UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October 28, 2017~~August 4, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 1-14035

Stage Stores, Inc.

(Exact name of registrant as specified in its charter)



NEVADA (State or other jurisdiction of incorporation or organization)	91-1826900 (I.R.S. Employer Identification No.)

2425 West Loop South, Houston, Texas (Address of principal executive offices)	77027 (Zip Code)

(800) 579-2302

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	o	Accelerated filer	þ
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of ~~November 29, 2017,~~September 6, 2018, there were ~~27,627,382~~28,242,790 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
			Page No.
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets
		~~October 28, 2017~~August 4, 2018, February 3, 2018 and ~~January 28,~~July 29, 2017	3
			Condensed Consolidated Statements of Operations and Comprehensive Loss
		Three and ~~Nine~~Six Months Ended ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and October 29, 2016~~	4
	Condensed Consolidated Statements of Cash Flows
		~~Nine~~Six Months Ended ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and October 29, 2016~~	5
	Condensed Consolidated Statement of Stockholders' Equity
		~~Nine~~Six Months Ended ~~October 28, 2017~~August 4, 2018	6
			Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		1822
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		2731
Item 4.	Controls and Procedures		2731

PART II OTHER INFORMATION

Item 1.	Legal Proceedings		2831
Item 1A.	Risk Factors		2831
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		2932
Item 3.	Defaults Upon Senior Securities		3033
Item 4.	Mine Safety Disclosures		3033
Item 5.	Other Information		3033
Item 6.	Exhibits		3134

SIGNATURES			3235

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Stage Stores, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value)

(Unaudited)


										February 3, 2018			July 29, 2017
	October 28, 2017			January 28, 2017			August 4, 2018			As Adjusted			As Adjusted
ASSETS
Cash and cash equivalents	$	30,330		$	13,803		$	26,573		$	21,250		$	26,132
Merchandise inventories, net	578,633			409,384			476,883			438,377			458,319
Prepaid expenses and other current assets	52,376			41,574			48,525			52,407			64,443
Total current assets	661,339			464,761			551,981			512,034			548,894

Property, equipment and leasehold improvements, net of accumulated depreciation of $734,626 and $697,087, respectively	260,870			284,110
Property, equipment and leasehold improvements, net of accumulated depreciation of $722,938, $699,788 and $721,472, respectively							236,151			252,788			269,977
Intangible assets	17,135			15,235			17,135			17,135			17,135
Other non-current assets, net	28,237			22,883			24,409			24,449			23,925
Total assets	$	967,581		$	786,989		$	829,676		$	806,406		$	859,931

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	214,783		$	101,985		$	122,680		$	145,991		$	126,904
Current portion of debt obligations							3,542			2,985			3,050
Accrued expenses and other current liabilities	77,093			66,685			73,506			64,442			70,754
Total current liabilities	291,876			168,670			199,728			213,418			200,708

Long-term debt obligations	268,969			163,749			268,682			180,350			227,385
Other long-term liabilities	70,052			74,410			65,431			68,524			78,209
Total liabilities	630,897			406,829			533,841			462,292			506,302

Commitments and contingencies

Common stock, par value $0.01, 100,000 shares authorized, 32,794 and 32,340 shares issued, respectively	328			323
Common stock, par value $0.01, 100,000 shares authorized, 33,418, 32,806 and 32,766 shares issued, respectively							334			328			328
Additional paid-in capital	416,422			410,504			421,621			418,658			414,524
Treasury stock, at cost, 5,175 shares, respectively	(43,248		)	(43,286		)	(43,388		)	(43,298		)	(43,210		)
Accumulated other comprehensive loss	(5,021		)	(5,648		)	(4,823		)	(5,177		)	(5,385		)
(Accumulated deficit) retained earnings	(31,797		)	18,267
Accumulated deficit							(77,909		)	(26,397		)	(12,628		)
Total stockholders' equity	336,684			380,160			295,835			344,114			353,629
Total liabilities and stockholders' equity	$	967,581		$	786,989		$	829,676		$	806,406		$	859,931

Stage Stores, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(Unaudited)

Three Months Ended Nine Months Ended
October 28, 2017
October 29, 2016 October 28, 2017 October 29, 2016
Net sales $ 357,236
$ 317,140
$ 1,042,924
$ 988,275
Cost of sales and related buying, occupancy and distribution expenses 285,542
260,550
816,071
779,128
Gross profit 71,694

56,590
226,853

209,147
Selling, general and administrative expenses 100,036
84,564
289,188
260,076
Interest expense 2,001
1,395
5,505
3,616
Loss before income tax (30,343 )
(29,369 ) (67,840 )
(54,545 )
Income tax benefit (12,621 ) (13,735 ) (24,873 ) (23,492 )
Net loss $ (17,722 )
$ (15,634 ) $ (42,967 )
$ (31,053 )

Other comprehensive income:
Amortization of employee benefit related costs, net of tax of $81, $86, $242 and $256, respectively $ 132
$ 139
$ 395
$ 417
Pension settlement charge, net of tax of $142 232
—
232
—
Total other comprehensive income 364

139
627

417
Comprehensive loss $ (17,358 )
$ (15,495 ) $ (42,340 )
$ (30,636 )

Basic loss per share data:
Basic loss per share $ (0.64 )
$ (0.58 ) $ (1.57 ) $ (1.15 )
Basic weighted average shares outstanding 27,602
27,155
27,468
27,066

Diluted loss per share data:
Diluted loss earnings per share $ (0.64 )
$ (0.58 ) $ (1.57 ) $ (1.15 )
Diluted weighted average shares outstanding 27,602
27,155
27,468
27,066



	Three Months Ended						Six Months Ended
				July 29, 2017						July 29, 2017
	August 4, 2018			As Adjusted			August 4, 2018			As Adjusted
Net sales	$	369,294		$	377,081		$	713,523		$	685,688
Credit income	14,305			13,190			29,819			26,118
Total revenues	383,599			390,271			743,342			711,806
Cost of sales and related buying, occupancy and distribution expenses	286,807			284,140			568,548			530,529
Selling, general and administrative expenses	110,914			113,833			218,191			215,270
Interest expense	2,650			1,918			4,903			3,504
Loss before income tax	(16,772		)	(9,620		)	(48,300		)	(37,497		)
Income tax expense (benefit)	150			(3,362		)	300			(12,252		)
Net loss	$	(16,922	)	$	(6,258	)	$	(48,600	)	$	(25,245	)

Other comprehensive income:
Amortization of employee benefit related costs, net of tax of $0, $81, $0 and $161, respectively	$	155		$	132		$	354		$	263
Total other comprehensive income	155			132			354			263
Comprehensive loss	$	(16,767	)	$	(6,126	)	$	(48,246	)	$	(24,982	)

Loss per share:
Basic	$	(0.60	)	$	(0.23	)	$	(1.74	)	$	(0.93	)
Diluted	$	(0.60	)	$	(0.23	)	$	(1.74	)	$	(0.93	)

Weighted average shares outstanding:
Basic	28,152			27,535			27,959			27,401
Diluted	28,152			27,535			27,959			27,401

Stage Stores, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


							Six Months Ended
	Nine Months Ended									July 29, 2017
	October 28, 2017			October 29, 2016			August 4, 2018			As Adjusted
Cash flows from operating activities:
Net loss	$	(42,967	)	$	(31,053	)	$	(48,600	)	$	(25,245	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation, amortization and impairment of long-lived assets	49,476			54,285			31,217			33,177
(Gain) loss on retirements of property, equipment and leasehold improvements	(926		)	273
Loss (gain) on retirements of property, equipment and leasehold improvements							17			(528		)
Deferred income taxes	(6,065		)	1,965			—			5,520
Tax deficiency from stock-based compensation	—			(3,295		)
Stock-based compensation expense	6,191			7,345			3,049			4,312
Amortization of debt issuance costs	216			164			148			144
Deferred compensation obligation	(38		)	233			90			(76		)
Amortization of employee benefit related costs and pension settlement charge	1,011			673
Amortization of employee benefit related costs							354			424
Construction allowances from landlords	1,228			6,994			757			1,098
Other changes in operating assets and liabilities:
Increase in merchandise inventories	(137,479		)	(133,347		)	(38,506		)	(18,199		)
Increase in other assets	(9,709		)	(18,527		)
Increase in accounts payable and other liabilities	120,137			119,544
Decrease (increase) in other assets							2,412			(23,240		)
(Decrease) increase in accounts payable and other liabilities							(19,958		)	30,802
Net cash (used in) provided by operating activities	(18,925		)	5,254			(69,020		)	8,189

Cash flows from investing activities:
Additions to property, equipment and leasehold improvements	(25,342		)	(67,934		)	(12,822		)	(15,502		)
Proceeds from insurance and disposal of assets	2,404			1,177			1,802			1,307
Business acquisition	(36,144		)	—			—			(36,144		)
Net cash used in investing activities	(59,082		)	(66,757		)	(11,020		)	(50,339		)

Cash flows from financing activities:
Proceeds from revolving credit facility borrowings	426,308			389,701			298,509			277,013
Payments of revolving credit facility borrowings	(318,851		)	(314,783		)	(233,148		)	(211,891		)
Proceeds from long-term debt obligation	—			5,830			25,000			—
Payments of long-term debt obligations	(5,626		)	(3,507		)	(1,472		)	(4,850		)
Payments of debt issuance costs	(8		)	—			(354		)	(8		)
Payments for stock related compensation	(192		)	(857		)	(260		)	(135		)
Cash dividends paid	(7,097		)	(12,466		)	(2,912		)	(5,650		)
Net cash provided by financing activities	94,534			63,918			85,363			54,479
Net increase in cash and cash equivalents	16,527			2,415			5,323			12,329

Cash and cash equivalents:
Beginning of period	13,803			16,487			21,250			13,803
End of period	$	30,330		$	18,902		$	26,573		$	26,132

Supplemental disclosures including non-cash investing and financing activities:
Interest paid	$	5,221		$	3,425		$	4,866		$	3,324
Income taxes (refunded) paid	$	(8,485	)	$	2,931
Income taxes paid							$	14		$	247
Unpaid liabilities for capital expenditures	$	5,362		$	4,631		$	4,798		$	5,563

Stage Stores, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

For the ~~Nine~~Six Months Ended ~~October 28, 2017~~August 4, 2018

(in thousands, except per share data)

(Unaudited)


	Common Stock			Additional Paid-in Capital				Treasury Stock							Accumulated Other Comprehensive Loss				Retained Earnings (Accumulated Deficit)							Common Stock					Additional Paid-in Capital				Treasury Stock					Accumulated Other Comprehensive Loss				Accumulated Deficit
	Shares	Amount					Shares			Amount								Total				Shares			Amount					Shares	Additional Paid-in Capital			Amount					Total					Accumulated Deficit
Balance at January 28, 2017	32,340	$	323	Additional Paid-in Capital	$	410,504			(5,175	)		$	(43,286	)	Accumulated Other Comprehensive Loss		$	(5,648	Retained Earnings (Accumulated Deficit)		)		$	18,267			$	380,160
Balance at February 3, 2018																										32,806			$	328	$	418,658			(5,175	)	$	(43,298	)	Accumulated Other Comprehensive Loss	$	(5,177	)		$	(26,397	)		$	344,114
Net loss	—	—		—				—			—				—				(42,967		)		(42,967		)	—			—		—				—		—			—				(48,600		)		(48,600		)
Other comprehensive income	—	—		—				—			—				627				—				627			—			—		—				—		—			354				—				354
Dividends on common stock, $0.25 per share	—	—		—				—			—				—				(7,097		)		(7,097		)
Dividends on common stock, $0.10 per share																										—			—		—				—		—			—				(2,912		)		(2,912		)
Deferred compensation	—	—		(38		)		—			38				—				—				—			—			—		90				—		(90		)	—				—				—
Issuance of equity awards, net	454	5		(5		)		—			—				—				—				—			612			6		(6		)		—		—			—				—				—
Tax withholdings paid for net settlement of stock awards	—	—		(230		)		—			—				—				—				(230		)	—			—		(170		)		—		—			—				—				(170		)
Stock-based compensation expense	—	—		6,191				—			—				—				—				6,191			—			—		3,049				—		—			—				—				3,049
Balance at October 28, 2017	32,794	$	328	$	416,422			(5,175	)		$	(43,248	)		$	(5,021	)		$	(31,797	)		$	336,684
Balance at August 4, 2018																										33,418			$	334	$	421,621			(5,175	)	$	(43,388	)	$	(4,823	)		$	(77,909	)		$	295,835

Stage Stores, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Stage Stores, Inc. and its subsidiary (“we,” “us” or “our”) have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods have been made. Results of operations for such interim periods are not necessarily indicative of the results of operations for a full year due to seasonality and other factors. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with our Annual Report on Form 10-K for the year ended ~~January 28, 2017~~February 3, 2018 (“Form 10-K”).

