UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

or

For the transition period from ____to____

Commission File No. 001-31390

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

 Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  YES ☒  NO

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES

(in thousands)

(unaudited)

 

See Notes to Condensed Consolidated Financial Statements

 

NOTE 1 — Basis of Presentation

 

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited condensed consolidated financial statements, except the condensed consolidated balance sheet as of January 28, 2017 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

 

The results of operations for the interim period shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of July 29,October 28, 2017, and July 30,October 29, 2016 and for all periods presented.

 

Recently issued accounting pronouncements

 

 

We reviewed all other significant newly-issued accounting pronouncements and concluded they are either not applicable to our operations, or that no material effect is expected on our consolidated financial statements as a result of future adoption.

NOTE 2 — Merchandise Inventories and Sources of Supply

 

Merchandise inventories consisted of the following (in thousands):

There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the twenty-sixthirty-nine weeks ended July 29,October 28, 2017 compared to the fiscal 2016 year ended January 28, 2017.

NOTE 3 — Property, Equipment and Improvements, Net

Property, equipment and improvements, net consisted of the following (in thousands):

 

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In conjunction with an impairment analysis, the Company determined that improvements and equipment at certain under-performing stores and at stores identified for closure were impaired. As a result, the Company recorded approximately $0.1 million and $0.3 million forno long-lived asset impairmentsimpairment during the thirteen week periods ended July 29,October 28, 2017 and July 30, 2016, respectively.October 29, 2016. The Company recorded approximately $0.2 million and $0.5 million for long-lived asset impairments during the twenty-sixthirty-nine week periods ended July 29,October 28, 2017 and July 30,October 29, 2016, respectively.

NOTE 4 — Accrued Liabilities

Accrued liabilities and other current liabilities consisted of the following (in thousands):

NOTE 5 — Credit Facility

The Company is party to an amended and restated credit agreement (the "Credit Facility") with Wells Fargo Bank, N.A. (“Wells Fargo”), as lender. The Credit Facility was most recently amended and extended on September 8, 2014. The current expiration date is September 8, 2019.

The Credit Facility provides the Company with revolving credit loans of up to $50.0 million in the aggregate, subject to a borrowing base formula based primarily on eligible credit card receivables, inventory and real estate, as such terms are defined in the Credit Facility, and up to $10.0 million of which may be drawn in the form of standby and documentary letters of credit.

Borrowings under the Credit Facility will generally accrue interest at a rate ranging from 1.50% to 1.75% over the London Interbank Offered Rate ("LIBOR") or 0.50% to 0.75% over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such terms are defined in the Credit Facility. The Company has the ability to select between the LIBOR or prime based rate at the time of the cash advance. The Credit Facility has an unused commitment fee of 0.25%.

The Credit Facility contains customary events of default and various affirmative and negative covenants. The sole financial covenant contained in the Credit Facility requires the Company to maintain Availability at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. The Company was in compliance with all covenants and other financial provisions as of July 29,October 28, 2017.

The Company's obligations under the Credit Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company's subsidiaries.

The Company had no revolving credit loan borrowings under the Credit Facility during each of the twenty-sixthirty-nine week periods ended July 29,October 28, 2017, and July 30,October 29, 2016. The total Borrowing Base at July 29,October 28, 2017 was approximately $36.5$48.1 million. As of July 29,October 28, 2017, the Company had open on-demand letters of credit of approximately $0.9$2.3 million. Accordingly, after reducing the Borrowing Base for the open letters of credit and the required minimum availability of the greater of $3.0 million, or 10.0% of the Borrowing Base, the net availability of revolving credit loans under the Credit Facility was approximately $32.0$40.9 million at July 29,October 28, 2017.

NOTE 6 — Income Taxes

 

The Company's liability for unrecognized tax benefits associated with uncertain tax positions is recorded within other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.

 

The Company and its subsidiaries are subject to U.S. federal income taxes and the income tax obligations of various state and local jurisdictions. Periods after fiscal 2013 remain subject to examination by the IRS.Internal Revenue Service. With few exceptions, the Company is not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2012.

As of July 29,October 28, 2017, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed related to certain tax benefits.

Sections 382 and 383 of the Internal Revenue Code limit the annual utilization of certain tax attributes, including NOLnet operating loss carryforwards, incurred prior to a change in ownership. If the Company were to experience an ownership change, as defined by Sections 382 and 383, its ability to utilize its tax attributes could be substantially limited. Depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant number of its accumulated NOLs.

