UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended AugustMay 4, 20182019
or
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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)
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NEVADA (State or other jurisdiction of incorporation or organization) | 91-1826900 (I.R.S. Employer Identification No.) |
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2425 West Loop South, Houston, Texas (Address of principal executive offices) | 77027 (Zip Code) |
(800) 579-2302
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock ($0.01 par value) | SSI | New York Stock Exchange |
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):
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Large accelerated filer | o | | Accelerated filer | þ |
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Non-accelerated filer | o(Do not check if a smaller reporting company) | | Smaller reporting company | oþ |
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| | | 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 September 6, 2018,June 5, 2019, there were 28,242,79028,663,276 shares of the registrant’s common stock outstanding.
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TABLE OF CONTENTS |
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| | | Page No. |
Item 1. | | |
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| | AugustMay 4, 2018,2019, February 3,2, 2019 and May 5, 2018 and July 29, 2017 | |
| | |
| | Three and Six Months Ended AugustMay 4, 20182019 and July 29, 2017May 5, 2018 | |
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| | SixThree Months Ended AugustMay 4, 20182019 and July 29, 2017May 5, 2018 | |
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| | SixThree Months Ended AugustMay 4, 2019 and May 5, 2018 | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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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 | | | | | |
| August 4, 2018 | | As Adjusted | | As Adjusted | May 4, 2019 | | February 2, 2019 | | May 5, 2018 |
ASSETS | | | | | | | | | | |
Cash and cash equivalents | $ | 26,573 |
| | $ | 21,250 |
| | $ | 26,132 |
| $ | 22,793 |
| | $ | 15,830 |
| | $ | 29,091 |
|
Merchandise inventories, net | 476,883 |
| | 438,377 |
| | 458,319 |
| 472,000 |
| | 424,555 |
| | 477,562 |
|
Prepaid expenses and other current assets | 48,525 |
| | 52,407 |
| | 64,443 |
| 43,817 |
| | 52,518 |
| | 48,762 |
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Total current assets | 551,981 |
| | 512,034 |
| | 548,894 |
| 538,610 |
| | 492,903 |
| | 555,415 |
|
| | | | | | | | | | |
Property, equipment and leasehold improvements, net of accumulated depreciation of $722,938, $699,788 and $721,472, respectively | 236,151 |
| | 252,788 |
| | 269,977 |
| |
Property, equipment and leasehold improvements, net of accumulated depreciation of $742,162, $733,366 and $713,867, respectively | | 211,849 |
| | 224,803 |
| | 244,214 |
|
Operating lease assets | | 332,233 |
| | — |
| | — |
|
Intangible assets | 17,135 |
| | 17,135 |
| | 17,135 |
| 2,225 |
| | 2,225 |
| | 17,135 |
|
Other non-current assets, net | 24,409 |
| | 24,449 |
| | 23,925 |
| 22,690 |
| | 24,230 |
| | 23,715 |
|
Total assets | $ | 829,676 |
| | $ | 806,406 |
| | $ | 859,931 |
| $ | 1,107,607 |
| | $ | 744,161 |
| | $ | 840,479 |
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| | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
| | | |
| | |
| | |
Accounts payable | $ | 122,680 |
| | $ | 145,991 |
| | $ | 126,904 |
| $ | 121,347 |
| | $ | 106,825 |
| | $ | 128,883 |
|
Current portion of debt obligations | 3,542 |
| | 2,985 |
| | 3,050 |
| 5,170 |
| | 4,812 |
| | 2,896 |
|
Current portion of operating lease liabilities | | 75,211 |
| | — |
| | — |
|
Accrued expenses and other current liabilities | 73,506 |
| | 64,442 |
| | 70,754 |
| 73,822 |
| | 65,715 |
| | 64,617 |
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Total current liabilities | 199,728 |
|
| 213,418 |
| | 200,708 |
| 275,550 |
|
| 177,352 |
| | 196,396 |
|
| | | | | | | | | | |
Long-term debt obligations | 268,682 |
| | 180,350 |
| | 227,385 |
| 306,699 |
| | 250,294 |
| | 265,469 |
|
Long-term operating lease liabilities | | 289,154 |
| | — |
| | — |
|
Other long-term liabilities | 65,431 |
| | 68,524 |
| | 78,209 |
| 33,305 |
| | 61,990 |
| | 66,029 |
|
Total liabilities | 533,841 |
|
| 462,292 |
| | 506,302 |
| 904,708 |
|
| 489,636 |
| | 527,894 |
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| | | | | | | | | | |
Commitments and contingencies |
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Common stock, par value $0.01, 100,000 shares authorized, 33,418, 32,806 and 32,766 shares issued, respectively | 334 |
| | 328 |
| | 328 |
| |
Common stock, par value $0.01, 100,000 shares authorized, 33,805, 33,469 and 33,111 shares issued, respectively | | 338 |
| | 335 |
| | 331 |
|
Additional paid-in capital | 421,621 |
| | 418,658 |
| | 414,524 |
| 424,407 |
| | 423,535 |
| | 420,091 |
|
Treasury stock, at cost, 5,175 shares, respectively | (43,388 | ) | | (43,298 | ) | | (43,210 | ) | (43,552 | ) | | (43,579 | ) | | (43,339 | ) |
Accumulated other comprehensive loss | (4,823 | ) | | (5,177 | ) | | (5,385 | ) | (5,687 | ) | | (5,857 | ) | | (4,978 | ) |
Accumulated deficit | (77,909 | ) | | (26,397 | ) | | (12,628 | ) | (172,607 | ) | | (119,909 | ) | | (59,520 | ) |
Total stockholders' equity | 295,835 |
| | 344,114 |
| | 353,629 |
| 202,899 |
| | 254,525 |
| | 312,585 |
|
Total liabilities and stockholders' equity | $ | 829,676 |
|
| $ | 806,406 |
| | $ | 859,931 |
| $ | 1,107,607 |
|
| $ | 744,161 |
| | $ | 840,479 |
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Stage Stores, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(Unaudited)
| | | Three Months Ended | | Six Months Ended | Three Months Ended |
| |
| July 29, 2017 | | | | July 29, 2017 | | | |
| August 4, 2018 | | As Adjusted | | August 4, 2018 | | As Adjusted | May 4, 2019 | | May 5, 2018 |
Net sales | $ | 369,294 |
| | $ | 377,081 |
| | $ | 713,523 |
| | $ | 685,688 |
| $ | 327,721 |
| | $ | 344,229 |
|
Credit income | 14,305 |
| | 13,190 |
| | 29,819 |
| | 26,118 |
| 13,108 |
| | 15,514 |
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Total revenues | 383,599 |
| | 390,271 |
| | 743,342 |
| | 711,806 |
| 340,829 |
| | 359,743 |
|
Cost of sales and related buying, occupancy and distribution expenses | 286,807 |
| | 284,140 |
| | 568,548 |
| | 530,529 |
| 277,599 |
| | 281,741 |
|
Selling, general and administrative expenses | 110,914 |
| | 113,833 |
| | 218,191 |
| | 215,270 |
| 106,576 |
| | 107,277 |
|
Interest expense | 2,650 |
| | 1,918 |
| | 4,903 |
| | 3,504 |
| 3,994 |
| | 2,253 |
|
Loss before income tax | (16,772 | ) |
| (9,620 | ) | | (48,300 | ) |
| (37,497 | ) | (47,340 | ) |
| (31,528 | ) |
Income tax expense (benefit) | 150 |
| | (3,362 | ) | | 300 |
| | (12,252 | ) | |
Income tax expense | | 150 |
| | 150 |
|
Net loss | $ | (16,922 | ) |
| $ | (6,258 | ) | | $ | (48,600 | ) |
| $ | (25,245 | ) | $ | (47,490 | ) |
| $ | (31,678 | ) |
| | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | |
Amortization of employee benefit related costs, net of tax of $0, $81, $0 and $161, respectively | $ | 155 |
| | $ | 132 |
| | $ | 354 |
| | $ | 263 |
| |
Amortization of employee benefit related costs, net of tax of $0, respectively | | $ | 170 |
| | $ | 199 |
|
Total other comprehensive income | 155 |
|
| 132 |
| | 354 |
|
| 263 |
| 170 |
|
| 199 |
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Comprehensive loss | $ | (16,767 | ) |
| $ | (6,126 | ) | | $ | (48,246 | ) |
| $ | (24,982 | ) | $ | (47,320 | ) |
| $ | (31,479 | ) |
| | | | | | | | | | |
Loss per share: | | | | | | | | |
Net loss per share: | | | | |
Basic | $ | (0.60 | ) | | $ | (0.23 | ) | | $ | (1.74 | ) | | $ | (0.93 | ) | $ | (1.67 | ) | | $ | (1.14 | ) |
Diluted | $ | (0.60 | ) | | $ | (0.23 | ) | | $ | (1.74 | ) | | $ | (0.93 | ) | $ | (1.67 | ) | | $ | (1.14 | ) |
| | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic | 28,152 |
| | 27,535 |
| | 27,959 |
| | 27,401 |
| 28,441 |
| | 27,765 |
|
Diluted | 28,152 |
| | 27,535 |
| | 27,959 |
| | 27,401 |
| 28,441 |
| | 27,765 |
|
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Stage Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
| | | Six Months Ended | Three Months Ended |
| | | July 29, 2017 | | | |
| August 4, 2018 | | As Adjusted | May 4, 2019 | | May 5, 2018 |
Cash flows from operating activities: | | | | | | |