We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of August 4, 2018, we operated in 42 states through 764 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 59 GORDMANS off-price stores, as well as an e-commerce website. Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in mid-sized, non-rural Midwest markets.

References to a particular year are to our fiscal year, which is the 52- or 53-week period ending on the Saturday closest to January 31st of the following calendar year. For example, a reference to ~~“2017”~~“2018” is a reference to the fiscal year ending February ~~3, 2018,~~2, 2019, and ~~“2016”~~“2017” is a reference to the fiscal year ended ~~January 28, 2017.~~February 3, 2018. Fiscal years ~~2017~~2018 and ~~2016~~2017 are comprised of 5352 weeks and 5253 weeks, respectively. References to the “three months ended ~~October 28, 2017”~~August 4, 2018” and “three months ended ~~October~~July 29, ~~2016”~~2017” are for the respective 13-week fiscal quarters. References to quarters relate to our fiscal quarters. References to the ~~“nine~~“six months ended ~~October 28, 2017”~~August 4, 2018” and ~~“nine~~“six months ended ~~October~~July 29, ~~2016”~~2017” are for the respective ~~39-week~~26-week fiscal periods.

On April 7, 2017, we acquired select assets of Gordmans Stores, Inc. and its subsidiaries through a bankruptcy auction (“Gordmans Acquisition”). The results of the Gordmans branded stores that we operated ~~from April 7, 2017 through October 28, 2017~~since the Gordmans Acquisition are included in our condensed consolidated ~~statement~~statements of operations ~~for the nine months ended October 28, 2017~~ (see Note 8)9).

Recently Adopted Accounting Pronouncements. In ~~March 2016,~~May 2014, the Financial Accounting Standards Board ~~(“FASB”)~~(FASB) issued Accounting Standards Update ~~(“ASU”) 2016-09,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~, which modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and the option to estimate expected forfeitures or recognize forfeitures as they occur. We adopted this standard on a prospective basis in first quarter of 2017. Under the new standard, excess income tax benefits and deficiencies related to awards that vest or settle are recognized in the provision for income taxes as a discrete event in the period in which they occur, which may create significant volatility in the provision for income taxes and earnings. Historically, these amounts were reflected within additional paid-in capital on the balance sheet. In addition, upon adoption excess tax benefits are reflected within operating activities in the statements of cash flows, whereas historically these amounts were reflected as a financing activity. Cash paid to tax authorities on an employee’s behalf for withheld shares continues to be classified as a financing activity in the statement of cash flows. We made a policy election to recognize forfeitures as they occur. For the three and nine months ended October 28, 2017, we recognized excess tax deficiencies of $0.1 million and $2.1 million, respectively, in the provision for income taxes. The adoption of the other requirements of this guidance did not have a material impact on our consolidated financial statements.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~, which provides guidance on certain specific cash flow issues including proceeds received from the settlement of insurance claims. This guidance requires cash proceeds received from the settlement of insurance claims to be classified on the statement of cash flows on the basis of the related insurance coverage (that is, the nature of the loss). The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted and is to be applied retrospectively. We adopted this guidance in the first quarter of 2017. The adoption of ASU 2016-15 did not have a material impact on our condensed consolidated statements of cash flows.

~~Table of Contents~~

~~Recent Accounting Pronouncements Not Yet Adopted. In May 2014, the FASB issued ASU~~(ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), ,and subsequently issued related ASUs, which ~~supersedes most existing~~were incorporated into Topic 606. Under Topic 606, revenue ~~recognition guidance in GAAP. The core principle~~is recognized when a customer obtains control of ~~the guidance is that an entity should recognize revenue when it transfers~~ promised goods or services ~~to customers~~ in an amount that reflects ~~what~~the consideration the entity expects to be entitled to in exchange for those goods or services. The ~~guidance~~standard establishes a five-step revenue recognition model, which includes (i) identifying the contract with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. The ~~guidance~~standard also requires ~~additional disclosures to describe~~disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On February 4, 2018, we adopted the new standard using the full retrospective method. As a result of the adoption of ASU 2014-09, ~~may~~the condensed consolidated statements of operations reflect the reclassification of credit income related to our private label credit card program from selling, general and administrative expenses to revenue. In addition, the condensed consolidated balance sheets and condensed consolidated statement of cash flows reflect the reclassification of the asset for the right to recover sales return merchandise from merchandise inventories to prepaid expenses and other current assets. The tables that follow depict the impact of the reclassification adjustments on the prior period financial statement presentations.

Table of Contents

The condensed consolidated balance sheets reflect the reclassification of the asset for the right to recover sales return merchandise from merchandise inventories to prepaid expenses and other current assets.



Condensed Consolidated Balance Sheets (in thousands)
	February 3, 2018		ASU 2014-09			February 3, 2018
	As previously reported		Adjustments			As adjusted
Assets:
Merchandise inventories, net	$	439,735	$	(1,358	)	$	438,377
Prepaid expenses and other current assets	51,049		1,358			52,407


	July 29, 2017		ASU 2014-09			July 29, 2017
	As previously reported		Adjustments			As adjusted
Assets:
Merchandise inventories, net	$	460,405	$	(2,086	)	$	458,319
Prepaid expenses and other current assets	62,357		2,086			64,443

The condensed consolidated statement of operations reflects the reclassification of credit income from selling, general and administrative expenses to revenue.



Condensed Consolidated Statement of Operations and Comprehensive Loss (in thousands)
	Three Months Ended				Three Months Ended
	July 29, 2017		ASU 2014-09		July 29, 2017
	As previously reported		Adjustments		As adjusted
Net sales	$	377,081	$	—	$	377,081
Credit income	—		13,190		13,190
Total revenues	377,081		13,190		390,271
Selling, general and administrative expenses	100,643		13,190		113,833


	Six Months Ended				Six Months Ended
	July 29, 2017		ASU 2014-09		July 29, 2017
	As previously reported		Adjustments		As adjusted
Net sales	685,688		—		685,688
Credit income	—		26,118		26,118
Total revenues	685,688		26,118		711,806
Selling, general and administrative expenses	189,152		26,118		215,270

Table of Contents

The condensed consolidated statement of cash flows reflects the reclassification of the asset for the right to recover merchandise returned from merchandise inventories to prepaid expenses and other current assets.



Condensed Consolidated Statement of Cash Flows (in thousands)
	Six Months Ended						Six Months Ended
	July 29, 2017			ASU 2014-09			July 29, 2017
	As previously reported			Adjustments			As adjusted
Cash flows from operating activities:
Increase in merchandise inventories	$	(19,251	)	$	1,052		$	(18,199	)
Increase in other assets	(22,188		)	(1,052		)	(23,240		)

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. If a subtotal for operating income is shown on the income statement, then the other components of the net periodic benefit cost must be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. The new standard also requires disclosure of the line item(s) in the income statement that include net periodic benefit costs. Additionally, only the service cost component of the net periodic benefit cost is eligible for capitalization. The change in presentation of service cost must be applied retrospectively, ~~to each prior reporting period presented, or retrospectively with~~while the ~~cumulative effect~~capitalization of ~~initially applying the guidance recognized in retained earnings at the date of adoption. The new revenue standard will~~service cost must be ~~effective for us in the first quarter of fiscal 2018, which begins~~applied on a prospective basis. On February 4, 2018, we adopted ASU 2017-07. The pension plan that we sponsor is frozen, and ~~we plan to apply~~therefore, service costs no longer accrue under the ~~full retrospective method~~plan. The adoption of ~~adoption. We do~~the new standard did not ~~expect~~change the ~~adoption to have a material impact on~~presentation of our ~~financial condition, results~~condensed consolidated statements of ~~operations or cash flows.~~operations.

Recent Accounting Pronouncements Not Yet Adopted. In February 2016, the FASB issued ASU 2016-02,Leases~~(Topic~~ (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840,, Leases. The new standard requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. ~~We plan to make a~~A policy election ~~that will~~can be made, by underlying asset class, to keep leases with an initial term of 12 months or less off of the balance sheet and ~~will result in recognizing~~recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. As a result, lessees will be required to put most leases on their balance sheets while recognizing expense on their income statements in a manner similar to current accounting. In addition, this guidance requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. The new standard will be effective for us in the first quarter of fiscal 2019, which begins on February 3, 2019. AASU 2016-02 requires a modified retrospective transition approach ~~is required~~ for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides an optional transition method for the adoption of the new leases standard. If elected, the comparative periods would continue to be reported under the legacy guidance in Topic 840, including the related disclosures, and a cumulative-effect adjustment would be made to retained earnings as of the adoption date.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarifies certain aspects of the new leases standard. The amendments in this ASU address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. The amendments have the same effective date and transition requirements as the new leases standard.

We continue to evaluate the impact that the adoption of ~~this ASU~~Topic 842 will have on our consolidated financial statements and disclosures, including the effect of ~~certain~~the optional practical expedients permitted under the transition guidance. Based on our assessment to date, we expect the adoption of ~~ASU 2016-02~~ Topic 842will result in a significant increase in lease-related assets and liabilities on our consolidated balance sheets. The ultimate impact of adopting the new standard will depend on our lease portfolio as of the adoption date.

~~In March 2017, the FASB issued ASU 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. If a subtotal for operating income is shown on the income statement, then the other components of the net periodic benefit cost must be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. The new standard also requires disclosure of the line item(s) in the income statement that include net periodic benefit costs. Additionally, only the service cost component of the net periodic benefit cost is eligible for capitalization. We plan to adopt ASU 2017-07 in the first quarter of fiscal 2018, which begins on February 4, 2018. The change in presentation of service cost must be applied retrospectively, while the capitalization of service cost must be applied on a prospective basis. The pension plan that we sponsor is frozen, and therefore, service costs no longer accrue under the plan. Upon adoption, we will recognize net periodic pension costs in selling, general and administrative expenses, consistent with our current presentation, and we will disclose this in the notes to the financial statements.

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NOTE 2 - ~~STOCK-BASED COMPENSATION~~DEBT OBLIGATIONS

~~Stock-based compensation expense by type of grant~~Debt obligations for each period presented ~~was as follows~~consisted of the following (in thousands):

Three Months Ended Nine Months Ended
October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016
Restricted stock units $ 108
$ —
$ 310
$ —
Non-vested stock 1,300
1,362
4,203
5,311
Performance shares 579
(569 ) 1,988
2,034
Total compensation expense 1,987
793
6,501
7,345
Related tax benefit (747 ) (298 ) (2,444 ) (2,762 )
Stock-based compensation expense, net of tax $ 1,240
$ 495
$ 4,057
$ 4,583



	August 4, 2018		February 3, 2018		July 29, 2017
Revolving credit facility	$	244,649	$	179,288	$	224,824
Term loan	25,000		—		—
Finance obligations	1,064		1,549		2,142
Other financing	1,511		2,498		3,469
Total debt obligations	272,224		183,335		230,435
Less: Current portion of debt obligations	3,542		2,985		3,050
Long-term debt obligations	$	268,682	$	180,350	$	227,385

On August 3, 2018, we entered into an amendment to our senior secured revolving credit facility agreement (“credit facility” or “credit facility agreement”). The amendment provides us with a $25.0 million term loan, which increased total availability under our credit facility from $400.0 million to $425.0 million, with a seasonal increase to $450.0 million and a $25.0 million letter of credit sublimit. Both the existing credit facility and the term loan mature on December 16, 2021. The term loan is payable in quarterly installments of $0.6 million beginning on February 4, 2019, with the remaining balance due upon maturity.

