Segment reporting |
14. Segment reporting The Company’s reportable segments were determined on the same basis as how management evaluates performance internally by the Chief Operating Decision Maker (“CODM”). The Company has determined that the Chief Executive Officer is the CODM and the Company’s two reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as the installation services business. The Elfa segment includes the manufacturing business that produces the elfa® brand products that are sold domestically exclusively through the TCS segment, as well as on a wholesale basis in approximately 30 countries around the world with a concentration in the Nordic region of Europe. The intersegment sales in the Elfa column represent elfa® product sales to the TCS segment. These sales and the related gross margin on merchandise recorded in TCS inventory balances at the end of the period are eliminated for consolidation purposes in the Eliminations column. The net sales to third parties in the Elfa column represent sales to customers outside of the United States. The Company has determined that adjusted earnings before interest, tax, depreciation, and amortization (“Adjusted EBITDA”) is the profit or loss measure that the CODM uses to make resource allocation decisions and evaluate segment performance. Adjusted EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations and, therefore, are not included in measuring segment performance. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and the Revolving Credit Facility and we define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, certain non-cash items, and other adjustments that we do not consider in our evaluation of ongoing operating performance from period to period. | | | | | | | | | | | | | Fiscal Year Ended April 3, 2021 | | TCS | | Elfa | | Eliminations | | Total | Net sales to third parties | | $ | 923,083 | | $ | 67,005 | | $ | — | | $ | 990,088 | Intersegment sales | | | — | | | 62,918 | | | (62,918) | | | — | Adjusted EBITDA | | | 126,543 | | | 24,865 | | | (885) | | | 150,523 | Depreciation and amortization | | | 31,043 | | | 3,688 | | | — | | | 34,731 | Interest expense, net | | | 16,947 | | | 321 | | | — | | | 17,268 | Capital expenditures (1) | | | 15,073 | | | 2,103 | | | — | | | 17,176 | Goodwill | | | 202,815 | | | — | | | — | | | 202,815 | Trade names (1) | | | 187,048 | | | 40,621 | | | — | | | 227,669 | Assets (1) | | | 979,411 | | | 106,408 | | | (7,350) | | | 1,078,469 |
| | | | | | | | | | | | | Fiscal Year Ended March 28, 2020 | | TCS | | Elfa | | Eliminations | | Total | Net sales to third parties | | $ | 852,349 | | $ | 63,604 | | $ | — | | $ | 915,953 | Intersegment sales | | | — | | | 61,955 | | | (61,955) | | | — | Adjusted EBITDA | | | 77,156 | | | 16,988 | | | (3,373) | | | 90,771 | Depreciation and amortization | | | 34,608 | | | 4,030 | | | — | | | 38,638 | Interest expense, net | | | 21,200 | | | 341 | | | — | | | 21,541 | Capital expenditures (1) | | | 30,500 | | | 3,119 | | | — | | | 33,619 | Goodwill | | | 202,815 | | | — | | | — | | | 202,815 | Trade names (1) | | | 187,048 | | | 35,721 | | | — | | | 222,769 | Assets (1) | | | 1,073,888 | | | 99,587 | | | (6,661) | | | 1,166,814 |
| | | | | | | | | | | | | Fiscal Year Ended March 30, 2019 | | TCS | | Elfa | | Eliminations | | Total | Net sales to third parties | | $ | 829,622 | | $ | 65,471 | | $ | — | | $ | 895,093 | Intersegment sales | | | — | | | 57,849 | | | (57,849) | | | — | Adjusted EBITDA | | | 84,041 | | | 12,563 | | | (257) | | | 96,347 | Depreciation and amortization | | | 31,924 | | | 4,381 | | | — | | | 36,305 | Interest expense, net | | | 27,016 | | | 259 | | | — | | | 27,275 | Capital expenditures (1) | | | 31,176 | | | 2,494 | | | — | | | 33,670 | Goodwill | | | 202,815 | | | — | | | — | | | 202,815 | Trade names (1) | | | 187,048 | | | 38,102 | | | — | | | 225,150 | Assets (1) | | | 649,351 | | | 103,347 | | | (3,954) | | | 748,744 |
(1) | Tangible assets and trade names in the Elfa column are located outside of the United States. |