Net loss | $ | (48,600 | ) | | $ | (25,245 | ) | $ | (47,490 | ) | | $ | (31,678 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |
| | |
| |
Depreciation, amortization and impairment of long-lived assets | 31,217 |
| | 33,177 |
| |
Loss (gain) on retirements of property, equipment and leasehold improvements | 17 |
| | (528 | ) | |
Deferred income taxes | — |
| | 5,520 |
| |
Adjustments to reconcile net loss to net cash used in operating activities: | | |
| | |
|
Depreciation and amortization of long-lived assets | | 15,344 |
| | 15,151 |
|
Impairment of long-lived assets | | 519 |
| | — |
|
Gain on retirements of property, equipment and leasehold improvements | | (678 | ) | | (30 | ) |
Non-cash operating lease expense | | 17,588 |
| | — |
|
Stock-based compensation expense | 3,049 |
| | 4,312 |
| 949 |
| | 1,558 |
|
Amortization of debt issuance costs | 148 |
| | 144 |
| 170 |
| | 74 |
|
Deferred compensation obligation | 90 |
| | (76 | ) | (27 | ) | | 41 |
|
Amortization of employee benefit related costs | 354 |
| | 424 |
| 170 |
| | 199 |
|
Construction allowances from landlords | 757 |
| | 1,098 |
| 1,867 |
| | — |
|
Other changes in operating assets and liabilities: | |
| | |
| |
| | |
|
Increase in merchandise inventories | (38,506 | ) | | (18,199 | ) | (47,445 | ) | | (39,185 | ) |
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 | (69,020 | ) |
| 8,189 |
| |
Decrease in other assets | | 14,252 |
| | 4,303 |
|
Decrease in operating lease liabilities | | (18,972 | ) | | — |
|
Increase (decrease) in accounts payable and other liabilities | | 26,551 |
| | (19,088 | ) |
Net cash used in operating activities | | (37,202 | ) |
| (68,655 | ) |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
| | |
|
Additions to property, equipment and leasehold improvements | (12,822 | ) | | (15,502 | ) | (13,774 | ) | | (6,930 | ) |
Proceeds from insurance and disposal of assets | 1,802 |
| | 1,307 |
| 678 |
| | 45 |
|
Business acquisition | — |
| | (36,144 | ) | |
Net cash used in investing activities | (11,020 | ) |
| (50,339 | ) | (13,096 | ) |
| (6,885 | ) |
| | | | | | |
Cash flows from financing activities: | |
| | |
| |
| | |
|
Proceeds from revolving credit facility borrowings | 298,509 |
| | 277,013 |
| 149,411 |
| | 164,071 |
|
Payments of revolving credit facility borrowings | (233,148 | ) | | (211,891 | ) | (91,756 | ) | | (78,310 | ) |
Proceeds from long-term debt obligation | 25,000 |
| | — |
| |
Payments of long-term debt obligations | (1,472 | ) | | (4,850 | ) | (338 | ) | | (731 | ) |
Payments of debt issuance costs | (354 | ) | | (8 | ) | (36 | ) | | — |
|
Payments for stock related compensation | (260 | ) | | (135 | ) | (20 | ) | | (204 | ) |
Cash dividends paid | (2,912 | ) | | (5,650 | ) | — |
| | (1,445 | ) |
Net cash provided by financing activities | 85,363 |
|
| 54,479 |
| 57,261 |
|
| 83,381 |
|
Net increase in cash and cash equivalents | 5,323 |
|
| 12,329 |
| 6,963 |
|
| 7,841 |
|
| | | | | | |
Cash and cash equivalents: | |
| | |
| |
| | |
|
Beginning of period | 21,250 |
| | 13,803 |
| 15,830 |
| | 21,250 |
|
End of period | $ | 26,573 |
|
| $ | 26,132 |
| $ | 22,793 |
|
| $ | 29,091 |
|
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Supplemental disclosures including non-cash investing and financing activities: | |
| | |
| |
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Interest paid | $ | 4,866 |
| | $ | 3,324 |
| $ | 3,745 |
| | $ | 2,116 |
|
Income taxes paid | $ | 14 |
| | $ | 247 |
| |
Income taxes paid (refunded) | | $ | 473 |
| | $ | (180 | ) |
Unpaid liabilities for capital expenditures | $ | 4,798 |
| | $ | 5,563 |
| $ | 3,863 |
| | $ | 2,597 |
|
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Stage Stores, Inc.
Condensed Consolidated StatementStatements of Stockholders’ Equity
For the Six Months Ended August 4, 2018
(in thousands, except per share data)amounts)
(Unaudited)
| | | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | |
| | Shares | | Amount | | Shares | | Amount | | Total |
Balance at February 2, 2019 | | 33,469 |
| | $ | 335 |
| | $ | 423,535 |
| | (5,175 | ) | | $ | (43,579 | ) | | $ | (5,857 | ) | | $ | (119,909 | ) | | $ | 254,525 |
|
Cumulative-effect adjustment (a) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,208 | ) | | (5,208 | ) |
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (47,490 | ) | | (47,490 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 170 |
| | — |
| | 170 |
|
Deferred compensation | | — |
| | — |
| | (27 | ) | | — |
| | 27 |
| | — |
| | — |
| | — |
|
Issuance of equity awards, net | | 336 |
| | 3 |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Tax withholdings paid for net settlement of stock awards | | — |
| | — |
| | (47 | ) | | — |
| | — |
| | — |
| | — |
| | (47 | ) |
Stock-based compensation expense | | — |
| | — |
| | 949 |
| | — |
| | — |
| | — |
| | — |
| | 949 |
|
Balance at May 4, 2019 | | 33,805 |
| | $ | 338 |
| | $ | 424,407 |
| | (5,175 | ) | | $ | (43,552 | ) |
| $ | (5,687 | ) | | $ | (172,607 | ) | | $ | 202,899 |
|
| | | | | | | | | | | | | | | | |
(a) Related to the adoption of the new lease accounting standard. See Note 1 for further disclosures regarding the adoption impact. | | (a) Related to the adoption of the new lease accounting standard. See Note 1 for further disclosures regarding the adoption impact. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | |
| Shares | | Amount | | Shares | | Amount | | Total | Shares | | Amount | | Shares | | Amount | | Total |
Balance at February 3, 2018 | 32,806 |
| | $ | 328 |
| | $ | 418,658 |
| | (5,175 | ) | | $ | (43,298 | ) | | $ | (5,177 | ) | | $ | (26,397 | ) | | $ | 344,114 |
| 32,806 |
| | $ | 328 |
| | $ | 418,658 |
| | (5,175 | ) | | $ | (43,298 | ) | | $ | (5,177 | ) | | $ | (26,397 | ) | | $ | 344,114 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (48,600 | ) | | (48,600 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31,678 | ) | | (31,678 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 354 |
| | — |
| | 354 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 199 |
| | — |
| | 199 |
|
Dividends on common stock, $0.10 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,912 | ) | | (2,912 | ) | |
Dividends on common stock, $0.05 per share | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,445 | ) | | (1,445 | ) |
Deferred compensation | — |
| | — |
| | 90 |
| | — |
| | (90 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | 41 |
| | — |
| | (41 | ) | | — |
| | — |
| | — |
|
Issuance of equity awards, net | 612 |
| | 6 |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| 305 |
| | 3 |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Tax withholdings paid for net settlement of stock awards | — |
| | — |
| | (170 | ) | | — |
| | — |
| | — |
| | — |
| | (170 | ) | — |
| | — |
| | (163 | ) | | — |
| | — |
| | — |
| | — |
| | (163 | ) |
Stock-based compensation expense | — |
| | — |
| | 3,049 |
| | — |
| | — |
| | — |
| | — |
| | 3,049 |
| — |
| | — |
| | 1,558 |
| | — |
| | — |
| | — |
| | — |
| | 1,558 |
|
Balance at August 4, 2018 | 33,418 |
| | $ | 334 |
| | $ | 421,621 |
| | (5,175 | ) | | $ | (43,388 | ) |
| $ | (4,823 | ) | | $ | (77,909 | ) | | $ | 295,835 |
| |
Balance at May 5, 2018 | | 33,111 |
| | $ | 331 |
| | $ | 420,091 |
| | (5,175 | ) | | $ | (43,339 | ) | | $ | (4,978 | ) | | $ | (59,520 | ) | | $ | 312,585 |
|
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 February 3, 20182, 2019 (“Form 10-K”).
We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of AugustMay 4, 2018,2019, we operated in 42 states through 764685 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 59105 GORDMANS off-price stores, as well as an e-commerce website.website (www.stage.com). Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized non-rural Midwest markets.markets in the Midwest.
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 “2018”“2019” is a reference to the fiscal year ending February 2, 2019,1, 2020, and “2017”“2018” is a reference to the fiscal year ended February 3, 2018.2, 2019. Fiscal years 20182019 and 20172018 are comprised of 52 weeks and 53 weeks, respectively.weeks. References to the “three months ended AugustMay 4, 2018”2019” and “three months ended July 29, 2017”May 5, 2018” are for the respective 13-week fiscal quarters. References to quarters relate to our fiscal quarters. References to the “six months ended August 4, 2018” and “six months ended July 29, 2017” are for the respective 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 since the Gordmans Acquisition are included in our condensed consolidated statements of operations (see Note 9).