AsWe use the credit facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of ~~October 28, 2017, we have unrecognized compensation cost~~credit requirements. Borrowings under the credit facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the credit facility agreement. The credit facility is secured by our inventory, cash, cash equivalents, and substantially all of ~~$12.6 million related to stock-based compensation awards granted, which is expected to be recognized over~~our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the credit facility agreement. For the six months ended August 4, 2018, the weighted average ~~period of 2.1 years.~~

~~Stock Appreciation Rights (“SARs”)~~interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 3.30% and $259.9 million, respectively.

~~Prior~~Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At August 4, 2018, outstanding letters of credit totaled approximately $12.4 million. These letters of credit expire within 12 months of issuance and may be renewed.

The credit facility agreement contains a covenant requiring us to ~~2012, we granted SARs~~maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The credit facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to ~~our employees, which generally vested 25% annually over~~$30.0 million in a ~~four-year period from~~fiscal year, and (iii) the ~~grant date. Outstanding SARs expire, if not exercised or forfeited, within seven years from the grant date. Exercised SARs are settled by the issuance~~repurchase of common stock under certain circumstances. At August 4, 2018, we were in ~~an amount equal~~compliance with the debt covenants of the credit facility agreement and we expect to remain in compliance. Excess availability under the ~~increase in share price~~credit facility was $95.2 million as of ~~our common stock between the grant date and the exercise date.~~August 4, 2018.

~~The following table summarizes SARs activity for the nine months ended October 28, 2017:~~

Stock Appreciation Rights Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years)
Aggregate Intrinsic Value
(in thousands)
Outstanding, vested and exercisable at January 28, 2017 177,900
$ 17.69

Expired (65,000 ) 16.29

Outstanding, vested and exercisable at October 28, 2017 112,900
$ 18.50
0.4 $ —

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~~Restricted Stock Units (“RSUs”)~~

We grant RSUs to our employees, which vest 25% annually over a four-year period from the grant date. Each vested RSU is settled in cash in an amount equal to the fair market value of one share of our common stock on the vesting date, not to exceed five times the per share fair market value of our common stock on the grant date. Unvested RSUs have the right to receive a dividend equivalent payment equal to cash dividends paid on our common stock. RSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for RSUs is remeasured based on the closing share price of our common stock at each reporting period until the award vests. Compensation expense is recognized ratably over the vesting period and adjusted with changes in the fair value of the liability.

~~The following table summarizes RSU activity for the nine months ended October 28, 2017:~~

Restricted Stock Units Number of Units
Weighted
Average Grant
Date Fair Value
Outstanding at January 28, 2017 —
$ —
Granted 1,321,250
2.14
Forfeited (37,500 ) 2.09
Outstanding at October 28, 2017 1,283,750
2.14

~~Non-vested Stock~~

We grant shares of non-vested stock to our employees and non-employee directors. Non-vested stock awarded to employees vests 25% annually over a four-year period from the grant date. Non-vested stock awarded to non-employee directors cliff vests after one year. At the end of the vesting period, non-vested stock converts one-for-one to common stock. Certain non-vested stock awards have shareholder rights, including the right to vote and to receive dividends. The fair value of non-vested stock awards with dividend rights is based on the closing share price of our common stock on the grant date. The fair value of non-vested stock awards that do not have dividend rights is discounted for the present value of expected dividends during the vesting period. Compensation expense is recognized ratably over the vesting period.

~~The following table summarizes non-vested stock activity for the nine months ended October 28, 2017:~~

Non-vested Stock Number of Shares
Weighted
Average Grant
Date Fair Value
Outstanding at January 28, 2017 1,596,410
$ 10.22
Granted 668,371
2.21
Vested (562,122 ) 11.22
Forfeited (47,130 ) 9.39
Outstanding at October 28, 2017 1,655,529
6.67

The weighted-average grant date fair value for non-vested stock granted during the nine months ended October 28, 2017 and October 29, 2016 was $2.21 and $6.78, respectively. The aggregate intrinsic value of non-vested stock that vested during the nine months ended October 28, 2017 and October 29, 2016, was $1.2 million and $2.7 million, respectively. The payment of the employees’ tax liability for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of shares issued during nine months ended October 28, 2017 was 453,677.

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~~Performance Shares~~

We grant performance shares as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a three-year performance cycle. Performance shares cliff vest following a three-year performance cycle, and if earned are settled in shares of our common stock. The actual number of shares of our common stock that may be earned and issued ranges from zero to a maximum of twice the number of target shares outstanding on the vesting date. Grant recipients do not have any shareholder rights on unvested or unearned shares. The fair value of performance shares is estimated using a Monte Carlo simulation, based on the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recorded ratably over the corresponding vesting period.

~~The following table summarizes information about the performance shares that were outstanding at October 28, 2017:~~

Period Granted Target Shares
Outstanding at January 28, 2017 Target Shares Granted Target Shares Vested Target Shares Forfeited Target Shares
Outstanding at October 28, 2017 Weighted Average
Grant Date Fair Value Per Share
2015 158,490
—
—
(4,444 ) 154,046
$ 28.33
2016 330,233
—
—
(8,527 ) 321,706
8.69
2017 —
600,000
—
—
600,000
1.80
Total 488,723
600,000
—
(12,971 ) 1,075,752
7.65

The weighted-average grant date fair value for performance shares granted during the nine months ended October 28, 2017 and October 29, 2016 was $1.80 and $8.69, respectively. No performance shares vested during the nine months ended October 28, 2017 and October 29, 2016, respectively.

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NOTE 3 - REVENUE

Net Sales

We recognize revenue for merchandise sales, net of expected returns and sales tax, at the time of in-store purchase or delivery of the product to our guest. When merchandise is shipped to our guests, we estimate receipt based on historical experience. Revenue is deferred and a liability is established for sales returns based on historical return rates and sales for the return period. We recognize an asset and corresponding adjustment to cost of sales for our right to recover returned merchandise. At each financial reporting date, we assess our estimates of expected returns, refund liabilities and return assets. For merchandise sold in our stores and online, tender is accepted at the point of sale. When we receive payment before the guest has taken possession of the merchandise, the amount received is recorded as deferred revenue until the transaction is complete. Our performance obligations for unfulfilled merchandise orders are typically satisfied within one week. Shipping and handling fees charged to guests relate to fulfillment activities and are included in net sales with the corresponding costs recorded in cost of sales.

We record deferred revenue for the sale of gift cards and merchandise credits issued for returned merchandise, and we recognize revenue in net sales upon redemption. Gift card and merchandise credit redemptions typically occur within 12 months of the date of issuance with the majority redeemed within the first three months. Our gift cards and merchandise credits do not expire. Based on historical redemption rates, a small percentage of gift cards and merchandise credits will never be redeemed. We recognize estimated breakage income for gift cards and merchandise credits that will never be redeemed in proportion to actual historical redemption patterns.

Under our loyalty programs, members can accumulate points, based on their spending, toward earning a reward certificate that can be redeemed for future merchandise purchases. Points earned by loyalty members reset to zero at the end of each calendar year. Reward certificates expire 30 and 60 days after the date of issuance for our department stores and off-price stores, respectively. We allocate and defer a portion of our sales to reward certificates expected to be earned, based on the relative stand-alone sales transaction price and reward certificate value, and recognize the reward certificate as a net sale when it is redeemed.

The following table presents the composition of net sales by merchandise category (in thousands):



	Three Months Ended
	August 4, 2018									July 29, 2017
Merchandise Category	Department Stores			Off-price Stores			Total Company			Department Stores		Off-price Stores			Total Company
Women’s	$	117,209		$	19,264		$	136,473		$	126,695	$	17,022		$	143,717
Men’s	53,124			8,913			62,037			54,442		7,625			62,067
Children's	29,400			7,530			36,930			29,397		6,217			35,614
Apparel	199,733			35,707			235,440			210,534		30,864			241,398

Footwear	45,141			4,505			49,646			43,864		756			44,620
Accessories	18,426			3,889			22,315			20,991		5,184			26,175
Cosmetics/Fragrances	31,287			2,428			33,715			32,860		2,558			35,418
Home/Gifts/Other	11,989			16,746			28,735			11,093		16,175			27,268
Non-apparel	106,843			27,568			134,411			108,808		24,673			133,481

Revenue adjustments not allocated^(a)	(281		)	(276		)	(557		)	2,224		(22		)	2,202

Net sales	$	306,295		$	62,999		$	369,294		$	321,566	$	55,515		$	377,081

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	Six Months Ended
	August 4, 2018									July 29, 2017
Merchandise Category	Department Stores			Off-price Stores			Total Company			Department Stores		Off-price Stores			Total Company
Women’s	$	220,696		$	39,231		$	259,927		$	240,087	$	22,126		$	262,213
Men’s	94,460			16,458			110,918			96,914		9,694			106,608
Children's	58,478			15,626			74,104			62,085		8,150			70,235
Apparel	373,634			71,315			444,949			399,086		39,970			439,056

Footwear	89,624			9,324			98,948			89,507		1,161			90,668
Accessories	37,298			8,255			45,553			41,253		6,779			48,032
Cosmetics/Fragrances	62,473			4,910			67,383			61,797		3,285			65,082
Home/Gifts/Other	24,798			35,253			60,051			22,009		21,162			43,171
Non-apparel	214,193			57,742			271,935			214,566		32,387			246,953

Revenue adjustments not allocated^(a)	(3,169		)	(192		)	(3,361		)	219		(540		)	(321		)

Net sales	$	584,658		$	128,865		$	713,523		$	613,871	$	71,817		$	685,688

^(a)Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories.

Contract Liabilities

Contract liabilities reflect our performance obligations related to gift cards, merchandise credits, loyalty program rewards and merchandise orders that have not been satisfied as of a given date, and therefore, revenue recognition has been deferred. Contract liabilities are recorded in accrued expenses and other current liabilities. Contract liabilities for each period presented were as follows (in thousands):



	August 4, 2018		February 3, 2018		July 29, 2017
Gift cards and merchandise credits, net	$	9,657	$	12,122	$	8,883
Loyalty program rewards, net	4,612		1,118		630
Merchandise fulfillment liability	850		234		886
Total contract liabilities	$	15,119	$	13,474	$	10,399

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The following table summarizes contract liability activity for each period presented (in thousands):



	Three Months Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Beginning balance	14,028			11,303			$	13,474		$	11,669
Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period	(5,484		)	(3,833		)	(6,284		)	(4,403		)
Current period additions to contract liability balances included in contract liability balances at the end of the period	6,575			2,929			7,929			3,133
Ending balance	$	15,119		$	10,399		$	15,119		$	10,399

Credit Income

The portfolio for our private label credit card is owned and serviced by Comenity Bank, an affiliate of Alliance Data Systems Corporation. Comenity Bank manages the account activation, receivables funding, card authorization, card issuance, statement generation, remittance processing and guest service functions for our private label credit card program. We perform certain duties, including electronic processing and transmitting of transaction records, and executing marketing promotions designed to increase card usage. We also accept payments in our stores from cardholders on behalf of Comenity Bank. We receive a monthly net portfolio yield payment from Comenity Bank, and we can potentially earn an annual bonus based upon the performance of the private label credit card portfolio. The receivable for credit income, which is recorded in prepaid expenses and other current assets, was $4.7 million, $5.8 million, $4.1 million and $4.9 million as of August 4, 2018, February 3, 2018, July 29, 2017 and January 28, 2017, respectively.

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NOTE 34 - ~~DEBT OBLIGATIONS~~STOCK-BASED COMPENSATION

~~Debt obligations~~Stock-based compensation expense by type of grant for each period presented ~~consisted~~was as follows (in thousands):



	Three Months Ended					Six Months Ended
	August 4, 2018		July 29, 2017			August 4, 2018		July 29, 2017
Non-vested stock	1,079		1,395			$	2,266	$	2,903
Restricted stock units	259		129			751		202
Stock-settled performance share units	412		735			783		1,409
Cash-settled performance share units	96		—			150		—
Total stock-based compensation expense	1,846		2,259			3,950		4,514
Related tax benefit	—		(849		)	—		(1,697		)
Stock-based compensation expense, net of tax	$	1,846	$	1,410		$	3,950	$	2,817

As of August 4, 2018, we have estimated unrecognized compensation cost of $12.9 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.3 years.

