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 Act).  ☐  YES ☒  NO

As of AugustMay 25, 2017,2018 there were 37,855,18138,075,509 shares of the registrant's common stock outstanding.

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

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, 2017February 3, 2018 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.February 3, 2018.

 

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 JulyMay 5, 2018, and April 29, 2017 and July 30, 2016 and for all periods presented.

 

Recently issued accounting pronouncements

 

 

NOTE 32 — 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 periodsperiod ended JulyMay 5, 2018 and approximately $0.1 million during the thirteen week period ended April 29, 20172017.

On April 27, 2018, the Company completed the sale of and July 30, 2016, respectively.entered into an agreement to leaseback its corporate headquarters facility, including the distribution center, in Plymouth, MN. The agreement provided for the sale of the facility for a purchase price of $13.7 million and the subsequent leaseback of the facility for a 15-year period. The lease is classified as an operating lease. As a result, the Company recorded approximately $0.2a deferred gain of $7.7 million. As of May 5, 2018, $7.2 million andof the deferred gain is reflected in the Condensed Consolidated Balance Sheet under other non-current liabilities, with the remaining $0.5 million included as a component of accrued liabilities and other current liabilities. As part of the transaction, the Company has put $1.7 million in escrow for long-lived asset impairments duringcertain repairs on the twenty-six week periods ended July 29, 2017building. This amount is considered to be restricted cash and July 30, 2016, respectively.is included within cash and cash equivalents on the Condensed Consolidated Balance Sheet.

 

NOTE 43 — Accrued Liabilities

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

NOTE 54 — 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,inventory 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 financial covenants and other financial provisions as of July 29, 2017.May 5, 2018.

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 hadThere were no revolving credit loanoutstanding borrowings underon the Credit Facility during eachas of the twenty-six week periods ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016.2017. The total Borrowing Base at July 29, 2017May 5, 2018 was approximately $36.5$35.2 million. As of July 29, 2017,May 5, 2018, the Company had open on-demand letters of credit of approximately $0.9$4.7 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$26.9 million at July 29, 2017.May 5, 2018.

NOTE 65 — Income Taxes

The Company's liability for unrecognized tax benefits associated with uncertain tax positions isFor the thirteen weeks ended May 5, 2018, the Company 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.

As of July 29, 2017, the end of the second quarter of fiscal 2017, the Company had no other ongoing audits in various jurisdictions and does not expect the liability for unrecognized tax benefits to significantly increase or decrease in the next twelve months.

$0.8 million is available in net tax credit carryforwards. The state NOLsloss carryforwards will result in net state tax benefits of approximately $2.5$4.5 million.

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 4.13.9 million and 2.24.4 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen week periods ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, as they were anti-dilutive. Total stock options of approximately 4.1 million and 2.4 million were excluded from the shares used in the computation of diluted earnings per share for the twenty-six week periods ended July 29, 2017 and July 30, 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:

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

Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable

Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.

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-sixthirteen weeks ended July 29, 2017May 5, 2018 and the fiscal year ended January 28, 2017,February 3, 2018, 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. 

Fixed asset fair values were derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group is expected to generate. The fair value measurementkey inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the long-livedcase of assets encompassesfor which the following significant unobservable inputs:

NOTE 9 — Legal Proceedings

The Company isWe are 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,If 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 issueddetermine 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 lawsuitunfavorable outcome 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 currentlymay be 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 doesWe do not, however, currently believe that the resolution of any pending matter will have a material adverse effect on itsour financial position, results of operations or liquidity.

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, 2017February 3, 2018 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 our 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, 2017,May 5, 2018, we operated 473462 stores in 45 states, including 320314 Missy, Petite, Women ("MPW") stores, 79 outlet stores, 3836 Christopher & Banks ("CB") stores, and 3633 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.

Strategic Priorities Update

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

We are committed to ensuring that we consistently meet our customers’ needs with a differentiated merchandiseproduct assortment that fits her lifestyle at a recognizable value. Over the past twelve months we have increased the flow of fashion offerings to entice her to shop more often. We are focused on ensuring that our assortment is easy to shop so that she can more easily see what is new and build her outfit.

We intend to increasebetter leverage our data and tools to execute a marketing and promotional strategy that will drive traffic and conversion while expanding gross margins. We are committed to our value proposition that recognizes our customer is drawn to the flowstyle, quality and value that we offer. With the assistance of data analytics, we believe there is an opportunity to better leverage our fashion offeringdata to drive fewer, more meaningful promotions. We will continue to analyze, test, react and provide a more versatile assortmentrefine our promotional strategy to encourageensure that we are providing the most attractive offers for our customer, which support our financial goals.