NOTE 7 — Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) shown on the face of the accompanying consolidated statement of operations:

Total stock options of approximately 4.12.6 million and 2.23.2 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen week periods ended July 29,October 28, 2017 and July 30,October 29, 2016, as they were anti-dilutive. Total stock options of approximately 4.12.6 million and 2.42.8 million were excluded from the shares used in the computation of diluted earnings per share for the twenty-sixthirty-nine week periods ended July 29,October 28, 2017 and July 30,October 29, 2016, respectively, as they were anti-dilutive.

 

NOTE 8 — Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:

Assets that are Measured at Fair Value on a Non-recurring Basis:

The following table summarizes certain information for non-financial assets for the twenty-sixthirty-nine weeks ended July 29,October 28, 2017 and the fiscal year ended January 28, 2017, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. 

General economic uncertainty impacting the retail industry and the continuation of recent trends in company performance makes it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.

The fair value measurement of the long-lived assets encompasses the following significant unobservable inputs:

NOTE 9 — Legal Proceedings

The Company is subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. In connection with a preliminary settlement of pre-litigation employment claims reached in February 2017, we established a loss contingency of $1.475 million as of January 28, 2017. In connection therewith, on April 13, 2017, a complaint was filed in state Circuit Court in the Fifteenth Judicial Circuit in Palm Beach County, Florida (the “Florida Circuit Court”) by three named plaintiffs in a purported class action asserting claims on behalf of current and former store managers. The plaintiffs principally alleged that they and other similarly situated store managers were improperly classified as exempt employees and thus not compensated for overtime work as required under applicable federal and state law. On May 4, 2017, the Company entered into a settlement agreement with the named plaintiffs and the proposed class. On May 8, 2017, the Florida Circuit Court issued an order approving the class settlement. As approved by the Florida Circuit Court, certain current and former store managers will be eligible to receive payments in connection with time worked in prior years. The settlement of the lawsuit is not an admission by us of any wrongdoing.

The ultimate resolution of legal matters can be inherently uncertain and for some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. The Company does not, however, currently believe that the resolution of any pending matter will have a material adverse effect on its financial position, results of operations or liquidity.

 

NOTE 10 — Segment Reporting

In the table below, Retail Operations includes activity generated by the Company’s retail store locations (Missy Petite Women ("MPW"), Outlets, Christopher & Banks, and C.J. Banks stores) as well as the eCommerce business. Retail Operations only includes net sales, merchandise gross margin and direct store expenses with no allocation of corporate overhead as that is the information used by the chief operating decision maker to evaluate performance and to allocate resources. The Corporate/Administrative balances include supporting administrative activity at the corporate office and distribution center facility and are included to reconcile the amounts to the condensed consolidated financial statements. 

Business Segment Information

(in thousands)

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

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 and our unaudited Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude.

Executive Overview

We are a national specialty retailer featuring exclusively-designed, privately-branded women’s apparel and accessories. We offer our customer an assortment of unique, classic and versatile clothing that fits her everyday needs at a good value.

We operate an integrated, omni-channel platform that provides our customer the ability to shop when and where she wants, including online or at retail and outlet stores. This approach allows our customers to browse, purchase, return, or exchange our merchandise through the channel that is optimal for her.

As of July 29,October 28, 2017, we operated 473472 stores in 45 states, including 320321 Missy, Petite, Women ("MPW") stores, 79 outlet stores, 3837 Christopher & Banks ("CB") stores, and 3635 C.J. Banks ("CJ") stores. Our CB brand offers unique fashions and accessories featuring exclusively designed assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our MPW concept and outlet stores offer an assortment of both Christopher & BanksCB and C.J. BanksCJ apparel servicing the Missy, Petite and Women-sized customer in one location.

Fiscal 2017 Strategic Priorities Update

Our overall business strategy is to build sustainable, long-term revenue growth and consistent profitability through the following strategic initiatives:

Offer a differentiated product assortment

We are committed to ensuring we consistently meet our customers’ needs with a differentiated merchandise assortment that fits her lifestyle at a recognizable value. We intend to increasehave increased the flow of our fashion offering andofferings to provide a more versatile assortment to encourage ourso customers to shop more frequently and buy more when she visits.they visit. To further support the newness of our merchandise presentations, we are analyzing our promotional cadence and adjusting our markdown strategy to increaseincreased inventory turnover to keep merchandise fresh and current.