Recently Adopted Accounting Pronouncements. In May 2014,February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,Updates (“ASU”) 2016-02, Revenue from Contracts with CustomersLeases (Topic 606)842), and subsequently issued related ASUs, which were incorporated into Topic 606. 842.Under Topic 606, revenue is recognized whenthe new standard, lessees are required to recognize a customer obtains controlright-of-use asset and a lease liability, measured on a discounted basis, at the later of promised goods or services in an amount that reflects the considerationlease commencement date and the entity expects to be entitled to in exchange for those goods or services.date of adoption. The 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 standardguidance also requires disclosure ofqualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On February 4, 2018, weleases. We adopted the new standard usingon February 3, 2019, the full retrospective method. As a resultfirst day of fiscal 2019.
Transition elections:
We elected to apply the effective date transition method as of the February 3, 2019 adoption date. Comparative periods prior to the adoption of ASU 2014-09, the condensed consolidated statementsnew standard have not been restated and are reported under the legacy guidance in Accounting Standards Codification (“ASC”) Topic 840, Leases.
We elected the package of operations reflectpractical expedients in the reclassificationtransition guidance, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
We elected not to use the practical expedient of credit income relatedusing hindsight to our private label credit card program from selling, generaldetermine the lease term and administrative expenses to revenue. In addition, the condensed consolidated balance sheets and condensed consolidated statement of cash flows reflect the reclassificationin assessing impairment of the assetright-of-use assets.
Accounting policy elections:
We elected the short-term lease exemption for non-real estate leases that have a lease term of twelve months or less. For non-real estate leases that qualify for the rightshort-term exemption, we will not recognize a right-of-use asset or liability and will recognize those lease expenses on a straight-line basis over the lease term.
We elected to recover sales return merchandise from merchandise inventories to prepaid expensesnot separate lease and othernon-lease components for all of our current assets. The tables that follow depict the impact of the reclassification adjustments on the prior period financial statement presentations.
lease classes.
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.
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| | | | | | | | | | | |
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 |
|
The condensed consolidated statementadoption of cash flows reflectsthe standard resulted in the recognition of operating lease assets and liabilities of $344.2 million and $375.8 million, respectively, as of February 3, 2019. Included in the measurement of the operating lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and deferred rent tenant allowances. We also recognized a cumulative effect charge of $5.2 million, net of tax, to the opening accumulated deficit balance. This adjustment reflects $5.8 million in depreciation of leasehold improvements associated with conforming the asset foruseful life to 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 itemremaining lease life 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 fromtransition date. It also reflects $0.6 million associated with the line itemderecognition of lease obligations that includeshad been classified as finance obligations under the service cost and outside of any subtotal of operating income. Theformer failed sale-leaseback guidance applied to build-to-suit arrangements. Under 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, while the capitalization of service cost must be applied on a prospective basis. On February 4, 2018, we adopted ASU 2017-07. The pension plan that we sponsor is frozen, and therefore, service costs no longer accrue under the plan.these leases are classified as operating leases. The adoption of the new standard did not changehave a material impact on our results of operations or cash flows. In addition, our bank covenants under our Credit Facility were not affected by the presentationadoption of our condensed consolidated statements of operations.the standard. See Note 5 for further disclosures regarding leases.
Recent Accounting Pronouncements Not Yet Adopted. In February 2016,August 2018, the FASB issued ASU 2016-02,2018-13, LeasesFair Value Measurement (Topic 842)820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. 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, which eliminates, adds and lease liability on the balance sheetmodifies certain disclosure requirements for all leases with terms longer than 12 months. A policy election can be made, by underlying asset class, to keep leases with an initial term of 12 months or less off the balance sheet and 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.fair value measurements. The new standard will be effective for us in the first quarter of fiscal 2019, which begins on February 3, 2019. ASU 2016-02 requires a modified retrospective transition approach for leases existing at, or entered into after,2020, with early adoption permitted. We are currently evaluating the beginningimpact of the earliest comparative period presented in the financial statements.new guidance on our disclosures.
In JulyAugust 2018, the FASB issued ASU 2018-11,2018-15, Leases (Topic 842) - Targeted ImprovementsIntangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), , which provides an optional transition methodaligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementations costs incurred to develop or obtain internal-use software. The guidance also requires disclosure of the nature of hosting arrangements that are service contracts. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact 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 Topic 842 will have on our consolidated financial statements and disclosures, includingdisclosures.
NOTE 2 - FAIR VALUE MEASUREMENTS
We recognize or disclose the effectfair value of the optional practical expedients permitted under the transition guidance. Based on our assessment to date, we expect the adoption of Topic 842will result in a significant increase in lease-relatedfinancial and non-financial assets and liabilities on our consolidated balance sheets. The ultimate impact of adoptinga recurring and non-recurring basis. Fair value is defined as the new standard will depend on our lease portfolio asprice 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 adoption date.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 applied the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases 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. |
Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| May 4, 2019 |
| 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) | $ | 17,887 |
| | $ | 17,887 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
| | | | | | | |
| February 2, 2019 |
| 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) | $ | 19,536 |
| | $ | 19,536 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
| | | | | | | |
| May 5, 2018 |
| 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) | $ | 19,606 |
| | $ | 19,606 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
(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 securities 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 three months ended May 4, 2019 and May 5, 2018, and for the fiscal year ended February 2, 2019.
Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| May 4, 2019 |
| Balance | | Quoted Prices in Active Markets for Identical Instruments (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Assets held for sale (a) | $ | 3,270 |
| | $ | — |
| | $ | — |
| | $ | 3,270 |
|
Store property, equipment and leasehold improvements (b) | 2 |
| | — |
| | — |
| | 2 |
|
Total Assets | $ | 3,272 |
| | $ | — |
| | $ | — |
| | $ | 3,272 |
|
| | | | | | | |
| | | | | | | |
| February 2, 2019 |
| 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) | $ | 1,583 |
| | $ | — |
| | $ | — |
| | $ | 1,583 |
|
| | | | | | | |
(a) Assets held for sale are reflected in prepaid expenses and other current assets.
(b) 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 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 three months ended May 4, 2019 and fiscal year 2018, we recognized impairment charges of $0.5 million and $2.8 million, respectively. There were no impairment charges recognized for the three months ended May 5, 2018. Impairment charges related to assets held for sale are recorded in selling, general and administrative expenses, while impairment charges related to store property, equipment and leasehold improvements 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 credit facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.
NOTE 2 - DEBT OBLIGATIONS
Debt obligations for each period presented consisted of the following (in thousands):
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| | | | | | | | | | | |
| 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.
We 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 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 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 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.
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 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 $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At August 4, 2018, we were in compliance with 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.
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 |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
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.
NOTE 3 - DEBT OBLIGATIONS
Debt obligations for each period presented consisted of the following (in thousands):
|
| | | | | | | | | | | |
| May 4, 2019 | | February 2, 2019 | | May 5, 2018 |
Revolving loan | $ | 261,699 |
| | $ | 204,044 |
| | $ | 265,049 |
|
Term loan | 50,000 |
| | 50,000 |
| | — |
|
Finance obligations | — |
| | 554 |
| | 1,310 |
|
Other financing | 170 |
| | 508 |
| | 2,006 |
|
Total debt obligations | 311,869 |
|
| 255,106 |
| | 268,365 |
|
Less: Current portion of debt obligations | 5,170 |
| | 4,812 |
| | 2,896 |
|
Long-term debt obligations | $ | 306,699 |
|
| $ | 250,294 |
| | $ | 265,469 |
|
We have total availability of $450.0 million with a seasonal increase to $475.0 million under our senior secured revolving credit facility agreement including a revolving loan (“Revolving Loan”) and term loans (“Term Loan”), jointly referred to as the “Credit Facility”. Additionally, we have a $25.0 million letter of credit sublimit. The Term Loan is payable in quarterly installments of $1.3 million beginning on June 15, 2019, with the remaining balance due upon maturity. The Credit Facility matures on December 16, 2021.
We 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 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 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 three months ended May 4, 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the Credit Facility, were 4.8% and $299.2 million, respectively.
Letters of credit issued under the Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At May 4, 2019, outstanding letters of credit totaled approximately $6.0 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 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 $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At May 4, 2019, we were in compliance with the debt covenants of the Credit Facility agreement and we expect to remain in compliance. Excess availability under the Credit Facility at May 4, 2019 was $55.7 million.
We derecognized finance obligations of $0.6 million upon adoption of ASC Topic 842, Leases, on February 3, 2019. See Note 1 for further disclosures regarding the adoption impact.