Non-vested Stock

We grant shares of non-vested stock to our employees and non-employee directors. Shares of non-vested stock awarded to employees vest 25% annually over a four-year period from the grant date. Shares of non-vested stock awarded to non-employee directors cliff vests after one year. At the end of the vesting period, shares of non-vested stock convert one-for-one to common stock. Certain non-vested stock awards have shareholder rights, including the right to vote and to receive dividends. The fair value of non-vested stock awards with dividend rights is based on the closing share price of our common stock on the grant date. The fair value of non-vested stock awards that do not have dividend rights is discounted for the present value of expected dividends during the vesting period. Compensation expense is recognized ratably over the vesting period.

The following ~~(in thousands):~~table summarizes non-vested stock activity for the six months ended August 4, 2018:



Non-vested Stock	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at February 3, 2018	1,637,037		$	6.67
Granted	631,266		2.41
Vested	(688,534	)	7.19
Forfeited	(50,478	)	3.03
Outstanding at August 4, 2018	1,529,291		4.79

The weighted-average grant date fair value for non-vested stock granted during the six months ended August 4, 2018 and July 29, 2017 was $2.41 and $2.21, respectively. The aggregate intrinsic value of non-vested stock that vested during the six months ended August 4, 2018 and July 29, 2017, was $1.6 million and $1.1 million, respectively. The payment of the employees’ tax liability for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of shares issued during six months ended August 4, 2018 was 612,037.

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Restricted Stock Units (“RSUs”)

The following table summarizes RSU activity for the six months ended August 4, 2018:



Restricted Stock Units	Number of Units		Weighted Average Grant Date Fair Value
Outstanding at February 3, 2018	1,283,750		$	2.14
Granted	1,375,000		2.19
Vested	(320,936	)	2.14
Outstanding at August 4, 2018	2,337,814		2.17

Stock-settled Performance Share Units (“Stock-settled PSUs”)

We grant stock-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a three-year performance cycle. These awards cliff vest following a three-year performance cycle, and if earned, are settled in shares of our common stock, unless otherwise determined by our Board of Directors (“Board”), or its Compensation Committee. The actual number of shares of our common stock that may be earned ranges from zero to a maximum of twice the number of target units awarded to the recipient. Grant recipients do not have any shareholder rights on unvested or unearned stock-settled PSUs. The fair value of these PSUs is estimated using a Monte Carlo simulation, based on the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period for stock-settled PSUs.

The following table summarizes stock-settled PSU activity for the six months ended August 4, 2018:

October 28, 2017 January 28, 2017
Revolving Credit Facility $ 267,159
$ 159,702
Finance obligations 1,849
2,708
Other financing 2,986
7,753
Total debt obligations 271,994

170,163
Less: Current portion of debt obligations 3,025
6,414
Long-term debt obligations $ 268,969

$ 163,749

We have a $400.0 million senior secured revolving credit facility (“Revolving Credit Facility”) with a seasonal increase to $450.0 million and a $25.0 million letter of credit sublimit. The Revolving Credit Facility matures on December 16, 2021.

We use the Revolving Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Revolving Credit Facility agreement. Inventory, cash and cash equivalents are pledged as collateral. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the Revolving Credit Facility agreement. For the nine months ended October 28, 2017, the weighted average interest rate on outstanding borrowings and the average daily borrowings were 2.62% and $221.7 million, respectively.

Letters of credit issued under the Revolving Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At October 28, 2017, outstanding letters of credit totaled approximately $7.3 million. These letters of credit expire within 12 months of issuance, but may be renewed. Excess availability under the Revolving Credit Facility at October 28, 2017 was $157.4 million.



Period Granted	Target PSUs Outstanding at February 3, 2018	Target PSUs Granted	Target PSUs Outstanding at August 4, 2018	Weighted Average Grant Date Fair Value per Target PSU
2016	321,706	—	321,706	$	8.69
2017	600,000	—	600,000	1.80
2018	—	280,000	280,000	3.05
Total	921,706	280,000	1,201,706	3.94

The ~~Revolving Credit Facility agreement contains covenants which, among other things, restrict, based on required levels of excess availability, (i)~~weighted-average grant date fair value for stock-settled PSUs granted during the ~~amount of additional debt or capital lease obligations, (ii)~~six months ended August 4, 2018 and July 29, 2017 was $3.05 and $1.80, respectively. No stock-settled PSUs vested during the ~~payment of dividends to $30 million in a fiscal year,~~six months ended August 4, 2018 and (iii) the repurchase of common stock under certain circumstances. The agreement also contains a fixed charge coverage ratio covenant in the event excess availability is below a defined threshold or an event of default has occurred. At October 28,July 29, 2017, ~~we were in compliance with all of the debt covenants of the Revolving Credit Facility agreement and we expect to remain in compliance.~~

respectively.

1215

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Cash-settled Performance Share Units (“Cash-settled PSUs”)

We grant cash-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a three-year performance cycle. These awards cliff vest following a three-year performance cycle, and if earned, are settled in cash. The amount of settlement ranges from zero to a maximum of twice the number of target units awarded multiplied by the fair market value of one share of our common stock on the vesting date. Grant recipients do not have any shareholder rights on unvested or unearned cash-settled PSUs. Cash-settled PSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for cash-settled PSUs is remeasured based on their fair value at each reporting period until the award vests, which is estimated using a Monte Carlo simulation. Assumptions used in the valuation include the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period and adjusted with changes in the fair value of the liability.

The following table summarizes cash-settled PSU activity six months ended August 4, 2018:



Period Granted	Target PSUs Outstanding at February 3, 2018	Target PSUs Granted	Target PSUs Outstanding at August 4, 2018	Weighted Average Grant Date Fair Value per Target PSU
2018	—	460,000	460,000	$	3.05

Stock Appreciation Rights (“SARs”)

Prior to 2012, we granted SARs to our employees, which generally vested 25% annually over a four-year period from the grant date. Outstanding SARs expire, if not exercised or forfeited, within seven years from the grant date.

The following table summarizes SARs activity for the six months ended August 4, 2018:



Stock Appreciation Rights	Number of Shares		Weighted Average Exercise Price
Outstanding, vested and exercisable at February 3, 2018	97,900		$	18.83
Expired	(97,900	)	18.83
Outstanding, vested and exercisable at August 4, 2018	—

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NOTE 45 - EARNINGS PER SHARE

The following tables show the computation of basic and diluted loss per common share for each period presented (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Basic:
Net loss	$	(17,722	)	$	(15,634	)	$	(42,967	)	$	(31,053	)	$	(16,922	)	$	(6,258	)	$	(48,600	)	$	(25,245	)
Less: Allocation of earnings to participating securities	(66		)	—			(268		)	—
Distributed earnings allocated to participating securities													(68		)	(51		)	(131		)	(202		)
Net loss allocated to common shares	(17,788		)	(15,634		)	(43,235		)	(31,053		)	(16,990		)	(6,309		)	(48,731		)	(25,447		)

Basic weighted average shares outstanding	27,602			27,155			27,468			27,066			28,152			27,535			27,959			27,401
Basic loss per share	$	(0.64	)	$	(0.58	)	$	(1.57	)	$	(1.15	)	$	(0.60	)	$	(0.23	)	$	(1.74	)	$	(0.93	)

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Diluted:
Net loss	$	(17,722	)	$	(15,634	)	$	(42,967	)	$	(31,053	)	$	(16,922	)	$	(6,258	)	$	(48,600	)	$	(25,245	)
Less: Allocation of earnings to participating securities	(66		)	—			(268		)	—
Distributed earnings allocated to participating securities													(68		)	(51		)	(131		)	(202		)
Net loss allocated to common shares	(17,788		)	(15,634		)	(43,235		)	(31,053		)	(16,990		)	(6,309		)	(48,731		)	(25,447		)

Basic weighted average shares outstanding	27,602			27,155			27,468			27,066			28,152			27,535			27,959			27,401
Add: Dilutive effect of stock awards	—			—			—			—
Dilutive effect of stock awards													—			—			—			—
Diluted weighted average shares outstanding	27,602			27,155			27,468			27,066			28,152			27,535			27,959			27,401
Diluted loss per share	$	(0.64	)	$	(0.58	)	$	(1.57	)	$	(1.15	)	$	(0.60	)	$	(0.23	)	$	(1.74	)	$	(0.93	)

The number of shares attributable to ~~SARs and non-vested stock grants~~outstanding stock-based compensation awards that would have been considered dilutive securities, but were excluded from the calculation of diluted loss per common share because the effect was anti-dilutive were as follows (in thousands):


	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	October 28, 2017	October 29, 2016	October 28, 2017	October 29, 2016	August 4, 2018	July 29, 2017	August 4, 2018	July 29, 2017
Number of anti-dilutive shares due to net loss for the period	—	20	—	42	357	—	248	—
Number of anti-dilutive SARs due to exercise price greater than average market price of our common stock	113	187	129	198	—	119	29	138

NOTE 56 - STOCKHOLDERS’ EQUITY

During the six months ended August 4, 2018, we paid $2.9 million in cash dividends. On ~~November 16, 2017,~~August 23, 2018, our Board ~~of Directors (“Board”)~~ declared a quarterly cash dividend of $0.05 per share of common stock, payable on ~~December 13, 2017~~September 19, 2018 to shareholders of record at the close of business on ~~November 28, 2017.~~September 4, 2018.

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NOTE 67 - PENSION PLAN

We sponsor a frozen defined benefit pension plan. The components of net periodic pension cost, which were recognized in selling, general and administrative expenses, were as follows (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Employer service cost	$	123		$	85		$	368		$	255		$	133		$	120		$	256		$	245
Interest cost on pension benefit obligation	363			400			1,090			1,198			317			363			675			727
Expected return on plan assets	(407		)	(437		)	(1,222		)	(1,312		)	(456		)	(412		)	(870		)	(815		)
Amortization of net loss	213			225			637			673			155			213			354			424
Pension settlement charge	374			—			374			—
Net periodic pension cost	$	666		$	273		$	1,247		$	814		$	149		$	284		$	415		$	581

During the three and nine months ended October 28, 2017, we recognized a non-cash pension settlement charge of $0.4 million as a result of lump sum distributions exceeding interest cost for 2017. This settlement was included in selling, general and administrative expenses in our condensed consolidated statements of operation.

Our funding policy is to make contributions to maintain the minimum funding requirements for our pension obligations in accordance with the Employee Retirement Income Security Act. We may elect to contribute additional amounts to maintain a level of funding to minimize the Pension Benefit Guaranty Corporation premium costs or to cover the short-term liquidity needs of the plan in order to maintain current invested positions. We contributed ~~$0.7~~$0.4 million during the ~~nine~~six months ended ~~October 28, 2017,~~August 4, 2018, and we expect to contribute an additional ~~$0.2~~$0.9 million in ~~2017.~~2018.

NOTE 78 - FAIR VALUE MEASUREMENTS

We recognize or disclose the fair value of our financial and non-financial assets and liabilities on a recurring and non-recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and base the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:



Level 1 –	Quoted prices in active markets for identical assets or liabilities.

Level 2 –	Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 –	Inputs that are both unobservable and significant to the overall fair value measurement reflect our estimates of assumptions that market participants would use in pricing the asset or liability.

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Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):


	October 28, 2017								August 4, 2018
	Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other assets:
Securities held in grantor trust for deferred compensation plans ^(a)(b)	$	18,750	$	18,750	$	—	$	—	$	20,188	$	20,188	$	—	$	—


	January 28, 2017								February 3, 2018
	Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other assets:
Securities held in grantor trust for deferred compensation plans ^(a)(b)	$	18,094	$	18,094	$	—	$	—	$	20,293	$	20,293	$	—	$	—


									July 29, 2017
									Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other assets:
Securities held in grantor trust for deferred compensation plans ^(a)(b)									$	19,019	$	19,019	$	—	$	—

^(a) The liability for the amount due to participants corresponding in value to the securities held in the grantor trust is recorded in other long-term liabilities.

^(b) Using the market approach, the fair values of these items represent quoted market prices multiplied by the quantities held. Net gains and losses related to the changes in fair value in the assets and liabilities under the various deferred compensation plans are recorded in selling, general and administrative expenses and were nil for the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, and for the fiscal year ended ~~January 28, 2017.~~February 3, 2018.