A reconciliation of Adjusted EBITDA to income before taxes is set forth below: | | | | | | | | | | | | Fiscal Year Ended | | | April 3, | | March 28, | | March 30, | | | | 2021 | | | 2020 | | | 2019 | Income before taxes | | $ | 80,843 | | $ | 21,202 | | $ | 21,961 | Add: | | | | | | | | | | Depreciation and amortization | | | 34,731 | | | 38,638 | | | 36,305 | Interest expense, net | | | 17,268 | | | 21,541 | | | 27,275 | Pre-opening costs (a) | | | 1,026 | | | 8,237 | | | 2,103 | Non-cash lease expense (b) | | | 4,147 | | | (2,169) | | | (1,327) | Stock-based compensation (c) | | | 7,823 | | | 3,110 | | | 2,846 | Management transition costs (d) | | | 1,200 | | | — | | | — | Loss on extinguishment of debt (e) | | | 893 | | | — | | | 2,082 | Foreign exchange losses (gains) (f) | | | 200 | | | (167) | | | 60 | Optimization Plan implementation charges (g) | | | — | | | — | | | 4,864 | Elfa France closure (h) | | | — | | | 402 | | | — | Employee retention credit (i) | | | (1,028) | | | — | | | — | COVID-19 costs (j) | | | 2,266 | | | — | | | — | Severance and other costs (credits) (k) | | | 1,154 | | | (23) | | | 178 | Adjusted EBITDA | | | 150,523 | | | 90,771 | | | 96,347 |
(a) | Non-capital expenditures associated with opening new stores, relocating stores, and net costs associated with opening the second distribution center, including marketing expenses, travel and relocation costs. We adjust for these costs to facilitate comparisons of our performance from period to period. |
(b) | Reflects the extent to which our annual GAAP operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments. Non-cash lease expense increased in fiscal 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments, of which approximately $4,700 remains deferred as of April 3, 2021, and the modification of certain lease terms for a substantial portion of our leased properties. In fiscal 2019, lease expenses associated with the opening of the second distribution center were excluded from Non-cash lease expense and included in Pre-opening costs. |
(c) | Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period. |
(d) | Costs related to the transition of key executives including signing bonus and relocation expenses recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(e) | Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in December 2020 and September 2018, which we do not consider in our evaluation of our ongoing operations. |
(f) | Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations. |
(g) | Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance. |
(h) | Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance. |
(i) | Employee retention credit related to the CARES Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense which we do not consider in our evaluation of ongoing performance. |
(j) | Includes incremental costs attributable to the COVID-19 pandemic, which consist of hazard pay for distribution center employees in the first quarter of fiscal 2020 and sanitization costs in fiscal 2020, all of which are recorded as selling, general and administrative expenses which we do not consider in our evaluation of ongoing performance. |
(k) | Severance and other credits/costs include amounts our management does not consider in our evaluation of our ongoing operations. The fiscal 2020 amounts include costs primarily incurred in the first and second quarters of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020. |
The following table shows sales by merchandise category as a percentage of total net sales for fiscal 2020, fiscal 2019, and fiscal 2018: | | | | | | | | | | Fiscal Year Ended | | | | April 3, | | March 28, | | March 30, | | | | 2021 | | 2020 | | 2019 | | Custom Closets (1) | | 50 | % | 51 | % | 49 | % | Kitchen and Trash | | 18 | % | 14 | % | 14 | % | Storage, Long-Term Storage, Shelving | | 14 | % | 13 | % | 14 | % | Office, Collections, Hooks | | 8 | % | 8 | % | 8 | % | Bath, Travel, Laundry | | 5 | % | 7 | % | 8 | % | Gift Packaging, Seasonal, Impulse | | 4 | % | 5 | % | 6 | % | Other | | 1 | % | 2 | % | 1 | % | Total | | 100 | % | 100 | % | 100 | % |
(1) | Includes elfa®, Avera® and Laren® products and installation services, as well as closet lifestyle department products sold by the TCS segment and Elfa segment sales to third parties. |
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