Increase customer loyalty, acquire new customers, and recapture lapsed customers

We have a very loyal customer base that is highly engaged. The personalized customer service that our Associates provide is a differentiator for us and is a contributor to the loyalty our customers exhibit, with approximately 90% of our active customers participating in our loyalty rewards program.

We continue to be focused on maximizing the benefits of our customer relationship management (“CRM”) database, Friendship Rewards Loyalty Program (“Friendship Rewards”), and private-label credit card program to strengthen engagement with our customers. Our Friendship Rewards program, in conjunction with our CRM system, allows us to personalize communications and customize our offers. We also will continue to leverage our direct and digital marketing channels to encourage additional customer visits and increased spending per visit.

We are acceleratingcontinue to focus our efforts to re-engageattention on re-engaging former customers that stopped shopping followingin the migration of their local CB or CJ store to the MPW formatrecent past through targeted communications. We are also workinghave increased investments in digital paid media to gain new customers and brand awareness through increased investments in digital paid media, and earned media. Additionally, we are increasing the frequency of storeawareness. We continue to use store-based grass root events that will continue to capitalize on the strong relationships between our store associates and customers.

Leverage Our Omni-Channel Capabilities

We will capitalize on investments made in ourOur integrated, omni-channel strategy which is designed to provide customers a seamless retail experience together with the ability to shop when and where they want, including retail stores, outlet stores, online and mobile. TheseOur investments in this strategy enable us to address multiple customer touch points to drive spend and build brand affinity by providing a comprehensive view of our customer and our merchandise assortment and depth.

In fiscal 2017, we expect continued growth inWe continue to grow eCommerce by leveraging our new platform launched in fiscal 2016, including improving personalization and enhanced site experiences. New omni-channel capabilities, including new fulfillment functionality, store grading and localized assortment planning, will support improved management of the receipt, allocation, and distribution of merchandise.

In the second quarter of fiscal 2017, we launched our “find in store” feature online in our effort to provide more convenience to our customers. We believe that providing more visibility into store inventory will help drive traffic to our stores where our associates can provide personalized service and outfitting recommendations, and ultimately lead to increased customer spend. Later in fiscal 2017, we expectWe intend to offer othertest omni-channel fulfillment options, such asincluding both ship to store orand pick up in store.store in early 2018.

Performance Measures

Management evaluates our financial results based on the following key measuremeasures of performance:

Comparable sales

Comparable sales is a measure that highlights the performance of our store channel and eCommerce channel sales by measuring the changes in sales over the comparable, prior-year period of equivalent length.

Our comparable sales calculation includes merchandise sales for:

Our comparable sales calculation excludes:

We believe our eCommerce operations are interdependent with our brick-and-mortar store sales and, as such, we believe that reporting combined store and eCommerce comparable sales is a more appropriate presentation. Our customers are able to browse merchandise in one channel and consummate a transaction in a different channel. At the same time, our customers have the option to return merchandise to a store or our third-party distribution center, regardless of the original channel used for purchase.

As we continue to execute our MPW format conversions, we have made changes to the base store population that comprises comparable stores, as illustrated in the table below:

Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

To supplement our comparable sales performance measure, we also monitor changes in net sales per store and net sales per gross square foot for the entire store base.

Third Quarter Fiscal 2017 Results of Operations

SecondThird Quarter Fiscal 2017 Summary

Net Sales

The components of the 3.7%7.7% net sales decrease in the secondthird quarter fiscal 2017 compared to the secondthird quarter of fiscal 2016 were as follows:

Sales decreased primarily due to a 7.6%6.5% decline in average store count and a 6.4% decrease in average unit retail prices, a 7.0% decline in average store count, partly offset by a sequential improvement in mall traffic, higher conversion rates and a 0.9% increase in units per transaction.prices. The sales decrease was also correlated to lower inventory levels at the beginning of the quarter and promotional spend to sell through inventory that did not reflect our go-forward strategy, contributing to the decline in average unit retail prices.is attributable to higher promotional activities in response to the effects of unseasonably warm weather and deceleration in base store traffic trends partly offset by higher conversion rates.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:

Net sales per store and Netnet sales per square foot decreased mainly due to a decline in average unit retail prices.