NOTE 4 - REVENUE
Net Sales
The following table presents the composition of net sales by merchandise category (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | May 4, 2019 | | May 5, 2018 |
Merchandise Category | | Department Stores | | Off-price Stores | | Total Company | | Department Stores | | Off-price Stores | | Total Company |
Women’s | | $ | 83,615 |
| | $ | 20,861 |
| | $ | 104,476 |
| | $ | 103,487 |
| | $ | 19,967 |
| | $ | 123,454 |
|
Men’s | | 39,108 |
| | 8,514 |
| | 47,622 |
| | 41,336 |
| | 7,545 |
| | 48,881 |
|
Children's | | 25,138 |
| | 9,880 |
| | 35,018 |
| | 29,078 |
| | 8,096 |
| | 37,174 |
|
Apparel | | 147,861 |
| | 39,255 |
| | 187,116 |
| | 173,901 |
| | 35,608 |
| | 209,509 |
|
| | | | | | | | | | | | |
Footwear | | 40,271 |
| | 5,074 |
| | 45,345 |
| | 44,483 |
| | 4,819 |
| | 49,302 |
|
Accessories | | 16,714 |
| | 4,344 |
| | 21,058 |
| | 18,872 |
| | 4,366 |
| | 23,238 |
|
Cosmetics/Fragrances | | 27,869 |
| | 2,813 |
| | 30,682 |
| | 31,186 |
| | 2,482 |
| | 33,668 |
|
Home/Gifts/Other | | 25,154 |
| | 20,705 |
| | 45,859 |
| | 12,809 |
| | 18,507 |
| | 31,316 |
|
Non-apparel | | 110,008 |
| | 32,936 |
| | 142,944 |
| | 107,350 |
| | 30,174 |
| | 137,524 |
|
| | | | | | | | | | | | |
Revenue adjustments not allocated (a) | | (1,912 | ) | | (427 | ) | | (2,339 | ) | | (2,888 | ) | | 84 |
| | (2,804 | ) |
| | | | | | | | | | | | |
Net sales | | $ | 255,957 |
| | $ | 71,764 |
| | $ | 327,721 |
| | $ | 278,363 |
| | $ | 65,866 |
| | $ | 344,229 |
|
| | | | | | | | | | | | |
(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 (recorded in accrued expenses and other current liabilities) for each period presented were as follows (in thousands):
|
| | | | | | | | | | | | |
| | May 4, 2019 | | February 2, 2019 | | May 5, 2018 |
Gift cards and merchandise credits, net | | $ | 10,503 |
| | $ | 12,433 |
| | $ | 10,159 |
|
Loyalty program rewards, net | | 3,239 |
| | 1,484 |
| | 3,081 |
|
Merchandise fulfillment liability | | 698 |
| | 488 |
| | 788 |
|
Total contract liabilities | | $ | 14,440 |
| | $ | 14,405 |
| | $ | 14,028 |
|
The following table summarizes contract liability activity for each period presented (in thousands):
|
| | | | | | | | |
| | Three Months Ended |
| | May 4, 2019 | | May 5, 2018 |
Beginning balance | | $ | 14,405 |
| | $ | 13,474 |
|
Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period | | (4,986 | ) | | (4,669 | ) |
Current period additions to contract liability balances included in contract liability balances at the end of the period | | 5,021 |
| | 5,223 |
|
Ending balance | | $ | 14,440 |
| | $ | 14,028 |
|
Credit Income
We earn credit income from our private label credit card (“PLCC”) through a profit-sharing arrangement with Comenity Bank, an affiliate of Alliance Data Systems Corporation. 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 PLCC portfolio.
We recorded deferred revenue for certain upfront payments received from Comenity Bank associated with the execution of the PLCC agreement, and we recognized $0.6 million and $0.4 million in credit income related to these upfront payments during the three months ended May 4, 2019 and May 5, 2018, respectively. As of May 4, 2019, deferred revenue of $7.3 million remained to be amortized.
NOTE 5 - LEASES
Our lease agreements include leases for our retail stores, distribution centers and corporate headquarters. As of May 4, 2019, all of our leases were classified as operating leases. Our store leases typically have an initial term of 10 years and often have two renewal options of five years each. The exercise of a lease renewal option is at our sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that we will exercise that option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.
We recognize a lease liability for our obligation to make lease payments arising from the lease and a related asset for our right to use the underlying asset for the lease term. The lease liability is measured based on the present value of lease payments over the lease term, and the asset is measured based on the value of the lease liability, net of landlord allowances. As the implicit interest rate in our lease agreements is not readily identifiable, we use our estimated collateralized incremental borrowing rate in determining the present value of lease payments. For all current lease classes, we made an accounting policy election not to separate lease and non-lease components.
The majority of our leases include fixed rent payments. A number of store leases provide for escalating minimum rent payments at pre-determined dates. Certain store leases provide for contingent rent payments based on a percentage of retail sales over contractual levels. Some of our leases include variable payments for maintenance, taxes and insurance.
Operating lease payments are expensed on a straight-line basis over the lease term. Variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.
We sublease our former corporate office building to a third party and recognize sublease income on a straight-line basis over the lease term.
ASC 842 Disclosures
Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost were as follows (in thousands):
|
| | | |
| Three Months Ended |
| May 4, 2019 |
Operating lease cost | $ | 26,294 |
|
Variable lease cost | 9,657 |
|
Sublease income | (368 | ) |
Total net lease cost (a) | $ | 35,583 |
|
(a) Of this amount, $34.1 million is recorded in cost of sales and related buying, occupancy and distribution expenses and $1.5 million is recorded in selling, general and administrative expenses.
Cash and non-cash activities associated with our leases were as follows (in thousands):
|
| | | |
| Three Months Ended |
| May 4, 2019 |
Cash paid for operating leases | $ | 27,678 |
|
Cash received from sublease | 362 |
|
Lease assets obtained in exchange for lease liabilities (a) | 7,333 |
|
(a) Excludes operating lease assets of $344.2 million recognized on February 3, 2019 as a result of the adoption of ASU 2016-02, Leases (Topic 842). See Note 1 for further disclosures regarding the adoption impact.
The weighted-average remaining lease term and weighted-average discount rate associated with our leases as of May 4, 2019 were as follows:
|
| | |
Weighted average remaining lease term | 5.4 years |
|
Weighted average discount rate | 10.1 | % |
Maturities of operating leases as of May 4, 2019 were as follows (in thousands):
|
| | | | | | | | |
Fiscal Year | | Operating Leases | | Sublease |
2019 (remainder of year) | | $ | 81,980 |
| | $ | (1,085 | ) |
2020 | | 101,056 |
| | (1,492 | ) |
2021 | | 86,201 |
| | (1,582 | ) |
2022 | | 69,971 |
| | (1,582 | ) |
2023 | | 49,154 |
| | (1,054 | ) |
2024 | | 31,275 |
| | — |
|
Thereafter | | 55,898 |
| | — |
|
Total lease payments | | 475,535 |
| | $ | (6,795 | ) |
Less: Effects of discounting | | 111,170 |
| | |
Present value of lease liabilities | | 364,365 |
| | |
Less: Current portion of lease liabilities | | 75,211 |
| | |
Long-term lease liabilities | | $ | 289,154 |
| | |
| | | | |
As of May 4, 2019, there were no leases that had not yet commenced.
Comparative Period Disclosures Reported Under ASC 840
Future minimum rental commitments on long-term, non-cancelable operating leases at February 2, 2019, were as follows (in thousands):
|
| | | | | | | | | | | | |
Fiscal Year | | Commitments | | Sublease Income | | Net Minimum Lease Commitments |
2019 | | $ | 108,541 |
| | $ | (1,447 | ) | | $ | 107,094 |
|
2020 | | 98,859 |
| | (1,492 | ) | | 97,367 |
|
2021 | | 83,377 |
| | (1,582 | ) | | 81,795 |
|
2022 | | 67,447 |
| | (1,582 | ) | | 65,865 |
|
2023 | | 46,887 |
| | (1,054 | ) | | 45,833 |
|
Thereafter | | 77,910 |
| | — |
| | 77,910 |
|
Total | | $ | 483,021 |
| | $ | (7,157 | ) | | $ | 475,864 |
|
While infrequent in occurrence, occasionally we are responsible for the construction of leased stores and for paying project costs. ASC 840-40-55, The Effect of Lessee Involvement in Asset Construction, requires us to be considered the owner (for accounting purposes) of such build-to-suit arrangements during the construction period. The leases are accounted for as finance obligations with the amounts received from the landlord being recorded in debt obligations. Interest expense is recognized at a rate that will amortize the finance obligation over the initial term of the lease. Where ASC 840-40-55 was applicable, we have recorded finance obligations with interest rates of 6.1% and 12.3% on our consolidated financial statements related to two store leases as of February 2, 2019.