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Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):


	October 28, 2017								August 4, 2018
	Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Store property, equipment and leasehold improvements ^(a)	$	229	$	—	$	—	$	229	$	1,101	$	—	$	—	$	1,101


	January 28, 2017								February 3, 2018
	Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Store property, equipment and leasehold improvements ^(a)	$	8,795	$	—	$	—	$	8,795	$	778	$	—	$	—	$	778


									July 29, 2017
									Balance		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Store property, equipment and leasehold improvements ^(a)									$	251	$	—	$	—	$	251

^(a)Using an undiscounted cash flow model, we evaluate the cash flow trends of our stores at least annually and when events or changes in circumstances, such as a store closure, indicate that property, equipment and leasehold improvements may not be fully recoverable. When a store’s projected undiscounted cash flows indicate its carrying value may not be recoverable, we use a discounted cash flow model, with a 10% discount rate, to estimate the fair value of the underlying long-lived assets. An impairment write-down is recorded if the carrying value of a long-lived asset exceeds its fair value. Key assumptions in estimating future cash flows include, among other things, expected future operating performance, including expected closure date and lease term, and changes in economic conditions. We believe estimated future cash flows are sufficient to support the carrying value of our long-lived assets. Significant changes in the key assumptions used in our cash flow projections may result in additional asset impairments. For the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, and during fiscal year ~~2016,~~2017, we recognized impairment charges of $1.1 million, $0.2 million, and ~~$19.9~~$1.7 million, respectively. Impairment charges are recorded in cost of sales and related buying, occupancy and distribution expenses.

Due to the short-term nature of cash and cash equivalents, payables and short-term debt obligations, the carrying value approximates the fair value of these instruments. In addition, we believe that the ~~Revolving Credit Facility~~credit facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.

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NOTE 89 - GORDMANS ACQUISITION

On April 7, 2017, we acquired select assets of Gordmans Stores, Inc. and its subsidiaries (collectively, the “Sellers”) through a bankruptcy auction. The terms of the transaction agreement required us to take assignment of a minimum of 50 of the Sellers’ store leases, with rights to take assignment of the leases for an additional seven stores and a distribution center. We also acquired all of the Sellers’ inventory, furniture, fixtures and equipment at the 57 store locations and distribution center, as well as the trademarks and other intellectual property of the Sellers. The Gordmans ~~branded~~ stores, which we ~~intend to~~ operate as an off-price concept, add scale to our business, while allowing us to leverage strategic synergies and our current infrastructure. The acquisition also brings beneficial geographic and ~~customer~~guest diversification.

The purchase price for the inventory and other assets acquired from the Sellers was approximately $36.1 million, all of which was paid by the end of the second quarter 2017 using existing cash and availability under the ~~Revolving Credit Facility.~~credit facility. We took assignment of 55 of the 57 store locations and the distribution ~~center.~~center, and we renegotiated the terms of many of those leases. We also entered into new leases for three former Gordmans store locations, two of which ~~two were~~ opened in the second quarter 2017, and one opened in ~~August~~the third quarter 2017.

The estimated fair values of the assets acquired at the acquisition date were as follows (in thousands):



	April 7, 2017
Inventory	$	31,770
Property, plant and equipment and other assets	4,374
Total	$	36,144

Acquisition and integration related costs were recognized in selling, general and administrative expenses and were ~~as follows~~$2.9 million and $9.2 million for ~~each period presented (in thousands):~~

Three Months Ended Nine Months Ended
October 28, 2017
Business acquisition costs $ (39 ) $ 9,169
the three and six months ended July 29, 2017, respectively.

Net sales included in our condensed consolidated statements of operations from ~~the GORDMANS branded~~Gordmans stores that we operated beginning on April 7, 2017, were as follows for each period presented (in thousands):

Three Months Ended Nine Months Ended
October 28, 2017
Net sales $ 61,774
$ 133,591



	Three Months Ended				Six Months Ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Net sales	$	62,999	$	55,515	$	128,865	$	71,817

Pro forma net sales and earnings for the three and ~~nine~~six months ended ~~October 28,~~July 29, 2017 ~~and October 29, 2016~~ are not presented due to the impracticability in substantiating this information as the Gordmans Acquisition was limited to select assets and assignment of leases acquired through a bankruptcy auction. Furthermore, the results of operations may have been impacted by the Sellers’ liquidation and may not be indicative of future performance.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Concerning Forward-Looking Statements for 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,” “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 and factors concerning future conditions that may ultimately prove to be inaccurate and could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements that are made 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. These factors include, but are not limited to, the ability for us to maintain normal trade terms with vendors, the ability for us to comply with the various covenant requirements contained in the ~~Revolving Credit Facility~~credit facility agreement, the demand for apparel, and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in our markets, consumer confidence, energy and gasoline prices, the value of the Mexican peso, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sales volume include unusual weather patterns, an increase in the level of competition in our market areas, competitors’ marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of our merchandising and marketing plans as well as our store opening or relocation plans. Additional assumptions, factors and risks concerning future conditions are discussed in the Risk Factors section of the Form 10-K, and may be 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. Most of these factors are difficult to predict accurately and are generally beyond our control.

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 management believes 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.

Readers should carefully review the Form 10-K in its entirety including, but not limited to, our financial statements and the notes thereto and the risks and uncertainties described in Part I, Item 1A (Risk Factors) of the Form 10-K. This report should be read in conjunction with the Form 10-K, 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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For purposes of the following discussion, all references to the ~~“third~~“second quarter ~~2017”~~2018” and the ~~“third~~“second quarter ~~2016”~~2017” are for the 13-week fiscal periods ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively, and all ~~references~~reference to the “year-to-date 2018” and the “year-to-date 2017” ~~and “year-to-date 2016”~~ are for the ~~39-week~~26-week fiscal periods ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively.

The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-Q as well as the financial and other information included in the Form 10-K.

Our Business

We are a ~~leading~~ retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of ~~October 28, 2017,~~August 4, 2018, we operated in 42 states through ~~789~~764 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 5859 GORDMANS off-price stores, as well as an e-commerce website. Our ~~specialty~~ department stores are predominantly located in small towns and rural communities. Our ~~GORDMANS~~ off-price stores are predominantly located in mid-sized, non-rural Midwest markets.

Results of Operations

Select financial results for the ~~third~~second quarter ~~2017~~2018 were as follows (comparisons are to the ~~third~~second quarter ~~2016)~~2017):

Net sales ~~increased $40.1~~decreased $7.8 million, or ~~12.6%, including $61.8 million in sales from the Gordmans off-price stores.~~2.1%.

Comparable sales decreased ~~3.9%~~0.2%. Comparable sales consist of store sales after a store has been in operation for 14 full months and e-commerce sales.

~~Gross profit increased $15.1~~Net loss was $16.9 million ~~or 26.7%.~~compared to $6.3 million.

~~Selling, general and administrative (“SG&A”) expenses increased $15.5 million, or 18.3%, primarily due to the addition of the Gordmans off-price stores.~~

~~Diluted loss~~Loss per common share was ~~$0.64,~~$0.60, compared to ~~$0.58.~~

~~Adjusted (non-GAAP) diluted loss per common share was $0.64, compared to adjusted (non-GAAP) diluted~~a loss per common share of ~~$0.57~~$0.23.

EBIT was $(14.1) million compared to $(7.7) million (see the reconciliation of non-GAAP financial measures on page ~~21)~~24).

~~Paid cash~~Cash dividends of ~~$1.4~~$1.5 million, or $0.05 per common ~~share.~~share, were paid.

~~2017~~2018 Outlook and Strategy

~~Although in-store traffic continues~~Our department store sales declined for the year-to-date 2018 compared to ~~be negative and we experienced temporary disruption from hurricanes in~~ the ~~third quarter~~year-to-date 2017, some macroeconomic challenges have moderated and we have undertaken steps that we expect to improve our business. Year-over-year store traffic has declined during each quarter of 2017, although the rate of decline has decreased in the last two quarters. We believe that the headwinds from the downturn in the oil and gas sector are no longer a factor in ourreflecting lower comparable sales ~~performance as we anniversary those results. Comparable sales for our stores in Texas, Louisiana, Oklahoma~~ and ~~New Mexico, which have been impacted by the oil and gas sector, slightly outperformed the balance of our chain during each quarter in the year-to-date 2017.~~

store closures. We are focused on ~~effectively managing our inventory, promotional levels and expenses. For the third quarter 2017, compared to the third quarter 2016:~~

~~Department store inventory was down 9% and clearance inventory was down 20% as of the quarter end.~~

~~Gross profit as a percent of~~driving sales ~~increased by 230 basis points.~~

~~SG&A expenses as a percent of sales increased by 130 basis points due to the deleverage from lower department store sales.~~

~~Approximately 130 of~~in our department stores ~~were disrupted or closed during~~by emphasizing trending categories, such as active, outdoor and denim, with top brands like Nike, Adidas, Puma, Columbia and Realtree. We have also expanded the ~~third quarter 2017 due to Hurricanes Harvey and Irma. The majority of those~~home category in our department stores ~~were reopened within a week, however, nine of those~~through synergies with our off-price stores, ~~suffered significant damage. Six of the nine stores reopened in time for Thanksgiving, one will reopen in the spring of 2018~~ and we ~~have permanently closed two of the stores.~~anticipate continued growth in this category. We ~~estimate that the hurricanes negatively impacted total sales by approximately $3.8 million, or 1.1% of sales, during the time the stores were closed. Excluding the impact of the hurricanes,~~continue to review our ~~comparable sales improved from the second quarter to the third quarter 2017.~~

~~Table of Contents~~

~~During the third quarter 2017, we progressed with the transition of the Gordmans stores to an off-price concept by eliminating coupons~~department store portfolio and promotions and implementing a pricing strategy that is competitive with the off-price industry. In addition, we have increased the inventory in the Gordmans stores closer to planned levels as we head into the holiday season. Our first marketing campaign for Gordmans, featuring digital, radio and television advertisements, launched in mid-November and will continue through Christmas.

~~We closed nine department stores during the year-to-date 2017, and we expect to close approximately 20 department stores in total in 2017, as part of our multi-year plan to~~ exit stores that do not meet our sales productivity and profitability ~~benchmarks.~~standards. During the year-to-date 2018, we permanently closed nine department stores, and we plan to close a total of approximately 30 to 40 department stores in 2018, excluding store conversions to off-price.

~~In September 2017, we announced~~Our off-price stores have had strong sales growth for the year-to-date 2018 compared to the year-to-date 2017. We are focused on expanding our off-price business, with plans to open one new off-price store and convert a total of nine department stores to off-price stores in 2018. One conversion store was opened in the first quarter 2018, four opened in mid-August and the remaining four stores are planned ~~closure of our South Hill, Virginia distribution center by~~to open in time for the holiday season.

Store counts at the end of the second quarter 2018 and second quarter 2017 were as part of our strategy to increase the efficiency of our distribution network. Operations from the Virginia distribution center will be transferred to our distribution centers in Texas, Ohio and Nebraska.follows:



	August 4, 2018	July 29, 2017
Department stores	764	793
Off-price stores	59	57
Total stores	823	850

~~During the year-to-date 2017, we made progress on our Jump Start Plan key strategic initiatives for our department stores, which are to:~~

•~~Continue building~~We anticipate continued growth in our e-commerce ~~business with further enhancements to~~sales, which have had double-digit sales increases over the site design and functionality, improved mobile capabilities, additional digital marketing, expanded assortments and investments in our supply chain. These efforts contributed to double-digit e-commerce growth in each quarter of 2017 compared to the prior year periods. In the third quarter 2017, we introduced online ordering from within our stores, giving guests access to an assortment that is approximately seven times larger than our average store.past several years.

•Invigorate merchandise with a more frequent flow of new items, an emphasis on style and value and an expanded gift selection. We aim to be the gift destination for our guests this holiday season by expanding our women’s gift power center and adding a toy power center featuring the iconic FAO Schwarz brand. By building more liquidity into our merchandise plans and editing less productive categories, we have been able to increase our emphasis on key categories that appeal to our guests, including beauty, plus sizes, gifts and women’s updated and contemporary apparel.

•Build on beauty with the addition of new, smaller Estee Lauder and Clinique counters in 32 stores and the launch of an expanded self-service beauty concept featuring new brands in 150 stores during the third quarter 2017. We have also expanded assortments within beauty, bath and body across the store base.

•Improve merchandise margin by increasing average unit retail price, eliminating overlapping coupons and enhancing seasonal transitions. In addition, we have begun adding off-price buys into our department stores.