Store count, openings, closings, and square footage for our stores were as follows:

Average store count in the secondthird quarter of fiscal 2017 was 474473 stores compared to an average store count of 509506 stores in the secondthird quarter of fiscal 2016, a decrease of 6.9%6.5%. Average square footage in the secondthird quarter of fiscal 2017 decreased 5.7%5.1% compared to the secondthird quarter of fiscal 2016.

Gross Profit

Gross margin rate decreased 510300 basis points primarily driven by our effortsincreased promotions and mix shift to sell through non go-forwardslow selling and clearance product and address slow sellers more quickly through markdowns.partly due to the unseasonably warm weather. The gross margin rate decline accelerated inmarked a sequential improvement compared to the second quarter compared toas the first quarter due to seasonal markdowns that typically occur at the endmix of the second quarter.new fashion merchandise strengthened.

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

SG&A decreased by $1.4$0.7 million, driven bymainly due to lower store operating expenses of $1.4$1.1 million, due to a managed effort to reduce expenses. The SG&A expense decrease was also attributable tolower net employee compensation expenses of $0.3 million, and the absence of non-recurring charges of eCommercecosts related to the customer platform transition costs of $0.3 million incurredthat occurred in the secondlast year's third quarter of fiscal 2016.$0.2 million. These SG&A expense savings were partially offset by an increase in eCommerce operatingmedical expenses of $0.2$0.4 million, to support higher eCommerce sales.and an increase in professional services of $0.5 million. As a percent of net sales, SG&A improvedincreased approximately 40180 basis points to 33.7%.points.

Depreciation and Amortization (“D&A”)

Depreciation and amortization expense increaseddecreased primarily due to a decrease in average store count partly offset by the deployment of technology solutions, including new omni-channel capabilities partly offset by the effects of the decrease in average store count.capabilities.

Impairment of Long-Lived Assets

We recordedThere were no non-cash impairment charges relatedrelating to long-lived assets held at store locations.assets.

Operating Loss

Our operating loss increased in the secondthird quarter of fiscal 2017 compared to the secondthird quarter of fiscal 2016 primarily due to a 510net sales decrease of $8.2 million and a 300 basis point gross margin rate decline, and net sales decrease of $3.3 million, partly offset by a SG&A decrease of $1.4 million, including the absence of fiscal 2016 non-recurring charges of $0.3$0.7 million.

Interest expense, net

The change in interest expense, net is not material.

Income Tax Provision

The change in the incomeIncome tax provision is not material. Forexpense recorded for the thirteen weeks ended July 29,October 28, 2017 ourwas $45,000 compared to income tax expense of $82,000 for the same period of fiscal 2016. Our effective tax rate was (1.3)(2.8)% for the thirteen weeks ended October 28, 2017 compared to (2.2)%2.3% in the same period last year.

Net earnings

Our net loss increase in the secondthird quarter of fiscal 2017 compared to our net lossincome in the secondthird quarter of 2016 was primarily due to a net sales decrease and gross margin rate decline and a net sales decrease partly offset by lower SG&A.

First HalfYear-to-Date Fiscal 2017 Results of Operations

First HalfYear-to-Date Fiscal 2017 Summary

Net Sales

The components of the 7.8%7.7% net sales decrease in the first halfthirty-nine weeks of fiscal 2017 compared to the first halfthirty-nine weeks of fiscal 2016 were as follows:

Sales decreased primarily due to an 8.8%8.0% decrease in average unit retail prices, a 7.1%6.7% decline in average store count, continued weakness in mallbase store traffic, and a 0.6% decrease in units per transaction, partly offset by higher conversion rates. Our promotional pricing contributed to a decline in average unit retail prices to sell through inventory that did not reflect our go-forward strategy and partly due to the effects of unseasonably warm weather in the third quarter. The sales decrease was also correlated to lower inventory levels at the beginning of the year and lower inventory receipts in the first quarter and promotional spend to sell through inventory that did not reflect our go-forward strategy, contributing to the decline in average unit retail prices.quarter.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:

Net sales per store and Net sales per square foot decreased mainly due to a decline in average unit retail prices.

Store count, openings, closings, and square footage for our stores were as follows:

Average store count in the first halfthirty-nine weeks of fiscal 2017 was 476 stores compared to an average store count of 512510 stores in the same period of fiscal 2016, a decrease of 7.0%6.7%. Average square footage in the first halfthirty-nine weeks of fiscal 2017 decreased 5.7%5.2% compared to the same period of fiscal 2016.

Gross Profit