Future minimum annual payments required under existing finance obligations as of February 2, 2019 were as follows (in thousands):
|
| | | | | | | | | | | | |
Fiscal Year | | Minimum Payments | | Less: Interest | | Principal Payments |
2019 | | $ | 580 |
| | $ | 26 |
| | $ | 554 |
|
NOTE 6 - STOCK-BASED COMPENSATION
Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
| | | Three Months Ended | | Six Months Ended | Three Months Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
Non-vested stock | 1,079 |
| | 1,395 |
| | $ | 2,266 |
| | $ | 2,903 |
| $ | 781 |
| | $ | 1,187 |
|
Restricted stock units | 259 |
| | 129 |
| | 751 |
| | 202 |
| 178 |
| | 492 |
|
Stock-settled performance share units | 412 |
| | 735 |
| | 783 |
| | 1,409 |
| 168 |
| | 371 |
|
Cash-settled performance share units | 96 |
| | — |
| | 150 |
| | — |
| 79 |
| | 54 |
|
Total stock-based compensation expense | 1,846 |
| | 2,259 |
| | 3,950 |
| | 4,514 |
| 1,206 |
| | 2,104 |
|
Related tax benefit | — |
| | (849 | ) | | — |
| | (1,697 | ) | — |
| | — |
|
Stock-based compensation expense, net of tax | $ | 1,846 |
| | $ | 1,410 |
| | $ | 3,950 |
| | $ | 2,817 |
| $ | 1,206 |
| | $ | 2,104 |
|
As of AugustMay 4, 2018,2019, we have estimated unrecognized compensation cost of $12.9$8.3 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.32.6 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 vestsvest 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 table summarizes non-vested stock activity for the sixthree months ended AugustMay 4, 2018:2019:
| | Non-vested Stock | | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at February 3, 2018 | | 1,637,037 |
| | $ | 6.67 |
| |
Outstanding at February 2, 2019 | | | 1,379,616 |
| | $ | 4.43 |
|
Granted | | 631,266 |
| | 2.41 |
| | 625,000 |
| | 0.98 |
|
Vested | | (688,534 | ) | | 7.19 |
| | (383,465 | ) | | 7.09 |
|
Forfeited | | (50,478 | ) | | 3.03 |
| | (9,983 | ) | | 6.36 |
|
Outstanding at August 4, 2018 | | 1,529,291 |
| | 4.79 |
| |
Outstanding at May 4, 2019 | | | 1,611,168 |
| | 2.45 |
|
The weighted-average grant date fair value for non-vested stock granted during the sixthree months ended AugustMay 4, 2019 and May 5, 2018 was $0.98 and July 29, 2017 was $2.41 and $2.21,$2.19, respectively. The aggregate intrinsic value of non-vested stock that vested during the sixthree months ended AugustMay 4, 2019 and May 5, 2018, and July 29, 2017, was $1.6$0.4 million and $1.1$0.8 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 sixthe three months ended AugustMay 4, 20182019 was 612,037.336,233.
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 sixthree months ended AugustMay 4, 2018:2019:
| | Restricted Stock Units | | Number of Units | | Weighted Average Grant Date Fair Value | | Number of Units | | Weighted Average Grant Date Fair Value |
Outstanding at February 3, 2018 | | 1,283,750 |
| | $ | 2.14 |
| |
Outstanding at February 2, 2019 | | | 1,740,314 |
| | $ | 2.16 |
|
Granted | | 1,375,000 |
| | 2.19 |
| | 1,615,000 |
| | 0.98 |
|
Vested | | (320,936 | ) | | 2.14 |
| | (439,064 | ) | | 2.16 |
|
Outstanding at August 4, 2018 | | 2,337,814 |
| | 2.17 |
| |
Outstanding at May 4, 2019 | | | 2,916,250 |
| | 1.51 |
|
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 sixthree months ended AugustMay 4, 2018:2019:
| | 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 | | Target PSUs Outstanding at February 2, 2019 | | Target PSUs Granted | | Target PSUs Outstanding at May 4, 2019 | | Weighted Average Grant Date Fair Value per Target PSU |
2016 | | 321,706 |
| | — |
| | 321,706 |
| | $ | 8.69 |
| |
2017 | | 600,000 |
| | — |
| | 600,000 |
| | 1.80 |
| | 470,000 |
| | — |
| | 470,000 |
| | $ | 1.80 |
|
2018 | | — |
| | 280,000 |
| | 280,000 |
| | 3.05 |
| | 280,000 |
| | — |
| | 280,000 |
| | 3.05 |
|
2019 | | | — |
| | 375,000 |
| | 375,000 |
| | 1.39 |
|
Total | | 921,706 |
| | 280,000 |
| | 1,201,706 |
| | 3.94 |
| | 750,000 |
| | 375,000 |
| | 1,125,000 |
| | 1.97 |
|
The weighted-average grant date fair value for stock-settled PSUs granted during the sixthree months ended AugustMay 4, 2019 and May 5, 2018 was $1.39 and July 29, 2017 was $3.05, and $1.80, respectively. No stock-settled PSUs vested during the sixthree months ended AugustMay 4, 20182019 and July 29, 2017, respectively.May 5, 2018.
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 sixthree months ended AugustMay 4, 2018:2019:
| | 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 | | Target PSUs Outstanding at February 2, 2019 | | Target PSUs Granted | | Target PSUs Outstanding at May 4, 2019 | | Weighted Average Grant Date Fair Value per Target PSU |
2018 | | — |
| | 460,000 |
| | 460,000 |
| | $ | 3.05 |
| | 300,000 |
| | — |
| | 300,000 |
| | $ | 3.05 |
|
2019 | | | — |
| | 530,000 |
| | 530,000 |
| | $ | 1.39 |
|
Total | | | 300,000 |
| | 530,000 |
| | 830,000 |
| | $ | 1.99 |
|
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 | | — |
| | |
NOTE 5 - 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 | | Six Months Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Basic: | | | | | | | |
Net loss | $ | (16,922 | ) | | $ | (6,258 | ) | | $ | (48,600 | ) | | $ | (25,245 | ) |
Distributed earnings allocated to participating securities | (68 | ) | | (51 | ) | | (131 | ) | | (202 | ) |
Net loss allocated to common shares | (16,990 | ) | | (6,309 | ) | | (48,731 | ) |
| (25,447 | ) |
| | | | | | | |
Basic weighted average shares outstanding | 28,152 |
| | 27,535 |
| | 27,959 |
| | 27,401 |
|
Basic loss per share | $ | (0.60 | ) | | $ | (0.23 | ) | | $ | (1.74 | ) | | $ | (0.93 | ) |
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Diluted: | |
| | |
| | | | |
Net loss | $ | (16,922 | ) | | $ | (6,258 | ) | | $ | (48,600 | ) | | $ | (25,245 | ) |
Distributed earnings allocated to participating securities | (68 | ) | | (51 | ) | | (131 | ) | | (202 | ) |
Net loss allocated to common shares | (16,990 | ) | | (6,309 | ) | | (48,731 | ) |
| (25,447 | ) |
| | | | | | | |
Basic weighted average shares outstanding | 28,152 |
| | 27,535 |
| | 27,959 |
| | 27,401 |
|
Dilutive effect of stock awards | — |
| | — |
| | — |
| | — |
|
Diluted weighted average shares outstanding | 28,152 |
| | 27,535 |
| | 27,959 |
|
| 27,401 |
|
Diluted loss per share | $ | (0.60 | ) | | $ | (0.23 | ) | | $ | (1.74 | ) | | $ | (0.93 | ) |
The number of shares attributable to 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 | | Six Months Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 |
Number of anti-dilutive shares due to net loss for the period | 357 |
| | — |
| | 248 |
| | — |
|
Number of anti-dilutive SARs due to exercise price greater than average market price of our common stock | — |
|
| 119 |
| | 29 |
| | 138 |
|
NOTE 6 - STOCKHOLDERS’ EQUITY
During the six months ended August 4, 2018, we paid $2.9 million in cash dividends. On August 23, 2018, our Board declared a quarterly cash dividend of $0.05 per share of common stock, payable on September 19, 2018 to shareholders of record at the close of business on September 4, 2018.
NOTE 7 - 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 | | Six Months Ended | Three Months Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
Employer service cost | $ | 133 |
| | $ | 120 |
| | $ | 256 |
| | $ | 245 |
| $ | 135 |
| | $ | 123 |
|
Interest cost on pension benefit obligation | 317 |
| | 363 |
| | 675 |
| | 727 |
| 327 |
| | 358 |
|
Expected return on plan assets | (456 | ) | | (412 | ) | | (870 | ) | | (815 | ) | (368 | ) | | (414 | ) |
Amortization of net loss | 155 |
| | 213 |
| | 354 |
| | 424 |
| 170 |
| | 199 |
|
Net periodic pension cost | $ | 149 |
|
| $ | 284 |
| | $ | 415 |
|
| $ | 581 |
| $ | 264 |
|
| $ | 266 |
|
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 $0.4$0.3 million during the sixthree months ended AugustMay 4, 2018,2019, and we expect to contribute an additional $0.9$1.0 million in 2018.2019.
NOTE 8 - 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. |
EARNINGS PER SHARE
For the three months ended May 4, 2019 and May 5, 2018, respectively, participating securities had no impact on loss per common share and there were no anti-dilutive securities.
Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| 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) |
Other assets: | | | | | | | |
Securities held in grantor trust for deferred compensation plans (a)(b) | $ | 20,188 |
| | $ | 20,188 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
| | | | | | | |
| 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) |
Other assets: | |
| | |
| | |
| | |
|
Securities held in grantor trust for deferred compensation plans (a)(b) | $ | 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 six months ended August 4, 2018 and July 29, 2017, and for the fiscal year ended February 3, 2018.
Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| 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) |
Assets: | | | | | | | |
Store property, equipment and leasehold improvements (a) | $ | 1,101 |
| | $ | — |
| | $ | — |
| | $ | 1,101 |
|
| | | | | | | |
| | | | | | | |
| 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) |
Assets: | | | | | | | |
Store property, equipment and leasehold improvements (a) | $ | 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 six months ended August 4, 2018 and July 29, 2017, and during fiscal year 2017, we recognized impairment charges of $1.1 million, $0.2 million, and $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 credit facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.