Our omni-channel strategy is designed to provide our customers with a seamless shopping experience allowing her to shop more frequentlywhen and where she wants. New flexible fulfillment options should also allow us to leverage our total inventory across channels to drive sales and lower costs. In January 2018, we launched buy more when she visits. To further support the newness of our merchandise presentations,online, ship to store, we are analyzingin the process of piloting buy online, ship from store and we will pilot buy online pick up in store by the end of summer. Additionally, while we have a well established  and growing ecommerce business, we see an opportunity to improve our promotional cadencewebsite experience. Some of these include enhancing product recommendation capabilities, increasing site speed, and adjustingmaking it easier for her to create an account. We believe these enhancements will further improve her online experience and drive higher conversion on our markdown strategy to increase inventory turnover to keep merchandise fresh and current.site.

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 besaw our customer base stabilize over the past several quarters last year and now we are extremely focused on maximizing the benefits ofincreasing our total 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.file. We also will continue to leverage our direct andbelieve that leveraging digital marketing channelsis one of the best ways to encourage additional customer visits and increased spending per visit.

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

Comparable sales is a measure that highlights the sales 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 ourOur MPW format conversions we have made changes to theare nearing completion. As such, our base store population that comprises comparable stores as illustrated inmostly reflects 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.

The following table presents selected consolidated financial data for the secondfirst quarter of fiscal 20172018 compared to the secondfirst quarter of fiscal 2016:2017:

SecondFirst Quarter Fiscal 20172018 Summary

Net Sales

The components of the 3.7%3.0% net sales decrease in the secondfirst quarter fiscal 20172018 compared to the secondfirst quarter of fiscal 20162017 were as follows:

Sales decreased primarily due to a 7.6%5.3% decrease in average unit retail prices,transactions, including the effects of a 7.0%3.6% decline in average store count, partly offset by a sequential improvement in mall traffic,count. Average dollar sale was 1.1% higher conversion rates and a 0.9% increase inthan last year with average unit retail outpacing units per transaction. The sales decrease was also correlatedis mostly attributable to lower inventory levels atunderperformance in certain product categories and unseasonable weather, particularly in our Midwest and Northeast regions. Sales performance improved as the beginningweather became more seasonal during the latter part of the quarter and promotional spendas customers responded favorably to sell through inventory that did not reflect our go-forward strategy, contributing to the decline in average unit retail prices.product offering.

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 transactions partly offset by a 1.1% increase in average dollar sales with average unit retail prices.retails slightly outpacing a decline in units per transaction.

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

Average store count in the first halfquarter of fiscal 20172018 was 476462 stores compared to an average store count of 512479 stores in the same periodfirst quarter of fiscal 2016,2017, a decrease of 7.0%3.6%. Average square footage in the first halfquarter of fiscal 20172018 decreased 5.7%3.1% compared to the same periodfirst quarter of fiscal 2016.2017.

Gross Profit

Gross margin rate decreased 420270 basis points primarily driven by our efforts to sell through non go-forwardincreased product costs, which have been corrected for the balance of the year, and address slow sellers more quickly throughadditional markdowns and to a lesser extent, the effects of sales leverage on occupancy expenses. The gross margin rate decline accelerated in the second quarter compared to the first quarter due to seasonal markdowns that typically occur at the end of the second quarter.lower than anticipated sales.

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

SG&A decreased by $5.9$1.2 million, driven bymainly due to lower store operating expenses of $3.2$1.0 million, lower insurance and tax expenses of $0.5 million, and lower net employee compensation expenses of $1.2$0.2 million. The SG&A expense decrease was also attributable to the absence of non-recurring charges of $2.2 million, including advisory fees in connection with shareholder activism of $1.5 million and eCommerce transition costs of $0.7 million incurred in the first half of fiscal 2016. These SG&A expense savings were partially offset by an increase in eCommerce operatingmarketing expenses of $1.0$0.3 million to support higher eCommerce sales.and an increase in professional services of $0.3 million. As a percent of net sales, SG&A improveddecreased approximately 5040 basis points to 34.3%.points.

Depreciation and Amortization (“D&A”)

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

Impairment of Long-LivedStore Assets

We recordedThere were no non-cash impairment charges relating to long-lived assets for the thirteen weeks ended May 5, 2018 compared to an impairment charge of $0.1 million related to long-lived assets held at a small number of store locations.

Operating Loss