•Improve our relationship with our customers by communicating through the channels she uses most often and engaging her through our loyalty programs. We continue to reduce the amount of print marketing and shift our media mix to digital as we place more emphasis on our mobile app, email and social media. We have also shifted the timing of marketing campaigns to align with the heavier shopping periods. In July, we relaunched the value proposition for our Style Circle Rewards^® ~~loyalty program and private label credit card in conjunction with launching the gRewards~~^TM~~loyalty program. In November, we reissued over 2 million new private label credit cards for our department and off-price stores.~~

•Enhance the shopping experience for our guests by creating a culture of strong customer service and execution through our suggestive selling program, referred to as “Sell One More.” We have simplified administrative tasks to enable our store associates to direct their attention on providing exceptional service to our guests.

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Our 2018 strategic initiatives are focused on:

Off-Price Growth - In the first quarter 2018, we converted one department store to an off-price store located in Rosenberg, Texas, a suburb of Houston, and it is projected to deliver an annual sales increase of more than 25% compared to its volume as a department store. We are testing conversions in new metro markets similar to Rosenberg, as well as conversions in Midwestern markets, and we expect to leverage what we learn from these tests to accelerate our off-price store conversion process in 2019.

Differentiation - We are differentiating both our department stores and off-price stores from the competition by growing the outperforming areas of their respective businesses. Beauty is a core strength in our department stores, and we are leveraging this strength to drive beauty and fragrance sales growth in our off-price stores. Additionally, we expanded our Beauty Bar concept in our department stores to over 300 stores during the year-to-date 2018, and we now have Beauty Bar in nearly 500 stores. In our off-price stores, home is a core strength, representing nearly 30% of sales, and we are leveraging this strength to drive more value and expanded assortments into our department store home business. We are also focused on accelerating the positive sales trends in athletic and outdoor by adding new brands and expanded assortments in these categories.

Guest Acquisition and Retention - Our loyalty programs and private label credit card program are integral to the value proposition for our guests. Spend and retention rates for guests enrolled in these programs are significantly higher than non-members, and we are focused on growing these programs and expanding private label credit card usage as a percentage of sales. To communicate value to existing members and attract new guests, we have increased our digital marketing efforts, which enables us to be more targeted and nimble with our promotions. As of August 4, 2018, our Style Circle Rewards® and gRewards® loyalty programs have grown to nearly 10 million members. In our department stores, we expect our private label credit card sales penetration to reach 50% for 2018. In our off-price stores, we believe we can attain a 15% penetration for 2018 and 25% in the longer term.

Guest Experience - We are enhancing the guest experience by focusing on service, maintaining an ongoing flow of new merchandise offerings, and expanding categories that generate guest excitement. We are also pursuing opportunities to gain market share by shifting our assortments to capitalize on specialty retailers exiting our markets. In our off-price stores, for example, we are expanding on toys, baby apparel and baby gear.

Non-GAAP Financial Measures

~~To provide additional transparency,~~The following table presents earnings (loss) before interest and taxes (EBIT), a non-GAAP financial measure. We believe the ~~following~~presentation of this supplemental ~~information reflects~~non-GAAP financial measure helps facilitate comparisons of our operating performance across periods. In addition, management uses this non-GAAP financial measure to assess the results of operations for the periods presented on a basis in conformity with GAAP and on a non-GAAP basis to show earnings excluding certain items presented below. We believe this supplemental financial information enhances an investor’s understanding of our ~~financial performance as it excludes those items which impact comparability of operating trends. The non-GAAP~~operations. Non-GAAP financial information should not be considered in isolation or viewed as a substitute for net income, cash flow from operations, diluted earnings per common share or other measures of performance as defined by GAAP. Moreover, the inclusion of non-GAAP financial information as used herein is not necessarily comparable to other similarly titled measures of other companies due to the potential inconsistencies in the method of presentation and items considered. The following ~~tables set~~table sets forth the supplemental financial information and the reconciliation of GAAP disclosures to non-GAAP financial measures (in ~~thousands, except diluted loss per share)~~thousands):

Three Months Ended Nine Months Ended
October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016
Net loss (GAAP) $ (17,722 ) $ (15,634 ) $ (42,967 ) $ (31,053 )
Business acquisition costs (pretax)^(a)
(39 ) —
9,169
—
Store closures, impairments and other (pretax)^(b)
552
443
1,333
1,394
Consolidation of corporate headquarters and severance charges associated with workforce reduction (pretax)^(c)
—
—
—
904
Income tax impact^(d)
(370 ) (271 ) (4,176 ) (989 )
Adjusted net loss (non-GAAP) $ (17,579 )
$ (15,462 ) $ (36,641 )
$ (29,744 )

Diluted loss per share (GAAP) $ (0.64 ) $ (0.58 ) $ (1.57 ) $ (1.15 )
Business acquisition costs (pretax)^(a)
—
—
0.33
—
Store closures, impairments and other (pretax)^(b)
0.02
0.02
0.05
0.05
Consolidation of corporate headquarters and severance charges associated with workforce reduction (pretax)^(c)
—
—
—
0.03
Income tax impact^(d)
(0.02 ) (0.01 ) (0.15 ) (0.03 )
Adjusted diluted loss per share (non-GAAP) $ (0.64 )
$ (0.57 ) $ (1.34 )
$ (1.10 )

^(a) ~~Reflects acquisition and integration costs related to the Gordmans Acquisition.~~

^(b)Reflects store closing costs related to our strategic store closure plan that was announced in fiscal 2015, which primarily consists of fixture moving costs, lease termination charges, severance, and impairment charges. In addition, the three and nine months ended October 28, 2017 include a pension settlement charge, and the three and nine months ended October 29, 2016 include costs related to other strategic initiatives.

^(c) Reflects duplicate rent expense and moving related costs associated with the consolidation of our corporate headquarters into a single location, which was completed in February 2016, and severance charges associated with workforce reductions.

^(d) ~~Taxes were allocated based on the estimated annual effective tax rate, excluding the impact of the stock-based compensation tax deficiency discreet item.~~



	Three Months Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net loss (GAAP)	$	(16,922	)	$	(6,258	)	$	(48,600	)	$	(25,245	)
Interest expense	2,650			1,918			4,903			3,504
Income tax expense (benefit)	150			(3,362		)	300			(12,252		)
EBIT (non-GAAP)	$	(14,122	)	$	(7,702	)	$	(43,397	)	$	(33,993	)

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~~Third~~Second Quarter ~~2017~~2018 Compared to ~~Third~~Second Quarter ~~2016~~2017

The following table sets forth the results of operations for the periods presented (in thousands, except percentages):


	Three Months Ended															Three Months Ended
	October 28, 2017					October 29, 2016					Change					August 4, 2018					July 29, 2017					Change
	Amount			% to Sales ^(a)		Amount			% to Sales ^(a)		Amount			%		Amount			% to Sales ^(a)		Amount			% to Sales ^(a)		Amount			%
Net sales	$	357,236		100.0	%	$	317,140		100.0	%	$	40,096		12.6	%	$	369,294		100.0	%	$	377,081		100.0	%	$	(7,787	)	(2.1	)%
Credit income																14,305			3.9	%	13,190			3.5	%	1,115			8.5	%
Total revenues																383,599			103.9	%	390,271			103.5	%	(6,672		)	(1.7	)%
Cost of sales and related buying, occupancy and distribution expenses	285,542			79.9	%	260,550			82.2	%	24,992			9.6	%	286,807			77.7	%	284,140			75.4	%	2,667			0.9	%
Gross profit	71,694			20.1	%	56,590			17.8	%	15,104			26.7	%
Selling, general and administrative expenses	100,036			28.0	%	84,564			26.7	%	15,472			18.3	%	110,914			30.0	%	113,833			30.2	%	(2,919		)	(2.6	)%
Interest expense	2,001			0.6	%	1,395			0.4	%	606			43.4	%	2,650			0.7	%	1,918			0.5	%	732
Loss before income tax	(30,343		)	(8.5	)%	(29,369		)	(9.3	)%	(974		)	3.3	%	(16,772		)	(4.5	)%	(9,620		)	(2.6	)%	(7,152		)
Income tax benefit	(12,621		)	(3.5	)%	(13,735		)	(4.3	)%	1,114			(8.1	)%
Income tax expense (benefit)																150			—	%	(3,362		)	(0.9	)%	3,512
Net loss	$	(17,722	)	(5.0	)%	$	(15,634	)	(4.9	)%	$	(2,088	)	13.4	%	$	(16,922	)	(4.6	)%	$	(6,258	)	(1.7	)%	$	(10,664	)

^(a) Percentages may not foot due to rounding.	^(a) Percentages may not foot due to rounding.															^(a) Percentages may not foot due to rounding.

Net Sales

Sales ~~increased $40.1~~decreased $7.8 million, or ~~12.6%~~2.1%, to ~~$357.2~~$369.3 million for the ~~third~~second quarter ~~2017~~2018 from ~~$317.1~~$377.1 million for the ~~third~~second quarter ~~2016,~~2017, primarily due to ~~$61.8 million~~a decrease in department store comparable sales, ~~from the Gordmans branded stores,~~store closures and increased deferred revenue associated with our guest loyalty programs, partially offset by ~~a decline~~increases in ~~comparable sales and closed stores. Comparable sales include~~off-price store sales ~~after a store has been in operation for 14 full months~~ and e-commerce sales. Comparable sales for the second quarter 2018 decreased ~~3.9%~~0.2%. Comparable sales benefited from our off-price stores, the majority of which became part of the comparable sales base in the ~~third~~second quarter ~~2017~~2018. Comparable sales decreased 2.2% for department stores and increased 11.4% for off-price stores. Sales were robust in May as temperatures normalized and spring seasonal apparel results improved. With the absence of a strong natural sales catalyst in June, guest traffic declined, contributing to the decrease in comparable sales for the quarter. Comparable sales turned positive again in July as back-to-school shopping ramped up. Our e-commerce business continues to grow and had a double-digit sales increase for the second quarter 2018 compared to the ~~third~~second quarter 2016, reflecting a 7.3% decrease in the number of transactions, partially offset by a 3.7% increase in average transaction value. The increase in average transaction value was comprised of a 5.2% increase in average unit retail, partially offset by a 1.4% decrease in units per transaction.2017.

~~Our~~In our department stores, non-apparel categories outperformed ~~our~~apparel categories. Non-apparel comparable sales ~~average~~decreased 0.1% and ~~our~~ apparel ~~categories underperformed.~~comparable sales decreased 3.3%. Home and gifts, ~~cosmetics, handbags~~footwear, children’s and ~~footwear~~men’s were our best performing merchandise ~~categories. Our best performing apparel areas~~categories, while women’s and accessories underperformed. In our off-price stores, women’s, men’s, children’s and footwear had positive comparable sales, home and gifts comparable sales were ~~denim, plus sizes, dresses~~flat, and ~~activewear.~~accessories and cosmetics lagged.

~~Gross Profit~~

~~Gross profit increased $15.1 million, or 26.7%, to $71.7 million~~Geographically, comparable sales for our department stores in Texas, Louisiana, Oklahoma and New Mexico, where the economies are generally impacted by the oil and gas industry, outperformed the balance of our department store chain by 80 basis points for the ~~third~~second quarter 2018 compared to the second quarter 2017, ~~from $56.6 million for~~with comparable sales in these four states down 1.8% and the ~~third quarter 2016. Gross profit as a percent~~balance of the chain down 2.6%. This variance was less than in prior quarters due to weaker sales ~~increased 230 basis points to 20.1% for the third quarter 2017 from 17.8% for the third quarter 2016. The increase~~in our Mexican border stores in the gross profit rate reflects a decrease of 260 basis points in the merchandise costs of sales rate due to fewer markdowns and less clearance sales attributable to effective inventory management, partially offset by an increase of 30 basis points in the buying, occupancy and distribution expenses rate.

~~Selling, General and Administrative Expenses~~second quarter 2018.

SG&A expenses for the third quarter 2017 increased $15.5 million to $100.0 million from $84.6 million for the third quarter 2016. As a percent of sales, SG&A expenses increased to 28.0% for the third quarter 2017 from 26.7% for the third quarter 2016. The increase in SG&A expenses is primarily attributable to higher store expenses from the addition of the Gordmans branded stores.

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Credit Income

Credit income earned from our private label credit card program increased $1.1 million, or 8.5%, to $14.3 million for the second quarter 2018 from $13.2 million for the second quarter 2017, primarily due to incremental credit income from our off-price stores.