NOTE 9 - 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 stores, which we 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 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 credit facility. We took assignment of 55 of the 57 store locations and the distribution 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 opened in the second quarter 2017, and one opened in 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 $2.9 million and $9.2 million for the three and six months ended July 29, 2017, respectively.
Net sales included in our condensed consolidated statements of operations from Gordmans stores that we operated beginning on April 7, 2017, were as follows for each period presented (in thousands):
|
| | | | | | | | | | | | | | | |
| 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 six months ended July 29, 2017 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.
| |
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 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.
For purposes of the following discussion, all references to the “second“first quarter 2018”2019” and the “second“first quarter 2017”2018” are for the 13-week fiscal periods ended AugustMay 4, 20182019 and July 29, 2017, respectively, and all reference to the “year-to-date 2018” and the “year-to-date 2017” are for the 26-week fiscal periods ended August 4,May 5, 2018, and July 29, 2017, 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 retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of AugustMay 4, 2018,2019, we operated in 42 states through 764685 specialty department stores under the BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department storesnameplates and 59105 GORDMANS off-price stores, as well asstores. We also operate an e-commerce website. Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized non-rural Midwest markets.markets in the Midwest.
Results of OperationsFirst Quarter 2019 Financial Overview
Select financial results for the secondfirst quarter 20182019 were as follows (comparisons are to the secondfirst quarter 2017)2018):
Net sales decreased $7.8$16.5 million, or 2.1%4.8%.
Comparable sales decreased 0.2%3.1%. Comparable sales consist of store sales after a store has been in operation for 14 full months, including stores converted to off-price stores, and e-commerce sales.
Net loss was $16.9$47.5 million compared to $6.3$31.7 million.
Loss per common share was $0.60,$1.67, compared to a loss per common share of $0.23.$1.14.
EBITEBITDA adjusted for impairments was $(14.1)a loss of $27.5 million compared to $(7.7)a loss of $14.1 million (see the reconciliation of non-GAAP financial measures on page 24)23).
Cash dividends of $1.5 million, or $0.05 per common share, were paid.
20182019 Outlook and Strategy
Our department store sales declined for the year-to-date 2018 compared to the year-to-date 2017, reflecting lower comparable sales and store closures. We are focusedstrategy is centered on driving sales in our department stores 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 home category in our department stores through synergies withgrowing our off-price stores, and we anticipate continued growthemphasizing merchandise categories that are trending to drive sales in this category. We continue to reviewboth our department store portfoliooff-price and exit stores that do not meet our sales productivity and profitability standards. During the year-to-date 2018, we permanently closed nine department stores, and we plan to close a total of approximately 30 to 40exiting underperforming department storesstores. Sales early in 2018, excluding store conversions to off-price.
Our off-price stores have had strong sales growth for the year-to-date 2018 comparedfirst quarter 2019 were negatively impacted by expected disruptions related to the year-to-date 2017. We are focused on expandingrollout of our off-price business,strategic initiatives, which included temporary store closures associated with plans to open one new off-price store and convert a totalthe conversion of nine37 department stores to off-price storesand the home department expansion in 2018. One conversion store was openedour department stores. Sales benefited later in the first quarter 2018, four opened in mid-Augustas these initiatives began to take hold. We expect these initiatives to positively impact our sales going forward and the remaining four stores are planned to open in timecontribute to positive comparable sales for the holiday season.year.
Store counts at the end of the secondfirst quarter 20182019 and secondfirst quarter 20172018 were as follows:
| | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
Department stores | 764 |
| | 793 |
| 685 |
| | 773 |
|
Off-price stores | 59 |
| | 57 |
| 105 |
| | 59 |
|
Total stores | 823 |
| | 850 |
| 790 |
| | 832 |
|
We anticipate continued growth in our e-commerce sales, which have had double-digit sales increases over the past several years.
Our 20182019 and long-term strategic initiativesobjectives are focused on:to:
Off-Price Growth - InAccelerate our presence in the off-price sector with the conversion of approximately 85 department stores to off-price in 2019, and another 150 conversions in the first half of 2020. Following the conversions, our off-price store count will be approximately 300, and will represent approximately 50% of our total sales volume in 2020. During the first quarter 2018,2019, we converted one37 department storestores to anoff-price. Comparable sales in the small markets which constitute the majority of our off-price store located in Rosenberg, Texas, a suburb of Houston, and it is projected to deliver an annual sales increase ofconversions increased more than 25% compared to its volume as a department store. We are testing conversions120% 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 inthe first quarter 2019.
Differentiation - We are differentiating both ourClose between 40 to 60 underperforming department stores and off-price stores from(excluding conversions to off-price). During the competition by growingfirst quarter 2019, we permanently closed 6 department stores.
Expand the outperforming areas of their respective businesses. Beauty is a core strength in ourhome 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 duringdrive sales in this trending category. During the year-to-date 2018, andfirst quarter 2019, we now have Beauty Bar in nearly 500 stores. In our off-price stores,rolled out new high capacity home is a core strength, representing nearly 30%fixtures to all 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 weand moved the home department to the front of the store, which along with expanded merchandise assortments, drove home department sales up by more than 100% in our department stores. We expect home department sales as a percent of total sales to increase in penetration throughout the year with the greatest benefit to sales during the fourth quarter holiday gift period.
| |
• | Promote brand recognition of our nameplates through our private label credit card and loyalty program, which guests can use across all our stores and online. In March 2019, we rebranded our Gordmans loyalty program and integrated it with our existing department stores multi-tender loyalty program called Style Circle Rewards®. In the second quarter 2019, we plan to reissue our existing credit cards as a combined off-price and department store branded credit card to more than 2 million cardholders. |
Optimize our private label credit card sales penetrationsupply chain through capital investments and by engaging outside expertise to reach 50%mitigate higher supply chain costs and prepare us for 2018. In ourfuture off-price stores, we believe we can attain a 15% penetration for 2018 and 25% in the longer term.
store growth.
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
The following table presents earnings (loss) before interest, taxes, depreciation and taxes (EBIT), aamortization (“EBITDA”) and EBITDA adjusted for impairments, non-GAAP financial measure.measures. We believe the presentation of thisthese supplemental non-GAAP financial measuremeasures helps facilitate comparisons of our operating performance across periods. In addition, management uses thisthese non-GAAP financial measuremeasures to assess the results of our 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 table sets forth the supplemental financial information and the reconciliation of GAAP disclosures tothe non-GAAP financial measures to the most directly comparable GAAP measure (in thousands):
| | | Three Months Ended | | Six Months Ended | Three Months Ended |
| August 4, 2018 | | July 29, 2017 | | August 4, 2018 | | July 29, 2017 | May 4, 2019 | | May 5, 2018 |
Net loss (GAAP) | $ | (16,922 | ) | | $ | (6,258 | ) | | $ | (48,600 | ) | | $ | (25,245 | ) | $ | (47,490 | ) | | $ | (31,678 | ) |
Interest expense | 2,650 |
| | 1,918 |
| | 4,903 |
| | 3,504 |
| 3,994 |
| | 2,253 |
|
Income tax expense (benefit) | 150 |
| | (3,362 | ) | | 300 |
| | (12,252 | ) | |
EBIT (non-GAAP) | $ | (14,122 | ) | | $ | (7,702 | ) | | $ | (43,397 | ) | | $ | (33,993 | ) | |
Income tax expense | | 150 |
| | 150 |
|
Depreciation and amortization | | 15,344 |
| | 15,151 |
|
EBITDA (non-GAAP) | | (28,002 | ) | | (14,124 | ) |
Impairment of long-lived assets | | 519 |
| | — |
|
EBITDA adjusted for impairments (non-GAAP) | | $ | (27,483 | ) | | $ | (14,124 | ) |
SecondResults of Operations
First Quarter 2019 Compared to First Quarter 2018 Compared to Second Quarter 2017
The following table sets forth the results of operations for the periods presented (in(amounts in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| August 4, 2018 | | July 29, 2017 | | Change |
| Amount | | % to Sales (a) | | Amount | | % to Sales (a) | | Amount | | % |
Net sales | $ | 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 | 286,807 |
| | 77.7 | % | | 284,140 |
| | 75.4 | % |
| 2,667 |
| | 0.9 | % |
Selling, general and administrative expenses | 110,914 |
| | 30.0 | % | | 113,833 |
| | 30.2 | % |
| (2,919 | ) | | (2.6 | )% |
Interest expense | 2,650 |
| | 0.7 | % | | 1,918 |
| | 0.5 | % |
| 732 |
| |
|
Loss before income tax | (16,772 | ) | | (4.5 | )% | | (9,620 | ) | | (2.6 | )% |
| (7,152 | ) | |
|
Income tax expense (benefit) | 150 |
| | — | % | | (3,362 | ) | | (0.9 | )% |
| 3,512 |
| |
|
Net loss | $ | (16,922 | ) | | (4.6 | )% | | $ | (6,258 | ) | | (1.7 | )% |
| $ | (10,664 | ) | |
|
| | | | | | | | | | | |
(a) Percentages may not foot due to rounding. |
Net Sales
Sales decreased $7.8 million, or 2.1%, to $369.3 million |
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
Net sales | $ | 327,721 |
| | $ | 344,229 |
| | $ | (16,508 | ) |
Sales percent change: | | | | | |
Total net sales | | | | | (4.8 | )% |
Comparable sales | | | | | (3.1 | )% |
Net sales for the secondfirst quarter 2018 from $377.1 million for2019 decreased compared to the secondfirst quarter 2017,2018 primarily due to a decrease in department store comparable sales, as traffic continued to be challenged, and store closures. In addition, sales in the beginning of the first quarter 2019 were negatively impacted by disruptions due to temporary store closures and increased deferred revenue associated with the conversion of 37 department stores to off-price and the installation of new high capacity home fixtures in our guest loyalty programs, partially offset by increasesdepartment stores. Sales later in off-price storethe quarter benefited from these initiatives. As a result, comparable sales were down double digits in February and e-commerce sales. Comparable saleswere flat in the combined March and April period, which includes the Easter shift.
