agreement. AtJuly 31, 2021 , we were in compliance with the covenants of the Credit Agreement. AtJuly 31, 2021 , we had no borrowings outstanding under the Credit Agreement, and the borrowings available under the Credit Agreement were$690.9 million , after taking into account the reduction in availability resulting from outstanding letters of credit totaling$9.1 million . OnAugust 7, 2019 , we entered into the 2019 Term Note, a$70 million term note agreement, which was secured by the equipment at ourCalifornia distribution center and carried a fixed interest rate of 3.3%. In light of our strong liquidity and current market conditions, we prepaid the remaining$44.3 million principal balance under the 2019 Term Note in the second quarter of 2021. In connection with the prepayment, we incurred a$0.4 million prepayment fee and recognized a$0.5 million loss on debt extinguishment in the second quarter of 2021. 21 -------------------------------------------------------------------------------- Table of Contents We have historically funded our working capital requirements with borrowings under our credit facility. However, based on our current cash and cash equivalents position and projected cash flows from operations, we intend to fund our working capital requirements, along with capital expenditures, share repurchases, and other contractual commitments, for the upcoming quarter without borrowing under the Credit Agreement. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments. InAugust 2020 , our Board of Directors authorized the repurchase of up to$500 million of our common shares ("2020 Repurchase Authorization"). Pursuant to the 2020 Repurchase Authorization, we are authorized to repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Common shares acquired through the 2020 Repurchase Authorization will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 2020 Repurchase Authorization has no scheduled termination date and we intend to fund repurchases under the authorization with cash and cash equivalents on hand and cash generated from operations going forward. During the year-to-date 2021, we purchased 3.6 million of our common shares for$230.4 million under the 2020 Repurchase Authorization, at an average price of$64.83 . AtJuly 31, 2021 , we had$96.8 million available for future repurchases under the 2020 Repurchase Authorization. InMay 2021 , our Board of Directors declared a quarterly cash dividend of$0.30 per common share payable onJune 25, 2021 to shareholders of record as of the close of business onJune 11, 2021 . The cash dividend of$0.30 per common share is consistent with our quarterly dividends declared in 2020. In the year-to-date of 2021, we paid approximately$22.7 million in dividends compared to$24.3 million in the year-to-date of 2020. InAugust 2021 , our Board of Directors declared a quarterly cash dividend of$0.30 per common share payable onSeptember 24, 2021 to shareholders of record as of the close of business onSeptember 10, 2021 .
The following table compares the main components of our year-to-date 2021 cash flow versus year-to-date 2020: (in thousands)
2021 2020 Change Net cash provided by operating activities$ 142,158 $ 468,384 $ (326,226) Net cash (used in) provided by investing activities (77,086) 517,586 (594,672)
Net cash used in financing activities
Cash provided by operating activities decreased$326.2 million to$142.2 million in the year-to-date 2021 compared to$468.4 million in the year-to-date 2020. The decrease was principally driven by an increase in cash outflows from inventories, due to normalization of inventory levels at the end of the second quarter of 2021 compared to the historically low inventory levels at the end of the second quarter of 2020, and an increase in cash outflows from current income taxes, driven by the payment of taxes on the sale of our distribution centers since the second quarter of 2020. These decreases were partially offset by an increase in net income after adjusting for non-cash activities such as non-cash share-based compensation expense, non-cash lease expense, and the add-back for (loss) gain on disposition of equipment and property.
Cash (used) provided by investing activities decreased by
Cash used in financing activities increased by$191.2 million to$331.3 million in the year-to-date 2021 compared to$140.1 million in the year-to-date 2020. The increase was primarily driven by an increase in payments for treasury shares acquired due to shares repurchased under the 2020 Repurchase Authorization compared to the year-to-date 2020 when we did not have an active share repurchase program, and the absence of financing proceeds from sale and leaseback transactions completed in the second quarter of 2020. The increase was partially offset by a decrease in net repayments of long-term debt due to the repayment of all outstanding borrowings under the Credit Agreement in the year-to-date 2020 compared to repayment of all outstanding borrowings under the 2019 Term Note, which carried a lower balance at the time of repayment compared to the Credit Agreement at the time of repayment, in the year-to-date 2021. 22 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, and bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. See note 1
To
our consolidated financial statements included in our Form 10-K 2020 for additional information on our accounting policies.
The estimates, judgments, and assumptions that have a higher degree of inherent uncertainty and require the most significant judgments are outlined in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2020 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 2020 Form 10-K, our financial condition, results of operations, and liquidity for the current period could have been materially different from those presented.
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