Cost of Sales

Cost of sales increased $2.7 million, or 0.9%, to $286.8 million for the second quarter 2018 from $284.1 million for the second quarter 2017. As a percent of sales, cost of sales increased 230 basis points to 77.7% for the second quarter 2018 from 75.4% for the second quarter 2017 due to increased promotional markdowns in department stores, higher freight costs, and higher distribution center costs related to processing inventory for our off-price stores. Cost of sales also deleveraged due to increased deferred revenue associated with our loyalty programs.

Selling, General and Administrative Expenses (“SG&A Expenses”)

SG&A expenses for the second quarter 2018 decreased $2.9 million to $110.9 million from $113.8 million for the second quarter 2017, primarily due to Gordmans Acquisition related costs of $2.9 million incurred in the second quarter 2017. As a percent of sales, SG&A expenses decreased 20 basis points to 30.0% for the second quarter 2018 from 30.2% for the second quarter 2017.

Interest Expense

~~Net interest~~Interest expense was ~~$2.0~~$2.7 million for the ~~third~~second quarter ~~2017,~~2018, compared to ~~$1.4~~$1.9 million for the ~~third~~second quarter ~~2016.~~2017. Interest expense is primarily comprised of interest on borrowings under the ~~Revolving Credit Facility,~~credit facility, related letters of credit and commitment fees, amortization of debt issuance costs and interest on finance obligations. The increase in interest expense is primarily due to an increase in average borrowings and higher interest rates under the ~~Revolving Credit Facility~~credit facility for the ~~third~~second quarter ~~2017~~2018 compared to the ~~third~~second quarter ~~2016.~~2017. For the second quarter 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 3.43% and $272.4 million, respectively, as compared to 2.64% and $238.5 million for the second quarter 2017.

Income Taxes

Our effective income tax rate for the ~~third~~second quarter ~~2017~~2018 was ~~41.6%~~0.9%, ~~resulting in an~~and our estimated tax ~~benefit of $12.6~~expense was $0.2 million. This compares to an effective tax rate of ~~46.8%~~34.9% and an income tax benefit of ~~$13.7~~$3.4 million for the ~~third~~second quarter ~~2016.~~2017. The lower effective income tax ~~rates were impacted by a $0.1 million tax deficiency charge related to share-based compensation~~rate in the ~~third~~second quarter 2018 compared to the second quarter 2017 ~~and~~is primarily attributable to the ~~settlement~~valuation of ~~an Internal Revenue Service (“IRS”) appeal in~~all tax benefits due to the ~~third quarter 2016,~~uncertainty of realization, which ~~resulted in a $0.7 million tax benefit.~~is dependent upon generation of future taxable income.

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Year-to-Date ~~2017~~2018 Compared to Year-to-Date ~~2016~~2017

The following table sets forth the results of operations for the periods presented (in thousands, except percentages):


	Nine Months Ended
	October 28, 2017					October 29, 2016					Change					Six Months Ended
	Amount			% to Sales ^(a)		Amount			% to Sales ^(a)		Amount			%		August 4, 2018					July 29, 2017					Change
																Amount			% to Sales ^(a)		Amount			% to Sales ^(a)		Amount			%
Net sales	$	1,042,924		100.0	%	$	988,275		100.0	%	$	54,649		5.5	%	$	713,523		100.0	%	$	685,688		100.0	%	$	27,835		4.1	%
Credit income																29,819			4.2	%	26,118			3.8	%	3,701			14.2	%
Total revenues																743,342			104.2	%	711,806			103.8	%	31,536			4.4	%
Cost of sales and related buying, occupancy and distribution expenses	816,071			78.2	%	779,128			78.8	%	36,943			4.7	%	568,548			79.7	%	530,529			77.4	%	38,019			7.2	%
Gross profit	226,853			21.8	%	209,147			21.2	%	17,706			8.5	%
Selling, general and administrative expenses	289,188			27.7	%	260,076			26.3	%	29,112			11.2	%	218,191			30.6	%	215,270			31.4	%	2,921			1.4	%
Interest expense	5,505			0.5	%	3,616			0.4	%	1,889			52.2	%	4,903			0.7	%	3,504			0.5	%	1,399
Loss before income tax	(67,840		)	(6.5	)%	(54,545		)	(5.5	)%	(13,295		)	24.4	%	(48,300		)	(6.8	)%	(37,497		)	(5.5	)%	(10,803		)
Income tax benefit	(24,873		)	(2.4	)%	(23,492		)	(2.4	)%	(1,381		)	5.9	%
Income tax expense (benefit)																300			—	%	(12,252		)	(1.8	)%	12,552
Net loss	$	(42,967	)	(4.1	)%	$	(31,053	)	(3.1	)%	$	(11,914	)	38.4	%	$	(48,600	)	(6.8	)%	$	(25,245	)	(3.7	)%	$	(23,355	)

^(a) Percentages may not foot due to rounding.	^(a) Percentages may not foot due to rounding.															^(a) Percentages may not foot due to rounding.

Net Sales

Sales increased ~~$54.6~~$27.8 million, or ~~5.5%~~4.1%, to ~~$1,042.9~~$713.5 million for the year-to-date 2018 from $685.7 million for the year-to-date 2017, ~~from $988.3 million for the year-to-date 2016,~~ primarily due to ~~$133.6~~a $57.0 million increase in sales ~~from the Gordmans branded~~in our off-price stores, partially offset by a ~~decline~~decrease in our department store comparable sales and ~~closed stores.~~store closures. Comparable sales for the year-to-date 2018 decreased 1.3%. Comparable sales benefited from our off-price stores, the majority of which became part of the comparable sales base in the second quarter 2018. Comparable sales decreased ~~5.7%~~2.5% for department stores and increased 11.4% for off-price stores. Our e-commerce business continues to grow and had a double-digit sales increase for the year-to-date ~~2017~~2018 compared to the year-to-date 2016, reflecting a decrease of 8.3% in the number of transactions, partially offset by an increase of 2.8% in average transaction value. The increase in average transaction value was comprised of a 2.3% increase in average unit retail and a 0.5% increase in units per transaction.2017.

~~Our~~In our department stores, non-apparel categories outperformed our apparel categories. Non-apparel comparable sales ~~average~~increased 1.6% and ~~our~~ apparel ~~categories underperformed.~~comparable sales decreased 4.8%. Home and gifts, cosmetics, footwear, handbags and ~~footwear~~men’s were our best performing merchandise categories. ~~Our best performing apparel areas~~In our off-price stores, women’s, men’s, children’s and footwear had positive comparable sales, home and gifts comparable sales were ~~denim, plus sizes, dresses~~flat, and ~~activewear.~~accessories and cosmetics lagged.

Geographically, comparable sales for our department stores in Texas, Louisiana, Oklahoma and New Mexico, where the economies are generally impacted by the oil and gas industry, outperformed the balance of our department store chain in the year-to-date 2018 compared to the year-to-date 2017, with comparable sales in these four states down 1.6% and the balance of the chain down 3.5%.

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Credit Income

~~Gross Profit~~

~~Gross profit~~Credit income earned from our private label credit card program increased ~~$17.7~~$3.7 million, or ~~8.5%~~14.2%, to ~~$226.9~~$29.8 million for the year-to-date 2018 from $26.1 million for the year-to-date 2017, primarily due to incremental credit income from ~~$209.1~~our off-price stores.

Cost of Sales

Cost of sales increased $38.0 million, or 7.2%, to $568.5 million for the year-to-date ~~2016. Gross profit as~~2018 from $530.5 million for the year-to-date 2017. As a percent of sales, cost of sales increased 60230 basis points to ~~21.8%~~79.7% for the year-to-date 2018 from 77.4% for the year-to-date 2017 ~~from 21.2%~~due to increased promotional markdowns in department stores, higher freight costs, and higher distribution center costs related to processing inventory for ~~the year-to-date 2016. The increase in the gross profit rate reflects a decrease of 130 basis points in the merchandise cost~~our off-price stores. Cost of sales ~~rate~~also deleveraged due to ~~fewer markdowns and less clearance sales attributable to effective inventory management, partially offset by an increase of 70 basis points in the buying, occupancy and distribution expenses rate.~~increased deferred revenue associated with our loyalty programs.

~~Selling, General and Administrative~~SG&A Expenses

SG&A expenses for the year-to-date ~~2017~~2018 increased ~~$29.1~~$2.9 million to ~~$289.2~~$218.2 million from ~~$260.1~~$215.3 million for the year-to-date ~~2016. As a percent of sales, SG&A expenses increased to 27.7% for the year-to-date 2017 from 26.3% for the year-to-date 2016.~~2017. The increase in SG&A expenses is primarily attributable to higher store expenses from the addition of ~~the Gordmans branded~~our off-price stores and higher advertising expenses related to increased marketing efforts for these stores, partially offset by ~~a reduction in advertising expense. SG&A expenses for the year-to-date 2017 also included~~ Gordmans Acquisition related costs of $9.2 million ~~or 0.9%~~incurred in the year-to-date 2017. As a percent of ~~sales.~~sales, SG&A expenses decreased 80 basis points to 30.6% for the year-to-date 2018 from 31.4% for the year-to-date 2017.

Interest Expense

~~Net interest~~Interest expense was ~~$5.5~~$4.9 million for the year-to-date ~~2017,~~2018, compared to ~~$3.6~~$3.5 million for the year-to-date ~~2016.~~2017. Interest expense is primarily comprised of interest on borrowings under the ~~Revolving Credit Facility,~~credit facility, related letters of credit and commitment fees, amortization of debt issuance costs and interest on finance obligations. The increase in interest expense is primarily due to an increase in average borrowings and higher interest rates under the ~~Revolving Credit Facility~~credit facility for the year-to-date ~~2017~~2018 as compared to the year-to-date ~~2016.~~2017. For the year-to-date 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 3.30% and $259.9 million, respectively, as compared to 2.54% and $215.4 million for the year-to-date 2017.

Income Taxes

Our effective income tax rate for the year-to-date ~~2017~~2018 was ~~36.7%~~0.6%, ~~resulting in an~~and our estimated tax ~~benefit of $24.9~~expense was $0.3 million. This compares to an effective tax rate of ~~43.1%~~32.7% and an income tax benefit of ~~$23.5~~$12.3 million for the year-to-date ~~2016.~~2017.

The lower effective income tax ~~rates were impacted by a $2.1 million tax deficiency charge related to share-based compensation~~rate in the year-to-date 2018 compared to year-to-date 2017 ~~and~~is primarily attributable to the ~~settlement~~valuation of ~~an IRS appeal in~~all tax benefits due to the ~~year-to-date 2016,~~uncertainty of realization, which ~~resulted in a $0.7 million tax benefit.~~is dependent upon generation of future taxable income.

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Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year. Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

Liquidity and Capital Resources

Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows, (iii) ~~normal~~ trade credit terms from our vendors and their factors and (iv) the ~~Revolving Credit Facility.~~credit facility, including the term loan. Our primary cash requirements are for operational needs, including rent and salaries, inventory purchases, and capital investments in our stores, ~~e-commerce~~omni-channel, supply chain and information technology. We also have used our cash flows and other liquidity sources to pay quarterly cash dividends. Our cash requirements for 2017 ~~include~~included the Gordmans Acquisition and additional investments required to support the integration of the Gordmans operations into our infrastructure.

We believe that our sources of liquidity will be sufficient to cover working capital needs, planned capital expenditures and debt service requirements for the remainder of ~~2017~~2018 and the foreseeable future.

Key components of our cash flow are summarized below (in thousands):


	Nine Months Ended						Six Months Ended
	October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017
Net cash (used in) provided by:
Operating activities	$	(18,925	)	$	5,254		$	(69,020	)	$	8,189
Investing activities	(59,082		)	(66,757		)	(11,020		)	(50,339		)
Financing activities	94,534			63,918			85,363			54,479

Operating Activities

During the year-to-date 2018, we used $69.0 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $13.7 million. Changes in operating assets and liabilities used net cash of approximately $56.1 million, which included a $38.5 million increase in merchandise inventories, primarily due to the seasonal build of inventories, and a $20.0 million decrease in accounts payable and other liabilities, partially offset by a $2.4 million decrease in other assets. Additionally, cash flows from operating activities included construction allowances from landlords of $0.8 million, which funded a portion of the capital expenditures related to leasehold improvements in our corporate office building.