Non-apparel categories outperformed apparel categories for the secondfirst quarter 2018 decreased 0.2%. 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 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 second quarter 2017.
2019. In our department stores, non-apparel categories outperformed apparel categories. Non-apparel comparable sales decreased 0.1% and apparel comparable sales decreased 3.3%. Home and gifts, footwear, children’shome and men’s were our best performing merchandise categories, while women’s, children’s, footwear, accessories and accessoriescosmetics underperformed. In our off-price stores, children’s and cosmetics were our best performing merchandise categories, while footwear, accessories, women’s, men’s children’s and footwear had positive comparable sales, home and gifts comparable sales were flat, and accessories and cosmetics lagged.underperformed.
Geographically, comparable sales for our department storesCredit Income
|
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
Credit Income | $ | 13,108 |
| | $ | 15,514 |
| | $ | (2,406 | ) |
As a percent of net sales | 4.0 | % | | 4.5 | % | | (0.5 | )% |
The decrease 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 pointscredit income for the secondfirst quarter 20182019 compared to the secondfirst quarter 2017, with comparable sales in these four states down 1.8% and the balance of the chain down 2.6%. This variance was less than in prior quarters2018 is primarily due to weakerthe off-price store conversions, lower department store credit sales and bad debt write-offs. Off-price store credit sales are generally underpenetrated as compared to department stores. However, we expect off-price credit sales as a percentage of total off-price sales to continue to grow in 2019 as compared to 2018. For the first quarter 2019 compared to the first quarter 2018, the credit sales penetration rate in our Mexican border stores in the second quarter 2018.
off-price business increased by 170 basis points.
Credit IncomeCost of Sales and Gross Margin
Credit income earned from our private label credit card program increased $1.1 million, or 8.5%, to $14.3 million |
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
Net sales | $ | 327,721 |
| | $ | 344,229 |
| | $ | (16,508 | ) |
Cost of sales and related buying, occupancy and distribution expenses | 277,599 |
| | 281,741 |
| | (4,142 | ) |
Gross profit | $ | 50,122 |
| | $ | 62,488 |
| | $ | (12,366 | ) |
As a percent of net sales | 15.3 | % | | 18.2 | % | | (2.9 | )% |
The decrease in gross profit rate for the secondfirst quarter 2019 compared to the first quarter 2018 from $13.2 million for the second quarter 2017,is primarily due to incremental credit income fromincreased supply chain costs associated with 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”)
|
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
SG&A Expenses | $ | 106,576 |
| | $ | 107,277 |
| | $ | (701 | ) |
As a percent of net sales | 32.5 | % | | 31.2 | % | | 1.3 | % |
The decrease in SG&A expenses for the secondfirst quarter 2019 compared to the first quarter 2018 decreased $2.9 million to $110.9 million from $113.8 million for the second quarter 2017,is primarily due to Gordmans Acquisition related costs of $2.9 million incurredreductions in the second quarter 2017. Asstore payroll and department store advertising expenses, partially offset by lower net gains from casualty insurance claims. SG&A as a percentpercentage of sales SG&A expenses decreased 20 basis pointsincreased due to 30.0% for the second quarter 2018 from 30.2% for the second quarter 2017.grand opening costs related to store conversions and sales deleverage.
Interest Expense
Interest expense was $2.7 million for the second quarter 2018, compared to $1.9 million for the second quarter 2017. |
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
Interest Expense | $ | 3,994 |
| | $ | 2,253 |
| | $ | 1,741 |
|
As a percent of net sales | 1.2 | % | | 0.7 | % | | 0.5 | % |
Interest expense is primarily comprised of interest on borrowings under the 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 credit facility for the secondfirst quarter 20182019 compared to the secondfirst quarter 2017.2018. For the secondfirst quarter 2018,2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 3.43%4.8% and $272.4$299.2 million, respectively, as compared to 2.64%3.2% and $238.5$247.5 million for the secondfirst quarter 2017.
Income Taxes
Our effective income tax rate for the second quarter 2018 was 0.9%, and our estimated tax expense was $0.2 million. This compares to an effective tax rate of 34.9% and an income tax benefit of $3.4 million for the second quarter 2017. The lower effective income tax rate in the second quarter 2018 compared to the second quarter 2017 is primarily attributable to the valuation of all tax benefits due to the uncertainty of realization, which is dependent upon generation of future taxable income.
2018.
Year-to-Date 2018 Compared to Year-to-Date 2017
The following table sets forth the results of operations for the periods presented (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| August 4, 2018 | | July 29, 2017 | | Change |
| Amount | | % to Sales (a) | | Amount | | % to Sales (a) | | Amount | | % |
Net sales | $ | 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 | 568,548 |
| | 79.7 | % | | 530,529 |
| | 77.4 | % | | 38,019 |
| | 7.2 | % |
Selling, general and administrative expenses | 218,191 |
| | 30.6 | % | | 215,270 |
| | 31.4 | % | | 2,921 |
| | 1.4 | % |
Interest expense | 4,903 |
| | 0.7 | % | | 3,504 |
| | 0.5 | % | | 1,399 |
| |
|
Loss before income tax | (48,300 | ) | | (6.8 | )% | | (37,497 | ) | | (5.5 | )% | | (10,803 | ) | |
|
Income tax expense (benefit) | 300 |
| | — | % | | (12,252 | ) | | (1.8 | )% | | 12,552 |
| |
|
Net loss | $ | (48,600 | ) | | (6.8 | )% | | $ | (25,245 | ) | | (3.7 | )% | | $ | (23,355 | ) | |
|
| | | | | | | | | | | |
(a) Percentages may not foot due to rounding. |
Net Sales
Sales increased $27.8 million, or 4.1%, to $713.5 million for the year-to-date 2018 from $685.7 million for the year-to-date 2017, primarily due to a $57.0 million increase in sales in our off-price stores, partially offset by a decrease in our department store comparable sales and 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 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 2018 compared to the year-to-date 2017.
In our department stores, non-apparel categories outperformed our apparel categories. Non-apparel comparable sales increased 1.6% and apparel comparable sales decreased 4.8%. Home and gifts, cosmetics, footwear, handbags and men’s were our best performing merchandise categories. In our off-price stores, women’s, men’s, children’s and footwear had positive comparable sales, home and gifts comparable sales were flat, and 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%.
Credit Income
Credit income earned from our private label credit card program increased $3.7 million, or 14.2%, to $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 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 2018 from $530.5 million for the year-to-date 2017. As a percent of sales, cost of sales increased 230 basis points to 79.7% for the year-to-date 2018 from 77.4% for the year-to-date 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.
SG&A Expenses
SG&A expenses for the year-to-date 2018 increased $2.9 million to $218.2 million from $215.3 million for the year-to-date 2017. The increase in SG&A expenses is primarily attributable to higher store expenses from the addition of our off-price stores and higher advertising expenses related to increased marketing efforts for these stores, partially offset by Gordmans Acquisition related costs of $9.2 million incurred in the year-to-date 2017. As a percent of 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
Interest expense was $4.9 million for the year-to-date 2018, compared to $3.5 million for the year-to-date 2017. Interest expense is primarily comprised of interest on borrowings under the 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 credit facility for the year-to-date 2018 as compared to the year-to-date 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
|
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
Income tax expense | $ | 150 |
| | $ | 150 |
| | $ | — |
|
Effective tax rate | (0.3 | )% | | (0.5 | )% | | 0.2 | % |
The effective income tax raterates in both the first quarter 2019 and the first quarter 2018 were nearly 0% due to a valuation allowance taken for the year-to-date 2018 was 0.6%, and our estimated tax expense was $0.3 million. This compares to an effective tax rate of 32.7% and an income tax benefit of $12.3 million for the year-to-date 2017.
The lower effective income tax rate in the year-to-date 2018 compared to year-to-date 2017 is primarily attributable to the valuation ofsubstantially all tax benefits generated by tax losses in each period due to the uncertaintyuncertainly of realization, which is is dependent upon generation of future taxable income. We expect our effective income tax rate to be approximately 0% percent for 2019.
Loss Before Income Tax and Net Loss
|
| | | | | | | | | | | |
| Three Months Ended | | |
| May 4, 2019 | | May 5, 2018 | | Change |
Loss before income tax | $ | (47,340 | ) | | $ | (31,528 | ) | | $ | (15,812 | ) |
Net loss | (47,490 | ) | | (31,678 | ) | | (15,812 | ) |
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) trade credit terms from our vendors and their factors and (iv) the Credit Facility. The loss of key vendors, or material changes in support by our vendors or their factors, can have a material impact on our business and liquidity. To date, we have successfully managed our vendor relationships to maintain inventory purchases at planned levels on acceptable payment terms. However, if we fail to meet our performance objectives, we may experience a tightening of credit facility, including the term loan.or payment terms from our vendors or their factors. Our primary cash requirements are for operational needs, including rent and salaries, inventory purchases, and capital investments in our stores, 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 included the Gordmans Acquisition and additional investments required to support the integration of the Gordmans operations into our infrastructure.