During the year-to-date 2017, we ~~used $18.9~~generated $8.2 million in cash from operating activities. Net loss, adjusted for non-cash expenses, generated cash of approximately ~~$6.9~~$17.7 million. Changes in operating assets and liabilities used net cash of approximately ~~$27.1~~$10.6 million, which included increases of ~~$137.5~~$18.2 million in merchandise inventories, primarily due to the seasonal build of inventories, and ~~$9.7~~$23.2 million in other assets, partially offset by an increase of ~~$120.1~~$30.8 million in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of ~~$1.2~~$1.1 million, which funded a portion of the capital expenditures related to store leasehold improvements in relocated, expanded and remodeled stores.

The year-over-year change reflects an increase in off-price store inventory levels, and a shift in the timing of payments due to earlier merchandise receipts and a higher payables balance at the end of 2017 compared to 2016.

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During the year-to-date 2016, we generated $5.3 million in cash from operating activities. Net loss, adjusted for non-cash expenses, provided cash of approximately $30.6 million. Changes in operating assets and liabilities used net cash of approximately $32.3 million, which included increases of $133.3 million in merchandise inventories, primarily due to the seasonal build of inventories, and $18.5 million in other assets, partially offset by an increase of $119.5 million in accounts payable and other liabilities primarily related to inventory purchases. Additionally, cash flows from operating activities included construction allowances from landlords of $7.0 million, which funded a portion of the capital expenditures related to leasehold improvements in our new corporate office building and store leasehold improvements in relocated, expanded and remodeled stores.

Investing Activities

Net cash used in investing activities was ~~$59.1~~$11.0 million for the year-to-date ~~2017,~~2018, compared to ~~$66.8~~$50.3 million for the year-to-date ~~2016.~~2017. Investing activities for the year-to-date 2017 included $36.1 million paid for the Gordmans Acquisition, which was funded with existing cash and availability under the credit facility, and was predominately for inventory acquired.

Capital expenditures were ~~$25.3~~$12.8 million for the year-to-date ~~2017,~~2018, compared to ~~$67.9~~$15.5 million for the year-to-date ~~2016,~~2017, reflecting a decrease in store expansions and remodels. We received construction allowances from landlords of ~~$1.2~~$0.8 million in the year-to-date 2018 and $1.1 million in the year-to-date 2017, which are reflected in cash flows from operating activities, and ~~$7.0 million in the year-to-date 2016~~were used to fund a portion of the capital expenditures related to ~~store~~ leasehold improvements ~~and~~in our ~~new~~ corporate office ~~building.~~building and stores. These funds are recorded as a deferred rent credit on the balance sheet and are recognized as an offset to rent expense over the lease term commencing with the date the allowances are earned.

~~During the year-to-date 2017, we paid $36.1~~We estimate that capital expenditures in 2018, net of construction allowances to be received from landlords, will be approximately $30.0 million to $35.0 million. The expenditures will principally be for ~~the Gordmans Acquisition (see Note 8 to the condensed consolidated financial statements), which was funded with existing cash~~investments in our stores, omni-channel, supply chain and ~~availability under the Revolving Credit Facility.~~technology.

Financing Activities

Net cash provided by financing activities for the year-to-date ~~2017~~2018 was ~~$94.5~~$85.4 million, compared to ~~$63.9~~$54.5 million for the year-to-date ~~2016.~~2017.

On August 3, 2018, we entered into an amendment to our senior secured revolving credit facility agreement. The ~~change~~amendment provides us with a $25.0 million term loan, which increased total availability under our credit facility from $400.0 million to $425.0 million, with a seasonal increase to $450.0 million and a $25.0 million letter of credit sublimit. Both the existing credit facility and the term loan mature on December 16, 2021. The term loan is ~~primarily~~payable in quarterly installments of $0.6 million beginning on February 4, 2019, with the remaining balance due ~~to increased net borrowings under the Revolving Credit Facility.~~upon maturity.

We use the ~~Revolving Credit Facility~~credit facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings under the credit facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the ~~Revolving Credit Facility~~credit facility agreement. ~~Inventory,~~The credit facility is secured by our inventory, cash, ~~and~~ cash equivalents, ~~are pledged as collateral.~~and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the ~~Revolving Credit Facility~~credit facility agreement. For the ~~year-to-date 2017,~~six months ended August 4, 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were ~~2.62%~~3.30% and ~~$221.7~~$259.9 million, respectively, compared to ~~1.83%~~2.54% and ~~$188.0~~$215.4 million for the year-to-date ~~2016. The increase in average daily borrowings for the year-to-date 2017 compared to the year-to-date 2016 includes the Gordmans Acquisition and related costs.~~2017.

Letters of credit issued under the ~~Revolving Credit Facility~~credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At ~~October 28, 2017,~~August 4, 2018, outstanding letters of credit totaled approximately ~~$7.3~~$12.4 million. These letters of credit expire within 12 months of issuance ~~but~~and may be renewed. ~~Excess borrowing availability under the Revolving Credit Facility at October 28, 2017 was $157.4 million.~~

The ~~Revolving Credit Facility~~credit facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The credit facility agreement also contains covenants which, among other things, restrict ~~based on required levels of excess availability,~~ (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. ~~The agreement also contains a fixed charge coverage ratio covenant in the event excess availability is below a defined threshold or an event of default has occurred.~~ At ~~October 28, 2017,~~August 4, 2018, we were in compliance with ~~all of~~ the debt covenants of the credit facility agreement and we expect to remain in compliance. Excess availability under the credit facility was $95.2 million as of August 4, 2018.

During the year-to-date ~~2017,~~2018, we paid ~~$7.1~~$2.9 million in cash dividends. On ~~November 16, 2017,~~August 23, 2018, our Board declared a quarterly cash dividend of $0.05 per share of common stock, payable on ~~December 13, 2017~~September 19, 2018 to shareholders of record at the close of business on ~~November 28, 2017.~~September 4, 2018.

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Recent Accounting Standards

Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk from exposure to changes in interest rates on borrowings under the ~~Revolving Credit Facility. An~~credit facility. For the year-to-date 2018, a 10% increase or decrease ~~of 10%~~ in the weighted average interest ~~rates would not have a material effect~~rate on our ~~financial condition, results of operations, or liquidity.~~weighted average borrowings under the credit facility would have had a $0.4 million impact on our interest expense.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term “internal control over financial reporting” means a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:


(1)	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;


(2)	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and


(3)	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material adverse effect on the financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in our internal control over financial reporting during the three months ended ~~October 28, 2017~~August 4, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Table of Contents~~

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

No response is required under Item 103 of Regulation S-K.

ITEM 1A. RISK FACTORS

~~In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A (Risk Factors) of the Form 10-K.~~ There have not been noany material changes from the risk factors as previously disclosed in ~~our~~the Form ~~10-K, except for the addition of the risk factor that follows:~~10-K.

Failure to successfully integrate the Gordmans business and convert the Gordmans business to off-price retail operations, and to do so in the time frame we anticipate, may adversely affect our results of operations and financial condition. ~~The acquisition involves numerous risks and uncertainties, including the following:~~

~~The potential loss of distributors, vendors and other business partners following the Gordmans acquisition.~~

~~The potential loss of customers as we rebuild inventory levels and implement new pricing and marketing strategies in the Gordmans off-price stores.~~

~~We may not be able to attract or retain key employees with experience in off-price retail operations.~~

~~We may be unable to adapt our supply chain, or convert the former Gordmans supply chain, well enough or quickly enough to support off-price retail operations.~~

~~Projected sales and margins for the Gordmans off-price stores may not be achieved.~~

~~Integration of the Gordmans business may take longer or be more costly than anticipated.~~

If we are not able to successfully and timely integrate the Gordmans business and operate the Gordmans business as profitably was we plan, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected, which may adversely affect our results of operations and financial condition.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 7, 2011, our Board approved a stock repurchase program (“2011 Stock Repurchase Program”), which authorized us to repurchase up to $200.0 million of our outstanding common stock. The 2011 Stock Repurchase Program will expire when we have exhausted the authorization, unless terminated earlier by our Board. Through ~~October 28, 2017,~~August 4, 2018, we repurchased approximately $141.6 million of our outstanding common shares under the 2011 Stock Repurchase Program. Also in March 2011, our Board authorized us to repurchase shares of our outstanding common stock equal to the amount of the proceeds and related tax benefits from the exercise of stock options, stock appreciation rights and other equity grants. Purchases of shares of our common stock may be made from time to time, either on the open market or through privately negotiated transactions and are financed by our existing cash, cash flow and other liquidity sources, as appropriate.

The table below sets forth information regarding our repurchases of common stock during the three months ended ~~October 28, 2017:~~August 4, 2018:

													ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased ^(a)	Average Price Paid Per Share ^(a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ^(b)		Total Number of Shares Purchased ^(a)	Average Price Paid Per Share ^(a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ^(b)

July 30, 2017 to August 26, 2017	6,249	$	1.84	—	$	58,351,202
May 6, 2018 to June 2, 2018							3,517	$	2.84	—	$	58,351,202

August 27, 2017 to September 30, 2017	20,312	1.85		—	$	58,351,202
June 3, 2018 to July 7, 2018							13,258	2.50		—	$	58,351,202

October 1, 2017 to October 28, 2017	4,797	1.86		—	$	58,351,202
July 8, 2018 to August 4, 2018							5,420	2.23		—	$	58,351,202

Total	31,358	$	1.85	—			22,195	$	2.49	—

^(a)Although we did not repurchase any of our common stock during the three months ended ~~October 28, 2017~~August 4, 2018 under the 2011 Stock Repurchase Program:

We reacquired ~~10,580~~2,947 shares of common stock from certain employees to cover tax withholding obligations from the vesting of restricted stock at a weighted average acquisition price of ~~$1.82~~$2.33 per common share; and

The trustee of the grantor trust established by us for the purpose of holding assets under our deferred compensation plan purchased an aggregate of ~~20,778~~19,248 shares of our common stock in the open market at a weighted average price of ~~$1.87~~$2.51 in connection with the option to invest in our stock under the deferred compensation plan and reinvestment of dividends paid on our common stock held in trust in the deferred compensation plan.

^(b)Reflects the $200.0 million authorized under the 2011 Stock Purchase Program, less the $141.6 million repurchased as of ~~October 28, 2017~~August 4, 2018 using our existing cash, cash flow and other liquidity sources since March 2011.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following documents are the exhibits to this Form 10-Q. For convenient reference, each exhibit is listed according to the Exhibit Table of Item 601 of Regulation S-K.



Exhibit Number	Description

~~10.1*#~~ 10.1	Third Amendment ~~No. Five~~to Second Amended and Restated Credit Agreement, Second Amendment to Amended and Restated ~~Private Label Credit Card Plan~~Security Agreement and First Amendment to Amended and Restated Guaranty dated August 3, 2018, among Specialty Retailers, Inc., as ~~of August 11, 2017, between~~borrower, Stage Stores, Inc., as guarantor, and ~~Comenity Bank.~~the banks named therein, is incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on August 7, 2018.

31.1*	Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*	Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document



*	Filed electronically herewith.
#	~~Certain confidential portions marked with a [****] have been omitted pursuant to a confidential treatment request that has been filed separately with the U.S. Securities and Exchange Commission.~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	STAGE STORES, INC.

Dated: ~~December 7, 2017~~September 13, 2018	/s/ Michael L. Glazer
	Michael L. Glazer
	President and Chief Executive Officer
	(Principal Executive Officer)


Dated: ~~December 7, 2017~~September 13, 2018	/s/ ~~Oded Shein~~Jason T. Curtis
	~~Oded Shein~~Jason T. Curtis
	~~Executive~~Senior Vice President,
	Interim Chief Financial Officer and Treasurer
	(Principal Financial Officer)

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Period Granted	Target Shares Outstanding at January 28, 2017	Target Shares Granted	Target Shares Vested	Target Shares Forfeited		Target Shares Outstanding at October 28, 2017	Weighted Average Grant Date Fair Value Per Share
2015	158,490	—	—	(4,444	)	154,046	$	28.33
2016	330,233	—	—	(8,527	)	321,706	8.69
2017	—	600,000	—	—		600,000	1.80
Total	488,723	600,000	—	(12,971	)	1,075,752	7.65