WeOur working capital fluctuates with seasonal variations which affect our borrowings and availability under the Credit Facility. Our availability under the Credit Facility is generally highest after the back-to-school and holiday selling seasons and is lowest just before those seasons as we build inventory levels. Based on our current expectations regarding our operating results, we believe that our sources of liquidity will be sufficient to cover working capital needs, planned capital expenditures and debt service requirements for at least the remainder of 2018 and the foreseeable future. next 12 months.
Key components of our cash flow are summarized below (in thousands):
| | | Six Months Ended | Three Months Ended | | |
| August 4, 2018 |
| July 29, 2017 | May 4, 2019 |
| May 5, 2018 | | Change |
Net cash (used in) provided by: |
|
|
|
|
|
| | |
Operating activities | $ | (69,020 | ) |
| $ | 8,189 |
| $ | (37,202 | ) |
| $ | (68,655 | ) | | $ | 31,453 |
|
Investing activities | (11,020 | ) |
| (50,339 | ) | (13,096 | ) |
| (6,885 | ) | | (6,211 | ) |
Financing activities | 85,363 |
|
| 54,479 |
| 57,261 |
|
| 83,381 |
| | (26,120 | ) |
Operating Activities
During the year-to-date 2018,first quarter 2019, we used $69.0$37.2 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $13.7$13.5 million, including operating lease asset amortization of $17.6 million. Changes in operating assets and liabilities used net cash of approximately $56.1$25.6 million, which included a $38.5$47.4 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$14.3 million decrease in other assets. Additionally, cash flows from operating activities included construction allowances from landlords of $0.8assets, a $19.0 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 generated $8.2 million in cash from operating activities. Net loss, adjusted for non-cash expenses, generated cash of approximately $17.7 million. Changesdecrease in operating assetslease liabilities and liabilities used net cash of approximately $10.6a $26.6 million which included increases of $18.2 million in merchandise inventories, primarily due to the seasonal build of inventories, and $23.2 million in other assets, partially offset by an increase of $30.8 million in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of $1.1$1.9 million, which funded a portion of the capital expenditures relatedin investing activities.
During the first quarter 2018, we used $68.7 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $14.7 million. Changes in operating assets and liabilities used net cash of approximately $54.0 million, which included a $39.2 million increase in merchandise inventories, primarily due to store leasehold improvementsthe seasonal build of inventories, partially offset by a $4.3 million decrease in relocated, expandedother assets and remodeled stores.a $19.1 million decrease in accounts payable and other liabilities.
The year-over-year change primarily reflects ana $47.3 million increase in off-price store inventory levels, andcash flow from working capital, offset by a shifthigher net loss of $15.8 million. The increase in the timing of paymentscash flow from working capital was largely due to earlier merchandise receiptsfavorable fluctuations of $45.6 million in cash flows from accounts payable and a higherother liabilities driven by paying down our elevated payables balance at the end of 2017 compared to 2016.in the first quarter 2018.
Investing Activities
Net cash used in investing activities was $11.0increased $6.2 million to $13.1 million for the year-to-date 2018,first quarter 2019, compared to $50.3$6.9 million for the year-to-date 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.first quarter 2018.
Capital expenditures were $12.8$13.8 million for the year-to-date 2018,first quarter 2019, compared to $15.5$6.9 million for the year-to-date 2017, reflecting a decreasefirst quarter 2018. The increase in store expansionscapital expenditures reflect our investments in converting stores to off-price and remodels.rolling out high capacity home fixtures in our department stores. We received construction allowances from landlords of $0.8$1.9 million in the year-to-date 2018 and $1.1 million in the year-to-date 2017,first quarter 2019, which are reflectedincluded in cash flows from operating activities, and were used to fund a portion of the capital expenditures related to leasehold improvements in our corporate office building and stores.expenditures. These funds are recorded as a deferred rent creditreduction from our operating lease assets 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.
We estimate that capital expenditures in 2018,2019, 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 investments in our stores, omni-channel, supply chain and technology.
Financing Activities
Net cash provided by financing activities for the year-to-date 2018 was $85.4decreased $26.1 million compared to $54.5$57.3 million for the year-to-date 2017.
On August 3,first quarter 2019, compared to $83.4 million for the first quarter 2018, we entered into an amendmentprimarily due to our senior secured revolving credit facility agreement. The amendment provides us with a $25.0 million term loan, which increased total availabilitylower net borrowings 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.Credit Facility.
We use the credit facilityCredit 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 credit facilityCredit Facility agreement. The credit facilityCredit Facility is secured by our inventory, cash, cash equivalents, 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 credit facility agreement. For the six months ended August 4, 2018,first quarter 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 3.30%4.8% and $259.9$299.2 million, respectively, compared to 2.54%3.2% and $215.4$247.5 million for the year-to-date 2017.first quarter 2018.
Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At AugustMay 4, 2018,2019, outstanding letters of credit totaled approximately $12.4$6.0 million. These letters of credit expire within 12 months of issuance and may be renewed.
The credit facilityCredit 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 facilityCredit 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 $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At AugustMay 4, 2018,2019, we were in compliance with the debt covenants of the credit facility agreement and we expect to remain in compliance. Excess availability under the credit facility at May 4, 2019 was $95.2 million as of August 4, 2018.
During the year-to-date 2018, we paid $2.9 million in cash dividends. On August 23, 2018, our Board declared a quarterly cash dividend of $0.05 per share of common stock, payable on September 19, 2018 to shareholders of record at the close of business on September 4, 2018.$55.7 million.
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 borrowingsNo response is required under the credit facility. For the year-to-date 2018, a 10% increase or decrease in the weighted average interest rate on our weighted average borrowings under the credit facility would have had a $0.4 million impact on our interest expense.Item 305 of Regulation S-K.
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. During the three months ended May 4, 2019, we implemented software and related technology controls to comply with the new lease accounting guidance requirements under ASC Topic 842. In addition, we enhanced our control environment over financial reporting and accounting for lease arrangements. There were no other changes in our internal control over financial reporting during the three months ended AugustMay 4, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No response is required under Item 103 of Regulation S-K.
ITEM 1A. RISK FACTORS
There have not been any material changes from the risk factors as previously disclosed in the Form 10-K.
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 AugustMay 4, 2018,2019, 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 AugustMay 4, 2018:2019:
| | 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) |
| | | | | | | | | | | | | | | | |
May 6, 2018 to June 2, 2018 | | 3,517 |
| | $ | 2.84 |
| | — |
| | $ | 58,351,202 |
| |
February 3, 2019 to March 2, 2019 | | | 9,480 |
| | $ | 1.14 |
| | — |
| | $ | 58,351,202 |
|
| | | | | | | | | | | | | | | | |
June 3, 2018 to July 7, 2018 | | 13,258 |
| | 2.50 |
| | — |
| | $ | 58,351,202 |
| |
March 3, 2019 to April 6, 2019 | | | 51,341 |
| | 1.00 |
| | — |
| | $ | 58,351,202 |
|
| | | | | | | | | | | | | | | | |
July 8, 2018 to August 4, 2018 | | 5,420 |
| | 2.23 |
| | — |
| | $ | 58,351,202 |
| |
April 7, 2019 to May 4, 2019 | | | 12,147 |
| | 1.07 |
| | — |
| | $ | 58,351,202 |
|
| | | | | | | | | | | | | | | | |
Total | | 22,195 |
| | $ | 2.49 |
| | — |
| | | | 72,968 |
| | $ | 1.03 |
| | — |
| | |
(a) Although we did not repurchase any of our common stock during the three months ended AugustMay 4, 20182019 under the 2011 Stock Repurchase Program:
We reacquired 2,94747,232 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 $2.33$1.00 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 19,24825,736 shares of our common stock in the open market at a weighted average price of $2.51$1.08 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 AugustMay 4, 20182019 using our existing cash, cash flow and other liquidity sources since March 2011.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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.
|
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Exhibit Number | Description |
| |
10.1
10.1*# | Third Amendment to Second Amended and Restated Credit Agreement, Second AmendmentNo. Eight to Amended and Restated SecurityPrivate Label Credit Card Plan Agreement dated as of April 11, 2019 between Comenity Bank and First Amendment to AmendedStage Stores, Inc. and Restated Guaranty dated August 3, 2018, among Specialty Retailers, Inc., as borrower, Stage Stores, Inc., as guarantor, and 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. |
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31.1* | |
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31.2* | |
| |
32* | |
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101.INS | XBRL Instance Document |
| |
101.SCH | XBRL Taxonomy Extension Schema Document |
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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 with a [****] have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K |
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. |
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Dated: SeptemberJune 13, 20182019 | /s/ Michael L. Glazer |
| Michael L. Glazer |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
| |
Dated: SeptemberJune 13, 20182019 | /s/ Jason T. Curtis |
| Jason T. Curtis |
| SeniorExecutive Vice President, |
| Interim Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
| |